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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-30152
Payment Data Systems, Inc.
(Exact name of registrant as specified in its charter)
Nevada 98-0190072
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
211 North Loop 1604 East, Suite 200
San Antonio, TX 78232
(Address of principal executive offices)
(210) 402-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days. Yes |X| No |_|
At August 1, 2003, 20,722,656 shares of the registrant's common stock, $.001 par
value, were outstanding.
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PAYMENT DATA SYSTEMS, INC.
(FORMERLY BILLSERV, INC.)
INDEX
Part I - Financial Information Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2003
and December 31, 2002 ............................................. 3
Consolidated Statements of Operations for the three and six months
ended June 30, 2003 and 2002 ...................................... 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2003 and 2002 ...................................... 5
Notes to Consolidated Financial Statements .......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..........19
Item 4. Controls and Procedures .............................................19
Part II - Other Information
Item 1. Legal Proceedings ...................................................20
Item 6. Exhibits and Reports on Form 8-K ....................................20
Signature ....................................................................21
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PAYMENT DATA SYSTEMS, INC.
(FORMERLY BILLSERV, INC.)
CONSOLIDATED BALANCE SHEETS
June 30, 2003 December 31, 2002
------------- -----------------
(Unaudited) (Note 1)
Assets:
Current assets:
Cash and cash equivalents $ 102,340 $ 286,105
Cash pledged as collateral for related party obligations -- 1,311,984
Accounts receivable, net 630,944 659,074
Prepaid expenses and other 124,165 257,810
------------ ------------
Total current assets 857,449 2,514,973
Property and equipment, net 1,360,047 2,171,790
Intangible asset, net 15,000 22,500
------------ ------------
Total assets $ 2,232,496 $ 4,709,263
============ ============
Liabilities and stockholders' equity (deficit):
Current liabilities:
Accounts payable $ 1,478,871 $ 797,211
Accrued expenses and other current liabilities 699,934 707,741
Payable under related party guarantees -- 1,278,138
Current portion of obligations under capital leases 19,973 31,315
Current portion of deferred revenue 203,670 309,492
Short-term borrowings 1,800,000 1,800,000
------------ ------------
Total current liabilities 4,202,448 4,923,897
Obligations under capital leases, less current portion 31,722 39,168
Deferred revenue, less current portion 35,556 91,468
Stockholders' equity (deficit):
Common stock, $.001 par value, 200,000,000 shares
authorized; 20,722,656 issued and outstanding at
June 30, 2003, 20,603,799 issued and outstanding at
December 31, 2002 20,723 20,604
Additional paid-in capital 46,793,027 46,770,186
Accumulated deficit (48,850,980) (47,136,060)
------------ ------------
Total stockholders' equity (deficit) (2,037,230) (345,270)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 2,232,496 $ 4,709,263
============ ============
See notes to interim consolidated financial statements.
3
PAYMENT DATA SYSTEMS, INC.
(FORMERLY BILLSERV, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Service revenues $ 947,406 $ 1,104,413 $ 1,851,145 $ 2,234,085
Software license revenues -- 238,000 -- 238,000
------------ ------------ ------------ ------------
Total revenues 947,406 1,342,413 1,851,145 2,472,085
Cost of service revenues 702,929 1,224,061 1,419,970 2,429,156
Cost of software license revenues -- 228,000 -- 228,000
------------ ------------ ------------ ------------
Total cost of revenues 702,929 1,452,061 1,419,970 2,657,156
------------ ------------ ------------ ------------
Gross margin 244,477 (109,648) 431,175 (185,071)
Operating expenses:
General and administrative 573,337 1,281,749 1,127,861 2,246,443
Selling and marketing 40,388 245,973 66,199 568,561
Research and development 32,390 138,798 71,940 277,473
Provision for impairment of assets 200,000 -- 200,000 --
Depreciation and amortization 281,846 340,718 604,352 764,717
------------ ------------ ------------ ------------
Total operating expenses 1,127,961 2,007,238 2,070,352 3,857,194
------------ ------------ ------------ ------------
Operating loss (883,484) (2,116,886) (1,639,177) (4,042,265)
Other income (expense), net:
Interest income 26 22,342 4,194 58,319
Interest expense (16,387) (7,660) (60,780) (13,282)
Equity in loss of unconsolidated
subsidiary -- (9,856) -- (7,676)
Other income (expense) (13,117) (37,122) (19,157) (36,908)
------------ ------------ ------------ ------------
Total other income, net (29,478) (32,296) (75,743) 453
------------ ------------ ------------ ------------
Loss before income taxes (912,962) (2,149,182) (1,714,920) (4,041,812)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (912,962) $ (2,149,182) $ (1,714,920) $ (4,041,812)
============ ============ ============ ============
Net loss per common share - basic and
diluted $ (0.04) $ (0.10) $ (0.08) $ (0.20)
Weighted average common shares
outstanding - basic and diluted 20,722,656 20,581,126 20,704,523 20,579,479
See notes to interim consolidated financial statements.
4
PAYMENT DATA SYSTEMS, INC.
