Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - OFFICIAL PAYMENTS HOLDINGS, INC. | Financial_Report.xls |
| EX-31.1 - CEO CERTIFICATION 34 ACT - OFFICIAL PAYMENTS HOLDINGS, INC. | exhibit311.htm |
| EX-10.1 - EXHIBIT 10.1 - OFFICIAL PAYMENTS HOLDINGS, INC. | exhibit101.htm |
| EX-31.2 - CFO CERTIFICATION 34 ACT - OFFICIAL PAYMENTS HOLDINGS, INC. | exhbiti312.htm |
| EX-32.1 - CEO CERTIFICAITON SOX - OFFICIAL PAYMENTS HOLDINGS, INC. | exhibit321.htm |
| EX-32.2 - CFO CERTIFICAITON SOX - OFFICIAL PAYMENTS HOLDINGS, INC. | exhibit322.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2012
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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__________________
Commission file number 001-33475
OFFICIAL PAYMENTS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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94-3145844
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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3550 Engineering Drive, Suite 400
Norcross, Georgia 30092
(Address of principal executive offices)
(770) 325-3100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer," "accelerated filer," and "smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer x
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Non-accelerated filer o
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
At April 30, 2012 there were 16,641,621 shares of the Registrant's Common Stock outstanding.
OFFICIAL PAYMENTS HOLDINGS, INC.
Private Securities Litigation Reform Act Safe Harbor Statement
Statements made in this report that are not historical facts are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to future events or the Company’s future financial and/or operating performance and generally can be identified as such because the context of the statement includes words such as “may,” “will,” “intends,” “plans,” “believes,” “anticipates,” “expects,” “estimates,” “shows,” “predicts,” “potential,” “continue,” or “opportunity,” the negative of these words or words of similar import. The Company undertakes no obligation to update any such forward-looking statements. Each of these statements is made as of the date hereof based only on current information and expectations that are inherently subject to change and involve a number of risks and uncertainties. Actual events or results may differ materially from those projected in any of such statements due to various factors, including, but not limited to: general economic conditions, which affect the Company’s financial results in all our markets, which we refer to as “vertical markets,” particularly the federal vertical market, the state and local tax vertical market and the property tax vertical market; effectiveness and performance of our systems, payment processing platforms and operational infrastructure; our ability to grow Payments Solutions revenue while reducing our costs, including processor and interchange related costs; the timing, initiation, completion, renewal, extension or early termination of client or partner contracts or projects; our ability to execute on our sales and product strategy and realize revenues from our business development opportunities; the impact of regulatory requirements; and unanticipated claims as a result of project performance, including due to the failure of software providers, processors, vendors, partners, or subcontractors to satisfactorily perform and complete engagements. For a discussion of these and other factors which may cause our actual events or results to differ from those projected, please refer to Item 1A. Risk Factors beginning on page 32 of this report.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
OFFICIAL PAYMENTS HOLDINGS, INC.
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(in thousands)
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March 31, 2012
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September 30, 2011
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||||||
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(unaudited)
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||||||||
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ASSETS:
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||||||||
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Current assets:
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||||||||
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Cash and cash equivalents
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$ | 39,210 | $ | 39,760 | ||||
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Accounts receivable, net
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4,601 | 4,467 | ||||||
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Settlements receivable, net
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15,130 | 7,648 | ||||||
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Prepaid expenses and other current assets
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2,606 | 2,368 | ||||||
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Total current assets
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61,547 | 54,243 | ||||||
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Property, equipment and software, net
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17,277 | 18,189 | ||||||
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Goodwill
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17,521 | 17,460 | ||||||
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Other intangible assets, net
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2,334 | 4,037 | ||||||
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Other assets
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226 | 238 | ||||||
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Total assets
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$ | 98,905 | $ | 94,167 | ||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY:
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||||||||
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Current liabilities:
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||||||||
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Accounts payable
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$ | 33 | $ | 1,057 | ||||
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Settlements payable
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18,461 | 9,812 | ||||||
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Accrued compensation liabilities
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4,580 | 2,721 | ||||||
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Accrued discount fees
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4,266 | 4,900 | ||||||
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Other accrued liabilities
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2,142 | 3,703 | ||||||
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Accrued restructuring charges
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362 | 178 | ||||||
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Deferred income
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406 | 439 | ||||||
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Total current liabilities
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30,250 | 22,810 | ||||||
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Other liabilities:
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||||||||
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Deferred rent
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102 | 1,556 | ||||||
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Accrued restructuring charges
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1,056 | — | ||||||
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Other liabilities
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98 | 28 | ||||||
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Total other liabilities
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1,256 | 1,584 | ||||||
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Total liabilities
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31,506 | 24,394 | ||||||
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Contingencies and commitments (Note 8)
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||||||||
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Shareholders’ equity:
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||||||||
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Preferred stock, no par value; authorized shares: 4,579;
no shares issued and outstanding
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— | — | ||||||
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Common stock $0.01 par value, and paid-in capital; shares authorized: 44,260; shares issued: 20,817 and 20,817; shares outstanding: 16,642 and 16,642
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194,412 | 193,732 | ||||||
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Treasury stock—at cost, 4,175 shares
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(31,383 | ) | (31,383 | ) | ||||
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Accumulated deficit
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(95,630 | ) | (92,576 | ) | ||||
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Total shareholders’ equity
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67,399 | 69,773 | ||||||
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Total liabilities and shareholders’ equity
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$ | 98,905 | $ | 94,167 | ||||
See Notes to Consolidated Financial Statements
OFFICAL PAYMENTS HOLDINGS, INC.
(unaudited)
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Three months ended
March 31,
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Six months ended
March 31,
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|||||||||||||||
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(in thousands, except per share data)
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2012
|
2011
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2012
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2011
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||||||||||||
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Revenues
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$ | 32,820 | $ | 30,266 | $ | 67,657 | $ | 63,236 | ||||||||
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Costs and expenses:
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||||||||||||||||
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Direct costs
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22,900 | 23,332 | 46,775 | 48,202 | ||||||||||||
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General and administrative
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7,309 | 4,884 | 16,495 | 10,809 | ||||||||||||
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Selling and marketing
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2,152 | 1,822 | 3,660 | 3,372 | ||||||||||||
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Depreciation and amortization
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1,867 | 1,806 | 3,770 | 3,564 | ||||||||||||
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Total costs and expenses
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34,228 | 31,844 | 70,700 | 65,947 | ||||||||||||
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Loss from continuing operations before other income and income taxes
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(1,408 | ) | (1,578 | ) | (3,043 | ) | (2,711 | ) | ||||||||
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Other income:
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||||||||||||||||
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Interest income, net
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— | 20 | 1 | 57 | ||||||||||||
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Total other income
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— | 20 | 1 | 57 | ||||||||||||
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Loss from continuing operations before income taxes
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(1,408 | ) | (1,558 | ) | (3,042 | ) | (2,654 | ) | ||||||||
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Income tax benefit
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— | 186 | — | 185 | ||||||||||||
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Loss from continuing operations
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(1,408 | ) | (1,372 | ) | (3,042 | ) | (2,469 | ) | ||||||||
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Gain (loss) from discontinued operations, net
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(3 | ) | 300 | (12 | ) | 302 | ||||||||||
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Net loss
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$ | (1,411 | ) | $ | (1,072 | ) | $ | (3,054 | ) | $ | (2,167 | ) | ||||
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(Loss) gain per share—Basic and diluted:
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||||||||||||||||
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From continuing operations
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$ | (0.08 | ) | $ | (0.08 | ) | $ | (0.18 | ) | $ | (0.14 | ) | ||||
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From discontinued operations
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— | 0.02 | — | 0.02 | ||||||||||||
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(Loss) gain per share—Basic and diluted
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$ | (0.08 | ) | $ | (0.06 | ) | $ | (0.18 | ) | $ | (0.12 | ) | ||||
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Weighted average common shares used in computing:
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||||||||||||||||
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Basic and diluted loss per share
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16,642 | 16,928 | 16,642 | 17,577 | ||||||||||||
See Notes to Consolidated Financial Statements
OFFICIAL PAYMENTS HOLDINGS, INC.
