Usio, Inc. 2020 Form 10-K Summary
Business context and reporting period
Usio, Inc. provides ACH, credit-card, debit-card, prepaid-card, payment-facilitation, money-disbursement, and related payment-processing services to merchants and businesses. In December 2020, Usio acquired substantially all assets of Information Management Solutions, LLC, adding electronic bill presentment, document composition, printing, mailing, and other Output Solutions services.
The filing covers the fiscal year ended December 31, 2020, with comparisons to 2019. The fourth quarter contributed one month of IMS operations. The filing was dated March 30, 2021. The consolidated financial statements received an unqualified audit opinion from ADKF, P.C.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $32.3 million | $28.2 million | 14.4% increase |
| Gross profit | $7.4 million | $5.9 million | 24.0% increase |
| Gross margin | 22.9% | 21.1% | Improved |
| Operating loss | $3.8 million | $5.1 million | Improved by $1.3 million |
| Operating margin | (11.6%) | (18.0%) | Improved |
| Net loss | $2.9 million | $5.1 million | Improved by $2.2 million |
| Basic and diluted loss per share | $(0.19) | $(0.39) | Improved |
| Cash and cash equivalents | $5.0 million | $2.1 million | Increased by $2.9 million |
| Working capital | $5.6 million | $1.3 million | Improved by $4.3 million |
Revenue by major line was $19.5 million from credit cards, $8.5 million from ACH and complementary services, $3.2 million from prepaid card services, and $1.2 million from Output Solutions. Fourth-quarter revenue was $9.4 million, up 27.4% from $7.4 million in the fourth quarter of 2019.
Net cash provided by operating activities was $6.3 million in 2020 versus $3.7 million of cash used in 2019. Management stated that, after adjusting for operating lease assets and liabilities, prepaid card load obligations, and merchant reserves, operating activities used $0.4 million in 2020 versus $1.3 million in 2019. Investing cash flow was negative $6.8 million, including $5.9 million paid for the IMS acquisition. Financing cash flow was positive $10.0 million, principally from equity offerings.
Payment volume was $3.34 billion, down 5.6% from $3.54 billion in 2019, while transaction count increased 19% to 18.2 million. Credit-card dollars processed increased 14%, credit-card transactions increased 58%, prepaid load volume increased 162%, and prepaid transaction volume increased 97%. ACH processing volume decreased 12%.
The filing does not report conventional funded debt outstanding at December 31, 2020. The $813,500 PPP loan was fully forgiven in December 2020. Balance-sheet liabilities primarily comprised settlement-processing obligations of $43.6 million, prepaid-card load obligations of $7.6 million, merchant-reserve obligations of $8.3 million, and operating lease liabilities totaling $2.8 million.
Material changes versus 2019
- Credit-card revenue increased 12.3%, and prepaid-card revenue increased 107.3%, benefiting from PayFac growth and contracts supporting COVID-19-related aid disbursements.
- ACH revenue declined 9.3%, principally because of pandemic-related weakness in non-bank consumer lending, partly offset by PINless debit growth.
- Output Solutions added $1.2 million of reported revenue from one month of operations following the IMS acquisition.
- Cost of services increased 11.8% to $24.9 million, below the rate of revenue growth, supporting gross-margin expansion.
- Operating expenses increased modestly to $11.1 million. Stock-based compensation rose to $1.5 million, while depreciation and amortization declined to $1.5 million.
- The company raised approximately $3.0 million in a private equity offering and $7.4 million net in a public equity offering. Shares issued and outstanding increased materially during the year, creating dilution risk.
- Merchant accounts increased 30% to 4,984 at December 31, 2020 from 3,830 at December 31, 2019.
- Total assets increased to $82.7 million from $61.6 million, and stockholders’ equity increased to $16.7 million from $7.6 million, primarily reflecting equity issuances and the IMS acquisition.
Guidance, outlook, risks, contingencies, and unusual items
Management provided no formal numerical revenue or earnings guidance. Its stated objectives are to drive top-line growth, expand the customer base and sales force, improve technology, cross-sell services, pursue complementary acquisitions, and regain and sustain profitability.
The IMS acquisition had a total purchase price of $6.5 million, consisting of $5.9 million in cash and $552,283 of warrant consideration. Management identified integration and the realization of anticipated growth opportunities as key uncertainties. Unaudited pro forma revenue would have been $45.2 million in 2020 and $41.8 million in 2019 if the acquisition had occurred at the beginning of 2019; these figures are not necessarily indicative of future results.
COVID-19 initially reduced activity among medical, veterinary, and consumer-lending merchants. Medical-related activity recovered above pre-pandemic levels, while consumer-lending activity remained below pre-pandemic levels. Prepaid activity benefited from municipal assistance programs. Management stated that the pandemic’s continuing financial impact remains uncertain.
In early January 2021, the company’s largest ACH customer filed for bankruptcy and stopped processing transactions. The customer represented 15% of 2020 ACH volume but only 1.12% of total company revenue. Management stated that organic growth from other ACH customers more than offset the volume loss in January 2021.
Key risks include continued operating losses, an accumulated deficit of $65.1 million, possible future capital needs, dependence on bank sponsors and third-party processors, merchant chargebacks and fraud, cybersecurity and privacy incidents, extensive payment and prepaid-card regulation, competition, technology disruption, and execution risk relating to IMS. Recorded fraud losses were $116,613 in 2020, and prepaid-cardholder overdrafts totaled $17,604 at year-end.
The company maintained a $145,000 loss reserve for the C2Go note receivable, which may not be recoverable. Usio also disclosed litigation with former Chief Revenue Officer Vaden Landers, including company claims for injunctive relief and arbitration and a counterclaim seeking damages in excess of $1 million. The company disputes the counterclaim.
Employment agreements with the Chairman and Chief Executive Officer could require substantial separation payments upon specified termination or change-in-control events. The filing estimates potential cash payments of approximately $1.5 million to $2.0 million for each agreement in certain circumstances.
Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020. As a smaller reporting company, the company was not required to obtain an auditor attestation on internal control effectiveness.
Important facts for investors to verify
- Whether Output Solutions integration produces sustainable revenue and margin growth beyond the one month included in 2020.
- Whether the loss of the bankrupt ACH customer remains offset by organic ACH growth in subsequent quarters.
- The company’s path to profitability, given the 2020 net loss, $65.1 million accumulated deficit, and stated possibility of future financing.
- The effect of 2020 equity issuances, stock awards, and 945,599 IMS warrants on fully diluted share count and shareholder dilution.
- Actual unrestricted liquidity after separating $7.6 million of prepaid-card load assets, $8.3 million of merchant reserves, and other settlement-related balances from cash.
- Exposure to bank-sponsor or processor termination, payment-network rule changes, chargebacks, fraud, and regulatory penalties.
- Developments in the Vaden Landers litigation and the collectability of the C2Go note receivable.
- Whether the company’s reported operating cash flow is sustained after excluding working-capital changes related to prepaid loads, customer deposits, and merchant reserves.