Usio, Inc. (filed as Payment Data Systems, Inc.) — Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter and nine months ended September 30, 2011, filed November 14, 2011. The registrant identified in the filing is Payment Data Systems, Inc.; the request identifies the company as Usio, Inc. The company provides electronic payment processing services, including credit and debit card processing, ACH transaction processing, prepaid-card program management, and online bill-payment services.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $1.438 million, up 122% | $2.991 million, up 61% |
| Cost of services | $914,330 | $2.125 million |
| Gross margin | Approximately 36.4% | Approximately 29.0% |
| Operating income (loss) | $208,996; approximately 14.5% margin | $(104,106); approximately (3.5%) margin |
| Net income (loss) | $262,541; approximately 18.3% margin | $(119,958); approximately (4.0%) margin |
| Net income (loss) per share | $0.00 | $(0.00) |
- Cash and cash equivalents were $1.943 million at September 30, 2011, compared with $978,699 at December 31, 2010.
- Accounts receivable increased to $428,873 from $137,957.
- Customer deposits payable increased to $2.087 million from $983,713; these balances primarily represented cash held in transit for merchants.
- Total current liabilities were $3.205 million versus current assets of $2.405 million, resulting in negative working capital of approximately $800,000.
- Stockholders’ equity improved to $52,309 from a deficit of $134,309, but the accumulated deficit remained approximately $54.8 million.
- The filing does not report outstanding conventional debt. The company had no financing cash flows during either comparable nine-month period.
- Net cash provided by operating activities was $1.001 million, compared with $411,535 of cash used in the prior-year period. The 2011 operating cash flow was primarily driven by the $1.104 million increase in customer deposit payables.
- Net cash used in investing activities was $36,329, primarily for long-term deposits under processing agreements and property and equipment.
Material changes versus the prior comparable period
- Revenue growth reflected more customers and higher card and ACH transaction volume, particularly following enhancements to the ACH platform that attracted internet-commerce companies and marketers.
- Cost of services increased 84% year over year in the quarter and 47% in the nine-month period, largely from variable processing costs.
- The company moved from a quarterly operating loss of $134,626 to operating income of $208,996. For the nine-month period, the operating loss narrowed from $481,309 to $104,106.
- The company reported quarterly net income versus a prior-year net loss. The nine-month net loss narrowed by $217,386, although the 2010 comparable period benefited from approximately $155,010 of other income primarily related to a legal settlement.
- Third-quarter 2011 other income included a $66,809 unrealized gain on marketable securities. For the nine-month period, other expense included a $24,929 unrealized loss, partly offset by $22,446 from a reduction in commissions payable.
- Weighted-average shares outstanding increased to 137.0 million for the nine-month period from 119.8 million, indicating substantial year-over-year dilution in the share base.
Guidance, outlook, risks, contingencies, and unusual items
- Management provided no quantitative revenue or earnings guidance. Its stated priorities were customer acquisition, expense control, technology and transaction-processing capabilities, customer service, and outsourcing certain processing functions to preserve operating efficiency.
- Management stated that available cash and anticipated revenues may be insufficient to meet anticipated needs for the foreseeable future. The company’s ability to continue as a going concern is likely contingent on obtaining additional equity or debt financing or achieving positive cash flow.
- Future equity or convertible-debt financing could dilute shareholders; debt financing could impose restrictive covenants, and financing may not be available on acceptable terms.
- Merchant processing creates exposure to chargebacks and merchant insolvency. The reserve for merchant losses was $206,647 at September 30, 2011; management reported no significant chargeback losses to date.
- The allowance for doubtful accounts was approximately $52,000. No bad-debt expense or write-offs were recorded during the first nine months of 2011.
- The company held $74,787 of trading marketable securities, all classified as Level 1 fair-value assets.
- Related-party receivables totaled $702,337, while accrued expenses included $499,350 of deferred salaries owed to executives. The filing also disclosed $23,000 paid to an executive’s father-in-law for network engineering and administration services during the nine months.
- The company issued 383,879 restricted shares to Sheffield Corporation for consulting services and recorded $10,000 of expense. The equity line of credit with Dutchess was unavailable for 2010 and the first nine months of 2011 because the registration statement had become stale.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material legal proceedings or changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm the corporate-name continuity between Payment Data Systems, Inc. in the filing and Usio, Inc. in the request.
- Assess whether operating cash flow is sustainable without increases in customer deposits payable, which represent merchant funds held in transit.
- Review the going-concern disclosure, negative working capital, accumulated deficit, and the company’s ability to obtain financing.
- Evaluate processing-volume growth against the faster increases in variable cost of services and the resulting gross-margin trend.
- Review related-party receivables, deferred executive compensation, and the collectability and settlement terms of those balances.
- Check the effect of share issuances, stock-based compensation, and the higher weighted-average share count on future dilution.
- Examine merchant-loss reserves, chargeback exposure, customer concentration, and the terms of agreements with processing banks and third-party processors.