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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, 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 001-14665
---------
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,
17,016,214 shares outstanding, Preferred Series D Stock, $.001 par value, 3,304
shares outstanding, and Preferred Series E Stock, $.001 par value, 167 shares
outstanding as of April 21, 2003.
1
CLAIMSNET.COM INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) as of March
31, 2003 and December 31, 2002
Condensed Consolidated Statements of Operations (unaudited)
for the Three Months Ended March 31, 2003 and 2002
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Three Months Ended March 31, 2003 and 2002
Notes to Condensed 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
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 31, December 31,
2003 2002
--------- ---------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 52 $ 153
Accounts receivable, net of allowance for
doubtful accounts of $6 and $34, respectively 122 150
Prepaid expenses and other current assets 33 79
--------- ---------
Total current assets 207 382
EQUIPMENT, FIXTURES AND SOFTWARE
Computer hardware and software 1,685 1,685
Software development costs 1,928 1,922
Furniture and fixtures 108 108
Office equipment 25 25
--------- ---------
3,746 3,740
Accumulated depreciation and amortization (3,654) (3,601)
--------- ---------
Total equipment, fixtures and software 92 139
--------- ---------
TOTAL ASSETS $ 299 $ 521
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable to related parties - short term $ 118 $ 118
Accounts payable 514 486
Accrued severance 241 241
Accrued acquisition costs 500 500
Accrued payroll and other current liabilities 141 228
Deferred revenues 45 47
--------- ---------
Total current liabilities 1,559 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 1,594 1,655
STOCKHOLDERS' DEFICIT
Preferred stock, $.001 par value; 4,000,000 shares authorized
3,471 shares issued and outstanding as of March 31, 2003
and December 31, 2002, respectively (liquidation preference of $876) -- --
Common stock, $.001 par value; 40,000,000 shares authorized;
15,766,000 shares and 14,816,000 shares issued as of March 31, 2003
and December 31, 2002, respectively 16 15
Additional capital 41,461 41,275
Accumulated deficit (42,772) (42,424)
--------- ---------
Total stockholders' deficit (1,295) (1,134)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 299 $ 521
========= =========
See notes to condensed consolidated financial statements.
3
CLAIMSNET.COM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
------------------------
2003 2002
--------- ---------
REVENUES $ 173 $ 315
Cost of Revenues 232 560
--------- ---------
Gross Loss (59) (245)
--------- ---------
OPERATING EXPENSES:
Research and development 10 95
Selling, general and administrative 279 760
--------- ---------
Total operating expenses 289 855
--------- ---------
LOSS FROM OPERATIONS (348) (1,100)
OTHER INCOME (EXPENSE)
Gain on settlement of liabilities 4 --
Interest expense - related parties (2) (2)
Interest expense - other (2) --
--------- ---------
Total other income (expense) -- (2)
--------- ---------
NET LOSS $ (348) $ (1,102)
--------- ---------
NET LOSS PER COMMON SHARE (BASIC AND DILUTED) $ (0.02) $ (0.10)
========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (BASIC AND DILUTED) 15,323 11,141
========= =========
See notes to condensed consolidated financial statements.
4
CLAIMSNET.COM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (348) $(1,102)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 53 139
Stock options and warrants issued for services -- 50
Gain on settlement of liabilities (4) --
Changes in operating assets and liabilities:
Accounts receivable 28 (65)
Prepaid expenses and other current assets 46 56
Current liabilities (57) (5)
-------- --------
Net cash used in operating activities (282) (927)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment -- (10)
Capitalized cost of software development (6) (107)
-------- --------
Net cash used in investing activities (6) (117)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable to affiliate -- 390
Payment of notes payable to affiliate -- (105)
Proceeds from issuance of common stock 187 --
Proceeds from issuance of preferred stock -- 276
-------- --------
Net cash provided by financing activities 187 561
-------- --------
NET DECREASE IN CASH AND EQUIVALENTS (101) (483)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 153 531
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 52 $ 48
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ -- $ 2
======== ========
See notes to condensed consolidated financial statements.
5
CLAIMSNET.COM INC. AND SUBSIDIARIES
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 subsidiaries as of March 31, 2003 and the results of its operations
and cash flows for the three months ended March 31, 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 months ended March 31, 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. 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 through May
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, 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.
3. SALE OF COMMON STOCK
In January, February and March 2003, the Company completed the private
placement of 950,000 shares of common stock to accredited investors at
$0.20 per share, for net proceeds of $187,000. In connection with these
private placements, the Company also issued warrants to the investors
to purchase an aggregate of 950,000 shares of common stock. The
warrants contain an exercise price of $0.20 per share and expire
December 31, 2007. These private placements included 100,000 shares of
common stock plus warrants to acquire an additional 100,000 shares of
common stock purchased by National Financial Corporation, a related
party, and 500,000 shares of common stock plus warrants to acquire an
additional 500,000 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.
