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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
COMMISSION FILE NUMBER 0-30152
BILLSERV, INC.
(Exact name of registrant as specified in its charter)
NEVADA 98-0190072
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
211 NORTH LOOP 1604 EAST, SUITE 200
SAN ANTONIO, TX 78232
(Address of principal executive offices)
(210) 402-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days. Yes X No ___
At August 1, 2002, 20,603,799 shares of the registrant's common stock, $.001 par
value, were outstanding.
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BILLSERV, INC.
INDEX
Part I - Financial Information PAGE
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001.........................................................3
Consolidated Statements of Operations for the three and six months
ended June 30, 2002 and 2001..................................................4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001..................................................5
Notes to Consolidated Financial Statements......................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................13
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K...............................................14
Signature...............................................................................15
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BILLSERV, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2002 December 31, 2001
-------------------- ---------------------
(Unaudited) (Note 1)
Assets:
Current assets:
Cash and cash equivalents $ 2,251,803 $ 6,192,550
Restricted cash 800,000 -
Investments 66,900 236,948
Accounts receivable, net 837,021 437,677
Prepaid expenses and other 390,643 225,795
Related party notes receivable - 162,154
-------------------- ---------------------
Total current assets 4,346,367 7,255,124
Property and equipment, net 3,894,288 3,701,205
Intangible asset, net 30,000 37,500
Other assets 108,328 421,307
-------------------- ---------------------
Total assets $ 8,378,983 $ 11,415,136
==================== =====================
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 669,397 $ 201,513
Accrued expenses and other current liabilities 665,081 664,200
Current portion of obligations under capital leases 50,889 148,228
Current portion of deferred revenue 497,004 490,829
Short-term borrowings 645,000 -
-------------------- ---------------------
Total current liabilities 2,527,371 1,504,770
Deferred revenue, less current portion 105,713 161,800
Stockholders' equity:
Common stock, $.001 par value, 200,000,000 shares
authorized; 20,581,126 issued and outstanding at
June 30, 2002, 20,538,526 issued and outstanding at
December 31, 2001 20,581 20,539
Additional paid-in capital 45,948,513 45,909,410
Accumulated deficit (40,223,195) (36,181,383)
-------------------- ---------------------
Total stockholders' equity 5,745,899 9,748,566
-------------------- ---------------------
Total liabilities and stockholders' equity $ 8,378,983 $ 11,415,136
==================== =====================
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
3
BILLSERV, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
---------------- ---------------- --------------- ----------------
Revenues $ 1,342,413 $ 690,062 $ 2,472,085 $ 1,199,471
Cost of revenues 1,452,061 1,226,250 2,657,156 2,458,566
---------------- ---------------- --------------- ----------------
Gross margin (109,648) (536,188) (185,071) (1,259,095)
Operating expenses:
General and administrative (see Note 7) 1,281,749 1,089,326 2,246,443 2,271,662
Selling and marketing 245,973 551,036 568,561 1,374,393
Research and development 138,798 190,532 277,473 405,506
Depreciation and amortization 340,718 377,994 764,717 752,257
---------------- ---------------- --------------- ----------------
Total operating expenses 2,007,238 2,208,888 3,857,194 4,803,818
---------------- ---------------- --------------- ----------------
Operating loss (2,116,886) (2,745,076) (4,042,265) (6,062,913)
Other income (expense), net:
Interest income 22,342 142,094 58,319 239,603
Interest expense (7,660) (10,061) (13,282) (24,909)
Equity in loss of investee (9,856) - (7,676) -
Other income (expense) (see Note 7) (37,122) 36,070 (36,908) 36,941
---------------- ---------------- --------------- ----------------
Total other income, net (32,296) 168,103 453 251,635
---------------- ---------------- --------------- ----------------
Loss before income taxes (2,149,182) (2,576,973) (4,041,812) (5,811,278)
Income taxes - - - -
---------------- ---------------- --------------- ----------------
Net loss $ (2,149,182) $ (2,576,973) $ (4,041,812) $ (5,811,278)
================ ================ =============== ================
Net loss per common share - basic and
diluted $ (0.10) $ (0.14) $ (0.20) $ (0.34)
Weighted average common shares
outstanding - basic and diluted 20,581,126 18,490,631 20,579,479 17,101,558
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
4
BILLSERV, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
-----------------------------------
