Business Context and Reporting Period
Payment Data Systems, Inc. (now Usio, Inc.; Nasdaq: PYDS) filed this unaudited Form 10-Q for the three months ended March 31, 2019. The company provides integrated electronic payment processing, including ACH, credit and debit card, prepaid card, returned-check, and related services.
Total payment volume exceeded $856 million, compared with $783 million in the prior-year quarter. Credit card transaction volume declined 4%, while credit card dollars processed increased 7%, ACH transaction volume increased 20%, and returned-check transaction volume increased 16%.
Financial Results and Key Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $6.588 million | $5.844 million | 12.7% increase |
| Cost of services | $5.252 million | $4.573 million | 14.9% increase |
| Gross profit | $1.336 million | $1.271 million | 5.1% increase |
| Gross margin | 20.3% | 21.7% | Down approximately 1.4 percentage points |
| Operating loss | $1.096 million | $1.061 million | 3.3% wider loss |
| Net loss | $1.073 million | $1.051 million | 2.1% wider loss |
| Basic and diluted loss per share | $0.09 | $0.09 | Unchanged as reported |
| Operating cash flow | $(1.197) million | $(0.239) million | Higher cash use |
| Capital expenditures | $0.153 million | $0.030 million | Higher investment |
Operating expenses were $2.432 million, including $0.283 million of stock-based compensation, $1.662 million of other selling, general and administrative expense, and $0.487 million of depreciation and amortization. The implied operating margin was approximately negative 16.6%, versus negative 18.2% in the prior-year quarter; the net margin was approximately negative 16.3%, versus negative 18.0%.
Other income, net, was $23,075, compared with $9,979 in the prior-year period. No income tax expense was recorded.
Liquidity, Capital Resources, and Balance Sheet
- Cash and cash equivalents were $4.466 million at March 31, 2019, compared with $2.695 million at December 31, 2018.
- Cash, cash equivalents, and merchant reserves totaled $15.764 million at quarter-end, compared with $15.341 million at year-end 2018. Merchant reserves were $11.298 million and are matched by corresponding obligations.
- Working capital was reported at $3.6 million, compared with $2.4 million at December 31, 2018.
- Total assets were $62.028 million and total liabilities were $51.403 million at March 31, 2019.
- Stockholders’ equity was $10.625 million, while accumulated deficit was $58.109 million.
- The company reported operating lease liabilities of $2.749 million following adoption of the new lease standard. The filing does not disclose conventional funded debt or borrowings outstanding.
- Net cash provided by financing activities was $1.772 million, principally from a February 2019 public offering of 769,230 shares. Net proceeds were $1.794 million and are intended for general corporate purposes and working capital.
Material Changes Versus the Prior Comparable Period
- Revenue grew 12.7%, driven primarily by ACH and prepaid portfolio growth.
- Cost of services grew faster than revenue, primarily because of increased processing volume and higher referral-fee arrangements, reducing gross margin.
- Gross profit increased only 5.1%, despite the revenue increase.
- Other selling, general and administrative expense increased 10.9% to $1.662 million, reflecting investments in prepaid and PayFac initiatives.
- Operating cash usage increased substantially, partly reflecting changes in merchant reserves and the adoption of operating lease accounting.
- Cash increased primarily because of the public offering rather than internally generated cash flow.
- The company adopted ASC 842 on January 1, 2019, recognizing a right-of-use asset and corresponding lease liability. Management stated that adoption did not affect results of operations or liquidity.
- Common shares issued increased from 17,129,680 at December 31, 2018 to 17,961,132 at March 31, 2019, largely due to the public offering and equity incentive plan activity.
Guidance, Outlook, Risks, and Unusual Items
Management anticipated continued revenue increases in ACH and returned-check services during the second quarter of 2019, as well as incremental revenue from PayFac integrated payments and prepaid initiatives. Management also expected growth in contracted merchant customers, new clients from its sales pipeline, and continued traction in prepaid card transactions.
The company cautioned that it may incur future operating losses. Its stated path to profitability depends on growing and retaining customers, increasing sales of ACH, credit card, and prepaid products, controlling operating expenses, maintaining technology and processing systems, responding to competition, and executing its growth initiatives.
- The company continues to invest in its sales force, prepaid platform, integrated payments capabilities, and internal-use software.
- A $135,764 fair-value charge related to warrants issued to University Fancards is being amortized as a reduction of revenue; $8,985 was recognized in the quarter.
- The company held a $36,250 loss reserve against the remaining $145,000 principal balance related to the Mercury Investment Partners/C2Go note. A default judgment was obtained, but recovery is uncertain and counsel was pursuing domestication and collection.
- Merchant processing-loss reserves increased to $407,153 from $374,153 at December 31, 2018. Management stated that it had not incurred significant processing losses to date, but actual losses could exceed estimates.
- The company had approximately $45.3 million of net operating loss carryforwards at December 31, 2018, subject to expiration beginning in 2022. Approximately $8.9 million of deferred tax assets were offset by a valuation allowance.
- Management reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2019.
Important Facts for Investors to Verify
- Whether revenue growth in ACH, prepaid, PayFac, and returned-check services can offset continued operating losses and declining gross margin.
- The sustainability of cash resources, given negative operating cash flow and reliance on equity financing during the quarter.
- The recoverability of the $145,000 Mercury Investment Partners/C2Go receivable and the adequacy of the related $36,250 reserve.
- The level and volatility of merchant reserve requirements and processing-loss exposure.
- The effect of equity issuance, stock-based compensation, warrants, and share repurchases on future dilution and per-share results.
- Execution of the company’s prepaid and integrated-payments growth initiatives and management’s stated second-quarter outlook.
- Future lease obligations totaling $3.419 million in minimum payments, with $2.749 million recorded as the lease liability at March 31, 2019.