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, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from to
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COMMISSION FILE NUMBER
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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 executive offices) (Zip Code)
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,
12,591,514 shares outstanding, and Preferred Series D Stock, $.001 par value,
3,304 shares outstanding as of August 13, 2002.
CLAIMSNET.COM INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) as of June 30,
2002 and December 31, 2001
Condensed Consolidated Statements of Operations (unaudited) for
the Three Months Ended June 30, 2002 and 2001, and for the Six
Months Ended June 30, 2002 and 2001
Condensed Consolidated Statements of Changes in Stockholders'
Equity (unaudited) for the Year Ended December 31, 2001 and the
Six Months Ended June 30, 2002
Condensed Consolidated Statements of Cash Flows (unaudited) for
the Six Months Ended June 30, 2002 and 2001
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 share data)
(Unaudited)
June 30, December 31,
2002 2001(1)
--------- ---------
ASSETS
CURRENT ASSETS:
Cash $ 247 $ 531
Accounts receivable, net of allowance for
doubtful accounts of $40 and $35, respectively 256 198
Accounts receivable - related party 12 --
Prepaid expenses and other current assets 74 108
--------- ---------
Total current assets 589 837
EQUIPMENT, FIXTURES AND SOFTWARE
Computer hardware and software 1,827 1,822
Software development costs 2,093 1,922
Furniture and fixtures 160 150
Office equipment 25 25
--------- ---------
4,105 3,919
Accumulated depreciation and amortization (3,568) (3,299)
--------- ---------
Total equipment, fixtures and software 537 620
--------- ---------
TOTAL $ 1,126 $ 1,457
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 574 $ 298
Accrued severance 146 90
Accrued acquisition costs 500 500
Accrued payroll and other current liabilities 301 467
Deferred revenue 13 17
Notes payable - related party 170 --
Notes payable 50 --
Pending equity investment from Directors 50 --
--------- ---------
Total current liabilities 1,804 1,372
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value; 4,000,000 shares
authorized, 3,304 and 0 shares issued and
outstanding as of June 30, 2002 and December 31, 2001 -- --
Common stock, $.001 par value; 40,000,000 shares
authorized; 12,141,000 and 11,141,000 shares
issued as of June 30, 2002 and December 31, 2001 12 11
Additional capital 40,649 39,571
Accumulated deficit (41,339) (39,497)
--------- ---------
Total stockholders' equity (deficit) (678) 85
--------- ---------
TOTAL $ 1,126 $ 1,457
========= =========
(1) The condensed consolidated balance sheet as of December 31, 2001 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,
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUES $ 338 $ 263 $ 653 $ 795
COST OF REVENUES 463 565 1,023 1,475
--------- --------- --------- ---------
GROSS PROFIT (LOSS) (125) (302) (370) (680)
--------- --------- --------- ---------
OPERATING EXPENSES:
Research and development 81 178 176 360
Selling, general & administrative 527 946 1,287 1,704
--------- --------- --------- ---------
Total operating expenses 608 1,124 1,463 2,064
--------- --------- --------- ---------
LOSS FROM OPERATIONS (733) (1,426) (1,833) (2,744)
OTHER INCOME (EXPENSE)
Interest expense -- (3) -- (4)
Interest expense - related party (7) (4) (9) (7)
Interest income -- 27 -- 33
--------- --------- --------- ---------
Total Other Income (Expense) (7) 20 (9) 22
--------- --------- --------- ---------
NET LOSS $ (740) $ (1,406) $ (1,842) $ (2,722)
========= ========= ========= =========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.07) $ (0.14) $ (0.17) $ (0.29)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 11,175 10,285 11,158 9,467
========= ========= ========= =========
See notes to condensed consolidated financial statements.