(unaudited)
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Three months ended March 31,
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Six months ended March 31,
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|||||||||||||||
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(in thousands)
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2012
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2011
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2012
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2011
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||||||||||||
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Net loss
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$ | (1,411 | ) | $ | (1,072 | ) | $ | (3,054 | ) | $ | (2,167 | ) | ||||
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Other comprehensive income, net of tax:
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||||||||||||||||
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Unrealized gain on investment in marketable securities
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— | — | — | 1 | ||||||||||||
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Other comprehensive income
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— | — | — | 1 | ||||||||||||
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Comprehensive loss
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$ | (1,411 | ) | $ | (1,072 | ) | $ | (3,054 | ) | $ | (2,166 | ) | ||||
See Notes to Consolidated Financial Statements
OFFICIAL PAYMENTS HOLDINGS, INC.
(unaudited)
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Six months ended
March 31,
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||||||||
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(in thousands)
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2012
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2011
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||||||
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CASH FLOWS FROM OPERATING ACTIVITIES:
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||||||||
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Net loss
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$ | (3,054 | ) | $ | (2,167 | ) | ||
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Less: Gain from discontinued operations, net
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(12 | ) | 302 | |||||
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Loss from continuing operations, net
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(3,042 | ) | (2,469 | ) | ||||
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Non-cash items included in net loss:
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||||||||
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Restructuring costs
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962 | — | ||||||
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Depreciation and amortization
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3,770 | 3,564 | ||||||
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Provision for doubtful accounts
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— | 192 | ||||||
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Deferred rent
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21 | 224 | ||||||
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Share-based compensation
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680 | (846 | ) | |||||
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Capitalized software impairment loss
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— | 246 | ||||||
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Net effect of changes in assets and liabilities:
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||||||||
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Accounts receivable, net
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(135 | ) | (920 | ) | ||||
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Settlement processing assets and obligations, net
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1,167 | (363 | ) | |||||
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Prepaid expenses and other assets
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(225 | ) | 171 | |||||
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Accounts payable and accrued liabilities
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(1,521 | ) | 290 | |||||
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Income taxes receivable
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— | (22 | ) | |||||
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Other long term liabilities
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70 | — | ||||||
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Deferred income
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(33 | ) | (69 | ) | ||||
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Cash provided by (used in) operating activities from continuing operations
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1,714 | (2 | ) | |||||
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Cash used in operating activities from discontinued operations
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(12 | ) | (7 | ) | ||||
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Cash provided by (used in) operating activities
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1,702 | (9 | ) | |||||
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CASH FLOWS FROM INVESTING ACTIVITIES:
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||||||||
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Purchases of available-for-sale securities
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— | (5,998 | ) | |||||
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Maturities of available-for-sale securities
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— | 14,576 | ||||||
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Maturities of restricted investments
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— | 983 | ||||||
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Capitalized internally developed software
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(1,192 | ) | (1,496 | ) | ||||
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Purchase of equipment and software
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(982 | ) | (954 | ) | ||||
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ChoicePay acquisition
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(61 | ) | (35 | ) | ||||
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Cash (used in) provided by investing activities from continuing operations
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(2,235 | ) | 7,076 | |||||
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Cash provided by investing activities from discontinued operations
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— | 309 | ||||||
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Cash (used in) provided by investing activities
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(2,235 | ) | 7,385 | |||||
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CASH FLOWS FROM FINANCING ACTIVITIES:
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||||||||
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Net proceeds from issuance of common stock
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— | 289 | ||||||
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Purchase of company stock
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— | (10,363 | ) | |||||
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Capital lease obligations and other financing arrangements
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(17 | ) | (16 | ) | ||||
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Cash used in financing activities
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(17 | ) | (10,090 | ) | ||||
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Net decrease in cash and cash equivalents
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(550 | ) | (2,714 | ) | ||||
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Cash and cash equivalents at beginning of period
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39,760 | 45,757 | ||||||
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Cash and cash equivalents at end of period
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$ | 39,210 | $ | 43,043 | ||||
OFFICIAL PAYMENTS HOLDINGS, INC.
(unaudited)
|
Six months ended
March 31,
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||||||||
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(in thousands)
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2012
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2011
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||||||
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
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||||||||
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Cash paid during the period for:
|
||||||||
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Interest
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$ | 1 | $ | 2 | ||||
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Income taxes paid, net
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$ | — | $ | 42 | ||||
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SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
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||||||||
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Equipment acquired under capital lease obligations
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$ | — | $ | 18 | ||||
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Investments released from restriction
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$ | — | $ | 327 | ||||
See 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 operate in the following biller direct markets:
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·
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Property Tax—which includes state and local real property tax payments;
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·
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Federal—which includes federal income and business tax payments;
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·
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State and Local Tax—which includes state and local income tax payments and business tax payments;
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·
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Utility—which includes payments to private and public utilities;
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·
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Education—which consists of services to post-secondary educational institutions; and
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·
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Other—which includes charitable giving, local government fines and fees, motor vehicle registration and payments, rent, insurance, K-12 education meal payments and fee payments and personal property tax payments.
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We also operate in one other business area called our Voice and Systems Automation, or VSA, business, which we expect to wind down during fiscal year 2013, 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 some 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 us 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 impact the following estimates: collectability of receivables; share-based compensation; valuation of goodwill, intangibles and investments; contingent liabilities; and effective tax rates, deferred taxes and associated valuation allowances. Although we believe the estimates and assumptions used in preparing our Consolidated Financial Statements and related notes are reasonable in light of known facts and circumstances, actual results could differ materially.
NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS
FASB ASU 2010-06. In January 2010, the FASB issued FASB Accounting Standards Update, or ASU 2010-06, which amends the disclosure requirements relating to recurring and nonrecurring fair value measurements. New disclosures are required about transfers into and out of the levels 1 and 2 fair value hierarchy and separate disclosures about purchases, sales, issuances and settlements relating to Level 3
measurements. This ASU also requires an entity to present information about purchases, sales, issuances and settlements for significant unobservable inputs on a gross basis rather than as a net number. This ASU was effective for us with the reporting period beginning January 1, 2010, except for the disclosures on the roll forward activities for Level 3 fair value measurements, which became effective for us with the reporting period beginning October 1, 2011. The adoption of this ASU had no impact on our financial position and results of operations, as it only requires additional disclosures.
FASB ASU 2010-28. In December 2010, the FASB issued FASB ASU 2010-28, which affects entities evaluating goodwill for impairment under FASB ASC 350-20. ASU 2010-28, among other things, requires entities with a zero or negative carrying value to assess, considering qualitative factors, whether it is more likely than not that goodwill impairment exists. If an entity concludes that it is more likely than not that goodwill impairment exists, the entity must perform step 2 of the goodwill impairment test. ASU 2010-28 is effective for impairment tests performed during an entity’s fiscal year beginning after December 15, 2010, with early adoption not permitted. We adopted this ASU effective October 1, 2011. We do not believe the adoption of this ASU will have a material impact on our financial position or results of operations.
