UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from ________ to ________.
Commission File Number:
USIO, INC.
(Exact name of registrant as specified in its charter)
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(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 |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| | Smaller reporting company |
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| Emerging Growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
As of November 8, 2021, the number of outstanding shares of the registrant's common stock was
INDEX
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Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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| Item 1. |
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| Item 1A. |
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| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds. |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
USIO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Settlement processing assets | ||||||||
| Prepaid card load assets | ||||||||
| Customer deposits | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other | ||||||||
| Current assets before merchant reserves | ||||||||
| Merchant reserves | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Other assets: | ||||||||
| Intangibles, net | ||||||||
| Deferred tax asset, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Other assets | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Operating lease liabilities, current portion | ||||||||
| Equipment loan, current portion | ||||||||
| Settlement processing obligations | ||||||||
| Prepaid card load obligations | ||||||||
| Customer deposits | ||||||||
| Deferred revenues | ||||||||
| Current liabilities before merchant reserve obligations | ||||||||
| Merchant reserve obligations | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Equipment loan, non-current portion | ||||||||
| Operating lease liabilities, non-current portion | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, par value, shares authorized; -- shares outstanding at September 30, 2021 (unaudited) and December 31, 2020, respectively | ||||||||
| Common stock, par value, shares authorized; and issued, and and outstanding at September 30, 2021 (unaudited) and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost; and shares at September 30, 2021 (unaudited) and December 31, 2020, respectively | ( | ) | ( | ) | ||||
| Deferred compensation | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See the accompanying notes to the condensed interim consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
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| 2021 |
2020 |
2021 |
2020 |
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| Revenues |
$ | $ | $ | $ | ||||||||||||
| Cost of services |
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| Gross profit |
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| Selling, general and administrative: |
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| Stock-based compensation |
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| Other SG&A expenses |
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| Depreciation and amortization |
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| Total selling, general and administrative expenses |
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| Operating income (loss) |
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| Other income and (expense): |
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| Interest income |
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| Other income (expense) |
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| Other income and (expense), net |
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| Income (loss) before income taxes |
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| Income tax expense |
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| Net income (loss) |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
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| Basic income (loss) per common share: |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
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| Diluted income (loss) per common share: |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
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| Weighted average common shares outstanding |
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| Basic |
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| Diluted |
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See the accompanying notes to the condensed interim consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended September 30, |
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| 2021 |
2020 |
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| Operating activities: |
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| Net (loss) |
$ | ( |
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| Adjustments to reconcile net (loss) to net cash provided by operating activities: |
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| Depreciation |
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| Amortization |
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| Bad debt |
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| Non-cash stock-based compensation |
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| Amortization of warrant costs |
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| Changes in current assets and current liabilities: |
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| Accounts receivable |
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| Prepaid expenses and other |
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| Operating lease right-of-use assets |
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| Other assets |
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| Inventory |
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| Accounts payable and accrued expenses |
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| Operating lease liabilities |
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| Prepaid card load obligations |
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| Merchant reserves |
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| Customer deposits |
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| Deferred revenue |
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| Net cash provided by operating activities |
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| Investing activities: |
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| Purchases of property and equipment |
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| Net cash (used) by investing activities |
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| Financing activities: |
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| Proceeds from PPP Loan Program |
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| Proceeds from public offering, net of expenses |
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| Proceeds from private offering |
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| Proceeds from equipment loan |
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| Payments on equipment loan |
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| Purchases of treasury stock |
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| Net cash (used) provided by financing activities |
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| Change in cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves |
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| Cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves, beginning of period |
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| Cash, Cash Equivalents, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End of Period |
$ | $ | ||||||
| Supplemental disclosure of cash flow information: |
