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 March 31, 1999
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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,
6,250,000 shares outstanding as of May 17, 1999.
CLAIMSNET.COM INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 (unaudited) and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 (unaudited) and 1998 (unaudited)
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
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CLAIMSNET.COM INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
(Unaudited)
March 31, December 31,
1999 1998(1)
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ASSETS
CURRENT ASSETS:
Cash $ 337 $ 44
Accounts receivable, less allowance for
doubtful accounts of $44 and $10, respectively 58 42
Prepaid expenses and other current assets 23 20
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Total current assets 418 106
PROPERTY AND EQUIPMENT - Net 289 233
INTANGIBLE ASSETS - Net 1,222 1,290
DEFERRED COSTS AND OTHER ASSETS 47 25
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TOTAL $ 1,976 $ 1,654
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 201 $ 174
Accrued expenses and other current liabilities 999 671
Current portion of long-term debt 1,055 350
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Total current liabilities 2,254 1,195
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LONG-TERM DEBT 5,210 4,323
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value; 4,000 shares
authorized, no shares issued and outstanding
Common stock, $.001 par value; 40,000 shares
authorized; 3,750 shares and 3,625 shares
outstanding as of March 31, 1999 and December
31, 1998, respectively 4 4
Additional capital 4,732 3,882
Accumulated deficit (10,225) (7,750)
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Total stockholders' deficit (5,489) (3,864)
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TOTAL $ 1,976 $ 1,654
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(1) The condensed consolidated balance sheet as of December 31, 1998 has been
derived from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
CLAIMSNET.COM INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
Three Months Ended
March 31,
-------------------------
1999 1998
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REVENUES $ 65 $ 43
Cost of Revenues 216 138
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Gross Loss (151) (95)
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OPERATING EXPENSES:
Research and Development 131 142
Software Amortization 168 168
Selling, General & Administrative 1,163 307
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Total operating expenses 1,462 617
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LOSS FROM OPERATIONS (1,613) (712)
INTEREST EXPENSE, Net 862 69
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LOSS BEFORE INCOME TAXES (2,475) (781)
INCOME TAXES - -
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NET LOSS $ (2,475) $ (781)
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BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.67) $ (0.25)
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WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 3,669 3,111
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See notes to condensed consolidated financial statements.
CLAIMSNET.COM INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
Three Months Ended March 31, 1999
(Unaudited)
Number of Common Additional Accumulated
Shares Stock Capital Deficit
--------- -------- ---------- -----------
Balances at December 31, 1998 3,625 $ 4 $ 3,882 $ (7,750)
Issuance of common stock
with Series A 12%
Subordinated Notes 125 - 850 -
Net loss and comprehensive
loss - - - (2,475)
--------- -------- ---------- ---------
Balances at March 31, 1999 3,750 $ 4 $ 4,732 $ (10,225)
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--------- -------- ---------- ---------
See notes to condensed consolidated financial statements.
CLAIMSNET.COM INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,475) $ (781)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 183 174
Provision for doubtful accounts - 10
Amortization of debt discount and
deferred financing costs 766 -
Changes in operating assets and liabilities
net of effects of businesses acquired:
Accounts receivable (16) (40)
Prepaid expenses and other current assets (3) 10
Accounts payable, accrued expenses and
other current liabilities 355 (32)
Accrued interest 96 70
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Net cash used in operating activities (1,094) (589)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (76) (4)
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Net cash used in investing activities (76) (4)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in line of credit - affiliate 791 318
Payments for deferred offering costs (95) (52)
Issuance of Series A 12% Subordinated Notes 892 -
Payment of contingent notes payable (125) -
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Net cash provided by financing activities 1,463 266
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NET INCREASE (DECREASE) IN CASH 293 (327)
CASH, BEGINNING OF PERIOD 44 395
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CASH, END OF PERIOD $ 337 $ 68
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Common Stock issued in connection with Series A
12% Subordinated Notes $ 850 $ -
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See notes to condensed consolidated financial statements.
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 subsidiary as of March 31, 1999
and the results of its operations and cash flows for the three months
ended March 31, 1999 and 1998, in conformity with generally accepted
accounting principles for the interim financial information applied on
a consistent basis. The results of operations for the three months
ended March 31, 1999 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 Registration
Statement on Form S-1 as filed with the Securities and Exchange
Commission on April 6, 1999.
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.
Effective January 1, 1999 the Company adopted Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." No expenses met the criteria to be
capitalized during the three months ended March 31, 1999.
