UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from ____ to ____
Commission file number 0-30152
PAYMENT DATA SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 98-0190072
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12500 SAN PEDRO, SUITE 120
SAN ANTONIO, TX 78216
(Address of principal executive offices)
(210) 249-4100
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 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 ___
--
As of November 1, 2004, 22,381,921 shares of the issuer's common stock, $0.001
par value, were outstanding.
Transitional Small Business Disclosure Format (Check one): Yes ___ No X
================================================================================
PAYMENT DATA SYSTEMS, INC.
INDEX
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2004
and December 31, 2003 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 2004 and 2003 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 10
Item 3. Controls and Procedures 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Unregistered Sales of Equity Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 18
Signature 20
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAYMENT DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2004 December 31, 2003
------------------ -----------------
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $ 194,877 $ 528,119
Accounts receivable, net 42,742 43,693
Prepaid expenses and other 70,474 113,650
------------ ------------
Total current assets 308,093 685,462
Property and equipment, net 153,231 215,156
Other assets 23,589 37,782
------------ ------------
Total assets $ 484,913 $ 938,400
============- ============
Liabilities and stockholders'
equity (deficit):
Current liabilities:
Accounts payable $ 556,063 $ 501,488
Accrued expenses 366,474 224,180
Note payable 255,429 -
------------ ------------
Total current liabilities 1,177,966 725,668
Stockholders' equity (deficit):
Common stock, $0.001 par value,
200,000,000 shares authorized;
22,074,041 and 20,987,956 issued
and outstanding 22,074 20,988
Additional paid-in capital 47,028,769 46,842,908
Accumulated deficit (47,743,896) (46,651,164)
------------ -------------
Total stockholders'
equity (deficit) (693,053) 212,732
------------ -------------
Total liabilities and
stockholders' equity (deficit) $ 484,913 $ 938,400
============ =============
See notes to interim consolidated financial statements.
PAYMENT DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
---- ---- ---- ----
Revenues $ 69,201 $ 29,342 $ 188,600 $ 82,413
Operating expenses:
Cost of services 61,974 59,022 191,333 96,286
Selling, general
and administrative 353,352 455,784 986,055 1,281,035
Depreciation and amortization 20,988 29,827 74,023 98,461
---------- --------- ---------- ----------
Total operating expenses 436,314 544,633 1,251,411 1,475,782
---------- --------- ---------- ----------
Operating loss (367,113) (515,291) (1,062,811) (1,393,369)
Other income (expense), net:
Interest income 57 299 700 4,493
Interest expense (9,261) (643) (9,261) (61,423)
Other income (expense) (12,750) 179,474 (21,360) 160,317
---------- --------- ---------- ----------
Total other income (expense), net (21,954) 179,130 (29,921) 103,387
---------- --------- ---------- ----------
Loss from continuing operations
before income taxes (389,067) (336,161) (1,092,732) (1,289,982)
Income taxes - - - -
---------- --------- ---------- ----------
Loss from continuing operations (389,067) (336,161) (1,092,732 (1,289,982)
Discontinued operations:
Income (loss) from discontinued
operations, net of no
income taxes - 188,319 - (572,780)
Gain on disposition of
discontinued operations, net
of no income taxes - 2,768,260 - 2,768,260
---------- --------- ---------- ----------
Net income (loss) $ (389,067) $ 2,620,418 $ (1,092,732) $ 905,498
Basic and diluted loss
per common share:
Loss from continuing operations $ (0.02) $ (0.01) $ (0.05) $ (0.06)
Income from discontinued
operations $ - $ 0.14 $ - $ 0.10
---------- ---------- ---------- ----------
Net income (loss) $ (0.02) $ 0.13 $ (0.05) $ 0.04
========== ========== ========== ==========
Weighted average common
shares outstanding 21,695,525 20,722,656 21,459,825 20,710,634
See notes to interim consolidated financial statements.
PAYMENT DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
-------------------------------
2004 2003
---- -----
Operating activities:
Loss from continuing operations $ (1,092,732) $ (1,289,982)
Adjustments to reconcile loss
from continuing operations to net cash
used in operating activities:
Depreciation and amortization 74,023 98,461
Non-cash issuance of common stock 120,910 -
Non-cash issuance of common stock warrants 29,675 -
Amortization of debt discount 6,000 -
Changes in current assets and current liabilities:
Accounts receivable 951 335,840
Prepaid expenses and other 43,176 43,991
Accounts payable and accrued expenses 200,444 (617,194)
Deferred revenue - (400,960)
------------- -------------
Net cash used in continuing operations (617,553) (1,829,844)
Net cash used in discontinued operations - (251,972)
------------- -------------
Net cash used in operating activities (617,553) (2,081,816)
Investing activities:
Purchases of property and equipment (4,598) (25,016)
Long-term deposits, net 6,693 (30,282)
Proceeds from sale of assets - 4,224,108
------------- -------------
Net cash provided by investing activities 2,095 4,168,810
Financing activities:
Proceeds from notes payable 260,000 -
Principal payments for notes payable (10,571) (1,800,000)
Cash pledged as collateral
for related party obligations - 1,311,984
Payments for related party obligations - (1,278,138)
Issuance of common stock,
net of issuance costs 32,787 6,710
------------- -------------
Net cash provided by (used in)
financing activities 282,216 (1,759,444)
------------- -------------
Change in cash and cash equivalents (333,242) 327,550
Cash and cash equivalents,
beginning of period 528,119 286,105
------------- -------------
Cash and cash equivalents,
end of period $ 194,877 $ 613,655
============ =============
See notes to interim consolidated financial statements.
PAYMENT DATA SYSTEMS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
Payment Data Systems, Inc. and subsidiaries (the "Company"), has incurred
substantial losses since inception, which has led to a significant decrease in
its cash position and a deficit in working capital. The Company sold
substantially all of its assets in July 2003 (see Note 3) and reduced
expenditures for operating requirements. Despite these actions, the Company
believes that its current available cash along with anticipated revenues may be
insufficient to meet its anticipated cash needs for the foreseeable future.