(FORMERLY BILLSERV, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
---------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $(1,714,920) $(4,041,812)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 604,352 764,717
Loss on impairment of assets 200,000 --
(Gain) loss on disposition -- 3,017
Equity in loss of unconsolidated subsidiary -- 7,676
Non-cash exchange of assets -- (600,000)
Loss on renegotiation of facilities lease -- 345,880
Changes in current assets and current liabilities:
(Increase) decrease in accounts receivable 28,130 (399,344)
Decrease in related party notes receivables -- 162,154
(Increase) decrease in prepaid expenses and other 133,645 (164,731)
Increase (decrease) in accounts payable,
accrued expenses and other current liabilities 673,853 462,351
Decrease in deferred revenue (161,734) (49,912)
----------- -----------
Net cash used in operating activities (236,674) (3,510,004)
Cash flows from investing activities:
Purchases of property and equipment -- (390,597)
Long-term deposits, net -- 176,174
Proceeds from sale of equipment -- 3,000
Other investing activities -- (6,126)
----------- -----------
Net cash provided by (used in) investing activities -- (217,549)
Cash flows from financing activities:
Cash pledged as collateral for related party 1,311,984 577,115
obligations
Payments for related party obligations (1,278,138) --
Proceeds from notes payable -- 645,000
Increase in restricted cash for collateral on note -- (800,000)
payable
Principal payments for capital lease obligations (3,897) (97,339)
Issuance of common stock, net of issuance costs 22,960 39,145
----------- -----------
Net cash provided by financing activities 52,909 363,921
----------- -----------
Net decrease in cash and cash equivalents (183,765) (3,363,632)
Cash and cash equivalents, beginning of period 286,105 4,173,599
----------- -----------
Cash and cash equivalents, end of period $ 102,340 $ 809,967
=========== ===========
See notes to interim consolidated financial statements.
5
PAYMENT DATA SYSTEMS, INC.
(FORMERLY BILLSERV, INC.)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Payment Data
Systems, Inc. ("PDS" or the "Company"), formally known as Billserv, Inc., have
been prepared without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to 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, 2002. 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. In prior fiscal years, the Company had been in
the development stage, but is no longer considered to be a development stage
company.
The consolidated balance sheet at December 31, 2002 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 FASB No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"), to stock-based employee compensation.
6
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss, as reported $ (912,962) $(2,149,182) $(1,714,920) $(4,041,812)
Less: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (175,356) (480,691) (366,330) (1,117,710)
----------- ----------- ----------- -----------
Pro forma net loss (1,088,318) (2,629,873) (2,081,250) (5,159,522)
=========== =========== =========== ===========
Net loss per common share - basic
and diluted, as reported $ (0.04) $ (0.10) $ (0.08) $ (0.20)
Net loss per common share - basic
and diluted, pro forma $ (0.05) $ (0.13) $ (0.10) $ (0.25)
The effects of applying FAS 123 in this pro forma disclosure are not indicative
of future amounts. Additional awards in future years are anticipated.
Note 3. Related Party Transactions
As of December 31, 2002, the Company had pledged $1.3 million to collateralize
certain margin loans of three officers and an ex-officer of the Company. The
margin loans are from institutional lenders and are secured by shares of the
Company's common stock held by these individuals. The pledged funds were
classified as Cash pledged as collateral for related party obligations on the
Company's balance sheet at December 31, 2002. During the fourth quarter of 2002,
the Company recognized a loss of $1,278,000 and recorded a corresponding payable
related to the probable loss. During the quarter ended March 31, 2003, the
institutional lenders applied $1,278,000 of the pledged funds being held to
satisfy the outstanding balances of the loans and released the remaining $34,000
for return to the Company. The total balance of the margin loans guaranteed by
the Company was zero at June 30, 2003. 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 4. Going Concern
The Company has incurred substantial losses since inception and has experienced
a material shortfall from anticipated revenues, which has led to a significant
decrease in its cash position and a deficit in working capital. Also, the
Company defaulted under its convertible debt agreement during the fourth quarter
of 2002 and was unsuccessful in its attempt to access its funds held as
collateral to guarantee certain executive margin loans (see Note 3) after
attempting to retrieve such funds during the fourth quarter of 2002.
Consequently, 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. Accordingly, the Company reduced expenditures for
operating requirements, including a reduction of 36 employees in its workforce
in November 2002, and sold substantially all of its assets on July 25, 2003 (see
Note 5). The satisfactory completion of an additional investment in the Company
may be essential to provide sufficient cash flows to meet future operating
requirements. 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.
