SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2000
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
--------------------- -----------------------
001-14665
COMMISSION FILE NUMBER
CLAIMSNET.COM INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2649230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12801 N. Central Expressway, Suite 1515
Dallas, Texas 75243
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: 972-458-1701
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.001 par value,
9,195,000 shares outstanding as of August 14, 2000.
1
CLAIMSNET.COM INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
(unaudited) and December 31, 1999
Condensed Consolidated Statements of Operations
(unaudited) for the Three Months Ended June 30, 2000 and
1999, and for the Six Months Ended June 30, 2000 and 1999
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Year Ended December 31, 1999 and the Six Months
Ended June 30, 2000 (unaudited)
Condensed Consolidated Statements of Cash Flows (unaudited) for
the Six Months Ended June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLAIMSNET.COM INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
(unaudited)
June 30, December 31,
2000 1999(1)
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 3,158 $ 3,021
Marketable securities 250 3,832
Accounts receivable, less allowance for
doubtful accounts of $39 and $26, respectively 124 98
Prepaid expenses and other current assets 537 225
------------ ------------
Total current assets 4,069 7,176
EQUIPMENT, FIXTURES AND SOFTWARE
Computer Hardware and Software 1,876 1,617
Software development costs 1,923 1,923
Furniture and fixtures 139 109
Office Equipment 25 25
Leasehold improvements 18 31
------------ ------------
3,981 3,705
Accumulated depreciation and amortization (2,457) (1,983)
------------ ------------
Total equipment, fixtures and software 1,524 1,722
INTANGIBLE ASSETS, net 3,546 -
DEFERRED COSTS AND OTHER ASSETS 25 25
------------ ------------
TOTAL $ 9,164 $ 8,923
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 1,053 $ 489
Accrued expenses and other current liabilities 1,550 463
------------ ------------
Total current liabilities 2,603 952
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 4,000 shares
authorized, no shares issued and outstanding
Common stock, $.001 par value; 40,000 shares
authorized; 8,925 shares and 6,625 shares
outstanding as of June 30, 2000 and December
31, 1999, respectively 9 7
Additional capital 34,403 24,572
Accumulated deficit (27,851) (16,608)
------------ ------------
Total stockholders' equity 6,561 7,971
------------ ------------
TOTAL $ 9,164 $ 8,923
============ ============
(1) The condensed consolidated balance sheet as of December 31, 1999 has been
derived from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
3
CLAIMSNET.COM INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
REVENUES $ 330 $ 64 $ 610 $ 129
Cost of Revenues 772 411 1,362 627
--------- --------- --------- ---------
Gross Loss (442) (347) (752) (498)
--------- --------- --------- ---------
OPERATING EXPENSES:
Research and Development 789 217 1,056 348
Purchased Research & Development 6,154 - 6,154 -
Amortization of Software & Intangibles 288 168 489 336
Selling, General & Administrative 1,655 1,037 2,913 2,200
--------- --------- --------- ---------
Total operating expenses 8,886 1,422 10,612 2,884
--------- --------- --------- ---------
LOSS FROM OPERATIONS (9,328) (1,769) (11,364) (3,382)
OTHER INCOME (EXPENSE)
Interest expense (3) - (3) -
Interest expense - affiliate - (229) - (1,091)
Interest income 23 84 124 84
--------- --------- --------- ---------
Total Other Income (Expense) 20 (145) 121 (1,007)
--------- --------- --------- ---------
NET LOSS $ (9,308) $ (1,914) $(11,243) $ (4,389)
--------- --------- --------- ---------
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (1.20) $ (0.30) $ (1.56) $ (0.88)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 7,746 6,282 7,185 4,983
========= ========= ========= =========
See notes to condensed consolidated financial statements.
