SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
2002 OR
o
[ ] 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
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 0-30152
Billserv, Inc.
(Exact
BILLSERV, INC.
(Exact name of registrant as specified in its charter)
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NEVADA 98-0190072
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
211 NORTH LOOP 1604 EAST, SUITE 200
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 ýX No o
___
At November 1, 2001, 18,538,5262002, 20,603,799 shares of the registrant’sregistrant's common stock, $.001
par value, were outstanding.
================================================================================
INDEX
TO FORM 10-Q
Statements.........................................6 Item 2. |
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Operations............................................................9 Item 3. | |||
Information.................................................................15 Item 6. | |||
2
–- FINANCIAL INFORMATION
Item
ITEM 1. FINANCIAL STATEMENTS
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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| September 30, 2001 |
| December 31, 2000 |
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Assets: |
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Current assets: |
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Cash and cash equivalents |
| $ | 4,295,071 |
| $ | 6,171,822 |
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Investments |
| 1,115,281 |
| 1,013,900 |
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Accounts receivable, net |
| 650,746 |
| 782,537 |
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Prepaid expenses and other |
| 240,642 |
| 596,546 |
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Related party accounts receivable |
| 180,223 |
| 283,738 |
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Total current assets |
| 6,481,963 |
| 8,848,543 |
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Property and equipment, net of accumulated depreciation and amortization of $2,314,388 and $1,178,813 at September 30, 2001 and December 31, 2000, respectively |
| 4,049,071 |
| 4,518,347 |
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Intangible assets, net |
| 41,250 |
| 52,500 |
| ||
Long-term investments |
| - |
| 1,000,920 |
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Other assets |
| 593,631 |
| 870,232 |
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Total assets |
| $ | 11,165,915 |
| $ | 15,290,542 |
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Liabilities & shareholders’ equity: |
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Current liabilities: |
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Accounts payable |
| $ | 209,328 |
| $ | 726,804 |
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Accrued expenses and other current liabilities |
| 474,254 |
| 896,772 |
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Current portion of obligations under capital leases |
| 184,638 |
| 181,128 |
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Current portion of deferred revenue |
| 351,355 |
| 252,833 |
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Other current liabilities |
| - |
| 1,500,000 |
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Total current liabilities |
| 1,219,575 |
| 3,557,537 |
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|
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Obligations under capital leases, less current portion |
| 11,644 |
| 148,428 |
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Deferred revenue, less current portion |
| 355,794 |
| 573,167 |
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Shareholders’ equity: |
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Common stock, $.001 par value, 200,000,000 shares authorized; 18,538,526 issued and outstanding at September 30, 2001, 15,527,870 issued and outstanding at December 31, 2000 |
| 18,539 |
| 15,528 |
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Additional paid-in capital |
| 43,622,460 |
| 36,758,450 |
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Accumulated other comprehensive income |
| 3,248 |
| 13,109 |
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Deficit accumulated during the development stage |
| (34,065,345 | ) | (25,775,677 | ) | ||
Total shareholders’ equity |
| 9,578,902 |
| 11,011,410 |
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Total liabilities and shareholders’ equity |
| $ | 11,165,915 |
| $ | 15,290,542 |
|
See notes to interim condensed consolidated financial statements.
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
3
(A DEVELOPMENT STAGE COMPANY)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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| July 30, 1998 (Inception) to September 30, 2001 |
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| Three Months Ended |
| Nine Months Ended |
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| September 30, 2001 |
| September 30, 2000 |
| September 30, 2001 |
| September 30, 2000 |
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Revenues |
| $ | 831,893 |
| $ | 117,499 |
| $ | 2,031,364 |
| $ | 169,133 |
| $ | 2,736,825 |
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Cost of revenues |
| 1,306,400 |
| 1,071,207 |
| 3,764,966 |
| 2,334,809 |
| 7,583,154 |
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Gross margin |
| (474,507 | ) | (953,708 | ) | (1,733,602 | ) | (2,165,676 | ) | (4,846,329 | ) | |||||
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Operating expenses: |
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Selling and marketing |
| 436,248 |
| 1,481,040 |
| 1,810,641 |
| 3,110,095 |
| 8,236,377 |
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General and administrative |
| 1,052,416 |
| 1,049,160 |
| 3,324,078 |
| 2,455,845 |
| 9,190,132 |
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Research and development |
| 193,898 |
| 234,388 |
| 599,404 |
| 512,614 |
| 2,273,687 |
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Depreciation and amortization |
| 395,054 |
| 323,713 |
| 1,147,311 |
| 665,840 |
| 2,359,773 |
| |||||
Non-cash expense related to the issuance of warrants |
| - |
| - |
| - |
| 7,488,000 |
| 7,979,428 |
| |||||
Total operating expenses |
| 2,077,616 |
| 3,088,301 |
| 6,881,434 |
| 14,232,394 |
| 30,039,397 |
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Operating loss |
| (2,552,123 | ) | (4,042,009 | ) | (8,615,036 | ) | (16,398,070 | ) | (34,885,726 | ) | |||||
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Other income (expense), net: |
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Interest income |
| 82,594 |
| 314,474 |
| 322,197 |
| 500,159 |
| 1,082,291 |
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Interest expense |
| (8,861 | ) | (41,206 | ) | (33,770 | ) | (75,653 | ) | (241,942 | ) | |||||
Other income (expense) |
| - |
| (1,471 | ) | 36,941 |
| (271 | ) | 36,941 |
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Total other income, net |
| 73,733 |
| 271,797 |
| 325,368 |
| 424,235 |
| 877,290 |
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Loss before income taxes and cumulative effect of accounting change |
| (2,478,390 | ) | (3,770,212 | ) | (8,289,668 | ) | (15,973,835 | ) | (34,008,436 | ) | |||||
Income taxes |
| - |
| - |
| - |
| - |
| - |
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Net loss before cumulative effect of accounting change |
| (2,478,390 | ) | (3,770,212 | ) | (8,289,668 | ) | (15,973,835 | ) | (34,008,436 | ) | |||||
Cumulative effect of a change in accounting principle, net of taxes |
| - |
| - |
| - |
| (52,273 | ) | (52,273 | ) | |||||
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Net loss |
| $ | (2,478,390 | ) | $ | (3,770,212 | ) | $ | (8,289,668 | ) | $ | (16,026,108 | ) | $ | (34,060,709 | ) |
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Net loss before cumulative effect of accounting change - basic and diluted |
| $ | (0.13 | ) | $ | (0.24 | ) | $ | (0.47 | ) | $ | (1.10 | ) | $ | (2.51 | ) |
Cumulative effect of accounting change - basic and diluted |
| - |
| - |
| - |
| - |
| - |
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Net loss per common share - basic and diluted |
| $ | (0.13 | ) | $ | (0.24 | ) | $ | (0.47 | ) | $ | (1.10 | ) | $ | (2.51 | ) |
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Weighted average common shares outstanding - basic and diluted |
| 18,535,923 |
| 15,525,973 |
| 17,584,934 |
| 14,547,148 |
| 13,579,271 |
| |||||
See notes to interim condensed consolidated financial statements.
