Usio, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2022; filed August 11, 2022. Usio provides ACH, credit card, prepaid card, debit card, and bill presentment, printing and mailing services.
Financial Highlights
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $16.2 million, up 6% | $34.3 million, up 20% |
| Gross profit | $3.3 million, down 21% | $6.8 million, down 4% |
| Gross margin | 20.1%, versus 27.1% | 19.7%, versus 24.5% |
| Operating income/(loss) | $(1.9) million, versus $0.3 million | $(3.4) million, versus $(0.4) million |
| Net income/(loss) | $(1.9) million, versus $0.2 million | $(3.6) million, versus $(0.5) million |
| Basic and diluted EPS | $(0.10), versus $0.01 | $(0.18), versus $(0.03) |
Revenue growth reflected higher credit card, prepaid card and Output Solutions revenue. Six-month revenue increases were led by prepaid card services, up 112%, Output Solutions, up 19%, credit card revenue, up 11%, and ACH and complementary services, up 9%. Second-quarter ACH revenue declined 3% as cryptocurrency-related activity was substantially higher in the prior-year period.
Cost of services increased 17% in the second quarter and 27% for the six-month period. Management attributed margin compression to greater revenue contribution from lower-margin business lines and weaker ACH revenue, which is described as a higher-margin business. SG&A also increased, including stock-based compensation of $0.5 million for the quarter and $1.0 million year to date.
Liquidity, Cash Flow and Capitalization
- Cash and cash equivalents were $5.1 million at June 30, 2022, compared with $7.3 million at December 31, 2021.
- Working capital was $6.8 million at June 30, 2022, versus $8.8 million at year-end 2021.
- Six-month operating cash flow was negative $22.1 million, compared with positive $2.6 million in the prior-year period. The 2022 use was driven primarily by a $21.5 million decrease in prepaid card load obligations and related operating balances.
- Excluding merchant reserves, prepaid card load assets, customer deposits and lease-related balances, operating cash flow was negative $1.2 million, versus positive $1.1 million in the prior-year period.
- Investing cash outflow was $0.4 million, primarily for property, equipment and capitalized software-related investment.
- Financing cash outflow was $0.6 million, including $0.5 million of treasury stock purchases.
- Total liabilities were $66.6 million, substantially consisting of settlement processing obligations, prepaid card load obligations, customer deposits and merchant reserve obligations that are matched by corresponding assets. Equipment loan principal totaled approximately $0.1 million, with a 3.95% rate and maturity in March 2024.
- Accumulated deficit was $68.9 million and stockholders’ equity was $15.6 million at June 30, 2022.
Operational Trends and Management Commentary
- Second-quarter credit card transaction counts increased 35% and credit card dollars processed increased 9%; both were reported as company records. Management attributed growth to PayFac initiatives, particularly in healthcare and legal markets.
- ACH transaction counts declined 8% and electronic check dollars processed declined 16%, primarily because of unusually high cryptocurrency activity in the prior-year quarter. Returned check transactions increased 39% as consumer lending activity recovered.
- Prepaid card load volumes increased 81%, prepaid transaction counts increased 190%, and prepaid purchase volume increased 139%, driven largely by government assistance, vaccine incentive and guaranteed-income programs.
- Total dollar volume processed across business lines declined to $2.4 billion from $2.7 billion.
- Management expects certain expenses to decrease beginning in the third quarter because of lower customer service and prepaid-service costs following the loss of existing or anticipated Voyager card programs.
- Management plans to continue investing in sales, technology, security, infrastructure and employee resources to expand ACH, PayFac, prepaid and Output Solutions businesses, while acknowledging that future operating losses may occur.
Material Subsequent Event, Risks and Contingencies
In early July 2022, the company’s largest ACH customer filed for Chapter 11 bankruptcy and stopped processing transactions. The customer represented 49% of Usio’s ACH transaction volume in 2021 and 8% of company revenue. Management stated that revenue and cash flows will be affected if the customer does not resume full operations. This is the most significant disclosed near-term business risk.
- COVID-19-related economic uncertainty, labor shortages and supply-chain constraints remain risks. Paper and paper-product shortages could affect the completion, margins and growth of Output Solutions.
- Usio bears potential credit risk for chargebacks, returned ACH and credit card transactions, and negative prepaid card balances. The reserve for processing losses was $0.7 million at June 30, 2022.
- A lawsuit involving KDHM, LLC alleges that $317,000 of customer deposits were improperly transferred in connection with the Output Solutions asset purchase. Usio has asserted counterclaims involving alleged misrepresentations, breach of contract and conversion, and considers its risk of loss remote.
- The company reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements and effective disclosure controls as of June 30, 2022.
- Usio renewed its share repurchase program in May 2022 with authorization to repurchase up to $4 million through the earliest of May 15, 2025, exhaustion of funds or board termination. It repurchased 191,193 shares during the quarter.
Most Important Facts to Verify
- Whether the bankrupt ACH customer resumes operations, and the resulting effect on ACH volume, revenue, cash flow and processing-loss exposure.
- Whether prepaid and PayFac growth can offset ACH weakness and the loss of Voyager-related programs.
- Whether gross margins stabilize after shifting toward lower-margin prepaid and Output Solutions revenue.
- Usio’s ability to fund continued operating losses and infrastructure investment with $5.1 million of unrestricted cash and negative adjusted operating cash flow.
- The timing and financial outcome of the KDHM litigation and the recoverability of disputed customer deposits.
- The impact of treasury stock repurchases and stock-based compensation on liquidity, share count and future dilution.