UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[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
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 0-26123
ONLINE RESOURCES CORPORATION
----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1623052
-------- ----------
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
7600 COLSHIRE DRIVE, McLEAN, VIRGINIA 22102
------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(703) 394-5100
--------------
(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 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.
YES X NO
--- ---
As of November 13, 2001 there were 13,376,890 shares of the issuer's common
stock outstanding.
ONLINE RESOURCES CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
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Part I. FINANCIAL INFORMATION
Item 1: Financial Statements
Unaudited Balance Sheets at September 30, 2001 and December 31, 2000 1
Unaudited Statements of Operations for the three months and nine 2
months ended September 30, 2001 and 2000
Unaudited Statements of Cash Flows for the nine months ended 3
September 30, 2001 and 2000
Notes to Financial Statements (unaudited) 4
Item 2: Management's Discussion and Analysis of Financial Condition and 7
Results of Operations
Item 3: Quantitative and Qualitative Disclosures about Market Risk 12
PART II OTHER INFORMATION
Item 1: Legal Proceedings 12
Item 2, 3 and 4: Not Applicable 12
Item 5: Other Information 12
Item 6: Exhibits and Reports on Form 8-K 12
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ONLINE RESOURCES CORPORATION
UNAUDITED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,076,433 $ 1,771,477
Investments 7,632,472 19,688,454
Accounts receivable (net of allowance of approximately $46,000
and $117,000 at September 30, 2001 and December 31, 2000,
respectively) 3,127,014 3,026,010
Deferred implementation costs 919,783 809,901
Prepaid expenses and other current assets 906,686 540,780
------------ ------------
Total current assets 14,662,388 25,836,622
Property and equipment, net 7,029,393 6,524,904
Deferred implementation costs, less current portion 675,025 712,828
Debt issuance costs 1,065,286 1,750,096
Other assets 347,738 303,978
------------ ------------
Total assets $ 23,779,830 $ 35,128,428
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 828,199 $ 858,980
Accrued expenses and other current liabilities 1,253,188 1,309,211
Accrued compensation expenses 584,399 947,136
Deferred revenues 983,029 1,103,964
Current portion of capital lease obligations 308,416 278,638
------------ ------------
Total current liabilities 3,957,231 4,497,929
Capital lease obligation, less current maturities 423,928 232,125
Deferred revenues, less current portion 700,461 1,193,404
Notes payable 14,000,000 20,000,000
------------ ------------
Total liabilities 19,081,620 25,923,458
Commitments
Series B redeemable convertible preferred stock; 100,000 shares
authorized, no shares issued and outstanding -- --
Series C redeemable convertible preferred stock; 287,000 shares
authorized, no shares issued and outstanding -- --
Stockholders' equity:
Series A convertible preferred stock, $.01 par value; 1,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $.0001 par value; 35,000,000 shares authorized,
12,961,521 and 11,616,649 issued and outstanding at September 30,
2001 and December 31, 2000, respectively 1,296 1,162
Additional paid-in capital 88,763,421 85,238,538
Accumulated deficit (83,561,910) (75,482,307)
Deferred stock compensation (147,263) (185,894)
Receivable from the sale of common stock (422,604) (422,604)
Accumulated other comprehensive income 65,270 56,075
------------ ------------
Total stockholders' equity 4,698,210 9,204,970
------------ ------------
Total liabilities and stockholders' equity $ 23,779,830 $ 35,128,428
============ ============
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
1
ONLINE RESOURCES CORPORATION
UNAUDITED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
Service fees $ 5,746,278 $ 3,724,723 $ 15,904,399 $ 8,907,009
Implementation and other revenues 628,284 479,090 2,041,854 1,774,905
------------ ------------ ------------ ------------
Total revenues 6,374,562 4,203,813 17,946,253 10,681,914
Costs and expenses:
Service costs 3,203,951 3,059,839 9,612,891 8,618,117
Implementation and other costs 357,710 293,839 1,156,057 886,809
------------ ------------ ------------ ------------
Costs of revenues 3,561,661 3,353,678 10,768,948 9,504,926
------------ ------------ ------------ ------------
Gross profit 2,812,901 850,135 7,177,305 1,176,988
General & administrative 1,709,040 1,580,854 5,306,616 4,744,562
Selling and marketing 1,480,582 2,269,018 4,541,491 6,697,858
Systems and development 1,534,422 1,568,796 4,505,152 4,680,510
Non-recurring charges -- -- 209,434 --
------------ ------------ ------------ ------------
Total expenses 4,724,044 5,418,668 14,562,693 16,122,930
------------ ------------ ------------ ------------
