SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(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, 2003
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from to
--------------- --------------
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 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,
23,701,180 shares outstanding as of March 26, 2004.
1
CLAIMSNET.COM INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2003 (unaudited,
restated) and December 31, 2002
Consolidated Statements of Operations (unaudited) for the
Three Months Ended June 30, 2003 (restated) and 2002, and
for the Six Months Ended June 30, 2003 (restated) and 2002
Consolidated Statements of Changes in Stockholders' Deficit
for the Year Ended December 31, 2002 and the Six Months
Ended June 30, 2003 (unaudited, restated)
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 30, 2003 (restated) and 2002
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
ITEM 4. Controls and Procedures
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
June 30, December 31,
2003 2002
(Restated)
--------- ---------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 122 $ 153
Accounts receivable, net of allowance for
doubtful accounts of $3 and $33 as of June 30, 2003
and December 31, 2002, respectively 111 150
Prepaid expenses and other current assets 59 79
--------- ---------
Total current assets 292 382
EQUIPMENT, FIXTURES AND SOFTWARE
Computer hardware and software 1,685 1,685
Software development costs 1,938 1,922
Furniture and fixtures 108 108
Office equipment 25 25
--------- ---------
3,756 3,740
Accumulated depreciation and amortization (3,674) (3,601)
--------- ---------
Total equipment, fixtures and software 82 139
--------- ---------
TOTAL ASSETS $ 374 $ 521
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable to related parties - short term $ 151 $ 118
Accounts payable 151 486
Accrued severance -- 241
Accrued acquisition costs -- 500
Accrued payroll and other current liabilities 163 228
Deferred revenues 64 47
--------- ---------
Total current liabilities 529 1,620
LONG TERM LIABILITIES
Notes payable to related parties - long term 10 10
Notes payable - long term 25 25
--------- ---------
Total long term liabilities 35 35
--------- ---------
Total liabilities 564 1,655
STOCKHOLDERS' DEFICIT
Preferred stock, $.001 par value; 4,000,000 shares authorized;
2,789 and 3,471 shares issued and outstanding as of June 30, 2003
and December 31, 2002, respectively (liquidation preference of
$735 and $876 at June 30, 2003 and December 31, 2002, respectively) -- --
Common stock, $.001 par value; 40,000,000 shares authorized;
19,173,000 shares and 14,816,000 shares issued and outstanding as
of June 30, 2003 and December 31, 2002, respectively 19 15
Additional capital 42,183 41,275
Accumulated deficit (42,392) (42,424)
--------- ---------
Total stockholders' deficit (190) (1,134)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 374 $ 521
========= =========
See notes to consolidated financial statements.
3
CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
(Restated) (Restated)
--------- --------- --------- ---------
REVENUES $ 168 $ 338 $ 330 $ 653
Cost of Revenues 174 463 374 1,023
--------- --------- --------- ---------
Gross Loss (6) (125) (44) (370)
--------- --------- --------- ---------
OPERATING EXPENSES:
Research and development 4 81 14 176
Selling, general and administrative 506 527 817 1,287
--------- --------- --------- ---------
Total operating expenses 510 608 831 1,463
--------- --------- --------- ---------
LOSS FROM OPERATIONS (516) (733) (875) (1,833)
OTHER INCOME (EXPENSE)
Gain on settlement of liabilities 912 -- 916 --
Interest expense - related parties (3) (7) (5) (9)
Interest expense - other (2) -- (4) --
--------- --------- --------- ---------
Total other income (expense) 907 (7) 907 (9)
--------- --------- --------- ---------
NET INCOME (LOSS) $ 391 $ (740) $ 32 $ (1,842)
--------- --------- --------- ---------
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ 0.02 $ (0.07) $ 0.00 $ (0.17)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 17,730 11,175 16,533 11,158
========= ========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ 0.02 $ (0.07) $ 0.00 $ (0.17)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 22,136 11,175 20,097 11,158
========= ========= ========= =========
See notes to consolidated financial statements.
