Usio, Inc. (then Payment Data Systems, Inc.) — Q2 2016 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three and six months ended June 30, 2016, with comparisons to the same periods in 2015. The company provides electronic payment processing services, including credit, debit, prepaid card, ACH, online payments and Akimbo prepaid-card services. The filing was signed August 15, 2016. As of August 3, 2016, 12,075,806 common shares were outstanding.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $2.890 million | $3.425 million | $6.119 million | $7.167 million |
| Gross profit | $855,621 | $998,144 | $1.929 million | $2.365 million |
| Gross margin | 29.6% | 29.1% | 31.5% | 33.0% |
| Operating income (loss) | $(455,220) | $91,833 | $(501,633) | $786,552 |
| Operating margin | (15.8%) | 2.7% | (8.2%) | 11.0% |
| Net income (loss) | $(355,301) | $24,850 | $(387,303) | $733,465 |
| Net margin | (12.3%) | 0.7% | (6.3%) | 10.2% |
| Operating cash flow | Not separately provided | Not separately provided | $657,286 | $1.344 million |
Cash and cash equivalents were $4.378 million at June 30, 2016, compared with $4.060 million at December 31, 2015. Restricted cash was $18.316 million, and settlement processing assets and obligations were each $25.072 million. Reported working capital was $4.202 million, compared with $3.872 million at year-end 2015.
The company reported no cash financing activity and disclosed no debt balance in the financial statements. Investing cash outflows were $338,487, consisting primarily of $138,487 of property and equipment purchases and a $200,000 note receivable. Total assets were $54.185 million and stockholders’ equity was $9.334 million at June 30, 2016.
Material changes versus the prior comparable period
- Second-quarter revenue declined 16%; six-month revenue declined 15%, primarily because of lower ACH and return-transaction volumes.
- Credit-card transactions increased 4% year over year in Q2, but credit-card dollars processed decreased 4%. ACH transaction volume decreased 17%.
- Cost of services decreased 16% in Q2 and 13% for the first six months, broadly reflecting lower processing volumes.
- Other selling, general and administrative expense increased 91% in Q2 and 50% for the first six months, driven by higher salaries and benefits, investor outreach, marketing, legal and professional fees, and director compensation.
- Depreciation and amortization increased to $225,554 in Q2 from $92,948 and to $449,777 for the six months from $178,520, primarily because the useful life of $2.585 million of Akimbo software was reduced from 10 years to five years.
- Other income included $97,493 from a legal settlement in the company’s favor, contributing to the improvement in other income despite the operating loss.
- Operating cash flow fell 51% to $657,286 for the first six months, while ending cash increased by $318,799.
Guidance, outlook, risks and unusual items
Management expected the decline in ACH activity to reverse in the second half of 2016 and early 2017, based on its sales pipeline. It also expected more enrolled merchants and new clients to increase transaction volumes and stated that it expected to return to profitability in the foreseeable future, while acknowledging that profitability might not be regained and future operating losses could occur.
- The company identified customer acquisition, expense management, technology investment, service quality, competition, personnel retention and changing industry requirements as key execution factors.
- Restricted cash serves as collateral for chargebacks, returned items and third-party claims and generally may be repaid 90 to 180 days after the customer’s last processed item.
- The reserve for merchant processing losses was $248,868, unchanged from December 31, 2015. Management stated that significant processing losses had not been incurred to date.
- The company had a recognized deferred tax asset of approximately $1.6 million and a valuation allowance of approximately $12.2 million. Net operating loss carryforwards were approximately $39.7 million at December 31, 2015, beginning to expire in 2020.
- Employment agreements with Chairman Michael Long and CEO/COO Louis Hoch could require estimated cash payments of $1.5 million to $2.0 million each upon certain terminations or a change in control, plus accelerated vesting of approximately $1.3 million of stock awards each. Death or disability provisions had separate estimated payment ranges. Amendments were under renegotiation at the filing date.
- On August 1, 2016, Kirk E. Taylor resigned as Audit Committee chair and as a director. On August 3, amendments to executive employment agreements were signed, and Louis Hoch assumed the CEO role while Michael Long remained chairman.
- A shareholder derivative and class-action lawsuit concerning executive compensation was refiled in April 2016. Management considered the claims without merit and had not accrued a loss, but disclosed that legal fees and losses remained possible.
- The company issued 10,000 unregistered shares to a consultant on May 15, 2016, valued at $1.53 per share.
- Management reported effective disclosure controls and procedures as of June 30, 2016 and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the expected recovery in ACH volumes and merchant additions occurred in the second half of 2016 and whether profitability returned.
- The sustainability of cash generation given the six-month decline in operating cash flow and the company’s accumulated deficit of $49.442 million.
- The composition and availability of restricted cash and settlement-related balances, which are not equivalent to unrestricted operating liquidity.
- The final terms and potential cash impact of executive employment agreement amendments and any change-in-control, termination, death or disability obligations.
- The status and potential exposure from the refiled shareholder litigation and other ordinary-course legal matters.
- The effect of increased SG&A spending and accelerated Akimbo software amortization on future operating margins.