<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 98-0190072
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
211 NORTH LOOP 1604 EAST, 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 OCTOBER 1, 2000, 15,527,870 SHARES OF COMMON STOCK, $.001 PAR VALUE, OF THE
REGISTRANT WERE OUTSTANDING.
================================================================================
<PAGE>
billserv.com, Inc.
FORM 10-Q
For the Quarter Ended September 30, 2000
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement 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 21
Signatures 22
</TABLE>
2
<PAGE>
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BILLSERV.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 9,097,972 $ 7,069,423
Investments 995,260 -
Accounts receivable, net 565,110 10,227
Related party accounts receivable 157,121 30,222
Prepaid expenses and other 1,328,118 380,776
------------ ------------
Total current assets 12,143,581 7,490,648
Property and equipment, net of accumulated depreciation and
amortization of $907,844 and $258,055 for September 30,
2000 and December 31, 1999, respectively 3,607,023 1,513,510
Intangible assets, net 56,250 67,500
Long-term investments 2,014,320 -
Other assets 870,667 326,510
------------ ------------
Total assets $ 18,691,841 $ 9,398,168
============ ============
Liabilities & shareholders' equity:
Current liabilities:
Accounts payable $ 365,239 $ 589,480
Current portion of obligations under capital leases 174,487 309,313
Current portion of deferred revenue 54,602 -
Accrued expenses and other current liabilities 659,271 298,638
Short-term borrowings 1,500,000 -
------------ ------------
Total current liabilities 2,753,599 1,197,431
Obligations under capital leases, less current portion 196,282 254,394
Deferred revenue, less current portion 598,802 5,000
Equity subject to potential redemption 5,300 5,300
Shareholders' equity:
Common stock, $.001 par value, 200,000,000 shares
authorized; 15,527,870 issued and outstanding at
September 30, 2000, 13,113,065 issued and outstanding
at December 31, 1999 15,528 13,113
Additional paid-in capital 36,908,450 13,695,584
Accumulated other comprehensive income 12,642 -
Deficit accumulated during the development stage (21,798,762) (5,772,654)
------------ ------------
Total shareholders' equity 15,137,858 7,936,043
------------ ------------
Total liabilities and shareholders' equity $ 18,691,841 $ 9,398,168
============= ============
</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 Nine Months Ended July 30, 1998
----------------------------- ----------------------------- (inception) to
September 30, September 30, September 30, September 30, September 30,
2000 1999 2000 1999 2000
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 106,564 $ - $ 158,198 $ - $ 213,636
Cost of sales 1,060,272 - 2,323,874 - 2,451,219
------------ ------------ ------------ ------------ ------------
Gross margin (953,708) - (2,165,676) - (2,237,583)
Operating expenses:
Research and development 234,388 260,847 512,614 600,389 1,419,146
Selling and marketing 1,481,040 536,629 3,110,095 1,278,566 4,949,008
General and administrative 1,049,160 516,463 2,455,845 1,453,805 4,644,065
Depreciation and amortization 323,713 87,541 665,840 168,805 937,307
Non-cash expense related to the
issuance of warrants - 134,845 7,488,000 491,428 7,979,428
------------ ------------ ------------ ------------ ------------
Total operating expenses 3,088,301 1,536,325 14,232,394 3,992,993 19,928,954
------------ ------------ ------------ ------------ ------------
Operating loss (4,042,009) (1,536,325) (16,398,070) (3,992,993) (22,166,537)
Other income (expense), net:
Interest income 314,474 24,774 500,159 36,905 588,820
Interest expense (41,206) (30,434) (75,653) (38,588) (143,174)
Other income (expense) (1,471) 2,127 (271) 3,327 (15,662)
------------ ------------ ------------ ------------ ------------
Total other income (expense), net 271,797 (3,533) 424,235 1,644 429,984
------------ ------------ ------------ ------------ ------------
Loss before income taxes and cumulative
effect of accounting change (3,770,212) (1,539,858) (15,973,835) (3,991,349) (21,736,553)
Income taxes - - - - -
------------ ------------ ------------ ------------ ------------
Net loss before cumulative effect of
accounting change (3,770,212) (1,539,858) (15,973,835) (3,991,349) (21,736,553)
Cumulative effect of a change in
accounting principle, net of taxes - - (52,273) - (52,273)
------------ ------------ ------------ ------------ ------------
Net loss $ (3,770,212) $ (1,539,858) $(16,026,108) $ (3,991,349) $(21,788,826)
============ ============ ============ ============ ============
Net loss per common share before
cumulative effect of accounting
change - basic and diluted $ (0.24) $ (0.14) $ (1.10) $ (0.38) $ (1.81)
Cumulative effect of accounting
change - basic and diluted $ - $ - $ - $ - $ (0.01)
Net loss per common share - basic and
diluted $ (0.24) $ (0.14) $ (1.10) $ (0.38) $ (1.82)
Weighted average common shares
outstanding - basic and diluted 15,525,973 10,976,428 14,547,148 10,414,811 11,978,007
</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 SHAREHOLDERS' 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, - - - (289,770) - (289,770)
1998
----------------------------------------------------------------------------------
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 153,846 154 490,057 - - 490,211
Debt
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 SHAREHOLDERS' EQUITY, CONT.