(unaudited)
SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
4
(A DEVELOPMENT STAGE COMPANY)
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY,
(UNAUDITED)
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| Deficit Accumulated |
| Unrealized |
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| Additional |
| During the |
| Gain/(Loss) |
| Total |
| |||||
|
| Common Stock |
| Paid-In |
| Development |
| on |
| Shareholders’ |
| |||||||
|
| Shares |
| Amount |
| Capital |
| Stage |
| Investments |
| Equity |
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Balance at July 30, 1998 (date of inception) |
| 1,000 |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
|
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 | ) | |||||
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Balance at December 31, 1998 |
| 10,030,000 |
| 10,030 |
| - |
| (294,406 | ) | - |
| (284,376 | ) | |||||
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 year ended December 31, 1999 |
| - |
| - |
| - |
| (5,472,948 | ) | - |
| (5,472,948 | ) | |||||
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Balance at December 31, 1999 |
| 13,113,065 |
| $ | 13,113 |
| $ | 13,695,584 |
| $ | (5,767,354 | ) | $ | - |
| $ | 7,941,343 |
|
See notes to interim condensed consolidated financial statements.
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY,
CONTINUED
(UNAUDITED)
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| Deficit |
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| Accumulated |
| Unrealized |
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| Additional |
| During the |
| Gain/(Loss) |
| Total |
| |||||
|
| Common Stock |
| Paid-In |
| Development |
| on |
| Shareholders’ |
| |||||||
|
| Shares |
| Amount |
| Capital |
| Stage |
| Investments |
| Equity |
| |||||
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Balance at December 31, 1999 |
| 13,113,065 |
| $ | 13,113 |
| $ | 13,695,584 |
| $ | (5,767,354 | ) | $ | - |
| $ | 7,941,343 |
|
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 year ended December 31, 2000 |
| - |
| - |
| - |
| (20,008,323 | ) | - |
| (20,008,323 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at December 31, 2000 |
| 15,527,870 |
| $ | 15,528 |
| $ | 36,758,450 |
| $ | (25,775,677 | ) | $ | 13,109 |
| $ | 11,011,410 |
|
Issuance of common stock, January 2, 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 |
| - |
| - |
| - |
| - |
| (9,861 | ) | (9,861 | ) | |||||
Equity issuance costs |
| - |
| - |
| (50,000 | ) | - |
| - |
| (50,000 | ) | |||||
Issuance of common stock, July 6, 2001 |
| 47,895 |
| 49 |
| 83,406 |
| - |
| - |
| 83,455 |
| |||||
Net loss for the nine months ended September 30, 2001 |
| - |
| - |
| - |
| (8,289,668 | ) | - |
| (8,289,668 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at September 30, 2001 |
| 18,538,526 |
| $ | 18,539 |
| $ | 43,622,460 |
| $ | (34,065,345 | ) | $ | 3,248 |
| $ | 9,578,902 |
|
See notes to interim condensed consolidated financial statements.
