Usio, Inc. (formerly Payment Data Systems, Inc.) — Q2 2017 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three and six months ended June 30, 2017. The company provides electronic payment processing services, including ACH, credit, debit, prepaid card, returned-check and online payment processing, as well as Akimbo prepaid card products. The interim financial statements are unaudited.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|---|---|
| Revenue | $2.550 million | $2.890 million | $5.361 million | $6.119 million |
| Cost of services | $1.854 million | $2.034 million | $3.722 million | $4.189 million |
| Operating income (loss) | $(0.549) million | $(0.455) million | $(0.871) million | $(0.502) million |
| Net income (loss) | $(0.534) million | $(0.355) million | $(0.821) million | $(0.387) million |
| Basic and diluted loss per share | $(0.06) | $(0.05) | $(0.10) | $(0.05) |
- Revenue declined 11.8% in the quarter and 12.4% for the six-month period.
- Gross profit, calculated as revenue less cost of services, was approximately $0.696 million for the quarter and $1.639 million for the six months, representing estimated gross margins of 27.3% and 30.6%, respectively.
- Operating margins were approximately negative 21.5% for the quarter and negative 16.2% for the six months.
- Cash flow from operating activities was $13,078 for the six months, compared with $657,286 in the prior-year period. Investing cash outflow was $798,426, including $500,000 advanced under a note receivable and $298,426 of property and equipment purchases. Financing cash outflow was $108,939 for treasury-stock purchases.
- Cash and cash equivalents were $3.226 million at June 30, 2017, compared with $4.121 million at December 31, 2016. Working capital was $4.168 million.
- Total assets were $60.896 million and stockholders’ equity was $8.523 million at June 30, 2017. Settlement processing assets and matching obligations were each $36.552 million, while restricted cash and the corresponding liability were each $14.953 million.
- The balance sheet does not report traditional debt borrowings. Notes receivable totaled $700,000, consisting of the C2Go note and the Singular Payments advance.
- Accumulated deficit was $51.073 million. The company recognized a $1.621 million deferred tax asset and maintained a $12.7 million valuation allowance against other deferred tax assets.
Material Changes Versus the Prior Comparable Period
- Credit card transaction volume decreased 46% year over year in the second quarter, although credit card dollar volume declined only 5%. Management attributed the volume change primarily to the exit of a large, low-margin fast-food retailer.
- ACH transaction volume decreased 15% and returned-check volume decreased 12%, primarily because a customer sold part of its portfolio. Total dollars processed exceeded $613 million in the quarter.
- Cost of services declined 8.8% in the quarter and 11.1% for the six months, broadly reflecting lower processing volumes.
- Stock-based compensation declined to $217,759 for the quarter and $425,679 for the six months, versus $283,747 and $571,436, respectively, due primarily to awards that vested or were canceled in December 2016.
- Other selling, general and administrative expense was nearly flat in the quarter but increased 15% for the six months to $1.628 million, driven by higher advertising, marketing, press-release and legal expenses.
- Net losses increased from $355,301 to $534,337 for the quarter and from $387,303 to $820,920 for the six months. Prior-year other income included a $97,493 benefit from settling a legal case in the company’s favor.
- The company repurchased 74,032 shares during the six months at an average price of $1.47 per share. Approximately $459,000 remained available under the authorized repurchase program at June 30.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal numerical revenue or earnings guidance. It expects ACH transaction trends to improve in the fourth quarter of 2017 and early 2018, supported by a sales pipeline and a customer rebuilding its portfolio.
- Management expects growth in enrolled merchant customers, prepaid card transactions and recently implemented PIN-less debit transactions.
- The company acknowledged that it may incur future operating losses and identified customer growth, expense management, technology investment, competition, personnel retention, industry developments and acquisition integration as important factors for achieving profitability.
- The company advanced $500,000 to Singular Payments under a secured line of credit related to a potential acquisition. After quarter-end, the line and related letter of intent were extended through August 31, 2017, and the loan was increased to $600,000. The acquisition remained subject to due diligence and finalization.
- The $200,000 C2Go note matured on August 2, 2017, and C2Go did not pay. The cure period ran through August 16, 2017. The company could pursue its security interest but stated that recovery of principal, interest and collection costs was uncertain. No loss reserve was recorded.
- A derivative/class-action lawsuit concerning allegedly excessive compensation remained pending. Management believes the claim lacks merit and has not accrued a loss, but acknowledged potential future legal fees and losses.
- Processing-loss reserves were $172,832 and unchanged from December 31, 2016. Management reported no significant processing losses to date, but actual losses could exceed estimates.
- The company expects to adopt the new revenue-recognition standard in the first quarter of 2018 and was evaluating the impact of gross-versus-net reporting. It did not expect the new lease standard to have a significant effect.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2017, and reported no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether transaction volumes and revenue recover as management expects in the fourth quarter of 2017 and early 2018.
- The collectibility and ultimate resolution of the C2Go note, including any reserve or write-off.
- Whether the Singular Payments acquisition closes and how the $600,000 secured advance is treated if it does not.
- The company’s ability to return to profitability while operating cash flow remains near breakeven and the accumulated deficit exceeds $51 million.
- The effect of adopting revenue-recognition requirements on reported revenue and margins.
- The outcome and potential cost of the pending compensation-related litigation.
- The availability and use of unrestricted cash, given the significant settlement-processing assets and restricted cash that may not be available for general corporate purposes.