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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 74-2418590
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
14607 SAN PEDRO AVENUE, SUITE 100,
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 MAY 10, 2000, 16,428,101 SHARES OF COMMON STOCK, $.001 PAR VALUE, OF THE
REGISTRANT WERE OUTSTANDING.
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<PAGE>
billserv.com, Inc.
FORM 10-Q
For the Quarter Ended March 31, 2000
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 ......................... 7
Notes to Consolidated Financial Statements .................... 9
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
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Assets:
Cash and cash equivalents ....................................... $ 9,036,538 $ 7,069,423
Accounts receivable ............................................. 71,274 10,227
Related party accounts receivable ............................... 13,083 30,222
Prepaid expenses ................................................ 315,471 166,820
Deposits ........................................................ 20,619 25,420
Other current assets ............................................ 190,630 188,536
------------ ------------
9,647,615 7,490,648
Property and equipment, net of accumulated
depreciation and amortization of $402,443 and $258,055
for March 31, 2000 and December 31, 1999, respectively ....... 2,124,470 1,513,510
Other assets .................................................... 819,305 394,010
------------ ------------
Total assets .................................................... $ 12,591,390 $ 9,398,168
============ ============
Liabilities & shareholders' equity (deficit):
Current liabilities:
Accounts payable .............................................. $ 919,481 $ 589,480
Accrued expenses .............................................. 254,755 296,452
Current portion of obligations under capital leases ........... 321,634 309,313
Current portion of deferred revenue ........................... 18,506 --
Other current liabilities ..................................... 70,323 2,186
------------ ------------
Total current liabilities ....................................... 1,584,699 1,197,431
Obligations under capital leases, less current portion ........ 169,212 254,394
Deferred revenue, less current portion ........................ 102,889 5,000
Equity subject to potential redemption ........................ 5,300 5,300
Shareholders' equity (deficit):
Common stock, $.001 par value, 200,000,000 shares
authorized; 14,301,140 issued and outstanding
at March 31, 2000, 13,113,065 issued and outstanding
at December 31, 1999 ....................................... 14,301 13,113
Paid-in capital ............................................... 18,558,856 13,695,584
Deficit accumulated during the development stage .............. (7,843,867) (5,772,654)
------------ ------------
Total shareholders' equity (deficit) ............................ 10,729,290 7,936,043
------------ ------------
Total liabilities and shareholders' equity (deficit) ............ $ 12,591,390 $ 9,393,168
============ ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONT.)
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 30,
THREE MONTHS THREE MONTHS 1998
ENDED ENDED (INCEPTION)
MARCH 31, MARCH 31, TO MARCH 31,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Revenues ............................................................ $ 6,426 $ -- $ 61,864
Cost of sales ....................................................... 470,691 -- 598,036
------------ ------------ ------------
Gross margin ........................................................ (464,265) -- (536,172)
Operating expenses
Research and development .......................................... 124,912 172,191 1,031,444
Selling expenses .................................................. 775,364 287,172 2,614,277
General and administrative ........................................ 570,205 331,507 3,115,008
Depreciation & amortization ....................................... 150,671 12,694 422,138
------------ ------------ ------------
Total operating expenses ............................................ 1,621,152 803,564 7,182,867
------------ ------------ ------------
Operating loss ...................................................... (2,085,417) (803,564) (7,719,039)
Other income (expense):
Interest income ................................................... 85,755 2,704 174,416
Interest expense .................................................. (20,478) -- (222,844)
Other income (expense) ............................................ 1,200 -- (14,191)
------------ ------------ ------------
Total other income (expense) ........................................ 66,477 2,704 (62,619)
------------ ------------ ------------
Loss before income taxes and cumulative effect of accounting change . (2,018,940) (800,860) (7,781,658)
Income taxes ........................................................ -- -- --
------------ ------------ ------------
Net loss before cumulative effect of accounting change .............. (2,018,940) (800,860) (7,781,658)
Cumulative effect of a change in accounting principle, net of taxes . (52,273) -- (52,273)
------------ ------------ ------------
Net loss ............................................................ $ (2,071,213) $ (800,860) $ (7,833,931)
============ ============ ============
Net loss before cumulative effect of accounting change - basic and
diluted ............................................................. $ (0.15) $ (0.08) $ (0.71)
Cumulative effect of accounting change - basic and diluted .......... $ (0.01) $ -- $ (0.01)
------------ ------------ ------------
Net loss per common share - basic and diluted ....................... $ (0.16) $ (0.08) $ (0.72)
Weighted average common shares ...................................... ------------ ------------ ------------
outstanding - basic and diluted ................................... 13,230,142 10,030,000 11,013,663
============ ============ ============
</TABLE>
4
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONT.)
