UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______, 19___ to ______, 19___.
Commission File Number: 33-35580-D
BURST.COM, INC.
(Exact Name of Small Business Issuer
as Specified in its Charter)
Delaware 84-1141967
(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication Number)
500 SANSOME STREET, SUITE 500
SAN FRANCISCO, CALIFORNIA 94111
Address of Principal Executive Offices, Including Zip Code
(415) 391-4455
(Issuer's Telephone Number, Including Area Code)
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 Issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[ X ] YES [ ] NO
There were 19,123,866 shares of the Issuer's $.00001 par value common stock
outstanding as of August 11, 2000
<PAGE>
BURST.COM, INC.
FORM 10-Q
JUNE 30, 2000
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION............................................. 3
ITEM 1. FINANCIAL STATEMENTS........................................... 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................... 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 13
PART II - OTHER INFORMATION................................................ 14
ITEM 1. LEGAL PROCEEDINGS.............................................. 14
ITEM 2. CHANGES IN SECURITIES.......................................... 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................ 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 15
ITEM 5. OTHER INFORMATION.............................................. 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 15
SIGNATURES................................................................. 16
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BURST.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, December 31,
ASSETS 2000 1999
(unaudited)
------------ ------------
Current assets:
Cash and cash equivalents $ 3,477,295 $ 302,979
Accounts receivable, net 329,027 --
Prepaid expenses and other current assets 262,011 63,893
------------ ------------
Total current assets 4,068,333 366,872
Property and equipment, net 1,678,599 725,412
Other assets 41,626 36,457
------------ ------------
Total assets $ 5,788,558 $ 1,128,741
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 4,834,847
Accounts payable 1,124,824 1,384,289
Accrued expenses 1,066,013 208,374
Accrued interest -- 114,277
Deferred revenue 420,436 51,600
------------ ------------
Total current liabilities 2,611,273 6,593,387
Stockholders' equity:
Preferred stock, $.00001 par value,
20,000,000 shares authorized:
Series A, 2,020,000 shares issued
and outstanding in 1999 -- 20
Series B, 2,476,609 shares issued and
outstanding in 1999 -- 25
Common stock, $.00001 par value, 100,000,000
shares authorized; 19,083,531 and
9,535,527 shares issued and outstanding 190 95
Additional paid-in capital 50,672,302 31,971,108
Accumulated deficit (47,495,207) (37,435,894)
------------ ------------
Total stockholders' equity (deficit) 3,177,285 (5,464,646)
------------ ------------
Total liabilities and stockholders'
equity (deficit) $ 5,788,558 $ 1,128,741
============ ============
See accompanying notes to condensed consolidated financial statements.
3
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<TABLE>
BURST.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Revenues $ 311,136 $ -- $ 386,149 $ --
Cost of revenues -- -- 30,272 --
------------ ------------ ------------ ------------
Gross Profit 311,136 -- 355,877 --
------------ ------------ ------------ ------------
Operating expenses:
Research and development 1,284,763 467,656 2,218,738 928,558
Sales and marketing 3,356,785 1,118,909 5,084,068 1,567,727
General and administrative 1,836,034 1,034,691 3,089,697 1,704,092
------------ ------------ ------------ ------------
Total operating expenses 6,477,582 2,621,256 10,392,503 4,200,377
------------ ------------ ------------ ------------
Loss from operations (6,166,446) (2,621,256) (10,036,626) (4,200,377)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (212) (1,395) (32,696) (1,760)
Interest income 98,957 -- 202,987 --
Other, net (192,563) 25,748 (192,978) 32,735
------------ ------------ ------------ ------------
Total other income (expense), net (93,818) 24,353 (22,687) 30,975
------------ ------------ ------------ ------------
Net loss (6,260,264) (2,596,903) (10,059,313) (4,169,402)
Accumulated deficit, beginning of period (41,234,943) (26,030,664) (37,435,894) (24,458,165)
------------ ------------ ------------ ------------
Accumulated deficit, end of period $(47,495,207) $(28,627,567) $(47,495,207) $(28,627,567)
