USIO, INC. FORWARD-LOOKING STATEMENTS DISCLAIMER
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. If used in this report, the words "anticipate," "believe," "estimate," "intend," and other words or phrases of similar import are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described in our annual report on Form 10-K and other reports we file with theSecurities and Exchange Commission . Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made. We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law. This discussion and analysis should be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes thereto included in this report, and our annual report on Form 10-K for the fiscal year endedDecember 31, 2021 , filed onMarch 17, 2022 , including the audited consolidated financial statements and the notes contained therein. Name Change
Effective on
Overview We provide integrated payment processing services to merchants and businesses, including all types of Automated Clearing House, or ACH, processing, credit, prepaid card and debit card-based processing services and statement preparation, presentment and mailing services. In addition, we offer customizable prepaid cards which companies use for expense management, incentives, refunds, claims and disbursements, as well as unique forms of compensation such as per diem payments, government disbursements, and similar payments. We also offer prepaid cards to consumers for use as a tool to stay on budget, manage allowances and share money with family and friends. Our UsioCard platform supports Apple Pay®, Samsung Pay™ andFifth-Third Bank ,Sunrise Bank , andWells Fargo Bank . Our strategy is to drive growth through a leveraged, one to many, distribution model in the software development marketplace. Following the completion of the Singular Payments acquisition, we launched our payment facilitation, PayFac, platform called "PayFac-in-a-Box" in late 2018 targeting partnership opportunities with app and software developers in bill-centric verticals, such as legal, healthcare, property management, utilities and insurance. The PayFac-in-a-Box platform 'integration layer' offers a simple integration experience for technology companies who are looking to monetize payments within an existing base of downstream clients. The added value of offering our integration partners access to credit card, debit card, ACH and prepaid card issuance capabilities through a single vendor partner relationship in face-to-face, mobile and virtual payment acceptance environments provides a true single channel commerce experience through an application programming interface, API. With the acquisition of the assets ofInformation Management Solutions, LLC , or IMS, inDecember 2020 , we now offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions through our wholly-owned subsidiary,Usio Output Solutions, Inc. , or Output Solutions. This product offering provides an outsourced solution for document design, print and electronic delivery to potential customers and entities looking to reduce postage costs and increase efficiencies. Summary of Results We believe that our success will continue to depend in large part on our ability to (a) grow revenues, (b) manage our operating expenses, (c) add quality customers to our client base, (d) meet evolving customer requirements, (e) adapt to technological changes in an emerging market, and (f) assimilate current and future acquisitions of companies and customer portfolios. We will continue to invest in our sales force and technology platforms to drive revenue growth. In particular, we are focused on growing our ACH merchants, adding new software integrators, growing our electronic bill presentment, document composition, document decomposition, printing and mailing services business while providing incremental services to existing merchants. In addition to our near-term growth opportunities, we are focused on leveraging and optimizing the infrastructure of the organization allowing expansion of our payment processing and mail and printing capabilities without significantly increasing our operating costs. We believe that the number of credit card transactions processed, ACH transaction counts, prepaid card volumes and total card volumes are the most critical measures to gauge the state of our business. During the third quarter of 2022, the number of credit card transactions processed by us increased by 41% versus the third quarter of 2021. The volume of credit card dollars processed during the third quarter of 2022 increased by 7% compared to the same time period in 2021. Both the number of credit card transactions and dollars processed by us during the three months endedSeptember 30, 2022 were the highest in our history. The continued growth in credit card metrics was primarily attributable to our PayFac strategy to drive increased penetration across multiple industries including healthcare and legal. ACH (eCheck) transaction counts during the third quarter of 2022 decreased by 4% compared to the third quarter of 2021. Returned check transactions processed during the third quarter of 2022 increased by 72% compared to the third quarter of 2021. Electronic check dollars processed during the third quarter of 2022 decreased by 36% compared to the third quarter of 2021. The decreases in eCheck transactions and electronic check dollar volumes processed were primarily attributable to significantly higher cryptocurrency activity levels in the prior year period versus the current year period. Increases in returned check transactions were primarily attributable to the continued recovery of the consumer lending market following its decline due to COVID-19. Prepaid card load volumes processed during the third quarter of 2022 decreased by 41% compared to the third quarter of 2021. Prepaid card transaction counts processed during the third quarter of 2022 increased by 5% compared to the third quarter of 2021. Prepaid card purchase volume during the third quarter of 2022 decreased by 26% compared to the third quarter of 2021. This decrease occurred primarily due to the continued wind down of government assistance programs including organizations such asNew York City Economic Development Corporation ,City of Houston ,Harris County, TX ,Open Society International (City of Baltimore ), andGreater Washington Community Foundation (Washington DC ) with their vaccine incentive and cash disbursement programs. We continue to support numerous guaranteed income programs including theArlington Community Foundation , E.A.T (Equity and Transformation)Chicago , and Hudson UP, the City ofDenver's Basic Income Project . Total dollar volumes processed across all business lines in the third quarter of 2022 were$2.4 billion compared to$2.7 billion processed in the third quarter of 2021 primarily as a result of the decrease in cryptocurrency activity and the winding down of COVID-19 government assistance programs. Critical Accounting Policies Our management's discussion and analysis of our financial condition and results of operations is based upon our interim condensed consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to the reported amounts of revenues and expenses, bad debt, investments, intangible assets, income taxes, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. We consider the accounting policies described in Note 1 to the Notes to the Interim Condensed Consolidated Financial Statements to be critical because the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change or because the impact of the estimates and assumptions on financial condition or operating performance is material.
