ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
OFFICIAL PAYMENTS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
December 31, 2012
|
|
|
September 30, 2012
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
53,291
|
|
|
$
|
39,071
|
|
Accounts receivable, net
|
|
|
5,680
|
|
|
|
5,304
|
|
Settlements receivable
|
|
|
21,878
|
|
|
|
15,291
|
|
Prepaid expenses and other current assets
|
|
|
1,726
|
|
|
|
1,692
|
|
Total current assets
|
|
|
82,575
|
|
|
|
61,358
|
|
|
|
|
|
|
|
|
|
|
Property, equipment and software, net
|
|
|
17,730
|
|
|
|
17,368
|
|
Goodwill
|
|
|
17,642
|
|
|
|
17,582
|
|
Other intangible assets, net
|
|
|
954
|
|
|
|
1,107
|
|
Other assets
|
|
|
466
|
|
|
|
509
|
|
Total assets
|
|
$
|
119,367
|
|
|
$
|
97,924
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
76
|
|
|
$
|
74
|
|
Settlements payable
|
|
|
38,423
|
|
|
|
17,019
|
|
Accrued compensation liabilities
|
|
|
2,530
|
|
|
|
6,373
|
|
Accrued discount fees
|
|
|
8,793
|
|
|
|
5,616
|
|
Other accrued liabilities
|
|
|
2,871
|
|
|
|
2,201
|
|
Deferred income
|
|
|
298
|
|
|
|
284
|
|
Total current liabilities
|
|
|
52,991
|
|
|
|
31,567
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
|
57
|
|
|
|
67
|
|
Other liabilities
|
|
|
1,051
|
|
|
|
1,103
|
|
Total other liabilities
|
|
|
1,108
|
|
|
|
1,170
|
|
Total liabilities
|
|
|
54,099
|
|
|
|
32,737
|
|
|
|
|
|
|
|
|
|
|
Contingencies and commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock, no par value; authorized shares: 4,579;
no shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock $0.01 par value, and paid-in capital; shares authorized: 44,260; shares issued: 20,885 and 20,817; shares outstanding: 16,710 and 16,642
|
|
|
196,035
|
|
|
|
195,126
|
|
Treasury stock—at cost, 4,175 shares
|
|
|
(31,383
|
)
|
|
|
(31,383
|
)
|
Accumulated deficit
|
|
|
(99,384
|
)
|
|
|
(98,556
|
)
|
Total shareholders' equity
|
|
|
65,268
|
|
|
|
65,187
|
|
Total liabilities and shareholders' equity
|
|
$
|
119,367
|
|
|
$
|
97,924
|
|
See Notes to Consolidated Financial Statements
OFFICIAL PAYMENTS HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three months ended
December 31,
|
|
(in thousands, except per share data)
|
|
2012
|
|
|
2011
|
|
Revenues
|
|
$
|
33,416
|
|
|
$
|
34,837
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
23,501
|
|
|
|
23,876
|
|
General and administrative
|
|
|
6,810
|
|
|
|
9,186
|
|
Selling and marketing
|
|
|
2,140
|
|
|
|
1,508
|
|
Depreciation and amortization
|
|
|
1,799
|
|
|
|
1,903
|
|
Total costs and expenses
|
|
|
34,250
|
|
|
|
36,473
|
|
Loss from continuing operations before other income and income taxes
|
|
|
(834
|
)
|
|
|
(1,636
|
)
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest (expense) income, net
|
|
|
(1
|
)
|
|
|
1
|
|
Total other (expense) income
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(835
|
)
|
|
|
(1,635
|
)
|
Income tax benefit
|
|
|
7
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(828
|
)
|
|
|
(1,635
|
)
|
Loss from discontinued operations, net
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(828
|
)
|
|
$
|
(1,643
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share—Basic and diluted:
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
From discontinued operations
|
|
|
—
|
|
|
|
—
|
|
Loss per share—Basic and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in computing:
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
|
16,649
|
|
|
|
16,642
|
|
See Notes to Consolidated Financial Statements
OFFICIAL PAYMENTS HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
|
|
Three months ended
December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(828
|
)
|
|
$
|
(1,643
|
)
|
Less: loss from discontinued operations, net
|
|
|
—
|
|
|
|
(8
|
)
|
Loss from continuing operations, net
|
|
|
(828
|
)
|
|
|
(1,635
|
)
|
Non-cash items included in net loss:
|
|
|
|
|
|
|
|
|
Restructuring costs
|
|
|
—
|
|
|
|
1,196
|
|
Depreciation and amortization
|
|
|
1,799
|
|
|
|
1,903
|
|
Deferred rent
|
|
|
(10
|
)
|
|
|
(1
|
)
|
Share-based compensation
|
|
|
568
|
|
|
|
467
|
|
Net effect of changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(376
|
)
|
|
|
(1,073
|
)
|
Settlement processing assets and payables, net
|
|
|
14,817
|
|
|
|
5,551
|
|
Prepaid expenses and other assets
|
|
|
350
|
|
|
|
192
|
|
Accounts payable and accrued liabilities
|
|
|
11
|
|
|
|
1,947
|
|
Other long term liabilities
|
|
|
14
|
|
|
|
79
|
|
Deferred income
|
|
|
(51
|
)
|
|
|
(71
|
)
|
Cash provided by operating activities from continuing operations
|
|
|
16,294
|
|
|
|
8,555
|
|
Cash used in operating activities from discontinued operations
|
|
|
—
|
|
|
|
(8
|
)
|
Cash provided by operating activities
|
|
|
16,294
|
|
|
|
8,547
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capitalized internally developed software
|
|
|
(1,272
|
)
|
|
|
(600
|
)
|
Purchase of equipment and software
|
|
|
(736
|
)
|
|
|
(818
|
)
|
Earn out payments—ChoicePay
|
|
|
(60
|
)
|
|
|
(30
|
)
|
Cash used in investing activities
|
|
|
(2,068
|
)
|
|
|
(1,448
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital lease obligations and other financing arrangements
|
|
|
(6
|
)
|
|
|
(8
|
)
|
Cash used in financing activities
|
|
|
(6
|
)
|
|
|
(8
|
)
|
Net increase in cash and cash equivalents
|
|
|
14,220
|
|
|
|
7,091
|
|
Cash and cash equivalents at beginning of period
|
|
|
39,071
|
|
|
|
39,760
|
|
Cash and cash equivalents at end of period
|
|
$
|
53,291
|
|
|
$
|
46,851
|
|
OFFICIAL PAYMENTS HOLDINGS, INC.
CONSOLIDATED
SUPPLEMENTAL CASH FLOW INFORMATION
(unaudited)
|
|
Three months ended
December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
:
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
Interest
|
|
$
|
—
|
|
|
$
|
—
|
|
Income taxes paid, net
|
|
|
28
|
|
|
|
—
|
|
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1—NATURE OF OPERATIONS AND BASIS OF PRESENTATION
NATURE OF OPERATIONS
Official Payments Holdings, Inc., or Official Payments (formerly known as Tier Technologies, Inc.) primarily provides electronic payment solutions ("Payment Solutions"), which are provided by our wholly owned subsidiary Official Payments Corporation, or OPC. We provide payment solutions to the following types of Clients:
·
|
Federal, State and Local governments—which includes federal and state income and business tax payments, and local real property tax payments;
|
·
|
Higher Education—which consists of payments to post-secondary educational institutions;
|
·
|
Utility—which includes payments to private and public utilities;
|
·
|
Charitable organizations; and
|
·
|
Other—which includes rent, insurance, and K-12 education meal payments and fee payments.
|
We also operate in one other business area, our Voice and Systems Automation, or VSA, business. We expect to wind down our VSA business during fiscal year 2014, because we do not believe the services are compatible with our long-term strategic direction. VSA
provides call center interactive voice response systems and support services, including customization, installation and maintenance.
For additional information about our Payment Solutions and VSA operations, see Note 10—Segment Information.
