Usio, Inc. (formerly Payment Data Systems, Inc.) — Q1 2013 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three months ended March 31, 2013, with comparisons to the three months ended March 31, 2012. The company provided electronic payment processing services for credit, debit, ACH and prepaid-card transactions, as well as online payment services through Billx.com. The filing identifies the registrant as Payment Data Systems, Inc.; the current company name is Usio, Inc.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $1.060 million | $1.296 million | Down 18% |
| Cost of services | $826,299 | $772,477 | Up 7% |
| Gross profit | $233,204 | $523,393 | Down 55% |
| Gross margin | 22.0% | 40.4% | Down 18.4 percentage points |
| Operating income (loss) | $(222,658) | $58,981 | Declined by $281,639 |
| Operating margin | (21.0%) | 4.6% | Down 25.6 percentage points |
| Net income (loss) | $(232,432) | $69,072 | Declined by $301,504 |
| Net cash used in operating activities | $(1.042 million) | $(1.197 million) | Use decreased by $155,012 |
Cash and cash equivalents were $2.401 million at March 31, 2013, down from $3.760 million at December 31, 2012. Working capital was positive at approximately $735,402 at March 31, 2013. Current liabilities included $1.285 million of customer deposits payable, representing funds held in connection with merchant activity.
Investing cash outflows were $316,384, including $301,255 used to purchase shares from executives in lieu of cash bonuses. There were no financing cash flows in Q1 2013. The prior-year financing outflow of $300,000 reflected repayment of the company’s line of credit, which expired in November 2012. The filing reports no current debt balance and no material off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Revenue decreased 18%, primarily because of lower ACH customer and transaction volumes, partly offset by higher card-based and prepaid-card volumes.
- Management stated that credit and debit card processing transactions reached the highest quarterly level in the company’s history, while prepaid-card volumes also increased year over year.
- Cost of services increased 7% because of variable processing costs associated with higher card transaction volume.
- Selling, general and administrative expenses, excluding stock-based compensation and depreciation, decreased 8% to $376,300, primarily reflecting lower executive bonus accruals, despite higher insurance, accounting, legal and marketing costs.
- The company moved from profitability in Q1 2012 to a net loss in Q1 2013, and other income of $10,091 became other expense of $9,774, including a $10,250 unrealized loss on trading securities.
- Operating cash use remained significant. The decrease from the prior year was primarily driven by a smaller reduction in customer deposit payables, while the company also reported a $288,986 decrease in accounts payable and accrued expenses.
Guidance, outlook, risks and unusual items
Management stated that increased merchant enrollment, prepaid customers, prospective clients and transaction volumes were expected to provide sufficient cash for operations for the foreseeable future and expressed the expectation that profitability could be regained and maintained in the near future. No quantitative revenue or earnings guidance was provided.
Management identified the need to grow and retain customers, control operating expenses, maintain and upgrade processing technology, provide customer service, respond to competition and technological change, and attract qualified personnel. The company planned to focus on customer acquisition and outsource some processing services to expand without materially increasing fixed costs.
Processing-loss exposure remains a risk because the company may bear losses from merchant insolvency, chargebacks, returned ACH items or negative prepaid-card balances. The reserve for processing losses was $214,839 at March 31, 2013, and the allowance for doubtful accounts was $50,362. Actual losses could exceed estimates as transaction volumes grow.
The company had approximately $44 million of net operating loss carryforwards at December 31, 2012, with expirations beginning in 2020; approximately $3.5 million was subject to an Internal Revenue Code Section 382 limitation. Deferred tax assets were fully offset by a valuation allowance.
A significant related-party transaction occurred on March 11, 2013. The company accepted 5,575,510 shares owned by CEO/CFO Michael R. Long and President/COO Louis A. Hoch, valued at $1.004 million, consisting of $702,337 in settlement of related-party receivables and $301,255 of shares purchased in lieu of cash bonuses. The transaction eliminated the related-party receivable and reduced cash by $301,255. The shares were recorded as treasury stock at $0.18 per share.
The company reported no material changes to previously disclosed risk factors, no defaults on senior securities and no material legal proceedings. Management concluded that disclosure controls and procedures were effective as of March 31, 2013, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the sharp decline in ACH volumes was temporary or reflects continuing customer or competitive weakness.
- Whether card and prepaid-card growth can offset lower-margin or declining ACH revenue and restore gross margins.
- The sustainability of operations given the $1.042 million quarterly operating cash outflow and $2.401 million cash balance.
- The terms, governance approval and valuation of the related-party treasury-stock and bonus transaction involving the two senior executives.
- The adequacy of processing-loss reserves, particularly as transaction volumes increase.
- Whether management’s expectation of a return to profitability is supported by subsequent quarterly results.