UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-26123

ONLINE RESOURCES CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Delaware		52-1623052
(STATE OR OTHER JURISDICTION OF		(I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)		IDENTIFICATION NO.)
4795 Meadow Wood Lane
Chantilly, Virginia		20151
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)		(ZIP CODE)

(703) 653-3100
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

     Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     As of July 31, 2011 there were 32,055,962 shares of the issuer’s common stock outstanding.

 

 

ONLINE RESOURCES CORPORATION

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets (unaudited) at June 30, 2011 and December 31, 2010			3
Condensed Consolidated Statements of Operations (unaudited) — Three and six months ended June 30, 2011 and 2010			4
Condensed Consolidated Statements of Cash Flows (unaudited) — Six months ended June 30, 2011 and 2010			5
Notes to Condensed Consolidated Financial Statements (unaudited)			6
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3: Quantitative and Qualitative Disclosures About Market Risk			25
Item 4: Controls and Procedures			25
PART II OTHER INFORMATION
Item 1: Legal Proceedings			25
Item 1A: Risk Factors			25
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 3: Defaults Upon Senior Securities			26
Item 4: Submission of Matters to a Vote of Security Holders			26
Item 5: Other Information			26
Item 6: Exhibits			26
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

ONLINE RESOURCES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par values)

		June 30,				December 31,
		2011				2010
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	24,333			$	29,127
Accounts receivable (net of allowance of $245 and $232, respectively)			18,961				20,410
Deferred tax asset, current portion			3,893				3,893
Deferred implementation costs, current portion			3,095				2,970
Prepaid expenses and other current assets			2,900				2,069
Total current assets			53,182				58,469
Property and equipment, net			23,181				25,145
Deferred tax asset, less current portion			25,759				22,536
Goodwill			181,516				181,516
Intangible assets			11,525				14,157
Deferred implementation costs, less current portion, and other assets			9,249				8,762
Total assets		$	304,412			$	310,585
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,034			$	2,410
Accrued expenses			14,264				6,293
Notes payable, senior secured debt, current portion			26,750				27,188
Deferred revenues, current portion and other current liabilities			9,317				8,232
Total current liabilities			51,365				44,123
Notes payable, senior secured debt, less current portion			—				9,563
Deferred revenues, less current portion and other long-term liabilities			6,018				6,956
Total liabilities			57,383				60,642
Commitments and contingencies
Redeemable convertible preferred stock:
Series A-1 convertible preferred stock, $0.01 par value; 75 shares authorized and issued at June 30, 2011 and December 31, 2010 (redeemable on July 3, 2013 at $135,815)			115,070				110,182
Stockholders’ equity:
Series B junior participating preferred stock, $0.01 par value; 297.5 shares authorized; none issued			—				—
Common stock, $0.0001 par value; 70,000 shares authorized; 32,375 issued and 31,933 outstanding at June 30, 2011 and 31,856 and 31,429 outstanding at December 31, 2010			3				3
Additional paid-in capital			219,654				217,873
Accumulated deficit			(84,708	)			(75,192	)
Treasury stock, 442 shares at June 30, 2011 and 427 shares at December 31, 2010			(2,990	)			(2,923	)
Total stockholders’ equity			131,959				139,761
Total liabilities and stockholders’ equity		$	304,412			$	310,585

See accompanying notes to condensed consolidated unaudited financial statements.

ONLINE RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(Unaudited)								(Unaudited)
Revenues:
Account presentation services		$	2,721			$	2,058			$	5,460			$	4,439
Payment services			28,074				28,145				57,866				57,877
Relationship management services			1,717				2,042				3,531				4,140
Professional services and other			5,817				4,114				10,750				8,485
Total revenues			38,329				36,359				77,607				74,941
Costs and expenses:
Service costs			19,706				18,210				40,338				36,711
Implementation and other costs			1,245				1,176				2,428				2,301
Costs of revenues			20,951				19,386				42,766				39,012
Gross profit			17,378				16,973				34,841				35,929
General and administrative			9,663				8,273				19,161				16,028
Reserve for potential legal liability			—				—				7,700				—
Sales and marketing			5,302				4,846				10,404				9,757
Systems and development			2,700				2,553				5,346				5,126
Total expenses			17,665				15,672				42,611				30,911
(Loss) income from operations			(287	)			1,301				(7,770	)			5,018
Other income (expense):
Interest income			25				14				57				21
Interest expense (income)			185				224				(70	)			164
Other (expense) income			—				(1	)			—				(99	)
Total other income (expense)			210				237				(13	)			86
(Loss) income before income tax (benefit) provision			(77	)			1,538				(7,783	)			5,104
Income tax (benefit) provision			(201	)			469				(3,155	)			1,855
Net income (loss)			124				1,069				(4,628	)			3,249
Preferred stock accretion			2,463				2,374				4,888				4,711
Net loss available to common stockholders		$	(2,339	)		$	(1,305	)		$	(9,516	)		$	(1,462	)
Net loss available to common stockholders per share:
Basic		$	(0.07	)		$	(0.04	)		$	(0.30	)		$	(0.05	)
Diluted		$	(0.07	)		$	(0.04	)		$	(0.30	)		$	(0.05	)
Shares used in calculation of net loss available to common stockholders per share:
Basic			31,820				30,911				31,705				30,699
Diluted			31,820				30,911				31,705				30,699

See accompanying notes to condensed consolidated unaudited financial statements.