BASIS OF PRESENTATION
Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America, or US GAAP, for interim financial information and in accordance with Regulation S-X, Article 10, under the Securities Exchange Act of 1934, as amended. They are unaudited and exclude certain disclosures required for annual financial statements. We believe we have made all necessary adjustments so that our Consolidated Financial Statements are presented fairly and that all such adjustments are of a normal recurring nature.
Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported on our Consolidated Financial Statements and accompanying notes. We believe that near-term changes could reasonably affect the following estimates: collectability of receivables; share-based compensation; valuation of goodwill, intangibles and investments; contingent liabilities; effective tax rates; and deferred taxes and the associated valuation allowance. Although we believe the estimates and assumptions used in preparing our Consolidated Financial Statements and notes thereto are reasonable in light of known facts and circumstances, actual results could differ materially.
NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS
FASB ASU 2011-04
. In May 2011, the FASB issued FASB ASU 2011-04, which clarifies some existing concepts, eliminates wording differences between US GAAP and International Financial Reporting Standards, or IFRS, and changes some of the principles and disclosures of fair value measurement to achieve convergence between US GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. We adopted this ASU effective January 1, 2012. The initial adoption of this ASU did not have a material impact on our financial position or results of operations.
FASB ASU 2011-08
. In September 2011, the FASB issued FASB ASU 2011-08, which allows entities testing for impairment of goodwill the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that the fair value of a reporting unit is more than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test. We adopted this ASU effective October 1, 2012. We do not believe the adoption of this ASU will have a material impact on our financial position or results of operations.
FASB ASU 2011-11
. In December 2011, the FASB issued FASB ASU 2011-11, which requires entities to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on an entity's financial position. The amendments require enhanced disclosures about financial instruments and derivative instruments that are either (i) offset in accordance with current literature or (ii) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. This standard will become effective for us beginning October 2013. The disclosures required by ASU 2011-11 will be applied retrospectively for all comparative periods presented. We are currently evaluating the impact of ASU 2011-11.
FASB ASU 2012-02.
In July 2012 the FASB issued FASB ASU 2012-02 regarding the testing of indefinite-lived intangible assets for impairment. An entity will have an option not to calculate annually the fair value of an indefinite-lived intangible asset if the entity determines that it is not more likely than not that the asset is impaired. Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance. This is effective
for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. While we have not completed our annual or interim impairment tests to date in fiscal 2013, we do not believe the adoption of this standard will have any impact on our financial statements or results of operations.
NOTE 3—INVESTMENTS
At December 31, 2012 all of our investments are classified as cash equivalents and are included in
Cash and Cash Equivalents
on our Consolidated Balance Sheets and consist of money market funds. Unrestricted investments with original maturities of 90 days or less (as of the date that we purchased the securities) are classified as cash equivalents.
NOTE 4—FAIR VALUE MEASUREMENTS
Fair value is defined under US GAAP as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs that may be used to measure fair value as follows:
Level 1—
|
Quoted prices in active markets for identical assets or liabilities.
|
Level 2—
|
Inputs other than quoted prices in active markets, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
Level 3—
|
Unobservable inputs, for which there is little or no market data for the assets or liabilities.
|
The following table presents the fair value hierarchy for our financial assets, comprised of money market investments, measured at fair value on a recurring basis as of December 31, 2012 and September 30, 2012.
Fair value measurements as of December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
|
|
$
|
8,259
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,259
|
|
Fair value measurements as of September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
|
|
|
8,256
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,256
|
|
The carrying amounts of certain financial instruments, including cash equivalents, restricted cash, accounts receivable, settlements receivable, accounts payable, settlements payable, and accrued liabilities, approximate fair value due to their short maturities.
NOTE 5—CLIENT CONCENTRATION AND RISK
We derive a significant portion of our revenue from a limited number of government Clients. Typically, our contracts with these Clients allow them to terminate all or part of the contract for convenience or cause. We have one Client, the Internal Revenue Service, or IRS, which is the source of more than 10% of our revenues from Payment Solutions operations.
The following table shows the revenues specific to our contract with the IRS:
|
|
Three months ended December 31,
|
|
(in thousands, except percentages)
|
|
2012
|
|
|
2011
|
|
Revenue
|
|
$
|
4,392
|
|
|
$
|
4,379
|
|
Percentage of Payment Solutions revenue
|
|
|
13.2
|
%
|
|
|
12.8
|
%
|
Accounts receivable, net.
We reported $5.7 million and $5.3 million in
Accounts receivable, net
on our Consolidated Balance Sheets for December 31, 2012 and September 30, 2012, respectively. This balance represents the
receivables from our Clients and other parties that we expect to receive. Approximately 2.8% and 3.1% of the balances reported at December 31, 2012 and September 30, 2012, respectively, represent accounts receivable, net that is attributable to operations that we intend to wind down during fiscal 2013 and fiscal 2014. The remainder of the
Accounts receivable, net
balance is composed of receivables from certain of our Payment Solutions Clients. None of our Clients have receivables that exceed 10% of our total receivable balance. As of December 31, 2012 and September 30, 2012,
Accounts receivable, net
included an allowance for uncollectible accounts of $0.2 million and $0.2 million, respectively, representing the balance of receivables for which we believe collectability is not reasonably assured.
Settlements receivable.
As of December 31, 2012 and September 30, 2012, we reported $21.9 million and $15.3 million, respectively, in
Settlements receivable
on our Consolidated Balance Sheets, which represents amounts due from credit or debit card companies or banks. Individuals and businesses settle their obligations to our various Clients using credit or debit cards or via ACH payments. We record a receivable for the amount due from the credit or debit card company or bank, and a corresponding payable to the Client. Once we receive confirmation the funds have been received, we settle the obligation to the Client. See Note 8—Contingencies and Commitments for information about the settlements payable to our Clients.
NOTE 6—GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
As a result of our acquisition of substantially all of the assets of ChoicePay, Inc. in January 2009, ChoicePay, Inc. has the potential to receive an earn out of up to $2.0 million through December 31, 2013, based upon a percentage of the gross profits generated by specific Client contracts. Any earn out is recorded as additional goodwill associated with the asset acquisition. The following table summarizes changes in the carrying amount of goodwill during the three months ended December 31, 2012:
(in thousands)
|
|
Payment Solutions
|
|
|
VSA
|
|
|
Discontinued Operations
|
|
|
Total
|
|
Goodwill
|
|
$
|
17,582
|
|
|
$
|
—
|
|
|
$
|
23,041
|
|
|
$
|
40,623
|
|
Accumulated impairment loss
|
|
|
—
|
|
|
|
—
|
|
|
|
(23,041
|
)
|
|
|
(23,041
|
)
|
Balance at September 30, 2012
|
|
|
17,582
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,582
|
|
ChoicePay, Inc. earn-out payments
|
|
|
60
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60
|
|
Goodwill
|
|
|
17,642
|
|
|
|
—
|
|
|
|
23,041
|
|
|
|
40,683
|
|
Accumulated impairment loss
|
|
|
—
|
|
|
|
—
|
|
|
|
(23,041
|
)
|
|
|
(23,041
|
)
|
Balance at December 31, 2012
|
|
$
|
17,642
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,642
|
|
We test goodwill for impairment during the fourth quarter of each fiscal year at the reporting unit level using a fair value approach. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, we would evaluate goodwill for impairment between annual tests. No such events occurred during the three months ended December 31, 2012.