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (DEFICIT)
<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
Issuance of Common Stock,
October 15, 1999 ....................... 1,230,791 1,231 3,665,608 -- 3,666,839
Issuance of Common Stock,
October 22, 1999 ....................... 20,000 20 59,565 -- 59,585
Issuance of Common Stock,
October 22, 1999, in
exchange for debt ...................... 153,846 154 490,057 -- 490,211
Issuance of Common Stock,
December 16, 1999 ...................... 270,000 270 1,361,019 -- 1,361,289
Issuance of Common Stock,
December 17, 1999 ...................... 285,000 285 1,436,629 -- 1,436,914
Issuance of Common Stock,
December 21, 1999 ...................... 127,000 127 640,184 -- 640,311
Issuance of Common Stock,
December 22, 1999 ...................... 50,000 50 252,040 -- 252,090
Net loss for the
twelve-months ending
December 31, 1999 ...................... -- -- -- (5,472,948) (5,472,948)
----------------------------------------------------------------------------------------
Balance at December 31, 1999 ........... 13,113,065 $ 13,113 $ 13,695,584 $ (5,772,654) $ 7,936,043
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Stock Option Exercise .................. 900 1 2,530 -- 2,531
Equity issuance costs .................. -- -- (8,465) -- (8,465)
Exercise of Warrants,
January 20, 2000 ....................... 15,400 15 57,735 -- 57,750
Exercise of Warrants,
February 16, 2000 ...................... 126,969 127 476,007 -- 476,134
Exercise of Warrants,
February 24, 2000 ...................... 52,426 53 232,984 -- 233,037
Exercise of Warrants,
March 7, 2000 .......................... 22,515 23 73,147 -- 73,170
Exercise of Warrants,
March 9, 2000 .......................... 11,032 11 75,648 -- 75,659
Exercise of Warrants,
March 10, 2000 ......................... 145,054 145 895,911 -- 896,056
Exercise of Warrants,
March 20, 2000 ......................... 2,318 2 15,607 -- 15,609
Exercise of Warrants,
March 28, 2000.......................... 138,385 138 518,806 -- 518,944
Exercise of Warrants,
March 30, 2000 ......................... 673,076 673 2,523,362 -- 2,524,035
Net loss for the
three-months ending
March 31, 2000 ......................... -- -- -- (2,071,213) (2,071,213)
----------------------------------------------------------------------------------------
Balance at March 31, 2000 .............. 14,301,140 $ 14,301 $18,558,856 $ (7,843,867) $ 10,729,290
========================================================================================
See notes to consolidated financial statements
</TABLE>
6
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONT.)