FASB ASU 2010-29. In December 2010, the FASB issued FASB ASU 2010-29, which requires an entity to disclose revenue and earnings of a combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual period only. It also requires pro forma disclosures to include a description of the nature and amount of the material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This ASU became effective for us October 1, 2011, and is applied to business combinations for which the acquisition date is on or after the effective date. The initial adoption of this ASU had no impact on our financial position or results of operations.
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 companies 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 will adopt 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 by requiring improved information about financial instruments and derivative instruments that are either (i) offset in accordance with current literature or (2) 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 on our settlement processing assets and obligations disclosures.
NOTE 3—INVESTMENTS
At March 31, 2012 all of our investments are classified as cash equivalents and are included in Cash and Cash Equivalents on our Consolidated Balance Sheets. 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 represents the fair value hierarchy for our financial assets, comprised of cash equivalents, measured at fair value on a recurring basis as of March 31, 2012 and September 30, 2011:
|
Fair value measurements as of March 31, 2012
|
||||||||||||||||
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(in thousands)
|
Level 1
|
Level 2
|
Level 3
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Total
|
||||||||||||
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Cash equivalents:
|
||||||||||||||||
|
Money market
|
$ | 8,250 | — | — | $ | 8,250 | ||||||||||
|
Fair value measurements as of September 30, 2011
|
||||||||||||||||
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(in thousands)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
|
Cash equivalents:
|
||||||||||||||||
|
U.S. Treasury bills
|
$ | 7,200 | $ | — | $ | — | $ | 7,200 | ||||||||
|
Money market
|
1,045 | — | — | 1,045 | ||||||||||||
|
Total
|
$ | 8,245 | $ | — | $ | — | $ | 8,245 | ||||||||
The carrying amounts of certain financial instruments, including cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short maturities.
NOTE 5—CUSTOMER CONCENTRATION AND RISK
We derive a significant portion of our revenue from a limited number of governmental customers. Typically, the contracts allow these customers 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:
|
Six months ended March 31,
|
||||||||
|
(in thousands, except percentages)
|
2012
|
2011
|
||||||
|
Revenue
|
$ | 8,779 | $ | 8,997 | ||||
|
Percentage of Payment Solutions revenue
|
13.0 | % | 14.4 | % | ||||
Accounts receivable, net. We reported $4.6 million and $4.5 million in Accounts receivable, net on our Consolidated Balance Sheets for March 31, 2012 and September 30, 2011, respectively. This item represents the receivables from our customers and other parties and retainers that we expect to receive. Approximately 8.3% and 7.0% of the balances reported at March 31, 2012 and September 30, 2011, respectively, represent Accounts receivable, net that is attributable to operations that we intend to wind down during fiscal year 2013. The remainder of the Accounts receivable, net balance is composed of receivables from certain of our Payment Solutions customers. None of our customers have receivables that exceed 10% of our total receivable balance. As of March 31, 2012 and September 30, 2011, Accounts receivable, net included an allowance for uncollectible accounts of $0.2 million and $0.4 million, respectively, which represents the balance of receivables that we believe are likely to become uncollectible.
Settlements receivable, net. As of March 31, 2012 and September 30, 2011, we reported $15.1 million and $7.6 million, respectively, in Settlements receivable, net 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, primarily utility and other public sector clients, using credit or debit cards or via ACH payments. We create a receivable for the amount due from the credit or debit card company or bank and an offsetting 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, we may be required to pay 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 six months ended March 31, 2012:
|
(in thousands)
|
Payment Solutions
|
Total
|
||||||
|
Balance at September 30, 2011
|
$ | 17,460 | $ | 17,460 | ||||
|
ChoicePay, Inc. earn out
|
61 | 61 | ||||||
|
Balance at March 31, 2012
|
$ | 17,521 | $ | 17,521 | ||||
As a general practice, 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. One such triggering event is when there is a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of. No such events occurred during the six months ended March 31, 2012. There has been no impairment of our goodwill to date.
OTHER INTANGIBLE ASSETS, NET
Currently, all of our other intangible assets are included in our 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 six months ended March 31, 2012. The following table summarizes Other intangible assets, net, for our Continuing Operations:
|
March 31, 2012
|
September 30, 2011
|
||||||||||||||||||||||||
|
(in thousands)
|
Amortization period
|
Gross
|
Accumulated amortization
|
Net
|
Gross
|
Accumulated amortization
|
Net
|
||||||||||||||||||
|
Client relationships
|
8-15 years
|
$ | 26,059 | $ | (24,447 | ) | $ | 1,612 | $ | 26,059 | $ | (23,083 | ) | $ | 2,976 | ||||||||||
|
Technology and research and development
|
5 years
|
1,842 | (1,311 | ) | 531 | 1,842 | (1,160 | ) | 682 | ||||||||||||||||
|
Trademarks
|
6-10 years
|
3,463 | (3,272 | ) | 191 | 3,463 | (3,084 | ) | 379 | ||||||||||||||||
|
Other intangible assets, net
|
$ | 31,364 | $ | (29,030 | ) | $ | 2,334 | $ | 31,364 | $ | (27,327 | ) | $ | 4,037 | |||||||||||
During the three months ended March 31, 2012 and March 31, 2011, we recognized $0.85 million and $0.86 million of amortization expense on our other intangible assets, respectively. During the six months ended March 31, 2012 and March 31, 2011, we recognized $1.7 million and $1.7 million of amortization expense on our other intangible assets, respectively. There has been no impairment of our goodwill to date.
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 March 31,
|
Six months ended March 31,
|
|||||||||||||||
|
(in thousands)
|
2012
|
2011
|
2012
|
2011
|
||||||||||||
|
Current income tax provision:
|
||||||||||||||||
|
State
|
$ | — | $ | 20 | $ | — | $ | 22 | ||||||||
|
Federal
|
— | — | — | — | ||||||||||||
|
Total provision for income taxes
|
$ | — | $ | 20 | $ | — | $ | 22 | ||||||||
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.
Generally, the amount of tax expense or benefit allocated to continuing operations is determined without regard to the tax effects of other categories of income or loss, such as discontinued operations, extraordinary items, other comprehensive income and items charged or credited to shareholders’ equity. However, an exception to the general rule is provided when there is a pre-tax loss from continuing operations and pre-tax income from other categories in the current year. In such instances, income from other categories must be considered in allocating the aggregate tax provision for the period among the various categories. The intra-period tax allocation rules in ASC 740-20 related to items charged directly
to other categories of income or loss can result in deferred tax assets or liabilities that remain until certain events occur. Our Discontinued Operations did not generate taxable income during the three and six month periods ended March 31, 2012; therefore we were not required to record an intra-period allocation. Income tax expense related to Continuing Operations for the three and six months ended March 31, 2011 includes a benefit of $0.2 million due to the required intra-period tax allocation. Conversely, Discontinued Operations for the three and six months ended March 31, 2011 includes a charge of $0.2 million related to a gain on disposal of discontinued operations.
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 March 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 may go back to the tax year ended September 30, 2007. As of March 31, 2012, we were not engaged in a federal audit. Currently, we are in the process of providing information for a Virginia state income tax audit covering November 1, 2007 through October 31, 2010.
As of March 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 March 31, 2012, none of these matters was expected to have a material impact on our financial position, results of operations or cash flows. At March 31, 2012 and September 30, 2011, we had legal accruals of $0.6 million and $0.8 million, respectively, based upon estimates of key legal matters.
