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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 September 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 November 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 September 30, 2002
and December 31, 2001............................................................3
Consolidated Statements of Operations for the three and nine months
ended September 30, 2002 and 2001................................................4
Consolidated Statements of Cash Flows for the nine months
ended September 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........................14
Item 4. Controls and Procedures...........................................................14
PART II - OTHER INFORMATION
Item 5. Other Information.................................................................15
Item 6. Exhibits and Reports on Form 8-K..................................................15
Signature..................................................................................16
Certifications.............................................................................17
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BILLSERV, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
------------------ ------------------
(Unaudited) (Note 1)
Assets:
Current assets:
Cash and cash equivalents $ 660,636 $ 6,192,550
Cash pledged as collateral for related party obligations 1,356,796 -
Investments 66,900 236,948
Accounts receivable, net 702,019 437,677
Prepaid expenses and other 512,194 225,795
Related party notes receivable - 162,154
------------------ ------------------
Total current assets 3,298,545 7,255,124
Property and equipment, net 3,535,438 3,701,205
Intangible asset, net 26,250 37,500
Other assets 95,846 421,307
------------------ ------------------
Total assets $ 6,956,079 $ 11,415,136
================== ==================
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 593,871 $ 201,513
Accrued expenses and other current liabilities 524,142 664,200
Current portion of obligations under capital leases 11,444 148,228
Current portion of deferred revenue 368,643 490,829
Short-term borrowings 1,320,136 -
------------------ ------------------
Total current liabilities 2,818,236 1,504,770
Deferred revenue, less current portion 101,730 161,800
Stockholders' equity:
Common stock, $.001 par value, 200,000,000 shares
authorized; 20,603,799 issued and outstanding at
September 30, 2002, 20,538,526 issued and outstanding at
December 31, 2001 20,604 20,539
Additional paid-in capital 46,514,409 45,909,410
Accumulated deficit (42,498,900) (36,181,383)
------------------ ------------------
Total stockholders' equity 4,036,113 9,748,566
------------------ ------------------
Total liabilities and stockholders' equity $ 6,956,079 $ 11,415,136
================== ==================
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
3
BILLSERV, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
--------------------------------- ---------------------------------
Revenues $ 827,736 $ 831,893 $ 3,299,821 $ 2,031,364
Cost of revenues 1,102,447 1,306,400 3,759,603 3,764,966
---------------- ---------------- --------------- ----------------
Gross margin (274,711) (474,507) (459,782) (1,733,602)
Operating expenses:
General and administrative 878,567 1,052,416 3,125,010 3,324,078
Selling and marketing 196,960 436,248 765,521 1,810,641
Research and development 114,044 193,898 391,517 599,404
Depreciation and amortization 352,750 395,054 1,117,467 1,147,311
---------------- ---------------- --------------- ----------------
Total operating expenses 1,542,321 2,077,616 5,399,515 6,881,434
---------------- ---------------- --------------- ----------------
Operating loss (1,817,032) (2,552,123) (5,859,297) (8,615,036)
Other income (expense), net:
Interest income 13,457 82,594 71,776 322,197
Interest expense (454,096) (8,861) (467,378) (33,770)
Equity in loss of unconsolidated
subsidiary (53) - (7,729) -
Other income (expense) (17,981) - (54,889) 36,941
---------------- ---------------- --------------- ----------------
Total other income, net (458,673) 73,733 (458,220) 325,368
---------------- ---------------- --------------- ----------------
Loss before income taxes (2,275,705) (2,478,390) (6,317,517) (8,289,668)
Income taxes - - - -
---------------- ---------------- --------------- ----------------
Net loss $ (2,275,705) $ (2,478,390) $ (6,317,517) $ (8,289,668)
================ ================ =============== ================
Net loss per common share - basic and
diluted $ (0.11) $ (0.13) $ (0.31) $ (0.47)
Weighted average common shares
outstanding - basic and diluted 20,602,074 18,535,923 20,587,093 17,584,934
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
4
BILLSERV, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30,
-----------------------------------
2002 2001
----------------- -----------------
Cash flows from operating activities:
Net loss $ (6,317,517) $ (8,289,668)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,117,467 1,147,311
(Gain) loss on disposition 20,999 (36,070)
Equity in loss of unconsolidated subsidiary 7,729 -
Non-cash exchange of assets (600,000) -
Loss on renegotiation of facilities lease 345,880 -
Issuance of common stock warrants and convertible
debt 425,509 -
Changes in current assets and current liabilities:
(Increase) decrease in accounts receivable (264,342) 131,791
Decrease in related party notes receivables 162,154 103,515
(Increase) decrease in prepaid expenses and other (142,123) 355,904
Increase (decrease) in accounts payable,
accrued expenses and other current liabilities 245,886 (939,994)
Decrease in deferred revenue (182,256) (118,851)
----------------- -----------------
Net cash used in operating activities (5,180,614) (7,646,062)
Cash flows from investing activities:
Purchases of property and equipment (405,729) (666,049)
Long-term deposits, net 188,603 170,918
