Usio, Inc. (USIO) Q1 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Usio Earnings Conference Call for the first quarter ended March 31, 2020. [Operator Instructions]. Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A replay will be available shortly after the end of the call through May 28, 2020. I would now like to turn the conference over to Joe Hassett, Investor Relations. Please go ahead.

Thanks, Gary, and thank you, everyone, for participating today. Welcome to Usio's First Quarter 2020 Financial Results Conference Call. The earnings release, which Usio issued earlier this afternoon, is available on the company's Investor Relations website at uco.com/investor under News. On the call today are Louis Hoch, President and CEO; Greg Carter, Senior Vice President of Payment Facilitation; Tom Jewell, Senior Vice President and Chief Financial Officer; and Houston Frost, Senior Vice President of Prepaid Services. Management will provide prepared remarks, and then we will open the call to your questions. Before we begin, please remember that comments on today's call include forward-looking statements. Forward-looking statements can be identified by the use of such words as estimate, anticipate, expect, believe, intend, may, will, should, seek, approximate or plan or the negative of these words and other similar words and phrases. Forward-looking statements, by their nature, involve estimates, projections, goals, forecasts and assumptions and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements, including risks related to the COVID-19 pandemic and its effect on the economy, the realization, the opportunities from the Singular acquisition; management of the company's growth; the loss of key resellers; the relationships with the Automated Clearing House Network, bank sponsors, third-party card processing providers and merchants; the volatility of stock price; the loss of key personnel; growing competition in electronic commerce market; the security of the company's software, hardware and information; compliance with complex federal, state and local laws and regulations and other risks detailed in the company's filings with the SEC. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. Usio expressly disclaims any obligations or undertaking to update or revise any forward-looking statements made today to reflect any change in Usio's expectations with regard thereto or any other changes in the events, conditions or circumstances on which any such statement is based, except as required by law. Please refer to the company's SEC filings on its Investor Relations website for additional information. Now I would like to turn the call over to Louis. Louis?

