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 MARCH 31, 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 19,007,281 shares of the Issuer's $.00001 par value common stock
outstanding as of May 12, 2000
<PAGE>
BURST.COM, INC.
FORM 10-Q
MARCH 31, 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 AND USE OF PROCEEDS........................ 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................. 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 14
ITEM 5. OTHER INFORMATION................................................ 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................. 15
SIGNATURES................................................................... 16
2
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<TABLE>
PART I - FINANCIAL INFORMATION
BURST.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
(Unaudited)
ASSETS
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,549,325 $ 302,979
Accounts receivable, net 361,987 --
Prepaid expenses and other current assets 221,997 63,893
------------ ------------
Total current assets 10,133,309 366,872
Property and equipment, net 1,056,307 725,412
Other assets 40,105 36,457
------------ ------------
Total assets $ 11,229,721 $ 1,128,741
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 4,834,847
Accounts payable 1,218,856 1,384,289
Accrued expenses 545,190 208,374
Accrued interest 145,905 114,277
Deferred revenue 378,275 51,600
------------ ------------
Total liabilities 2,288,226 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; 18,953,065 and 9,535,527 shares issued and
outstanding in 2000 and 1999, respectively 188 95
Additional paid-in capital 50,176,341 31,971,108
Accumulated deficit (41,235,034) (37,435,894)
------------ ------------
Total stockholders' equity 8,941,495 (5,464,646)
------------ ------------
Total liabilities and stockholders' equity $ 11,229,721 $ 1,128,741
============ ============
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
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BURST.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
2000 1999
------------ ------------
Revenue $ 75,012 $ --
Cost of revenues 30,271 --
------------ ------------
44,741 --
------------ ------------
Costs and expenses:
Research and development 933,975 460,902
Sales and marketing 1,727,283 448,818
General and administrative 1,151,649 669,401
------------ ------------
Total costs and expenses 3,812,907 1,579,121
------------ ------------
Loss from operations (3,768,166) (1,579,121)
------------ ------------
Other income (expense):
Interest expense (32,484) (365)
Interest income 104,030 --
Other, net (102,520) 6,987
------------ ------------
Total other income (expense), net (30,974) 6,622
------------ ------------
Net loss (3,799,140) (1,572,499)
Accumulated deficit, beginning of the period (37,435,894) (24,458,165)
------------ ------------
Accumulated deficit, end of period $(41,235,034) $(26,030,664)
============ ============
Basic and diluted net loss per common share $ (0.24) $ (0.18)
============ ============
Shares used in per share computation 15,938,027 8,532,685
============ ============
See accompanying notes to condensed consolidated financial statements
4
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<TABLE>
BURST.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Deficit)
For the Three Months Ended March 31, 2000
(Unaudited)
<CAPTION>
Additional
Common Stock Preferred Stock 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)
------------ --------- ------------ --------- ------------ ------------ ------------
Balance at March 31, 2000 18,953,065 $ 188 -- $ -- $ 50,176,341 $(41,235,034) $ 8,941,495
============ ========= ============ ========= ============ ============ ============
<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
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,799,140) $ (1,572,499)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 95,425 28,887
Non-cash compensation expense related to sale of stock to employees 77,726 --
Stock option compensation 22,563 30,501
Changes in operating assets and liabilities:
Accounts receivable (361,987) --
Prepaid expenses and other current assets (161,752) (122,642)
Accounts payable (165,433) 391,264
Accrued expenses 336,816 (123,907)
Accrued interest 31,628 --
Deferred revenue 326,675 --
------------ ------------
Net cash used in operating activities (3,597,479) (1,368,396)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (426,320) (227,999)
------------ ------------
Cash flows from financing activities:
Payment of receivables from Series B Convertible Stock offering -- 810,000
Proceeds from sale of common stock 12,795,145 --
Proceeds from convertible debt 430,000 --
Proceeds from exercise of warrants and stock options 45,000 1,237,500
Repayment of debt -- (7,935)
------------ ------------
Net cash provided by financing activities 13,270,145 2,039,565
------------ ------------
Increase in cash and cash equivalents 9,246,346 443,170
Cash and cash equivalents, beginning of period 302,979 2,212,141
------------ ------------
Cash and cash equivalents, end of period $ 9,549,325 $ 2,655,311
============ ============
<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 Three Months Ended March 31, 2000 and 1999
(Unaudited)
2000 1999
---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for state franchise tax $ 850 $ 800
========== ==========
Cash paid for interest $ -- $ 365
========== ==========
Supplemental schedule of non-cash financing activities:
Debt converted into 1,333,750 shares of common stock $5,335,000 $ --
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 April 13, 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.