Proceeds from sales and maturities of investments - 1,028,680
Proceeds from sale of equipment 10,000 -
Other investing activities (6,126) 2,015
----------------- -----------------
Net cash provided by (used in) investing activities (213,252) 535,564
Cash flows from financing activities:
Proceeds from notes payable 2,145,000 -
Principal payments for notes payable (645,000) (1,500,000)
Financing costs, net (207,703) -
Principal payments for capital lease obligations (136,784) (133,274)
Cash pledged as collateral for related party obligations (1,356,796) -
Issuance of common stock, net of issuance costs 63,235 6,867,021
----------------- -----------------
Net cash provided by (used in)financing activities (138,048) 5,233,747
----------------- -----------------
Net decrease in cash and cash equivalents (5,531,914) (1,876,751)
Cash and cash equivalents, beginning of period 6,192,550 6,171,822
----------------- -----------------
Cash and cash equivalents, end of period $ 660,636 $ 4,295,071
================= =================
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 Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net loss $(2,275,705) $(2,478,390) $(6,317,517) $(8,289,668)
Unrealized loss on investments - (7,382) - (9,861)
------------ ------------ ------------ ------------
Total comprehensive loss $(2,275,705) $(2,485,772) $(6,317,517) $(8,299,529)
============ ============ ============ ============
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. The Company borrowed $645,000
under this line of credit during the first six months of 2002. In September
2002, the Company repaid the outstanding balance in full, including accrued
interest, and terminated the line of credit. Advances under the line of credit
accrued 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 had to maintain a minimum restricted cash balance
of $800,000 with the bank.
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 nine months ended September 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 September 30, 2002, there were no outstanding
loans due from any officer of the Company.
The Company has pledged $1,357,000 held as money market funds and certificates
of deposit to collateralize certain margin loans of three officers and an
ex-officer of the Company. The margin loans are from institutional lenders 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 $1,347,000 at September 30, 2002. The Company believes it has the
unrestricted legal right to use the pledged funds for its operations if
necessary, but the institutional lenders holding the funds as collateral are
disputing this claim. Therefore, the funds are not currently available for the
Company's use as of the date of this report. In light of this dispute, the
Company is attempting to negotiate a resolution of this matter with the lenders.
NOTE 5. NONMONETARY TRANSACTIONS
During the nine months ended September 30, 2002, the Company entered into two
nonmonetary transactions whereby the Company licensed the use of its Application
Service Provider ("ASP") payment gateway technology to certain third party
software vendors to be used as an original equipment manufacturer ("OEM")
component of their product offering in exchange for 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 in accordance with APB Opinion No. 29, "Accounting for
Nonmonetary Transactions". The Company recognized $300,000 in a transaction
where the Company's technology was exchanged for customer relationship
management software and concurrent seat licenses to use in providing customer
care services via the Internet or telephone. The Company also recognized
$300,000 in a transaction where the Company's technology was exchanged for
document archival and retrieval software to use in the storage of electronic
billing statements. The book value of the gateway technology exchanged in both
transactions was zero. 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. CONVERTIBLE DEBT
On July 25, 2002, the Company executed a financing agreement with Laurus Master
Fund, Ltd. ("Laurus") in
7
exchange for a $1.5 million 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 the Company's
common stock at a fixed conversion price of $0.78, subject to certain
restrictions in the purchase agreement.
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 the Company gives
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. However, Laurus has opted to
delay the repayment of principal until no later than December 1, 2002. If the
required monthly payment is made in cash, the principal amount paid will be 105%
of the monthly amount due. The Company granted Laurus a security interest in its
assets.
The Company recorded a debt discount as a result of the issuance of the warrant
to Laurus of approximately $259,000, which is being charged to interest expense
over the term of the convertible note using the effective yield method.
Furthermore, the Company recorded an additional debt discount as a result of the
beneficial conversion feature of approximately $283,000, which was charged to
interest expense at the date of issuance. The amount related to the beneficial
conversion feature was determined by dividing the note proceeds allocated to the
convertible security of approximately $1,241,000 by the number of shares into
which it is convertible. The resulting effective conversion price was then
compared to the fair value of the Company's stock on the issuance date. The
difference between the fair value of the stock and the effective conversion
price was then multiplied by the number of shares the convertible security was
convertible into at the date of issuance, taking into account the limitation on
the number of shares that Laurus could convert at that time. If the number of
issued and outstanding shares increases, additional expense will be recognized
to reflect the increase in the number of shares that Laurus is able to acquire
through conversion.
