Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 20222023

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________.

 

Commission File Number:000-30152

   

USIO, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

98-0190072

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 
   

3611 Paesanos Parkway, Suite 300, San Antonio, TX

 

78231

(Address of principal executive offices)

 

(Zip Code)

(210) 249-4100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name on each exchange on which registered

Common stock, par value $0.001 per share

USIO

The Nasdaq Stock Market LLC

 

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. ☒ Yes ☐ No

 

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). ☒ Yes ☐ No

 

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 ☐

Non-accelerated filer ☒

Smaller reporting company ☒

 

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). ☐ Yes ☒ No

 

As of August 11, 2022,9, 2023, the number of outstanding shares of the registrant's common stock was 25,188,217.26,385,331.

 

 

 

 

 

USIO, INC.

INDEX

 

 

 

Page

PART I – FINANCIAL INFORMATION

1

 

 

 

Item 1.

Financial Statements (Unaudited).

1

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 20222023 and December 31, 20212022

1

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 20222023 and 20212022

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 20222023 and 20212022

3

 

 

 

 

Condensed Consolidated Statements of Stockholders' Equity for the Three and Six Months ended June 30, 20222023 and 20212022

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

129

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

15

 

 

 

Item 4.

Controls and Procedures.

15

 

 

 

PART II – OTHER INFORMATION

16

 

 

 

Item 1.

Legal Proceedings.

16

 

 

 

Item 1A.

Risk Factors.

16

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

17

 

 

 

Item 3.

Defaults Upon Senior Securities.

17

 

 

 

Item 4.

Mine Safety Disclosures (Not applicable).

17

 

 

 

Item 5.

Other Information.

17

 

 

 

Item 6.

Exhibits.

18

 

 

 

 

PART IFINANCIAL INFORMATION

Item 1. Financial Statements.

 

USIO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

June 30, 2022

  

December 31, 2021

  

June 30, 2023

  

December 31, 2022

 
 

(Unaudited)

    

(Unaudited)

   

Assets

        

Current assets:

  

Cash and cash equivalents

 $5,102,061  $7,255,321  $6,575,124  $5,709,117 

Accounts receivable, net

 3,854,077  4,979,493  5,221,772  4,371,640 

Settlement processing assets

 36,927,255  63,824,646  45,060,670  49,737,068 

Prepaid card load assets

 15,104,808  36,590,893  46,398,476  20,170,761 

Customer deposits

 1,471,214  1,364,193  1,563,192  1,554,122 

Inventory

 488,382  434,532  482,170  507,355 

Prepaid expenses and other

  829,902   426,963   627,117   450,389 

Current assets before merchant reserves

 63,777,699  114,876,041  105,928,521  82,500,452 

Merchant reserves

  6,815,073   6,381,153   5,141,040   4,909,501 

Total current assets

 70,592,772  121,257,194  111,069,561  87,409,953 
  

Property and equipment, net

 3,432,039  3,607,157  3,006,347  3,222,816 
  

Other assets:

  

Intangibles, net

 3,227,962  4,163,894  2,189,427  2,625,360 

Deferred tax asset, net

 1,504,000  1,504,000  1,504,000  1,504,000 

Operating lease right-of-use assets

 3,083,555  2,802,113  2,680,527  2,795,483 

Other assets

  345,357   345,357   355,357   355,357 

Total other assets

  8,160,874   8,815,364   6,729,311   7,280,200 
  

Total assets

 $82,185,685  $133,679,715  $120,805,219  $97,912,969 
  

Liabilities and stockholders’ equity

        

Current liabilities:

  

Accounts payable

 $719,379  $1,400,100  $913,277  $858,622 

Accrued expenses

 2,177,000  2,325,665  3,802,854  3,721,108 

Operating lease liabilities, current portion

 579,442  504,027  663,354  617,319 

Equipment loan, current portion

 43,386  54,760  43,208  56,429 

Settlement processing obligations

 36,927,255  63,824,646  45,060,670  49,737,068 

Prepaid card load obligations

 15,104,808  36,590,893  46,398,476  20,170,761 

Customer deposits

 1,471,214  1,364,193   1,563,192   1,554,122 

Deferred revenues

  0   17,647 

Current liabilities before merchant reserve obligations

 57,022,484  106,081,931  98,445,031  76,715,429 

Merchant reserve obligations

  6,815,073   6,381,153   5,141,040   4,909,501 

Total current liabilities

 63,837,557  112,463,084  103,586,071  81,624,930 
  

Non-current liabilities:

  

Equipment loan, non-current portion

 55,698  71,434    14,994 

Operating lease liabilities, non-current portion

  2,690,378   2,476,291   2,157,933   2,338,947 

Total liabilities

 66,583,633  115,010,809  105,744,004  83,978,871 
  

Stockholders’ equity:

  

Preferred stock, $0.01 par value, 10,000,000 shares authorized; -0- shares outstanding at June 30, 2022 (unaudited) and December 31, 2021, respectively

 0  0 

Common stock, $0.001 par value, 200,000,000 shares authorized; 26,837,978 and 26,807,145 issued, and 25,295,875 and 25,473,453 outstanding at June 30, 2022 (unaudited) and December 31, 2021, respectively

 195,250  195,235 

Preferred stock, $0.01 par value, 10,000,000 shares authorized; -0- shares outstanding at June 30, 2023 (unaudited) and December 31, 2022, respectively

    

Common stock, $0.001 par value, 200,000,000 shares authorized; 28,462,606 and 27,044,900 issued, and 26,362,870 and 25,097,963 outstanding at June 30, 2023 (unaudited) and December 31, 2022, respectively

 196,888  195,471 

Additional paid-in capital

 93,468,139  93,100,129  96,853,243  94,048,603 

Treasury stock, at cost; 1,542,103 and 1,333,692 shares at June 30, 2022 (unaudited) and December 31, 2021, respectively

 (2,951,047) (2,404,458)

Treasury stock, at cost; 2,099,736 and 1,946,937 shares at June 30, 2023 (unaudited) and December 31, 2022, respectively

 (3,924,225) (3,749,027)

Deferred compensation

 (6,167,870) (6,842,195) (7,421,516) (5,697,900)

Accumulated deficit

  (68,942,420)  (65,379,805)  (70,643,175)  (70,863,049)

Total stockholders’ equity

  15,602,052   18,668,906   15,061,215   13,934,098 
  

Total liabilities and stockholders’ equity

 $82,185,685  $133,679,715  $120,805,219  $97,912,969 

 

See the accompanying notes to the condensed interim consolidated financial statements.

 

 

1

 

 

USIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

Three Months Ended June 30,

  

Six Months Ended June 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 
  

Revenues

 $16,215,686  $15,233,141  $34,327,029  $28,694,691  $21,261,706  $16,215,686  $42,707,950  $34,327,029 

Cost of services

  12,955,782   11,105,696   27,557,996   21,660,009   16,250,988   12,955,782   32,795,417   27,557,996 

Gross profit

 3,259,904  4,127,445  6,769,033  7,034,682  5,010,718  3,259,904  9,912,533  6,769,033 
  

Selling, general and administrative:

  

Stock-based compensation

 473,701  317,285  1,024,383  645,000  577,869  473,701  1,082,443  1,024,383 

Other SG&A expenses

 3,848,696  2,845,213  7,643,842  5,505,247  3,854,022  3,848,696  7,727,241  7,643,842 

Depreciation and amortization

  807,934   627,149   1,522,869   1,249,356   522,999   807,934   1,041,028   1,522,869 

Total selling, general and administrative expenses

  5,130,331   3,789,647   10,191,094   7,399,603   4,954,890   5,130,331   9,850,712   10,191,094 
  

Operating income (loss)

 (1,870,427) 337,798  (3,422,061) (364,921) 55,828  (1,870,427) 61,821  (3,422,061)
  

Other income and (expense):

  

Interest income

 1,166  2,169  1,747  4,636  218,844  1,166  311,772  1,747 

Interest expense

  (1,084)  (1,484)  (2,301)  (1,484)  (533)  (1,084)  (1,195)  (2,301)

Other income and (expense), net

 82 685 (554) 3,152  218,311 82 310,577 (554)
  

Income (Loss) before income taxes

  (1,870,345)  338,483   (3,422,615)  (361,769) 274,139  (1,870,345) 372,398  (3,422,615)

Income tax expense

  70,000   120,000   140,000   140,000   69,098   70,000   152,524   140,000 
  

Net income (Loss)

 $(1,940,345) $218,483  $(3,562,615) $(501,769)

Net Income (Loss)

 $205,041  $(1,940,345) $219,874  $(3,562,615)
  

Income (Loss) Per Share

                

Basic income (loss) per common share:

 $(0.10) $0.01  $(0.18) $(0.03) $0.01  $(0.10) $0.01  $(0.18)

Diluted income (loss) per common share:

 $(0.10) $0.01  $(0.18) $(0.03) $0.01  $(0.10) $0.01  $(0.18)

Weighted average common shares outstanding

  

Basic

 20,316,572  19,993,387  20,298,573  19,962,661  20,128,429  20,316,572  20,125,440  20,298,573 

Diluted

 20,316,572  24,962,389  20,298,573  19,962,661  26,413,329  20,316,572  26,410,340  20,298,573 

 

See the accompanying notes to the condensed interim consolidated financial statements.