CONSEQUENTLY, THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN IS LIKELY
CONTINGENT ON THE COMPANY RECEIVING ADDITIONAL FUNDS IN THE FORM OF EQUITY OR
DEBT FINANCING. The Company is currently aggressively pursuing strategic
alternatives (see Note 6). The sale of additional equity or convertible debt
securities would result in additional dilution to the Company's stockholders,
and debt financing, if available, may involve covenants which could restrict
operations or finances. There can be no assurance that financing will be
available in amounts or on terms acceptable to the Company, if at all. If the
Company cannot raise funds on acceptable terms, or achieve positive cash flow,
it may not be able to continue to exist, conduct operations, grow market share,
take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, any of which would negatively impact its business,
operating results and financial condition. The accompanying unaudited
consolidated financial statements of the Company do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the outcome of this uncertainty.
The accompanying unaudited consolidated financial statements of the Company have
been prepared without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with U.S.
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 for the year ended December 31, 2003.
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.
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles 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. STOCK-BASED COMPENSATION
The Company applies the intrinsic value method under the recognition and
measurement provisions of APB No. 25, "Accounting for Stock Issued to
Employees," in accounting for its stock option and stock purchase plans.
Accordingly, no stock-based employee compensation expense has been recognized
for options granted with an exercise price equal to the market value of the
underlying common stock on the date of grant or in connection with the employee
stock purchase plan. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," to stock-based employee compensation.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
2004 2003 2004 2003
---------- ---------- ----------- ----------
Net income (loss), as reported $(389,067) $2,620,418 $(1,092,732) $ 905,498
Less: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (3,198) (206,278) (138,708) (572,608)
---------- ----------- ------------ ----------
Pro forma net income (loss) $(392,265) $2,414,140 $(1,231,440) $ 332,890
========== =========== ============ ==========
Net income (loss) per common share
- basic and diluted, as reported $ (0.02) $ 0.13 $ (0.05) $ 0.04
Net income (loss) per common share
- basic and diluted, pro forma $ (0.02) $ 0.12 $ (0.06) $ 0.02
NOTE 3. DISCONTINUED OPERATIONS
Prior to selling substantially all of its assets in July 2003, the Company
provided electronic bill presentment and payment ("EBPP") services to companies
generating recurring bills and also provided related EBPP consulting and
Internet-based customer care interaction services. In accordance with Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the results of operations for the asset group
disposed of have been classified as discontinued operations. All financial
information presented for the three and nine months ended September 30, 2003 has
been restated to reflect the operating results of this asset group as
discontinued operations.
NOTE 4. RELATED PARTY TRANSACTIONS
Beginning in December 2000, the Company pledged as loan guarantees certain funds
held as money market funds and certificates of deposit to collateralize margin
loans for the following executive officers of the Company: (1) Michael R. Long,
then Chairman of the Board of Directors and Chief Executive Officer; (2) Louis
A. Hoch, then President and Chief Operating Officer; (3) Marshall N. Millard,
then Secretary, Senior Vice President, and General Counsel; and (4) David S.
Jones, then Executive Vice President. Mr. Millard and Mr. Jones no longer are
employees of the Company. The margin loans were obtained in March 1999 from
institutional lenders and were secured by shares of the Company's common stock
owned by these officers. The pledged funds were held in the Company's name in
accounts with the lenders that held the margin loans of the officers. The
Company's purpose in collateralizing the margin loans was to prevent the sale of
its common stock owned by these officers while it was pursuing efforts to raise
additional capital through private equity placements. The sale of that common
stock could have hindered the Company's ability to raise capital in such a
manner and compromised its continuing efforts to secure additional financing.
The highest total amount of funds pledged for the margin loans guaranteed by the
Company was approximately $2.0 million. The total balance of the margin loans
guaranteed by the Company was approximately $1.3 million at December 31, 2002.
At the time the funds were pledged, the Company believed they would have access
to them because (a) their stock price was substantial and the stock pledged by
the officers, if liquidated, would produce funds in excess of the loans payable,
and (b) with respect to one of the institutional lenders (who was also assisting
the Company as a financial advisor at the time), even if the stock price fell,
they had received assurances from that institutional lender that the pledged
funds would be made available as needed. During the fourth quarter of 2002, the
Company requested partial release of the funds for operating purposes, which
request was denied by an institutional lender. At that time, their stock price
had fallen as well, and it became clear that both institutional lenders would
not release the pledged funds. In light of these circumstances, the Company
recognized a loss on the guarantees of $1,278,138 in the fourth quarter of 2002
and recorded a corresponding payable under related party guarantees on their
balance sheet at December 31, 2002 because it became probable at that point that
they would be unable to recover their pledged funds. During the quarter ended
March 31, 2003, the lenders applied the pledged funds to satisfy the outstanding
balances of the loans. The total balance of the margin loans guaranteed by the
Company was zero at September 30, 2004. The Company may institute litigation or
arbitration in collection of the outstanding repayment obligations of Mr. Long,
Mr. Hoch, Mr. Millard, and Mr. Jones, which currently total $1,278,138.