============ ============ ============ ============
Basic and diluted net loss per common
share $ (0.33) $ (0.28) $ (0.59) $ (0.47)
============ ============ ============ ============
Shares used in per share computation 19,047,098 9,229,705 17,114,457 8,884,253
============ ============ ============ ============
<FN>
See accompanying notes to condensed consolidated financial statements
</FN>
</TABLE>
4
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<TABLE>
BURST.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Deficit)
For the Six Months Ended June 30, 2000
(unaudited)
<CAPTION>
Common Stock Preferred Stock Additional
------------------------ ----------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital deficit Total
------------ --------- ----------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 9,535,527 $ 95 4,496,609 $ 45 $ 31,971,108 $(37,435,894) $ (5,464,646)
Common stock offering 3,474,625 35 -- -- 13,898,465 -- 13,898,500
Exercise of stock options 112,554 -- -- -- 45,000 -- 45,000
Non-cash compensation
related to
February 1, 2000 options -- -- -- -- 22,563 -- 22,563
Non-cash compensation
related to sale of
common stock to employees -- -- -- -- 77,726 -- 77,726
Transaction costs related
to common stock
offering -- -- -- -- (1,103,355) -- (1,103,355)
Conversion of debt to
common stock 1,333,750 13 -- -- 5,334,987 -- 5,335,000
Write-off of convertible
note discount -- -- -- -- (70,153) -- (70,153)
Conversion of preferred
stock to common 4,496,609 45 (4,496,609) (45) -- -- --
Net loss -- -- -- -- -- (3,799,140) (3,799,140)
Common stock offering -- -- -- -- -- -- --
Exercise of stock options 80,466 1 -- -- 210,057 -- 210,058
Exercise of warrants 50,000 1 -- -- 49,999 -- 50,000
Stock options issued in
lieu of services -- -- -- -- 235,905 235,905
performed
Net loss -- -- -- -- -- (10,059,313) (10,059,313)
------------ --------- ----------- --------- ------------ ------------ ------------
Balance at June 30, 2000 19,083,531 $ 190 -- $ -- $ 50,672,302 $(47,495,207) $ 3,177,285
============ ========= =========== ========= ============ ============ ============
<FN>
See accompanying notes to condensed consolidated financial statements
</FN>
</TABLE>
5
<PAGE>
<TABLE>
BURST.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
<CAPTION>
Six Months Ended
----------------------------
June 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(10,059,313) $ (4,169,402)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 258,374 74,529
Non-cash compensation expense related to sale of stock to employees 100,289 --
Stock option compensation 235,906 191,089
Changes in operating assets and liabilities:
Accounts receivable (329,027) (50,000)
Prepaid expenses and other current assets (198,118) (30,274)
Payment of receivables from Series B Convertible Stock offering -- 810,000
Other assets (5,170) (525)
Accounts payable (259,465) 349,514
Notes payable (4,834,847) --
Accrued expenses 857,639 (52,467)
Accrued interest (114,277) --
Deferred revenue 368,836 50,000
------------ ------------
Net cash used in operating activities (13,979,173) (2,827,536)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (1,211,561) (421,186)
------------ ------------
Cash flows from financing activities:
Proceeds from sale of common stock 18,059,992 --
Proceeds from exercise of stock options 255,058 6,300
Proceeds from exercise of warrants 50,000 1,537,500
Repayment of debt -- (22,736)
------------ ------------
Net cash provided by financing activities 18,365,050 1,521,064
------------ ------------
Increase (decrease) in cash and cash equivalents 3,174,316 (1,727,658)
Cash and cash equivalents, beginning of period 302,979 2,212,141
------------ ------------
Cash and cash equivalents, end of period $ 3,477,295 $ 484,483
============ ============
<FN>
See accompanying notes to condensed consolidated financial statements
</FN>
</TABLE>
6
<PAGE>
BURST.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, Continued
For the Six Months Ended June 30, 2000 and 1999
(unaudited)
2000 1999
---------- ------
Supplemental disclosure of cash flow information:
Cash paid for state franchise tax $ 850 $ 800
========== ======
Cash paid for interest $ -- $ 913
========== ======
Supplemental schedule of non-cash financing activities:
Debt converted into 1,333,750 shares of common stock $ 5,335,00 $ --
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
BURST.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) CHANGE OF NAME
On January 27, 2000 the Company changed its name from Instant Video
Technologies, Inc. to Burst.com, Inc.