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| Cash paid during the period for: |
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| Interest |
$ | $ | ||||||
| Income taxes |
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| Non-cash transactions: |
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| Issuance of deferred stock compensation |
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See accompanying notes to the condensed interim consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
| Common Stock | Additional Paid- In | Treasury | Deferred | Accumulated | Total Stockholders' | |||||||||||||||||||||||
| Shares | Amount | Capital | Stock | Compensation | Deficit | Equity | ||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Issuance of common stock under equity incentive plan | — | — | — | |||||||||||||||||||||||||
| Warrant compensation costs | — | — | — | — | — | |||||||||||||||||||||||
| Cashless warrant exercise | ( | ) | — | — | — | — | ||||||||||||||||||||||
| Reversal of deferred compensation amortization that did not vest | ( | ) | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||||||||
| Deferred compensation amortization | — | — | — | — | — | |||||||||||||||||||||||
| Purchase of treasury stock costs | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Net (loss) for the period | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Issuance of common stock under equity incentive plan | — | — | — | |||||||||||||||||||||||||
| Warrant compensation costs | — | — | — | — | — | |||||||||||||||||||||||
| Reversal of deferred compensation amortization that did not vest | ( | ) | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||||||||
| Deferred compensation amortization | — | — | — | — | — | |||||||||||||||||||||||
| Purchase of treasury stock costs | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Net income for the period | — | — | — | — | — | |||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Issuance of common stock under equity incentive plan | — | 20,785 | — | |||||||||||||||||||||||||
| Warrant compensation costs | — | — | — | — | — | |||||||||||||||||||||||
| Cashless warrant exercise | ( | ) | — | — | — | — | ||||||||||||||||||||||
| Reversal of deferred compensation amortization that did not vest | ( | ) | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||||||||
| Deferred compensation amortization | — | — | — | — | — | |||||||||||||||||||||||
| Purchase of treasury stock costs | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Net income for the period | — | — | — | — | — | |||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Issuance of common stock under equity incentive plan | — | — | — | |||||||||||||||||||||||||
| Warrant compensation costs | — | — | — | — | — | |||||||||||||||||||||||
| Deferred compensation amortization | — | — | — | — | — | |||||||||||||||||||||||
| Purchase of treasury stock costs | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Net (loss) for the period | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Issuance of common stock under equity incentive plan | — | ( | ) | — | ||||||||||||||||||||||||
| Warrant compensation cost | — | — | — | — | — | |||||||||||||||||||||||
| Deferred compensation amortization | — | — | — | — | — | |||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Net (loss) for the period | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Issuance of common stock under equity incentive plan | — | — | — | |||||||||||||||||||||||||
| Warrant compensation cost | — | — | — | — | — | |||||||||||||||||||||||
| Cashless warrant exercise | ( | ) | — | — | — | — | ||||||||||||||||||||||
| Reversal of deferred compensation amortization that did not vest | ( | ) | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||||||||
| Issuance of common stock, public offering | — | — | — | |||||||||||||||||||||||||
| Issuance of common stock, private offering | — | — | — | |||||||||||||||||||||||||
| Deferred compensation amortization | — | — | — | — | — | |||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Net (loss) for the period | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements of Usio, Inc. and its subsidiaries (the “Company”) have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company's financial position, results of operations and cash flows for such periods. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission on March 30, 2021. 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.
Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 and bill preparation, presentment and mailing services. Revenue is recognized during the period in which the transactions are processed or when the related services are performed. The Company complies with ASC 606-10 and reports revenues at gross as a principal versus net as an agent. Although some of the Company's processing agreements vary with respect to specific credit risks, the Company has determined for each agreement it is acting in the principal role. Merchants may be charged for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through third-party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations. Certain card distributors remit payment of fees earned 45 days after the end of the processing period. Prepaid card distributors have payment terms of 30 days following the end of the month. Sales taxes billed are reported directly as a liability to the taxing authority and are not included in revenue. Usio Output Solutions, Inc. provides bill preparation, presentment and mailing services. Revenue from Output solutions is recognized when the related services are performed for printing and delivered to USPS for postage.
The following table presents the Company's revenues by source:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| ACH and complementary service revenue | $ | $ | $ | $ | ||||||||||||
| Credit card revenue | ||||||||||||||||
| Prepaid card services revenue | ||||||||||||||||
| Output solutions revenue | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Deferred Revenues: The Company records deferred revenues when it receives payments in advance of transferring control of promised goods or services to a customer. The advance consideration received from a customer is deferred until the Company provides the customer that product or service. The deferred revenues totaled $
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 settlement process 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.
Prepaid Card Load Assets: The Company maintains pre-funding accounts for its customers to facilitate prepaid card loads as initiated by the customer. These prepaid card load assets are carried on the Company's balance sheet with a corresponding liability.
The reconciliation of cash and cash equivalents to cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves is as follows for each period presented:
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Beginning cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Prepaid card load assets | ||||||||
| Customer deposits | ||||||||
| Merchant reserves | ||||||||
| Total | $ | $ | ||||||
| Ending cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Prepaid card load assets | ||||||||
| Customer deposits | ||||||||
| Merchant reserves | ||||||||
| Total | $ | $ | ||||||
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. Past losses incurred by the Company due to bad debts have been 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 be required. 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 $
Inventory: Inventory is stated at the lower of cost or net realizable value. At September 30, 2021 and December 31, 2020, inventory consisted primarily of printing and paper supplies used for Output 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-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. In the nine months ended September 30, 2021 and September 30, 2020, the Company capitalized $
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 performance 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.