Presently, the Company has refrained from initiating action to recover these
funds from Mr. Long, Mr. Hoch, and Mr. Millard because they may have offsetting
claims that total $1,445,500 collectively by virtue of the change of control
clause in their respective employment agreements based on our preliminary
analysis. The Company understands that these individuals may assert such claims
based on the Company's sale of substantially all of its assets to Harbor
Payments, Inc. on July 25, 2003. The Company has not initiated any formal
settlement negotiations with these individuals because they have been under an
extended employment contract with us or have not been amenable to such an
action. On July 25, 2004, the Company's employment agreements with Michael Long,
Chief Executive Officer and Chief Financial Officer, and Louis Hoch, President
and Chief Operating Officer, expired. The Company intends to enter into new
employment agreements with both of these individuals and is currently
negotiating the terms of such agreements. The Company has not pursued the
outstanding repayment obligation of Mr. Jones because the Company does not
consider a recovery attempt to be cost beneficial. In order to attempt a
recovery from Mr. Jones, the Company estimates that it would incur a minimum of
$20,000 in estimated legal costs with no reasonable assurance of success in
recovering his outstanding obligation of approximately $38,000. Because of the
limited amount of the obligation, the Company also anticipates difficulty in
retaining counsel on a contingency basis to pursue collection of this
obligation. The ultimate outcome of this matter cannot presently be determined.
NOTE 5. NOTE PAYABLE
On August 24, 2004, the Company entered into a promissory note with Dutchess
Private Equities Fund, II, LP. Pursuant to terms of the promissory note, the
Company received $260,000 and promised to pay Dutchess $284,000 with a maturity
date of December 24, 2004. The Company will also issue 75,000 shares of
restricted common stock to Dutchess as an incentive for the investment and
agreed to register the common stock issued pursuant to the promissory note on
the next registration statement filed by the Company.
Payments on the promissory note are to be made from the equity line of credit
that the Company previously entered into with Dutchess (see Note 6). We will
make payments to Dutchess of the lesser of $71,000 or 50% of each put, until the
face amount of the promissory note is paid in full. The first payment is due at
the closing of the first put 30 days after the issuance of the promissory note
and all subsequent payments are due at the closing of every put to Dutchess. The
Company will issue as collateral twenty-five put notices to Dutchess for the
full amount applicable under the terms of the equity line of credit and shall do
so at the maximum frequency allowed under the equity line agreement, until such
time as the note is paid in full.
In the event that on the maturity date, the Company has any remaining amounts
unpaid on this note, Dutchess can exercise its right to increase the residual
amount by 2.5% per month paid as liquated damages. In the event that the Company
defaults, Dutchess has the right, but not the obligation, to 1) switch the
residual amount to a three-year, 10% interest bearing convertible debenture at a
conversion rate at the lesser of (i) 75% of the average of the lowest closing
bid price during the fifteen trading immediately preceding the convertible
maturity date or (ii) 100% of the average of the lowest bid price for the twenty
trading days immediately preceding the convertible maturity date. If Dutchess
chooses to convert the residual amount to a convertible debenture, the Company
shall have twenty business days after notice of the same to file a registration
statement covering an amount of shares equal to 300% of the residual amount. In
the event the Company does not file such registration statement within twenty
business days of Dutchess' request, or such registration statement is not
declared by the Securities and Exchange Commission to be effective within the
time period described above, the residual amount shall increase by $1,000 per
day.
NOTE 6. EQUITY LINE OF CREDIT
In February 2004, the Company executed an agreement for an equity line of credit
with Dutchess Private Equities Fund, LP ("Dutchess"). Under the terms of the
agreement, the Company may elect to receive as much as $10 million from Dutchess
in common stock purchases over the next three years at the option of the
Company. The Company agreed to file with the Securities and Exchange Commission,
and have declared effective before any funds may be received under the
agreement, a registration statement registering the resale of the shares of the
Company's common stock to be issued to Dutchess. On August 11, 2004, the Company
filed an amended registration statement on Form SB-2 with the Securities and
Exchange Commission to register the resale of the shares to be issued under the
equity line of credit with Dutchess Private Equities Fund, LP. The Securities
and Exchange Commission declared this amended registration statement to be
effective on August 13, 2004. During the quarter ended September 30, 2004, the
Company sold 363,950 shares of its common stock pursuant to the equity line of
credit and received total proceeds, net of issuance costs, of $28,362. Pursuant
to the terms of a promissory note with Dutchess Private Equities Fund, II, LP.,
the Company is obligated to use a portion of the proceeds from the equity line
to pay back the promissory note (see Note 5).
NOTE 7. ISSUANCE OF CAPITAL STOCK
In February 2004, the Company issued 55,000 shares of common stock under the
terms of its Comprehensive Employee Stock Plan to a former employee for services
provided while employed by the Company in 2003. During the nine months ended
September 30, 2004, the Company also issued a total of 573,910 shares of common
stock under the terms of its Comprehensive Employee Stock Plan to independent
contractors providing consulting services to the Company and recorded
approximately $108,000 of related expense.
During the nine months ended September 30, 2004, the Company issued 21,000
shares of common stock and received cash proceeds of approximately $4,000
related to the exercise of stock options granted under the terms of its
Comprehensive Employee Stock Plan.
During the nine months ended September 30, 2004, the Company issued a total of
72,225 shares of common stock to certain independent contractors performing
services for the Company. Such shares were issued pursuant to Section 506 of
Regulation D of the Securities and Exchange Act of 1933, as amended. The Company
recorded approximately $11,000 of expense related to the issuance of this stock.
The average closing price was used to value the stock given as consideration
because the related independent contractor agreements called for the contractors
to earn a certain number of shares of common stock for each month (prorated for
any partial month) spent working on behalf of the Company with no specified
term. In effect, the contractors earned the same fixed number of shares for each
day that they worked for the Company so the performance commitment was met by
the contractors on a daily basis and valued as such in accordance with the
measurement date guidance provided by EITF 96-18.
NOTE 8. SUBSEQUENT EVENTS
Subsequent to September 30, 2004 and through the date of this report, the
Company sold 307,880 shares of its common stock pursuant to the equity line of
credit (see Note 6) and received total proceeds, net of issuance costs, of
$75,200.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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
and analysis 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 for the year ended December 31,
2003. All references to "we," "us" or "our" in this Form 10-QSB mean Payment
Data Systems, Inc. and its consolidated subsidiaries (the "Company").
