UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 OF (I.R.S. EMPLOYER
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 AUGUST 1, 2000, 15,517,937 SHARES OF COMMON STOCK, $.001 PAR VALUE, OF THE
REGISTRANT WERE OUTSTANDING.
<PAGE>
billserv.com, Inc.
FORM 10-Q
For the Quarter Ended June 30, 2000
INDEX
Part I - Financial Information PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in Shareholder's Equity 5
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Part II - Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE>
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Assets:
Cash and cash equivalents .................. $ 8,598,074 $ 7,069,423
Investments ................................ 5,862,615 --
Accounts receivable ........................ 341,998 10,227
Related party accounts receivable .......... 59,318 30,222
Prepaid expenses ........................... 304,041 166,820
Other current assets ....................... 297,884 213,956
------------- -----------------
15,463,930 7,490,648
Property and equipment, net of
accumulated depreciation and
amortization of $588,316 and $258,055
for June 30, 2000 and December 31,
1999, respectively ....................... 2,990,130 1,513,510
Intangible assets, net ..................... 143,500 67,500
Long-term investments ...................... 1,997,094 --
Other assets ............................... 871,103 326,510
------------- -----------------
Total assets ................................. $ 21,465,757 $ 9,398,168
============= =================
Liabilities & shareholders' equity:
Current liabilities:
Accounts payable ........................ $ 947,670 $ 589,480
Current portion of obligations under
capital leases ........................ 168,144 309,313
Current portion of deferred revenue ..... 29,780 --
Accrued expenses and other current
liabilities ........................... 954,249 298,638
------------- -----------------
Total current liabilities .................... 2,099,843 1,197,431
Obligations under capital leases, less
current portion ........................... 242,253 254,394
Deferred revenue, less current portion ..... 297,794 5,000
Equity subject to potential redemption ..... 5,300 5,300
Shareholders' equity:
Common stock, $.001 par value,
200,000,000 shares authorized;
15,507,722 issued and outstanding at
June 30, 2000,
13,113,065 issued and outstanding at
December 31, 1999 ......................... 15,508 13,113
Additional paid-in capital ................. 36,838,659 13,695,584
Accumulated other comprehensive loss ....... (5,050) --
Deficit accumulated during the
development stage ......................... (18,028,550) (5,772,654)
------------- -----------------
Total shareholders' equity ................... 18,820,567 7,936,043
------------- -----------------
Total liabilities and shareholders' equity ... $ 21,465,757 $ 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>
THREE MONTHS ENDED SIX MONTHS ENDED JULY 30, 1998
------------------------------ ------------------------------ (INCEPTION) TO
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues ....................................... $ 45,208 $ -- $ 51,634 $ -- $ 107,072
Cost of sales .................................. 792,911 -- 1,263,602 -- 1,390,947
------------- ------------- ------------- ------------- -------------
Gross margin ................................... (747,703) -- (1,211,968) -- (1,283,875)
Operating expenses:
Research and development .................... 153,314 167,351 278,226 339,542 1,184,758
Selling and marketing ....................... 853,691 454,765 1,629,055 741,937 3,467,968
General and administrative .................. 836,480 605,835 1,406,685 937,342 3,460,060
Depreciation and amortization ............... 191,456 68,570 342,127 81,264 613,594
Non-cash expense related to the issuance
of warrants .............................. 7,488,000 356,583 7,488,000 356,583 7,979,428
------------- ------------- ------------- ------------- -------------
Total operating expenses ....................... 9,522,941 1,653,104 11,144,093 2,456,668 16,705,808