2002 2001
----------------- -----------------
Cash flows from operating activities:
Net loss $ (4,041,812) $ (5,811,278)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 764,717 752,257
(Gain) loss on disposition 3,017 (36,070)
Equity in loss of investee 7,676 -
Non-cash exchange of assets (see Note 5) (600,000) -
Loss on renegotiation of facilities lease (see
Note 7) 345,880 -
Changes in current assets and current liabilities:
(Increase) decrease in accounts receivable (399,344) 39,645
Decrease in related party notes receivables 162,154 162,423
(Increase) decrease in prepaid expenses and other (164,731) 208,545
Increase (decrease) in accounts payable,
accrued expenses and other current liabilities 462,351 (770,193)
Decrease in deferred revenue (49,912) (156,726)
----------------- -----------------
Net cash used in operating activities (3,510,004) (5,611,397)
Cash flows from investing activities:
Purchases of property and equipment (390,597) (419,575)
Long-term deposits, net 176,174 66,236
Proceeds from sales and maturities of investments - 1,035,581
Proceeds from sale of equipment 3,000 -
Other investing activities (6,126) (6,471)
----------------- -----------------
Net cash provided by (used in) investing activities (217,549) 675,771
Cash flows from financing activities:
Proceeds from notes payable 645,000 -
Principal payments for notes payable - (1,500,000)
Increase in restricted cash for collateral on note
payable (800,000) -
Principal payments for capital lease obligations (97,339) (87,180)
Issuance of common stock, net of issuance costs 39,145 6,783,566
----------------- -----------------
Net cash provided by (used in) financing activities (213,194) 5,196,386
----------------- -----------------
Net increase (decrease) in cash and cash equivalents (3,940,747) 260,760
Cash and cash equivalents, beginning of period 6,192,550 6,171,822
----------------- -----------------
Cash and cash equivalents, end of period $ 2,251,803 $ 6,432,582
================= =================
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
5
BILLSERV, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Billserv, Inc.
(the "Company") have been prepared without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying consolidated
financial statements reflect all adjustments of a normal recurring nature
considered necessary to present fairly the Company's financial position, results
of operations and cash flows for such periods. The accompanying interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Results of operations for interim periods are not necessarily indicative of
results that may be expected for any other interim periods or the full fiscal
year. Certain prior period amounts have been reclassified to conform to the
current year presentation. In prior fiscal years, the Company had been in the
development stage, but is no longer considered to be a development stage
company.
The consolidated balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2. COMPREHENSIVE LOSS
The Company's comprehensive loss is composed of net loss and unrealized gains
and losses on investments held as available-for-sale investments. The following
table presents the calculation of comprehensive loss:
Three Months Ended Six Months Ended
JUNE 30, JUNE 30,
------------------------------- ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net loss $(2,149,182) $(2,576,973) $(4,041,812) $(5,811,278)
Unrealized loss on investments - (27,634) - (2,479)
------------ ------------ ------------ ------------
Total comprehensive loss $(2,149,182) $(2,604,607) $(4,041,812) $(5,813,757)
=========== =========== =========== ===========
NOTE 3. LINE OF CREDIT
On March 29, 2002, the Company executed a working capital line of credit
agreement with a bank in the amount of $700,000. Advances under the line of
credit accrue interest at the prime rate minus 0.25%, with repayment terms of
monthly interest-only payments and principal due in June 2003. As part of the
line of credit agreement, the Company must maintain a minimum restricted cash
balance of $800,000 with the bank. The Company borrowed $645,000 under this line
of credit during the first six months of 2002.
6
NOTE 4. RELATED PARTY TRANSACTIONS
From time to time, the Company has made loans to certain officers of the
Company. These amounts are included in Related Party Notes Receivable. The
highest aggregate amount outstanding of loans due from officers (including an
ex-officer of the Company) during the six months ended June 30, 2002 was
$162,000. The Company had an aggregate of $116,000 in notes receivable bearing
interest at 8.0% annually from an ex-officer of the Company at December 31,
2001. In March 2002, this ex-officer repaid the balance of these loans in full,
including accrued interest. The Company had a $46,000 note receivable bearing
interest at 8.0% annually from a certain officer of the Company at December 31,
2001. In May 2002, this officer repaid the balance of this loan in full,
including accrued interest. As of June 30, 2002, there were no outstanding loans
due from any officer of the Company.
