Business Context and Reporting Period
Payment Data Systems, Inc. (now associated with Usio, Inc.) filed this Form 10-K for the fiscal year ended December 31, 2012. The company operated as a U.S.-only, single-segment electronic payments processor, providing ACH, credit and debit card processing, prepaid card program management, online bill payment services through billx.com, and related technology services.
Merchant accounts increased to 711 at year-end 2012 from 675 at year-end 2011, while average monthly billx.com users declined to 2,876 from 2,962. One reseller customer represented 21% of 2012 revenue, compared with 44% in 2011.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $7.346 million | $4.813 million | Up 53% |
| Operating income | $1.391 million | $0.373 million | Up 273% |
| Net income | $1.275 million | $0.352 million | Up 263% |
| Basic EPS | $0.01 | $0.00 | Improved |
| Net cash from operations | $0.475 million | $2.405 million | Down 80% |
| Capital expenditures | $0.094 million | $0.005 million | Higher |
| Cash and cash equivalents | $3.760 million | $3.679 million | Up $0.081 million |
| Working capital | $1.261 million | $(0.212) million | Improved |
| Outstanding line-of-credit borrowings | None | $0.300 million | Repaid and expired |
Cost of services rose to $4.187 million from $3.094 million, primarily because of higher transaction volume. Operating expenses were $5.955 million, compared with $4.440 million. Other expense increased to $39,761, primarily due to unrealized losses on marketable securities.
Calculated operating margin improved to approximately 18.9% from 7.7%, and net margin improved to approximately 17.4% from 7.3%. The filing does not present these margins as reported metrics.
Total assets were $5.156 million and stockholders’ equity was $2.138 million at December 31, 2012, compared with $4.910 million and $0.611 million, respectively, at December 31, 2011. Customer deposits payable declined to $2.115 million from $3.429 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by increased customers and transaction volumes in card-based and ACH processing.
- The company remained profitable throughout 2012 after becoming profitable in the third quarter of 2011; accumulated deficit remained substantial at $53.065 million.
- Operating cash flow fell materially because of a $1.314 million decrease in customer deposits payable, despite higher net income.
- Cash increased modestly, while the $500,000 secured line of credit matured and was fully repaid in November 2012.
- Stock-based compensation declined to $251,830 from $348,768, while other selling, general and administrative expenses increased to $1.509 million from $993,877.
- The processing-loss reserve increased to $214,560 from $131,544; the allowance for doubtful accounts decreased to $50,362 from $103,052.
- The company issued 5 million restricted shares during 2012 and had approximately $1.580 million of unrecognized share-based compensation remaining at year-end.
Guidance, Outlook, Risks, Contingencies and Unusual Items
Management expected to remain profitable for the foreseeable future but cautioned that profitability was recent and could not be assured. The strategy focused on customer acquisition, maintaining and upgrading technology, controlling operating expenses, and using third-party processors to expand without significantly increasing fixed costs. No specific revenue, earnings or margin guidance was provided.
- Key risks include dependence on bank sponsors, ACH relationships, card networks and third-party processors; termination or repricing of these relationships could disrupt operations or increase costs.
- One customer accounted for 21% of revenue and was not contractually required to continue using the company’s services.
- The business is exposed to chargebacks, merchant insolvency, fraud, cardholder overdrafts and regulatory fines. Reported fraud losses were less than $10,000 in 2012, and overdrawn cardholder balances were less than $5,000 at year-end.
- Payment processing and prepaid card operations face extensive federal and state regulation, including potential additional prepaid-card oversight, anti-money-laundering requirements and privacy obligations.
- Security breaches, system outages, software defects or failures at third-party providers could result in liability, penalties, reputational damage and lost customers.
- The company held approximately $44 million of tax net operating loss carryforwards, but recorded a full valuation allowance against deferred tax assets. The filing states that approximately $3.5 million is subject to an Internal Revenue Code Section 382 limitation.
- A legal action against SmartCard Marketing Systems was settled for $35,000 in cash and 500,000 shares; the litigation was dismissed with prejudice after receipt of the settlement consideration.
- After year-end, executives Michael Long and Louis Hoch transferred company shares valued at approximately $1.004 million to satisfy the $702,337 related-party receivable and to fund $301,255 of compensation in lieu of cash bonuses. The company also retired 5,575,510 shares and eliminated the receivable.
- The audit report expressed an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting, although the company was not required to obtain an auditor’s opinion on internal control.
Important Facts for Investors to Verify
- Confirm the corporate name and ticker transition from Payment Data Systems, Inc. to Usio, Inc., as the filed document uses the former name.
- Assess whether the sharp revenue and profit growth continued after 2012 and whether operating cash flow normalized after the customer-deposit reduction.
- Evaluate customer concentration and the status of the 21% reseller relationship.
- Review current bank-sponsor, ACH, card-network and third-party processing agreements, including termination rights and reserve requirements.
- Examine the effect of the subsequent related-party share transactions, share retirement and executive compensation arrangements on dilution, liquidity and governance.
- Monitor regulatory developments affecting prepaid cards, electronic payments, interchange fees, privacy and anti-money-laundering compliance.
- Reconcile the reported cash balance with customer deposits payable and processing-loss reserves to assess usable corporate liquidity.