7
Note 5. Subsequent Event - Asset Sale
On July 25, 2003 (the "Closing") the Company sold substantially all of its
assets (the "Business") to Saro, Inc., a Delaware corporation (the "Purchaser"),
which is a wholly owned subsidiary of CyberStarts, Inc., a Delaware corporation
(the "Sale"). The aggregate selling price for the Business was $4,800,000 (the
"Purchase Price"), including $700,000 subject to certain earnout provisions,
plus the Purchaser's assumption of certain liabilities of the Company. The
Purchase Price was determined through extensive negotiations between the
Purchaser and the Company. The board of directors of the Company, in its
reasonable business judgment, approved the Purchase Price based upon the
following factors: 1) the extensive search for a purchaser of the Business; 2)
the number of offers made by potential purchasers for the Business; 3) the
Company's ability to raise other sources of capital to operate the Business; and
4) the future trends in the industry of the Business. The sale of the Business
was approved by a majority of the shareholders of PDS at a Special Meeting of
Shareholders held on July 14, 2003. The assets sold represent the Company's
proprietary technology infrastructure along with certain third party software
and hardware platforms and certain furniture and fixtures that support its
service offerings, including its eServ and eConsulting products. The carrying
value of these non-current assets was approximately $1,038,000 at June 30, 2003.
The Purchaser also assumed certain current and non-current liabilities with
carrying values of $20,000 and $32,000, respectively, at June 30, 2003. The
assets sold represent virtually all of the Company's assets, which it uses to
produce nearly all of its revenue, therefore, the Company has ceased its primary
operations and will continue to operate its bills.com consumer bill payment
portal and concentrate on building its electronic payments presence. During the
quarters ended June 30, 2003 and 2002, these continuing operations provided
revenue of $29,000 and $18,000, respectively. During the six months ended June
30, 2003 and 2002, these continuing operations provided revenue of $53,000 and
$33,000, respectively.
At Closing, the Purchaser paid the Company $4,100,000 in cash. The Company may
earn an additional $700,000 based upon two earnouts calculated upon gross
revenues of the Business for the four consecutive quarters following the
Closing, the first quarter of which begins the first day of the first full month
after the Closing. The Sale of the Business qualifies as a change of control
under the employee agreements of certain officers of the Company, 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.
The following unaudited pro forma financial information gives effect to the
Company's disposition of the Business on July 25, 2003. The unaudited pro forma
condensed consolidated statements of operations for the six months ended June
30, 2003 and the year ended December 31, 2002 include the effects of the
disposition as if the disposition had occurred on January 1, 2002. The following
pro forma financial information, consisting of the pro forma balance sheet as of
June 30, 2003, the pro forma statements of operations, and the accompanying
notes, should be read in conjunction with the historical annual and quarterly
financial statements and accompanying notes of the Company. The pro forma
financial information is presented for illustrative purposes only and is not
necessarily indicative of the future results of operations of the Company after
the disposition of the Business, or of the results of operations of the Company
that would have occurred had the disposition been effected on the dates
described above.
8
PAYMENT DATA SYSTEMS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 2003
Pro Forma Pro Forma
Historical Adjustments Results
------------ ------------ ------------
Assets:
Current assets:
Cash and cash equivalents (2) $ 102,340 $ 1,340,698 $ 1,443,038
Accounts receivable, net 630,944 -- 630,944
Prepaid expenses and other (4) 124,165 (79,336) 44,829
------------ ------------ ------------
Total current assets 857,449 1,261,362 2,118,811
Property and equipment, net (4) 1,360,047 (1,172,969) 187,078
Property and equipment held for sale (11) -- 135,000 135,000
Intangible asset, net 15,000 -- 15,000
------------ ------------ ------------
Total assets $ 2,232,496 $ 223,393 $ 2,455,889
============ ============ ============
Liabilities and stockholders' equity (deficit):
Current liabilities:
Accounts payable (3) $ 1,478,871 $ (619,889) $ 858,982
Accrued expenses and other current liabilities (3) 699,934 (50,000) 649,934
Current portion of obligations under
capital leases (5) 19,973 (19,973) --
Current portion of deferred revenue (5) (6) 203,670 (203,670) --
Short-term borrowings (3) 1,800,000 (1,800,000) --
------------ ------------ ------------
Total current liabilities 4,202,448 (2,693,532) 1,508,916
Obligations under capital leases, less current portion (5) 31,722 (31,722) --
Deferred revenue, less current portion (6) 35,556 (35,556) --
Stockholders' equity (deficit):
Common stock, $.001 par value, 200,000,000 shares
authorized; 20,722,656 issued and outstanding at
June 30, 2003 20,723 -- 20,723
Additional paid-in capital 46,793,027 -- 46,793,027
Accumulated deficit (48,850,980) 2,984,203 (45,866,777)
------------ ------------ ------------
Total stockholders' equity (deficit) (2,037,230) 2,984,203 946,973
------------ ------------ ------------
Total liabilities and stockholders' equity (deficit) $ 2,232,496 $ 223,393 $ 2,455,889
============ ============ ============
9
