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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE PERIOD ENDED September 30, 1999
Commission file No. 30152
billserv.com, Inc.
(Exact name of issuer as specified in its charter)
Nevada 98-0190072
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Lori Turner Marshall Millard
Vice President and Chief Vice President and General Counsel
Financial Officer
14607 San Pedro Ave., Suite 100
San Antonio, Texas 78232
(210) 402-5000
(Address, including zip code, and telephone number, including
area code of issuer's principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the 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 requirements for the past 90 days. [X] Yes [ ] No
10,976,428 shares of $.001 par value common stock outstanding as
of September 30, 1999
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<PAGE>
billserv.com, Inc.
FORM 10-Q
For the Quarter Ended September 30, 1999
INDEX
Part I - Financial Information PAGE
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Changes in Shareholder's
Equity (Deficit) 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Part II - Other Information
Item 1. Legal Proceedings 19
Signatures 20
<PAGE>
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
billserv.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- ---------------
<S> <C> <C>
Assets:
Cash and cash equivalents ......................................... $ 1,498,703 $ 329,618
Related party accounts receivable ................................. 55,911 24,000
Prepaid expenses .................................................. 147,114 3,213
Other current assets .............................................. 205,336 31,149
----------- -----------
Total current assets .............................................. 1,907,064 387,980
Property and equipment, net of accumulated
depreciation and amortization of $161,289 and $559 ............. 1,099,219 19,550
Other assets ...................................................... 399,960 --
----------- -----------
Total assets ...................................................... $ 3,406,243 $ 407,530
=========== ===========
Liabilities & shareholders' equity (deficit):
Current liabilities:
Accounts payable ................................................ $ 122,366 $ 3,779
Note payable .................................................... 1,000,000 --
Accrued expenses ................................................ 124,866 38,127
Current portion of obligations under capital leases ............. 296,430 --
Other current liabilities ....................................... 13,019 --
Advance from shareholders ....................................... -- 500,000
Accounts payable, related party ................................. -- 150,000
----------- -----------
Total current liabilities ......................................... 1,556,681 691,906
Obligations under capital leases, less current portion ................... 333,859
Equity subject to potential redemption ................................... 5,300 5,300
Shareholders' equity (deficit):
Common stock, $.001 par value, 200,000,000 shares
authorized; 10,976,428 issued and outstanding
at September 30, 1999, 10,030,000 issued and
outstanding at December 31, 1998 ............................. 10,976 10,030
Paid-in capital ................................................. 5,790,482 --
Deficit accumulated during the development stage ................ (4,291,055) (297,706)
----------- -----------
Total shareholders' equity (deficit) .............................. 1,510,403 (289,676)
----------- -----------
Total liabilities and shareholders' equity (deficit) .............. $ 3,406,243 $ 407,530
=========== ===========
</TABLE>
See notes to financial statements
-3-
<PAGE>
billserv.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 30, 1998
THREE MONTHS NINE MONTHS (INCEPTION)
ENDED ENDED TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 1999
--------------- ---------------- -----------------
<S> <C> <C> <C>
Revenues ................................... $ -- $ -- $ --
Operating expenses
Research and development ................. 260,847 600,389 600,389
Selling expenses ......................... 536,629 1,278,566 1,366,864
General and administrative ............... 516,463 1,810,388 2,011,301
Depreciation & amortization .............. 87,541 168,805 169,364
------------ ------------ ------------
Total operating expenses ................... 1,401,480 3,858,148 4,147,918
------------ ------------ ------------
Operating loss ............................. (1,401,480) (3,858,148) (4,147,918)
Other income (expense):
Interest income .......................... 24,774 36,905 36,905
Interest expense ......................... (165,279) (173,433) (173,433)
Other income ............................. 2,127 3,327 3,327
------------ ------------ ------------
Total other income (expense) ............... (138,378) (133,201) (133,201)
------------ ------------ ------------
Loss before income taxes ................... (1,539,858) (3,991,349) (4,281,119)
Income taxes ............................... -- -- --
------------ ------------ ------------
Net loss ................................... $ (1,539,858) $ (3,991,349) $ (4,281,119)
============ ============ ============
