================================================================================ ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 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 APRIL 1, 2001, 18,490,631 SHARES OF COMMON STOCK, $.001 PAR VALUE, OF THE REGISTRANT WERE OUTSTANDING. ================================================================================
BILLSERV.COM, INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 INDEX <TABLE> <CAPTION> PAGE ---- <S> <C> Part I - Financial Information Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statement of Changes in Shareholders' 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 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Part II - Other Information Item 1. Legal Proceedings 18 Item 2. Changes in Securities and Use of Proceeds 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 </TABLE> 2
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BILLSERV.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> MARCH 31, 2001 (UNAUDITED) DECEMBER 31, 2000 -------------------- --------------------- <S> <C> <C> Assets: Cash and cash equivalents $ 7,997,853 $ 6,171,822 Investments 1,019,590 1,013,900 Accounts receivable, net 505,730 782,537 Prepaid expenses and other 410,956 596,546 Related party accounts receivable 119,348 283,738 -------------------- --------------------- Total current assets 10,053,477 8,848,543 Property and equipment, net of accumulated depreciation and amortization of $1,549,141 and $1,178,813 at March 31, 2001 and December 31, 2000, respectively 4,379,721 4,518,347 Intangible assets, net 48,750 52,500 Long-term investments 1,019,450 1,000,920 Other assets 869,797 870,232 -------------------- --------------------- Total assets $ 16,371,195 $ 15,290,542 ==================== ===================== Liabilities & shareholders' equity: Current liabilities: Accounts payable $ 206,410 $ 726,804 Accrued expenses and other current liabilities 535,187 896,772 Current portion of obligations under capital leases 188,035 181,128 Current portion of deferred revenue 320,227 252,833 Other current liabilities - 1,500,000 -------------------- --------------------- Total current liabilities 1,249,859 3,557,537 Obligations under capital leases, less current portion 98,744 148,428 Deferred revenue, less current portion 436,766 573,167 Equity subject to potential redemption 5,300 5,300 Shareholders' equity: Common stock, $.001 par value, 200,000,000 shares authorized; 18,490,631 issued and outstanding at March 31, 2001, 15,527,870 issued and outstanding at December 31, 2000 18,490 15,528 Additional paid-in capital 43,539,054 36,758,450 Accumulated other comprehensive income 38,264 13,109 Deficit accumulated during the development stage (29,015,282) (25,780,977) -------------------- --------------------- Total shareholders' equity 14,580,526 11,006,110 -------------------- --------------------- Total liabilities and shareholders' equity $ 16,371,195 $ 15,290,542 ==================== ===================== </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3
ITEM 1. FINANCIAL STATEMENTS (CONT.) BILLSERV.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED JULY 30, 1998 --------------------------------- (INCEPTION) TO MARCH 31, 2001 MARCH 31, 2000 MARCH 31, 2001 ---------------- --------------- ----------------- <S> <C> <C> <C> Revenues $ 470,667 $ 6,426 $ 1,138,445 Cost of sales 1,193,574 470,691 4,974,079 ---------------- --------------- ----------------- Gross margin (722,907) (464,265) (3,835,634) Operating expenses: Research and development 214,974 124,912 1,889,257 Selling and marketing 823,357 775,364 7,249,093 General and administrative 1,182,336 570,205 7,048,390 Depreciation and amortization 374,263 150,671 1,586,725 Non-cash expense related to the issuance of warrants - - 7,979,428 ---------------- --------------- ----------------- Total operating expenses 2,594,930 1,621,152 25,752,893 ---------------- --------------- ----------------- Operating loss (3,317,837) (2,085,417) (29,588,527) Other income (expense), net: Interest income 97,509 85,755 857,603 Interest expense (14,848) (20,478) (223,020) Other income (expense) 871 1,200 871 ---------------- --------------- ----------------- Total other income (expense), net 83,532 66,477 635,454 ---------------- --------------- ----------------- Loss before income taxes and cumulative effect of accounting change (3,234,305) (2,018,940) (28,953,073) Income taxes - - - ---------------- --------------- ----------------- Net loss before cumulative effect of accounting change (3,234,305) (2,018,940) (28,953,073) Cumulative effect of a change in accounting principle, net of taxes - (52,273) (52,273) ---------------- --------------- ----------------- Net loss $ (3,234,305) $ (2,071,213) $ (29,005,346) ================ =============== ================= Net loss per common share before cumulative effect of accounting change - basic and diluted $ (0.21) $ (0.15) $ (2.28) Cumulative effect of accounting change - basic and diluted $ - $ (0.01) $ (0.01) Net loss per common share - basic and diluted $ (0.21) $ (0.16) $ (2.29) Weighted average common shares outstanding - basic and diluted 15,697,051 13,230,142 12,658,172 </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4
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, 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
