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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 September 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.)
14860 Montfort Dr, Suite 250
Dallas, Texas 75254
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: 972-458-1701
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.001 par value,
22,692,180 shares outstanding as of October 29, 2003.
CLAIMSNET.COM INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2003
(unaudited) and December 31, 2002
Consolidated Statements of Operations (unaudited) for the
Three Months Ended September 30, 2003 and 2002, and for the
Nine Months Ended September 30, 2003 and 2002
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the Year Ended December 31, 2002 and the Nine
Months Ended September 30, 2003 (unaudited)
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 30, 2003 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)
September 30, December 31,
2003 2002
-------------- --------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 29 $ 153
Accounts receivable, net of allowance for
doubtful accounts of $9 and $33 as of September 30, 2003
and December 31, 2002, respectively 140 150
Prepaid expenses and other current assets 82 79
-------------- --------------
Total current assets 251 382
EQUIPMENT, FIXTURES AND SOFTWARE
Computer hardware and software 1,097 1,685
Software development costs 1,966 1,922
Furniture and fixtures 31 108
Office equipment 25 25
Leasehold Improvements 26 --
-------------- --------------
3,145 3,740
Accumulated depreciation and amortization (3,031) (3,601)
-------------- --------------
Total equipment, fixtures and software 114 139
-------------- --------------
TOTAL ASSETS $ 365 $ 521
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable to related parties - short term $ 151 $ 118
Accounts payable 168 486
Accrued severance -- 241
Accrued acquisition costs -- 500
Accrued payroll and other current liabilities 164 228
Deferred revenues 62 47
-------------- --------------
Total current liabilities 545 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 580 1,655
STOCKHOLDERS' DEFICIT
Preferred stock, $.001 par value; 4,000,000 shares authorized;
850 and 3,471 shares issued and outstanding as of September 30, 2003
and December 31, 2002, respectively (liquidation preference of
$215 and $876 at September 30, 2003 and December 31, 2002, respectively) -- --
Common stock, $.001 par value; 40,000,000 shares authorized;
22,112,000 shares and 14,816,000 shares issued and outstanding as of
September 30, 2003 and December 31, 2002, respectively 22 15
Additional capital 42,380 41,275
Accumulated deficit (42,617) (42,424)
-------------- --------------
Total stockholders' deficit (215) (1,134)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 365 $ 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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUES $ 230 $ 285 $ 574 $ 938
Cost of Revenues 115 446 489 1,469
------------ ------------ ------------ ------------
Gross PROFIT (Loss) 115 (161) 85 (531)
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Research and development 10 54 24 230
Selling, general and administrative 308 441 1,125 1,728
------------ ------------ ------------ ------------
Total operating expenses 318 495 1,149 1,958
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (203) (656) (1,064) (2,489)
OTHER INCOME (EXPENSE)
Gain on settlement of liabilities -- -- 916 --
Interest expense - related parties (4) (6) (9) (15)
Interest expense - other (1) -- (5) --
Gain (loss) on sale of assets (31) 640 (31) 640
------------ ------------ ------------ ------------
Total other income (expense) (36) 634 871 625
------------ ------------ ------------ ------------
NET LOSS $ (239) $ (22) $ (193) $ (1,864)
============ ============ ============ ============
NET LOSS PER COMMON SHARE (BASIC AND DILUTED) $ (0.01) $ (0.00) $ (0.01) $ (0.16)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (BASIC AND DILUTED) 20,537 12,707 17,882 11,678
============ ============ ============ ============
See notes to consolidated financial statements.
4
CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Year Ended December 31, 2002 and the Nine Months Ended September 30, 2003
(In thousands)
(Unaudited)
Number of Number of Total
Preferred Common Stockholders'
Shares Preferred Shares Common Additional Accumulated Equity
Outstanding Stock Outstanding 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 (2) - 2,621 2 (2) - -
Sale of common stock - - 3,675 4 728 - 732
Issuance of warrants and
options to related parties for
services - - - - 180 - 180
Warrants exercised for common
stock - - 1,000 1 199 - 200
Net loss - - - - - (193) (193)
----------- ---------- ----------- ------- ---------- ----------- -------------
Balances at September 30, 2003 1 $ - 22,112 $ 22 $ 42,380 $ (42,617) $ (215)
=========== ========== =========== ======= ========== =========== =============
See notes to consolidated financial statements.