Net loss per common share - basic .......... $ (0.14) $ (0.38) $ (0.42)
============ ============ ============
Weighted average common shares
outstanding - basic ...................... 10,976,428 10,414,811 10,276,027
============ ============ ============
</TABLE>
See notes to financial statements
-4-
<PAGE>
billserv.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE TOTAL
COMMON STOCK PAID-IN DEVELOPMENT SHAREHOLDERS'
SHARES AMOUNT CAPITAL STAGE EQUITY
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance July 30, 1998
(date of inception) ....................... 1,000 $ -- $ -- $ -- $ --
Reclass of equity subject to potential
redemption ................................ (5,300) (5,300)
Acquisition of shares and reverse
merger, December 9, 1998 .................. 10,029,000 10,030 -- (4,636) 5,394
Net loss from inception (July 30, 1998
to December 31, 1998) ..................... -- -- -- (289,770) (289,770)
------------------------------------------------------------------------------------
Balance at December 31, 1998 ................ 10,030,000 10,030 -- (299,706) (289,676)
Shares issued under Reg S,
June 11, 1999 ............................. 946,428 946 5,299,054 -- 5,300,000
Issuance of Common Stock Warrants,
May 18, 1999 .............................. -- -- 356,583 -- 356,583
Issuance of Common Stock Warrants,
August 6, 1999 ............................ -- -- 134,845 -- 134,845
Net loss for the nine months ending
September 30, 1999 ........................ -- -- -- (3,991,349) (3,991,349)
------------------------------------------------------------------------------------
Balance at September 30, 1999 ............... 10,976,428 $ 10,976 $ 5,790,482 $(4,291,055) $ 1,510,403
====================================================================================
</TABLE>
See notes to financial statements
-5-
<PAGE>
billserv.com, Inc.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 30, 1998
NINE MONTHS (INCEPTION)
ENDED TO
SEPTEMBER 30, SEPTEMBER 30,
1999 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................. $(3,991,349) $(4,281,119)
Adjustments to reconcile net loss to net
cash used in operating activities-
Issuance of common stock warrants .................................... 491,428 491,428
Depreciation and amortization ........................................ 168,805 169,364
Changes in current assets and current liabilities-
(Increase) decrease in related party receivables ..................... (31,911) (55,911)
(Increase) decrease in prepaid expenses and other current assets ..... (318,088) (352,450)
Increase (decrease) in accounts payable and accrued liabilities ...... 205,326 397,232
Increase (decrease) in accounts payable related party ................ (150,000) (150,000)
Increase (decrease) in other current liabilities ..................... 13,019 13,019
----------- -----------
Net cash used in operating activities ................................ (3,612,770) (3,768,437)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................... (665,398) (685,507)
Proceeds from sale of property and equipment ......................... 116,320 116,320
Purchase of long term investments .................................... (286,098) (286,098)
Purchase of intangible assets ........................................ (75,000) (75,000)
Deposits - long term ................................................. (42,834) (42,834)
Proceeds of acquisition/merger ....................................... -- 5,394
----------- -----------
Net cash used in investing activities ................................ (953,010) (967,725)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable ........................................... 1,000,000 1,000,000
Advance from shareholders ............................................ 1,500,000 2,000,000
Repayment to shareholders ............................................ (2,000,000) (2,000,000)
Issuance of common stock ............................................. 5,300,000 5,300,000
Payments on obligations under capital lease .......................... (65,135) (65,135)
----------- -----------
Net cash provided by financing activities ............................ 5,734,865 6,234,865
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................. 1,169,085 1,498,703
CASH AND CASH EQUIVALENTS, beginning of period ................................... 329,618 --
----------- -----------
CASH AND CASH EQUIVALENTS, end of period ......................................... $ 1,498,703 $ 1,498,703
=========== ===========
NON CASH INVESTING AND FINANCING ACTIVITIES:
Purchases of equipment under capital leases .......................... $ 695,423 $ 695,423
</TABLE>
See notes to financial statements
-6-
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company's principal activities have been research and development, raising
capital, and organizational activities. Accordingly, it is considered a
development stage company. The Company expects to incur losses during its first
year of operation and may incur losses in subsequent years as development
efforts continue after the commencement of generation of revenue. The Company
plans to meet its capital requirements primarily through funding under
borrowings and issuance of equity securities, capital lease financing, and in
the longer term, revenue from services.