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
| July 30, 1998 |
| |||
|
|
|
|
|
| (Inception) to |
| |||
|
| Nine Months Ended |
| September 30, |
| |||||
|
| September 30, 2001 |
| September 30, 2000 |
| 2001 |
| |||
|
|
|
|
|
|
|
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
| |||
Net loss |
| $ | (8,289,668 | ) | $ | (16,026,108 | ) | $ | (34,060,709 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
| |||
Issuance of common stock warrants |
| - |
| 7,488,000 |
| 7,979,428 |
| |||
Depreciation and amortization |
| 1,147,311 |
| 665,840 |
| 2,359,733 |
| |||
Gain on sale of investments |
| (36,070 | ) | - |
| (36,070 | ) | |||
Cumulative effect of change in accounting principle |
| - |
| 52,273 |
| 52,273 |
| |||
Changes in current assets and current liabilities: |
|
|
|
|
|
|
| |||
(Increase) decrease in accounts receivable |
| 131,791 |
| (554,883 | ) | (650,746 | ) | |||
(Increase) decrease in related party receivables |
| 103,515 |
| (126,899 | ) | (180,223 | ) | |||
(Increase) decrease in prepaid expenses and other |
| 355,904 |
| (727,003 | ) | (19,868 | ) | |||
Increase (decrease) in accounts payable, accrued expenses and other current liabilities |
| (939,994 | ) | 136,392 |
| 838,582 |
| |||
Decrease in related party accounts payable |
| - |
| - |
| (150,000 | ) | |||
Increase (decrease) in deferred revenue |
| (118,851 | ) | 596,131 |
| 649,876 |
| |||
|
|
|
|
|
|
|
| |||
Net cash used in operating activities |
| (7,646,062 | ) | (8,496,257 | ) | (23,217,724 | ) | |||
|
|
|
|
|
|
|
| |||
Cash flows from investing activities: |
|
|
|
|
|
|
| |||
Purchases of property and equipment |
| (666,049 | ) | (2,470,023 | ) | (5,391,329 | ) | |||
Purchases of investments |
| - |
| (7,864,759 | ) | (8,140,255 | ) | |||
Proceeds from sales and maturities of investments |
| 1,028,680 |
| 4,867,821 |
| 6,891,728 |
| |||
Long-term deposits, net |
| 170,918 |
| (680,996 | ) | (638,619 | ) | |||
Other investing activities |
| 2,015 |
| (83,500 | ) | (79,475 | ) | |||
|
|
|
|
|
|
|
| |||
Net cash provided by (used in) investing activities |
| 535,564 |
| (6,231,457 | ) | (7,357,950 | ) | |||
|
|
|
|
|
|
|
| |||
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 |
| - |
| 1,500,000 |
| 2,500,000 |
| |||
Principal payments for notes payable |
| (1,500,000 | ) | - |
| (2,000,000 | ) | |||
Exercise of warrants |
| - |
| 6,096,498 |
| 6,096,498 |
| |||
Issuance of common stock, net of issuance costs |
| 6,867,021 |
| 9,630,783 |
| 29,055,043 |
| |||
Principal payments for capital lease obligations |
| (133,274 | ) | (471,018 | ) | (780,796 | ) | |||
|
|
|
|
|
|
|
| |||
Net cash provided by financing activities |
| 5,233,747 |
| 16,756,263 |
| 34,870,745 |
| |||
|
|
|
|
|
|
|
| |||
Net increase (decrease) in cash and cash equivalents |
| (1,876,751 | ) | 2,028,549 |
| 4,295,071 |
| |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents, beginning of period |
| 6,171,822 |
| 7,069,423 |
| - |
| |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents, end of period |
| $ | 4,295,071 |
| $ | 9,097,972 |
| $ | 4,295,071 |
|
|
|
|
|
|
|
|
| |||
Non-cash investing and financing activities: |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Purchases of equipment under capital leases |
| $ | - |
| $ | 278,080 |
| $ | 841,786 |
|
Conversion of debt to equity |
| $ | - |
| $ | - |
| $ | 500,000 |
|
See notes to interim condensed consolidated financial statements.
BILLSERV, INC.
(A DEVELOPMENT STAGE COMPANY)
(UNAUDITED)
Note
NOTE 1. Basis of Presentation
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Billserv, Inc.
(the “Company”"Company") have been prepared without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (“SEC”("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted accounting principlesin the
United States have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying condensed consolidated
financial statements reflect all adjustments of a normal recurring nature
considered necessary to present fairly the Company's financial position, results
of operations and cash flows for such periods. The accompanying interim
condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.2001.
Results of operations for interim periods are not necessarily indicative of
results that may be expected for any other interim periods or the full fiscal
year. Certain prior period amounts have been reclassified to conform to the
current year presentation.
In prior fiscal years, the Company had been in the
development stage, but is no longer considered to be a development stage
company.
The consolidated balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
The preparation of financial statements in conformity with United Statesaccounting principles
generally accepted accounting principlesin the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Note
NOTE 2. 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 that do not represent a separate earnings process to 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 for up-front implementation fees. The cumulative effect of this accounting change totaled $52,273. This amount was recognized as a non-cash after-tax charge during the first quarter of 2000. The cumulative effect was recorded as deferred revenue and is being recognized as revenue over the remaining contractual service periods.
Note 3. Comprehensive Loss
COMPREHENSIVE LOSS The Company's comprehensive loss is composed of net loss and unrealized gains and losses on investments held as available-for-sale investments. The following table presents the calculation of comprehensive loss:
|
|
|
|
|
|
|
|
|
| ||||
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2001 |
| 2000 |
| 2001 |
| 2000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| $ | (2,478,390 | ) | $ | (3,770,212 | ) | $ | (8,289,668 | ) | $ | (16,026,108 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Unrealized gain (loss) on investments |
| (7,382 | ) | 17,692 |
| (9,861 | ) | 12,642 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total comprehensive loss |
| $ | (2,485,772 | ) | $ | (3,752,520 | ) | $ | (8,299,529 | ) | $ | (16,013,466 | ) |
Note 4. Line of Credit
Note 5. Related Party Transactions
bank.
6
a certain officerofficers (including an
ex-officer of the Company) during the nine months ended September 30, 20012002 was
$184,000.$162,000. The Company had an aggregate of $48,000$116,000 in notes receivable bearing
interest at 8.0% annually from an ex-officer of the Company at December 31,
2001. In March 2002, this ex-officer repaid the balance of these loans in full,
including accrued interest. The Company had a $46,000 note receivable bearing
interest at 8.0% annually from a certain officer of the Company at December 31,
2001. In May 2002, this officer repaid the balance of this loan in full,
including accrued interest. As of September 30, 2001.
During December 2000 and May 2001,2002, there were no outstanding
loans due from any officer of the Company.
The Company has pledged $1.0 million and $530,000, respectively,$1,357,000 held in aas money market accountfunds and certificates
of deposit to collateralize certain margin loans of three officers and an
ex-officer of the Company. The margin loans are from an institutional lenderlenders and
are secured by shares of the Company’sCompany's common stock held by these officers. Additionally, the Company guaranteed theindividuals.