    

2

 

 

USIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

Six Months Ended June 30,

  

Six Months Ended June 30,

 
 

2022

  

2021

  

2023

  

2022

 

Operating activities:

            

Net (loss)

 $(3,562,615) $(501,769)

Adjustments to reconcile net (loss) to net cash provided (used) by operating activities:

     

Net income (loss)

 $219,874  $(3,562,615)

Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:

     

Depreciation

 586,936  313,423  605,095  586,936 

Amortization

 935,933  935,933  435,933  935,933 

Bad debt

 0 86,402 

Non-cash stock-based compensation

 1,024,383  645,000 

Stock-based compensation

 1,082,443  1,024,383 

Amortization of warrant costs

 17,970  17,970    17,970 

Non-cash revenue from returned common stock

 (156,162)  

Changes in current assets and current liabilities:

          

Accounts receivable

 1,125,416  (383,213) (850,132) 1,125,416 

Prepaid expenses and other

 (402,939) (130,662) (176,728) (402,939)

Operating lease right-of-use assets

 (281,442) (367,654) 114,956  (281,442)

Other assets

 0  (45,883)

Inventory

 (53,850) (38,452) 25,185 (53,850)

Accounts payable and accrued expenses

 (829,390) 177,315  136,401  (829,390)

Operating lease liabilities

 289,502  377,957  (134,979) 289,502 

Prepaid card load obligations

 (21,486,085) 1,547,277  26,227,715  (21,486,085)

Merchant reserves

 433,920  (164,402) 231,539  433,920 

Customer deposits

 107,021 105,311  9,070 107,021 

Deferred revenue

  (17,647)  (22,454)     (17,647)

Net cash provided (used) by operating activities

 (22,112,887) 2,552,099  27,770,210  (22,112,887)
  

Investing activities:

            

Purchases of property and equipment

  (411,818)  (533,854)  (388,628)  (411,818)

Net cash (used) by investing activities

 (411,818) (533,854) (388,628) (411,818)
  

Financing activities:

            

Proceeds from equipment loan

 0 165,996 

Payments on equipment loan

 (27,110) (13,221) (28,215) (27,110)

Purchases of treasury stock

  (546,589)  (79,264)  (19,036)  (546,589)

Net cash provided (used) by financing activities

  (573,699)  73,511 

Net cash (used) by financing activities

  (47,251)  (573,699)
  

Change in cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves

 (23,098,404) 2,091,756  27,334,331  (23,098,404)

Cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves, beginning of period

  51,591,560   22,192,225   32,343,501   51,591,560 
  

Cash, Cash Equivalents, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End of Period

 $28,493,156  $24,283,981  $59,677,832  $28,493,156 
  

Supplemental disclosure of cash flow information:

            

Cash paid during the period for:

          

Interest

 $2,301  $1,484  $1,195  $2,301 

Income taxes

 0  92,850  312,158   

Non-cash transactions:

     

Non-cash financing activities:

     

Issuance of deferred stock compensation

 12,330 0  2,478,506 12,330 

 

See accompanying notes to the condensed interim consolidated financial statements.

 

3

 

 

USIO, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(UNAUDITED)

 

 

Common Stock

 

Additional Paid- In

 

Treasury

 

Deferred

 

Accumulated

 

Total Stockholders'

  

Common Stock

 

Additional Paid- In

 

Treasury

 

Deferred

 

Accumulated

 

Total Stockholders'

 
 

Shares

  

Amount

  

Capital

  

Stock

  

Compensation

  

Deficit

  

Equity

  

Shares

  

Amount

  

Capital

  

Stock

  

Compensation

  

Deficit

  

Equity

 
 

Balance at December 31, 2022

 27,044,900  $195,471  $94,048,603  $(3,749,027) $(5,697,900) $(70,863,049) $13,934,098 
 

Issuance of common stock under equity incentive plan

 1,421,250  1,421  2,638,529    (2,444,054)   195,896 

Deferred compensation amortization

         308,676    308,676 

Purchase of treasury stock costs

       (8,529)     (8,529)

Net income for the period

                 14,833   14,833 
 

Balance at March 31, 2023

  28,466,150  $196,892  $96,687,132  $(3,757,556) $(7,833,278) $(70,848,216) $14,444,974 
 

Issuance of common stock under equity incentive plan

 111,456 111 354,199  (34,452)  319,858 

Reversal of deferred compensation amortization that did not vest

 (115,000) (115) (188,088)  103,091  (85,112)

Deferred compensation amortization

     343,123  343,123 

Purchase of treasury stock costs

    (10,507)   (10,507)

Non-cash return of common stock

       (156,162)     (156,162)

Net income for the period

            205,041  205,041 
 

Balance at June 30, 2023

  28,462,606 $196,888 $96,853,243 $(3,924,225) $(7,421,516) $(70,643,175) $15,061,215 
  

Balance at December 31, 2021

 26,807,145  $195,235  $93,100,129  $(2,404,458) $(6,842,195) $(65,379,805) $18,668,906  26,807,145  $195,235  $93,100,129  $(2,404,458) $(6,842,195) $(65,379,805) $18,668,906 
  

Issuance of common stock under equity incentive plan

 61,600  62  267,856  0  (12,330) 0  255,588  61,600 62 267,856  (12,330)  255,588 

Warrant compensation costs

   0  8,985  0  0  0  8,985    8,985    8,985 

Deferred compensation amortization

         295,092    295,092      295,092  295,092 

Purchase of treasury stock costs

   0  0  (66,494) 0  0  (66,494)    (66,494)   (66,494)

Net (loss) for the period

     0   0   0   0   (1,622,270)  (1,622,270)            (1,622,270)  (1,622,270)
  

Balance at March 31, 2022

  26,868,745  $195,297  $93,376,970  $(2,470,952) $(6,559,433) $(67,002,075) $17,539,807   26,868,745  $195,297  $93,376,970  $(2,470,952) $(6,559,433) $(67,002,075) $17,539,807 
  

Issuance of common stock under equity incentive plan

 54,233  52  258,636  0  0  0  258,687  54,233 52 258,636    258,688 

Warrant compensation costs

   0  8,985  0  0  0  8,985    8,985    8,985 

Reversal of deferred compensation amortization that did not vest

 (85,000) (85) (176,465)  97,621  (78,929) (85,000) (85) (176,465)  97,621  (78,929)

Deferred compensation amortization

         293,942    293,942      293,942  293,942 

Purchase of treasury stock costs

   0  0  (480,095) 0  0  (480,095)    (480,095)   (480,095)

Net (loss) for the period

    0  0  0  0  (1,940,345)  (1,940,345)            (1,940,345)  (1,940,345)
  

Balance at June 30, 2022

  26,837,978 $195,264 $93,468,126 $(2,951,047) $(6,167,870) $(68,942,420) $15,602,052   26,837,978 $195,264 $93,468,126 $(2,951,047) $(6,167,870) $(68,942,420) $15,602,053 
 

Balance at December 31, 2020

 26,260,776  $194,692  $89,659,433  $(2,165,721) $(5,926,872) $(65,058,171) $16,703,361 
 

Issuance of common stock under equity incentive plan

 51,000 51 120,484 0 0 0 120,535 

Warrant compensation costs

  0 8,985 0 0 0 8,985 

Cashless warrant exercise

 19,795 19 (19)     

Reversal of deferred compensation amortization that did not vest

 (17,111) (17) (48,599) 0 5,994 0 (42,622)

Deferred compensation amortization

  0 0 0 249,801 0 249,801 

Purchase of treasury stock costs

  0 0 (49,454) 0 0 (49,454)

Net (loss) for the period

     0   0   0   0   (720,252)  (720,252)
 

Balance at March 31, 2021

  26,314,460  $194,745  $89,740,284  $(2,215,175) $(5,671,077) $(65,778,423) $16,270,354 
 

Issuance of common stock under equity incentive plan

 61,556 61 150,481 0 0 0 150,542 

Warrant compensation costs

  0 8,985 0 0 0 8,985 

Reversal of deferred compensation amortization that did not vest

 (115,000) (115) (237,085) 0 158,096 0 (79,104)

Deferred compensation amortization

  0 0 0 245,847 0 245,847 

Purchase of treasury stock costs

  0 0 (29,810) 0 0 (29,810)

Net income for the period

    0  0  0  0  218,483  218,483 
 

Balance at June 30, 2021

  26,261,016 $194,691 $89,662,665 $(2,244,985) $(5,267,134) $(65,559,940) $16,785,297 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4

 

USIO, INC.

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(collectively, the “Company”) have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.Commission (the "Commission"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles ("GAAP") 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, 2021,2022, as filed with the Securities and Exchange Commission on March 17, 2022.8, 2023, and as amended by Form 10-K/A Amendment No.1 filed with the Commission on May 1, 2023 (together, the "2022 Annual Report"). 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. References in this quarterly report to "the quarter" or the "second quarter" mean the three month period ended June 30, 2023 or 2022, as the case may be and unless otherwise noted.

 

Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principlesGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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. Our subsidiary, 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 consolidated revenues by source:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

ACH and complementary service revenue

 $3,899,612  $4,001,897  $7,742,928  $7,080,353 

Credit card revenue

  6,885,697   6,558,076   13,653,919   12,281,785 

Prepaid card services revenue

  1,388,110   1,077,531   4,156,557   1,964,107 

Output solutions revenue

  4,042,267   3,595,637   8,773,625   7,368,446 

Total revenue

 $16,215,686  $15,233,141  $34,327,029  $28,694,691 

 

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 $0 and $17,647 at June 30, 2022 and December 31, 2021, respectively.

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2023

  

2022

  

2023

  

2022

 
                 

ACH and complementary service revenue

 $4,079,157  $3,899,612  $7,419,879  $7,742,928 

Credit card revenue

  7,115,884   6,885,697   14,455,782   13,653,919 

Prepaid card services revenue

  5,217,468   1,388,110   10,024,872   4,156,557 

Output solutions revenue

  4,849,197   4,042,267   10,807,417   8,773,625 

Total revenue

 $21,261,706  $16,215,686  $42,707,950  $34,327,029 

 

Cash and Cash Equivalents:Cash and cash equivalents includes cash and other money market instruments. The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents.

 

Settlement Processing Assets and Obligations:Settlement processing assets and obligations represent intermediary balances arising in our settlementprocess for merchants.

 

Customer Deposits: The Company holds customer deposits primarily for postage expenses to ensure the Company is not out of pocket for amounts billed daily by the United States Postal Service.  These customer deposits are carried on the Company's balance sheet with a corresponding liability.

Merchant Reserves: The Company has merchant reserve requirements associated with Automated Clearing House ("ACH") transactions. The merchant reserve assets are carried on the Company's balance sheet with a corresponding liability. Merchant Reserves are set for each merchant. Funds are collected from each merchant and held as collateral to minimize contingent liabilities associated with any losses that may occur under the merchant agreement. While this cash is not restricted in its use, the Company believes that designating this cash to collateralize Merchant Reserves strengthens its fiduciary standing with the Company's member sponsors and is in accordance with the guidelines set by the card networks.

5

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.

 

Customer Deposits: The Company holds customer deposits primarily for postage expenses to ensure the Company is not out of pocket for amounts billed daily by the USPS. These customer deposits are carried on the Company's balance sheet with a corresponding liability.