4
CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
Year Ended December 31, 2002 and the Six Months Ended June 30, 2003 (Restated)
(In thousands)
(Unaudited)
Number of Number of
Preferred Common Total
Shares Preferred Shares Additional Accumulated Stockholders'
Outstanding Stock Outstanding Common Stock Capital Deficit Deficit
------------- ---------- ------------- ------------ ------------ ------------ -------------
Balances at January 1, 2002 -- $ -- 11,141 $ 11 $ 39,571 $(39,497) $ 85
Sale of preferred stock 3 -- -- -- 875 -- 875
Sale of common stock -- -- 3,675 4 731 -- 735
Issuance of warrants and
options for services -- -- -- -- 98 -- 98
Net loss -- -- -- -- -- (2,927) (2,927)
--------- ------ --------- --------- --------- --------- ---------
Balances at December 31, 2002 3 -- 14,816 15 41,275 (42,424) (1,134)
--------- ------ --------- --------- --------- --------- ---------
Preferred stock converted into
common stock -- -- 682 1 (1) -- --
Sale of common stock -- -- 2,325 2 460 -- 462
Issuance of common stock in
payment of notes payable and
accrued interest -- -- 350 -- 70 -- 70
Issuance of warrants and
options for services -- -- -- -- 180 -- 180
Warrants exercised for common
stock -- -- 1,000 1 199 -- 200
Net income (restated) -- -- -- -- -- 32 32
--------- ------ --------- --------- --------- --------- ---------
Balances at June 30, 2003
(restated) 3 $ -- 19,173 $ 19 $ 42,183 $(42,392) $ (190)
========= ====== ========= ========= ========= ========= =========
See notes to consolidated financial statements.
5
CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
2003 2002
(Restated)
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 32 $(1,842)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 73 269
Provision for doubtful accounts (8) 5
Stock options and warrants issued for services 180 53
Gain on settlement of liabilities (916) --
Changes in operating assets and liabilities:
Accounts receivable 47 (75)
Prepaid expenses and other current assets 19 34
Current liabilities (202) 212
-------- --------
Net cash used in operating activities (775) (1,344)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment -- (15)
Capitalized software development costs (16) (171)
-------- --------
Net cash used in investing activities (16) (186)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to related parties 100 475
Payment of notes payable to related parties (2) (305)
Proceeds from notes payable -- 50
Proceeds from issuance of common stock 662 200
Proceeds from issuance of preferred stock -- 826
-------- --------
Net cash provided by financing activities 760 1,246
-------- --------
NET DECREASE IN CASH AND EQUIVALENTS (31) (284)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 153 531
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 122 $ 247
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ -- $ 2
======== ========
Pending equity investment from Directors $ -- $ 50
======== ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
Payment of notes payable and accrued interest through issuance of
common stock $ 70 $ --
======== ========
See notes to consolidated financial statements.
6
CLAIMSNET.COM INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited 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
subsidiaries as of June 30, 2003 and the results of their operations
and cash flows for the three months and six months ended June 30, 2003
and 2002, 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, 2003
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, 2002, as filed with the
Securities and Exchange Commission on April 1, 2003.
2. RESTATEMENT OF PREVIOUSLY REPORTED RESULTS
The Company is amending and restating its Form 10-Q for the three and
six months ended June 30, 2003. Subsequent to the issuance of the
Company's financial results for the quarters ended March 31, June 30,
and September 30, 2003, the Company, after consultation with its
auditors, determined that certain implementation fees previously
reported as revenue during the quarters did not meet the technical
requirements to be accounted for as a separate unit of accounting, as
defined in the Emerging Issues Task Force Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables", and as further clarified by
Staff Accounting Bulletin No. 104, "Revenue Recognition", as issued by
the SEC on December 17, 2003. As a result, the implementation fees must
be recognized as revenue ratably over the expected period of the
customer business arrangement.
Accordingly, the consolidated financial statements for the three and
six months ended June 30, 2003, have been restated to defer
implementation fees and recognize those fees over the expected life of
the customer arrangement. The Company expenses costs related to
implementation services as they are incurred. Therefore, the net loss
for the three and six month periods ended June 30, 2003 increased by
the same amount as the increase in the net revenue deferral,
approximately $3,000 and $14,000, respectively. The revenue restatement
also resulted in a restatement of deferred revenues at June 30, 2003.
The restatement did not result in a change to the net loss per common
share of $0.02 as previously reported for the three month period ended
June 30, 2003 or the net income per common share of $0.00 as previously
reported for the six month period ended June 30, 2003.
3. NEED FOR ADDITIONAL CAPITAL AND LIQUIDITY
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 past August
31, 2003. Necessary additional capital may not be available on a timely
basis or on acceptable terms, if at all. 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 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.