The total balance of thesethe margin loans which wereguaranteed by the Company was
approximately $1.5 million$1,347,000 at September 30, 2001.2002. The Company believes it has the
unrestricted legal right to use the pledged funds for its operations if
necessary.
During April 2001,necessary, but the institutional lenders holding the funds as collateral are
disputing this claim. Therefore, the funds are not currently available for the
Company's use as of the date of this report. In light of this dispute, the
Company pledged $430,000is attempting to negotiate a resolution of this matter with the lenders.
NOTE 5. NONMONETARY TRANSACTIONS
During the nine months ended September 30, 2002, the Company entered into two
nonmonetary transactions whereby the Company licensed the use of its Application
Service Provider ("ASP") payment gateway technology to certain third party
software vendors to be used as an original equipment manufacturer ("OEM")
component of their product offering in exchange for software products from those
vendors. These exchanges were determined to culminate the earning process and
the Company recognized revenue related to these transactions at the fair value
of the software received in accordance with APB Opinion No. 29, "Accounting for
Nonmonetary Transactions". The Company recognized $300,000 in a transaction
where the Company's technology was exchanged for customer relationship
management software and concurrent seat licenses to use in providing customer
care services via the Internet or telephone. The Company also recognized
$300,000 in a transaction where the Company's technology was exchanged for
document archival and retrieval software to use in the storage of electronic
billing statements. The book value of the gateway technology exchanged in both
transactions was zero. The Company has capitalized the software received and is
depreciating these assets over their estimated useful lives of three years.
NOTE 6. STOCK OPTION EXCHANGE
In May 2002, the Company tendered an offer to employees and non-employee
directors to cancel certain outstanding stock options under a stock option
exchange program. In return for voluntarily canceling certain stock options,
employees and non-employee directors will be granted an equal number of stock
options promptly after six months and one day from the cancellation date. The
exercise price of the new options granted will be equal to the fair market value
of the Company's common stock on the grant date. The program is not expected to
result in any additional compensation expense or variable plan accounting.
NOTE 7. FACILITIES LEASE
In May 2002, the lease agreement for the office space the Company utilizes for
its headquarters and operations was amended. The amendment reduced the leased
space to approximately 36,000 square feet and lowered the annual rent to
approximately $677,000 from $1,175,000. In return, the Company surrendered a
portion of its prepaid rent, which was included in other assets, to the lessor.
Including the write-off of affected leasehold improvements, the Company
recognized a charge related to the lease amendment of $346,000 for the quarter
ended June 30, 2002.
NOTE 8. CONVERTIBLE DEBT
On July 25, 2002, the Company executed a financing agreement with Laurus Master
Fund, Ltd. ("Laurus") in
7
Certificates of Deposit to collateralize a margin loan for one officerNovember 2002
and is currently aggressively pursuing strategic alternatives, including
investment in or sale of the Company. The margin loan is from an institutional lendersale of additional equity or
convertible debt securities would result in additional dilution to the Company's
stockholders, and is secured by shares of the Company’s common stock held by this officer. The Company has the unrestricted rightdebt financing, if available, may involve restrictive
covenants which could restrict operations or finances. There can be no assurance
that financing will be available in amounts or on terms acceptable to use the pledged funds for its operations if necessary.
Note 6. 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 issuedif 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,all. If the Company filed a registration statement with the SEC,cannot raise funds, on acceptable terms, or
achieve positive cash flow, it may not be able to continue to exist, conduct
operations, grow market share, take advantage of future opportunities or respond
to competitive pressures or unanticipated requirements, any of which became effective on Maywould
negatively impact its business, operating results and financial condition.
8
2001.
Note 7. New Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", which addresses the initial recognition of goodwill and other intangible assets acquired in a business combination and requires that all future business combinations be accounted for under the purchase method of accounting. In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets", which addresses the recognition and measurement of other intangible assets acquired outside of a business combination whether acquired individually or with a group of assets. In accordance with these statements, goodwill and certain intangible assets will no longer be amortized, but will be subject to at least an annual assessment of impairment. The Company will adopt these statements on a prospective basis on January 1, 2002, although certain provisions of these statements may also apply to business combinations completed after June 30, 2001. Management does not believe the adoption of these statements will have an adverse impact on the financial statements of the Company.
MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 2000.2001. All references
to “we,” “us”"we," "us" or “our”"our" in this Form 10-Q mean Billserv, Inc. (“Billserv”("Billserv" or the
“Company”"Company").
Overview
OVERVIEW
We provide electronic bill presentment and payment ("EBPP") and related services
to companies that generate recurring bills, primarily in the United States. EBPP
is the process of sending bills to consumers securely through the Internet and
processing Internet payment of bills utilizing an electronic transfer of funds.
Our service offering allows companies to outsource their electronic billing
process, providing them a single point of contact for developing, implementing
and managing their EBPP process. Billserv offers services to consolidate
customer billing information and then securely deliver an electronic bill to the
biller's own Billserv-hosted payment Web site, the consumer's e-mail inbox and
numerous Internet bill consolidation Web sites, such as those sponsored by
financial institutions. Our EBPP services allow billers to establish an
interactive, online relationship with their consumers by integrating Internet
customer care and direct marketing with the electronic bill. We provide
professional services to assist with the implementation and maintenance of an
electronic bill offering. The Company also provides Internet-based customer care
interaction services and operates an Internet bill presentment and payment
portal for consumers under the domain name www.bills.com.