Merchant Reserves: The Company has merchant reserve requirements associated with Automated Clearing House, or ACH, transactions. The merchant reserve assets are carried on the Company's balance sheet with a corresponding liability. Merchant reserves are set for each merchant and funds are collected and held as collateral to minimize contingent liabilities associated with any losses that may occur. While this cash is not restricted in its use, the Company believes that designating this cash to collateralize merchant reserves strengthens the Company's standing with its member sponsors and is in accordance with the guidelines set by the card networks.

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,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 
  

Beginning cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves:

  

Cash and cash equivalents

 $7,590,951  $4,284,360  $7,255,321  $5,011,132  $6,763,813  $7,590,951  $5,709,117  $7,255,321 

Prepaid card load assets

 28,846,980  18,555,474  36,590,893  7,610,242  18,812,954  28,846,980  20,170,761  36,590,893 

Customer deposits

 1,391,465  1,357,242  1,364,193  1,305,296  1,575,075  1,391,465  1,554,122  1,364,193 

Merchant reserves

  6,386,153   8,317,462   6,381,153   8,265,555   4,744,615   6,386,153   4,909,501   6,381,153 

Total

 $44,215,549  $32,514,538  $51,591,560  $22,192,225  $31,896,457  $44,215,549  $32,343,501  $51,591,560 
  

Ending cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves:

  

Cash and cash equivalents

 $5,102,061  $5,614,702  $5,102,061  $5,614,702  $6,575,124  $5,102,061  $6,575,124  $5,102,061 

Prepaid card load assets

 15,104,808  9,157,519  15,104,808  9,157,519  46,398,476  15,104,808  46,398,476  15,104,808 

Customer deposits

 1,471,214  1,410,607  1,471,214  1,410,607  1,563,192  1,471,214  1,563,192  1,471,214 

Merchant reserves

  6,815,073   8,101,153   6,815,073   8,101,153   5,141,040   6,815,073   5,141,040   6,815,073 

Total

 $28,493,156  $24,283,981  $28,493,156  $24,283,981  $59,677,832  $28,493,156  $59,677,832  $28,493,156 

 

Allowance for Estimated Losses:The Company maintains an allowance for estimated doubtful accounts receivable resulting from the inability or failure of the Company’s customers to make required payments. The Company determines the allowance for estimated doubtful accounts receivable losses based on an account-by-account review, taking into consideration such factors as the age of the outstanding balance, historical pattern of collections, and financial condition of the customer. PastDuring the six months ended June 30, 2023 and the year ended December 31, 2022, there were no losses due to bad debt. In the past, losses incurred by the Company due to bad debts have beenwere within its expectations. If the financial conditions of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make contractual payments, additional allowances might losses may be required.incurred in future periods. Estimates for doubtful account losses are variable based on the volume of transactions processed and could increase or decrease accordingly. The allowance for estimated doubtful accounts was $319,000 at June 30, 20222023 and December 31, 20212022.

 

Inventory: Inventory is stated at the lower of cost or net realizable value. At June 30, 20222023 and December 31, 2021,2022, inventory consisted primarily of printing and paper supplies used for Output solutions.Solutions.

 

Accounting for Internal Use Software: The Company capitalizes the costs associated with software being developed or obtained for internal use when both the preliminary project stage is completed and it is probable that computer software being developed will be completed and placed-inplaced in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (iii) interest costs incurred, when material, while developing internal-use software. The Company ceases capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose. InDuring the six months ended June 30, 20222023 and June 30, 20212022, the Company capitalized $246,210software costs of $378,197 and $388,349,$246,210, respectively.

 

Valuation of Long-Lived and Intangible Assets: The Company assesses the impairment of long-lived and intangible assets at least annually, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important, which could trigger an impairment review, include the following: significant under performanceunderperformance relative to historical or projected future cash flows; significant changes in the manner of use of the assets or the strategy of the overall business; and significant negative industry trends. When management determines that the carrying value of long-lived and intangible assets may not be recoverable, impairment is measured as the excess of the assets’ carrying value over the estimated fair value. NaNNo impairment losses were recorded in 20212022 or during the six months ended June 30, 20222023. Management is not aware of any impairment changes that may currently be required; however, the Company cannot predict the occurrence of events that might adversely affect the reported values in the future.

 

6

Reserve for Processing Losses: If, due to insolvency or bankruptcy of one of the Company’s merchant customers, or for any other reason, the Company is not able to collect amounts from its credit card, ACH or prepaid customers that have been properly "charged back" by the customer, or if a prepaid cardholder incurs a negative balance, the Company must bear the credit risk for the full amount of the transaction. The Company may require cash deposits and other types of collateral from certain merchants to minimize any such risks. In addition, the Company utilizes multiple systems and procedures to manage merchant risk. ACH, prepaid and credit card merchant processing loss reserves are primarily determined by performing a historical analysis of the Company’s loss experience, considering other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company’s relationship with the Company’s prepaid card holders. This reserve amount is subject to the risk that actual losses may be greater than the Company’s estimates. The Company has not incurred any significant processing losses to date. Estimates for processing losses are variable based on the volume of transactions processed and could increase or decrease accordingly. At June 30, 20222023 and December 31, 20212022, the Company’s reserve for processing losses was $689,494$769,789 and $623,494$755,494, respectively.

 

Legal Proceedings: The Company may be involved in legal matters arising in the ordinary course of business from time to time. While the Company believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation will not have a material adverse effect on its business, financial condition or results of operations.

 

New Recently AdoptedAccounting Pronouncements: In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses(Topic  (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 doesadopted the amendments effective January 1, 2023, and it has not expect the adoption of the amendments in ASU 2016-13 to havehad a significant effectmaterial impact on its financial position and the results of its operations when suchoperations. The Company will continue to monitor the adoption of this amendment is adopted.in order to evaluate if it has any material effect on its financial position and results of operations.

 

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.

 

75

 

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 each of the quartersthree months ended June 30, 20222023 and 20212022, operating lease expenses totaled $257,038 and $239,105, and $123,134, respectively.

 

Note 3. Accrued Expenses

 

Accrued expenses consisted of the following balances:

 

 

June 30, 2022

  

December 31, 2021

  

June 30, 2023

  

December 31, 2022

 
  

Accrued commissions

 $745,210  $879,120  $2,391,712  $1,479,580 

Reserve for processing losses

 689,494  623,494  769,789  755,494 

Other accrued expenses

 255,775  226,888  139,764  821,167 

Accrued taxes

 185,995  298,168  160,610  320,854 

Accrued salaries

  300,526   297,995   340,979   344,013 

Total accrued expenses

 $2,177,000  $2,325,665  $3,802,854  $3,721,108 

 

Note 4. Equipment Loan

 

On March 20, 2021, the Company entered into a debt arrangement to finance $165,996 for the purchase of an Output Solutions sorter. The loan is for a period of 36 months with a maturity date of March 20, 2024.2024 The repayment amount is for 36 months at $4,902 per month. Annual payments are $58,821. The financing is at anand annual interest rate of 3.95%. Current periodMonthly principal and interest payments onare required in the equipment loanamount of $4,902. Principal payments for the three months ended June 30, 2023 and 2022 were $13,622.$14,171 and $13,622, respectively.

 

Note 5. Stockholders' Equity

 

Stock Warrants: On August 21, 2018, the Company issued University FanCards, LLC a warrantwarrants to purchase 150,000 shares of the Company's common stock.stock, which were subject to the following vesting schedule: (i) 30,000 warrants vested immediately upon the date on which the first financial transaction was processed, on a card account issued under the prepaid agreement, which occurred on October 5, 2018.2018; and (ii) 120,000 warrants vestvested annually over 4 years in 30,000 warrant increments beginning on July 31, 2019 and becoming fully vestedending on July 31, 2022. The exercise price for the initial 30,000 warrants that vested immediately on October 5, 2018 was $1.80 per share. The exercise price for the remaining 120,000 warrants will bewas the lesser of $2.00 per share or one hundred and twenty percent (120%) of the market price of the Company's common stock on the vesting date of the warrant. TheAt the time of issuance, the warrants were valued using the Black-Scholes option pricing model. Assumptions used were as follows: (i) the fair value of the underlying stock was $0.94 per share for the 30,000 warrants and $0.90 per share for the 120,000 warrants; (ii) the risk-free interest rate is 2.77%; (iii) the contractual life is 5 years; (iv) the dividend yield is 0%; and (v) the volatility is 64.6%. The fair value of the warrants was $135,764, which will bewas amortized over the life of the warrants as a reduction of revenues. The reduction of revenues as a result of this amortization recorded for the six months ended June 30, 20222023 and 20212022 was $17,970.$0 and $17,970, respectively.

 

On August 12, 2020,July 31, 2022, the Company issued 27,051 shares of common stock to University FanCards, LLC in a cashless exercise at $3.46 per common share in exchange for 60,000remaining, unvested warrants exercised by FanCards, LLC.

On February 5, 2021, expired, and the Company issued 19,795 sharesis no longer recording a reduction of common stock to University FanCards, LLC in a cashless exercise at $5.88 per common share in exchange for 30,000 warrants exercised by FanCards, LLC.

On September 1, 2021, revenues associated with the Company issued 19,950 sharesamortization of common stock to University FanCards, LLC in a cashless exercise at $5.97 per common share in exchange for 30,000 warrants exercised by FanCards, LLC.their fair value.

 

On December 15, 2020, the Company issued warrants to purchase 945,599 shares of the Company's common stock with an exercise price of $4.23 per share to Information Management Solutions, LLC warrants to purchase 945,599 unregistered shares of Usio, Inc. or 945,599 shares of common stock, $0.001 par value per share, with an exercise price of $4.23. 945,599("Management Solutions"). The Management Solutions' warrants vest annually over 3 years in three equal tranches beginning on December 15, 2021 and becomingbecome fully vested on December 15, 2023. TheAt the time of issuance, these warrants were valued using the Black-Scholes option pricing model. Assumptions used were as follows: (i) the fair value of the underlying stock was $0.58;0.58 per share; (ii) the risk-free interest rate iswas 0.09%; (iii) the contractual life iswas 5 years; (iv) the dividend yield ofwas 0%; and (v) the volatility iswas 59.9%. The fair value of the warrants amounted to $552,283 and will bewas recorded as an increase in the customer list asset and havehas a term of five years from time of vest.