(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 December 31, 1999 13,113,065 $ 13,113 $ 13,695,584 $ (5,772,654) $ - $ 7,936,043
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
Stock Option Exercise, March 28, 2000 900 1 2,530 - - 2,531
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
Issuance of Common Stock, July 2, 2000 17,848 18 117,075 - - 117,093
Equity Issuance Costs - - (56,876) - - (56,876)
Stock Option Exercise, August 11, 2000 300 - 844 - - 844
Stock Option Exercise, September 10, 2,000 2 8,748 - - 8,750
2000
Unrealized Gain/(Loss) on Investments - - - - 12,642 12,642
Net Loss for the Nine Months Ended
September 30, 2000 - - - (16,026,108) - (16,026,108)
---------------------------------------------------------------------------------
Balance at September 30, 2000 15,527,870 $ 15,528 $ 36,908,450 $ (21,798,762) $ 12,642 $ 15,137,858
=================================================================================
</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>
<CAPTION>
Nine Months Ended July 30, 1998
----------------------------------- (Inception) to
September 30, September 30, September 30,
2000 1999 2000
----------------- ----------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (16,026,108) $ (3,991,349) $ (21,788,826)
Adjustments to reconcile net loss to net cash used in
operating activities:
Issuance of common stock warrants 7,488,000 491,428 7,979,428
Depreciation and amortization 665,840 168,805 937,307
Cumulative effect of change in accounting principle 52,273 - 52,273
Changes in current assets and current liabilities:
(Increase) decrease in accounts receivable (554,883) - (565,110)
(Increase) decrease in related party receivables (126,899) (31,911) (157,121)
(Increase) decrease in prepaid expenses and
other (727,003) (318,088) (1,107,779)
Increase (decrease) in accounts payable,
accrued expenses and other current liabilities 136,392 218,345 1,179,510
Increase (decrease) in accounts payable related - (150,000) (150,000)
party
Increase (decrease) in deferred revenue 596,131 - 596,131
----------------- ----------------- ----------------
Net cash used in operating activities (8,496,257) (3,612,770) (13,024,187)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,470,023) (549,078) (3,542,591)
Purchase of investments (7,864,759) (286,098) (8,140,255)
Proceeds from sales and maturities of investments 4,867,821 - 4,867,821
Purchase of intangible assets - (75,000) (75,000)
Capital lease set up fee - - (11,884)
Deposits long-term, net (764,496) (42,834) (809,537)
Proceeds of acquisition/merger - - 5,394
----------------- ----------------- ----------------
Net cash used in investing activities (6,231,457) (953,010) (7,706,052)
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 and short-term borrowings 1,500,000 1,000,000 2,500,000
Principal payments for notes payable - - 500,000
Exercise of warrants 6,096,498 - 6,096,498
Issuance of common stock, net of issuance costs 9,630,783 5,300,000 22,338,022
Principal payments for capital lease obligations (471,018) (65,135) (606,309)
----------------- ----------------- ----------------
Net cash provided by financing activities 16,756,263 5,734,865 29,828,211
----------------- ----------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,028,549 1,169,085 9,097,972
CASH AND CASH EQUIVALENTS, beginning of period 7,069,423 329,618 -
----------------- ----------------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 9,097,972 $ 1,498,703 $ 9,097,972
================= ================= ================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchases of equipment under capital leases $ 278,080 $ 695,423 $ 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. ORGANIZATION
billserv.com, Inc. and its wholly-owned subsidiaries, bills.com., Inc. and
billserv.com-canada, inc. (collectively, "billserv.com" or "the Company"), is a
billing service provider operating in the electronic bill presentment and
payment ("EBPP") industry. In addition, the Company provides consulting and
Internet-based customer care interaction services. The Company also operates an
Internet bill presentment and payment portal for consumers.