PAYMENT DATA SYSTEMS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
Pro Forma Pro Forma
Historical Adjustments Results
------------ ------------ ------------
Service revenues $ 1,851,145 $ (1,798,074) $ 53,071
Software license revenues -- -- --
------------ ------------ ------------
Total revenues (7) 1,851,145 (1,798,074) 53,071
Cost of service revenues 1,419,970 (1,382,707) 37,263
Cost of software license revenues -- -- --
------------ ------------ ------------
Total cost of revenues (7) 1,419,970 (1,382,707) 37,263
------------ ------------ ------------
Gross margin 431,175 (415,367) 15,808
Operating expenses:
Selling, general and administrative (8) 1,194,060 -- 1,194,060
Research and development (8) 71,940 -- 71,940
Provision for impairment of assets 200,000 -- 200,000
Depreciation and amortization (9) 604,352 (508,822) 95,530
------------ ------------ ------------
Total operating expenses 2,070,352 (508,822) 1,561,530
------------ ------------ ------------
Operating loss (1,639,177) 93,455 (1,545,722)
Other income (expense), net:
Interest income 4,194 -- 4,194
Interest expense (10) (60,780) 59,178 (1,602)
Other income (expense) (19,157) -- (19,157)
------------ ------------ ------------
Total other income, net (75,743) 59,178 (16,565)
------------ ------------ ------------
Loss from continuing operations before income taxes (1,714,920) 152,633 (1,562,287)
Income taxes -- -- --
------------ ------------ ------------
Net loss from continuing operations (1,714,920) 152,633 (1,562,287)
Discontinued operations:
Net loss from discontinued operations -- (152,633) (152,633)
Gain on disposition of discontinued operations -- -- --
------------ ------------ ------------
Net loss $ (1,714,920) $ -- $ (1,714,920)
============ ============ ============
Per common share - basic and diluted:
Net loss from continuing operations $ (0.07)
Net loss from discontinued operations $ (0.01)
------------
Net loss $ (0.08)
============
Weighted average common shares outstanding 20,704,523
10
PAYMENT DATA SYSTEMS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
Pro Forma Pro Forma
Historical Adjustments Results
------------ ------------ ------------
Service revenues $ 3,968,554 $ (3,891,484) $ 77,070
Software license revenues 238,000 (238,000) --
------------ ------------ ------------
Total revenues (7) 4,206,554 (4,129,484) 77,070
Cost of service revenues 4,462,344 (4,403,605) 58,739
Cost of software license revenues 228,000 (228,000) --
------------ ------------ ------------
Total cost of revenues (7) 4,690,344 (4,631,605) 58,739
------------ ------------ ------------
Gross margin (483,790) 502,121 18,331
Operating expenses:
Selling, general and administrative (8) 4,822,459 -- 4,822,459
Research and development (8) 461,065 -- 461,065
Provision for impairment of assets 855,117 -- 855,117
Depreciation and amortization (9) 1,658,886 (1,467,826) 191,060
------------ ------------ ------------
Total operating expenses 7,797,527 (1,467,826) 6,329,701
------------ ------------ ------------
Operating loss (8,281,317) 1,969,947 (6,311,370)
Other income (expense), net:
Interest income 81,799 -- 81,799
Interest expense (10) (1,114,798) 1,091,886 (22,912)
Equity in loss of unconsolidated subsidiary (7,729) -- (7,729)
Loss on related party guarantees (1,278,138) -- (1,278,138)
Other income (expense) (354,494) -- (354,494)
------------ ------------ ------------
Total other income, net (2,673,360) 1,091,886 (1,581,474)
------------ ------------ ------------
Loss from continuing operations before income
taxes (10,954,677) 3,061,833 (7,892,844)
Income taxes -- -- --
------------ ------------ ------------
Net loss from continuing operations (10,954,677) 3,061,833 (7,892,844)
Discontinued operations:
Net loss from discontinued operations -- (3,061,833) (3,061,833)
Gain on disposition of discontinued operations -- -- --
------------ ------------ ------------
Net loss $(10,954,677) $ -- $(10,954,677)
============ ============ ============
Per common share - basic and diluted:
Net loss from continuing operations $ (0.38)
Net loss from discontinued operations $ (0.15)
------------
Net loss $ (0.53)
============
Weighted average common shares outstanding 20,591,304
11
Notes to the Pro Forma Financial Information:
(1) The pro forma adjustments above give effect to the Company's disposition
of the Business on July 25, 2003 to the Purchaser. The pro forma
adjustments consider only that portion of the consideration received at
the closing of the transaction ($4,126,000 in cash). The pro forma
adjustments for the balance sheet are reflected as if the disposition had
occurred on the balance sheet date. The pro forma adjustments for the
statements of operations reflect the elimination of financial activity
from the Company's divested operations along with the pro forma effect of
the disposition as if the disposition had occurred on January 1, 2002.
(2) The adjustment reflects the cash proceeds from the sale of $4,126,000 less
the payments required to be made to secured creditors at the time of
Closing, including a broker fee of $315,000 (see note 3).
(3) The adjustments represent amounts due to secured creditors that were
required to be paid at the time of Closing as a condition of the Sale.
(4) The adjustment represents the carrying value of the assets that were sold
to the Purchaser, excluding $135,000 of property and equipment that was
reclassified as held for sale (see note 11).
(5) The adjustments give effect to the liabilities assumed by the Purchaser,
including deferred revenue of $54,000.
(6) The adjustments reflect the recognition of the deferred revenue that
related to the customer list that was sold as part of the Business.