2. BRIDGE FINANCING
During the three months ended March 31, 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 approximately $892,000 (net of
closing fees and cash financing expenses). The notes and all accrued
interest are due upon the earlier of the first day subsequent to the
close of the Company's initial public offering or one year from the
date of issuance.
The 125,000 shares of common stock issued with the Notes were valued at
$850,000 ($6.80 per share) and were recorded at that amount with a
corresponding charge to debt discount. The Notes were repaid from the
proceeds of the initial public offering which occurred on April 6, 1999
(see note 4) and the debt discount was amortized over the period from
issuance to repayment, resulting in a $680,000 charge to interest
expense during the three months ended March 31, 1999. Debt issuance
costs of $108,000 were also capitalized as deferred financing costs and
amortized over the period the Notes were outstanding, resulting in a
$86,000 charge to interest expense during the three months ended March
31, 1999.
3. INCOME TAXES
The tax benefit from the Company's losses for the three months ended
March 31, 1999 and 1998 were offset by increases in the valuation
allowance related to deferred tax assets.
4. INITIAL PUBLIC OFFERING
On April 6, 1999, the Company consummated an initial public offering
("IPO") of 2,500,000 shares of common stock at a price of $8.00 per
share. The underwriters have the right to sell an additional 375,000
shares until the expiration of the underwriters' overallotment option
on May 21, 1999. The net proceeds to the Company (after deducting the
underwriting discount and offering expenses payable by the Company)
were approximately $17.0 million. The net proceeds to the Company were
used to (i) repay approximately $5.2 million of outstanding principal
and accrued interest on its 9.5% note payable and line of credit
facility with American Medical Finance, Inc., a related party, and (ii)
repay approximately $1.0 million of outstanding indebtedness and
accrued interest under its Series A 12% Subordinated Notes.
In connection with the initial public offering, the Company granted
certain employees and non-employees options to purchase 420,000 shares
of common stock under the 1997 Stock Option Plan, 27,000 of which were
granted to non-employees. The options were issued at a price of $8.00
per share, expire on the tenth anniversary of the grant, and the
employee options vest ratably over the first four anniversaries of the
grant. The non-employee options were issued for past services, are
fully vested, and become exercisable ratably over the first four
anniversaries of the grant. The options granted to non-employees
require a charge to earnings equal to the imputed value of the options,
which is estimated at $5.73 per option using the Black-Sholes valuation
method. Therefore, the Company has accrued and recognized a one-time
expense of $154,710 related to the past services in the three months
ended March 31, 1999.
The Company also granted non-employee directors options to purchase
80,000 shares of common stock under the Non-Employee Director's Plan.
The non-employee director options were issued at a price of $8.00 per
share. Options for 50,000 shares of common stock vest ratably over the
first two anniversaries of the grant, and expire on the tenth
anniversary of the grant. Options for 30,000 shares of common stock
vest ratably on each three-month anniversary of the grant and expire on
the tenth anniversary of the grant.
Also in connection with the initial public offering, the Company issued
warrants to purchase an aggregate of 20,000 shares of common stock at a
price of $8.80 per share, exercisable between the first and fifth
anniversaries of the date of grant. The warrants are fully vested and
issued for past services and, therefore, require a charge to earnings
equal to the imputed value of the warrants, which is estimated at $6.07
per share using the Black-Sholes valuation method. Therefore, the
Company has accrued and recognized a one-time expense of $121,400
related to the issuance of warrants in the three months ended March 31,
1999.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1998
Revenues
Revenues in the three months ended March 31, 1999 were $65,000 compared to
$48,000 in the three months ended March 31, 1998, representing an increase of
52%. Revenues for the 1998 period were exclusively derived from the remaining
business of Medica Systems, Inc. (Medica), which was acquired by the Company in
June 1997. The acquisition was made primarily for the value of Medica's claims
processing software technology. A majority of Medica's revenues related to
business that was not transferable to the Company's Internet-based system.
Nearly all of the Medica business was phased out during 1998, with only $4,500
of the 1999 revenue related to this business. The remainder of the revenues
during 1999 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 1999
period from recurring revenue sources represented 65% of total revenues and were
comprised of $31,000 from transaction-based fees and $11,000 from subscription
fees. Revenues from non-recurring sources totaled $23,000 and were related to
setup, support, and other fees.
