Usio, Inc. Form 10-Q Summary
Business context and reporting period
Usio, Inc. (formerly Payment Data Systems, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company provides ACH, credit, debit, prepaid-card, and integrated electronic payment processing services. The corporate name change became effective June 26, 2019.
- Second-quarter credit-card transaction volume increased 8% year over year and dollars processed increased 13%.
- ACH transaction volume increased 14%; prepaid-card load volume increased 95%; prepaid-card transaction volume increased 74%.
- Total dollars processed exceeded $876 million, compared with $821 million in the prior-year quarter.
Financial performance and liquidity
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $7.2 million | $6.3 million | $13.7 million | $12.1 million |
| Gross profit | $1.6 million | $1.3 million | $2.9 million | $2.6 million |
| Gross margin | 21.9% | 21.0% | 21.1% | 21.4% |
| Operating loss | $(1.3) million | $(1.0) million | $(2.4) million | $(2.1) million |
| Net loss | $(1.3) million | $(1.0) million | $(2.3) million | $(2.1) million |
| Loss per diluted share | $(0.10) | $(0.09) | $(0.18) | $(0.17) |
- Revenue increased 13.9% in the quarter and 13.3% for the six-month period, driven by ACH, credit-card, and prepaid portfolios.
- Cost of services increased 12.6% in the quarter and 13.7% year to date, primarily from higher transaction volumes and referral-fee arrangements.
- Other selling, general and administrative expenses increased 23.5% in the quarter and 17.4% year to date, reflecting investment in prepaid and integrated-payments initiatives.
- Net loss margins were approximately 17.8% for the quarter and 17.1% year to date, compared with approximately 16.5% and 17.2%, respectively, in the prior-year periods.
- Cash and cash equivalents were $3.3 million at June 30, 2019, compared with $2.7 million at December 31, 2018. Cash, cash equivalents, and merchant reserves totaled $14.4 million.
- Net cash used in operating activities was $2.4 million for the six months, compared with $0.9 million in the prior-year period. Excluding merchant reserves and lease-related assets and liabilities, management reported cash used in operations of approximately $1.0 million versus $0.7 million.
- Investing cash use was $0.3 million, primarily for internal-use software and other property and equipment. Financing activities provided $1.7 million, including $1.8 million of net proceeds from a February 2019 public offering.
- Working capital was $2.9 million at June 30, 2019, compared with $2.4 million at December 31, 2018. Accumulated deficit was $59.4 million.
- The filing does not report conventional funded debt. Operating lease liabilities totaled $2.8 million, including $0.2 million current and $2.5 million non-current.
Material changes versus the prior comparable period
- Growth accelerated in payment-processing volumes, particularly prepaid and healthcare-related integrated payments.
- Gross profit grew faster than revenue in the second quarter, but year-to-date gross margin declined modestly because of service-cost and partner-fee pressures.
- Operating and net losses widened as operating expenses increased faster than gross profit.
- Cash increased after the equity offering, although operating cash usage also increased.
- Adoption of lease accounting on January 1, 2019 added approximately $2.6 million of right-of-use assets at June 30 and approximately $2.8 million of lease liabilities; management stated that adoption did not affect results of operations or liquidity.
- Outstanding issued common shares increased to 18.0 million at June 30, 2019 from 17.1 million at December 31, 2018, principally reflecting the public offering and equity incentive-plan activity. Outstanding shares reported as of August 9, 2019 were 17.1 million.
Guidance, outlook, risks, contingencies, and unusual items
- Management anticipated third-quarter revenue increases in ACH and returned-check services, incremental revenue from integrated payments and prepaid initiatives, additional merchant contracts, and continued prepaid-card growth. No quantitative earnings or revenue guidance was provided.
- Management warned that future operating losses may occur and identified customer growth, expense control, technology investment, competition, personnel, and industry developments as key factors affecting profitability.
- The company bears processing and merchant credit risk, including losses from chargebacks, ACH transactions, prepaid-card balances, or merchant insolvency. The reserve for processing losses was $440,153 at June 30, 2019, compared with $374,153 at year-end.
- A note receivable dispute remains outstanding. Following a default judgment against Mercury Investment Partners, the company holds a lien on property valued by the court at more than $1.0 million, but stated that recoverability is uncertain. The remaining principal was reported as $145,000, with a $36,250 loss reserve.
- The company has approximately $45.3 million of net operating loss carryforwards, subject to expiration beginning in 2022, and maintains a valuation allowance of approximately $8.9 million against deferred tax assets.
- The company reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2019.
- Stock-based compensation was $356,103 in the quarter and $639,511 year to date. Anti-dilutive awards and options totaling approximately 3.9 million shares were excluded from diluted loss-per-share calculations.
Important facts for investors to verify
- Whether volume growth in ACH, integrated payments, and prepaid services converts into sustainable operating profitability.
- The pace of operating-expense growth relative to gross-profit growth and the resulting cash-burn rate.
- The adequacy and availability of cash and merchant reserves, which include funds held to support processing obligations and are not equivalent to unrestricted corporate cash.
- The status and collectability of the Mercury Investment Partners judgment and the $145,000 remaining principal balance.
- The potential dilution from equity awards, warrants, and future capital raises, as well as the company’s continuing accumulated deficit.
- The expiration and usability of net operating loss carryforwards and the potential for additional valuation allowances.
- The status of the stock-repurchase authorization, which had approximately $1.4 million remaining at June 30, 2019 and was scheduled to expire September 29, 2019 unless extended or terminated earlier.