4
CLAIMSNET.COM INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31, 2001 and the Six Months Ended June 30, 2002
(In thousands)
(Unaudited)
Number of Number of Total
Preferred Common Deferred Stockholders'
Shares Preferred Shares Common Additional Sales Accumulated Treasury Equity
Outstanding Shares Outstanding Stock Capital Discount Deficit Stock (Deficit)
--------- ------- --------- --------- --------- --------- --------- --------- ---------
Balances at January 1, 2001 -- $ -- 8,551 $ 9 $ 36,820 $ (1,334) $(34,303) $ (1,026) $ 166
Sale of preferred stock
converted into common stock -- -- 660 1 462 -- -- -- 463
Sale of common stock -- -- 1,914 1 3,216 -- -- -- 3,217
Issuance of common stock
for services -- -- 16 -- 42 -- -- -- 42
Issuance of warrants for
services -- -- -- -- 57 -- -- -- 57
Cancellation of treasury
stock -- -- -- -- (1,026) -- -- 1,026 --
Write off unamortized
portion of deferred sales
discount -- -- -- -- -- 1,334 -- -- 1,334
Net loss -- -- -- -- -- -- (5,194) -- (5,194)
--------- ------- --------- --------- --------- --------- --------- --------- ---------
Balances at December 31, 2001 -- -- 11,141 11 39,571 -- (39,497) -- 85
--------- ------- --------- --------- --------- --------- --------- --------- ---------
Sale of preferred stock 3 -- -- -- 826 -- -- -- 826
Sale of common stock -- -- 1,000 1 199 -- -- -- 200
Issuance of warrants and
options for severance
agreement -- -- -- -- 53 -- -- -- 53
Net loss -- -- -- -- -- -- (1,842) -- (1,842)
--------- ------- --------- --------- --------- --------- --------- --------- ---------
Balances at June 30, 2002 3 $ -- 12,141 $ 12 $ 40,649 $ -- $(41,339) $ -- $ (678)
========= ======= ========= ========= ========= ========= ========= ========= =========
See notes to condensed consolidated financial statements.
5
CLAIMSNET.COM INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,842) $(2,722)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 269 317
Provision for doubtful accounts 5 6
Stock options and warrants issued for service 53 67
Amortization of deferred sales discount -- 78
Write down of net deferred charges on
McKesson contract -- 356
Loss on sale of assets -- 16
Changes in operating assets and liabilities:
Accounts receivable (75) 144
Prepaid expenses and other current assets 34 11
Current liabilities 212 (172)
-------- --------
Net cash used in operating activities (1,344) (1,899)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (15) (29)
Proceeds from sale of assets -- 11
Capitalized cost of software development (171) --
-------- --------
Net cash provided by(used in) investing activities (186) (18)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in note payable to related party 475 400
Payment of note payable to related party (305) (400)
Increase in note payable 50 --
Proceeds from issuance of common stock 200 3,271
Proceeds from issuance of preferred stock 826 --
-------- --------
Net cash provided by financing activities 1,246 3,271
-------- --------
NET INCREASE (DECREASE) IN CASH (284) 1,354
CASH, BEGINNING OF PERIOD 531 1,132
-------- --------
CASH, END OF PERIOD $ 247 $ 2,486
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 2 $ 2
======== ========
Pending equity investment from Directors $ 50 $ --
======== ========
See notes to condensed consolidated financial statements.
6
CLAIMSNET.COM INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all necessary adjustments
(consisting of normal recurring accruals) and present fairly the
consolidated financial position of Claimsnet.com inc. (the "Company")
and subsidiary as of June 30, 2002 and the results of its operations
and cash flows for the three months and six months ended June 30, 2002
and 2001, 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, 2002
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, 2001, as filed with the
Securities and Exchange Commission on April 15, 2002.
The adoption of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" as of January 1, 2002 had no
effect on the financial statements for the three months ended March 31,
2002.