7
4. EQUITY TRANSACTIONS
From January through June 2003, the Company completed the private
placement of 2,675,000 shares of common stock to accredited investors
at $0.20 per share, for net proceeds of $462,000. In connection with
these private placements, the Company also issued warrants to the
investors to purchase an aggregate of 2,675,000 shares of common stock.
The warrants contain an exercise price of $0.20 per share and expire
December 31, 2007. These private placements included 350,000 shares of
common stock plus warrants to acquire an additional 350,000 shares of
common stock purchased by National Financial Corporation, a related
party, for net proceeds of $20,000 and retirement of debt of $50,000;
1,250,000 shares of common stock plus warrants to acquire an additional
1,250,000 shares of common stock purchased by Elmira United
Corporation, which owned at the time more than 5% of the outstanding
shares of common stock of the Company, for net proceeds of $250,000; a
5% shareholder who purchased 100,000 shares of common stock plus
warrants to acquire an additional 100,000 shares of common stock for
retirement of debt plus accrued interest of $20,000; and 50,000 shares
of common stock plus warrants to acquire an additional 50,000 shares of
common stock purchased by a director of the Company for net proceeds of
$10,000.
On April 7, 2003, Elmira United Corporation, a 5% shareholder,
exercised a previously issued warrant to purchase 1,000,000 shares of
the Company's common stock and tendered payment in the amount of
$200,000.
In May 2003, 682 shares of preferred stock were converted into 682,000
shares of common stock.
5. ISSUANCE OF WARRANTS
In June 2003, the Company issued warrants to acquire an aggregate of
3,450,000 shares of common stock to employees. The warrants contain an
exercise of $0.15 per share and expire in June 2013. In June 2003, the
Company issued warrants to acquire an aggregate of 1,200,000 shares of
common stock to two directors as compensaton for services outside of
their director duties. The warrants were valued at $0.15 per warrant
for a total charge of approximately $180,000 based on the Black-Scholes
valuation method (using the following assumptions: life of ten years,
risk free rate of 4.77%, no dividends during the term, and a volatility
of 2.04).
6. GAIN ON SETTLEMENT OF LIABILITIES
During March and April 2003, the Company entered into settlement
agreements with various creditors, contingent upon the Company making
payment within ten days of the date of agreement. When the agreed
payment was made by the Company, the creditor released the Company from
all other liabilities. The aggregate amount of the agreements entered
into required payments totaling $217,000 to settle certain accounts
payable, accrued severance and accrued acquisition cost liabilities
totaling $1,134,000. Payments totaling $1,000 pursuant to the
agreements were made prior to March 31, 2003, resulting in a gain on
settlement of liabilities totaling $4,000. Payments totaling $216,000
pursuant to the agreements were made in April 2003, resulting in a gain
on settlement of liabilities totaling $912,000.
7. LOANS FROM RELATED PARTY
In May 2003, the Company entered into an unsecured short-term loan
agreement with NFC, a related party, pursuant to which NFC loaned the
Company an aggregate amount of $100,000. In June 2003, The Company
repaid a portion of this note in the aggregate amount of $32,000 by
issuing 160,000 share of Company common stock and warrants to purchase
160,000 shares of Company common stock. Also in June 2003, an aggregate
of $2,000 plus accrued interest on the note was paid.
In June 2003, The Company also repaid a second note to NFC in the
principal amount of $18,000 by issuing to the shareholder 90,000 shares
of Company common stock and warrants to purchase 90,000 shares of
Company common stock. Also in June 2003, all accrued interest on the
note was paid.
In June 2003, the Company retired a portion of an outstanding note with
J.R. Schellenberg, a related party, in the principal amount of $15,000
plus $5,000 accrued interest thereon by issuing to Mr. Schellenberg
100,000 shares of Company common stock and warrants to purchase 100,000
shares of Company common stock in a private placement as more fully
described in Note 3. The remaining principal amount of $35,000 plus
interest, at 9.5% per annum on the unpaid principal, is due on demand.
8
8. STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation plan
using the intrinsic value-based method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. As such, compensation expense
is recorded on the date of grant to the extent the current market price
of the underlying stock exceeds the exercise price. The Company
recorded no compensation expense associated with options issued to
employees during the three and six months ended June 30, 2003 and 2002.