Prior to 2002, Billserv was in the development stage, but is no longer
considered to be a development stage enterprise withcompany. We generated our first full year
of revenues in 2000 and therefore have a relatively 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 billers as clients and implementing Electronic Bill Presentment and Payment (“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,growth, 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.continue as a going concern. To address these risks, we must,
among other things, maintain and increase our customer base;base, implement and successfully execute our business and marketing strategy;a successful cost
reduction strategy, continue to developmaintain and upgrade our technology and
transaction-processing systems;systems, provide superior customer service;service, respond to
competitive developments;developments, attract, retain and motivate qualified personnel;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, andand as of
September 30, 2001,2002, we have an accumulated deficit of $34.1$42.5 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 to achieve profitability 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 client base, (c) drive the consumer
adoption rate of EBPP, (d)(b) meet changingevolving customer requirements and (e)(c) adapt to
technological changes in an emerging market. Accordingly, we intend to continuefocus on
activities and service offerings that serve 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 our Customer Communication Networksä to qualified prospective billers as well as converting existing clients to this enhanced service. Our selling strategy is a targeted approach with an emphasis on complementary marketing initiatives within key geographic areas in an attempt to driveencourage EBPP adoption rates. The approach begins with targeting localby
consumers 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. New accounts are obtained through both direct sales and by working with our valued reseller and referral partners in order to maximize our leverage in the marketplace. The Company also provides professional marketing consultations as a key element of its Account Management group to actively assist billers in creating programs to migrate their consumers to EBPP.existing billers. Because growth of our revenues is dependent upon
consumer acceptance of EBPP, we work directly and regularly withthe Company offers billers services for a client’s marketing department to spurfee that
encourage consumer adoption rates and increase the number of EBPP transactions.such as Online Demonstrations, Online
Enrollment Assistance, Instant Activation of consumers through bill warehousing,
and Auto Enrollment, which streamlines the enrollment process for new consumers
(collectively, "Preferred Enrollment").
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 sourcesThe components of our
service offering, all of which are currently available to customers and have
generated revenue to date with the exception of our electronic publishing and
storage services, include:
• eConsulting – Value-added professional
9
dedicated resources.
• ASP Gateway Services – Offersvalue-added resources to deliver customized EBPP services,
including payment gateway services that provide billers who are
already participating in EBPP using in-house software solutions a single
distribution point to virtually any bill presentment and payment
location across the World Wide Web in addition to itstheir existing
distribution points.
•points or biller direct site. Gateway technology may also
be embedded as an OEM (original equipment manufacturer) component
within vendors' software or service offerings to provide a
cost-effective, proven method to give their clients and consumers the
ability to make online payments, and view and pay bills anytime,
anywhere through bank and Internet payment portals.
o Licensing of CheckFree e-billing software as an authorized reseller in
Australia.
o Online bill payment and management services for consumers through the
bills.com – EBPP Internet portal for complete payment of all bills.
portal.
As a result of our limited operating history, the current economic environment
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’scustomer'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
RESULTS OF OPERATIONS
Revenues for the quarter andended September 30, 2002 decreased slightly to $827,736
from $831,893 for the quarter ended September 30, 2001. For the nine months
ended September 30, 2002 and 2001, were $831,893 andrevenues grew 62% to $3,299,821 from
$2,031,364, respectively, as compared to $117,499 and $169,133, respectively, for the quarter and nine months ended September 30, 2000.respectively. The increasesincrease from the prior year periods wereperiod was primarily
attributable to the addition of eConsulting services in 2001 and growth in transaction and related implementation fee revenue, which accounted for 45% of
the growth from the prior year nine-month period, due to an increase in the
number of implemented billers and volume of transactions. The increase in professional consulting fees, which
includes revenue from the licensing of ASP payment gateway technology, accounted
for 37% of the growth from the prior year nine-month period due to the
nonmonetary transactions discussed below. As of September 30, 2001,2002, we had 86114
billers under contract who were in various stages of development, including 67102
billers that were in full production or pilot stages.stages, as compared to 67 billers
in full production or pilot stages at September 30, 2001. Although revenue from
transaction fees continuesincreased significantly from the prior year periods,
transaction fees are not likely to increase quarter over quarter, total transaction fee revenue still makes up less than a majority of total revenues. Transaction fees can become a significantthe major revenue source only whenuntil
consumer adoption rates increase. While consumer adoption rates cannot be
controlled, we are working with our clients and partners to promote EBPP through
consumer education and marketing programs.
Priorprograms and the utilization of programmatic
adoption driving services such as Preferred Enrollment. The Company's first sale
as a reseller of CheckFree's e-billing software in Australia also contributed
18% to December 31, 1999, wethe increase in revenue from the prior year nine-month period. The sale
was made to an Australian billing service provider that is also an equal partner
with the Company in a joint venture formed to provide EBPP services to the
Australian market.
During the nine months ended September 30, 2002, the Company entered into two
nonmonetary transactions whereby the Company licensed the use of its ASP payment
gateway technology to certain third party software vendors to be used as an OEM
component of their product offering in exchange for software products from those
vendors. These exchanges were determined to culminate the earning process and
the Company recognized revenue generated from up-front fees upon completion of an implementation project. In December 1999,related to these transactions at the SEC issued SAB 101, which requires revenue generated from up-front implementation fees that do not represent a separate earnings process to be recognized over the termfair value
of the related service contract. We adopted SAB 101 on January 1, 2000,software received in accordance with APB Opinion No. 29, "Accounting for
Nonmonetary Transactions". The Company recognized $300,000 in a transaction
where the Company's technology was exchanged for customer relationship
management software and accordingly, revised our implementation fee revenue recognition policyconcurrent seat licenses to defer this typeuse in providing customer
care services via the Internet or telephone. The Company also recognized
$300,000 in a
10
revenue, whileelectronic billing statements.
