<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended March 31, 2000
Commission File No. 0-27055
CAVION TECHNOLOGIES, INC.
(Name of Small Business Issuer in its Charter)
Colorado 84-1472763
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
6446 S. Kenton Street
Englewood, Colorado 80111
(720) 875-1900
(Address and Telephone Number of Principal Executive Offices)
TITLE OF CLASS
Class A Common Stock, $.0001 Par Value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
[X] Yes [ ] No
The number of shares outstanding of the issuer's class of common stock as of May
8, 2000:
CLASS OF SECURITIES OUTSTANDING SECURITIES
$.0001 per volume Common Stock 4,964,808
DOCUMENTS INCORPORATED BY REFERENCE
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I. Financial Information
Item 1. Unaudited Financial Statements:
Cavion Technologies, Inc.
Balance Sheets as of March 31, 2000 and December 31, 1999......................................3
Statements of Operations for the three months ended
March 31, 2000 and 1999 ....................................................................5
Statements of Cash Flows for the three months ended March 31, 2000 and 1999 ....................6
Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations.........18
Part II. Other Information
Item 1 Legal Proceedings..............................................................................25
Item 2 Changes in Securities and Use of Proceeds......................................................25
Item 3 Defaults Upon Senior Securities................................................................27
Item 4 Submission of Matters to a Vote of Security Holders............................................27
Item 5 Other Information..............................................................................27
Item 6 Exhibits and Reports on Form 8-K...............................................................27
Signatures
</TABLE>
-------------------------------
This report contains forward-looking statements within the meaning of Section
221E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities of the Securities Act of 1933, as amended, and is subject to the safe
harbors created by those sections. These forward-looking statements are subject
to significant risks and uncertainties, including those identified in the
section of this Form 10-QSB entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations Factors That May Affect Future
Operating Results," which may cause actual results to differ materially from
those discussed in such forward-looking statements. The forward-looking
statements within this Form 10-QSB are identified by words such as "believes,
"anticipates," "expects," "intends," "may," "will" and other similar
expressions. However, these words are not the exclusive means of identifying
such statements. In addition, any statements which refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements. The Company undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements which
may be made to reflect events or circumstances occurring subsequent to the
filing of this Form 10-QSB with the Securities and Exchange Commission ("SEC").
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
SEC that attempt to advise interested parties of the risks and other factors
that may affect the Company's business.
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
CAVION TECHNOLOGIES, INC.
BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 2000 1999
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,539,043 $4,346,699
Accounts receivable 110,240 94,190
Prepaid assets 150,335 141,949
Prepaid compensation 870,232 -
Other 50,742 2,558
------------ ------------
Total current assets 5,720,592 4,585,396
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements 504,441 164,357
Furniture and fixtures 245,666 16,851
Network equipment and licensed software 779,221 530,466
------------ ------------
1,529,328 711,674
Less - accumulated depreciation (119,217) (45,066)
------------ ------------
Property and equipment, net 1,410,111 666,608
------------ ------------
DEPOSIT FOR LETTER OF CREDIT 325,000 300,000
GOODWILL, net of accumulated amortization of $1,111,896 and
$873,632, respectively 3,653,372 3,891,636
OTHER ASSETS 53,850 159,637
------------ ------------
TOTAL ASSETS $11,162,925 $9,603,277
============ ============
</TABLE>
The accompanying notes to financial statements are an
integral part of these balance sheets.
3
<PAGE>
CAVION TECHNOLOGIES, INC.
BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
------------------------------------ ------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 139,837 $ 213,098
Accrued liabilities 403,774 375,524
Deferred revenue - network access and connectivity fees 873,194 547,639
Deferred revenue - preferred merchant fees 225,000 300,000
Deferred revenue - software license agreements 119,073 -
Current portion of capital lease obligations 160,760 137,500
Notes payable 470,000 470,000
-------------- ------------
Total current liabilities 2,391,638 2,043,761
-------------- ------------
LONG-TERM LIABILITIES:
Capital lease obligations 383,494 386,494
-------------- ------------
PUTABLE CLASS B COMMON STOCK: 30,000 shares
authorized; 0 and 28,648 shares issued and outstanding,
respectively (stated at redemption value) - 200,537
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A Common Stock; $.0001 par value, 19,970,000 shares authorized;
4,935,308 and 4,697,326 issued and
outstanding, respectively 494 470
Warrants and options 1,898,835 507,096
Deferred compensation - (107,735)
Additional paid-in capital 13,720,593 11,426,314
Accumulated deficit (7,232,129) (4,853,660)
-------------- ------------
Total stockholders' equity 8,387,793 6,972,485
-------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,162,925 $ 9,603,277
============== ============
</TABLE>
The accompanying notes to financial statements are an
integral part of these balance sheets.
4
<PAGE>
CAVION TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------- -----------
<S> <C> <C>
REVENUE:
Network access and connectivity fees $ 241,494 $ 55,578
Preferred merchant fees 75,000 -
Software licensing fees 10,348 1,338
Installation services - 9,623
------------- -----------
Total revenue 326,842 66,539
------------- -----------
OPERATING EXPENSES:
Network access and connectivity, installation services and software licensing 284,514 41,443
Selling and marketing 893,584 151,998
General and administrative 1,115,921 252,251
Research and development 198,972 46,584
Amortization of goodwill 238,263 158,776
------------- -----------
Total operating expenses 2,731,254 651,052
------------- -----------
LOSS FROM OPERATIONS (2,404,412) (584,513)
INTEREST INCOME 68,035 -
INTEREST EXPENSE (42,092) (73,656)
------------- -----------
NET LOSS $(2,378,469) $(658,169)
============= ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.50) $ (0.23)
============= ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 4,796,337 2,875,879
============= ===========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
5
<PAGE>
CAVION TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,378,469) $ (658,169)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 292,688 184,178
Amortization of deferred compensation 498,655 -
Accretion of debt discount - 24,880
Accretion of putable stock - 5,619
Change in operating assets and liabilities-
Accounts receivable (16,050) 7,605
Prepaids and inventories (8,386) (17,721)
Other assets 105,787 (2,667)
Accounts payable (73,261) (83,681)
Accrued liabilities 28,250 162,031
Deferred revenue 369,628 21,151
Certificate of deposit (25,000) -
------------- ------------
Net cash used in operating activities (1,206,158) (357,314)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (738,809) (38,810)
Proceeds from sale leasehold 2,673 -
------------- ------------
Net cash used in investing activities (736,136) (35,810)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 2,460,000 178
Proceeds from the exercise of employee options 13,001 -
Proceeds from notes payable - 100,000
Proceeds from issuance of Series A Preferred Stock - 1,701,000
Principal payments on capital leases (41,533) (12,099)
Common Stock offering costs (248,646) -
Deferred offering costs (48,184) (119,773)
Series A Preferred Stock offering costs - (204,120)
Payment of debt issuance costs - (36,567)
------------- ------------
Net cash provided by financing activities 2,134,638 1,428,619
------------- ------------
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
6
<PAGE>
CAVION TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
NET INCREASE IN CASH AND CASH
EQUIVALENTS $ 192,344 $1,035,495
CASH AND CASH EQUIVALENTS,
beginning of period 4,346,699 19,735
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $4,539,043 $1,055,230
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 42,092 $ 16,679
------------ ------------
SUPPLEMENTAL DISCLOSURE OF NON-
CASH FINANCING ACTIVITIES:
Property acquired with capital leases $ 61,793 $ 63,804
------------ ------------
Value of warrants to purchase common stock issued
to note holders $ - $ 35,885
------------ ------------
Value of warrants to purchase common stock issued
to selling agent $ - $ 3,590
------------ ------------
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
7
<PAGE>
CAVION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
1. DESCRIPTION OF BUSINESS:
ORGANIZATION
Cavion Technologies, Inc. (the "Company") offers products and services for
business to business communications, secure Internet financial products, such as
online banking and bill paying services, and secure Internet access and services
for its customers. The Company is also building and managing a secure private
communications network exclusively for the credit union industry. This network
acts as a communications platform for the delivery of services and information
to and from credit unions and related businesses. The Company has developed and
is beginning to offer an integrated network of e-commerce portals called Member
Emporium-TM-. Member Emporian-TM- is designed to enable a credit union to
provide its members with access to a variety of products and services, typically
at a discount from retail or Internet-based prices.
