USIO 10-Q
Usio, Inc. (USIO)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from ________ to ________.
Commission File Number:
USIO, INC.
(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name on each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| | Smaller reporting company |
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| Emerging Growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
As of August 11, 2022, the number of outstanding shares of the registrant's common stock was
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Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 |
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Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2022 and 2021 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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| Item 1A. |
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| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds. |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
USIO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Settlement processing assets | ||||||||
| Prepaid card load assets | ||||||||
| Customer deposits | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other | ||||||||
| Current assets before merchant reserves | ||||||||
| Merchant reserves | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Other assets: | ||||||||
| Intangibles, net | ||||||||
| Deferred tax asset, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Other assets | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Operating lease liabilities, current portion | ||||||||
| Equipment loan, current portion | ||||||||
| Settlement processing obligations | ||||||||
| Prepaid card load obligations | ||||||||
| Customer deposits | ||||||||
| Deferred revenues | ||||||||
| Current liabilities before merchant reserve obligations | ||||||||
| Merchant reserve obligations | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Equipment loan, non-current portion | ||||||||
| Operating lease liabilities, non-current portion | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ par value, shares authorized; -- shares outstanding at June 30, 2022 (unaudited) and December 31, 2021, respectively | ||||||||
| Common stock, $ par value, shares authorized; and issued, and and outstanding at June 30, 2022 (unaudited) and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost; and shares at June 30, 2022 (unaudited) and December 31, 2021, respectively | ( | ) | ( | ) | ||||
| Deferred compensation | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See the accompanying notes to the condensed interim consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended June 30, |
Six Months Ended June 30, |
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| 2022 |
2021 |
2022 |
2021 |
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| Revenues |
$ | $ | $ | $ | ||||||||||||
| Cost of services |
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| Gross profit |
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| Selling, general and administrative: |
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| Stock-based compensation |
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| Other SG&A expenses |
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| Depreciation and amortization |
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| Total selling, general and administrative expenses |
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| Operating income (loss) |
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| Other income and (expense): |
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| Interest income |
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| Interest expense |
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| Other income and (expense), net |
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| Income (Loss) before income taxes |
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| Income tax expense |
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| Net income (Loss) |
$ | ( |
) | $ | $ | ( |
) | $ | ( |
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| Income (Loss) Per Share |
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| Basic income (loss) per common share: |
$ | ( |
) | $ | $ | ( |
) | $ | ( |
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| Diluted income (loss) per common share: |
$ | ( |
) | $ | $ | ( |
) | $ | ( |
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| Weighted average common shares outstanding |
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| Basic |
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| Diluted |
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See the accompanying notes to the condensed interim consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Six Months Ended June 30, |
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| 2022 |
2021 |
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| Operating activities: |
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| Net (loss) |
$ | ( |
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| Adjustments to reconcile net (loss) to net cash provided (used) by operating activities: |
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| Depreciation |
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| Amortization |
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| Bad debt |
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| Non-cash stock-based compensation |
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| Amortization of warrant costs |
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| Changes in current assets and current liabilities: |
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| Accounts receivable |
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| Prepaid expenses and other |
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| Operating lease right-of-use assets |
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| Other assets |
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| Inventory |
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| Accounts payable and accrued expenses |
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| Operating lease liabilities |
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| Prepaid card load obligations |
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| Merchant reserves |
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| Customer deposits |
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| Deferred revenue |
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| Net cash provided (used) by operating activities |
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| Investing activities: |
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| Purchases of property and equipment |
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| Net cash (used) by investing activities |
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| Financing activities: |
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| Proceeds from equipment loan |
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| Payments on equipment loan |
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| Purchases of treasury stock |
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| Net cash provided (used) by financing activities |
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| Change in cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves |
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| Cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves, beginning of period |
