Usio, Inc. (formerly Payment Data Systems, Inc.) — Q3 2017 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the unaudited three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. The company provides electronic payment processing services, including ACH, credit, debit, prepaid card and online payment services. On September 1, 2017, the company acquired Singular Payments, LLC, a credit-card-processing provider focused on healthcare and other niche markets.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 |
|---|---|---|---|---|
| Revenue | $3.589 million | $3.067 million | $8.950 million | $9.186 million |
| Cost of services | $2.764 million | $2.102 million | $6.487 million | $6.291 million |
| Gross profit | $0.825 million | $0.965 million | $2.463 million | $2.895 million |
| Approximate gross margin | 23.0% | 31.5% | 27.5% | 31.5% |
| Operating loss | $(0.892) million | $(0.575) million | $(1.763) million | $(1.077) million |
| Net loss | $(0.890) million | $(0.566) million | $(1.711) million | $(0.953) million |
| Loss per diluted share | $(0.10) | $(0.07) | $(0.20) | $(0.12) |
Third-quarter credit-card processing transactions increased 33% year over year, while credit-card dollars processed increased 77%. Total dollars processed exceeded $704 million. ACH transaction volume declined 18% year over year, and returned-check transactions declined 16% year over year, primarily because of the sale of a customer portfolio.
Cash and cash equivalents were $2.200 million at September 30, 2017, down from $4.121 million at December 31, 2016. Restricted cash was $14.909 million. Working capital was $2.364 million, compared with $4.522 million at year-end 2016. The company reported $33,104 of operating cash flow, $1.845 million of investing cash outflow and $109,382 of financing cash outflow for the first nine months. Investing outflows included $900,000 paid for the Singular acquisition, $344,611 of property and equipment purchases and $600,000 advanced under notes receivable.
Total assets were $58.861 million and stockholders’ equity was $11.362 million at September 30, 2017. The balance sheet does not disclose conventional outstanding debt; current liabilities primarily comprised settlement-processing obligations of $31.521 million and restricted-cash-related liabilities of $14.909 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 17%, but nine-month revenue decreased 3%.
- Cost of services increased 32% in the third quarter and 3% for the nine-month period, reducing gross margins.
- Third-quarter and nine-month net losses widened to $890,025 and $1,710,945, respectively, from $565,957 and $953,259.
- Other selling, general and administrative expense increased 7% in the quarter and 12% year to date, reflecting higher advertising, marketing, legal and acquisition-related costs.
- Depreciation and amortization increased to $314,789 for the quarter and $770,607 year to date. The filing identifies $83,333 of incremental amortization related to Singular.
- Stock-based compensation declined to $230,206 for the quarter and $655,885 year to date, compared with $264,154 and $835,590, respectively.
- Shares issued and outstanding increased materially following the issuance of 1,515,152 common shares valued at $3.5 million as part of the Singular acquisition.
Guidance, Outlook, Risks and Unusual Items
Management expected fourth-quarter 2017 revenue growth from a full quarter of Singular revenues and continued PINless-debit growth. Management also expected ACH and returned-check volumes to partially recover in the fourth quarter and early 2018, and anticipated growth in enrolled merchants and new clients. The company acknowledged that it may incur future operating losses and must grow its customer base, manage expenses, maintain technology, respond to competition and integrate acquisitions effectively.
The Singular acquisition had an aggregate purchase price of $5.0 million: $1.5 million of cash, reduced by the $600,000 outstanding note receivable, and $3.5 million in common stock. The purchase price was allocated entirely to a customer list. The shares were unregistered and subject to a 24-month lock-up.
C2Go defaulted on a $200,000 secured note, including accrued interest, and did not cure the August 2017 payment default. The company filed suit and was pursuing settlement discussions, but had not reached an agreement. The company wrote off $31,667 of accrued interest but had not recorded a reserve against the $200,000 principal because management had not concluded that a loss was more likely than not.
The company reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements and no material changes in internal control over financial reporting. A derivative compensation-related lawsuit was fully dismissed on October 7, 2017. The company planned to adopt the new revenue-recognition standard in the first quarter of 2018 and did not expect the new lease standard to have a significant impact.
Important Facts for Investors to Verify
- Whether Singular generates the expected incremental revenue and gross profit after a full quarter of ownership.
- Whether credit-card growth offsets declining ACH and returned-check volumes and the resulting margin pressure.
- The company’s path to profitability given the $1.711 million year-to-date net loss, $2.200 million cash balance and limited operating cash generation.
- The recoverability of the $200,000 C2Go principal and any additional accrued amounts, including the status of the pending litigation and settlement discussions.
- The valuation and future amortization of the $5.0 million customer-list intangible asset recorded in the Singular acquisition.
- The dilution, lock-up terms and future resale implications of the 1,515,152 shares issued for the acquisition.
- The impact of adopting the new revenue-recognition standard, particularly gross-versus-net presentation for payment-processing revenues.
- The adequacy of merchant-loss reserves, doubtful-account allowances and restricted cash relative to transaction-processing risks.