Usio, Inc. Form 10-Q Summary
Business Context and Reporting Period
Usio, Inc. provides ACH, credit and debit card processing, prepaid card services, payment-facilitation technology, and electronic bill presentment, printing and mailing through Output Solutions. This filing covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $21.45 million | $18.11 million | +18% |
| Gross profit | $4.90 million | $3.51 million | +40% |
| Gross margin | 22.9% | 19.4% | +350 basis points |
| Operating income (loss) | $5,993 | $(1.55) million | Improved |
| Net income (loss) | $14,833 | $(1.62) million | Improved |
| Adjusted EBITDA | $1.03 million | $(0.29) million | Improved |
| Adjusted EBITDA margin | 4.8% | (1.6)% | Improved |
| Net cash used in operating activities | $(0.21) million | $(7.22) million | Improved |
| Adjusted operating cash flow | $1.32 million | $0.49 million | Improved |
Revenue by source was $3.34 million from ACH and complementary services, $7.34 million from credit cards, $4.81 million from prepaid card services, and $5.96 million from Output Solutions.
At March 31, 2023, cash and cash equivalents were $6.76 million, total current assets were $80.66 million, total current liabilities were $74.02 million, and working capital was approximately $6.6 million. Total assets were $90.89 million and total liabilities were $76.45 million. The company reported an accumulated deficit of $70.85 million.
Debt consisted primarily of an equipment loan with a remaining current balance of $57,380 at March 31, 2023. The loan bears interest at 3.95% and matures March 20, 2024. Operating lease liabilities totaled approximately $2.96 million.
Material Changes Versus the Prior Comparable Period
- Credit card revenue increased 8%, supported by a 24% increase in credit card transaction counts and an 8% increase in credit card dollars processed.
- Prepaid card services revenue increased 74%, while Output Solutions revenue increased 26%.
- ACH and complementary services revenue declined 13%, primarily because Usio exited cryptocurrency-related processing following Voyager Digital’s July 2022 bankruptcy.
- Total payment volume declined to approximately $1.2 billion from $2.2 billion, principally because of reduced cryptocurrency activity and the wind-down of COVID-19 government assistance programs.
- Gross margin improved as management reported more favorable pricing and improved profitability across all business lines.
- SG&A remained relatively stable: stock-based compensation declined 8.4% to $0.50 million, other SG&A increased 2% to $3.87 million, and depreciation and amortization declined to $0.52 million from $0.71 million.
- Common shares issued increased during the quarter, including 1.42 million shares issued under the equity incentive plan. Deferred compensation increased to $(7.83) million from $(5.70) million.
Cash Flow, Liquidity, Outlook and Risks
Management stated that available cash and internally generated funds should be sufficient to support working capital, capital expenditures, acquisitions and debt service for at least the next 12 months. Reported operating cash flow was negative because of changes in prepaid card obligations, merchant reserves and other settlement-related accounts; management’s non-GAAP adjusted operating cash flow was positive at $1.32 million.
No formal quantitative revenue or earnings guidance was provided. Management expects to focus on growing ACH merchants, software-integrator relationships, PayFac, prepaid products, and Output Solutions while investing in sales, technology, security, infrastructure and personnel.
- The company incurred $833,485 of merchant processing losses from fraudulent and identity-fraud activity involving multiple merchants. Of this amount, $755,494 was charged against the processing-loss reserve, and management replenished the reserve by $200,000. The reserve balance was $386,789 at March 31, 2023.
- Management does not expect similar processing losses in the immediate future, but actual losses could exceed estimates.
- Cryptocurrency exposure has declined following the Voyager bankruptcy, but the withdrawal materially reduced ACH activity and revenue. Management continues to monitor potential legal, regulatory and technological risks associated with cryptocurrency.
- Prepaid volumes remain affected by the wind-down of government assistance and vaccine-incentive programs. Management expects to recognize some related revenue through 2023 and the beginning of 2024.
- Output Solutions faces paper and paper-product supply risks that could affect revenue, margins and growth.
- The company reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2023.
- A lawsuit against Lifetime Home Warranty seeks collection of $213,780.16, excluding interest and attorneys’ fees, for chargebacks and returned transactions. The defendant had not been served as of the filing.
- A separate KDHM dispute concerns alleged customer deposits of $317,000 and additional deposits of approximately $305,000. Usio has asserted counterclaims and considers its risk of loss remote.
Important Facts for Investors to Verify
- Whether the improved gross margin and near-breakeven GAAP profitability can be sustained after the unusually favorable comparison with Q1 2022.
- The impact of the Voyager-related withdrawal and continued decline in ACH volumes on future revenue and gross profit.
- Actual merchant processing losses, reserve adequacy and chargeback trends following the Q1 fraud losses.
- Liquidity requirements associated with settlement processing assets, prepaid card obligations, merchant reserves and customer deposits.
- The effect of equity incentive grants and other potentially dilutive securities on future share count and per-share results.
- Progress in replacing government-assistance prepaid volumes and expanding corporate expense, healthcare, PayFac and Output Solutions businesses.
- Collection prospects and potential financial exposure from the Lifetime Home Warranty and KDHM legal proceedings.