------------- ------------- ------------- ------------- -------------
Operating loss ................................. (10,270,644) (1,653,104) (12,356,061) (2,456,668) (17,989,683)
Other income (expense), net:
Interest income ............................. 99,930 9,427 185,685 12,131 274,346
Interest expense ............................ (13,969) (8,154) (34,447) (8,154) (236,813)
Other income (expense) ...................... -- 1,200 1,200 1,200 (14,191)
------------- ------------- ------------- ------------- -------------
Total other income, net ........................ 85,961 2,473 152,438 5,177 23,342
------------- ------------- ------------- ------------- -------------
Loss before income taxes and cumulative effect
of accounting change ........................ (10,184,683) (1,650,631) (12,203,623) (2,451,491) (17,966,341)
Income taxes ................................... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Net loss before cumulative effect of
accounting change ........................... (10,184,683) (1,650,631) (12,203,623) (2,451,491) (17,966,341)
Cumulative effect of a change in accounting
principle, net of taxes ..................... -- -- (52,273) -- (52,273)
------------- ------------- ------------- ------------- -------------
Net loss ....................................... $ (10,184,683) $ (1,650,631) $ (12,255,896) $ (2,451,491) $ (18,018,614)
============= ============= ============= ============= =============
Net loss before cumulative effect of
accounting change - basic and diluted ....... $ (0.68) $ (0.16) $ (0.87) $ (0.24) $ (1.56)
Cumulative effect of accounting change - basic
and diluted ................................. -- -- -- -- --
Net loss per common share - basic and diluted .. $ (0.68) $ (0.16) $ (0.87) $ (0.24) $ (1.56)
Weighted average common shares
outstanding - basic and diluted ............. 14,874,517 10,227,606 14,052,329 10,129,349 11,514,810
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONT.)
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED UNREALIZED
COMMON STOCK ADDITIONAL DURING THE GAIN/LOSS TOTAL
-------------------- PAID-IN DEVELOPMENT ON SHAREHOLDERS'
SHARES AMOUNT CAPITAL STAGE INVESTMENTS EQUITY
---------- ------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at 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 Ended
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>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONT.)
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY, CON'T.
(UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE UNREALIZED TOTAL
-------------------- PAID-IN DEVELOPMENT GAIN/LOSS ON SHAREHOLDERS'
SHARES AMOUNT CAPITAL STAGE INVESTMENTS EQUITY
---------- ------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 ..................... 13,113,065 $13,113 $ 13,695,584 $ (5,772,654) $ -- $ 7,936,043
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
Exercise of Warrants, April 4, 2000 .............. 153,846 154 576,769 -- -- 576,923
Exercise of Warrants, April 4, 2000 .............. 26,923 27 100,934 -- -- 100,961
Exercise of Warrants, April 5, 2000 .............. 92,346 92 346,206 -- -- 346,298
Exercise of Warrants, April 25, 2000 ............. 53,846 54 201,868 -- -- 201,922
Issuance of Common Stock, Net of Issuance
Costs, June 2, 2000 ........................... 879,121 879 9,564,621 -- -- 9,565,500
Issuance of Common Stock Warrants,
June 2, 2000 ................................. -- -- 7,488,000 -- -- 7,488,000
Stock Option Exercise, June 6, 2000 .............. 500 1 1,405 -- -- 1,406
Unrealized Loss on Investments ................... -- -- -- -- (5,050) (5,050)
Net Loss for the Six-Months Ended June 30,
2000.......................................... -- -- -- (12,255,896) -- (12,255,896)
---------- ------- ------------ ------------ ------- ------------
Balance at June 30, 2000 ......................... 15,507,722 $15,508 $ 36,838,659 $(18,028,550) $(5,050) $ 18,820,567
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONT.)