2. TRANSACTIONS WITH MCKESSON CORPORATION ("McKesson")
On April 12, 2001, the Company entered into an agreement with McKesson
which superseded the Company's October 1999 agreement. Under the 1999
Development and Services Agreement the Company (a) issued a three year
warrant to McKesson to purchase 819,184 shares of common stock at $7.00
per share, (b) received fees for the development of a private label
claims processing and statement processing internet application for
McKesson, (c) received one of three scheduled license fee payments for
use of the McKesson internet application, (d) received monthly support
fees for dedicated private label system hosting, operation and support
services commencing at the date of acceptance of the McKesson internet
application, and (e) received transaction fees for claims and
statements processed by the McKesson internet application. Under the
new agreement, (a) McKesson acquired 1,514,285 shares of common stock
at $1.75 per share for net proceeds of $2,650,000, (b) McKesson paid a
one-time fee of $200,000 (c) the stock purchase warrant originally
issued to McKesson in October 1999 was cancelled, (d) McKesson retained
a license to use the McKesson internet application to process
statements and claims without additional license fee payments, (e)
McKesson agreed to eliminate the need for dedicated private label
system hosting, operation, and support services and the Company agreed
to provide standard system hosting, operation, and support serviced
without the payment of future monthly support fees, (f) the Company
will receive fees for transactions processed by the McKesson internet
application, (g) the Company and McKesson agreed to use best efforts to
expand the scope of the license agreement to include additional claim
types, and (h) the Company and McKesson agreed to use best efforts to
pursue other unspecified business opportunities. Under a separate
agreement, the Company has contracted for McKesson processing services
to print patient statements and submit claims to payers for certain
customers, for which the Company pays McKesson fees for some
transactions and shares third party revenues for other transactions.
Pursuant to the October 1999 agreement, through March 31, 2001 the
Company (a) received payments in the aggregate amount of $2,202,000 (of
which approximately $1,200,000 was received in December 2000) related
to development and license fee provisions, which were recorded as
deferred revenue and were being accounted for by amortizing the total
amount, received and to be received, of approximately $4,500,000
ratably over the expected contract life of 65 months, (b) expended
$428,000 related to development and implementation costs, which was
7
recorded as software development costs on the balance sheet, and was
being amortized ratably over the expected contract period of 65 months,
and (c)recorded in equity a capital contribution and an offsetting
deferred sales discount in the amount of $1,700,000 for the imputed
value of the warrant, which was being amortized ratably over the
expected contract period of 65 months. As of March 31, 2001 the Company
had amortized $1,187,000 of the deferred revenue into revenue, $112,000
of the deferred development costs into cost of revenues, and $445,000
of the deferred sales discount as a reduction of revenues, leaving
balances of $1,015,000, $316,000 and $1,255,000, respectively. As of
March 31, 2001, the Company accrued the $200,000 payment received in
April in connection with the contract modification as additional
deferred revenue. As a result of the April 2001 modification of the
1999 contract with McKesson, as of March 31, 2001 the Company offset
the remaining deferred sales discounts against the remaining deferred
revenue. The remaining software development costs of $316,000 were
written off to cost of revenue. Although the new agreement with
McKesson permits McKesson to continue to use the software developed
specifically to process its transactions, there is no requirement for
McKesson to use the system and no ability to project future transaction
revenues.
3. SALE OF PREFERRED STOCK
In March and May 2002, the Company completed private placements of
1,104 shares and 2,200 shares, respectively, of Series D Preferred
Stock to accredited investors at $250 per share for net proceeds of
$276,000 and $550,000, respectively. A portion of the proceeds of the
sale was used to repay $305,000 of short term loans incurred in
February and March 2002.
4. SALE OF COMMON STOCK
In June, July and August 2002, the Company completed the private
placement of 1,450,000 shares of common stock to accredited investors
at $0.20 per share for net proceeds of $290,000. In connection with the
private placement, the Company also issued warrants to purchase an
aggregate of 1,450,000 shares of common stock as described below.
5. PENDING EQUITY INVESTMENT FROM DIRECTORS
In June 2002, the Company accepted non-revocable equity investments in
the aggregate amount of $50,000 from four members of the Board of
Directors on such terms as shall be negotiated at arms length with
unaffiliated third parties and shall be approved by a committee of
disinterested directors. Funds received have been recorded as a current
liability until the equity investment terms have been determined and
approved.
6. LOANS FROM RELATED PARTY
In February, March, April and June 2002, the Company borrowed an
aggregate of $475,000 pursuant to six separate unsecured short-term
loan agreements with National Financial Corp., a related party. In
February and May 2002, the Company repaid principal pursuant to three
notes in the aggregate amount of $305,000 plus accrued interest
thereon. The remaining three notes in the aggregate principal amount of
$170,000 plus interest, at 9.5% per annum on the unpaid principal, are
due on September 30, 2002.
7. NOTES PAYABLE
In June and August 2002, the Company borrowed an aggregate of $100,000
and issued two unsecured promissory notes, each in the amount of
$50,000. One note is payable to a director of the Company and the other
is payable to an accredited investor. The notes are due, along with
interest at the rate of 9.5% per annum, on September 30, 2002.