4
CLAIMSNET.COM INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended June 30, 2000
(Unaudited)
Total
Number of Common Additional Accumulated Stockholder's
Shares Stock Capital Deficit Equity
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1998 3,625 $ 4 $ 3,882 $ (7,750) $ (3,864)
Issuance of common stock with 125 - 850 - 850
Series A 12% Subordinated Notes
Non-employee stock option grants - - 155 - 155
Issuance of common stock warrants - - 121 - 121
Sale of common stock in initial
public offering 2,875 3 19,512 - 19,515
Amortization of deferred sales
discounts - - 52 - 52
Net loss - - - (8,858) (8,858)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 6,625 7 24,572 (16,608) 7,971
----------- ----------- ----------- ----------- -----------
Issuance of common stock 1,100 1 3,299 - 3,300
Issuance of common stock for
software purchase 1,200 1 6,375 - 6,376
Amortization of deferred
sales discounts - - 157 - 157
Net loss - - - (11,243) (11,243)
----------- ----------- ----------- ----------- -----------
Balances at June 30, 2000 8,925 $ 9 $ 34,403 $ (27,851) $ 6,561
=========== =========== =========== =========== ===========
See notes to condensed consolidated financial statements.
5
CLAIMSNET.COM INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,243) $ (4,389)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 628 372
Provision for doubtful accounts 23 58
Amortization of deferred sales discounts 157
Purchased research and development
in exchange for common stock 6,154 -
Amortization of debt discount and
deferred financing costs - 958
Non-cash compensation for past services - 276
Changes in operating assets and liabilities:
Accounts receivable (49) (88)
Prepaid expenses and other current assets (312) (132)
Accounts payable, accrued expenses and
other current liabilities 1,651 243
--------- ---------
Net cash used in operating activities (2,991) (2,702)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of marketable securities 3,582 -
Purchases of property and equipment (276) (660)
Purchase of intangible assets (3,478) -
--------- ---------
Net cash used in investing activities (172) (660)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in line of credit - affiliate - 791
Payments of notes and line of credit - affiliate - (5,114)
Issuance of Series A 12% Subordinated Notes - 892
Payment of Series A 12% Subordinated Notes - (1,000)
Payment of contingent notes - (125)
Proceeds from issuance of common stock 3,300 -
Payments of deferred offering costs - -
Net proceeds from issuance of common stock
in initial public offering - 19,510
--------- ---------
Net cash provided by financing activities 3,300 14,954
--------- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 137 11,592
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 3,021 44
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 3,158 $ 11,636
========= =========
6
CLAIMSNET.COM INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
(Unaudited)
Six Months Ended
June 30,
2000 1999
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Common Stock issued in connection with Series A
12% Subordinated Notes $ - $ 850
========= =========
Non-employee stock options issued for past services $ - 155
========= =========
Common stock warrants issued for past services $ - 121
========= =========
Issuance of common stock for investment in Health-
Exchange assets $ 6,376 $ -
========= =========
See notes to condensed consolidated financial statements.
7
CLAIMSNET.COM INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed consolidated
financial statements include all necessary adjustments (consisting of
normal recurring accruals) and present fairly the financial position of
Claimsnet.com inc. (the "Company") and subsidiaries as of June 30, 2000
and the results of its operations and cash flows for the three months
and six months ended June 30, 2000 and 1999, in conformity with
generally accepted accounting principles for interim financial
information applied on a consistent basis. The results of operations for
the three and six months ended June 30, 2000 are not necessarily
indicative of the results to be expected for the full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. These financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, as filed with the
Securities and Exchange Commission on March 30, 2000.
During February 1999 the Board of Directors authorized a 1.115385 for 1
split in the common shares of the Company. All shares and per share
amounts have given retroactive effect to this stock split.
2. TRANSACTIONS WITH MCKESSONHBOC, INC.
In October of 1999, the Company entered into a Development and Services
Agreement (the "Agreement") with McKessonHBOC, Inc. (McKesson), whereby
the Company granted McKesson a multi-year, non-exclusive, private label
license for certain of the Company's proprietary technology and has
agreed to manage McKesson's operation of the system on a fully
outsourced basis. The Company will receive development fees, license
fees, subscription fees, and transaction fees pursuant to the agreement.
In connection with the Agreement, the Company issued McKesson a warrant
for the purchase of 819,184 shares of common stock at an exercise price
of $7.00 per share. The warrant is immediately exercisable and can be
exercised at any time through October 27, 2002. The value of the
warrant, which was estimated at approximately $1.7 million using the
Black-Scholes valuation method, is being amortized ratably over the life
of the agreement as a sales discount. Amortization of the deferred sales
discounts of $157,000 was recorded in the six month period ended June
30, 2000.