The Company's statements have been prepared by the Company pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC") and, in the
opinion of management, include all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the results for the interim
periods shown. Certain information and footnote disclosures, normally included
in financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to such SEC rules
and regulations. The results for the interim periods are not necessarily
indicative of results for the full year. The financial statements contained
herein should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10, as amended.
The Company's operations began in November 1998, and as a result, there are no
results of operations presented for the three months period ended September 30,
1998. No revenue was recorded during 1998.
2. STOCK ISSUANCE UNDER REGULATION S
On June 11, 1999, the Company issued 946,428 shares of common stock, in exchange
for $5.3 million in cash. The stock was issued pursuant to exemption under
Regulation S.
3. RELATED PARTY TRANSACTIONS
The Company entered into an agreement ("Consulting Agreement") to receive
financial consulting, public relations services, advertising services, and
investor relations' services from a group of minority shareholders ("Consulting
Group"). The term of the agreement is for one year, from November 1, 1998 to
October 31, 1999, and provides for services totaling $1.2 million. The Company
paid $1 million to the Consulting Group, previously reported as Accounts Payable
- - Related Party, from the proceeds of the Regulation S offering which was
completed on June 11, 1999. The remaining $200,000 under the agreement was paid
to the Consulting Group during the third quarter of 1999.
-7-
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1999
4. OBLIGATIONS UNDER CAPITAL LEASES
Equipment held under capital leases is stated at the present value of minimum
lease payments at the inception of the related leases. Equipment held under
capital leases and leasehold improvements are amortized on a straight-line basis
over the estimated useful life of the assets. Amortization of equipment held
under capital leases is included with depreciation expense. Repairs and
maintenance costs are charged to expense as incurred. At September 30, 1999,
there was $695,423 of office and computer equipment held under capital leases.
The following is a schedule, by year, of future minimum lease payments under
capital leases, together with the present value of the minimum lease payments as
of September 30, 1999:
Year ending December 31,
1999 $ 92,745
2000 370,979
2001 226,289
2002 43,183
Total minimum lease payments $ 733,196
Less: amount representing interest (102,907)
---------
$ 630,289
Less: current portion (296,430)
---------
Obligations under capital leases $ 333,859
=========
-8-
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1999
5. OPERATING LEASES
The Company leases office space and other equipment under noncancelable
operating leases expiring in 2004. Future minimum lease payments required under
these leases entered into by the Company, by year and in the aggregate, consist
of the following at September 30, 1999:
Year ending December 31,
1999 $ 52,588
2000 200,799
2001 50,548
2002 6,074
2003 6,074
Thereafter 3,400
----------
Total minimum lease payments $ 319,483
==========
6. OTHER ASSETS
The Company purchased the domain name bills.com for $75,000 in April 1999. The
Company has utilized the domain name for its own Internet portal at the website
www.bills.com. The domain name is reflected in Other Assets. The Company is
amortizing the amount over a ten year period. Additionally, certificates of
deposit purchased for security of long term capital leases are classified under
Other Assets.
7. NOTE PAYABLE
On August 6, 1999, the Company issued a one-year unsecured note payable for $1
million to an accredited investor, which bears interest at 9% per annum, payable
quarterly. The proceeds of this note payable were allocated for use in corporate
operations and to supplement the Company's cash reserves until future equity
financing was obtained. In connection with the issuance of the note, the Company
paid a $20,000 loan origination fee to a venture capitalist firm and issued a
warrant to the accredited investor. See Note 9.
8. EQUITY SUBJECT TO POTENTIAL REDEMPTION
On or about December 3, 1998, the Company, then under the control of former
management, and then known as Goldking Resources, Inc., concluded an offering of
approximately 5.3 million shares of the Company's common stock. This transaction
-9-
<PAGE>
was completed through the cancellation of approximately 6.2 million shares, held
by shareholders who tendered their shares to the Company, followed by the
Company's issuance of 5.3 million shares to 15 new shareholders, who paid par
value to the Company for such shares, in the total amount of approximately
$5,300. The new shareholders also paid an additional $300,000 to the
shareholders who had agreed to cancel their shares. Subsequently, some of these
new shareholders sold the shares into the secondary market. The Company timely
filed a Form D reporting this transaction to the SEC, and claimed exemption
under Rule 504. The SEC has challenged the validity of this claimed exemption.
