Usio, Inc. Form 10-Q Summary
Business Context and Reporting Period
Usio, Inc. provides integrated payment processing services, including ACH, credit, debit and prepaid card processing, payment facilitation, and electronic bill presentment, printing and mailing through Output Solutions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. The filing was signed November 9, 2022.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $16.4 million | $15.8 million | $50.7 million | $44.5 million |
| Gross profit | $3.1 million | $4.0 million | $9.9 million | $11.1 million |
| Gross margin | 19.1% | 25.5% | 19.5% | 24.9% |
| Operating income (loss) | $(1.7) million | $0.2 million | $(5.1) million | $(0.2) million |
| Net income (loss) | $(1.8) million | $0.1 million | $(5.3) million | $(0.4) million |
| Adjusted EBITDA | $(0.5) million | $1.2 million | $(1.4) million | $2.7 million |
| Adjusted EBITDA margin | (3.3)% | 7.5% | (2.8)% | 6.1% |
| Operating cash flow | Not separately provided | Not separately provided | $(22.8) million | $8.7 million |
Q3 revenue increased 4%, while nine-month revenue increased 14%. Revenue by business line for Q3 was $6.8 million from credit card services, $4.7 million from Output Solutions, $3.2 million from ACH and complementary services, and $1.6 million from prepaid card services.
As of September 30, 2022, cash and cash equivalents were $4.6 million, total current assets were $81.4 million, total current liabilities were $75.8 million, and working capital was $5.6 million. Total assets were $92.4 million and total stockholders’ equity was $14.0 million. The company had an accumulated deficit of $70.7 million.
Debt consisted primarily of an equipment loan with $85,322 outstanding, including current and non-current portions, and operating lease liabilities totaling $3.1 million. The filing states that management believes available cash and internally generated funds will be sufficient to support operations for at least the next 12 months.
Material Changes Versus Prior Comparable Period
- Q3 revenue rose $0.6 million, or 4%, driven by 32% growth in Output Solutions and 5% growth in credit card revenue. These increases offset declines of 13% in ACH and complementary service revenue and 21% in prepaid card services revenue.
- Nine-month revenue increased $6.2 million, or 14%, led by 44% growth in prepaid card services, 23% growth in Output Solutions, and 9% growth in credit card revenue.
- Cost of services increased 13% in Q3 and 22% for the nine-month period, outpacing revenue growth because of a greater mix of lower-margin business lines.
- Gross profit declined 22% in Q3 and 11% for the nine-month period. Gross margin decreased 640 basis points in Q3 and 540 basis points for the nine-month period.
- Other SG&A increased 29% in Q3 and 36% for the nine-month period. Stock-based compensation increased 50.2% in Q3 and 55.8% for the nine-month period, reflecting new hires and performance-related equity awards.
- Net cash used in operating activities was $22.8 million for the first nine months of 2022, compared with $8.7 million of cash provided in the prior-year period. The principal driver was a $21.3 million decrease in prepaid card load obligations.
- Credit card transaction counts increased 41% and credit card dollar volume increased 7% in Q3. ACH transaction counts declined 4%, electronic check dollar volume declined 36%, and prepaid card load volume declined 41%.
Outlook, Risks, Contingencies, and Unusual Items
Management is focused on expanding ACH merchants, software-integrator relationships, PayFac services, prepaid programs, and Output Solutions while investing in technology, security, staffing and infrastructure. Management expects to leverage existing infrastructure to expand processing and mailing capabilities, but the filing provides no formal revenue or earnings guidance.
Management attributed weaker ACH results to unusually high cryptocurrency activity in the prior-year period and weaker prepaid results to the wind-down of COVID-19 government assistance programs. Total dollar volumes processed declined to $2.4 billion from $2.7 billion.
Key risks include continued operating losses, lower margins, dependence on transaction volumes, merchant processing and chargeback losses, customer credit risk, labor availability, paper and supply-chain constraints affecting Output Solutions, technology and cybersecurity requirements, and continuing uncertainty related to COVID-19 and broader economic conditions. The company maintains a $722,494 reserve for processing losses and a $319,000 allowance for doubtful accounts.
The company disclosed a lawsuit by KDHM, LLC concerning alleged improper transfer of $317,000 of customer deposits in connection with the Output Solutions asset acquisition. Usio disputes the claims, filed counterclaims, and considers the risk of loss remote. No material changes to previously disclosed risk factors were reported.
After quarter-end, the company purchased 135,578 additional shares for $232,611 under its stock buyback program. During Q3, it repurchased 156,368 shares, and approximately $3.2 million remained available under the program at September 30, 2022.
Management concluded that disclosure controls and procedures were effective as of September 30, 2022, and reported no material change in internal control over financial reporting during the quarter. No material off-balance-sheet arrangements were reported.
Important Facts for Investors to Verify
- Whether the company can reverse the sharp deterioration in gross margin and adjusted EBITDA.
- Whether operating cash flow improves after the large working-capital outflow associated with prepaid card obligations.
- The sustainability and margins of growth in Output Solutions and credit card processing.
- The effect of winding down COVID-related prepaid programs and reduced cryptocurrency-related ACH activity.
- Available liquidity relative to ongoing operating losses, buybacks, capital expenditures and processing-related reserve requirements.
- The status and ultimate financial impact of the KDHM litigation and related counterclaims.
- The amount and potential dilution from outstanding restricted stock, options and other anti-dilutive awards.