Usio - 10-Q quarterly report FY

The following discussion and analysis of financial condition and results of operations contains forward-looking statements that involve a number of risks and uncertainties.  Actual results in future periods may differ materially from those expressed or implied in such forward-looking statements.  This discussion should be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes thereto included in this report, and the Company's Annual Report on Form 10-K for the year ended December 31, 2000.  All references to “we,” “us” or “our” in this Form 10-Q mean Billserv, Inc. (“Billserv” or the “Company”).

Overview

Billserv is a development stage enterprise with a limited operating history on which to base an evaluation of our businesses and prospects.  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.  Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets such as electronic commerce.  Such risks include, but are not limited to, an evolving and unpredictable business model and our ability to manage growth.  To address these risks, we must, among other things, maintain and increase our customer base; implement and successfully execute our business and marketing strategy; continue to develop and upgrade our technology and transaction-processing systems; provide superior customer service; respond to competitive developments; attract, retain and motivate qualified personnel; and respond to unforeseen industry developments and other factors.  We cannot assure you that we will be successful in addressing such risks, and the failure to do so could have a material adverse effect on our business, prospects, financial condition and results of operations.

Since inception, we have incurred operating losses each quarter, and as of June 30, 2001, we have an accumulated deficit of $31.6 million.  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.  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.  In addition, our sales focus has shifted to a more comprehensive offering that delivers a single, outsourced solution for developing customer relationships utilizing the electronic bill as a dynamic communication medium.  By integrating our electronic billing capabilities with online real-time customer care support provided by our Internet Interaction Center (“IIC”) and Internet-enabled direct marketing and communication (“IDMC”), Billserv effectively creates a media network that puts billers in direct, interactive contact with their customers.  We are actively promoting conversion of our current clients to such Customer Communication Networksäas well as qualified potential new billers. 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 selected metropolitan areas with high Internet usage that have the willingness and ability to market EBPP access to their consumers.  Additionally, we will continue to target national billers to offer complete coverage of all recurring bills in each targeted region. The Company also has a professional staff of adoption marketing consultants that actively assist billers in creating programs to migrate their consumers to EBPP.  Because growth of our revenues is dependent upon consumer acceptance of EBPP, we work directly and regularly with every client’s marketing department to spur adoption rates and increase the number of EBPP transactions. Since we have a significant amount of investment in infrastructure and a certain level of fixed 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:

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.  Although we systematically budget for planned outlays and maintain tight controls on our expenditures, 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

Revenues for the quarter and six months ended June 30, 2001 were $690,062 and $1,199,471, respectively, as compared to $45,208 and $51,634, respectively, for the quarter and six months ended June 30, 2000.  The increases from the prior year periods were primarily attributable to the provision of eConsulting services in 2001 and growth in transaction and related implementation fee revenue.  As of June 30, 2001, we had 84 billers under contract who were in various stages of development, including 60 billers that were in full production or pilot stages.  Although revenue from transaction fees has dramatically increased during the last year, total transaction fee revenue remains relatively low as a percentage of total revenues.  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 through consumer education and marketing programs.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 totaled $52,273 and was 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 June 30, 2001, deferred revenue was $669,274.  We anticipate that transaction fees and other services will be 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 related revenue we will earn in future periods are dependent upon the rate at which consumers utilize EBPP.

Cost of revenues 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 professional staff dedicated to providing contracted services to EBPP customers under consulting arrangements.  Cost of revenues also includes fees paid for presentation of consumer bills on Web sites powered by aggregators and processing of payments for EBPP transactions by third party providers.  Cost of revenues was $1,226,250 and $792,911 for the quarter ended June 30, 2001 and 2000, respectively, and $2,458,566 and $1,263,602 for the six months ended June 30, 2001 and 2000, respectively.  The increases are primarily the result of an increase in personnel costs associated with revenues recorded in these periods.  We expect cost of revenues to decrease as a percentage of revenues based on improved efficiencies as our revenue increases.

Research and development 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.  These expenses increased 24% and 46% for the three and six months ended June 30, 2001, respectively, from the comparable prior year periods.  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.