SETTLEMENTS PAYABLE
Settlements payable on our Consolidated Balance Sheets consists of payments due primarily to utility companies and other 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 $18.5 million and $9.8 million, respectively, of settlements payable at March 31, 2012 and September 30, 2011.
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 March 31, 2012, our investment portfolio was comprised of money market funds. Our investment portfolio and cash and cash equivalents approximate fair value.
PERFORMANCE, BID AND GUARANTEE PAYMENT BONDS
Pursuant to the terms of money transmitter licenses we obtain with individual states, we are required to provide guarantee payment bonds from a licensed surety. At March 31, 2012, we had $10.8 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 customers. Fees for obtaining the bonds are expensed over the life of each bond. At March 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 to RKV Technologies, Inc., or RKV. The sale was completed pursuant to an Asset Purchase Agreement dated February 6, 2009. As part of the agreement, we are required to leave in place a $2.4 million performance bond on the continuing contract with the State of Indiana, or the State. Subsequent to the sale of the UI business to RKV, the prime contractor, Haverstick Corporation, or Haverstick, the State, and RKV determined that the contract completion will be delayed and additional funding is needed to complete the contract. In November 2009 Haverstick cancelled its contract with RKV and directly rehired various RKV resources and RKV contractors. We retain certain liabilities for completion of the project and continue as the indemnitor under the performance bond.
Since the sale of the UI business in February 2009, we have had limited access to information about the project status and scope and have not received an accounting of the additional project tasks and their related costs to complete the contract. In 2009, we offered $420,000 as a contribution towards project completion. The project is scheduled to be completed in December 2012 and mediation is expected to take place after the completion of the project, to discuss the allocation of the cost of project completion.
EMPLOYMENT AGREEMENTS
As of March 31, 2012, we had employment and change of control agreements with six executives and three other key employees. If certain termination or change of control events were to occur under the nine contracts as of March 31, 2012, we would have been required to pay up to $4.9 million.
OPERATING AND CAPITAL LEASE OBLIGATIONS
As of March 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 our financial statements for the year ended September 30, 2011.
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 three months ended December 31, 2011, we moved our principal executive offices from Reston, Virginia to Norcross, Georgia, in an effort to reduce general and administrative costs and capitalize on the strong electronic payments industry employee resources in the Atlanta area. We incurred total expenses of approximately $1.5 million, including $0.1 million of employee relocation reimbursement expense, and $1.4 million of facilities related restructuring expense during the six months ended March 31, 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 we wrote off certain balances associated with our original lease agreement including net leasehold improvements of $1.0
million, and deferred rent. The project is essentially complete with only cash transactions remaining related to the lease on the Reston, Virginia facility through April 2018. 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 six months ended March 31, 2012:
|
(in thousands)
|
Severance
|
Relocation
|
Facilities closures
|
Total
|
||||||||||||
|
Balance at September 30, 2011
|
$ | 178 | $ | — | $ | — | $ | 178 | ||||||||
|
Additions
|
— | 106 | 1,472 | 1,578 | ||||||||||||
|
Reversal of deferred rent, net
|
— | — | 502 | 502 | ||||||||||||
|
Cash payments
|
(178 | ) | (106 | ) | (556 | ) | (840 | ) | ||||||||
|
Balance at March 31, 2012
|
$ | — | $ | — | $ | 1,418 | $ | 1,418 | ||||||||
NOTE 10—SEGMENT INFORMATION
Our business consists of two reportable segments: Payment Solutions and Voice SystemsAutomation, or VSA. The following table presents the results of operations for our Payment Solutions operations and our VSA operations for the three and six months ended March 31, 2012 and 2011:
|
(in thousands)
|
Payment Solutions
|
VSA
|
Total
|
|||||||||
|
Three months ended March 31, 2012:
|
||||||||||||
|
Revenues
|
$ | 32,470 | $ | 350 | $ | 32,820 | ||||||
|
Costs and expenses:
|
||||||||||||
|
Direct costs
|
22,539 | 361 | 22,900 | |||||||||
|
General and administrative
|
7,266 | 43 | 7,309 | |||||||||
|
Selling and marketing
|
2,152 | — | 2,152 | |||||||||
|
Depreciation and amortization
|
1,867 | — | 1,867 | |||||||||
|
Total costs and expenses
|
33,824 | 404 | 34,228 | |||||||||
|
Loss from continuing operations before other income and income taxes
|
(1,354 | ) | (54 | ) | (1,408 | ) | ||||||
|
Other income:
|
||||||||||||
|
Interest income, net
|
— | — | — | |||||||||
|
Total other income
|
— | — | — | |||||||||
|
Loss from continuing operations before taxes
|
(1,354 | ) | (54 | ) | (1,408 | ) | ||||||
|
Income tax benefit
|
— | — | — | |||||||||
|
Loss from continuing operations
|
$ | (1,354 | ) | $ | (54 | ) | $ | (1,408 | ) | |||
|
(in thousands)
|
Payment Solutions
|
VSA
|
Total
|
|||||||||
|
Three months ended March 31, 2011:
|
||||||||||||
|
Revenues
|
$ | 29,904 | $ | 362 | $ | 30,266 | ||||||
|
Costs and expenses:
|
||||||||||||
|
Direct costs
|
23,266 | 66 | 23,332 | |||||||||
|
General and administrative
|
4,871 | 13 | 4,884 | |||||||||
|
Selling and marketing
|
1,822 | — | 1,822 | |||||||||
|
Depreciation and amortization
|
1,806 | — | 1,806 | |||||||||
|
Total costs and expenses
|
31,765 | 79 | 31,844 | |||||||||
|
(Loss) income from continuing operations before other income and income taxes
|
(1,861 | ) | 283 | (1,578 | ) | |||||||
|
Other income:
|
||||||||||||
|
Interest income, net
|
20 | — | 20 | |||||||||
|
Total other income
|
20 | — | 20 | |||||||||
|
(Loss) income from continuing operations before taxes
|
(1,841 | ) | 283 | (1,558 | ) | |||||||
|
Income tax benefit
|
186 | — | 186 | |||||||||
|
(Loss) income from continuing operations
|
$ | (1,655 | ) | $ | 283 | $ | (1,372 | ) | ||||
|
(in thousands)
|
Payment Solutions
|
VSA
|
Total
|
|||||||||
|
Six months ended March 31, 2012:
|
||||||||||||
|
Revenues
|
$ | 66,772 | $ | 885 | $ | 67,657 | ||||||
|
Costs and expenses:
|
||||||||||||
|
Direct costs
|
46,323 | 452 | 46,775 | |||||||||
|
General and administrative
|
16,322 | 173 | 16,495 | |||||||||
|
Selling and marketing
|
3,660 | — | 3,660 | |||||||||
|
Depreciation and amortization
|
3,770 | — | 3,770 | |||||||||
|
Total costs and expenses
|
70,075 | 625 | 70,700 | |||||||||
|
(Loss) income from continuing operations before other income and income taxes
|
(3,303 | ) | 260 | (3,043 | ) | |||||||
|
Other income:
|
||||||||||||
|
Interest income, net
|
1 | — | 1 | |||||||||
|
Total other income
|
1 | — | 1 | |||||||||
|
(Loss) income from continuing operations before taxes
|
(3,302 | ) | 260 | (3,042 | ) | |||||||
|
Income tax benefit
|
— | — | — | |||||||||
|
(Loss) income from continuing operations
|
$ | (3,302 | ) | $ | 260 | $ | (3,042 | ) | ||||
|
(in thousands)
|
Payment Solutions
|
VSA
|
Total
|
|||||||||
|
Six months ended March 31, 2011:
|
||||||||||||
|
Revenues
|
$ | 62,381 | $ | 855 | $ | 63,236 | ||||||
|
Costs and expenses:
|
||||||||||||
|
Direct costs
|
48,083 | 119 | 48,202 | |||||||||
|
General and administrative
|
10,809 | — | 10,809 | |||||||||
|
Selling and marketing
|
3,372 | — | 3,372 | |||||||||
|
Depreciation and amortization
|
3,564 | — | 3,564 | |||||||||
|
Total costs and expenses
|
65,828 | 119 | 65,947 | |||||||||
|
(Loss) income from continuing operations before other income and income taxes
|
(3,447 | ) | 736 | (2,711 | ) | |||||||
|
Other income:
|
||||||||||||
|
Interest income, net
|
57 | — | 57 | |||||||||
|
Total other income
|
57 | — | 57 | |||||||||
|
(Loss) income from continuing operations before taxes
|
(3,390 | ) | 736 | (2,654 | ) | |||||||
|
Income tax benefit
|
185 | — | 185 | |||||||||
|
(Loss) income from continuing operations
|
$ | (3,205 | ) | $ | 736 | $ | (2,469 | ) | ||||
Our total assets for each of these businesses are shown in the following table:
|
(in thousands)
|
March 31, 2012
|
September 30, 2011
|
||||||
|
Continuing operations:
|
||||||||
|
Payment Solutions
|
$ | 99,353 | $ | 93,834 | ||||
|
VSA
|
384 | 333 | ||||||
|
Total assets
|
$ | 99,737 | $ | 94,167 | ||||
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 1/48th 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 March 31, 2012, there were 1,159,036 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 46,250 options from the Plan during the three months ended March 31, 2012 and during the six months ended March 31, 2012, we granted 399,500 options from the Plan.
