Usio(USIO) - 2018 Q4 - Annual Report

PART I Business The company provides integrated payment processing services and targets software developers with its "PayFac-in-a-Box" platform - The company provides a comprehensive suite of payment services, including ACH, credit/debit card processing, and prepaid card program management through its subsidiaries FiCentive and Singular Payments[15] - The acquisition of Singular Payments in September 2017 added a significant customer portfolio and an experienced sales force, strengthening the company's credit card processing segment[17] - A core growth strategy is the "PayFac-in-a-Box" platform, designed to offer a simple integration for software and app developers to monetize payments within their applications[20] - The company's merchant customer base grew from 1,817 to 1,958 in 2018, with no single customer accounting for more than 10% of revenues[51][52] - The business is subject to significant government regulation, including the Dodd-Frank Act, the CARD Act, and anti-money laundering (AML) laws[60][61][66] Risk Factors The company faces business, industry, and stock-related risks, including financial losses, regulatory burdens, and key personnel dependence - The company has a history of net losses, reporting a loss of $3.8 million in 2018 and an accumulated deficit of $57.0 million as of December 31, 2018, and may require additional financing[77][86] - Business operations are highly dependent on relationships with bank sponsors like Fifth Third Bank and Wells Fargo for network access[83][84] - The company is subject to extensive regulations from the CARD Act, Dodd-Frank Act, and CFPB, with non-compliance risking fines and suspension[91][92][97] - Security breaches involving cardholder data could expose the company to significant liability, litigation, fines, and reputational damage[102][103] - The company's common stock is subject to the SEC's "penny stock" rules, which can make trading more difficult and limit liquidity for investors[132] - The company depends significantly on key executives, and their departure could adversely affect the business[105][109] Properties The company leases office spaces in San Antonio, TX, and Nashville, TN, which are considered adequate for current needs Leased Office Properties | Location | Purpose | Lease Expiration | Annual Rent Range | | :--- | :--- | :--- | :--- | | San Antonio, TX | Headquarters & Operations | July 31, 2024 | $117,000 - $232,000 | | Nashville, TN | Singular Payments Sales | April 30, 2023 | $109,000 - $122,000 | Legal Proceedings The company is pursuing collection of a defaulted loan after obtaining a default judgment against Mercury Investment Partners - The company filed a lawsuit against Mercury Investment Partners for defaulting on a note purchase agreement related to a $200,000 loan to C2Go, Inc[141] - A Texas court granted a default judgment in favor of the company on December 21, 2018, and collection efforts are underway[141] - A loss reserve on the remaining $145,000 principal was reduced to $36,250 as of December 31, 2018, following the favorable judgment[142] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[145] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq (PYDS), no dividends are paid, and a stock repurchase program is active 2018 Quarterly Stock Price Range | Quarter (2018) | High | Low | | :--- | :--- | :--- | | First Quarter | $3.39 | $1.43 | | Second Quarter | $2.09 | $1.56 | | Third Quarter | $2.05 | $1.57 | | Fourth Quarter | $1.90 | $1.38 | - As of March 18, 2019, there were 16,863,222 shares of common stock outstanding held by 92 stockholders of record[150] - The company has never declared or paid dividends and has no plans to do so in the foreseeable future[151] - A stock repurchase program had $1,472,284 available for repurchases as of December 31, 2018[155] Selected Financial Data As a smaller reporting company, this information is not required and has been omitted - The company is a smaller reporting company and has opted out of providing selected financial data[157] Management's Discussion and Analysis of Financial Condition and Results of Operations FY2018 revenue grew 72% to $25.0M, but net loss widened to $3.8M due to higher expenses from the Singular acquisition Key Financial Metrics | Metric | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $25.0M | $14.6M | +72% | | Gross Profit | $5.6M | $3.8M | +48% | | Net Loss | ($3.8M) | ($3.0M) | +27% | | Total Dollars Processed | $3.4B | $2.8B | +19% | - The increase in revenue was driven by 12% organic growth, primarily from the ACH business, and incremental revenue from the Singular Payments acquisition[168] - The wider net loss was primarily