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 September 30, 2021 and December 31, 2020, the Company’s reserve for processing losses was $
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 Accounting Pronouncements: In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326), to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in Topic 326 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Topic 326 is effective for fiscal years beginning after December 25, 2022, including interim periods within those fiscal years for smaller reporting companies. The Company does not expect the adoption of the amendments in ASU 2016-13 to have a significant effect on its financial position and the results of its operations when such amendment is adopted.
Accounting standards that have been issued or proposed by the FASB, the SEC or other standard setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
Note 2. Acquisition of Information Management Solutions, LLC.
On December 15, 2020, the Company entered into an asset purchase agreement to purchase substantially all the assets of Information Management Solutions, LLC ("IMS"), a Texas limited liability company in the business of 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. The total purchase price consideration consisted of a cash payment of $
The final number of warrants was determined by dividing $
The purchase price was allocated to the net assets acquired based upon their estimated fair values as follows:
| Estimated Fair | Estimated Useful | |||||||
| Value | Life (in years) | |||||||
| Accounts receivable | $ | |||||||
| Inventory | ||||||||
| Fixed assets | ||||||||
| Prepaid expenses | ||||||||
| Other assets | ||||||||
| Customer list | ||||||||
| Total Cash Consideration | $ | |||||||
| Customer list | $ | |||||||
| Total Warrant Consideration | $ | |||||||
| Total Purchase Price | $ | |||||||
Unaudited Pro Forma Information
The unaudited proforma results including the effects of the IMS acquisition as if it had been consummated on January 1, 2019 were included in a Form 8-K/A filed on March 3, 2021 and summarized in the Form 10-K filed on March 30, 2021.
Note 3. Leases
The Company leases facilities and office equipment under various operating leases, which generally are expected to be renewed or replaced by other leases. For the quarters ended September 30, 2021 and 2020, operating lease expenses totaled $
Operating lease liabilities as of September 30, 2021 will require the following payments:
| 2021 (excluding the nine months ended September 30, 2021) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total minimum lease payments | ||||
| Less imputed interest | ( | ) | ||
| Total lease liabilities | $ |
Note 4. Accrued Expenses
Accrued expenses consisted of the following balances:
| September 30, 2021 | December 31, 2020 | |||||||
| Accrued commissions | $ | $ | ||||||
| Reserve for merchant losses | ||||||||
| Other accrued expenses | ||||||||
| Accrued taxes | ||||||||
| Accrued salaries | ||||||||
| Total accrued expenses | $ | $ | ||||||
Note 5. Equipment Loan
On March 20, 2021, the Company entered into a debt arrangement to finance $
Note 6. Stockholders' Equity
Stock Warrants: On August 21, 2018, the Company issued University FanCards, LLC a warrant to purchase
On August 12, 2020, the Company issued
On February 5, 2021, the Company issued
On September 1, 2021, the Company issued
On December 15, 2020, the Company issued to Information Management Solutions, LLC warrants to purchase
Equity Transactions: On April 1, 2020, the Company granted
On July 1, 2020, Topline Capital Partners, LP purchased
On September 25, 2020, the Company entered into a placement agency agreement with Ladenburg Thalmann & Company Inc. for the issuance and sale of an aggregate of
Note 7. 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 nine months ended September 30, 2021 and September 30, 2020.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Numerator: | ||||||||||||||||
| Numerator for basic and diluted income (loss) per share, net income (loss) available to common shareholders | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Denominator: | ||||||||||||||||
| Denominator for basic (loss) per share, weighted average shares outstanding | ||||||||||||||||
| Effect of dilutive securities | ||||||||||||||||
| Denominator for diluted earnings per share, adjust weighted average shares and assumed conversion | ||||||||||||||||
| Basic income (loss) per common share | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Diluted income (loss) per common share and common share equivalent | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
The awards and options to purchase shares of common stock that were outstanding at September 30, 2021 and September 30, 2020 that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive, are as follows:
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Anti-dilutive awards and options | ||||||||
Note 8. Income Taxes
Deferred tax assets and liabilities are recorded based on the difference between financial reporting and tax basis of assets and liabilities and are measured by the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Deferred tax assets are computed with the presumption that they will be realizable in future periods when taxable income is generated. Predicting the ability to realize these assets in future periods requires judgment by management. U.S. generally accepted accounting principles prescribe a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Income tax benefits that meet the “more likely than not” recognition threshold should be recognized.