8
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(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.
(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 expiring 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.
9
<PAGE>
BURST.COM, INC. AND SUBSIDIARIES
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 April 17, 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.
The Company believes that period-to-period comparisons of its operating results,
including its 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. The Company does not believe
that its historical growth rates are indicative of future growth or trends.
The Company has incurred significant losses since its inception, and as of March
31, 2000, it had an accumulated deficit of $41,235,034. There can be no
assurance that the Company will achieve or sustain profitability and the Company
believes that it 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
10
<PAGE>
the Internet and corporate intranets, optimizing network efficiency and quality
of service. Our Burstware(R) suite of software products 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
Revenue recorded for the three months ended March 31, 2000 was $75,012 versus
none 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
three months ended March 31, 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 $441,000, consisting of
software license fees and hosting and other consulting services and related
equipment were taken during the quarter. Of this amount, approximately $279,000
in software license fee revenue (excluding deferred maintenance revenue of
approximately $48,000) was deferred and will be recognized as collectibility is
assured and/or acceptance conditions are met. The remaining revenue not
recognized or deferred relate to establishment of a returns reserve and deferral
of customer support, hosting and other services that will be recognized as
services are provided. The cost of revenue recorded for the quarter ended March
31, 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.
Costs and expenses during the three months ended March 31, 2000, totaled
$3,812,907 as compared to $1,579,121 during the three months ended March 31,
1999. The $2,233,786 increase was due to a $473,073, or 103%, increase in
research & development expenditures, a $1,278,465, or 285%, increase in sales &
marketing expenditures, as well as a $482,248, or 72% increase in general and
administrative expense. 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.
The increase in research & development expenditures resulted from personnel
added to develop, test and complete documentation of new product releases and
fix errors found in previous releases. There was no significant amount of
research and development that would qualify for capitalization under SFAS 86.
Major development activities began later in 1999 and continued in the first
three months of 2000 in the areas of player scripting, incorporation of a
database for replication, and various other features to be included in
subsequent releases.
The increase in sales & marketing was primarily a result of adding sales account
managers, sales engineers and other sales support staff and opening various
sales offices around the country. We have also added marketing staff and have
engaged in a targeted marketing campaign, including print, radio and billboard
advertising, public relations, collateral development, and participation in
major trade shows.
We incurred an increase in general and administrative expense as a result of
additional personnel, equipment and facilities costs to support the increased
operations.
.
We had a net loss from operations of $3,768,166 during the three months ended
March 31, 2000, as compared to $1,579,121, a 139% increase over the same three
months in 1999. The increased loss resulted from the increased expenditures
discussed above. Other expense, net was $30,974 for the three months ended March
31, 2000; as compared to $6,622 net other income for the three months ended
March 31, 1999. This $37,596 decrease was principally due to approximately
$100,000 in non-cash expense recorded in connection with the equity financing
closed during the 2000 period, offset by interest earned 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 $12,796,000
in cash, net of $1,103,000 in costs, 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. As of March 31, 2000 we had cash reserves of approximately $9.5
million, which will meet current operating requirements for approximately six
months at our current spending rate, assuming no revenue. Based on projected
revenues and our ability to reduce expenditures as required, we believe
operating requirements could be met beyond six months and possibly through
11
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year end 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 $1,500,000 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 March 31, 2000, we had working capital of $7,845,083 as compared to a
deficit of $6,226,515 at December 31, 1999. This $14,071,598 increase reflects a
$9,766,437 increase in current assets and a decrease in current liabilities of
$4,305,161. 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 $3,799,140 net loss for the quarter.
