Usio, Inc. (formerly Payment Data Systems, Inc.) — Q2 2015 Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended June 30, 2015. The company provides ACH, credit, debit, prepaid-card, and online payment-processing services. Following its December 2014 acquisition of Akimbo Financial, the company operated Akimbo’s prepaid-card business on the MasterCard network beginning in April 2015 and discontinued the Visa program on May 30, 2015.
The interim financial statements are unaudited. The company was a smaller reporting company and reported effective disclosure controls as of June 30, 2015.
Financial performance and liquidity
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $3.425 million | $3.304 million | $7.167 million | $6.035 million |
| Operating income | $91,833 | $466,379 | $786,552 | $636,843 |
| Net income | $24,850 | $486,801 | $733,465 | $648,540 |
| Net margin | 0.7% | 14.7% | 10.2% | 10.7% |
| Operating cash flow | Not separately provided | Not separately provided | $10.432 million | $34.247 million |
Cost of services was $2.427 million in the second quarter and $4.802 million for the first six months. Implied gross margins were approximately 29.1% and 33.0%, respectively. Implied operating margins were approximately 2.7% for the quarter and 11.0% for the six-month period.
Cash and cash equivalents increased to $64.866 million at June 30, 2015 from $54.990 million at December 31, 2014. Working capital was $3.569 million, compared with $2.854 million at year-end. The company reported no debt balance in the filing and no cash used in financing activities. Total current liabilities were $63.133 million, including $61.274 million of customer deposits payable. Customer deposits include security deposits and cash held in transit for merchants and therefore are not equivalent to unrestricted corporate liquidity.
Total assets were $71.222 million and stockholders’ equity was $8.089 million at June 30, 2015. The accumulated deficit remained $49.338 million despite current-year profitability.
Material changes versus the prior comparable period
- Second-quarter revenue increased 4% year over year; six-month revenue increased 19%, primarily from higher credit, debit, ACH, and return-transaction volumes and newly acquired customers.
- Management reported second-quarter ACH volume more than 2% above the prior-year quarter, credit-card dollars processed 9% higher, and total payments processed of more than $806.8 million.
- Second-quarter net income declined 95% year over year to $24,850. Six-month net income increased 13% to $733,465.
- Operating income declined substantially in the quarter because operating expenses rose faster than revenue. Stock-based compensation increased to $393,525 from $72,995, and depreciation and amortization increased to $92,948 from $10,706.
- Six-month stock-based compensation increased to $627,056 from $150,990, reflecting the Akimbo acquisition, new personnel, and additional directors. A $163,936 cancellation of prior stock-based compensation reduced six-month expense.
- Operating cash flow fell to $10.432 million from $34.247 million, primarily because the increase in customer deposit payables was $9.088 million versus $33.749 million in the prior-year period.
- Capital expenditures and capitalized internal-use software costs resulted in $555,778 of investing cash outflow, compared with $30,233 in the prior-year period.
Guidance, outlook, risks, contingencies, and unusual items
Management expected continued growth in enrolled merchants, sales-pipeline activity, and transaction volumes and believed profitability could continue for the foreseeable future. Management also stated that profitability may not be sustained and future operating losses remain possible. Priorities included customer acquisition, expense management, technology upgrades, customer service, regulatory compliance, and selective outsourcing.
- The company acquired Akimbo assets for stated consideration of $3.0 million in common stock; the recorded purchase-price allocation totaled $2.25 million after identified liabilities.
- The company had a $1.6 million recognized deferred tax asset and a $12.2 million valuation allowance. Net operating loss carryforwards were approximately $40.8 million at December 31, 2014, with expirations beginning in 2020.
- The reserve for processing losses was $272,365 at June 30, 2015. Processing-loss exposure can increase with transaction volumes, merchant insolvency, chargebacks, fraud, or prepaid-card negative balances.
- A customer lawsuit relates to $181,709 of allegedly fraudulent credit transactions. The company cited a contractual liability limitation and had not accrued additional potential loss beyond its existing reserve; unrecovered funds incurred to date were $13,710, excluding attorney fees.
- A shareholder derivative and class-action lawsuit filed June 26, 2015 alleges excessive compensation and fiduciary-duty violations. The company considered the claims without merit and recorded no accrual, but potential legal fees and losses remain uncertain.
- After quarter-end, shareholders approved a 2015 Equity Incentive Plan authorizing up to 5 million post-split shares. The company also effected a 1-for-15 reverse stock split on July 23, 2015; historical share and per-share amounts in the filing were adjusted for the split.
- The company agreed in April 2015 to issue 500,000 shares each to directors Miguel Chapa and Kirk Taylor under the equity plan, subject to vesting; the shares had not been issued as of August 10, 2015.
- Key operating risks include payment-network and sponsor-bank compliance, ACH-network relationships, cybersecurity, technology changes, regulatory requirements, merchant credit and fraud losses, competition, and dependence on third-party processors.
Important facts for investors to verify
- Whether revenue and transaction-volume growth continues after the Akimbo integration and prepaid-card network transition.
- Whether the sharp second-quarter decline in operating income and net income was temporary or indicates sustained pressure from stock compensation, personnel, technology, and legal costs.
- The composition and liquidity restrictions, if any, on the $64.9 million of cash, particularly the $61.3 million customer-deposit liability.
- Actual merchant chargebacks, processing losses, reserve adequacy, and customer-deposit repayment obligations.
- The potential financial impact and resolution status of the two disclosed lawsuits.
- The accounting and dilution effects of the 2015 equity incentive plan, director awards, and the 1-for-15 reverse stock split.
- Whether the company’s deferred tax assets and net operating loss carryforwards will ultimately be realizable despite the $12.2 million valuation allowance.