The Company has recognized a deferred tax asset of approximately $
At December 31, 2020, the Company had available net operating loss carryforwards of approximately $
Management is not aware of any tax positions that would have a significant impact on the Company’s financial position.
Note 9. Related Party Transactions
Louis Hoch
During the nine months ended September 30, 2021 and the year ended December 31, 2020, the Company purchased a total of $
Directors and Officers
On January 6, 2021, the Company repurchased
On January 6, 2020, the Company repurchased
On April 1, 2021, the Company granted
On November 1, 2020, as approved by the Company's Compensation Committee, the Company issued
Note 10. COVID-19
The ongoing COVID-19 pandemic has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses, “shelter in place” and other governmental regulations, reduced consumer spending due to both job losses and other effects attributable to the COVID-19 pandemic. There remain many uncertainties as a result of the pandemic. As a result of the spread of COVID-19, economic uncertainties could continue to impact our operations. Any potential incremental financial impact is unknown at this time.
At this time, certain states are considering reinstatement of select mandated operating restrictions and continued efforts are underway to provide vaccinations to as many people as possible. 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, our business was adversely affected as doctor's offices, dental offices, veterinarian offices and non-bank consumer lending accounts were ordered closed in connection with curbing the spread of the pandemic. As these doctors, dental and veterinarian offices re-opened, these businesses quickly recovered and returned to levels higher than pre-COVID. Consumer lending merchants were adversely affected by COVID relief payments made during the pandemic and a pause placed on past due amounts owed. The level of activity for consumer lending merchants has somewhat returned to pre-COVID levels. We received an increase in revenues in our prepaid business line, as we were able to work in conjunction with major cities across the U.S. to use our prepaid debit cards to facilitate the transfer of money via our debit cards from city foundations to the local residents in need of financial assistance. The efforts have included the disbursement of funds to encourage vaccinations.
The Company has recently experienced some difficulty in recruiting and retaining certain categories of employees due to limited resource availability. The Company continues to monitor resource availability and is taking necessary steps to retain employees and recruit employees to fill open positions.
The impacts and recovery from the COVID-19 pandemic are still a work in process. To date, we have 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, we will continue to monitor the overall impact on our operations and take necessary steps to ensure the safety of our employees and the well-being of our customers.
Note 11. Subsequent Events
On October 19, 2021, the Company entered into a lease amendment to the existing lease in San Antonio, Texas commencing on December 1, 2021 and expiring on September 24, 2024 running concurrently with the existing lease. The incremental space lease is
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS DISCLAIMER
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. If used in this report, the words "anticipate," "believe," "estimate," "intend," and other words or phrases of similar import are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described in our annual report on Form 10-K and other reports we file with the Securities and Exchange Commission. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made. We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.
This discussion and analysis should be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes thereto included in this report, and our annual report on Form 10-K for the fiscal year ended December 31, 2020, filed on March 30, 2021, including the audited consolidated financial statements and the notes contained therein.
Name Change
Effective on June 26, 2019, we changed our corporate name from Payment Data Systems, Inc. to Usio, Inc.
Overview
We provide integrated electronic payment processing services to merchants and businesses, including all types of Automated Clearing House, or ACH processing, credit card, PINless debit, prepaid card and debit card-based processing services. Through Akimbo, under the domain name www.akimbocard.com, we offer MasterCard prepaid cards to consumers for use as a tool to stay on budget, to manage allowances, and to share money with family and friends. We have further developed our Akimbo platform to include Akimbo Now for businesses, Akimbo Gift for consumers and support for Apple Pay®, Android Pay™ and Samsung Pay™. With the acquisition of the assets of IMS in December 2020, we now offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services.
During the third quarter of 2021, the amount of credit card transactions processed increased by 76% versus the third quarter of 2020. The volume of credit card dollars processed during the third quarter of 2021 increased by 43% compared to the same time period in 2020. Both credit card transactions processed and dollars processed were the highest in our history. The continued growth in credit card metrics was primarily attributable to our PayFac growth initiatives driving increased penetration across multiple industries including healthcare and legal.
ACH (eCheck) transaction counts during the third quarter of 2021 increased by 86% compared to the third quarter of 2020. Returned check transactions processed during the third quarter of 2021 increased by 100% compared to the third quarter of 2020. Electronic check dollars processed during the third quarter of 2021 increased by 100% compared to the third quarter of 2020. The increases in eCheck transactions, returned check transactions and electronic check dollar volumes processed were primarily attributable to higher activity levels primarily in the cryptocurrency and FinTech lending industries.
