Usio, Inc. 2020 Third-Quarter Form 10-Q Summary
Business context and reporting period
Usio, Inc. provides electronic payment processing services, including ACH, credit and debit card processing, prepaid card program management, and related services. The unaudited filing covers the three and nine months ended September 30, 2020, with comparisons to the same periods in 2019. The company reported 24,759,545 common shares outstanding as of November 9, 2020.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Revenue | $8.14 million | $7.09 million | 14.8% increase |
| Gross profit | $1.72 million | $1.55 million | 11.2% increase |
| Gross margin | 21.2% | 21.8% | Down approximately 60 basis points |
| Operating loss | $(0.91) million | $(1.23) million | Loss narrowed by 25.8% |
| Operating margin | (11.2)% | (17.3)% | Improved |
| Net loss | $(0.94) million | $(1.24) million | Loss narrowed by 24.4% |
| Net loss per share | $(0.06) | $(0.09) | Improved |
| Metric | Nine months 2020 | Nine months 2019 | Change |
|---|---|---|---|
| Revenue | $22.87 million | $20.83 million | 9.8% increase |
| Gross profit | $4.94 million | $4.45 million | 10.9% increase |
| Gross margin | 21.6% | 21.4% | Up approximately 20 basis points |
| Operating loss | $(3.08) million | $(3.58) million | Loss narrowed by 13.9% |
| Net loss | $(3.06) million | $(3.59) million | Loss narrowed by 14.7% |
| Net loss per share | $(0.22) | $(0.28) | Improved |
Third-quarter revenue growth was led by credit card revenue of $5.08 million, up 13.6%, and prepaid card services revenue of $997,028, up 225.0%. ACH and complementary service revenue declined 10.8% to $2.06 million.
For the third quarter, credit card transaction volume increased 81% and credit card dollars processed increased 15%; both were company records. Prepaid card load volume increased 329% and prepaid card transaction volume increased 170%. Total dollars processed declined to $852 million from $915 million, primarily reflecting lower ACH activity.
At September 30, 2020, cash and cash equivalents were $11.4 million versus $2.1 million at December 31, 2019. Working capital was $10.4 million versus $1.3 million at year-end 2019. Total assets were $60.8 million and total liabilities were $45.3 million. Stockholders’ equity increased to $15.5 million from $7.6 million.
Net cash provided by operating activities for the nine months was $4.6 million, compared with $3.0 million of cash used in the prior-year period. Management stated that, excluding changes in merchant reserves, prepaid card load assets, and lease assets and liabilities, cash used in operating activities was $1.0 million versus $0.9 million in 2019. Investing cash use was $582,347, primarily for internal-use software and other property and equipment.
Financing activities provided $10.9 million, including $813,500 from the PPP loan, $3.0 million from a private stock offering, and approximately $7.4 million of net proceeds from a public offering. The company had a $813,500 PPP loan outstanding at September 30, 2020, bearing interest at 1% and maturing April 15, 2022. Operating lease liabilities totaled approximately $2.47 million.
Material changes versus the prior comparable period
- Revenue increased 14.8% in the quarter and 9.8% year to date, driven by credit card and prepaid services growth.
- ACH revenue declined 10.8% in the quarter and 13.5% year to date, primarily because of lower volumes from non-bank consumer lending merchants affected by COVID-19.
- Gross profit increased, while quarterly gross margin modestly declined because cost of services grew faster than revenue.
- Operating and net losses narrowed despite continued investment in prepaid and Payment Facilitation initiatives.
- Cash improved substantially because of equity financing, PPP proceeds, and positive operating cash flow that included changes in customer-related settlement balances.
- Common equity expanded materially through the issuance of 1,796,407 shares in a private offering and 4,705,883 shares in a public offering, creating potential dilution.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide formal quantitative revenue or earnings guidance. Management expects COVID-19 to continue to hamper ACH growth in the fourth quarter, but believes the ACH business can recover as unemployment declines and government assistance programs are curtailed. Credit card activity in the Singular portfolio recovered to pre-pandemic revenue levels after mandated closures affected dental and veterinary practices in April.
Prepaid growth benefited from newly created government assistance programs. Management expects increased remote payment processing and credit card processing to continue, while emphasizing ongoing investment in sales personnel, technology, ACH merchants, software integrators, and existing merchant services.
- COVID-19 may cause additional business closures, reduced consumer spending, lower transaction volumes, and unknown incremental financial impacts.
- The company remains loss-making, has an accumulated deficit of $65.2 million, and stated that it may incur future operating losses.
- The company bears credit and processing risk for certain ACH, credit card, and prepaid transactions. The reserve for processing losses was $491,659 at September 30, 2020.
- The PPP loan may be forgiven in whole or in part, but the Small Business Administration had not determined the amount eligible for forgiveness.
- Outstanding anti-dilutive awards and options totaled 5,244,265 shares for the nine-month 2020 period.
- On November 1, 2020, after quarter-end, the company issued 136,891 shares to the CEO valued at $216,000 under an employment agreement and repurchased 54,756 shares to cover withholding taxes.
- Management reported no material changes to previously disclosed risk factors, no material legal proceedings, and no material off-balance-sheet arrangements.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material change in internal control over financial reporting during the quarter.
Facts investors should verify
- Whether credit card and prepaid growth offsets continued weakness in ACH volumes after the third quarter.
- The sustainability and profitability of government assistance-related prepaid programs and Payment Facilitation growth.
- The amount of PPP loan forgiveness ultimately approved and the resulting remaining debt obligation.
- Cash generation excluding customer settlement balances, prepaid card load assets, and merchant reserves.
- Future dilution from equity awards, options, warrants, and the 2020 stock offerings.
- Whether the company can achieve profitability while funding technology, sales, and growth initiatives.
- Potential increases in processing-loss reserves or chargebacks if merchant or consumer credit conditions deteriorate.