Thank you, Joe, and welcome, everyone. I can think of no better way to follow up 3 consecutive years of record performance than with a record first quarter. I'm pleased to report that we recorded our all-time best quarterly revenues and a significant improvement in profitability. Revenue growth accelerated for the second quarter, rising 18% in the first quarter versus the comparable period in the prior year, which is a nice sequential improvement from 15% growth in the fourth quarter of 2019. We promised that we would enhance revenue transparency in 2020. And in Q1, we delivered segmented revenue reporting. Due to this new public information, I can report that both credit card and prepaid card division's revenues in the first quarter rose sharply from the same quarter a year ago, with credit card revenue up 20%, and prepaid card revenue up 69%. Credit card processing growth was led by our PayFac division, where volumes were up 52% sequentially from the fourth quarter of fiscal 2019. That is our third consecutive quarter of sequential payback processing volume growth. Adjusted EBITDA was greatly improved, reflecting strong top line growth, expanded gross margins and a flattening of expenses. And with our balance sheet remaining strong and our cash burn decreasing, and the influx of over -- influx of $813,500 in cash in April from our PPP loan application as previously disclosed we have the financial strength to support operations and to continue to invest in our growth strategies. All of our segments are off to a great start this year. ACH continues to generate strong margins and cash flow, which we are electively investing back into both Prepaid and PayFac divisions. Our new remote check capture service and PINless debit products both had a very strong first quarter. They are part of our expanding portfolio of products that leverage our Nacha certification Tier 1 processor designation, which includes direct access to the Federal Reserve and a dedicated bank routing number. ACH did feel the impact of the coronavirus over the second half of March, which impacted growth, somewhat offset by the 30 new accounts onboarded in the same 2 weeks. So there is underlying strength in the ACH business. It has been overshadowed by the temporary impacts of the market verticals created by the coronavirus. ACH is growing. It's a highly profitable and integral part of our suite of electronic transaction processing services, both in a stand-alone product as well as our integrated electronic payment solution. In our prepaid business, revenue has almost doubled. And profitability improved significantly in the first quarter. Earlier this week, we announced an exciting new prepaid program supporting government and charitable organizations in their effort to provide relief to victims of COVID-19. This is just one of the many exciting developments in prepaid, illustrating both the ability to innovate and our capabilities of our technology. Houston Frost will be on shortly to provide additional insight. Yesterday, we announced leadership changes within our Payment Facilitation division. I want to thank Greg Carter for joining Usio. And we're excited about him leading our innovative, high-growth PayFac business unit. We are glad that we have Greg with his extensive transaction processing experience on board and ready to step into this new role. Our card business, PayFac is hitting its stride. Both revenues and profitability are up from a year ago as PayFac volumes continued to trend steadily higher. Later, Greg Carter, who is replacing Vaden, will go through our card business in more detail. While we're certainly sorry to see Vaden go, we understand his entrepreneurial spirit and wish him well. In the case of both prepaid and PayFac, the recent improvement in performance is extremely rewarding. We believe the best is yet to come. As we all know that coronavirus has affected the economy and how we all go about our daily lives. Usio has been quick to act to ensure the health and safety of our employees and those around us. We are adhering to all the regulations governing our operations. Many of our employees were in states with strict shelter-in-place and social distancing rules. But from an operational standpoint, work from home had little impact on our productivity. Fortunately, some of those restrictions are beginning to ease and all Usio offices are now open. However, we value our employees safety and have implemented policies to achieve safe social distancing and other safety measures. We've had a great success in transitioning our employees to a work-at-home model and their productivity in either home or office continues to meet our expectations. However, as we anticipated last quarter, the economic consequences of the coronavirus impacted some of our markets. For instance, one of our legacy card portfolios, which is comprised of a number of dentists, veterinarians, optometrists, all of who have been forced to rely exclusively on telemedicine revenues. In our ACH business, the increase in lending that we anticipated has not occurred. It has been almost the opposite. Our financial services customers are not writing new loans and are granting borrowers payment deferrals, which reduced the amount of ACH transactions we processed. These trends became even more evident in April. As the restrictions are eased and businesses open back up, we believe in the late weeks of May and the month of June should be better. In fact, many of our business lines were actually up in April as compared to March, including our prepaid, RCC and PINless debit and nonhealth care legacy card portfolios. On balance, however, we believe the second quarter will be down from the first quarter. Before the coronavirus, we were feeling good about the direction of our business and the first quarter suggests our confidence was well founded. And we continue to feel confident about the success of all of our businesses. Although certain business segments volumes may feel the impact, we have not been losing customers. In fact, all of our businesses have active sales pipelines and we continue to implement new clients during this work-from-home period. Consequently, once coronavirus has passed, we believe we will come out of this on a strong growth trajectory. With that, I'd like to conclude my opening remarks and turn the call over to Houston Frost, our Head of Prepaid Services, to talk a little more about that segment.

Thank you, Louis, and hello to everyone on the call. Over the past year, the prepaid line of business has evolved dramatically. We have continued to refocus our efforts on distribution of our cards through business sales and partnerships. In December of last year, we ceased direct-to-consumer card enrollments through the Akimbo website. In addition, we have shifted our sales strategy to prioritize opportunities and relationships that leverage our more scalable solutions. For example, disbursement and expense cards for organizations. We have learned that the custom card programs we launched for clients in the past to create ongoing challenges with operational complexity and scalability. The time lines involved in our sales and implementation cycle required some patients before the results of our updated strategy could be recognized, but the outcome is clear in our Q1 2020 performance. The Prepaid segment has experienced continued growth in revenue and a dramatic increase in gross margins as compared to the same period last year. In fact, the improvements in the Prepaid segment's margin was a major contributor to the increase in the company's gross margin this quarter. To briefly address the ongoing impact of the COVID-19 pandemic, in respect to prepaid products, I believe we have reason to be relatively optimistic. To be sure, we initially saw a dip in card orders and loads for our promotional and incentive products. That said, consumer loads, both for the Akimbo program and for our custom client programs experienced a typical Q1 boost from individual filing taxes early. However, beginning in April, we have experienced a dramatic uptick in disbursement sales related to COVID relief programs. We are still determining just how much in terms of load volume and card orders these programs will generate. But we believe it could more than double the activity we had projected over the next 2 quarters. In our recent press release, we announced a few of the organizations we've been working with, including CARE USA, The New York Immigration Coalition and the Mayor's office of Los Angeles. We are working with several additional municipalities and nonprofits that we aren't able to announce at this time. It's wonderful to be able to participate in these COVID relief efforts and the increased activity will be a positive for the company. That said, I want to mention that card sales related to these relief efforts will be slightly lower margin as compared to typical incentive and promotional sales to business. While the COVID-related programs could be assumed to provide a temporary boost in activity, we have made substantial strides in terms of our visibility in the industry and our reputation in general with key partners like Mastercard. We are confident that our involvement in these programs will have lasting benefits. We're becoming known in the market as a very responsive, flexible and capable partner when it comes to implementing prepaid solutions. I am particularly proud of the way the prepaid team has responded to the increased activity in workload and wanted to share my appreciation of our team members on this call. With that, I'd like to conclude my opening remarks and turn the call over to Tom Jewell, our Senior Vice President and Chief Financial Officer, to discuss financial results in greater detail.

