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, 2013. The company processed ACH, credit-card, debit-card and prepaid-card transactions, operated the BillX online payment service, and reported as a single U.S. operating segment. The filing states that the fourth quarter of 2013 was profitable, but it does not provide clear standalone fourth-quarter revenue or earnings figures.
Financial Performance and Position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $5.18 million | $7.35 million | Down 29% |
| Cost of services | $4.21 million | $4.19 million | Up less than 1% |
| Operating income (loss) | $(755,432) | $1.39 million | Declined to a loss |
| Net income (loss) | $(789,039) | $1.28 million | Declined to a loss |
| Basic and diluted EPS | $(0.01) | $0.01 | Declined |
| Net cash from operations | $23.18 million | $475,059 | Significant increase |
| Cash and cash equivalents | $26.57 million | $3.76 million | Up $22.81 million |
| Working capital | $368,149 | $1.26 million | Down |
- Approximate gross margin was 18.8% in 2013 versus 43.0% in 2012; operating margin was negative 14.6% versus positive 18.9%; net margin was negative 15.2% versus positive 17.4%.
- Credit- and debit-card transaction volume increased 23%, and dollars processed increased 18%, reaching company records. Lower ACH and prepaid-card volumes more than offset that growth.
- Customer deposits payable increased to $25.74 million from $2.12 million. Management attributed the increase to cash collected and held in transit for newly acquired ACH customers and related reserve requirements. Accordingly, much of the reported cash increase was restricted economically by corresponding customer-deposit obligations.
- Total assets were $27.53 million and total current liabilities were $26.89 million at December 31, 2013. Stockholders’ equity declined to $638,804 from $2.14 million.
- The company reported no debt at year-end. Its prior $500,000 line of credit matured and expired in November 2012.
- Capital expenditures were $62,385. The company used $301,255 in financing activities to purchase shares from its two principal executives in connection with compensation and settlement of related-party receivables.
- Processing-loss reserves increased to $297,365 from $214,560. The allowance for doubtful accounts was $49,782 versus $50,362.
Material Changes Versus the Prior Comparable Period
- Revenue fell $2.17 million, principally because of lower ACH and prepaid-card volumes.
- Cost of services remained broadly flat despite lower revenue, substantially compressing margins.
- Operating results shifted from $1.39 million of operating income and $1.28 million of net income in 2012 to losses in 2013.
- Cash flow from operations increased primarily because customer deposit payables rose $23.63 million; this increase does not represent ordinary operating profitability.
- Merchant accounts increased to 735 from 711, while average monthly BillX users fell to 864 from 2,876.
- In March 2013, the company eliminated a $702,337 related-party receivable by accepting executive-owned shares and purchased additional executive-owned shares for $301,255 in lieu of cash bonuses.
Guidance, Outlook, Risks and Unusual Items
Management expected the fourth-quarter profitability and higher ACH volumes from newly acquired customers to continue for the foreseeable future. It also expected growth in enrolled merchants, transaction volumes and its sales pipeline, while acknowledging that future profitability and operating results remained uncertain.
- The business depends on bank sponsors, ACH access, card-network registrations and third-party processors. Termination, insolvency, rule changes or higher fees could disrupt operations or increase costs.
- The company bears significant exposure to chargebacks, merchant insolvency, fraud, cardholder overdrafts and processing losses. It reported less than $10,000 of fraud losses and less than $5,000 of overdrawn cardholder balances at year-end.
- Cybersecurity breaches, system failures, privacy violations and regulatory noncompliance could result in fines, litigation, reimbursement obligations or loss of processing privileges.
- One ACH customer represented 11% of 2013 revenue, creating customer-concentration risk.
- The company had an accumulated deficit of $53.85 million and reported a full valuation allowance against deferred tax assets. Net operating loss carryforwards were approximately $43.6 million, beginning to expire in 2020.
- Management stated that additional capital might be required for product development and market expansion, although no specific financing commitment was disclosed.
- The filing identifies no material pending legal proceedings and no material off-balance-sheet arrangements. The audit report gave an unqualified opinion, and management concluded that disclosure controls and internal control over financial reporting were effective.
Important Facts for Investors to Verify
- Confirm the issuer identity and corporate-name continuity because the filing names Payment Data Systems, Inc., while the request identifies Usio, Inc.
- Separate operating cash generation from the $23.63 million increase in customer deposits payable and assess the availability of the related cash.
- Verify whether the fourth-quarter profitability and newly added ACH customers were sustained after December 31, 2013.
- Review the decline in ACH, prepaid-card and BillX activity and determine whether card-volume growth can offset those declines.
- Assess exposure to the 11% revenue customer, bank sponsors, processors, card-network rules, chargebacks and fraud losses.
- Review the March 2013 related-party share transactions, executive compensation arrangements and potential termination or change-of-control payments.
- Evaluate liquidity in light of only $368,149 of working capital, $638,804 of equity and the company’s history of accumulated losses.