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| Cash, Cash Equivalents, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End of Period |
$ | $ | ||||||
| Supplemental disclosure of cash flow information: |
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| Cash paid during the period for: |
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| Interest |
$ | $ | ||||||
| Income taxes |
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| Non-cash transactions: |
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| Issuance of deferred stock compensation |
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See accompanying notes to the condensed interim consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
| Common Stock |
Additional Paid- In |
Treasury |
Deferred |
Accumulated |
Total Stockholders' |
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| Shares |
Amount |
Capital |
Stock |
Compensation |
Deficit |
Equity |
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| Balance at December 31, 2021 |
$ | $ | $ | ( |
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) | $ | ||||||||||||||||
| Issuance of common stock under equity incentive plan |
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| Warrant compensation costs |
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| Deferred compensation amortization |
— | — | — | — | — | |||||||||||||||||||||||
| Purchase of treasury stock costs |
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| Net (loss) for the period |
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| Balance at March 31, 2022 |
$ | $ | $ | ( |
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| Issuance of common stock under equity incentive plan |
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| Warrant compensation costs |
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| Reversal of deferred compensation amortization that did not vest |
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) | — | — | ( |
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| Deferred compensation amortization |
— | — | — | — | — | |||||||||||||||||||||||
| Purchase of treasury stock costs |
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| Net (loss) for the period |
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| Balance at June 30, 2022 |
$ | $ | $ | ( |
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) | $ | ||||||||||||||||
| Balance at December 31, 2020 |
$ | $ | $ | ( |
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) | $ | ||||||||||||||||
| Issuance of common stock under equity incentive plan |
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| Warrant compensation costs |
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| Cashless warrant exercise |
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| Reversal of deferred compensation amortization that did not vest |
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| Deferred compensation amortization |
— | |||||||||||||||||||||||||||
| Purchase of treasury stock costs |
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| Net (loss) for the period |
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| Balance at March 31, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||
| Issuance of common stock under equity incentive plan |
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| Warrant compensation costs |
— | |||||||||||||||||||||||||||
| Reversal of deferred compensation amortization that did not vest |
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| Deferred compensation amortization |
— | |||||||||||||||||||||||||||
| Purchase of treasury stock costs |
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| Net income for the period |
— | |||||||||||||||||||||||||||
| Balance at June 30, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements of Usio, Inc. and its subsidiaries (the “Company”) have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company's financial position, results of operations and cash flows for such periods. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on March 17, 2022. Results of operations for interim periods are not necessarily indicative of results that may be expected for any other interim periods or the full fiscal year.
Revenue Recognition: Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services. Revenue is recognized during the period in which the transactions are processed or when the related services are performed. The Company complies with ASC 606-10 and reports revenues at gross as a principal versus net as an agent. Although some of the Company's processing agreements vary with respect to specific credit risks, the Company has determined for each agreement it is acting in the principal role. Merchants may be charged for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through third-party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations. Certain card distributors remit payment of fees earned 45 days after the end of the processing period. Prepaid card distributors have payment terms of 30 days following the end of the month. Sales taxes billed are reported directly as a liability to the taxing authority and are not included in revenue. Usio Output Solutions, Inc. provides bill preparation, presentment and mailing services. Revenue from Output Solutions is recognized when the related services are performed for printing and delivered to USPS for postage.
The following table presents the Company's revenues by source:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| ACH and complementary service revenue | $ | $ | $ | $ | ||||||||||||
| Credit card revenue | ||||||||||||||||
| Prepaid card services revenue | ||||||||||||||||
| Output solutions revenue | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Deferred Revenues: The Company records deferred revenues when it receives payments in advance of transferring control of promised goods or services to a customer. The advance consideration received from a customer is deferred until the Company provides the customer that product or service. The deferred revenues totaled $
Prepaid Card Load Assets: The Company maintains pre-funding accounts for its customers to facilitate prepaid card loads as initiated by the customer. These prepaid card load assets are carried on the Company's balance sheet with a corresponding liability.
The reconciliation of cash and cash equivalents to cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves is as follows for each period presented:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Beginning cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves: | ||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||
| Prepaid card load assets | ||||||||||||||||
| Customer deposits | ||||||||||||||||
| Merchant reserves | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Ending cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves: | ||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||
| Prepaid card load assets | ||||||||||||||||
| Customer deposits | ||||||||||||||||
| Merchant reserves | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
New Accounting Pronouncements: In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326), to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in Topic 326 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Topic 326 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies. The Company does not expect the adoption of the amendments in ASU 2016-13 to have a significant effect on its financial position and the results of its operations when such amendment is adopted.
