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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
|X| AMENDMENT NO. 2 TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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, 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 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 |X| No |_|
At May 1, 2002, 20,581,126 shares of the registrant's common stock, $.001 par
value, were outstanding.
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Billserv, Inc.
INDEX
Part I - Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2002
and December 31, 2001 ........................................... 3
Consolidated Statements of Operations for the three months
ended March 31, 2002 and 2001 ................................... 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2002 and 2001 ................................... 5
Notes to Consolidated Financial Statements ........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 14
Item 4. Controls and Procedures ........................................... 14
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K .................................. 15
Signature .................................................................. 16
Certifications ............................................................. 17
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BILLSERV, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2002 December 31, 2001
-------------- -----------------
(Unaudited) (Note 1)
Assets:
Current assets:
Cash and cash equivalents $ 1,579,700 $ 4,173,599
Cash pledged as collateral for related party obligations 1,914,794 2,018,951
Restricted cash 800,000 --
Investments restricted as collateral for capital leases 243,074 236,948
Accounts receivable, net 486,400 437,677
Prepaid expenses and other 309,151 225,795
Related party notes receivable 41,304 162,154
------------ ------------
Total current assets 5,374,423 7,255,124
Property and equipment, net 3,939,000 3,701,205
Intangible asset, net 33,750 37,500
Other assets 423,370 421,307
------------ ------------
Total assets $ 9,770,543 $ 11,415,136
============ ============
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 636,488 $ 201,513
Accrued expenses and other current liabilities 369,795 664,200
Current portion of obligations under capital leases 98,544 148,228
Current portion of deferred revenue 318,484 490,829
------------ ------------
Total current liabilities 1,423,311 1,504,770
Deferred revenue, less current portion 152,151 161,800
Long-term borrowings 300,000 --
Stockholders' equity:
Common stock, $.001 par value, 200,000,000 shares authorized; 20,581,126
issued and outstanding at March 31, 2002, 20,538,526 issued and
outstanding at
December 31, 2001 20,581 20,539
Additional paid-in capital 45,948,513 45,909,410
Accumulated deficit (38,074,013) (36,181,383)
------------ ------------
Total stockholders' equity 7,895,081 9,748,566
------------ ------------
Total liabilities and stockholders' equity $ 9,770,543 $ 11,415,136
============ ============
See notes to interim consolidated financial statements.
3
BILLSERV, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended March 31,
------------------------------
2002 2001
------------ ------------
Revenues $ 1,129,672 $ 509,409
Cost of revenues 1,205,096 1,232,316
------------ ------------
Gross margin (75,424) (722,907)
Operating expenses:
General and administrative 964,693 1,182,336
Selling and marketing 322,587 823,357
Research and development 138,675 214,974
Depreciation and amortization 424,000 374,263
------------ ------------
Total operating expenses 1,849,955 2,594,930
------------ ------------
Operating loss (1,925,379) (3,317,837)
Other income (expense), net:
Interest income 35,977 97,509
Interest expense (5,622) (14,848)
Equity in earnings of
unconsolidated subsidiary 2,180 --
Other income (expense) 214 871
------------ ------------
Total other income, net 32,749 83,532
------------ ------------
Loss before income taxes (1,892,630) (3,234,305)
Income taxes -- --
------------ ------------
Net loss $ (1,892,630) $ (3,234,305)
============ ============
Net loss per common share - basic and
diluted $ (0.09) $ (0.21)
Weighted average common shares
outstanding - basic and diluted 20,577,813 15,697,051
See notes to interim consolidated financial statements.
4
BILLSERV, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net loss $(1,892,630) $(3,234,305)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 424,000 374,263
Equity in earnings of unconsolidated subsidiary (2,180) --
Changes in current assets and current liabilities:
(Increase) decrease in accounts receivable (48,723) 276,807
Decrease in related party notes receivables 134,605 164,390
(Increase) decrease in prepaid expenses and other (83,239) 185,590
Increase (decrease) in accounts payable,
accrued expenses and other current liabilities 126,815 (881,979)
Decrease in deferred revenue (181,994) (69,007)
----------- -----------
Net cash used in operating activities (1,523,346) (3,184,241)
Cash flows from investing activities:
Purchases of property and equipment (658,045) (231,452)
Other investing activities (6,126) 935
----------- -----------
Net cash used in investing activities (664,171) (230,517)
Cash flows from financing activities:
Proceeds from notes payable 300,000 --
Principal payments for notes payable -- (1,500,000)
Increase in restricted cash for collateral on note payable (800,000) --
Principal payments for capital lease obligations (49,684) (42,777)
Cash pledged as collateral for related party obligations 104,157 --
Issuance of common stock, net of issuance costs 39,145 6,783,566
----------- -----------
Net cash provided by (used in) financing activities (406,382) 5,240,789
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,593,899) 1,826,031
Cash and cash equivalents, beginning of period 4,173,599 6,171,822
----------- -----------
Cash and cash equivalents, end of period $ 1,579,700 $ 7,997,853
=========== ===========
See notes to interim consolidated financial statements.
