Usio, Inc. Form 10-Q Summary
Business context and reporting period
Usio provides ACH, credit, debit and prepaid card processing, payment-facilitation services, and electronic bill presentment, printing and mailing through Output Solutions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. The filing was signed November 8, 2023.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $20.5 million | $16.4 million | $63.2 million | $50.7 million |
| Gross profit | $4.2 million | $3.1 million | $14.1 million | $9.9 million |
| Gross margin | 20.4% | 19.1% | 22.3% | 19.5% |
| Operating loss | $(1.2) million | $(1.7) million | $(1.2) million | $(5.1) million |
| Net loss | $(0.7) million | $(1.8) million | $(0.5) million | $(5.3) million |
| Adjusted EBITDA | $(0.1) million | $(0.5) million | $2.1 million | $(1.4) million |
| Adjusted EBITDA margin | (0.5)% | (3.3)% | 3.3% | (2.8)% |
- Q3 revenue increased 25%; nine-month revenue also increased 25%.
- Q3 revenue by business line was $7.2 million credit card, $5.1 million Output Solutions, $4.7 million prepaid card services and $3.5 million ACH and complementary services.
- Nine-month revenue growth was led by prepaid card services, up 157%, and Output Solutions, up 18%. Credit card revenue increased 6%, while ACH and complementary service revenue was essentially flat.
- Cash and cash equivalents were $7.4 million at September 30, 2023, compared with $5.7 million at December 31, 2022. Working capital was $7.5 million, compared with $5.8 million at year-end.
- Net cash provided by operating activities was $41.5 million for the nine months, versus $22.8 million used in the prior-year period. The change was primarily driven by a $38.7 million increase in prepaid card load obligations. Adjusted operating cash flow, excluding such settlement-related balances and lease effects, was $2.4 million versus $1.1 million used in 2022.
- Capital expenditures were $0.6 million. Financing cash outflows were $0.1 million, including $69,000 of treasury-stock purchases and $43,000 of equipment-loan payments.
- Total assets were $130.5 million and total liabilities were $115.7 million. Settlement processing and prepaid card load assets and corresponding obligations represented $100.6 million of the balance sheet.
- The equipment loan had a current balance of approximately $28,900 and matured March 20, 2024. Operating lease liabilities totaled approximately $2.7 million.
Material changes versus the prior comparable period
- Gross profit increased 34% in Q3 and 42% for the first nine months, with gross-margin expansion attributed primarily to favorable pricing and improved profitability across business lines.
- Operating losses and net losses narrowed substantially. Q3 net loss improved to $0.7 million from $1.8 million; nine-month net loss improved to $0.5 million from $5.3 million.
- Interest income increased to $0.5 million in Q3 and $0.8 million for the nine months, compared with negligible amounts in 2022, reflecting higher interest rates and interest-bearing balances.
- Q3 credit-card transaction counts increased 2% and dollar volume increased 5%. ACH transaction counts, returned checks and electronic-check dollar volume declined 21%, 31% and 11%, respectively.
- Prepaid card load volume increased 239%, prepaid transaction counts increased 23%, and prepaid purchase volume increased 152% in Q3, driven by guaranteed-income and government-assistance programs and expansion in corporate expense and healthcare markets.
- Other SG&A increased to $4.3 million in Q3 from $3.7 million, partly due to one-time professional-services and marketing costs and increased sales travel. Management expects these expenses to decline in subsequent quarters.
- The company issued 1.46 million common shares during the first nine months under equity incentive arrangements and reported $1.7 million of stock-based compensation expense, compared with $1.5 million in the prior-year period.
Outlook, risks, contingencies and unusual items
- Management expects growth from ACH merchants, software integrators, prepaid programs, Output Solutions and expanded services to existing merchants. It plans continued investment in sales personnel, technology and infrastructure.
- Management states that available cash, cash equivalents and internally generated funds should support working capital, capital expenditures, acquisitions and debt service, and that liquidity is sufficient for at least the next 12 months.
- The company exited the cryptocurrency market after its largest cryptocurrency customer, Voyager Digital, filed for bankruptcy in July 2022. Management attributes approximately $2 million of lost ACH and complementary-services revenue to the first and second quarters of 2023 and continues to monitor cryptocurrency-related risks and opportunities.
- In March 2023, the company incurred $833,485 of merchant-processing losses from fraudulent activity and identity fraud involving multiple merchants; $755,494 was charged against the processing-loss reserve. Management does not expect similar losses in the immediate future. The reserve was $793,528 at September 30, 2023.
- The allowance for doubtful accounts was $319,000. Management reported no bad-debt losses during the nine months ended September 30, 2023.
- On October 1, 2023, the company entered into $811,819 of equipment financing for an Output Solutions folder and inserter, bearing 6.75% annual interest, with monthly payments of $16,017 and maturity in April 2029.
- Usio is pursuing approximately $213,780, excluding interest and attorneys’ fees, from Lifetime Home Warranty for unpaid chargebacks and returns; a motion for default judgment has been filed.
- In the KDHM litigation concerning customer deposits related to the Output Solutions acquisition, a judge ruled in August 2023 on allocation of certain deposits. Usio requested reconsideration and considers the risk of loss remote.
- The company reports no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2023.
Important facts for investors to verify
- Whether prepaid-card growth and Output Solutions growth are sustainable and sufficiently offset ACH softness and the loss of cryptocurrency-related business.
- The underlying composition and liquidity implications of prepaid card load assets, settlement assets, merchant reserves and their matching obligations.
- Whether the company can achieve sustained GAAP profitability; Q3 remained loss-making despite positive adjusted operating cash flow and improved adjusted EBITDA.
- The frequency and severity of merchant fraud, chargebacks, ACH returns and other processing losses relative to the $793,528 reserve.
- The outcome and financial exposure of the KDHM and Lifetime Home Warranty proceedings.
- The impact of stock-based compensation, equity grants and treasury-stock repurchases on dilution and shareholder returns.
- The effect of future interest-rate reductions on the currently significant interest-income contribution.
- The terms, collateral requirements and cash-flow impact of the new $811,819 equipment loan.