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 30, 1998
THREE MONTHS THREE MONTHS (INCEPTION)
ENDED ENDED TO
MARCH 31, MARCH 31, MARCH 31,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) .............................................................. $ (2,071,213) $ (800,860) $ (7,833,931)
Adjustments to reconcile net income (loss) to net
cash used in operating activities-
Issuance of common stock warrants ....................................... -- -- 491,428
Depreciation and amortization ........................................... 150,671 12,694 422,138
Cumulative effect of change in accounting principle ..................... 52,273 -- 52,273
Changes in current assets and current liabilities-
(Increase) decrease in accounts receivable .............................. (61,047) -- (71,274)
(Increase) decrease in related party receivables 17,139 24,000 (13,083)
(Increase) decrease in prepaid expenses and other current assets ........ (15,654) (59,256) (396,430)
Increase (decrease) in accounts payable and accrued liabilities ......... 288,304 570,220 1,324,236
Increase (decrease) in accounts payable related party ................... -- -- (150,000)
Increase (decrease) in deferred revenue ................................. 64,122 -- 69,122
Increase (decrease) in other current liabilities ........................ 68,137 -- 70,323
------------ ------------ ------------
Net cash used in operating activities ................................... (1,507,268) (253,202) (6,035,198)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ...................................... (755,348) (223,024) (1,827,916)
Purchase of long term investments ....................................... -- -- (275,496)
Purchase of intangible assets ........................................... -- -- (75,000)
Capital lease set up fee ................................................ -- -- (11,884)
Deposits - long term .................................................... (561,868) -- (606,909)
Proceeds of acquisition/merger .......................................... -- -- 5,394
------------ ------------ ------------
Net cash used in investing activities ................................... (1,317,216) (223,024) (2,791,811)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance from shareholders ............................................... -- 500,000 2,000,000
Repayment to shareholders ............................................... -- -- (2,000,000)
Proceeds from notes payable ............................................. -- -- 1,000,000
Principal payments for notes payable .................................... -- -- (500,000)
Exercise of warrants .................................................... 4,864,460 -- 4,864,460
Issuance of common stock ................................................ -- -- 12,707,239
Principal payments for capital lease obligations ........................ (72,861) -- (208,152)
------------ ------------ ------------
Net cash used by financing activities ................................... 4,791,599 500,000 17,863,547
------------ ------------ ------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................... 1,967,115 23,774 9,036,538
CASH AND CASH EQUIVALENTS, beginning of year .............................. 7,069,423 -- --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period .................................. $ 9,036,538 $ 23,774 $ 9,036,538
============ ============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES
Purchases of equipment under capital leases ............................. $ -- $ -- $ 563,707
============ ============ ============
Conversion of debt to equity ............................................ $ -- $ -- $ 500,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements
8
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
1. 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 continue to incur losses
during its second year of operations and may incur losses in subsequent years as
development efforts continue. 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 SEC rules and
regulations. The results for the interim periods are not necessarily indicative
of results for the full year. Certain prior period amounts have been
reclassified for comparative purposes. It is recommended that these interim
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes thereto for the year ended December 31, 1999
included in the Company's annual report on Form 10-K filed with the SEC on
February 11, 2000.
2. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In December 1999, the SEC issued Staff Accounting Bulletin No. (SAB) 101,
"Revenue Recognition in Financial Statements", which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements.
The implementation of SAB 101 requires the Company's revenue generated from
up-front implementation fees be recognized over the term of the related service
contract. Prior to December 31, 1999, the Company recognized revenue generated
from such up-front fees upon completion of an implementation project. The
Company adopted SAB 101 as of January 1, 2000, and accordingly, changed its
revenue recognition policy on up-front design and implementation fees. The
cumulative effect of this accounting change totals $52,273. This amount has been
recognized as a non-cash after tax charge during the first quarter of 2000. The
cumulative effect has been recorded as deferred revenue and will be recognized
as revenue over the remaining contractual service periods.
9
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
3. PROPERTY AND EQUIPMENT, NET
The following is a summary of our property and equipment at March 31, 2000 and
December 31, 1999.
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
Furniture and fixtures ................. $ 280,301 $ 216,824
Equipment .............................. 1,227,697 954,123
Software ............................... 953,016 545,382
Leasehold improvements ................. 65,899 55,236
----------- -----------
2,526,913 1,771,565
Less: accumulated depreciation
and amortization ...................... (402,443) (258,055)
----------- -----------
Total - property and equipment, net .... $ 2,124,470 $ 1,513,510
=========== ===========
4. OPERATING LEASES
During March 2000 the Company entered into a five-year operating lease for its
future corporate headquarters. The lease required a deposit of approximately
$516,000. Additionally the Company leases other office space and equipment under
noncancelable operating leases. Future minimum lease payments required under
these leases consist of the following as of March 31, 2000:
Year ending December 31,
2000 $ 488,245
2001 852,481
2002 807,998
2003 807,998
2004 805,404
Thereafter 468,044
----------
Total minimum lease payments $4,230,170
==========
10
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
5. STOCK WARRANTS
In connection with the private placement offering in October 1999, we issued
warrants to 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. We
have the right to call the exercise of the warrants at any time after March 14,
2000 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, the holders of
the warrants must exercise the warrants within thirty days, after which time we
may redeem each warrant for $0.05. As of March 31, 2000, warrants covering
1,000,245 shares of common stock had been exercised, resulting in net proceeds
totaling $3,750,919. The exercise of the remainder of the warrants would result
in net proceeds of $1,516,470.