8
In August 2002, the Company borrowed $10,000 from an accredited
investor and issued an unsecured promissory note. The note bears
interest at the rate of 8.0% per annum, with interest payments due on
August 31, 2003 and 2004 and principal and the remaining unpaid
interest due on August 31, 2005.
8. ISSUANCE OF OPTIONS AND WARRANTS
In January 2002, the Company granted employees options under its 1997
Stock Option Plan to purchase an aggregate of 456,000 shares of common
stock. The options contain an exercise price of $0.60 per share, the
market price on the date of grant, expire on the tenth anniversary of
the grant, and vest 100% one year from the date of grant.
In February 2002, the Company granted employees the remaining options
to purchase 328,872 shares of common stock under its 1997 Stock Option
Plan and warrants to purchase an additional 253,203 shares of common
stock in exchange for voluntary salary reductions. The options and
warrants contain an exercise price of $0.35 per share, the market price
on the date of grant, expire on the tenth anniversary of the grant, and
vest 25% immediately on the date of grant and an additional 25% on each
third month anniversary of the date of grant.
In June 2002 the Company issued warrants to acquire an aggregate of
50,000 shares of common stock to a non-employee in connection with an
agreement for professional services to be rendered. The warrants
contain an exercise of $0.30 per share and expire in June 2003. The
warrants were valued at $0.07 per share based on the Black-Scholes
valuation method (using the following assumptions: life of one year,
risk free rate of 2.12%, no dividends during the term, and a volatility
of .566). The expense is being recognized ratably over the service
agreement.
In June, July and August 2002, in connection with the sale of common
stock described in note 4 above, the Company issued warrants to acquire
an aggregate of 1,450,000 shares of common stock to accredited
investors. The warrants contain an exercise price of $0.20 per share
and expire between June and August 2007.
9. NEED FOR ADDITIONAL CAPITAL
Management believes that available cash resources, together with
anticipated revenues from operations and the proceeds of recently
completed financing activities and funding commitments will not be
sufficient to satisfy the Company's capital requirements through
December 31, 2002. Necessary additional capital may not be available on
a timely basis or on acceptable terms, if at all. In any of these
events, the Company may be unable to implement current plans for
expansion or to repay debt obligations as they become due. If
sufficient capital cannot be obtained, the Company may be forced to
significantly reduce operating expenses to a point which would be
detrimental to business operations, curtail research and development
activities, sell certain business assets or discontinue some or all of
its business operations, take other actions which could be detrimental
to business prospects and result in charges which could be material to
its operations and financial position, or cease operations altogether.
In the event that any future financing should take the form of equity
securities, the holders of the common stock and preferred stock may
experience additional dilution. In the event of a cessation of
operations, there may not be sufficient assets to fully satisfy all
creditors, in which case the holders of equity securities will be
unable to recoup any of their investment.
Management is actively exploring the sale of certain assets that it
believes are not critical to ongoing operations or future business
development efforts.
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, 2002 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 2001
REVENUES
Revenues in the three months ended June 30, 2002 were $338,000 compared to
$263,000 in the three months ended June 30, 2001, representing an increase of
29%. Revenues for the three months ended June 30, 2002 from recurring revenue
sources represented 93% of total revenues. Recurring revenues for the three
months were comprised of $257,000 from transaction-based fees and $59,000 from
subscription fees. Revenues from non-recurring sources totaled $22,000 and were
related to support and other fees.
Revenues in the six months ended June 30, 2002 were $653,000 compared to
$795,000 in the six months ended June 30, 2001, representing a decrease of 18%.
There were no revenues from the McKesson Development and Services Agreement
recognized in the six months ended June 30, 2002. During the year earlier
period, revenues of $289,000 were related to recognition of license fees and
support revenues from the McKesson Development and Services Agreement and
revenues of $506,000 were related to our other clients. Revenues for the six
months ended June 30, 2002 from recurring revenue sources represented 94% of
total revenues. Recurring revenues for the six months were comprised of $502,000
from transaction-based fees and $109,000 from subscription fees. Revenues from
non-recurring sources totaled $42,000 and were related to support and other
fees.