2. BASIS OF PRESENTATION
The Company's principal activities since inception have been research and
development, raising of 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 and third years of operations and may incur
losses in subsequent years as development efforts continue. However, if the
Company continues to execute its business plan and address challenges as they
arise, the Company believes operating losses should begin to decline. The
Company plans to meet its capital requirements primarily through issuance of
equity securities, borrowings, 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 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.
8
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
3. 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." The Company
has not had any investments classified as "trading" securities.
"Held-to-maturity" securities have been carried at amortized cost. 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.
4. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In December 1999, the SEC issued Staff Accounting Bulletin ("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 that 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.
5. PROPERTY AND EQUIPMENT, NET
The following is a summary of the Company's property and equipment at
September 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Furniture and fixtures $ 795,517 $ 216,824
Equipment 1,979,883 954,123
Software 1,335,956 545,382
Leasehold improvements 403,511 55,236
------------- ------------
4,514,867 1,771,565
Less: accumulated depreciation and
amortization (907,844) (258,055)
------------- ------------
Total - property and equipment, net $3,607,023 $1,513,510
============= ============
</TABLE>
9
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
6. OPERATING LEASES
During March 2000, the Company entered into a five-year operating lease for its
corporate headquarters at a rate of $98,000 per month. The lease required a cash
deposit of approximately $516,000. This deposit is included in Other Assets on
the Balance Sheet.
7. 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. The Company recorded
$7,488,000 of expense and a corresponding credit to paid-in capital related to
the estimated fair value of 1.3 million of these warrants, which were issued as
consideration for entering into the extended biller service provider agreement.
Also, CheckFree has the ability to earn incentive warrants on up to 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 these 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. As of
September 30, 2000, none of these incentive warrants have vested.
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.
10
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
7. STOCK WARRANTS (continued)
At September 30, 2000, the outstanding vested warrants to purchase common stock
are as follows:
<TABLE>
<CAPTION>
Shares of Exercise Aggregate Expiration
Common Stock Price Exercise Price Date
----------------------------------------------------------------
<S> <C> <C> <C>
57,431 $ 3.75 $ 215,366 10/14/2002
20,000 $ 3.75 75,000 10/25/2002
41,237 $ 6.06 250,000 08/05/2004
250 $ 3.25 813 10/14/2004
280 $ 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
--------------- ----------------
2,310,709 $ 25,433,276
=============== ================
</TABLE>
8. SHORT-TERM BORROWINGS
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 of credit
accrue interest at the prime rate minus 0.25%, 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. The Company has borrowed
$1,500,000 on this line of credit for the security deposit and leasehold
improvements of the Company's corporate headquarters.
9. 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. A 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.
11
<PAGE>
billserv.com, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Unaudited)
9. EQUITY SUBJECT TO POTENTIAL REDEMPTION (continued)
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.
We publicly disclosed the foregoing matters on November 22, 1999, in the
Company's amended Form 10, which was filed with the SEC. Since the date of this
filing, the Company has received no notice of any claim by any person,
including the SEC.
10. SUBSEQUENT EVENT
On October 4, 2000, the Company's Board of Directors declared a dividend
distribution of Common Share Purchase Rights. The terms of these Rights have
been defined in the Rights Agreement, which has been filed with the SEC on
October 11, 2000 as an Exhibit to a Registration Statement on Form 8-A.
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 risks
and uncertainties. Actual results may differ materially from those expressed or
implied in such forward-looking statements. All references to "we," "us" or
"our" in this Form 10-Q mean billserv.com, Inc.
OVERVIEW
billserv.com is 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
September 30, 2000, we have an accumulated deficit of $21.8 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) continue
to add to our significant 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 in product research and
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 sources of revenue include:
- eCare - Our Internet Interaction Center (IIC) which provides
Internet-enabled customer care support.
- eConsulting - Value-added professional services for EBPP customers
needing dedicated resources.
- IDM - Internet-enabled Direct Marketing (latter part of Year 2001).
- bills.com - EBPP Internet portal for complete bill payment of all
bills.
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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. Revenue and operating results will depend on
the volume of transactions processed and related services rendered. The timing
of such services and transactions and our ability to fulfill a customer's
demands are difficult to forecast. 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-MONTH AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2000 AND 1999
Our operations for the nine months ended September 30, 2000 resulted in a net
loss of $16,026,108, or $1.10 per share, as compared to $3,991,349, or $0.38
per share, for the nine months ended September 30, 1999. We earned revenues
totaling $106,564 and $158,198 for the three-month and nine-month periods ended
September 30, 2000, respectively. During the first three quarters of 1999, we
were not yet in a production phase, nor had we provided any other services for
our customers, 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 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, which are primarily three to five years
in length. Total deferred revenue increased 99% to $653,404 as of September 30,
2000 from $327,574 as of June 30, 2000. This increase is primarily due to the
deferral of implementation fees that have been invoiced during the third
quarter of 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 are dependent upon the rate at which consumers utilize EBPP.