The Company disputes the following assertions, but it is possible that the
issuance of shares described above may have violated provisions of the federal
and state securities laws which subject the Company to fines, penalties or other
regulatory enforcement action. There can be no assurance that the SEC or
applicable state authorities will not pursue any enforcement action. The Company
disputes any such liability.
Additionally, while the Company also disputes the following assertions, it is
possible that shareholders who purchased the shares described above may have the
right under state and federal securities laws to require the Company to
repurchase their shares, for the amount originally paid, plus interest. The
Company disputes any such liability.
Based upon the best information available to the Company at this time, the
Company has calculated a range of possible, but disputed, exposure that exists
for the Company in light of the disputed civil liabilities described above.
Accordingly, in the event these disputed civil liabilities were successfully
asserted, the Company could be liable to the 15 new shareholders, and to any
shareholder that immediately purchased from these 15 shareholders, in an amount
ranging from approximately $5,300 up to approximately $2.9 million, plus
interest. This range of possible exposure is calculated by reference to the
average closing price for a share of the Company's common stock, weighted for
reported daily volume, during December 1998 and January 1999; the number of
shares possibly sold during the same period of time; and the closing price of
one share on November 11, 1999. The foregoing range could be adjusted higher or
lower depending upon adjustments to any of the referenced items, and as any new
information becomes available to the Company.
-10-
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1999
9. STOCK WARRANT AGREEMENTS
On May 7, 1999, the Company contracted to issue a warrant for the purchase of up
to 500,000 shares of common stock to Southwest Business Corporation ("SWBC"), of
San Antonio, Texas. Subject to specific performance criteria in sales and
marketing of the Company's products, SWBC may earn the right to purchase shares
of common stock, at 110% of the closing bid price as of May 7, 1999 ($7.15),
over a three-year term. If SWBC meets the contract requirements, the warrant
will be issued in accordance with an exemption under Section 4(2) of the
Securities Act of 1933, as amended, because the transaction is by an issuer not
involving a public offering. No warrants had been issued as of September 30,
1999.
On May 18, 1999, the Company contracted with Pennsylvania Merchant Group ("PMG")
to provide strategic and financial advisory services. In exchange for these
advisory services, the Company issued to PMG a warrant to purchase 111,085
shares of common stock of the Company at an exercise price of $6.75 per share
(which represents the average closing price of the Company's stock over the
twenty (20) day period preceding May 18, 1999). The warrant is exercisable for
five (5) years. This warrant was issued in accordance with an exemption under
Section 4(2) of the Securities Act of 1933, as amended, because the transaction
is by an issuer not involving a public offering. Using the fair value based
method of accounting, the company recorded $356,583 of expense and a
corresponding credit to paid-in-capital related to the issuance of this warrant.
This expense is included in the general and administrative line item in the
Statements of Operations for the nine months ended September 30, 1999. No shares
had been exercised as of September 30, 1999.
As part of the August 6, 1999 debt issuance, the Company issued a warrant to the
accredited investor for the purchase of 41,237 shares of the Company's Common
Stock at an exercise price of $6.0625, which represents the average reported
closing sale price of the Company's Common Stock for the ten (10) business days
immediately preceding the loan agreement. The warrant is immediately exercisable
and carries a term of five years and piggyback registration rights. Using the
fair value based method of accounting, the company recorded $134,845 of expense
and a corresponding credit to paid-in-capital related to the issuance of this
warrant. This expense is included in the interest expense line item in the
Consolidated Statement of Operations for the quarter and nine months ended
September 30,1999. See Note 7.
-11-
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1999
10. SUBSEQUENT EVENTS
On October 15, 1999 and October 22, 1999, ("the Closing") the Company issued
1,230,792 and 173,845 shares of Common Stock (the "Shares"), respectively to
twenty-one accredited investors under a private placement offer (the
"Offering"). The shares were issued at $3.25 per share which represented a
discount upon the average reported closing sale price of the Company's Common
Stock for the ten (10) business days immediately preceding the Closing date. Net
proceeds to the Company totaled approximately $4,188,053, net of expenses of
$377,009, which included $264,299, or 6.5% of the Offering, paid Pennsylvania
Merchant Group ("PMG") as Placement Agent. Of the Shares issued on October 22,
1999, 153,845 shares were issued in satisfaction of the $500,000 of the
Company's outstanding short-term note payable. The remaining $500,000 of the
outstanding short-term note payable was paid on October 18, 1999.
