Usio, Inc. (filed as Payment Data Systems, Inc.) — Q2 2014 Form 10-Q Summary
Business context and reporting period
The unaudited Form 10-Q covers the quarter and six months ended June 30, 2014. The company provides electronic payment processing services, including credit and debit card processing, ACH processing, prepaid card program management, and online payment services through Billx. The filing identifies the registrant as Payment Data Systems, Inc.; the request identifies the company as Usio, Inc.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $3.30 million, up 255% | $6.03 million, up 203% |
| Operating income | $466,379 | $636,843 |
| Net income | $486,801 | $648,540 |
| Operating margin | 14.1% | 10.6% |
| Net margin | 14.7% | 10.7% |
| Net cash provided by operating activities | Not separately reported for the quarter | $34.25 million |
- Cost of services was $2.35 million for the quarter and $4.44 million for the six months, representing approximately 71.1% and 73.6% of revenue, respectively.
- Cash and cash equivalents were $60.79 million at June 30, 2014, compared with $26.57 million at December 31, 2013.
- Working capital was $1.11 million at June 30, 2014, compared with $368,149 at year-end 2013.
- Total assets were $62.11 million and stockholders’ equity was $1.44 million at June 30, 2014.
- Customer deposits payable were $59.49 million, up $33.75 million from December 31, 2013. These balances principally represent cash held in transit and customer security deposits and substantially explain the increase in cash and operating cash flow.
- The filing does not report borrowings or outstanding debt; current liabilities primarily consist of customer deposits payable and accrued expenses.
- Marketable securities were $32,835 and were classified as trading securities. The company reported $34,471 of net other income for the six-month period, including $29,238 of interest income.
Material changes versus the prior comparable period
- Revenue increased from $930,830 to $3.30 million in the second quarter and from $1.99 million to $6.03 million for the first six months, primarily because of increased ACH processing for newly acquired customers.
- The company shifted from prior-year operating losses of $321,900 for the quarter and $544,558 for the six months to operating income of $466,379 and $636,843, respectively.
- Net results improved from a prior-year quarterly loss of $266,484 and six-month loss of $498,915 to net income of $486,801 and $648,540.
- Credit and debit card transactions increased 14% year over year in the second quarter, while dollars processed increased 56%. ACH transactions increased 45% from the first quarter of 2014, and returned-check transactions increased 27% sequentially.
- Operating cash flow improved from a use of $1.05 million in the prior-year six-month period to $34.25 million, principally because of the $33.75 million increase in customer deposit payables.
- Cost of services increased faster than revenue for the six-month period, rising 169% versus revenue growth of 203%. Selling, general and administrative expenses increased 8% for the six months, primarily because of higher employee bonus compensation.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects transaction volumes, customer enrollment, sales activity, and profitability trends to continue for the foreseeable future, but cautions that future operating results and the timing of sustained profitability are uncertain and future losses remain possible.
- Sustained profitability depends on customer growth and retention, marketing, technology and processing-system maintenance, customer service, competition, qualified personnel, expense management, and adaptation to industry and technology changes.
- Customer deposits are generally repayable within 90 to 180 days after the last item is processed. These funds are not equivalent to unrestricted corporate cash and are associated with customer and processing obligations.
- The company maintains a $297,365 reserve for processing losses. Management states that significant processing losses have not occurred to date, but actual losses could exceed estimates as transaction volumes change. The allowance for doubtful accounts was $46,023 at June 30, 2014.
- The company had approximately $43.6 million of federal net operating loss carryforwards at December 31, 2013, with expirations beginning in 2020; approximately $3.5 million is subject to an Internal Revenue Code Section 382 limitation. A full valuation allowance reduced deferred tax assets to zero.
- The company disclosed no material changes to previously reported risk factors, no material off-balance-sheet arrangements, and no material pending legal proceedings. Ordinary-course legal matters could nonetheless have an adverse effect.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
- The company is evaluating a new revenue-recognition standard issued in May 2014 and expects to adopt it in the first quarter of 2017.
- A related-party service provider who is the chief operating officer’s father-in-law received $20,500 during the six months for network engineering and administration services.
Most important facts for an investor to verify
- Confirm that the substantial cash balance is reconciled to customer deposit obligations and is not largely restricted or required for settlement activities.
- Evaluate whether the sharp ACH-driven revenue and volume growth is recurring, including the retention and economics of newly acquired customers.
- Review processing-loss, chargeback, reserve, and customer-credit exposures as transaction volumes expand.
- Assess whether operating expenses and cost of services can remain controlled as processing volumes grow.
- Verify the company’s ability to sustain profitability given its historical accumulated deficit of $53.21 million and its stated warning that future losses remain possible.
- Review the company’s net operating loss carryforwards, Section 382 limitation, and valuation allowance for deferred tax assets.
- Confirm related-party service arrangements and compensation practices, including the payments to the executive’s family member.