8

these warrants, which is included in the total amortization expense of the customer list intangible asset, totaled $55,228 in the six months ended June 30, 2023 and 2022.

 

Note 6. Net Income (Loss) Per Share

 

Basic income (loss) per share (EPS) was computed by dividing net income (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 income (loss) for the three and six months ended June 30, 20222023 and June 30, 20212022.

 

 

Three Months Ended June 30,

  

Six Months Ended June 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 

Numerator:

  

Numerator for basic and diluted income (loss) per share, net income (loss) available to common shareholders

 $(1,940,345) $218,483  $(3,562,615) $(501,769) $205,041  $(1,940,345) $219,874  $(3,562,615)

Denominator:

  

Denominator for basic income (loss) per share, weighted average shares outstanding

 20,316,572  19,993,387  20,298,573  19,962,661  20,128,429  20,316,572  20,125,440  20,298,573 

Effect of dilutive securities

  0   4,969,002   0   0   6,284,900      6,284,900    

Denominator for diluted earnings per share, adjust weighted average shares and assumed conversion

  20,316,572   24,962,389   20,298,573   19,962,661   26,413,329   20,316,572   26,410,340   20,298,573 

Basic income (loss) per common share

 $(0.10) $0.01  $(0.18) $(0.03) $0.01  $(0.10) $0.01  $(0.18)

Diluted income (loss) per common share and common share equivalent

 $(0.10) $0.01  $(0.18) $(0.03) $0.01  $(0.10) $0.01  $(0.18)

 

The awards and options to purchase shares of common stock that were outstanding at June 30, 20222023 and June 30, 20212022 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

  5,159,902   4,969,002 

Six Months Ended June 30,

2023

2022

Anti-dilutive awards and options

5,159,902

 

96

 

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 prescribeGAAP prescribes 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 beare recognized.

 

The Company has recognized a net deferred tax asset of approximately $1.5 million and has recorded a valuation allowance of approximately $5.2$4.6 million against the other deferred tax assets. The Company reviews the assessment of the deferred tax asset and valuation allowance on an annual basis or more often when events indicate that a change to the valuation allowance may be warranted.

 

At December 31, 20212022, the Company had available net operating loss carryforwards of approximately $29.5$23.9 million. Net operating loss carryforwards generated during or prior to 2017 are available to offset taxable income of future periods and expire 20 years after the loss was generated. 

 

Net operating loss carryforwards totaling $10.7$9.1 million expired in 2021.2022. The schedule below outlines when the Company's pre-2017net operating losses for 2017 and prior years were generated and the year they may expire.

 

Tax Year End

 

NOL

  

Expiration

 

2002

 $9,109,774   2022 

2004

  1,621,096   2024 

2005

  1,788,157   2025 

2006

  1,350,961   2026 

2007

  1,740,724   2027 

2008

  918,960   2028 

2009

  835,322   2029 

2010

  429,827   2030 

2013

  504,862   2033 

2016

  474,465   2036 

2017

  1,267,336   2037 

Total

 $20,041,484     

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 $9,413,692. The below table outlines our net operating losses generated in 2018 and after.

Tax Year End

 

NOL

 

2018

 $4,410,916 

2019

  2,730,461 

2020

  2,272,315 

Total

 $9,413,692 

Total loss carryforwards

 $29,455,176 

Tax Year End

 

NOL

  

Expiration

 

2004

  1,621,096   2024 

2005

  1,788,157   2025 

2006

  1,350,961   2026 

2007

  1,740,724   2027 

2008

  918,960   2028 

2009

  835,322   2029 

2010

  429,827   2030 

2013

  504,862   2033 

2016

  474,465   2036 

2017

  1,267,336   2037 

Total

 $10,931,710     

 

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, 20222023 and the year ended December 31, 2021June 30, 2022, the Company purchased a total of $19,929$18,148 and $4,009,$19,929, respectively, of corporate imprinted sportswear, promotional items, and caps from Angry Pug Sportswear. Louis Hoch, the Company’s Chairman of the Board, President, Chief Executive Officer and Chief ExecutiveOperating Officer, is a 50% owner of Angry Pug Sportswear.

 

10

Directors and Officers

 

On January 6, 2022, the Company repurchased 11,361 shares of the Company's common stock for $47,930 in a private transaction at the closing price on January 6, 2022 of $4.21 per share from Tom Jewell, the Company's Chief Financial Officer, to cover his share of taxes.taxes in the vesting of stock compensation issued as 3-year vesting restricted stock units ("RSUs").

 

On January 6, 2021,February 8, 2022, the Company repurchased 11,860granted 1,000 RSUs with a 3-year vesting period to Houston Frost as a performance bonus at an issue price of $3.32 per share.

On June 26, 2022, the Company granted 66,667 RSUs with a 3-year vesting period to Elizabeth Michelle Miller for joining the Board of Directors at an issue price of $2.28 per share.

Effective on February 17, 2023, the Company entered into an employment agreement with Greg Carter, the Company’s Executive Vice President, Payment Acceptance. Under the terms of this agreement, Mr. Carter will receive an annual salary of $250,000, Override/Commissions of 10% of the actual cash commissions paid to salespersons under direct management of Mr. Carter, to be paid quarterly, and the payment of a one-time signing bonus of $40,000. 

On February 8, 2023, the Company granted 1,403,000 shares of common stock at a closing price of $3.25 per share from Tom Jewell, the Company's Chief Financial Officer to cover taxes due.

The Company granted 319,900 shares ofrestricted common stock with a 10-year vesting period and 141,900 restricted stock units (RSUs) with a 3-year vesting period to employees and Directors as a performance bonus on November 18, 2021 at an issue price of $6.39 per share. Executive officers and Directors included in the 10-year grant were Louis Hoch (100,000 shares), Tom Jewell (50,000 shares), Greg Carter (30,000 shares) and Houston Frost (25,000 shares). Executive officers and Directors included in the RSU grant were Louis Hoch (30,000 shares), Tom Jewell (21,000 shares), Greg Carter (9,000 shares) Houston Frost (6,000 shares), Blaise Bender (12,000 RSUs), Brad Rollins (12,000 RSUs) and Ernesto Beyer (12,000 RSUs).

On April 1, 2021, the Company granted 1,444,000 shares of common stock with a 10-year vesting period and 103,000 restricted stock units (RSUs)273,000 RSUs with a 3-year vesting period to employees and Directors as a performance bonus at an issue price of $1.08$1.75 per share. Executive officers and Directors included in the 10-year restricted stock grant were Louis Hoch (300,000(330,000 shares), Tom Jewell (200,000 shares), Greg Carter (100,000 shares) and Houston Frost (100,000 shares). Executive officers included in the RSU grant were Louis Hoch (33,000 RSUs), Tom Jewell (21,000 RSUs), Greg Carter (12,000 RSUs) and Houston Frost (12,000 RSUs).

On March 16, 2023, the Company granted 69,000 RSUs with a 3-year vesting period to Directors as a performance bonus at an issue price of $1.60 per share. Directors included in the RSU grant were Blaise Bender (10,000(21,000 RSUs), Brad Rollins (21,000 RSUs), Ernesto Beyer (21,000 RSUs) and Brad Rollins (30,000Michelle Miller (6,000 RSUs).

7

 

Note 9. COVID-19

 

The ongoing COVID-19 pandemic has had and continues to have 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,reopened, 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. 

 

TheSince 2020, 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. IfWhile these efforts have been successful thus far, 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, we do not believe that the Company has notbeen adversely impacted into the same 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 earlyOn July 2022,12, 2023, the Company convened its 2023 annual meeting of stockholders at which stockholders approved the proposed 2023 Employee Stock Purchase Plan, or ESPP, which gives certain employees of the Company (including certain employees of subsidiaries) an opportunity to purchase shares of the Company's largest ACH customer filed chaptercommon stock through the ESPP. The offering of the securities was registered under the Securities Act of 111933, bankruptcy and stopped processing transactions. The customer represented 49%as amended, through the filing of our total ACH transaction volume in a registration statement on Form S-20218 and 8% of revenue forwith the Company. The Company's revenue and cash flows will be impacted if the customer doesCommission on notJuly 24, 2023. resume full operations.

 

11
8

 

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 "will," "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-Kthe 2022 Annual Report 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 Annual Report, including the audited consolidated financial statements and the notes contained therein.

 

Name ChangeOverview

 

Effective onUsio, Inc. (collectively with its subsidiaries, "we," "our," "us," the "Company" or "Usio") was founded under the name Billserv Com, Inc. in July 1998 and incorporated in the State of Nevada. On June 26, 2019, we changed our corporate name from Payment Data Systems, Inc. to Usio, Inc.

Overview Our principal offices are located at 3611 Paesanos Parkway, Suite 300, San Antonio, TX 78231. Our telephone number is (210) 249-4100. 

 

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.

 

WeIn addition, we offer customizable prepaid cards which companies use for expense management, incentives, refunds, claims and disbursements, as well as unique forms of compensation likesuch as per diems,diem payments, government disbursements, and more.similar payments. We also offer prepaid cards to consumers for use as a tool to stay on budget, manage allowances and share money with family and friends. Our UsioCard platform supports Apple Pay®, Samsung Pay™ 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.

 

DuringOur strategy is to drive growth through a leveraged, one to many, distribution model in the second quartersoftware development marketplace. Following the completion of 2022, the amountSingular Payments acquisition, we launched our payment facilitation, PayFac, platform called "PayFac-in-a-Box" in late 2018 targeting partnership opportunities with app and software developers in bill-centric verticals, such as legal, healthcare, property management, utilities and insurance. The PayFac-in-a-Box platform 'integration layer' offers a simple integration experience for technology companies who are looking to monetize payments within an existing base of downstream clients. We believe that the added value of offering our integration partners access to credit card, transactions processed increased by 35% versus the second quarter of 2021.  The volume of creditdebit card, dollars processed during the second quarter of 2022 increased by 9% compared to the same time periodACH and prepaid card issuance capabilities through a single vendor partner relationship in 2021. Both credit card transactions processedface-to-face, mobile 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. virtual payment acceptance environments provides a true single channel commerce experience through an application programming interface, API.

 

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.