Thank you, Houston. Exciting progress. Welcome, everyone. Thanks for joining our call today and your interest in Usio. I'm going to provide a brief review of our financial results before turning the call over to Greg. As mentioned by Louis, we achieved record revenues in the first quarter. Revenues for the quarter increased 18% to $7.8 million versus the comparable period in the prior year. Revenues were up 69% in our prepaid category and 28% in our credit card category, while ACH revenues were relatively flat. In the credit card category, PayFac had a strong quarter and was a major contributor to growth. This is the second consecutive quarter in which our PayFac growth initiative has been a primary catalyst behind a significant increase in credit card revenues. Gross profits indicated -- increased 44% to $1.9 million and gross margins expanded 450 basis points to 24.8% for the quarter. The improvement in gross profits was driven by improvement in the profitability of our credit card and prepaid categories that was a function of strong revenue growth and the prepaid initiatives that Houston discussed. After recently funding these two growth initiatives with cash flows from our ACH business, it was great to see both initiatives deliver both top line revenue growth and expanding margins. Others, selling, general and administrative expenses in the first quarter was $2.1 million, which was flat to fourth quarter 2019 operating expense levels. The expense increases to drive incremental revenues in our growth initiatives has leveled off, and we expect expenses to remain in this approximate range over the balance of the year. Other SG&A expenses again included approximately $100,000 of onetime expenses for recently concluded M&A activities. The quarter represented an improvement in adjusted EBITDA operating losses to a loss of $200,000 approximately for the quarter. Adjusted EBITDA improved $400,000 from the fourth quarter of 2019 and was $100,000 better than Q1 2019. Overall, we reported a net loss of $0.8 million or $0.06 per share for the quarter as compared to a net loss of $1.1 million or $0.09 a share for the same period in the prior year and an improvement from the loss of $1.2 million or $0.09 per share in Q4 2019. We continue to have a solid balance sheet with a cash balance of $1.7 million and no debt at quarter end. We did see a cash burn of $400,000 for the quarter. That was a combination of an operating loss and capital expenditures of $150,000. Subsequent to the end of the quarter, we secured $813,500 in funding through the Paycheck Protection Plan as a part of the recently enacted Coronavirus Aid, Relief and Economic Security Act, briefly the CARES Act, administrated by the U.S. Small Business Administration. The loan is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. The company has not determined how much of the loan, if any, may be subject to forgiveness. In conclusion, this year is off to a strong start, and we are gaining momentum in our prepaid and credit card categories. Revenue growth accelerated for the second consecutive quarter versus the comparable prior year period and cost controls allowed us to reduce our adjusted EBITDA cash burn. The momentum is being interrupted by COVID-19 in the second quarter, as Louis discussed in detail. Despite the challenging times, we are confident the fundamental drivers of our business remain intact. And as restrictions are gradually lifted, we will be able to resume our growth trajectory and create value for our shareholders. At this time, I'd like to turn the call over to Greg. Greg?