OTHER INTANGIBLE ASSETS, NET
All of our other intangible assets are finite lived and included in Continuing Operations. We test our other intangible assets for impairment when an event occurs or circumstances change that would more likely than not reduce the fair value of the assets below the carrying value. No such events occurred during the three months ended December 31, 2012. The following table summarizes
Other intangible assets, net
, for our Continuing Operations:
|
|
|
December 31, 2012
|
|
|
September 30, 2012
|
|
(in thousands)
|
Amortization period
|
|
Gross
|
|
|
Accumulated amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated amortization
|
|
|
Net
|
|
Client relationships
|
8-15 years
|
|
$
|
26,059
|
|
|
$
|
(25,414
|
)
|
|
$
|
645
|
|
|
$
|
26,059
|
|
|
$
|
(25,362
|
)
|
|
$
|
697
|
|
Technology and research and development
|
5 years
|
|
|
1,842
|
|
|
|
(1,576
|
)
|
|
|
266
|
|
|
|
1,842
|
|
|
|
(1,488
|
)
|
|
|
354
|
|
Trademarks
|
6-10 years
|
|
|
3,463
|
|
|
|
(3,420
|
)
|
|
|
43
|
|
|
|
3,463
|
|
|
|
(3,407
|
)
|
|
|
56
|
|
Other intangible assets, net
|
|
|
$
|
31,364
|
|
|
$
|
(30,410
|
)
|
|
$
|
954
|
|
|
$
|
31,364
|
|
|
$
|
(30,257
|
)
|
|
$
|
1,107
|
|
During the three months ended December 31, 2012 and 2011, we recognized $0.2 million and $0.9 million, respectively, of amortization expense on our other intangible assets.
NOTE 7—INCOME TAXES
Significant components of the provision for income taxes at the consolidated level, which includes Continuing Operations and Discontinued Operations, are as follows:
|
|
Three months ended December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Current income tax (benefit) provision:
|
|
|
|
|
|
|
State
|
|
$
|
(7
|
)
|
|
$
|
—
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
Total (benefit) provision for income taxes
|
|
$
|
(7
|
)
|
|
$
|
—
|
|
We did not record a federal tax provision due to availability of net operating loss carryforwards. Our effective tax rates differ from the federal statutory rate due to state income taxes, and the charge for establishing a valuation allowance on our net deferred tax assets. Our future tax rate may vary due to a variety of factors, including, but not limited to: the relative income contribution by tax jurisdiction; changes in statutory tax rates; changes in our valuation allowance; our ability to utilize net operating losses and any non-deductible items related to acquisitions or other nonrecurring charges. Deferred tax assets are reduced by a valuation allowance, when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
LIABILITIES FOR UNRECOGNIZED TAX BENEFITS
We have examined our current and past tax positions taken, and have concluded that it is more likely than not these tax positions will be sustained in the event of an examination and that there would be no material impact to our effective tax rate. In the event interest or penalties had been accrued, our policy is to include these amounts related to unrecognized tax benefits in income tax expense. As of December 31, 2012, we had no accrued interest or penalties related to uncertain tax positions. We file tax returns with the IRS and in various states in which the statute of limitations extend to the tax year ended September 30, 2007 in certain jurisdictions. As of December 31, 2012, we were not engaged in a federal audit.
As of December 31, 2012, we had no unrecognized tax benefits.
NOTE 8—CONTINGENCIES AND COMMITMENTS
LEGAL ISSUES
From time to time during the normal course of business, we are a party to litigation and/or other claims. At December 31, 2012, none of these matters was expected to have a material impact on our financial position, results of operations or cash flows. At December 31, 2012 and September 30, 2012, we had legal accruals of $0.5 million and $0.5 million, respectively, based upon estimates of certain key legal matters.
SETTLEMENTS PAYABLE
Settlements payable
on our Consolidated Balance Sheets consists of payments due primarily to utilities, higher education, and public sector Clients. As individuals and businesses settle their obligations to our various Clients, we generate a receivable from the credit or debit card company and a payable to the Client. Once we receive confirmation the funds have been received by the card company, we settle the liabilities to the Client. This process may take several business days to complete and can result in unsettled funds at the end of a reporting period. We had $38.4 million and $17.0 million, respectively, of settlements payable at December 31, 2012 and September 30, 2012.
CREDIT RISK
We maintain our cash in bank deposit accounts and money market accounts. Typically, the balance in a number of these accounts significantly exceeds federally insured limits. We have not experienced any losses in such accounts and believe that any associated credit risk is
de minimis
. At December 31, 2012, our investments were comprised of money market funds. Our investments, and cash and cash equivalents approximate fair value.
PERFORMANCE, BID AND GUARANTEE PAYMENT BONDS
Pursuant to the terms of money transmitter licenses we hold with individual states, we are required to provide guarantee payment bonds from a licensed surety. At December 31, 2012, we had $13.5 million of bonds posted in connection with state money transmitter licenses. There were no claims pending against any of these bonds.
Under certain contracts or bids, we are required to obtain performance or bid bonds from a licensed surety and to post the performance bonds with our Clients. Fees for obtaining the bonds are expensed over the life of each bond. At December 31, 2012, we had $4.1 million of bonds posted with Clients. There were no claims pending against any of these bonds.
In February 2009, we completed the sale of our Unemployment Insurance, or UI, business as part of our divestment of several business units. Our sale of the UI business was completed pursuant to an Asset Purchase Agreement dated February 6, 2009 and included the State of Indiana Unemployment Insurance contract as an asset. We retain certain contractual liabilities in connection with completion of the project, and we continue as the indemnitor under a $2.4 million performance bond on the continuing contract with the State of Indiana. Both the State and the prime contractor under the State of Indiana Unemployment Insurance contract have asserted that we breached that contract by transferring it without their consent. In 2009, as part of a contractually required mediation we offered a $420,000 contribution towards project completion; however the matter was not resolved. An additional mediation is scheduled to take place in February 2013. We anticipate the performance bond remaining in place until final resolution of the matter.
Amounts accrued for such contingencies are included in other accrued liabilities within our consolidated balance sheets.
EMPLOYMENT AGREEMENTS
As of December 31, 2012, we had employment and change of control agreements with several key employees. If certain termination or change of control events were to occur under these contracts as of December 31, 2012, we would have been required to pay up to $5.0 million.
OPERATING AND CAPITAL LEASE OBLIGATIONS
As of December 31, 2012, our principal lease commitments consisted of obligations outstanding under operating leases. We lease most of our facilities under operating leases that expire at various dates through 2018. There have been no material changes in our principal lease commitments compared to those discussed in the Form 10-K for the year ended September 30, 2012.
INDEMNIFICATION AGREEMENTS
Our Certificate of Incorporation obligates us to indemnify our directors and officers against all expenses, judgments, fines and amounts paid in settlement for which such persons become liable as a result of acting in any capacity on behalf of Official Payments, if the director or officer met the standard of conduct specified in the Certificate, and subject to the limitations specified in the Certificate. In addition, we have indemnification agreements with certain of our directors and officers, which supplement the indemnification obligations in our Certificate. These agreements generally obligate us to indemnify the indemnitees against expenses incurred because of their status as a director or officer, if the indemnitee met the standard of conduct specified in the agreement, and subject to the limitations specified in the agreement.
NOTE 9—RESTRUCTURING
During the quarter ended December 31, 2011, we moved our principal executive offices from Reston, Virginia to Norcross, Georgia to reduce general and administrative costs and take advantage of the electronic payments industry employee resources in the Atlanta area. We incurred total expenses of approximately $1.6 million, including $0.1 million of employee relocation cost and $1.5 million of facilities
related restructuring cost during the year ended September 30, 2012. We have vacated and sublet our Reston, Virginia facility as of December 31, 2011. In connection with vacating and subletting our Reston, Virginia facility in December 2011 we wrote off certain balances associated with our original lease agreement including net leasehold improvements of $1.0 million, and deferred rent. We also recorded an obligation for the remaining lease payments less sublease income. Our Reston, Virginia facility lease ends in April 2018. For fiscal 2012 we received $0.2 million in sublease payments. We expect to receive $3.1 million in future sublease payments over the remaining terms of the subleases. The restructuring charge is included in General and administrative expense in the accompanying Consolidated Statements of Operations and is within the Payment Solutions reporting segment.
The following table summarizes restructuring liabilities activity associated with Continuing Operations for the three months ended December 31, 2012:
(in thousands)
|
|
Severance
|
|
|
Relocation
|
|
|
Facilities closures
|
|
|
Total
|
|
Balance at September 30, 2012
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,219
|
|
|
$
|
1,219
|
|
Cash payments
|
|
|
—
|
|
|
|
—
|
|
|
|
(71
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,148
|
|
|
$
|
1,148
|
|
NOTE 10—SEGMENT INFORMATION
Our business consists of two reportable segments: Payment Solutions and Voice Systems Automation, or VSA. The following table presents the results of operations for our Payment Solutions operations and our VSA operations for the three months ended December 31, 2012 and 2011.
