UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2002
[X] 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)
613 FOURTH STREET, SUITE 201
SANTA ROSA, CALIFORNIA 95404
Address of Principal Executive Offices, Including Zip Code
(707) 541-3870
(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 19,683,554 shares of the Issuer's $.00001 par value common stock
outstanding as of May 12, 2002
1
BURST.COM, INC.
FORM 10-Q SB
MARCH 31, 2002
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 13
PART II - OTHER INFORMATION 16
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 17
2
PART I Financial Information
Item 1. Financial Statements.
BURST.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2002 2001
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,606 $ 6,112
Accounts receivable, net 7,540 17,500
Prepaid expenses and other current assets 8,936 12,258
------------ ------------
Total Current Assets 19,082 35,870
------------ ------------
Property and Equipment, net 91,463 102,984
------------ ------------
Other assets 2,700 2,700
------------ ------------
TOTAL ASSETS $ 113,245 $ 141,554
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 636,106 $ 692,423
Accrued expenses 340,176 504,573
Accrued interest 133,894 93,079
Deferred revenue 282,100 322,400
Notes and obligations payable, current portion 1,130,620 1,053,239
------------ ------------
Total Current Liabilities 2,522,896 2,665,714
------------ ------------
LONG TERM LIABILITIES 567,346 274,970
------------ ------------
STOCKHOLDERS' DEFICIT:
Common stock 191 187
Additional paid-in-capital 57,876,016 57,823,883
Accumulated Deficit (60,853,204) (60,623,200)
------------ ------------
Total Stockholders' Deficit (2,976,997) (2,799,130)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIIT $ 113,245 $ 141,554
============ ============
The accompanying notes are an integral part of these financial statements.
3
BURST.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
2002 2001
------------ ------------
REVENUE $ 70,300 $ 31,323
COSTS AND EXPENSES:
Research and development 12,600 147,542
Sales and marketing 7,263 260,661
Restructuring costs -- 2,705,866
General and administrative 173,679 823,752
------------ ------------
Total Costs and Expenses 193,542 3,937,821
------------ ------------
LOSS FROM OPERATIONS (123,242) (3,906,498)
------------ ------------
OTHER INCOME (EXPENSES)
Interest income 15,765 8,134
Interest expense (117,240) (23,062)
Other, net (5,287) (567,839)
------------ ------------
Total Other Income (Expenses) (106,762) (582,767)
------------ ------------
NET LOSS $ (230,004) $ (4,489,265)
------------ ------------
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.01) $ (0.21)
------------ ------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 19,105,575 21,148,125
============ ============
The accompanying notes are an integral part of these financial statements.
4
BURST.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
2002 2001
--------- -----------
Cash flows from operating activities:
Net loss $(230,004) $(4,489,265)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 11,521 48,195
Loss on asset impairments -- 56,584
Non-cash interest expense 75,324 8,300
Reserve against loan to officer -- 157,190
Realized and unrealized losses on sale of marketable securities -- 562,931
Compensation from stock and option awards to employees -- 366,000
Changes in operating assets and liabilities:
Accounts receivable 9,960 (18,630)
Prepaid and other current assets 3,322 17,192
Loans to officers -- (17,557)
Accounts payable (56,317) 336,070
Accrued expenses 27,173 2,234,282
Accrued interest 40,815 9,899
Deferred revenue (40,300) 20,000
--------- -----------
Net Cash Used by Operating Activities (158,506) (708,809)
--------- -----------
Cash flows from investing activities:
Sales of property and equipment -- 14,034
Proceeds from sale of marketable securities -- 118,475
--------- -----------
Net Cash Used by Investing Activities -- 132,509
--------- -----------
Cash flows from financing activities:
Exercise of warrants 25,000 --
Proceeds from notes payable 130,000 350,000
--------- -----------
Net Cash Provided by Financing Activities 155,000 350,000
--------- -----------
Decrease in cash and cash equivalents (3,506) (226,300)
Cash and cash equivalents, beginning 6,112 296,584
--------- -----------
Cash and cash equivalents, end $ 2,606 $ 70,284
========= ===========
The accompanying notes are an integral part of these financial statements.
5
BURST.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
2002 2001
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid for state franchise tax $ -- $ 504
Cash paid for interest $ 1,101 $ --
Supplemental schedule of non-cash investing and financing activities:
Shares issued against liability for stock to be issued $ 12,000 $ --
Notes issued in debt settlements - offset by accrued expenses $179,570
Offset of deferred revenue against accounts receivable $ -- $287,225
Exchange of common stock for licensing agreement - credited to
deferred revenue $ -- $322,400
Exchange of common stock for marketable securities $ -- $843,750
Discount related to warrants granted in conjunction with debt $ 15,137 $100,000
The accompanying notes are an integral part of these financial statements.