3. ACQUISITION OF VHx ASSETS
On April 18, 2000, Claimsnet.com Inc., through its newly formed,
wholly-owned subsidiary, HealthExchange.com, Inc., a Delaware
corporation ("HECOM"), successfully executed an asset purchase agreement
(the "Asset Purchase Agreement") with VHx Company, a Nevada corporation
("VHx"), whereby HECOM acquired the properties and assets of VHx,
including the HealthExchange.com name and HealthExchange.com trademarks,
related to all VHx products and services designed to use Internet
technology to facilitate and improve interaction between physicians,
health plans, employers and their members in exchange for (i) 1,200,000
shares of common stock, par value $.001 per share (ii) the assumption of
certain liabilities, and (iii) the cancellation of a $2 million advance
owed by VHx to the Company. In addition, contingent upon the completion
of specified milestones, described below, the Company will issue
additional consideration comprised of 13,767 shares of Series A 8%
Convertible Redeemable Preferred Stock , stated value of $725.60 per
share, and 13,767 shares of Series B 8% Convertible Redeemable Preferred
Stock, stated value of $725.60 per share, (the Preferred Stock).
8
The Preferred Stock, if issued, will be convertible into shares of
Common Stock at a conversion price based upon the market value of the
Common Stock at a specified time provided that the conversion price
cannot be less than $14.00 or greater than $15.00, and provided further
that (i) the convertibility of the Preferred Stock has been approved by
the stockholders of the Company by March 31, 2001 and (ii) the
performance milestone for the relevant series of Preferred Stock has
been satisfied by March 31, 2001. The maximum number of common shares
into which the Preferred Stock may be converted should both of these
requirements be satisfied is 1,427,076 (713,538 for Series A and 713,538
for Series B).
The performance milestone for the Series A Preferred Stock is the
existence of 1,000,000 lives covered by the business operation
attributable to assets acquired. The performance milestone for the
Series B Preferred Stock is the recognition of revenue from 6,000,000
member-months attributable to assets acquired. In the event that the
performance milestone of any series of Preferred Stock is not satisfied
by March 31, 2001 that series of Preferred Stock will be cancelled.
Thus, for accounting purposes, the Preferred Stock is not considered to
be issued until the milestones have been met. In the event that the
performance milestone for any series of Preferred Stock is satisfied by
such date, but the required approval by the stockholders of the Company
is not obtained by such date, the relevant series of preferred stock
will begin on April 1, 2001 to accrue cumulative dividends at the rate
of 8% per annum and will be redeemed in equal quarterly installments
thereafter for three years out of capital legally available therefor.
The Preferred Stock will be presented as mezzanine equity outside of
stockholders' equity.
The Company retained an independent valuation firm to evaluate the
HealthExchange asset purchase and recommend the allocation of purchase
price to the various assets acquired. The appraisals utilized standard
appraisal methodologies, projecting cash flows over the estimated useful
lives of the assets, net of additional investment needs, and considering
the stage of completion of software development projects. A blended
state and federal effective tax rate of 40% was applied to the cash
flows. These cash flows were discounted to their present value using
discount rates between 60 and 70 percent, reflective of development
products at similar risk. The preliminary results of the valuation value
the intangible assets at $3,546,000 after a charge to in-process
technology of $6,154,000. Amortization of $154,000 was recorded in the
three months ended June 30, 2000. Results of the initial valuation are
preliminary. In addition, further allocations are contingent upon
accomplishment of future performance milestones.
9
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS FOR THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 1999
REVENUES
Revenues increased 416% to $330,000 from $64,000 for the three months ended June
30, 2000 and 1999, respectively. Revenues increased 373% to $610,000 from
$129,000 for the six month periods ended June 30, 2000 and 1999, respectively.