As part of their compensation for acting as placement agent for the Offering, we
issued warrants to Pennsylvania Merchant Group ("PMG") for the purchase of
36,924, 600, 18,900, 19,950, 8,890 and 3,500 shares of common stock. The
warrants are immediately exercisable, carry a five year term, exercise prices of
$3.25, $3.25, $8.00, $7.44, $7.41 and $7.31, respectively, piggyback
registration rights and cashless exercise provision. As of March 31, 2000,
warrants to purchase 75,844 shares of common stock had been exercised, with net
proceeds to the Company totaling $418,529. The exercise of the remainder of the
warrants would result in net proceeds of $94,512.
At March 31, 1999, warrants outstanding were as follows:
WARRANT TO PURCHASE SHARES OF EXERCISE AGGREGATE EXPIRATION DATE
COMMON STOCK PRICE EXERCISE PRICE
- --------------------------------------------------------------------------------
Common stock ...... 41,237 $ 6.06 $ 250,000 08/05/2004
Common stock ...... 250 $ 3.25 $ 813 10/14/2004
Common stock ...... 230,546 $ 3.75 $ 864,548 10/14/2002
Common stock ...... 20,000 $ 3.75 $ 75,000 10/25/2002
Common stock ...... 153,846 $ 3.75 $ 576,923 10/14/2002
Common stock ...... 240 $ 8.00 $ 2,240 12/15/2004
Common stock ...... 8,890 $ 7.41 $ 65,875 12/20/2004
Common stock ...... 3,500 $ 7.31 $ 25,585 12/22/2004
------- -----------
458,549 $ 1,860,982
======= ===========
11
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
5. STOCK WARRANTS (CONTINUED)
Warrants exercised through March 31, 2000, were as follows:
WARRANT TO PURCHASE SHARES OF EXERCISE AGGREGATE EXPIRATION DATE
COMMON STOCK PRICE EXERCISE PRICE
- --------------------------------------------------------------------------------
Common stock ...... 111,085 $ 6.31 $ 700,946 05/17/2004
Common stock ...... 36,674 $ 3.25 $ 119,190 10/14/2004
Common stock ...... 1,000,245 $ 3.75 $ 3,750,919 10/14/2002
Common stock ...... 600 $ 3.25 $ 1,950 10/25/2004
Common stock ...... 18,620 $ 8.00 $ 148,960 12/15/2004
Common stock ...... 19,950 $ 7.44 $ 148,428 12/16/2004
--------- -----------
1,187,174 $ 4,870,394
========= ===========
Subsequent to March 31, 2000, an additional 326,961 warrants were exercised,
resulting in net proceeds of $1,226,103.
6. 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 common stock. This transaction 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. Form D was filed with the SEC to timely report
the transaction, and an exemption under Rule 504 was claimed. The SEC has
challenged the validity of this claimed exemption.
We dispute 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 us 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. We dispute any such
liability.
12
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
6. EQUITY SUBJECT TO POTENTIAL REDEMPTION (CONTINUED)
Additionally, while we also dispute 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 us to repurchase their
shares, for the amount originally paid, plus interest. We dispute any such
liability.
Based upon the best information available at this time, we have calculated a
range of possible, but disputed, exposure that exists in light of the disputed
civil liabilities described above. Accordingly, in the event these disputed
civil liabilities were successfully asserted, we could be liable to the 15 new
shareholders, and to any shareholder that immediately purchased shares 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 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.
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 expectation,
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.
