Usio, Inc. Form 10-Q Summary
Business context and reporting period
Usio provides electronic payment processing services, including ACH, credit and debit card processing, prepaid card services, and related payment technology. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, with comparisons to the 2019 periods. The filing was signed August 13, 2020.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $7.0 million | $7.2 million | $14.7 million | $13.7 million |
| Gross profit | $1.3 million | $1.6 million | $3.2 million | $2.9 million |
| Gross margin | 18.5% | 21.9% | 21.8% | 21.1% |
| Operating loss | $(1.3) million | $(1.3) million | $(2.2) million | $(2.4) million |
| Net loss | $(1.3) million | $(1.3) million | $(2.1) million | $(2.3) million |
| Loss per diluted share | $(0.10) | $(0.10) | $(0.16) | $(0.18) |
Q2 revenue declined 2.7%, while six-month revenue increased 7.2%. Q2 cost of services increased approximately 1% to $5.7 million, reducing gross profit by 18%. Six-month cost of services increased approximately 6% to $11.5 million. Q2 SG&A totaled $2.6 million, including $0.3 million of stock-based compensation; six-month SG&A totaled $5.4 million, including $0.6 million of stock-based compensation.
Cash and cash equivalents were $1.8 million at June 30, 2020, compared with $2.1 million at December 31, 2019. Total assets were $65.8 million and total stockholders’ equity was $6.0 million. Working capital was approximately $0.7 million, down from $1.3 million at year-end.
Reported operating cash flow was $16.4 million for the first six months, compared with $(2.4) million in the prior-year period. This increase was primarily driven by an $18.8 million increase in prepaid card load obligations and therefore does not represent operating profitability. Excluding merchant reserves, prepaid card load assets, and lease-related items, management reported cash used in operations of approximately $0.7 million.
Cash used in investing activities was $0.3 million, primarily for property, equipment, and internal-use software. Financing activities provided $0.7 million, consisting primarily of the PPP loan proceeds.
Material changes versus the prior comparable period
- Credit card revenue increased 3.7% in Q2 and 14.9% for the first six months, while prepaid card services revenue increased 58.0% and 63.2%, respectively.
- ACH and complementary service revenue decreased 24.6% in Q2 and 14.8% for the first six months, primarily because COVID-19 reduced consumer lending activity.
- Q2 credit card transaction volume increased 26%, although credit card dollars processed increased only 2%. Total dollars processed declined to $694 million from $876 million.
- Prepaid card load volume increased 64% and prepaid transaction volume increased 47% in Q2, primarily from newly implemented government assistance programs.
- Q2 gross margin declined to 18.5% from 21.9%, primarily because of lower ACH revenue and profitability. Six-month gross margin improved to 21.8% from 21.1%.
- Other SG&A decreased 6% in Q2 because of lower travel and one-time expenses, but increased 10% for the first six months due to investments in prepaid and integrated payments initiatives.
- Common shares issued increased substantially during the period, including 1.5 million shares issued under the equity incentive plan and performance grants of 1.444 million shares and 103,000 RSUs.
Debt, liquidity, outlook, and risks
Usio received an $813,500 PPP loan bearing 1% interest and maturing April 15, 2022. Principal and interest payments were deferred for six months. The company used the proceeds for payroll and other permitted expenses, and its forgiveness documentation was being filed; the amount eligible for forgiveness had not been determined by the SBA.
On July 1, 2020, after the reporting date, the company sold 1,796,407 unregistered shares for gross proceeds of approximately $3.0 million. On August 12, 2020, it issued 27,051 shares in a cashless exercise of 60,000 warrants.
Management stated that COVID-19 materially affected second-quarter operations. Dental practice closures reduced April credit card volume in the Singular portfolio, although related revenues returned to pre-COVID-19 levels in May and June as merchants reopened. Management expected COVID-19, unemployment, and weaker consumer credit conditions to continue pressuring ACH growth in the third quarter, while anticipating eventual ACH recovery as unemployment declines and government assistance programs are curtailed.
The company reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements. Key risks include continued COVID-19 disruption, merchant and consumer credit losses, chargebacks, prepaid card and ACH processing obligations, dependence on payment networks and sponsor banks, ongoing operating losses, customer and transaction growth requirements, technology investments, and potential dilution from equity compensation and future financing.
Usio had an accumulated deficit of $64.3 million and stated that it may incur future operating losses. Merchant reserve assets and prepaid card load assets are held with corresponding liabilities; the filing does not present these balances as unrestricted corporate liquidity.
Important facts for investors to verify
- Confirm the amount of PPP debt ultimately forgiven versus repaid and the resulting effect on liabilities and income.
- Assess unrestricted cash liquidity separately from the $27.0 million of settlement processing assets, $19.3 million of prepaid card load assets, and $8.4 million of merchant reserves, each matched by corresponding obligations or reserve requirements.
- Monitor whether ACH volumes recover and whether credit card and prepaid growth initiatives offset COVID-19-related weakness.
- Evaluate the sustainability of reported operating cash flow, given that the six-month inflow was driven largely by changes in prepaid card obligations.
- Review gross-margin trends, particularly the effect of payment-network costs and the changing mix among ACH, credit card, and prepaid services.
- Consider dilution from performance-based stock grants, equity compensation, outstanding anti-dilutive awards and options totaling 5.5 million shares, and the July 2020 private offering.
- Verify the company’s ability to return to profitability while maintaining required merchant reserves and funding payment-processing obligations.