Prepaid card load volumes processed during the third quarter of 2021 increased by 2% compared to the third quarter of 2020. Prepaid card transaction counts processed during the third quarter of 2021 increased by 115% compared to the third quarter of 2020. Prepaid card purchase volume during the third quarter of 2021 increased by 18% compared to the third quarter of 2020. 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 for the third quarter of 2021 were $2.1 billion compared to $852 million processed in the third quarter of 2020.
Critical Accounting Policies
Our management’s discussion and analysis of our financial condition and results of operations is based upon our interim condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to the reported amounts of revenues and expenses, bad debt, investments, intangible assets, income taxes, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. We consider the accounting policies described in Note 1 to the Notes to the Interim Condensed Consolidated Financial Statements to be critical because the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change or because the impact of the estimates and assumptions on financial condition or operating performance is material.
For a summary of Critical Accounting Policies, please refer to the Notes to Interim Condensed Consolidated Financial Statements, Note 1, Basis of Presentation.
Results of Operations
Revenues
Our revenues are principally derived from providing integrated electronic payment services to merchants and businesses, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH, network and the program management and processing of prepaid debit cards. With the acquisition of the assets of IMS in December 2020, we now offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services through our Output Solutions entity.
| Three Months Ended September 30, |
||||||||||||||||
| 2021 |
2020 |
$ Change |
% Change |
|||||||||||||
| ACH and complementary service revenue |
$ | 3,733,453 | $ | 2,063,458 | $ | 1,669,995 | 80.9 | % | ||||||||
| Credit card revenue |
6,509,344 | 5,076,591 | 1,432,753 | 28.2 | % | |||||||||||
| Prepaid card services revenue |
2,004,657 | 997,028 | 1,007,629 | 101.1 | % | |||||||||||
| Output solutions revenue |
3,573,616 | — | 3,573,616 | 100.0 | % | |||||||||||
| Total Revenue |
$ | 15,821,070 | $ | 8,137,077 | $ | 7,683,993 | 94.4 | % | ||||||||
| Nine Months Ended September 30, |
||||||||||||||||
| 2021 |
2020 |
$ Change |
% Change |
|||||||||||||
| ACH and complementary service revenue |
$ | 10,813,806 | $ | 6,080,449 | $ | 4,733,357 | 77.8 | % | ||||||||
| Credit card revenue |
18,791,129 | 14,647,448 | 4,143,681 | 28.3 | % | |||||||||||
| Prepaid card services revenue |
3,968,764 | 2,141,412 | 1,827,352 | 85.3 | % | |||||||||||
| Output solutions revenue |
10,942,062 | — | 10,942,062 | 100.0 | % | |||||||||||
| Total Revenue |
$ | 44,515,761 | $ | 22,869,309 | $ | 21,646,452 | 94.7 | % | ||||||||
Revenues for the quarter ended September 30, 2021 increased by 94.4% to $15.8 million, as compared to $8.1 million for the quarter ended September 30, 2020. Excluding the impact of the Output Solutions revenues, the organic growth was 51% versus the same period last year. The revenue increases were across all business lines including incremental revenues from our Output Solutions plus double-digit gains in our other business lines as referenced above. During the third quarter we saw continued growth in our ACH and complementary service category from strong transaction growth in our cryptocurrency and FinTech lending businesses.
For the nine months ended September 30, 2021, revenues increased by 95% to $44.5 million, as compared to $22.9 million for the nine months ended September 30, 2020. Excluding the impact of the Output Solutions revenues, the organic growth was 47% versus the same period last year. The revenue increases were across all business lines including incremental revenues from our Output Solutions plus double-digit gains in our other business lines as referenced above.
Cost of Services
Cost of services includes the cost of personnel dedicated to the creation and maintenance of connections to third-party payment processors and the fees paid to such third-party providers for electronic payment processing services. Through our contractual relationships with our payment processors and sponsoring banks, we process ACH and debit, credit or prepaid card transactions on behalf of our customers and their consumers. We pay volume-based fees for debit, credit, ACH and prepaid transactions initiated through these processors or sponsoring banks, and pay fees for other transactions such as returns, notices of change to bank accounts and file transmission. Cost of service fees also include fees paid to referral agents and partners.
Cost of services increased by $5.4 million, or 84% to $11.8 million for the quarter ended September 30, 2021, as compared to $6.4 million for the same period in the prior year. Cost of services increased by $15.5 million, or 87% to $33.4 million for the nine months ended September 30, 2021, as compared to $17.9 million for the same period in the prior year. The increases in the quarter and nine-month period ended September 30, 2021, as compared to the same period in the prior year, were primarily due to the increased costs associated with higher revenues plus incremental costs associated with the Output Solutions business.