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, 2000 2,000 2 8,748 - - 8,750 Equity Issuance Costs - - (150,000) - - (150,000) Unrealized Gain/(Loss) on Investments - - - - 13,109 13,109 Net Loss for the Twelve Months Ended December 31, 2000 - - - (20,008,323) - (20,008,323) ------------------------------------------------------------------------------------- Balance at December 31, 2000 15,527,870 $ 15,528 $ 36,758,450 $ (25,780,977) $ 13,109 $ 11,006,110 Issuance of Common Stock, January 2001 69,299 69 150,866 - - 150,935 Stock Option Exercise, January 31, 2001 8,000 8 34,992 - - 35,000 Issuance of Common Stock, Net of Issuance Costs, March 28, 2001 2,885,462 2,885 6,644,746 - - 6,647,631 Unrealized Gain/(Loss) on Investments - - - - 25,155 25,155 Equity Issuance Costs - - (50,000) - - (50,000) Net Loss for the Three Months Ended March 31, 2001 - - - (3,234,305) - (3,234,305) ------------------------------------------------------------------------------------- Balance at March 31, 2001 18,490,631 $ 18,490 $ 43,539,054 $ (29,015,282) $ 38,264 $ 14,580,526 ===================================================================================== </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 6
ITEM 1. FINANCIAL STATEMENTS (CONT.) BILLSERV.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED JULY 30, 1998 ------------------------------------ (INCEPTION) TO MARCH 31, 2001 MARCH 31, 2000 MARCH 31, 2001 ----------------- ----------------- ---------------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (3,234,305) $ (2,071,213) $ (29,005,346) Adjustments to reconcile net loss to net cash used in operating activities: Issuance of common stock warrants - - 7,979,428 Depreciation and amortization 374,263 150,671 1,586,685 Cumulative effect of change in accounting principle - 52,273 52,273 Changes in current assets and current liabilities: (Increase) decrease in accounts receivable 276,807 (61,047) (505,730) (Increase) decrease in related party receivables 164,390 17,139 (119,348) (Increase) decrease in prepaid expenses and other 186,025 (15,654) (189,747) Increase (decrease) in accounts payable, accrued expenses and other current liabilities (881,979) 356,441 896,597 Increase (decrease) in accounts payable related party - (150,000) Increase (decrease) in deferred revenue (69,007) 64,122 699,720 ----------------- ----------------- ---------------- Net cash used in operating activities (3,183,806) (1,507,268) (18,755,468) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (231,887) (755,348) (4,957,167) Purchase of investments, net (24,220) - (8,164,475) Proceeds from sales and maturities of investments 25,155 - 5,888,203 Purchase of intangible assets - - (75,000) Capital lease set up fee - - (11,884) Deposits long-term, net - (561,868) (809,537) Proceeds of acquisition/merger - - 5,394 ----------------- ----------------- ---------------- Net cash used in investing activities (230,952) (1,317,216) (8,124,466) CASH FLOWS FROM FINANCING ACTIVITIES: Advance from shareholders - - 2,000,000 Repayment to shareholders - - (2,000,000) Proceeds from notes payable and short-term borrowings - - 2,500,000 Principal payments for notes payable (1,500,000) - (2,000,000) Exercise of warrants - 4,864,460 6,096,498 Issuance of common stock, net of issuance costs 6,783,566 - 28,971,588 Principal payments for capital lease obligations (42,777) (72,861) (690,299) ----------------- ----------------- ---------------- Net cash provided by financing activities 5,240,789 4,791,599 34,877,787 ----------------- ----------------- ---------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 1,826,031 1,967,115 7,997,853 CASH AND CASH EQUIVALENTS, beginning of period 6,171,822 7,069,423 - ----------------- ----------------- ---------------- CASH AND CASH EQUIVALENTS, end of period $ 7,997,853 $ 9,036,538 $ 7,997,853 ================= ================= ================ NON-CASH INVESTING AND FINANCING ACTIVITIES: Purchases of equipment under capital leases $ - $ - $ 841,786 Conversion of debt to equity $ - $ - $ 500,000 </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 7
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 included research and development, raising of capital and organizational activities. More recently, the Company has increased its activities in the areas of marketing and promotion, as well as obtaining current billers as clients and implementing EBPP capabilities for those billers. The Company remains a development stage company, as recurring revenue related to consumer payment activity has not reached a significant level. The Company expects to continue to incur losses during the next several quarters of operations and may incur losses in subsequent quarters as development efforts continue. The Company plans to meet its capital requirements primarily through borrowings, issuance of additional equity securities, capital lease financing and, in the longer term, revenues from operations. Management believes that there will be adequate liquidity to fund its operations and anticipated cash needs for fiscal 2001. However, material shortfalls or variances from anticipated performance or unforeseen expenditures could require the Company to seek alternative sources of capital or to limit expenditures for operating or capital requirements. If such a shortfall in liquidity should occur, the Company has both the intent and the ability to take the necessary actions to preserve its liquidity through the reduction of expenditures. The financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. The accompanying unaudited 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. The accompanying financial statements should be read with the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 8
BILLSERV.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The balance sheet at December 31, 2000 has been derived from the audited financial statements of that date but does not include all of the information required by generally accepted accounting principles for complete financial statements. For further information, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 3. RECLASSIFICATION Certain prior year amounts have been reclassified to conform to the current year presentation. 4. FOREIGN OPERATIONS Foreign operations began in 2000, however the impact financially of expanding internationally is immaterial at December 31, 2000. Canada is the only foreign country in which the Company is currently operating. 5. 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. 6. 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 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. The cumulative effect has been recorded as deferred revenue and will be recognized as revenue over the remaining contractual service periods. 9
