ONLINE RESOURCES CORP - 10-Q Quarterly Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

As of July 25, 2003 there were 15,354,377 shares of the issuer’s common stock outstanding.


		Page

Part I	FINANCIAL INFORMATION

Item 1:	Financial Statements

	Unaudited Balance Sheets at June 30, 2003 and December 31, 2002	1

	Unaudited Statements of Operations for the three and six months ended June 30, 2003 and 2002	2

	Unaudited Statements of Cash Flows for the six months ended June 30, 2003 and 2002	3

	Notes to Financial Statements (unaudited)	4

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7

Item 3:	Quantitative and Qualitative Disclosures about Market Risk	13

Item 4:	Controls and Procedures	13

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	13

Item 2, 3 and 4:	Not Applicable	13

Item 5:	Other Information	13

Item 6:	Exhibits and Reports on Form 8-K	13


				JUNE 30,			DECEMBER 31,
				2003			2002

ASSETS
Current assets:
		Cash and cash equivalents		$	6,754,645		$	2,290,950
		Investments			2,416,717			4,494,877
		Accounts receivable (net of allowance of approximately $67,000 and $77,000 at June 30, 2003 and December 31, 2002, respectively)			4,319,547			3,825,801
		Deferred implementation costs			571,973			631,087
		Prepaid expenses and other current assets			1,156,662			771,986

			Total current assets		15,219,544			12,014,701
	Property and equipment, net				7,453,288			7,804,229
	Deferred implementation costs, less current portion				457,693			401,051
	Debt issuance costs				364,523			659,879
	Other assets				562,602			450,080

			Total assets	$	24,057,650		$	21,329,940

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
		Accounts payable		$	653,014		$	891,313
		Accrued expenses and other current liabilities			884,843			984,535
		Accrued compensation			929,559			743,107
		Deferred revenues			576,453			531,789
		Current portion of capital lease obligations			193,203			213,913

			Total current liabilities		3,237,072			3,364,657
	Capital lease obligation, less current maturities				23,379			111,491
	Deferred revenues, less current portion				305,549			355,662
	Notes payable				8,100,000			12,000,000

			Total liabilities		11,666,000			15,831,810

	Commitments and contingencies				—			—

	Stockholders’ equity:
	Series A convertible preferred stock, $.01 par value; 1,000,000 shares authorized, none issued at June 30, 2003 and December 31, 2002				—			—
	Series B junior participating preferred stock, $0.01 par value; 297,500 shares authorized, none issued at June 30, 2003 and December 31, 2002				—			—
	Common stock, $.0001 par value; 35,000,000 shares authorized, 15,369,067 issued and 15,293,542 outstanding at June 30, 2003; and 13,781,946 issued and 13,706,421 outstanding at December 31, 2002, respectively				1,529			1,370
	Additional paid-in capital				96,339,438			91,410,356
	Accumulated deficit				(83,725,491	)		(85,700,448	)
	Treasury stock, 75,525 shares at June 30, 2003 and December 31, 2002				(227,800	)		(227,800	)
	Accumulated other comprehensive income				3,974			14,652
			Total stockholders’ equity		12,391,650			5,498,130

			Total liabilities and stockholders’ equity	$	24,057,650		$	21,329,940


			THREE MONTHS ENDED						SIX MONTHS ENDED
			JUNE 30,						JUNE 30,

			2003			2002			2003			2002

Revenues:
	Banking services		$	943,312		$	1,329,385		$	2,251,223		$	2,630,002
	Payment services			4,888,242			3,603,397			9,463,035			6,995,011
	Consumer contact services			1,977,316			2,226,039			4,392,812			4,338,682
	Professional services and other			608,540			720,156			3,320,338			1,742,661

		Total revenues		8,417,410			7,878,977			19,427,408			15,706,356
Costs and expenses:
	Service costs			3,306,272			3,156,909			6,855,765			6,500,170
	Implementation and other costs			454,153			516,815			755,149			1,107,306