Had the Company determined compensation based on the fair value at the
grant date for its stock options under SFAS 123 "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure," net income
(loss) and net income (loss) per share would have been affected as
indicated below (in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(Restated) (Restated)
-------- -------- ------- ----------
Net income (loss), as reported $ 391 $ (740) $ 32 $ (1,842)
Stock-based compensation expense:
Included in reported net income (loss) -- -- -- --
Determined using the fair value method (17) (92) (17) (183)
-------- -------- ------- ----------
Pro forma net income (loss) $ 374 $ (832) $ 15 $ (2,025)
-------- -------- ------- ----------
Net income (loss) per share - basic
As reported $ 0.02 $ (0.07) $ 0.00 $ (0.17)
Pro forma $ 0.02 $ (0.08) $ 0.00 $ (0.18)
Net income (loss) per share - diluted
As reported $ 0.02 $ (0.07) $ 0.00 $ (0.17)
Pro forma $ 0.02 $ (0.08) $ 0.00 $ (0.18)
9. SUBSEQUENT EVENTS
In July 2003, the Company completed the private placement of 475,000
shares of common stock to accredited investors at $0.20 per share, for
net proceeds of $80,000 cash and $15,000 in services performed by a
director of the Company outside of his director duties. In connection
with these private placements, the Company also issued warrants to the
investors to purchase an aggregate of 475,000 shares of common stock.
The warrants contain an exercise price of $0.20 per share and expire
December 31, 2007. These private placements included 250,000 shares of
common stock plus warrants to acquire an additional 250,000 shares of
common stock purchased by Elmira United Corporation, which owned at the
time more than 5% of the outstanding shares of common stock of the
Company.
9
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND OTHER PORTIONS OF THIS REPORT CONTAIN FORWARD-LOOKING INFORMATION
THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED BY THE FORWARD-LOOKING INFORMATION. FACTORS THAT MAY
CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, AVAILABILITY OF
FINANCIAL RESOURCES FOR LONG TERM NEEDS, PRODUCT DEMAND, MARKET ACCEPTANCE AND
OTHER FACTORS DISCUSSED ELSEWHERE IN THIS REPORT. THIS MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN
CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES
INCLUDED ELSEWHERE IN THIS REPORT.
GENERAL OVERVIEW
As of June 30, 2003, we had a working capital deficit of $(237,000) and
stockholders' deficit of $(190,000). We generated revenues of $330,000 for the
six months ended June 30, 2003 and $653,000 for the six months ended June 30,
2002. We have incurred net losses since inception and had an accumulated deficit
of $(42,392,000) at June 30, 2003. We expect to continue to operate at a loss
for the near future. There can be no assurance that we will ever achieve
profitability.
We have only been in operation since 1996, and have operated under several
different business strategies. As a result, the relationships between revenue
and cost of revenue, and operating expenses reflected in the financial
information included in this report may not represent future expected financial
relationships. Much of the cost of revenue and operating expenses reflected in
our consolidated financial statements are associated with people costs, and not
directly related to transaction volumes. Our expenses decreased for the year
ended December 31, 2002 due to staffing and other cost reductions and further
expense reductions were effected at the beginning of 2003. In 2002 we recognized
a significant gain on sale of certain business assets and a significant one-time
expense due to the impairment of in-process software development. In 2003, we
realized a gain of $916,000 from the settlement of certain liabilities. The
majority of our revenues in prior years were generated by contracts which have
either terminated or were assigned through an asset sale in September 2002. Our
operating expenses in prior years included a significant one-time charge related
to termination of a business agreement and significant costs associated with an
asset acquisition and the subsequent impairment of purchased assets.
Accordingly, we believe that, at our current stage of operations, period to
period comparisons of results of operations are not meaningful.
PRIVATE PLACEMENTS, OPTIONS AND WARRANTS
From January through June 2003, we completed the private placement of 2,675,000
shares of common stock to accredited investors at $0.20 per share, for net
proceeds of $462,000 and the extinguishment of $70,000 of notes payable and
accrued interest. In connection with these private placements, we also issued
warrants to the investors to purchase an aggregate of 2,675,000 shares of common
stock. The warrants contain an exercise price of $0.20 per share and expire
December 31, 2007. These private placements included 350,000 shares of common
stock plus warrants to acquire an additional 350,000 shares of common stock
purchased by National Financial Corporation, a related party for net proceeds of
$20,000 and retirement of debt of $50,000; 1,250,000 shares of common stock plus
warrants to acquire an additional 1,250,000 shares of common stock purchased by
Elmira United Corporation, which owned at the time more than 5% of the
outstanding shares of our common stock, for net proceeds or $250,000; a 5%
shareholder who purchased 100,000 shares of common stock plus warrants to
acquire an additional 100,000 shares of common stock for retirement of debt plus
accrued interest of $20,000; and 50,000 shares of common stock plus warrants to
acquire an additional 50,000 shares of common stock purchased by a member of our
Board of Directors for net proceeds of $10,000.
