Usio, Inc. (filed as Payment Data Systems, Inc.) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial statements are unaudited. The filing was signed May 15, 2012. The company provided electronic payment processing, ACH processing, online bill payment, and prepaid card services.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $1.296 million | $0.785 million | Up 65% |
| Cost of services | $0.880 million | $0.611 million | Up 44% |
| Gross profit | $0.415 million | $0.174 million | Up approximately 138% |
| Gross margin | 32.1% | 22.2% | Up approximately 9.9 percentage points |
| Operating income (loss) | $58,981 | $(144,017) | Improved by $202,998 |
| Operating margin | 4.6% | (18.3%) | Improved |
| Net income (loss) | $69,072 | $(144,017) | Improved by $213,089 |
| Basic and diluted EPS | $0.00 | $(0.00) | Improved |
| Net cash used in operating activities | $(1.207) million | $(0.832) million | Cash use increased |
Revenue growth was attributed primarily to a larger customer base and higher card-based and ACH transaction volumes. Cost of services increased with transaction volume and included accrued annual bonuses required under executive employment agreements. Selling, general and administrative expense increased 47% to $268,789, while stock-based compensation declined to $87,192 from $133,650.
Other income was $10,091, primarily from the write-off of accrued professional fees under a terminated contract, partially offset by the write-off of a receivable. No income tax expense was recorded. The company reported net operating income and net income for the third consecutive quarter, following operating losses through June 30, 2011.
Cash and cash equivalents were $2.180 million at March 31, 2012, down from $3.679 million at December 31, 2011. The cash decline primarily reflected a $1.533 million reduction in customer deposits payable, representing cash held in transit for merchants, and repayment of a $300,000 line-of-credit balance. Working capital deficit was $46,710 at March 31, 2012, compared with $211,744 at December 31, 2011.
The company had no outstanding line-of-credit debt at quarter-end. Its borrowing facility permits up to $500,000, matures November 16, 2012, bears interest at 2.25%, and is collateralized by a $500,000 certificate of deposit. Management stated that the expanded customer base and transaction volumes are expected to provide sufficient cash for operations for the foreseeable future.
Material changes and unusual items
- Revenue increased 65%, and the company moved from a quarterly loss to profitability.
- Operating cash flow remained significantly negative despite reported net income, primarily because of the decline in customer deposits payable.
- Accounts receivable declined to $173,035 from $376,070; total assets declined to $3.196 million from $4.910 million, largely due to lower cash and customer deposit balances.
- Stockholders’ equity increased to $767,571 from $611,307, principally because of current-quarter net income and amortization of deferred compensation.
- A $702,337 related-party receivable remained outstanding from CEO/CFO Michael R. Long and President/COO Louis A. Hoch for unpaid installments under prior employment agreements. The company paid $26,773 of deferred salary obligations to those executives during the first quarter.
- The company paid $8,077 for network engineering and administration services to Herb Authier, the father-in-law of President/COO Louis Hoch.
- Trading marketable securities totaled $74,787 and were classified as Level 1 fair-value assets.
Outlook, risks, and contingencies
The filing provides no formal revenue or earnings guidance. Management’s stated priorities are to expand and retain its customer base, control operating expenses, improve technology and processing systems, maintain customer service, adapt to competition and industry changes, and outsource selected processing functions to support growth without materially increasing fixed costs.
- Merchant processing exposes the company to chargeback and merchant insolvency risk. The reserve for merchant losses was $131,544, and management expects the reserve requirement to rise as transaction volumes increase.
- The allowance for doubtful accounts was approximately $78,300. Additional allowances may be required if customer financial conditions deteriorate.
- The company had approximately $44 million of net operating loss carryforwards at December 31, 2011, but recorded a full valuation allowance because realization of related deferred tax assets was not considered reasonably certain.
- The company has a history of operating losses and depends on continued customer and transaction-volume growth to maintain profitability and liquidity.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors, and no material off-balance-sheet arrangements.
- Disclosure controls and procedures were assessed as effective, and no material change in internal control over financial reporting was reported during the quarter.
- The Dutchess equity line could provide up to $10 million through September 10, 2012, but no shares had been sold under the facility during 2012, 2011, or 2010; management did not expect to renew it.
Investor verification points
- Verify whether the improvement in profitability is sustainable after excluding the $10,091 of unusual other income and considering accrued executive bonuses.
- Monitor operating cash flow and customer deposit balances, which produced a substantial cash use despite net income.
- Assess collectibility and resolution timing for the $702,337 related-party receivable.
- Review merchant chargeback exposure, loss-reserve adequacy, and the approximately $78,300 doubtful-account allowance as processing volumes grow.
- Confirm the company’s ability to maintain liquidity after repaying the credit line and with a $46,710 working capital deficit.
- Reconcile the filing entity name, which is Payment Data Systems, Inc., with the requested company name, Usio, Inc.