Business Context and Reporting Period
Payment Data Systems, Inc. (now associated with Usio, Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The company provides electronic payment processing, ACH transaction processing, online payments, and prepaid card services. The company was a smaller reporting company.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $962,633, versus $2,333,698 | $2,952,966, versus $5,099,269 |
| Operating income (loss) | $(269,227), versus $621,025 | $(813,785), versus $814,878 |
| Net income (loss) | $(339,825), versus $626,742 | $(838,740), versus $800,120 |
| Operating margin | (28.0%), versus 26.6% | (27.6%), versus 16.0% |
| Net margin | (35.3%), versus 26.9% | (28.4%), versus 15.7% |
| Cash flow from operating activities | Not separately provided | $5,661,668, versus $(319,308) |
- Cash and cash equivalents were $9,057,819 at September 30, 2013, compared with $3,759,791 at December 31, 2012.
- Total assets were $9,553,472, compared with $5,155,620 at year-end 2012.
- Current liabilities were $9,037,638, including $8,155,247 of customer deposits payable. Working capital was $247,271, compared with $1,260,528 at December 31, 2012.
- Customer deposits payable increased by $6,040,125 and largely explains the increase in cash and operating cash flow. These funds represent cash held in transit for merchants and are not equivalent to unrestricted operating cash.
- The company had no outstanding line-of-credit borrowings at September 30, 2013. The prior $500,000 secured line of credit matured and expired on November 16, 2012.
- Investing cash outflows were $62,385, primarily for property and equipment. Financing cash outflows were $301,255 for treasury-stock purchases.
- Marketable securities were $23,953 and were classified as trading securities. The company recorded a $59,584 loss on marketable securities in the quarter.
- Shares outstanding were 137,150,323 at September 30, 2013, compared with 142,725,833 at December 31, 2012. The decrease primarily reflected treasury-stock purchases.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue decreased 59%, and nine-month revenue decreased 42%, primarily because of lower ACH and prepaid-card transaction volumes.
- Cost of services declined 35% for the quarter and 16% for the nine-month period, but the reduction was insufficient to offset the revenue decline.
- Operating results shifted from income to loss for both the quarter and nine-month period. The company had been profitable in every quarter of 2012.
- Stock-based compensation increased to $73,270 for the quarter and $219,810 for the nine-month period, compared with $59,520 and $178,560, respectively.
- Other selling, general and administrative expenses declined 14% for the quarter and 9% for the nine-month period, while depreciation increased.
- Credit and debit card transaction volume declined 2% from the prior quarter but was described as the highest nine-month volume in company history. ACH volumes increased sharply in September after newly acquired customers began processing.
- In March 2013, the company settled a $702,337 related-party receivable from executives with treasury stock and purchased additional executive-owned shares valued at $301,255 in lieu of cash bonuses. The related-party receivable was eliminated.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected ACH volumes from newly acquired customers and merchant enrollment to increase, and stated that September 2013 ACH volumes were the highest of the year to date.
- Management believed the company would have sufficient cash for foreseeable operations and expected to regain and maintain profitability in the near future. The filing provides no quantified earnings or revenue guidance.
- Management identified customer acquisition, marketing, technology investment, customer service, competition, personnel retention, transaction-processing costs, and adapting to industry and technological changes as key priorities and risks.
- The company bears potential credit risk for merchant chargebacks, ACH losses, and prepaid-card negative balances. The processing-loss reserve was $297,365 at September 30, 2013, compared with $214,560 at year-end 2012.
- The allowance for doubtful accounts was $49,782 at September 30, 2013. Management stated that historical bad-debt losses had been within expectations.
- The company had approximately $44 million of net operating loss carryforwards at December 31, 2012, subject to expiration beginning in 2020; approximately $3.5 million was subject to an Internal Revenue Code Section 382 limitation. A full valuation allowance reduced deferred tax assets to zero.
- Management reported no material off-balance-sheet arrangements, no material changes to previously disclosed risk factors, and no material legal proceedings, although ordinary-course litigation could adversely affect results.
- Disclosure controls and procedures were deemed effective, and no material change in internal control over financial reporting was reported.
Important Facts for Investors to Verify
- Determine whether the substantial 2013 revenue decline was temporary and whether newly acquired ACH customers produced sustained transaction growth after September 30, 2013.
- Separate unrestricted cash from customer funds, particularly the $8.2 million customer-deposit balance, when assessing liquidity.
- Assess the company’s path back to profitability given the 2013 operating losses and negative margins.
- Review chargeback, processing-loss, and customer-credit exposure relative to transaction volumes and the recorded reserves.
- Examine the terms, valuation, governance implications, and dilution effects of the March 2013 related-party treasury-stock transactions.
- Confirm the status and potential usability of the net operating loss carryforwards, including the Section 382 limitation.