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
SIX MONTHS ENDED JULY 30, 1998
------------------------------- (INCEPTION) TO
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss ................................................................... $ (12,255,896) $ (2,451,491) $ (18,018,614)
Adjustments to reconcile net loss to net cash used in
operating activities-
Issuance of common stock warrants ........................................ 7,488,000 356,583 7,979,428
Depreciation and amortization ............................................ 342,127 81,264 613,594
Cumulative effect of change in accounting principle ...................... 52,273 -- 52,273
Changes in current assets and current liabilities-
(Increase) decrease in accounts receivable ............................... (331,771) -- (341,998)
(Increase) decrease in related party receivables ......................... (29,096) 14,985 (59,318)
(Increase) decrease in prepaid expenses and
other current assets .................................................. 276,834 (355,245) (103,942)
Increase (decrease) in accounts payable,
accrued expenses and other current liabilities ........................ 579,957 189,896 1,623,075
Increase (decrease) in accounts payable related party .................... -- (150,000) (150,000)
Increase (decrease) in deferred revenue .................................. 270,301 -- 270,301
------------- ------------- -------------
Net cash used in operating activities ...................................... (3,607,271) (2,314,008) (8,135,201)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ......................................... (1,533,167) (410,811) (2,605,735)
Purchase of investments .................................................... (7,864,759) (256,535) (8,140,255)
Purchase of intangible assets .............................................. (83,500) (75,000) (158,500)
Capital lease set up fee ................................................... -- -- (11,884)
Deposits - long term ....................................................... (1,042,546) (37,143) (1,087,617)
Proceeds of acquisition/merger ............................................. -- -- 5,394
------------- ------------- -------------
Net cash used in investing activities ...................................... (10,524,002) (663,169) (11,998,597)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance from shareholders .................................................. -- 1,500,000 2,000,000
Repayment to shareholders .................................................. -- (2,000,000) (2,000,000)
Proceeds from notes payable ................................................ -- -- 1,000,000
Principal payments for notes payable ....................................... -- -- (500,000)
Exercise of warrants ....................................................... 6,096,498 -- 6,096,498
Issuance of common stock, net of issuance costs ............................ 9,994,816 5,300,000 22,702,055
Principal payments for capital lease obligations ........................... (431,390) (18,988) (566,681)
------------- ------------- -------------
Net cash provided by financing activities .................................. 15,659,924 4,781,012 28,731,872
------------- ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................................... 1,528,651 1,803,835 8,598,074
CASH AND CASH EQUIVALENTS, beginning of period ............................... 7,069,423 329,618 --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period ..................................... $ 8,598,074 $ 2,133,453 $ 8,598,074
============= ============= =============
NON-CASH INVESTING AND FINANCING ACTIVITIES
Purchases of equipment under capital leases .................................. $ 278,079 $ 623,375 $ 841,786
Conversion of debt to equity ................................................. $ -- $ -- $ 500,000
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The Company's principal activities since inception have been research and
development, raising capital, and organizational activities. However, more
recently, the Company has increased its activities in the areas of marketing and
promotion, as well as the implementation of current billers. Accordingly, the
Company remains 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, issuance of
equity securities, capital lease financing and in the longer term, revenue from
services.
The accompanying consolidated financial statements and notes thereto have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC") for Form 10-Q 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. INVESTMENTS
The Company's investments consist primarily of commercial paper, repurchase
agreements and investment grade corporate bonds. The Company classifies these
investments as "available-for-sale", "trading" or "held-to-maturity" securities
in accordance with Statement of Financial Accounting Standards ("SFAS") 115,
"Accounting for Certain Investments in Debt and Equity Securities." Currently,
the Company does not have any investments classified as "trading" securities.
Investments classified as "available-for-sale" securities are carried at fair
value, with unrealized holding gains and losses reported as a separate component
of shareholders' equity. "Held-to-maturity" securities are carried at amortized
cost.
8
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
3. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
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 totaled $52,273. This amount has
been recognized as a non-cash after tax charge during the first quarter of 2000
and has been recorded as deferred revenue to be recognized as revenue over the
remaining contractual service periods.
4. PROPERTY AND EQUIPMENT, NET
The following is a summary of the Company's property and equipment at June 30,
2000 and December 31, 1999.
