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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO 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 (I.R.S. 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 May 1, 2004, 21,495,181 shares of the issuer's common stock, $0.001 par
value, were outstanding.
Transitional Small Business Disclosure Format (Check one): Yes No X
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PAYMENT DATA SYSTEMS, INC.
INDEX
Part I - Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2004
and December 31, 2003..............................................3
Consolidated Statements of Operations for the three months
ended March 31, 2004 and 2003......................................4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and 2003......................................5
Notes to Consolidated Financial Statements...........................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................9
Item 3. Controls and Procedures.............................................13
Part II - Other Information
Item 2. Changes in Securities...............................................14
Item 6. Exhibits and Reports on Form 8-K....................................14
Signature....................................................................16
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAYMENT DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2004 December 31, 2003
------------------- -------------------
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $ 268,230 $ 528,119
Accounts receivable, net 28,227 43,693
Prepaid expenses and other 66,388 113,650
------------------- -------------------
Total current assets 362,845 685,462
Property and equipment, net 192,303 215,156
Other assets 34,032 37,782
------------------- -------------------
Total assets $ 589,180 $ 938,400
=================== ===================
Liabilities and stockholders' equity (deficit):
Current liabilities:
Accounts payable $ 511,376 $ 501,488
Accrued expenses 186,418 224,180
------------------- -------------------
Total current liabilities 697,794 725,668
Stockholders' equity:
Common stock, $0.001 par value, 200,000,000 shares
authorized; 21,495,181 and 20,987,956 issued and
outstanding 21,445 20,988
Additional paid-in capital 46,921,821 46,842,908
Accumulated deficit (47,051,880) (46,651,164)
------------------- -------------------
Total stockholders' equity (deficit) (108,614) 212,732
------------------- -------------------
Total liabilities and stockholders' equity (deficit) $ 589,180 $ 938,400
=================== ===================
See notes to interim consolidated financial statements.
3
PAYMENT DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
--------------------------------
2004 2003
--------------- ---------------
Revenues $ 55,197 $ 24,156
Operating expenses:
Cost of services 63,640 17,530
Selling, general and administrative 359,819 388,593
Depreciation and amortization 27,682 36,073
--------------- ---------------
Total operating expenses 451,141 442,196
--------------- ---------------
Operating loss (395,944) (418,040)
Other income (expense), net:
Interest income 398 4,168
Interest expense - (44,393)
Other income (expense) (5,170) (6,040)
--------------- ---------------
Total other income (expense), net (4,772) (46,265)
--------------- ---------------
Loss from continuing operations before
income taxes (400,716) (464,305)
Income taxes - -
--------------- ---------------
Loss from continuing operations (400,716) (464,305)
Discontinued operations:
Loss from discontinued operations, net
of no income taxes - (337,653)
--------------- ---------------
Net loss $ (400,716) $ (801,958)
=============== ===============
Basic and diluted loss per common share:
Loss from continuing operations $ (0.02) $ (0.02)
Loss from discontinued operations - (0.02)
--------------- ---------------
Net loss $ (0.02) $ (0.04)
=============== ===============
Weighted average common shares
outstanding 21,189,477 20,686,189
See notes to interim consolidated financial statements.
4
PAYMENT DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
-----------------------------------
2004 2003
----------------- -----------------
Operating activities:
Loss from continuing operations $ (400,716) $ (464,305)
Adjustments to reconcile loss from continuing
operations to net cash used in operating
activities:
Depreciation and amortization 27,682 36,073
Non-cash issuance of common stock 59,700 16,250
Changes in current assets and current liabilities:
Accounts receivable 15,466 (68,593)
Prepaid expenses and other 47,262 95,522
Accounts payable and accrued expenses (11,549) 284,346
Deferred revenue - (7,985)
----------------- -----------------
Net cash used in continuing operations (262,155) (108,692)
Net cash used in discontinued operations - (51,220)
----------------- -----------------
Net cash used in operating activities (262,155) (159,912)
Investing activities:
Purchases of property and equipment (1,079) -
----------------- -----------------
Net cash used in investing activities (1,079) -
Financing activities:
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 3,345 6,710
----------------- -----------------
Net cash provided by financing activities 3,345 40,556
----------------- -----------------
Change in cash and cash equivalents (259,889) (119,356)
Cash and cash equivalents, beginning of period 528,119 286,105
----------------- -----------------
Cash and cash equivalents, end of period $ 268,230 $ 166,749
================= =================
See notes to interim consolidated financial statements.