OVERVIEW
We are a development stage enterprise with a 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 stage of development, 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 the management of 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; and attract, retain and motivate
qualified personnel. 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 losses, and as of March 31, 2000, we have an
accumulated deficit of $7,843,867. We believe that our success will depend in
large part on our ability to (a) secure additional financing to meet capital and
operating requirements, (b) capture a significant number of customers as our
customer base, (c) drive the consumer adoption rate of Electronic Bill
Presentment and Payment ("EBPP"), and (d) meet changing customer requirements
and technological changes in an emerging market. Accordingly, we intend to
invest heavily in product development, technology and operating infrastructure
development as well as marketing and promotion. Because our services will
require a significant amount of investment in infrastructure and a substantial
level of fixed operating expenses, achieving profitability depends on our
ability to generate a high volume of revenues. As a result of our limited
operating history 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
14
<PAGE>
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 our
ability to fulfill a customer's demands are difficult to forecast. 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 an adverse effect on our
business, prospects, financial condition and results of operations. Further, we
may from time to time make certain pricing, service, marketing or acquisition
decisions that could have a material adverse effect on our business, prospects,
financial condition and results of operations.
In January 2000, we adopted Staff Accounting Bulletin (SAB) 101 and revised our
revenue policies so that in periods subsequent to December 31, 1999,
implementation fee revenue will be deferred over the life of the respective
contracts. We anticipate that transaction fees will become our major source of
revenue in future periods. However, the volume of transactions and amount of
revenue we will earn in future periods is dependent upon the rate at which
consumers utilize EBPP. This rate is commonly called the "consumer adoption
rate."
RESULTS OF OPERATION - FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999
Our activities for the quarter ended March 31, 2000, resulted in a net loss of
$2,071,213, or $.16 per share, as compared to $800,860, or $.08 per share, for
the quarter ended March 31, 1999. We earned revenues totaling $6,426 during the
first quarter of 2000. During the first quarter of 1999, we were not yet in a
production phase and therefore did not generate any revenues.
Prior to December 31, 1999, we recognized revenue generated from up-front fees
upon completion of an implementation project. In December 1999, the SEC issued
SAB 101, which requires recognition of revenue generated from up-front
implementation fees over the term of the related service contract. We
voluntarily adopted SAB 101 on January 1, 2000, and accordingly, revised our
implementation fee revenue recognition policy. The cumulative effect of this
accounting change totals $52,272. This amount has been recognized as a non-cash
after tax charge during the first quarter of 2000. The cumulative effect has
been recorded as deferred revenue and will be recognized as revenue over the
remaining contractual service periods. We recognized the applicable portion of
this deferred revenue during the first quarter of 2000.
Although revenue from transaction fees increased as compared to the fourth
quarter of 1999, total transaction fee revenue remains an immaterial amount.
Consumer adoption rates remained low, less than a hundredth of a percent, during
the first quarter of 2000. Each of our customers who have completed the
implementation period have not yet begun consumer education and marketing
programs, and thus, we would not expect adoption rates to be significant at this
point. Transaction fees will become a significant dollar amount only when
consumer adoption rates approach double digits. While we cannot control these
adoption rates, we are working with our customers to promote EBPP to consumers.
Cost of sales for the first quarter in 2000 totaled $470,691. We were not in
live production for customers during the first quarter of 1999, and accordingly,
we incurred no cost of sales during that period. Cost of sales includes the cost
of technical and support personnel who design specific EBPP components for
customers, process data and perform customer care. Cost of sales also
15
<PAGE>
includes fees paid to third parties or payment processors for the presentation
of electronic bills on web sites owned by those parties and payment processors.
Research and development expenses totaled $124,912 and $172,191 for the quarters
ending March 31, 2000 and 1999, respectively. During the first quarter of 1999,
our bill presentation systems were under development and accordingly, all
expenses related to our operating systems during that period are classified as
research and development. The 28% decrease in expense for the March 2000 quarter
reflects the reallocation of resources to production efforts, which were
formerly devoted to research and development. All research and development costs
are expensed as incurred. These costs include the cost of personnel devoted to
development of new and enhanced solutions for bill presentment, payment,
customer care, and Internet direct marketing.
Selling expenses increased 170%, totaling $775,364 for the quarter ending March
31, 2000, as compared to $287,172 for the 1999 quarter. The increase in expenses
is a result of the full-scale efforts of our marketing and sales teams that were
being developed during the 1999 quarter. As of March 31, 2000, we employed
nineteen sales and marketing personnel as compared to three such personnel at
March 31, 1999. Selling expenses include the cost of these personnel,
commissions, expenses for trade shows, advertising in trade publications, sales
collateral, and other selling and marketing expenses. We will continue to expand
our marketing and sales efforts, increasing the size of our sales force and
broadening our reach with even more marketing activities.