5
CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (193) $(1,864)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 81 370
Provision for doubtful accounts (3) 13
Stock options and warrants issued for services 180 53
Gain on settlement of liabilities (916) --
(Gain) loss on sale of assets 31 (640)
Changes in operating assets and liabilities:
Accounts receivable 9 12
Prepaid expenses and other current assets (4) 26
Current liabilities (187) 151
-------- --------
Net cash used in operating activities (1,002) (1,879)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (46) (19)
Proceeds from sale of assets 2 640
Capitalized software development costs (43) (266)
-------- --------
Net cash provided by (used in) investing activities (87) 355
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to related parties 100 475
Payment of notes payable to related parties (67) (412)
Proceeds from note payable to director -- 50
Proceeds from notes payable -- 85
Proceeds from issuance of common stock 932 445
Proceeds from issuance of preferred stock -- 826
-------- --------
Net cash provided by financing activities 965 1,469
-------- --------
NET DECREASE IN CASH AND EQUIVALENTS (124) (55)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 153 531
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 29 $ 476
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ -- $ 6
======== ========
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 September 30, 2003 and the results of their
operations and cash flows for the three months and nine months ended
September 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 nine
months ended September 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. 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 November
30, 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.
3. EQUITY TRANSACTIONS
From January through September 2003, the Company completed the private
placement of 3,675,000 shares of common stock to accredited investors
at $0.20 per share, resulting in net proceeds to the Company of
$732,000. In connection with these private placements, the Company also
issued warrants to the investors to purchase an aggregate of 3,675,000
shares of common stock. These 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 ("NFC"), a related party, 2,000,000 shares of
common stock plus warrants to acquire an additional 2,000,000 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, 100,000 shares of common stock plus warrants to acquire an
additional 100,000 shares of common stock purchased by J.R.
Schellenberg, a related party, and 150,000 shares of common stock plus
warrants to acquire an additional 150,000 shares of common stock
purchased by a director of the Company.
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 ($0.20 per share).
From May through August 2003, the Company issued an aggregate 2,621,000
shares of its common stock upon conversion and surrender of 2,621
shares of preferred stock by the holders thereof.
4. ISSUANCE OF WARRANTS
In June 2003, the Company issued warrants to acquire an aggregate of
3,450,000 shares of common stock to certain employees. These warrants
contain an exercise price of $0.15 per share and expire in June 2013.
In June 2003, the Company issued ten-year warrants to acquire an
aggregate of 1,200,000 shares of common stock to two directors as
compensation for services outside of their director duties. The
warrants were valued at $0.15 per warrant resulting in a total charge
against earnings 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). See Note 3 for information regarding issuances to investors
of warrants to purchase 3,675,000 shares of common stock.
7
5. 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 $1,133,000, resulting in a gain on settlement of liabilities
totaling $916,000.
6. LOANS FROM RELATED PARTIES
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. The Company repaid a portion
of this note in the principal amount of $34,000 plus accrued interest
thereon in June 2003. The Company also repaid a second note to NFC in
the principal amount of $18,000 plus accrued interest thereon in June
2003. The remaining note payable to NFC in the principal amount of
$66,000 plus interest, at 9.5% per annum on the unpaid principal, is
due on demand.
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.
7. 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 nine months ended September 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 loss and net
loss per share would have been affected as indicated below (in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net loss, as reported $ (239) $ (22) $ (193) $(1,864)
Stock-based compensation expense:
Included in reported net loss -- -- -- --
Determined using the fair value method (45) (92) (64) (275)
-------- -------- -------- --------
Pro forma net loss $ (284) $ (114) $ (257) $(2,139)
-------- -------- -------- --------
Net loss per share - basic and diluted
As reported $ (0.01) $ (0.00) $ (0.01)$ (0.16)
Pro forma $ (0.01) $ (0.01) $ (0.02)$ (0.18)
8. SALE OF ASSETS
On September 11, 2002 the Company 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. The Company received cash consideration of $690,000, net
of contractual expenses, recognized a gain of $640,000 on the sale, and
recorded $50,000 as deferred revenue.