The Company was incorporated in Colorado on August 18, 1998 as Network
Acquisitions, Inc. to acquire the assets of Cavion Technologies, Inc., now known
as LanXtra, Inc. ("LanXtra"), which was engaged in providing internet, intranet,
and extranet services to the credit union industry. On February 1, 1999, the
Company acquired the business of LanXtra, and the Company changed its name to
Cavion Technologies, Inc., doing business as cavion.com.
The Company's operations are subject to risks associated with a rapidly evolving
marketplace, including need for additional capital, technological change, and a
dependence on key personnel. The Company believes that its cash and other
sources of liquidity will be sufficient to fund its operations into the third
quarter of 2000, and that additional financing will be required to fund
operations beyond that date. In order to facilitate our aggressive growth model,
management intends to pursue additional financing as it has done previously.
On February 17, 2000, the Company entered into an agreement to issue, for $12.00
per share, 205,000 shares of its Class A Common Stock in a private transaction.
Gross proceeds of $2,460,000 were raised, and, the Company, after a reduction of
$196,800 for the selling agents commission and other offering costs, netted
proceeds of $2,211,354. In conjunction with this private placement, warrants to
purchase 20,500 shares of the Company's Class A Common Stock were issued to the
selling agent, which were valued at $130,590.
On October 29, 1999, the Company successfully completed an Initial Public
Offering ("IPO"). The number of shares offered and sold was 1,200,000, with an
underwriter's over-allotment option for an additional 180,000 shares. Total
gross proceeds of $7,800,000 were raised in the offering, and the Company, after
offering expenses, netted proceeds of approximately $6,288,000. In November
1999, the Company sold 90,500 additional shares from the underwriters
over-allotment option, raising additional gross proceeds of approximately
$588,000, and net proceeds of approximately $467,000. The total number of shares
outstanding after the offering was 4,696,826, reflecting the automatic
conversion of 700,000 shares of Convertible Preferred Stock into 700,000 shares
of common stock upon the closing of the offering. In addition, at the closing of
the IPO, the Company issued warrants to purchase 120,000 shares of the Company's
Common Stock to the Representative of the underwriter at a price of 125% of the
IPO price, or $8.125 per share.
Prior to the IPO, the Company financed its operations through a private
placement of its 15% notes, which were offered commencing on October 20, 1998
(the "Offering"), the sale of Series A Preferred Stock and funding through a
Bridge Loan. The Company advanced a portion of the proceeds from the Offering to
LanXtra in anticipation of the acquisition of LanXtra.
8
<PAGE>
PURCHASE OF LANXTRA'S ASSETS, LIABILITIES AND OPERATIONS
In August 1998, the Company signed a letter of intent to purchase LanXtra's
business. In December 1998, the Company signed an Asset Purchase Agreement (the
"Purchase Agreement") with LanXtra to purchase substantially all the assets of
LanXtra in exchange for approximately 375,214 shares and 28,648 shares of the
Company's Class A and B Common Stock, respectively, and the assumption by the
Company of certain liabilities of LanXtra. The number of Class A Common Stock
shares issued to LanXtra represented approximately 12% of the Company's equity
interest at the time of the Purchase Agreement. The Purchase Agreement was
consummated on February 1, 1999 and the Company assumed the operations of
LanXtra on that date. Upon consummation, significant modifications were made to
LanXtra's capital structure. On December 21, 1998, the Company issued 625,356
shares to certain shareholders of LanXtra who would continue as management of
the Company. One of these shareholders held directly and through irrevocable
proxies sufficient voting shares to approve the transaction. The shares are
non-forfeitable and not contingent upon the management's continued employment
with the Company. As a result, the shares have been considered additional
purchase consideration and are recorded at their estimated fair value of $3 per
share.
The estimated fair value of assets acquired, liabilities assumed, and
consideration issued in the transaction with LanXtra are as follows:
<TABLE>
<S> <C>
Consideration:
Class A Common Stock $3,001,710
Class B Common Stock 167,197
Cash 338,735
------------
3,507,642
Add: Net liabilities (assets) assumed:
Working capital deficit assumed 706,044
Property and equipment (331,020)
Borrowings assumed 924,417
Other assets (41,815)
------------
Goodwill $4,765,268
============
</TABLE>
The Company has recorded the fair value of its stock issued to LanXtra at $3 per
share based principally upon its private placement of Series A Preferred Stock
completed in February 1999. The transaction with LanXtra resulted in
approximately $4,760,000 of goodwill, and will be amortized over five years.
Because the business now operated by the Company has never been profitable, and
due to the other risks and uncertainties discussed herein, it is reasonably
possible that an analysis of these long-lived assets in future periods could
result in a conclusion that they are impaired, and the amount of the impairment
could be substantial.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The interim financial statements of the Company as of and for the three months
ended March 31, 2000 and 1999 are unaudited and have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of the Company's management, the unaudited interim financial
statements contain all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation. The results of operations for the
interim period is not necessarily indicative of the results of the entire year.
9
<PAGE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable from future undiscounted cash flows. Impairment losses are
recorded for the difference between the carrying value and fair value of the
long-lived assets. The acquisition of LanXtra generated approximately $4,760,000
of intangible assets, which are continuously reviewed by the Company for
impairments. As of March 31, 2000, management does not believe that these assets
are impaired.
DEFERRED COMPENSATION
The Company has issued options to purchase shares of its common stock to certain
non-employees. If the options are unvested and the option holder is required to
perform certain services to meet the vesting requirements, the unamortized fair
market value of the option is recorded as deferred compensation, a reduction of
stockholders' equity. Once the options become fully vested and the option holder
is still obligated to provide services to the Company, the unamortized deferred
compensation is reclassified as an asset and, is expensed over the period in
which the related services are provided by the non-employee.
The valuation of equity based securities issued to consultants is generally
based upon the Black-Scholes option pricing model. Use of this model may result
in significant variation in the fair market value on each determination date.
Fair market values are generally redetermined until the equity-based security is
vested, and the resulting income statement impact can be volatile and
significant. As of March 31, 2000, all outstanding equity based securities that
have been issued by the Company to consultants are fully vested.
ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Accrued commissions and vacation $ 79,798 $ 53,938
Accrued professional fees 201,232 67,854
Accrued telecom
fees for Convergent contract 109,356 81,392
Other liabilities 13,388 172,340
---------- ----------
Total accrued liabilities $403,774 $375,524
========== ==========
</TABLE>
10
<PAGE>
NET LOSS PER SHARE
The Company reports net loss per share in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which requires the
presentation of both basic and diluted earnings (loss) per share. Basic net loss
per common share has been computed based upon the weighted average number of
shares of common stock outstanding during the period. Weighted average common
shares excludes 28,648 shares of putable Class B Common Stock as an assumed cash
settlement is more dilutive. Diluted net loss per share is computed by dividing
the net loss applicable to common stockholders for the period by the weighted
average number of common and potential common shares outstanding during the
period if the effect of the potential common shares is dilutive. The Company has
also excluded the weighted average effect of common stock issuable upon exercise
of all warrants and options from the computation of diluted earnings per share
as the effect of all such securities is anti-dilutive for the periods presented.
The shares excluded related to outstanding options and warrants (without regard
to the treasury stock method) at March 31, 2000 and December 31, 1999 were
1,012,500 and 511,000, respectively.
STOCK BASED COMPENSATION
The Company accounts for its employee stock option plan and other employee
stock-based compensation arrangements in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and related interpretations. The Company adopted the
disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which allows entities to continue to apply the
provisions of APB No. 25 for transactions with employees and provide pro forma
disclosures for employee stock grants as if the fair-value-based method of
accounting in SFAS No. 123 had been applied to these transactions. The Company
accounts for equity instruments issued to non-employees in accordance with the
provisions of SFAS No. 123 and related interpretations.
REVENUE RECOGNITION
The Company currently generates revenue from three sources: (1) recurring
monthly network access and connectivity fees, (2) software license fees, and
(3) preferred merchant fees (See Note 8). During the first quarter of 2000,
the Company modified its price structure to eliminate installation charges.
Service revenue was previously recognized as the services were performed. As
a result of the change to the Company's price structure, service fees are now
bundled with the network access and connectivity fees, and now are not
recognized separately. Software license arrangements typically provide for
enhancements over the term of the arrangement, and software license fees are
generally received in advance, deferred and recognized ratably over the term
of the arrangement. Network access and connectivity fees, including bundled
service fees are typically billed in advance and recognized ratably over the
period that the access/connectivity is provided.
COMPREHENSIVE INCOME
The Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting
comprehensive income and its components in the financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. From inception through March 31, 2000,
there have been no differences between the Company's comprehensive loss and its
net loss.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"), and in June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB 133" ("SFAS No 137"). SFAS No. 137 requires the Company to adopt SFAS
No. 133 for all quarters in the year ended December 31, 2001. SFAS No. 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. To date, the Company has not entered into any derivative financial
instruments or hedging activities.
11
<PAGE>
In March 2000, Emerging Issues Task Force ("EITF") reached a consensus relating
to Issue No. 00-3 "Application of AICPA SOP 97-2 `Software Revenue Recognition',
To Arrangements That Include the Right to Use Software Stored on Another
Entities Hardware." This consensus defines whether SOP 97-2 applies to an
entity's revenue recognition policy. The Company adopted this EITF during the
current quarter. The adoption did not have a material impact on the Company's
results from operations.
During December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), to establish
guidelines for revenue recognition and enhance revenue recognition disclosure
requirements. SAB 101 clarifies basic criteria for when revenues are taken into
account for purposes of a company's financial statements. SAB 101 is effective
for the quarter ended June 30, 2000. The Company is currently assessing the
implications of adopting SAB 101. Currently, implementation service fees are
recognized over the term of the underlying contract rather than on completion of
implementation. Upon adoption of SAB 101, previously recognized implementation
fees will be deferred and recognized ratably over the contract term. In the
period of adoption, the cumulative impact will be reported as a change in
accounting principle as dictated by SAB 101.
3. RELATED PARTY TRANSACTIONS:
MONEYLINE AMERICA, LLC
In August 1999, the Company entered into an agreement with MoneyLine America,
LLC, (the "MoneyLine Agreement"), which provides that the Company will receive
payments under an agreement with MoneyLine to provide online mortgage lending
services for credit unions and their members through the Company's network. This
agreement calls for a minimum payment of $300,000 in the first year, beginning
September 1999, escalating to $1,000,000 in years six through ten, provided the
Company has at least 1,500 credit unions, or 12% of the U.S. credit unions, on
its network by the end of year three. The amounts received are reflected as
deferred revenue - preferred merchant fees in the accompanying balance sheets.
This service was initiated in January 2000, and as a result, through March 31,
2000, $75,000 has been recognized as preferred merchant fees revenue. Boutine
Capital, LLC, a principal shareholder of the company owned 50% of MoneyLine
America on August 18, 1999, the date of the MoneyLine Agreement, and currently
owns 5% of MoneyLine.
CONVERGENT COMMUNICATIONS
Effective October 22, 1999, the Company entered into a five-year agreement
with Convergent Communications Services, Inc., ("Convergent"). This agreement
includes a sale lease back of certain network equipment. Equipment with a net
book value of $265,394 was sold for $285,976. A corresponding deferred gain
of $20,582 was recorded and will be recognized over the life of the leases.
Under this agreement, Convergent will establish, maintain and support network
connectivity between the Company's network and its customers, including
providing, equipment, maintenance and related services for the network for a
monthly fee. During the three months ended March 31, 2000, the company paid
approximately $120,000 to Convergent for these services. One of the Company's
directors was also a director of Convergent until April 2000 and he served as
its Executive Officer and Chairman until March 31, 2000.
4. CAPITAL LEASE OBLIGATIONS:
The Company assumed several capital lease agreements related to computers and
various office equipment in conjunction with the Purchase Agreement. The Company
has also entered into additional capital lease agreements. The capital leases
have terms ranging from 24 to 60 months with interest rates ranging between 9%
and 20.3%.
12
<PAGE>
As of March 31, 2000, the present value of the future minimum lease payments is
as follows:
<TABLE>
<S> <C>
2000 $ 159,195
2001 203,254
2002 121,505
2003 93,065
2004 77,555
-----------
654,574
Less: amounts representing interest (110,320)
-----------
544,254
Less: current portion (160,760)
-----------
Long-term capital lease obligation $ 383,494
===========
</TABLE>
The net book value of assets under capital lease obligations as of March 31,
2000 was approximately $545,398.
5. STOCKHOLDERS' EQUITY:
The Company is authorized to issue 19,970,000 shares of common stock, par
value $.0001 per share and 10,000,000 shares of preferred stock, par value
$.0001 per share.
CLASS A COMMON STOCK
At March 31, 2000 and December 31, 1999, 4,935,308 and 4,697,326 shares,
respectively, of Class A Common Stock were issued and outstanding The holders of
Class A Common Stock are entitled to one vote for each share held on record on
each matter submitted to a vote of shareholders. Cumulative voting for election
of directors is not permitted. Holders of Class A Common Stock have no
preemptive rights or rights to convert their Class A Common Stock into any other
securities.