The Company processed 1,922,000 transactions during the three months ended June
30, 2002, compared with 1,572,000 transactions in the year-earlier quarter, an
increase of 22%. The increase was attributable to internal growth in the number
of accounts and healthcare providers subscribing to the Company's services.
Additionally, 94% of all transactions were for claim submission services and 6%
were for patient statement processing and eligibility verification services. The
Company had 566 accounts processing transactions for 5,332 providers at June 30,
2002 compared with 440 accounts and 3,700 providers at June 30, 2001,
representing increases of 29% and 44%, respectively.
Transaction-based revenue averaged $0.13 per transaction for the three months
ended June 30, 2002 as compared with $0.11 per transaction for the three months
ended June 30, 2001. Revenue per claim processing transaction for the 1,801,000
claims processed averaged $0.11 during the period compared with 1,434,000 claims
averaging $0.08 during 2001. The Company processed 116,000 patient statements at
an average revenue of $0.45 per transaction during the current quarter compared
to 137,000 at an average revenue of $0.37 in the prior year period. The Company
processed 5,000 eligibility transactions during the quarter ended June 30, 2002
compared with 1,000 eligibility transactions in the quarter ended June 30, 2001.
The Company processed 3,784,000 transactions during the six months ended June
30, 2002, compared with 3,006,000 transactions in the year-earlier quarter, an
increase of 26%. The increase was attributable to internal growth in the number
of accounts and healthcare providers subscribing to the Company's services.
Additionally, 93% of all transactions were for claim submission services and 7%
were for patient statement processing and eligibility verification services.
Transaction-based revenue averaged $0.13 per transaction for the six months
ended June 30, 2002 as compared with $0.11 per transaction for the six months
ended June 30, 2001. Revenue per claim processing transaction for the 3,520,000
claims processed averaged $0.11 during the period compared with 2,762,000 claims
averaging $0.08 during 2001. The Company processed 253,000 patient statements at
an average revenue of $0.44 per transaction during the current period compared
to 242,000 at an average revenue of $0.39 in the prior year period. The Company
processed 11,000 eligibility transactions during the six months ended June 30,
2002 compared with 1,000 eligibility transactions in the prior year period.
10
COST OF REVENUES
Cost of revenues in the three months ended June 30, 2002 was $463,000, compared
with $565,000 in the three months ended June 30, 2001, representing a decrease
of 18%. The four ordinary components of cost of revenues are data center
expenses, transaction processing expenses, customer support operation expenses
and software amortization. Data center expenses decreased 20% to $69,000 for the
three months ended June 30, 2002 compared with $86,000 for the same period in
2001. Transaction processing expenses were $136,000 in 2002 compared to $131,000
in the second quarter of 2001, representing a 4% increase in costs,
substantially less than the 29% increase in revenues and the 22% increase in the
total number of transactions processed. Customer support operations expense
decreased by 32% to $187,000 in the second quarter of 2002 from $277,000 in the
second quarter of 2001, while the number of accounts and providers served at the
end of each quarter increased 29% and 44%, respectively. Software amortization
and development project amortization expenses remained level at $71,000.
Cost of revenues in the six months ended June 30, 2002 was $1,023,000, compared
with $1,475,000 in the six months ended June 30, 2001, representing a decrease
of 31%. Data center expenses decreased 7% to $164,000 for the six months ended
June 30, 2002 compared with $177,000 for the same period in 2001. Transaction
processing expenses for the six month periods were $273,000 in 2002 compared to
$244,000 in 2001, representing a 12% increase in costs. Customer support
operations expense decreased by 23% to $444,000 in the six months ended June 30,
2002 from $577,000 in 2001. Software amortization and development project
amortization expenses decreased 70% to $142,000 in 2002 from $477,000 in the
same period of 2001. A portion of this decrease reflects completion of
amortization for earlier versions of software for customer use. Additionally,
deferred development costs of $316,000 associated with the McKesson development
project were written off to cost of revenues in the six months ended June 30,
2001.