6
BURST.COM, INC. AND SUBSIDIAIRES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated balance sheet as of March 31, 2002, the
condensed consolidated statements of operations for the three months
ended March 31, 2002 and 2001, and the condensed consolidated
statements of cash flows for the three months ended March 31, 2002 and
2001 are unaudited. However, in the opinion of management, all
adjustments (which include reclassifications and normal recurring
adjustments) necessary to present fairly the financial position,
results of operations and cash flows at March 31, 2002 and for all
periods presented, have been made. The results of operation for the
three-month period ended March 31, 2002 are not necessarily indicative
of the operating results for the full year.
These condensed consolidated financial statements and notes are
presented in accordance with rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in the consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America, have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the Company's consolidated financial statements and
notes thereto included in the Company's December 31, 2001 Form 10-K.
NOTE 2 - GOING CONCERN CONSIDERATIONS
The accompanying condensed consolidated financial statements have been
presented assuming the continuity of the Company as a going concern.
However, the Company has incurred substantial losses resulting in an
accumulated deficit of approximately $60.9 million as of March 31,
2002. The Company's current liabilities exceed current assets by
approximately $2.5 million at March 31, 2002. These conditions raise
substantial doubt as the ability of the Company to continue as a going
concern.
Management's plans with regards to these issues are as follows:
o Expanding revenues by focusing on a small number of existing
customers that management believes are growing and whose needs
for Burstware are increasing.
o Expanding revenues by finding a limited number of new customers
that can benefit by utilizing either Burstware in its current
form, or by licensing a combination of the Company's intellectual
property and/or Burstware source-code.
o Raising new investment capital, either in the form of equity or
loans, sufficient to meet the Company's greatly reduced monthly
operating expenses, until the revenues are sufficient to meet
operating expenses on an ongoing basis.
o Management is in the process of renegotiating outstanding
short-term debt.
Presently, the Company cannot ascertain the eventual success of
management's plans with any degree of certainty. No assurances can be
given that the Company will be successful in raising immediate capital
or that the Company will achieve profitability or positive cash flows.
If the Company is unable to obtain adequate additional financing and
bring the Company to profitability or positive cash flows, there can
be no assurance that the Company can continue as a going concern. The
accompanying condensed consolidated financial
7
BURST.COM, INC. AND SUBSIDIAIRES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
statements do not include any adjustments that might result from the
eventual outcome of the risks and uncertainty described above.
NOTE 3 - PRIOR PERIOD CORRECTIONS
During the year ended December 31, 2001, the Company entered into
various settlement agreements with its vendors, employees and
landlord. In connection therewith, the Company reduced its overall
liabilities from approximately $2,388,900 to $208,735. In the
Company's December 31, 2001 financial statements, the total
liabilities of $2,388,900 were inadvertently disclosed as $2,718,600
in Note 7 to the financial statements. This error had no effect on the
Company's financial position and results of operations as of and for
the year ended December 31, 2001.
Furthermore, in Note 14 to the December 31, 2001 financial statements,
the decrease in total liabilities as a result of employee settlements
should have been $538,137 instead of $867,863, and the decrease in net
loss as a result of employee settlements should have been $518,341
instead of $848,067. These errors had no effect on the Company's
financial position and results of operations as of and for the year
ended December 31, 2001.
NOTE 4 - MARKETABLE SECURITIES
During the quarter ended March 31, 2001, the Company sold 93,200
shares of marketable securities resulting in a realized loss of
$96,817. The remaining shares were reduced to their market value as of
March 31, 2001, resulting in unrealized losses of $466,114, also
included in other expenses.
NOTE 5 - DEFERRED REVENUE
During 2001, the Company entered into a licensing agreement with Eagle
Wireless International, Inc. whereby Eagle Wireless issued 104,000 of
its common stock valued at $322,400 in exchange for a two-year license
for certain technological rights. The license agreement is effective
the earlier of January 2002 or the commercial deployment of any
products incorporating the technology licensed from Burst. During the
quarter ended March 31, 2002, the Company recognized revenue of
$40,300 in conjunction with this agreement, reducing deferred revenue
to $282,100 as of March 31, 2002.