Accounting standards that have been issued or proposed by the FASB, the SEC or other standard setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
Note 2. Leases
The Company leases facilities and office equipment under various operating leases, which generally are expected to be renewed or replaced by other leases. For the quarters ended June 30, 2022 and 2021, operating lease expenses totaled $
Note 3. Accrued Expenses
Accrued expenses consisted of the following balances:
| June 30, 2022 |
December 31, 2021 |
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| Accrued commissions |
$ | $ | ||||||
| Reserve for processing losses |
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| Other accrued expenses |
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| Accrued taxes |
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| Accrued salaries |
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| Total accrued expenses |
$ | $ | ||||||
Note 4. Equipment Loan
On March 20, 2021, the Company entered into a debt arrangement to finance $
Note 5. Stockholders' Equity
Stock Warrants: On August 21, 2018, the Company issued University FanCards, LLC a warrant to purchase
On August 12, 2020, the Company issued
On February 5, 2021, the Company issued
On September 1, 2021, the Company issued
On December 15, 2020, the Company issued to Information Management Solutions, LLC warrants to purchase
Note 6. Net (Loss) Per Share
Basic (loss) per share (EPS) was computed by dividing net (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS differs from basic EPS due to the assumed conversion of potentially dilutive awards and options that were outstanding during the period. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net (loss) for the three and six months ended June 30, 2022 and June 30, 2021.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Numerator: | ||||||||||||||||
| Numerator for basic and diluted income (loss) per share, net income (loss) available to common shareholders | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Denominator: | ||||||||||||||||
| Denominator for basic income (loss) per share, weighted average shares outstanding | ||||||||||||||||
| Effect of dilutive securities | ||||||||||||||||
| Denominator for diluted earnings per share, adjust weighted average shares and assumed conversion | ||||||||||||||||
| Basic income (loss) per common share | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Diluted income (loss) per common share and common share equivalent | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
The awards and options to purchase shares of common stock that were outstanding at June 30, 2022 and June 30, 2021 that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive, are as follows:
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Anti-dilutive awards and options | ||||||||
Note 7. Income Taxes
Deferred tax assets and liabilities are recorded based on the difference between financial reporting and tax basis of assets and liabilities and are measured by the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Deferred tax assets are computed with the presumption that they will be realizable in future periods when taxable income is generated. Predicting the ability to realize these assets in future periods requires judgment by management. U.S. generally accepted accounting principles prescribe a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Income tax benefits that meet the “more likely than not” recognition threshold should be recognized.
The Company has recognized a net deferred tax asset of approximately $
At December 31, 2021, the Company had available net operating loss carryforwards of approximately $
Net operating loss carryforwards totaling $
| Tax Year End | NOL | Expiration | ||||||
| 2002 | $ | 2022 | ||||||
| 2004 | 2024 | |||||||
| 2005 | 2025 | |||||||
| 2006 | 2026 | |||||||
| 2007 | 2027 | |||||||
| 2008 | 2028 | |||||||
| 2009 | 2029 | |||||||
| 2010 | 2030 | |||||||
| 2013 | 2033 | |||||||
| 2016 | 2036 | |||||||
| 2017 | 2037 | |||||||
| Total | $ | |||||||
Effective for tax years ending in 2018, net operating losses can be carried forward to future years indefinitely. Net operating losses generated in 2018 and later total $
| Tax Year End | NOL | |||
| 2018 | $ | |||
| 2019 | ||||
| 2020 | ||||
| Total | $ | |||
| Total loss carryforwards | $ | |||
Management is not aware of any tax positions that would have a significant impact on the Company’s financial position.
Note 8. Related Party Transactions
Louis Hoch
During the six months ended June 30, 2022 and the year ended December 31, 2021, the Company purchased a total of $
Directors and Officers
On January 6, 2022, the Company repurchased
On January 6, 2021, the Company repurchased
The Company granted
On April 1, 2021, the Company granted
Note 9. COVID-19
The ongoing COVID-19 pandemic has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses, “shelter in place” and other governmental regulations, reduced consumer spending due to both job losses and other effects attributable to the COVID-19 pandemic. There remain many uncertainties as a result of the pandemic. As a result of the spread of COVID-19, economic uncertainties could continue to impact our operations. Any potential incremental financial impact is unknown at this time.
During 2020 and 2021, the government issued several rounds of COVID-19 relief and stimulus payments and other programs to stimulate economic activity and facilitate an economic recovery.