OPERATING EXPENSES
Research and development expenses were $81,000 in the three months ended June
30, 2002, compared with $178,000 in the three months ended June 30, 2001,
representing a decrease of 54%, and $176,000 during the six months ended June
30, 2002, compared with $360,000 in the prior year, representing a decrease of
51%. Research and development expenses are comprised of personnel costs and
related expenses. Software development expenses of $64,000 and $171,000 were
capitalized during the three and six months ended June 30,2002, respectively. No
software development costs were capitalized during the year-earlier period.
Development efforts during 2002 were primarily focused on enhancements required
to comply with provisions of the Health Insurance Portability and Accountability
Act, while the year-earlier efforts were related to continuous incremental
enhancements to the Company's proprietary software system, none of which were
subject to capitalization.
Selling, general and administrative expenses were $527,000 in the three months
ended June 30, 2002, compared with $946,000 in the same period of 2001, a
decrease of 44%, and $1,287,000 during the six months ended June 30, 2002,
compared with $1,704,000 in the same period of 2001, a decrease of 25%. A
one-time charge of $162,000 was recorded in the six month period ended June 30,
2002 pursuant to a severance agreement dated April 8, 2002 with Bo W. Lycke,
formerly our chief executive officer, of which $50,000 related to the issuance
of options and warrants. A one-time charge of $40,000 was recorded in the six
month period ended June 30, 2001 for unamortized deferred sales discount costs
net of deferred revenue associated with the McKesson contract.
OTHER INCOME (EXPENSE)
Interest income from investment of excess cash was less than $1,000 in the
quarter ended June 30, 2002 compared with $27,000 in the quarter ended June 30,
2001 due to diminished levels of cash available for investment between the
periods. Interest expense of $7,000 was incurred in the quarter ended June 30,
2002 on financing fees and affiliate debt compared with $4,000 in the quarter
ended June 30, 2001.
Interest income was less than $1,000 in the six month period ended June 30, 2002
compared with $33,000 in the period ended June 30, 2001. Interest expense of
$9,000 was incurred in the six month period ended June 30, 2002 on financing
fees and affiliate debt compared with $11,000 in the period ended June 30, 2001.
11
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities of $1,344,000 in the six months ended June
30, 2002 was primarily related to net operating losses of $1,842,000, less:
depreciation of $269,000, provision of $5,000 for doubtful accounts, non-cash
expense of $53,000 from issuance of options and warrants related to a severance
agreement, and net changes in working capital of $171,000. Net cash used in
operating activities of $1,899,000 for the six months ended June 30, 2001 was
primarily related to net operating losses of $2,722,000 and net changes in
working capital of $17,000, less: depreciation of $317,000, provision of $6,000
for doubtful accounts, non-cash expense of $67,000 from issuance of options and
warrants for services rendered, and non-cash write offs and amortization of
$450,000 associated with the McKesson contract renegotiation.
Net cash used in the current period by investing activities was $186,000, of
which $15,000 was used for the purchase of property and equipment and $171,000
was the capitalized cost of software development during the period. Net cash
used in the six months ended June 30, 2001 was $18,000, with $29,000 used for
the purchase of property and equipment and $11,000 provided by the sale of
assets that had a net book value of $27,000 and generated a loss of $16,000.
Net cash provided by financing activities was $1,246,000 for the six months
ended June 30, 2002 as compared with $3,271,000 for the same period in 2001.
In June 2002, we completed the private placement of 1,000,000 shares of common
stock to accredited investors at $0.20 per share for net proceeds of $200,000.
In connection with the private placement, we also issued warrants to purchase an
aggregate of 1,000,000 shares of common stock as fully described below. The
warrants contain an exercise of $0.20 per share and expire in June 2007.
In June 2002, we accepted equity investments in the aggregate amount of $50,000
from four members of our Board of Directors on such terms as shall be negotiated
at arms length with unaffiliated third parties and shall be approved by a
committee of disinterested directors.
In June 2002 we issued warrants to acquire an aggregate of 50,000 shares of
common stock to a non-employee in connection with an agreement for professional
services to be rendered. The warrants contain an exercise of $0.30 per share and
expire in June 2003. The warrants were valued at $0.07 per share based on the
Black-Scholes valuation method (using the following assumptions: life of one
year, risk free rate of 2.12%, no dividends during the term, and a volatility of
..566).