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.
NOTE 9. GOING CONCERN
Due to a material shortfall from anticipated revenues and the inability to
access its funds held as collateral to guarantee certain executive margin loans,
(see Note 4) the Company believes that its current available cash and cash
equivalents and investment balances along with anticipated revenues may be
insufficient to meet its anticipated cash needs for the foreseeable future.
Accordingly, the Company reduced its workforce by 36 employees in November 2002
and is currently aggressively pursuing strategic alternatives, including
investment in or sale of the Company. The sale of additional equity or
convertible debt securities would result in additional dilution to the Company's
stockholders, and debt financing, if available, may involve restrictive
covenants which could restrict operations or finances. There can be no assurance
that financing will be available in amounts or on terms acceptable to the
Company, if at all. If the Company cannot raise funds, on acceptable terms, or
achieve positive cash flow, it may not be able to continue to exist, conduct
operations, grow market share, take advantage of future opportunities or respond
to competitive pressures or unanticipated requirements, any of which would
negatively impact its business, operating results and financial condition.
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 sending bills to consumers securely through the Internet and
processing Internet payment of bills utilizing an electronic transfer of funds.
Our service offering allows companies to outsource their electronic billing
process, providing them a single point of contact for developing, implementing
and managing their EBPP process. Billserv offers services to consolidate
customer billing information and then securely deliver an electronic bill to the
biller's own Billserv-hosted payment Web site, the consumer's e-mail inbox and
numerous Internet bill consolidation Web sites, such as those sponsored by
financial institutions. Our EBPP services allow billers to establish an
interactive, online relationship with their consumers by integrating Internet
customer care and direct marketing with the electronic bill. We provide
professional services to assist with the implementation and maintenance of an
electronic bill offering. The Company also provides 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 continue as a going concern. To address these risks, we must,
among other things, maintain our customer base, implement a successful cost
reduction strategy, continue to maintain 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
September 30, 2002, we have an accumulated deficit of $42.5 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) meet evolving customer requirements and (c) 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 existing billers. Because growth of our revenues is dependent upon
consumer acceptance of EBPP, the Company offers billers services for a fee 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. The components of our
service offering, all of which are currently available to customers and have
generated revenue to date with the exception of our electronic publishing and
storage services, include:
9
o Internet billing services for EBPP through a Billserv-hosted payment
Web 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 services,
including payment gateway services that provide billers who are
already participating in EBPP using in-house software 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 embedded as an OEM (original equipment manufacturer) component
within vendors' software or service offerings 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 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.
RESULTS OF OPERATIONS
Revenues for the quarter ended September 30, 2002 decreased slightly to $827,736
from $831,893 for the quarter ended September 30, 2001. For the nine months
ended September 30, 2002 and 2001, revenues grew 62% to $3,299,821 from
$2,031,364, respectively. The increase from the prior year period was primarily
attributable to growth in transaction fee revenue, which accounted for 45% of
the growth from the prior year nine-month period, due to an increase in the
volume of transactions. The increase in professional consulting fees, which
includes revenue from the licensing of ASP payment gateway technology, accounted
for 37% of the growth from the prior year nine-month period due to the
nonmonetary transactions discussed below. As of September 30, 2002, we had 114
billers under contract who were in various stages of development, including 102
billers that were in full production or pilot stages, as compared to 67 billers
in full production or pilot stages at September 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
18% to the increase in revenue from the prior year nine-month period. 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 services to the
Australian market.
During the nine months ended September 30, 2002, the Company entered into two
nonmonetary transactions whereby the Company licensed the use of its ASP payment
gateway technology to certain third party software vendors to be used as an OEM
component of their product offering in exchange for 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 in accordance with APB Opinion No. 29, "Accounting for
Nonmonetary Transactions". The Company recognized $300,000 in a transaction
where the Company's technology was exchanged for customer relationship
management software and concurrent seat licenses to use in providing customer
care services via the Internet or telephone. The Company also recognized
$300,000 in a
10
transaction where the Company's technology was exchanged for document archival
and retrieval software to use in the storage of electronic billing statements.
The book value of the gateway technology exchanged in both transactions was
zero. 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 aggregators
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 $1,102,447 and
$1,306,400 for the quarters ended September 30, 2002 and 2001, respectively, and
$3,759,603 and $3,764,966 for the nine months ended September 30, 2002 and 2001,
respectively. The decrease from the prior year quarter is attributable to cost
reductions that were implemented in the second half of 2001. The resulting costs
savings from the prior year period were offset by the cost of the CheckFree
software that was resold in the second quarter of 2002.