BILLSERV.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. LINE OF CREDIT 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 had borrowed $1,500,000 on this line of credit for the security deposit and leasehold improvements of the Company's corporate headquarters. In January 2001, the Company paid down the entire outstanding balance, however the line of credit remains available. 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 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. The Company disputes the following assertions, but it is possible that the issuance of shares described above may have violated provisions of the federal and state securities laws which subject 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. The Company disputes any such liability. Additionally, while the Company also disputes the following assertions, it is possible that shareholders who purchased the shares described above may have the right under state and federal securities laws to require us to repurchase their shares, for the amount originally paid, plus interest. The Company disputes any such liability. Based upon the best information available at this time, the Company has calculated a range of possible, but disputed, exposure that exists in light of the disputed civil liabilities described above. 10
BILLSERV.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Accordingly, in the event these disputed civil liabilities were successfully asserted, the Company could be liable to the 15 new shareholders, and to any shareholder that immediately purchased 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. The Company has now concluded that the likelihood of any liability associated with the foregoing matters is remote. 9. RELATED PARTY TRANSACTIONS During December 2000, the Company pledged $1.0 million held in a money market account to collateralize margin loans of three officers of the Company. The margin loans are from an institutional lender and are secured by shares of the Company's common stock held by these officers. Additionally, the Company guaranteed the total balance of these margin loans, which were approximately $1.5 million at March 31, 2001. The Company has the unrestricted right to use the pledged funds for its operations if necessary. During April 2001, the Company pledged $430,000 held in Certificates of Deposit to collateralize a margin loan for one officer of the Company. The margin loan is from an institutional lender and is secured by shares of the Company's common stock held by this officer. The Company has the unrestricted right to use the pledged funds for its operations if necessary. 10. PRIVATE PLACEMENT OFFERING In March 2001, the Company issued 2,885,462 shares of common stock under a private placement offering (the "2001 Offering"). The shares were issued at an undiscounted price of $2.50 per share. Net proceeds totaled approximately $6.6 million, net of offering costs of approximately $565,000, which included approximately $540,000, or 7.5% of the Offering, paid to the placement agent. In conjunction with the 2001 Offering, the Company filed a registration statement with the SEC, which became effective on May 8, 2001. 11
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 March 31, 2001, we have an accumulated deficit of $29 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: o eCare - Our Internet Interaction Center (IIC) which provides Internet-enabled customer care support. o eConsulting - Value-added professional services for EBPP customers needing dedicated resources. o ASP Gateway Services - Offers billers who are already participating in EBPP a single distribution point to virtually any bill presentment and payment location across the World Wide Web in addition to its existing distribution points. o IDM - Internet-enabled Direct Marketing. o bills.com - EBPP Internet portal for complete bill payment of all bills. 12
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 PERIOD ENDED MARCH 31, 2001 AND 2000 Our operations for the three months ended March 31, 2001 resulted in a net loss of $3,234,305, or $0.21 per share, as compared to $2,071,213, or $0.16 per share, for the three months ended March 31, 2000. We earned revenues totaling $470,667 and $6,426 for the three-month period ended March 31, 2001 and 2000, respectively. 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. At March 31, 2001, deferred revenue was $756,993. 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 year, total transaction fee revenue remains relatively low. We have 73 billers under contract who are in various stages of development. As of March 31, 2001, 36 billers are in production or pilot stages and have 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 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 Web site simpler and more secure for consumers to view, pay and manage their bills online. As part 13
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 $1,193,574 and $470,691 for the three-month period ended March 31, 2001 and 2000, respectively. 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 March 31, 2001, approximately 67 employees were involved in these functions. Cost of sales also includes fees paid for presentation of consumer bills on web sites powered by aggregators. Fees are also paid to third parties who perform the payment portion of the EBPP transaction. Research and development expenses increased 72% for the three months ended March 31, 2001 compared to the first quarter of 2000. The increase reflects the general growth of the Company over the same period. 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 $823,357 for the quarter ended March 31, 2001, as compared to $775,364 for the first quarter of 2000. 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 2000, as well as advertising media costs associated with bills.com, Inc. As of March 31, 2001, we employed 25 sales and marketing personnel as compared to 16 such personnel at March 31, 2000. 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. The majority of our billers currently in production plan to market and advertise EBPP to their consumers. 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 $1,182,336 for the quarter ended March 31, 14
