Business Context and Reporting Period
Usio, Inc. provides ACH, credit-card, debit-card and prepaid-card payment processing, payment-facilitation services, and electronic bill presentment, printing and mailing through Output Solutions. This unaudited Form 10-Q covers the three months ended March 31, 2024, compared with the same period in 2023. The filing was signed May 15, 2024.
Financial Highlights
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $20.3 million | $21.4 million | Down 5% |
| Gross profit | $4.2 million | $4.9 million | Down 14% |
| Gross margin | 20.7% | 22.9% | Down 220 basis points |
| Operating income (loss) | $(0.9) million | $0.01 million | Deteriorated |
| Net income (loss) | $(0.25) million | $0.01 million | Deteriorated |
| Adjusted EBITDA | $0.145 million | $1.029 million | Down 86% |
| Adjusted EBITDA margin | 0.7% | 4.8% | Down 410 basis points |
| Cash used in operating activities | $(2.8) million | $(0.2) million | Higher use of cash |
| Adjusted operating cash flow | $0.14 million | $1.32 million | Down substantially |
Revenue by source was $3.9 million from ACH and complementary services, $7.6 million from credit card services, $3.3 million from prepaid card services, and $5.5 million from Output Solutions.
Cash and cash equivalents were $7.1 million at March 31, 2024, compared with $7.2 million at December 31, 2023. Working capital was $8.7 million, compared with $8.0 million at year-end. Total liabilities were $83.8 million and stockholders’ equity was $15.3 million.
Debt consisted principally of an equipment loan with $0.81 million outstanding at March 31, 2024, including $0.18 million classified as current. A prior equipment loan matured and was paid in full on March 20, 2024. The remaining equipment loan bears interest at 6.75% and matures in April 2029. The company also reported operating lease liabilities totaling approximately $2.45 million.
Interest income increased to $0.76 million from $0.09 million, primarily because of higher interest rates and interest-bearing merchant reserves. Income tax expense was $70,000. The company reported an accumulated deficit of $71.6 million.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 5%, primarily because prepaid-card breakage revenue declined as COVID-related incentive programs wound down. Output Solutions revenue decreased 7% because the prior-year period benefited from higher one-time government tax-form and voter-card work.
- ACH revenue increased 16% and credit-card revenue increased 3%, reflecting new merchant onboarding and continued implementation of the PayFac strategy.
- Prepaid-card revenue decreased 30%, despite prepaid load volume increasing 108%, prepaid transaction counts increasing 26%, and prepaid purchase volume increasing 42%.
- Consolidated dollar volume processed increased 19% to approximately $1.5 billion. Credit-card transaction counts increased 18% and credit-card dollar volume increased 8%; ACH transaction counts increased 4% and ACH dollar volume increased 22%.
- Gross margin declined to 20.7%, primarily due to lower prepaid-card and Output Solutions profit metrics, including the loss of higher-margin breakage revenue.
- Other SG&A increased to $4.1 million from $3.9 million due to marketing initiatives, sales-related travel, and moderate increases in salary and benefits. Stock-based compensation remained approximately $0.5 million.
- Operating cash flow declined largely because prepaid-card load obligations decreased by $2.9 million and accounts payable and accrued expenses declined. Excluding specified settlement-related and lease changes, adjusted operating cash flow remained positive at $0.14 million.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantified revenue or earnings guidance. Management expects available cash, cash equivalents and internally generated funds to support working capital, capital expenditures, acquisitions and debt service, and believes liquidity is sufficient for at least the next 12 months.
- Management intends to continue investing in sales, technology, ACH merchants, software integrators, PayFac capabilities, prepaid programs and Output Solutions. It cautions that prior growth rates may not continue because COVID-related prepaid incentive programs are winding down.
- Interest income may decline if the Federal Reserve lowers rates.
- Processing-loss reserves were $0.86 million at March 31, 2024. Management stated that the $0.83 million of merchant processing losses incurred in Q1 2023 from fraudulent activity and identity fraud had not recurred since then, although similar losses remain possible.
- Key risks include merchant insolvency, chargebacks, ACH returns, prepaid negative balances, fraud, credit losses, macroeconomic weakness, inflation, higher interest rates, technology and cybersecurity risks, competition, customer concentration and dependence on banking and processing partners.
- The company maintains a $1.5 million net deferred tax asset against an approximately $6.1 million valuation allowance and had approximately $23.3 million of net operating loss carryforwards at December 31, 2023.
- Pending litigation includes claims involving former executives and Triple Pay Play, Greenwich Business Capital, and KDHM. In the KDHM matter, the court denied Usio’s motion for reconsideration on May 2, 2024, and Usio is pursuing an appeal. The filing does not provide a clear estimate of potential loss exposure.
- The company repurchased 27,864 shares for approximately $44,823 during the quarter. Approximately $2.23 million remained available under the buyback program, which is scheduled to terminate no later than May 15, 2025, unless earlier suspended or exhausted.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material off-balance-sheet arrangements were reported.
Important Facts for Investors to Verify
- Whether prepaid-card growth and new customer programs can offset the continuing decline in COVID-related breakage revenue.
- Whether transaction-volume growth converts into sustainable revenue, gross-margin and adjusted EBITDA improvement.
- The sustainability of positive adjusted operating cash flow given the company’s recurring net losses and working-capital movements.
- The amount and availability of unrestricted cash after excluding settlement processing assets, prepaid-card load assets, customer deposits and merchant reserves.
- Potential financial effects of processing losses, fraud, chargebacks and merchant insolvencies beyond the $0.86 million reserve.
- Material developments, expected exposure and insurance coverage relating to the pending litigation, particularly the KDHM appeal.
- The impact of declining interest rates on the company’s $0.76 million quarterly interest-income contribution.