(7) The adjustments give effect to the revenues and related costs of revenues
of the Business that was sold to the Purchaser.
(8) Although no pro forma adjustments were made, the Company estimates that
cost savings related to these expenses resulting from the disposition of
the Business, including the termination of personnel that were hired by
the Purchaser subsequent to the Sale, are approximately $800,000 and $4.3
million for the six months ended June 30, 2003 and year ended December 31,
2002, respectively.
(9) The adjustments give effect to the depreciation and amortization expense
related to the assets that were sold to the Purchaser.
(10) The adjustment gives effect to the interest savings as a result of the
short-term borrowings being paid in full as a condition of the Sale at the
Closing (see note 3).
(11) The adjustment represents additional assets available for sale as a result
of the release of creditor liens at the Closing and excess capacity
subsequent to the Sale.
Note 6. Subsequent Events - Other
On July 29, 2003, the Company amended its articles of incorporation to change
its name to Payment Data Systems, Inc. The Company expects to begin trading on
the Nasdaq OTC market under a new symbol, PAYS, in August 2003.
In March 2003, the Company's amended five-year operating lease for its corporate
headquarters was terminated by the lessor for nonpayment of rent. Subsequently,
the lessor executed a monthly lease with no renewal option for approximately
25,000 square feet with the Company. In August 2003, the Company signed a 3-year
lease for approximately 4,200 square feet that will serve as the Company's new
headquarters.
On August 6, 2003, Payment Data Systems, Inc., formerly Billserv, Inc. (the
"Registrant"), a Nevada corporation, became aware that certain shareholders of
the Registrant commenced legal action against the Registrant and certain of its
current and former directors in the District Court of the 45th Judicial
District, Bexar County, Texas seeking recovery for alleged improper disclosure
of the Registrant's right to access funds held by certain institutional lenders
(the "Suit").
The Registrant believes the Suit to be without merit, and intends to vigorously
defend itself and those current and former directors of the Registrant named as
defendants therein.
12
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
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/A for the year ended December 31, 2002. All
references to "we," "us" or "our" in this Form 10-Q mean Payment Data Systems,
Inc. ("PDS" or the "Company").
Overview
On July 25, 2003 (the "Closing") the Company sold substantially all of its
assets (the "Business") to Saro, Inc., a Delaware corporation (the "Purchaser"),
which is a wholly owned subsidiary of CyberStarts, Inc., a Delaware corporation
(the "Sale"). The aggregate selling price for the Business was $4,800,000 (the
"Purchase Price") plus the Purchaser's assumption of certain liabilities of the
Company. The Purchase Price was determined through extensive negotiations
between the Purchaser and the Company. The board of directors of the Company, in
its reasonable business judgment, approved the Purchase Price based upon the
following factors: 1) the extensive search for a purchaser of the Business; 2)
the number of offers made by potential purchasers for the Business; 3) the
Company's ability to raise other sources of capital to operate the Business; and
4) the future trends in the industry of the Business. The sale of the Business
was approved by a majority of the shareholders of PDS at a Special Meeting of
Shareholders held on July 14, 2003. The assets sold represent the Company's
proprietary technology infrastructure along with certain third party software
and hardware platforms and certain furniture and fixtures that support its
service offerings, including its eServ and eConsulting products. The carrying
value of these non-current assets was approximately $1,038,000 at June 30, 2003.
The Purchaser also assumed certain current and non-current liabilities with
carrying values of $20,000 and $32,000, respectively, at June 30, 2003. The
assets sold represent virtually all of the Company's assets, which it uses to
produce nearly all of its revenue, therefore, the Company has ceased its primary
operations, but will continue to operate its bills.com consumer bill payment
portal and concentrate on building its electronic payments presence. During the
quarters ended June 30, 2003 and 2002, these continuing operations provided
revenue of $29,000 and $18,000, respectively. During the six months ended June
30, 2003 and 2002, these continuing operations provided revenue of $53,000 and
$33,000, respectively.
Prior to the Sale, PDS provided electronic bill presentment and payment ("EBPP")
and related services to companies that generate recurring bills, primarily in
the United States. EBPP is the process of sending bills to consumers securely
through the Internet and processing Internet payment of bills utilizing an
electronic transfer of funds. Our service offering allowed companies to
outsource their electronic billing process, providing them a single point of
contact for developing, implementing and managing their EBPP process. PDS
offered services to consolidate customer billing information and then securely
deliver an electronic bill to the biller's own payment Web site hosted by PDS,
the consumer's e-mail inbox and numerous Internet bill consolidation Web sites,
such as those sponsored by financial institutions. Our EBPP services allowed
billers to establish an interactive, online relationship with their consumers by
integrating Internet customer care and direct marketing with the electronic
bill. PDS also provided Internet-based customer care interaction services and
professional services to assist with the implementation and maintenance of an
electronic bill offering. As a condition of the sale to Saro, Inc., the
principal employees of PDS agreed to non-compete provisions covering the
presentment of electronic bills. The Company will continue to operate an
Internet bill presentment and payment portal for consumers under the domain name
www.bills.com and plans to provide integrated electronic payment services,
including credit and debit card-based processing services and transaction
processing via the ACH network.