NOTE 6 - NOTES AND OBLIGATIONS PAYABLE
March 31, December 31,
------------------------------------------
2002 2001
---- ----
Notes payable to Gordon Rock (net of unamortized discount
of $209,681 and $276,246, respectively) $ 1,121,318 $ 993,754
Notes payable to investors, (net of unamortized discount
of $11,657 and $4,280, respectively) 188,343 125,720
Notes and obligations payable issued in connection with
debt settlements 388,305 208,735
----------- ----------
$ 1,518,396 $1,328,209
=========== ==========
8
BURST.COM, INC. AND SUBSIDIAIRES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
NOTE 6 - NOTES AND OBLIGATIONS PAYABLE (CONTINUED)
NOTES PAYABLE TO GORDON ROCK
In February and April 2001, the Company issued two notes payable to
Gordon Rock in the aggregate principal amount of $350,000 at 9%
collateralized by a security interest in the assets of the Company.
Mr. Rock was a member of the Board of Directors at that time, but has
since resigned his seat on the Board. Mr. Rock is also one of the
Company's major stockholders and is deemed a related party.
In August and September 2001, the Company issued a series of notes
payable to Mr. Rock totaling an additional $305,000. Each of these
notes bears interest at 9% and is collateralized by a security
interest in all assets of the Company.
In connection with the April, August and September notes, Mr. Rock
received five-year warrants to acquire up to 183,333 shares of the
Company's common stock at an exercise price of $.30 per share,
1,000,000 shares at $.20 per share, and 1,666,666 shares at $.15 per
share. Accordingly, the Company recorded a discount on the notes for
the fair value of the warrants issued using the Black-Scholes model.
The resulting discount of $368,333 is being amortized over the term of
the notes.
In October and December 2001, the Company issued three additional
notes to Mr. Rock for loans totaling $115,000, with interest ranging
from prime plus 2% to 9%. The notes are collateralized by a security
interest in all assets of the Company. In connection with these notes
payable, Mr. Rock was issued 383,333 warrants to acquire common stock
at $.30 per share. Accordingly, the Company recorded a discount on the
notes for the fair value of the warrants issued using the
Black-Scholes model. The discount of $23,900 is being amortized over
the term of the notes.
In December 2001, all of Mr. Rock's notes, originally expiring in
various amounts from November 2001 through February 2002, were
extended as follows: aggregate principal amount of $1,210,000 plus
accrued interest due and payable in November 2002; aggregate principal
amount of $30,000 plus accrued interest due in November 2004; and the
remaining $30,000 of principal and accrued interest due in December
2004. In connection with the extensions, Mr. Rock received 2,600,000
additional warrants to buy shares of the Company's common stock at
$.25 per share. Accordingly, the Company recorded a discount on the
notes for the fair value of the warrants issued using the
Black-Scholes model. The discount of $151,060 is being amortized over
the term of the notes.
During February 2002, the Company issued two additional notes to Mr.
Rock for loans totaling $60,000, with interest at prime plus 2%. The
notes are collateralized by a security interest in all assets of the
Company. In connection with these notes, Mr. Rock was issued 200,000
warrants to acquire common stock at $.30 per share. Accordingly, the
Company recorded a discount on the notes for the fair value of the
warrants issued using the Black-Scholes model. The discount of $6,700
is being amortized over the respective terms of the notes.
9
BURST.COM, INC. AND SUBSIDIAIRES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
NOTE 6 - NOTES AND OBLIGATIONS PAYABLE (CONTINUED)
NOTES ISSUED TO INVESTORS
During 2001, the Company issued 9% convertible notes payable to
Draysec Finance Limited, one of the Company's major stockholders, in
the aggregate principal amount of $100,000, with interest and
principal due in February and March 2002. The notes are convertible
into a new series of preferred stock to be identified as Series A-2001
at a per share conversion price of $5.00 at the option of the
noteholder. In November 2001, Draysec agreed to extend the due date of
the loan to November 2002.
In addition, during 2001, the Company issued a promissory note to an
investor, in the principal amount of $30,000. The note is
collateralized by a security interest in all assets of the Company.
The note is due in December 2004 and bears interest at prime plus 2%.
In connection with the note, the Company issued 100,000 warrants to
the investor to acquire common stock at $.30 per share. Accordingly,
the Company recorded a discount on the note for the fair value of the
warrants issued using the Black-Scholes model. The discount totaling
$4,280 is being amortized over the term of the note.