In April and May of 2020, the Company's business was adversely affected as doctor's offices, dental offices, veterinarian offices and non-bank consumer lending accounts were ordered closed in connection with curbing the spread of the pandemic. As these doctors, dental and veterinarian offices re-opened, these businesses quickly recovered and returned to levels higher than pre-COVID. Consumer lending merchants were adversely affected by COVID relief payments made during the pandemic and a pause placed on past due amounts owed. The level of activity for consumer lending merchants continues to recover to pre-COVID levels. The Company recorded an increase in revenues in its prepaid business line, as it was able to work in conjunction with major cities across the U.S. to use its prepaid debit cards to facilitate the transfer of money via its debit cards from city foundations to the local residents in need of financial assistance. The efforts have included the disbursement of funds to encourage vaccinations.
The Company has recently experienced some difficulty in recruiting and retaining certain categories of employees due to limited labor availability. The Company continues to monitor labor availability and is taking necessary steps to retain employees and recruit employees to fill open positions.
Due to the COVID-19 pandemic and global economic challenges, supply chain issues have resulted in a reduced supply, and growing demand of paper and paper products utilized in our Output Solutions line of business. Sourcing inventory remains a key challenge to execute jobs and projects with existing and new customers. If the Company cannot continue to acquire sufficient inventory stock, the successful completion, margins, and growth of Output Solutions may be impacted.
The impacts and recovery from the COVID-19 pandemic are still a work in process. To date, the Company has not been adversely impacted in the magnitude that other payment processors were, as our customer base had limited exposure to retail facing businesses. Within that framework, the Company will continue to monitor the overall impact on its operations and take necessary steps to ensure the safety of its employees and the well-being of its customers.
Note 10. Subsequent Events
In early July, 2022, the Company's largest ACH customer filed chapter 11 bankruptcy and stopped processing transactions. The customer represented
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 the Securities 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 ended December 31, 2021, filed on March 17, 2022, including the audited consolidated financial statements and the notes contained therein.
Name Change
Effective on June 26, 2019, we changed our corporate name from Payment Data Systems, Inc. to Usio, Inc.
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.
We offer customizable prepaid cards companies use for expense management, incentives, refunds, claims and disbursements, unique forms of compensation like per diems, government disbursements, and more. 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. UsioCard platform supports Apple Pay®, Samsung Pay™ and Google Pay™. Our PIN-less debit product allows merchants to debit and credit accounts in real-time. In our over 20-year history, we have created a loyal customer base that relies on us for our convenient, secure, innovative and adaptive services and technology, and we have built long-standing and valuable relationships with premier banking institutions such as Fifth-Third Bank, Sunrise Bank, and Wells Fargo Bank.
During the second quarter of 2022, the amount of credit card transactions processed increased by 35% versus the second quarter of 2021. The volume of credit card dollars processed during the second quarter of 2022 increased by 9% compared to the same time period in 2021. Both credit card transactions processed and dollars processed were the highest in our history. The continued growth in credit card metrics was primarily attributable to our PayFac growth initiatives driving increased penetration across multiple industries including healthcare and legal.
ACH (eCheck) transaction counts during the second quarter of 2022 decreased by 8% compared to the second quarter of 2021. Returned check transactions processed during the second quarter of 2022 increased by 39% compared to the second quarter of 2021. Electronic check dollars processed during the second quarter of 2022 decreased by 16% compared to the second quarter of 2021. The decreases in eCheck transactions and electronic check dollar volumes processed were primarily attributable to significant higher cryptocurrency activity levels in the prior year period versus the current year period. Increases in returned check transactions was 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 second quarter of 2022 increased by 81% compared to the second quarter of 2021. Prepaid card transaction counts processed during the second quarter of 2022 increased by 190% compared to the second quarter of 2021. Prepaid card purchase volume during the second quarter of 2022 increased by 139% compared to the second quarter of 2021. These increases occurred primarily due to the continued associations with many government assistance programs including organizations such as New York City Economic Development Corporation, City of Houston, Harris County, TX, Open Society International (City of Baltimore), and Greater Washington Community Foundation (Washington DC) with their vaccine incentive and cash disbursement programs. We also continue to support numerous guaranteed income programs including the Arlington Community Foundation, E.A.T (Equity and Transformation) Chicago, and Hudson UP, the City of Denver's Basic Income Project.