		Costs of revenues		3,760,425			3,673,724			7,610,914			7,607,476

Gross profit				4,656,985			4,205,253			11,816,494			8,098,880
	General and administrative			1,900,645			1,680,522			4,212,291			3,386,084
	Sales and marketing			1,480,936			1,309,175			3,025,589			2,572,690
	Systems and development			955,750			1,068,531			1,846,404			2,269,778

		Total expenses		4,337,331			4,058,228			9,084,284			8,228,552

Income (loss) from operations				319,654			147,025			2,732,210			(129,672	)
Other (expenses) income:
	Interest income			13,857			33,266			36,581			80,282
	Interest expense			(273,047	)		(312,942	)		(585,155	)		(664,382	)
	Other			—			(417	)		—			(34,211	)
	Debt repurchase/conversion expense			(181,179	)		—			(181,179	)		(191,807	)

		Total other expense		(440,369	)		(280,093	)		(729,753	)		(810,118	)

Income (loss) before income taxes				(120,715	)		(133,068	)		2,002,457			(939,790	)
Income tax provision				27,500			—			27,500			—

Net income (loss)			$	(148,215	)	$	(133,068	)	$	1,974,957		$	(939,790	)

Net income (loss) per share:
	Basic		$	(0.01	)	$	(0.01	)	$	0.14		$	(0.07	)
	Diluted		$	(0.01	)	$	(0.01	)	$	0.13		$	(0.07	)
Shares used in calculation of net income (loss) per share:
	Basic			14,108,920			13,557,195			13,909,443			13,418,599
	Diluted			14,108,920			13,557,195			14,846,817			13,418,599


			SIX MONTHS ENDED JUNE 30,

			2003			2002

OPERATING ACTIVITIES
Net income (loss)			$	1,974,957		$	(939,790	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Debt repurchase/conversion expense			181,179			191,807
	Depreciation			1,463,493			1,193,186
	Amortization of debt issuance costs			114,177			126,579
	Stock compensation			—			58,246
	Provision for losses on accounts receivable			(10,000	)		113,000
	Net realized gain on investments			(6,631	)		(6,775	)
	Amortization of bond premium			5,040			249
Changes in assets and liabilities:
	Accounts receivable			(483,746	)		(700,059	)
	Prepaid expenses and other current assets			(384,676	)		27,573
	Deferred implementation costs			2,472			398,894
	Other assets			(112,522	)		458,203
	Accounts payable			(238,299	)		(431,038	)
	Accrued expenses			86,760			269,390
	Deferred revenues			(5,449	)		(317,812	)

Net cash provided by operating activities				2,586,755			441,653

INVESTING ACTIVITIES
Purchase of available for sale securities				(7,015,442	)		(2,303,226	)
Sales of available for sale securities				9,084,515			3,914,323
Purchases of property and equipment				(1,112,552	)		(1,735,293	)

Net cash provided by (used in) investing activities				956,521			(124,196	)

FINANCING ACTIVITIES
Net proceeds from issuance of common stock				4,929,241			112,427
Principal payments of capital lease obligations				(108,822	)		(118,173	)
Purchase of notes payable				(3,900,000	)		—

Net cash provided by (used in) financing activities				920,419			(5,746	)

Net increase in cash and cash equivalents				4,463,695			311,711
Cash and cash equivalents at beginning of period				2,290,950			2,120,252

Cash and cash equivalents at end of period			$	6,754,645		$	2,431,963

Supplemental information to statement of cash flows:
		Cash paid for interest		492,968			519,580
		Conversion of notes payable		—			1,000,000
		Unrealized loss on investments		(10,678	)		(15,339	)

Online Resources Corporation (the “Company”) is a leading outsourcer of Internet banking, payment and consumer contact services to financial institution clients nationwide. The Company offers services, branded in the clients’ name, that integrate seamlessly into a single-vendor, end-to-end solution, supported by 24x7 customer care, targeted consumer marketing, training and other network and technical professional products and services.

