Usio, Inc. (then Payment Data Systems, Inc.) — Q3 2012 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012; filed November 14, 2012. The filing identifies the registrant as Payment Data Systems, Inc., not Usio, Inc. Financial statements are unaudited.
Business context
The company provides electronic payment processing for merchants and businesses, including credit, debit, ACH and prepaid-card services. It also operates the Billx online payment service and offers private-label processing applications.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $2.334 million | $1.438 million | $5.099 million | $2.991 million |
| Operating income (loss) | $621,025 | $208,996 | $814,878 | $(104,106) |
| Net income (loss) | $626,742 | $262,541 | $800,120 | $(119,958) |
| Operating margin | 26.6% | 14.5% | 16.0% | (3.5%) |
| Net margin | 26.8% | 18.3% | 15.7% | (4.0%) |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $(308,308) | $1.001 million |
- Revenue increased 62% in Q3 and 70% for the first nine months, primarily from customer growth and higher card and ACH transaction volumes.
- Cost of services increased 39% year over year in both the quarter and nine-month period, while selling, general and administrative expenses increased 55% and 51%, respectively.
- Cash and cash equivalents were $3.036 million at September 30, 2012, compared with $3.679 million at December 31, 2011. Cash included a $500,000 certificate of deposit collateralizing the line of credit.
- Working capital improved to $817,308 from a deficit of $211,744 at year-end 2011.
- The company had no outstanding borrowings at September 30, 2012. Its $500,000 line of credit bore interest at 2.25% and matured November 16, 2012; nine-month borrowings were $479,405 and repayments were $779,405.
- Total assets were $4.474 million and stockholders’ equity was $1.673 million at September 30, 2012.
- Customer deposits payable declined to $1.807 million from $3.429 million at year-end 2011, materially affecting operating cash flow.
Material changes versus the prior comparable period
- The company shifted from a nine-month operating loss of $104,106 and net loss of $119,958 in 2011 to operating income of $814,878 and net income of $800,120 in 2012.
- Q3 profitability increased, but the year-over-year improvement was partly offset by lower unrealized gains on marketable securities: $17,450 in Q3 2012 versus $66,809 in Q3 2011.
- Operating cash flow changed from $1.001 million provided in the first nine months of 2011 to $308,308 used in 2012, primarily because customer deposit payables decreased by $1.622 million.
- Accounts payable and accrued expenses increased by $424,022 during the first nine months of 2012, compared with a $4,787 decrease in the prior-year period.
- The Dutchess Private Equities equity line expired on September 10, 2012. No shares were sold under the facility in 2012, 2011 or 2010.
- Shares outstanding were 142,721,077 issued and 137,725,833 outstanding at September 30, 2012; the filing reports 142,721,077 shares outstanding as of November 7, 2012, an apparent presentation inconsistency requiring verification.
Guidance, outlook, risks and unusual items
- Management provided no specific quantitative revenue, earnings or cash-flow guidance. It stated that continued profitability depends on growing the customer base and transaction volumes, controlling expenses, maintaining technology and processing systems, and responding to competition and industry developments.
- Management expected the expanded client base and higher transaction volumes to provide sufficient cash for operations for the foreseeable future, but results for interim periods are not necessarily indicative of full-year results.
- Merchant processing creates chargeback and credit risk. The reserve for merchant losses was $131,544, and the allowance for doubtful accounts was approximately $72,000. Management noted that these amounts may increase as transaction volume grows.
- A $702,337 related-party receivable remained outstanding from CEO/CFO Michael Long and President/COO Louis Hoch for unpaid employment-agreement loan installments. The receivable was unchanged from December 31, 2011.
- The company maintained a full valuation allowance against deferred tax assets and reported approximately $44 million of net operating-loss carryforwards at December 31, 2011, with expirations beginning in 2020. Approximately $3.5 million was subject to an Internal Revenue Code Section 382 limitation.
- On September 17, 2012, the company sued former customer SmartCard Marketing Systems, seeking approximately $72,000 in economic damages plus attorneys’ fees. The outcome was uncertain.
- Management reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2012.
Investor verification points
- Confirm the registrant identity and corporate-name continuity between Payment Data Systems, Inc. in the filing and Usio, Inc.
- Assess whether operating cash flow can normalize after the significant reduction in customer deposit payables.
- Evaluate the collectability and governance implications of the $702,337 related-party receivable.
- Confirm the status and renewal or replacement of the credit line after its November 16, 2012 maturity.
- Review merchant chargeback exposure, reserves and the adequacy of the doubtful-account allowance as transaction volumes increase.
- Verify the discrepancy between issued shares and the November 7, 2012 share-count disclosure.
- Monitor the SmartCard litigation and any resulting recovery, costs or contingencies.