|
Three months ended
March 31,
|
Six months ended
March 31,
|
|||||||||||||||
|
2012
|
2011
|
2012
|
2011
|
|||||||||||||
|
Weighted-average assumptions used in Black-Scholes model:
|
||||||||||||||||
|
Expected period that options will be outstanding (in years)
|
5.00 | 5.00 | 5.00 | 5.00 | ||||||||||||
|
Interest rate (based on U.S. Treasury yields at time of grant)
|
0.73 | % | 2.39 | % | 0.93 | % | 1.52 | % | ||||||||
|
Volatility
|
49.09 | % | 46.65 | % | 48.76 | % | 46.89 | % | ||||||||
|
Dividend yield
|
— | — | — | — | ||||||||||||
|
Weighted-average fair value of options granted
|
$ | 1.86 | $ | 2.48 | $ | 1.53 | $ | 2.41 | ||||||||
|
Weighted-average intrinsic value of options exercised (in thousands)
|
$ | — | $ | 1 | $ | — | $ | 83 | ||||||||
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—INDUCEMENT GRANT
On August 16, 2010, we granted our current CEO the option to purchase 100,000 shares of common stock as an inducement grant outside of the Plan. These options vest as to 25% of the original number of shares on the first anniversary of the grant date and as to an additional 1/48th of the original number of shares on the same date in each succeeding month following the first anniversary of the grant date until the fourth anniversary of the grant date and expire ten years from the grant date.
On June 13, 2011, we granted our current CFO the option to purchase 250,000 shares of common stock as an inducement grant outside of the Plan. These options vest as to 25% of the original number of shares on the first anniversary of the grant date and as to an additional 1/48th of the original number of shares on the same date in each succeeding month following the first anniversary of the grant date until the fourth anniversary of the grant date and expire ten years from the grant date.
The following table shows the assumptions used to calculate the fair value of these awards:
|
CFO award
|
CEO award
|
|||||||
|
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)
|
1.59 | % | 1.40 | % | ||||
|
Volatility
|
46.21 | % | 45.50 | % | ||||
|
Dividend yield
|
— | — | ||||||
|
Fair value of options granted
|
$ | 1.95 | $ | 2.08 | ||||
STOCK OPTIONS
Stock option activity for all option grants for the six months ended March 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, 2011
|
3,083 | $ | 6.42 | ||||||||||
|
Granted
|
400 | 3.57 | |||||||||||
|
Exercised
|
— | — | |||||||||||
|
Forfeitures or expirations
|
(209 | ) | 8.15 | ||||||||||
|
Options outstanding at March 31, 2012
|
3,273 | $ | 5.96 |
7.90 years
|
$ | 868 | |||||||
|
Options vested and expected to vest at March 31, 2012
|
2,747 | $ | 5.99 |
7.82 years
|
$ | 741 | |||||||
|
Options exercisable at March 31, 2012
|
1,014 | $ | 8.00 |
5.65 years
|
$ | 27 | |||||||
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 $0.3 million and $0.2 million for the three months ended March 31, 2012 and 2011, respectively, and $0.7 million and $0.4 million for the six months ended March 31, 2012 and 2011, respectively.
As of March 31, 2012 a total of $3.2 million of unrecognized compensation cost related to stock options, net of estimated forfeitures, was expected to be recognized over a 2.98 year weighted-average period.
RESTRICTED STOCK UNITS
In March 2011, we reversed $1.5 million in expense related to restricted stock units awarded to our former CEO which did not meet vesting conditions:
BOARD OF DIRECTOR RESTRICTED STOCK UNITS
In accordance with our Board compensation package, our non-employee Board members are awarded 9,000 restricted stock units annually upon their election to our Board at our annual meeting. The following awards are outstanding as of March 31, 2012:
|
Total restricted stock units awarded
|
Vesting date
|
|
|
2011 annual meeting
|
63,000
|
April 14, 2012
|
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. During February 2010 we entered into an agreement in which two of our board members not standing for re-election at our 2010 annual meeting of stockholders were each entitled to the accelerated vesting on April 8, 2010 of the restricted stock units that they were awarded in March 2009. On April 13, 2012 we granted 9,000 restricted stock units to each of our non employee directors which will vest on April 13, 2013.
The following table provides information on the expense related to the restricted stock unit awards to the Board of Directors:
|
(in thousands)
|
2011 annual meeting
|
2009 annual meeting
|
||||||
|
Expense recognized for the quarter ended March 31, 2012
|
$ | 100 | $ | 68 | ||||
|
Expense recognized through March 31, 2012
|
$ | 306 | $ | 416 | (a) | |||
|
Estimated expense to be recognized through vesting date
|
(b)
|
(b)
|
||||||
|
a. This amount includes the $0.1 million recognized related to the acceleration for the two board members not standing for re-election at our 2010 annual meeting.
b. 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.
|
||||||||
PERFORMANCE STOCK UNITS
In December 2008, upon recommendation of the Compensation Committee, our Board of Directors adopted the Official Payments Holdings, Inc. Executive Performance Stock Unit Plan, or the PSU Plan. Executives selected by our Chief Executive Officer were eligible to participate. Under the PSU Plan, up to 800,000 Performance Stock Units, or PSUs, were approved for issuance. The PSUs would have been awarded if we had achieved and maintained for a period of 60 days performance targets of $8.00, $9.50, $11.00, and $13.00 per share. We intended to pay the PSUs in cash in the pay period in which the PSUs became fully vested. The executives would have received a cash payment equal to (x) the price of a share of our common stock as of the close of market on the date of vesting, but not more than $15.00, multiplied by (y) the number of PSUs that had been awarded to the executive.