(in thousands)
|
|
Payment Solutions
|
|
|
VSA
|
|
|
Total
|
|
Three months ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
33,282
|
|
|
$
|
134
|
|
|
$
|
33,416
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
23,453
|
|
|
|
48
|
|
|
|
23,501
|
|
General and administrative
|
|
|
6,802
|
|
|
|
8
|
|
|
|
6,810
|
|
Selling and marketing
|
|
|
2,140
|
|
|
|
—
|
|
|
|
2,140
|
|
Depreciation and amortization
|
|
|
1,799
|
|
|
|
—
|
|
|
|
1,799
|
|
Total costs and expenses
|
|
|
34,194
|
|
|
|
56
|
|
|
|
34,250
|
|
(Loss) income from continuing operations before other income and income taxes
|
|
|
(912
|
)
|
|
|
78
|
|
|
|
(834
|
)
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
Total other expense
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
(Loss) income from continuing operations before taxes
|
|
|
(913
|
)
|
|
|
78
|
|
|
|
(835
|
)
|
Income tax benefit
|
|
|
7
|
|
|
|
—
|
|
|
|
7
|
|
(Loss) income from continuing operations
|
|
$
|
(906
|
)
|
|
$
|
78
|
|
|
$
|
(828
|
)
|
(in thousands)
|
|
Payment Solutions
|
|
|
VSA
|
|
|
Total
|
|
Three months ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
34,302
|
|
|
$
|
535
|
|
|
$
|
34,837
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
23,784
|
|
|
|
92
|
|
|
|
23,876
|
|
General and administrative
|
|
|
9,056
|
|
|
|
130
|
|
|
|
9,186
|
|
Selling and marketing
|
|
|
1,508
|
|
|
|
—
|
|
|
|
1,508
|
|
Depreciation and amortization
|
|
|
1,903
|
|
|
|
—
|
|
|
|
1,903
|
|
Total costs and expenses
|
|
|
36,251
|
|
|
|
222
|
|
|
|
36,473
|
|
(Loss) income from continuing operations before other income and income taxes
|
|
|
(1,949
|
)
|
|
|
313
|
|
|
|
(1,636
|
)
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
Total other income
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
(Loss) income from continuing operations before taxes
|
|
|
(1,948
|
)
|
|
|
313
|
|
|
|
(1,635
|
)
|
Income tax benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
(Loss) income from continuing operations
|
|
$
|
(1,948
|
)
|
|
$
|
313
|
|
|
$
|
(1,635
|
)
|
Our total assets for each of these businesses are shown in the following table:
(in thousands)
|
|
December 31, 2012
|
|
|
September 30, 2012
|
|
Continuing operations:
|
|
|
|
|
|
|
Payment Solutions
|
|
$
|
119,205
|
|
|
$
|
97,756
|
|
VSA
|
|
|
162
|
|
|
|
168
|
|
Total assets
|
|
$
|
119,367
|
|
|
$
|
97,924
|
|
NOTE 11—SHARE-BASED PAYMENT
Stock options are issued under the Amended and Restated 2004 Stock Incentive Plan, or the Plan. The Plan provides our Board of Directors discretion in creating employee equity incentives, including incentive and non-statutory stock options. Options granted in and after August 2010 typically vest over four years, with 25% of the shares subject to each grant vesting on the first anniversary of the grant date and an additional 1/48
th
of the shares vesting each month thereafter until the fourth anniversary of the grant date, and expire ten years from the grant date. Options granted prior to August 2010 typically vest over five years, with 20% of the shares subject to each grant vesting on each of the first five anniversaries of the grant date, and expire ten years from the grant date. At December 31, 2012, there were 1,070,638 shares of common stock available for future issuance under the Plan.
STOCK OPTIONS—AMENDED AND RESTATED 2004 STOCK INCENTIVE PLAN
The following table shows the weighted-average assumptions we used to calculate fair value of share-based options using the Black-Scholes model, as well as the weighted-average fair value of options granted and the weighted-average intrinsic value of options exercised. We granted 347,500 options from the Plan during the three months ended December 31, 2012.
|
|
Three months ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Weighted-average assumptions used in Black-Scholes model:
|
|
|
|
|
|
|
Expected period that options will be outstanding
(in years)
|
|
|
5.00
|
|
|
|
5.00
|
|
Interest rate
(based on U.S. Treasury yields at time of grant)
|
|
|
0.62
|
%
|
|
|
0.96
|
%
|
Volatility
|
|
|
48.10
|
%
|
|
|
48.69
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Weighted-average fair value of options granted
|
|
$
|
2.14
|
|
|
$
|
1.49
|
|
Weighted-average intrinsic value of options exercised
(in thousands)
|
|
|
32
|
|
|
|
—
|
|
Expected volatilities are based on historical volatility of our stock. In addition, we used historical data to estimate option exercise and employee termination within the valuation model.
STOCK OPTIONS
Stock option activity for all option grants for the three months ended December 31, 2012 is as follows:
|
|
|
|
|
Weighted-average
|
|
|
|
(in thousands, except per share data)
|
|
Shares under option
|
|
|
Exercise price
|
|
Remaining contractual term
|
|
Aggregate intrinsic value
|
|
Options outstanding at September 30, 2012
|
|
|
3,160
|
|
|
$
|
5.94
|
|
|
|
|
|
Granted
|
|
|
348
|
|
|
|
5.22
|
|
|
|
|
|
Exercised
|
|
|
(68
|
)
|
|
|
5.02
|
|
|
|
$
|
32
|
|
Forfeitures or expirations
|
|
|
(146
|
)
|
|
|
8.80
|
|
|
|
|
|
|
Options outstanding at December 31, 2012
|
|
|
3,294
|
|
|
$
|
5.75
|
|
7.56 years
|
|
$
|
1,988
|
|
Options vested and expected to vest at December 31, 2012
|
|
|
2,857
|
|
|
$
|
5.87
|
|
7.43 years
|
|
$
|
1,677
|
|
Options exercisable at December 31, 2012
|
|
|
1,595
|
|
|
$
|
6.70
|
|
6.33 years
|
|
$
|
631
|
|
Stock-based compensation expense for all stock-based compensation awards granted was based on the grant-date fair value using the Black-Scholes model. We recognize compensation expense for stock option awards on a ratable basis over the requisite service period of the award. Stock-based compensation expense was $0.6 million for the three months ended December 31, 2012 and $0.3 million for the three months ended December 31, 2011. In the three months ending December 31, 2012, former employees exercised 67,950 options for an aggregate purchase price of $341,000. The funds related to this exercise were received in January 2013. At December 31, 2012 this exercise was reflected in prepaid expenses and other current assets in the accompanying financial statements.
As of December 31, 2012, a total of $2.8 million of unrecognized compensation cost related to stock options, net of estimated forfeitures, was expected to be recognized over a 2.7 year weighted-average period.
BOARD OF DIRECTOR RESTRICTED STOCK UNITS
Our non-employee Board members are awarded 9,000 restricted stock units upon their election to our Board at our annual meeting. These are liability based awards. The following awards are currently outstanding:
|
|
Total restricted stock units awarded
|
|
Vesting date
|
2012 annual meeting
|
|
|
63,000
|
|
April 13, 2013
|
The amount payable to each member at the vesting date will be the equivalent of 9,000 restricted stock units multiplied by the closing price of our stock on the vesting date. The following table provides information on the expense related to the restricted stock unit awards to the Board of Directors:
(in thousands)
|
|
2012 annual meeting
|
|
Expense recognized for the quarter ended December 31, 2012
|
|
$
|
109
|
|
Expense recognized through December 31, 2012
|
|
|
252
|
|
Estimated expense to be recognized through vesting date
|
|
(a)
|
|
a.
