Usio, Inc. (formerly Payment Data Systems, Inc.) — Q2 2013 Form 10-Q Summary
Business context and reporting period
The filing is for the quarterly and six-month periods ended June 30, 2013. The registrant is identified in the filing as Payment Data Systems, Inc. and provides electronic payment processing, ACH transaction processing, online payment services through BillX, and prepaid card program management through FiCentive.
The financial statements are unaudited and should be read with the company’s 2012 Form 10-K. As of August 9, 2013, 137,150,323 common shares were outstanding.
Financial results and key metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $930,830 | $1,469,702 | $1,990,333 | $2,765,571 |
| Operating income (loss) | $(321,900) | $134,873 | $(544,558) | $193,854 |
| Net income (loss) | $(266,484) | $104,306 | $(498,915) | $173,378 |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | $(1,052,128) | $(1,601,251) |
- Revenue declined 37% year over year in the quarter and 28% for the six-month period.
- Operating margins were approximately negative 34.6% for the quarter and negative 27.4% for the six months, compared with approximately 9.2% and 7.0%, respectively, in the prior-year periods.
- Cost of services declined 9% in the quarter and 2% for the six months, but declined less than revenue.
- Other income included a $62,319 quarterly and $52,070 year-to-date unrealized gain on trading marketable securities.
- Cash and cash equivalents were $2.35 million at June 30, 2013, down from $3.76 million at December 31, 2012.
- Working capital was $450,645 at June 30, 2013, compared with $1.26 million at December 31, 2012.
- Total assets were $2.83 million and stockholders’ equity was $782,389 at June 30, 2013.
- Current liabilities included $1.43 million of customer deposits payable and $586,857 of accrued expenses, including a $297,172 reserve for processing losses.
- The company reported no financing cash flows during the six months ended June 30, 2013. Its prior $500,000 line of credit expired in November 2012, and no debt balance is reported at June 30, 2013.
Material changes versus the prior comparable period
- Credit and debit card processing volumes reached the company’s highest quarterly level to date, but lower ACH and prepaid card volumes drove the overall revenue decline.
- The company moved from prior-year operating income and net income to operating and net losses in both the quarter and six-month period.
- Operating cash usage improved by $549,123 year over year, primarily because customer deposit payables decreased by $686,226 in 2013 versus $2.18 million in 2012.
- Investing cash usage increased to $357,988 from $20,645. This included $301,255 paid to purchase company shares from executives in lieu of cash bonuses.
- On March 11, 2013, the company accepted an aggregate 5,575,510 shares from executives. Shares valued at $702,337 settled related-party receivables, and shares valued at $301,255 were acquired in lieu of cash bonuses. The related-party receivable was eliminated and the shares were recorded as treasury stock.
- Treasury stock increased to 10,570,754 shares from 4,995,244 shares at December 31, 2012, reducing stockholders’ equity.
- Stock-based compensation increased to $73,270 for the quarter and $146,540 for the six months, compared with $59,520 and $119,040, respectively.
Guidance, outlook, commentary, risks, and unusual items
- Management stated that growth in enrolled merchants, new clients in the sales pipeline, and increased credit and debit transaction volumes are expected to provide sufficient cash for operations for the foreseeable future.
- Management expects to regain and maintain profitability in the near future, but provided no quantified revenue, earnings, margin, or cash-flow guidance.
- Management plans to focus on customer acquisition, marketing, technology and transaction-processing systems, customer service, cost management, and outsourcing certain processing services to limit fixed-cost growth.
- Key risks include continued weakness in ACH and prepaid volumes, competitive and technological changes, customer acquisition and retention, dependence on third-party processors and sponsoring banks, merchant chargebacks and processing losses, and the possibility that estimated reserves may be insufficient.
- The reserve for processing losses increased to $297,172 from $214,560 at year-end 2012. The allowance for doubtful accounts was $49,782 at June 30, 2013.
- The company had approximately $44 million of net operating loss carryforwards at December 31, 2012, but maintained a full valuation allowance against deferred tax assets. Approximately $3.5 million of the carryforwards is subject to an Internal Revenue Code Section 382 limitation.
- Management reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and no material legal proceedings known to the company.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2013, with no material changes to internal control over financial reporting during the quarter.
Investor verification checklist
- Verify the registrant’s corporate-name relationship to Usio, Inc., because the filing identifies the company as Payment Data Systems, Inc.
- Reconcile the 37% quarterly and 28% year-to-date revenue declines to transaction volumes by service line, particularly ACH and prepaid cards.
- Assess whether the $2.35 million cash balance and $450,645 of working capital are adequate given the $1.05 million year-to-date operating cash burn.
- Review customer deposit obligations, processing-loss reserves, chargeback exposure, and the timing of customer deposit repayments.
- Evaluate the unusual related-party share transactions, including the $702,337 settlement of executive receivables and $301,255 purchase of shares in lieu of cash bonuses.
- Confirm the absence of debt after expiration of the former line of credit and assess future financing needs if losses continue.
- Review the company’s ability to use its net operating loss carryforwards, including the Section 382 limitation and full valuation allowance.