Usio, Inc. (filed as Payment Data Systems, Inc.) — 2016 Q3 Form 10-Q Summary
Business Context and Reporting Period
The unaudited Form 10-Q covers the three and nine months ended September 30, 2016. The company provides integrated electronic payment processing services, including ACH, credit, debit, prepaid card, online payment, and Akimbo prepaid-card services. The filing identifies the registrant as Payment Data Systems, Inc.; the request identifies the company as Usio, Inc.
Financial Performance and Liquidity
| Metric | Three months ended Sept. 30, 2016 | Three months ended Sept. 30, 2015 | Nine months ended Sept. 30, 2016 | Nine months ended Sept. 30, 2015 |
|---|---|---|---|---|
| Revenue | $3.067 million | $3.550 million | $9.186 million | $10.718 million |
| Operating income (loss) | $(0.575) million | $0.023 million | $(1.077) million | $0.810 million |
| Net income (loss) | $(0.566) million | $0.118 million | $(0.953) million | $0.851 million |
| Basic EPS | $(0.07) | $0.02 | $(0.12) | $0.12 |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $0.586 million | $1.722 million |
Third-quarter revenue declined 14% year over year, and nine-month revenue declined 14%. Gross profit was approximately $0.966 million in the quarter and $2.895 million for the nine months. Gross margin was approximately 31.5% in both periods, compared with approximately 34.2% and 33.4%, respectively, in the comparable 2015 periods. The third-quarter operating margin was approximately negative 18.8%, compared with approximately 0.7% in 2015; the nine-month operating margin was approximately negative 11.7%, compared with approximately 7.6% in 2015.
At September 30, 2016, cash and cash equivalents were $4.294 million, restricted cash was $18.111 million, and working capital was $4.496 million. Settlement processing assets and corresponding obligations were each $41.116 million. Total assets were $69.610 million and stockholders’ equity was $9.406 million. The filing does not report outstanding interest-bearing debt. Cash increased from $4.060 million at December 31, 2015. No material off-balance-sheet arrangements were reported.
Material Changes Versus Prior Comparable Period
- Revenue decreased $0.483 million, or 14%, in the third quarter and $1.532 million, or 14%, for the nine-month period, primarily because of lower ACH and returned-transaction volumes.
- Credit-card processing volume decreased 2% and credit-card dollars processed decreased 9% in the third quarter. ACH transaction volume decreased 15% year over year but increased 8% from the second quarter.
- Total third-quarter dollars processed exceeded $759.3 million, the company’s highest quarterly total for 2016.
- Cost of services decreased 10% in the quarter and 12% for the nine months, but the decline was insufficient to offset lower revenue and higher operating expenses.
- Other selling, general and administrative expenses increased 44% in the quarter and 48% for the nine months, driven primarily by a $200,000 increase in the processing-loss reserve and higher salaries and benefits.
- Depreciation and amortization increased to $225,759 for the quarter and $675,536 for the nine months, primarily because the useful life of $2.585 million of Akimbo software was changed from 10 years to five years.
- Operating results shifted from income to loss, and nine-month operating cash flow declined approximately 66% from the prior year.
- Shares outstanding increased during the period, including 167,153 shares issued in August 2016 to Akimbo shareholders under the asset purchase agreement.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that a strong sales pipeline and new products could reverse the transaction-volume decline in the fourth quarter of 2016 and early 2017. Management expected additional merchant enrollment and stated that it believed profitability could return in the foreseeable future, while acknowledging that profitability might not be regained and future operating losses could occur. A new PIN-less debit product was introduced in October 2016.
On August 26, 2016, an ACH processing-engine malfunction caused approximately $236,850 of excess funding to merchant customers’ accounts. The company had been unable to recover the amount as of the filing, believed it might recover some or all of the funds, and established a $200,000 reserve. Processing losses, cybersecurity incidents, system failures, third-party processor or bank-sponsor failures, regulatory compliance, competition, technology changes, and customer attrition remain key risks.
The company reported a derivative class-action lawsuit alleging excessive and unfair executive compensation. Management believes the claims lack merit and has not accrued a loss, but the outcome remains uncertain. The company also disclosed potential employment-agreement obligations, including estimated cash payments of approximately $1.5 million to $2.0 million per executive upon certain change-in-control or termination events, plus accelerated vesting of stock awards estimated at approximately $1.3 million per executive.
The company authorized up to $1 million of common-stock repurchases in August 2016. It also disclosed a $1.6 million deferred tax asset and a $12.2 million valuation allowance against other deferred tax assets. Net operating loss carryforwards were approximately $39.7 million at December 31, 2015, with expirations beginning in 2020.
Investor Verification Points
- Verify the registrant’s corporate name and continuity between Payment Data Systems, Inc. and Usio, Inc.
- Assess whether transaction volumes, merchant additions, and the October 2016 PIN-less debit product improved revenue and profitability after the reporting date.
- Confirm recovery of the approximately $236,850 ACH overfunding and whether the $200,000 reserve was adequate.
- Review cash availability excluding restricted cash and settlement-processing balances, which are not generally available for ordinary corporate use.
- Monitor the derivative compensation lawsuit, related legal costs, and potential executive employment-agreement payments.
- Evaluate the effect of the shortened Akimbo software amortization period and continuing stock-based compensation on future earnings.
- Review the company’s ability to realize deferred tax assets and net operating loss carryforwards given the reported losses and valuation allowance.