Liability awards are revalued at the end of every quarter based on the closing price of our stock on the last day of the quarter. We are unable to estimate the expense expected to be recognized for these awards.
|
|
NOTE 12—LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per share:
|
|
Three months ended December 31,
|
|
(in thousands, except per share data)
|
|
2012
|
|
|
2011
|
|
Numerator:
(Loss) income from:
|
|
|
|
|
|
|
Continuing operations, net of income taxes
|
|
$
|
(828
|
)
|
|
$
|
(1,635
|
)
|
Discontinued operations, net of income taxes
|
|
|
—
|
|
|
|
(8
|
)
|
Net loss
|
|
$
|
(828
|
)
|
|
$
|
(1,643
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
16,649
|
|
|
|
16,642
|
|
Effects of dilutive common stock options
|
|
|
—
|
|
|
|
—
|
|
Adjusted weighted-average shares
|
|
|
16,649
|
|
|
|
16,642
|
|
Loss per basic and diluted share
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
From discontinued operations
|
|
|
—
|
|
|
|
—
|
|
Loss per basic and diluted share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
The following options were not included in the computation of diluted loss per share because the exercise price was greater than the average market price of our common stock for the periods stated and, therefore, the effect would be anti-dilutive:
|
|
Three months ended December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Weighted-average options excluded from computation of diluted loss per share
|
|
|
1,082
|
|
|
|
2,909
|
|
Due to net losses from Continuing Operations, we have excluded an additional 87,877 shares at December 31, 2012 of common stock equivalents from the calculation of diluted loss per share since their effect would have been anti-dilutive. There were no common stock equivalents that were dilutive at December 31, 2011.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. We have based these forward-looking statements on our current plans, expectations and beliefs about future events. Our actual performance could differ materially from the expectations and beliefs reflected in the forward-looking statements in this section and throughout this report, as a result of the risks, uncertainties and assumptions discussed under Item 1A. Risk Factors of this Quarterly Report on Form 10-Q and other factors discussed in this section. For more information regarding what constitutes a forward-looking statement, refer to the Private Securities Litigation Reform Act Safe Harbor Statement on page .
The following discussion and analysis is intended to help the reader understand the results of operations and financial condition of Official Payments Holdings, Inc. This discussion and analysis is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements.
OVERVIEW
Official Payments provides electronic payment solutions for over 3,000 Clients across all 50 states, Puerto Rico and the District of Columbia. Official Payments' solutions enable government agencies, educational institutions, utility companies and charitable organizations to accept payments by credit card, debit card and electronic check via mobile, web, telephone and point of sale environments.
SUMMARY OF OPERATING RESULTS
The following table provides a summary of our operating results by segment for the quarter ended December 31, 2012, for our Payment Solutions operations, our VSA operations and Discontinued Operations:
|
|
Three months ended December 31, 2012
|
|
(in thousands, except per share)
|
|
Net (loss) income
|
|
|
(Loss) earnings per share
|
|
Continuing Operations:
|
|
|
|
|
|
|
Payment Solutions
|
|
$
|
(906
|
)
|
|
$
|
(0.05
|
)
|
VSA
|
|
|
78
|
|
|
|
—
|
|
Total Continuing Operations
|
|
$
|
(828
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
Total Discontinued Operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(828
|
)
|
|
$
|
(0.05
|
)
|
2013 INITIATIVES
Platform Consolidation
We currently support three processing platforms, a legacy of past acquisitions. We believe that our Clients would be better served by combining our payment operations into a single processing platform. By using one platform we believe that we will be more efficient, more flexible in delivering new product features and services, and able to provide a better overall Client and Customer experience. We therefore intend to execute the previously discussed platform consolidation project with a target of being substantially complete by the end of calendar 2013. We estimate that this consolidation project will cost approximately $2.5 million, a substantial cost savings, compared to prior estimates.
Product
Building products that Customers want to use is important to our ability to sign up new Clients and to get their Customers and Constituents to make more payments utilizing Official Payments' services. We intend to supplement our current browser-based mobile solutions with the launch of native applications (apps) for iPad,
iPhone, and Android users in fiscal 2013. In addition, we believe that there is a significant opportunity to enable our Clients to deliver their bills electronically to their Customers and Constituents, so we plan to introduce a suite of electronic bill presentment solutions in fiscal 2013 as well.
Continued Operational Efficiency
We also continue to work to reduce our overall processing costs, including discount fees and other related transaction processing fees. We believe that promoting lower cost, higher margin payment types may result in both higher Customer adoption and higher Payment Solutions net revenue.
RESULTS OF OPERATIONS
The following table provides an overview of our results of operations for the three months ended December 31, 2012 and 2011:
|
|
Three months ended,
|
|
|
Variance
|
|
|
|
December 31,
|
|
|
2012 vs. 2011
|
|
(in thousands, except percentages)
|
|
2012
|
|
|
2011
|
|
|
|
$
|
|
|
|
%
|
|
Revenues
|
|
$
|
33,416
|
|
|
$
|
34,837
|
|
|
$
|
(1,421
|
)
|
|
|
(4.1
|
)%
|
Costs and expenses
|
|
|
34,250
|
|
|
|
36,473
|
|
|
|
(2,223
|
)
|
|
|
(6.1
|
)%
|
Loss from continuing operations before other income and income taxes
|
|
|
(834
|
)
|
|
|
(1,636
|
)
|
|
|
802
|
|
|
|
49.0
|
%
|
Other (expense) income
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
(200.0
|
)%
|
Loss from continuing operations before income taxes
|
|
|
(835
|
)
|
|
|
(1,635
|
)
|
|
|
800
|
|
|
|
48.9
|
%
|
Income tax benefit
|
|
|
7
|
|
|
|
—
|
|
|
|
7
|
|
|
|
100.0
|
%
|
Loss from continuing operations
|
|
|
(828
|
)
|
|
|
(1,635
|
)
|
|
|
807
|
|
|
|
49.4
|
%
|
Loss from discontinued operations, net
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
8
|
|
|
|
nm
|
|
Net loss
|
|
$
|
(828
|
)
|
|
$
|
(1,643
|
)
|
|
$
|
815
|
|
|
|
49.6
|
%
|
nm not meaningfu
l
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following sections describe the reasons for key variances in the results that we are reporting for Continuing Operations.
CONTINUING OPERATIONS
The Continuing Operations section of our Consolidated Statements of Operations includes the results of operations of our Payment Solutions business and our VSA operations.
Revenues (Continuing Operations)
The following table compares the revenues generated by our Continuing Operations during the three months ended December 31, 2012 and 2011:
|
|
Three months ended
December 31,
|
|
|
Variance
|
|
(in thousands, except percentages)
|
|
2012
|
|
|
2011
|
|
|
|
$
|
|
|
|
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Solutions
|
|
$
|
33,282
|
|
|
$
|
34,302
|
|
|
$
|
(1,020
|
)
|
|
|
(3.0
|
)%
|
VSA
|
|
|
134
|
|
|
|
535
|
|
|
|
(401
|
)
|
|
|
(75.0
|
)%
|
Total
|
|
$
|
33,416
|
|
|
$
|
34,837
|
|
|
$
|
1,421
|
|
|
|
(4.1
|
)%
|
The following sections discuss the key factors that caused the changes in our Revenues from Continuing Operations.
Payment Solutions Revenues:
Our core business consists of Payment Solutions that we offer to a variety of federal, state and local governments, utility companies, higher education institutions, and charitable organizations.
Our Clients utilize our services to provide electronic payment alternatives to their Customers or Constituents.
Examples of payment transactions made utilizing our services include federal and state income taxes, real property taxes, tuition payments, court and other fines, utility and other payment obligations and charitable donations. In the quarter ended December 31, 2012,
we processed approximately 4.7 million transactions, representing approximately $2.7 billion in payment volume.
We offer our Clients two primary pricing options: service fees paid by the Customer, and absorbed fees paid by the Client. These fees are generally calculated as a percentage of the underlying transaction, but may also be expressed as a fixed fee in some cases. Payment Solutions revenue is comprised primarily of such fees, which we refer to collectively as transaction fees.