Loss from operations (1,911,143) (4,568,533) (7,385,388) (14,945,942)
Other (expenses) income:
Interest income 135,071 168,467 534,813 707,018
Interest expense (410,613) (25,199) (1,390,437) (74,707)
Debt conversion expense (921,744) -- (921,744) --
------------ ------------ ------------ ------------
Total other (expenses) income (1,197,286) 143,268 (1,777,368) 632,311
------------ ------------ ------------ ------------
Loss before extraordinary item and
cumulative effect of change in
accounting principle (3,108,429) (4,425,265) (9,162,756) (14,313,631)
Extraordinary item- gain from
repurchase of debt -- -- 1,083,153 --
Cumulative effect of change in
accounting principle -- -- -- (216,818)
------------ ------------ ------------ ------------
Net loss $ (3,108,429) $ (4,425,265) $ (8,079,603) $(14,530,449)
============ ============ ============ ============
Loss per share:
Loss from operations $ (0.16) $ (0.39) $ (0.63) $ (1.31)
Loss before extraordinary item and
cumulative effect of change
in accounting principle (0.26) (0.38) (0.78) (1.25)
Extraordinary item -- -- 0.09 --
Cumulative effect of change in
accounting principle -- -- -- (0.02)
Net loss $ (0.26) $ (0.38) $ (0.69) $ (1.27)
Pro forma amounts assuming the
accounting change is applied
retroactively:
Net loss $(14,313,631)
Net loss per share $ (1.25)
Shares used in calculation of loss per
share:
Basic and diluted 11,731,259 11,594,792 11,688,038 11,425,557
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
2
ONLINE RESOURCES CORPORATION
UNAUDITED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
------------ ------------
OPERATING ACTIVITIES
Net loss $ (8,079,603) $(14,530,449)
Adjustments to reconcile net loss to net
cash used in operating activities:
Extraordinary item- gain on repurchase of debt (1,083,153) --
Debt conversion expense 921,744 --
Depreciation 1,580,217 1,255,020
Amortization 257,441 --
Stock compensation expense 58,935 147,665
Cumulative effect of change in accounting principle -- 216,818
Provision for losses on accounts receivable (70,929) (38,000)
Realized gain on investments (65,279) --
Amortization of bond discount (22,714) --
Other -- (69,028)
Changes in assets and liabilities:
Accounts receivable (30,075) (1,172,048)
Prepaid expenses and other current assets (365,906) (114,558)
Deferred implementation costs (72,079) (289,442)
Accrued interest -- (99,097)
Other assets (43,760) (367)
Accounts payable (30,781) (101,272)
Accrued expenses (378,871) 425,291
Deferred revenues (613,878) 481,039
------------ ------------
Net cash used in operating activities (8,038,691) (13,888,428)
INVESTING ACTIVITIES
Purchase of available for sale securities (18,475,902) (35,633,983)
Sales of available for sale securities 30,629,072 31,890,309
Purchases of property and equipment (1,576,644) (2,189,845)
------------ ------------
Net cash provided by (used in) investing activities 10,576,526 (5,933,519)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 273,463 1,516,210
Net repayment of stock subscription -- 227,636
Repayment of capital lease obligations (286,481) (550,738)
Net proceeds from issuance of convertible subordinated notes -- 18,798,782
Repurchase of notes payable (2,167,389) --
Payment of financing costs (52,472) --
------------ ------------
Net cash (used in) provided by financing activities (2,232,879) 19,991,890
------------ ------------
Net increase in cash and cash equivalents 304,956 169,943
Cash and cash equivalents at beginning of period 1,771,477 1,588,187
------------ ------------
Cash and cash equivalents at end of period $ 2,076,433 $ 1,758,130
============ ============
Supplemental information to statement of cash flows:
Cash paid for interest 1,131,855 74,707
Conversion of notes payable 2,500,000 --
Acquisition of property and equipment by capital lease 508,062 155,762
Unrealized gain (loss) on investment 9,195 (55,838)
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
3
ONLINE RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Online Resources Corporation (the "Company") is a leading outsourcer of
e-financial services with over 500 bank and credit union clients. The Company's
comprehensive Quotien (SM) suite of services provides Internet banking,
electronic bill payment-presentment, and other consumer and small business
e-finance applications. The Company performs 24x7 customer care and consumer
marketing services, giving clients the benefit of a single, integrated solution,
backed by a unique end-to-end service guarantee and real-time transaction
capabilities.
INTERIM FINANCIAL INFORMATION
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, 2000, included in the Annual Report on Form 10-K filed by the Company with
the Securities and Exchange Commission on March 30, 2001. 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.
RECENT PRONOUNCEMENTS
In July 2001, the Securities and Exchange Commission issued staff
announcement, D-98, Classification and Measurement of Redeemable Securities.