During February 2002, the Company issued promissory notes to two
investors, in the aggregate principal amount of $70,000. The notes are
due in December 2004 and January 2005, respectively, and bear interest
at prime plus 2%. In connection with the notes, the Company issued
233,333 warrants to the investors to acquire common stock at $.30 per
share. Accordingly, the Company recorded a discount on the notes for
the fair value of the warrants issued using the Black-Scholes model.
The discount totaling $8,437 is being amortized over the respective
terms of the notes.
NOTES AND OBLIGATIONS ISSUED IN CONNECTION WITH DEBT SETTLEMENTS
During 2001, the Company entered into various settlement agreements
with some of its vendors, employees and landlord. In connection
therewith, the Company renegotiated its liabilities and reduced its
overall obligations from approximately $2,388,900 to $208,735. Some
settlements resulted in the recognition of extraordinary income. In
addition, the Company issued 80,000 warrants to acquire common stock
at $0.30 per share and 50,000 options to acquire common stock at $0.30
per share. The warrants were valued at $2,520 and the options were
valued at $2,140, using the Black-Scholes model. As part of these
settlements, the Company is obligated to issue an aggregate amount of
794,946 shares of its common stock. Accordingly, the Company recorded
a liability for stock to be issued in the amount of $31,796. During
the quarter ended March 31, 2002, 300,000 of those shares valued at
$12,000 were issued.
During the quarter ended March 31, 2002, the Company entered into
settlement agreements with two other employees. In connection
therewith, the Company renegotiated its liabilities and reduced its
obligations from $152,816 to $64,487. As part of these settlements,
the Company is obligated to issue an aggregate amount of 103,361
shares of its common stock. Accordingly, the Company recorded a
liability for stock to be issued in the amount of $3,547. In addition,
some of the settlement agreements entered into by the Company with
some of its former employees during the fourth quarter of 2001 were
amended to include additional payments of $115,083. As a result of
these settlements and revised settlement agreements, the Company
recognized additional compensation expense of $32,841 during the
quarter ended March 31, 2002.
10
BURST.COM, INC. AND SUBSIDIAIRES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
NOTE 6 - NOTES AND OBLIGATIONS PAYABLE (CONTINUED)
Maturities of long-term debt at March 31, 2002 are as follows:
2002 $1,130,620
2003 -
2004 199,513
2005 367,833
-----------
Total 1,697,966
Less: current Portion (1,130,620)
-----------
$ (567,346)
===========
NOTE 7 - EQUITY
LIABILITY FOR STOCK TO BE ISSUED
During the quarter ended March 31, 2002, the Company agreed to issue
87,750 shares of its common stock at fair market value to independent
consultants for services performed during the quarter. In connection
with these agreements, the Company recognized $2,613 in consulting
fees, offset by a liability for stock to be issued.
EXERCISE OF WARRANTS
During the quarter ended March 31, 2002, warrants to purchase 138,888
shares of the Company's common stock were exercised, for $25,000.
SHARES ISSUED IN CONNECTION WITH SETTLEMENT AGREEMENTS
During the fourth quarter of 2001, the Company had agreed to issue
794,946 shares of is common stock valued at $31,796 in connection with
various settlement agreements. During the quarter ended March 31,
2002, 300,000 of these shares valued at $12,000 were issued. The
remaining 494,946 shares valued at $19,796 are included in accrued
expenses.
SHARE EXCHANGE AGREEMENT
During February 2001, the Company exchanged 1,500,000 shares of its
common stock for 400,000 shares of Eagle Wireless International, Inc.
common stock. This transaction was valued at $843,735, the estimated
fair value of the Company's common stock at the date of the
transaction.
NOTE 8 - STOCK OPTIONS
In January 2001, the Company granted options to purchase 150,000
shares of common stock exercisable at $0.2812 to an independent
contractor. In addition, existing options for employees under variable
plan accounting and unvested options being earned by contractors were
revalued, resulting in a net reduction in stock-based compensation of
$250,000. Furthermore, as a result of severance agreements with
certain senior officials, the lives of their options were extended to
one year after termination or the full contractual life instead of
expiring within a shorter time. These extensions resulted in a
stock-based compensation charge of $616,000. During the fourth quarter
of 2001, as a result of further negotiations with those senior
officials, the stock-based compensation was reduced to $127,947.
11
BURST.COM, INC. AND SUBSIDIAIRES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
NOTE 9 - BUSINESS RISKS AND SEGMENT DISCLOSURES
The Company's primary source of revenue is the licensing of Burst
technology, and its success is largely dependent on this product.
Changes in desirability of the product in the marketplace may
significantly affect the Company's future operating results.