Total dollar volumes processed across all business lines in the second quarter of 2022 were $2.4 billion compared to $2.7 billion processed in the second quarter of 2021.
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 with U.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.
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 in December 2020, we now offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services through our Output Solutions entity.
| Three Months Ended June 30, |
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| 2022 |
2021 |
$ Change |
% Change |
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| ACH and complementary service revenue |
$ | 3,899,612 | $ | 4,001,897 | $ | (102,285 | ) | (3 | )% | |||||||
| Credit card revenue |
6,885,697 | 6,558,076 | 327,621 | 5 | % | |||||||||||
| Prepaid card services revenue |
1,388,110 | 1,077,531 | 310,579 | 29 | % | |||||||||||
| Output solutions revenue |
4,042,267 | 3,595,637 | 446,630 | 12 | % | |||||||||||
| Total Revenue |
$ | 16,215,686 | $ | 15,233,141 | $ | 982,545 | 6 | % | ||||||||
| Six Months Ended June 30, |
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| 2022 |
2021 |
$ Change |
% Change |
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| ACH and complementary service revenue |
$ | 7,742,928 | $ | 7,080,353 | $ | 662,575 | 9 | % | ||||||||
| Credit card revenue |
13,653,919 | 12,281,785 | 1,372,134 | 11 | % | |||||||||||
| Prepaid card services revenue |
4,156,557 | 1,964,107 | 2,192,450 | 112 | % | |||||||||||
| Output solutions revenue |
8,773,625 | 7,368,446 | 1,405,179 | 19 | % | |||||||||||
| Total Revenue |
$ | 34,327,029 | $ | 28,694,691 | $ | 5,632,338 | 20 | % | ||||||||
Revenues for the quarter ended June 30, 2022 increased by 6% to $16.2 million, as compared to $15.2 million for the quarter ended June 30, 2021 due to continued traction and growth in our prepaid and PayFac lines of business, despite a minor decline in our ACH and complimentary services business sector. This decline was a result of ACH competing against an outsized year ago quarter when cryptocurrency activity was at its peak. During the second quarter we saw continued growth in our prepaid card services category due to strong relationships with government and municipality card programs.
Revenues for the six months ended June 30, 2022 increased by 20% to $34.3 million, as compared to $28.7 million for the six months ended June 30, 2021.
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 $1.9 million, or 17%, to $13.0 million for the quarter ended June 30, 2022, as compared to $11.1 million for the same period in the prior year.
Cost of services increased by $5.9 million, or 27%, to $27.6 million for the six months ended June 30, 2022, as compared to $21.7 million for the same period in the prior year.
Increases in cost of services are due to growing revenues and their associated costs, compounded by more significant revenue growth in lower margin lines of business, versus ACH, which is our most profitable business line.
Gross Profit
Gross profit is the net profit existing after the cost of services.
Gross profits decreased by 21% to $3.3 million for the quarter ended June 30, 2022, as compared to $4.1 million for the same period in the prior year. Similarly, the gross margin percentage was 20.1% for the quarter ended June 30, 2022 as compared to 27.1% in the prior year period. The decrease in gross profits and margin percentage in the quarter ended June 30, 2022, as compared to the same period a prior year ago, is attributable to increased revenue contribution from business lines with lower profit margins, as well as decreased ACH and complementary service revenues, a high margin business.
Gross profits decreased by 4% to $6.8 million for the six months ended June 30, 2022, as compared to $7.0 million for the same period in the prior year. Similarly, the gross margin percentage was 19.7% for the six months ended June 30, 2022 as compared to 24.5% in the prior year period. The decrease in gross profits and margin percentage in the six months ended June 30, 2022, as compared to the same period a prior year ago, is 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 ended June 30, 2022 as compared to $0.3 million for the quarter ended June 30, 2021, an increase of 49.3%.
Stock-based compensation expenses were $1.0 million for the six months ended June 30, 2022 as compared to $0.6 million for the six months ended June 30, 2021, an increase of 58.8%.
Other Selling, General and Administrative Expenses
Other selling, general and administrative expenses (other SG&A) were $3.8 million for the quarter ended June 30, 2022 as compared to $2.8 million in the prior year, a 35% increase versus the prior year period. The increase in other SG&A for the quarter ended June 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. Beginning in the third quarter, we believe expenses should start to decrease due to a reduction in customer service and other prepaid services expenses attributable to the loss of any existing or anticipated Voyager card programs.