The Company has pledged $1.3 million held as money market funds and certificates
of deposit to collateralize margin loans of three officers and an ex-officer of
the Company. The margin loans are from an institutional lender and are secured
by shares of the Company's common stock held by these individuals. The total
balance of the margin loans guaranteed by the Company was approximately $1.3
million at June 30, 2002. The Company has the unrestricted right to use the
pledged funds for its operations if necessary.
NOTE 5. NONMONETARY TRANSACTIONS
During the six months ended June 30, 2002, the Company entered into two
nonmonetary transactions whereby the Company licensed certain technology to
software vendors in exchange for customer relationship management and document
archival and retrieval software products from those vendors. These exchanges
were determined to culminate the earning process and the Company recognized
revenue related to these transactions at the fair value of the software
received, which totaled $600,000. The Company has capitalized the software
received and is depreciating these assets over their estimated useful lives of
three years.
NOTE 6. STOCK OPTION EXCHANGE
In May 2002, the Company tendered an offer to employees and non-employee
directors to cancel certain outstanding stock options under a stock option
exchange program. In return for voluntarily canceling certain stock options,
employees and non-employee directors will be granted an equal number of stock
options promptly after six months and one day from the cancellation date. The
exercise price of the new options granted will be equal to the fair market value
of the Company's common stock on the grant date. The program is not expected to
result in any additional compensation expense or variable plan accounting.
NOTE 7. FACILITIES LEASE
In May 2002, the lease agreement for the office space the Company utilizes for
its headquarters and operations was amended. The amendment reduced the leased
space to approximately 36,000 square feet and lowered the annual rent to
approximately $677,000 from $1,175,000. In return, the Company surrendered a
portion of its prepaid rent, which was included in other assets, to the lessor.
Including the write-off of affected leasehold improvements, the Company
recognized a charge related to the lease amendment of $346,000 for the quarter
ended June 30, 2002.
NOTE 8. SUBSEQUENT EVENTS
On July 25, 2002, the Company executed a $1.5 million financing arrangement with
Laurus Master Fund, Ltd. in exchange for a convertible note and a three-year
warrant to purchase 300,000 shares of the Company's common stock at exercise
prices of $0.936 for the first 150,000 shares, $0.975 for the next 50,000
shares, and $1.17 for the remaining 100,000 shares. Laurus may convert the
convertible note, which bears interest at 7% annually, at any time into shares
of our common stock at a fixed conversion price of $0.78, subject to certain
restrictions in the purchase agreement.
7
The Company may pay the principal and interest on the convertible note, which
has a one-year term, in cash, shares of its common stock or a combination of
cash and stock. If common stock is used to pay the note, the conversion price
will be the lesser of (i) $0.78 or (ii) 88% of the average of the 7 lowest
closing prices during the 22 trading days prior to the date we give notice of
payment. Accrued interest and one-ninth of the principal is due on the first
business day of each calendar month beginning on November 1, 2002 and continuing
until the maturity date of July 1, 2003. If the required monthly payment is made
in cash, the amount paid will be 105% of the monthly amount due. The Company
granted Laurus a security interest in its assets.
The Company agreed to file with the Securities and Exchange Commission, and have
declared effective by November 25, 2002, a registration statement registering
the resale of the shares of the Company's common stock issuable upon conversion
or payment of the note and exercise of the warrant.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations contains forward-looking statements that involve a number of risks
and uncertainties. Actual results in future periods may differ materially from
those expressed or implied in such forward-looking statements. This discussion
should be read in conjunction with the unaudited interim consolidated financial
statements and the notes thereto included in this report, and the Company's
Annual Report on Form 10-K for the year ended December 31, 2001. All references
to "we," "us" or "our" in this Form 10-Q mean Billserv, Inc. ("Billserv" or the
"Company").