The Company operates in one segment and accordingly has provided only
the required enterprise wide disclosure. The Company recognized no
foreign revenues during the quarters ended March 31, 2002 and 2001.
The Company currently has five customers who are acting as resellers
and use the Company's software in their business. Two customers
accounted for approximately 57%, and 43% respectively, of the
Company's total revenue during the quarter ended March 31, 2002.
NOTE 10 - SUBSEQUENT EVENTS
Subsequent to March 31, 2002, the Company issued two promissory notes
to Gordon Rock, in the aggregate principal amount of $160,000. The
notes bear interest at prime plus 2% and are due in three years. In
connection with the notes, the Company issued 300,000 warrants to Mr.
Rock to acquire common stock at $0.30 per share.
Subsequent to March 31, 2002, Mr. John J. Micek III and Mr. Trevor
Bowen resigned from their position as directors.
12
ITEM 2. Management's Discussion and Analysis or Plan of Operation.
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, 2001 included in the Company's Form 10-K.
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 attracting immediate financing;
o delivering quality product that meets customer expectations;
o obtaining and expanding market acceptance of the products 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 and in our annual
report on Form 10-K for the fiscal year ended December 31, 2001. 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.
13
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. 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, 2002, it had an accumulated deficit of $60,853,204. 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 2002.
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 Santa Rosa, California. 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 enables companies to transmit video and
audio files at Faster-Than-Real-Time(R) 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, patent
licenses, and some consulting services.
Results of Operations
Revenue recorded for the three-month period ended March 31, 2002 was $70,300
versus $31,323 during the same period in 2001. The revenue was due primarily to
a licensing agreement with Eagle Wireless. The cost of revenue recorded for the
quarter ended March 31, 2002 was zero. Research and development expenditures
during the three-month period ended March 31, 2002 were $12,600, as compared to
$147,542 during the same period in 2001. The decrease resulted from personnel
reductions and curtailment of new product development and testing. There was no
significant amount of research and development that would qualify for
capitalization under SFAS 86.
Sales and marketing expenses during the three month period ended March 31, 2002
were $7,263 as compared to $260,661 during the same period in 2001. The decrease
was primarily a result of staff reductions and curtailment of sales, support and
product marketing activity in 2001 as part of our restructuring during that
year.
During the three month period ended March 31, 2002, general and administrative
expenses were $173,679, as compared to $823,752 during the same period in 2001.
The decrease was primarily due to the slowdown in our operations and termination
of employees both during 2001 as part of our restructuring.
Restructuring costs were $0 during the three-months ended March 31, 2002 as
compared to $2,705,866 during the same period in 2001 The 2001 restructuring
costs resulted primarily from steep staff reductions and moving from the
company's San Francisco office.
We had a net loss from operations of $123,242 during the three month period
ended March 31, 2002, as compared to $3,906,498 during the same period in 2001.
The decreased losses resulted from reduction in workforce and operations
discussed above.
Other expense, net was $106,762 for the three-month period ended March 31, 2002,
as compared to $582,767 during the same periods in 2001. The decrease in other
expenses, net, during 2002 compared to 2001 is due to realized and unrealized
losses on sales of marketable securities of $562,931 during 2001. There were no
securities during 2001.
The increase in interest expense during 2002 is due to an increase in non-cash
interest expense of $75,324 resulting from amortization of a discount on notes
payable.
14
Liquidity and Capital Resources
The opinion of our independent certified public accountants on the audited
financial statements for the year ended December 31, 2001 contained an
explanatory paragraph regarding doubt about our ability to continue as a going
concern
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. During the three months ended March 31, 2002, we
raised $130,000 (net) in cash by issuing notes payable. As of March 31, 2002, we
had cash reserves of approximately $2,606. We are currently in negotiations to
obtain additional outside funding through loan financing and possibly the sale
of our common stock to qualified investors. Any new funding raised may have a
dilutive effect on our existing shareholders.
Changes in Financial Position
As of March 31, 2002, we had a working capital deficit of $2,503,814 as compared
to a deficit of $2,629,844 at December 31, 2001. This $126,030 decrease reflects
a $16,788 decrease in current assets and a decrease in current liabilities of
$109,242. The decrease in current liabilities is mostly due to a decrease in
accrued settlements, but this decrease is offset by increases in accrued
interest and notes payable.
Net cash used in operating activities totaled $158,506 during the three months
ended March 31, 2002, as compared to net cash used in operating activities of
$708,809 during the three months ended March 31, 2001. The decrease reflects
reduced operating activities.