ONLINE RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

		Six Months Ended June 30,
		2011				2010
		(Unaudited)
Operating activities
Net (loss) income		$	(4,628	)		$	3,249
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Deferred tax benefit			(3,223	)			2,754
Depreciation and amortization			8,455				9,362
Equity compensation expense			1,200				1,579
Write off and amortization of debt issuance costs			106				185
Loss on disposal of assets			—				1
Provision for losses on accounts receivable			56				8
Change in fair value of theoretical swap derivative			(518	)			(1,027	)
Reserve for potential legal liability			7,700				—
Changes in certain other assets and liabilities			(589	)			(1,193	)
Net cash provided by operating activities			8,559				14,918
Investing activities
Purchases of property and equipment			(3,855	)			(9,070	)
Net cash used in investing activities			(3,855	)			(9,070	)
Financing activities
Net proceeds from issuance of common stock			502				441
Repayment of 2007 Notes			(10,000	)			(8,000	)
Repayment of capital lease obligations			—				(19	)
Net cash used in financing activities			(9,498	)			(7,578	)
Net decrease in cash and cash equivalents			(4,794	)			(1,730	)
Cash and cash equivalents at beginning of year			29,127				22,907
Cash and cash equivalents at end of period		$	24,333			$	21,177

See accompanying notes to condensed consolidated unaudited financial statements.

ONLINE RESOURCES CORPORATION

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

     Online Resources Corporation (the “Company”) provides outsourced, web- and phone-based financial technology services to financial institution, biller, card issuer and creditor clients to fulfill payment, banking and other financial services to their millions of consumer end-users. The Company’s products and services enable its clients to provide their consumer end-users with the ability to perform various self-service functions including electronic bill payments and funds transfers, which utilize our unique, real-time debit architecture, ACH and other payment methods, as well as gain online access to their accounts, transaction histories and other information. The Company delivers its products and services to two primary vertical markets: Banking Services and e-Commerce Services.

     INTERIM FINANCIAL INFORMATION

     The accompanying condensed consolidated unaudited financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. In the opinion of management, the condensed consolidated unaudited financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. These condensed consolidated unaudited financial statements should be read in conjunction with the consolidated audited financial statements for the year ended December 31, 2010, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) on March 15, 2011. The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year. Certain amounts from prior periods have been reclassified to conform to current period presentation.

     NEW ACCOUNTING STANDARDS

     In October 2009, the FASB changed its guidance for the accounting of multiple-deliverable revenue arrangements with customers. Current GAAP requires a vendor to use vendor-specific objective evidence or third-party evidence of selling price to separate deliverables in a multiple-deliverable arrangement. Multiple-deliverable arrangements will be separated in more circumstances with the updated guidance. The change in guidance establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific nor third-party evidence is available. The best estimate to use in determining a selling price is the price as if the item were sold on a stand alone basis. Changes also include eliminating the residual method of allocation and requiring that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates discounts in the arrangement proportionally to each deliverable based on each selling price. These changes became effective, prospectively, for the Company on January 1, 2011. Adoption of this guidance did not materially impact the Company’s consolidated financial statements.

2. SENIOR SECURED NOTES

     The Company has an agreement with Bank of America which finances its senior secured notes (“2007 Notes”). The agreement also provides a $15 million revolver (“Revolver”) under which the Company can secure up to $5 million in letters of credit. Currently, there are no amounts outstanding under the Revolver, but available credit under the Revolver has been reduced by approximately $1.6 million as a result of letters of credit the bank has issued. The Company has made a principal payment of $10.0 million on the 2007 Notes in the six months ended June 30, 2011, reducing the outstanding principal from $36.8 million to $26.8 million. The Company will make periodic principal payments until the 2007 Notes are due in 2012 as noted in the table below.

     The interest rate on both the Revolver and the 2007 Notes is the one-month London Interbank Offered Rate (“LIBOR”) plus 225 to 275 basis points based upon the ratio of the Company’s funded indebtedness to its earnings before interest, taxes, depreciation and amortization (“EBITDA,” as defined in the 2007 Notes), and it is payable monthly. At June 30, 2011, the margin was 250 basis points. The average interest rate was 2.56%. The 2007 Notes and the Revolver are secured by the assets of the Company.

     Maturities of long-term debt for each of the next 8 months are as follows (in thousands):

		Maturing
Year		Amounts
2011 (July 1, 2011-December 31, 2011)		$	17,188
2012		$	9,562

3. DERIVATIVE INSTRUMENTS

     Theoretical Swap Derivative

     The Company bifurcated the fair market value of the embedded derivative associated with the Series A-1 Redeemable Convertible Preferred Stock (“Series A-1 Preferred Stock”) issued in conjunction with the Princeton eCom acquisition on July 3, 2006 as required by GAAP. The Company determined that the embedded derivative is defined as the right to receive a fixed rate of return on the accrued, but unpaid dividends and the variable negotiated rate, which creates a theoretical swap between the fixed rate of return on the accrued, but unpaid dividends and the variable rate actually accrued on the unpaid dividends. This embedded derivative is marked to market at the end of each reporting period through earnings and an adjustment to other assets as required by the Derivative and Hedging Topic. There is no active market quote available for the fair value of the embedded derivative. Thus, management measures fair value of the derivative by estimating future cash flows related to the asset using a forecasted iMoney Net First Tier rate based on the one-month LIBOR rate adjusted for the historical spread for the estimated period in which the Series A-1 Preferred Stock will be outstanding.