CLASS B COMMON STOCK
As of March 31, 2000 and December 31, 1999, there were 0 and 28,648 shares,
respectively, of the Class B voting Common Stock issued and outstanding, in
connection with the Company's purchase of the assets of LanXtra in February
1999. These shares were issued in exchange for similar securities of LanXtra
as partial consideration for the purchase of LanXtra's business, and were
callable by the Company at $7 per share. The holders of Class B Common Stock
had the right to sell the Class B Common Stock to the Company at $7 per share
or convert their shares to equivalent units of Class A Common Stock until
March 31, 2000, at which time no holder of Class B Common Stock had exercised
the put option. On that date, pursuant to the Company's Articles of
Incorporation, (i) each share of Class B Common Stock terminated; (ii) the
Company's authority to issue Class B Common Stock terminated, and (iii) the
only other Class of Common Stock, which had until that time been designated
as Class A Common Stock, was designated as Common Stock.
PREFERRED STOCK
In February 1999, the Board of Directors authorized the Company, without further
action by the shareholders, to issue 10,000,000 shares of one or more series of
preferred stock at a par value of $.0001, all of which is nonvoting. The Board
of Directors may, without shareholder approval, determine the dividend rates,
redemption prices, preferences on liquidation or dissolution, conversion rights,
voting rights and any other preferences.
WARRANTS
As part of the selling agent's compensation for the funds raised in the February
2000 private issuance of Class A Common Stock, the Company issued warrants to
purchase 20,500 shares of its Class A Common Stock. The warrants are exercisable
at any time during a five-year term at an exercise price or $12.00 per share.
The warrants,
13
<PAGE>
when issued, were valued at a total of $130,590, utilizing the Black-Scholes
option pricing model assuming a volatility factor of 53%, a risk free
interest rate of 6.22% and a fair market value of the underlying shares of
$12.00. The value of these warrants were recorded as a reduction of
additional paid-in capital received from the IPO. As part of the
underwriter's compensation for the funds raised in the Company's IPO, the
Company agreed to sell, for $100, warrants to purchase 120,000 shares of the
Class A Common Stock. The warrants are exercisable at any time during a
five-year term at an exercise price equal to 125% of the offering price, or
$8.125. The warrants outstanding were valued at a total of $366,234,
utilizing the Black-Scholes option pricing model assuming a volatility factor
of 53%, a risk free interest rate of 6.22% and a fair market value of the
underlying shares of $6.50. The value of these warrants were recorded as a
reduction of additional paid in capital received from the IPO. On February
25, 2000, the Company agreed with certain of the present holders of these
warrants that 112,500 of these warrants will be exercised without a cash
payment on November 3, 2000, in return for the issuance of 65,625 shares of
common stock. In connection with the negotiation of this net exercise price,
the underwriter forfeited its right of first refusal to act as the Company's
investment banker for future private or public securities offerings.
In conjunction with the issuance of the August 1999 Bridge Loan, the Company
granted the Bridge Loan holders warrants to purchase 5,000 shares of the
Company's Class A common stock for every $50,000 of notes purchased. The
warrants are exercisable for a period of five years beginning on the earlier to
occur of (i) the closing of the IPO or (ii) one year from the date of the
warrant. These detachable warrants were valued at a total of $33,127 utilizing
the Black-Scholes option pricing model, assuming a volatility factor of 70%, a
risk free rate of 6.22% and a fair value of the underlying common stock of $6.75
per share, and have been recorded as a debt discount.
STOCK OPTIONS
Effective March 19, 1999, the Company adopted a stock option plan (the "Plan").
The Plan provides for grants of incentive stock options, nonqualified stock
options and restricted stock to designated employees, officers, directors,
advisors and independent contractors. The Plan authorizes the issuance of up to
995,000 shares of Class A Common Stock. Under the Plan, the exercise price per
share of a non-qualified stock option must be equal to at least 50% of the fair
market value of the common stock at the grant date, and the exercise price per
share of an incentive stock option must equal the fair market value of the
common stock at the grant date. Through March 31, 2000 and December 31, 1999,
options for 841,500 and 505,500 shares of Class A Common Stock, respectively,
have been issued to employees under the Plan. The outstanding stock options have
an average exercise price of $8.29 per share, with a range of $3.00 to $24.85,
and vest over various terms with a maximum vesting period of 18 months and
expire after the contract period of ten years.
During the year ended December 31, 1999, the Company granted options for 20,000
shares of Class A Common Stock to non-employees in exchange for services. The
exercise price of these options range from $3.00 to $6.00 per share. These
options became fully vested on March 1, 2000 and no future services were
required by the option holders. The fair value of these options on the vesting
date was approximately $324,000, which is included in general and administrative
expense in the accompanying Statements of Operations. The fair value of each
non-employee option grant was estimated on the vesting date using the
Black-Scholes option pricing model. Assumptions used to calculate the fair value
were risk free interest rates of 6.22%, no dividend yields, a life of 9-10 years
and volatility of 69%.
On February 14, 2000, the Company entered into an agreement for investor
relations consulting services with Strategic Growth International, Inc. ("SGI").
In connection with the agreement, the Company granted SGI fully vested options
to purchase 175,000 shares of Class A common stock exercisable at $11.1875 for a
period of five years. The agreement has a term of one-year and requires monthly
payments of $8,000 to SGI for the services. The fair value of these options on
the date of grant was approximately $1,045,000. This is being amortized over the
life of the contract, one year, in which amortization of $175,000 is included in
selling and marketing expense in the accompanying Statements of Operations. The
fair value of the non-employee option grant was estimated on the vesting date
using the Black-Scholes option pricing model. Assumptions used to calculate the
fair value were risk free interest rates of 6.22%, no dividend yields, a life of
five years and volatility of 53%.
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<PAGE>
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Under the Stock Option Plan: Other Grants:
------------------------------------------------------ -------------------------
Granted to Granted to
Granted to Employees Non-Employees Non-Employees
--------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- -------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 1999 - $ - - $ - - $ -
Granted 505,500 4.19 20,000 4.50 - -
Exercised (500) 3.00 - - - -
Canceled (14,000) 3.38 - - - -
-------- ------- ------- ----- -------- ------
Outstanding at December 31, 1999 491,000 4.41 20,000 4.50 - -
Granted 336,000 11.79 - - 175,000 11.19
Exercised (4,334) 3.00 - - - -
Canceled (5,166) 4.96 - - - -
-------- ------- ------- ----- -------- ------
Outstanding at March 31, 2000 817,500 $7.76 20,000 $4.50 175,000 $11.19
-------- ------- ------- ----- -------- ------
Exercisable at March 31, 2000 300,751 $3.69 20,000 $4.50 - $ -
-------- ------- ------- ----- -------- ------
Weighted average fair value of
options granted during the
quarter $9.39 $ - $ 5.97
------- ----- ------
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
LEGAL MATTERS
In connection with the Purchase Agreement transaction, a shareholder of LanXtra
exercised his rights as a dissenting shareholder. The Company assumed LanXtra's
obligation (if any) to this dissenting shareholder. If the shareholder is
permitted to pursue his claim in a legal proceeding, LanXtra could be required
to pay the shareholder the fair value of his shares immediately before the
closing date of the Purchase Agreement. The Company's and LanXtra's management
believes that the value paid on account of these shares pursuant to the Purchase
Agreement is greater than the amount which the dissenting shareholder could
recover under Colorado law. The dissenting shareholder has asserted that the
value of his 50,000 LanXtra shares immediately before the closing date of the
Purchase Agreement would be approximately $250,000. The ultimate resolution of
the matter, which is expected to occur within one year, could result in an
obligation to such shareholder. Further, should LanXtra, or the Company as
successor, be required to make a payment to this shareholder, such payment could
result in the purchase transaction being treated as a taxable transaction which
could subject the Company to a significant tax liability.
