Usio, Inc. Form 10-Q Summary
Business Context and Reporting Period
Usio provides ACH, credit-card, debit-card, prepaid-card, payment-processing, and related services. Following its December 2020 acquisition of Information Management Solutions, the company also provides electronic bill presentment, document composition, printing, and mailing services through Output Solutions. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, filed August 12, 2021.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Revenue | $15.2 million | $7.0 million | $28.7 million | $14.7 million |
| Gross profit | $4.1 million | $1.3 million | $7.0 million | $3.2 million |
| Gross margin | 27.1% | 18.5% | 24.5% | 21.8% |
| Operating income (loss) | $0.3 million | $(1.3) million | $(0.4) million | $(2.2) million |
| Net income (loss) | $0.2 million | $(1.3) million | $(0.5) million | $(2.1) million |
| Operating cash flow | Not separately presented for the quarter | $2.6 million | $16.4 million |
- Q2 revenue increased 118.8%; six-month revenue increased 94.8%. Excluding Output Solutions, management reported organic growth of 67% for Q2 and 45% for the six-month period.
- Q2 cost of services was $11.1 million, up 96%; six-month cost of services was $21.7 million, up 88%.
- SG&A was $3.8 million in Q2 and $7.4 million for the six-month period. Six-month SG&A included $645,000 of stock-based compensation.
- At June 30, 2021, cash and cash equivalents were $5.6 million, total assets were $76.9 million, total liabilities were $60.1 million, and stockholders’ equity was $16.8 million.
- Working capital was $6.3 million, compared with $5.6 million at December 31, 2020. Settlement-processing assets and obligations were each $35.5 million; prepaid-card assets and obligations were each $9.2 million; merchant reserves and related obligations were each $8.1 million.
- Debt consisted primarily of a $166,000 equipment loan entered into in March 2021, bearing 3.95% interest and maturing in March 2024. Operating lease liabilities totaled $3.2 million.
- Accumulated deficit was $65.6 million. The company had approximately $39.4 million of federal net operating loss carryforwards at December 31, 2020 and a deferred tax asset of approximately $1.4 million, with approximately $7.5 million of valuation allowance against other deferred tax assets.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher activity across all business lines and the inclusion of Output Solutions revenue of $3.6 million in Q2 and $7.4 million for the six-month period; Output Solutions had no comparable 2020 revenue in the presented periods.
- Q2 ACH and complementary-services revenue increased 124.9%, credit-card revenue increased 42.9%, and prepaid-card-services revenue increased 81.7%.
- Gross margin expanded by 8.6 percentage points in Q2 and 2.7 percentage points for the six-month period, which management attributed to a shift toward higher-profit transactions.
- The company generated Q2 net income, compared with a Q2 2020 loss, while the six-month loss narrowed by approximately $1.6 million.
- Six-month operating cash flow declined to $2.6 million from $16.4 million, primarily because the prior-year period benefited from a much larger increase in prepaid-card load obligations. Excluding merchant reserves, prepaid-card assets, customer deposits, and lease-related items, management reported operating cash flow of $1.1 million in 2021 versus cash used of $0.7 million in 2020.
- Q2 credit-card transaction counts increased 100% and credit-card dollars processed increased 55%. ACH transaction counts increased 155%, returned-check transactions increased 133%, electronic-check dollars processed increased 133%, and prepaid-card load volumes increased 65%.
- Total dollar transaction volume increased to $2.730 billion from $694 million in Q2 2020.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No formal numerical revenue, earnings, or cash-flow guidance was provided.
- Management expects to continue investing in sales personnel, technology, ACH merchants, software integrations, prepaid services, PayFac initiatives, and Output Solutions while seeking operating leverage.
- Management stated that future operating losses remain possible and that profitability depends on continued revenue growth, expense control, customer acquisition, technology investment, competitive execution, and successful integration of acquisitions.
- COVID-19 remains an uncertainty. Management reported recovery in previously affected healthcare and consumer-lending merchants and increased prepaid activity tied to government assistance programs, but stated that potential incremental financial effects remain unknown.
- Payment processing exposes the company to chargebacks, merchant insolvencies, prepaid-card negative balances, and other processing losses. The reserve for processing losses was $575,000 at June 30, 2021, compared with $515,000 at year-end 2020.
- The company is pursuing claims against former Chief Revenue Officer Vaden Landers concerning alleged non-compete and employment-agreement violations. The company considers its risk of loss remote.
- Former merchants World Health Merchants and Laitan Group filed a lawsuit in July 2021 alleging negligence, breach of contract, unjust enrichment, conversion, and related claims, seeking damages exceeding $1 million. The company denies liability and considers the risk of loss remote.
- The company reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and no subsequent events requiring recognition or disclosure.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether the sharp transaction-volume and revenue growth, particularly in cryptocurrency, FinTech lending, prepaid programs, and PayFac activities, is sustainable and sufficiently diversified.
- The contribution, profitability, integration costs, and cash requirements of the Output Solutions acquisition.
- Whether improved gross margins and the Q2 return to profitability continue after growth-related SG&A, technology spending, amortization, and stock-based compensation.
- The quality and liquidity of operating cash flow after excluding settlement-related balances, prepaid-card funds, merchant reserves, customer deposits, and lease-related changes.
- Potential exposure to processing losses, chargebacks, merchant reserves, regulatory requirements, and customer or sponsor-bank concentration.
- The ultimate outcomes and potential costs of the Landers arbitration and the World Health/Laitan litigation.
- The effect of COVID-19-related economic changes and government assistance programs on transaction volumes and prepaid revenue.