5
PAYMENT DATA SYSTEMS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Payment Data
Systems, Inc. and subsidiaries (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 March 31,
2004 2003
---- ----
Net loss, as reported $ (400,716) $ (801,958)
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (67,755) (190,974)
----------- ------------
Pro forma net loss (468,471) (992,932)
=========== ============
Net loss per common share - basic and diluted, as reported $ (0.02) $ (0.04)
Net loss per common share - basic and diluted, pro forma $ (0.02) $ (0.05)
6
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 months ended March 31, 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 certain funds held as money
market funds and certificates of deposit to collateralize certain margin loans
of four executive officers of the Company (only two of which are currently
employed by the Company). The margin loans were from institutional lenders and
were secured by shares of the Company's common stock held by these officers. The
Company's purpose in collateralizing the margin loans was to prevent the sale of
the Company's common stock held by these officers while the Company was pursuing
efforts to raise additional capital through private equity placements. The sale
of the Company's common stock could have hindered the Company's ability to raise
capital in such a manner and compromised the Company's continuing efforts to
secure additional financing. The total balance of the margin loans guaranteed by
the Company was approximately $1.3 million at December 31, 2002. The Company
believed it had the unrestricted legal right to use the pledged funds for its
operations, if necessary, based on (i) its interpretation of the loan guarantee
agreements, (ii) the market price of the Company's stock at the time of the
pledge, and (iii) assurances the Company received from one of the institutional
lenders that funds would be made available if needed. During the fourth quarter
of 2002, the Company sought partial release of the funds for operating purposes,
which was denied by the institutional lender, based upon their interpretation of
the loan guarantee agreements. In light of this action, 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 the Company's balance
sheet at December 31, 2002. During the quarter ended March 31, 2003, the lenders
applied the pledged funds being held to satisfy the outstanding balances of the
loans. The total balance of the margin loans guaranteed by the Company was zero
at March 31, 2004. The Company may institute litigation or arbitration
concerning these matters, which may result in the assertion of claims by these
officers under their employee agreements. The ultimate outcome of this matter
cannot presently be determined.
NOTE 5. 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. The Company filed a
registration statement on Form SB-2 with the Securities and Exchange Commission
on April 28, 2004 to register the resale of these shares. As of the date of this
report, the Securities and Exchange Commission had not declared this
registration statement effective.
NOTE 6. 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 quarter ended March
31, 2004, the Company also issued a total of 315,000 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 $60,000 of related expense.
In March 2004, the Company issued 15,000 shares of common stock and received
cash proceeds of approximately $3,000 related to the exercise of stock options
granted under the terms of its Comprehensive Employee Stock Plan.
During the quarter ended March 31, 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
7
Regulation D of the Securities and Exchange Act of 1933, as amended. The Company
recorded approximately $11,000 of equity related to the issuance of this stock.
NOTE 7. GOING CONCERN
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 may
be contingent on the Company receiving additional funds in the form of equity or
debt financing. Accordingly, the Company is currently aggressively pursuing
strategic alternatives, including investment in the Company via an equity line
of credit (see Note 5). 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 restrictive 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.
NOTE 8. SUBSEQUENT EVENTS
In April 2004, the Company issued 50,000 shares of common stock under the terms
of its Comprehensive Employee Stock Plan to an independent contractor providing
consulting services to the Company. The Company recorded $9,500 of expense
related to the issuance of this stock.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition
and Results of Operations
The following discussion and analysis of financial condition and results of
operations contains forward-looking statements that involve a number of risks
and uncertainties. Actual results in future periods may differ materially from
those expressed or implied in such forward-looking statements. This discussion
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
The Company operates an Internet electronic payment processing service for
consumers under the domain name www.bills.com and provides integrated electronic
payment services, including credit and debit card-based processing services and
transaction processing via the ACH network. Since inception, we have incurred
operating losses each quarter, and as of March 31, 2004, we have an accumulated
deficit of $47.1 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.