The book value of the related costs will be expensed as incurred.gateway technology exchanged in both transactions was
zero. The cumulative effectCompany has capitalized the software received and is depreciating
these assets over their estimated useful lives 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 September 30, 2001, deferred revenue was $707,149. We anticipate that transaction fees and other services will make up a larger percentage of total revenue in future periods, which will reduce the effect that deferring implementation fee revenue has on our current operating results. However, the volume of transactions and amount of related revenue we will generate in future periods are dependent upon the rate at which consumers utilize EBPP.
years.
Cost of revenues includes the cost of personnel dedicated to the design of
electronic bill templates, creation of connections to third-party presentmentaggregators
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 $1,306,400$1,102,447 and
$1,071,207$1,306,400 for the quarterquarters ended September 30, 20012002 and 2000,2001, respectively, and
$3,764,966$3,759,603 and $2,334,809$3,764,966 for the nine months ended September 30, 20012002 and 2000,2001,
respectively. The increases are primarilydecrease from the resultprior year quarter is attributable to cost
reductions that were implemented in the second half of an increase in personnel2001. The resulting costs
associated with revenues recorded in these periods. We expectsavings from the prior year period were offset by the cost of revenuesthe CheckFree
software that was resold in the second quarter of 2002.
General and administrative expenses decreased to decrease as$878,567 for the quarter ended
September 30, 2002, from $1,052,416 for the prior year quarter due to lower rent
of $83,000 and cost reductions resulting from the restructuring and realignment
of our organization during the latter half of 2001 to better position the
Company for current economic and market conditions. In May 2002, the Company
renegotiated the lease terms for its corporate headquarters to provide for a
percentagereduction in future rent expense of revenues based on improved efficiencies as our revenue increases.
approximately $1.6 million over the
remaining term of the lease. The lease amendment required the Company to expense
a portion of its prepaid rent, which resulted in a one-time charge of $312,000
for the second quarter of 2002. In spite of this charge, general and
administrative expenses for the first nine months of 2002 decreased to
$3,125,010 from $3,324,078 in the prior year period due to the rent savings of
$83,000 in the third quarter of 2002 and the cost reductions made during 2001.
Selling and marketing expenses decreased to $436,248$196,960 and $765,521 for the
quarter and nine months ended September 30, 2001,2002, respectively, from $1,481,040 for the third quarter of 2000. For the first nine months of 2001, selling$436,248
and marketing expenses decreased to $1,810,641 from $3,110,095 for the comparable periodperiods of 2000.2001, respectively. The decreasesdecrease
from the prior year periods werewas primarily the result of lower advertising media costs relatedreductions in our direct
sales staff, which contributed 77% and 66% to promotion of the bills.com web sitedecrease from the prior year
quarter and nine-month period, respectively, as well as lower related travel
expenses and reductions in corporate marketing. We will continuetrade show participation, which contributed 5% and 17% to analyze our sales and marketing efforts in order to control costs, increase the
effectiveness of our sales force, and broaden our reach through reseller initiatives and advantageous alliances. We expect selling and marketing expenses to decrease as a percentage of total revenue in future periods as revenue from existing customers increases.
General and administrative expenses remained relatively flat at $1,052,416 for the quarter ended September 30, 2001, compared to $1,049,160 for the third quarter of 2000. General and administrative expenses for the nine months ended September 30, 2001 increased to $3,324,078 from $2,455,845 for the same period of the prior year. The increase in such expenses from the prior year quarter and nine-month period, is principally duerespectively. As we
have increased our focus on using strategic partners to provide sales
opportunities related to the costs associated with additional generaldeployment and administrative personnel hired to manageuse of our growth, as well as increased facilities costs resulting from our move to new corporate headquarters. Total rent expense in 2000 was $682,000, and in 2001, the aggregate rent expense is anticipated to be approximately $1.2 million. We expect total general and administrative expenses toEBPP services, we have
experienced a significant decrease in absolute dollars in subsequent periods as a resultthe amount of a continuing restructuring and realignment ofexpenses related to our
organization to make more efficient use of resources.
direct sales channel.
Research and development expenses includeconsist primarily of the cost of personnel
devoted to the design of new processes that will improve our electronic
presentment and payment abilities and capacities, new customer care and direct
marketing services, additional business-to-consumer applications, and
integration of third-party applications, new customer care solutions, additional business-to-consumer applications, business-to-business applications and solutions for direct marketing opportunities.applications. These expenses decreased 17%41% and 35% in
the third quarter and nine months of 2002, respectively, from the comparable
prior year periods due to a focus on our core competencies in order to implement
and service existing products. We plan to minimize our research and development
activities in the foreseeable future, as we intend to concentrate our limited
resources on generating revenue and servicing existing customers.
Depreciation and amortization decreased to $352,750 for the quarter ended
September 30, 2002, from $395,054 for the third quarter of 2001. During the nine
months ended September 30, 2002 and 2001, depreciation and amortization expenses
were $1,117,467 and $1,147,311, respectively. The decreases from the prior year
periods were the result of certain assets becoming fully depreciated during
2002. We acquired approximately $1.0 million of property and equipment during
the nine months ended September 30, 2002 and anticipate making minimal capital
expenditures over the remainder of 2002.
Net other expense was $458,673 for the quarter but were flatended September 30, 2002, as
compared to net other income of $73,733 for the secondthird quarter of 2001. Such expenses increased 17%Net other
expense was $458,220 for the nine months ended September 30, 2001 from2002, as compared
to net other income of $325,368 for the comparable prior year period. We will continueThese changes were
primarily attributable to invest in research and development$445,000 of interest expense recognized in the foreseeable future,third
quarter of 2002 related to the Company's convertible debt and lower interest
income earned in 2002 as it is an essential parta result of the execution of our business strategy. We believe that it will be importantlower investment balances and lower market
interest rates.