     The following table presents the fair value of the theoretical swap derivative instrument included within the condensed consolidated balance sheet at June 30, 2011 and December 31, 2010 (in thousands):

		June 30,				December 31,				Balance Sheet
		2011				2010				Location
Asset Derivatives:
Theoretical swap (1)		$	6,522			$	6,004			Other assets

     The following table presents the amounts affecting the condensed consolidated statement of operations for the three and six months ended

		Theoretical Swap (1)
		Three Months Ended June 30,								Six Months Ended June 30,
Derivative Not Designated as Hedging Instrument:		2011				2010				2011				2010
Amount of gain (loss) recognized in income on derivative, pre tax		$	466			$	629			$	518			$	1,027

4. REDEEMABLE CONVERTIBLE PREFERRED STOCK

     Series A-1 Redeemable Convertible Preferred Stock

     Pursuant to the restated certificate of incorporation, the Board of Directors has the authority, without further action by the stockholders, to issue up to 3,000,000 shares of preferred stock in one or more series. Of these 3,000,000 shares of preferred stock, 75,000 shares have been designated Series A-1. The Series A-1 Preferred Stock has a redemption value of 115% of the face value of the stock, on or after seven years from the date of issuance, or July 3, 2013. The Company recognized $0.4 million for the three months ended June 30, 2011 and 2010 and $0.8 million for the six months ended June 30, 2011 and 2010, to adjust for the redemption value at maturity.

     Additionally, the Series A-1 Preferred Stock has a feature that grants holders the right to receive interest-like returns on accrued, but unpaid, dividends that accumulate at 8% per annum. For the three months ended June 30, 2011and 2010, $1.5 million of preferred stock accretion was recognized and for the six months ended June 30, 2011 and 2010, $3.0 million of preferred stock accretion was recognized in the condensed consolidated statements of operations, for the 8% per annum cumulative dividends. The right to receive the accrued, but unpaid dividends is based on a variable interest rate, and as such the difference between the fixed and variable rate of returns is a theoretical swap derivative. The Company bifurcates this feature and accretes it to the Series A-1 Preferred Stock over the life of the security. For the three months ended June 30, 2011 and 2010, $0.4 million and $0.3 million, of preferred stock accretion expense were recognized and for the six months ended June 30, 2011 and 2010, $0.7 million and $0.6 million of preferred stock accretion expense were recognized for the theoretical swap derivative in the condensed consolidated statement of operations.

     Finally, the cost to issue the Series A-1 Preferred Stock of $5.1 million is being accreted back to the redemption value of the Series A-1 Preferred Stock through July 2013, and generated an additional $0.2 million and $0.2 million of preferred stock accretion for each of the three months and $0.4 million and $0.4 million of preferred stock accretion for each of the six months ended June 30, 2011 and 2010 in the condensed consolidated statements of operations.

5. REPORTABLE SEGMENTS

     The Company manages its business through two reportable segments: Banking and eCommerce. The Banking segment’s market consists primarily of banks, credit unions and other depository financial institutions in the United States. The segment’s fully integrated suite of account presentation, bill payment, relationship management and professional services are delivered through the Internet. The eCommerce segment’s market consists of billers, card issuers, processors, and other creditors such as payment acquirers and very large online billers. The segment’s account presentation, payment, relationship management and professional services are distributed to these clients through the Internet.

     Factors used to identify the Company’s reportable segments include the organizational structure of the Company and the financial information available for evaluation by the chief operating decision-maker in making decisions about how to allocate resources and assess performance. The Company’s operating segments have been broken out based on similar economic and other qualitative criteria. The Company operates both reporting segments in one geographical area, the United States. The Company’s management assesses the performance of its assets in the aggregate, and accordingly, they are not presented on a segment basis.

     The results of operations from these reportable segments were as follows for the three and six months ended June 30, 2010 and 2009 (in thousands):

		Banking				eCommerce				Corporate(1)				Total
Three months ended June 30, 2011:
Revenues		$	20,856			$	17,473			$	—			$	38,329
Costs of revenues			11,385				9,566				—				20,951
Gross profit			9,471				7,907				—				17,378
Operating expenses			7,026				5,825				4,814				17,665
Income (loss) from operations		$	2,445			$	2,082			$	(4,814	)		$	(287	)
Three months ended June 30, 2010:
Revenues		$	22,169			$	14,190			$	—			$	36,359
Costs of revenues			11,428				7,958				—				19,386
Gross profit			10,741				6,232				—				16,973
Operating expenses			6,218				4,679				4,775				15,672
Income (loss) from operations		$	4,523			$	1,553			$	(4,775	)		$	1,301
Six months ended June 30, 2011:
Revenues		$	41,876			$	35,731			$	—			$	77,607
Costs of revenues			22,921				19,845				—				42,766
Gross profit			18,955				15,886				—				34,841
Operating expenses			13,799				11,367				17,445				42,611
Income (loss) from operations		$	5,156			$	4,519			$	(17,445	)		$	(7,770	)
Six months ended June 30, 2010:
Revenues		$	45,516			$	29,425			$	—			$	74,941
Costs of revenues			22,731				16,281				—				39,012
Gross profit			22,785				13,144				—				35,929
Operating expenses			12,472				9,424				9,015				30,911
Income (loss) from operations		$	10,313			$	3,720			$	(9,015	)		$	5,018

6. GOODWILL

     Goodwill is not amortized and is tested at the reporting unit level at least annually or whenever events or circumstances indicate that goodwill might be impaired. The fair value of the Company’s reporting units are measured under the income method by utilizing discounted cash flows. The estimates the Company uses in evaluating goodwill are consistent with the plans and estimates that the Company uses to manage its operations.