In July 2003, the Company sold substantially all of its assets, which it used to
provide electronic bill presentment and payment, or EBPP, and related services.
Accordingly, the results of operations for the asset group disposed of have been
reported as discontinued operations in the accompanying statements of
operations.
CRITICAL ACCOUNTING POLICIES
GENERAL
Management's discussion and analysis of its financial condition and results of
operations is based upon the Company's consolidated financial statements, which
have been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of these financial statements requires the Company
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, the Company evaluates its estimates,
including those related to the reported amounts of revenues and expenses, bad
debt, investments, intangible assets, income taxes, and contingencies and
litigation. The Company bases its 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.
9
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. This
reserve amount is subject to risk that actual losses may be greater than our
estimates. At March 31, 2004, we did not have a significant card merchant
processing loss reserve due to the limited volume of transactions processed by
the Company since the inception of our card processing services during the
fourth quarter of 2003.
Bad Debt
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability or failure of its customers to make required
payments. The Company recorded bad debt expense of $10,700 and recorded bad debt
write-offs of $54,742 to its allowance for doubtful accounts in 2003. At March
31, 2004, the balance of the allowance for doubtful accounts was $3,155. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make contractual payments, additional
allowances may be required.
Valuation of Long-Lived and Intangible Assets
The Company assesses 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. Impairment losses of $217,000 were recorded
in 2003, and are included in discontinued operations in the statements of
operations except for $17,000 that is included in continuing operations in 2003.
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 March 31, 2004 will be realized in future periods. Accordingly,
a valuation allowance has been provided to reduce the net deferred tax assets to
$0. At December 31, 2003, the Company had available net operating loss
carryforwards of approximately $34.6 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. The Company also provides 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 March 31, 2004 increased 129% to $55,197 from $24,156 for the
quarter ended March 31, 2003. The increase from the prior year quarter was
primarily attributable to the addition of revenues generated from card-based and
ACH processing services that the Company 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 number of consumers
subscribing to the bills.com payment service.
10
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
its contractual relationships with its payment processors, the Company is able
to process ACH and debit or credit card transactions on behalf of its customers
and their consumers. The Company pays volume-based fees for debit and credit
transactions initiated through these processors, and pays fees for other
transactions such as returns, notices of change to bank accounts and file
transmission. Cost of revenues was $63,640 and $17,530 for the quarters ended
March 31, 2004 and 2003, respectively. The increase from the prior year is due
to fees incurred in 2004 for ACH and card-based processing services and the
higher subscriber volume of the bills.com payment service.
Selling, general and administrative expenses decreased to $359,819 for the
quarter ended March 31, 2004, from $388,593 for the first quarter of 2003. The
decrease in such expenses from the prior year quarter is principally due to
lower corporate insurance expenses and lower salary and benefit costs due to the
reduction of personnel during 2003.
Depreciation and amortization decreased to $27,682 for the quarter ended March
31, 2004, as compared to $36,073 for the first quarter of 2003. This decrease
was due to lower depreciation related to certain assets that became fully
depreciated during 2003. We purchased $1,000 of computer software during the
quarter ended March 31, 2004 and do not anticipate making any significant
capital expenditures over the remaining nine months of 2004.
Net other expense was $4,772 for the quarter ended March 31, 2004, compared to
$46,265 for the first quarter of 2003. This decrease is primarily attributable
to lower interest expense in 2004 due to the repayment of the Company's
convertible debt in July 2003 and lower interest income earned in 2004 as a
result of lower invested balances.
Net loss from continuing operations improved to $400,716 for the quarter ended
March 31, 2004, from $464,305 for the first quarter of 2003 primarily as a
result of the decrease in interest expense and increase in revenues from the
prior year quarter.
