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 October 28, 2003 there were 17,618,672 shares of the issuer’s common stock outstanding.


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Part I	FINANCIAL INFORMATION

Item 1:	Financial Statements

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

	Unaudited Statements of Operations for the three and nine months ended September 30, 2003 and 2002	2

	Unaudited Statements of Cash Flows for the nine months ended September 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	12

Item 4:	Controls and Procedures	12

PART II	OTHER INFORMATION

Item 1:	Legal Proceedings	12

Item 2:	Changes in Securities and Use of Proceeds	12

Item 3 and 4:	Not Applicable

Item 5:	Exhibits and Reports on Form 8-K	12


				SEPTEMBER 30,			DECEMBER 31,
				2003			2002

ASSETS
Current assets:
		Cash and cash equivalents		$	5,412,206		$	2,290,950
		Investments			5,995,266			4,494,877
		Accounts receivable (net of allowance of approximately $67,000 and
		$77,000 at September 30, 2003 and December 31, 2002, respectively)			3,804,764			3,825,801
		Deferred implementation costs			532,629			631,087
		Prepaid expenses and other current assets			1,051,084			771,986

			Total current assets		16,795,949			12,014,701
	Property and equipment, net				7,305,231			7,804,229
	Deferred implementation costs, less current portion				427,652			401,051
	Debt issuance costs				324,020			659,879
	Other assets				351,510			450,080

			Total assets	$	25,204,362		$	21,329,940

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
		Accounts payable		$	501,380		$	891,313
		Accrued expenses and other current liabilities			961,587			984,535
		Accrued compensation			973,984			743,107
		Deferred revenues			682,524			531,789
		Current portion of capital lease obligations			139,458			213,913

			Total current liabilities		3,258,933			3,364,657
	Capital lease obligation, less current maturities				25,006			111,491
	Deferred revenues, less current portion				225,837			355,662
	Notes payable				8,100,000			12,000,000

			Total liabilities		11,609,776			15,831,810
	Commitments and contingencies				—			—
	Stockholders’ equity:
	Series A convertible preferred stock, $.01 par value; 1,000,000 shares authorized, none issued at September 30, 2003 and December 31, 2002				—			—
	Series B junior participating preferred stock, $0.01 par value; 297,500 shares authorized, none issued at September 30, 2003 and December 31, 2002				—			—
	Common stock, $.0001 par value; 35,000,000 shares authorized, 15,703,118 issued and 15,627,593 outstanding at September 30, 2003; and 13,781,946 issued and 13,706,421 outstanding at December 31, 2002, respectively				1,563			1,370
	Additional paid-in capital				97,175,196			91,410,356
	Accumulated deficit				(83,361,687	)		(85,700,448	)
	Treasury stock, 75,525 shares at September 30, 2003 and December 31, 2002				(227,800	)		(227,800	)
	Accumulated other comprehensive income				7,314			14,652

			Total stockholders’ equity		13,594,586			5,498,130

			Total liabilities and stockholders’ equity	$	25,204,362		$	21,329,940


			THREE MONTHS ENDED						NINE MONTHS ENDED
			SEPTEMBER 30,						SEPTEMBER 30,

			2003			2002			2003			2002

Revenues:
	Banking services		$	972,500		$	1,332,130		$	3,223,723		$	3,962,132
	Payment services			5,664,984			3,956,185			15,128,019			10,951,196
	Consumer contact services			2,109,367			2,329,892			6,502,179			6,668,574
	Professional services and other			512,271			533,669			3,832,609			2,276,330

		Total revenues		9,259,122			8,151,876			28,686,530			23,858,232
Costs and expenses:
	Service costs			3,558,276			3,082,705			10,414,041			9,582,875
	Implementation and other costs			453,246			456,089			1,208,395			1,563,395

		Costs of revenues		4,011,522			3,538,794			11,622,436			11,146,270

Gross profit				5,247,600			4,613,082			17,064,094			12,711,962
	General and administrative			2,041,070			1,802,891			6,253,361			5,188,975
	Sales and marketing			1,608,514			1,410,186			4,634,103			3,982,876
	Systems and development			1,029,563			1,018,067			2,875,967			3,287,845

