Usio, Inc. annual report, FY2019

Usio, Inc. 2019 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2019; filed March 30, 2020. The filing is an annual report rather than a standalone fourth-quarter report. Usio provides ACH, credit, debit, prepaid-card, payment-facilitation and related electronic payment-processing services. The company changed its name from Payment Data Systems, Inc. to Usio, Inc. on June 26, 2019.

Key Financial Metrics

Metric	2019	2018	Change
Revenue	$28.2 million	$25.0 million	+12.7%
Gross profit	$5.9 million	$5.6 million	+6.8%
Gross margin	21.1%	22.3%	Down approximately 1.2 percentage points
Operating loss	$(5.1) million	$(3.8) million	Loss increased
Net loss	$(5.1) million	$(3.8) million	Loss increased 35.5%
Net margin	(18.1)%	(15.1)%	Declined
Basic and diluted loss per share	$(0.39)	$(0.31)	More negative
Cash and cash equivalents	$2.1 million	$2.2 million	Approximately flat
Working capital	$1.3 million	$2.4 million	Declined
Stockholders’ equity	$7.6 million	$9.6 million	Declined

• Payment volume exceeded $3.54 billion, up 5% from approximately $3.4 billion in 2018.
• ACH processing volume increased 8%; credit-card dollars processed increased 12% and credit-card transactions increased 10%.
• Prepaid-card load volume increased 74% and prepaid transaction volume increased 91%.
• Merchant accounts declined modestly to 1,913 from 1,958. No customer represented more than 10% of revenue.
• Cost of services increased 14.4% to $22.3 million, faster than revenue growth, primarily due to higher credit-card and prepaid processing volumes.
• Operating expenses rose 17.9% to $11.0 million, including $7.7 million of other selling, general and administrative expenses, $2.0 million of depreciation and amortization, and $1.3 million of stock-based compensation.
• Cash used in operating activities was $3.7 million, compared with $2.8 million in 2018. Excluding certain lease, prepaid-card and merchant-reserve effects, adjusted operating cash use was $1.3 million versus $0.8 million.
• Cash used in investing activities was $0.6 million, primarily for property, equipment and internal-use software.
• Financing activities provided $1.7 million, principally from a February 2019 public offering that generated $1.8 million of net proceeds from 769,230 shares.
• The balance sheet shows no conventional debt or short-term borrowings. Operating lease liabilities totaled $2.6 million, including $356,184 due within one year.
• Settlement-processing assets and obligations were each $38.9 million, and merchant reserves and related obligations were each $10.0 million; these largely represent matched processing and collateral balances rather than freely available liquidity.

Material Changes Versus 2018

• Revenue growth was driven by the ACH business, payment-facilitation initiatives and prepaid-card growth, but higher processing costs and investments in personnel and infrastructure reduced profitability.
• The net loss increased from $3.8 million to $5.1 million, and accumulated deficit reached $62.2 million.
• Gross margin contracted as cost of services grew faster than revenue.
• Merchant reserves decreased from $12.6 million to $10.0 million, while total assets decreased from $68.2 million to $61.6 million.
• The company adopted the new lease accounting standard, recognizing operating lease right-of-use assets of $2.5 million and lease liabilities of $2.6 million at year-end. Adoption did not materially affect operations or liquidity.
• The reserve for processing losses increased to $506,153 from $374,153, and reported fraud losses increased to $147,362 from $28,879.
• The company expanded its platform with remotely created check processing and established a direct connection to the FedACH system, which management expects to reduce costs, extend cutoff times and improve merchant onboarding.

Outlook, Risks and Unusual Items

Management’s stated priorities are to grow revenue and the customer base, expand sales capacity, enhance payment technology, pursue complementary acquisitions and control expenses while scaling. The filing does not provide formal numerical revenue, earnings or cash-flow guidance.

• Management stated that existing cash and cash equivalents were expected to fund operating expenses and capital requirements for at least 12 months, but acknowledged that additional financing may be required in the future.
• The company reported continuing operating losses, negative operating cash flow and a substantial accumulated deficit. Future profitability is not assured.
• COVID-19 emerged after year-end and was identified as a material uncertainty for 2020. Management stated that offices were closed and employees were working remotely; the potential financial impact was not yet determinable.
• Revenue is exposed to consumer and business spending, payment volumes, merchant failures, chargebacks, fraud and prepaid-card overdrafts. Prepaid-cardholder overdrawn balances totaled $5,789 at year-end.
• Usio relies on bank sponsors, card networks, third-party processors and the ACH network. Termination, repricing, regulatory changes or noncompliance could interrupt services or increase costs.
• The business is subject to extensive federal and state regulation, including anti-money-laundering, consumer-protection, prepaid-card, privacy and payment-network requirements. The California Consumer Privacy Act became effective January 1, 2020.
• A disputed note receivable from Mercury Investment Partners had $145,000 of remaining principal, fully reserved at year-end. Usio obtained a judgment and lien but stated that recovery is uncertain.
• Employment agreements with the chairman and chief executive officer could require estimated cash separation payments of approximately $1.5 million to $2.0 million each upon specified termination or change-in-control events.
• The company maintained a share-repurchase authorization with $1.4 million available at December 31, 2019 and has never paid dividends.

Important Facts for Investors to Verify

• Whether revenue growth, payment volumes and the FedACH connection can translate into positive operating cash flow and sustainable profitability.
• The pace and cost of prepaid-card and payment-facilitation expansion, including whether margins recover from the 2019 decline.
• Cash runway, working-capital requirements and the likelihood, terms and dilution implications of future financing.
• Exposure to chargebacks, fraud, merchant insolvencies, processing-loss reserves and prepaid-cardholder overdrafts.
• Continuity and economics of bank-sponsor, card-network and third-party processor relationships.
• The effect of COVID-19 and any subsequent changes in transaction volumes, merchant activity and customer mix.
• Recoverability of the $145,000 Mercury Investment Partners receivable and the adequacy of related reserves.
• Potential dilution from approximately 4.0 million outstanding stock awards, warrants and other equity compensation, and the remaining share-repurchase authorization.