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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 Information Management Solutions, LLC, or IMS, in December 2020, we nowbegan to offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions through our wholly-owned subsidiary, Usio Output Solutions, entity.

  

Three Months Ended June 30,

 
  

2022

  

2021

  

$ Change

  

% Change

 
                 

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,

 
  

2022

  

2021

  

$ Change

  

% Change

 
                 

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%

RevenuesInc., or Output Solutions.  This product offering provides an outsourced solution for the quarter ended June 30, 2022 increased by 6%document design, print and electronic delivery to $16.2 million, as comparedpotential customers and entities looking to $15.2 million for the quarter ended June 30, 2021 due to continued tractionreduce postage costs 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. increase efficiencies.

 

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. 

CostSummary 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%. 

13

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.Results

 

We believe that our success will continue to depend in large part on our ability to (a) grow revenues, (b) manage our operating expenses, (c) add quality customers to our client base, (d) meet evolving customer requirements, (e) adapt to technological changes in an emerging market, and (f) assimilate current and future acquisitions of companies and customer portfolios. We will continue to invest in our sales force and technology platforms to drive revenue growth. In particular, we are focused on growing our ACH merchants, adding new software integrators, growing our electronic bill presentment, document composition, document decomposition, printing and mailing services business while providing incremental services to existing merchants. In addition to our near-term growth opportunities, we are focused on leveraging and optimizing the infrastructure of the organization allowing expansion of our payment processing and mail and printing capabilities without significantly increasing our operating costs.

 

Liquidity

We believe that the number of credit card transactions processed, ACH transaction counts, prepaid card volumes and Capital Resourcestotal dollar volumes are the most critical measures to gauge the state of our business. During the second quarter of 2023, the number of credit card transactions processed by us increased by 15% versus the second quarter of 2022. The volume of credit card dollars processed during the second quarter of 2023 increased by 2% compared to the same time period in 2022. The continued growth in credit card metrics was primarily attributable to our PayFac strategy to drive increased penetration across multiple industries including healthcare and legal. 

 

AtACH (eCheck) transaction counts during the second quarter of 2023 decreased by 31% compared to the second quarter of 2022. Returned check transactions processed during the second quarter of 2023 decreased by 17% compared to the second quarter of 2022. Electronic check dollars processed during the second quarter of 2023 decreased by 55% compared to the second quarter of 2022. The decreases in eCheck transactions, returns, and electronic check dollar volumes processed were primarily attributable to our withdrawal from the cryptocurrency space following the filing for bankruptcy protection by Voyager Digital on July 6, 2022 and the subsequent decline in processing and revenues in our ACH and complementary services revenue line of business.

9

Prepaid card load volumes processed during the second quarter of 2023 increased by 48% compared to the second quarter of 2022. Prepaid card transaction counts processed during the second quarter of 2023 decreased by 9% compared to the second quarter of 2022. Prepaid card purchase volume during the second quarter of 2023 increased by 51% compared to the second quarter of 2022. This increase occurred primarily due to the continued traction, and implementation of new guaranteed income and government assistance programs, and expansion in the corporate expense and healthcare markets.

Total dollar volumes processed across all business lines in the second quarter of 2023 were $1.3 billion compared to $2.4 billion processed in the second quarter of 2022, with such decrease primarily a result of the decrease in cryptocurrency activity and the winding down of COVID-19 government assistance programs.

Material Trends and Uncertainties

On July 6, 2022, our largest cryptocurrency customer, Voyager Digital, filed for bankruptcy protection and the cryptocurrency landscape encountered significant distress during 2022. Due to this bankruptcy, we lost a significant customer, and have pulled out of the cryptocurrency space, resulting in a meaningful loss of revenue and downturn in our ACH and complementary services business segment, which contributed substantial gross profit to the Company in previous periods. Our lost revenue in the ACH and complementary services business was approximately $3 million in 2022 and $1 million in the quarter ended June 30, 2023. We continue to closely monitor the cryptocurrency environment, and the unique risks associated with cryptocurrencies, including technological, legal, and regulatory risks along with the potentially significant revenue opportunities associated with re-entering the market and offering our services.

On August 16, 2022, we had $5.1President Biden signed the Inflation Reduction Act, or IRA, which implemented a 1% excise tax on certain corporate stock repurchases. On May 13, 2022, our Board of Directors authorized a renewal of the Company's stock buyback program (the "buyback program"), with a repurchase limit equal to $4 million of cashthe Company's common stock and cash equivalents, as compared to $7.3a three year duration. As of December 31, 2022, the Company had repurchased $1.3 million of stock as part of the buyback program, of which $1.1 million is subject to the IRA's 1% excise tax. Should the Company continue the repurchase of its securities on the open market, and the IRA remain in effect, we may be subject to this tax in 2023 and future years. As of June 30, 2023, the Company had repurchased $19,036 of stock as part of the buyback program, which may become subject to the IRA's 1% excise tax if the Company meets or exceeds the IRA's 1% excise tax repurchase minimum of $1 million in stock buy backs.

The COVID-19 pandemic has had and continues to have 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. Economic uncertainties, including those related to COVID-19, 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's offices were ordered closed in connection with curbing the spread of the pandemic. As these offices reopened, these businesses quickly recovered and returned to levels higher than pre-COVID. In addition, non-bank consumer lending merchants were adversely affected by COVID relief payments made during the pandemic and a pause placed on the collection of past due amounts. The level of activity for consumer lending merchants continues to recover to pre-COVID levels. The Company has recorded an increase in revenues in its prepaid business line since 2021, 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. While the general activity of COVID-related disbursement programs has largely declined, we currently recognize revenues associated with these programs and expect to continue recognizing such revenues through the remainder of 2023 and the start of 2024.

Since 2020, the Company has 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. While these efforts have been successful thus far, if the Company cannot continue to acquire sufficient inventory stock, existing revenues, 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.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue 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, 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 these accounting policies 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 such highly uncertain matters or due to 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.

10

Reserve for Processing Losses

We establish allowances for negative customer balances and estimated transaction losses arising from processing customer transactions, such as chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery or unsatisfactory delivery of purchased items, account takeovers, ACH returns, and insolvency. Additions to the allowance are reflected in our cost of services on our consolidated statements of income (loss). The allowances are based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving collection and write-off patterns, and the mix of transaction and loss types, as well as current and projected factors such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company with its prepaid card holders.

Determining appropriate current expected transactional losses is an inherently uncertain process, and final losses may vary from our current estimates. We regularly review and update our allowance estimates as new facts become known and events occur that may impact the settlement or recovery of losses. In the quarter ended March 31, 2023, we incurred $833,485 in merchant processing losses as a result of fraudulent activity and identity fraud from multiple merchants, of which $755,494 was taken from our reserve for processing losses. We do not expect similar processing losses in the immediate future; however, in the second quarter of 2023, we replenished our reserve for processing losses by the amount of $383,000, for a total balance of $769,789 as of June 30, 2023, to be used if future losses are incurred. The allowances are maintained at a level we deem appropriate to adequately provide for current expected losses at the balance sheet date.

Reserve for Doubtful Accounts

We establish an allowance for accounts receivable, which represents our estimate of current expected allowances for doubtful accounts. This evaluation process is subject to numerous estimates and judgements. This allowance is primarily based on expectations of unrecoverable receivables based on historical losses, as well as forecasted trends in customer instability, and general market conditions. The Company reviews this allowance quarterly on an account-by-account basis. Projected loss rates, inclusive of historical loss data and macroeconomic factors, are applied to the principal amount of our merchant and consumer receivables.

Determining appropriate current expected losses on our accounts receivable is an inherently uncertain process, and final losses may vary from our current estimates. We regularly review and update our allowance estimates as new facts become known, and events occur that may impact the settlement or recovery of losses. The allowances are maintained at a level we deem appropriate to adequately provide for current expected losses at the balance sheet date.

Accounting for Income Taxes

Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authority. Significant judgement is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We review our tax positions yearly and adjust the balances as new information becomes available. 

Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings, and available tax planning strategies. These rely heavily on estimates that are based on a number of factors, including historical data, and business forecasts. To the extent deferred tax assets are not expected to be realized, we record a valuation allowance.

We recognize and measure uncertain tax positions in accordance with GAAP, pursuant to which we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities.

As with all businesses, the Company’s tax returns are subject to periodic examination. The Company’s federal returns for the past four years remain open to examination. The Company is subject to the Texas margin tax and Tennessee franchise tax. Management is not aware of any tax positions that would have a significant impact on its financial position.

Revenue Recognition

Application of the accounting principles in GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Specifically, the determination of whether we are a principal to a transaction (gross revenue) or an agent (net revenue) can require considerable judgment. Further, we provide incentive payments to consumers and merchants. Evaluating whether these incentives are a payment to a customer, or consideration payable on behalf of a customer, requires judgment. Incentives determined to be made to a customer, or payable on behalf of a customer, are recorded as a reduction to gross revenue. Changes in judgments with respect to these assumptions and estimates could impact the amount of revenue recognized.

11

Key Business Metric - Non-GAAP Financial Measures

This filing includes the following non-GAAP financial measures as defined in Regulation G of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows. The Company reports its financial results in compliance with GAAP, but believes that also discussing non-GAAP financial measures provides investors with financial measures the Company uses in the management of its business. The Company defines EBITDA as operating income (loss), before interest, taxes, depreciation and amortization of intangibles. The Company defines adjusted EBITDA as EBITDA, as defined above, plus non-cash stock option costs and certain non-recurring items, such as costs related to acquisitions. The Company defines adjusted EBITDA margins as adjusted EBITDA, as defined above, divided by total revenues. The Company defines adjusted operating cash equivalents at December 31, 2021.flow as net cash provided (used) by operating activities, less changes in prepaid card load obligations, customer deposits, merchant reserves and net operating lease assets and obligations. Operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits and merchant reserves are deducted from operating cash flow, as these metrics do not serve in providing a clear picture of the true operational cash used or provided in a given time period. These measures may not be comparable to similarly titled measures reported by other companies. Management uses EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows as indicators of the Company's operating performance and ability to fund acquisitions, capital expenditures and other investments and, in the absence of refinancing options, to repay debt obligations. 

Management believes EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows are helpful to investors in evaluating the Company's operating performance because non-cash costs and other items that management believes are not indicative of its results of operations are excluded. 