June 30, December 31,
2000 1999
------------- -------------
Furniture and fixtures $ 207,324 $ 216,824
Equipment 470,518 954,123
Software 1,772,856 545,382
Leasehold improvements 1,127,748 55,236
------------- -------------
3,578,446 1,771,565
Less: accumulated depreciation and
amortization (588,316) (258,055)
------------- -------------
Total - property and equipment, net $ 2,990,130 $ 1,513,510
============= =============
9
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
5. 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 June 30, 2000:
Year ending December 31,
2000 $ 705,760
2001 1,224,701
2002 1,180,218
2003 1,180,218
2004 1,177,624
Thereafter 195,763
--------------
Total minimum lease payments $ 5,664,285
==============
6. STOCK WARRANTS
On June 2, 2000, the Company entered into an extended biller service provider
agreement with CheckFree Investment Corporation, CheckFree Services Corporation
and CheckFree Holdings Corporation ("CheckFree"). As part of this agreement,
CheckFree purchased 879,121 shares of the Company's common stock at $11.375 per
share totaling $10.0 million. Additionally, the Company issued CheckFree
warrants to purchase 2,179,121 shares at $11.375 per share for entering into
this agreement and investing $10.0 million. Offering proceeds to the Company,
net of issuance costs, were approximately $9.6 million. Using the fair value
based method of accounting, the Company recorded $7,488,000 of expense and a
corresponding credit to paid-in capital related to the issuance of 1.3 million
of these warrants as consideration for entering into the extended biller service
provider agreement. Also, CheckFree has the ability to earn incentive warrants
not to exceed 2,801,903 additional shares, of which 1,000,000 are exercisable at
$11.375 per share and 1,801,903 are exercisable at $14.219 per share. The
incentive warrants vest upon the achievement of certain target levels of
referred billers to the Company by CheckFree and will occur on the first through
fifth anniversaries of the agreement. All incentive warrants that are not vested
by the fifth anniversary will expire at that time. Assuming certain of theses
warrants vest, the Company will record a charge for the fair value of the
warrants based on a Black Scholes valuation which will take into consideration
the market value of the Company's stock, the strike price of the warrants, the
volatility of the Company's stock price and the applicable risk-free interest
rate at the measurement date.
10
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
6. STOCK WARRANTS (continued)
In conjunction with the private placement offerings in October and December
1999, the Company issued warrants to purchase 1,493,401 shares to the
shareholders and the placement agent of the offering. The warrants have various
exercise prices and some are callable by the Company.
At June 30, 2000, the outstanding vested warrants to purchase common stock are
as follows:
Aggregate
Shares of Exercise Exercise Expiration
Common Stock Price Price Date
--------------------------------------------------------
41,237 $ 6.06 $ 250,000 08/05/2004
250 $ 3.25 813 10/14/2004
57,431 $ 3.75 215,366 10/14/2002
20,000 $ 3.75 75,000 10/25/2002
240 $ 8.00 2,240 12/15/2004
8,890 $ 7.41 65,875 12/20/2004
3,500 $ 7.31 25,585 12/22/2004
2,179,121 $ 11.38 24,798,397 06/02/2010
-------------- --------------
2,310,669 $ 25,432,956
============== ==============
7. CREDIT FACILITY
On June 9, 2000 the Company executed a working capital line of credit agreement
with a bank in the amount of $1,500,000. Advances under the line accrue interest
at the prime rate minus .25%, with repayment terms of monthly interest-only
payments and principal due in July 2001. The line of credit is secured by
certain investments of the Company. Subsequent to June 30, 2000, the Company
borrowed approximately $880,000 on this line of credit for the security deposit
and leasehold improvements of the Company's future corporate headquarters.
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 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,
11
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
8. EQUITY SUBJECT TO POTENTIAL REDEMPTION (continued)
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.
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.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve risk
and uncertainties. Actual results may differ materially from those indicated in
such forward-looking statements.