OVERVIEW
We provide electronic bill presentment and payment ("EBPP") and related services
to companies that generate recurring bills, primarily in the United States. EBPP
is the process of presenting a bill in a secure environment on the Internet and
facilitating payment of the bill utilizing an electronic transfer of funds.
Billserv provides a turnkey outsourced solution that enables our clients to
offer EBPP services to their customers and to utilize that channel to enhance
their business, Internet and customer relationship management strategies. The
EBPP medium allows billers to establish an interactive, online relationship with
their customers, creating avenues for additional revenue streams, increasing
branding opportunities, enhancing customer service and reducing the costs
associated with customer care and the billing function. Through the
implementation of our complete solution, we provide our customers a single point
of contact for developing, implementing and managing their entire EBPP channel.
The Company also provides related professional services and Internet-based
customer care interaction services and operates an Internet bill presentment and
payment portal for consumers under the domain name www.bills.com.
Prior to 2002, Billserv was in the development stage, but is no longer
considered to be a development stage company. We generated our first full year
of revenues in 2000 and therefore have a relatively limited operating history on
which to base an evaluation of our businesses and prospects. Our prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stages of growth, particularly companies
in new and rapidly evolving markets such as electronic commerce. Such risks
include, but are not limited to, an evolving and unpredictable business model
and our ability to manage growth. To address these risks, we must, among other
things, maintain and increase our customer base, implement and successfully
execute our business and marketing strategy, continue to develop and upgrade our
technology and transaction-processing systems, provide superior customer
service, respond to competitive developments, attract, retain and motivate
qualified personnel, and respond to unforeseen industry developments and other
factors. We cannot assure you that we will be successful in addressing such
risks, and the failure to do so could have a material adverse effect on our
business, prospects, financial condition and results of operations.
Since inception, we have incurred operating losses each quarter, and as of June
30, 2002, we have an accumulated deficit of $40.2 million. The Company expects
to continue to incur losses during the next several quarters of operations as
efforts to achieve profitability continue. We believe that our success will
depend in large part on our ability to (a) drive the consumer adoption rate of
EBPP, (b) continue to add quality billers to our significant client base, (c)
meet evolving customer requirements and (d) adapt to technological changes in an
emerging market. Accordingly, we intend to focus on activities and service
offerings that serve to encourage EBPP adoption by consumers and billers as well
as continue to invest in product research and development, technology and
infrastructure as required to remain competitive.
9
In keeping with this strategy, our sales focus has shifted to a more
comprehensive offering that delivers a single, outsourced solution for
developing customer relationships utilizing the electronic bill as a dynamic
communication medium. By integrating our electronic billing capabilities with
online real-time customer care support provided by our Internet Interaction
Center ("IIC") and Internet-enabled direct marketing and communication ("IDMC"),
Billserv effectively creates a media network that puts billers in direct,
interactive contact with their customers. We are actively promoting our Customer
Communication Networks to qualified prospective billers as well as converting
existing clients to this enhanced service. New accounts are obtained through
both direct sales and by working with our valued reseller and referral partners
in order to maximize our leverage in the marketplace.
Because growth of our revenues is dependent upon consumer acceptance of EBPP, we
work directly and regularly with clients to spur adoption rates and increase the
number of EBPP transactions. The Company provides professional marketing
consultations as a key element of its account management group to actively
assist billers in creating programs to move their consumers to EBPP. The Company
also offers billers services that encourage consumer adoption of EBPP such as
Online Demonstrations, Online Enrollment Assistance, Instant Activation of
consumers through bill warehousing, and Auto Enrollment, which streamlines the
enrollment process for new consumers (collectively, "Preferred Enrollment").