 

We reported adjusted EBITDA of $1.2 million for the quarter ended June 30, 2023, as compared to an adjusted EBITDA loss of $0.6 for the same period in the prior year. The increase in adjusted EBITDA in the 2023 quarter was attributable to minimal increases in SG&A combined with strong revenue growth and increased profit margins.

The following tables set forth reconciliations of Operating income (loss) to EBITDA; EBITDA to Adjusted EBITDA; and Revenues to Adjusted EBITDA margins for the three months ended June 30, 2023 and 2022.

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2023

  

2022

  

2023

  

2022

 
                 

Reconciliation from Operating income (Loss) to Adjusted EBITDA:

                

Operating income (Loss)

 $55,828  $(1,870,427) $61,821  $(3,422,061)

Depreciation and amortization

  522,999   807,934   1,041,028   1,522,869 

EBITDA

  578,827   (1,062,493)  1,102,849   (1,899,192)

Non-cash stock-based compensation expense, net

  577,869   473,701   1,082,443   1,024,383 

Adjusted EBITDA

 $1,156,696  $(588,792) $2,185,292  $(874,809)
                 
                 

Calculation of Adjusted EBITDA margins:

                

Revenues

 $21,261,706  $16,215,686  $42,707,950  $34,327,029 

Adjusted EBITDA

  1,156,696   (588,792)  2,185,292   (874,809)

Adjusted EBITDA margins

  5.4%  (3.6)%  5.1%  (2.5)%

We reported cash provided by adjusted operating cash flows of $1.3 million for the six months ended June 30, 2023 (after adjusting for the impact of operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits, and merchant reserves), as compared to $1.2 million used in the six months ended June 30, 2022. Operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits and merchant reserves are deducted from operating cash flow, as these metrics do not serve in providing a clear picture of the true operational cash used or provided in a given time period. These adjustments to net cash provided (used) by operating activities do not include any recurring expense items which are included in the calculation of operating income (loss), and only include changes in our assets and liabilities accounts on the balance sheet. The Company believes non-GAAP adjusted operating cash flow to be a more accurate indicator of cash contributions that can be used to sustain current and future business operations. The increase in adjusted operating cash flows in the 2023 quarter compared to the 2022 quarter was primarily attributable to an increase the Company's net income, due to strong growth in revenue with improved profit margins, alongside relatively flat increases in SG&A.

The following table is a reconciliation of operating cash flow provided (used) to adjusted operating cash flow provided (used) for the six months ended June 30, 2023 and 2022.

  Six Months Ended June 30, 
  

2023

  

2022

 
         

Reconciliation from net cash provided (used) by operating activities to non-GAAP Adjusted Operating Cash Flow (used):

        

Net cash provided (used) by operating activities

 $27,770,210  $(22,112,887)

Operating cash flow (used) adjustments:

        

Prepaid card load obligations

  (26,227,715)  21,486,085 

Customer deposits

  (9,070)  (107,021)

Merchant reserves

  (231,539)  (433,920)

Operating lease right-of-use assets

  (114,956)  281,442 

Operating lease liabilities

  134,979   (289,502)

Total adjustments to net cash provided (used) by operating activities

 $(26,448,301) $20,937,084 

Adjusted operating cash flows provided (used)

 $1,321,909  $(1,175,803)

Use of Non-GAAP Financial Measures

EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. They are not measurements of our financial performance under GAAP and should not be considered as alternatives to revenue, net income, or cash provided (used) by operating activities, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows have limitations as analytical tools and you should not consider these non-GAAP measures in isolation or as a substitute for analysis of our operating results as reported under GAAP.

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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 program management and processing of prepaid debit cards. With the acquisition of the assets of IMS in December 2020, we began to offer additional output solution services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions.

  

Three Months Ended June 30,

 
  

2023

  

2022

  

$ Change

  

% Change

 
                 

ACH and complementary service revenue

 $4,079,157  $3,899,612  $179,545   5%

Credit card revenue

  7,115,884   6,885,697   230,187   3%

Prepaid card services revenue

  5,217,468   1,388,110   3,829,358   276%

Output Solutions revenue

  4,849,197   4,042,267   806,930   20%

Total Revenue

 $21,261,706  $16,215,686  $5,046,020   31%

  

Six Months Ended June 30,

 
  

2023

  

2022

  

$ Change

  

% Change

 
                 

ACH and complementary service revenue

 $7,419,879  $7,742,928  $(323,049)  (4)%

Credit card revenue

  14,455,782   13,653,919   801,863   6%

Prepaid card services revenue

  10,024,872   4,156,557   5,868,315   141%

Output Solutions revenue

  10,807,417   8,773,625   2,033,792   23%

Total Revenue

 $42,707,950  $34,327,029  $8,380,921   24%

Consolidated revenue for the quarter ended June 30, 2023 increased by 31% to $21.3 million, as compared to $16.2 million for the quarter ended June 30, 2022, due to continued traction and growth in our prepaid card and Output Solutions lines of business, with modest growth in our ACH and credit card lines of business. 

Consolidated revenue for the six months ended June 30, 2022 increased by 24% to $42.7 million, as compared to $34.3 million for the six months ended June 30, 2022, primarily as a result of strong growth in our prepaid card and Output Solutions lines of business. Declines in ACH revenues were primarily the result of the Company's withdrawal from the crypto market in July of 2022.

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 and 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 $3.3 million, or 25%, to $16.3 million for the quarter ended June 30, 2023, as compared to $13.0 million for the same period in the prior year, due to increased revenue growth. 

Cost of services increased by $5.2 million, or 19%, to $32.8 million for the six months ended June 30, 2023, as compared to $27.6 million for the same period in the prior year, due to increased revenue growth. 

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Gross Profit

Gross profit is the net profit existing after the cost of services.

Gross profit increased by 54% to $5.0 million for the quarter ended June 30, 2023, as compared to $3.3 million for the same period in the prior year. Similarly, gross margin percentage was 23.6% for the quarter ended June 30, 2023 as compared to 20.1% in the prior year period. The increase in gross profit and gross margin percentage in the quarter ended June 30, 2023, as compared to the same period during the prior year, was primarily attributable to strong revenue growth and improved profitability metrics across all business lines, driven by more favorable pricing in the quarter.

Gross profit increased by 46% to $9.9 million for the six months ended June 30, 2023, as compared to $6.8 million for the same period in the prior year. Similarly, gross margin percentage was 23.2% for the six months ended June 30, 2023 as compared to 19.7% in the prior year period. The increase in gross profit and gross margin percentage in the six months ended June 30, 2023, as compared to the same period during the prior year, was primarily attributable to strong revenue growth and improved profitability metrics across all business lines, driven by more favorable pricing on the year.

Stock-based Compensation

Stock-based compensation expenses were $0.6 million for the quarter ended June 30, 2023 as compared to $0.5 million for the quarter ended June 30, 2022, an increase of 22.0% due to stock grants made to retain and attract employees.

Stock-based compensation expenses were $1.1 million for the six months ended June 30, 2023 as compared to $1.0 million for the six months ended June 30, 2022, a marginal increase of 5.7% due to stock grants made to retain and attract employees.

Other Selling, General and Administrative Expenses

Other selling, general and administrative expenses (other SG&A) were $3.9 million for the quarter ended June 30, 2023 as compared to $3.8 million in the prior year quarter. The nominal increase in other SG&A for the quarter ended June 30, 2023 reflects a flattening of expenses and slowed investment in our business units as they achieve further scale.

Other selling, general and administrative expenses (other SG&A) were $7.7 million for the six months ended June 30, 2023 as compared to $7.6 million in the prior year six-month period, a 1% increase. The nominal increase in other SG&A for the six months ended June 30, 2022 reflects a flattening of expenses and slowed investment in our business units as they achieve further scale.

Depreciation and Amortization

Depreciation and amortization expense consists of the reduction in value of our tangible and intangible assets over their useful life. These assets include property, plant, and equipment, along with intangible assets acquired through acquisition, or developed as internal use software.

Depreciation and amortization expense totaled $0.5 million and $0.8 million for the quarters ended June 30, 2023 and 2022, respectively. The decrease in depreciation and amortization expense was due to the completed amortization of intangible assets, reducing overall depreciation and amortization expense versus the same period a year ago. 

Depreciation and amortization expense totaled $1.0 million and $1.5 million for the six months ended June 30, 2023 and 2022, respectively. The decrease in depreciation and amortization expense was due to the completed amortization of intangible assets, reducing overall depreciation and amortization expense versus the same period a year ago. 

Other Income (Expense)

Other income (expense), net was $218,311 for the quarter ended June 30, 2023 compared to $82 for the quarter ended June 30, 2022. Higher interest-bearing merchant reserves and interest rates drove the increased interest income.

Other income (expense), net was $310,577 for the six months ended June 30, 2023 compared to $554 for the six months ended June 30, 2022. Higher interest-bearing merchant reserves and interest rates drove the increased interest income.

Net Income (Loss)

We reported net income of $0.2 million for the quarter ended June 30, 2023, as compared to a net loss of $1.9 million for the same period in the prior year. The increase in net income was attributable to increases in revenue combined with increased profit margins.

We reported net income of $0.2 million for the six months ended June 30, 2023, as compared to a net loss of $3.6 million for the same period in the prior year. The increase in net income was attributable to increases in revenue combined with increased profit margins.

We may incur future operating losses. To maintain, grow and sustain profitability, we must, among other things, continue to incrementally grow and maintain our customer base, sell our ACH, credit card, prepaid product offerings and Output Solutions offerings to existing and new customers, implement successful marketing strategies, maintain and upgrade our technology and transaction-processing systems, provide superior customer service, respond to competitive developments, attract, retain and motivate personnel, and respond to unforeseen industry developments among other factors.

Liquidity and Capital Resources

Our primary sources of liquidity are available cash and cash equivalents and cash flows provided by operations. As of June 30, 2023, we had cash and cash equivalents of $6.6 million. For the six months ended June 30, 2023, cash provided by operations was $27.8 million. We expect available cash and cash equivalents and internally generated funds to be sufficient to support working capital needs, capital expenditures (including acquisitions), and our debt service obligations. We believe we have sufficient liquidity to operate for at least the next 12 months from the date of filing this report. Cash from operating activities is dependent on our net income (loss), less depreciation, amortization, bad debt, deferred federal income tax, non-cash stock-based compensation, the amortization of warrant costs, and net of the changes in our operating assets and liabilities. These assets and liabilities include our accounts receivable, prepaid expenses, operating lease right-of-use assets, inventory, other assets, accounts payable and accrued expenses, operating lease liabilities, prepaid card load obligations, merchant reserves, customer deposits, and deferred revenues.

