Usio, Inc. 2021 Form 10-K Summary
Business Context and Reporting Period
Usio provides integrated ACH, credit, debit, prepaid-card, payment-facilitation and money-disbursement 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.
The filing covers the fiscal year ended December 31, 2021, with comparison to the year ended December 31, 2020. The filing was signed March 17, 2022. Usio processed $9.5 billion across 35.3 million transactions in 2021. Merchant accounts increased 1% to 5,039 at year-end, and no customer represented more than 10% of revenue.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $61.94 million | $32.25 million | +92% |
| Gross profit | $15.63 million | $7.38 million | +112% |
| Gross margin | 25.2% | 22.9% | +2.3 percentage points |
| Operating loss | $0.16 million | $3.76 million | Improved |
| Operating margin | -0.3% | -11.6% | Improved |
| Net loss | $0.32 million | $2.91 million | Improved |
| Net loss per share | $0.02 | $0.19 | Improved |
| Cash and equivalents | $7.26 million | $5.01 million | +$2.24 million |
| Working capital | $8.8 million | $5.6 million | +$3.2 million |
Revenue by business line was $15.43 million from ACH and complementary services, $25.17 million from credit cards, $6.54 million from prepaid card services and $14.79 million from Output Solutions. Output Solutions generated $14.8 million of revenue in its first full year after acquisition.
Cost of services increased 86% to $46.31 million, reflecting higher transaction volumes. Selling, general and administrative expenses excluding stock-based compensation increased 43% to $11.65 million, while depreciation and amortization rose 74% to $2.64 million, primarily because of the Output Solutions acquisition. Stock-based compensation was $1.49 million, broadly unchanged from 2020.
Net cash provided by operating activities was $29.78 million versus $6.29 million in 2020. Management states that, after adjusting for prepaid-card load obligations, merchant reserves, operating lease items and related balance-sheet effects, cash generated by operations was $2.6 million in 2021 versus cash used of $0.4 million in 2020. Investing cash outflow was $1.27 million, primarily for property and equipment. Financing cash inflow was $0.89 million, including $1.0 million from a private stock offering, partially offset by treasury-stock purchases.
At December 31, 2021, total assets were $133.68 million and total liabilities were $115.01 million. Settlement processing assets and obligations were each $63.82 million, and prepaid-card load assets and obligations were each $36.59 million. Equipment-loan liabilities totaled approximately $126,000, and operating lease liabilities totaled $2.98 million. Stockholders’ equity was $18.67 million. The company had an accumulated deficit of $65.38 million.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 92%, led by 82% growth in ACH and complementary revenue, 29% growth in credit-card revenue, 107% growth in prepaid-card revenue and the first full year of Output Solutions revenue.
- Total payment volume increased 184% to $9.5 billion, while transaction count increased 94% to 35.3 million.
- ACH volume increased 93%; credit-card dollars and transactions increased 42% and 76%, respectively; prepaid-card load volume increased 32% and prepaid-card transaction volume increased 135%.
- Gross margin expanded to 25.2% from 22.9%, and the net loss narrowed by approximately $2.6 million.
- Cash increased despite a substantially larger operating settlement base. Prepaid-card load obligations increased from $7.61 million to $36.59 million.
- Usio uplisted its common stock to the Nasdaq Global Market on June 15, 2021. It issued 142,857 shares to Voyager Digital for $1.0 million and repurchased $238,737 of treasury stock.
- The company transitioned from a traditional data center to a cloud provider during 2021 and early 2022 to increase processing speed and capacity.
Guidance, Outlook, Risks, Contingencies and Unusual Items
No formal revenue, earnings or other quantitative guidance is provided. Management expects to pursue top-line growth, additional sales personnel and customers, technology enhancements, cross-selling, and acquisitions or merchant-portfolio opportunities. Management stated that existing cash and cash equivalents were expected to fund operating and capital requirements for at least 12 months, although additional financing may be needed in the future.
- Management continues to report losses and acknowledges that future operating losses are possible. The company had approximately $29.5 million of tax net operating loss carryforwards, but realization is uncertain; a $1.50 million deferred tax asset remained at year-end after valuation allowances.
- A ransomware attack detected December 25, 2021 encrypted a small portion of systems and involved non-payment-processing data from an externally hosted Office 365 environment. The company remained operational and stated that no cardholder or payment data was compromised. It expects most direct response costs to be covered by cyber insurance, subject to a deductible, but continues to assess the incident.
- Output Solutions faces paper and paper-product supply constraints related to COVID-19 supply-chain disruptions, which could affect job completion, margins and growth.
- The business is exposed to merchant fraud, chargebacks, returned ACH transactions, prepaid-card overdrafts, processing losses and the financial condition of merchant customers. Fraud losses were $136,608 in 2021, and prepaid-card overdrafts totaled $56,922 at year-end. The reserve for processing losses was $623,494.
- Usio depends on bank sponsors, card networks, ACH access and third-party processors. Termination, higher fees, regulatory changes or loss of sponsorship could interrupt processing or reduce earnings.
- The company operates in a highly regulated environment involving payment networks, prepaid products, money-services regulation, anti-money-laundering requirements, consumer protection and data privacy laws.
- Usio is defending a lawsuit by KDHM alleging that $317,000 of customer deposits were improperly transferred in the Output Solutions acquisition. Usio asserts counterclaims and considers the risk of loss remote. The former Chief Revenue Officer litigation was settled in February 2022 for a payment of $13,742.50 by the former executive.
- Executive employment agreements may require significant separation payments upon specified termination or change-in-control events. The company estimates potential payments of approximately $1.5 million to $3.0 million for each of its Chairman and Chief Executive Officer agreements under certain circumstances.
Most Important Facts for Investors to Verify
- Reconcile the reported $29.8 million of operating cash flow with management’s adjusted operating cash flow of $2.6 million and assess the sustainability of cash generation excluding prepaid-card and settlement-related working-capital movements.
- Evaluate whether the 2021 revenue growth, particularly in cryptocurrency-related ACH, fintech lending, prepaid disbursements and Output Solutions, is recurring or dependent on unusual customer and stimulus-related activity.
- Review the composition, restrictions and liquidity of settlement processing assets, prepaid-card load assets and merchant reserves relative to the corresponding obligations.
- Assess exposure to bank sponsors, card networks, third-party processors, chargebacks, fraud and merchant insolvency.
- Monitor Output Solutions’ paper supply availability, customer retention, margins and integration results following the IMS acquisition.
- Review the ransomware incident, insurance coverage, remediation costs and any later determination that payment or personal information was affected.
- Consider the company’s continuing net losses, accumulated deficit, tax-asset valuation allowance and potential need for future financing or equity dilution.
- Verify the status and potential financial impact of the KDHM litigation, lease commitments, executive separation obligations and other contingencies.