Since we have a significant amount of investment in infrastructure and a certain
level of fixed operating expenses, achieving profitability depends on the volume
of transactions we process and the revenue we generate from these transactions,
as well as other services performed for our customers. Sources of revenue for
the Company include:
o Internet billing clearinghouse services for EBPP through a biller
direct site, secure direct delivery to the consumer's email inbox,
or distribution via bill aggregators.
o Electronic publishing and storage services for online document
delivery and archival.
o Internet-enabled, interactive customer care services on an in-house
or outsourced basis.
o Professional consulting services for EBPP billers or software
vendors needing value-added resources to deliver customized EBPP
solutions.
o Gateway services that provide billers who are already participating
in EBPP using in-house software solutions a single distribution
point to virtually any bill presentment and payment location across
the World Wide Web in addition to their existing distribution points
or biller direct site. Gateway technology may also be used by
vendors to provide a cost-effective, proven method to give their
clients and consumers the ability to make online payments, and view
and pay bills anytime, anywhere through bank and Internet payment
portals.
o Licensing of CheckFree e-billing software solutions as an authorized
reseller in Australia.
o Online bill payment and management services for consumers through
the bills.com Internet portal.
As a result of our limited operating history, the current economic environment
and the emerging nature of the markets in which we compete, we are unable to
precisely forecast our revenues. Our current and future expense levels are based
largely on our investment plans and estimates of future revenues. Revenue and
operating results will depend on the volume of transactions processed and
related services rendered. The timing of such services and transactions and our
ability to fulfill a customer's demands are difficult to forecast. Although we
systematically budget for planned outlays and maintain tight controls on our
expenditures, we may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues in relation to our planned expenditures could have a
material adverse effect on our business, prospects, financial condition and
results of operations. Further, we may make certain pricing, service, marketing
or acquisition decisions that could have a material adverse effect on each or
all of these areas.
10
RESULTS OF OPERATIONS
Revenues for the quarter ended June 30, 2002 increased 95% to $1,342,413 from
$690,062 for the quarter ended June 30, 2001. For the six months ended June 30,
2002 and 2001, revenues grew 106% to $2,472,085 from $1,199,471, respectively.
The increase from the prior year periods was primarily attributable to growth in
professional consulting services and transaction fee revenue due to an increase
in the number of implemented billers and volume of transactions. As of June 30,
2002, we had 112 billers under contract who were in various stages of
development, including 96 billers that were in full production or pilot stages,
as compared to 60 billers in full production or pilot stages at June 30, 2001.
Although revenue from transaction fees increased significantly from the prior
year periods, transaction fees are not likely to become the major revenue source
until consumer adoption rates increase. While consumer adoption rates cannot be
controlled, we are working with our clients and partners to promote EBPP through
consumer education and marketing programs and the utilization of programmatic
adoption driving services such as Preferred Enrollment. The Company's first sale
as a reseller of CheckFree's e-billing software in Australia also contributed to
the increases in revenue. The sale was made to an Australian billing service
provider that is also an equal partner with the Company in a joint venture
formed to provide EBPP solutions to the Australian market.
During the six months ended June 30, 2002, the Company entered into two
nonmonetary transactions whereby the Company licensed certain technology to
software vendors in exchange for customer relationship management and document
archival and retrieval software products from those vendors. These exchanges
were determined to culminate the earning process and the Company recognized
revenue related to these transactions at the fair value of the software
received, which totaled $600,000. The Company has capitalized the software
received and is depreciating these assets over their estimated useful lives of
three years.
Cost of revenues includes the cost of personnel dedicated to the design of
electronic bill templates, creation of connections to third-party presentment
and payment processors, testing and quality assurance processes related to
implementation and presentment, as well as professional staff dedicated to
providing contracted services to EBPP customers under consulting arrangements.
Cost of revenues also includes fees paid for presentation of consumer bills on
Web sites powered by aggregators and processing of payments for EBPP
transactions by third party providers. Cost of revenues was $1,452,061 and
$1,226,250 for the quarters ended June 30, 2002 and 2001, respectively, and
$2,657,156 and $2,458,566 for the six months ended June 30, 2002 and 2001,
respectively. The increases from the prior year periods are due to the cost of
the CheckFree software that was resold in the second quarter of 2002.