The specific share performance targets were not met as of the expiration of the plan on December 4, 2011, and as such, these PSUs expired unawarded.
NOTE 12—LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per share:
|
Three months ended March 31,
|
Six months ended March 31,
|
|||||||||||||||
|
(in thousands, except per share data)
|
2012
|
2011
|
2012
|
2011
|
||||||||||||
|
Numerator:
(Loss) income from:
|
||||||||||||||||
|
Continuing operations, net of income taxes
|
$ | (1,408 | ) | $ | (1,372 | ) | $ | (3,042 | ) | $ | (2,469 | ) | ||||
|
Discontinued operations, net of income taxes
|
(3 | ) | 300 | (12 | ) | 302 | ||||||||||
|
Net loss
|
$ | (1,411 | ) | $ | (1,072 | ) | $ | (3,054 | ) | $ | (2,167 | ) | ||||
|
Denominator:
|
||||||||||||||||
|
Basic weighted-average common shares outstanding
|
16,642 | 16,928 | 16,642 | 17,577 | ||||||||||||
|
Effects of dilutive common stock options
|
— | — | — | — | ||||||||||||
|
Diluted weighted-average shares
|
16,642 | 16,928 | 16,642 | 17,577 | ||||||||||||
|
(Loss) earnings per basic and diluted share
|
||||||||||||||||
|
From continuing operations
|
$ | (0.08 | ) | $ | (0.08 | ) | $ | (0.18 | ) | $ | (0.14 | ) | ||||
|
From discontinued operations
|
— | 0.02 | — | 0.02 | ||||||||||||
|
Loss per basic and diluted share
|
$ | (0.08 | ) | $ | (0.06 | ) | $ | (0.18 | ) | $ | (0.12 | ) | ||||
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 March 31,
|
Six months ended March 31,
|
|||
|
(in thousands)
|
2012
|
2011
|
2012
|
2011
|
|
Weighted-average options excluded from computation of diluted loss per share
|
2,056
|
1,254
|
2,105
|
1,534
|
Due to net losses from Continuing Operations, the following common stock equivalents were excluded from the calculation of diluted loss per share since their effect would have been anti-dilutive:
|
Three months ended
March 31,
|
Six months ended
March 31,
|
|||
|
(in thousands)
|
2012
|
2011
|
2012
|
2011
|
|
Common stock equivalents excluded from computation of diluted loss per share
|
30
|
39
|
23
|
31
|
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 i.
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 Holdings, Inc., or Official Payments, is a leading provider of biller direct electronic payment solutions. These solutions provide processing for Web, call center and point-of-sale environments. We partner and connect with a host of payment processors and other payment service providers to offer our clients a single source solution that simplifies electronic payment management. Our solutions include multiple payment options, including bill presentment, convenience payments, installment payments and flexible payment scheduling. Our solutions offer our clients a range of online payment options, including credit and debit cards, electronic checks, cash and money orders, and alternative payment types.
SUMMARY OF OPERATING RESULTS
The following table provides a summary of our operating results by segment for the three and six months ended March 31, 2012, for our Payment Solutions, our VSA operations and our Discontinued Operations:
|
Three months ended
March 31, 2012
|
Six months ended
March 31, 2012
|
|||||||||||||||
|
(in thousands, except per share)
|
Net loss
|
Loss per share
|
Net (loss) income
|
(Loss) earnings per share
|
||||||||||||
|
Continuing Operations:
|
||||||||||||||||
|
Payment Solutions
|
$ | (1,354 | ) | $ | (0.08 | ) | $ | (3,302 | ) | $ | (0.20 | ) | ||||
|
VSA
|
(54 | ) | — | 260 | 0.02 | |||||||||||
|
Total Continuing Operations
|
$ | (1,408 | ) | $ | (0.08 | ) | $ | (3,042 | ) | $ | (0.18 | ) | ||||
|
Total Discontinued Operations
|
$ | (3 | ) | $ | — | $ | (12 | ) | $ | — | ||||||
|
Net loss
|
$ | (1,411 | ) | $ | (0.08 | ) | $ | (3,054 | ) | $ | (0.18 | ) | ||||
2012 INITIATIVES
We believe that the changes that we made in fiscal year 2011 have left us well positioned for improved performance in fiscal year 2012. We completed our previously announced relocation of our principal executive offices to our Norcross, Georgia office and closed our Reston, Virginia facility during the quarter ended December 31, 2011. In connection with this move, we have made significant personnel upgrades
in Finance and Accounting, Sales and Business Development, Product Management, Operations, Software Development and Technology Infrastructure.
As previously discussed, we are in the process of making significant investments in the hardware, software, and services we need to improve our reliability, security, and to enable us to handle significant increases in transaction volume in the future. An important step in building the operational capacity and efficiency we need is the reduction of our data center footprint. We started fiscal year 2011 with five data centers but are now down to three. We transferred mission critical customer support and reporting capabilities from an outdated data center adjacent to our San Ramon, California office to our Tulsa, Oklahoma data center and moved a number of corporate support IT functions out of our Reston office to our Norcross data center.
In addition to the infrastructure upgrades we are investing in, we are also focused on new product capabilities to meet the needs of both existing clients and new prospects. We remain very focused on the government, higher education, and municipal utility vertical markets, but we will continue to explore opportunities to expand our presence in the charitable giving, insurance, and property management vertical markets on an opportunistic basis. It is important to note that we are building new product capabilities in a decoupled way, whenever possible, so that we will be able to move to a single technology architecture. We currently support three processing platforms, a legacy of the acquisitions that led to the formation of the company as it exists today, but we believe that efficiency and earnings leverage are attainable from a single processing platform. We therefore intend to execute the previously discussed platform consolidation project during the next 18 to 30 months.
We are also very focused on reducing our overall processing costs, including both interchange 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 resulting higher net revenue. We are beginning to see improvements in our net revenue as well as our gross margin from our efforts to reduce our overall processing costs. We cannot be sure that we will be able to maintain these cost savings in future periods. After we concluded our second quarter we were informed that VISA is implementing a new Fixed Acquirer Network Fee (“FANF”), effective May 1, 2012. This is essentially a new access charge to allow merchant processors to access the VISA network. We are evaluating what the impact of FANF will be on our overall processing costs based on the number of clients for whom we process transactions. The FANF charge imposed by VISA could cause a significant increase in our processing costs in future periods.
From a regulatory perspective, on October 1, 2011, the final rules implementing the Durbin Amendment, or Durbin, to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or Financial Reform Act, became effective. Durbin places limits on debit card interchange rates that card issuing banks may charge. Therefore, beginning in the first quarter of our fiscal year 2012, we experienced a decrease in Direct Costs in our Consolidated Statements of Operations, since we process a large number of debit card transactions. We anticipate realizing benefits from Durbin throughout the remainder of our fiscal year 2012. We believe it is too early to predict the long-term impact of Durbin on the debit and credit card markets.