General and administrative expenses decreased to $878,567 for the quarter ended
September 30, 2002, from $1,052,416 for the prior year quarter due to lower rent
of $83,000 and cost reductions resulting from the restructuring and realignment
of our organization during the latter half of 2001 to better position the
Company for current economic and market conditions. 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. In spite of this charge, general and
administrative expenses for the first nine months of 2002 decreased to
$3,125,010 from $3,324,078 in the prior year period due to the rent savings of
$83,000 in the third quarter of 2002 and the cost reductions made during 2001.
Selling and marketing expenses decreased to $196,960 and $765,521 for the
quarter and nine months ended September 30, 2002, respectively, from $436,248
and $1,810,641 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, which contributed 77% and 66% to the decrease from the prior year
quarter and nine-month period, respectively, as well as lower related travel
expenses and trade show participation, which contributed 5% and 17% to the
decrease from the prior year quarter and nine-month period, respectively. 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.
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 services, additional business-to-consumer applications, and
integration of third-party applications. These expenses decreased 41% and 35% in
the third quarter and nine 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. We plan to minimize our research and development
activities in the foreseeable future, as we intend to concentrate our limited
resources on generating revenue and servicing existing customers.
Depreciation and amortization decreased to $352,750 for the quarter ended
September 30, 2002, from $395,054 for the third quarter of 2001. During the nine
months ended September 30, 2002 and 2001, depreciation and amortization expenses
were $1,117,467 and $1,147,311, respectively. The decreases from the prior year
periods were the result of certain assets becoming fully depreciated during
2002. We acquired approximately $1.0 million of property and equipment during
the nine months ended September 30, 2002 and anticipate making minimal capital
expenditures over the remainder of 2002.
Net other expense was $458,673 for the quarter ended September 30, 2002, as
compared to net other income of $73,733 for the third quarter of 2001. Net other
expense was $458,220 for the nine months ended September 30, 2002, as compared
to net other income of $325,368 for the prior year period. These changes were
primarily attributable to $445,000 of interest expense recognized in the third
quarter of 2002 related to the Company's convertible debt and lower interest
income earned in 2002 as a result of lower investment balances and lower market
interest rates.
11
Net loss improved to $2,275,705 for the quarter ended September 30, 2002, from
$2,478,390 for the third quarter of 2001 partly as a result of the decrease in
costs of revenue of $204,000 from the prior year quarter. The overall decrease
in total operating expenses of $535,000 from the prior year quarter was offset
by the decrease in net other income. Net loss improved to $6,317,517 for the
nine months ended September 30, 2002, from $8,289,668 for the comparable period
of 2001 partly as a result of the increase in revenue of $1.3 million from the
prior year period. Also contributing to the improvement was the overall decrease
in total operating expenses of $1.5 million from the prior year period that was
offset partially by the decrease in net other income of $784,000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, the Company's principal sources of liquidity consisted of
$2.0 million of cash and cash equivalents 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. Included in the cash balance at September 30,
2002 is $1,357,000 in money market funds and certificates of deposit being used
to collateralize certain margin loans of three officers and an ex-officer of the
Company. The margin loans are from institutional lenders 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
$1,347,000 at September 30, 2002 and has decreased from approximately $2.0
million at December 31, 2001. The Company believes it has the unrestricted legal
right to use the pledged funds for its operations if necessary, but the
institutional lenders holding the funds as collateral are disputing this claim.
Therefore, the funds are not currently available for the Company's use as of the
date of this report. In light of this dispute, the Company is attempting to
negotiate a resolution of this matter with the lenders.
Net cash used in operating activities was $5.2 million and $7.6 million for the
nine months ended September 30, 2002 and 2001, respectively. The Company's
average monthly net cash outflows, or cash burn rate, increased from
approximately $440,000 in the second quarter of 2002 to approximately $796,000
for the third quarter of 2002, primarily as a result of the $645,000 repayment
of the Company's line of credit in September 2002.
Net cash used in investing activities was $213,000 for the nine months ended
September 30, 2002 and primarily reflected capital expenditures of approximately
$406,000 for computer equipment and software offset by the return of $189,000 of
deposits. We anticipate making minimal capital expenditures for the remainder of
2002. Net cash provided by investing activities was $536,000 for the nine months
ended September 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 $138,000 for the nine months ended
September 30, 2002 and included the borrowing of $1.5 million under a
convertible debt agreement, which was partially offset by the effect of
$1,357,000 pledged as collateral as discussed above. Net cash provided by
financing activities of $5.2 million for the nine months ended September 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. The Company borrowed $645,000
on this line of credit during the six months ended June 30, 2002. In September
2002, the Company repaid the outstanding balance in full, including accrued
interest, and terminated the line of credit. Advances under the line of credit
accrued 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 had to maintain a minimum restricted cash balance
of $800,000 with the bank.