     The Company did not experience any impairment of goodwill or other intangible assets for the six months ended June 30, 2011 or 2010. The Company’s stock price declined from $4.65 as of December 31, 2010 to $3.26 as of June 30, 2011. The Company considered whether or not the decline in stock price indicated an impairment requiring reevaluation of the goodwill. Factors evaluated include consideration of the 2011

financial performance as well as other Company specific matters. The Company’s financial performance exceeded the financial projections included in the annual impairment testing and there was no indication that other assumptions used in the annual impairment testing were no longer appropriate. As a result, the Company concluded that there was no indication of impairment. The Company will continue to monitor its financial performance, stock price and other factors in order to determine if there are any indicators of impairment prior to its annual impairment evaluation date.

7. STOCK BASED COMPENSATION

     At June 30, 2011, the Company had three stock-based employee compensation plans. The compensation expense for stock-based compensation was $0.6 million and $0.6 million for the three months and $1.2 million and $1.6 million for the six months ended June 30, 2011 and 2010, respectively. A portion of the stock based compensation cost has been capitalized as part of software development costs and deferred costs. For each of the three months ended June 30, 2011 and 2010, less than $0.1 million was capitalized as part of software development costs and deferred costs. For each of the six months ended June 30, 2011 and 2010, $0.1 million was capitalized as part of software development costs and deferred costs.

     Stock Options

     The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option-pricing formula that uses the assumptions noted in the table and discussion that follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Dividend yield			—				—				—				—
Expected volatility			66	%			62	%			66	%			62	%
Risk-free interest rate			2.63	%			2.75	%			2.63	%			2.75	%
Expected life in years			6.4				6.4				6.4				6.4

     Dividend Yield. The Company has never declared or paid dividends and has no plans to do so in the foreseeable future.

     Expected Volatility. Volatility is a measure of the amount by which a financial variable, such as a share price, has fluctuated (historical daily volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses the historical average daily volatility over the average expected term of the options granted to estimate expected volatility.

     Risk-Free Interest Rate. The risk-free interest rate is the average U.S. Treasury rate for the week of each option grant during the period having a term that most closely resembles the expected term of the option.

     Expected Life of Option Term. Expected life of option term is the period of time that the options granted are expected to remain unexercised. Options granted during the period have a maximum term of seven to ten years. The Company uses historical expected terms, with further consideration given to the class of employees to whom the equity awards were granted, to estimate the expected life of the option term.

     Forfeiture Rate. Forfeiture rate is the estimated percentage of equity awards granted that are expected to be forfeited or canceled on an annual basis before becoming fully vested. The Company estimates forfeiture rate based on past turnover data ranging anywhere from one to five years with further consideration given to the class of employees to whom the equity awards were granted.

     A summary of stock option activity as of June 30, 2011, and changes in the period then ended is presented below (in thousands, except exercise price and remaining contract term data):

										Weighted-
						Weighted-				Average
						Average				Remaining				Aggregate
						Exercise				Contract				Intrinsic
		Shares				Price				Term				Value
Outstanding at January 1, 2011			2,512			$	5.41
Granted			20			$	3.83
Exercised			(173	)		$	2.90
Forfeited or expired			(93	)		$	6.09
Outstanding at June 30, 2011			2,266			$	5.56				2.64			$	356
Vested or expected to vest at June 30, 2011			2,262			$	5.56				2.63			$	356
Exercisable at June 30, 2011			1,939			$	5.57				2.13			$	354

     At June 30, 2011, approximately 1,980,000 shares of stock options were outstanding under the 1999 or 2005 Plans. Additionally, approximately 20,000 stock options were granted outside the Company’s plans to a new executive employee and 266,000 stock options were granted outside the Company’s plans to the Company’s CEO as an inducement to join the Company during the second quarter of 2011 and 2010, respectively.

     The weighted-average grant-date fair value of options granted was $2.40 and $2.80 per share during the three months ended June 30, 2011 and 2010, respectively and $2.40 and $2.80 per share during the six months ended June 30, 2011 and 2010, respectively. In the table above, the total intrinsic value is calculated as the difference between the market price of the Company’s stock on the last trading day of the quarter and the exercise price of the options. For options exercised, intrinsic value is calculated as the difference between the market price on the date of exercise and the grant price. The intrinsic value of options exercised in the three months ended June 30, 2011 and 2010 was $0.0 million and $0.4million, respectively and $0.4 million and $0.4 million, respectively, for the six months ended June 30, 2011 and 2010.

     As of June 30, 2011, there was $0.7 million of total unrecognized compensation cost related to stock options granted under the 1999 and 2005 Plans. This cost is expected to be recognized over a weighted average period of 2.5 years.

     Cash received from option exercises under all share-based payment arrangements for the three months ended June 30, 2011 and 2010 was $0.1 million and $0.8 million, respectively, and $0.5 million and $0.9 million for the six months ended June 30, 2011 and 2010, respectively, net of shares repurchased to cover the cost of certain exercises and taxes. The tax benefits related to the deductions from option exercises of the share-based payment arrangements will be recognized when those deductions, currently being carried forward as net operating losses, reduce taxes payable.

     Restricted Stock Units

     A summary of the Company’s non-vested restricted stock units as of the six months ended June 30, 2011, and changes for the period then ended, is presented below (in thousands, except grant-date fair value data):

						Weighted-
						Average
						Grant-Date
		Shares				Fair Value
Non-vested at January 1, 2011			1,134			$	4.88
Granted			50			$	3.83
Vested			(448	)		$	4.82
Forfeited			(141	)		$	7.05
Non-vested at June 30, 2011			595			$	4.49

     At June 30, 2011, there were approximately 333,000 shares of non-vested restricted stock units under the 1999 or 2005 Plans. Additionally, approximately 50,000 restricted stock units were granted outside the Company’s plans to a new executive employee and 321,000 restricted stock units were granted outside the Company’s plans to the Company’s CEO as an inducement to join the Company during the second quarter of 2011 and 2010, respectively.