The announcement is required to be adopted in years beginning after December
15, 2001. The Company believes that the announcement will not have a
significant effect on the earnings or the financial position of the Company
upon adoption.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". This statement applies to all long-lived assets,
including discontinued operations, and replaces the provisions of APB Opinion
No. 30, Reporting Results of Operations-Reporting the Effects of Disposal of a
segment of a Business, for the disposal of segments of a business. This
statement requires that those long-lived assets be measured at the lower of
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. The Company will be required to adopt
this statement no later than January 1, 2002 and is currently assessing the
impact of this statement on its results of operations, financial position and
cash flows.
RECLASSIFICATION
Certain 2000 amounts have been reclassified to conform to the 2001
presentation.
2. CHANGE IN REVENUE RECOGNITION FOR IMPLEMENTATION REVENUE
The Company generates revenues from service fees, implementation fees, and
other revenues. Revenues from service fees are derived from recurring monthly
fees by providing services which include banking and bill payment, customer
service, consumer marketing, information reporting, and administrative services,
to financial institution clients, typically based on the number of billable
customers. These services are priced on a monthly per billable customer basis,
and in some cases, on a transaction basis. Implementation and other related
revenues are generated from the linking of the Company's financial institution
clients to the Company's Quotien(TM) e-financial suite through various networks
and the Company's gateways and the sale of PC software and customer service
software used to access the e-financial suite. Effective January 1, 2001, we
discontinued support of our proprietary PC software and screen-based telephone,
both of which we previously sold, but neither of which produced any material
revenue for the Company.
The Company previously recognized nonrefundable implementation fees as
revenue under the percentage of completion method as certain milestone output
measures were completed. During the year ended December 31, 2000, the Company
adopted SEC Staff
4
Accounting Bulletin No. 101 -- Revenue Recognition in Financial Statements ("SAB
101"), effective January 1, 2000, and changed its method of accounting for
nonrefundable implementation fees for all contracts to recognize such fees and
the related incremental direct costs of implementation activities over the
contract term as the services are provided, which typically range from one to
five years (generally three years). The Company believes the change in
accounting principle was preferable based on guidance provided in SAB 101. The
cumulative effect of the accounting change as of January 1, 2000 was $217,000
($1,371,000 of revenue less direct incremental costs of $1,154,000) and was
recognized in the statement of operations for the three months ended March 31,
2000. The effect of the accounting change was to increase the net loss before
the cumulative effect of the accounting change by $9,000 and $172,000 for the
three months and nine months ended September 30, 2000, respectively. Due to the
adoption of SAB 101, $1,371,000 of revenue that was previously recognized under
the Company's prior revenue recognition policy will be recognized under the
Company's revised revenue recognition policy through periods up to 2004 because
some contract periods extend through 2004. During the three months and nine
months ended September 30, 2001, the Company recognized revenue of approximately
$120,000 and $441,000, respectively, and related direct incremental costs that
were included in the cumulative effect adjustment at January 1, 2000.
3. NON-RECURRING CHARGES
The Company incurred a one-time charge of $209,434 including severance and
benefit payments during the nine months ended September 30, 2001 as a result of
the staff reduction of 23 employees, approximately 9% of the total employees, on
January 3, 2001.
4. NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is calculated by dividing the
net loss by the weighted average number of common shares outstanding.
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
-------------- -------------- ------------ ------------
Loss before extraordinary item and
cumulative effect of change in accounting
principle $ (3,108,429) $ (4,425,265) $ (9,162,756) $(14,313,631)
Extraordinary item -- -- 1,083,153 --
Cumulative effect of change in accounting
principle -- -- -- (216,818)
-------------- -------------- ------------ ------------
Net loss $ (3,108,429) $ (4,425,265) $ (8,079,603) $(14,530,449)
============== ============== ============ ============
Weighted average number of common shares 11,731,259 11,594,792 11,688,038 11,425,557
Loss per share:
Basic and diluted $ (0.26) $ (0.38) $ (0.69) $ (1.27)
============== ============== ============ ============
Proforma amounts assuming the accounting
change is applied retroactively:
Net loss $(14,313,631)
============
Net loss per share $ (1.25)
============
Due to their antidulitive effects, shares underlying outstanding stock
options, warrants and convertible subordinated notes to purchase shares of
common stock were excluded from the computation of diluted earnings per share
for all periods presented.
5. EQUITY
During the nine months ended September 30, 2001, employees purchased 70,847
shares of common stock under the Company's employee stock purchase plan and
4,004 shares of common stock under the Company's stock option plan and
individuals exercised warrants to purchase 21,385 shares of common stock with
net proceeds to the Company of approximately $273,000. On September 28, 2001,
$2.5 million of the 8% convertible subordinated notes (the "Convertible Notes")
were converted at $2.00 per share of common stock (Note 6). This conversion
resulted in an issuance of 1,250,000 shares of common stock. No cash proceeds
were obtained from the conversion.