13
Since inception, we have incurred operating losses each quarter, and as of June
30, 2003, we have an accumulated deficit of $48.7 million. Our prospects 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.
As a result of our limited operating history and the emerging nature of the
markets in which we compete, we are unable to precisely forecast our revenues.
Our current and future expense levels are based largely on our investment plans
and estimates of future revenues. Revenue and operating results will depend on
the volume of payment transactions processed and related services rendered. The
timing of such services and transactions and our ability to fulfill a customer's
demands are difficult to forecast. Although we systematically budget for planned
outlays and maintain tight controls on our expenditures, we may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in revenues in relation to our
planned expenditures could have a material adverse effect on our business,
prospects, financial condition and results of operations. Further, we may make
certain pricing, service, marketing or acquisition decisions that could have a
material adverse effect on each or all of these areas.
Critical Accounting Policies
General
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. 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.
Revenue Recognition
Prior to December 31, 1999, the Company recognized revenue generated from
up-front fees upon completion of an implementation project. These up-front fees
are charged for the work involved in implementing the basic functionality
required to provide EBPP services to customers. These set-up procedures include
tasks such as establishing connectivity, design and construction of the hosted
Web site, and conversion of the paper bill print stream to an electronic format.
In December 1999, the SEC issued SAB 101, which requires that revenue generated
from up-front implementation fees that do not represent a separate earnings
process to be recognized over the term of the related service contract. The
Company adopted SAB 101 on January 1, 2000, and accordingly, revised our
implementation fee revenue recognition policy to defer this type of revenue,
while the related costs will be expensed as incurred. The cumulative effect of
this accounting change totaled $52,273 and was recognized as a non-cash
after-tax charge during the first quarter of 2000. The cumulative effect has
been recorded as deferred revenue to be
14
recognized as revenue over the remaining contractual service periods, which are
primarily three to five years in length. At June 30, 2003 and December 31, 2002,
deferred revenue was $239,226 and $400,960, respectively. We anticipate that
transaction fees and other services will make up a larger percentage of total
revenue in future periods, which will further reduce the effect that deferring
implementation fee revenue has on our current operating results. However, the
volume of transactions and amount of related revenue we will generate in future
periods is dependent upon, among other things, the rate at which consumers
utilize EBPP.
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. There were no write-offs or bad debt expense recorded to the allowance
for doubtful accounts for the six months ended June 30, 2003. At June 30, 2003
and December 31, 2002, the balance of the allowance for doubtful accounts was
$47,197. 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 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. An
impairment loss of $200,000 was recorded in the quarter ended June 30, 2003 and
an impairment loss of $855,000 was recorded in 2002.
Income Taxes
The Company accounts for income taxes using the liability method in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109"). The liability method provides that the 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 carried on
the balance sheet 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 tax
assets carried on our balance sheet as of June 30, 2003 will be fully realized
in future periods. FAS 109 requires a valuation allowance to reduce the deferred
tax assets reported if, based on the weight of the evidence, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. After consideration of all of the evidence, both positive and
negative, management determined that a valuation allowance at December 31, 2002
is necessary to reduce the deferred tax assets to the amount that will more
likely than not be realized. The change in valuation allowance for 2002 is a net
increase of $3.7 million. At December 31, 2002, the Company has available net
operating loss carryforwards of approximately $34.8 million, which expire
beginning in the year 2020.
Results of Operations
Prior to the Sale, our revenues were principally derived from fees for
implementing EBPP capabilities, processing EBPP transactions and providing
related customer care, and consulting services. PDS also became a licensed
reseller of CheckFree's e-billing software in Australia during 2002. The
components of our service offering that generated revenue through June 30, 2003,
include:
o Internet billing services for EBPP through a PDS-hosted payment Web
site, secure direct delivery to the consumer's email inbox, or
distribution via bill aggregators.
o Internet-enabled, interactive customer care services on an in-house
or outsourced basis.
15
o Professional consulting services for EBPP billers or software
vendors needing value-added resources to deliver customized EBPP
services, including payment gateway services that provide billers
who are already participating in EBPP using in-house software a
single distribution point to virtually any bill presentment and
payment location across the World Wide Web in addition to their
existing distribution points or biller direct site. Gateway
technology may also be embedded as an OEM (original equipment
manufacturer) component within vendors' software or service
offerings to provide a cost-effective, proven method to give their
clients and consumers the ability to make online payments, and view
and pay bills anytime, anywhere through bank and Internet payment
portals.
o Licensing of CheckFree e-billing software as an authorized reseller
in Australia only.
o Online bill payment and management services for consumers through
the bills.com Internet portal.