Revenues of $131,000 and $262,000 for the three and six months ended June
30,2000 are related to percentage completion recognition of the McKesson
Development and Services Agreement. The remainder of the revenues during 2000
are related to the Company's Internet-based clients. Although the Company
provided Internet-based services during the year-earlier period, there were no
related revenues recognized because the Company waived fees as an introductory
promotional offer for its initial clients. Revenues for the three months and six
months ended June 30, 2000 from recurring revenue sources represented 88% and
91%, respectively, of total revenues. Recurring revenues for the six months were
comprised of $262,000 from long-term contracts, $239,000 from transaction-based
fees and $56,000 from subscription fees. Revenues from non-recurring sources
totaled $53,000 and were related to setup, support, and other fees.
Transactions processed by the Company increased 126% to 1,194,000 from 529,000
for the three months ended June 30, 2000 and 1999, respectively. Transactions
increased 150% to 2,448,000 from 981,000 for the six months ended June 30, 2000
and 1999, respectively. All of the increase was attributable to internal growth
in the number of accounts and healthcare providers subscribing to the Company's
services. Additionally, 95% of all transactions were for physician and dental
claim submission services. The Company had 378 accounts processing transactions
for 3,005 providers at June 30, 2000 compared with 237 accounts and 2,402
providers at June 30, 1999, representing increases of 59% and 25%, respectively.
Transaction-based revenue averaged $0.11 and $0.10 per transaction for the three
and six month periods ended June 30, 2000 versus $0.07 per transaction for the
three and six month periods ended June 30, 1999. The Company expects the average
revenue per transaction to continue to increase in future quarters for several
reasons. Revenue per transaction for the 640,000 commercial electronic claims
averaged $0.06 during the three month period and is expected to increase.
Revenue per transaction for the 433,000 Medicare and Medicaid claims averaged
$0.09 during the three month period after implementation of a new pricing
structure, which charges a per transaction fee to a broader group of customers.
Additionally, the Company's agreement with McKesson includes a per transaction
processing fee which is greater than the average revenue per transaction
recognized in the current period. Average revenue per transaction for the 61,000
paper claims was $0.46 during the quarter. The company processed approximately
60,000 patient statements during the three months ended June 30, 2000,
representing five percent of total transactions during the period.
COST OF REVENUES
Cost of revenues in the three months and six months ended June 30, 2000 were
$772,000 and $1,362,000, compared with $411,000 and $627,000 in the prior year
periods, representing increases of 88% and 117%, respectively. The three
components of cost of revenues are data center expenses, transaction processing
expenses, and customer support operation expenses. Data center expenses were
$99,000 for the three months ended June 30, 2000 compared with $98,000 for 1999,
an increase of 1%. Transaction processing expenses were $139,000 in 2000
compared to $46,000 in the second quarter of 1999, representing a 202% increase.
Customer support operations expense increased by 100% to $534,000 in the second
quarter of 2000 from $267,000 in the second quarter of 1999. The increases in
Customer support operations expense were primarily attributable to a 20%
increase in number of employees and an increase in maintenance of customer
support systems.
10
OPERATING EXPENSES
Research and development expenses were $789,000 and $1,056,000 in the three
months and six months ended June 30, 2000, compared with $217,000 and $348,000
in the three months and six months ended June 30, 1999, representing increases
of 264% and 203%, respectively. Research and development expenses are comprised
of personnel costs and related expenses as a result of Claimsnet growth and the
acquisition of HealthExchange.com. There were no software development expenses
capitalized during either of the periods. Development efforts during the current
quarter were primarily focused on the McKesson project and the HealthExchange
product, while the year-earlier efforts were related to continuous incremental
enhancements to the Company's claim processing system. The McKesson development
project reached the beta testing phase during the second quarter and achieved
customer sign-off in the third quarter, signaling completion of the development
stage.
Purchased research and development reflects the charge to operations associated
with the acquisition of HealthExchange assets during the quarter.
Amortization expenses increased 71% to $288,000 in the current quarter from
$168,000 in the year-earlier period. This increase reflects amortization of
intangibles related to the HealthExchange asset acquisition and amortization of
new software purchased for internal use. Prior period amortization included
software developed for customer use, which became fully amortized in the current
quarter.