(2) BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Explore Technology, Inc. and
Timeshift-TV. All significant intercompany transactions and accounts have
been eliminated in consolidation.
(3) INTERIM FINANCIAL INFORMATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
and the instructions for Form 10-Q and Article 10 of Regulation S-X. In the
Company's opinion, the financial statements include all adjustments,
consisting of normal recurring adjustments, that the Company considers
necessary to fairly state the Company's financial position and the results
of operations and cash flows. The balance sheet at December 31, 1999, has
been derived from the audited financial statements at that date but does not
include all of the necessary informational disclosures and footnotes as
required by generally accepted accounting principles. The accompanying
financial statements should be read in conjunction with the financial
statements and notes thereto included with the Company's Amended Form 10
filed July 20, 2000 and other documents filed with the Securities and
Exchange Commission. The results of the Company's operations for any interim
period are not necessarily indicative of the results of the Company's
operations for any other interim period or for a full fiscal year.
(4) NOTES PAYABLE
During January, 2000 the Company received $430,000 evidenced by notes
payable convertible into common stock, due in one year. The conversion rate
was the lower of: (1) $6.50, (2) 80% of the average closing price of the
Company's publicly traded shares in the 20 trading days immediately
preceding the closing of an ongoing private placement, or (3) the price
agreed in that private placement. Upon completion of the private placement
discussed in Note 5 below, these and all other notes outstanding, totaling
$5,335,000, were converted into 1,333,750 shares of common stock as of
January 31, 2000. The conversion price was $4.00 per share of common stock
plus one warrant per share of common stock acquired by conversion. Each
warrant has an exercise price of $5.00 and expires 5 years from the date of
issue.
(5) EQUITY FINANCING
The Company completed a sale of its common stock and warrants to purchase
common stock in January 2000. In addition to the conversion of notes
outstanding referred to above, the Company received $13,898,500 in cash from
various investors, including some directors and employees of the company, in
exchange for 4,808,375 shares of common stock and 4,808,375 warrants to
purchase common stock, offset by approximately $1,103,000 in transactions
costs. The price per share of common stock was $4.00, which included the
issuance of one warrant for each share of stock sold. Each warrant is
exercisable for one share of common stock at an exercise price of $5.00 per
share and expires 5 years from the date of issue. Compensation expense of
$77,726 was recorded as a result of sales of stock to employees for the
excess of fair value over the price paid. In connection with the offering,
98,870 five-year warrants to purchase common stock at $8.4375 per share were
issued to the placement agent.
During 2000, 104,645 options and during 1999, 281,250 warrants granted to
non-employees in connection with previous equity transactions were exercised
to purchase 94,711 and 252,262 shares of common stock in cashless exercises,
respectively.
(6) PREFERRED STOCK
Concurrently with and conditioned on the closing of the equity financing
described in Note 5 above, all holders of preferred stock converted their
shares of preferred stock into common stock at a 1:1 conversion ratio. As a
result, 2,020,000 shares of Series A preferred stock and 2,476,609 shares of
Series B preferred stock were converted into 4,496,609 shares of common
stock.