Although revenue from transaction fees has dramatically increased during the
last three quarters, total transaction fee revenue remains relatively low. We
have 50 billers under contract who are in various stages of development. As of
September 30, 2000, 24 billers are in production or pilot stages and only one
has begun consumer education and marketing programs. As such, the low adoption
rates are consistent with our expectations at this point. Transaction fees can
become a significant revenue source only when consumer adoption rates increase.
While consumer
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adoption rates cannot be controlled, we are working with our customers to
promote EBPP to their consumers.
During the second quarter of 2000, bills.com was re-launched with a focus on
making the Website simpler and more secure for consumers to view, pay and
manage their bills online. As part of this re-launch, we devoted a defined
amount of resources to develop and market the portal. We also launched our
ECare product during the second quarter of 2000 and went live with three
customers. This product is an Internet Interaction Center that enables
consumers and customer service representatives to interact privately, in real
time, via the Internet. Currently, we are uncertain of the magnitude of future
revenues from these products, and plan to devote resources as appropriate.
Cost of sales was $1,060,272 and $2,323,874 for the three-month and nine-month
periods ended September 30, 2000, respectively. We were not in production or
pilot stages for customers during the first three 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 connections to third-party presentment and payment
processors, 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 September 30, 2000, approximately 66
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 declined 10% for the three months ended
September 30, 2000 compared to the third quarter of 1999. For the nine-month
periods ended September 30, 2000 and September 30, 1999, we experienced a
decrease of 15% in research and development expenses. These decreases are
primarily a result of a re-allocation of resources to production efforts during
2000. During the first three quarters of 1999, our 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, integration of
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 in the foreseeable future, as it
is an essential part of the execution of our business strategy. We believe that
it will be important to rapidly develop, test and offer new products and
services.
Selling and marketing expenses totaled $1,481,040 for the quarter ended
September 30, 2000, as compared to $536,629 for the third quarter of 1999.
Selling and marketing costs were $3,110,095 and $1,278,566 for the nine months
ended September 30, 2000 and 1999, respectively. The increase in these costs is
a result of the development and expansion initiatives of our sales and
marketing departments that were being created and developed during the first
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three quarters of 1999, as well as advertising media costs associated with
bills.com, Inc. As of September 30, 2000, we employed 27 sales and marketing
personnel as compared to 13 such personnel at September 30, 1999. We will
continue to expand our sales and marketing efforts, increasing the size of our
sales force and broadening our reach with marketing activities. As each biller
is signed, billserv assigns a marketing representative to work with that biller
in developing their plan to educate their consumers on EBPP. All of our billers
currently in production plan to market and advertise EBPP to their consumers
during the next 4 months. Our selling strategy is a targeted 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 continue to target national
billers to offer complete coverage of all recurring bills in each targeted
region. We expect promotional expenses to increase at a managed rate in support
of our strategy.
General and administrative expenses increased to $1,049,160 for the quarter
ended September 30, 2000, as compared to $516,463 for the third quarter of
1999. General and administrative costs were $2,455,845 and $1,453,805 for the
nine months ended September 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 our growth, 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. We expect 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 our expectation of increased revenue from the
escalation of adoption rates.
Depreciation and amortization increased to $323,713 for the quarter ended
September 30, 2000, as compared to $87,541 for the third quarter of 1999.
Depreciation and amortization were $665,840 and $168,805 for the nine-month
periods ended September 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
$2.7 million of property and equipment during the nine-month period ended
September 30, 2000 and anticipate making capital expenditures of approximately
$4.0 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 nine-month period ended
September 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 and third
quarters of 1999, warrant expense was $356,583 for 111,085 warrants issued in
exchange for strategic and financial advisory services rendered by our private
placement agent and $134,845 related to the issuance of warrants associated
with debt, respectively. 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 us by
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CheckFree; however, those expense amounts are unknown as they are dependent
upon various milestones to be achieved by CheckFree and several other variables.
Other income (expense) increased to $271,797 for the quarter ended September
30, 2000, as compared to an expense of $3,533 for the third quarter of 1999,
and to $424,235 for the nine months ended September 30, 2000 from $1,644 for
the same nine-month period in 1999. This increase primarily relates to interest
earned from the investment of the proceeds from the equity offerings in the
fourth quarter of 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 offset by the increased interest expense incurred
on capital leases and borrowings on the line of credit during 2000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company's principal source of liquidity consisted of
$9.1 million of cash and cash equivalents and $1.0 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 September 30, 2000. At September 30, 2000, the Company had net working
capital of $9.4 million.
