Business Context and Reporting Period
Registrant: Payment Data Systems, Inc. (identified in the request as Usio, Inc.). The filing is a Form 10-K for the fiscal year ended December 31, 2016, filed April 6, 2017.
The company provides U.S.-based ACH, credit, debit, prepaid-card, bill-payment and related electronic payment-processing services through Payment Data Systems, FiCentive and other subsidiaries. Its platforms include Akimbo prepaid cards and billx.com. The company had 21 full-time employees at year-end.
Financial Performance and Liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $12.08 million | $14.38 million | Down 16% |
| Cost of services | $8.29 million | $9.42 million | Down 12% |
| Gross profit | $3.78 million | $4.96 million | Down approximately 24% |
| Gross margin | 31.3% | 34.5% | Down approximately 3.2 percentage points |
| Operating income (loss) | $(1.36) million | $0.95 million | Shifted to loss |
| Operating margin | (11.3%) | 6.6% | Down approximately 17.9 percentage points |
| Net income (loss) | $(1.20) million | $1.02 million | Shifted to loss |
| Basic EPS | $(0.15) | $0.14 | Declined |
| Cash flow from operations | $0.85 million | $2.09 million | Down 59% |
| Cash and cash equivalents | $4.12 million | $4.06 million | Up $0.06 million |
| Working capital | $4.52 million | $3.87 million | Up $0.65 million |
Total payment dollars processed exceeded $2.9 billion, down approximately 12% from $3.3 billion in 2015. ACH processing volume declined 12%; credit-card processing volume declined 5%, although credit-card transactions increased by less than 1% and remained the company’s second-highest annual level.
Other notable 2016 expenses included $1.31 million of stock-based compensation, $3.19 million of other selling, general and administrative expenses, and $0.90 million of depreciation and amortization. SG&A increased 32%, while depreciation and amortization increased 82%, primarily because of Akimbo-related assets.
Total assets were $69.51 million, including $43.85 million of settlement-processing assets and $15.80 million of restricted cash. Settlement-processing obligations were also $43.85 million and restricted cash was matched by a corresponding liability. The filing does not report conventional debt outstanding at year-end; it reports a $200,000 note receivable from C2Go. Total stockholders’ equity was $9.01 million, and accumulated deficit was $50.25 million.
Material Changes Versus the Prior Comparable Period
- Revenue fell 16% because of lower ACH and credit-card processing volumes.
- The company moved from $1.02 million of net income in 2015 to a $1.20 million net loss in 2016.
- Operating expenses were broadly flat overall, but the mix worsened: SG&A and depreciation increased while revenue and gross profit declined.
- Operating cash flow decreased from $2.09 million to $0.85 million.
- Merchant accounts declined to 710 from 768. The average monthly billx.com customer count declined to 38 from 197.
- The Shelby Systems referral agreement lapsed on February 1, 2016. Retained Shelby-referred customers still represented approximately 15% of 2016 revenue, compared with approximately 17% of 2015 revenue from Shelby referrals.
- The company launched a new client-facing web application, an Apple iOS payment SDK and PIN-less real-time debit services, and added mortgage-loan-servicer customers.
- The company repurchased 246,717 shares for approximately $431,755 to cover employee and director tax obligations and separately authorized a common-stock repurchase program of up to $1 million.
- The CFO resigned effective December 30, 2016; Tom Jewell became CFO on January 6, 2017.
Outlook, Risks, Contingencies and Unusual Items
The filing provides no quantitative revenue, earnings or cash-flow guidance. Management states that future performance depends on customer acquisition and retention, technology investment, operating-expense control, service quality, adaptation to changing technology and continued access to payment networks and sponsoring banks.
- Liquidity and losses: Management reported an accumulated deficit of $50.25 million and stated that additional capital may be needed if losses continue or expansion initiatives require funding.
- Processing and sponsor risk: The company is financially liable for certain chargebacks, fines, returned transactions, merchant losses and prepaid-card negative balances. Its services depend on ODFIs, card-network sponsors, processors and regional debit networks, which may terminate or restrict access.
- Regulatory risk: The business is subject to the Bank Secrecy Act, anti-money-laundering requirements, card-network rules, consumer-protection requirements, prepaid-card regulations and evolving CFPB requirements. The CFPB Prepaid Account Rule was scheduled to apply beginning October 1, 2017, subject to exceptions.
- Cybersecurity and systems: Breaches, software defects, outages, fraud or third-party processing failures could result in losses, fines, litigation, reputational damage or loss of processing privileges. A 2016 ACH malfunction caused approximately $237,000 of excess remittances; most was recovered and the remainder was charged to the processing-loss reserve.
- Legal matters: A Brightmoor Christian Church lawsuit concerning $181,709 of allegedly fraudulent transactions was dismissed in April 2016 under a settlement agreement with no consideration. A derivative lawsuit concerning executive and director compensation remained unresolved; management believed the claims lacked merit and had not accrued a loss.
- Unusual income: Dismissal of the Shelby litigation generated $97,493 of income.
- Acquisition and financing developments: In March 2017, the company entered into a non-binding letter of intent to acquire Singular Payments and agreed to provide up to $500,000 under a secured line of credit. Completion of the acquisition was uncertain.
- Executive obligations: Change-in-control or certain termination events could require estimated cash payments of approximately $1.5 million to $2.0 million each for the Chairman and CEO, plus accelerated equity vesting.
- Tax assets: The company reported approximately $40.2 million of net operating-loss carryforwards, substantially offset by a valuation allowance. The filing does not establish that these tax benefits will be realized.
Most Important Facts to Verify
- Confirm the legal name and ticker relationship between the filing’s Payment Data Systems, Inc. and the requested company name, Usio, Inc.
- Reconcile the sharp 2016 revenue decline and volume reductions with current customer retention, reseller concentration and transaction trends.
- Assess whether the $4.12 million of unrestricted cash and $4.52 million of working capital are sufficient if operating losses continue.
- Review the composition and availability of $15.80 million of restricted cash and the matching settlement-processing obligations.
- Evaluate exposure to chargebacks, merchant insolvency, fraud, data breaches, processing errors and termination of bank or network sponsorships.
- Monitor the derivative compensation litigation, the Singular Payments acquisition and the related $500,000 secured line of credit.
- Consider dilution and future cash requirements in light of approximately 3.36 million unvested awards, accumulated losses and potential capital needs.