Usio, Inc. Form 10-Q Summary
Business Context and Reporting Period
Usio provides ACH, credit and debit card, prepaid card, payment facilitation, and electronic bill presentment, printing and mailing services through its Output Solutions subsidiary. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. Usio is a smaller reporting company listed on Nasdaq under “USIO.”
Financial Highlights
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Revenue | $21.3 million | $16.2 million | $42.7 million | $34.3 million |
| Gross profit | $5.0 million | $3.3 million | $9.9 million | $6.8 million |
| Gross margin | 23.6% | 20.1% | 23.2% | 19.7% |
| Operating income (loss) | $55,828 | $(1.9) million | $61,821 | $(3.4) million |
| Net income (loss) | $205,041 | $(1.9) million | $219,874 | $(3.6) million |
| Adjusted EBITDA | $1.2 million | $(0.6) million | $2.2 million | $(0.9) million |
| Adjusted EBITDA margin | 5.4% | (3.6)% | 5.1% | (2.5)% |
Revenue growth was led by prepaid card services and Output Solutions. Q2 revenue by source was $7.1 million from credit cards, $5.2 million from prepaid card services, $4.8 million from Output Solutions, and $4.1 million from ACH and complementary services.
Six-month operating cash flow was $27.8 million, compared with $(22.1) million in the prior-year period. This result was heavily affected by a $26.2 million increase in prepaid card load obligations. Management’s non-GAAP adjusted operating cash flow, excluding changes in prepaid card load obligations, customer deposits, merchant reserves and lease-related balances, was $1.3 million versus $(1.2) million in 2022.
Cash and cash equivalents were $6.6 million at June 30, 2023, compared with $5.7 million at December 31, 2022. Total assets were $120.8 million and total liabilities were $105.7 million. Working capital was approximately $7.5 million. The company had $43,208 of current equipment-loan obligations and no non-current equipment-loan balance; operating lease liabilities totaled $2.8 million. Settlement processing and prepaid card balances are matched by corresponding obligations and should not be viewed as unrestricted liquidity.
Material Changes Versus the Prior Comparable Period
- Q2 revenue increased 31%, while six-month revenue increased 24%.
- Q2 gross profit increased 54% and six-month gross profit increased 46%, reflecting improved pricing and profitability across business lines.
- Prepaid card services revenue increased 276% in Q2 and 141% for the six-month period.
- Output Solutions revenue increased 20% in Q2 and 23% for the six-month period.
- ACH and complementary revenue increased 5% in Q2 but declined 4% for the six-month period, reflecting the company’s withdrawal from cryptocurrency-related processing after Voyager Digital filed for bankruptcy.
- Credit card revenue increased 3% in Q2 and 6% for the six-month period.
- Other SG&A remained broadly stable, while depreciation and amortization declined because certain intangible assets were fully amortized.
- Interest income increased to $218,844 in Q2 and $311,772 for the six-month period, primarily because of higher interest-bearing reserves and interest rates.
- Shares outstanding increased year over year, while the company continued limited repurchases under its $4 million buyback authorization. It repurchased 5,632 shares during Q2 for approximately $19,036, leaving approximately $2.71 million available under the program.
Guidance, Outlook, Risks and Unusual Items
No formal revenue or earnings guidance was provided. Management expects available cash, cash equivalents and internally generated funds to support working capital, capital expenditures, potential acquisitions and debt service for at least the next 12 months.
Management’s strategy emphasizes growth in ACH, payment facilitation, software integrations, prepaid programs and Output Solutions while controlling operating expenses and leveraging existing infrastructure. Q2 credit card transaction counts increased 15% and credit card dollar volume increased 2% year over year. Prepaid load volume increased 48% and prepaid purchase volume increased 51%, although prepaid transaction counts declined 9%. Total dollar volume processed declined to $1.3 billion from $2.4 billion, primarily because of reduced cryptocurrency activity and the winding down of COVID-19 assistance programs.
- The company estimates that the loss of Voyager-related business reduced ACH and complementary-service revenue by approximately $1 million in Q2 2023; management has withdrawn from the cryptocurrency market.
- In Q1 2023, Usio incurred $833,485 of merchant processing losses related to fraud and identity fraud involving multiple merchants. It used $755,494 of its reserve and replenished the reserve by $383,000 in Q2, resulting in a June 30 reserve of $769,789.
- The company received 142,857 shares previously sold to Voyager, valued at $156,162, in a non-cash transaction recognized as revenue and treasury stock during Q2.
- COVID-related disbursement programs continue to generate revenue, but activity has generally declined. Management expects some related revenue through the remainder of 2023 and the beginning of 2024.
- Labor availability and paper-supply constraints could affect staffing, Output Solutions revenue and margins.
- Processing-loss reserves, chargebacks, ACH returns, merchant insolvencies and customer credit deterioration could produce losses exceeding current estimates.
- The company reported litigation involving KDHM, LLC concerning customer deposits and a separate claim against Lifetime Home Warranty for approximately $213,780 in unpaid chargebacks and returns. Management considers the KDHM loss risk remote; the outcome and collectability of the Lifetime claim remain uncertain.
- At June 30, 2023, Usio reported an accumulated deficit of $70.6 million and a net deferred tax asset of approximately $1.5 million, with a valuation allowance of approximately $4.6 million.
- Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the sustainability of recent prepaid and Output Solutions growth, particularly as COVID-related programs decline.
- Assess underlying liquidity separately from settlement processing assets, prepaid card load assets, merchant reserves and corresponding obligations.
- Monitor fraud, chargeback and processing-loss trends following the Q1 2023 loss event and the Q2 reserve replenishment.
- Evaluate the continuing impact of Voyager’s bankruptcy and the company’s reduced ACH volumes and cryptocurrency exposure.
- Review share-based compensation, restricted stock grants and dilution; diluted weighted-average shares were approximately 26.4 million versus basic weighted-average shares of approximately 20.1 million in 2023.
- Track the status and collectability of the Lifetime Home Warranty claim and the KDHM litigation.
- Verify the company’s non-GAAP adjusted EBITDA and adjusted operating cash flow reconciliations against GAAP results; these measures are not substitutes for GAAP earnings or operating cash flow.