4. 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 contingent
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.
5. STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 148 provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. SFAS 148 is
effective for fiscal years ending after December 15, 2002. The adoption
of SFAS 148 did not impact the Company's financial position or
operations.
6
SFAS 123 requires the disclosure of pro forma net loss and net loss per
share as if the Company applied the fair value method. The Company's
calculations for employee grants were made using a Black-Scholes model
using the following assumptions: expected life, five to ten years; risk
free rate of 2.5%; no dividends during the expected term; and a
volatility of 2.8 for 2002. No employee stock options were issued in
the first quarter of 2003.
If the computed values of all the Company's stock based awards were
calculated and expensed (over the vesting period of the awards) using
the fair value method specified under SFAS 123, net loss would have
been as follows:
Three Months Ended
March 31,
2003 2002
-------- -------
Loss from operations as reported (thousands) $ 348 $1,102
Stock-based compensation expense:
As reported -- --
Determined using the fair value method -- 92
-------- -------
Pro forma loss from operations $ 348 $1,194
======== =======
Loss per share (basic and diluted)
As reported $ 0.02 $ 0.10
Pro forma $ 0.02 $ 0.11
6. SUBSEQUENT EVENTS
On April 7, 2003, Elmira United Corporation, a 5% shareholder of the
Company, 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.
On April 14, 2003, the Company completed the private placement of
250,000 shares of common stock to Elmira United Corporation at $0.20
per share for net proceeds of $50,000. In connection with the private
placement, the Company also issued warrants to Elmira United
Corporation to purchase an aggregate of 250,000 shares of common stock.
The warrants contain an exercise price of $0.20 per share and expire
December 31, 2007.
The Company used $217,000 of the proceeds from the above transactions
to make payments pursuant to creditor agreements, as described in Note
4, resulting in an additional $913,000 gain on settlement of
liabilities in April.
7
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.
IN GENERAL
As of March 31, 2003, we had a working capital deficit of $(1,352,000) and
stockholders' deficit of $(1,295,000). We generated revenues of $173,000 for the
three months ended March 31, 2003 and $315,000 for the three months ended March
31, 2002. We have incurred net losses since inception and had an accumulated
deficit of $(42,772,000) at March 31, 2003. We expect to continue to operate at
a loss for the foreseeable 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. 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
During January, February and March 2003, we completed the private placement of
950,000 shares of common stock to accredited investors at $0.20 per share for
net proceeds of $187,000. In connection with these private placements, we also
issued warrants to the investors to purchase an aggregate of 950,000 shares of
common stock. The warrants contain an exercise price of $0.20 per share and
expire December 2007. These private placements included 100,000 shares of common
stock plus warrants to acquire an additional 100,000 shares of common stock
purchased by National Financial Corporation, a related party, and 500,000 shares
of common stock plus warrants to acquire an additional 500,000 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.
On April 7, 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.
On April 14, 2003, we completed the private placement of 250,000 shares of
common stock to Elmira United Corporation at $0.20 per share for net proceeds of
$50,000. In connection with the private placement, we also issued warrants to
Elmira United Corporation to purchase an aggregate of 250,000 shares of common
stock. The warrants contain an exercise price of $0.20 per share and expire
December 31, 2007.
The Company used $217,000 of the proceeds from the April 7, 2003 and April 14,
2003 transactions to make payments pursuant to creditor agreements, as described
in Note 4 to the condensed 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.
8
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.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
We enter into services agreements with our customers to provide access to our
hosted software platform for processing of customer transactions, including base
level support. 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 customers' systems. Customers pay transaction fees and pay
time and materials charges for support above the base level. Customer agreements
also may provide for (i) 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, and (ii) periodic license
fees. We account for our service agreements by combining the contractual
revenues from development, license and support fees and recognizing the revenue
ratably over the estimated period covered by the development and license. We do
not segment these services and use the contractual allocation 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.
We recognize service fees for transactions, above base support and monthly
hosting as the services are performed.
9
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 MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2002
REVENUES
Revenues in the three months ended March 31, 2003 (the "2003 first quarter")
were $173,000 compared to $315,000 in the three months ended March 31, 2002 (the
2002 first quarter), representing a decrease of 45%. Revenues of $285,000 during
the 2002 first quarter were generated by our Internet-based healthcare provider
clients, under contracts which were sold in September 2002. Revenues for the
2003 first quarter from recurring revenue sources totaled $152,000 and
represented 88% of total revenues. Revenues from non-recurring sources totaled
$21,000 and were related to implementation, development, support and other fees.
COST OF REVENUES
Cost of revenues in the 2003 first quarter was $232,000, compared with $560,000
in the 2002 first quarter, representing a decrease of 59%. 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 $63,000 for the 2003 first quarter compared with
$95,000 for the 2002 first quarter. Transaction processing expenses were $1,000
in the 2003 first quarter compared to $137,000 in the 2002 first quarter, nearly
a 100% decrease. Customer support operations expense decreased by 47% to
$137,000 in the 2003 first quarter from $257,000 in the 2002 first 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 56% to
$31,000 in the 2003 first quarter from $71,000 in the 2002 first quarter. This
decrease reflects completion in 2002 of amortization for earlier versions of
software for customer use.