Net cash used in operating activities was $8.5 million and $3.6 million for the
nine months ended September 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 $6.2 million and $1.0 million for the
nine months ended September 30, 2000 and 1999, respectively, and primarily
consisted of purchases of investments and equipment. To a lesser extent, during
the nine months ended September 30, 2000, cash was used to make deposits for
leases. Cash available for investment purposes increased substantially in the
nine months ended September 30, 2000, primarily as a result of the proceeds
from the equity investment by CheckFree and the exercise of warrants.
Net cash provided by financing activities of $16.8 million for the nine months
ended September 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 $5.7 million for the nine months
ended September 30, 1999 largely resulted from the issuance of common stock.
We anticipate making capital expenditures of approximately $4.0 million in the
next twelve months. Further, we are experiencing an increase in rent expense as
we have moved to our 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.
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We believe that our current cash and cash equivalents and investments balances
along with anticipated revenues will be sufficient to meet our anticipated cash
needs into the latter half of the fiscal year ending December 31, 2001;
however, we may face unforeseen expenditures or a lack of revenue, the result
of which may be a more accelerated depletion of capital resources. We expect to
experience operating losses and negative cash flow for the foreseeable future,
and as a result, we will be forced to rely on equity financing, the
establishment of new borrowings and equipment leasing arrangements to meet
future capital requirements, the amount of which is subject to substantial
uncertainty.
Our capital requirements depend on several factors, including:
- the rate of consumer acceptance of the Internet, Internet technology,
electronic commerce and our online solution
- the ability to adapt quickly to rapid changes in technology and
competition in electronic commerce and related financial services
- the ability to expand our customer base and increase revenues
- the level of expenditures for marketing and sales
- the level of purchases of equipment and software
- possible acquisitions of or investments in complementary businesses,
products, services and technologies
- the need to respond to unforeseen industry developments and other
factors
If our capital requirements vary from those currently planned, we may require
additional financing sooner than anticipated. If current cash, marketable
securities and cash that may be generated from operations are insufficient to
satisfy our liquidity requirements, we may seek to sell additional equity or
secure borrowings prematurely. The sale of additional equity or convertible
debt securities would result in additional dilution to our shareholders, and
debt financing, if available, may involve restrictive covenants which could
restrict our operations or finances. There can be no assurance that financing
will be available in amounts or on terms acceptable to us, if at all. If we
cannot raise funds, on acceptable terms, we may not be able to continue to
exist, expand our operations, grow market share, take advantage of future
opportunities or respond to competitive pressures or unanticipated
requirements, any of which would negatively impact our business, operating
results and financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued 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 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133." SFAS 137 deferred the effective date of SFAS 133 until
fiscal years beginning after June 15, 2000. We have not used derivative
instruments; therefore, the adoption of this statement will not have any effect
on our results of operations or our financial position.
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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 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. We are not aware of any
disputes that may lead to litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Change rights of stockholders
On October 4, 2000, the Board of Directors of the Company
declared a dividend of one Right for each outstanding share of
Common Stock, par value $.001 per share, of the Company. The
dividend is payable to holders of record of Common Stock at
the close of business on October 4, 2000, the date of record.
Each right entitles the registered holder to purchase from the
Company shares of Common Stock at a purchase price of $14.00.
The terms and conditions of the Rights are contained in a
Rights Agreement between the Company and American Stock
Transfer and Trust Company, which has been filed with the SEC
on October 11, 2000 as an exhibit to a Registration Statement
on Form 8-A.
(b) Not applicable.
(c) None in the third quarter of fiscal 2000.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None in the third quarter of fiscal 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 13, 2000 the Annual Shareholders Meeting of the Company was
held to vote on a.) election of two board members; b.) an amendment to
the 1999 Employee Comprehensive Stock Plan; and c.) the appointment of
Ernst and Young LLP as independent auditors.
ITEM 5. OTHER INFORMATION
None in the third quarter of fiscal 2000.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4 Instruments defining the rights of security holders,
including debentures - Rights Agreement dated as of
October 4, 2000, incorporated by reference from the
Registration Statement on Form 8-A filed with the SEC
on October 11, 2000.
27 Financial Data Schedule
(b) Reports on Form 8-K: None in the third 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: November 14, 2000 /s/ Louis Hoch
-------------------------------------
by: LOUIS HOCH
President and Chief Operating Officer
Date: November 14, 2000 /s/ Terri A. Hunter
-------------------------------------
by: TERRI A. HUNTER
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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