Revenues by type for the three and six months ended June 30, 2003 and 2002 are
as follows:
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Service revenues:
Implementation revenues $ 59,066 $ 79,550 $ 110,485 $ 180,230
Transaction revenues 588,717 461,618 1,171,954 929,820
Consulting revenues 299,623 563,245 568,706 1,124,035
---------- ---------- ---------- ----------
Total service revenues 947,406 1,104,413 1,851,145 2,234,085
Software license revenues -- 238,000 -- 238,000
---------- ---------- ---------- ----------
Total revenues $ 947,406 $1,342,413 $1,851,145 $2,472,085
========== ========== ========== ==========
Total revenues for the quarter ended June 30, 2003 decreased 29% to $947,406
from $1,342,413 for the quarter ended June 30, 2002. Total revenues for the six
months ended June 30, 2003 decreased 25% to $1,851,145 from $2,472,085 for the
six months ended June 30, 2002. The decrease from the prior year periods was
primarily attributable to a decrease in consulting revenues, which includes
revenue from the licensing of the Company's gateway technology. The decrease in
consulting revenues was partially offset by the increase in transaction fee
revenue, which grew due to an increase in the number of implemented billers and
volume of transactions. As of June 30, 2003, we had 121 billers under contract
who were in various stages of development, including 112 billers that were in
full production or pilot stages, as compared to 96 billers in full production or
pilot stages at June 30, 2002. The Company's lack of any software license sales
in the quarter ended June 30, 2003 as a reseller of CheckFree's e-billing
software in Australia also contributed to the decreases in total revenue from
the prior year quarter and six-month period.
Cost of revenues includes the cost of personnel dedicated to the design of
electronic bill templates, creation of connections to third-party aggregators
and payment processors, testing and quality assurance processes related to
implementation and presentment, as well as professional staff dedicated to
providing contracted services to EBPP customers under consulting arrangements.
Cost of revenues also includes fees paid for presentation of consumer bills on
Web sites powered by aggregators and processing of payments for EBPP
transactions by third party providers. Cost of revenues was $702,929 and
$1,452,061 for the quarters ended June 30, 2003 and 2002, respectively, and
$1,419,970 and $2,657,156 for the six months ended June 30, 2003 and 2002,
respectively. The decrease from the prior year periods is primarily the result
of lower salary and benefit costs due to the personnel reductions during 2002.
Also contributing to the decrease was the absence of CheckFree software license
costs in the quarter ended June 30, 2003 as compared to the $228,000 cost of the
software license that was resold in the second quarter of 2002.
General and administrative expenses decreased to $573,337 and $1,127,861 for the
quarter and six months ended June 30, 2003, respectively, from $1,281,749 and
$2,246,443 for the comparable periods of 2002, respectively. The decreases in
such expenses from the prior year periods were due to lower salary and benefit
costs due to the personnel reductions during 2002, which contributed 30% and 35%
to the decrease from the prior year quarter and period, respectively, and lower
rental expenses under the Company's amended lease agreement, which contributed
22% and 26% to the decrease from the prior year quarter and period,
respectively. In addition, the Company incurred a one-time charge of $312,000 in
the second quarter of 2002 related to amending the lease terms for its corporate
16
headquarters, which contributed 43% and 27% to the decrease in general and
administrative expenses from the prior year quarter and period, respectively.
Selling and marketing expenses decreased to $40,388 and $66,199 for the quarter
and six months ended June 30, 2003, respectively, from $245,973 and $568,561 for
the comparable periods of 2002, respectively. The decreases from the prior year
periods were primarily the result of reductions in our direct sales staff, which
contributed 92% and 90% to the decrease from the prior year quarter and period,
respectively, as well as lower related travel expenses, which contributed 4% to
the decrease from both the prior year quarter and period.
Research and development expenses consist primarily of the cost of personnel
devoted to the design of new processes that will improve our electronic
presentment and payment abilities and capacities, new customer care and direct
marketing services, additional business-to-consumer applications, and
integration of third-party applications. These expenses decreased 77% and 74% in
the first quarter and six months of 2003 from the prior year quarter and period,
respectively, due to a focus on our core competencies in order to implement and
service existing products.
Depreciation and amortization decreased to $281,846 and $604,352 for the quarter
and six months ended June 30, 2003, respectively, from $340,718 and $764,717 for
the comparable periods of 2002, respectively. These decreases were due to lower
depreciation related to certain assets that became fully depreciated during
2002. We did not purchase any property and equipment during the quarter ended
June 30, 2003 and do not anticipate making any significant capital expenditures
over the remaining six months of 2003.
Net other expense was $29,478 for the quarter ended June 30, 2003, compared to
$32,296 for the first quarter of 2002 and reflected lower interest income as a
result of lower invested balances. Net other expense was $75,743 for the six
months ended June 30, 2003, as compared to net other income of $453 for the
prior year period. This change from the prior year period is primarily
attributable to lower interest income earned in 2003 as a result of lower
invested balances and higher interest expense related to the convertible debt
issued in the third quarter of 2002.
Net loss improved to $912,962 and $1,714,920 for the quarter and six months
ended June 30, 2003, from $2,149,182 and $4,041,812 for the comparable periods
of 2002, respectively, primarily as a result of the overall decrease in total
operating expenses from the prior year periods.