In May 2003, 682 shares of preferred stock were converted into 682,000 shares of
our common stock.
In April 2003, Elmira United Corporation, a 5% shareholder, exercised a
previously issued warrant to purchase 1,000,000 shares of our common stock and
tendered payment in the amount of $200,000.
10
The Company used $217,000 of the proceeds from the April 2003 transactions to
make payments pursuant to creditor agreements, as described in Note 5 to the
consolidated financial statements.
None of the above sales of securities involved the use of an underwriter and
except as indicated no commissions were paid in connection with the sale of any
securities. 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 transactions referenced
above was exempt from registration under the Securities Act of 1933 by virtue of
Section 4(2) thereof and the rules promulgated thereunder. Each of the offerees
and investors in such private placements provided representations to us that the
offeree or investor is an "accredited investor," as defined in Rule 501 under
the Act, as well as highly sophisticated (some of whom were existing
stockholders of us at the time of such transaction.) The shares subject to the
options have been registered under the Act.
PLAN OF OPERATIONS
Our recently modified business strategy is as follows:
o to utilize our state of the art technology to help large healthcare
organizations achieve more efficient and less costly administrative
operations;
o to market our services directly to the payer community and its trading
partners;
o to aggressively pursue and support strategic relationships with companies
that will in turn aggressively market our services to large volume
healthcare organizations, including insurers, HMO's, third party
administrators, provider networks, re-pricing organizations, clinics,
hospitals, laboratories, physicians and dentists;
o to provide total claim management services to payer organizations,
including internet claim submission, paper claim conversion to electronic
transactions, and receipt of EDI transmissions;
o to continue to expand our product offerings to include additional
transaction processing solutions, such as HMO encounter forms, eligibility
and referral verifications, claim status inquiries, electronic remittance
advices, claim attachments, and other healthcare administrative services,
in order to diversify sources of revenue; and
o to license our technology for other applications, including stand-alone
purposes, Internet systems and private label use, and for original
equipment manufacturers.
We anticipate that our primary source of revenues will be fees paid by payers
and vendors for private-label or co-branded licenses and services. Historically,
our primary source of revenues was fees paid by users for insurance claims and
patient statement services, and fees from medical and dental payers for
processing claims electronically. We expect most of our revenues to be recurring
in nature.
Our principal costs to operate are anticipated to be technical and customer
support services, sales and marketing, research and development, acquisition of
capital equipment, and general and administrative expenses. We intend to
continue to develop and upgrade our technology and transaction-processing
systems and continually update and improve our website to incorporate new
technologies, protocols, and industry standards. No assurance can be given that
our development and upgrading efforts will be successful. Selling, general and
administrative expenses include all corporate and administrative functions that
serve to support our current and future operations and we hope will provide an
infrastructure to support future growth. Major items in this category include
management and staff salaries and benefits, travel, professional fees, network
administration, business insurance, and rent.
11
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
We generally enter into services agreements with our customers to provide access
to our hosted software platform for processing of customer transactions. We
operate the software application for all customers and the customers are not
entitled to ownership of our software at any time during or at the end of the
agreements. The end users of our software application access our hosted software
platform or privately hosted versions of our software application via the
internet with no additional software required to be located on the customer's
systems. Customers pay implementation fees, transaction fees and time and
materials charges for additional services. Revenues primarily include fees for
implementation and transaction fees, which may be subject to monthly minimum
provisions. Customer agreements may also provide for development fees related to
private labeling of our software platform (i.e. access to our servers through a
web site which is in the name of and/or has the look and feel of the customer's
other web sites) and some customization of the offering and business rules. We
account for our service agreements by combining the contractual revenues from
development, implementation, license, support and certain additional service
fees and recognizing the revenue ratably over the expected period of
performance. We currently use an estimated expected business arrangement term of
three years which is currently the term of the typical contracts signed by our
customers. We do not segment these services and use the underlying contractual
terms to recognize revenue because we do not have objective and reliable
evidence of fair value to allocate the arrangement consideration to the
deliverables in the arrangement. To the extent that implementation fees are
received in advance of recognizing the revenue, we defer these fees and record
deferred revenue. We recognize service fees for transactions and some additional
services as the services are performed. We expense the costs associated with our
customer service agreements as those costs are incurred.