		Total expenses		4,679,147			4,231,144			13,763,431			12,459,696

Income from operations				568,453			381,938			3,300,663			252,266
Other (expenses) income:
	Interest income			19,957			26,318			56,538			106,600
	Interest expense			(209,606	)		(315,506	)		(794,761	)		(979,888	)
	Other			—			(157	)		—			(34,368	)
	Debt repurchase/conversion expense			—			—			(181,179	)		(191,807	)

		Total other expense		(189,649	)		(289,345	)		(919,402	)		(1,099,463	)

Income (loss) before income taxes				378,804			92,593			2,381,261			(847,197	)
Income tax provision				15,000			—			42,500			—

Net income (loss)			$	363,804		$	92,593		$	2,338,761		$	(847,197	)

Net income (loss) per share:
	Basic		$	0.02		$	0.01		$	0.16		$	(0.06	)
	Diluted		$	0.02		$	0.01		$	0.15		$	(0.06	)
Shares used in calculation of net income (loss) per share:
	Basic			15,449,767			13,580,203			14,428,526			13,473,059
	Diluted			17,523,798			14,206,039			15,764,946			13,473,059


			NINE MONTHS ENDED SEPTEMBER 30,

			2003			2002

OPERATING ACTIVITIES
Net income (loss)			$	2,338,761		$	(847,197	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Debt repurchase/conversion expense			181,179			191,807
	Depreciation			2,310,003			1,914,271
	Amortization of debt issuance costs			154,680			188,976
	Stock compensation			—			83,497
	(Recovery) provision for losses on accounts receivable			(10,000	)		73,000
	Net realized gain on investments			(6,631	)		(7,239	)
	Amortization of bond premium (discount)			7,047			(7,342	)
Changes in assets and liabilities:
	Accounts receivable			31,037			(604,345	)
	Prepaid expenses and other current assets			(279,098	)		(194,431	)
	Deferred implementation costs			71,857			528,310
	Other assets			98,570			587,155
	Accounts payable			(389,933	)		(63,627	)
	Accrued expenses			207,929			341,402
	Deferred revenues			20,910			(416,068	)

Net cash provided by operating activities				4,736,311			1,768,169
INVESTING ACTIVITIES
Purchase of available for sale securities				(10,798,470	)		(4,646,977	)
Sales of available for sale securities				9,290,327			5,749,548
Purchases of property and equipment				(1,811,005	)		(3,221,808	)

Net cash used in investing activities				(3,319,148	)		(2,119,237	)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock				5,765,033			170,038
Principal payments of capital lease obligations				(160,940	)		(170,039	)
Purchase of notes payable				(3,900,000	)		—

Net cash provided by (used in) financing activities				1,704,093			(1	)

Net increase (decrease) in cash and cash equivalents				3,121,256			(351,069	)
Cash and cash equivalents at beginning of period				2,290,950			2,120,252

Cash and cash equivalents at end of period			$	5,412,206		$	1,769,183

Supplemental information to statement of cash flows:
		Cash paid for interest		500,072			582,680
		Conversion of notes payable		—			1,000,000
		Unrealized loss on investments		(7,338	)		(13,006	)

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 three months ended September 30, 2003 and 2002, one of the Company’s financial institution clients, California Federal Bank (“Cal Fed”), accounted for approximately $0 and $1.3 million, or 0% and 16% of the Company’s revenue, respectively. For the nine months ended September 30, 2003 and 2002, Cal Fed accounted for approximately $3.3 million and $3.6 million, or 12% and 15% of the Company’s revenue, respectively. Citigroup acquired Cal Fed and during the first quarter of 2003 converted the Cal Fed customers to the Citigroup banking and bill payment platform. Of the $3.3 million in revenue earned from Cal Fed during the first nine 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 income (loss) 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.


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