In June 2002, we issued an unsecured promissory note in the amount of $50,000 to
an accredited investor. The note is due, along with interest at the rate of 9.5%
per annum, on September 30, 2002.
In May 2002, we completed the private placement of 2,200 shares of Series D
Preferred Stock to accredited investors at $250 per share for net proceeds of
$550,000. A portion of the proceeds of the sale was used to repay $200,000 of
short term loans incurred in February and March 2002.
In April and June 2002, we entered into two separate unsecured short-term loan
agreements with National Financial Corp., a related party, in the aggregate
amount of $85,000. The related notes plus interest, at 9.5% per annum on the
unpaid principal, are due on September 30, 2002.
In March 2002, we completed the private placement of 1,104 shares of Series D
Preferred Stock to accredited investors at $250 per share for net proceeds of
$276,000. A portion of the proceeds of the sale was used to repay $105,000 of
short term loans incurred in February 2002.
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In February and March 2002, we borrowed an aggregate amount of $390,000 pursuant
to four separate unsecured short-term loan agreements with National Financial
Corp., a related party, and issued four promissory notes. In February and May
2002, the Company repaid three notes in the aggregate principal amount of
$305,000 plus accrued interest thereon. The Company repaid two notes in the
aggregate principal amount of $200,000 plus accrued interest thereon in May
2002. The remaining note in the principal amount of $85,000 plus interest, at
9.5% per annum on the unpaid principal, is due on September 30, 2002.
In February 2002, we granted employees the remaining options to purchase 328,842
shares of common stock under our 1997 Stock Option Plan and warrants to purchase
an additional 253,203 shares of common stock in exchange for voluntary salary
reductions. The options and warrants contained an exercise price of $0.35 per
share, the market price on the date of grant, expire on the tenth anniversary of
the grant, and vest 25% immediately on the date of grant and an additional 25%
on each third month anniversary of the date of grant.
In January 2002, we granted employees options under our 1997 Stock Option Plan
to purchase an aggregate of 456,000 shares of common stock. The options contain
an exercise price of $0.60 per share, the market price on the date of grant,
expire on the tenth anniversary of the grant, and vest 100% one year from the
date of grant.
In December 2001, upon completion of our annual meeting, ten year options
exercisable for an aggregate of 25,000 shares of common stock were granted under
the Non-Employee Directors' Plan. The option exercise price of $0.50 was the
fair market value of a share of the outstanding common stock on the date the
options were granted. The options vest to the extent of 50% one year from the
date of grant and will vest fully on the second anniversary of the date of
grant.
In December 2001, we issued to accredited investors for a net consideration of
$462,000, at the rate of $0.70 per common share, 660,000 shares of common stock,
including 440,000 shares resulting from the conversion of 440 shares of Series C
Preferred Stock with an aggregate stated value of $308,000.
In June 2001, we issued 16,000 shares of common stock with a fair market value
of $41,600 to New York Capital AG in connection with an agreement for
professional services to be rendered in 2001.
In April 2001, McKesson acquired 1,514,285 shares of common stock at $1.75 per
share for net proceeds of $2,650,000 and the cancellation of the stock purchase
warrant originally issued to McKesson in 1999 to purchase 819,184 shares of
common stock. No registration rights were granted to McKesson for the shares
acquired.
In April 2001, ten year options exercisable for an aggregate of 25,000 shares of
common stock were granted to employees under the 1997 Stock Option Plan. The
option exercise price of $1.75 was the fair market value of a share of the
outstanding common stock on the date the options were granted. The options
become vested to the extent of 50% one year from the date of grant and fully on
the second anniversary of the date of grant.
In March 2001, we sold 400,000 shares of common stock to an accredited investor
for $1.75 per share for net proceeds of $596,000, and in connection therewith,
in April 2001, we issued immediately exercisable two year warrants at a price of
$1.75 per share to purchase 40,000 shares of common stock to financial advisors
who assisted us in the negotiation and structuring of the sale.
In March 2001, we entered into a loan agreement with American Medical Finance,
Inc., a related party, in the amount of $400,000. Principal and interest, at
9.5% per annum on the unpaid principal, was due in March 2002. In April 2001, we
repaid the full amount of the note along with accrued interest thereon.