OVERVIEW
We provide integrated electronic payment processing services to merchants and
businesses, including all types of Automated Clearinghouse, or ACH, network
processing and credit and debit card-based processing services. We also operate
an online payment processing service for consumers under the domain name
www.bills.com through which consumers can pay anyone. Since inception, we have
incurred operating losses each quarter, and as of September 30, 2004, we have an
accumulated deficit of $47.7 million. OUR PROSPECTS TO CONTINUE AS A GOING
CONCERN 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 continue as a going concern. To
address these risks, we must, among other things, grow and maintain our customer
base, implement a successful marketing strategy, continue to maintain 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. We believe
that our success will depend in large part on our ability to (a) manage our
operating expenses, (b) add quality customers to our client base, (c) meet
evolving customer requirements and (d) adapt to technological changes in an
emerging market. Accordingly, we intend to focus on customer acquisition
activities and outsource some of our processing services to third parties to
allow us to maintain an efficient operating infrastructure and expand our
operations without significantly increasing our fixed operating expenses.
Prior to July 25, 2003, we provided electronic bill presentment and payment, or
EBPP, and related services to companies that generate recurring bills to their
consumers. On July 25, 2003, we sold substantially all of the assets that we
used in providing these EBPP services. After we sold these assets, we no longer
provided EBPP services. Accordingly, we have reported the results of operations
for the asset group disposed of as discontinued operations in the accompanying
statements of operations.
CRITICAL ACCOUNTING POLICIES
General
Management's discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to the
reported amounts of revenues and expenses, bad debt, investments, intangible
assets, income taxes, and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could differ from these
estimates under different assumptions or conditions. We consider the following
accounting policies to be critical because the nature of the estimates or
assumptions is material due to the levels of subjectivity and judgment necessary
to account for highly uncertain matters or the susceptibility of such matters to
change or because the impact of the estimates and assumptions on financial
condition or operating performance is material.
Reserve for Losses on Card Processing
If, due to insolvency or bankruptcy of the merchant, or for another reason, we
are not able to collect amounts from our card processing merchant customers that
have been properly "charged back" by the cardholders, we must bear the credit
risk for the full amount of the cardholder transaction. We may require cash
deposits and other types of collateral from certain merchants to minimize any
such risk. In addition, we utilize a number of systems and procedures to manage
merchant risk. Card merchant processing loss reserves are primarily determined
by performing a historical analysis of our chargeback loss experience and
considering other factors that could affect that experience in the future, such
as the types of card transactions processed and nature of the merchant
relationship with their consumers. This reserve amount is subject to risk that
actual losses may be greater than our estimates. At September 30, 2004, we did
not have a significant card merchant processing loss reserve due to the limited
volume of transactions that we processed since the inception of our card
processing services during the fourth quarter of 2003. We have not incurred any
chargeback losses to date. Our estimate for chargeback losses is likely to
increase in the future as our volume of card-based transactions processed
increases.
Bad Debts
We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability or failure of our customers to make required payments. We
determine the allowance for doubtful accounts based on an account-by-account
review, taking into consideration such factors as the age of the outstanding
balance, historical pattern of collections and financial condition of the
customer. Past losses incurred by us due to bad debts have been within our
expectations. We recorded bad debt expense of $10,700 and recorded bad debt
write-offs of $54,742 to our allowance for doubtful accounts in 2003. At
September 30, 2004, the balance of the allowance for doubtful accounts was
$3,155. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make contractual payments,
additional allowances may be required. Our estimate for bad debt losses is
likely to increase in the future as our volume of transactions processed
increases.
Valuation of Long-Lived and Intangible Assets
We assess the impairment of long-lived and intangible assets at least annually,
and whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. Factors considered important, which could trigger an
impairment review, include the following: significant underperformance relative
to historical or projected future cash flows; significant changes in the manner
of use of the assets or the strategy of the overall business; and significant
negative industry trends. When management determines that the carrying value of
long-lived and intangible assets may not be recoverable, impairment is measured
as the excess of the assets' carrying value over the estimated fair value.
During the second quarter of 2003, we performed an impairment review because we
expected to sell the asset group used to provide electronic bill payment and
presentment services. We determined that the asset group to be sold was impaired
and recorded a non-cash charge of $200,000, which is included as a component of
discontinued operations in the accompanying consolidated statement of
operations. Fair value was based on the expected selling price of the asset
group. No impairment losses were recorded during the nine months ended September
30, 2004.
Income Taxes
Deferred tax assets and liabilities are recorded based on the difference between
the tax bases of assets and liabilities and their carrying amount for financial
reporting purposes, as measured by the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Deferred tax assets are
computed with the presumption that they will be realizable in future periods
when pre-taxable income is generated. Predicting the ability to realize these
assets in future periods requires a great deal of judgment by management. It is
our judgment that we cannot predict with reasonable certainty that the deferred
tax assets as of September 30, 2004 will be realized in future periods.
Accordingly, a valuation allowance has been provided to reduce the net deferred
tax assets to $0. At September 30, 2004, we had available net operating loss
carryforwards of approximately $35.7 million, which expire beginning in the year
2020.