The Company processed 451,000 transactions during the three months ended March
31, 1999, compared with 96,000 transactions in the year-earlier quarter, an
increase of 370%. All of the increase was attributable to internal growth in the
number of accounts and healthcare providers subscribing to the Company's
services. The Company had 253 accounts processing transactions for 2,045
providers at March 31, 1999 compared with 75 accounts and 596 providers at March
31, 1998, representing increases of 237% and 243%, respectively.
Transaction-based revenue averaged $.07 per transaction for the three months
ended March 31, 1999. The Company expects the average revenue per transaction to
increase in future quarters for several reasons. Revenue per transaction for the
286,357 commercial electronic claims averaged $.02 during the period and will
increase due to payer rebate contracts with volume-based pricing structures.
Revenue per transaction for the 97,206 Medicare and Medicaid claims averaged
$.01 during the period and will increase with the implementation of a new
pricing structure to charge a per transaction fee. The new pricing structure was
implemented in early May 1999 for new clients and is expected to be fully
implemented for all clients by the end of 1999. Average revenue per transaction
for the 64,509 paper claims was $.36 during the quarter.
The average revenue per patient statement processed during the quarter ended
March 31, 1999 was $.48, but the 3,269 transactions represented less than one
percent of total transactions during the period. Since patient statement
processing only became available recently, the Company expects the number of
accounts using patient statement processing to increase and, therefore, patient
statement transactions should represent a larger percentage of total
transactions in future quarters.
Cost of revenues
Cost of revenues in the three months ended March 31, 1999 was $217,000, compared
with $138,000 in the three months ended March 31, 1998, representing an increase
of 57%. The three components of cost of revenues are data center expenses,
transaction processing expenses, and customer support operation expenses. Data
center expenses were $35,000 for the three months ended March 31, 1999 compared
with $25,000 for 1998, an increase of 40%. Transaction processing expenses were
$41,000 in 1999 compared to $22,000 in the first quarter of 1998, representing
an 86% increase. While these two transaction-based expense categories combined
increased 62%, the number of transactions processed increased 370%. Customer
support operations expense increased by 55% to $141,000 in the first quarter of
1999 from $91,000 in the first quarter of 1998, while the number of accounts and
providers served at the end of each quarter increased by 237% and 243%,
respectively.
Operating expenses
Research and development expenses were $131,000 in the three months ended March
31, 1999, compared with $142,000 in the three months ended March 31, 1998,
representing a decrease of 8%. Research and development expenses are comprised
of personnel costs and related expenses. There were no software development
expenses capitalized during either of the periods. Development efforts during
both periods were related to continuous incremental enhancements to the
Company's proprietary software system. Each enhancement, whether major or minor
in nature, can be individually and simultaneously implemented for all clients on
the Company's centralized operating system.
Software amortization expense was $168,000 in each of the three month periods
ended March 31, 1999 and 1998.
Selling, general and administrative expenses were $1,163,000 in the three months
ended March 31, 1999, compared with $307,000 in the same period of 1998, an
increase of 279%. The $856,000 period-to-period increase includes a $277,000
increase in sales and marketing expenses and a $199,000 increase in technology
infrastructure and support expenses, both of which are primarily related to
personnel costs and related expenses. A one-time charge of $276,000 for the cost
of past services related to the grant of stock options and warrants to
non-employees is also included in the increase. The increase for other general
administrative expenses was $104,000, primarily due to increases in office rent,
telephone expenses, and outside professional fees.
Interest expense
Net interest expense was $862,000 for the three months ended March 31, 1999
compared with $69,000 in 1998. Included in the 1999 expense was $680,000 related
to amortization of debt discount and $86,000 related to amortization of deferred
financing costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied on capital from private equity sales and
debt from an affiliate to fund operations. Net cash used in operating activities
was $1,094,000 in the three months ended March 31, 1999, compared with $589,000
for the year-earlier period, primarily due to increased selling, general and
administrative expenses, as discussed above. Net cash used in investing
activities was $76,000 and $4,000 in the three months ended March 31, 1999 and
1998, respectively, all of which was related to purchases of computer equipment.
Net cash provided by financing activities for the three months ended March 31,
1999 was $1,463,000, compared with $266,000 in the comparable period of 1998.
Borrowings under the line of credit - affiliate were $791,000 in 1999 and
$318,000 in 1998. Payments for deferred costs of the Company's initial public
offering were $95,000 in 1999 verses $52,000 in 1998. During the three months
ended March 31, 1999, the Company issued an aggregate of $1,000,000 of Series A
12% Subordinated Notes, for which the Company received $892,000, net of cash
financing expenses, which were capitalized as deferred financing costs to
be amortized over the term of the Notes. The amount of deferred financing
costs charged to interest expense during the three months ended March 31,
1999 was $86,000. The remaining $22,000 will be charged to interest expense
in the second quarter 1999.