For a summary of Critical Accounting Policies, please refer to the Notes to Interim Condensed Consolidated Financial Statements, Note 1, Basis of Presentation.
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Key Business Metric - Non-GAAP Financial Measures
This filing includes non-GAAP financial measures, EBITDA and adjusted EBITDA, as defined in Regulation G of the Securities and Exchange Act of 1934, as amended. The Company reports its financial results in compliance with GAAP, but believes that also discussing non-GAAP financial measures provides investors with financial measures it uses in the management of its business. The Company defines EBITDA as operating income (loss), before interest, taxes, depreciation and amortization of intangibles. The Company defines adjusted EBITDA as EBITDA, as defined above, plus non-cash stock option costs and certain non-recurring items, such as costs related to acquisitions. These measures may not be comparable to similarly titled measures reported by other companies. Management uses EBITDA and adjusted EBITDA as indicators of the Company's operating performance and ability to fund acquisitions, capital expenditures and other investments and, in the absence of refinancing options, to repay debt obligations. Management believes EBITDA and adjusted EBITDA are helpful to investors in evaluating the Company's operating performance because non-cash costs and other items that management believes are not indicative of its results of operations are excluded. EBITDA and adjusted EBITDA are supplemental non-GAAP measures, which have limitations as an analytical tool. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Non-GAAP financial measures do not reflect a comprehensive system of accounting, may differ from GAAP measures with the same names, and may differ from non-GAAP financial measures with the same or similar names that are used by other companies. We reported an adjusted EBITDA loss of$0.5 million for the quarter endedSeptember 30, 2022 , as compared to an adjusted EBITDA of$1.2 for the same period in the prior year. The increase in adjusted EBITDA loss in the current quarter was attributable to increases in SG&A combined with reduced profit margins. We reported an adjusted EBITDA loss of$1.4 million for the nine months endedSeptember 30, 2022 , as compared to an adjusted EBITDA of$2.7 million for the same period in the prior year. The increase in adjusted EBITDA loss in the current year was attributable to increases in SG&A combined with reduced profit margins.