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(7) STOCK OPTIONS
The Company granted options to purchase 90,250 shares of common stock to
employees on February 1, 2000. Of these options, options to purchase 45,125
shares were issued with an exercise price of $4.00 per share and expire on
April 30, 2000. The remaining options to purchase 45,125 shares were issued
with an exercise price of $5.00 per share and expire 5 years from the issue
date. To the extent that any of the options with an exercise price of $4.00
per share are not exercised by April 30, 2000, then options to purchase an
equal number of shares at an exercise price of $5.00 will terminate. As a
result of these grants, the Company recorded compensation expense of
$22,563 for the excess of the fair value over the exercise price.
During the three months ended June 30, 2000 the Company granted options to
purchase 1,012,650 shares of common stock to employees and options to
purchase 100,000 shares of common stock were granted to Board Members, all
exercisable at $4.50 per share. Options were exercised during the same
period to purchase 174,239 shares of common stock at an average price of
$1.49 per share.
(8) SIGNIFICANT CONCENTRATIONS
During the six months ended June 30, 2000 one Korean customer accounted for
72% of revenues. No other single customer accounted for more than 10% of
revenues.
9
<PAGE>
BURST.COM, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion of the financial condition and results of operations of
Burst.com, Inc. should be read in conjunction with the Management's Discussion
and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and the Notes thereto for the year ended
December 31, 1999 included in the Company's Form 10/A and S-1 Registration
Statement filed with the SEC.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Some of the matters discussed in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this quarterly
report on Form 10-Q include forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events, including, among other things:
o implementing our business strategy;
o attracting and retaining customers;
o delivering quality product that meets customer expectations;
o obtaining and expanding market acceptance of the products and services
we offer;
o responding quickly to technological challenges from third parties;
o forecasts of Internet usage and the size and growth of relevant
markets;
o rapid technological changes in our industry and relevant markets; and
o competition in our market.
In some cases, you can identify forward-looking statements by terminology such
as "may," "will," "should," "could," "predicts," "potential," "continue,"
"expects," "anticipates," "future," "intends," "plans," "believes," "estimates"
and similar expressions. These statements are based on our current beliefs,
expectations and assumptions and are subject to a number of risks and
uncertainties. Actual results, levels of activity, performance, achievements and
events may vary significantly from those implied by the forward-looking
statements. These forward-looking statements involve risks and uncertainties
that could cause our results to differ materially from those discussed. These
risks and uncertainties include, but are not limited to, those described under
the caption "Factors That May Impact Future Results" below. Additional
information concerning factors that may impact future results can be found in
the Risk Factors section of the above referenced S-1 Registration Statement
filed on August 11, 2000. These forward-looking statements are made as of the
date of this report, and except as required under applicable securities law, we
assume no obligation to update them or to explain the reasons why actual results
may differ.
We believe that period-to-period comparisons of our operating results, including
our revenues, cost of sales, gross margins, expenses, and capital expenditures
may not necessarily provide meaningful results and should not be relied upon as
indications of future performance. We do not believe that our historical growth
rates are indicative of future growth or trends.
We have incurred significant losses since our inception, and as of June 30,
2000, we had an accumulated deficit of $47,495,207. There can be no assurance
that we will achieve or sustain profitability and we believe that we will
continue to incur net losses in 2000.
Overview
We are an independent provider of client/server network software for the
delivery of video and audio information over networks. Our principal executive
offices are located in San Francisco, California and we have a number of
additional sales offices in several domestic metropolitan areas. Our software
manages the delivery of video and audio content over various networks, including
the Internet and corporate intranets, optimizing network efficiency and quality
of service. Our Burstware(R) suite of software products
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enables companies to transmit video and audio files at Faster-Than-Real-Time(TM)
speed, which is accomplished by utilizing available bandwidth capacity to send
more video or audio data to users than the players are demanding. This data is
stored on the users' machine for playing on demand, thus isolating the user from
noise and other network interference. The result is high quality, full-motion
video and CD-quality audio to the end-user. Our revenue is derived from fees for
software licenses, content hosting and other consulting services.