Payment Solutions
generated $33.3 million of revenue during the three months ended December 31, 2012, a $1.0 million, or 3.0%, decrease over the three months ended December 31, 2011. During the three months ended December 31, 2012, we processed 6% fewer transactions than we did in the same period last year, while total dollars processed increased 7%. We are continuing to see increases in the average size of the payments we process. However, during the quarter ended December 31, 2012, we also saw a shift in the mix of payment types, towards ACH payments, many of which had a lower than average transaction fee than if payments had been made with a debit or credit card. Additionally, we offered a fixed fee debit card transaction fee to certain Clients during the quarter, which resulted in lower revenues than we have experienced with these Clients in prior periods. Therefore the overall increase in dollars processed did not result in a corresponding increase in revenue during this quarter.
Our gross margin from Continuing Operations is calculated by subtracting (i) direct costs from Continuing Operations from (ii) revenue from Continuing Operations. Our gross margin percentage is calculated by dividing (i) gross margin from Continuing Operations by (ii) revenue from Continuing Operations. Our gross margin and gross margin percentage depend on four principal factors: revenue, cost, the number of transactions processed, and the mix of transactions by Client type and payment type.
·
|
Our revenue from a transaction depends on whether we receive a flat fee or a fee based on a percentage of the transaction amount. The type and amount of a fee depends on many competitive considerations, including regulations of payment networks, industry competition, and the level of service that we provide to each Client. If our revenue is equal to a percentage of the amount paid, then revenue will also be affected by all the factors that cause payment amounts to vary.
|
·
|
Our direct cost for a transaction depends principally on how the payment is made. It costs us more to process certain types of transactions such as credit card payments and less to process other types of transactions such as electronic checks and debit card payments. We discuss our direct costs in more detail below.
|
·
|
The number of transactions we process and the mix of transactions among Client types are influenced by, among other things: Customers' and Constituents' payment preferences; the type of payments being processed (annual, monthly, quarterly, or periodic); the market penetration of electronic payment options among federal, state, and local governments, higher education institutions, utility companies and charitable organizations; the success of our sales and marketing efforts; and the usability of our products and services.
|
Each of these factors is subject to change, and as a result, our gross margin from Continuing Operations and our gross margin percentage may change at different rates.
VSA Revenues:
During the three months ended December 31, 2012, our VSA operations generated $0.1 million in revenues, down $0.4 million from the three months ended December 31, 2011. We expect to continue to see decreases in VSA revenues as we continue to complete and wind down existing maintenance projects over the next two years.
Direct Costs (Continuing Operations)
Direct costs, which represent costs directly attributable to providing services to Clients, consist predominantly of discount fees. Discount fees include payment card interchange fees, assessments payable to banks and payment card processing fees. Other, less significant costs include: payroll and payroll-related costs; travel-related expenditures; co-location and telephony costs; and the cost of hardware, software and equipment sold to VSA Clients. The following table provides a year-over-year comparison of direct costs incurred by our Continuing Operations during the three months ended December 31, 2012 and 2011:
|
|
Three months ended
December 31,
|
|
|
Variance
|
|
(in thousands, except percentages)
|
|
2012
|
|
|
2011
|
|
|
|
$
|
|
|
|
%
|
|
Direct costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Solutions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount fees
|
|
$
|
21,947
|
|
|
$
|
22,342
|
|
|
$
|
(395
|
)
|
|
|
(1.8
|
)%
|
Other costs
|
|
|
1,506
|
|
|
|
1,442
|
|
|
|
64
|
|
|
|
4.4
|
%
|
Total Payment Solutions
|
|
|
23,453
|
|
|
|
23,784
|
|
|
|
(331
|
)
|
|
|
(1.4
|
)%
|
VSA
|
|
|
48
|
|
|
|
92
|
|
|
|
(44
|
)
|
|
|
(47.8
|
)%
|
Total
|
|
$
|
23,501
|
|
|
$
|
23,876
|
|
|
$
|
(375
|
)
|
|
|
(1.6
|
)%
|
The following sections discuss the key factors that caused these changes in the direct costs for Continuing Operations.
Payment Solutions Direct Costs:
We experienced a decrease in our Payment Solutions
direct costs of $0.3 million, or 1.4%, during the three months ended December 31, 2012 compared to the same period last year. Discount fees decreased $0.4 million, or 1.8%, over the same period last year. This decrease in discount fees is attributable to the reduction in transaction volume and the related revenue. We continue to experience the benefits of the Durbin provisions of the Financial Reform Act. Although it is difficult to predict the long-term impact of Durbin on the debit and credit card markets, we anticipate realizing benefits from it throughout the remainder of our fiscal year 2013.
VSA Direct Costs:
During the three months ended December 31, 2012, direct costs from our VSA operations decreased $44,000, or 47.8%, from the same period last year. This decrease is consistent with the decrease in revenue volume we experienced as we continue to wind down these operations.
General and Administrative (Continuing Operations)
General and administrative (G&A) expenses consist primarily of: payroll and payroll-related costs for technology, product management, finance, accounting, legal and executive management; information systems; and outside services fees, including regulatory compliance, audits and other costs that we incur as a public company. Information systems expenses include costs to enhance our processing platforms as well as the costs associated with ongoing maintenance of these platforms. The following table compares general and administrative costs incurred by our Continuing Operations during the three months ended December 31, 2012 and 2011:
|
|
Three months ended
December 31,
|
|
|
Variance
|
|
(in thousands, except percentages)
|
|
2012
|
|
|
2011
|
|
|
|
$
|
|
|
|
%
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Solutions
|
|
$
|
6,802
|
|
|
$
|
9,056
|
|
|
$
|
(2,254
|
)
|
|
|
(24.9
|
)%
|
VSA
|
|
|
8
|
|
|
|
130
|
|
|
|
(122
|
)
|
|
|
(93.8
|
)%
|
Total
|
|
$
|
6,810
|
|
|
$
|
9,186
|
|
|
$
|
(2,376
|
)
|
|
|
(25.9
|
)%
|
Payment Solutions General and Administrative:
During the three months ended December 31, 2012, Payment Solutions incurred $6.8 million of general and administrative expenses, a $2.3 million, or 24.9%, decrease over the same period last year. This decrease is primarily attributable to the fact that there were no
restructuring charges recorded during the three months ended December 31, 2012 as compared with the three months ended December 31, 2011, when we recorded a restructuring charge of $1.5 million related to the relocation of our principal executive offices from Reston, Virginia to Norcross, Georgia. Additionally, the expense recorded for our management incentive plan in the three months ended December 31, 2012 was $1.4 million lower than the same expense in the previous year due to the fact that such expense is tied directly to our financial operating results.
Offsetting these quarter over quarter reductions was a $0.7 million increase in compensation and contract labor costs, which are primarily associated with our platform consolidation efforts.
VSA General and Administrative:
During the three months ended December 31, 2012, general and administrative costs for VSA operations decreased $0.1 million compared to the same period last year. This decrease was due to corporate allocations to this segment being lower as a result of its smaller contribution to the overall business as we continue to wind down these operations.
Selling and Marketing (Continuing Operations)
Selling and marketing expenses consist primarily of payroll and payroll-related costs for sales, large account management and marketing personnel, sales commissions, advertising and marketing expenditures and travel-related expenditures. We expect selling and marketing expenses to fluctuate from quarter to quarter due to a variety of factors, such as increased advertising and marketing expenses incurred in connection with the April 15th federal income tax payment deadline. The following table provides a year-over-year comparison of selling and marketing costs incurred in our Continuing Operations during the three months ended December 31, 2012 and 2011:
|
|
Three months ended
December 31,
|
|
|
Variance
|
|
(in thousands, except percentages)
|
|
2012
|
|
|
2011
|
|
|
|
$
|
|
|
|
%
|
|
Selling and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Solutions
|
|
$
|
2,140
|
|
|
$
|
1,508
|
|
|
$
|
632
|
|
|
|
41.9
|
%
|
VSA
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
2,140
|
|
|
$
|
1,508
|
|
|
$
|
632
|
|
|
|
41.9
|
%
|
Payment Solutions Selling and Marketing:
During the three months ended December 31, 2012, Payment Solutions incurred $2.1 million of selling and marketing expenses, a $0.6 million, or 41.9%, increase over the same period last year. We increased our advertising and co-marketing expenditures by $0.4 million during the three months ended December 31, 2012 as part of our efforts to increase penetration across our Client base and in anticipation of the 2013 IRS tax season. In addition, sales commissions and travel costs were each higher by $0.1 million during the three months ended December 31, 2012 as compared with same period last year.