6. NOTES PAYABLE
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 debt issuance costs of $1.3 million including
commission of
5
$917,200. The proceeds have been and will continue to be used for working
capital. The Convertible Notes carry an 8% coupon and interest payment dates are
April 1 and October 1, commencing April 1, 2001. 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 be less
than $4.00 per share. Subject to certain conditions, the Company may redeem all
or part of the Convertible Notes prior to maturity. As of September 30, 2001,
4,210,526 shares were authorized and issuable upon conversion of the Convertible
Notes. Jefferies & Company, Inc., one of the underwriters of the private
placement, also obtained 200,000 warrants that expire on September 30, 2005 that
are exercisable at the same price as the conversion price under the Convertible
Notes.
On May 22, 2001 and May 24, 2001, the Company repurchased $3,000,000 and
$500,000, respectively, of the Convertible Notes in privately negotiated
transactions.
On September 28, 2001, $2.5 million of the Convertible Notes were converted
at $2.00 per common share instead of the $4.00 conversion price that otherwise
existed under the Convertible Notes. This induced conversion resulted in the
issuance of 1,250,000 shares or 625,000 additional shares had the Convertible
Notes been converted at the $4.00 per common share conversion price. The net
shareholders' equity increase consisted of $3.2 million of common stock and
additional paid in capital, offset by a $922,000 non-cash debt conversion
expense. Accordingly, as of September 30, 2001, $14.0 million of the Convertible
Notes remains outstanding and matures on September 30, 2005.
Interest expense related to the Convertible Notes for the three months and
nine months ended September 30, 2001, was $311,000 and $1,091,000, respectively.
As of September 30, 2001, accrued interest on notes payable totaled $660,000.
7. EXTRAORDINARY ITEM
The extraordinary item represents a gain of $1,083,153 from the repurchase
of $3.5 million of the Convertible Notes pursuant to privately negotiated
transactions in May 2001. The funds used to repurchase the Convertible Notes
represent a portion of the proceeds from the issuance of the Convertible Notes.
8. COMPONENTS OF COMPREHENSIVE INCOME
Comprehensive income includes the Company's net loss adjusted for changes,
net of tax, of unrealized losses on investments in marketable securities.
Comprehensive income for the three months and nine months ended September 30,
2001 and 2000 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
Comprehensive income:
Net loss $ (3,108,429) $ (4,425,265) $ (8,079,603) $(14,530,449)
Unrealized (loss) gain on
investments in marketable
securities (3,383) (27,158) 9,195 (55,838)
------------ ------------ ------------ ------------
Total comprehensive loss: $ (3,111,812) $ (4,452,423) $ (8,070,408) $(14,586,287)
============ ============ ============ ============
9. SUBSEQUENT EVENTS
On November 1, 2001, a holder converted $350,000 of the Convertible Notes
into 87,500 shares of common stock at $4.00 per share, the price at which the
Convertible Notes are now convertible.
On November 2, 2001, $1.0 million of the Convertible Notes were converted
at $3.05 per common share instead of the $4.00 conversion price that otherwise
existed under the Convertible Notes. This induced conversion resulted in the
issuance of 327,869 shares or 77,869 additional shares had the Convertible Notes
been converted at the $4.00 per common share conversion price. The net
shareholders' equity increase consisted of $1.18 million of common stock and
additional paid in capital, offset by a $250,000 non-cash debt conversion
expense. As of November 2, 2001, $12.65 million of the Convertible Notes remains
outstanding and matures on September 30, 2005.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY NOTE
The following management's discussion and analysis should be read in
conjunction with the accompanying Financial Statements and Notes thereto. This
Quarterly Report on Form 10-Q may contain "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including, but
not limited to:
- Any statements in this document that are not statements of historical
fact may be considered forward-looking;
- Forecasts of growth in business-to-business electronic commerce, and
growth in the number of consumers using online banking and billpaying
services;
- Statements regarding trends in our revenues, expense levels, and
liquidity and capital resources;
- Statements about the sufficiency of the proceeds from the sale of
securities and cash balances to meet currently planned working capital
and capital expenditure requirements for at least the next twelve
months; and
- Other statements identified or qualified by words such as "likely",
"will", "suggest", "may", "would", "could", "should", "expects",
"anticipates", "estimates", "plans", "projects", "believes", "seek",
"intend" and other similar words that signify forward-looking
statements.