The note holders received 125,000 shares of common stock valued at $850,000,
which is treated as debt discount over the term of the notes. The notes are due
on the earlier of one day after the closing of the Company's initial public
offering or one year from issuance. As a result of the Company's initial public
offering on April 6, 1999, the notes became due and were repaid. The amount of
debt discount charged to interest expense during the three months ended March
31, 1999 was $680,000. The remaining $170,000 debt discount will be charged to
interest expense in the second quarter 1999.
During the three months ended March 31, 1999, the Company paid $125,000 of notes
payable related to the acquisition of Medica System, Inc. in June 1997, which
were contingent upon the Company's initial public offering.
On April 6, 1999, the Company consummated an initial public offering ("IPO") of
2,500,000 shares of common stock at a price of $8.00 per share. The underwriters
have the right to sell an additional 375,000 shares until the expiration of the
underwriters' overallotment option on May 21, 1999. The net proceeds to the
Company (after deducting the underwriting discount and offering expenses payable
by the Company) were approximately $17.0 million. The net proceeds to the
Company were used to (i) repay approximately $5.2 million of outstanding
principal and accrued interest on its 9.5% note payable and line of credit
facility with American Medical Finance, Inc., a related party, and (ii) repay
approximately $1.0 million of outstanding indebtedness and accrued interest
under its Series A 12% Subordinated Notes.
As of May 17, 1999 the only outstanding notes payable are $225,000 related to
the Medica acquisition, due in December 1999.
The Company believes that, with the proceeds of the initial public offering,
current cash reserves are sufficient to fund operations and capital improvements
needed for a period of at least eighteen months.
YEAR 2000
Many currently installed computer systems and software products are unable to
distinguish between twentieth century dates and twenty-first century dates. As a
result, many companies' software and computer systems may need to be upgraded or
replaced to comply with each "Year 2000" requirements. The Company's business is
dependent on the operation of numerous systems that could potentially be
impacted by Year 2000 related problems. Those systems include, among others;
hardware and software systems used by the Company to deliver services to its
customers (including the Company's proprietary software systems as well as
hardware and software supplied by third parties; communications networks, such
as the Internet and private intranets, which the Compnay depends on to provide
electronic transactions to its customers, the internal systems of the Company's
customers and suppliers, the hardware and software systems used internally by
the Company in the management of its business; and non-information technology
systems and services used by the Company in its business, such as telephone
systems and building systems.
The Company has internally reviewed the proprietary software systems it uses to
deliver services to its customers. Although the Company believes that its
internally developed applications and systems are designed to be Year 2000
compliant the Company utilizes third-party equipment and software that may not
be Year 2000 compliant. Failure of such third-party or currently owned equipment
or software to operate properly with regard to the Year 2000 and thereafter
could require the Company to incur unanticipated expenses to remedy any
problems, which could have a material adverse effect on its business, prospects,
financial condition, and results of operations. The Company does not believe
that its expenditures to upgrade its internal systems and applications will be
material to its business, prospects, financial condition, and results of
operations.
Futhermore, the success of the Company's efforts may depend on the success of
other healthcare participants in dealing with their Year 2000 issues. Many of
these organizations are not Year 2000 compliant and the impact of widespread
customer failure on the Company's systems is difficult to determine. Customer
difficulties due to Year 2000 issues could interfere with healthcare
transactions or information, which might expose the Company to significant
potential liability. If client failures result in the failure of the Company's
systems, its business, prospects, financial condition, and results of operations
would be materially adversely affected. Furthermore, the purchasing patterns of
these customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to become Year 2000 compliant. The costs
of becoming Year 2000 compliant for current or potential customers may result in
reduced funds being available to purchase and implement the Company's
applications and services.
The Company is conducting a formal assessment of its Year 2000 exposure in order
to determine what steps beyond those identified by its internal review may be
advisable. The Company does not presently have a contingency plan for handling
Year 2000 problems that are not detected and corrected prior to their
occurrence. Any failure of the Company to address any unforeseen Year 2000 issue
could adversely affect its business, prospects, financial condition, and results
of operations.
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.
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 Registration Statement on Form S-1
which was filed with the Securities and Exchange Commission in connection with
the IPO. No assurance can be given that future results covered by the
forward-looking statements will be achieved.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) REPORTS:
None.
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
May 17, 1999