Business Context and Reporting Period
This Form 10-Q covers the quarter and nine months ended September 30, 2015. The filing identifies the registrant as Payment Data Systems, Inc.; the request identifies the company as Usio, Inc., so the corporate-name relationship should be verified. The company provides electronic payment processing, including ACH, credit, debit, prepaid-card, and online payment services. Its Akimbo prepaid-card business was acquired in December 2014; the Akimbo MasterCard program launched in April 2015, and the Visa program was decommissioned in May 2015.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $3.55 million | $3.60 million | $10.72 million | $9.63 million |
| Operating income | $23,332 | $676,774 | $809,886 | $1.31 million |
| Net income | $117,780 | $688,560 | $851,246 | $1.34 million |
| Basic EPS | $0.02 | $0.08 | $0.12 | $0.16 |
| Diluted EPS | $0.01 | $0.08 | $0.07 | $0.15 |
- Revenue was approximately flat year over year in Q3 and increased 11% for the nine-month period.
- Net margin was approximately 3.3% in Q3 2015 versus 19.1% in Q3 2014; nine-month net margin was approximately 7.9% versus 13.9%. Operating margin was approximately 0.7% in Q3 2015 and 7.6% for the nine months.
- Total payment volume exceeded $864.7 million in Q3, the company’s highest quarterly volume. Credit-card dollars processed increased 14%, credit-card transactions increased 3%, and electronic-check transaction volumes increased 6% year over year.
- Cash and cash equivalents were $52.17 million at September 30, 2015, compared with $54.99 million at December 31, 2014. Working capital was $4.05 million, compared with $2.85 million at year-end 2014.
- Customer deposits payable were $48.40 million, down from $52.19 million at year-end. These balances include customer security deposits and funds held in transit and are not equivalent to unrestricted corporate cash.
- Net cash used in operating activities was $2.07 million for the nine months, compared with $34.24 million provided in the prior-year period. The change primarily reflected a $3.79 million reduction in customer deposit payables.
- Capital expenditures were $726,476, principally for internal-use software. The filing reports no debt or off-balance-sheet arrangements with a material effect.
Material Changes Versus the Prior Comparable Period
- Q3 revenue decreased 1%, while nine-month revenue increased 11%, reflecting different transaction-volume trends and fewer return transactions in the quarter.
- Q3 operating income declined from $676,774 to $23,332, and nine-month operating income declined 38% to $809,886.
- Net income declined 83% in Q3 and 36% for the nine months. Higher stock-based compensation, selling, general and administrative costs, and depreciation materially reduced profitability.
- Stock-based compensation increased to $338,488 in Q3 and $965,544 for the nine months, compared with $72,995 and $223,985, respectively, in the prior-year periods.
- Other expenses increased 92% in Q3 and 44% for the nine months, driven by higher legal and accounting fees, salaries, NASDAQ-listing costs, bonuses, rent, and director compensation.
- Other income included a $91,598 reversal of an expense accrual after the statute of limitations expired, as well as unrealized gains and losses on marketable securities.
- The company invested $726,476 in property and equipment, compared with $35,346 in the prior-year period, primarily for internal-use software.
- A 1-for-15 reverse stock split became effective July 23, 2015. The company also granted equity awards to new independent directors, contributing to increased stock-based compensation and diluted share counts.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expects merchant enrollment, transaction volumes, and profitability to continue increasing for the foreseeable future, but expressly states that profitability may not be sustained and future operating losses are possible. Planned priorities include customer acquisition, expense management, technology upgrades, customer service, and outsourcing certain processing functions.
- Key operating risks include cybersecurity and processing losses, dependence on ACH networks, third-party processors and sponsoring banks, card-network compliance, regulatory compliance, technological change, competition, and the ability to maintain customers and qualified personnel.
- The processing-loss reserve was $248,868 at September 30, 2015. Management reported no significant processing losses to date, but actual losses could exceed estimates.
- The company had recognized deferred tax assets of $1.6 million and maintained a $12.2 million valuation allowance. It also reported approximately $40.8 million of net operating loss carryforwards at December 31, 2014.
- Brightmoor Church voluntarily dismissed a lawsuit concerning $181,709 of fraudulent transactions. The company later filed its own breach-of-contract action; unrecovered funds were $13,710 excluding attorney fees.
- A shareholder derivative and class-action lawsuit alleges excessive compensation and fiduciary-duty breaches. The company had not been served as of November 11, 2015, believes the claims lack merit, and recorded no loss accrual, although future legal fees or losses remain possible.
- The estate of a long-time shareholder was reported to hold approximately 934,667 shares, or 8% of outstanding stock, and a large sale could pressure the share price.
- Management stated that disclosure controls and procedures were effective as of September 30, 2015, with no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the registrant’s name and whether the filing corresponds to Usio, Inc. or its predecessor, Payment Data Systems, Inc.
- Assess the sustainability of reported profitability after excluding or separately considering stock-based compensation and the $91,598 accrual reversal.
- Reconcile unrestricted corporate cash with the $48.40 million customer-deposit liability and understand potential reserve-release or repayment obligations.
- Review the impact of the Akimbo acquisition and the transition from Visa to MasterCard on revenue, costs, customer retention, and future growth.
- Monitor operating cash flow, customer-deposit movements, capitalized software spending, and the company’s ability to convert high payment volumes into earnings.
- Review outstanding litigation, the processing-loss reserve, cybersecurity exposure, regulatory dependencies, and the potential sale of the estate’s shares.
- Verify the effect of the 1-for-15 reverse split, equity awards, and substantially higher diluted share count on per-share results and dilution.