The following table is a reconciliation of Net Income to EBITDA for the three
and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Reconciliation from Operating income
(Loss) to Adjusted EBITDA:
Operating income (Loss) $ (1,701,555 ) $
210,947
640,599 634,912 2,163,468 1,884,268
EBITDA (1,060,956 ) 845,859 (2,960,148 ) 1,730,294
Non-cash stock-based compensation
expense, net 515,992 343,567 1,540,375 988,567
Adjusted EBITDA $ (544,964 ) $ 1,189,426 $ (1,419,773 ) $ 2,718,861
Calculation of Adjusted EBITDA margins:
Revenues $ 16,395,760 $
15,821,070
(544,964 ) 1,189,426 (1,419,773 ) 2,718,861
Adjusted EBITDA margins (3.3 )% 7.5 % (2.8 )% 6.1 %
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Table of Contents Results of Operations Revenues Our revenues are principally derived from providing integrated electronic payment services to merchants and businesses, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH, network and the program management and processing of prepaid debit cards. With the acquisition of the assets of IMS inDecember 2020 , we now offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services through our wholly-owned Output Solutions subsidiary. Three Months Ended September 30, 2022 2021 $ Change % Change
ACH and complementary service revenue
$ (490,659 ) (13 )% Credit card revenue 6,842,065 6,509,344 332,721 5 % Prepaid card services revenue 1,576,871 2,004,657 (427,786 ) (21 )% Output solutions revenue 4,734,030 3,573,616 1,160,414 32 % Total Revenue$ 16,395,760 $ 15,821,070 $ 574,690 4 % Nine Months Ended September 30, 2022 2021 $ Change % Change
ACH and complementary service revenue
$ 171,916 2 % Credit card revenue 20,495,984 18,791,129 1,704,855 9 % Prepaid card services revenue 5,733,428 3,968,764 1,764,664 44 % Output solutions revenue 13,507,655 10,942,062 2,565,593 23 % Total Revenue$ 50,722,789 $ 44,515,761 $ 6,207,028 14 % Revenues for the quarter endedSeptember 30, 2022 increased by 4% to$16.4 million , as compared to$15.8 million for the quarter endedSeptember 30, 2021 due to continued traction and growth in our PayFac and Output Solutions lines of business, despite declines in both our Prepaid, and ACH and complimentary services business sectors. These declines were a result of our ACH business achieving a record 2021 quarter when cryptocurrency activity was substantially higher as compared with the same period in 2022, along with the wind down of COVID-19 relief programs which were at their peak in the third and fourth quarter of 2021. Revenues for the nine months endedSeptember 30, 2022 increased by 14% to$50.7 million , as compared to$44.5 million for the nine months endedSeptember 30, 2021 primarily as a result of continued growth in our prepaid card services category, and strong performance from our wholly-owned Output Solutions subsidiary. Cost of Services Cost of services includes the cost of personnel dedicated to the creation and maintenance of connections to third-party payment processors and the fees paid to such third-party providers for electronic payment processing services. Through our contractual relationships with our payment processors and sponsoring banks, we process ACH and debit, credit or prepaid card transactions on behalf of our customers and their consumers. We pay volume-based fees for debit, credit, ACH and prepaid transactions initiated through these processors or sponsoring banks, and pay fees for other transactions such as returns, notices of change to bank accounts and file transmission. Cost of service fees also include fees paid to referral agents and partners.
Cost of services increased by
Cost of services increased by
Increases in cost of services in both the three and nine months endedSeptember 30, 2022 as compared to the same periods a year ago were due to proportionally greater revenue growth in lower margin business lines. 11
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Table of Contents Gross Profit
Gross profit is the net profit existing after the cost of services.
Gross profits decreased by 22% to$3.1 million for the quarter endedSeptember 30, 2022 , as compared to$4.0 million for the same period in the prior year. Similarly, the gross margin percentage was 19.1% for the quarter endedSeptember 30, 2022 as compared to 25.5% in the prior year period. The decrease in gross profits and margin percentage in the quarter endedSeptember 30, 2022 , as compared to the same period during the prior year, was primarily attributable to increased revenue contribution from business lines with lower profit margins, as well as decreased ACH and complementary service revenues, a higher margin business. Gross profits decreased by 11% to$9.9 million for the nine months endedSeptember 30, 2022 , as compared to$11.1 million for the same period in the prior year. Similarly, the gross margin percentage was 19.5% for the nine months endedSeptember 30, 2022 as compared to 24.9% in the prior year period. The decrease in gross profits and margin percentage in the nine months endedSeptember 30, 2022 , as compared to the prior year was primarily attributable to increased revenue contribution from business lines with lower profit margins. Stock-based Compensation Stock-based compensation expenses were$0.5 million for the quarter endedSeptember 30, 2022 as compared to$0.3 million for the quarter endedSeptember 30, 2021 , an increase of 50.2% due to incremental stock compensation from new hires, along with the Company's 10-year and 3-year stock vesting for performance compensation entered into onNovember 18, 2021 . Stock-based compensation expenses were$1.5 million for the nine months endedSeptember 30, 2022 as compared to$1.0 million for the nine months endedSeptember 30, 2021 , an increase of 55.8% due to incremental stock compensation from new hires, along with the Company's 10-year and 3-year stock vesting for performance compensation entered into onNovember 18, 2021 .