General and administrative expenses increased to $1,281,749 for the quarter
ended June 30, 2002, from $1,089,326 for the prior year quarter. In May 2002,
the Company renegotiated the lease terms for its corporate headquarters to
provide for a reduction in future rent expense of approximately $1.6 million
over the remaining term of the lease. The lease amendment required the Company
to expense a portion of its prepaid rent, which resulted in a one-time charge of
$312,000 for the second quarter of 2002 and caused the increase in expenses from
the prior year quarter. In spite of this charge, general and administrative
expenses for the first six months of 2002 decreased to $2,246,443 from
$2,271,662 in the prior year period due to the restructuring and realignment of
our organization during the latter half of 2001 to better position the Company
for current economic and market conditions. We expect total general and
administrative expenses to decrease for the remainder of 2002 as we realize the
benefit of the rent and other cost reductions made during the second quarter of
2002 and continue to emphasize management of expenses.
Selling and marketing expenses decreased to $245,973 and $568,561 for the
quarter and six months ended June 30, 2002, respectively, from $551,036 and
$1,374,393 for the comparable periods of 2001, respectively. The decrease from
the prior year periods was primarily the result of reductions in our direct
sales staff and trade show participation as well as lower related travel
expenses. As we have increased our focus on using strategic partners to provide
sales opportunities related to the deployment and use of our EBPP services, we
have experienced a significant decrease in the amount of expenses related to our
direct sales channel. We will continue to analyze our sales and marketing
efforts in order to control costs, increase the effectiveness of our sales
force, and broaden our reach through reseller initiatives and advantageous
alliances.
11
Research and development expenses consist primarily of the cost of personnel
devoted to the design of new processes that will improve our electronic
presentment and payment abilities and capacities, new customer care and direct
marketing solutions, additional business-to-consumer applications, and
integration of third-party applications. These expenses decreased 27% and 32% in
the first quarter and six months of 2002, respectively, from the comparable
prior year periods due to a focus on our core competencies in order to implement
and service existing products. Research and development expenses were flat with
those in the first quarter of 2002. We plan to maintain our research and
development activities, as we believe this is critical in order to remain
competitive.
Depreciation and amortization decreased to $340,718 for the quarter ended June
30, 2002, from $377,994 for the second quarter of 2001, as a result of certain
assets becoming fully depreciated during 2002. During the six months ended June
30, 2002 and 2001, depreciation and amortization expenses were $764,717 and
$752,257, respectively. This increase was due to depreciation related to the
capital expenditures made for infrastructure and operating systems in support of
our growth strategy. We acquired approximately $991,000 of property and
equipment during the six months ended June 30, 2002 and anticipate making
capital expenditures of approximately $300,000 over the remaining six months of
2002.
Net other expense was $32,296 for the quarter ended June 30, 2002, as compared
to net other income of $168,103 for the second quarter of 2001. Net other income
decreased to $453 for the six months ended June 30, 2002 from $251,635 for the
prior year period. These changes were primarily attributable to lower interest
income earned in 2002 as a result of lower investment balances and lower market
interest rates.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company's principal sources of liquidity consisted of $3.1
million of cash and cash equivalents, including $800,000 of restricted cash, and
$67,000 in short-term investments, compared to $6.2 million of cash and cash
equivalents and $237,000 in short-term investments at December 31, 2001.
Net cash used in operating activities was $3.5 million and $5.6 million for the
six months ended June 30, 2002 and 2001, respectively. The Company's average
monthly net cash outflows, or cash burn rate, decreased from approximately
$621,000 in the first quarter of 2002 to approximately $440,000 for the second
quarter of 2002 as a result of one-time annual payments for items such as
property taxes and insurance renewals in the first quarter. We plan to continue
to focus on expending our resources prudently and expect to achieve positive
cash flow in 2003 as a result of expense reductions and anticipated future
revenues.
Net cash used in investing activities was $218,000 for the six months ended June
30, 2002 and primarily reflected capital expenditures of approximately $391,000
for computer equipment and software offset by the return of $176,000 of
deposits. We anticipate making capital expenditures of approximately $300,000
for the remaining six months of 2002. Net cash provided by investing activities
was $676,000 for the six months ended June 30, 2001 and reflected the sale of a
marketable security held for investment for $1.0 million and purchases of
property and equipment.