We reported net income of $0.2 million for the quarter ended June 30, 2022.2023. At June 30, 2022,2023, we had an accumulated deficit of $68.9$70.6 million. Additionally, we had working capital of $6.8$7.5 million and $8.8$5.8 million at June 30, 20222023 and December 31, 2022, respectively.

From time to time we have sold shares of our common stock in order to provide us liquidity. For example, on November 19, 2021, respectively.Voyager Digital purchased 142,857 unregistered shares of common stock at a price of $7.00 per share in a private offering. The gross proceeds to us from the private offering were $1,000,000. On May 9, 2023, Voyager Digital returned 142,857 shares of common stock, valued at a price of $1.09 per share, in a non-cash transaction to satisfy payment obligations related to the wind down of their payment disbursement needs following their bankruptcy. This transaction was recognized as revenue for services rendered and as shares returned to treasury stock in the quarter ended June 30, 2023. We have also sold securities in public offerings from time to time. For example, in September 2020, we sold 4,705,883 shares of our common stock and received net proceeds of approximately $8 million. We cannot assure you that we will be able to sell shares of our equity securities on terms acceptable to us or at all in the future.

 

Cash Flows

 

Net cash usedprovided 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, 20222023 was $22.1$27.8 million, andas compared to net cash providedused by operating activities of $22.1 million for the six months ended June 30, 20212022. The increase in cash provided by operating activities was $2.6 million.due to the increase in prepaid card load obligations versus the same period last year. Excluding merchant reserves, prepaid card load assets, customer deposits and lease right-of-useright of use assets and liabilities, our cash used by operating activities was $1.2 million and cash provided by operating activities was $1.1$1.3 million as compared to cash provided by operating activities of $1.2 million for the six months ended June 30, 2023 and 2022, and June 30, 2021, respectively. This increase in cash provided by operating activities was primarily attributable to an increase in the Company's net income, due to strong growth in revenue with improved profit margins, alongside relatively flat increases in SG&A. We continue to invest resources and infrastructure in our business to achieve scale across all business lines.

 

Net cash used by investing activities was $388,628 as compared to cash used by investing activities of $411,818 and $533,854 for the six months ended June 30, 20222023 and June 30, 2021,2022, respectively. The primary drivers of our investing activities were capital expenditures associated with capitalized software development costs and other capital investments associated with growing our business lines and associated employee counts. The decrease in cash used by investing activities was primarily attributable to the reduced amount of fixed asset purchases relative to the same period a year ago.

 

Net cash used by financing activities for the six months ended June 30, 20222023 was $573,699$47,251 and net cash providedused by financing activities for the threesix months ended June 30, 20212022 was $73,511, respectively.$573,699. The 2021decrease in cash providedused by financing activities was from net proceeds from our equipment loan offset bydue to the Company's stock buyback program and the increased quantity of treasury stock transactions. purchased in 2022.

 

14

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”))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, 20222023 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 SECCommission 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 theas a 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, 20222023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

15

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

KDHM, LLC

 

On September 1, 2021, KDHM, LLC sued PDS Acquisition Corp, now known as Usio Output Solutions, Inc., in the District Court of Bexar County, Texas 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 salepost-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 the 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,GAAP. KDHM and third-party defendants, its principals Henry Minten and Thomas Dowe, affirmatively represented and warranted in section 3.1(e) of the asset purchase agreement that “[t]he 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 that these deposits were not conveyed to us as required by the asset purchase 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 asset purchase agreement provides that the purchased assets includesinclude “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 assetassets under the agreement. We demanded the missing customer lists, but they have yet to be provided to us per the asset purchase 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 fromLifetime Home Warranty, LLC

On or about December 1, 2022, Usio and Lifetime Home Warranty, LLC ("Defendant") entered into an Automated Clearing House and Remotely Created Check Service Agreement (the “Agreement”). Pursuant to the terms of the Agreement, Usio agreed to and did provide to Defendant certain automated remotely created check and other payment processing services. Usio initiated certain payment transactions as directed by Defendant, and in exchange, Defendant agreed to pay Usio for its services. Additionally, to the extent that there were any “chargebacks” or “returns,” Defendant contractually agreed to pay Usio and/or cover the amount of these items. Chargebacks and returns are essential rejections or disputes by the Defendant’s end consumer user of the charges Usio was directed to process by Defendant. Pursuant to the Agreement and the Operating Rules and Guidelines as defined in the Agreement, Defendant’s return rate was not to exceed 0.50% of the total transaction volume. By the end of 2022, Defendant’s returns were so large that Usio terminated its Agreement with the Defendant based on the amounts owed to Usio and the risks associated with conducting further business with the Defendant. Pursuant to the Agreement, Usio invoiced Defendant on a monthly basis for all fees, chargeback and returns. Usio attempted to debit Defendant’s Settlement Account for the amount due and owing, but Defendant’s account contained insufficient funds to cover of the excessive chargebacks and returns.  Subsequent attempts to collect the amounts due and owing to Usio failed, necessitating the filing of a lawsuit in Bexar County, Texas on April 10, 2023. The current amount owed to Usio, exclusive of interest or attorneys’ fees, currently totals $213,780.16. The Defendant has not been served at this time. 

Section 5.1 of the Agreement provides: “Company shall establish a checking account (“Settlement Account”) described on Exhibit D, Company shall maintain funds in the Settlement Account sufficient to (i) process all Credit Entries, (ii) offset all Return Entries, Reversals, and Adjustments as described on Exhibit C, and (iii) offset all fees and other charges imposed by Processor under this Agreement, including those set forth in Article VII and in Exhibit C.”

In addition to 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.

 

Item 1A. RISK FACTORS.

 

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, 2022.2022 Annual Report.

 

16

 

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, 2022.2023.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

On November 2, 2016, we announced that our Board of Directors authorized the buyback program, pursuant to which the Company may repurchase of up to $1 million in shares of our common sharesstock from time to time onin the open market, in block transactions, or in privately negotiated transactions. On January 9, 2018, theour Board of Directors added an additional $2 million to the buyback plan.program. The buyback 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.buyback program. On November 7, 2019, theour Board of Directors approved the renewal of the share buy-backbuyback program. The Board approved a limit of $1,420,000, which was rolled over from the buyback program prior buy-back programto renewal, with a three-year duration. On May 13, 2022, theour Board of Directors authorized aanother renewal of the buy-backbuyback program, with a limit upequal to $4 million of the Company's common stock withand a three year duration. The new buyback program, as renewed most recently, terminates on the earliest of May 15, 2025, the date the funds are exhausted, or the date theour Board of Directors, at its sole discretion, terminates or suspends the buyback program. The buyback program is used for the purchaserepurchase of stock from employees and directors, and for open-market purchases through a broker. During the three months ended June 30, 2022,2023, 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 

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, 2023

  3,198  $1.75   3,198  $2,715,588 

May 1 - May 31, 2023

  1,751  $2.04   1,751  $2,712,013 

June 1 - June 30, 2023

  683  $1.96   683  $2,710,677 

Total

  5,632       5,632  $2,710,677 

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

Item 5. OTHER INFORMATION.

 

None.

 

17

 

Item 6. Exhibits.

 

Exhibit

 

 

Number

 

Description

 

 

 

3.1

 

Amended and Restated Articles of Incorporation (included as exhibit 3.1 to the Form 10-KSB filed March 31, 2006, and incorporated herein by reference).

 

 

 

3.2

 

Amendment to Restated Articles of Incorporation (included as exhibit A to the Schedule 14C filed April 18, 2007, and incorporated herein by reference).

 

 

 

3.3

 

Certificate of Change Filed Pursuant to NRS 78.209 (included as exhibit 3.1 to the Form 8-K filed July 23, 2015, and incorporated herein by reference).

 

 

 

3.4

 

Articles of Amendment of Restated Articles of Incorporation of Usio, Inc., as amended, effective June 26, 2019 (included as exhibit 3.1 to the Form 8-K filed July 1, 2019, and incorporated herein by reference).

 

 

 

3.5

 

Amended and Restated By-laws (included as exhibit 3.2 to the Form 10-KSB filed March 31, 2006, and incorporated herein by reference).

 

 

 

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).
   

10.1

4.1

Employment Agreement between the Company and Michael R. Long, dated February 27, 2007Description of Securities (included as exhibit 10.14.1 to the Form 8-K10-K for the year ended December 31, 2022 filed on March 2, 2007, and incorporated herein by reference).8, 2023)

10.210.1*

 

Employment Agreement between the Company and Louis A. Hoch, dated February 27, 2007 (included as exhibit 10.2 to the Form 8-K filed March 2, 2007, and incorporated herein by reference).

 

 

 

10.3

First Amendment to Employment Agreement between the Company and Michael R. Long, dated November 12, 2009 (included as exhibit 10.15 to the Form 10-Q filed November 16, 2009, and incorporated herein by reference).

10.410.2*

 

First Amendment to Employment Agreement between the Company and Louis A. Hoch, dated November 12, 2009 (included as exhibit 10.16 to the Form 10-Q filed November 16, 2009, and incorporated herein by reference).

 

 

 

10.5

Second Amendment to Employment Agreement between the Company and Michael R. Long, dated April 12, 2010 (included as exhibit 10.16 to the Form 10-K filed April 15, 2010, and incorporated herein by reference).

10.610.3*

 

Second Amendment to Employment Agreement between the Company and Louis A. Hoch, dated April 12, 2010 (included as exhibit 10.17 to the Form 10-K filed April 15, 2010, and incorporated herein by reference).

 

 

 

10.710.4

 

Bank Sponsorship Agreement between the Company and University National Bank, dated August 29, 2011 (included as exhibit 10.18 to the Form 10-K filed April 3, 2012, and incorporated herein by reference).

 

 

 

10.8

Third Amendment to Employment Agreement between the Company and Michael R. Long, dated January 14, 2011 (included as exhibit 10.19 to the Form 10-K filed April 3, 2012, and incorporated herein by reference).

