Usio, Inc. (formerly Payment Data Systems, Inc.) — Q1 2016 Form 10-Q
Business context and reporting period
The filing covers the unaudited quarter ended March 31, 2016, and was signed May 16, 2016. The company provides electronic payment processing services, including credit, debit, ACH, prepaid-card, online payment, and merchant-processing services. The Akimbo MasterCard platform was active during the period.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $3.229 million | $3.742 million | Down 14% |
| Cost of services | $2.155 million | $2.304 million | Down 6% |
| Operating income (loss) | $(46,413) | $694,721 | Declined $741,134 |
| Net income (loss) | $(32,002) | $708,617 | Declined $740,619 |
| Operating margin | (1.4%) | 18.6% | Down 20.0 percentage points |
| Net margin | (1.0%) | 18.9% | Down 19.9 percentage points |
| Net cash from operating activities | $472,239 | $824,575 | Down 43% |
| Cash and cash equivalents at period end | $4.224 million | $3.374 million | Up $849,795 year over year |
Total dollars processed exceeded $737 million. Credit-card transaction volume increased 6% and credit-card dollars processed increased 5% year over year. ACH transaction volume decreased 11%, while returned-check transactions decreased 28%.
At March 31, 2016, total assets were $52.556 million, total current liabilities were $43.166 million, and stockholders’ equity was $9.390 million. Working capital was $4.064 million. The filing does not report outstanding debt or borrowings. Settlement processing assets and corresponding obligations were each $23.423 million, and restricted cash was $18.244 million.
Material changes versus the prior comparable period
- Revenue declined primarily because of lower ACH and return-transaction volumes and the loss of certain customers.
- Cost of services decreased less than revenue, resulting in materially lower profitability.
- Stock-based compensation increased to $287,689 from $233,531, largely due to grants to two independent directors.
- Depreciation and amortization increased to $224,223 from $85,571. The increase included additional amortization from changing the useful life of $2.585 million of Akimbo software from 10 years to five years.
- Operating cash flow decreased to $472,239 from $824,575, although cash increased during the quarter by $164,285.
- Investing cash outflow was $307,954, including a $200,000 loan to C2Go, Inc. and $107,954 of property and equipment purchases. The company capitalized an additional $100,154 of internal-use software costs.
Guidance, outlook, risks, contingencies, and unusual items
Management expects the decline in ACH transactions to reverse in the second half of 2016 and early 2017, citing a strong sales pipeline. It expects additional enrolled merchants and increased transaction volumes, and believes profitability may return in the foreseeable future; however, management expressly acknowledges that profitability may not be regained and that future operating losses are possible.
Key operating risks include customer acquisition and retention, competitive and technological changes, dependence on payment-processing systems and third parties, merchant chargebacks and processing losses, and the need to control operating expenses. The reserve for merchant processing losses was $248,868, unchanged from December 31, 2015. The company had approximately $39.7 million of net operating loss carryforwards at December 31, 2015, but maintained a $12.2 million valuation allowance against deferred tax assets; the recognized deferred tax asset was $1.6 million.
A derivative/class-action lawsuit concerning compensation of directors and officers was re-filed on April 26, 2016. Management considers the claims without merit and has not accrued a loss, but acknowledges that legal fees and losses remain possible. A separate dispute with Brightmoor Church was settled and dismissed in March 2016 without consideration.
On February 15, 2016, the company issued 10,000 unregistered shares to a consultant at $1.90 per share for investor-relations services. Management reported effective disclosure controls and no material change in internal control over financial reporting. The company reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the anticipated recovery in ACH volumes and merchant additions occurred in subsequent quarters.
- Whether revenue growth and transaction volumes were sufficient to restore operating and net profitability.
- The effect of the Akimbo software amortization change and continuing stock-based compensation on future margins.
- The collectability and terms of the $200,000 C2Go note receivable.
- The status and potential financial exposure of the re-filed derivative/class-action litigation.
- The adequacy of restricted cash, merchant-loss reserves, and other protections against chargebacks and processing losses.
- The company’s debt status and liquidity needs, including any later equity financing or dilution.