Usio, Inc. (filed as Payment Data Systems, Inc.) — Q2 2018 Form 10-Q Summary
Business context and reporting period
The unaudited Form 10-Q covers the three and six months ended June 30, 2018, with comparative periods ended June 30, 2017. The company provides integrated electronic payment processing, including ACH, credit, debit, prepaid-card and online payment services. The September 1, 2017 acquisition of Singular Payments expanded credit-card processing and payment software capabilities and was the primary driver of reported growth.
At June 30, 2018, the company reported 15,997,361 common shares outstanding. Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $6.284 million | $2.550 million | $12.128 million | $5.361 million |
| Gross profit | $1.320 million | $0.696 million | $2.591 million | $1.639 million |
| Gross margin | 21.0% | 27.3% | 21.4% | 30.6% |
| Operating loss | $(1.031) million | $(0.549) million | $(2.092) million | $(0.871) million |
| Net loss | $(1.035) million | $(0.534) million | $(2.086) million | $(0.821) million |
| Basic and diluted loss per share | $(0.09) | $(0.06) | $(0.17) | $(0.10) |
Revenue increased 146% in the quarter and 126% year to date. Management attributed the increase to Singular Payments and organic growth of 13.5% for the quarter and 4.7% for the six-month period, excluding Singular. Cost of services increased faster than revenue, rising 168% in the quarter and 156% year to date. Gross profit increased 90% and 58%, respectively, but gross margins declined materially.
Operating expenses increased substantially. Six-month stock-based compensation was $672,855, other selling, general and administrative expense was $3.094 million, and depreciation and amortization was $915,939. The company attributed the higher expenses primarily to personnel, technology and sales investments and amortization related to the Singular acquisition.
Net cash used in operating activities was $(882,469) for the six months ended June 30, 2018, compared with $(838,043) in the prior-year period. Investing cash use was $(431,815), principally for property and equipment, and financing cash use was $(959,076) for treasury-stock purchases. Cash and cash equivalents declined to $2.722 million from $4.801 million at December 31, 2017. Cash, cash equivalents and merchant reserves totaled $17.505 million at June 30, 2018, compared with $18.179 million at June 30, 2017.
Total assets were $66.889 million and total liabilities were $56.130 million at June 30, 2018. Current liabilities included $40.131 million of settlement-processing obligations and $14.782 million of merchant-reserve obligations, substantially matched by corresponding assets. Stockholders’ equity was $10.759 million, and accumulated deficit was $55.347 million. The filing does not disclose traditional long-term debt; non-current liabilities consisted of $27,416 of deferred rent.
Material changes versus the prior comparable period
- Credit-card transaction volume increased 415% and credit-card dollars processed increased 291% year over year in Q2, primarily because of the Singular Payments acquisition.
- ACH transaction volume increased 17% year over year; total dollars processed exceeded $821 million, compared with $783 million in Q1 2018.
- Revenue growth was accompanied by lower gross margins because processing costs grew faster than revenue.
- Operating and net losses widened despite higher gross profit, reflecting increased staffing, technology, sales and acquisition-related amortization costs.
- Cash declined by approximately $2.1 million from year-end, driven by operating cash use, $959,076 of treasury-stock purchases and $431,815 of capital expenditures.
- The company adopted revenue-recognition guidance under ASC 606 and related principal-versus-agent guidance beginning January 1, 2018. Management stated that revenue continues to be reported gross and that the adoption did not change the existing revenue-recognition process.
Guidance, outlook, risks and unusual items
Management anticipated continued revenue increases in ACH and returned-check businesses during Q3 2018, additional year-over-year and sequential revenue growth from the Singular legacy business, increases in enrolled merchants and continued traction for prepaid-card products. No quantitative earnings or revenue guidance was provided.
Management stated that the company may incur future operating losses and must grow its customer base, cross-sell products, control expenses, maintain technology and transaction-processing systems, attract personnel and successfully integrate acquisitions to achieve sustainable profitability and positive operating cash flow.
A material contingency involves a defaulted C2Go note. Mercury Investment Partners agreed to pay $200,000 in installments but failed to make the required $50,000 payment by April 30, 2018; $5,000 was received after quarter-end. The company recorded a $72,500 loss reserve and reported uncertainty regarding recovery of the remaining $145,000 and the value of collateral. Litigation remains pending in Bexar County, Texas.
The company repurchased 397,845 shares for $956,128 in January to cover tax obligations on vested shares, including purchases from the chairman, chief executive officer and chief financial officer. The company also repurchased 1,929 shares during Q2. Approximately $1.496 million remained available under the repurchase plan at June 30, 2018.
Other risks include merchant processing losses, chargebacks, customer credit risk, dependence on payment networks and sponsoring banks, technology and cybersecurity risks, competition, acquisition integration, continued losses and possible impairment of intangible assets. Management reported no material changes to the risk factors disclosed in the 2017 Form 10-K.
Important facts for investors to verify
- Whether revenue growth from Singular Payments converts into sustainable gross-profit and operating-cash-flow growth.
- The effect of declining gross margins and continuing operating losses on the company’s liquidity and capital needs.
- The amount and availability of cash excluding merchant reserves, which are held to support merchant-related obligations.
- The status and collectability of the C2Go/Mercury note, including the remaining $145,000 exposure and pending litigation.
- The scale, timing and economic impact of further share repurchases and equity-based compensation.
- Whether management’s Q3 expectations for transaction volumes, merchant additions and revenue growth are achieved.
- The company’s ability to manage processing-loss, chargeback, settlement and network-related obligations as transaction volumes expand.