Other selling, general and administrative expenses (other SG&A) were $7.6 million for the six months ended June 30, 2022 as compared to $5.5 million in the prior year, a 39% increase versus the prior year period. The increase in other SG&A for the six months ended June 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. Beginning in the third quarter, we believe expenses should start to decrease due to a reduction in customer service and other prepaid services expenses attributable to the loss of any existing or anticipated Voyager card programs.
Depreciation and Amortization
Depreciation and amortization totaled $0.8 million and $0.6 million for the quarters ended June 30, 2022 and June 30, 2021, respectively.
Depreciation and amortization totaled $1.5 million and $1.2 million for the six months ended June 30, 2022 and June 30, 2021, respectively.
Other Income (Expense)
Other income and expense, net was $82 for the quarter ended June 30, 2022 compared to $685 for the quarter ended June 30, 2021. Lower interest-bearing merchant reserves and lower interest rates drove the lower interest income as well as interest expense associated with our equipment loan.
Other income and expense, net was ($554) for the six months ended June 30, 2022 compared to $3,152 for the six months ended June 30, 2021. Lower interest-bearing merchant reserves and lower interest rates drove the lower interest income as well as interest expense associated with our equipment loan.
Net Income (Loss)
We reported a net loss of $1.9 million for the quarter ended June 30, 2022, as compared to a net income of $0.2 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 $3.6 million for the six months ended June 30, 2022, as compared to a net loss of $0.5 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.
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.
Liquidity and Capital Resources
At June 30, 2022, we had $5.1 million of cash and cash equivalents, as compared to $7.3 million of cash and cash equivalents at December 31, 2021.
We reported a net loss of $1.9 million for the quarter ended June 30, 2022. At June 30, 2022, we had an accumulated deficit of $68.9 million. Additionally, we had working capital of $6.8 million and $8.8 million at June 30, 2022 and December 31, 2021, respectively.
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 six months ended June 30, 2022 was $22.1 million, and net cash provided for the six months ended June 30, 2021 was $2.6 million. Excluding merchant reserves, prepaid card load assets, customer deposits and lease right-of-use assets and liabilities, our cash used by operating activities was $1.2 million and cash provided by operating activities was $1.1 million for the six months ended June 30, 2022 and June 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 $411,818 and $533,854 for the six months ended June 30, 2022 and June 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.
Net cash used by financing activities for the six months ended June 30, 2022 was $573,699 and net cash provided by financing activities for the three months ended June 30, 2021 was $73,511, respectively. The 2021 cash provided by financing activities was from net proceeds from our equipment loan offset by treasury stock transactions.
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
Item 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive and Chief Financial Officers, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report on Form 10-Q. Based on that evaluation, our Chief Executive and Chief Financial Officers concluded that our disclosure controls and procedures as of June 30, 2022 were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive and Chief Financial Officers, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our evaluation of disclosure controls and procedures included an evaluation of certain components of our internal control over financial reporting. Management’s assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance that the control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
KDHM, LLC
On September 1, 2021, KDHM, LLC sued PDS Acquisition Corp, now known as Usio Output Solutions, Inc., claiming a breach of the asset purchase agreement executed by the parties on December 14, 2020. The lawsuit alleges that due to a mistake, accident, or inadvertence, certain customer deposits in the amount of $317,000 were improperly transferred to us.
We believe that plaintiff's claims in the lawsuit have no merit and contradict the express terms of the asset purchase agreement. As a result of this post sale dispute, we discovered that KDHM, LLC, and its principals, made certain misrepresentations and breached the terms of the asset purchase agreement.
On September 28, 2021, we filed an answer generally denying plaintiff’s allegations. On October 5, 2021, we filed a counterclaim and third-party petition. Therein, we allege that neither KDHM nor its principals disclosed that KDHM was not accounting for the customer deposits in accordance with Generally Accepted Accounting Principles. Yet, KDHM, and third-party defendants its principals Henry Minten and Thomas Dowe, affirmatively represented and warranted in section 3.1(e) of the agreement that “[t]Annual Financial Statements and the Interim Financial Statements have been prepared from the books and records of Seller in accordance with GAAP applied on a consistent basis.”