Other Selling, General and Administrative Expenses
Other selling, general and administrative expenses (other SG&A) were$3.7 million for the quarter endedSeptember 30, 2022 as compared to$2.8 million in the prior year, a 29% increase. The increase in other SG&A for the quarter endedSeptember 30, 2022 reflects continued investments in our ACH, PayFac, Prepaid and Output Solutions business lines, a substantial portion of which represents an investment in strengthening our infrastructure to support our current growth. These investments include preparation for increased service requirements for growing card holders in our prepaid line of business, security and IT infrastructure, as well as staffing and employee retention. Other selling, general and administrative expenses (other SG&A) were$11.3 million for the nine months endedSeptember 30, 2022 as compared to$8.3 million in the prior year, a 36% increase. The increase in other SG&A for the nine months endedSeptember 30, 2022 reflects continued investments in our ACH, PayFac, Prepaid and Output Solutions business lines, a substantial portion of which represents an investment in strengthening our infrastructure to support our current growth. These investments include preparation for increased service requirements for growing card holders in our prepaid line of business, security and IT infrastructure, as well as staffing and employee retention.
Depreciation and Amortization
Depreciation and amortization expense consist of the reduction in value of our tangible and intangible assets over their useful life. These assets include property, plant, and equipment, along with intangible assets acquired through acquisition, or developed as internal use software.
Depreciation and amortization totaled
Depreciation and amortization totaled
Other Income (Expense)
Other income and expense, net was
Other income and expense, net was
Net Income (Loss) We reported a net loss of$1.8 million for the quarter endedSeptember 30, 2022 , as compared to a net income of$0.1 million for the same period in the prior year. The increase in net loss in the current quarter was attributable to increases in SG&A combined with reduced profit margins. We reported a net loss of$5.3 million for the nine months endedSeptember 30, 2022 , as compared to a net loss of$0.4 million for the same period in the prior year. The increase in net loss in the current quarter was attributable to increases in SG&A combined with reduced profit margins. We may incur future operating losses. To maintain, grow and sustain profitability, we must, among other things, continue to incrementally grow and maintain our customer base, sell our ACH, credit card, prepaid product offerings and output solutions offerings to existing and new customers, implement successful marketing strategies, maintain and upgrade our technology and transaction-processing systems, provide superior customer service, respond to competitive developments, attract, retain and motivate personnel, and respond to unforeseen industry developments among other factors.
Liquidity and Capital Resources
Our primary sources of liquidity are available cash and cash equivalents and cash flows provided by operations. As ofSeptember 30, 2022 , we had cash and cash equivalents of$4.6 million . For the nine months endedSeptember 30, 2022 , cash used in operations was$22.8 million . We expect available cash and cash equivalents and internally generated funds to be sufficient to support working capital needs, capital expenditures (including acquisitions), and our debt service obligations. In addition, we may also receive proceeds, if an opportunity presents itself, from the sale of assets and/or the sale of debt or equity securities, although we may not be able to complete such a sale or any such financing on terms acceptable to us, if at all. We believe we have sufficient liquidity to operate for at least the next 12 months from the date of filing this report.
We reported a net loss of
Cash Flows Net cash used by operating activities, including merchant reserve funds, prepaid card load assets, customer deposits and net operating lease assets for the nine months endedSeptember 30, 2022 was$22.8 million , as compared to net cash provided by operating activities of$8.7 million for the nine months endedSeptember 30, 2021 . Excluding merchant reserves, prepaid card load assets, customer deposits and lease right of use assets and liabilities, our cash used by operating activities was$1.1 million and cash provided by operating activities was$2.0 for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. We continue to invest resources and infrastructure in our business to achieve scale across all business lines. Net cash used by investing activities was$642,764 and$999,493 for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The primary drivers of our investing activities were capital expenditures associated with capitalized software development costs and other capital investments associated with growing our business lines and associated employee counts. The decrease in cash used by investing activities was primarily attributable to the reduced amount of fixed asset purchases relative to the same period a year ago. Net cash used by financing activities for the nine months endedSeptember 30, 2022 was$935,513 and net cash used by financing activities for the nine months endedSeptember 30, 2021 was$58,800 , respectively. The increase in cash used by financing activities was due to the Company's stock buyback program, and increased quantity of treasury stock purchased in 2022. The 2021 cash used by financing activities included the net proceeds from our equipment loan offset by treasury stock transactions. 12
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Material Trends and Uncertainties
Please refer to Note 9 of our financial statements included in this report that describe certain risks in connection with the Covid-19 pandemic.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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