These forward-looking statements represent our best judgment as of the date
of the Quarterly Report on Form 10-Q, and we caution readers not to place undue
reliance on such statements. Actual performance and results of operations may
differ materially from those projected or suggested in the forward-looking
statements due to certain risks and uncertainties, including but not limited to,
the risks and uncertainties described or discussed in the section "Risk Factors"
in our Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 30, 2001. These risks include, among others, the following:
- our history of losses and anticipation of future losses;
- significant fluctuations of our quarterly financial results;
- our potential need for additional capital to stay in business;
- our dependence on the marketing efforts of third parties;
- our dependence on our financial institution clients to market our
services;
- the possibility that we may not be able to expand to meet increased
demand for our services and related products;
- the potential uncertainty of our co-marketing efforts and the risk
that such efforts may not be successful;
- the potential loss of a material client;
- our potential inability to compete with larger, more established
businesses offering similar products or services;
- the possibility of a failure to successfully implement a system
upgrade or conversion;
- our inability to attract and retain skilled personnel;
- possible security breaches or system failures disrupting our business
and the liability associated with these disruptions;
- the lack of success in promoting our services for broad use and
acceptance by consumers;
- the potential obsolescence of our technology or the offering of new,
more efficient means of conducting Internet banking and bill
7
payment;
- reduction or elimination of the fees we charge for some services due
to the consumer demand for low-cost or free online financial services;
- the potential impact of the consolidation of the banking and financial
services industry;
- interference with our business from the adoption of government
regulations;
- control of the management and affaires by our executives and
directors;
- our volatile stock price;
- the trading of a substantial number of shares adversely impacting the
price of our shares; and
- the possibility that we fail to meet listing standards for continued
listing on The Nasdaq National Market.
OVERVIEW
Online Resources Corporation is a leading outsourcer of e-financial
services with over 500 bank and credit union clients. Our comprehensive Quotien
(SM) suite of services provides Internet banking, electronic bill
payment-presentment, and other consumer and small business e-finance
applications. We perform 24x7 customer care and consumer marketing services,
giving clients the benefit of a single, integrated solution, backed by a unique
end-to-end service guarantee and real-time transaction capabilities. We process
approximately 60 million transactions annually, including $2.7 billion in
consumer bill payments.
We primarily derive revenue from long-term service contracts with our
financial institution clients, who pay us recurring fees based primarily on the
number of their billable customers enrolled and transaction volumes, as well as
an up-front implementation fees. Our financial institution clients typically
subsidize some or all of our fees when reselling our services to their
customers, as they derive significant potential benefits including account
retention, delivery and paper cost savings, account consolidation and
cross-selling of other products. As a network-based service provider, we have
made substantial up-front investments in infrastructure. We believe our
financial performance and operating leverage will be based primarily on
increasing billable customer subscriptions and transaction volumes over a
relatively fixed cost base.
Our current sources of revenue are from service fees, implementation fees
and other revenues. We expect that our revenue growth will principally come from
service fees as a result of continued growth of billable customers.
- Service fees. Our service fee revenues are derived from recurring
monthly fees by providing services which include banking and bill
payment, customer service, consumer marketing, information reporting,
and administrative services, to financial institution clients,
typically based on the number of billable customers. These services
are priced on a monthly per billable customer basis, and in some
cases, on a transaction basis. We recognize these revenues as services
are provided.
- Implementation and other revenues. We generate revenue from
implementation of our fully integrated services to our financial
institution clients. Implementation fees are paid on a one-time basis
at signing. We previously recognized revenue from nonrefundable
implementation fees under the percentage of completion method as
certain milestone output measures were completed. During the year
ended December 31, 2000, effective January 1, 2000, we adopted SEC
Staff Accounting Bulletin No. 101--Revenue Recognition in Financial
Statements ("SAB 101") and changed our method of accounting for
nonrefundable implementation fees for all contracts to recognize such
fees over the contract term as the services are provided, which
typically range from one to five years. We also derive revenue from
sales of related enabling products and software at fixed prices,
including our PC software and customer service software. These have
not been a significant source of revenue and continue to decline as
customers migrate to the web service. Effective January 1, 2001, we
discontinued support of our proprietary PC software and screen-based
telephone products.
Historically, the majority of our resources have been directed to creating
and upgrading our proprietary system. Our proprietary system enables us to
provide a broad range of services to our financial institution clients including
Internet banking, bill paying, and access to complementary financial services
supported by our customer call center, marketing services and other support
services. While investment to date has been significant, we believe the
infrastructure we have built will enable us to support our anticipated growth
over the next several years with only modest cost increases associated with
adding customers.
8
FINANCIAL CONDITION
Since our founding, we have incurred high costs to create our
infrastructure, while generating low revenues. As a result, we have historically
experienced large operating losses and negative cash flow. At September 30,
2001, we had an accumulated deficit of $83.6 million and net property and
equipment of $7.0 million. We have funded our operations primarily through the
issuance of equity and debt securities. Ongoing working capital requirements
will primarily consist of personnel costs related to enhancing and maintaining
our system. We expect to continue to incur losses in the foreseeable future.