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 March 31, 2003, these discontinued operations provided revenue of
$879,583 and generated a net loss of $337,653.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, the Company's principal source of liquidity consisted of
$268,000 of cash and cash equivalents, compared to $528,000 of cash and cash
equivalents at December 31, 2003. 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 and reduced expenditures for operating requirements. Despite
these actions, the Company believes that its current available cash and cash
equivalents 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 may be contingent on the Company
receiving additional funds in the form of equity or debt financing. The Company
is currently aggressively pursuing strategic alternatives, including investment
in the Company via an 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. Any funds received will be used, as needed, to support
on-going operations and enhance potential merger and acquisition activity. The
Company filed a registration statement on Form SB-2 with the Securities and
Exchange Commission on April 28, 2004 to register the resale of these shares. As
of the date of this report, the Securities and Exchange Commission had not
declared this registration statement effective. We anticipate that the equity
line of credit will provide sufficient cash flows to meet current operating
requirements after the registration statement is declared effective. We also
anticipate that the registration statement will become effective and we will be
able to receive funds under the equity line of credit before our currently
available sources of liquidity are extinguished. If
11
we are unable to receive funds from the equity line of credit because the
registration statement becomes effective later than we currently anticipate or
for any other reason, we may have to curtail or cease operations.
Beginning in December 2000, the Company pledged certain funds held as money
market funds and certificates of deposit to collateralize certain margin loans
of four executive officers of the Company (only two of which are currently
employed by the Company). These funds were classified as Cash pledged as
collateral for related party obligations on the Company's balance sheet at
December 31, 2002. The margin loans were from institutional lenders and were
secured by shares of the Company's common stock held by these officers. The
Company's purpose in collateralizing the margin loans was to prevent the sale of
the Company's common stock held by these officers while the Company was pursuing
efforts to raise additional capital through private equity placements. The sale
of the Company's common stock could have hindered the Company's ability to raise
capital in such a manner and compromised the Company's continuing efforts to
secure additional financing. The total balance of the margin loans guaranteed by
the Company was approximately $1.3 million at December 31, 2002. The Company
believed it had the unrestricted legal right to use the pledged funds for its
operations, if necessary, based on (i) its interpretation of the loan guarantee
agreements, (ii) the market price of the Company's stock at the time of the
pledge, and (iii) assurances the Company received from one of the institutional
lenders that funds would be made available if needed. During the fourth quarter
of 2002, the Company sought partial release of the funds for operating purposes,
which was denied by the institutional lender, based upon their interpretation of
the loan guarantee agreements. In light of this action, 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 the Company's balance
sheet at December 31, 2002. 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 March
31, 2004. The Company may institute litigation or arbitration concerning these
matters, which may result in the assertion of claims by these officers under
their employee agreements. The ultimate outcome of this matter cannot presently
be determined.
Net cash used in operating activities was $262,155 and $159,912 for the quarters
ended March 31, 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 used in investing activities was $1,079 for the quarter ended March 31,
2004 and reflected capital expenditures for computer software. There were no
investing activities for the quarter ended March 31, 2003 due to the Company's
state of liquidity. We do not anticipate making any significant capital
expenditures during the remaining nine months of 2004.
Net cash provided by financing activities of $3,345 for the quarter ended March
31, 2004 resulted from the exercise of stock options. Net cash provided by
financing activities was $40,556 for the quarter ended March 31, 2003 and
included a net return of $34,000 pledged under the Company's 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.
12
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 March 31, 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.
13
Part II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the quarter ended March 31, 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 equity related to the issuance of this stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation, as amended (incorporated by reference to such
exhibit in the Registrant's 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 February 6, 2004 (incorporated by reference to such
exhibit in the Registrant's Registration Statement on Form SB-2, filed
April 28, 2004)
10.9 Registration Rights Agreement between the Company and Dutchess Private
Equities Fund, LP dated February 6, 2004 (incorporated by reference to
such exhibit in the Registrant's Registration Statement on Form SB-2,
filed April 28, 2004)
10.10 Placement Agent Agreement between the Company, Charleston Capital
Corporation and Dutchess Private Equities Fund, LP dated February 6, 2004
(incorporated by reference to such exhibit in the Registrant's
14
Registration Statement on Form SB-2, filed April 28, 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)
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)
(b) Reports on Form 8-K:
On February 11, 2004, the Company filed a report on Form 8-K regarding
the change in the Company's certifying accountant.
On March 26, 2004, the Company filed a report on Form 8-K to clarify a
press release issued by the Company regarding a patent application.
ITEMS 1, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
15
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.
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)
Date: May 14, 2004
16