The Company is exposed to legal claims arising in the ordinary course of
business. In management's opinion, none of the claims currently asserted will
result in a material liability or change to earnings.
15
<PAGE>
7. ACQUISITION OF LANXTRA BUSINESS (UNAUDITED):
As discussed above, the Company acquired the business of LanXtra on February 1,
1999. The following is pro forma operating information. For purposes of the pro
forma statement of operations, the transaction was assumed to be consummated on
January 1, 1999. Pro forma earnings per share are calculated as if the Purchase
Agreement was completed on January 1, 1999 and the related 1,029,218 shares of
common stock were issued on that date.
The pro forma statement of operations for the three months ended March 31, 1999
is as follows:
<TABLE>
<CAPTION>
Pro Forma
LanXtra Cavion Adjustments Pro Forma
---------- ------------- ------------- ----------
(unaudited) unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue $ 37,850 $ 66,539 $ - $ 104,389
Cost of revenue 31,898 41,443 - 73,341
---------- ------------- --------- ----------
Gross profit 5,952 25,096 - 31,048
Operating expenses 213,311 609,609 79,388 (1) 902,308
Interest expense and other 64,069 73,656 (52,932)(2) 84,793
---------- ------------- --------- -----------
Net loss $(271,428) $(658,169) $(26,456) $(956,053)
========== ============= ========= ===========
Net loss per basic share $ (0.32)
===========
Weighted average shares
outstanding 3,032,978
===========
</TABLE>
ADJUSTMENTS
(1) Amortization of goodwill
(2) Reduction of interest expense to reflect Cavion's capital structure
8. SEGMENT REPORTING:
The Company has two reportable segments: a provider of a secure financial
network connectivity and Internet solutions to credit unions and their business
partners ("cavion.com") and a provider of e-commerce services to credit union
members ("Member Emporium-TM-"). Cavion.com activities include the operations of
providing a connection to the CuiNet and Internet banking products which enables
credit unions to offer their members a wide array of financial products and
services over the Internet. Member Emporium-TM- activities include development
and implementing e-commerce relationships with third party merchants and
suppliers and, in turn, offering their products to credit union members. Member
Emporium-TM- operations began in the first quarter of 2000. The accounting
policies of the segments are the same as those applied in the consolidated
condensed financial statements. Intercompany interest is calculated based on
monthly balances of intercompany loans and are eliminated in consolidation. The
following is a summary of information about each of the Company's reportable
segments that is used by the Company to measure the segment's operations:
16
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 2000
------------------------------------------------
Member
Cavion.com Emporium Consolidated
------------- ---------- --------------
<S> <C> <C> <C>
Revenues $ 251,842 $ 75,000 $ 326,842
Segment Losses (2,326,065) (52,403) (2,378,469)
Segment Assets 10,970,841 192,083 11,162,925
</TABLE>
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Cavion.com offers a secure private network and Internet banking products
and services to credit unions that connect them to other credit unions, their
business partners and members. Cavion.com builds and maintains a suite of
network products and services for the credit union industry that currently
includes:
- a secure private network, CUiNET-TM-, that connects credit unions with
their business partners, enabling business-to-business movement of
data and e-commerce;
- secure Internet banking products, bill payment and secure automated
loan application software with access to third party decision
products;
- secure Internet access services for credit unions; and
- e-commerce services for credit union members.
The following discussion of our results of operations includes the results
of our predecessor, LanXtra, Inc., for the period prior to February 1, 1999.
LanXtra was incorporated in June 1992 and was originally engaged in the business
of integrating computer networks and communications technologies for large
business and government clients . In 1997, LanXtra created a software
development division to develop network-based financial services software for
credit unions. In December 1997, LanXtra sold all of its assets except its
credit union financial services business, which we acquired in February 1999. We
were originally incorporated under the name Network Acquisitions, Inc. in August
1998 for the purpose of acquiring the assets and business operations of LanXtra.
This acquisition was completed on February 1, 1999. At that time, we changed our
name to Cavion Technologies, Inc. and began to conduct some of our business
under the trade name cavion.com.
Prior to our acquisition of LanXtra, we did not conduct any business
operations except preparation for the acquisition, including providing bridge
funding to LanXtra with funds raised through a private placement of promissory
notes and related warrants.
In the following discussion, "we" refers both to the business we purchased
from LanXtra on February 1, 1999, and to cavion.com since its inception
(referred to below as the combined results).
Our revenues have been historically derived from recurring monthly
connectivity fees, installation services and software licensing fees associated
with our secure Internet access services and secure Internet financial products.
Beginning in January 2000, we changed our pricing policy and eliminated
installation fees for access to CUiNET-TM- and our Internet banking products.
Currently, credit unions pay us a flat monthly fee based on bandwidth
requirements and the mix of products and services we provide to them. In
addition, we charge vendors connected to CUiNET-TM- a flat monthly fee to be
connected to CUiNET-TM- in addition to charges based upon the number of credit
unions to which such vendors provide services. We market a connection to
CUiNET-TM- and our Internet banking products as a packaged solution to credit
unions.
In addition, we offer bill payment services, secure forms servers, secure
Internet access and an online loan application, CUiLOAN-TM-, with access to
third party approval products. Included in the monthly fee is the cost of
hardware, software installation, set up, maintenance, technical assistance for
our services, and any hardware or software upgrades. We do not charge end user
transaction fees or per user fees. Customers pay for a full year of services in
advance when they initially connect with us and on each anniversary date
thereafter. This payment is reflected on the balance sheet as an increase in
deferred revenue offset by an increase in cash. As revenues are deemed earned,
deferred revenues are amortized into revenue.
18
<PAGE>
We have recently developed and are beginning to market our e-commerce
product, Member Emporium-TM-, which will allow credit unions to offer their
members products and services at discounted prices. In the future, we expect to
earn a substantial portion of our revenue from commissions and fees for
transactions conducted over Member Emporium-TM-.
As of March 31, 2000, we had 130 customers under contract to connect to
CUiNET-TM-, which included 119 credit unions and 11 business critical vendors.
Of the 119 credit unions that contracted to connect to CUiNET-TM-, 57 had also
subscribed to our Internet banking products. We believe that our new pricing
policy, combined with our new strategy of marketing a CUiNET-TM- connection and
Internet banking products as a packaged solution will increase the percentage of
our credit union customers who also subscribe for Internet banking products. In
the first quarter of 2000, 66% of credit unions that contracted to connect to
CUiNET-TM- also subscribed to our Internet banking products, as compared to 42%
through December 31, 1999.