Results of Operations
Net revenues were $311,136 and $386,149 for the three month and six month
periods ended June 30, 2000, respectively, versus none in the same periods in
1999. We completed the commercial release of our Burstware(R) suite of products
in November 1999 and commenced shipments in February 2000. During the six months
ended June 30, 2000, we also introduced our content hosting service, which
enables our customers to store their audio-video content on our Burstware
servers for delivery to their employees, customers or other end-users over
broadband networks. Orders for approximately $357,073, consisting of software
license fees and hosting and other consulting services were taken during the
quarter. Revenues of $45,937 not recognized or deferred relate to establishment
of a returns reserve, deferral of customer support, hosting and other services
that will be recognized as services are provided. The product cost of revenue
recorded for the six months ended June 30, 2000 consisted primarily of the cost
of equipment purchased from a third-party, which was resold to a customer in
connection with a software sale. Resale of equipment is not part of our sales
strategy, and we do not plan to make such sales to any significant degree in the
future. During the six months ended June 30, 2000, our customer Interzest
accounted for 72% of revenues. No other single customer accounted for more than
10% of our revenues.
Operating expenses were $6,477,582 and $10,392,503 for the three month and the
six month periods ended June 30, 2000, respectively, as compared to $2,621,256
and $4,200,377 during the same periods in 1999. This resulted in total operating
expenses increasing by $3,856,326 and $6,192,166 for the three month and six
month periods ended June 20, 2000, respectively, over the same periods in 1999.
The increases were $817,107 and $1,290,180 for research and development,
$2,237,876 and $3,516,341 for sales and marketing and $801,343 and $1,385,605 in
general administrative for the three month and six month periods ended June 30,
2000, respectively, over the same periods in 1999. The increased costs were
primarily a result of an overall increase in business activity and the
establishment and expansion of our sales force and marketing programs in
particular, as more fully explained below.
Sales and Marketing
Sales and marketing expenses were $3,356,785 for the three months ended June 30,
2000 as compared to $1,118,909 for the three months ended June 30, 1999. For the
six months ended June 30, 2000, sales and marketing expenses were $5,084,068, as
compared to $1,567,727 for the six months ended June 30, 1999. Sales and
marketing expenses consist primarily of advertising and other marketing related
expenses, compensation and employee-related expenses, sales commissions, and
travel costs. The increase in absolute dollars is primarily attributable to an
increase in advertising and distribution costs associated with our aggressive
brand-building strategy and increases in compensation expense associated with
growth in its direct sales force and marketing personnel. We anticipate that
sales and marketing expenses in absolute dollars will increase in future periods
as we continue to pursue an aggressive brand-building strategy through
advertising, expanding international operations, and building a direct sales
organization.
Research and Development
Research and development expenses were $1,284,763 for the three months ended
June 30, 2000 as compared to $467,656 for the three months ended June 30, 1999.
For the six months ended June 30, 2000, research and development expenses were
$2,218,738 as compared to $928,558 for the six months ended June 30, 1999.
Research and development expenses consist primarily of payroll and related
expenses incurred for enhancements to and maintenance of our Burstware(R)
technology and other operating costs. The increase in absolute dollars is
primarily attributable to increases in the number of engineers that develop and
enhance our software technologies. We believe that significant investments in
research and development are required to remain competitive. Consequently, we
expect to incur increased research and development expenditures in absolute
dollars in future periods.
General and Administrative
General and administrative expenses were $1,836,034 for the three months ended
June 30, 2000 as compared to $ 1,034,691 for the quarter ended June 30, 1999.
For the six months ended June 30, 2000, general and administrative expenses were
$3,089,697 as compared to $1,704,092 for the six months ended June 30, 1999.
General and administrative expenses consist primarily of compensation and fees
for professional services, and the increase in absolute dollars is primarily
attributable to increases in these
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areas. We believe that the absolute dollar level of general and administrative
expenses will increase in future periods, as a result of an increase in
personnel and increased fees for professional services.