In January 2001, we granted employees options to purchase an aggregate of
385,500 shares of common stock under the 1997 Stock Option Plan. The options
were issued at a price of $1.25 per share, the market price on the date of
grant, expire on the tenth anniversary of the grant, and vest on the first
anniversary of the grant.
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Except as otherwise indicated, in each of the security issuances referenced
above, we either registered or provided certain rights to register resale of the
shares at our expense under the Securities Act of 1933 (the "Act"); no sales of
securities involved the use of an underwriter and no commissions were paid in
connection with the sale of any securities and the proceeds were used for
general corporate purposes. The certificates evidencing the common stock issued
in each of the transactions referenced above were appropriately legended.
The offer and sale of the securities in each of the foregoing transactions were
exempt from registration under the Act by virtue of Section 4(2) thereof and the
rules promulgated thereunder (except for the grants of options under the 1997
Stock Option Plan, which grants were registered) under the Act. Except for
issuance of options and warrants to employees who are not directors or executive
officers of he Company, each of the offerees and investors in such private
placements provided representations to us that they were each "accredited
investors," as defined in Rule 501 under the Act, and some were existing
stockholders at the time of such transaction. Each investor was afforded the
right to conduct a complete due diligence review of us and the opportunity to
ask questions of, and receive answers from, our management.
We believe that our available cash resources, together with anticipated revenues
from operations and the proceeds of recently completed financing activities and
funding commitments will not be sufficient to satisfy our capital requirements
through December 31, 2002. Necessary additional capital may not be available on
a timely basis or on acceptable terms, if at all. In any of these events, we may
be unable to implement current plans for expansion or to repay debt obligations
as they become due. If sufficient capital cannot be obtained, we may be forced
to significantly reduce operating expenses to a point which would be detrimental
to business operations, curtail research and development activities, sell
certain business assets or discontinue some or all of our business operations,
take other actions which could be detrimental to business prospects and result
in charges which could be material to our operations and financial position, or
cease operations altogether. In the event that any future financing should take
the form of equity securities, the holders of the common stock and preferred
stock may experience additional dilution. In the event of a cessation of
operations, there may not be sufficient assets to fully satisfy all creditors,
in which case the holders of equity securities will be unable to recoup any of
their investment.
In July and August 2002, we completed the private placement of 450,000 shares of
common stock to accredited investors at $0.20 per share for net proceeds of
$90,000. In connection with the private placement, we also issued warrants to
purchase an aggregate of 450,000 shares of common stock
In August 2002, we borrowed $50,000 from one of our directors and issued an
unsecured promissory note. The note is due, along with interest at the rate of
9.5% per annum, on September 30, 2002.
In August 2002, we borrowed $10,000 from an accredited investor and issued an
unsecured promissory note. The note bears interest at the rate of 8.0% per
annum, with interest payments due on August 31, 2003 and 2004 and principal and
the remaining unpaid interest due on August 31, 2005.
Management is actively exploring the sale of certain assets that it believes are
not critical to ongoing operations or future business development efforts.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial Accounting Standard No. 141
("SFAS 141") "Business Combinations" and Statement of Financial Accounting
Standard No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets". SFAS 141
eliminates the pooling-of-interests method of accounting for business
combinations and SFAS 142 stipulates that goodwill and intangible assets deemed
to have indefinite lives will no longer be amortized, but must be reviewed at
least annually for impairment. Since full impairment of the Company's intangible
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assets was recorded in 2000, the adoption of SFAS 142 as of January 1, 2002 had
no impact on the Company's financial position or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standard No.
144 ("SFAS 144") "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and supersedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and the accounting and reporting provision of APB Opinion No. 30, "Reporting the
Result of Operations for a Disposal of a Segment of a Business." The Company has
adopted SFAS 144 as of January 1, 2002 and does not expect that the adoption
will have a significant impact on the Company's financial position or results of
operations.
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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 April 15, 2002. 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, 2002, the Company filed (i) a report
on Form 8-K dated April 15, 2002, containing information under item 7
and (ii) a report on Form 8-K dated May 24, 2002, containing
information under item 5.
The following exhibit is filed herewith:
99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
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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/ Paul W. Miller
-----------------------------
Paul W. Miller
President and
Chief Executive Officer, on
behalf of the Registrant
August 14, 2002
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