     The fair value of non-vested units is determined based on the opening trading price of the Company’s shares on the grant date. As of June 30, 2011, there was $1.8 million of total unrecognized compensation cost related to non-vested restricted stock units granted under the 2005 Plan. This cost is expected to be recognized over a weighted average period of 2.2 years.

8. INCOME TAXES

     The Company recorded income tax expense based on the estimated effective tax rate for the full year, adjusted for non-forecastable items recorded during the first half of 2011.

     The Company’s effective tax rate was 261.0% and 30.5% for the three months ended June 30, 2011 and 2010, respectively and 40.3% and 36.3% for the six months ended June 30, 2011 and 2010, respectively. The year over year change in the effective tax rate relates to permanent differences, state taxes, and a stock based compensation adjustment of approximately $0.2 million relating to the difference between the expected deduction from stock based compensation which is based upon the fair value of the award at the date of issuance and the actual deduction taken which is based upon the fair value of the award at the time the award is exercised or vests.

     The Company has determined that there have been no material changes in tax positions taken in the prior periods, tax positions taken in the current period, settlements with taxing authorities resulting from lapses in the statute of limitations and unrecognized tax benefits that if recognized would affect the effective tax rate and amount of interest and penalties recognized in the condensed consolidated statement of operations and the condensed consolidated balance sheets.

     The tax return years since 2000 in the Company’s major tax jurisdictions, both federal and various states, have not been audited and are not currently under audit. The Company does not have reason to expect any changes in the next twelve months regarding uncertain tax positions.

9. NET LOSS AVAILABLE TO COMMON STOCKHOLDERS PER SHARE

     The following table sets forth the computation of basic and diluted net loss available to common stockholders per share (in thousands, except per share amounts):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net income (loss)		$	124			$	1,069			$	(4,628	)		$	3,249
Preferred stock accretion			2,463				2,374				4,888				4,711
Net loss available to common shareholders		$	(2,339	)		$	(1,305	)		$	(9,516	)		$	(1,462	)
Weighted average shares outstanding used in calculation of net loss available to common stockholders per share:
Basic			31,820				30,911				31,705				30,699
Dilutive stock options			—				—				—				—
Diluted			31,820				30,911				31,705				30,699
Net loss available to common stockholders per share:
Basic		$	(0.07	)		$	(0.04	)		$	(0.30	)		$	(0.05	)
Diluted		$	(0.07	)		$	(0.04	)		$	(0.30	)		$	(0.05	)

     Approximately 7,491,617 and 8,562,555 shares of common stock equivalents for the three months ended June 30, 2011 and 2010, respectively, and approximately 7,212,704 and 8,198,816 shares of common stock equivalents for the six months ended June 30, 2011 and 2010, respectively were excluded from the calculation of diluted earnings per share because of their anti-dilutive effect.

10. FAIR VALUE MEASUREMENTS

     Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In addition, the standard specifies that the fair value should be the exit price, or price received to sell the asset or liability as opposed to the entry price, or price paid to acquire an asset or assume a liability.

     The standard provides valuation techniques and a fair value hierarchy used to measure fair value. The hierarchy prioritizes inputs for valuation techniques used to measure fair value into three categories:

The tables below show how the Company categorizes certain financial assets and liabilities based on the types of inputs used in valuation techniques for measuring fair value:

		Fair Value Measurements at June 30, 2011
		Quoted
		Prices in
		Active
		Markets				Significant
		for				Other				Significant
		Identical				Observable				Unobservable
		Assets				Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Total
Financial assets (in thousands):
Merrill Lynch Institutional Fund		$	7,186			$	—			$	—			$	7,186
Theoretical swap derivative(1)			—				—				6,522				6,522
		$	7,186			$	—			$	6,522			$	13,708

		Fair Value Measurements at December 31, 2010
		Quoted
		Prices in
		Active				Significant
		Markets for				Other				Significant
		Identical				Observable				Unobservable
		Assets				Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Total
Financial assets (in thousands):
Merrill Lynch Institutional Fund		$	12,162			$	—			$	—			$	12,162
Theoretical swap derivative(1)			—				—				6,004				6,004
		$	12,162			$	—			$	6,004			$	18,166

The following tables are summaries of the Company’s financial assets that use Level 3 inputs to measure fair value (in thousands):

		Theoretical
		Swap Derivative
Balance as of January 1, 2011		$	6,004
Realized and unrealized gain(1)			518
Balance as of June 30, 2011		$	6,522

		Theoretical
		Swap Derivative
Balance as of January 1, 2010		$	4,668
Realized and unrealized gain(1)			1,027
Balance as of June 30, 2010		$	5,695

11. COMMITMENTS & CONTINGENCIES

     On April 22, 2011, a civil jury in the Circuit Court of Fairfax County, Virginia returned a verdict in the employment-related lawsuit filed against the Company by its former chairman and chief executive officer, Matthew P. Lawlor. The jury found in his favor on some, but not all, of his claims and awarded him a portion of the total damages he had requested. The verdict remains subject to post trial motions and proceedings. Once completed, the Company plans to seek an appeal of the verdict.