SOFTWARE FOR SALE OR LICENSE
We begin capitalizing costs incurred in developing a software product once
technological feasibility of the product has been determined. Capitalized
computer software costs include direct labor, labor-related costs and interest.
The software is amortized over its expected useful life of 3 years or the
contract term, as appropriate.
Management periodically evaluates the recoverability, valuation, and
amortization of capitalized software costs to be sold, leased, or otherwise
marketed. As part of this review, management considers the expected undiscounted
future net cash flows. If they are less than the stated value, capitalized
software costs will be written down to fair value.
RESULTS OF OPERATIONS FOR THREE AND SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 2002
REVENUES
Revenues in the three months ended June 30, 2003 (the "2003 second quarter")
were $168,000 compared to $338,000 in the three months ended June 30, 2002 (the
"2002 second quarter"), representing a decrease of 50%. Revenues of $308,000
during the 2002 second quarter were generated by our Internet-based healthcare
provider clients, under contracts which were sold in September 2002. Revenues
for the 2003 second quarter from recurring revenue sources totaled $162,000 and
represented 96% of total revenues. Revenues from non-recurring sources totaled
$6,000 and were related to support and other fees.
Revenues in the six months ended June 30, 2003 (the "2003 first half") were
$330,000 compared to $653,000 in the six months ended June 30, 2002 (the "2002
first half"), representing a decrease of 49%. Revenues of $593,000 during the
2002 first half were generated by our Internet-based healthcare provider
clients, under contracts which were sold in September 2002. Revenues for the
2003 first half from recurring revenue sources totaled $315,000 and represented
95% of total revenues. Revenues from non-recurring sources totaled $15,000 and
were related to support and other fees.
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COST OF REVENUES
Cost of revenues in the 2003 second quarter was $174,000, compared with $463,000
in the 2002 second quarter, representing a decrease of 62%. 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 to $61,000 for the 2003 second quarter compared with
$69,000 for the 2002 second quarter. Transaction processing expenses were $1,000
in the 2003 second quarter compared to $136,000 in the 2002 second quarter,
nearly a 100% decrease. Customer support operations expense decreased by 43% to
$107,000 in the 2003 second quarter from $187,000 in the 2002 second quarter.
The decreases in third party transaction processing expenses and customer
support operations expense were primarily attributable to the assignment of
contracts with a majority of our healthcare provider clients in September 2002.
Software amortization and development project amortization expenses decreased
93% to $5,000 in the 2003 second quarter from $71,000 in the 2002 second
quarter. This decrease reflects completion in 2002 of amortization for earlier
versions of software for customer use.
Cost of revenues in the 2003 first half was $374,000, compared with $1,023,000
in the 2002 first half, representing a decrease of 63%. 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 to $124,000 for the 2003 first half compared with
$164,000 for the 2002 first half. Transaction processing expenses were $2,000 in
the 2003 first half compared to $273,000 in the 2002 first half, nearly a 100%
decrease. Customer support operations expense decreased by 52% to $212,000 in
the 2003 first half from $444,000 in the 2002 first half. The decreases in third
party transaction processing expenses and customer support operations expense
were primarily attributable to the assignment of contracts with a majority of
our healthcare provider clients in September 2002. Software amortization and
development project amortization expenses decreased 75% to $36,000 in the 2003
first quarter from $142,000 in the 2002 first half. This decrease reflects
completion in 2002 of amortization for earlier versions of software for customer
use.
OPERATING EXPENSES
Research and development expenses were $4,000 in the 2003 second quarter,
compared with $81,000 in the 2002 second quarter, representing a decrease of
95%. Research and development expenses were $14,000 in the 2003 first half,
compared with $176,000 in the 2002 first half, representing a decrease of 92%.
