Usio, Inc. (formerly Payment Data Systems, Inc.) — Q3 2018 Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended September 30, 2018. The company provides electronic payment processing services, including ACH, credit, debit, prepaid card and online payment solutions. Results include the Singular Payments acquisition, completed September 1, 2017, which expanded credit-card processing and payment software capabilities.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $6.5 million | $3.6 million | $18.6 million | $9.0 million |
| Gross profit | $1.5 million | $0.8 million | $4.0 million | $2.5 million |
| Gross margin | 22.5% | 23.0% | 21.8% | 27.5% |
| Operating loss | $(0.8) million | $(0.9) million | $(2.9) million | $(1.8) million |
| Net loss | $(0.8) million | $(0.9) million | $(2.9) million | $(1.7) million |
| Loss per diluted share | $(0.07) | $(0.10) | $(0.24) | $(0.20) |
- Q3 revenue increased 80%; nine-month revenue increased 108%.
- Q3 gross margin was approximately 22.5%, while nine-month gross margin declined to approximately 21.8% from 27.5%.
- Operating expenses increased primarily from personnel, technology, sales investments and amortization related to Singular Payments. Nine-month stock-based compensation was $1.0 million versus $0.7 million in the prior-year period.
- Transaction volume exceeded $885 million in Q3 2018 versus $704 million in Q3 2017. Credit-card transaction count and dollars processed increased 109% and 112%, respectively; ACH transaction volume increased 28%.
- Cash and cash equivalents were $2.7 million at September 30, 2018, compared with $4.8 million at December 31, 2017. Cash, cash equivalents and merchant reserves totaled $16.3 million, including $13.6 million of merchant reserves that corresponded to an equal liability.
- Net cash used in operating activities was $1.9 million for the nine months, including a $1.4 million decrease in merchant reserves. Excluding merchant reserves, management reported operating cash use of approximately $0.6 million.
- Net cash used in investing activities was $0.6 million, primarily for $0.6 million of property and equipment purchases. Net cash used in financing activities was $1.0 million for treasury-stock purchases.
- Total assets were $60.2 million and total liabilities were $49.9 million at September 30, 2018. The filing reports no senior debt or material off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Revenue and gross profit expanded substantially from the Singular Payments acquisition and organic growth. Management attributed Q3 revenue growth to 17.9% organic growth, excluding Singular Payments.
- Cost of services increased 81% in Q3 and 124% for the nine-month period, outpacing revenue growth for the nine months and contributing to lower year-to-date gross margin.
- Despite higher Q3 revenue and a smaller quarterly loss, the nine-month net loss increased to $2.9 million from $1.7 million because of increased operating investments, employee-related costs and amortization.
- Accumulated deficit increased to $56.2 million from $53.3 million at December 31, 2017. Working capital declined to approximately $2.6 million from $4.8 million.
- The company adopted ASC 606 and the restricted-cash amendments effective January 1, 2018. Management stated that revenue continues to be reported gross because the company acts as principal in its payment-processing arrangements.
Guidance, outlook, risks and unusual items
- Management anticipated continued fourth-quarter revenue increases in ACH, returned-check, Integrated Payments and Prepaid businesses, along with growth in contracted merchant customers and transaction volumes.
- Management stated that future operating losses remain possible and that achieving sustainable profitability depends on revenue growth, customer acquisition and retention, expense management, technology investment, competitive execution and successful integration of acquisitions.
- The company maintains significant merchant processing exposure. Merchant reserves and processing-loss estimates may change with transaction volumes and actual merchant losses; the reserve for processing losses increased to $313,614 from $172,832 at year-end 2017.
- A note receivable involving C2Go and Mercury Investment Partners was in default. Only $5,000 of a remaining $150,000 scheduled balance was collected during 2018, and the company filed suit on September 4, 2018. A $72,500 loss reserve was recorded, and recovery of the remaining $145,000 principal is uncertain.
- The company repurchased approximately $966,000 of treasury stock during the first nine months, including 397,845 shares repurchased from employees, officers and directors to cover taxes on vested shares. Approximately $1.5 million remained available under the repurchase plan at September 30, 2018.
- A warrant agreement could result in the issuance of up to 150,000 common shares to University Fancards. At September 30, 2018, the triggering card transaction had not occurred.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material changes were reported to previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue growth from Singular Payments and organic operations translates into improved gross margins and positive operating cash flow.
- The amount of unrestricted cash available after excluding merchant reserves and the company’s ability to fund continued technology, sales and prepaid-business investments.
- The status and collectability of the C2Go/Mercury Investment Partners receivable and related litigation.
- Actual merchant processing losses relative to reserves and the potential effect of chargebacks, insolvencies or other settlement obligations.
- The company’s path to profitability given the $56.2 million accumulated deficit, ongoing operating losses and stock-based compensation.
- The effect of treasury-stock repurchases, employee equity awards and the University Fancards warrant on future share count and dilution.