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 stages 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 our ability to manage growth. To address these risks, we must, among
other things, maintain and increase our customer base; implement and
successfully execute our business and marketing strategy; continue to develop
and upgrade our technology and transaction-processing systems; provide superior
customer service; respond to competitive developments; attract, retain and
motivate qualified personnel; and respond to unforeseen industry developments
and other factors. We cannot assure you that we will be successful in addressing
such risks, and the failure to do so could have a material adverse effect on our
business, prospects, financial condition and results of operations.
Since inception, we have incurred operating losses each quarter, and as of June
30, 2000, we have an accumulated deficit of $18.0 million. 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"), (d) meet changing customer
requirements and (e) adapt to technological changes in an emerging market.
Accordingly, we intend to continue to invest heavily in product development,
technology and infrastructure, as well as marketing and promotion. Because our
services will require a significant amount of investment in infrastructure and a
substantial level of fixed and variable operating expenses, achieving
profitability depends on the volume of transactions we process and the revenue
we generate from these transactions, as well as other services performed for our
customers. Other potential sources of revenue in future periods may include:
o Revenue related to Internet-enabled customer care through our ECare
services;
o Revenue related to Internet direct marketing and other fees; and
o Revenue derived from our Internet portal, http://www.bills.com/
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
and estimates of future revenues. Sales and operating results will depend on the
volume of transactions processed and related services rendered. The timing of
such services and transactions and our ability to fulfill a customer's demands
are
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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 a
material adverse effect on our business, prospects, financial condition and
results of operations. Further, we may make certain pricing, service, marketing
or acquisition decisions that could have a material adverse effect on each or
all of these areas.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS AND SIX MONTHS PERIOD ENDED JUNE
30, 2000 AND 1999
Our operations for the six months ended June 30, 2000, resulted in a net loss of
$12,255,896, or $0.87 per share, as compared to $2,451,491, or $0.24 per share,
for the six months ended June 30, 1999. We earned revenues totaling $45,208 and
$51,634 for the three-month and six-month periods ended June 30, 2000,
respectively. During the first and second quarters 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
Staff Accounting Bulletin (SAB) 101, which requires recognition of revenue
generated from up-front implementation fees over the term of the related service
contract. We adopted SAB 101 on January 1, 2000, and accordingly, revised our
implementation fee revenue recognition policy to defer this type of revenue,
while the related cost of sales will be expensed as incurred. 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 to be recognized as revenue over
the remaining contractual service periods. We recognized the applicable portion
of this deferred revenue during the first and second quarters of 2000. Total
deferred revenue increased 170% to $327,574 as of June 30, 2000 from $121,395 as
of March 31, 2000. We anticipate that transaction fees and other services will
become our major source of revenue in future periods, which will reduce the
effect that deferring implementation fee revenue has on our overall operating
results. 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.
Although revenue from transaction fees has consistently increased during the
last three quarters, total transaction fee revenue remains low. As customers who
have completed the implementation period have not yet begun consumer education
and marketing programs, the low adoption rates are consistent with the Company's
expectations at this point. Transaction fees will become a significant dollar
amount only when consumer adoption rates increase. While consumer adoption rates
cannot be controlled, the Company is working with its customers to promote EBPP
to consumers.
During the second quarter of 2000, http://www.bills.com/ was re-launched with a
focus on making the site simpler and more secure for consumers to view, pay and
manage their bills online. As part of this re-launch, the Company incurred
development costs and intends to devote a defined amount of resources to market
the portal. The Company also launched its eCare
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product during the second quarter of 2000 and went live with three customers.
This product is an Internet interaction center that enables consumers and
customers' service representatives to interact privately, in real time via the
Internet. At the current time, the Company is uncertain of the magnitude of
future revenues from this product, and plans to devote resources as appropriate.