Thank you, Tom, and welcome, everyone. I'm pleased to have joined Usio and to head up our card and PayFac unit, and I thank Louis and the Board for their confidence. PayFac is making great progress and I believe my experience in high-volume transaction environments will help me maintain and, hopefully, even accelerate that momentum. The card business got off to a great start in fiscal 2020, fueled by the momentum that began to build in the back half of 2019. As mentioned last call and as seen in our recent performance, we believe we are entering the scale phase of our PayFac business. Volumes processed during Q1 were strong again and up on a sequential basis, with PayFac volume increasing 52% in the first quarter compared to the fourth quarter of 2019. This builds on sequential growth and volumes of 24% and 134% in the third and fourth quarter of last year, respectfully. Year-over-year, revenues in card were up 28% and our category gross profits more than doubled. Overall card volumes, which includes the legacy Singular business, were up 21% in the first quarter, also a nice sequential acceleration from 17% in the fourth quarter. To sustain this momentum, we continue to sign new clients, and our lead generation efforts are starting to produce a healthy flow of new qualified inbound inquiries. This has us very excited about our near and long-term growth prospects. To provide a brief overview of the many opportunities in our pipeline with the greatest potential for near-term impact they hailed from a variety of industries. This includes a large property management platform, where we are nearly 2 weeks into an initial beta test, legal software, where we've had a number of recent significant wins that we expect once fully implemented, will establish Usio as a leader within this vertical. And finally, growth from partnerships in which we have invested substantial time such as eVisit. eVisit is a pioneer in the rapidly evolving telemedicine industry. In recent months, since the coronavirus pandemic turned the world on its head, eVisit has been on an exponential growth trajectory as physicians using eVisit increased dramatically in March compared to February. This made it critical for them to align with a technology partner who could scale along with them. This highlights an inherent benefit of our leveraged distribution model as our customers enjoy success, adding new customers, we experienced organic growth without any direct selling expense or associated burden. Coronavirus has forced many merchants to develop strategies to take their business into the virtual payments world. And for many organizations, that means developing innovative ways to make that electronic payment experience as transparent and as painless as possible. This move forward in payments technology is playing right into our hands. We believe that as the economy returns to normal, we are positioned to take advantage of the corresponding increase in demand for our services. Let me conclude with some independent perspective regarding PayFac potential. At a payment summit hosted by Jefferies this February, they concluded that the trend of software-led distribution of payments is becoming more pronounced. The trend of ISVs leveraging payment facilitation as a service is expected to accelerate with over 208,000 software companies worldwide, processing an aggregate $2 trillion payment volume, which represents a potential $20 billion in payment processing revenue. Presently, this market is only served by 1,075 unique payment facilitators, but they forecast that number to grow to over 4,000 by 2025. So we are excited that while this land grab is underway, we are uniquely positioned to participate in the unfolding growth story. We expect PayFac to continue its growth trajectory. And while it's too early to tell how the virus will impact our business in Q2, we continue to have good success in terms of signing new ISVs, but some of our implementations and industries most impacted by COVID have been slowed. With that said, we are confident that second half of year will see further acceleration, such that we now believe that we are on pace to exceed previous estimate of $200 million in volume for the year, and we'll be heading into 2021 on even a better trajectory. At this time, we would like to open up the call to questions.

[Operator Instructions]. Our first question comes from Gary Prestopino with Barrington Research.

I just want to make sure I got these numbers right. Did you say that prepaid sales growth was 69% and the total credit card sales growth was 28% in the quarter?

That's correct. Revenues.

Okay. Okay. Revenues, great. So a couple of questions here. Number one, you're projecting a down quarter, obviously, from what's going on here, which is understandable. But I think, Tom, you said basically that the expenses would stay about this rate for the rest of the year on a quarterly basis. So given the impact of like a lot of companies have really done some things here to cut some costs. I assume that you are not going to be in that kind of stature here in the quarter, you're just going to let things play out. And then hopefully, things will reinvigorate as we get through the back half of the year?