The accompanying unaudited financial statements have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, 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 the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. These financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2002, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on March 31, 2003 and the amended Form 10-K filed as part of an 8-K on June 27, 2003. The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

The Company generates revenues from service fees, professional services, and other revenues. Revenues from service fees are reported in the statements of operations based on three business lines, banking services, payment services and consumer contact services. In prior years, revenues from these business lines were reported as service fees. Revenue amounts reported in prior periods have been reclassified to conform to the 2003 presentation. Service fee revenue from these three business lines includes account access fees, transaction fees, customer service, new user setup, communications and other services. Revenue from banking services, payment services and consumer contact services are recognized over the term of the contract as the services are provided. Professional services and other revenues are generated from the linking of the Company’s financial institution clients to the Company’s Quotien e-financial suite through various networks and the Company’s gateways and the sale of software used to access the e-financial suite. Other revenue also includes termination fees, which are recognized at the date of termination of a contract. Implementation revenue and direct implementation costs are recognized on a straight-line basis over the contract term. In prior years, professional services and other fees were included as implementation and other revenues. Although the Company separately reports its revenues from its three business lines, it does not track costs and expenses at the business line level.

For the quarter ended June 30, 2002, one of the Company’s financial institution clients, California Federal Bank (“Cal Fed”), accounted for approximately $1.2 million, or 15% of the Company’s revenue, but no revenue was generated from Cal Fed for the quarter ended June 30, 2003. For the six months ended June 30, 2003 and 2002, Cal Fed accounted for approximately $3.3 million and $2.3 million, or 17% and 14% of the Company’s revenue, respectively. In 2002 Citigroup acquired Cal Fed and during the first quarter of 2003 converted the Cal Fed customers to the Citigroup banking and bill payment platform, thereby causing a cessation of the Company’s relationship with Cal Fed. Of the $3.3 million in revenue earned from Cal Fed during the first six months of 2003, $2.2 million represented a one-time fee resulting from the conversion of Cal Fed customers to the Citigroup platform.

Basic and diluted net (loss) income per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding. The Convertible Notes are antidilutive for all periods presented.


			THREE MONTHS ENDED						SIX MONTHS ENDED
			JUNE 30,						JUNE 30,

			2003 (1)			2002 (1)			2003		2002 (1)

Net (loss) income			$	(148,215	)	$	(133,068	)	$	1,974,957	$	(939,790	)
Shares used in calculation of net (loss)/income per share:
		Basic		14,108,920			13,557,195			13,909,443		13,418,599
		In the money options		—			—			937,374		—

		Diluted		14,108,920			13,557,195			14,846,817		13,418,599
Net (loss) income per share:
	Basic			(0.01	)		(0.01	)		0.14		(0.07	)
	Diluted		$	(0.01	)	$	(0.01	)	$	0.13	$	(0.07	)

On September 28, 2000, the Company completed the private placement of $20 million in Convertible Notes to a group of accredited investors and received proceeds of $18.7 million net of expenses. The Convertible Notes carry an 8% coupon and interest payment dates are April 1 and October 1 of each year. The Convertible Notes were initially convertible at a price of $4.75 per share but are subject to an annual reset under certain circumstances. In no event can the conversion price under the terms of the Convertible Notes be reset to a price of less than $4.00 per share. Subject to certain conditions, the Company may redeem all or part of the Convertible Notes prior to maturity.

During 2001, the Company paid $2.2 million to repurchase $3.5 million of the Convertible Notes in privately negotiated transactions and converted $3.5 million of the Convertible Notes, under separately negotiated agreements with several holders of the Convertible Notes. On March 27, 2002, $1.0 million of the Convertible Notes were converted at $3.39 per common share, instead of the $4.00 conversion price that otherwise existed under the Convertible Notes. The induced conversion which occurred on March 27, 2002 resulted in the issuance of 295,031 shares, or 45,031 additional shares had the Convertible Notes been converted at the $4.00 per common share conversion price. For the quarter ending March 31, 2002, the Company recognized a $141,848 non-cash debt conversion expense and wrote off $49,959 of related debt issuance costs in connection with the transaction.


DELAWARE		52-1623052

(STATE OR OTHER JURISDICTION OF		(I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)		IDENTIFICATION NO.)

7600 COLSHIRE DRIVE, McLEAN, VIRGINIA		22102

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)		(ZIP CODE)


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


YES X		NO


YES X		NO