5
BILLSERV, INC.
Notes to INTERIM Consolidated Financial Statements
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Billserv, Inc.
(the "Company") have been prepared without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying 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 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/A for the year
ended December 31, 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 generally accepted accounting principles
for complete financial statements.
The preparation of financial statements in conformity with accounting principles
generally accepted in 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 2. 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
March 31,
------------------------------
2002 2001
----------- -----------
Net loss $(1,892,630) $(3,234,305)
Unrealized gain (loss) on investments -- 25,155
----------- -----------
Total comprehensive loss $(1,892,630) $(3,209,150)
=========== ===========
Note 3. Line of Credit
On March 29, 2002, the Company executed a working capital line of credit
agreement with a bank in the amount of $700,000. 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 June 2003. As part of the
line of credit agreement, the Company must maintain a minimum restricted cash
balance of $800,000 with the bank. The Company borrowed $300,000 under this line
of credit for a software purchase in March 2002.
6
Note 4. Related Party Transactions
From time to time, the Company has made loans to certain officers of the
Company. These amounts are included in Related Party Notes Receivable. The
highest aggregate amount outstanding of loans due from officers (including an
ex-officer of the Company) during the three months ended March 31, 2002 was
$162,000. The Company had an aggregate of $115,000 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 $41,000 note receivable bearing
interest at 8.0% annually from a certain officer of the Company at March 31,
2002. In May 2002, this officer repaid the balance of this loan in full,
including accrued interest. As of May 10, 2002, there were no outstanding loans
due from any officer of the Company.
The Company has pledged $1.9 million held as money market funds and certificates
of deposit to collateralize margin loans of three officers and an ex-officer of
the Company. These funds are classified as Cash pledged as collateral for
related party obligations on the Company's balance sheet at March 31, 2002. The
margin loans are from an institutional lender and are secured by shares of the
Company's common stock held by these individuals. The Company's purpose in
collateralizing the margin loans was to prevent the sale of the Company's common
stock held by these officers while the Company was pursuing efforts to raise
more capital through private equity placements. The sale of the Company's common
stock by these officers may have hindered the Company's ability to raise capital
in such a manner and compromised the Company's continuing efforts to secure
additional financing. The total balance of the margin loans guaranteed by the
Company was approximately $1.8 million at March 31, 2002. The Company believes
it has the unrestricted legal right to use the pledged funds for its operations
if necessary based on (i) its interpretation of the loan guarantee agreements,
(ii) the market price of the Company's stock at the time of the pledge, and
(iii) assurances the Company received from one of the institutional lenders that
funds would be made available if needed. The agreements provide for the Company
to terminate its guarantees at its sole discretion, and at the time the Company
entered into these agreements, the value of the stock pledged by the officers to
secure their margin loans exceeded the balance of the loans in the aggregate.
Note 5. Nonmonetary Transactions
During the three months ended March 31, 2002, the Company entered into a
nonmonetary transaction whereby the Company licensed the use of its ASP payment
gateway technology to a certain third party software vendor to be used as an OEM
component of their product offering in exchange for software products from that
vendor. The Company accounted for this transaction in accordance with APB
Opinion No. 29, "Accounting for Nonmonetary Transactions". This exchange was
determined to culminate the earning process because the technology exchanged by
the Company was held for sale in the ordinary course of business and the product
received by the Company was expected to be deployed and utilized as a productive
asset. The Company recognized $300,000 of revenue related to this transaction at
the fair value of the software received, which was determined by reference to
vendor-specific objective evidence, because it was more clearly evident than the
value of the asset transferred. The value of the software received was estimated
by comparison to third party evidence including vendor-specific established
pricing lists and historical sales information and was more readily determinable
because the Company did not have a history of comparable cash sales of its
payment gateway technology. 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 carrying
value of the gateway technology exchanged in this transaction was zero. The
Company has capitalized the software received and is depreciating the asset over
its estimated useful life of three years.