As of September 30, 2001, we had $2.1 million in cash and cash equivalents
and $7.6 million in investments as compared to $1.8 million in cash and cash
equivalents and $19.7 million in investments as of December 31, 2000. The
decrease in cash and investments results from cash used for operating purposes
and the repurchase of $3.5 million of 8% convertible subordinated notes
("Convertible Notes") in May 2001. Total liabilities decreased from $25.9
million as of December 31, 2000 to $19.1 million as of September 30, 2001
primarily as a result of the repurchase of $3.5 million and the conversion of
$2.5 million of the Convertible Notes.
Even though our financial trends have been favorable and indicate the
potential for our operations becoming profitable, we have not yet attained
profitable operations. Therefore, until we reach profitability our prospects for
success remain unproven.
RESULTS OF OPERATIONS
The following table presents certain items derived from our statements of
operations expressed as a percentage of revenue.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------ ------ ------ ------
Statement of Operations Data:
Revenues:
Service fees 90.1% 88.6% 88.6% 83.4%
Implementation and other
revenues 9.9 11.4 11.4 16.6
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Expenses:
Cost of revenues 55.9 79.8 60.0 89.0
------ ------ ------ ------
Gross margin 44.1 20.2 40.0 11.0
General and administrative 26.8 37.6 29.5 44.4
Sales and marketing 23.2 54.0 25.3 62.7
Systems and development 24.1 37.3 25.1 43.8
Non-recurring charges -- -- 1.2 --
------ ------ ------ ------
Total expenses 74.1 128.9 81.1 150.9
------ ------ ------ ------
Loss from operations (30.0) (108.7) (41.1) (139.9)
Other (expenses) income (4.3) 3.4 (4.8) 5.9
Debt conversion expense (14.5) -- (5.1) --
Extraordinary item -- -- 6.0 --
Cumulative effect of change
in accounting principle -- -- -- (2.0)
------ ------ ------ ------
Net loss (48.8)% (105.3)% (45.0)% (136.0)%
====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000.
Revenues. We derive revenues from service fees, implementation fees and
other revenues. Revenues increased $2.2 million, or 51.6%, to $6.4 million for
the three months ended September 30, 2001 as compared to $4.2 million for the
same period in 2000. This increase was primarily attributable to a 54.3%
increase in service fees which were largely recurring and driven by an increase
of 62.9% in the number of billable customers and an increase of 98.5% in the
number of transactions offset by lower service fees per user measured at
September 30, 2001 and 2000. Additionally, implementation and other revenues
increased $149,000, or 31.1%, to $628,000 as a result of increases in
implementation fees, professional service revenue and cancellation fees.
Cost of Revenues. Cost of revenues primarily includes telecommunications,
payment processing, systems operations, customer service, implementation and
related products. Cost of revenues increased $208,000, or 6.2%, to $3.6 million
for the three months ended September 30, 2001 as compared to $3.4 million for
the same period in 2000. This increase was primarily attributable to a $146,000
increase in bill payment processing costs resulting from increases in the number
of billable customers and transactions.
9
Gross Profit. Gross profit increased to $2.8 million from $850,000 for the
three months ended September 30, 2001 and 2000, respectively. Gross margin for
the same periods improved to 44% from 20% primarily due to increased service
fees from billable customer growth that was leveraged over our relatively fixed
costs of revenue. Gross margin for services fees also improved as a result of
improved efficiency from technology development and cost control initiatives.
General and Administrative. General and administrative expenses are
comprised primarily of salaries for executive, administrative and financial
personnel, consulting expenses and facilities costs such as office leases,
insurance, and depreciation. General and administrative expenses increased
$128,000, or 8.1%, to $1.7 million as compared to $1.6 million for the three
months ended September 30, 2001 and 2000, respectively. The increase was
primarily attributed to higher insurance and depreciation expenses as a result
of higher premiums necessary to cover the growing business operations and
additional capital expenditures of approximately $3.5 million between September
30, 2000 and 2001 offset by a decrease in other overhead expenses. General and
administrative expenses as a percentage of revenue decreased to 26.8% as
compared to 37.6% for the three months ended September 30, 2001 and 2001,
respectively.
Sales and Marketing. Sales and marketing expenses consist of salaries and
commissions paid to sales and marketing personnel, consumer marketing costs,
public relations costs, and other costs incurred in marketing our services and
products. Sales and marketing expenses decreased $788,000, or 34.7%, to $1.5
million for the three months ended September 30, 2001 as compared to $2.3
million for the same period in 2000. The principal reason for the decrease in
sales and marketing expenses was a decline in marketing and commission expenses
and a reduction in staffs as a result of consolidating certain client service
responsibilities.