In accordance with the terms of the Offering, the Company also issued warrants
to the twenty-one investors to purchase 1,404,637 shares of Common Stock at
$3.75 per share, or one warrant for each Share issued. The warrants are
exercisable for three years from the date of issuance, or October 14, 2002. The
Company has right to call the exercise of the warrants at any time after six
months after the date of the issuance and after the closing price of the Common
Stock exceeds $12.00 for a period of twenty (20) consecutive trading days. Upon
such call notice from the Company, the holders of the warrants must exercise the
warrants within thirty days, after which time the Company will redeem each
warrant for $.05.
Pursuant to the terms of the Offering, the Company shall file a registration
statement with the SEC within thirty days of the Closing for the purpose of
registering the Shares and underlying warrants. The Company shall also use its
best efforts to maintain with the SEC a Registration Statement that is
effective, as of one hundred twenty (120) days after Closing, and otherwise
cause the Shares and Warrant Shares to be Registered under the Securities Act
until the date on which the Shares and Warrant Shares are eligible for resale or
other disposition under Rule 144 without regard to the volume limitations
thereof.
If a Registration Statement is not filed on or before thirty (30) days after
Closing, or is not effective on or before one hundred twenty (120) days after
Closing (the "Target Date"), as required above, then for every applicable thirty
(30) day period after the applicable target date, the Company shall pay to
Purchaser, as liquidated damages, an amount equal to two percent (2%) of the
total Offering Price of such Shares (without reference to the Warrant Shares or
the Placement Agent Warrant Shares) for each thirty (30) day period following
the applicable Target Date until such time as the registration statement is
declared effective or, in the case of a late filing, is filed. Such payment
shall be made to the Purchaser by cashier's check or wire transfer in
immediately available funds to an account designated, in writing, by Purchaser.
-12-
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1999
10. SUBSEQUENT EVENTS (CONTINUED)
As additional compensation for acting as Placement Agent or the Offering, the
Company issued a warrant to PMG for the purchase of 37,524, or 3% of the Shares
sold in the Offering. The warrant is immediately exercisable, carries a five
year term, an exercise price of $3.25, piggyback registration rights, and a
cashless exercise provision.
DELISTING FROM OTC BB; EFFECT ON LIQUIDITY. The Company is a "reporting company"
under the Exchange Act, having filed a Form 10 Registration Statement (the
"Registration Statement") on June 11, 1999. Following initial comment by the
SEC, the Registration Statement was amended on July 27, 1999, and became
effective on August 11, 1999. In light of the risk factors stated above, the
Company anticipates that the SEC will require one or more post-effective date
amendments of the Registration Statement.
The National Association of Securities Dealers ("NASD"), which operates the Over
the Counter Bulletin Board ("OTC BB"), has recently adopted eligibility rules,
which require the Company to clear comment with the SEC in order to remain
listed on the OTC BB. While the Company has promptly responded to the SEC's
comments, the Registration Statement has not yet cleared comment. Thus, the
Company has not met the eligibility criteria established by the NASD.
Accordingly, as of October 7, 1999 the NASD notified the Company that its
listing on the OTC BB was terminated, and the Company's common stock is now
quoted in the National Quotation Board's Electronic Pink Sheets, until such
time, if any, as the Company requalifies for listing on the OTC BB.
Delisting of the Company's common stock from the OTC BB could substantially and
negatively affect the liquidity and marketability of the Company's common stock.
Furthermore, the Company can offer no assurances concerning the timing, nature,
or scope of further comment by the SEC.
-13-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements based on current expectations,
estimates, and projections about the Company's industry, management's beliefs
and certain assumptions made by management. All statements, trends, analyses,
and other information contained in this report relative to trends in net sales,
gross margin, anticipated expense levels, and liquidity and capital resources,
as well as other statements, including, but not limited to, words such as
"anticipate," "believe," "plan," "intend," "expect," and other similar
expressions constitute forward-looking statements. These forward-looking
statements are not guarantees of future performance and are subject to certain
risks and uncertainties that are difficult to predict. Accordingly, actual
results may differ materially from those anticipated or expressed in such
statements. Potential risks and uncertainties include, among others, those set
forth below. Particular attention should be paid to the cautionary statements
involving the Company's limited operating history, the unpredictability of its
future revenues, the unpredictable and evolving nature of its business model,
the intensely competitive online commerce industry and the risks associated with
capacity constraints, systems development, management of growth and business
expansion, as well as other risk factors.