Net cash used in operating activities totaled $3,597,479 during the three months
ended March 31, 2000, as compared to net cash used in operating activities of
$1,368,396 during the three months ended March 31, 1999, primarily as the result
of the increased operating loss.
Net cash used in investing activities during the three month period ended March
31, 2000 totaled $426,320 as compared to $227,999 during the three month period
ended March 31, 1999. Investing activities in both periods consisted of
purchases of personal property and equipment.
Cash flow provided by financing activities during the three month period ended
March 31, 2000 totaled $13,270,145 as compared to $2,039,565 during the same
period in 1999. This increase was primarily as a result of $12,795,145 net cash
proceeds from the sale of common stock and $430,000 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 2000; while it paid down $7,935 during the three months ended March 31,
1999.
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.
12
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Our products are technologically complex and are designed to effectively
interface 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.
Quantitative and Qualitative Disclosures About Market Risk
At March 31, 2000 we had approximately $9,550,000 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 March
31, 2000.
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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 from registration 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
Doug 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 Converted Common Shares Warrants
--------------- ------------- --------
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
Item 4. Submission of Matters to a Vote of Security Holders
None
14
<PAGE>
Item 5. Other Information
On January 24, 2000, BDO Seidman LLP was engaged as independent
accountants to audit our financial statements. BDO Seidman LLP had not
been consulted on any application of accounting principles, audit
opinion or matters that were previously the subject of disagreements or
a reportable event.
On May 5, 2000 the Company obtained an order from the Securities and
Exhchange 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 NASD 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.
Item 6. Exhibits and Reports on Form 8-K.
<TABLE>
(a) Exhibits.
<CAPTION>
Exhibit Sequential
No. Description Location Page No
- ------- ----------- -------- -------
<S> <C> <C> <C>
27 Financial Data Schedule Attached (filed only electronically
with the SEC)
99 SEC order granting an interim Stay Attached 19
"In the matter of The Application
of Burst.Com, Inc. for Review of
Action taken by the NASD".
</TABLE>
(b) Reports on Form 8-K.
Report on appointment of BDO Seidman LLP as independent accountants
filed January 28, 2000.
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: May 12, 2000 By: /s/ Richard Lang
---------------------------------------
Richard Lang, Chairman,
Chief Executive Officer and President
By /s/ Richard B. Jones
---------------------------------------
Richard B. Jones
Chief Financial Officer
16
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
99 SEC order granting an Interim Stay "In the matter of the
Application of Burst.Com, Inc. for Review of Action taken by
the NASD".
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONSOLIDATED BALANCE SHEETS AND UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTER
ENDED MARCH 31, 2000.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 9,549,325
<SECURITIES> 0
<RECEIVABLES> 361,987
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,133,309
<PP&E> 1,422,500
<DEPRECIATION> 366,193
<TOTAL-ASSETS> 11,229,721
<CURRENT-LIABILITIES> 2,288,226
<BONDS> 0
0
0
<COMMON> 188
<OTHER-SE> 8,941,495
<TOTAL-LIABILITY-AND-EQUITY> 11,229,721
<SALES> 75,012
<TOTAL-REVENUES> 75,012
<CGS> 30,271
<TOTAL-COSTS> 30,271
<OTHER-EXPENSES> 3,812,907
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,484
<INCOME-PRETAX> (3,799,140)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,799,140)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,799,140)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
ADMINISTRATIVE PROCEEDING
FILE NO. 3-10199
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
May 5, 2000
- ------------------------------------------------
In the Matter of the Application of
BURST.COM, INC
For Review of Action Taken by the
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
- ------------------------------------------------
ORDER GRANTING INTERIM STAY
Today, the Commission received a request for an interim stay filed on
behalf of Burst.Com, Inc. Burst.Com currently is quoted on the OTC Bulletin
Board. According to Burst.Com, the National Association of Securities Dealers,
Inc. ("NASD") has informed Burst.Com that it will be removed from the OTC
Bulletin Board at the start of business on May 8, 2000. We understand that the
NASD has determined that Burst.Com's securities are no longer eligible for
quotation under NASD Rule 6530, the "Eligibility Rule."
