Usio, Inc. (filed as Payment Data Systems, Inc.) — Q1 2017 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter ended March 31, 2017, compared with the quarter ended March 31, 2016. The company provides electronic payment processing services, including ACH, credit and debit card processing, prepaid cards, online payments, and related services.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $2.811 million | $3.229 million | Down 13% |
| Cost of services | $1.868 million | $2.155 million | Down 13% |
| Gross profit | $0.943 million | $1.074 million | Down 12% |
| Gross margin | 33.5% | 33.3% | Essentially stable |
| Operating loss | $0.322 million | $0.046 million | Loss increased |
| Operating margin | (11.5%) | (1.4%) | Lower |
| Net loss | $0.287 million | $0.032 million | Loss increased |
| Net margin | (10.2%) | (1.0%) | Lower |
| Operating cash flow | $0.239 million | $0.472 million | Down 49% |
| Capital expenditures | $0.210 million | $0.108 million | Higher |
| Cash used in investing | $0.710 million | $0.308 million | Higher use |
At March 31, 2017, cash and cash equivalents were $3.618 million, restricted cash was $14.725 million, and working capital was $4.402 million. Total assets were $58.806 million and stockholders’ equity was $8.902 million. The company reported an accumulated deficit of $50.538 million.
Settlement processing assets and corresponding obligations were each $34.139 million. The filing does not show material conventional debt outstanding. Notes receivable totaled $0.700 million, including a $0.500 million secured line of credit to Singular Payments and a $0.200 million secured note to C2Go.
Material changes versus the prior comparable period
- Revenue declined 13%, primarily because of lower ACH, credit card, and returned-transaction volumes and customer losses.
- Credit card transaction volume decreased 30% and credit card dollars processed decreased 13%; management attributed the volume decline largely to the exit of a fast-food retailer.
- ACH transaction volume decreased 13%, while returned-check transactions declined 6%. Total dollars processed exceeded $695 million.
- Cost of services declined in line with processing volumes, preserving a broadly stable gross margin.
- Other selling, general and administrative expenses increased 36% to $0.828 million, driven generally by higher salaries, investor-relations costs, and compliance costs.
- Stock-based compensation declined to $0.208 million from $0.288 million because certain grants were canceled or fully amortized.
- The company moved from a small prior-year loss to a significantly larger operating and net loss.
- Cash decreased $0.502 million during the quarter, primarily because of capital investment, the Singular Payments loan, and treasury-stock purchases, partially offset by operating cash generation.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects the decline in ACH transactions to reverse in the second half of 2017 and early 2018, supported by its sales pipeline and anticipated new merchant customers.
- Management expects growth in prepaid card transactions, newly implemented PINless debit transactions, and credit and debit processing volumes.
- The company expects to maintain positive operating cash flow but stated that it may not regain profitability in 2017 and may incur additional operating losses.
- The $0.500 million Singular Payments secured line of credit may be offset against the cash purchase price if the proposed acquisition closes. If the acquisition does not close before interest accrues, repayment is scheduled in 30 monthly installments, with interest at 10% per annum thereafter.
- A shareholder derivative/class-action lawsuit alleges excessive compensation and breach of fiduciary duties. The company believes the claim is without merit and has not accrued a loss, but acknowledges possible future legal fees and losses.
- Processing-loss reserves were $0.173 million and unchanged from December 31, 2016. Management reported no significant processing losses to date, but actual losses could exceed estimates.
- The company had approximately $40.2 million of federal net operating loss carryforwards at December 31, 2016, beginning to expire in 2020. A $1.6 million deferred tax asset was recognized, with a $12.7 million valuation allowance against other deferred tax assets.
- Management stated that there were no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2017.
- The company capitalized an additional $0.209 million of internal-use software costs during the quarter.
Important facts for investors to verify
- Whether the projected recovery in ACH activity and growth in prepaid, PINless debit, and merchant volumes occurs during the second half of 2017 and early 2018.
- Whether the company can sustain positive operating cash flow while returning to profitability, given the accumulated deficit and rising selling, general and administrative expenses.
- The status, valuation, and repayment or acquisition treatment of the Singular Payments $0.500 million secured loan.
- The outcome and potential cost of the shareholder litigation, for which no loss has been accrued.
- The sufficiency and availability of unrestricted cash after excluding restricted processing funds and considering ongoing settlement obligations.
- Future processing-loss reserves, customer concentration, transaction volumes, and the effect of additional customer losses or merchant insolvencies.
- The impact of adopting the new revenue-recognition standard in the first quarter of 2018.