Cost of sales were $792,911 and $1,263,602 for the three-month and six-month
periods ended June 30, 2000, respectively. We were not in live production for
customers during the first and second quarters of 1999, and accordingly, we
incurred no cost of sales during those periods. Cost of sales includes the cost
of personnel dedicated to the design of electronic bill templates, creation of
conduits or connections to third parties, testing and quality assurance
processes related to implementation and presentment as well as project
management staff devoted to our customers at the inception of a project. As of
June 30, 2000, approximately forty employees were involved in these functions.
Cost of sales also includes fees paid for presentation of consumer bills on
websites powered by aggregators. Fees are also paid to third parties who perform
the payment portion of the EBPP transaction.
Research and development expenses remained constant for the three months ended
June 30, 2000 and 1999. For the six-month periods ended June 30, 2000 and June
30, 1999,we experienced a decrease of 18% in research and development expenses.
This decrease is primarily a result of a reallocation of resources to production
efforts during the first quarter of 2000 and the timing of the increase of
technical personnel and the resulting increase in compensation costs. The
average number of technical personnel directed to research and development
efforts increased from two for the six-month period ended June 30, 1999 to six
for the same period in 2000. During the first two quarters of 1999, the
Company's presentation systems were under development and as such had not begun
to incur cost of sales. Accordingly, all expenses related to operating systems
and technical personnel during this period were classified as research and
development, while in 2000 a majority of these costs are included in cost of
sales. All research and development costs are expensed as incurred. These costs
include the cost of personnel devoted to the design of new processes that will
improve our electronic presentment and payment abilities and capacities,
integrating applications from third-party applications, new customer care
solutions, additional business to consumer applications, business to business
applications, and in future periods, solutions for direct marketing
opportunities. We will continue to invest in research and development, as it is
an essential part of the execution of our business strategy.
Selling and marketing expenses totaled $853,691 for the quarter ended June 30,
2000, as compared to $454,765 for the second quarter of 1999. Selling and
marketing costs were $1,629,055 and $741,937 for the six months ended June 30,
2000 and 1999, respectively. The increase in these costs is a result of the
full-scale efforts of our marketing and sales departments that were being
developed during the first two quarters of 1999. As of June 30, 2000, we
employed 22 sales and marketing personnel as compared to 12 such personnel at
June 30, 1999. We will continue to expand our marketing and sales efforts,
increasing the size of our sales force and broadening our reach with marketing
activities. Our strategy is a targeted selling approach with an emphasis on
saturating key geographic areas in an attempt to drive EBPP adoption rates. The
approach begins with targeting local and regional billers in metropolitan areas
with high Technically Advanced Family (TAF) populations and high Internet usage.
Additionally, we will
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continue to target national billers to offer complete coverage of all recurring
bills in each targeted region. The Company expects promotional expenses to
increase at a managed rate in support of EBPP.
General and administrative expenses increased $836,480 for the quarter ended
June 30, 2000, as compared to $605,835 for the second quarter of 1999. General
and administrative costs were $1,406,685 and $937,342 for the six months ended
June 30, 2000 and 1999, respectively. The increase in expenses is principally
due to the increased compensation costs associated with additional general and
administrative personnel hired to manage the growth of the Company, as well as
increased travel, insurance and professional fee expenses. The increase is also
attributable to a growth in facilities costs resulting from expanded demands.
The Company expects general and administrative expenses to increase as a result
of the growth of our business. This increase will be driven by the increase in
the number of customers or by the increased revenue from the escalation of
adoption rates.
Depreciation and amortization increased to $191,456 for the quarter ended June
30, 2000, as compared to $68,570 for the second quarter of 1999. Depreciation
and amortization were $342,127 and $81,264 for the six-month periods ended June
30, 2000 and 1999, respectively. The increase is due to depreciation related to
the capital expenditures made for infrastructure and operating systems in
support of our growth strategy. We have purchased over $1.8 million of property
and equipment during the six-month period ended June 30, 2000 and anticipate
making capital expenditures of approximately $3.0 million in the next twelve
months.