due to increased operating expenses associated with the full-year impact of the Singular Payments acquisition[169][172][176] - Cash and cash equivalents decreased to $2.7 million at Dec 31, 2018, from $4.8 million at Dec 31, 2017[177][178] - Subsequent to year-end, the company raised $1.8 million in net proceeds from a public offering on February 14, 2019[180][282] Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, this information is not required and has been omitted - The company is a smaller reporting company and has opted out of providing quantitative and qualitative disclosures about market risk[188] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and notes for fiscal years 2018 and 2017 Consolidated Balance Sheets Total assets were $68.2M and stockholders' equity decreased to $9.6M as of year-end 2018 Key Balance Sheet Items | Balance Sheet Items (in millions) | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $2.7 | $4.8 | | Total current assets | $60.9 | $59.1 | | Total Assets | $68.2 | $67.4 | | Liabilities & Equity | | | | Total current liabilities | $58.5 | $54.3 | | Total liabilities | $58.6 | $54.3 | | Total stockholders' equity | $9.6 | $13.1 | Consolidated Statements of Operations Revenues grew 72% to $25.0M in 2018, resulting in a net loss of $3.8M, or ($0.31) per share Key Income Statement Items | Income Statement Items (in millions) | 2018 | 2017 | | :--- | :--- | :--- | | Revenues | $25.02 | $14.57 | | Gross profit | $5.57 | $3.77 | | Total operating expenses | $9.34 | $6.61 | | Operating (loss) | ($3.77) | ($2.84) | | Net (Loss) | ($3.78) | ($3.01) | | Basic & Diluted EPS | ($0.31) | ($0.33) | Consolidated Statements of Cash Flows Net cash used by operating activities was $2.8M in 2018, with financing activities using $1.0M for stock buybacks Summary of Cash Flow Activities | Cash Flow Activities (in millions) | 2018 | 2017 | | :--- | :--- | :--- | | Net cash (used) by operating activities | ($2.76) | ($0.94) | | Net cash (used) by investing activities | ($0.70) | ($1.82) | | Net cash (used) provided by financing activities | ($0.98) | $2.61 | Notes to Consolidated Financial Statements Notes detail ASC 606 adoption, the Singular acquisition, NOLs, and a subsequent public offering - The company adopted ASC 606 and determined it is the principal in its transactions, thus continuing to report revenues on a gross basis[208][230] - The 2017 acquisition of Singular Payments had a total purchase price of $5,000,000, consisting of cash and common stock[234] - The company has approximately $45.3 million in net operating loss carryforwards for tax purposes, which begin to expire in 2022[262] - Subsequent to year-end, on February 14, 2019, the company raised approximately $1.8 million in net proceeds from a public offering of its common stock[282] Changes In and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants - None reported[284] Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of year-end 2018 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[284] - Management's assessment concluded that the company's internal control over financial reporting was effective as of December 31, 2018[285] Other Information No other information was reported for this item - None[287] PART III Directors, Executive Officers and Corporate Governance Required information on directors, officers, and governance is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the 2019 Proxy Statement[289] Executive Compensation Required information on executive compensation is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the 2019 Proxy Statement[294] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Required information on security ownership is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the 2019 Proxy Statement[295] Certain Relationships and Related Transactions, and Director Independence Required information on related transactions and director independence is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the 2019 Proxy Statement[296] Principal Accounting Fees and Services Required information on accountant fees and services is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the 2019 Proxy Statement[297] PART IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the report, with financial statements located in Item 8 - The consolidated financial statements are filed in Part II, Item 8 of the report[299] - All financial statement schedules were omitted because they were not applicable or the required information was included elsewhere[300] - Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002 are filed as exhibits[304] Form 10-K Summary The company elected not to provide a Form 10-K summary - None[305]