Selling, general and administrative expenses were $1,655,000 in the three months
ended June 30, 2000, compared with $1,037,000 in the same period of 1999, an
increase of 60%. Selling, General and Administrative expenses increased 32% to
$2,913,000 from $2,200,000 for the six months ended June 30, 2000 and 1999,
respectively. The $713,000 six month period-to-period increase includes a
$267,000 increase in sales and marketing expenses which is primarily related to
personnel costs and a marketing campaign targeted at laboratory clients. The
increase for other general administrative expenses was $622,000, primarily due
to the acquisition of HealthExchange and increases in office rent, telephone
expenses, employee recruiting expenses, employment agreement contractual
increases, and outside professional fees. Severance costs of $128,000 were
recorded to administrative expense in the current quarter as was $60,000 for the
out-of-court settlement of the Millbrook lawsuit. Technology infrastructure and
support expenses decreased $84,000 for capitalization of work performed on the
McKesson project. A one-time charge in 1999 of $280,000 for the cost of past
services related to the grant of stock options and warrants to non-employees is
also included in the decrease.
The company effected a staff reduction in June 2000 to reduce cash expenses and
to refocus expenditures on near-term opportunities.
OTHER INCOME (EXPENSE)
Interest income of $23,000 and $124,000 was provided in the three and six months
ended June 30, 2000 from investment of excess cash in money market instruments
and marketable securities. Interest expense of $3,000 was incurred in the six
months ended June 30, 2000. Interest expense of $1,091,000 recorded in the six
months ended June 30, 1999 included $850,000 related to amortization of debt
discount and $108,000 related to amortization of deferred financing costs.
Interest expense of $133,000 was paid to affiliates in the year-earlier period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $2,991,000 in the six months ended
June 30, 2000, compared with $2,702,000 for the year-earlier period, primarily
due to increased selling, general and administrative expenses, and purchase of
in-process research and development as discussed above. Net cash used in
investing activities was $172,000 in the six months ended June 30, 2000 and
$660,000 in the six months ended June 30, 1999. Cash was provided in the current
period by sale of marketable securities. The securities sold had a cost of
$1,600,000 at the time of sale and resulted in a net loss of $7,000. Primary
uses of cash consisted of the purchase of HealthExchange assets from VHx and the
purchase of additional furniture and equipment for the HealthExchange office.
11
In July, 2000 the Company received $897,750 net proceeds from the private
placement of 270,000 shares of common stock at $3.50 per share. Of those
proceeds, $276,500 was received by June 30, 2000 from the sale of 79,000 shares
of common stock, which were issued in July. In connection with the financing,
the Company also issued warrants to purchase 270,000 shares of common stock at a
price of $4.60 for a period of one year and warrants to purchase 270,000 shares
of common stock at a price of $5.60 for a period of two years.
On June 19, 2000 the Company completed a private placement of 1,000,000 shares
of common stock for proceeds of $3,000,000.
On May 22, 2000 the Company completed a private financing in the amount of
$300,000 with the sale of 100,000 shares of common stock to American Medical
Finance, Inc., a related party and the owner of record of 381,603 shares of
common stock prior to the transaction. At June 30, 2000, American Medical
Finance, Inc. was the owner of record of 5.4% of the outstanding common stock of
the Company. Bo W. Lycke, the Chairman of the Board, President and Chief
Executive Officer of the Company, Robert H. Brown, Jr., a Director of the
Company, and Ward L. Bensen, a Director of the Company, control 71.1%, 17.7%,
and 11.2%, respectively, of the outstanding common stock of American Medical
Finance, Inc.
On April 18, 2000, the Company, through its newly formed, wholly-owned,
subsidiary HealthExchange.com (HECOM), successfully executed an asset purchase
agreement with VHx Company, whereby HECOM acquired selected assets of VHx,
including the HealthExchange.com name and HealthExchange.com trademarks, related
to all VHx products and services designed to use Internet technology to
facilitate and improve interaction between physicians, health plans, employers
and their members in exchange for (i) 1,200,000 shares of common stock, par
value $0.001 per share, (ii) the assumption of certain liabilities, and (iii)
the cancellation of $2,000,000 of advances owed by VHx to the Company. In
addition, contingent upon the completion of specified milestones, described
below, the Company will issue additional consideration comprised of 13,767
shares of Series A 8% Convertible Redeemable Preferred Stock , stated value of
$725.60 per share, and 13,767 shares of Series B 8% Convertible Redeemable
Preferred Stock, stated value of $725.60 per share, (the Preferred Stock). The
purchase price will be adjusted based on the number of shares of Preferred Stock
issued upon the measurement of certain milestones contained in the agreement.