RESULTS OF OPERATIONS
The following table provides an overview of our results of operations for the three months and six months ended March 31, 2012 and 2011:
|
Three months ended
|
Variance
|
|||||||||||||||
|
March 31,
|
2012 vs. 2011
|
|||||||||||||||
|
(in thousands, except percentages)
|
2012
|
2011
|
$ | % | ||||||||||||
|
Revenues
|
$ | 32,820 | $ | 30,266 | $ | 2,554 | 8.4 | % | ||||||||
|
Costs and expenses
|
34,228 | 31,844 | 2,384 | 7.5 | % | |||||||||||
|
Loss from continuing operations before other income and income taxes
|
(1,408 | ) | (1,578 | ) | 170 | 10.8 | % | |||||||||
|
Other income
|
— | 20 | (20 | ) | (100.0 | )% | ||||||||||
|
(Loss) gain from continuing operations before income taxes
|
(1,408 | ) | (1,558 | ) | 150 | 9.6 | % | |||||||||
|
Income tax benefit
|
— | 186 | 186 | 100.0 | % | |||||||||||
|
Loss from continuing operations
|
(1,408 | ) | (1,372 | ) | (36 | ) | (2.8 | )% | ||||||||
|
(Loss) gain from discontinued operations, net
|
(3 | ) | 300 | (303 | ) | (104.0 | )% | |||||||||
|
Net loss
|
$ | (1,411 | ) | $ | (1,072 | ) | $ | 339 | (31.6 | )% | ||||||
|
Six months ended
|
Variance
|
|||||||||||||||
|
March 31,
|
2012 vs. 2011
|
|||||||||||||||
|
(in thousands, except percentages)
|
2012
|
2011
|
$ | % | ||||||||||||
|
Revenues
|
$ | 67,657 | $ | 63,236 | $ | 4,421 | 7.0 | % | ||||||||
|
Costs and expenses
|
70,700 | 65,947 | 4,753 | 7.2 | % | |||||||||||
|
Loss from continuing operations before other income and income taxes
|
(3,043 | ) | (2,711 | ) | (332 | ) | 12.2 | % | ||||||||
|
Other income
|
1 | 57 | (56 | ) | (98.3 | )% | ||||||||||
|
Loss from continuing operations before income taxes
|
(3,042 | ) | (2,654 | ) | (388 | ) | 14.6 | % | ||||||||
|
Income tax benefit
|
— | 185 | 185 | (100.0 | )% | |||||||||||
|
Loss from continuing operations
|
(3,042 | ) | (2,469 | ) | (573 | ) | 23.2 | % | ||||||||
|
(Loss) gain from discontinued operations, net
|
(12 | ) | 302 | (314 | ) | (103.9 | )% | |||||||||
|
Net loss
|
$ | (3,054 | ) | $ | (2,167 | ) | $ | (887 | ) | (40.9 | )% | |||||
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 core Payment Solutions business and our VSA operations. Following is an analysis of the variances in these financial results.
Payment Solutions net revenue is a non-GAAP financial measure. We believe this measure is useful for evaluating our business as we conclude our VSA operations and our performance against peer companies within the electronic payments industry. We also believe that this measure provides investors with additional transparency with respect to financial measures used by management in its financial and operational
decision-making. Non-GAAP financial measures should not be considered a substitute for the reported results prepared in accordance with generally accepted accounting principles in the United States, or US GAAP. Our definitions used to calculate non-GAAP financial measures may differ from those used by other companies. The following table provides the reconciliation from Payment Solutions net revenue to the most comparable GAAP measure, revenue from continuing operations for the three and six months ended March 31, 2012 and 2011:
|
Net Revenue
|
||||||||||||||||
|
Three months ended March 31,
|
||||||||||||||||
|
(in thousands, except percentages)
|
2012
|
2011
|
Change ($)
|
Change (%)
|
||||||||||||
|
Revenue from continuing operations
|
$ | 32,820 | $ | 30,266 | $ | 2,554 | 8.4 | % | ||||||||
|
Less:
|
||||||||||||||||
|
VSA revenue
|
350 | 362 | (12 | ) | (3.3 | )% | ||||||||||
|
Payment Solutions gross revenue
|
32,470 | 29,904 | 2,566 | 8.6 | % | |||||||||||
|
Less:
|
||||||||||||||||
|
Discount fees
|
20,938 | 21,884 | (946 | ) | (4.3 | )% | ||||||||||
|
Payment Solutions net revenue
|
$ | 11,532 | $ | 8,020 | $ | 3,512 | 43.8 | % | ||||||||
|
Net Revenue
|
||||||||||||||||
|
Six months ended March 31,
|
||||||||||||||||
|
(in thousands, except percentages)
|
2012
|
2011
|
Change ($)
|
Change (%)
|
||||||||||||
|
Revenue from continuing operations
|
$ | 67,657 | $ | 63,236 | $ | 4,421 | 7.0 | % | ||||||||
|
Less:
|
||||||||||||||||
|
VSA revenue
|
885 | 855 | 30 | 3.5 | % | |||||||||||
|
Payment Solutions gross revenue
|
66,772 | 62,381 | 4,391 | 7.0 | % | |||||||||||
|
Less:
|
||||||||||||||||
|
Discount fees
|
43,281 | 45,292 | (2,011 | ) | (4.4 | )% | ||||||||||
|
Payment Solutions net revenue
|
$ | 23,491 | $ | 17,089 | $ | 6,402 | 37.5 | % | ||||||||
Payment Solutions net revenue increased 43.8% to $11.5 million during the three months ended March 31, 2012 from $8.0 million during the three months ended March 31, 2011. For the six months ended March 31, 2012 Payment Solutions net revenue increased 37.5% or $6.4 million compared to the six months ended March 31, 2011. The increase in net revenue was driven primarily by lower interchange rates we incurred for processing consumer payments. Late in the first quarter of fiscal year 2012 we began to realize savings associated with negotiating lower processing fees for some of our customers. These savings continued during the second quarter of fiscal year 2012, however, depending on the payment mix as determined by the consumer, we cannot assure the amount of these savings we will realize in future periods. 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 revenue from VSA operations.
Revenues (Continuing Operations)
The following table compares the revenues generated by our Continuing Operations during the three and six months ended March 31, 2012 and 2011:
|
Three months ended
|
||||||||||||||||
|
March 31,
|
Variance
|
|||||||||||||||
|
(in thousands, except percentages)
|
2012
|
2011
|
$ | % | ||||||||||||
|
Revenues
|
||||||||||||||||
|
Payment Solutions
|
$ | 32,470 | $ | 29,904 | $ | 2,566 | 8.6 | % | ||||||||
|
VSA
|
350 | 362 | (12 | ) | (3.3 | )% | ||||||||||
|
Total
|
$ | 32,820 | $ | 30,266 | $ | 2,554 | 8.4 | % | ||||||||
|
Six months ended
|
||||||||||||||||
|
March 31,
|
Variance
|
|||||||||||||||
|
(in thousands, except percentages)
|
2012
|
2011
|
$ | % | ||||||||||||
|
Revenues
|
||||||||||||||||
|
Payment Solutions
|
$ | 66,772 | $ | 62,381 | $ | 4,391 | 7.0 | % | ||||||||
|
VSA
|
885 | 855 | 30 | 3.5 | % | |||||||||||
|
Total
|
$ | 67,657 | $ | 63,236 | $ | 4,421 | 7.0 | % | ||||||||
The following sections discuss the key factors that caused these revenue changes from our Continuing Operations.
Payment Solutions Revenues: Payment Solutions provides electronic processing solutions, including payment of taxes, fees and other obligations owed to government entities, educational institutions, utilities and other public sector clients. Payments Solutions’ revenues reflect the number of contracts with clients, the volume of transactions processed under each contract and the rates that we charge for each transaction that we process.