Our operating expenses consist of network access and connectivity expenses,
installation service expenses, selling, general and administrative expenses,
research and development expenses, and amortization of goodwill and other
intangible assets. Network access and connectivity expenses include our monthly
connection costs paid to Convergent and other telecommunications providers,
hardware costs, as well as the ongoing personnel and system maintenance costs
associated with our data center. Our installation services expenses consist of
personnel costs required to implement our secure private network and Internet
banking products. Selling, general and administrative expenses include marketing
expenses, sales commissions, employee compensation and benefits, amortization of
stock-based compensation and occupancy and general office expenses incurred in
the ordinary course of business. Research and development expenses consist of
programmers and engineers allocated salaries applicable to the amount of time
they devoted to development activities. Amortization of goodwill and other
intangible assets is related to the purchase of LanXtra.
RESULTS OF OPERATIONS FOR CAVION.COM AND THE PREDECESSOR
The following table sets forth the results of operations of our predecessor
for the periods ended March 31, 1999 and for the one month ended January 31,
1999. Combined operating information for the period ended March 31, 1999 has
been presented to facilitate comparison between these periods.
19
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR CAVION.COM COMBINED
---------------------------------------------------------------
For the For the three-month For the three-month
one-month ended period ended period ended
January 31, 1999 March 31, 1999 March 31, 1999
---------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REVENUE:
Network access and connectivity fees $24 $56
$80
Software licensing fees & installation
fees 13 11 24
---------------------------------------------------------------
Total revenue 37 67 104
OPERATING EXPENSES:
Network access and connectivity,
installation services and software
licensing 32 41 73
Selling and marketing 73 152 225
General and administrative 109 252 361
Research and development 31 47 78
Amortization of goodwill - 159 159
---------------------------------------------------------------
Total operating expenses 245 651 896
LOSS FROM OPERATIONS (208) (584) (792)
Interest expense, net (64) (74) (138)
---------------------------------------------------------------
NET LOSS $(272) $(658) $(930)
===============================================================
</TABLE>
20
<PAGE>
THREE MONTH PERIOD ENDED MARCH 31, 2000 COMPARED TO THREE MONTH PERIOD ENDED
MARCH 31, 1999 (COMBINED CAVION.COM AND LANXTRA)
REVENUE
Total revenue for the period increased approximately $222,000 or 214%
from approximately $104,000 for 1999 to approximately $327,000 for 2000. This
increase consisted of an increase of approximately $162,000 in network access
and connectivity revenue and an increase of approximately $75,000 in
preferred merchant fees for Member Emporium-TM-. As a result of the change in
the way we sell our products, we no longer charge separately for
installation. Therefore, installation services and software license fees
decreased approximately $14,000.
NETWORK ACCESS AND CONNECTIVITY. Network access and connectivity fees
increased approximately $162,000 or 202% from approximately $80,000 for 1999 to
approximately $241,000 for 2000. This increase was due to the increase in the
number of customers connected to CUiNET-TM- from 26 as of March 31, 1999 to 92
as of March 31, 2000.
PREFERRED MERCHANT FEES. Preferred Merchant fees increased 100% from $0 in
1999 to $75,000. This was due to the initiation of our Member
Emporium-TM-preferred merchant program in 2000.
INSTALLATION SERVICES AND SOFTWARE LICENSING. Installation services and
software licensing fees decreased approximately $14,000 or 58% from
approximately $24,000 for 1999 to approximately $10,000 for 2000. This decrease
was due to a change in the way we sell our products in which we no longer charge
for installations.
OPERATING EXPENSES
Total operating expenses increased approximately $1.8 million or 205% from
approximately $0.9 million for 1999 to approximately $2.7 million for 2000. This
increase consisted of an increase of approximately $221,000 in network access
and connectivity expenses, $669,000 in selling and marketing expenses, $754,000
in general and administrative expenses, $121,000 in research and development
expenses, and $79,000 of amortization of goodwill. These increases were
primarily due to an additional month of amortization of goodwill from the
LanXtra acquisition, increased personnel and occupancy costs to support our
recent growth, increased commissions paid to sales personnel, and amortization
of stock-based compensation for non-employees. Total operating expenses as a
percentage of total revenue decreased from 859% in 1999 to 836% in 2000.
COST OF NETWORK ACCESS AND CONNECTIVITY, INSTALLATION SERVICES AND
SOFTWARE LICENSING. Costs related to network access and connectivity,
installation services and software licensing revenue increased approximately
$212,000 or 290% from approximately $73,000 for 1999 to approximately
$285,000 for 2000. This increase was due to an increase in the number of
customers connected to CUINET-TM-, and related increased telecommunications
charges, personnel and network maintenance and data center expenses and
associated charges. The Company's data centers are currently being built out
and scaled to support the level of volume anticipated as a result of our
aggressive growth model. As such, network maintenance and data center
expenses are expected to decline as a percentage of related revenues in
future periods as our customer base expands. In the three-month period ended
March 31, 2000, costs of network access and connectivity include the costs to
transition telecommunication providers which included higher telephony costs
and some overlap of charges. This increase was somewhat offset by a reduction
in prices we were charged for installation services by a new
telecommunications provider. Cost of network access and connectivity as a
percentage of related revenue increased from 63% in 1999 to 112% in 2000. As
a result of the change in the way we sell our products and our alliance with
Convergent Communications Services, Inc., we no longer have installation
expenses related to telecommunication installations or equipment. Cost of
installation services is primarily salaries directly related to the
installation services we provide to our customers.
21
<PAGE>
SELLING AND MARKETING. Selling and marketing expenses increased
approximately $669,000 or 298% from $224,000 for 1999 to $894,000 for 2000. This
increase was primarily due to increased sales and sales support personnel,
increased occupancy costs for additional sales offices, increased commissions
paid to sales personnel and amortization of stock-based compensation. The amount
of stock-based compensation included in selling and marketing for the
three-month period ending March 31, 2000 was approximately $175,000. The fair
value of stock-based compensation to non-employees is estimated on the vesting
date using the Black-Scholes option pricing model. All options granted to
non-employees are fully vested. We anticipate that our salaries and commissions
will increase as we hire additional personnel to facilitate the growth of our
business. Selling and marketing expenses increased as a percentage of total
revenue from 215% in 1999 to 273% in 2000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased approximately $754,000 or 209% from $361,000 for 1999 to $1.1
million for 2000. This increase was primarily due to increased personnel,
increased occupancy costs for our corporate headquarters, and amortization of
stock-based compensation. The amount of stock-based compensation included in
general and administrative expenses for the three-month period ended March
31, 2000 was approximately $324,000. All options granted to non-employees are
fully vested. We also expect increased occupancy expenses and corporate
infrastructure costs as we grow. General and administrative expenses
decreased as a percentage of total revenue from 346% in 1999 to 341% in 2000.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
approximately $121,000 or 155% from $78,000 for 1999 to $199,000 for 2000. This
increase was primarily due to increased personnel devoted to development
activities. Research and development expenses decreased as a percentage of total
revenue from 75% in 1999 to 61% in 2000.