Note 6. Subsequent Events
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.
In May 2002, the lease agreement for the office space the Company utilizes for
its headquarters and operations was amended. The amendment reduces the leased
space to approximately 36,000 square feet and lowers the annual rent to
approximately $677,000. In return, the Company will surrender a portion of its
prepaid rent, which is included in Other assets at March 31, 2002, to the
lessor.
7
Item 2. MANAGEMENT'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 consolidated financial
statements and the notes thereto included in this report, and the Company's
Annual Report on Form 10-K/A for the year ended December 31, 2001. All
references to "we," "us" or "our" in this Form 10-Q/A mean Billserv, Inc.
("Billserv" or the "Company").
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 company. 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. Our prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stages of 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. 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, 2002, we have an accumulated deficit of $38.1 million. The Company expects
to continue to incur losses during the next several quarters of operations as
efforts to achieve profitability continue. We believe that our success will
depend in large part on our ability to (a) drive the consumer adoption rate of
EBPP, (b) continue to add quality billers to our significant client base, (c)
meet evolving customer requirements and (d) adapt to technological changes in an
emerging market. Accordingly, we intend to focus on activities and service
offerings that serve to encourage EBPP adoption by consumers and billers as well
as continue to invest in product research and development, technology and
infrastructure as required to remain competitive.
8
In keeping with this strategy, our sales focus has shifted to a more
comprehensive offering that delivers a single, outsourced capability 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 puts billers in direct, interactive contact with their consumers. We
refer to this as a "Customer Communication Network". We are actively promoting
our Customer Communication Networks to qualified prospective billers as well as
converting existing customers 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 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 attempt 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 move their consumers to EBPP. Because growth of our revenues is dependent
upon consumer acceptance of EBPP, we work directly and regularly with a 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, all of which are currently available to customers and have
generated revenue to date, include:
o Direct Delivery - Offers a distribution medium whereby the
electronic bill is delivered directly to the consumer's email inbox,
giving them the opportunity to make payments directly from it by
accessing the link to the appropriate biller direct site.
o Preferred Enrollment - Offers billers services that encourage
consumer adoption of EBPP 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.
o eConsulting - Provides value-added professional services for EBPP
billers or software vendors needing dedicated resources to deliver
customized EBPP capabilities.
o eInsert - Provides a targeted messaging medium that interacts with
consumers individually by dynamically presenting customized
communication campaigns directly on the electronic bill statement.
o ASP Gateway Services - Offers billers who are already participating
in EBPP using in-house software a single distribution point to
virtually any bill presentment and payment location across the World
Wide Web in addition to their existing distribution points or biller
direct site. ASP Gateway may also be used by vendors 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 bills.com - Provides an EBPP Internet portal for complete receipt,
management and payment of all bills.
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'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.
9
Results of Operations
Billserv's revenues are principally derived from fees for implementing EBPP
capabilities, processing EBPP transactions and providing related customer care,
and consulting services. Revenues by type for the three months ended March 31,
2002 and 2001 are as follows:
Three Months Ended
-------------------------------
March 31, 2002 March 31, 2001
-------------- --------------
Service revenues:
Implementation revenues $ 100,680 $ 74,512
Transaction revenues 468,202 215,792
Consulting revenues 560,790 219,105
---------- --------
Total revenues $1,129,672 $509,409
========== ========
Revenues for the quarter ended March 31, 2002 increased 122% to $1,129,672 from
$509,409 for the quarter ended March 31, 2001. The increase from the prior year
quarter was primarily attributable to growth in eConsulting services, which
accounted for 55% of the growth from the prior year quarter, and transaction fee
revenue, which accounted for 41% of the growth from the prior year quarter, due
to an increase in the number of implemented billers and volume of transactions.
As of March 31, 2002, we had 113 billers under contract who were in various
stages of development, including 92 billers that were in full production or
pilot stages, as compared to 36 billers in full production or pilot stages at
March 31, 2001. Although revenue from transaction fees increased significantly
from the prior year quarter, transaction fees are not likely to become the major
revenue source until 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 and the
utilization of programmatic adoption driving services such as Preferred
Enrollment.