Gross Profit
Gross profit is the net profit existing after the cost of services.
Gross profits increased by 134% to $4.0 million for the quarter ended September 30, 2021, as compared to $1.7 million for the same period in the prior year. Gross profits for the nine months ended September 30, 2021 increased by 124% to $11.1 million as compared to $4.9 million for the same period in the prior year. The increase in gross profit for the quarter and nine months ended September 30, 2021, as compared to the same period in the prior year, was primarily a result of incremental profits from our existing business lines plus the incremental profits of our Output Solutions business. The gross margin percentage was 25.5% for the quarter ended September 30, 2021 as compared to 21.2% in the prior year period. The gross margin percentage was 24.9% for the nine months ended September 30, 2021 as compared to 21.6% in the prior year period. The increase in gross margin percentage in the quarter and nine months ended September 30, 2021, as compared to the same periods in the prior year, are attributable to product mix shifts to higher profit transactions plus overall margin improvements.
Stock-based Compensation
Stock-based compensation expenses were $343,567 for the quarter ended September 30, 2021 as compared to $267,223 for the quarter ended September 30, 2020, an increase of 28.6%. The prior year period was lower than normal due the reversal of stock compensation expense due to stock cancellations. Stock compensation expense for the nine months ended September 30, 2021 was $988,567 as compared to $903,326 for the nine months ended September 30, 2020, an increase of 9.4%.
Other Selling, General and Administrative Expenses
Other selling, general and administrative expenses (other SG&A) were $2.8 million for the quarter ended September 30, 2021 as compared to $2.0 million in the prior year, a 44% increase versus the prior year period. Other SG&A expenses for the nine months ended September 30, 2021 increased to $8.3 million from $6.0 million, a 40% increase. The increase in other SG&A for the quarter and nine months ended September 30, 2021 reflects the incremental costs associated with our Output Solutions business and our continued investment in our prepaid and PayFac growth initiatives.
Depreciation and Amortization
Depreciation and amortization totaled $0.6 million and $0.4 million for the quarters ended September 30, 2021 and September 30, 2020, respectively and $1.9 million and $1.2 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. The incremental expense was primarily associated with the amortization of the IMS customer list asset.
Other Income (Expense)
Other income and expense, net was $287 for the quarter ended September 30, 2021 compared to other income of $10,343 for the quarter ended September 30, 2020. For the nine months ended September 30, 2021 and September 30, 2020, respectively, other income and expense, net was $3,439 and $23,712, respectively. Lower interest-bearing merchant reserves and lower interest rates drove the lower interest income and reflects interest expense associated with our equipment loan.
Net Income (Loss)
We reported net income of $0.1 million for the quarter ended September 30, 2021, as compared to a net loss of $0.9 million for the same period in the prior year. We reported a net loss of $0.4 million for the nine months ended September 30, 2021 compared to a net loss of $3.1 million for the same period in the prior year. The net income improvement in the current quarter and the nine month periods was attributable to increases in revenues and profits of the entity.
We may incur future operating losses. To maintain, grow and sustain profitability, we must, among other things, continue to incrementally grow and maintain our customer base, sell our ACH, credit card, prepaid product offerings and output solutions offerings to existing and new customers, implement successful marketing strategies, maintain and upgrade our technology and transaction-processing systems, provide superior customer service, respond to competitive developments, attract, retain and motivate personnel, and respond to unforeseen industry developments among other factors.
We believe that our success will continue to depend in large part on our ability to (a) grow revenues, (b) manage our operating expenses, (c) add quality customers to our client base, (d) meet evolving customer requirements, (e) adapt to technological changes in an emerging market, and (f) assimilate current and future acquisitions of companies and customer portfolios. We will continue to invest in our sales force and technology platforms to drive revenue growth. In particular, we are focused on growing our ACH merchants, adding new software integrators, growing our electronic bill presentment, document composition, document decomposition, printing and mailing services business while providing incremental services to existing merchants. In addition to our near-term growth opportunities, we are focused on leveraging and optimizing the infrastructure of the organization allowing expansion of our payment processing and mail and printing capabilities without significantly increasing our operating costs.
Liquidity and Capital Resources
At September 30, 2021, we had $5.9 million of cash and cash equivalents, as compared to $5.0 million of cash and cash equivalents at December 31, 2020.