Research and development expenses are comprised of personnel costs and related
expenses. Research and development efforts were substantially curtailed at the
beginning of 2003, while the 2002 costs were related to continuous incremental
enhancements to our proprietary software system. Software development expenses
of $64,000 and $171,000 were capitalized during the 2002 second quarter and 2002
first half, respectively for development efforts required to comply with
provisions of the Health Insurance Portability and Accountability Act of 1996
("HIPAA"). In December 2002, we terminated the ongoing HIPAA remediation
in-process development project in order to pursue a more cost-effective
development alternative and we recognized an impairment charge at that time.
During the 2003 first quarter, we began development of the alternative HIPAA
remediation project and capitalized development costs of $10,000 and $16,000
during the 2003 second quarter and 2003 first half, respectively.
Selling, general and administrative expenses were $506,000 in the 2003 second
quarter, compared with $527,000 in the 2002 second quarter, a decrease of 4%.
Selling, general and administrative expenses were $817,000 in the 2003 first
half, compared with $1,287,000 in the 2002 first half, a decrease of 37%. The
reduction is a result of cost containment measures including staff reductions,
salary reductions and other cost containment measures. A one-time charge of
$162,000 was recorded in the 2002 first half pursuant to a severance agreement
with our former chief executive officer, of which $50,000 related to the
issuance of options and warrants. A one-time charge of $195,000 was recorded in
the 2003 second quarter for services performed by two of our directors outside
of their director duties, of which $180,000 related to the issuance of warrants.
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OTHER INCOME (EXPENSE)
Interest expense of $5,000 and $9,000 was incurred in the 2003 second quarter
and 2003 first half, respectively, on financing fees and affiliate debt compared
with $7,000 and $9,000 in the 2002 second quarter and 2002 first half,
respectively. A $916,000 gain on settlement of liabilities was recognized during
the 2003 first half related to settlement agreements with several creditors such
agreements being consummated during March and April 2003.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities of $775,000 in the 2003 first half was
primarily related to net income of $32,000, plus depreciation of $73,000 and
non-cash expense of $180,000 from issuance of options and warrants, less a
reduction of $8,000 in the allowance for doubtful accounts, changes in working
capital of $136,000, offset by a non-cash gain of $916,000 from settlement of
liabilities. Net cash used in operating activities of $1,344,000 in the 2002
first half was primarily related to net 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, and net changes in working
capital of $171,000.
Net cash used in investing activities in the 2003 first half was $16,000 related
to the cost of software development capitalized during the year. Net cash used
in investing activities in the 2002 first half was $186,000, of which $15,000
was used for the purchase of property and equipment and $171,000 was the cost of
software development capitalized during the year.
Net cash provided by financing activities in the 2003 first half was $760,000,
of which $662,000 was related to the issuance of common stock and $98,000
related to proceeds of $100,000 from debt financing, offset by $2,000 used to
repay debt. Net cash provided by financing activities in the 2002 first half was
$1,246,000 resulting from the issuance of preferred stock for net proceeds of
$826,000, the issuance of common stock for net proceeds of $200,000 and proceeds
of $525,000 from debt financing, offset by $305,000 used to repay debt.
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
past August 31, 2003. 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.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS QUARTERLY 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 ANNUAL REPORT ON FORM 10-K WHICH WAS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 2003. NO ASSURANCE
CAN BE GIVEN THAT FUTURE RESULTS COVERED BY THE FORWARD-LOOKING STATEMENTS WILL
BE ACHIEVED.
ITEM 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures
are effective in gathering, analyzing and disclosing information needed
to satisfy the Company's disclosure obligations under the Exchange Act.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect those controls since
the most recent evaluation of such controls.
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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, 2003, the Company filed Reports on
Form 8-K dated April 8, 2003, and April 15, 2003, containing
information under item 5.
The following Additional Exhibits are filed herewith:
31.1 Certification pursuant to Exchange Act Rules 13a-15(e) and
15d-15(e) of the President and Chief Executive Officer
31.2 Certification pursuant to Exchange Act Rules 13a-15(e) and
15d-15(e) of the Chief Financial Officer
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
the President and Chief Executive Officer
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
the Chief Financial Officer
- --------------------------------------------------------------------------------
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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/ Don Crosbie
-----------------------------
Don Crosbie
President and
Chief Executive Officer, on
behalf of the Registrant
By: /s/ Paul W. Miller
----------------------------
Paul W. Miller
Chief Financial Officer
April 1, 2004
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