General and administrative expenses increased 72%, totaling $570,205 for the
quarter ending March 31, 2000, as compared to $331,507 for the 1999 quarter. The
increase in expenses is principally due to the increased compensation costs and
additional general and administrative personnel, as well as increased travel,
insurance and professional fee expenses.
Depreciation and amortization increased to $150,671 for the quarter ending March
31, 2000, as compared to $12,694 for the 1999 quarter. The increase is due to
the growth in our infrastructure and operating systems. We have purchased over
$2.0 million of property and equipment from March 31, 1999 to March 31, 2000.
Net interest income increased to $65,277 for the quarter ending March 31, 2000,
as compared to $2,704 for the 1999 quarter from interest earned from the
investment of the proceeds from our equity offerings in 1999 and the exercise of
warrants during the first quarter of 2000. We incurred interest expense on
capital leases during the 2000 quarter. We entered into these leases subsequent
to March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
From inception to date, we have funded our operations through the issuance of
common stock, warrants to purchase shares of common stock and short-term bridge
loans. We issued 946,428 shares of common stock resulting in net proceeds of
$5.3 million in cash on June 11, 1999, in a private placement, pursuant to
Regulation S. Advances made to us prior to the private placement totaling $2.0
million were repaid from the proceeds of the private placement. Additionally,
$1.0 million due to a related party for investor and public relations services
was paid from the proceeds and $200,000 was reserved for future payments due
under a consulting agreement.
16
<PAGE>
In October 1999 and December 1999, we issued 1,404,637 and 732,000 shares of
common stock, respectively, to accredited investors, in private placements. The
shares were issued at $3.25 and $5.50 per share, respectively, which represented
a discount upon the average reported closing sale price of our common stock for
the ten (10) business days immediately preceding the closing date. Aggregate net
proceeds totaled approximately $7,907,243.
In accordance with the terms of the October 1999 private placement, we issued
three-year warrants to twenty-one investors to purchase 1,404,637 shares of
common stock at $3.75 per share, or one warrant for each share issued. As of
March 31, 2000, warrants covering 1,000,245 shares of common stock had been
exercised, resulting in net proceeds totaling $3,750,919. The exercise of the
remainder of the warrants would result in net proceeds of $1,516,470. We have
the 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 our common stock
exceeds $12.00 for a period of twenty (20) consecutive trading days. Upon such
call notice, the holders of the warrants must exercise the warrants within
thirty days, after which time we may redeem each warrant for $0.05.
As part of their compensation for acting as placement agent for the October and
December 1999 private placements, we issued warrants to Pennsylvania Merchant
Group for the purchase of 36,924, 600, 18,900, 19,950, 8,890 and 3,500 shares of
common stock. The warrants are immediately exercisable and carry a five-year
term, exercise prices of $3.25, $3.25, $8.00, $7.44, $7.41 and $7.31,
respectively, piggyback registration rights and a cashless exercise provision.
As of March 31, 2000, warrants to purchase 75,844 shares of common stock had
been exercised, with net proceeds to the Company totaling $418,529. The exercise
of the remainder of the warrants would result in net proceeds of $94,512.
We issued a short-term note payable to an accredited investor for $1.0 million
in August 1999. The note was issued as bridge financing until such time that we
could obtain additional equity funding. One-half of the short-term note payable,
or $500,000, was converted into common stock pursuant to the October 1999
private placement. The remaining $500,000 plus interest was repaid on October
18, 1999.
At March 31, 2000, we had net working capital of approximately $8,062,916.
During 1999 we made significant expenditures and commitments for capital
improvements consistent with anticipated growth in operations, infrastructure
and personnel. We anticipate we will make capital expenditures of approximately
$3 million in the next twelve months. We will finance these expenditures through
the use of equipment leasing arrangements, borrowings or equity financing.
