Usio, Inc. (formerly Payment Data Systems, Inc.) — Q1 2015 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2015, with comparative results for the three months ended March 31, 2014. The company provides ACH, credit, debit, prepaid-card, and online payment-processing services. The Akimbo Financial asset acquisition closed on December 22, 2014, adding prepaid-card operations.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $3.742 million | $2.731 million | +37% |
| Cost of services | $2.304 million | $2.092 million | +10% |
| Operating income | $694,721 | $170,464 | +307% |
| Operating margin | 18.6% | 6.2% | Improved |
| Net income | $708,617 | $161,738 | +338% |
| Net margin | 18.9% | 5.9% | Improved |
| Net cash from operating activities | $10.587 million | $28.071 million | Down $17.484 million |
| Capital expenditures | $253,933 | $30,233 | Higher |
- Cash and cash equivalents were $65.323 million at March 31, 2015, up from $54.990 million at December 31, 2014.
- Working capital was $3.459 million, compared with $2.854 million at year-end 2014.
- Customer deposits payable were $61.949 million, up $9.762 million during the quarter. These balances include security deposits and cash held in transit for merchants and are a significant driver of reported cash and operating cash flow.
- Total assets were $71.591 million and stockholders’ equity was $7.802 million at March 31, 2015.
- The filing does not report outstanding debt or interest-bearing borrowings; financing cash flows were zero.
- Basic and diluted EPS were reported as $0.01 and $0.00, respectively. Diluted weighted-average shares were 181.8 million, reflecting substantial dilutive securities.
Material changes versus the prior comparable period
- Payment volumes exceeded $797 million, the company’s second-highest quarterly total. ACH processing volume increased more than 61%; credit-card dollars processed increased 8% and transactions increased 3% year over year.
- Revenue growth reflected higher credit, debit, ACH, and return-transaction volumes, including volumes from newly acquired customers.
- Cost of services increased more slowly than revenue, supporting the improvement in operating margin.
- Other selling, general and administrative expense increased 53% to $588,574, including bonus compensation, legal and accounting fees, and other expenses.
- Stock-based compensation increased to $233,531 from $72,995, primarily due to Akimbo-related employees and a new chief financial officer. A $163,936 cancellation of previously recognized stock-based compensation partially offset the expense.
- Depreciation and amortization increased to $85,571 from $9,905 due primarily to amortization of software and intangible assets acquired from Akimbo.
- Operating cash flow declined despite higher net income because the increase in customer deposits was $9.762 million, versus $27.968 million in Q1 2014.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that ACH and card-processing trends, merchant additions, and transaction volumes were expected to continue increasing, but cautioned that profitability may not be sustained and future operating losses remain possible.
- The Akimbo MasterCard program went live on the company’s platform in early April 2015. The Akimbo Visa program was scheduled for decommissioning on May 30, 2015, with management expecting the transitioned program to become cash-flow positive by June 30, 2015.
- The company acquired Akimbo assets for $3 million in company stock. The purchase-price allocation included software, customer contracts, goodwill, and assumed liabilities.
- The company carried a $272,365 reserve for processing losses and a $43,838 allowance for doubtful accounts at March 31, 2015.
- Brightmoor Christian Church sued the company over $181,709 of allegedly fraudulent credit transactions. The company disputes liability, cites a contractual liability limitation, and had not accrued an additional loss beyond its existing merchant-loss reserve. Unrecovered funds incurred to date were $13,710, excluding attorney fees.
- The company reported an accumulated deficit of $49.362 million despite Q1 2015 net income and stated that it had no material off-balance-sheet arrangements.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material changes were reported to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the sustainability and quality of cash generation after excluding cash held for customers and deposits payable.
- Assess whether the Akimbo MasterCard migration achieved the projected cash-flow-positive target and whether transition costs or customer attrition affected results.
- Review exposure to merchant chargebacks, processing losses, customer insolvencies, and the Brightmoor litigation.
- Evaluate the effect of stock-based compensation, cancellations of awards, and the large difference between basic and diluted share counts on per-share economics.
- Review the realizability of the $1.6 million recognized deferred tax asset, the $12.2 million valuation allowance, and approximately $40.8 million of net operating-loss carryforwards.
- Verify whether revenue growth and margins continued after Q1 2015, particularly as processing volumes and third-party network costs changed.