Usio, Inc. (formerly Payment Data Systems, Inc.) — Q3 2014 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the unaudited three and nine months ended September 30, 2014, filed November 13, 2014. The company provides electronic payment processing services, including credit and debit card processing, ACH transactions, prepaid card program management, online payments, and related private-label services.
As of November 13, 2014, 137,224,398 common shares were outstanding. The company was a smaller reporting company and reported effective disclosure controls, with no material changes in internal control over financial reporting.
Financial Highlights
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $3.596 million | $0.963 million | $9.631 million | $2.953 million |
| Operating income (loss) | $0.677 million | $(0.269) million | $1.314 million | $(0.814) million |
| Net income (loss) | $0.689 million | $(0.340) million | $1.337 million | $(0.839) million |
| Operating margin | 18.8% | (28.0%) | 13.6% | (27.6%) |
| Net margin | 19.1% | (35.3%) | 13.9% | (28.4%) |
| Basic EPS | $0.01 | $0.00 | $0.01 | $(0.01) |
- Q3 revenue increased 274%; nine-month revenue increased 226%, primarily due to higher credit, debit, ACH, and returned-transaction volumes from newly acquired customers.
- Cost of services increased 196% in Q3 and 178% for the nine-month period, reflecting increased processing volumes and third-party processing fees.
- Cash flow from operating activities was $34.237 million for the nine months ended September 30, 2014, compared with $5.662 million in the prior-year period.
- Capital expenditures were $35,346 for the nine-month period. There was no financing cash flow in 2014, compared with $301,255 used for treasury-stock purchases in 2013.
- Cash and cash equivalents were $60.776 million at September 30, 2014, compared with $26.574 million at December 31, 2013.
- Working capital was $1.880 million at September 30, 2014, compared with $0.368 million at December 31, 2013.
- The balance sheet contains no separately reported debt. Current liabilities were dominated by customer deposits payable of $58.907 million.
Material Changes Versus the Prior Comparable Period
- Total dollars processed exceeded $796 million in Q3 2014, described by management as a company record.
- Credit and debit processing transactions increased 16% year over year, while credit and debit dollars processed increased 59% compared with the second quarter of 2014.
- ACH processing transactions increased 2% year over year. Returned-check transactions increased 219% compared with the second quarter of 2014.
- Customer deposits payable increased $33.167 million from year-end 2013, largely reflecting higher ACH transaction volumes and increased cash reserve requirements for certain customers. These deposits substantially explain the increase in operating cash flow and cash balances.
- Interest income increased to $47,729 for the nine months from $651 in the prior-year period because of higher cash balances.
- The accumulated deficit declined to $52.517 million from $53.854 million at December 31, 2013, reflecting the nine-month net income.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that it expected the profitability achieved in the first three quarters of 2014 to continue for the foreseeable future, but cautioned that the extent of future operating profits was uncertain and that future operating losses remained possible. The company planned to focus on customer acquisition, expense management, technology and processing-system upgrades, customer service, and selective outsourcing of processing services.
- Processing-loss reserve was $297,365 at both September 30, 2014 and December 31, 2013. Management reported no significant processing losses to date, but actual losses could exceed estimates, particularly as transaction volumes increase.
- Customer deposits include security deposits and cash held in transit for customers. Deposits are generally repayable 90 to 180 days after the last item is processed, creating potential liquidity and settlement obligations.
- The company had approximately $43.6 million of federal net operating loss carryforwards at December 31, 2013, but maintained a full valuation allowance because realization of deferred tax assets was not considered reasonably certain.
- Management identified dependence on customer growth, marketing execution, expense control, technology, qualified personnel, competition, changing customer requirements, and industry developments as key risks to sustained profitability.
- Ordinary-course legal matters were not considered material, although the company stated that future litigation could adversely affect results. No material changes were reported to previously disclosed risk factors.
- The company paid $30,481 during the first nine months of 2014 to a service provider who is the father-in-law of the company’s president and chief operating officer.
- The company reported no material off-balance-sheet arrangements, no unregistered equity issuances during the period, and no defaults upon senior securities.
- A new revenue-recognition standard issued in May 2014 was not yet effective; the company was evaluating its potential impact and planned adoption in the first quarter of 2017.
Investor Verification Items
- Verify the sustainability and quality of revenue growth, including the contribution from newly acquired customers and the record processing volumes.
- Separate unrestricted corporate cash from customer funds and cash held in transit, given the $58.907 million customer-deposit liability.
- Assess whether processing-loss reserves and customer security deposits remain adequate as transaction volumes grow.
- Review the company’s ability to convert profitability into recurring free cash flow after settlement obligations and customer-deposit movements.
- Evaluate the risk that future processing costs, customer acquisition expenses, or competitive pressure could compress the reported margins.
- Confirm the treatment and realizability of approximately $43.6 million of net operating loss carryforwards and the related valuation allowance.
- Review related-party service payments and governance disclosures, as well as the company’s historical executive-related transactions.