The Company's office lease expired on September 30, 2003 and the
Company moved into similar space under a substantially less expensive
sublease. During the relocation, the Company sold all excess furniture
and equipment and recorded a $31,000 loss on the disposal.
8
9. SUBSEQUENT EVENTS
In October 2003, the Company completed the private placement of 125,000
shares of common stock to accredited investors at $0.20 per share, for
net proceeds of $25,000. In connection with these private placements,
the Company also issued warrants to the investors to purchase an
aggregate of 125,000 shares of common stock. The warrants contained an
exercise price of $0.20 per share and expired December 31, 2007. The
Company issued an aggregate of 375,000 shares of common stock pursuant
to the exercise of outstanding warrants in October 2003 for net
proceeds of $75,000. In addition, 80 shares of preferred stock were
converted into 80,000 shares of common stock.
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 September 30, 2003, we had a working capital deficit of $(294,000) and
stockholders' deficit of $(215,000). We generated revenues of $574,000 for the
nine months ended September 30, 2003 and $938,000 for the nine months ended
September 30, 2002. We have incurred net losses since inception and had an
accumulated deficit of $(42,617,000) at September 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. See Note 2 of the Notes to Consolidated
Financial Statements regarding our need for additional capital and liquidity.
We have 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 September 2003, we completed the private placement of
3,675,000 shares of common stock to accredited investors at $0.20 per share,
resulting in net proceeds to us of $732,000. In connection with these private
placements, we also issued warrants to the investors to purchase an aggregate of
3,675,000 shares of common stock. These 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, 2,000,000 shares of common stock plus warrants to acquire an additional
2,000,000 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,
and 150,000 shares of common stock plus warrants to acquire an additional
150,000 shares of common stock purchased by a member of our Board of Directors.
From May through August 2003, we issued an aggregate 2,621,000 shares of our
common stock upon conversion and surrender of 2,621 shares of preferred stock by
the holders thereof.
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 ($0.20 per share).
The Company used $217,000 of the proceeds from the April 2003 private placement
and warrant excercise 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 or, with respect to the conversion of the preferred stock,
Section 3(a)(9) 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 not been registered under the Act.
10
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. Subject to receipt
or generation of adequate funds, 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 or that we will receive or generate the funds necessary
therefore. 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.
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.
11
RESULTS OF OPERATIONS FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
REVENUES
Revenues in the three months ended September 30, 2003 (the "2003 third quarter")
were $230,000 compared to $285,000 in the three months ended September 30, 2002
(the "2002 third quarter"), representing a decrease of 19%. Revenues of $229,000
during the 2002 third quarter were generated by our Internet-based healthcare
provider clients, under contracts which were sold in September 2002. Revenues
for the 2003 third quarter from recurring revenue sources totaled $149,000 and
represented 65% of total revenues. Revenues from non-recurring sources totaled
$81,000 and were related to implementation, development, support and other fees.
Revenues in the nine months ended September 30, 2003 (the "2003 nine months")
were $574,000 compared to $938,000 in the nine months ended September 30, 2002
(the "2002 nine months"), representing a decrease of 39%. Revenues of $822,000
during the 2002 nine months were generated by our Internet-based healthcare
provider clients, under contracts which were sold in September 2002. Revenues
for the 2003 nine months from recurring revenue sources totaled $462,000 and
represented 80% of total revenues. Revenues from non-recurring sources totaled
$112,000 and were related to implementation, development, support and other
fees.
COST OF REVENUES
Cost of revenues in the 2003 third quarter was $115,000, compared with $446,000
in the 2002 third quarter, representing a decrease of 74%. 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 by 68% to $33,000 for the 2003 third quarter compared
with $103,000 for the 2002 third quarter. Transaction processing expenses were
eliminated in the 2003 third quarter compared to $86,000 in the 2002 third
quarter. Customer support operations expense decreased by 60% to $80,000 in the
2003 third quarter from $198,000 in the 2002 third 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 97% to
$2,000 in the 2003 third quarter from $59,000 in the 2002 third quarter. This
decrease reflects completion in 2002 of amortization for earlier versions of
software for customer use.
