Usio, Inc. — Q3 2021 Form 10-Q Summary
Business Context and Reporting Period
Usio provides ACH, credit card, prepaid card and debit card payment-processing services, together with electronic bill presentment, document composition, printing and mailing services through its December 2020 acquisition of Information Management Solutions, LLC. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Financial Performance and Liquidity
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $15.8 million | $8.1 million | $44.5 million | $22.9 million |
| Gross profit | $4.0 million | $1.7 million | $11.1 million | $4.9 million |
| Gross margin | 25.5% | 21.2% | 24.9% | 21.6% |
| Operating income (loss) | $0.2 million | $(0.9) million | $(0.2) million | $(3.1) million |
| Net income (loss) | $0.1 million | $(0.9) million | $(0.4) million | $(3.1) million |
| Operating cash flow | Not separately provided | Not separately provided | $8.7 million | $4.6 million |
- Q3 revenue increased 94.4%; nine-month revenue increased 94.7%. Excluding Output Solutions, management reported organic growth of 51% for Q3 and 47% for the nine-month period.
- Q3 gross profit increased 134%, while nine-month gross profit increased 124%. Management attributed margin expansion to product mix and overall operating improvements.
- Q3 reached profitability, but the company remained slightly unprofitable for the first nine months. Accumulated deficit was $65.4 million at September 30, 2021.
- Cash and cash equivalents were $5.9 million at September 30, 2021, compared with $5.0 million at December 31, 2020. Reported working capital was $6.9 million, versus $5.6 million at year-end.
- Operating cash flow included significant changes in prepaid card load obligations, merchant reserves and customer deposits. Excluding those items and lease-related changes, management reported $2.0 million of operating cash flow for the first nine months of 2021.
- Total assets were $83.9 million and stockholders’ equity was $17.2 million at September 30, 2021.
Material Changes Versus the Prior Comparable Period
- ACH and complementary-service revenue increased 80.9% in Q3 and 77.8% for nine months.
- Credit-card revenue increased 28.2% in Q3 and 28.3% for nine months. Credit-card transaction count increased 76% and dollar volume increased 43% in Q3, both reported as company records.
- Prepaid-card services revenue increased 101.1% in Q3 and 85.3% for nine months. Prepaid transaction counts increased 115% in Q3, supported partly by government assistance, vaccine incentive and guaranteed-income programs.
- Output Solutions contributed $3.6 million of Q3 revenue and $10.9 million of nine-month revenue; it had no comparable 2020 revenue following the IMS acquisition.
- Cost of services increased 84% in Q3 and 87% for nine months, broadly reflecting higher revenue and incremental Output Solutions costs.
- Other SG&A increased 44% in Q3 and 40% for nine months due to Output Solutions and continued investment in prepaid and PayFac initiatives. Depreciation and amortization also increased, primarily from amortization of the IMS customer-list asset.
- Total dollar volumes processed increased to $2.1 billion in Q3 2021 from $852 million in Q3 2020.
Debt, Commitments and Other Unusual Items
- The company entered into a $166,000 equipment loan in March 2021 at 3.95%, payable over 36 months through March 2024. The balance at September 30, 2021 was approximately $140,000, split between current and non-current portions.
- Operating lease liabilities totaled $3.1 million, including $3.6 million of undiscounted minimum payments. An October 2021 lease amendment added 6,628 square feet in San Antonio, with incremental annual rent of approximately $135,874 to $145,816 through September 2024.
- The $813,500 PPP loan received in 2020 was forgiven in full and recognized as income in 2020.
- The company repurchased 20,944 shares during Q3 for approximately $119,000 and had approximately $916,000 remaining under its repurchase program at September 30, 2021.
- Reserve for merchant processing losses increased to $608,149 from $515,199 at December 31, 2020. The allowance for doubtful accounts increased to $261,500 from $205,522.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal quantitative revenue or earnings guidance. Management expects to continue investing in sales personnel, technology, ACH merchants, software integrations, prepaid products, PayFac activities and Output Solutions, while seeking operating leverage from its existing infrastructure.
- Management cautioned that future operating losses remain possible and that continued profitability depends on revenue growth, expense control, customer acquisition, technology investment, personnel retention and successful integration of acquisitions.
- COVID-19 continues to create uncertainty regarding economic conditions, operating restrictions, customer activity and labor availability. Management reported that the company’s limited exposure to retail-facing businesses reduced the impact relative to some payment processors.
- Payment processing exposes the company to merchant insolvency, chargebacks, prepaid cardholder negative balances and other processing losses. Actual losses could exceed reserves.
- The company reported no material off-balance-sheet arrangements and stated that there were no material changes to previously disclosed risk factors.
- Legal matters included disputes with a former chief revenue officer, World Health Merchants and Laitan Group, and KDHM. The World Health matter was settled in September 2021, with the company receiving $156,166 in risk-mitigation payments and $15,000 for attorney fees. Management assessed the risk of loss as remote for the Landers and KDHM matters.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Assess the sustainability of reported growth after separating organic growth from the IMS acquisition and government-supported prepaid programs.
- Reconcile operating cash flow with changes in prepaid card assets, merchant reserves, customer deposits and settlement balances.
- Monitor whether Q3 profitability continues given higher SG&A, amortization, processing-loss reserves and personnel constraints.
- Review merchant concentration, cryptocurrency and FinTech lending exposure, chargeback trends and adequacy of processing-loss reserves.
- Evaluate liquidity relative to settlement obligations, prepaid-card obligations, merchant reserves, lease commitments and equipment-loan payments.
- Review the legal proceedings, the confidential World Health settlement and the ongoing KDHM dispute for potential financial effects.