We received funding under the Paycheck Protection Program, or PPP, as part of the Coronas Aid, Relief and Economic Security Act, or CARES Act, administered by the U.S. Small Business Administration. We received total proceeds of $813,500 bearing interest at a rate of 1% per annum with a maturity date of April 15, 2022. We used the proceeds for payroll costs and other permitted expenses. Under the terms of the PPP, the principal could be forgiven if the loan proceeds were used for qualifying expenses as described in the CARES act, such as for payroll costs, benefits, rents and utilities. The Company's loan forgiveness was approved in full by the U.S. Small Business Administration on December 14, 2020 and was accounted for as income in 2020 under FASB ASC 470.
On July 1, 2020, Topline Capital Partners, LP purchased 1,796,407 unregistered shares of common stock at an offering price of $1.67 per share in a private offering. The gross proceeds to us from the private offering were $3.0 million.
On September 25, 2020, we entered into a placement agency agreement with Ladenburg Thalmann & Company Inc. for the issuance and sale of an aggregate of 4,705,883 shares of common stock at an offering price of $1.70 per share in a public offering. We agreed to pay Ladenburg a cash fee of equal to $0.12325 per share of common stock sold in the offering as well as legal fees and expenses of up to $100,000. The net proceeds to the Company from the public offering were $7.4 million, after deducting the offering expenses and fees payable by the Company.
We reported a net income of $0.1 million for the quarter ended September 30, 2021 and a net loss of $0.4 million for the nine months ended September 30, 2021. At September 30, 2021, we had an accumulated deficit of $65.4 million. Additionally, we had working capital of $6.9 million and $5.6 million at September 30, 2021 and December 31, 2020, respectively.
Cash Flows
Net cash provided by operating activities, including merchant reserve funds, prepaid card load assets, customer deposits and net operating lease assets was $8.7 million and $4.6 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. Excluding merchant reserves, prepaid card load assets, customer deposits and lease right-of-use assets and liabilities, our cash provided by operating activities was $2.0 million and cash used by operating activities was $1.0 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. We continue to invest resources and infrastructure in our business to achieve scale across all business lines.
Net cash used by investing activities was $999,493 and $582,347 for the nine months ended September 30, 2021 and September 30, 2020, respectively. The primary drivers of our investing activities were capital expenditures associated with capitalized software development costs and other capital investments associated with growing our business lines and associated employee counts.
Net cash used by financing activities for the nine months ended September 30, 2021 was $58,800 and net cash provided by financing activities for the nine months ended September 30, 2020 was $10,891,114, respectively. The 2021 cash used by financing activities was net proceeds from our equipment loan offset by treasury stock transactions. The 2020 net funds provided by financing activities was the net proceeds from our public and private stock offerings plus proceeds from our PPP loan.
Material Trends and Uncertainties
Please refer of our Covid-19 risks described in Note 10 to our financial statements.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
Item 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive and Chief Financial Officers, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report on Form 10-Q. Based on that evaluation, our Chief Executive and Chief Financial Officers concluded that our disclosure controls and procedures as of September 30, 2021 were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive and Chief Financial Officers, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our evaluation of disclosure controls and procedures included an evaluation of certain components of our internal control over financial reporting. Management’s assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance that the control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Vaden Landers
On January 19, 2021, we initiated a lawsuit in Bexar County, Texas against our former Chief Revenue Officer, Vaden Landers. In the lawsuit, which is styled: Usio, Inc. v. Vaden Landers, Cause No. 2021CI01069, 407th Judicial District Court, Bexar County, Texas, we allege that Mr. Landers violated the provisions of his employment agreement dated September 1, 2017 - specifically that Mr. Landers violated his non-compete obligations. The state court lawsuit only seeks injunctive relief against Mr. Landers. We also instituted an action before the American Arbitration Association on February 2, 2021.
Mr. Landers initially refused to participate in the arbitration proceeding. After hearings in Bexar County state court proceeding, all of the parties' claims, excluding Mr. Lander's claims for defamation and tortious interference with contract, were ordered to be heard by the American Arbitration Association. We deny Mr. Landers’ allegations and do not believe that his counterclaims have any merit.
On or about April 27, 2021, Mr. Landers filed his answering statement and counterclaim against us in the arbitration proceeding. Therein, Mr. Landers alleged a variety of defenses to our claim that Landers violated the non-compete provisions of his employment agreement. Mr. Landers also asserted a counterclaim for a declaratory judgment finding the non-compete provisions are unenforceable. Mr. Landers further alleged that we breached the terms of his employment agreement because Mr. Landers' resignation was for good reason thus entitling Mr. Landers to deferred compensation. We deny Mr. Landers' allegations.