We had net loss from operations of $6,166,446 and $10,036,626 for the three
month and six month periods ended June 30, 2000, respectively, as compared to
$2,621,256 and $4,200,377 during the same periods in 1999. This was a 235% and
239% increase for the three month and six month periods ended June 30, 2000,
respectively, over the same periods in 1999. The increased loss resulted from
the increased expenditures discussed above. Total other income (expense), net
was ($93,818) and ($22,687) for the three and six month periods ended June 30,
2000, respectively, as compared to $24,353 and $30,975 for the same periods in
1999. The $118,171 and $53,662 decreases were primarily due to non-cash expense
recorded in connection with the equity financing closed during 2000 offset by
interest on the proceeds of that financing.
Liquidity and Capital Resources
Although we have been successful in our fundraising efforts to meet previous
operating requirements, there can be no guarantee that we will be successful in
future fundraising efforts. In January 2000, we raised approximately $13,899,000
in gross proceeds and converted $5,335,000 of debt (including $430,000 in new
debt raised in January 2000), by issuing 4,808,375 shares of our common stock
and warrants to purchase 4,808,375 shares of our common stock. In connection
with these transactions and the conversion of our remaining preferred to common
stock, we incurred approximately $1,103,000 in transaction costs. As of June 30,
2000 we had cash reserves of approximately $3.7 million, which will meet current
operating requirements for approximately two months at our current spending
rate, assuming no revenue. However, we have begun earning revenues in 2000.
Based on projected revenues and our ability to reduce expenditures as required,
we believe operating requirements could be met for three months without the need
for additional financing. We are currently in negotiations to obtain additional
outside funding through the sale of shares of our common stock in a private
placement directed at both "strategic" and "financial" investors. Any new
funding raised may have a dilutive effect on our existing shareholders. In the
event we were to be unsuccessful in our additional fundraising efforts and
projected revenues were significantly lower than expected, we would be required
to reduce significantly cash outflows through the reduction or elimination of
marketing and sales, development, capital, and administrative expenditures
resulting in decreased potential revenue and potential profitability.
We expect to have material capital expenditures for computer and network
equipment of approximately $2,000,000 in 2000 as we add employees and expand our
hosting services infrastructure, software test lab and training capabilities. We
will also incur significant marketing promotion expenses as we attempt to gain
market awareness and will continue to incur increasing research and development
costs as we continue to develop and upgrade our Burstware(R) product line and
follow-on products. In addition, space requirements at our San Francisco
headquarters location continue to grow as we take on additional staff. We are
currently seeking additional space nearby. Due to the high demand versus supply
of comparable office space in this area, we are anticipating a significant
increase in space costs later in this fiscal year. There is no assurance that we
will be able to find a location offering acceptable terms and conditions, which
could result in a costly move or the dispersal of our employees among different
locations.
Changes in Financial Position
As of June 30, 2000, we had working capital of $1,457,060 as compared to a
deficit of $6,226,515 at December 31, 1999. This $7,683,575 increase reflects a
$3,701,461 increase in current assets and a decrease in current liabilities of
$3,982,114. The reason for the increase was the closing of the equity financing
and conversion of notes payable that netted $18,137,718, including cash and note
conversions, partially offset by our $6,260,264 net loss for the quarter.
Net cash used in operating activities totaled $13,979,173 during the six months
ended June 30, 2000, as compared to net cash used in operating activities of
$2,827,536 during the six months ended June 30, 1999, primarily as the result of
the increased operating loss.
Net cash used in investing activities during the six months ended June 30, 2000
totaled $1,211,561 as compared to $421,186 during the six months ended June 30,
1999. Investing activities in both periods consisted of purchases of personal
property and equipment.
Cash flow provided by financing activities during the six months ended June 30,
2000 totaled $18,365,050 as compared to $1,521,064 during the same period in
1999. This increase was primarily the result of $18,059,992 net cash proceeds
from the sale of common stock and $435,000 from issuance of convertible notes in
2000, vs. approximately $2.0 million received from the exercise of options and
warrants and proceeds from the Series B convertible stock offering in 1999.