OPERATING EXPENSES
Research and development expenses were $10,000 in 2003 first quarter, compared
with $95,000 in the 2002 first quarter, representing a decrease of 89%. 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 were related to continuous incremental enhancements to
our proprietary software system. Software development expenses of $107,000 were
capitalized during the 2002 first quarter 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 $6,000 for development
costs during the quarter.
Selling, general and administrative expenses were $279,000 in the 2003 first
quarter, compared with $760,000 in the 2002 first quarter, a decrease of 63%.
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 quarter pursuant to a
severance agreement with our former chief executive officer, of which $50,000
related to the issuance of options and warrants.
OTHER INCOME (EXPENSE)
Interest expense of $4,000 was incurred in the 2003 first quarter on financing
fees and affiliate debt compared with $2,000 in the 2002 first quarter. A $4,000
gain on settlement of liabilities was recognized during the 2003 first quarter
related to settlement agreements with several creditors that were consummated
during the quarter.
10
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities of $282,000 in the 2003 first quarter was
primarily related to net operating losses of $348,000, less depreciation of
$53,000 and changes in working capital of $17,000, offset by a non-cash gain of
$4,000 from settlement of liabilities. Net cash used in operating activities of
$927,000 in the 2002 first quarter was primarily related to net operating losses
of $1,102,000 and changes in working capital of $14,000, excluding: depreciation
of $139,000, and non-cash expense of $50,000 from issuance of options and
warrants related to a severance agreement.
Net cash used in investing activities in the 2003 first quarter was $6,000
related to the cost of software development capitalized during the quarter. Net
cash used in investing activities in the 2002 first quarter was $117,000, of
which $10,000 was used for the purchase of property and equipment and $107,000
was the cost of software development capitalized during the quarter.
Net cash provided by investing activities in the 2003 first quarter was $187,000
related to the issuance of common stock and warrants. Net cash provided by
financing activities in the 2002 first quarter was $561,000 resulting from the
issuance of preferred stock for net proceeds of $276,000 and proceeds of
$390,000 from debt financing, offset by $105,000 used to repay debt.
In September 2002 we sold certain assets consisting primarily of customer
contracts (the "Assigned Contracts") and related revenue streams thereunder to
ProxyMed, Inc. ("Purchaser") in a negotiated arms-length transaction for a
purchase price consideration of $700,000. We received net proceeds of $690,000
on the sale, recognized a gain of $640,000 and recorded $50,000 as deferred
revenue. The Company and Purchaser also entered into an Affiliate and Partner
Services and License Agreement dated September 11, 2002, pursuant to which (i)
we and Purchaser have agreed to provide certain administrative and support
services for each other in connection with each other's customers, including
without limitation the customers under the Assigned Contracts, in each case
pursuant to an agreed upon fee schedule, (ii) we agreed to assist Purchaser in
establishing a "hot-site" which will permit Purchaser to run from its own
hardware platform, our software application to service Purchaser's customers,
and (iii) we granted Purchaser a limited, non-exclusive, 5-year license to use
our software application at its "hot-site". We are entitled to receive fees for
our services and use of our software application unless and until the occurrence
of certain bankruptcy and liquidation events set forth in such agreement in
respect of us. We also entered into a Preferred Escrow Agreement with Purchaser
and DSI Technology Escrow Services, Inc., pursuant to which we have agreed to
deposit into escrow our proprietary claims processing software and related
materials for potential release to Purchaser for use pursuant to a limited,
non-exclusive license upon the occurrence of certain bankruptcy and liquidation
events.
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 May 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
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.
11
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.
TEM 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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) REPORTS:
During the quarter ended March 31, 2003, the Company filed Reports on
Form 8-K dated February 27, 2003, and March 17, 2003, containing
information under item 4.
In addition, 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:
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
12
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 Operating Officer and
Chief Financial Officer
April 23, 2003
13
CERTIFICATION
I, Don Crosbie, certify that:
I have reviewed this quarterly report on Form 10-Q of CLAIMSNET.COM INC.;
(1) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(2) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(3) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by other within those entities, particularly during the period
in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(4) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weakness in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(5) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Don Crosbie
-----------------
Don Crosbie
President and Chief Executive Officer
April 23, 2003
14
CERTIFICATION
I, Paul W. Miller, certify that:
I have reviewed this quarterly report on Form 10-Q of CLAIMSNET.COM INC.;
(1) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(2) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(3) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by other within those entities, particularly during the period
in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(4) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weakness in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(5) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Paul W. Miller
-----------------------
Paul W. Miller
Chief Operating Officer and Chief Financial Officer
April 23, 2003
15