Business Context and Reporting Period
Usio, Inc. is identified in the provided filing as Payment Data Systems, Inc. The Form 10-K covers the fiscal year ended December 31, 2011, with comparative 2010 results. The company provides ACH, credit and debit card payment processing, prepaid card program management, and online bill-payment services through billx.com. It operates solely in the United States as one operating segment.
Merchant accounts increased to 675 from 599, while average monthly billx.com customers increased to 2,962 from 2,269. One reseller customer represented 44% of 2011 revenue.
Key Financial Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $4,813,257 | $2,618,864 | +84% |
| Cost of services | $3,093,891 | $2,019,602 | +53% |
| Gross profit | $1,719,366 | $599,262 | +187% |
| Gross margin | 35.7% | 22.9% | Improved |
| Operating income (loss) | $372,999 | $(609,731) | Turned positive |
| Operating margin | 7.8% | (23.3%) | Improved |
| Net income (loss) | $351,848 | $(464,168) | Turned positive |
| Net margin | 7.3% | (17.7%) | Improved |
| Net cash provided by operating activities | $2,404,869 | $413,814 | +481% |
| Cash and cash equivalents | $3,678,688 | $978,699 | +276% |
| Working capital deficit | $211,744 | $979,354 | Improved |
| Current line-of-credit borrowings | $300,000 | — | New |
| Stockholders’ equity (deficit) | $611,307 | $(134,309) | Turned positive |
Operating cash flow was substantially supported by a $2.45 million increase in customer deposits payable, representing cash held in transit for merchants, and therefore may not reflect freely available operating cash. Investing cash use was $4,880, and financing cash provided was $300,000, consisting of $400,000 of debt proceeds less $100,000 of debt repayment.
Other income changed from $160,000 in 2010 to a $2,782 expense in 2011, primarily due to changes in the value of securities held in Commerce Planet. Stock-based compensation declined to $348,768 from $534,600, while other selling, general and administrative expenses increased to $993,877 from $650,879.
Material Changes Versus the Prior Period
- Revenue growth was driven by higher transaction volumes, customer additions, and increased billx.com usage.
- The company reported profitability for the third and fourth quarters of 2011 after reporting operating losses through June 30, 2011.
- Accumulated deficit remained substantial at $54,339,799, despite the 2011 profit.
- Customer deposits payable increased to $3,429,135 from $983,713, driving much of the increase in operating cash flow.
- The company entered into a secured line of credit with a $500,000 maximum, collateralized by a $500,000 certificate of deposit, and had drawn $300,000 at year-end. The line bears interest at 2.25% and matures November 16, 2012.
- Prepaid card sponsorship transitioned from MetaBank, whose agreement terminated December 31, 2011, to University National Bank; card issuance with the new sponsor began in October 2011.
- The company discontinued development and offering of closed-loop prepaid gift-card programs, which management said had historically contributed immaterial revenue.
- Interchange-fee reductions under the Dodd-Frank Act mildly reduced revenue but increased earnings because merchant pricing was maintained.
- No shares were sold under the Dutchess equity line in 2011 or 2010. Management did not expect to renew the arrangement when it expired August 23, 2012.
- Common shares outstanding increased to 142,721,077 at December 31, 2011 from 141,073,691 issued shares at December 31, 2010.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that available cash and anticipated revenues may be insufficient to meet anticipated cash needs for the foreseeable future, notwithstanding the year-end cash balance and recent profitability. Future performance depends on customer acquisition and retention, cost control, technology maintenance, customer service, and the ability to respond to competition and regulatory changes. The filing provides no quantified revenue or earnings guidance.
- Liquidity remains dependent on sustaining profitability, managing working capital, and potentially using available financing.
- Revenue concentration is significant: one reseller accounted for 44% of 2011 revenue.
- The company relies on third-party ACH processors, card processors, sponsoring banks, and the ACH network. Termination, insolvency, rule changes, or increased fees could disrupt operations or raise costs.
- The company bears exposure to chargebacks, merchant insolvency, fraud, prepaid-card overdrafts, card-network fines, and data-security breaches. The filing states that 2011 fraud losses were minimal and cardholder overdrafts were less than $250 at year-end.
- Regulatory risks include prepaid-card, anti-money-laundering, privacy, payment-network, interchange, and electronic-funds-transfer requirements.
- Executives Michael Long and Louis Hoch owed the company $377,651 and $324,686, respectively, at year-end, for a total related-party receivable of $702,337. No payments were made in 2011. The company also owed them deferred salaries of $23,473 and $3,300.
- The company paid $30,000 for consulting services to Herb Authier, the father-in-law of Mr. Hoch.
- Deferred tax assets were fully offset by a valuation allowance. The company reported approximately $44 million of tax net operating loss carryforwards, with certain limitations.
- The independent auditor issued an unqualified opinion on the financial statements but did not express an opinion on internal control over financial reporting because the company was not required to have, and the auditor was not engaged to perform, such an audit. Management nevertheless concluded that internal controls were effective.
Important Facts for Investors to Verify
- Whether the company can sustain profitability after becoming profitable only in the third and fourth quarters of 2011.
- The composition and availability of the $3.68 million cash balance, particularly the portion supporting customer deposits payable and the $500,000 collateral certificate of deposit.
- Repayment prospects and collectability of the $702,337 related-party receivable from the two senior executives.
- Revenue concentration and the contractual status, financial condition, and retention risk of the reseller generating 44% of revenue.
- Terms, maturity, collateral, and renewal or replacement plans for the $300,000 line-of-credit borrowing.
- Continuity and economics of relationships with Fifth Third Bank, University National Bank, card processors, and card-network sponsors.
- Potential dilution from 142.7 million shares outstanding, 2.999 million outstanding options, and any future equity financing.
- Whether regulatory, fraud, chargeback, data-security, or network-fee developments could materially reduce margins or require additional reserves.