GENERAL
billserv.com, Inc. is a service bureau consolidator in the electronic bill
presentment and payment ("EBPP") industry. As a development stage enterprise,
the Company has yet to receive any operating revenues. However, the Company
intends to generate four principal revenue streams: Internet billing services,
Internet publishing of statements, customer care services through Internet and
traditional telephony technologies, and professional services associated with
the implementation and maintenance of these Internet technologies. The Company
has a limited operating history on which to base an evaluation of its businesses
and prospects. The Company's prospects must be considered in light of the risks,
expenses, and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving markets
such as electronic commerce. Such risks for the Company include, but are not
limited to, an evolving and unpredictable business model and the management of
growth. To address these risks, the Company must, among other things, maintain
and increase its customer base, implement and successfully execute its business
and marketing strategy, continue to develop and upgrade its technology and
transaction-processing systems, provide superior customer service, respond to
competitive developments, improve its Web site, and attract, retain, and
motivate qualified personnel. There can be no assurance that the Company will be
successful in addressing such risks, and the failure to do so could have a
material adverse effect on the Company's business, prospects, financial
condition, and results of operations.
Since inception, the Company has incurred losses and as of September 30, 1999
had an accumulated deficit of $4,291,055. The Company believes that its success
will depend in large part on its ability to (a) secure additional financing to
meet capital and operating requirements, (b) capture a major portion of the
medium to large size market of billers as its customer base, (c) drive the
consumer adoption rate of EBPP, and (d)
-14-
<PAGE>
meet changing customer requirements and technological changes in an emerging
market. Accordingly the Company intends to invest heavily in its product
development, technology, and operating infrastructure development as well as
marketing and promotion. Because the Company's services will require a
significant amount of investment in infrastructure and a substantial level of
fixed operating expenses, achieving profitability depends on the Company's
ability to generate a high volume of revenues. As a result of the Company's
limited operating history and the emerging nature of the markets in which it
competes, the Company is unable to accurately forecast its revenues. The
Company's current and future expense levels are based largely on its investment
plans and estimates of future revenues and are to a large extent fixed. Sales
and operating results will depend on the volume of transactions completed and
related services rendered. The timing of such services and transactions and the
Company's ability to fulfill a biller's demands are difficult to forecast. The
Company 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 the Company's planned expenditures could have an adverse
effect on the Company's business, prospects, financial condition and results of
operations. Further, the Company may from time to time make certain pricing,
service, marketing or acquisition decisions that could have a material adverse
effect on its business, prospects, financial conditions and results of
operations.
RESULTS OF OPERATIONS--QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999
The Company's activities for the quarter and nine months ended September 30,
1999 resulted in a net operating loss of $1,539,858 and $3,991,349,
respectively. The Company generated no revenues during the period.
Selling expenses consisted primarily of payroll and related expenses for
personnel engaged in marketing and selling activities, as well as advertising
services purchased from the Company's Consulting Group which totaled $100,000
and $400,000 for the quarter and nine months ended September 30,1999. The
Company expanded its sales and marketing staff during the quarter ended
September 30, 1999 and intends to continue such expansion. The Company has
opened sales offices in Arizona, California, Massachusetts, New Jersey, North
Carolina, Pennsylvania, and Texas. The Company plans to increase its marketing
and sales capacities through various marketing and sales activities, including
advertising in trade publications, promotional activities, and aggressive trade
show attendance. Therefore the Company expects marketing and sales expense to
increase substantially.
Research and development expenses totaled $260,847 and $600,389 for the quarter
and nine months ended September 30, 1999, respectively. The Company devoted
these resources to development of its technology infrastructure and operating
systems. The Company is continuing to invest significantly in research and
development, particularly in the development of its technology infrastructure
and operating systems in anticipation and support of revenue growth, quality
improvement and efficiency enhancement opportunities.