Although $5,335,000 in debt converted to common stock, the Company paid down no
debt in cash in 2000; while it paid down $22,736 during the six months ended
June 30, 1999.
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Factors That May Impact Future Results
We develop complex software for media delivery, content management and storage.
We have recently commenced sales of our first commercial product released late
last year and have yet to achieve very large commercial deployments. Despite
testing, software errors have been found in our product and, in some cases, our
product's performance when initially deployed has not met customer expectations.
To date, we believe that all of the errors in question have been resolved.
However, there can be no assurance that other errors will not occur, as errors
such as these are common in the development of any software product. Additional
errors in our product could result in, among other things, a delay in
recognition or loss of revenues, loss of market share, failure to achieve market
acceptance or substantial damage to our reputation. As a young company that
recently commenced a new product line, we face risks and uncertainties relating
to our ability to implement our business plan successfully.
Our future success depends on the growing use and acceptance of video
applications for PCs and set-top boxes, including the growth of video on the
Internet. The market for these applications is new, and may not develop to the
extent necessary to enable us to expand our business. We have recently invested
and expect to continue to invest significant time and resources in the
development of new products for this market. If the target markets for our
products do not grow, we may not obtain any benefits from these investments.
Our products are technologically complex and are designed to interface
effectively with third-party products such as Microsoft's Windows Media Player
(WMP) and the QuickTime Player using publicly published application program
interfaces (APIs). Modifications to the publicly published APIs for these
third-party products could require further development effort on our part to
continue to make the interface work properly or, in some cases, could disallow
our products interoperability. There is no assurance that these kinds of changes
will not occur or that we can develop new products effectively and quickly
enough to avoid loss of revenues or market share.
Prospective customers generally must make a significant commitment to test and
evaluate our software and to integrate it into their products. As a result, our
sales process is often subject to delays associated with lengthy approval
processes. For these and other reasons, the initial sales cycles of our new
software products has been lengthy, recently averaging approximately four to six
months from initiation in late 1999 to completion in 2000. We expect that future
sales will also experience lengthy sales cycles.
It has been our experience that our product is often embedded in our customers'
web pages. Since the proper development of video enabled web pages takes a high
level of sophistication, we may be required to provide professional service
support to our customers in this area. There can be no assurance that we will be
able to adequately staff for and deliver the level of professional services
required, or that we will be able to charge the customer fully for this work.
The result could be further impediments to sales and possibly higher than
anticipated cost of sales.
Delivery of video using the Internet is an emerging business. Many of our
customers are new companies that are innovating and counting on Burstware(R) to
provide a technical edge. Because many of these companies are early stage
enterprises without revenues, they may delay payment or fail to pay our
invoices. For this reason, we have deferred a substantial portion of revenue
booked until collectibility has been assured. There is no assurance that this
revenue will ultimately be collected and recognized, or that future bookings may
also be deferred.
We have increased our focus on the Internet applications for our product.
Competitors at times will provide their products at little or no cost to
customers in order to establish market share. There is a risk that we may be
forced to lower our prices substantially, at least initially, to gain market
share. This may negatively impact our own revenue and earnings potential in the
near future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At June 30, 2000 we had approximately $3,477,000 invested in two different money
market funds. The primary objective of our investment activities is to preserve
our capital until it is required to fund operations while at the same time
achieving a market rate of return without significant risk. Since these funds
are available immediately, a 10% movement in market interest rates would not
have a material impact on the total fair value of our portfolio as of June 30,
2000.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We have no material legal proceedings against us or in process nor are
we aware of any other legal proceedings or claims that we believe will
have, individually or in the aggregate, a material adverse effect.
Item 2. Changes in Securities.
Since January 1, 2000, the Company has sold the following unregistered
securities. Such sales were exempt in reliance on Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 of Regulation D
promulgated thereunder.