We also discovered that KDHM by and through its principals failed to disclose that $305,000 in additional customer deposits existed and these deposits were not conveyed to us as required by the agreement. KDHM, Minten and Dowe provided us with fraudulent and misleading profit and loss statements that did not disclose these additional customer deposits. KDHM and the defendants do not dispute that these additional customer deposits exist and that they were purchased by Usio. However, despite a written representation that these funds would be returned, KDHM and its principal have held these funds hostage. Section 2.1(b)(x) of the agreement provides that the purchased assets includes “All of Seller’s deposits from its customer, including without limitation, those customer deposits listed on Schedule 2.1(b)(xi) of the Disclosure Schedules.” Finally, we discovered that KDHM did not provide us with all customer lists, which are identified as purchased asset under the agreement. We demanded the missing customer lists, but they have yet to be provided to us per the agreement.
In our counterclaims and third-party petition, we assert causes of action for fraud, breach of contract and conversion. At this time, the parties have not engaged in any written discovery or depositions and no trial date has been set.
We consider the risk of loss as remote related to this lawsuit.
Aside from the proceedings described above, we may be involved in legal matters arising in the ordinary course of business from time to time. While we believe that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which we are or could become involved in litigation will not have a material adverse effect on our business, financial condition or results of operations.
There have been no material changes from risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the Securities and Exchange Commission on March 17, 2022.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Recent Sales of Unregistered Securities
We did not issue unregistered securities during the quarter ended June 30, 2022.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On November 2, 2016, we announced that our Board of Directors authorized the repurchase of up to $1 million of our common shares from time to time on the open market, in block transactions, or in privately negotiated transactions. On January 9, 2018, the Board of Directors added an additional $2 million to the buyback plan. The program began on November 16, 2016 and ended on September 29, 2019. At September 29, 2019 when the program ended, $1,374,049 was available under the repurchase plan. On November 7, 2019, the Board of Directors approved the renewal of the share buy-back program. The Board approved a limit of $1,420,000 which was rolled over from the prior buy-back program with a three-year duration. On May 13, 2022, the Board of Directors authorized a renewal of the buy-back program, with a limit up to $4 million of the Company's common stock with a three year duration. The new buyback program terminates on the earliest of May 15, 2025, the date the funds are exhausted, or the date the Board of Directors, at its sole discretion, terminates or suspends the program. The program is used for the purchase of stock from employees and directors, and for open-market purchases through a broker. During the three months ended June 30, 2022, we made the following stock repurchases:
| Period |
(a) Total number of shares (or units) purchased | (b) Average price paid per share (or unit) | (c) Total number of shares (or units) purchased as part of publicly announced plans or programs | (d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs | ||||||||||||
| April 1 - April 30, 2022 |
1,961 | $ | 3.43 | 1,003,398 | $ | 808,438 | ||||||||||
| May 1 - May 31, 2022 |
25,870 | $ | 2.34 | 1,029,268 | $ | 3,939,477 | ||||||||||
| June 1 - June 30, 2022 |
163,362 | $ | 2.53 | 1,192,630 | $ | 3,526,637 | ||||||||||
| Total |
191,193 | $ | 3,526,637 | |||||||||||||
Item 3. Defaults Upon Senior Securities.
None.
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
None.
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| 3.6 | Amendment to the Amended and Restated By-laws (included as exhibit A to Schedule 14C filed April 18, 2007, and incorporated herein by reference). | |
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Inline XBRL Taxonomy Extension Schema Document (filed herewith). |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith). |
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Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith). |
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Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith). |
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Inline XBRL Taxonomy Presentation Linkbase Document (filed herewith). |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
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Confidential treatment has been granted for portions of this agreement. |
| + | The schedules to the exhibit have been omitted from this filing pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish copies of any such schedules to the SEC upon request. | |
| * | Filed herewith. |
Copies of above exhibits not contained herein are available to any stockholder, upon written request to: Chief Financial Officer, Usio, Inc., 3611 Paesanos Parkway, Suite 300, San Antonio, TX 78231.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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USIO, INC |
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| Date: August 11, 2022 |
By: |
/s/ Louis A. Hoch |
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Louis A. Hoch |
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Chief Executive Officer |
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(Principal Executive Officer) |
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| Date: August 11, 2022 | By: |
/s/ Tom Jewell |
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Tom Jewell |
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Chief Financial Officer |
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(Principal Accounting Officer) |
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