On August 26, 2002, the Company annouced that it had received a letter from
Nasdaq advising the Company that for a period of 30 consecutive trading days,
the price of the Company's common stock closed below the minimum price of $1.00
per share as required for continued listing on the Nasdaq National Market. Under
the Nasdaq Marketplace Rule, if the Company's common stock closes at $1.00 per
share or more for a minimum of 10 consecutive trading days before November 19,
2002, the Company will be regain share price compliance. If the Company is not
compliant by that date, Nasdaq will provide the Company with written
notification that the Company's securities will be delisted from the Nasdaq
National Market. If that were to occur, the Company may at that time appeal for
an extension to a Nasdaq Listing Qualifications Panel. The letter also stated
that the Company could apply to transfer its common stock to the Nasdaq SmallCap
Market, which makes available an extended grace period, up to an additional 270
days, for the minimum $1.00 bid price requirement. During this period, the
Company would also have the ability to transfer back to the Nasdaq National
Market if it maintained a closing bid price equal to or greater than $1.00 for
30 consecutive trading days and if the Company complies with all other continued
listing requirements for that market.
Our capital requirements depend on several factors, including:
o The rate of consumer acceptance of the Internet, Internet technology,
electronic commerce and our online services
o The ability to adapt quickly to rapid changes in technology and
competition in electronic commerce and related financial services
12
o The level of purchases of computer equipment and software
o The need to respond to unforeseen industry developments and other
factors
The Company currently plans to meet its capital requirements primarily through
issuance of equity securities or new borrowing arrangements, and in the longer
term, revenue from operations. Due to a material shortfall from anticipated
revenues and the inability to access its funds held as collateral to guarantee
certain executive margin loans as discussed above, the Company believes that its
current available cash and cash equivalents and investment balances along with
anticipated revenues may be insufficient to meet its anticipated cash needs for
the foreseeable future. Accordingly, the Company reduced its workforce by 36
employees in November 2002 and is currently aggressively pursuing strategic
alternatives, including investment in or sale of the Company. The sale of
additional equity or convertible debt securities would result in additional
dilution to the Company's stockholders, and debt financing, if available, may
involve restrictive covenants which could restrict operations or finances. There
can be no assurance that financing will be available in amounts or on terms
acceptable to the Company, if at all. If the Company cannot raise funds, on
acceptable terms, or achieve positive cash flow, it may not be able to continue
to exist, conduct operations, grow market share, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements,
any of which would negatively impact its business, operating results and
financial condition.
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.
13
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.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this Quarterly Report on Form
10-Q, an evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design
and operation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934). Based on that
evaluation, the Company's CEO and CFO concluded that the Company's disclosure
controls and procedures were effective in ensuring that material information
relating to the Company with respect to the period covered by this report was
made known to them. Since the date of their evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls, including any corrective actions with
regard to significant deficiencies and material weaknesses, other than the
reduction in workforce in November 2002 discussed in Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations, on
page 13 of this report. The workforce reduction is not expected to have a
significant effect on the effectiveness of the Company's disclosure controls,
particularly with respect to the period covered by this report.
14
Part II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On August 16, 2002, the Company announced that its Board of Directors approved
the appointment of Mitch Hovendick to serve as a member of the Board of
Directors. Concurrently, the Company also announced that Roger Hemminghaus
resigned from the Board of Directors.
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:
On August 1, 2002, the Company filed a Current Report on Form 8-K regarding
the Company's execution of a financing agreement with Laurus Master Fund, Ltd.
The matter was reported under Item 5 of Form 8-K and the related securities
purchase agreement was filed as an exhibit under Item 7 of Form 8-K.
ITEMS 1, 2, 3 AND 4 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
15
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.
Date: November 14, 2002 /s/ Terri A. Hunter
----------------------------------------
Terri A. Hunter
Executive Vice President and
Chief Financial Officer
(Duly authorized and principal financial
and accounting officer)
16
CERTIFICATIONS
I, Michael R. Long, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Billserv, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Michael R. Long
-----------------------
Michael R. Long
Chief Executive Officer
17
I, Terri A. Hunter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Billserv, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Terri A. Hunter
--------------------------
Terri A. Hunter
Chief Financial Officer
18