VSA Selling and Marketing:
As a result of our decision to not pursue new contracts within VSA, we did not incur any selling and marketing expenses during the three months ended December 31, 2012 or December 31, 2011.
Depreciation and Amortization (Continuing Operations)
Depreciation and amortization represents expenses associated with the depreciation of equipment, software and leasehold improvements, as well as the amortization of intangible assets from acquisitions and other intellectual property not directly attributable to Client projects. The following table compares depreciation and amortization costs incurred by our Continuing Operations during the three months ended December 31, 2012 and 2011:
19
|
|
Three months ended
December 31,
|
|
|
Variance
|
|
(in thousands, except percentages)
|
|
2012
|
|
|
2011
|
|
|
|
$
|
|
|
|
%
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Solutions
|
|
$
|
1,799
|
|
|
$
|
1,903
|
|
|
$
|
(104
|
)
|
|
|
5.5
|
%
|
VSA
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
1,799
|
|
|
$
|
1,903
|
|
|
$
|
(104
|
)
|
|
|
5.5
|
%
|
Depreciation and amortization relating to Payment Solutions decreased during the three months ended December 31, 2012 by $0.1 million, or 5.5%. Amortization expense was lower by $0.7 million as result of the full amortization of certain intangible assets, whereas depreciation expense was higher by $0.6 million as a result of placing our previously disclosed infrastructure upgrades into service. We did not incur any amortization expense for our VSA operations for the three months ended December 31, 2012 or December 31, 2011.
Other Income (Continuing Operations)
Interest (expense) income, net:
Interest expense during the three months ended December 31, 2012 was $1,000 as compared with interest income of $1,000 for the three months ended December 31, 2011, an increase in cost of $2,000, attributable to continued low interest rates on our investment portfolio and increased interest costs from leased equipment.
Income Tax Provision (Continuing Operations)
During the three months ended December 31, 2012, we recorded an income tax benefit of $7,000, compared to a provision of zero dollars for the three months ended December 31, 2011. The provision for income taxes represents state tax obligations incurred by our Payment Solutions operations. Our
Consolidated Statements of Operations
for the three months ended December 31, 2012 and 2011 do not reflect a federal tax provision because of offsetting adjustments to our valuation allowance. Our effective tax rates differ from the federal statutory rate due to state income taxes, and the charge for establishing a valuation allowance on our net deferred tax assets. Our future tax rate may vary due to a variety of factors, including, but not limited to: the relative income contribution by tax jurisdiction; changes in statutory tax rates; changes in our valuation allowance; our ability to utilize net operating losses and any non-deductible items related to acquisitions or other nonrecurring charges.
Our acquired federal net operating loss carryforward is limited to $3.4 million per year pursuant to Internal Revenue Code Section 382, and approximately $11.2 million is still limited to this annual amount. If future ownership changes occur, there could be further limitations to our federal net operating loss carryforwards.
NON-GAAP FINANCIAL MEASURES
Payment Solutions net revenue and Adjusted EBITDA from continuing operations are supplemental non-GAAP financial measures. GAAP means generally accepted accounting principles in the United States. We define Payment Solutions net revenue as Payment Solutions gross revenue less Discount fees, which includes interchange fees and other processing-related dues, assessments and fees. Payment Solutions gross revenue is defined as revenue from continuing operations less non-Payment Solutions revenue. Adjusted EBITDA from continuing operations is equal to net income from continuing operations plus (a) interest income (expense) and other income(expense), net; (b) provision or benefit for income taxes; (c) depreciation and amortization; (d) share based compensation expense; and (e) restructuring charges. For a description of our use of Payment Solutions net revenue and Adjusted EBITDA from continuing operations and a reconciliation of these non-GAAP financial measures to their most comparable GAAP measures, see the discussion and related tables below.
We believe non-GAAP financial measures, such as Payment Solutions net revenue and Adjusted EBITDA from continuing operations are useful to an investor in evaluating our performance for the following reasons:
·
|
We believe Payment Solutions net revenue is useful for evaluating our business and our performance against peer companies in the electronic payments industry. We also believe that this measure provides investors with additional information about financial measures used by management in its financial and operational decision-making.
|
·
|
We believe Payment Solutions net revenue and Adjusted EBITDA from continuing operations are important indicators of our operational strength and the performance of our business because they provide a link between our operating cash flow and our results of operations.
|
·
|
We incur discount fees for each transaction we process. The discount fee represents a significant portion of our costs and by deducting the discount fee from gross revenue we provide information about the revenue we have available to us for operational purposes.
|
·
|
Depreciation and amortization expense primarily relates to property and equipment. Both of these expenses are non-cash charges that have significantly fluctuated over the past several years. As a result, we believe that adding back these non-cash charges to net income is useful in evaluating the operating performance of our business on a consistent basis from year-to-year.
|
·
|
As a result of varying federal and state income tax rates, we believe that presenting a financial measure that adjusts net income for provision for income taxes is useful to investors when evaluating the operating performance of our business.
|
·
|
Financial Statement Accounting Board Accounting Standards Codification (ASC) 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their estimated fair values. We believe adjusting net income for share based compensation expense is useful to investors when evaluating the operating performance of our business.
|
·
|
We recorded a restructuring charge in fiscal 2012 in conjunction with moving our corporate headquarters from Reston, Virginia to Norcross, GA. Since we executed this move with the expectation of future benefits and do not anticipate a restructuring charge in the future we believe adjusting net income for this non-operational expense is useful to investors when evaluating the operating performance of our business.
|
We also believe that analysts and investors use Payment Solutions net revenue and Adjusted EBITDA from continuing operations as supplemental measures to evaluate the overall operating performance of companies in our industry.
Our management team uses Payment Solutions net revenue and Adjusted EBITDA from continuing operations:
·
|
for periodic evaluation of our performance against key competitors;
|
·
|
for planning purposes, including the preparation of our internal annual operating budget;
|
·
|
to allocate resources to enhance the financial performance of our business; and
|
·
|
to evaluate the effectiveness of our operational strategies.
|
We also use Adjusted EBITDA from continuing operations, together with other criteria, in our executive compensation program.
Payment Solutions net revenue and Adjusted EBITDA from continuing operations as calculated by us are not necessarily comparable to similarly titled measures used by other companies. In addition, Payment Solutions net revenue and Adjusted EBITDA from continuing operations: (a) do not represent net income or cash flows from operating activities as defined by GAAP; (b) are not necessarily indicative of cash available to fund our cash flow needs; and (c) should not be considered as alternatives to net income, income from operations, cash provided by operating activities or our other financial information as determined under GAAP.
The following table provides the reconciliation from Payment Solutions net revenue to the most comparable GAAP measure, revenue from continuing operations for the quarters ended December 31, 2012 and 2011:
|
|
Net Revenue
|
|
|
|
Three months ended December 31,
|
|
(in thousands, except percentages)
|
|
2012
|
|
|
2011
|
|
|
Change ($)
|
|
|
Change (%)
|
|
Revenue from continuing operations
|
|
$
|
33,416
|
|
|
$
|
34,837
|
|
|
$
|
(1,421
|
)
|
|
|
(4.1
|
)%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Payment Solutions revenue
|
|
|
134
|
|
|
|
535
|
|
|
|
(401
|
)
|
|
|
(75.0
|
)%
|
Payment Solutions gross revenue
|
|
|
33,282
|
|
|
|
34,302
|
|
|
|
(1,020
|
)
|
|
|
(3.0
|
)%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Solutions Discount fees
|
|
|
21,948
|
|
|
|
22,342
|
|
|
|
(394
|
)
|
|
|
(1.8
|
)%
|
Payment Solutions net revenue
|
|
$
|
11,334
|
|
|
$
|
11,960
|
|
|
$
|
(626
|
)
|
|
|
(5.2
|
)%
|
Payment Solutions net revenue decreased 5.2% to $11.3 million during the three months ended December 31, 2012 from $11.9 million during the three months ended December 31, 2011. As discussed above, under "Payment Solutions Revenue," in the quarter ended December 31, 2012, we saw a shift in the mix of payment types, toward ACH payments, many of which had a lower than average transaction fee than if such payments had been made with a debit or credit card. Additionally, we offered a fixed fee debit card transaction fee to certain Clients during the quarter, which resulted in lower revenues than we have experienced with these Clients in prior periods. Therefore the increase in dollars processed did not result in a corresponding increase in revenue or net revenue during this quarter.
