Business Context and Reporting Period
Payment Data Systems, Inc. (identified in the request as Usio, Inc.) filed its Form 10-K for the fiscal year ended December 31, 2018. The company provides ACH, credit-card, debit-card, prepaid-card, payment-facilitation and related payment-processing services through Payment Data Systems, FiCentive, Akimbo and Singular Payments.
The company acquired Singular Payments on September 1, 2017 for $5.0 million, including $1.5 million in cash, a $600,000 note receivable offset and $3.5 million in common stock. The filing is an annual report, not a standalone fourth-quarter filing.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $25.0 million | $14.6 million | +72% |
| Gross profit | $5.6 million | $3.8 million | +48% |
| Gross margin | 22.3% | 25.9% | Down approximately 3.6 percentage points |
| Operating loss | $3.8 million | $2.8 million | Loss increased |
| Net loss | $3.8 million | $3.0 million | Loss increased 25% |
| Basic and diluted loss per share | $0.31 | $0.33 | Loss per share improved |
| Operating cash flow | $(2.8) million | $(0.9) million | Use increased |
| Capital expenditures | $0.7 million | $0.4 million | Increased |
| Cash and cash equivalents | $2.7 million | $4.8 million | Down $2.1 million |
| Working capital | $2.4 million | $4.8 million | Down $2.4 million |
| Accumulated deficit | $57.0 million | $53.3 million | Increased |
Revenue growth included approximately 12% organic growth, primarily from ACH, and eight additional months of Singular Payments revenue. Total payment volume exceeded $3.4 billion, up 19% from $2.8 billion. ACH volume increased 17%, while credit-card dollars and transactions increased 110% and 111%, respectively.
Cost of services rose 80% to $19.5 million, exceeding revenue growth and reducing gross margin. Selling, general and administrative expense excluding stock compensation increased 42% to $6.2 million, while depreciation and amortization increased 49% to $1.9 million, primarily due to Singular Payments-related intangible amortization.
The balance sheet included $44.1 million of settlement processing assets matched by $44.1 million of settlement processing obligations, and $12.6 million of merchant reserves matched by corresponding obligations. The filing does not disclose material outstanding debt or borrowings. Total liabilities were $58.6 million and stockholders’ equity was $9.6 million at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue and payment volume expanded substantially, driven by organic ACH growth and the Singular Payments acquisition.
- Gross profit increased, but gross margin declined because higher credit-card processing revenue carried substantial associated processing costs.
- The net loss widened from $3.0 million to $3.8 million as acquired-business operating costs, higher selling and administrative expenses and amortization outweighed gross-profit growth.
- Cash declined to $2.7 million from $4.8 million, and operating cash usage increased to $2.8 million.
- Financing activities used $1.0 million, primarily for treasury-stock purchases associated with employee, officer and director tax obligations. A 2017 public offering had instead provided $2.7 million of net proceeds.
- Merchant customers increased to 1,958 from 1,817. No customer represented more than 10% of revenue in either year.
- The company launched or enhanced payment-facilitation enrollment, gateway, API, Text-2-Give and Text-2-Pay capabilities and introduced PayFac-in-a-Box in late 2018.
Outlook, Commentary, Risks and Unusual Items
Management’s stated objectives are to grow revenue and the customer base, expand sales capacity, improve technology, pursue complementary acquisitions and manage expenses while scaling. The filing provides no formal revenue, earnings or margin guidance.
Management stated that year-end cash, together with proceeds from a February 14, 2019 equity offering, was expected to fund operating and capital requirements for at least 12 months. The offering issued 769,230 shares at $2.60 per share and generated approximately $1.8 million of net proceeds for general corporate purposes and working capital. The company acknowledged that additional financing may be required in the future.
- Key operating risks include dependence on bank sponsors, ACH access, card networks, third-party processors and reseller channels.
- The company bears exposure to chargebacks, merchant insolvency, fraud, prepaid-card overdrafts, processing losses and network fines. The processing-loss reserve was $374,153 at December 31, 2018; prepaid cardholder overdrafts totaled $20,500.
- Regulatory risks include changing prepaid-card, consumer-protection, anti-money-laundering, privacy, payment-network and state licensing requirements.
- Cybersecurity incidents, system outages or third-party failures could result in liability, fines, lost customers and reputational damage.
- A disputed note receivable resulted in litigation. The company obtained a default judgment and carried the remaining receivable at $108,750 after a $36,250 reserve, but recovery of the remaining $145,000 principal was uncertain.
- The company entered new San Antonio and Nashville leases. Expected adoption of the new lease standard was approximately $2.7 million of lease assets and $2.8 million of lease liabilities.
- Outstanding unrecognized stock-based compensation was $6.3 million at year-end, expected to be recognized over approximately 7.05 years. A warrant for up to 150,000 shares was issued in 2018.
- The independent auditor issued an unqualified opinion. Management concluded that disclosure controls and internal control over financial reporting were effective; the company was not required to obtain an auditor attestation of internal controls as a smaller reporting company.
Most Important Facts for Investors to Verify
- Whether revenue growth from Singular Payments and the PayFac strategy can translate into sustained profitability and positive operating cash flow.
- The composition and liquidity of settlement processing assets and merchant reserves, which materially increase reported assets and liabilities but are not equivalent to unrestricted cash.
- Cash consumption, available financing and dilution following the February 2019 equity offering and any subsequent capital raises.
- Gross-margin trends as the mix shifts toward credit-card processing and as sponsor, interchange and processor costs change.
- Renewal and termination terms for bank-sponsor, processor and card-network relationships, including exposure to chargebacks and compliance penalties.
- Recoverability of the C2Go/Mercury note receivable and the ultimate cost of related litigation and collection efforts.
- Future lease obligations, stock-based compensation, warrants and potential dilution from equity incentives.