Net cash used in financing activities was $213,000 for the six months ended June
30, 2002 and included $645,000 of draws under the Company's line of credit and
the restriction of $800,000 as collateral for the line of credit. Net cash
provided by financing activities of $5.2 million for the six months ended June
30, 2001 resulted from proceeds, net of issuance costs, of $6.8 million from the
issuance of common stock under the March 2001 private placement offering. The
$1.5 million repayment of the outstanding line of credit in January 2001 reduced
the amount of net cash provided by financing activities.
On March 29, 2002, the Company executed a working capital line of credit
agreement with a bank in the amount of $700,000. Advances under the line of
credit accrue interest at the prime rate minus 0.25%, with repayment terms of
monthly interest-only payments and principal due in June 2003. As part of the
line of credit agreement, the Company must maintain a minimum restricted cash
balance of $800,000 with the bank. The Company borrowed $645,000 on this line of
credit during the six months ended June 30, 2002.
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Our capital requirements depend on several factors, including:
o The rate of consumer acceptance of the Internet, Internet
technology, electronic commerce and our online solution
o The ability to adapt quickly to rapid changes in technology and
competition in electronic commerce and related financial services
o The ability to expand our customer base and increase revenues
o The level of expenditures for marketing and sales
o The level of purchases of computer equipment and software
o Possible acquisitions of or investments in complementary businesses,
products, services and technologies
o The need to respond to unforeseen industry developments and other
factors
We believe that our current cash and cash equivalents and investment balances
along with anticipated revenues and additional debt financing will be sufficient
to meet our anticipated cash needs for the foreseeable future; however, material
shortfalls or variances from anticipated performance or unforeseen expenditures
could require the Company to seek alternative sources of capital or to limit
expenditures for operating or capital requirements. If such a shortfall in
liquidity should occur, the Company has both the intent and the ability to take
the necessary actions to preserve its liquidity through the reduction of
expenditures. We expect to experience operating losses and negative cash flow
for the next several quarters as we work toward achieving profitability and
generating positive cash flow from operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters discussed in
our Form 10-Q include certain forward-looking statements within the meaning of
Section 27A of the Securities Act, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to,
all statements regarding our and management's intent, belief and expectations,
such as statements concerning our future and our operating and growth strategy.
Investors are cautioned that all forward-looking statements involve risks and
uncertainties including, without limitation, the factors set forth under the
Risk Factors section of Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, of the Annual Report on Form 10-K
for the year ended December 31, 2001 and other factors detailed from time to
time in our filings with the Securities and Exchange Commission. One or more of
these factors have affected, and in the future could affect, our businesses and
financial results in the future and could cause actual results to differ
materially from plans and projections. We believe that the assumptions
underlying the forward-looking statements included in this Form 10-Q will prove
to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that our
objectives and plans will be achieved. All forward-looking statements made in
this Form 10-Q are based on information presently available to our management.
We assume no obligation to update any forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's current investment portfolio. Certain of the
Company's marketable securities are designated as "available for sale" and
accordingly, are presented at fair value on the balance sheets. The Company
generally invests its excess cash in high-quality short- to intermediate-term
fixed income securities. Fixed-rate securities may have their fair market value
adversely impacted by a rise in interest rates, and the Company may suffer
losses in principal if forced to sell securities which have declined in market
value due to changes in interest rates.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
NUMBER DESCRIPTION
3.1 Articles of Incorporation, as amended (incorporated by reference to such
exhibit in the Registrant's Registration Statement on Form SB-2, filed
December 29, 1999)
3.2 By-laws, as amended (incorporated by reference to such exhibit in the
Registrant's Registration Statement on Form SB-2, filed December 29, 1999)
4.1 Rights Agreement, dated October 4, 2000 (incorporated by reference to such
exhibit in the Registrant's Registration Statement on Form 8-A, filed
October 11, 2000)
10.1 Securities Purchase Agreement, dated July 25, 2002, relating to the
purchase and sale of a convertible note and warrant (incorporated by
reference to such exhibit in the Registrant's Current Report on Form 8-K,
filed August 1, 2002)
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three months
ended June 30, 2002.
ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BILLSERV, INC.
By: /S/ TERRI A. HUNTER
-------------------------------
Terri A. Hunter
Executive Vice President and
Chief Financial Officer
(Duly authorized and principal financial and accounting officer)
Date: August 14, 2002
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