Usio, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The filing was signed November 14, 2019. Usio changed its corporate name from Payment Data Systems, Inc. effective June 26, 2019.
Business Context
Usio provides electronic payment processing services, including ACH, credit and debit card processing, prepaid card program management, and integrated payment facilitation. Management cited increased healthcare-related payment-facilitation activity and growth in prepaid products as key drivers of transaction growth.
- Third-quarter credit card transaction volume increased 8% and credit card dollars processed increased 12% year over year.
- ACH transaction volume increased 4%; returned-check transactions decreased 9%.
- Prepaid card load volume increased 100% and prepaid card transaction volume increased 106%.
- Total dollars processed exceeded $915 million, compared with $885 million in the prior-year quarter.
Financial Performance and Position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $7.1 million | $6.5 million | $20.8 million | $18.6 million |
| Gross profit | $1.55 million | $1.46 million | $4.45 million | $4.05 million |
| Operating loss | $(1.23) million | $(0.82) million | $(3.58) million | $(2.92) million |
| Net loss | $(1.24) million | $(0.81) million | $(3.59) million | $(2.90) million |
| Loss per share | $(0.09) | $(0.07) | $(0.28) | $(0.24) |
- Revenue increased 9.5% in the quarter and 12.0% for the first nine months.
- Gross profit increased 6.1% in the quarter and 9.9% year to date. Gross margin was approximately 21.9% in Q3 2019 versus 22.5% in Q3 2018, and approximately 21.4% for the first nine months versus 21.8% in the prior-year period.
- Operating losses widened as selling, general and administrative expenses increased 21.4% year to date, primarily from investments in prepaid and payment-facilitation growth initiatives.
- At September 30, 2019, cash and cash equivalents were $2.64 million, compared with $2.16 million at December 31, 2018.
- Total current assets were $53.5 million and total current liabilities were $51.3 million, producing reported working capital of approximately $2.3 million.
- Settlement processing assets and merchant reserves are substantially matched by corresponding liabilities and should not be treated as unrestricted liquidity.
- Total assets were $62.5 million and stockholders’ equity was $8.8 million. Accumulated deficit was $60.6 million.
- The company reported no traditional long-term debt. Operating lease liabilities totaled $2.70 million, including $2.45 million classified as non-current.
Cash Flow and Capital Resources
- Net cash used in operating activities was $3.0 million for the first nine months of 2019, compared with $1.9 million in the prior-year period.
- Excluding merchant reserves, prepaid card assets, and lease-related assets and liabilities, management reported operating cash use of $881,175 versus $746,316 in the prior-year period.
- Net cash used in investing activities was $536,405, primarily for property, equipment, and internal-use software development.
- Net cash provided by financing activities was $1.74 million, including $1.79 million of net proceeds from a February 2019 public offering of 769,230 shares.
- Cash, cash equivalents, prepaid card load assets, and merchant reserves declined to $13.56 million from $15.34 million at the beginning of the year.
Material Changes, Outlook, and Risks
- Management continues to invest in sales, technology, prepaid products, and payment facilitation, with the objective of achieving scale and eventually regaining profitability.
- The filing provides no specific numerical earnings or revenue guidance. Management states that future profitability depends on customer growth, expense control, successful marketing, technology investments, personnel retention, competition, and industry developments.
- Processing-loss reserves increased to $475,302 from $374,153 at December 31, 2018. Actual losses could exceed estimates, particularly as transaction volumes grow.
- The company maintains a $36,250 reserve against the remaining $145,000 principal of a delinquent note receivable. A default judgment and property lien exist, but recovery is uncertain because available equity has not been established.
- The company adopted the new lease standard in 2019 and recognized operating lease right-of-use assets and liabilities. Management states adoption did not affect operating results or liquidity.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- No material changes were reported to the risk factors in the 2018 Form 10-K.
Unusual and Subsequent Items
- Stock-based compensation was $954,770 for the first nine months of 2019 and remains a significant non-cash expense.
- The company recorded $26,955 of warrant-cost amortization as a reduction of revenue during the first nine months.
- On November 7, 2019, the board renewed the share repurchase program with a $1.42 million limit and a three-year duration, subject to earlier termination or exhaustion of funds.
- Related-party activity included purchases from an entity 50% owned by the CEO and revenue from businesses owned in part by the CEO and a director.
Important Facts for Investors to Verify
- Whether revenue growth and transaction-volume growth can offset continued operating losses and declining operating margins.
- The amount of unrestricted cash available after excluding settlement assets, prepaid-card funds, and merchant reserves.
- The sustainability and expected timing of cash breakeven, given recurring operating cash use and accumulated losses.
- The adequacy of merchant-loss reserves and exposure to chargebacks, ACH losses, prepaid-card balances, and customer insolvencies.
- The collectability of the $145,000 note receivable and the value and priority of the related property lien.
- The effect of the renewed share repurchase program and future equity issuance on liquidity and shareholder dilution.
- The scale of outstanding anti-dilutive awards and options, reported at 3,872,386 shares at September 30, 2019.