During the three months ended March 31, 2002, the Company entered into a
nonmonetary transaction whereby the Company licensed the use of its ASP payment
gateway technology to a certain third party software vendor to be used as an OEM
component of their product offering in exchange for software products from that
vendor. This exchange was determined to culminate the earning process and the
Company recognized $300,000 of revenue related to this transaction at the fair
value of the software received in accordance with APB Opinion No. 29,
"Accounting for Nonmonetary Transactions". 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 book value of the gateway technology exchanged in this
transaction was zero. The Company has capitalized the software received and is
depreciating the asset over its estimated useful life of three years.
Cost of revenues includes the cost of personnel dedicated to the design of
electronic bill templates, creation of connections to third-party aggregators
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 $1,205,096 and
$1,232,316 for the quarters ended March 31, 2002 and 2001, respectively. The
decrease is primarily the result of efforts to make more efficient use of
resources in light of our profitability objectives and reflects $18,000 in
personnel cost reductions that were implemented in the second half of 2001 and a
decrease in non-personnel related costs of $9,000. We expect cost of revenues to
continue to decrease as a percentage of revenues due to improved efficiencies as
our revenue increases.
General and administrative expenses decreased to $964,693 for the quarter ended
March 31, 2002, from $1,182,336 for the first quarter of 2001. The decrease in
such expenses from the prior year quarter is principally due to the
restructuring and realignment of our organization during the latter half of 2001
to better position the Company for current economic and market conditions. We
expect total general and administrative expenses to remain relatively flat in
absolute dollars in subsequent periods as we continue to emphasize management of
expenses.
10
Selling and marketing expenses decreased to $322,587 for the quarter ended March
31, 2002, from $823,357 for the first quarter of 2001. The decrease from the
prior year quarter was primarily the result of reductions in our direct sales
staff, which contributed 58% to the decrease from the prior year quarter, as
well as lower related travel expenses and trade show participation, which
contributed 23% to the decrease from the prior year quarter. As we have
increased our focus on using strategic partners to provide sales opportunities
related to the deployment and use of our EBPP services, we have experienced a
significant decrease in the amount of expenses related to our direct sales
channel. We will continue 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.
Research and development expenses consist 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 and business-to-business
applications, and integration of third-party applications. These expenses
decreased 35% in the first quarter of 2002 from the prior year quarter due to a
focus on our core competencies in order to implement and service existing
products. We will continue to invest in research and development in the
foreseeable future, as we believe this is critical in order to remain
competitive.
Depreciation and amortization increased to $424,000 for the quarter ended March
31, 2002, as compared to $374,263 for the first quarter of 2001. This increase
was due to depreciation related to the capital expenditures made for
infrastructure and operating systems in support of our growth strategy. We
purchased approximately $658,000 of property and equipment during the quarter
ended March 31, 2002 and anticipate making capital expenditures of approximately
$400,000 over the remaining nine months of 2002.
Net other income decreased to $32,749 for the quarter ended March 31, 2002, from
$83,532 for the first quarter of 2001. This decrease is primarily attributable
to lower interest income earned in 2002 as a result of lower market interest
rates.
Net loss improved to $1,892,630 for the quarter ended March 31, 2002, from
$3,234,305 for the first quarter of 2001 as a result of the overall decrease in
total operating expenses and the increase in revenue from the prior year
quarter.
Liquidity and Capital Resources
At March 31, 2002, the Company's principal sources of liquidity consisted of
$2.4 million of cash and cash equivalents, including $800,000 of restricted
cash, and $243,000 in short-term investments, compared to $4.2 million of cash
and cash equivalents and $237,000 in short-term investments at December 31,
2001. The Company had net working capital of $4.0 million at March 31, 2002 and
$5.8 million at December 31, 2001.