General and administrative expenses consisted primarily of payroll and related
expenses for executive, accounting, legal and administrative personnel, as well
as
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<PAGE>
professional and consulting fees and other general corporate expenses. For the
quarter and nine months ended September 30, 1999, financial and investor
relation's services provided under the Consulting Agreement totaled $100,000 and
$650,000, respectively. The Company expects general and administrative expenses
to increase as the Company expands its staff and incurs additional costs related
to the growth of its business.
LIQUIDITY AND CAPITAL RESOURCES
From inception to date, the Company's operations have been funded from advances
under an equity placement. This placement was concluded and fully funded on June
11, 1999, pursuant to Regulation S. The Company issued 946,428 shares of common
stock in exchange for $5.3 million in cash. Advances outstanding at the time of
the placement totaling $2 million were repaid from the proceeds, as well as
amounts due to a related party for investor and public relations services for $1
million. An additional $200,000 was paid during the quarter ended September 30,
1999 to the related party for services under a consulting agreement. See Note 3
to interim financial statements.
In addition to the equity placement, on August 6, 1999, the Company issued a
short-term note payable to an accredited investor for $1 million. The note was
issued as bridge financing until such time as the Company completed a private
placement offering ("Offering"). The Offering was completed in October 1999. A
total of 1,404,637 common shares were issued resulting in net proceeds of
approximately $4,188,053. One half of the short-term note payable, or $500,000
was converted into Common Stock under the Offering. The remaining $500,000 was
repaid on October 18, 1999.
At September 30, 1999, the Company had positive working capital of $350,383.
During the third quarter and the first nine months of 1999 the Company made
significant expenditures and commitments for capital improvements consistent
with anticipated growth in operations, infrastructure and personnel. The Company
anticipates it will make additional investments in and for capital improvements
utilizing proceeds of the Offering completed in October 1999 and will require
additional financing, either through the use of equipment leasing arrangements,
borrowing's or other equity financing.
The Company purchased the domain name bills.com for $75,000 in April 1999, at
which time it announced the establishment of its own Internet portal at the
website www.bills.com. The Company is amortizing the amount over a ten year
period. The operations of the Internet portal have been organized under
"bills.com, Inc.", a Delaware corporation that operates as a wholly owned
subsidiary of the Company. The portal is currently available for consumer use
and interaction. The Company will continue to develop the website and to enhance
its design. bills.com(TM) expects to earn revenues through Internet banner
advertising on its website, as well as through sponsorship agreements with other
Internet portals. The Company believes that companies will purchase space on its
bills.com(TM) website in order to take advantage of the potentially large number
of consumers who will use the site as an Internet bill presentment and payment
service. The Company currently has plans to invest only limited funds to support
and market the portal; however, the Company could at any time decide to devote
additional financial resources to the portal.
-16-
<PAGE>
The Company has engaged Pennsylvania Merchant Group ("PMG") to provide strategic
and financial advisory services, including analysis of markets, products,
positioning, financial models, organizations and staffing, potential strategic
alliances, capital requirements, and funding options. In exchange for these
advisory services, the Company issued a warrant to PMG to purchase 111,085
shares of common stock of the Company at an exercise price of $6.75 per share
(which represents the average closing price of the Company's stock over the
twenty (20) day period preceding May 18, 1999). The warrant is immediately
exercisable and expires in five (5) years. This warrant was issued in accordance
with exemption under Section 4(2) of the Securities Act of 1933, as amended,
because the transaction is by an issuer not involving a public offering. Using
the fair value based method of accounting, the company recorded $356,583 of
expense and a corresponding credit to paid-in-capital related to the issuance of
this warrant. This expense is included in the general and administrative line
item in the Consolidated Statements of Operations for the nine months ended
September 30, 1999.
The Company secured long-term financing for portions of its computer, software
and telephone systems, and furniture during the second and third quarter of
1999. It entered into four three-year capital leases for approximately $208,292,
which have an interest rate of 10.8%. The term of the leases include a
requirement of security totaling 50% of the total lease for which the Company
purchased a certificate of deposit for $105,000. The security deposit of
$105,000 is included in Other Assets on the Company's Consolidated Balance Sheet
as of September 30, 1999. Additionally, the Company entered into a two-year
capital lease totaling $487,131 carrying an interest rate of approximately 17%.
The terms of the lease include a requirement of an initial security in the form
of a certificate of deposit equal to 70% of the total dollars financed, 25% of
which will be released to the Company on each six month anniversary of the lease
inception date. A security deposit of $170,496 is included in Other Current
Assets and a deposit of $170,496 is included in Other Assets on the Company's
Consolidated Balance Sheet as of September 30, 1999.