11
rapidly develop, test and offer new products and services to maintain a competitive advantage.
Depreciation and amortization increased to $395,054$2,275,705 for the quarter ended September 30, 2001, as compared to $323,7132002, from
$2,478,390 for the third quarter of 2000. During2001 partly as a result of the nine months ended September 30, 2001 and 2000, depreciation and amortizationdecrease in
costs of revenue of $204,000 from the prior year quarter. The overall decrease
in total operating expenses were $1,147,311 and $665,840, respectively. These increases were dueof $535,000 from the prior year quarter was offset
by the decrease in net other income. Net loss improved to depreciation related to the capital expenditures made for infrastructure and operating systems in support of our growth strategy. We purchased approximately $666,000 of property and equipment during the nine-month period ended September 30, 2001 and anticipate making capital expenditures of approximately $150,000 over the last three months of 2001.
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 expensed the fair value of these warrant issuances, which was calculated using the Black Scholes Model, and recorded the 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 may 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 decreased to $73,733 for the quarter ended September 30, 2001, from $271,797 for the third quarter of 2000. Net other income decreased to $325,368$6,317,517 for the
nine months ended September 30, 2001,2002, from $424,235$8,289,668 for the same prior year period. These decreases are primarily attributable to higher interest income earned in the prior year periodscomparable period
of 2001 partly as a result of investing the proceedsincrease in revenue of $1.3 million from the
common stock soldprior year period. Also contributing to CheckFreethe improvement was the overall decrease
in June 2000.
Liquidity and Capital Resources
total operating expenses of $1.5 million from the prior year period that was
offset partially by the decrease in net other income of $784,000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001,2002, the Company's principal sources of liquidity consisted of
$4.3$2.0 million of cash and cash equivalents and $1.1 million$67,000 in short-term investments,
compared to $6.2 million of cash and cash equivalents and $2.0 million$237,000 in marketable securitiesshort-term
investments at December 31, 2000.2001. Included in the cash balance at September 30,
2002 is $1,357,000 in money market funds and certificates of deposit being used
to collateralize certain margin loans of three officers and an ex-officer of the
Company. The margin loans are from institutional lenders and are secured by
shares of the Company's common stock held by these individuals. The total
balance of the margin loans guaranteed by the Company was approximately
$1,347,000 at September 30, 2002 and has decreased from approximately $2.0
million at December 31, 2001. The Company had net working capitalbelieves it has the unrestricted legal
right to use the pledged funds for its operations if necessary, but the
institutional lenders holding the funds as collateral are disputing this claim.
Therefore, the funds are not currently available for the Company's use as of $5.3 million at both September 30, 2001 and December 31, 2000.
the
date of this report. In light of this dispute, the Company is attempting to
negotiate a resolution of this matter with the lenders.
Net cash used in operating activities was $7.6$5.2 million and $8.5$7.6 million for the
nine months ended September 30, 20012002 and 2000,2001, respectively. The Company succeeded in lowering itsCompany's
average monthly net cash outflows, or cash burn rate, increased from
over $1.0 millionapproximately $440,000 in the firstsecond quarter of 20012002 to approximately $681,000$796,000
for the third quarter of 2001. We have implemented an on-going restructuring plan to address current market conditions and expect to achieve at least2002, primarily as a 30% reductionresult of the $645,000 repayment
of the Company's line of credit in theSeptember 2002.
Net cash burn rateused in investing activities was $213,000 for the remaining fourth quarternine months ended
September 30, 2002 and primarily reflected capital expenditures of 2001.
approximately
$406,000 for computer equipment and software offset by the return of $189,000 of
deposits. We anticipate making minimal capital expenditures for the remainder of
2002. Net cash provided by investing activities was $536,000 for the nine months
ended September 30, 2001 and reflected the sale of a marketable security held
for investment for $1.0 million and purchases of property and equipment.
Capital expenditures amounted to approximately $666,000 in the first nine months of 2001 and related primarily to the purchase of computer equipment and software. We anticipate making capital expenditures of approximately $150,000 for the last three months of 2001. Net cash used in investingfinancing activities was $6.2 million$138,000 for the nine months ended
September 30, 20002002 and included the borrowing of $1.5 million under a
convertible debt agreement, which was primarily used for purchasespartially offset by the effect of
investments and equipment and to make long-term deposits for leases.
$1,357,000 pledged as collateral as discussed above. Net cash provided by
financing activities wasof $5.2 million for the nine months ended September 30,
2001. The cash provided by financing activities in the first nine months of 2001 primarily resulted from proceeds, net of issuance costs, of $6.8 million from the
issuance of common stock under the March 2001 private placement offering. The
amount of net cash provided by financing activities was reduced by the $1.5 million repayment of the outstanding line of credit in January 2001. Net2001 reduced
the amount of 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. In addition, the Company drew $1,500,000 on its line of credit.
activities.
On June 9, 2000,March 29, 2002, the Company executed a working capital line of credit
agreement with a bank in the amount of $1,500,000.$700,000. The Company borrowed $645,000
on this line of credit during the six months ended June 30, 2002. In September
2002, the Company repaid the outstanding balance in full, including accrued
interest, and terminated the line of credit. Advances under the line of credit
accrued interest at the prime rate minus 0.25%, with repayment terms of monthly
interest-only payments and principal due in July 2001. TheJune 2003. As part of the line of
credit was secured by certain investmentsagreement, the Company had to maintain a minimum restricted cash balance
of $800,000 with the bank.