The Company has pledged $1.9 million held as money market funds and certificates
of deposit to collateralize margin loans of three officers and an ex-officer of
the Company. These funds are classified as Cash pledged as collateral for
related party obligations on the Company's balance sheet at March 31, 2002. The
margin loans are from an institutional lender and are secured by shares of the
Company's common stock held by these individuals. The Company's purpose in
collateralizing the margin loans was to prevent the sale of the Company's common
stock held by these officers while the Company was pursuing efforts to raise
more capital through private equity placements. The sale of the Company's common
stock by these officers may have hindered the Company's ability to raise capital
in such a manner and compromised the Company's continuing efforts to secure
additional financing. The total balance of the margin loans guaranteed by the
Company was approximately $1.8 million at March 31, 2002. The Company believes
it has the unrestricted legal right to use the pledged funds for its operations
if necessary based on (i) its interpretation of the loan guarantee agreements,
(ii) the market price of the Company's stock at the time of the pledge, and
(iii) assurances the Company received from one of the institutional lenders that
funds would be made available if needed. The agreements provide for the Company
to terminate its guarantees at its sole discretion, and at the time the Company
entered into these agreements, the value of the stock pledged by the officers to
secure their margin loans exceeded the balance of the loans in the aggregate.
11
Net cash used in operating activities was $1.5 million and $3.2 million for the
quarters ended March 31, 2002 and 2001, respectively. The Company's average
monthly net cash outflows, or cash burn rate, increased from approximately
$466,000 in the fourth quarter of 2001 to approximately $621,000 for the first
quarter of 2002 as a result of one-time annual payments for items such as
property taxes and renewals of insurance premiums. We plan to continue to focus
on expending our resources prudently and expect to achieve positive cash flow by
the end of 2002 as a result of anticipated revenue growth. The Company believes
that positive cash flow will be realized before achieving profitability due to
the Company's history of collecting up-front fees for certain work performed in
implementing services for new customers and the expectation of future new
service contracts and collection of similar fees related to them. Since these
up-front implementation fees are deferred and recognized over the term of the
related service contract while the related costs are expensed as incurred, cash
receipts related to a new service contract that includes an up-front fee will
typically exceed the amount of related revenue that is recognized during the
implementation period following inception of such a contract. If sales of future
new service contracts with up-front implementation fees do not occur as
expected, the realization of positive cash flow may be delayed.
Net cash used in investing activities was $664,000 for the quarter ended March
31, 2002 and primarily reflected capital expenditures for computer equipment and
software, which amounted to approximately $658,000 in the first three months of
2002. We anticipate making capital expenditures of approximately $400,000 for
the remaining nine months of 2002. Net cash used in investing activities was
$231,000 for the quarter ended March 31, 2001 and was also primarily used for
purchases of property and equipment.
Net cash used in financing activities was $406,000 for the quarter ended March
31, 2002 and included a $300,000 draw under the Company's line of credit and the
return of $104,000 pledged as collateral as discussed above. These cash inflows
were offset by the restriction of $800,000 as collateral for the line of credit.
Net cash provided by financing activities of $5.2 million for the quarter ended
March 31, 2001 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 $1.5 million repayment of the outstanding line of credit in
January 2001 reduced the amount of net cash provided by financing activities.
On March 29, 2002, the Company executed a working capital line of credit
agreement with a bank in the amount of $700,000. 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 June 2003. The line of
credit is secured by certain investments of the Company. The Company borrowed
$300,000 on this line of credit for a software purchase in March 2002.
Our capital requirements depend on several factors, including:
o The rate of consumer acceptance of the Internet, Internet
technology, electronic commerce and our online services
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
computer 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
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 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 next several quarters as we work
toward achieving profitability and generating positive cash flow from
operations.
12
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/A 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
Risk 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/A for the year ended December 31, 2001 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/A 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/A 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. 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.
Item 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this Quarterly Report on Form
10-Q/A, 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.
13
Part II - OTHER INFORMATION
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 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)
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:
The Company did not file any reports on Form 8-K during the three months
ended March 31, 2002.
Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.
14
SIGNATURE
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, Inc.
By: /s/ Terri A. Hunter
-------------------------------------
Terri A. Hunter
Executive Vice President and
Chief Financial Officer
(Duly authorized and principal
financial and accounting officer)
Date: June 25, 2003
15
CERTIFICATIONS
I, Michael R. Long, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Billserv, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: June 25, 2003 /s/ Michael R. Long
----------------------------------------
Michael R. Long
Chief Executive Officer
16
I, Terri A. Hunter, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Billserv, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: June 25, 2003 /s/ Terri A. Hunter
----------------------------------------
Terri A. Hunter
Chief Financial Officer
17