     The Company has accrued $7.7 million to reflect the jury award, statutory interest and an estimate of additional expenses which may be recoverable by Mr. Lawlor if this verdict ultimately results in a final, non-appealable judgment in favor of Mr. Lawlor. This amount is shown as Reserve for potential legal liability in the condensed consolidated statement of operations. To the extent a final, non-appealable judgment upholds Mr. Lawlor’s claims arising under the Company’s stock-based equity incentive plans, other plan participants may refer to that judgment in asserting claims similar to Mr. Lawlor’s against the Company. If those claims were pursued, the Company believes it could incur costs of defense, settlement or damages.

     Online Resources Corporation is currently the defendant in a civil action, Kent D. Stuckey v. Online Resources Corporation, U.S. District Court for Southern Dist. Ohio, Eastern Div., Case No. 2:08-CV-1188. This lawsuit was filed on December 19, 2008 by Mr. Stuckey, the former Chief Executive Officer and Chairman of Internet Transaction Solutions, Inc. (“ITS”), a company that Online Resources acquired in August 2007. The plaintiff has purported to bring this suit in a representative capacity on behalf of all former ITS stockholders. Plaintiff’s primary allegation is that the stockholders of ITS were damaged as a result of the failure of Online Resources to register the shares that were

received in the acquisition of ITS. Online Resources has disputed all the claims made by the plaintiff, and believes no material exposure will result from the claims asserted.

     Online Resources Corporation is currently a defendant in a civil action, Leon Stambler v. Intuit Inc., et al., Civil Action No. 2:10-C-181, Eastern Dist. Texas, Marshall Div. This lawsuit was originally filed on May 28, 2010 and an amended complaint was filed on September 27, 2010. There are twenty-six other named defendants in this action asserting claims of infringement, by each defendant, of the plaintiff’s patents relating to certain aspects of online financial transactions. The plaintiff continues to proceed with discovery in the case. Online Resources disputes all the claims made by the plaintiff at this juncture, and does not anticipate any material liability from this lawsuit.

The current estimated losses in the Stuckey and Stambler cases are not material. Based on its current knowledge the Company has not recorded a loss provision related to these cases, however, it is reasonably possible that the ultimate loss related to these matters could exceed the amounts recorded in the financial statements as of June 30, 2011.

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATIONS

CAUTIONARY NOTE

     The following management’s discussion and analysis should be read in conjunction with the accompanying condensed consolidated unaudited financial statements and notes thereto. This Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including, but not limited to:

	•		Any statements that are not statements of historical fact;
	•		Statements regarding trends in our revenues, expense levels, and liquidity and capital resources;
	•		Statements about the sufficiency of the proceeds from the sale of securities and cash balances to meet currently planned working capital and capital expenditure requirements for at least the next twelve months; and
	•		Other statements identified or qualified by words such as “likely”, “will”, “suggest”, “may”, “would”, “could”, “should”, “expects”, “anticipates”, “estimates”, “plans”, “projects”, “believes”, “seeks”, “intends” and other similar words that signify forward-looking statements.

     These forward-looking statements represent our best judgment as of the date of the Quarterly Report on Form 10-Q, and we caution readers not to place undue reliance on such statements. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including but not limited to, the risks and uncertainties described or discussed below and elsewhere in this report, particularly in the section “Risk Factors” in Item 1A of Part II, as well as in the section “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 15, 2011. These risks include, among others, the following:

	•		our history of prior losses and the lack of certainty of maintaining consistent profitability;
	•		our dependence on the marketing assistance of third parties to market our services;
	•		the possibility that we may not be able to expand to meet increased demand for our services and related products;
	•		the potential adverse impact that client departures may have on our financial results;
	•		our inability to attract and retain qualified management and technical personnel and our dependence on our executive officers and key employees;
	•		potential security breaches or system failures disrupting our business and the liability associated with these disruptions;
	•		the failure to properly develop, market or sell new products;
	•		the potential impact of the consolidation of the banking and financial services industry;
	•		the potential effects of adoption of government rules or regulations on our business;
	•		our need to maintain satisfactory ratings from federal depository institution regulators;
	•		exposure to increased compliance costs and risks associated with new and increasing and new regulation of corporate governance and disclosure standards;
	•		the liquidation preference rights and redemption rights associated with our outstanding shares of preferred stock;
	•		the voting rights of our preferred stock restricting our right to take certain actions;
	•		the potential losses we may incur from the impairment of the goodwill we have obtained from our acquisitions;
	•		our inability to obtain additional financing to grow our business;
	•		the concentration of our clients in a small number of industries, including the financial services industry, and changes within those industries reducing demand for our products and services;

	•		the failure to retain existing end-users or changes in their continued use of our services adversely affecting our operating results;
	•		demand for low-cost or free online financial services and competition placing significant pressure on our pricing structure and revenues;
	•		exposure to greater than anticipated tax liabilities;
	•		our quarterly financial results being subject to fluctuations and having a material adverse effect on the price of our stock;
	•		our limited ability to protect our proprietary technology and other rights;
	•		the need to redesign our products, pay royalties or enter into license agreements with third parties as a result of our infringement, or alleged infringement, of proprietary rights of third parties;
	•		the potential obsolescence of our technology or the offering of new, more efficient means of conducting account presentation and payments services negatively impacting our business;
	•		errors and bugs existing in our internally developed software and systems as well as third-party products;
	•		the disruption of our business and the diversion of management’s attention resulting from breach of contract or product liability suits;
	•		difficulties in integrating acquired businesses;
	•		our having limited knowledge of, or experience with, the industries served and products provided by our acquired businesses;
	•		the increase in the size of our operations and the risks described herein from acquisitions or otherwise;
	•		the liabilities or obligations that were not or will not be adequately disclosed from acquisitions we have made and may make;
	•		the claims that may arise from acquired companies giving us limited warranties and indemnities in connection with their businesses;
	•		the effect on the trading price of our stock from the sale of the substantial number of shares of common and convertible preferred stock outstanding, including shares issued in connection with certain acquisitions and shares that may be issued upon exercise of grants under our equity compensation plans;
	•		the significant amount of debt which will have to repay;
	•		the adverse effect to the market price of our common stock from future offerings of debt and preferred stock which would be senior to our common stock upon liquidation; and
	•		the acceleration of repayment of borrowed funds if a default under the terms of our credit agreement arises.

