Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2017. The filing identifies the registrant as Payment Data Systems, Inc.; it does not use the name Usio, Inc. The company provided ACH, credit, debit, prepaid-card and other electronic payment processing services to merchants and businesses, including services through FiCentive and Akimbo.
On September 1, 2017, the company acquired Singular Payments, LLC for $5.0 million, consisting of $1.5 million in cash, $600,000 applied against an outstanding note receivable and $3.5 million in common stock. The 2017 results include approximately four months of Singular operations.
Financial Performance and Liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $14.57 million | $12.08 million | +21% |
| Cost of services | $10.80 million | $8.29 million | +30% |
| Gross profit | $3.77 million | $3.78 million | Approximately flat |
| Gross margin | 25.9% | 31.3% | Down 5.4 percentage points |
| Operating loss | $2.84 million | $1.36 million | Loss increased |
| Operating margin | (19.5%) | (11.3%) | Down 8.2 percentage points |
| Net loss | $3.01 million | $1.20 million | Loss increased |
| Basic and diluted loss per share | $0.33 | $0.15 | Loss per share increased |
| Cash flow from operations | $(110,277) | $848,438 | Turned negative |
Net loss margin was approximately (20.6%) in 2017 versus (9.9%) in 2016. The company reported $4.80 million of cash and cash equivalents, $14.98 million of restricted cash and $4.79 million of working capital at December 31, 2017. Restricted cash primarily represented merchant collateral. The balance sheet reported no material debt balance; current liabilities were dominated by $38.03 million of settlement processing obligations, matched by settlement processing assets.
Cash increased by $680,000 during 2017. Financing activities provided $2.61 million, principally from a December public offering that generated $2.73 million of net proceeds. Investing activities used $1.82 million, including $1.5 million of cash paid for the Singular acquisition. Capital expenditures were $372,337.
Material Changes Versus the Prior Comparable Period
- Revenue increased 21%, primarily from the Singular acquisition, but cost of services increased 30%, leaving gross profit approximately unchanged and compressing gross margin.
- Total payment dollars processed exceeded $2.8 billion, down approximately 3% from $3.3 billion in 2016. ACH processing volume declined 15%, while credit-card dollars processed increased 78% and credit-card transaction volume increased 34%.
- Fourth-quarter credit-card transactions increased 199% and credit-card dollars processed increased 274% year over year, primarily due to Singular.
- Merchant accounts increased to 1,817 from 710, substantially because of the acquired Singular customer portfolio.
- Operating expenses increased to $17.41 million from $13.44 million. Other selling, general and administrative expenses increased 37%, and depreciation and amortization increased 40% due largely to acquisition-related intangible assets.
- The accumulated deficit increased to $53.26 million from $50.25 million.
- Customer-list intangible assets increased to $4.68 million net at year-end following the Singular acquisition; annual amortization related to the acquired customer list is expected to be approximately $1.0 million.
Outlook, Risks, Contingencies and Unusual Items
Management stated that near-term priorities were aggressive top-line growth, adding sales personnel and quality customers, cross-selling payment products, improving technology, pursuing complementary acquisitions and controlling expenses while scaling. The filing provides no specific revenue, earnings or cash-flow guidance.
- Management said existing cash and cash equivalents, together with financing proceeds, were expected to fund operating expenses and capital requirements for at least 12 months, but disclosed that additional financing may be needed in the future.
- In mid-January 2018, Pueblo Bank and Trust terminated its relationship with the company’s gateway provider. The company stopped processing PINless debit transactions and had not resumed processing as of the filing, although it had secured another gateway and bank sponsorship relationship.
- FiCentive’s $200,000 C2Go note was in default. Under a settlement, $50,000 was received in December 2017, with $150,000 scheduled in two later installments. The filing states that recovery of the remaining amount is uncertain.
- The company bears potential exposure to merchant chargebacks, ACH returns, prepaid-card negative balances, fraud, network fines and losses involving sponsor banks and processors. The reserve for processing losses was $172,832 at year-end, and cardholder overdrawn balances were $12,700.
- The business is subject to extensive payment-network, prepaid-card, consumer-protection, anti-money-laundering, privacy and state and federal regulatory requirements. Loss of a bank sponsor or processing relationship could materially affect revenue.
- The company reported no significant fraud losses in 2017 or 2016, but identified cybersecurity, system interruptions, data breaches and third-party processing failures as material risks.
- The company had approximately $41.3 million of tax net operating loss carryforwards, but maintained a valuation allowance against most deferred tax assets because of its history of operating losses.
- Unrecognized stock-based compensation was $7.01 million at year-end, expected to be recognized over a weighted-average remaining period of 8.51 years, creating potential future non-cash expense and dilution.
- Subsequent to year-end, the company repurchased 397,845 shares for $956,128 to cover employee, officer and director tax obligations and increased its authorized stock buyback plan to $3.0 million.
Investor Verification Items
- Verify the registrant’s corporate identity and name change history, because the filing is for Payment Data Systems, Inc., while the request identifies Usio, Inc.
- Assess whether Singular’s acquired revenue and customer growth can be integrated profitably, given the 2017 gross-margin decline and larger operating loss.
- Confirm current processing status, replacement sponsorship and financial impact of the discontinued PINless debit service.
- Review cash availability excluding restricted merchant collateral and compare ongoing cash burn with management’s stated funding runway.
- Track the remaining C2Go settlement installments and assess collectability of the $150,000 receivable.
- Evaluate exposure to sponsor-bank termination, network fines, chargebacks, fraud, cybersecurity incidents and regulatory changes.
- Consider dilution and future expense from outstanding equity awards, the Singular acquisition shares, public-offering shares and ongoing buybacks.