Systems and Development. Systems and development expenses include salaries
of personnel in the systems and development department, consulting fees and all
other expenses incurred in supporting the research and development of new
services and products, and new technology to enhance existing products. Systems
and development expenses decreased $34,000, or 2.2%, to $1.5 million for the
three months ended September 30, 2001 as compared to $1.6 million for the same
period in 2000. The decrease in our systems and development expenses was
primarily due to the reduction in consulting fees associated with our efforts to
control costs.
Loss from Operations. Loss from operations decreased $2.7 million, or
58.2%, to $1.9 million as compared to $4.6 million for the three months ended
September 30, 2001 and 2000, respectively. Loss from operations significantly
decreased between the two periods, primarily as a result of increases in
services fees and gross profit driven by growth in our customer base, decreases
in various expenditures and costs derived from our cost-cutting initiatives, as
well as other factors described above.
Other Income and Expenses. Interest income decreased $33,000, or 19.8%, to
$135,000 for the three months ended September 30, 2001 as compared to $168,000
for the same period in 2000, primarily due to lower interest rates. Interest and
other expenses increased $385,000, or 1529.5%, to $411,000 for the three months
ended September 30, 2001 as compared to $25,000 for the same period in 2000 as
the result of the interest expense and the amortization of debt issuance costs
incurred in connection with the issuance of Convertible Notes. Going forward,
until at least September 2005, unless the Convertible Notes are earlier
converted or repurchased, we will continue to incur interest expenses due to
the Convertible Notes. The induced conversion of $2.5 million Convertible Notes
on September 28, 2001 resulted in a non-cash debt conversion expense of
$922,000 that was attributable to the issuance of 625,000 incremental shares of
common stock issued to holders in conformance with accounting rules for induced
conversions of convertible debt.
Net Loss and Loss Per Share. Net loss was $3.1 million compared to a loss
of $4.4 million for the three months ended September 30, 2001 and 2000,
respectively. For the three months ended September 30, 2001 and 2000 the basic
and diluted loss per share were $(0.26) and $(0.38), respectively. Excluding
debt conversion expense, we would have reported loss per share of $(0.19) and
$(0.38), for the three months ended September 30, 2001 and 2000, respectively,
as a result of the various factors noted above.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2000.
Revenues. Revenues increased $7.3 million, or 68.0%, to $17.9 million for
the nine months ended September 30, 2001 as compared to $10.7 million for the
same period in 2000. This increase was primarily attributable to a 78.6%
increase in service fees which were largely recurring and driven by an increase
of 62.9% in the number of billable customers and an increase of 108.4% in the
number of transactions. Additionally, implementation and other revenues
increased $267,000, or 15.0%, to $2.0 million as a result of an increase in
professional and web development service revenue.
Cost of Revenues. Cost of revenues increased $1.3 million, or 13.3%, to
$10.8 million for the nine months ended September 30, 2001 as compared to $9.5
million for the same period in 2000. This increase was primarily attributable to
a $608,000 increase in bill payment processing costs and a $406,000 increase in
customer service costs. These increases resulted from expansion in the number
10
of billable customers, transactions, as well as increased banking expenses and
staff to support the growth of operations.
Gross Profit. Gross profit increased to $7.2 million from $1.2 million for
the nine months ended September 30, 2001 and 2000, respectively. Gross margin
for the same periods improved to 40% from 11% primarily due to increased service
fees from end-user growth that was leveraged over our relatively fixed costs.
Gross margin for service fees also improved as a result of our continued efforts
to improve efficiency and our cost control initiatives.
General and Administrative. General and administrative expenses increased
$562,000, or 11.8%, to $5.3 million as compared to $4.7 million for the nine
months ended September 30, 2001 and 2000, respectively. The increase was
primarily attributed to higher depreciation expense as a result of capital
expenditures of approximately $3.5 million, higher insurance premium to cover
the growth of our operations, and an increase in other overhead expenses
necessary to support our growing business operations. General and administrative
expenses as a percentage of revenue decreased to 29.5% as compared to 44.4% for
the nine months ended September 30, 2001 and 2001, respectively.
Sales and Marketing. Sales and marketing expenses decreased $2.2 million,
or 32.2%, to $4.5 million for the nine months ended September 30, 2001 as
compared to $6.7 million for the same period in 2000. The principal reason for
the decrease in sales and marketing expenses was a decline in marketing,
commission, advertising expenses and a reduction in staffs as a result of
consolidating certain client service responsibilities.
Systems and Development. Systems and development expenses decreased
$175,000, or 3.7%, to $4.5 million for the nine months ended September 30, 2001
as compared to $4.7 million for the same period in 2000. The decrease in our
systems and development expenses was primarily due to the reduction in
consulting fees associated with our efforts to control costs.
Non-Recurring Charges. As a result of the reduction in staffs of
approximately 9% on January 3, 2001, we incurred a one-time charge of $209,000
including severance costs and benefit payments for the nine months ended
September 30, 2001. No such charges were incurred during the nine months ended
September 30, 2000.
