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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
|X| AMENDMENT NO. 1 TO 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 ........ 14
Item 4. Controls and Procedures ........................................... 14
PART II - OTHER INFORMATION
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
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 unconsolidated
subsidiary (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 unconsolidated subsidiary 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/A 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 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 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.
7
Note 8. Subsequent Events
On July 25, 2002, the Company executed a financing agreement with Laurus Master
Fund, Ltd. in 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 our 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 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.
We expect to record a debt discount as a result of the issuance of the warrant
to Laurus of approximately $259,000, which amount will be charged to interest
expense over the term of the convertible note using the effective yield method.
Furthermore, we expect to record an additional debt discount as a result of the
beneficial conversion feature of approximately $283,000, which amount will be
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 it is convertible into. 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.
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/A for the year ended December 31, 2001. All
references to "we," "us" or "our" in this Form 10-Q/A 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 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 capability 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 puts billers in direct, interactive contact with their consumers. We
refer to this as a "Customer Communication Network". We are actively promoting
our Customer Communication Networks to qualified prospective billers as well as
converting existing customers 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 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:
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.
o 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.
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 attributable to growth in
professional consulting services, which accounted for 31% and 43% of the growth
from the prior year quarter and six-month period, respectively, and transaction
fee revenue, which accounted for 30% and 32% of the growth from the prior year
quarter and six-month period, respectively, 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
36% and 19% to the increases in revenue from the prior year quarter and
six-month period, respectively. 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 six months ended June 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 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 $1,452,061 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 attributable 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.
11
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, which contributed 69% and 62% to the decrease from the prior year
quarter and six-month period, respectively, as well as lower related travel
expenses and trade show participation, which contributed 16% and 21% to the
decrease from the prior year quarter and six-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. 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.
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 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.
Net loss improved to $2,149,182 for the quarter ended June 30, 2002, from
$2,576,973 for the second quarter of 2001 primarily as a result of the increase
in revenue of $652,000 from the prior year quarter. The overall decrease in
total operating expenses from the prior year quarter was offset by the decrease
in net other income. Net loss improved to $4,041,812 for the six months ended
June 30, 2002, from $5,811,278 for the comparable period of 2001 primarily 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 $947,000 from the prior year period that was offset partially by the
decrease in net other income of $251,000.
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. The Company believes that positive cash flow will be realized before
achieving profitability due to the Company's history of collecting up-front fees
for certain work performed in implementing services for new customers and the
expectation of future new service contracts and collection of similar fees
related to them. Since these up-front implementation fees are deferred and
recognized over
12
the term of the related service contract while the related costs are expensed as
incurred, cash receipts related to a new service contract that includes an
up-front fee will typically exceed the amount of related revenue that is
recognized during the implementation period following inception of such a
contract. If sales of future new service contracts with up-front implementation
fees do not occur as expected, the realization of positive cash flow may be
delayed.
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.
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
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.
13
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/A 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/A 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/A 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/A 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.
Item 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this Quarterly Report on Form
10-Q/A, 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 a
significant reduction in workforce of 36 employees in November 2002. 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 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.
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.
By: /s/ Terri A. Hunter
-------------------------------
Terri A. Hunter
Executive Vice President and
Chief Financial Officer
(Duly authorized and principal
financial and accounting officer)
Date: November 15, 2002
16
CERTIFICATIONS
I, Michael R. Long, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A 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 15, 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/A 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 15, 2002 /s/ Terri A. Hunter
---------------------------
Terri A. Hunter
Chief Financial Officer
18