RESULTS OF CONTINUING OPERATIONS
Our revenues are principally derived from the operation of an Internet
electronic payment processing service for consumers under the domain name
www.bills.com. We also provide integrated electronic payment services to
merchants and businesses, including credit and debit card-based processing
services and transaction processing via the ACH network. Revenues for the
quarter ended September 30, 2004 increased 136% to $69,201 from $29,342 for the
quarter ended September 30, 2003. Revenues for the nine months ended September
30, 2004 increased 129% to $188,600 from $82,413 for the nine months ended
September 30, 2003. The increases from the prior year periods were primarily
attributable to the addition of revenues generated from card-based and ACH
processing services that we began providing during 2003. We processed our first
ACH transactions during the third quarter of 2003 and processed our first
card-based transactions during the fourth quarter of 2003. The increase in
revenue was also due to an increase in the monthly fee paid by certain consumers
subscribing to the bills.com payment service because these consumers were
converted from a per payment pricing plan to a flat monthly fee pricing plan
during the second quarter of 2004. The monthly average number of consumers using
our online payment service was as follows:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
------------ ---------------- -------------- -------------
Average number of bills.com
customers per month 2,026 2,084 2,035 1,944
The number of transactions generated by bills.com customers is not indicative of
revenue growth because the majority of these customers pay a flat monthly fee to
process up to a certain number of payments each month and do not exceed the
maximum number of payments allowed. We expect our revenues to increase as we
anticipate continued growth in the number of bills.com customers and additional
merchant customers. Revenue generated by our merchant customers represented
approximately 39% of our total revenues in the nine months ended September 30,
2004, but we believe that this percentage will increase as we anticipate adding
new merchant customers and experiencing growth in transaction volumes as a
result. We believe that our merchant business provides us with the best
opportunity for revenue growth and will comprise the majority of our business in
the future.
Cost of services includes the cost of personnel dedicated to the creation and
maintenance of connections to third party payment processors and fees paid to
such third party providers for electronic payment processing services. Through
our contractual relationships with our payment processors, we are able to
process ACH and debit or credit card transactions on behalf of our customers and
their consumers. We pay volume-based fees for debit and credit transactions
initiated through these processors, and pay fees for other transactions such as
returns, notices of change to bank accounts and file transmission. Cost of
services was $61,974 and $59,022 for the quarters ended September 30, 2004 and
2003, respectively, and $191,333 and $96,286 for the nine months ended September
30, 2004 and 2003, respectively. The increase from the prior year periods is due
to fees incurred in 2004 for ACH and card-based processing services.
Selling, general and administrative expenses decreased to $353,352 for the
quarter ended September 30, 2004, from $455,784 for the third quarter of 2003.
Such expenses decreased to $986,055 for the nine months ended September 30,
2004, from $1,281,035 for the nine months ended September 30, 2003. The
decreases from the prior year periods are principally due to lower accounting,
legal and corporate insurance expenses and lower salary and benefit costs due to
the reduction of personnel during 2003.
Depreciation and amortization decreased to $20,988 for the quarter ended
September 30, 2004, as compared to $29,827 for the third quarter of 2003.
Depreciation and amortization decreased to $74,023 for the nine months ended
September 30, 2004, from $98,461 for the nine months ended September 30, 2003.
These decreases were due to lower depreciation related to certain assets that
became fully depreciated during 2003. We purchased $4,598 of computer software
and hardware during the nine months ended September 30, 2004 and do not
anticipate making any significant capital expenditures over the remaining three
months of 2004.
Net other expense was $21,954 for the quarter ended September 30, 2004, compared
to net other income of $179,474 for the third quarter of 2003. Net other expense
of $29,921 for the nine months ended September 30, 2004, decreased from net
other income of $103,387 for the first nine months of 2003. These changes are
primarily attributable to $165,000 of consulting fees recognized in other income
in the third quarter of 2003 for transitional EBPP consulting services provided
to our former equal partner in an EBPP joint venture in Australia. The joint
venture was dissolved as a result of our sale of substantially all of our assets
during the third quarter of 2003. The change from the prior nine-month period is
also due to lower interest expense in 2004 due to the repayment of our
convertible debt in July 2003 and absence of any debt until the third quarter of
2004.
Net loss from continuing operations increased to $389,067 for the quarter ended
September 30, 2004, from $336,161 for the third quarter of 2003 primarily as a
result of the change in net other income (expense) from the prior year quarter.
Net loss from continuing operations improved to $1,092,732 for the nine months
ended September 30, 2004, from $1,289,982 for the nine months ended September
30, 2003 primarily as a result of the decrease in selling, general and
administrative expenses from the prior year period.
RESULTS OF DISCONTINUED OPERATIONS
Prior to selling substantially all of our assets in July 2003, our revenues were
principally derived from providing electronic bill presentment and payment and
related services to companies generating recurring bills. During the three
months ended September 30, 2003, these discontinued operations provided revenue
of $357,208 and generated net income of $188,319. During the nine months ended
September 30, 2003, these discontinued operations provided revenue of $2,155,282
and generated a net loss of $572,780.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, our principal source of liquidity consisted of $194,877
of cash and cash equivalents, compared to $528,119 of cash and cash equivalents
at December 31, 2003. We have incurred substantial losses since inception, which
has led to a significant decrease in our cash position and a deficit in working
capital. We sold substantially all of our assets in July 2003 and reduced
expenditures for operating requirements. Despite these actions, we believe that
our current available cash and cash equivalents along with anticipated revenues
may be insufficient to meet our anticipated cash needs for the foreseeable
future. CONSEQUENTLY, OUR ABILITY TO CONTINUE AS A GOING CONCERN MAY BE
CONTINGENT ON US RECEIVING ADDITIONAL FUNDS IN THE FORM OF EQUITY OR DEBT
FINANCING. We are currently aggressively pursuing strategic alternatives. In
February 2004, we executed an agreement for an equity line of credit with
Dutchess Private Equities Fund, LP ("Dutchess"). Under the terms of the
agreement, we may elect to receive as much as $10 million from Dutchess in
common stock purchases over the next three years at our option. We agreed to
file with the Securities and Exchange Commission, and have declared effective
before any funds could be received under the agreement, a registration statement
registering the resale of the shares of our common stock to be issued to
Dutchess. Any funds received will be used, as needed, to support on-going
operations and enhance potential merger and acquisition activity. We filed an
amended registration statement on Form SB-2 with the Securities and Exchange
Commission on August 11, 2004 to register the resale of these shares. The
Securities and Exchange Commission declared this registration statement to be
effective on August 13, 2004.