Loss from Operations. Loss from operations decreased $7.6 million, or
50.6%, to $7.4 million as compared to $14.9 million for the nine months ended
September 30, 2001 and 2000, respectively. Loss from operations significantly
decreased between the two periods, primarily as a result of increases in
services fees and gross profit driven by growth in our customer base, decreases
in various expenditures and costs derived from our cost-cutting initiatives, as
well as other factors described above.
Other Income and Expense. Interest income decreased $172,000, or 24.4%, to
$535,000 for the nine months ended September 30, 2001 as compared to $707,000
for the same period in 2000, primarily due to lower interest rates. Interest and
other expenses increased $1.3 million, or 1761.2%, to $1.4 million for the nine
months ended September 30, 2001 as compared to $75,000 for the same period in
2000 as the result of the interest expense and amortization of debt issuance
costs in connection with the issuance of Convertible Notes. Going forward, until
at least September 2005, unless the convertible notes are earlier converted or
repurchased, we will continue to incur interest expenses due to the Convertible
Notes. The conversion of $2.5 million Convertible Notes on September 28, 2001
resulted in a non-cash debt conversion expense of $922,000 that was attributable
to the issuance of 625,000 incremental shares of common stock issued to holders
in conformance with accounting rules for induced conversions of convertible
debt.
Net Loss and Loss Per Share. Net loss was $8.1 million, including $1.1
million gain from repurchase of debt, compared to a loss of $14.5 million for
the nine months ended September 30, 2001 and 2000, respectively. For the nine
months ended September 30, 2001 and 2000 the basic and diluted loss per share
were $(0.69) and $(1.27), respectively, as a result of the various factors noted
above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and investments in available for sale securities decreased $11.8
million to $9.7 million from $21.5 million as of September 30, 2001 and December
31, 2000, respectively, as a result of using the funds raised from the sale of
our Convertible Notes to fund operations and for the repurchase of $3.5 million
of the notes for $2.2 million in May 2001.
Net cash used in operating activities was $8.0 million for the nine months
ended September 30, 2001. The decrease resulted primarily from a net loss of
$8.1 million.
Net cash provided from investing activities for the nine months ended
September 30, 2001 was $10.6 million, which primarily resulted from the net
reduction of $12.2 million in available for sale securities offset by capital
expenditures of $1.6 million.
11
Net cash used in financing activities was $2.2 million for the nine months
ended September 30, 2001 relating primarily to $2.2 million in net payments made
to repurchase $3.5 million of Convertible Notes and repayment of capital lease
obligations for $286,000 offset by net proceeds of $273,000 from issuance of
common stock. At September 30, 2001, we had cash and cash equivalents of $2.1
million, investments in available for sale securities of $7.6 million, working
capital of $10.7 million, long-term obligations of $15.1 million and stockholder
equity of $4.7 million.
We currently believe that cash, cash equivalents and investment balances
will be sufficient to meet our current anticipated cash requirements for at
least the next twelve months. However, there can be no assurance that additional
capital beyond the amounts currently forecasted by us will not be required or
that any such required additional capital will be available on reasonable terms,
if at all, at such time as required. We intend to invest our cash in excess of
current operating requirements in marketable government, corporate and
mortgage-backed securities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest primarily in marketable government, corporate, and
mortgage-backed debt securities. We do not have operations subject to risks of
foreign currency fluctuations, nor do we use derivative financial instruments in
our operations or investment portfolio. We have classified all of our
investments as available-for-sale financial instruments. The following table
provides information about our available-for-sale investments that are sensitive
to changes in interest rates.
SEPTEMBER 30, 2001
------------------------------------------
BOOK VALUE FAIR VALUE INTEREST RATE
---------- ---------- -------------
U.S. government treasury
obligations .............. $1,068,782 $1,077,872 2.58%
Commercial bonds ........... 6,498,420 6,554,600 3.31%
---------- ----------
Total investments ..... $7,567,202 $7,632,472
========== ==========
The long-term debts on September 30, 2001 are comprised of convertible
subordinated notes with an 8% interest rate and capital lease obligations with
interest rates ranging from 4% to 13%. We do not believe a fluctuation of 100
basis points in the prime rate would have a material adverse effect on us.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any pending material litigation nor are we aware of
any pending or threatened litigation that would have a material adverse effect
on the Company, our business or results of operation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
None
(B) Reports on Form 8-K
None
12
SIGNATURES
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.
ONLINE RESOURCES CORPORATION
Date: November 13, 2001 By: /s/ Matthew P. Lawlor
----------------------- -------------------------
Matthew P. Lawlor
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2001 By: /s/ Carl D. Blandino
----------------------- ------------------------
Carl D. Blandino
Chief Financial Officer and
Executive Vice President
(Principal Financial Officer)
13