OVERVIEW

     We provide outsourced, web- and phone-based financial technology services to financial institution, biller, card issuer and creditor clients to fulfill payment, banking and other financial services to their millions of consumer end-users. Our products and services enable our clients to provide their consumer end-users with the ability to perform various self-service functions including electronic bill payments and funds transfers, which utilize our unique, real-time debit architecture, ACH and other payment methods, as well as gain online access to their accounts, transaction histories and other information. We deliver our products and services to two primary vertical markets: Banking Services and e-Commerce Services.

	•		Banking Services: For banks, credit unions and other depository financial institutions, we provide electronic bill payment and online banking services. Our electronic bill payment services provide clients a cost effective solution to process transactions for their consumer end-users. Our online banking products include an integrated suite of web-based account presentation and payment services, as well as supporting call center, consumer marketing and professional services. These solutions give clients an enhanced experience for their users, the marketing processes to drive Internet channel adoption, and innovative products and services that help them maintain their competitive position.
			The bill payment services we offer to our Banking clients use our proprietary payments gateway, which leverages real-time electronic funds transfer, also known as EFT, infrastructure and technology. By debiting end-users’ accounts in real-time, we are able to improve the speed, cost and certainty of payments, while eliminating the risk that bills will be paid against insufficient funds.
	•		e-Commerce Services: For billers, card issuers and credit providers, we provide web- and phone-based payment, account presentation and web-collections services, along with supporting professional services. Our services include a full suite of payment options that can be made available to consumers, including acceptance of payments made by credit card, signature debit card, ACH and PIN-less debit through multiple channels including online, interactive voice response, or IVR, and call center customer service representatives. These options also include flexible payment scheduling, convenience payments, bill presentment and other advanced payment and collection services.

     We currently derive approximately 80% of our revenues from payments and 20% from internet banking, account presentation and other services. These other services include customer care and consumer marketing services to support consumers and assist our clients in delivering a favorable user experience. It also includes professional services, including internet banking software solutions that enable various customization and deployment options.

     We believe our domain expertise fulfills a significant need among both smaller financial services providers, who lack the internal resources to build and operate web-based financial services, and larger providers and billers, who outsource niche solutions in order to use their internal resources elsewhere. We also believe that, because our business requires significant infrastructure along with a high degree of flexibility, real-time solutions, and the ability to integrate financial information and highly reliable transaction processing, we provide valuable service offerings in defensible market segments.

     We are headquartered in Chantilly, Virginia. We also maintain operations facilities in Princeton, New Jersey, Parsippany, New Jersey, Woodland Hills, California, Columbus, Ohio and Pleasanton, California and an additional data center facility in Newark, New Jersey. We were incorporated in Delaware in 1989.

     Registered end-users using account presentation, bill payment or both, and the payment transactions executed by those end-users are the major drivers of our revenues. At June 30, 2011 in comparison to December 31, 2010, the number of users of our account presentation services increased 4% and the number of users of our payment services decreased 2%, for an overall 1% decrease in users.

     We have long-term service contracts with most of our clients. The majority of our revenues are recurring, though these contracts also provide for implementation, set-up and other non-recurring fees. Account presentation services revenues are based on either a monthly license fee, allowing our clients to register an unlimited number of customers, or a monthly fee for each registered customer. Payment services revenues are either based on a monthly fee for each customer enrolled, a fee per executed transaction, or a combination of both. Our clients pay nearly all of our fees and then determine if or how they want to pass these costs on to their users. They typically provide account presentation services to users free of charge, as they derive significant potential benefits including account retention, delivery and paper cost savings, account consolidation and cross-selling of other products.

     As a network-based service provider, we have made substantial up-front investments in infrastructure, particularly for our proprietary systems. We invested approximately $3.9 million for the six months ended June 30, 2011, and $5.9 million and $6.2 million for the years ended December 31, 2010 and 2009, respectively. These investments were made to create new products, enhance the functionality of existing products and improve our infrastructure. Product enhancements allow us to remain competitive, retain existing clients and attract new clients. New products allow us to increase revenue and attract new clients. Infrastructure investments allow us to leverage ongoing advances in technology to improve our operating efficiency and capture cost savings.

     While we continue to incur ongoing development and maintenance costs, we believe the infrastructure we have built provides us with significant operating leverage. We continue to automate processes and develop applications that allow us to make only small increases in labor and other operating costs relative to increases in customers and transactions. We believe our financial and operating performance will be based primarily on our ability to leverage additional end-users and transactions over this relatively fixed cost base.

     Registered end-users using account presentation, payment services or both, and the payment transactions executed by those end-users are the major drivers of our revenues. Since June 30, 2010, the number of account presentation services users increased by 10%, and the number of payment services users increased 9%, for an overall 9% increase in users. The increase in account presentation services users is due to new clients as well as increased users with existing clients.