AMORTIZATION OF GOODWILL. Amortization of goodwill increased approximately
$79,000 or 50% from $159,000 in 1999 to $238,000 in 2000. This increase is due
to the acquisition of LanXtra, and the related goodwill, which occurred on
February 1, 1999. Amortization of goodwill decreased as a percentage of total
revenue from 152% in 1999 to 73% in 2000.
INTEREST INCOME AND EXPENSE
Interest income was approximately $68,000 in 2000, or a 100% increase from
1999, and was derived from interest earned on short-term cash investments.
Interest expense totaled approximately $42,000 for 2000, compared to
approximately $138,000 for 1999. The decrease is due to higher debt service
costs during 1999 prior to our initial public offering and obligations assumed
from LanXtra. Interest expense in 2000 primarily related to capital leases and
our notes payable.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through cash flow from
operations, net proceeds from the public and private sale of equity and debt
securities, and through debt which has subsequently been repaid. On March 31,
2000, we had approximately $4.5 million in cash and cash equivalents. The
Company's operations are subject to risks associated with a rapidly evolving
marketplace, including need for additional capital, technological change, and
a dependence on key personnel. The Company believes that its cash and other
sources of liquidity will be sufficient to fund its operations into the third
quarter of 2000, and that additional financing will be required to fund
operations beyond that date. In order to facilitate our aggressive growth
model, management intends to pursue additional financing as it has done
previously. As part of the Company's ongoing efforts to continue the
financing of the business, we considered a secondary public offering and
filed a Form S-1 registration statement on April 14, 2000. Given the current
market conditions, we decided not proceed with this offering and are exploring
other alternatives. As part of this offering, we incurred legal and
accounting fees and other costs of approximately $280,000, which will be
expensed in the second quarter.
Cavion.com's operating activities used cash of approximately $357,000 in
1999 and approximately $1.2 million during the three months ended March 31,2000.
Cash used by operating activities in each of these periods primarily resulted
from our net losses, which were partially offset by depreciation and
amortization, accretion of debt
22
<PAGE>
discount and putable stock non-cash compensation charge, by decrease in other
assets and an increase in deferred revenue.
Cavion.com's investing activities used cash of approximately $36,000 during
the three months ended March 31, 1999 and $736,000 during the three months ended
March 31, 2000, which was primarily related to purchase of new property and
equipment.
Cavion.com's financing activities generated cash of approximately $1.4
million and $2.1 million in 1999 and 2000, respectively. The cash generated by
financing activities during 1999 and 2000 resulted primarily from the sale of
equity, which was offset somewhat by payments of offering costs and principal
payments on capital leases.
In March 1999, we received net proceeds of approximately $1.5 million from
the private placement of 567,000 shares of our preferred stock. Subsequent to
March 31, 1999, the Company sold an additional 133,000 shares for a total of
700,000 shares and total net proceeds of approximately $1.8 million. These
shares were converted into 700,000 shares of common stock on November 3, 1999.
In February 2000, we received net proceeds of approximately $2.2 million
through a private placement to two investors. We issued 205,000 shares of common
stock for $12.00 per share.
We currently lease all of the equipment in our data center. We have a lease
line of credit from Data Sales Company which enables us to lease up to $500,000
of computer hardware. Interest on the outstanding balance accrues at the rate of
10% annually. As of March 31, 2000 a total of $164,283 was outstanding on this
line. Additionally, we have an agreement with Convergent Communications in which
we pay a monthly fee for data center equipment, customer equipment, maintenance
and related services for the network. The amount paid to Convergent
Communications during the first quarter ended March 31, 2000 was approximately
$120,000.
In the future, we expect to incur substantial costs in connection with
expanding our telecommunications infrastructure, establishing a sales presence
in key strategic markets, and developing new products. We also expect to incur
increased marketing costs and general and administrative expenses in connection
with the growth of our secure network for the credit union industry.
Management expects that we will continue to operate at a loss as we expand
our network of credit union clients. These expansion efforts are likely to cause
us to incur significant increases in expenses, both in absolute terms and as a
percentage of revenue, as we prepare for the anticipated future growth in our
credit union customer base. Expenses will increase because of the need to
increase staffing in all categories, acquire additional equipment, and provide
for additional telephone connections. We believe our operating results may
fluctuate significantly as a result of a variety of factors, some of which are
outside of our control. Because of that, we cannot assure you that we will
achieve profitable operations even with a significant increase in our credit
union customer base.
The Company's operations are subject to risks associated with a rapidly
evolving marketplace, including need for additional capital, technological
change, and a dependence on key personnel. The Company believes that its cash
and other sources of liquidity will be sufficient to fund its operations into
the third quarter of 2000, and that additional financing will be required to
fund operations beyond that date. In order to facilitate our aggressive growth
model, management intends to pursue additional financing as it has done
previously.
INFLATION
Although our operations are influenced by general economic conditions, we
do not believe that inflation had a material effect on the results of our
operations during the period ended March 31, 2000, nor do we expect that
inflation will have a material effect on the results of our future operations.
Our customer contracts have CPI Index provisions that can be adjusted on an
annual basis.
23
<PAGE>
RECENT ACCOUNTING GUIDELINES
During December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), to establish
guidelines for revenue recognition and enhance revenue recognition disclosure
requirements. SAB 101 clarifies basic criteria for when revenues are taken into
account for purposes of a company's financial statements. SAB 101 is effective
for the quarter ended June 30, 2000. We are currently assessing the implications
of adopting SAB 101. Currently, implementation service fees are recognized over
the term of the underlying contract rather than on completion of implementation.
Upon adoption of SAB 101, previously recognized implementation fees will be
deferred and recognized ratably over the contract term. In the period of
adoption, the cumulative impact will be reported as a change in accounting
principle as dictated by SAB 101.
24
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
RECENT SALES OF UNREGISTERED SECURITIES.
FOUNDERS SHARES. In August 1998, we issued 2,000,000 shares of $.0001 common
stock to our two founding shareholders at $.0001 per share. These issuances to
the two accredited investors were effected without registration under the
Securities Act of 1933 in reliance upon the exemption from registration
contained in Section 4(2) of the Act. As founding shareholders, they had access
to complete information regarding our business at the time of issuance.
1998-1999 PRIVATE PLACEMENT OF NOTES AND WARRANTS. Between October 20, 1998 and
February 8, 1999, we issued $470,000 in 15% secured promissory notes due October
19, 2000 and a total of 56,400 warrants to purchase shares of Class A common
stock at an exercise price of $.01 per share in a private placement. We relied
on the exemption from registration provided by Section 4(2) of the Act and Rule
505 of Regulation D adopted under the Act, as well as exemptions under various
state securities laws. The securities were sold to 13 private investors. One was
an accredited investor and 12 were sophisticated investors. Investors received a
private placement memorandum as well as copies of the documents relating to the
sale of the assets of LanXtra to cavion.com which closed in February 1999 and
the loan from cavion.com to LanXtra which has since been extinguished. Between
December 28, 1998 and February 8, 1999, all of the warrants were exercised. In
connection with the offering, the agent for the offering, First Capital
Investments, Inc. was issued an agent's warrant to purchase 5,640 shares of
Class A common stock at $.01 per share, which was exercised on February 8, 1999.
In addition, First Capital received a total offering commission of $37,600.