The maximum number of common shares into which the Preferred Stock may be
converted should both of these requirements be satisfied is 1,427,076 (713,538
for Series A and 713,538 for Series B).
In October of 1999, the Company entered into a Development and Services
Agreement (the "Agreement") with McKesson, Inc. (McKesson), whereby the Company
granted McKesson a multi-year, non-exclusive, private label license for certain
of the Company's proprietary technology and has agreed to manage McKesson's
operation of the system on a fully outsourced basis. The Company has received
development fees of $500,000 through June 30, 2000 and expects to receive
additional development fees of $535,000 as well as license fees, subscription
fees, and transaction fees pursuant to the agreement.
In connection with the Agreement, the Company issued McKesson a warrant for the
purchase of 819,184 shares of common stock at an exercise price of $7.00 per
share. The warrant is immediately exercisable and can be exercised at any time
through October 27, 2002. The value of the warrant, which is estimated at
approximately $1.7 million using the Black-Scholes valuation method, is being
amortized ratably over the life of the agreement as a sales discount.
Amortization of $79,000 was recorded in the current quarter.
In April of 1999, the Company completed its IPO issuing 2,875,000 shares of
common stock for proceeds of $19,515,000.
In February, 1999 the Company issued $1,000,000 of Series A 12% Subordinated
Notes along with 125,000 shares of common stock for net proceeds of $892,000
(net of closing fees and cash financing expenses). The Company retired all notes
and borrowings from affiliates with the proceeds of its IPO.
The Company believes that its current cash reserves and contractual cash inflows
will provide sufficient liquidity to fund operations, development activities,
and capital improvements into 2001. The Company also believes that it can
continue to raise additional capital, if needed, to pursue strategic business
opportunities and to fund operations to the point of profitability, however,
such future funding cannot be assured at this time.
12
YEAR 2000
In late 1999, the Company completed its remediation and testing of its
information systems to become year 2000 ready. The Company has experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date change. The Company is not aware of any material
problems resulting from Year 2000 issues, either with its products, its internal
systems, or the products and services of third parties. The Company will
continue to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the Year 2000 to insure that any latent Year
2000 matters that may arise are addressed promptly.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent pronouncements of the Financial Accounting Standards Board, which are not
required to be adopted at this date, include SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities". This pronouncement is not
expected to have a material impact on the Company's financial statements.
In December of 1999, the SEC staff issued Staff Accounting Bulletin No. 101 (SAB
101). Among other things, SAB 101 requires deferral and amortization of
up-front, non-refundable fees over the term of agreement or expected period of
benefit. The Company does not expect that the adoption of SAB 101 will have a
material impact on its financial statements.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information contained or incorporated by reference in this periodic report on
Form 10-Q and in other SEC filings by the Company contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are subject to various risks and
uncertainties that could cause actual results to vary materially from those
projected in such forward-looking statements. These risks and
uncertainties are discussed in more detail in the Company's Form 10-K which was
filed with the Securities and Exchange Commission on March 30, 2000. No
assurance can be given that future results covered by the forward-looking
statements will be achieved.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) REPORTS:
During the quarter ended June 30, 2000, the Company filed a report on form 8-K
dated June 5, 2000 containing information under item 5. The Company also filed a
report on form 8-K dated July 12, 2000, subsequent to the close of the quarter,
providing information under item 6.
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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.
CLAIMSNET.COM INC.
(Registrant)
By: /S/ Bo W. Lycke
-----------------------------
Bo W. Lycke
President and
Chief Executive Officer, on
behalf of the Registrant
By: /S/ Paul W. Miller
-----------------------------
Paul W. Miller
Chief Financial Officer
August 14, 2000
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