On August 24, 2004, we entered into a promissory note with Dutchess Private
Equities Fund, II, LP. Pursuant to terms of the promissory note, we received
$260,000 and promised to pay Dutchess $284,000 with a maturity date of December
24, 2004. We will also issue 75,000 shares of restricted common stock to
Dutchess as an incentive for the investment and agreed to register the common
stock issued pursuant to the promissory note on the next registration statement
we file with the SEC.
Payments on the promissory note are to be made from the equity line of credit
that we previously entered into with Dutchess. We will make payments to Dutchess
of the lesser of $71,000 or 50% of each put, until the face amount of the
promissory note is paid in full. The first payment is due at the closing of the
first put 30 days after the issuance of the promissory note and all subsequent
payments are due at the closing of every put to Dutchess. We will issue as
collateral twenty-five put notices to Dutchess for the full amount applicable
under the terms of the equity line of credit and shall do so at the maximum
frequency allowed under the equity line agreement, until such time as the note
is paid in full.
We anticipate that the equity line of credit will provide sufficient cash flows
to meet current operating requirements and that we will be able to receive funds
under the equity line of credit before our currently available sources of
liquidity are extinguished. If we are unable to receive adequate funds from the
equity line of credit as soon as we currently anticipate for any reason, we may
have to curtail or cease operations.
Beginning in December 2000, we pledged as loan guarantees certain funds held as
money market funds and certificates of deposit to collateralize margin loans for
the following executive officers of the Company: (1) Michael R. Long, then
Chairman of the Board of Directors and Chief Executive Officer; (2) Louis A.
Hoch, then President and Chief Operating Officer; (3) Marshall N. Millard, then
Secretary, Senior Vice President, and General Counsel; and (4) David S. Jones,
then Executive Vice President. Mr. Millard and Mr. Jones no longer are employees
of the Company. The margin loans were obtained in March 1999 from institutional
lenders and were secured by shares of our common stock owned by these officers.
The pledged funds were held in our name in accounts with the lenders that held
the margin loans of the officers. Our purpose in collateralizing the margin
loans was to prevent the sale of our common stock owned by these officers while
we were pursuing efforts to raise additional capital through private equity
placements. The sale of that common stock could have hindered our ability to
raise capital in such a manner and compromised our continuing efforts to secure
additional financing. The highest total amount of funds pledged for the margin
loans guaranteed by us was approximately $2.0 million. The total balance of the
margin loans guaranteed by us was approximately $1.3 million at December 31,
2002. At the time the funds were pledged, we believed we would have access to
them because (a) our stock price was substantial and the stock pledged by the
officers, if liquidated, would produce funds in excess of the loans payable, and
(b) with respect to one of the institutional lenders (who was also assisting us
as a financial advisor at the time), even if the stock price fell, we had
received assurances from that institutional lender that the pledged funds would
be made available as needed. During the fourth quarter of 2002, we requested
partial release of the funds for operating purposes, which request was denied by
an institutional lender. At that time, our stock price had fallen as well, and
it became clear that both institutional lenders would not release the pledged
funds. In light of these circumstances, we recognized a loss on the guarantees
of $1,278,138 in the fourth quarter of 2002 and recorded a corresponding payable
under related party guarantees on our balance sheet at December 31, 2002 because
it became probable at that point that we would be unable to recover our pledged
funds. During the quarter ended March 31, 2003, the lenders applied the pledged
funds to satisfy the outstanding balances of the loans. The total balance of the
margin loans guaranteed by us was zero at September 30, 2004. We may institute
litigation or arbitration in collection of the outstanding repayment obligations
of Mr. Long, Mr. Hoch, Mr. Millard, and Mr. Jones, which currently total
$1,278,138. Presently, we have refrained from initiating action to recover these
funds from Mr. Long, Mr. Hoch, and Mr. Millard because they may have offsetting
claims that total $1,445,500 collectively by virtue of the change of control
clause in their respective employment agreements based on our preliminary
analysis. We understand that these individuals may assert such claims based on
our sale of substantially all of our assets to Harbor Payments, Inc. on July 25,
2003. We have not initiated any formal settlement negotiations with these
individuals because they have been under an extended employment contract with us
or have not been amenable to such an action. We have not pursued the outstanding
repayment obligation of Mr. Jones because we do not consider a recovery attempt
to be cost beneficial. In order to attempt a recovery from Mr. Jones, we
estimate that we would incur a minimum of $20,000 in estimated legal costs with
no reasonable assurance of success in recovering his outstanding obligation of
approximately $38,000. Because of the limited amount of the obligation, we also
anticipate difficulty in retaining counsel on a contingency basis to pursue
collection of this obligation. The ultimate outcome of this matter cannot
presently be determined.
Net cash used in operating activities was $617,553 and $1,829,844 for the nine
months ended September 30, 2004 and 2003, respectively. Net cash used in
operating activities was primarily attributable to operating net losses
generated by early growth stage activities and overhead costs. We plan to focus
on expending our resources prudently given our current state of liquidity and do
not expect to achieve positive cash flow from operations for 2004.
Net cash provided by investing activities was $2,095 for the nine months ended
September 30, 2004 and reflected the return of $6,693 of a long-term lease
deposit, which was partially offset by capital expenditures for computer
hardware and software. Net cash used in investing activities was $4,168,810 for
the nine months ended September 30, 2003 and primarily reflected proceeds of
approximately $4.2 million from the sale of substantially all of our assets. We
do not anticipate making any significant capital expenditures during the
remaining three months of 2004.
Net cash provided by financing activities of $282,216 for the nine months ended
September 30, 2004 resulted primarily from borrowing $260,000 under a note
payable and receiving $32,787 from the issuance of common stock. Net cash used
in financing activities was $1,759,444 for the nine months ended September 30,
2003 and primarily reflected the repayment of our convertible debt of $1.8
million in July 2003 and also included a net return of $33,846 pledged under our
guarantees of related party obligations.