The Company's headquarters are located in San Antonio, Texas. The Company
entered into a two-year lease for its headquarters beginning in May 1999 for
8,000 square feet which was modified to include an additional 3,000 square feet
beginning in August 1999. The Company anticipates acquiring additional adjacent
leased space to meet the requirements of its expanding clerical, administrative,
and sales activities. Additionally, the Company leases sales offices in
Hollidaysburg, Pennsylvania; Dallas, Texas, Phoenix, Arizona; and Concord,
Massachusetts and plans to open additional sales offices throughout the United
States. The Company also anticipates increasing its lease commitments with the
establishment of a customer care center within the next 12 months.
The Company intends to develop, build, and staff a customer care center, which
integrates Internet and traditional telephone capabilities to further support
it, eCare product sales and service. While development costs for this center are
difficult to project, and may change as more extensive plans are developed later
this year, the Company estimates expenditures ranging from $3,000,000 to
$4,000,000 for the development and construction of its customer care center. The
Company plans to meet
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<PAGE>
its capital requirements primarily through use of cash on hand, additional
issuance of equity securities, capital lease financing, and in the longer term,
revenue from services.
The Company's sales and marketing efforts, their associated costs, and precise
timing are under development, and thus extremely difficult to project. Until
sufficient funds are available, the Company will be unable to pursue fully its
sales and marketing strategies. In order to fund these efforts, the cost of
which will likely exceed the amount of $3,000,000 over the next twelve (12)
month period, the Company currently plans to issue additional equity securities,
undertake capital lease financing arrangements, and in the longer term expend
revenue from operations.
YEAR 2000
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates to avoid system failures
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced in order to comply with
such "Year 2000" requirements.
As of November 15, 1999, the Company has completed the process of determining
whether or not its products, its internal systems, computers and software, and
the products and systems of its critical vendors and suppliers are Year 2000
compliant. The cost associated with this review has been minimal, primarily
because the Company has utilized internal personnel to complete the review, and
because the Company's systems are relatively new. To date, this evaluation
process has resulted in the following:
IT Systems. The Company has conducted a preliminary survey of its IT
hardware and software and believes that all such hardware and
software is Year 2000 compliant.
Non-IT Systems and Infrastructure. Machinery and equipment used in
operations has been inventoried and assessed for Year 2000
compliance. The Company believes all such items are Year 2000
compliant.
Vendors. The Company has completed the process of ascertaining
whether or not its vendors and suppliers are Year 2000 compliant.
Again, the Company believes that all of its critical vendors are
Year 2000 compliant.
Given these results of its Year 2000 review, in a reasonable worst case
scenario, the Company might experience some disruptions in certain of its
peripheral operating systems or with certain non-critical vendors. The Company
believes that sufficient redundancy exists in its systems and vendor
relationships to minimize any substantial detrimental effects on the Company's
operations and financial position.
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<PAGE>
Although the Company believes that its Year 2000 review has identified all
material Year 2000 issues, there can be no absolute assurance that the Company
identified and resolved all such issues. If the Company discovers Year 2000
problems in the future, it may not be able to develop, implement, or test
remediation or contingency plans in a timely or cost-effective manner.
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
billserv.com
Date: November 19, 1999 BY /s/ LOUIS HOCH
President
Date: November 19, 1999 BY /s/ LORI TURNER
Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM BILLSERV FORM 10-Q FOR THE QUARTER ENDED 03/31/99 AND 6/30/99 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,498,703
<SECURITIES> 0
<RECEIVABLES> 55,911
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,907,064
<PP&E> 1,260,508
<DEPRECIATION> 161,289
<TOTAL-ASSETS> 3,406,243
<CURRENT-LIABILITIES> 1,556,681
<BONDS> 333,859
0
0
<COMMON> 10,976
<OTHER-SE> 1,504,727
<TOTAL-LIABILITY-AND-EQUITY> 3,406,243
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> (3,858,148)
<OTHER-EXPENSES> 3,327
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (136,528)
<INCOME-PRETAX> (3,991,349)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,991,349)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,991,349)
<EPS-BASIC> (0.38)
<EPS-DILUTED> 0
</TABLE>