10.910.5*

 

Third Amendment to Employment Agreement between the Company and Louis A. Hoch, dated January 14, 2011 (included as exhibit 10.20 to the Form 10-K filed April 3, 2012, and incorporated herein by reference).

 

 

 

10.10

Fourth Amendment to Employment Agreement between the Company and Michael R. Long, dated July 2, 2012 (included as exhibit 10.18 to the Form 10-Q filed August 20, 2012, and incorporated herein by reference).

10.1110.6*

 

Fourth Amendment to Employment Agreement between the Company and Louis A. Hoch, dated July 2, 2012 (included as exhibit 10.19 to the Form 10-Q filed August 20, 2012, and incorporated herein by reference).

10.12

Asset Purchase Agreement, dated December 22, 2014, by and between Akimbo Financial, Inc. and Payment Data Systems, Inc. (included as exhibit 10.1 to the Form 8-K filed December 24, 2014, and incorporated herein by reference).

 

 

 

10.1310.7

 

Bank Sponsorship Agreement between the Company and Metropolitan Commercial Bank, dated December 11, 2014 (included as exhibit 10.26 to the Form 10-K filed March 30, 2015, and incorporated herein by reference).

 

18

 

 

 

 

10.14

Fifth Amendment to Employment Agreement between the Company and Michael R. Long, dated August 3, 2016 (included as exhibit 10.1 to the Form 8-K filed August 9, 2016, and incorporated herein by reference).

10.1510.8*

 

Fifth Amendment to Employment Agreement between the Company and Louis A. Hoch, dated August 3, 2016 (included as exhibit 10.2 to the Form 8-K filed August 9, 2016, and incorporated herein by reference).

 

10.16

Sixth Amendment to Employment Agreement between the Company and Michael R. Long, dated September 8, 2016 (included as exhibit 10.1 to the Form 8-K filed September 14, 2016, and incorporated herein by reference).

10.1710.9*

 

Sixth Amendment to Employment Agreement between the Company and Louis A. Hoch, dated September 8, 2016 (included as exhibit 10.2 to the Form 8-K filed September 14, 2016, and incorporated herein by reference).

 

 

 

10.1810.10*

 

Employment agreement between Tom Jewell and Payment Data Systems, Inc., dated January 6, 2017 (included as exhibit 10.1 to the Form 8-K filed January 6, 2017, and incorporated herein by reference).

 

 

 

10.1910.11*

 

Independent Director Agreement, dated May 5, 2017, by and between Payment Data Systems, Inc. and Brad Rollins (included as exhibit 10.1 to the Form 8-K, filed May 11, 2017, and incorporated herein by reference).

 

 

 

10.20†

Membership Interest Purchase Agreement, dated September 1, 2017, by and among Payment Data Systems, Inc., Singular Payments, LLC and Vaden Landers (included as exhibit 10.1 to the Form 8-K, filed September 8, 2017, and incorporated herein by reference).

10.2110.12*

 

First Amendment to Employment Agreement, dated November 27, 2017, by and between Payment Data Systems, Inc. and Tom Jewell (included as exhibit 10.1 to the Form 8-K, filed November 28, 2017, and incorporated herein by reference).

 

 

 

10.2210.13

 

Lease Agreement dated February 9, 2018 between Payment Data Systems, Inc. and Blauners Paesanos Parkway LP (included as exhibit 10.43 to the Form 10-K, filed March 30, 2018, and incorporated herein by reference).

 

 

 

10.2310.14

 

Lease Agreement between Payment Data Systems, Inc. and RP Circle 1 Building, LLC dated December 11, 2017 (included as exhibit 10.44 to the Form 10-K, filed March 30, 2018, and incorporated herein by reference).

 

 

 

10.2410.15*

 

Second Amendment to Employment Agreement between the Company and Tom Jewell, dated November 28, 2018 (included as exhibit 10.1 go the Form 8-K filed November 28, 2018, and incorporated herein by reference).

 

 

 

10.2510.16*

 

Independent Director Agreement dated April 1, 2019, by and between Payment Data Systems, Inc. and Blaise Bender (included as exhibit 10.2 to the Form 8-K filed April 3, 2019, and incorporated herein by reference).

 

 

 

10.26+

Securities Purchase Agreement between Usio, Inc. and Topline Capital Partners, L.P. dated July 1, 2020 (included as exhibit 10.1 to the Form 8-K filed on July 6, 2020, and incorporated herein by reference).

10.2710.17 2015 Equity Incentive Plan (included as Appendix B to the Definitive Proxy Statement filed June 5, 2015, and incorporated herein by reference).
   
10.2810.18 Warrant Agreement between the Company and University FanCards, LLC dated August 21, 2018 (included as exhibit 10.41 to the Form 10-Q filed on November 12, 2020, and incorporated herein by reference).
   
10.2910.19* Independent Director Agreement dated August 29, 2020, by and between the Company and Ernesto Beyer (included as exhibit 10.1 to the Form 8-K filed on August 31, 2020, and incorporated herein by reference).
   
10.30Underwriting Agreement between the Company and Ladenburg Thalmann & Co., Inc. as representative, dated September 23, 2020 (included as exhibit 1.1 to the Form 8-K filed on September 25, 2020, and incorporated herein by reference).
10.3110.20* Third Amendment to the Employment Agreement between the Company and Tom Jewell, effective October 12, 2020 (included as exhibit 10.1 to the Form 8-K filed on October 28, 2020, and incorporated herein by reference).
   
10.32+10.21+ Asset Purchase Agreement between the Company and Information Management Solutions, LLC dated December 15, 2020 (included as exhibit 10.2 to the Form 8-K filed on December 18, 2020, and incorporated herein by reference).
   
10.33+10.22+ Warrant Agreement between the Company and Information Management Solutions, LLC dated December 15, 2020 (included as exhibit 10.2 to the Form 8-K filed on December 18, 2020, and incorporated herein by reference).

 

19

 

10.3410.23 Lease agreement between Information Management Systems, LLC and Industrial Properties Corp. dated June 16, 2011 (included as exhibit 10.40 to the Form 10-K filed on March 30, 2021, and incorporated herein by reference).
   
10.3510.24 First amendment to lease between Information Management Systems, LLC and Industrial Properties Corp. dated April 4, 2013 (included as exhibit 10.41 to the Form 10-K filed on March 30, 2021, and incorporated herein by reference).
   
10.3610.25 Second amendment to lease between Information Management Systems, LLC and Industrial Properties Corp. dated March 5, 2018 (included as exhibit 10.42 to the Form 10-K filed on March 30, 2021, and incorporated herein by reference).
   
10.3710.26 Third amendment to lease between the Company as successor to Information Management Systems, LLC and ICON IPC TX Property Owner Pool 6 West/Southwest, LLC, dated December 22, 2020 (included as exhibit 10.43 to the Form 10-K filed on March 30, 2021, and incorporated herein by reference).

 

10.3810.27 Lease agreement between the Company and Smartyfi, LLC for Austin offices dated January 1, 2021 (included as exhibit 10.44 to the Form 10-K filed on March 30, 2021, and incorporated herein by reference).
   
10.3910.28 First amendment to lease between the Company and Paesanos Office Building, LLC for San Antonio offices dated March 15, 2021 (included as exhibit 10.45 to the Form 10-K filed on March 30, 2021, and incorporated herein by reference).
   
10.4010.29* Seventh Amendment to Employment Agreement between Usio, Inc. and Louis A. Hoch, dated April 18, 2021 (included as exhibit 10.1 to the Form 8-K filed on April 21, 2021, and incorporated herein by reference).
   
10.4110.30* 

Fourth Amendment to Employment Agreement between Usio, Inc. and Tom Jewell, dated April 18, 2021 (included as exhibit 10.2 to the Form 8-K filed on April 21, 2021, and incorporated herein by reference).

   
10.4210.31 Second Amendment to lease between the Company and Paesanos Office Building, LLC for San Antonio offices, dated October 19,2021 (included as exhibit 10.43 to the Form 10-Q filed on November 10, 2021, and incorporated herein by reference.
  

 

10.4310.32 Securities Purchase Agreement between the Company and Voyager Digital Holdings, Inc. dated November 19, 2021 (included as exhibit 10.1 to the Form 8-K filed on November 23, 2021, and incorporated herein by reference).
   
10.4410.33* Fifth Amendment to the Employment Agreement between the Company and Tom Jewell, dated November 22, 2021 (included as exhibit 10.2 to the Form 8-K filed on November 23, 2021, and incorporated herein by reference).
   

14.1

10.34*

Code of Ethics (includedIndependent Director Agreement dated June 16, 2022, by and between the Company and Michelle Miller (Included as exhibit 14.110.1 to the Form 10-K8-K filed March 30, 2004,on June 22, 2022, and incorporated herein by reference).

16.1

10.35*

Letter from ErnstEighth Amendment to Employment Agreement between Usio, Inc. and Young LLP to the Securities and Exchange CommissionLouis A. Hoch, dated February 10, 2004June 29, 2022 (included as exhibit 1610.1 to the Form 8-K filed February 11, 2004,on July 6, 2022, and incorporated herein by reference).

10.36*Employment Agreement Dated February 17, 2023 between Usio Inc and Greg Carter, the Company's Executive Vice President of Payment Acceptance
10.37*Usio, Inc. 2023 Equity Incentive Plan (Filed as Exhibit 10.1 to the Registrant's Form 8-K filed on July 12, 2023)

31.1

 

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

31.2

 

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

32.1

 

Certification of the Chief Executive Officer and the /Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

101.INS

 

Inline XBRL Instance Document (filed herewith).

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document (filed herewith).

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith).

 

 

 

101.PRE

 

Inline XBRL Taxonomy Presentation Linkbase Document (filed herewith).

   
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

 

 

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 SECCommission upon request.
* Filed herewith.Management Compensatory Plan or Arrangement

 

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.

 

20

 

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.

 

 

USIO, INC

 

 

 

 

 

 

Date: August 11, 202214, 2023

By:

/s/ Louis A. Hoch

 

 

Louis A. Hoch

 

 

Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

Date: August 11, 202214, 2023

By:

/s/ Tom Jewell

 

 

Tom Jewell

 

 

Chief Financial Officer

 

 

(Principal Accounting and Financial Officer)

 

 

 

21