2001, as compared to $570,205 for the first quarter of 2000. 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 $374,263 for the quarter ended March 31, 2001, as compared to $150,671 for the first quarter of 2000. 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 $231,000 of property and equipment during the three-month period ended March 31, 2001 and anticipate making capital expenditures of approximately $1.0 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 year ended December 31, 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. 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 CheckFree; however, those expense amounts are unknown as they are dependent upon various milestones to be achieved by CheckFree and several other variables. Net other income increased to $83,532 for the quarter ended March 31, 2001, from $66,477 for the first quarter of 2000. This increase primarily relates to interest earned from the equity investment by CheckFree in June 2000, interest earned on the proceeds of common stock sold under the 2001 private placement offering in March 2001, and the reduction of interest expense resulting from the January 2001 pay down of the outstanding line of credit. The increase in interest income is partially offset by the increased interest expense incurred on capital leases. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, the Company's principal source of liquidity consisted of $8.0 million of cash and cash equivalents and $1.0 million in short-term investments, compared to $6.2 million of cash and cash equivalents at December 31, 2000. Additionally, the Company had $1.0 million of long-term investments at March 31, 2001. At March 31, 2001, the Company had net working capital of $8.8 million. Net cash used in investing activities was $231,000 and $1.3 million for the three months ended March 31, 2001 and 2000, respectively, and primarily consisted of purchases of equipment and a deposit on our corporate office lease. Cash available for investment purposes increased substantially in the three months ended March 31, 2001, primarily as a result of the proceeds 15
from the equity investment. Net cash provided by financing activities of $5.2 million for the three months ended March 31, 2001 resulted from proceeds, net of issuance costs, of $6.8 million from the issuance of common stock under the 2001 private placement offering. The amount of net cash provided by financing activities was decreased by the $1.5 million January 2001 pay down of the outstanding line of credit. We anticipate making capital expenditures of approximately $1.0 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 2000 was $681,867, and in 2001, the aggregate rent expense is anticipated to be approximately $1.2 million. We believe that our current cash and cash equivalents and investment balances along with anticipated revenues will be sufficient to meet our anticipated cash needs beyond the fiscal year ending December 31, 2001; however, material shortfalls or variances from anticipated performance or unforeseen expenditures could require the Company to seek alternative sources of capital or to limit expenditures for operating or capital requirements. If such a shortfall in liquidity should occur, the Company has both the intent and the ability to take the necessary actions to preserve its liquidity through the reduction of expenditures. We expect to experience operating losses and negative cash flow for the 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: o the rate of consumer acceptance of the Internet, Internet technology, electronic commerce and our 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 our customer base and increase revenues o the level of expenditures for marketing and sales o the level of 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 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 16
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. 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, 2000 and other factors detailed from time to time in our filings with the Securities and Exchange Commission. One or more of these factors have affected, and in the future could affect, our businesses and financial results in the future and could cause actual results to differ materially from plans and projections. We believe that the assumptions underlying the forward-looking statements included in 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. 17
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) None in the first quarter of fiscal 2001. (b) Not applicable. (c) None in the first quarter of fiscal 2001. (d) Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None in the first quarter of fiscal 2001. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None in the first quarter of fiscal 2001. ITEM 5. OTHER INFORMATION None in the first quarter of fiscal 2001. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None in the first quarter of fiscal 2001. (b) Reports on Form 8-K: None in the first quarter of fiscal 2001. 18
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. billserv.com, Inc. Date: May 15, 2001 /s/ Louis Hoch -------------------------------------------- by: LOUIS HOCH President and Chief Operating Officer Date: May 15, 2001 /s/ Terri A. Hunter -------------------------------------------- by: TERRI A. HUNTER Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 19