Non-cash expense related to the issuance of warrants relates to expenses
recognized for warrants issued in consideration for services. In accordance with
Generally Accepted Accounting Principles, we calculated the fair value of these
warrant issuances using the Black Scholes Model and recorded the expense and
related credit to paid-in capital. During the three-month period ended June 30,
2000, we recognized $7.5 million of expense associated with the issuance of 1.3
million warrants to CheckFree as consideration for entering into an extended
biller service provider agreement. During the second quarter of 1999, warrant
expense was $356,583 for 111,085 warrants issued in exchange for strategic and
financial advisory services rendered by the Company's private placement agent.
We anticipate that we will recognize warrant costs in future periods based on
warrants that are issuable in consideration for the referral of billers to the
Company by CheckFree, however those expense amounts are unknown as they are
dependant upon various milestones to be achieved by CheckFree and several other
variables.
Other income increased to $85,961 for the quarter ended June 30, 2000, as
compared to $2,473 for the second quarter of 1999, and to $152,438 for the six
months ended June 30, 2000 from $5,177 for the same six-month period in 1999.
This increase primarily relates to interest earned from the investment of the
proceeds from our equity offerings in 1999, the exercise of warrants during the
first quarter of 2000 and the equity investment by CheckFree in June 2000. The
increase in interest income is partially diminished by the increased interest
expense incurred on capital leases during 2000.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company's principal source of liquidity consisted of $8.6
million of cash and cash equivalents and $5.9 million in short-term investments,
compared to $7.1 million of cash and cash equivalents at December 31, 1999.
Additionally, the Company had $2.0 million of long-term investments at June 30,
2000. At June 30, 2000, the Company had net working capital of $13.4 million.
Net cash used in operating activities was $3.6 million and $2.3 million for the
six months ended June 30, 2000 and 1999, respectively. Net cash used in
operating activities was primarily attributable to operating net losses.
Net cash used in investing activities was $10.5 million and $0.7 million for the
six months ended June 30, 2000 and 1999, respectively, and primarily consisted
of purchases of investments and equipment. To a lesser extent, during the six
months ended June 30, 2000, cash was used to make deposits for leases. Cash
available for investment purposes increased substantially in the six months
ended June 30, 2000, primarily as a result of the proceeds from the purchase of
common stock by CheckFree and the exercise of warrants.
Net cash provided by financing activities of $15.6 million for the six months
ended June 30, 2000 resulted from proceeds, net of issuance costs, of $9.6
million from the purchase of common stock by CheckFree and $6.1 million from the
exercise of warrants from the October and December 1999 private placements. Net
cash provided by financing activities of $4.8 million for the six months ended
June 30, 1999 largely resulted from the issuance of common stock.
The Company anticipates making capital expenditures of approximately $3.0
million in the next twelve months. Additionally, the Company intends to devote
between $1.5 and $2.0 million in resources towards the marketing of its
wholly-owned subsidiary, bills.com, Inc., during the remainder of 2000 to
accelerate the growth of subscribers. Further, the Company will experience an
increase in rent expense as it moves to its new corporate headquarters. Total
rent expense in 1999 was $130,000, and in 2000 and 2001, the aggregate rent
expense is anticipated to be approximately $600,000 and $1.2 million,
respectively.
The Company believes that its current cash and cash equivalents and investments
balances will be sufficient to meet its anticipated cash needs through the
fiscal year ending December 31, 2001, however the Company may face unforeseen
expenditures, the result of which may cause a more accelerated depletion of
capital resources. The Company expects to experience operating losses and
negative cash flow for the foreseeable future and, as a result, the Company may
be forced to rely on equity financing, draws on its line of credit, the
establishment of new borrowings and equipment leasing arrangements to meet
future capital requirements, the amount of which is subject to substantial
uncertainty. Subsequent to June 30, 2000, the Company borrowed approximately
$880,000 on the line of credit.