On August 26, 2002, the Company annouced that it had received a letter from
Nasdaq advising the Company that for a period of 30 consecutive trading days,
the price of the Company. TheCompany's common stock closed below the minimum price of $1.00
per share as required for continued listing on the Nasdaq National Market. Under
the Nasdaq Marketplace Rule, if the Company's common stock closes at $1.00 per
share or more for a minimum of 10 consecutive trading days before November 19,
2002, the Company borrowed $1,500,000 on this line of credit for the security deposit and leasehold improvements for the Company’s corporate headquarters and repaid the entire outstanding balance in January 2001. The line of credit expired in July 2001 and was not renewed.
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 for the foreseeable future; however, material shortfalls or variances from anticipated performance or unforeseen expenditures could requireregain share price compliance. If the Company to seek alternative sources of capital or to limit expenditures for operating or capital requirements.is not
compliant by that date, Nasdaq will provide the Company with written
notification that the Company's securities will be delisted from the Nasdaq
National Market. If such a shortfall in liquidity shouldthat were to occur, the Company has bothmay at that time appeal for
an extension to a Nasdaq Listing Qualifications Panel. The letter also stated
that the intent andCompany could apply to transfer its common stock to the Nasdaq SmallCap
Market, which makes available an extended grace period, up to an additional 270
days, for the minimum $1.00 bid price requirement. During this period, the
Company would also have the ability to taketransfer back to the necessary actionsNasdaq National
Market if it maintained a closing bid price equal to preserve its liquidity throughor greater than $1.00 for
30 consecutive trading days and if the reduction of expenditures. We expect to experience operating losses and negative cash flowCompany complies with all other continued
listing requirements 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.
that market. Our capital requirements depend on several factors, including:
• the
o The rate of consumer acceptance of the Internet, Internet technology,
electronic commerce and our online solution
• theservices
o 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
12
• possible acquisitions or investments in complementary businesses, products, services and technologies
• the
o The need to respond to unforeseen industry developments and other
factors
If our
The Company currently plans to meet its capital requirements varyprimarily through
issuance of equity securities or new borrowing arrangements, and in the longer
term, revenue from those currently planned, we may require additional financing sooner than anticipated. Ifoperations. Due to a material shortfall from anticipated
revenues and the inability to access its funds held as collateral to guarantee
certain executive margin loans as discussed above, the Company believes that its
current available cash marketable securities and cash thatequivalents and investment balances along with
anticipated revenues may be generated from operations are insufficient to satisfy our liquidity requirements, we may seek to sell additional equitymeet its anticipated cash needs for
the foreseeable future. Accordingly, the Company reduced its workforce by 36
employees in November 2002 and is currently aggressively pursuing strategic
alternatives, including investment in or secure borrowings.sale of the Company. The sale of
additional equity or convertible debt securities would result in additional
dilution to our shareholders,the Company's stockholders, 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,the Company, if at all. If wethe Company cannot raise funds, on
acceptable terms, weor achieve positive cash flow, it may not be able to continue
to exist, expand ourconduct operations, grow market share, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements,
any of which would negatively impact ourits business, operating results and
financial condition.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORMREFORM 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’smanagement'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” inRisk Factors section of Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, of the Annual Report on Form 10-K
for the year ended December 31, 20002001 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 this 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
13
The Company’sCompany's exposure to market risk for changes in interest rates relates
primarily to the Company’sCompany's current investment portfolio. Certain of the
Company’sCompany's marketable securities are designated as “available"available for sale”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.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this Quarterly Report on Form
10-Q, an evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design
and operation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934). Based on that
evaluation, the Company's CEO and CFO concluded that the Company's disclosure
controls and procedures were effective in ensuring that material information
relating to the Company with respect to the period covered by this report was
made known to them. Since the date of their evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls, including any corrective actions with
regard to significant deficiencies and material weaknesses, other than the
reduction in workforce in November 2002 discussed in Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations, on
page 13 of this report. The workforce reduction is not expected to have a
significant effect on the effectiveness of the Company's disclosure controls,
particularly with respect to the period covered by this report.
14
– - OTHER INFORMATION
Item 5. Other Information
ITEM 5. OTHER INFORMATION
On October 31, 2001,August 16, 2002, the Company announced that its Board of Directors approved
the appointment of Richard BergmanMitch Hovendick to serve as a member of the Board of
Directors.
Item 6. Exhibits and Reports Concurrently, the Company also announced that Roger Hemminghaus
resigned from the Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
- ------- -----------
3.1 Articles of Incorporation, as amended (incorporated by reference to
such exhibit in the Registrant's Registration Statement on Form 8–K
(a) Exhibits:
None.
SB-2,
filed December 29, 1999)
3.2 By-laws, as amended (incorporated by reference to such exhibit in the
Registrant's Registration Statement on Form SB-2, filed December 29,
1999)
4.1 Rights Agreement, dated October 4, 2000 (incorporated by reference to
such exhibit in the Registrant's Registration Statement on Form 8-A,
filed October 11, 2000)
10.1 Securities Purchase Agreement, dated July 25, 2002, relating to the
purchase and sale of a convertible note and warrant (incorporated by
reference to such exhibit in the Registrant's Current Report on Form
8-K, filed August 1, 2002)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
(b) Reports on Form 8–K:
The8-K:
On August 1, 2002, the Company did not file any reportsfiled a Current Report on Form 8-K duringregarding
the three months ended September 30, 2001.
ItemsCompany's execution of a financing agreement with Laurus Master Fund, Ltd.
The matter was reported under Item 5 of Form 8-K and the related securities
purchase agreement was filed as an exhibit under Item 7 of Form 8-K.
ITEMS 1, 2, 3 andAND 4 are not applicable and have been omitted.
ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
15
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.
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