Burst.Com states that, on November 12, 1999, it filed with the
Commission a registration statement on Form 10. That registration statement
became effective on January 11, 2000. The NASD reported on its web site that
Burst.Com had complied with the requirements of Rule 6530. According to
Burst.Com, three months later, the NASD "designated the Company for delisting by
appending an "E" to Burst.Com's trading symbol. Counsel
<PAGE>
2
represents that the NASD staff initially informed the company that Burst.Com was
ineligible because it had failed to file an annual report on Form 10-K for the
1999 fiscal year. Counsel responded that, because the company had become
registered in January 2000, it was not required to file a Form 10-K until March
2001.
According to Burst.Com, the NASD staff subsequently informed the
company that Burst.Com was not eligible for quotation on the OTC Bulletin Board
because its Form 10 had not cleared the Commission staff comment process.
Burst.Com responded that the text of Rule 6530 1/ requires only that issuers be
required to file periodic reports under Section 13 or 15(d) of the Securities
Exchange Act of 1934 and that those reports be current. 2/ The NASD responded
that the release approving Rule 6530 required that the Form 10 clear comments.
While NASD staff agreed that the
- -------------------
1/ Rule 6530 states, in pertinent part:
A member shall be permitted to quote the following categories of securities
in the Service:
(A) any domestic equity security that satisfies the requirements of
paragraph (10 and either subparagraph (2) or (3) or (4) below:
(1) the security is not listed on The Nasdaq Stock Market
("Nasdaq") or a registered national securities exchange ........
(2) the issuer of the security is required to file reports
pursuant to Section 13 or 15(d) of the Act .......
2/ Burst.Com represents that its quarterly report on Form 10-Q in due in
mid-May 2000.
<PAGE>
3
company's situation was unique, NASD staff stated that its previous inclusion on
the OTC Bulletin Board was in error. The staff further stated that "there are no
NASD procedures for an issuer to request review of an Eligibility Determination"
under Rule 6530. 3/ Burst.Com notes that the Commission recently determined to
grant a stay in Intelispan, Inc., Securities Exchange Act Rel. No. 4273 (May 1,
2000).
The NASD has not had sufficient opportunity to brief adequately the
merits of a stay before the Commission. Under the circumstances, we deem it
appropriate to grant an interim stay, which will preserve the status quo ante,
to permit the parties additional time to brief the issues presented and to allow
the Commission to make its decision on the request for a stay.
Accordingly, IT IS ORDERED that the request of Burst.Com, Inc. for an
interim stay of the NASD's action to deny continuance of the quotation of
Burst.Com, Inc. securities on the OTC Bulletin Board be, and it hereby is,
granted; and it is further
ORDERED that the National Association of Securities Dealers, Inc. be,
and it hereby is, directed to submit any response to
- --------------------
3/ Letter to Neil R. Bardack from Arnold R. Golub, dated May 2, 2000.
<PAGE>
4
Burst.Com, Inc.'s request no later than the close of business May 11, 2000; and
it is further
ORDERED that this interim stay shall remain in effect pending
Commission action on that request.
By the Commission.
Jonathan G. Katz
Secretary
/s/ Margaret H. McFarland
By: Margaret H. McFarland
Deputy Secretary