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The Company's capital requirements depend on several factors, including:
o the rate of consumer acceptance of the Internet, Internet technology,
electronic commerce and the Company's online solution
o the ability to adapt quickly to rapid changes in technology and competition
in electronic commerce and related financial services
o the ability to expand its customer base and increase revenues
o the level of expenditures for marketing and sales
o the purchases of equipment and software
o possible acquisitions of or investments in complementary businesses,
products, services and technologies
o the need to respond to unforeseen industry developments and other factors
If the Company's capital requirements vary materially from those currently
planned, the Company may require additional financing sooner than anticipated.
If current cash, marketable securities and cash that may be generated from
operations are insufficient to satisfy the Company's liquidity requirements, the
Company may seek to sell additional equity or secure borrowings. The sale of
additional equity or convertible debt securities could result in additional
dilution to the Company's shareholders, and debt financing, if available, may
involve restrictive covenants which could restrict the Company's operations or
finances. There can be no assurance that financing will be available in amounts
or on terms acceptable to the Company, if at all. If the Company cannot raise
funds, if needed, on acceptable terms, the Company may not be able to continue
to expand its operations, grow market share, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements,
any of which could negatively impact the Company's business, operating results
and financial condition.
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 has not used derivative instruments; therefore the adoption of this
statement will not have any effect on the Company's results of operations or its
financial position.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation." Interpretation No. 44 was issued in
order to clarify certain issues arising from Accounting Principles Board (APB)
Opinion No. 25 "Accounting for Stock Issued to Employees," which was previously
issued in October 1972. Interpretation No. 44 became effective July 1, 2000, but
certain conclusions cover specific events that occur either
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after December 15, 1998 or January 12, 2000. The principal issues addressed by
Interpretation No. 44 are: (a) the definition of an employee for purposes of
applying APB Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or awards in a
business combination. We do not expect that Interpretation No. 44 will have a
material impact on our results of operations or financial position.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters discussed in
our Form 10-Q include certain forward-looking statements within the meaning of
Section 27A of the Securities Act, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to,
all statements regarding our and management's intent, belief and expectations,
such as statements concerning our future and our operating and growth strategy.
Investors are cautioned that all forward-looking statements involve risks and
uncertainties including, without limitation, the factors set forth under the
caption "Business - Business Risks" in the Annual Report on Form 10-K for the
year ended December 31, 1999 and other factors detailed from time to time in our
filings with the Securities and Exchange Commission. One or more of these
factors have affected, and in the future could affect, our businesses and
financial results in the future and could cause actual results to differ
materially from plans and projections. Although we believe that the assumptions
underlying the forward-looking statements included in Form 10-Q will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that our
objectives and plans will be achieved. All forward-looking statements made in
this Form 10-Q are based on information presently available to our management.
We assume no obligation to update any forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's current investment portfolio and future draws on its
line of credit. Certain of the Company's marketable securities are designated as
"available for sale" and accordingly are presented at fair value on the balance
sheets. The Company generally invests its excess cash in high quality short- to
intermediate-term fixed income securities. Fixed rate securities may have their
fair market value adversely impacted by a rise in interest rates and the Company
may suffer losses in principal if forced to sell securities which have declined
in market value due to changes in interest rates.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is no litigation currently pending. Except as described in Footnote
8, we are not aware of any disputes that may lead to litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) On June 2, 2000, the Company sold 879,121 shares of common stock to
CheckFree for $10.0 million. These shares are not registered under
the Securities Act. The Company is obligated, upon timely requests
by CheckFree, to file a registration statement for these shares.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None in the second quarter of fiscal 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None in the second quarter of fiscal 2000.
ITEM 5. OTHER INFORMATION
None in the second quarter of fiscal 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K: None in the second quarter of fiscal 2000.
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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: August 14, 2000 BY /S/ LOUIS HOCH
President and Chief Operating Officer
Date: August 14, 2000 BY /S/ TERRI HUNTER
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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