Factors That May Impact Future Results
At the time of this report, we had insufficient cash reserves and receivables
necessary to meet forecast operating requirements. In the event we are
unsuccessful in our efforts to raise additional funds, we will be required to
significantly reduce cash outflows and, possibly, discontinue our operations. We
need to raise immediate capital to continue our operations and implement our
plans to respond to competitive pressures, or otherwise to respond to
unanticipated requirements. Our failure to obtain immediate financing, or
inability to obtain financing on acceptable terms, could require us to limit our
plans, incur indebtedness that has high rates of interest or substantial
restrictive covenants, issue equity securities that will dilute your holdings,
or discontinue all or a portion of our remaining operations.
We develop complex software for media delivery, content management and storage.
We depend on a limited number of key personnel who would be difficult to
replace, and we may not be able to attract and retain management and technical
personnel. We have yet to achieve very large commercial deployments. We began
our current product line of software only recently and, as a result, your
ability to evaluate our prospects may be limited. Our products could contain
defects, which would reduce sales of those products or result in claims against
us. Our future success in the licensing of our software may depend on our
ability to keep pace with technological changes, which could result in a loss of
revenues. If we do not develop new products or new product features in response
to customer requirements or in a timely way, customers may not buy our products,
which would seriously harm our business. We will not be able to sell sufficient
quantities of our software products to sustain a viable software licensing
business if the market for software media delivery products does not develop or
if a competing technology displaces our products. We rely upon our sales of a
small number of products, and the failure of any one of our products to be
successful in the market could substantially reduce our revenue. Our software
products generally have long sales cycles and implementation periods, which
increase our costs in obtaining orders and reduce the predictability of our
earnings.
Our success will depend, in large part, on our ability to protect the
intellectual property that we have developed. If our proprietary technology
infringes upon the intellectual property rights of others, our costs could
increase and our ability to license our products or patents could be limited.
If software media technology or our method of implementing this technology is
not accepted, we will not be able to sustain or expand our business. The markets
in which we operate are highly competitive, and many of our competitors have
much greater resources than we do, which may make it difficult for us to become
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profitable. Internal development efforts by our customers and new entrants to
the market may increase competition. We depend on the continued growth and
commercial acceptance of the Internet and we may face government regulation and
legal uncertainties relating to the Internet.
A more detailed description of these risk factors can be found under the caption
"Risks and Uncertainties" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2001.
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.
1. During the quarter ending March 31, 2002, the company issued the
following securities in conjunction with the loans made to the
Company:
(a) Warrants to purchase 133,333 shares of common stock at an
exercise price of $.30/share, issued to an individual
investor in conjunction with a $40,000 loan to the Company.
(b) Warrants to purchase 100,000 shares of common stock at an
exercise price of $.30/share, issued to an individual
investor in conjunction with a $30,000 loan to the Company.
(c) Warrants to purchase 200,000 shares of common stock at an
exercise price of $.30/share, issued to an individual
investor in conjunction with a $60,000 loan to the Company..
2. During the quarter ending March 31, 2002, the Company issued
300,000 shares of its common stock to a former landlord under the
terms of a settlement agreement.
3. During the quarter ending March 31, 2002, the company issued
138,888 shares of its common stock to an affiliate of Mr. John
Micek, then a member of the Board of Directors, as the result of
the exercise of an option at an exercise price of $.18/share.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Act")
in reliance on Section 4(2) of the Act, Regulation D and /or Rule 701
promulgated under the Act. In each such transaction, the recipients of
securities represented that they were accredited investors and
intended to acquire securities for investment only and not with a view
to or for sale in connection with any distribution thereof.
Appropriate legends were affixed to the securities issued in such
transactions.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
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Item 5. Other Information
(a) On April 25, 2002 the Company received $100,000 promissory
note financing from Gordon Rock, secured by assets of the
Company. Mr. Rock received 100,000 warrants to purchase the
company's common stock at $.30/share, in conjunction with
this loan.
(b) On April 22, 2002, the company accepted the resignations of
Trevor Bowen and John Micek from its Board of Directors.
Both individuals will serve on the company's newly formed
Advisory Board.
(c) On April 1, 2002 the Company received $60,000 promissory
note financing from Gordon Rock, secured by assets of the
Company. Mr. Rock received 200,000 warrants to purchase the
company' common stock at $.30/share, in conjunction with
this loan.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
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 14, 2002 By: /s/ Richard Lang
-----------------------------
Richard Lang, Chairman and
Chief Executive Officer
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