Gary, parts of our business is up. And parts of our business is down, right? We haven't -- we don't have any retail exposure other than dentist and optometrists and veterinarians. And that part of our business, that's going to get flip back on and we think that's going to occur in short order. And it's already starting to occur in some states. So we're not a processor that has terminals out there on the street that we have to worry about when a restaurant is going to get back to full steam. We don't have any. So we know that parts of our businesses continue to grow. We know that only two parts of our business is being affected. And in both cases, those being affected we know that once things flip, we're going to be fine. Meanwhile, we're not traveling. We have instituted no new hires. And so we're actually experiencing less expenses during this time period.

Okay. So I'm just trying to get an idea of what to expect in Q2.

Also, our EBITDA would have been around $50,000 in losses this quarter. If you -- when you read the Q, you'll see that we went ahead and took some items out of prepaid that were related to an acquisition that we're working on that we stopped during COVID. And so we're actually in a lot better shape in Q1 than once you take out that onetime transaction, onetime hit.

Okay. Maybe let me just see here. I mean, maybe I could approach it another way then. In terms of -- a lot of companies are saying that things hit the wall and start to hit the wall in March. Really, really fell out of bed in April. But towards the end of April and into May, they start to see some kind of lift on their sales on a weekly basis. Are you kind of experiencing that now? And could you maybe share some of that magnitude of what happened in March? What happened in the first 2 weeks of April and subsequently where you are -- what's transpired since then?

Yes. March, the last two weeks of March, we're not as visible because we had such a great quarter going up into those two weeks. April is when we really started getting some really good data. ACH in April was down 7% as compared to last year on the transactions. But 40% down on returns, which equates to probably about 15% less revenue for ACH. The dentist portfolio, we experienced $10 million less of processing in April, which is about $200,000 to $250,000 in revenue. And so it's not anything that's really scary because we know it's going to be turned right back on. And again, we're being -- we're very cost conscious with our money during this time period.

Okay. And then just a quick question for Greg. Are you going to be running the PayFac out of San Antonio? Or are you going to be moving up to Nashville?

No. I physically will reside in San Antonio. I'll be managing that business unit from here with frequent and visits as necessary. But it's -- this is where I'll office from.

Gary, [indiscernible] -- the PayFac operation has always been at San Antonio, just sales and marketing has been in Nashville.

Okay. So that's what my next question is going to be. In terms of your sales and marketing, who has the relationship with the ISV that you're selling to? Is it your individual salespeople?

Yes. And then partners that we work with that we have relationships with as well.

The next question is from Brian Kinstlinger with Kingstlinger

This is Jacob for Brian. How have volumes during April and early may compared for PayFac and separately the entire business?

Well, Jacob, you are from AGP, not from Kingstlinger, but appreciate you joining. So your question is PayFac volumes March versus April?

Yes. Sorry, no. April versus early May?

Well, we really don't have much early data to represent May, but I can tell you that April was almost identical to May. I mean, April was almost identical to March in PayFac.

Okay. And then can you speak to the pipeline for PayFac and how COVID-19 may lead to delays of customer decisions or installations?

Yes. There are certain ISVs that are on track for full implementation. But those, for example, in a property management role, we've got one that manages intercity parking. And obviously, that's being majorly affected. So that implementation, while structurally is happening, monetizing that implementation is going to be slower. So that probably be the best example I could use. But as I referenced earlier, the eVisit or the telemedicine is going on very well now.

Okay. And you talked a bit about dentists and optometrist being particularly hit hard in terms of transaction volumes. Can you talk a little bit about other segments that might offset this?

Well, there's only four segments that got hit that we have any type of exposure to. First, collectively, in our credit card processing, dentist, optometrists and veterinarians. Those are retail customers where cards are present. They swipe them there. And those businesses were primarily closed. Some of them did have telemedicine veterinarians, still open on a partial basis. But the net effect of it was 10 -- in April, we processed $10 million less than we did in March for that segment. The other segment was in our financial institutions. Usually, in bad times, there's more consumer loans that occur and that's what we had predicted. In this case, they came to a stop. And not only they're not initiating new loans, they offer deferrals on payments. So because of that, our ACH volumes were down. And like I just told, Gary, they were down 7% April as compared to last year.