We purchased the domain name bills.com for $75,000 in April 1999, at which time
we announced the establishment of our own Internet portal at the web site
www.bills.com. We are amortizing the purchase price over a five-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. The web site
acts as a portal and is currently available for consumer use and interaction. We
will continue to develop the web site and to enhance its design. We expect that
bills.com will generate revenues through Internet banner advertising on its web
site, as well as through sponsorship agreements with other Internet portals. We
believe that companies will purchase space on the bills.com web site in order to
take advantage of the potentially large
17
<PAGE>
number of consumers who will use the site as an Internet bill presentment and
payment service. We currently invest only limited funds to support and market
the portal; however, we could at any time decide to devote additional financial
resources to the portal.
We have engaged Pennsylvania Merchant Group to provide certain strategic and
financial advisory services. In exchange for these advisory services, we issued
a warrant to purchase 111,085 shares of common stock at an exercise price of
$6.75 per share (which represents the average closing price of our stock over
the twenty (20)-day period preceding May 18, 1999). In accordance with the
warrant's anti-dilutive provision, the exercise price was adjusted to $6.31
after the issuance of shares in October and December. The warrant was exercised
in March 2000, resulting in net proceeds totaling $700,946. Using the fair-value
based method of accounting, we 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
Statement of Operations for the year ended December 31, 1999.
As of March 31, 2000, our headquarters were housed in approximately 14,000
square feet of leased office space in San Antonio, Texas. These headquarters are
no longer large enough to accommodate our anticipated growth. We entered into a
five-year lease for approximately 43,000 square feet in March 2000. We
anticipate the new headquarters will be ready for occupancy during the summer of
2000. We believe the new facility will provide adequate space to meet the needs
of our expanding operating, administrative and sales activities for at least the
next two years. The lease on the 14,000 square feet expires April 30, 2001. We
will utilize the facility for redundancy purposes until we arrange a sublease or
the lease expires. Additionally, we lease sales offices in Hollidaysburg,
Pennsylvania; Dallas, Texas; Phoenix, Arizona; Denver, Colorado; and Los
Angeles, California and plan to open additional sales offices throughout the
United States. Total rent expenses in 1999 were $130,000, and in 2000, we expect
to pay aggregate rent of approximately $600,000.
As of March 31, 2000, warrants to purchase 1,187,174 shares of common stock had
been exercised, as discussed in the previous paragraphs, resulting in total net
proceeds of $4,870,394. Of these warrants, 111,085 shares were related to the
advisory warrant in favor of Pennsylvania Merchant Group, 75,844 shares were
related to the placement agent warrants, and 1,000,246 shares were related to
investor warrants. Subsequent to March 31, 2000, additional warrants to purchase
326,921 shares of common stock were exercised, resulting in net proceeds of
$1,226,103.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. In July 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the effective
date of SFAS No. 133 until fiscal years beginning after June 15, 2000. The
Company does not use derivative instruments; therefore the
18
<PAGE>
adoption of this statement will not have any effect on the Company's results of
operations or its financial position.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is no litigation currently pending. Except as described in Footnote 6, we
are not aware of any disputes that may lead to litigation.
19
<PAGE>
SIGNATURES
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.com, Inc.
Date: May 15, 2000 BY /s/ LOUIS HOCH
President
Date: May 15, 2000 BY /s/ LORI TURNER
Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE REGISTRANT COMPANY CONSOLIDATED BALANCE SHEET (UNAUDITED FOR MARCH 31,
2000 AND CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED
MARCH 31, 1999. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 9,036,538
<SECURITIES> 0
<RECEIVABLES> 84,357
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 190,630
<PP&E> 2,526,913
<DEPRECIATION> 402,443
<TOTAL-ASSETS> 12,591,390
<CURRENT-LIABILITIES> 1,584,699
<BONDS> 0
0
0
<COMMON> 14,301
<OTHER-SE> 18,558,856
<TOTAL-LIABILITY-AND-EQUITY> 12,591,390
<SALES> 6,426
<TOTAL-REVENUES> 6,426
<CGS> 470,691
<TOTAL-COSTS> 2,556,108
<OTHER-EXPENSES> 19,278
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,478
<INCOME-PRETAX> (2,018,940)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,018,940)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (52,273)
<NET-INCOME> (2,071,213)
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