Results of Operations The following table presents the summarized results of operations for our two reportable segments, Banking and eCommerce (dollars in thousands):

		Three Months Ended June 30,																Six Months Ended June 30,
		2011								2010								2011								2010
		Dollars				%				Dollars				%				Dollars				%				Dollars				%
Revenues:
Banking		$	20,856				54	%		$	22,169				61	%		$	41,876				54	%		$	45,516				61	%
eCommerce			17,473				46	%			14,190				39	%			35,731				46	%			29,425				39	%
Total		$	38,329				100	%		$	36,359				100	%		$	77,607				100	%		$	74,941				100	%

		Dollars				Margin				Dollars				Dollars				Margin				Margin				Dollars				Margin
Gross profit:
Banking		$	9,471				45	%		$	10,741				48	%		$	18,955				45	%		$	22,785				50	%
eCommerce			7,907				45	%			6,232				44	%			15,886				44	%			13,144				45	%
Total		$	17,378				45	%		$	16,973				47	%		$	34,841				45	%		$	35,929				48	%
Operating expenses:
Banking		$	7,026				40	%		$	6,218				40	%		$	13,799				32	%		$	12,472				40	%
eCommerce			5,825				33	%			4,679				30	%			11,367				27	%			9,424				31	%
Corporate(1)			4,814				27	%			4,775				30	%			17,445				41	%			9,015				29	%
Total		$	17,665				100	%		$	15,672				100	%		$	42,611				100	%		$	30,911				100	%

		Dollars				Margin				Dollars				Margin				Dollars				Margin				Dollars				Margin
Income from operations:
Banking		$	2,445				12	%		$	4,523				20	%		$	5,156				12	%		$	10,313				23	%
eCommerce			2,082				12	%			1,553				11	%			4,519				13	%			3,720				13	%
Corporate(1)			(4,814	)							(4,775	)							(17,445	)							(9,015	)
Total		$	(287	)			(1	)%		$	1,301				4	%		$	(7,770	)			(10	)%		$	5,018				7	%

THREE MONTHS ENDED JUNE 30, 2011 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2010

Revenues

     We generate revenues from account presentation, payment, relationship management and professional services and other revenues.

		Three Months Ended
		June 30,								Change
		2011(1)				2010(1)				Difference(1)				%
Revenues:
Account presentation services		$	2,721			$	2,058			$	663				32	%
Payment services			28,074				28,145				(71	)			(-	)%
Relationship management services			1,717				2,042				(325	)			(16	)%
Professional services and other			5,817				4,114				1,703				41	%
Total revenues		$	38,329			$	36,359			$	1,970				5	%
Payment metrics:
Banking payment transactions			37,370				36,596				774				2	%
Biller payment transactions			21,163				17,185				3,978				23	%

     Account Presentation Services. Both the Banking and eCommerce segments contribute to account presentation services revenues, which increased 32%, or $0.7 million, to $2.7 million. The increase is primarily due to $0.1 million increase in user fees, $0.5 million increase in hosting fees and $0.1 million in card usage fees.

     Payment Services. Both the Banking and eCommerce segments contribute to payment services revenues, which remained constant at $28.1 million compared to the same period in 2010.

     Relationship Management Services. Primarily composed of revenues from the Banking segment, relationship management services revenues which decreased 16%, or $0.3 million, to $1.7 million. The decrease is primarily due to $0.1 million decrease in new user set up fees, $0.1 million decrease in marketing program revenue and $0.1 million decrease in other user fees.

     Professional Services and Other. Both the Banking and eCommerce segments contribute to professional services and other revenues, which increased $1.7 million, or 41%. The increase is primarily due to $0.7 million increase in cancellation fees, $0.7 million increase in professional service fees , $0.2 million increase in license fees, and $0.1 million increase in user fees for ancillary services.

Costs and Expenses

		Three Months Ended
		June 30,								Change
		2011(1)				2010(1)				Difference(1)				%
Revenues		$	38,329			$	36,359			$	1,970				5	%
Costs of revenues			20,951				19,386				1,565				8	%
Gross profit			17,378				16,973				405				2	%
Gross margin			45	%			47	%
Operating expenses
General and administrative			9,663				8,273				1,390				17	%
Reserve for potential legal liability			—				—				—				—
Sales and marketing			5,302				4,846				456				9	%
Systems and development			2,700				2,553				147				6	%
Total operating expenses			17,665				15,672				1,993				13	%
(Loss) income from operations			(287	)			1,301				(1,588	)			(122	)%
Other income (expense)
Interest income			25				14				11				79	%
Interest and other expense (income)			185				223				(38	)			(17	)%
Total other income (expense)			210				237				(27	)			(11	)%
(Loss) income before tax (benefit) provision			(77	)			1,538				(1,615	)			(105	)%
Income tax (benefit) provision			(201	)			469				(670	)			(143	)%
Net income (loss)			124				1,069				(945	)			(88	)%
Preferred stock accretion			2,463				2,374				89				4	%
Net loss available to common stockholders		$	(2,339	)		$	(1,305	)		$	(1,034	)			(79	)%
Net loss available to common stockholders per share:
Basic		$	(0.07	)		$	(0.04	)		$	(0.03	)			(75	)%
Diluted		$	(0.07	)		$	(0.04	)		$	(0.03	)			(75	%
Shares used in calculation of net loss available to common stockholders per share:
Basic			31,820				30,911				909				3	%
Diluted			31,820				30,911				909				3	%