As of January 31, 2000 we sold 4,808,375 shares of common stock at a
purchase price of $4.00 per share, for an aggregate purchase price of
$19.2 million. We raised $13.9 million in cash in the offering, and the
remaining $5.3 million was conversion of notes payable. In addition to
the common shares, purchasers also received warrants to purchase up to
an aggregate of 4,808,375 shares of our common stock, at an exercise
price of $5.00 per share. The warrants are exercisable for a term of
five years from the date of issuance.
Cash Purchases
Investor Amount Invested Common Shares Warrants
--------------- ------------- --------
Special Situations Funds $ 4,000,000 1,000,000 1,000,000
Chelsey Capital 3,000,000 750,000 750,000
BayStar Capital 3,000,000 750,000 750,000
Ravinia Capital Ventures 2,374,000 593,500 593,500
Erik Franklin 400,000 100,000 100,000
Dorothy Lyddon 200,000 50,000 50,000
Kyle Faulkner 250,000 62,500 62,500
Douglas Glen 100,000 25,000 25,000
Others (under $100,000) 574,500 143,625 143,625
----------- --------- ---------
Total Cash Purchases $13,898,500 3,474,625 3,474,625
=========== ========= =========
Conversion of Notes Payable
---------------------------
Investor Notes Common Shares Warrants
----- ------------- --------
Converted
---------
Storie Partners $ 2,000,000 500,000 500,000
Mercer Management 1,550,000 387,500 387,500
Reed Slatkin 520,000 130,000 130,000
Robert London 500,000 125,000 125,000
Independence Properties LLC 100,000 25,000 25,000
Others (under $100,000) 665,000 166,250 166,250
----------- --------- ---------
Total Note Conversions $ 5,335,000 1,333,750 1,333,750
=========== ========= ==========
During January 2000, we received an additional $430,000 evidenced by
notes payable convertible into our common stock, due in one year. The
conversion rate was the lower of (1) $6.50, (2) 80% of the average
closing price of our publicly traded shares in the 20 trading days
immediately preceding the closing of an ongoing private placement, or
(3) the price agreed in that private placement. These shares were
converted to common stock as part of the above transactions at a
conversion price of $4.00 per share.
During February 2000, we issued 94,711 shares of common stock in
connection with a cashless exercise of 104,645 options.
Item 3. Defaults upon Senior Securities
None
14
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On May 5, 2000 the Company obtained an order from the Securities and
Exchange Commission (SEC) granting an interim stay of the NASD's action
to remove the Company's stock quotations from the OTC Bulletin Board on
the basis of issues with regards to the Company's registration status.
The Company has asserted to the National Association of Securities
Dealers, Inc. (the NASD) that it should remain eligible for quotation
since its registration statement on Form 10 is currently effective and
believes it is current in all filings.
On May 11, 2000 the NASD requested an extension of time, until May 15,
to respond to the Company's application for review.
On July 26, 2000, the Company notified the NASD that it cleared
Commission comments with respect to its registration statement.
Accordingly, on July 27, 2000, the NASD published a symbol change to
remove the fifth character "E" from the security's symbol.
Since the NASD believed that the securities of Burst.Com met the
requirements of NASD Rule 6530, and their securities were quoted on the
OTCBB without a fifth character modifier, on July 31, 2000 the NASD
filed a motion that Burst.Com's application for review be dismissed as
moot. Burst.Com supported this motion.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit Sequential
No. Description Location Page No
--- ----------- -------- -------
27 Financial Data Schedule Attached (filed only electronically
with the SEC)
(b) Reports on Form 8-K.
None
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
BURST.COM, INC.
Date: August 18, 2000 By: /s/ Richard Lang
----------------------------
Richard Lang, Chairman and
Chief Executive Officer
By /s/ John C. Lukrich
------------------------------
John C. Lukrich
Chief Financial Officer
16
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INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
17