OFF-BALANCE SHEET ARRANGEMENTS
We currently have no off-balance sheet arrangements that have or are reasonably
likely to have a current or future material effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
FORWARD-LOOKING STATEMENTS DISCLAIMER
Except for the historical information contained herein, the matters discussed in
our Form 10-QSB include certain forward-looking statements, which are intended
to be covered by safe harbors. 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 for the year ended December 31, 2003 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-QSB 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-QSB are based on information presently available to our management.
We assume no obligation to update any forward-looking statements, except as
required by law.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-QSB, 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. During the Company's last fiscal quarter ended September 30, 2004, there
was no change in the Company's internal control over financial reporting
identified in connection with the evaluation that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Beginning in December 2000, we pledged as loan guarantees certain funds held as
money market funds and certificates of deposit to collateralize margin loans for
the following executive officers of the Company: (1) Michael R. Long, then
Chairman of the Board of Directors and Chief Executive Officer; (2) Louis A.
Hoch, then President and Chief Operating Officer; (3) Marshall N. Millard, then
Secretary, Senior Vice President, and General Counsel; and (4) David S. Jones,
then Executive Vice President. Mr. Millard and Mr. Jones no longer are employees
of the Company. The pledged funds were held in our name in accounts with the
lenders that held the margin loans of the officers. Our purpose in
collateralizing the margin loans was to prevent the sale of our common stock
owned by these officers while we were pursuing efforts to raise additional
capital through private equity placements. The sale of that common stock could
have hindered our ability to raise capital in such a manner and compromised our
continuing efforts to secure additional financing. We were also trying to
accommodate the requests of the named executive officers, who were seeking to
preserve their financial liquidity. We believe this action served our purpose of
assuring stable management and leadership for our future. The margin loans were
obtained in March 1999 from institutional lenders and were secured by shares of
our common stock owned by these officers. Each of the officers used the proceeds
of their respective margin loans for investment purposes and usual and customary
living expenses.
None of the margin loans were recourse with respect to the officers and none of
the loan guarantees were recourse with respect to us because at the times the
margin loans were made and the funds pledged, the value of the common stock
collateralizing the margin loans exceeded the loan amounts. Under the original
terms of the arrangement, we charged each of the officers, pro rata, the
difference between the rate of return earned by us before the collateralization
of the margin loans on the funds that were to be the pledged funds and the rate
of return earned on the pledged funds after the collateralization of the margin
loans. We offset such amounts due from Mr. Long, Mr. Hoch, and Mr. Millard
against their respective salaries from the date the funds were pledged until
November of 2002, when we underwent significant downsizing and Mr. Long, Mr.
Hoch, and Mr. Millard began deferring their salaries. We offset such amounts due
from Mr. Jones against his salary from the date the funds were pledged until the
date of his departure from the Company in August 2001.
The highest total amount of funds pledged for the margin loans guaranteed by us
was approximately $2.0 million. The total balance of the margin loans guaranteed
by us was approximately $1.3 million at December 31, 2002. At the time the funds
were pledged, we believed we would have access to them because (a) our stock
price was substantial and the stock pledged by the officers, if liquidated,
would produce funds in excess of the loans payable, and (b) with respect to one
of the institutional lenders (who was also assisting us as a financial advisor
at the time), even if the stock price fell, we had received assurances from that
institutional lender that the pledged funds would be made available as needed.
During the fourth quarter of 2002, we requested partial release of the funds for
operating purposes, which request was denied by an institutional lender. At that
time, our stock price had fallen as well, and it became clear that both
institutional lenders would not release the pledged funds. In light of these
circumstances, we recognized a loss on the guarantees of $1,278,138 in the
fourth quarter of 2002 and recorded a corresponding payable under related party
guarantees on our balance sheet at December 31, 2002 because it became probable
at that point that we would be unable to recover our pledged funds. During the
quarter ended March 31, 2003, the lenders applied the pledged funds to satisfy
the outstanding balances of the loans. The total balance of the margin loans
guaranteed by us was zero at December 31, 2003.
The pledged funds were classified as cash and cash equivalents on our balance
sheet and disclosed in the accompanying footnotes in our Annual Report on Form
10-K for each of the years ended December 31, 2000 and 2001, respectively. The
pledged funds were classified as cash and cash equivalents on our balance sheet
and disclosed in the accompanying footnotes in our Quarterly Report on Form 10-Q
for the quarters ended March 31, 2002 and June 30, 2002, respectively. Under the
terms of the related guaranty agreements, we could, at any time, terminate our
obligations and the lenders' rights under the guaranty agreements, but we would
remain liable for any losses incurred by the lenders in liquidating the
guaranteed accounts by selling the common stock held as collateral in the margin
loan accounts in order to pay off the margin loan balances in full during a
reasonable time subsequent to the receipt of our termination notice. On June 30,
2003, we filed an amended Annual Report on Form 10-K for the year ended December
31, 2001 and amended Quarterly Reports on Form 10-Q for the quarters ended March
31, 2002 and June 30, 2002. These amended reports included restated balance
sheets that classified the pledged funds as cash pledged as collateral for
related party obligations beginning at December 31, 2000 as a result of comments
received from the Securities and Exchange Commission in connection with their
review of our registration statement on Form S-3 that we originally filed on
August 9, 2002.
We may institute litigation or arbitration in collection of the outstanding
repayment obligations of Mr. Long, Mr. Hoch, Mr. Millard, and Mr. Jones, which
currently total $1,278,138. Presently, we have refrained from initiating action
to recover these funds from Mr. Long, Mr. Hoch, and Mr. Millard because they may
have offsetting claims that total $1,445,500 collectively by virtue of the
change of control clause in their respective employment agreements based on our
preliminary analysis. We understand that these individuals may assert such
claims based on our sale of substantially all of our assets to Harbor Payments,
Inc. on July 25, 2003. We have not initiated any formal settlement negotiations
with these individuals because they were under an extended employment contract
with us or have not been amenable to such an action. We have not pursued the
outstanding repayment obligation of Mr. Jones because we do not consider a
recovery attempt to be cost beneficial. In order to attempt a recovery from Mr.