Yes. And then any other segments that maybe offset this that have been up is...

Yes. Prepaid is up. RCC, remote check capture is up, PINless debit is up. In the case of RCC and PINless debit, those are kind of ACH alternative products. And both of them are -- had nice gains in April over March.

Okay. And as PayFac volumes grow, should we expect gross margin to revert closer to 20%, given credit -- given the margin on credit card processing compared to ACH and other services?

PayFac or any credit card volumes will cause gross margins to go down. But as prepaid goes -- increases, that causes margins to go up. Our ACH business is like 60% gross margins. So any tick in that. So it really depends on the mix. But if we were -- to give you an example, if we were to double credit card traffic next quarter, which obviously isn't going to happen. Those margins would decrease, and they would be closer to 20%.

And I would just add that really we did see some significant improvements in prepaid margins, which typically, you would expect to see some pressure from incremental credit card business. But in this quarter, we clearly offset that with increases in prepaid margins.

Okay. Just two more from me. Can you talk to -- can you speak about liquidity on the balance sheet? I know you've received a government loan, but is there any other plan that you have in place to strengthen?

We are -- if we look at acquisitions, we potentially raise money. There's a lot of properties out there, as you can imagine, and we're looking at some.

All right. And lastly, Vaden was the visionary behind PayFac, which has emerged as a solid catalyst for your company. Can you talk about what gives you and should give investors confidence that Greg is the right person to lead the next phase of growth?

Well, that's a fun question. So first thing is the company has got a handle on it, and the PayFac was built in San Antonio, and it continues to be operated in San Antonio. Vaden was definitely a vision area and we love him. But it's -- he got it to a point where he's able to hand it off to us. And Greg is a very seasoned leader, and he's going to help excel the Nashville team to the next level. Greg has run companies a lot bigger than our company and as a public executive.

The next question is from Barry Sine with Spartan Capital Securities.

I dialed in a few minutes late, so hopefully I'm not repeating anything. First of all, I wanted to zero in a bit more on ACH. And the question around the question, I'm thinking about the potential severe weakness coming up in the economy with unemployment levels near 15%. So assuming that return checks have much -- I believe, that has much higher revenue per transaction. Obviously, that's down in the March quarter, down even more. But going forward, how does return checks trend compared to results in the economy. Does a weaker economy tend to see higher return check transactions? And maybe you could kind of update us on your economics when you do a return check transaction?

Yes. So weaker economies do create more NSX. I mean, it's just -- it's obvious, right? What didn't occur in April, was that our financial institutions were offering deferrals. If they didn't offer deferrals, but can almost guarantee you that our return check processing would have been higher than it was last year. The economics on return check, we, on an average, charge about $2, sometimes $3 and cost us about $0.50. So it's really good margin business.

Any other parts of the business that perform well inversely to the economy?

Yes. And so our return check conversion processing business has already experienced nice growth. That's where lenders that want to process payments outside of ACH, they're worried about the transactions coming back. So that part of our business is going really well. PINless debit is an alternative to ACH, where they accept payments for loans on debit cards only, has been doing really well, and prepaid has been doing really well as well.

Okay. And then I wanted to switch gears in the question on liquidity. You talked for a second about acquisitions. It sounded like there was something you were kicking the tires on in the first quarter that you decided not to go forward on. Could you update us on what your financial parameters are in terms of looking at acquisitions, or they have to be accretive? Would you take on debt and so on? And strategically, are you looking for areas of the business you're already in? Are there areas of the payments processing that you're not in potentially that you're looking at getting into? How should investors think about your profile for M&A? You're still open to M&A, what has changed and what's your profile there?

Yes. The deal we were looking at was accretive. It was a profitable company. And it was within our industry. And we had a cash component and a stock component. And that business just got affected by COVID. So that one may revive one day. But right now, we assign the probability that it probably isn't. So we went ahead and accelerated the prepaid or the depreciation on that acquisition. But anything we do is going to be accretive. It's going to have synergy through people or products or industry vertical, and that will be complementary to our existing business lines that we can cross-sell into.