Payment Solutions generated $32.5 million of revenues during the three months ended March 31, 2012, a $2.6 million, or 8.6%, increase over the three months ended March 31, 2011. During the three months ended March 31, 2012, we processed 0.2% fewer transactions than we did in the same period last year, however, the average payment increased 10.6% compared to the same quarter in 2011. The increase in average payments represented 10.5% more dollars processed in the three months ended March 31, 2012 compared to the three months ended March 31, 2011. We believe the growth in dollars processed, as compared with the growth in transactions, is due primarily to increased size of federal and real property tax payments.
Payment Solutions generated $66.8 million of revenues during the six months ended March 31, 2012, a $4.4 million, or 7.0%, increase over the six months ended March 31, 2011. During the six months ended March 31, 2012, we processed 1.7% more transactions than we did in the same period last year, representing 11.4% more dollars. See the prior paragraph for a discussion on growth in dollars processed compared to transactions, as well as average payment size. Most of our vertical markets experienced an increase in transactions processed during the six months ended March 31, 2012 compared to the same period last year, ranging from 0.3% to 43.1%. However, our Utilities vertical market incurred a 13.0% decrease in transactions processed for the six months ended March 31, 2012 when compared to the same period in the prior year, again due to a decrease in transactions for large utilities.
The Federal vertical is composed primarily of two components: (1) a partnership with an online tax filing service and (2) our contract with the IRS, which we traditionally implement through our primary brand, Official Payments. Both components faced new competitive pressures this tax season. Our partnership with the online tax filing service, which had been exclusive to us is now in its third year of reduced volume as another payments services company has the primary position. Our contract with the IRS continues in its third year in
which there are three providers of electronic payment services instead of two and we are listed in position two this year on the IRS website. The number of transactions we processed through the IRS contract for this tax season, which started January 1, 2012, have decreased 5 percent through the end of the second quarter of fiscal 2012, as compared with the same period in 2011. However, the average payment size to the IRS for this tax season has increased 10%, reversing trends we had seen in prior years related to the average payment size.
Our gross margin from Continuing Operations (which we calculate by subtracting (i) direct costs for Continuing Operations from (ii) revenue from Continuing Operations) and gross margin percentage (which we calculate by dividing (i) gross margin from Continuing Operations by (ii) revenue from Continuing Operations) depend on four principal factors: revenue, cost, the number of transactions processed, and the mix of transactions among verticals.
|
·
|
Our revenue from a transaction depends on whether we receive a flat fee for the transaction, or whether our revenue is equal to a percentage of the amount paid. Across our client base, there is variability in the size of the flat fees and the percentages we receive. The mix of flat fees and percentages, their sizes, and the resulting revenues depend on many competitive considerations, including the regulations of payment networks, the competition we face, and the level of service that we provide. When our revenue is based on a percentage of the amount paid, our revenue will fluctuate based on the size of the payment which itself will be affected by all the factors that cause payment amounts to differ.
|
|
·
|
Our direct cost for a transaction depends principally on how the payment is made. It costs us more to process certain types of transactions and less to process other types of transactions. We discuss our Payment Solutions direct costs in more detail below.
|
|
·
|
The number of transactions we process and the mix of transactions among vertical markets are influenced by many considerations, including bill-payers’ preferences for electronic forms of payment; the shift among federal, state, and local governments, educational institutions, and private entities to electronic payment options; the success of our sales and marketing effort; and the attractiveness of our products and services, among other things.
|
Each of these factors is subject to change, and some changes in the composition of our business affect more than one of these factors. As a result of these changes, our gross margin from Continuing Operations and our gross margin percentage may change at different rates from each other.
We expect to see continued revenue growth in fiscal year 2012 compared with fiscal year 2011 as we continue to experience larger average payment size.
VSA Revenues: During the three months ended March 31, 2012, our VSA operations generated $0.4 million in revenues, a $0.01 million, or 3.3%, decrease from the three months ended March 31, 2011. During the six months ended March 31, 2012, VSA generated $0.9 million in revenues, a $0.03 million, or 3.5%, increase from the six months ended March 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 and assessments payable to the banks as well as 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 clients. The following table provides a year-over-year comparison of direct costs incurred by our Continuing Operations during the three and six months ended March 31, 2012 and 2011:
|
Three months ended
|
||||||||||||||||
|
March 31,
|
Variance
|
|||||||||||||||
|
(in thousands, except percentages)
|
2012
|
2011
|
$ | % | ||||||||||||
|
Direct costs
|
||||||||||||||||
|
Payment Solutions:
|
||||||||||||||||
|
Discount fees
|
$ | 20,938 | $ | 21,884 | $ | (946 | ) | (4.3 | )% | |||||||
|
Other costs
|
1,601 | 1,382 | 219 | 15.8 | % | |||||||||||
|
Total Payment Solutions
|
22,539 | 23,266 | (727 | ) | (3.1 | )% | ||||||||||
|
VSA
|
361 | 66 | 295 | 447.0 | % | |||||||||||
|
Total
|
$ | 22,900 | $ | 23,332 | $ | (432 | ) | (1.9 | )% | |||||||
|
Six months ended
|
||||||||||||||||
|
March 31,
|
Variance
|
|||||||||||||||
|
(in thousands, except percentages)
|
2012
|
2011
|
$ | % | ||||||||||||
|
Direct costs
|
||||||||||||||||
|
Payment Solutions:
|
||||||||||||||||
|
Discount fees
|
$ | 43,281 | $ | 45,292 | $ | (2,011 | ) | (4.4 | )% | |||||||
|
Other costs
|
3,042 | 2,791 | 251 | 9.0 | % | |||||||||||
|
Total Payment Solutions
|
46,323 | 48,083 | (1,760 | ) | (3.7 | )% | ||||||||||
|
VSA
|
452 | 119 | 333 | 279.8 | % | |||||||||||
|
Total
|
$ | 46,775 | $ | 48,202 | $ | (1,427 | ) | (3.0 | )% | |||||||
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 $0.7 million, or 3.1%, during the three months ended March 31, 2012 compared to the same period last year. Discount fees decreased $0.9 million, or 4.1%, over the same period last year. The decrease in discount fees is a result of the savings associated with negotiating lower processing fees for some of our customers coupled with the final rules implementing the Durbin provisions of the Financial Reform Act becoming effective on October 1, 2011. Durbin places limits on debit card interchange rates that card issuing banks may charge. Therefore, beginning in the first quarter of our fiscal year 2012, we began to realize a decrease in Direct Costs in our Consolidated Statements of Operations, since we process a large number of debit card transactions. and we continued to see a reduction in our discount fees associated with debit card transactions in the second quarter of fiscal 2012. Although it is too early 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 2012. During the remainder of fiscal 2012, we expect to see a decrease in our Payment Solutions direct costs when compared to the same period in the prior year.
During the six months ended March 31, 2012, Payment Solutions direct costs decreased $1.8 million, or 3.7%, when compared to the same period last year. Discount fees decreased $1.9 million, or 4.2%, over the same period last year. As stated above, our ability to negotiate lower interchange fees for some of our customers along with the impact of the Durbin amendment has contributed to the decrease in discount fees.
Other direct costs increased $0.1 million, or 4.4%, during the six months ended March 31, 2012. This increase is attributed to increased co-location facility costs.
VSA Direct Costs: During the three and six months ended March 31, 2012, direct costs from our Wind-down operations increased $0.3 million or 447.0%, and $0.3 million or 279.8%, respectively, from the same period last year. This increase is attributable to the cost associated with an equipment sale to a
customer. As we wind down these operations, we expect that the direct costs of these operations will approximate $0.1 million or less per quarter during the remainder of fiscal 2012.
General and Administrative (Continuing Operations)