Jones, we estimate that we would incur a minimum of $20,000 in estimated legal
costs with no reasonable assurance of success in recovering his outstanding
obligation of approximately $38,000. Because of the limited amount of the
obligation, we also anticipate difficulty in retaining counsel on a contingency
basis to pursue collection of this obligation. The ultimate outcome of this
matter cannot presently be determined.
On July 25, 2003, certain of our stockholders (those stockholders being Mike
Procacci, Jr., Mark and Stefanie McMahon, Anthony and Lois Tedeschi, Donna and
James Knoll, John E. Hamilton, III, William T. Hagan, Samuel A. Fruscione, Dana
Fruscione-Penzone, Gia Fruscione, Alicia Fruscione, Joseph Fruscione, Robert
Evans, John Arangio, Gary and JoAnne Gardner, Lee and Margaret Getson, G. Harry
Bonham, Jr., Gary Brewer, Bob Lastowski, Robert Filipe, Mitchell D. Hovendick,
Dr. John Diephold, Joseph Maressa, Jr., and Charles Brennan) commenced legal
action against us, Ernst & Young, LLP, and certain of our current and former
directors (including the executive officers named above) in the District Court
of the 45th Judicial District, Bexar County, Texas. With respect to us and the
current and former directors named in the suit, the plaintiffs allege that we,
acting through such directors, misstated in our 2000 and 2001 Form 10-Ks our
ability to use for operational purposes the funds pledged as security for margin
loans of certain of our executive officers, as discussed above. The plaintiffs
allege and seek resulting economic and exemplary damages, rescission, interest,
attorneys' fees and costs of court. We believe this suit is without merit and
intend to vigorously defend the company and the directors named in the suit. As
of the date of this report, there have been no material developments in the
suit. The results of legal proceedings cannot be predicted with certainty. If we
fail to prevail in this legal matter, our financial position, results of
operations, and cash flows could be materially adversely affected.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
During the quarter ended September 30, 2004, we sold 363,950 shares of our
common stock to Dutchess Private Equities Fund pursuant to an equity line of
credit and received total proceeds, net of issuance costs, of $28,362.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation, as amended (incorporated by reference to such
exhibit in the Registrant's Quarterly Report on Form 10-Q, filed November
14, 2003)
3.2 By-laws, as amended (incorporated by reference to such exhibit in the
Registrant's Registration Statement on Form SB-2, filed December 29, 1999)
4.1 Rights Agreement, dated October 4, 2000 (incorporated by reference to such
exhibit in the Registrant's Registration Statement on Form 8-A, filed
October 11, 2000)
10.1 Asset Purchase Agreement between the Company and Saro, Inc. dated May 15,
2003 (incorporated by reference to Appendix A in the Registrant's
Definitive Proxy Statement, filed June 19, 2003)
10.2 First Amendment to Asset Purchase Agreement dated July 25, 2003
(incorporated by reference to such exhibit in the Registrant's Quarterly
Report on Form 10-Q, filed November 14, 2003)
10.3 Standard Office Lease between the Company and Frost National Bank, Trustee
for a Designated Trust, dated August 22, 2003 (incorporated by reference to
such exhibit in the Registrant's Quarterly Report on Form 10-Q, filed
November 14, 2003)
10.4 1999 Employee Comprehensive Stock Plan, as amended (incorporated by
reference to such exhibit in the Registrant's Registration Statement on
Form S-8, filed January 14, 2004)
10.5 1999 Non-Employee Director Plan (incorporated by reference to such exhibit
in the Registrant's Registration Statement on Form S-8, filed February 23,
2000)
10.6 1999 Employee Stock Purchase Plan (incorporated by reference to such
exhibit in the Registrant's Registration Statement on Form S-8, filed
February 23, 2000)
10.7 Form of Employment Agreement dated May 31, 2001, between the Company and
Executive Officers of the Company (incorporated by reference to such
exhibit in the Registrant's Annual Report on Form 10-K, filed April 1,
2002)
10.8 Investment Agreement between the Company and Dutchess Private Equities
Fund, LP dated June 6, 2004 (incorporated by reference to such exhibit in
the Registrant's Registration Statement on Form SB-2, filed June 18, 2004)
10.9 Registration Rights Agreement between the Company and Dutchess Private
Equities Fund, LP dated June 6, 2004 (incorporated by reference to such
exhibit in the Registrant's Registration Statement on Form SB-2, filed June
18, 2004)
10.10 Placement Agent Agreement between the Company, Clayton Dunning and Co,
Inc. and Dutchess Private Equities Fund, LP dated June 4, 2004
(incorporated by reference to such exhibit in the Registrant's Registration
Statement on Form SB-2, filed July 23, 2004)
10.11 Affiliate Office Agreement between the Company and Network 1 Financial,
Inc. dated October 7, 2003 (incorporated by reference to such exhibit in
the Registrant's Registration Statement on Form SB-2, filed April 28, 2004)
10.12 Promissory Note between the Company and Dutchess Private Equities Fund,
II, LP, dated August 24, 2004 (incorporated by reference to such exhibit in
the Registrant's Report on Form 8-K, filed September 2, 2004)
10.13 Warrant Agreement among Kubra Data Transfer LTD. and Payment Data Systems,
Inc., dated as of September 30, 2004 (incorporated by reference to such
exhibit in the Registrant's Report on Form 8-K, filed October 6, 2004)
31.1 Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PAYMENT DATA SYSTEMS, INC.
Date: November 15, 2004 By: /s/ Michael R. Long
----------------------
Michael R. Long
Chairman of the Board,
Chief Executive Officer and
Chief Financial Officer
(principal executive officer and
principal financial
and accounting officer)