The following table provides the reconciliation from Adjusted EBITDA from continuing operations to the most comparable GAAP measure, Net loss from continuing operations for the quarters ended December 31, 2012 and 2011:
|
|
Adjusted EBITDA from continuing operations
|
|
|
|
Three months ended December 31,
|
|
(in thousands, except percentages)
|
|
2012
|
|
|
2011
|
|
|
Change ($)
|
|
|
Change (%)
|
|
Net loss from continuing operations
|
|
$
|
(828
|
)
|
|
$
|
(1,635
|
)
|
|
$
|
807
|
|
|
|
49.4
|
%
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation/amortization
|
|
|
1,799
|
|
|
|
1,903
|
|
|
|
(104
|
)
|
|
|
(5.5
|
)%
|
Stock-based compensation
|
|
|
677
|
|
|
|
467
|
|
|
|
210
|
|
|
|
45.0
|
%
|
Restructuring charge
|
|
|
—
|
|
|
|
1,456
|
|
|
|
(1,456
|
)
|
|
|
(100.0)
|
%
|
Tax (benefit)
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
(7
|
)
|
|
nm
|
|
Interest (income) expense, net
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
200.0
|
%
|
Adjusted EBITDA from continuing operations
|
|
$
|
1,642
|
|
|
$
|
2,190
|
|
|
$
|
(548
|
)
|
|
|
(30.6
|
)%
|
nm not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA from continuing operations declined $0.5 million for the three months ended December 31, 2012 as compared with the same period last year. The net loss from continuing operations for the three months ended December 31, 2012 decreased by $0.8 million versus the same period last year. The year over year decline in net revenue was the primary cause of the decrease in Adjusted EBITDA. The decrease in net revenue was offset by reductions in General and Administrative expenses as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2012 we had $53.3 million in cash, cash equivalents and marketable securities compared with $39.1 million at September 30, 2012.
As discussed in Note 8—Contingencies and Commitments and Note 5—Customer Concentration and Risk our Consolidated Balance Sheets includes settlements payable and receivable. We had $53.3 million in cash and cash equivalents at December 31, 2012. We had $21.9 million of settlements receivable at December 31, 2012, which are generally collected within two business days of the fiscal quarter end as settlements from credit card companies and banks. We had $38.4 million of settlements payable and $8.8 million of accrued discount fees as of December 31, 2012 that we had not yet distributed to Clients due to the timing of bank transactions. One of our large Clients temporarily suspended their settlement operations for the holidays on December 26
th
and therefore did not settle funds from December 26
th
through December 31
st
. Additionally we processed significant property tax payments over the last few days of December which did not settle until the first few business days of January 2013. As a result, we experienced significant increases in Cash, Settlements Receivable, and Settlements Payable in our December 31, 2012 balance sheet. All of the increases we incurred at the end of December 2012 were settled in the first few business days of the following month.
We believe we have sufficient liquidity to meet currently anticipated needs, including capital expenditures, working capital investments, and acquisitions for the next twelve months. We expect to generate cash flows from operating activities over the long term; however, we may experience significant fluctuations from quarter to quarter as a result of the timing of billing and collections, and the related settlement of funds. To the extent that our existing capital resources are insufficient to meet our capital requirements, we would have to raise additional funds. There can be no assurance that such additional funding, if necessary, would be available on favorable terms, if at all. Currently, we do not have any short or long-term debt.
Net Cash from Continuing Operations—Operating Activities.
During the three months ended December 31, 2012, our operating activities from Continuing Operations provided $16.3 million of cash. This reflects a net loss of $0.8 million from Continuing Operations and $2.4 million of non-cash items. During the three months ended December 31, 2012, $14.8 million of cash was provided by our settlement activities. An increase in accounts receivable used $0.4 million of cash.
Net Cash from Continuing Operations—Investing Activities.
Net cash used by our investing activities from Continuing Operations for the three months ended December 31, 2012 was $2.1 million for the purchase of equipment and software to support our Payment Solutions operations and additional goodwill related to the ChoicePay earn-out.
Net Cash from Continuing Operations—Financing Activities.
For the three months ended December 31, 2012 $6,000 of cash was used for capital lease obligations.
CONTRACTUAL OBLIGATIONS
During the three months ended December 31, 2012, there was no material change outside the ordinary course of business in the contractual obligations disclosed in our most recent annual report.
CRITICAL ACCOUNTING POLICIES
The preparation of our financial results of operations and financial position requires us to make judgments and estimates that may have a significant impact upon our financial results. We believe that of our accounting policies, the following estimates and assumptions, which require complex subjective judgments by management, could have a material impact on reported results: collectability of receivables; share-based compensation; valuation of goodwill, intangibles and investments; contingent liabilities; and effective tax rates, deferred taxes and associated valuation allowances. Actual results could differ materially from management's estimates.
Goodwill and Intangible Assets
Acquired goodwill and intangible assets are initially recorded at fair value and tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. All of our goodwill and intangible assets are included in our Payment Solutions reporting unit. Goodwill is evaluated for possible impairment by comparing the fair value of a reporting unit with its carrying value, including the goodwill assigned to that reporting unit. Fair value of
the reporting unit is estimated using a combination of income-based and market-based valuation methodologies. Under the income approach, forecasted cash flows of a reporting unit are discounted to a present value using a discount rate commensurate with the risks of those cash flows. Under the market approach, the fair value of a reporting unit is estimated based on trading multiples of a group of comparable public companies and from values implied by recent merger and acquisition transactions involving comparable companies. An impairment charge is recorded if the carrying value of the Payment Solutions reporting unit exceeds its implied fair value. We performed our annual impairment test of the carrying value of our goodwill for fiscal 2012 during our fourth quarter; this is consistent with the historic timing of our annual goodwill impairment review. Based on our assessment as of September 30, 2012, we concluded that the fair value of the Payment Solutions reporting unit exceeded its carrying value by at least 50%. Significant assumptions inherent in the valuation methodologies employed include, but are not limited to, projected business results, growth rates and discount rates. These assumptions are based primarily on our historical results and expectations for future operations. Our assumptions do not include the potential impacts of alternative payment methods Customers might begin to use, significant changes in the overall economy or loss of significant Clients, each of which would likely decrease our estimated fair value and potentially cause us to record an impairment of our recorded goodwill.
At December 31, 2012, the carrying value of goodwill was approximately $17.6 million.
In addition to our annual goodwill impairment review, we also perform periodic reviews of the carrying values of our other intangible assets. These intangible assets consist primarily of acquired core technology and acquired Customer related assets. In evaluating potential impairment of these assets we specifically consider whether any indicators of impairment are present, including:
·
|
whether there has been a significant adverse change in the business climate that affects the value of an asset;
|
·
|
whether there has been a significant change in the extent or manner in which an asset is used; and
|
·
|
whether there is an expectation that the asset will be sold or disposed of before the end of its originally estimated useful life.
|
If indicators of impairment are present, an estimate of the undiscounted cash flows that the specific asset is expected to generate must be made to ensure that the carrying value of the asset can be recovered. These estimates involve significant subjectivity. At December 31, 2012, the carrying value of our intangible assets, excluding goodwill, was approximately $1.0 million. As a result of our fiscal 2012 impairment review, we concluded that none of these assets was impaired.
For a full discussion of our critical accounting policies and estimates, see the
Management's Discussion and Analysis of Financial Condition and Results of Operations
in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012.