Liquidity and Capital Resources
At June 30, 2003, the Company's principal source of liquidity consisted of
$102,000 of cash and cash equivalents, compared to $286,000 of cash and cash
equivalents at December 31, 2002. The Company has incurred substantial losses
since inception and has experienced a material shortfall from anticipated
revenues, which has led to a significant decrease in its cash position and a
deficit in working capital. Also, the Company defaulted under its convertible
debt agreement during the fourth quarter of 2002 and was unsuccessful in its
attempt to access its funds held as collateral to guarantee certain executive
margin loans after attempting to retrieve such funds during the fourth quarter
of 2002. Consequently, 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. Accordingly, the Company
reduced expenditures for operating requirements, including a reduction of 36
employees in its workforce in November 2002, and completed the Sale of its
Business in July 2003. At Closing, the Purchaser paid the Company $4,100,000 in
cash. The Company may earn an additional $700,000 based upon two earnouts
calculated upon gross revenues of the Business for the four consecutive quarters
following the Closing, the first quarter of which begins the first day of the
first full month after the Closing. Even though the purchase transaction has
been completed, the Company believes that its remaining cash after payment of
existing liabilities along with anticipated future revenues may be insufficient
for it to continue as a going concern.
The satisfactory completion of an additional investment in the Company may be
essential to provide sufficient cash flows to meet future operating
requirements. 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
17
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.
As of December 31, 2002, the Company had pledged $1.3 million to collateralize
certain margin loans of three officers and an ex-officer of the Company. The
margin loans are from institutional lenders and are secured by shares of the
Company's common stock held by these individuals. The pledged funds were
classified as Cash pledged as collateral for related party obligations on the
Company's balance sheet at December 31, 2002. During the quarter ended March 31,
2003, the institutional lenders applied $1,278,000 of the pledged funds being
held to satisfy the outstanding balances of the loans and released the remaining
$34,000 for return to the Company. The total balance of the margin loans
guaranteed by the Company was zero at June 30, 2003. 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 $237,000 and $3.5 million for the six
months ended June 30, 2003 and 2002, respectively. The Company plans to focus on
expending its resources prudently given its current state of liquidity and does
not expect to achieve positive cash flow from continuing operations for 2003.
There were no investing activities for the six months ended June 30, 2003 due to
the Company's current state of liquidity. We do not anticipate making any
significant capital expenditures during the remaining six months of 2003. Net
cash used in investing activities was $218,000 for the six months ended June 30,
2002 and primarily reflected capital expenditures of approximately $391,000 for
computer equipment and software offset by the return of $176,000 of deposits.
Net cash provided by financing activities was $53,000 for the six months ended
June 30, 2003 and included a net return of $34,000 under the Company's
guarantees of related party obligations. Net cash provided by financing
activities was $364,000 for the six months ended June 30, 2002 and included
$645,000 of draws under the Company's line of credit and the return of $577,000
pledged as collateral as discussed above. These inflows were reduced by the
restriction of $800,000 as collateral for the line of credit.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters discussed in
our Form 10-Q include certain forward-looking statements within the meaning of
Section 27A of the Securities Act, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the safe
harbors created thereby. 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, 2002 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-Q 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-Q are based on information presently available to our management.
We assume no obligation to update any forward-looking statements.
18
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's current investment portfolio. Certain of the
Company's marketable securities are designated as "available for sale" and
accordingly, are presented at fair value on the balance sheets. The Company
generally invests its excess cash in high-quality short- to intermediate-term
fixed income securities. Fixed-rate securities may have their fair market value
adversely impacted by a rise in interest rates, and the Company may suffer
losses in principal if forced to sell securities which have declined in market
value due to changes in interest rates.
Item 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this Quarterly Report on Form
10-Q, 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. Since the date of their evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
19
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
On August 6, 2003, Payment Data Systems, Inc., formerly Billserv, Inc. (the
"Registrant"), a Nevada corporation, became aware that certain shareholders of
the Registrant commenced legal action against the Registrant and certain of its
current and former directors in the District Court of the 45th Judicial
District, Bexar County, Texas seeking recovery for alleged improper disclosure
of the Registrant's right to access funds held by certain institutional lenders
(the "Suit").
The Registrant believes the Suit to be without merit, and intends to vigorously
defend itself and those current and former directors of the Registrant named as
defendants therein.
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 Registration Statement on Form SB-2, filed
December 29, 1999)
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 Securities Purchase Agreement, dated July 25, 2002, relating to the
purchase and sale of a convertible note and warrant (incorporated by
reference to such exhibit in the Registrant's Current Report on Form 8-K,
filed August 1, 2002)
31.1 Certification of Chief Executive Officer 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)
31.2 Certification of Chief Financial Officer 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 of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)
32.2 Certification of Chief Financial Officer 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:
The Company did not file any reports on Form 8-K during the three months
ended June 30, 2003.
Items 2, 3, 4 and 5 are not applicable and have been omitted.
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAYMENT DATA SYSTEMS, Inc.
By: /s/ Terri A. Hunter
-------------------------------------
Terri A. Hunter
Executive Vice President and
Chief Financial Officer
(Duly authorized and principal
financial and accounting officer)
Date: August 14, 2003
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