Business Context and Reporting Period
Usio, Inc., then named Payment Data Systems, Inc., filed this unaudited Form 10-Q for the three months ended March 31, 2018. The company provides electronic payment processing, ACH, credit and debit card processing, prepaid card programs, and online payment services. The period includes the business acquired from Singular Payments, LLC on September 1, 2017.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $5.844 million | $2.811 million | +108% |
| Cost of services | $4.573 million | $1.868 million | +145% |
| Gross profit | $1.271 million | $0.943 million | +35% |
| Gross margin | 21.8% | 33.6% | Down 11.8 percentage points |
| Operating loss | $(1.061) million | $(0.322) million | Loss increased |
| Operating margin | (18.2%) | (11.5%) | Lower |
| Net loss | $(1.051) million | $(0.287) million | Loss increased |
| Basic and diluted loss per share | $(0.09) | $(0.03) | Lower |
| Net cash used in operating activities | $(0.239) million | $(0.840) million | Improved |
At March 31, 2018, cash and cash equivalents were $3.473 million, compared with $4.801 million at December 31, 2017. Cash, cash equivalents and merchant reserves totaled $18.553 million. Working capital was $3.562 million, compared with $4.790 million at year-end 2017. Merchant reserves of $15.080 million were offset by corresponding merchant reserve obligations.
Total assets were $65.645 million and stockholders’ equity was $11.491 million at March 31, 2018. The filing does not disclose outstanding debt or borrowings; current liabilities were $54.155 million, including settlement processing obligations and merchant reserve obligations. The accumulated deficit was $54.311 million.
Investing cash outflow was $29,502, primarily for property and equipment. Financing cash outflow was $956,134 for treasury stock repurchases. The company reported no cash paid for interest or income taxes.
Material Changes Versus the Prior Comparable Period
- Revenue more than doubled, primarily because of the Singular Payments acquisition and organic growth.
- Credit card transaction volume increased 307%, and credit card dollars processed increased 305% year over year. Total dollars processed exceeded $782 million.
- Cost of services grew faster than revenue, reducing gross margin to 21.8% from 33.6%.
- Other selling, general and administrative expense increased 81% to $1.499 million, primarily due to employee and related costs associated with the acquisition and expanded sales and marketing activities.
- Stock-based compensation increased to $374,378 from $207,920, due to additional stock grants issued in November 2017.
- Depreciation and amortization increased to $458,663 from $228,545, primarily because of amortization related to the Singular Payments acquisition.
- Cash used in operating activities improved from $839,628 to $239,087, although the company remained loss-making.
- The company repurchased 397,845 shares for approximately $956,128, primarily to cover employee, officer and director taxes on vested shares. Approximately $1.499 million remained available under the repurchase plan at March 31, 2018.
Guidance, Outlook, Risks and Unusual Items
Management expected significant year-over-year revenue growth in the second quarter of 2018 from the Singular Payments acquisition, with modest sequential growth from the first quarter. Management also expected improvement in ACH and returned-check revenues, increased enrolled merchant customers, new clients from its sales pipeline, and modest growth in prepaid card transactions.
Management stated that future operating losses remained possible. Profitability depends on growing and retaining customers, managing expenses, maintaining technology and processing systems, integrating acquisitions, attracting qualified personnel, and responding to competition and industry changes.
A material contingency involves a $200,000 note receivable related to C2Go, Inc. Under a settlement agreement, $150,000 remained due after a $50,000 installment paid in December 2017. The April 30, 2018 installment was not paid, a default letter was issued, and the company agreed in principle to extend the payment date to May 16, 2018. The company stated that recovery of the remaining principal or collateral was uncertain and recorded no loss reserve as of March 31, 2018. Litigation is pending in Bexar County, Texas.
The company adopted the revenue recognition and restricted-cash accounting standards effective January 1, 2018. Management stated that revenue continued to be reported gross because the company acts as principal in providing end-to-end payment processing services. Management did not expect the forthcoming lease standard to have a significant impact.
The company reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2018.
Important Facts for Investors to Verify
- Whether the Singular Payments acquisition can sustain revenue growth while restoring gross margins and profitability.
- The company’s ability to fund operations given recurring losses, reduced unrestricted cash, and a $54.311 million accumulated deficit.
- The status and collectability of the C2Go/Mercury note receivable and related litigation.
- The composition and liquidity restrictions, if any, associated with the $15.080 million of merchant reserves.
- The effect of continued stock repurchases, stock-based compensation, and potential dilution from 3.878 million anti-dilutive awards and options.
- Whether management’s second-quarter outlook and expected ACH, merchant enrollment, and prepaid-card growth are achieved.