MANAGEMENT SHARES. In December 1998, we issued 625,356 shares of Class A common
stock to our management shareholders at $.01 per share. These issuances to the
three sophisticated investors were effected without registration under the Act
in reliance upon the exemption from registration contained in Section 4(2) of
the Act, relating to the sale of securities by an issuer not involving a public
offering. As these individuals were part of management at the time the shares
were issued, they had access to complete information regarding our business at
the time of issuance.
LANXTRA ASSET PURCHASE. In February 1999, we issued 375,214 shares of Class A
common stock and 28,648 shares of Class B common stock to LanXtra, Inc. in
exchange for the assets and liabilities of LanXtra. This issuance was effected
without registration under the Act in reliance upon the exemption from
registration contained in Section 4(2) of the Act. Since cavion.com was formed
to purchase the assets and liabilities of LanXtra, the management and
shareholders of LanXtra had access to complete information regarding our
business at the time of issuance.
1999 PRIVATE PLACEMENT OF PREFERRED STOCK. In March and April 1999, we issued
700,000 shares of convertible preferred stock, Series A, convertible into Class
A common stock, for an aggregate of $2,100,000, prior to expenses and
commissions. The initial conversion price was $3.00 per share of Class A common
stock, but the conversion price was subject to adjustment upon certain events
affecting cavion.com's capitalization. The shares of preferred stock were
automatically converted into Class A common stock on November 3, 1999, when we
closed our initial public offering. The convertible preferred stock was sold in
reliance on the exemption from registration provided by Section 4(2) of the Act
and Rule 506 of Regulation D adopted thereunder, as well as exemptions under
various state securities laws. The offering was sold to accredited investors
only. Investors received a private placement memorandum including financial
statements. In connection with the offering, the agent for the offering,
Neidiger, Tucker, Bruner, Inc. was issued a five year agent warrant to purchase
70,000 shares of preferred stock at
25
<PAGE>
an exercise price of $3.00 per share. Those warrants were subsequently
terminated at NTB's request. In addition, NTB received a commission of $210,000
and a non-accountable expense allowance of $42,000.
AUGUST 1999 PRIVATE PLACEMENT OF NOTES AND WARRANTS. In August 1999 we raised
$300,000 through the issuance of 14% promissory notes along with warrants to
purchase 30,000 shares of common stock. Each $50,000 note entitled the
subscriber to warrants to purchase 5,000 shares of Class A common stock. The
notes were due on the closing of our initial public offering or one year from
the date of their issuance. The notes were paid in full on November 5, 1999. The
warrants are exercisable for period of five years from November 3, 1999. The
warrant exercise price is $6.50, the price at which common stock was offered in
our initial public offering. The notes and warrants were sold to four accredited
investors. We relied on the exemption from registration provided by Sections
4(2) and 4(6) of the Act and Rule 506 of Regulation D adopted under the Act, as
well as exemptions under various state securities laws.
FEBRUARY 2000 PRIVATE PLACEMENT. On February 17, 2000, we raised $2,460,000
through a private placement of 205,000 shares of Class A common stock at $12.00
per share, the closing price on February 14, the date of the offering to the
investors. The securities were sold in reliance on the exemption from
registration provided by Section 4(2) and 4(6) of the Act and Rule 506 of
Regulation D adopted under the Act, as well as exemptions under various state
securities laws. The offering was sold to two accredited investors who each
received a copy of our most recent registration statement on Form SB-2 (No.
333-93929) which was declared effective by the SEC on February 4, 2000. In
connection with the offering, First Capital Investments, Inc. acted as our
placement agent and received a commission of 8%, or $196,000, and a warrant to
purchase 20,500 shares of our Class A common stock, exercisable at 110% of the
offering price, $13.20, for a period of 5 years from February 17, 2000. We also
agreed to register the shares issued to the investors and the shares for which
the warrants are exercisable as soon as practicable.
USE OF PROCEEDS.
Our initial public offering was effected through a Registration Statement
on Form SB-2 (File No. 333-80421) that was declared effective by the SEC on
October 29, 1999. The IPO commenced on October 29, 1999 and terminated shortly
thereafter on November 3, 1999. The Class A shares of common stock sold in the
IPO were offered for sale by a syndicate of underwriters represented by
Neidiger, Tucker, Bruner, Inc. as the lead underwriter. We registered an
aggregate of 1,380,000 shares of common stock (including 180,000 shares issuable
upon exercise of the underwriters' over-allotment option) in the IPO at a per
share price of $6.50. 1,200,000 registered shares were sold in the IPO and
90,500 were exercised under the underwriters' over-allotment for a total of
1,290,500 for an aggregate offering price of $8,388,250. We incurred the
following expenses in connection with the IPO:
<TABLE>
<S> <C>
Underwriting discounts and commissions $ 838,825
Other expenses $ 794,952
-----------
Total expenses $1,633,777
-----------
</TABLE>
After deducting the expenses set forth above, we received net proceeds of
approximately $6,755,000 with the proceeds from the IPO and the partial
over-allotment option exercised by the underwriters. As of March 31, 2000, we
had used approximately $5.5 million of the net proceeds approximately as
follows:
- - $1.2 million purchase equipment, infrastructure and establish new
points of presence
- - $1.3 million for selling and marketing expenses
- - $0.9 million for general working capital
- - $0.8 million to pay debts, accrued interest and accounts payable; and
- - $0.3 million to repay our August 1999 promissory notes
These amounts represent our best estimate of our use of proceeds for the period
indicated. No payments were made to our directors or officers or their
associates, holders of 10% or more of any class of our equity securities or to
our affiliates other than regular payments of salaries and directors expenses.
26
<PAGE>
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On March 8, 2000, we held a special meeting of shareholders.
At the meeting our Equity Incentive Plan was approved by the
shareholders.
The number of votes cast for, against, abstentions and broker
nonvotes for approval of our Equity Incentive Plan was as follows:
<TABLE>
<CAPTION>
For Against Abstain Broker Nonvotes
--- ------- ------- ---------------
<S> <C> <C> <C> <C>
3,143,735 26,625 31,018 0
</TABLE>
Because the approval of the Equity Incentive Plan was
considered routine under applicable stock exchange rules, all proxy
shares held in the names of brokers as nominees which were not voted at
the meeting by our shareholders were voted by the brokers at their
discretion.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company during the
quarter ended March 31, 2000.
27
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CAVION TECHNOLOGIES, INC.
Date: May 10, 2000 By:
-----------------------------------
Marshall E. Aster, Vice President
Chief Financial Officer and
Principal Financial and
Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 4,539,043
<SECURITIES> 0
<RECEIVABLES> 110,240
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,720,592
<PP&E> 1,529,328
<DEPRECIATION> (119,217)
<TOTAL-ASSETS> 11,162,925
<CURRENT-LIABILITIES> 2,391,638
<BONDS> 0
0
0
<COMMON> 494
<OTHER-SE> 8,387,299
<TOTAL-LIABILITY-AND-EQUITY> 11,162,925
<SALES> 326,842
<TOTAL-REVENUES> 326,842
<CGS> 0
<TOTAL-COSTS> 2,731,254
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,092
<INCOME-PRETAX> (2,378,469)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,378,469)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,378,469)
<EPS-BASIC> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