Cost of revenues in the 2003 nine months was $489,000, compared with $1,469,000
in the 2002 nine months, representing a decrease of 69%. Data center expenses
decreased by 56% to $157,000 for the 2003 nine months compared with $359,000 for
the 2002 nine months. Transaction processing expenses were $2,000 in the 2003
nine months compared to $359,000 in the 2002 nine months, nearly a 100%
decrease. Customer support operations expense decreased by 55% to $292,000 in
the 2003 nine months from $642,000 in the 2002 nine months. 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 81% to
$38,000 in the 2003 nine months from $201,000 in the 2002 nine months. 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 the 2003 third quarter,
compared with $54,000 in the 2002 third quarter, representing a decrease of 81%.
Research and development expenses were $24,000 in the 2003 nine months, compared
with $230,000 in the 2002 nine months, representing a decrease of 90%. 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 $95,000 and $266,000 were capitalized during the 2002 third quarter and 2002
nine months, 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 early 2003, we began development of the alternative HIPAA remediation
project and capitalized development costs of $27,000 and $43,000 during the 2003
third quarter and 2003 nine months, respectively.
Selling, general and administrative expenses were $308,000 in the 2003 third
quarter, compared with $441,000 in the 2002 third quarter, a decrease of 30%.
Selling, general and administrative expenses were $1,125,000 in the 2003 nine
months, compared with $1,728,000 in the 2002 nine months, a decrease of 35%. The
reductions are 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 nine months 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 nine months 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 $14,000 was incurred in the 2003 third quarter
and 2003 nine months, respectively, on financing fees and affiliate debt
compared with $6,000 and $15,000 in the 2002 third quarter and 2002 nine months,
respectively. A $916,000 gain on settlement of liabilities was recognized during
the 2003 nine months related to settlement agreements with several creditors. A
loss on sale of assets of $31,000 in the 2003 third quarter and 2003 nine months
related to the retirement of certain assets during relocation of the Company's
offices. A gain on sale of assets of $640,000 in the 2002 third quarter and 2002
nine months was related to the sale of certain assets on September 11, 2002 as
previously described.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities of $1,002,000 in the 2003 nine months was
primarily related to a net loss of $193,000, a reduction of $3,000 in the
allowance for doubtful accounts, changes in working capital of $182,000, and a
non-cash gain of $916,000 from settlement of liabilities offset by depreciation
of $81,000, a non-cash loss of $31,000 from sale of assets, and non-cash expense
of $180,000 from issuance of options and warrants. Net cash used in operating
activities of $1,879,000 in the 2002 nine months was primarily related to net
losses of $1,864,000, net of the $640,000 gain on sale of assets, less:
depreciation of $370,000, provision of $13,000 for doubtful accounts, non-cash
expense of $53,000 from issuance of options and warrants, and net changes in
working capital of $189,000.
Net cash used in investing activities in the 2003 nine months of $87,000 related
to the cost of software development capitalized during the year of $43,000 plus
the purchase of software of $20,000 and leasehold improvements of $26,000, less
$2,000 proceeds from sale of assets. Net cash provided in the 2002 nine months
by investing activities was $355,000, comprised of $640,000 net proceeds from
the sale of assets, less $19,000 used for the purchase of property and equipment
and $266,000 for the capitalized cost of software development during the period.
Net cash provided by financing activities in the 2003 nine months was $965,000,
of which $932,000 was related to the issuance of common stock and $33,000
related to proceeds of $100,000 from debt financing, offset by $67,000 used to
repay debt. Net cash provided by financing activities in the 2002 nine months
was $1,469,000 resulting from the issuance of preferred stock for net proceeds
of $826,000, the issuance of common stock for net proceeds of $445,000 and
proceeds of $610,000 from debt financing, offset by $412,000 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 November 30, 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 during
the quarter ended September 30, 2003.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) REPORTS:
During the quarter ended September 30, 2003, the Company filed a Report
on Form 8-K dated August 20, 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 Operating Officer and 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
Operating Officer and 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
By: /s/ Paul W. Miller
----------------------------
Paul W. Miller
Chief Operating Officer and
Chief Financial Officer
October 29, 2003
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