The next question is from Jon Hickman with Ladenburg.

I was just wondering if I could follow-up a little bit on this leadership change. For you to come up with somebody so quickly, was this in the works for a number of months?

Yes. No. Greg was already at the company, and he was helping us with that acquisition that we stopped, and he was going to lead that company. And he was available when we needed him.

The next question is a follow-up from Gary Prestopino with Barrington Research.

Yes. I don't know, this question may have been asked. I've been writing down stuff as I was talking. But in terms of -- your cash burn was $400,000 in the quarter. I mean, as you go through the rest of the year and you're still investing in PayFac and the lot, you'd basically, with the cash that you have on a trailing 12-month basis, should be out of money, out of cash on the balance sheet. So maybe can you address what you think your cash flow, your cash usage would be as we go through the year here?

Yes. First thing, we had some onetime stuff in Q1 that we -- we were talking about that acquisition that didn't go through. And Q1 is also a higher expense for us just because we have our audit that we go through. So we have tons of legal and other expense. So Q1 is not our baseline. That's for sure. And Tom, do you want to provide a little more color to that?

Yes. I mean, I guess, the good news is, we got the loan from the PPP. And obviously, there's a potential for some of that to be forgiven, which will help us from a liquidity perspective. And I think the first quarter really bodes well for us in the sense that we saw significant improvements in prepaid margins. Houston is signing a lot of new deals that should continue to drive that revenue up. And so that will be helpful. And then the expectation is that the PayFac volumes will continue to increase, which, again, we saw a very nice improvement in gross margins there. So we're obviously doing the things that we can, getting near that cash flow breakeven or to turn positive.

Okay. Could you just maybe explain for us the mechanics of PPP loan? My understanding is that if you pay -- use 75% of that loan to pay payroll, it's forgiven. Is that correct?

Yes, Gary, it's way more complicated than I can simplify in just a few minutes. But there is a cap that payroll has to be at least 75%. There's some other kickers. I think we did a good job of estimating it. And we -- although we haven't really fully determined because it's over an 8-week period. But we feel relatively comfortable that there's the potential for a significant percentage of that loan to be potentially forgiven. Obviously, yesterday, there was some additional disclosures came out that said that our loan was under $2 million. And there were some advantageous provisions that came out as a part of that. We'll play by the rules. We'll document everything that we do. And hopefully, that will turn out that there will be a positive impact for the company.

Yes. And that's what I'm kind of getting at. From the standpoint of how you book this on the income statement. Obviously, if the loan is forgiven, it could be either it actually reduces your SG&A? Or is there a contra addition to revenue for whatever you have for payroll expenses that are coming from the PPP?

Gary, I'll be honest with you. I have to listen to in on a lot of -- and actually, Houston may have some information on that, not particularly as it relates to it. I mean, obviously, the accountants are discussing that regularly. And so what I would say it's like, I don't know, maybe I'm being optimistic that it's only a 3-stage process, but the first process is getting the loan. The second process is figuring out how the reporting and forgiveness works. And the accountants are keeping up with all that, and they really haven't provided me the guidance that I can say one way or another in terms of how that will be reported. At this point, they seem to have flipped that -- and what they're saying is that if there is forgiveness, you can't take -- you can't reduce the -- you have to pay taxes on what is forgiven. And they haven't really got into what's the accounting aspects of that.

Okay. And then lastly for Houston. What do you see would be the impact of the Fancard business that you have? What we're hearing is that there's a real potential that either college football season will be canceled and/or college football season will occur, but there'll be no one in the stadiums. Have you given it any thought?

To be perfectly honest with you, the portion of our revenue that's related to the Fancard program is not necessarily significant. So it wouldn't impact us in a significant way is the short answer. And then the other side of that is that our contract on these custom programs ensures that we're going to receive a minimum amount of revenue even if their activity goes down, and that's because these programs -- these custom programs are operationally intensive to maintain and manage. So there's kind of a floor on that anyway in terms of our revenue on a program like that.

This concludes our question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.