Through our investigation, we have learned that Mr. Landers committed other violations of his employment agreement and we intend to pursue those claims in arbitration. Both the state court litigation and the arbitration are in their initial stages. We have obtained certain documents from Mr. Landers in the state court proceeding. Additional written discovery will be required before any depositions are taken in the state court litigation.
In the arbitration, the parties have both submitted motions to the arbitration panel on the initial legal question of whether the non-compete is enforceable. On September 16, 2021, the arbitration panel ruled the non-competition provisions in Mr. Landers' employment agreement were enforceable. The panel reserved ruling on the scope of the restrictions contained therein pending discovery. The arbitration panel held that the non-compete provisions need to be reformed to more specifically set forth the competition restrictions applicable to Mr. Landers. The parties attempted to confer on a mutually agreeable reformation, but were unable to reach an agreement. The parties are now engaging in written discovery both as to the anticipated reformation on the non-compete provision and the ultimate merits of the case.
The state court case involving Mr. Landers is still in discovery phase. There is no current trial setting.
We consider the risk of loss as remote related to this lawsuit.
World Health Merchants, LLC and Laitan Group, LLC
On July 21, 2021, a lawsuit was filed against us in Bexar County, Texas by two former merchants, World Health Merchants, LLC and Laitan Group, LLC. Three additional defendants were named in the lawsuit: Central Bank of St. Louis, Allied Platforms LLC, and Heriberto Cepeda.
The World Health lawsuit concerns the processing of certain transactions by us for the plaintiff merchants, which were referred to us by Allied Platforms, LLC, and defendant Mr. Cepeda pursuant to a referral agent agreement by and between us and Allied Platforms, LLC. After initial concerns arose regarding the Plaintiffs’ transactions, we, pursuant to the applicable sub merchant processing agreement, terminated the processing of transactions for Plaintiffs. Pursuant to the same agreement, we retained certain funds for the purposes of processing returns.
After termination of the sub merchant processing agreement, Plaintiffs repeatedly demanded the return of all monies, which are in the custody of defendant, Central Bank of St. Louis. We requested documentation from plaintiffs to substantiate the true nature of the transactions. The initial documentation provided to us raised additional concerns regarding the transactions.
After we retained counsel, additional demands were made for the return of the subject funds. However, additional concerns arose regarding ownership of the dispute funds. Based on the conflicting demands and claims of ownership, we retained the funds pending further information. Our counsel requested additional information from various attorneys claiming to represent plaintiffs. No further information or documents were provided, and plaintiff subsequently filed the lawsuit.
We settled the case without prejudice on September 16, 2021. The confidential settlement agreement provides for a release of funds by Central Bank of St. Louis to the Plaintiff. We received certain risk mitigation payments totaling $156,166 pursuant to the settlement agreement. We also received $15,000 for our reasonable and necessary attorney fees incurred in the matter.
KDHM, LLC
On September 1, 2021, KDHM, LLC sued PDS Acquisition Corp, now known as USIO Output Solutions, Inc., claiming a breach of the asset purchase agreement executed by the parties on December 14th, 2020. The lawsuit alleges that due to a mistake, accident, or inadvertence, certain customer deposits in the amount of $317,000 were improperly transferred two us.
We believe that plaintiff's claims in the lawsuit have no merit and contradict the express terms of the asset purchase agreement. As a result of this post sale dispute, we discovered that KDHM, LLC, and its principals, made certain misrepresentations and breached the terms of the asset purchase agreement.
On September 28, 2021, we filed an answer generally denying plaintiff’s allegations. On October 5, 2021, we filed a counterclaim and third-party petition. Therein, we allege that neither KDHM nor its principals disclosed that KDHM was not accounting for the customer deposits in accordance with Generally Accepted Accounting Principles. Yet, KDHM, and third-party defendants its principals Henry Minten and Thomas Dowe, affirmatively represented and warranted in section 3.1(e) of the agreement that “[t]Annual Financial Statements and the Interim Financial Statements have been prepared from the books and records of Seller in accordance with GAAP applied on a consistent basis.”
We also discovered that KDHM by and through its principals failed to disclose that $305,000 in additional customer deposits existed and these deposits were not conveyed to us as required by the agreement. KDHM, Minten and Dowe provided us with fraudulent and misleading profit and loss statements that did not disclose these additional customer deposits. KDHM and the defendants do not dispute that these additional customer deposits exist and that they were purchased by Usio. However, despite a written representation that these funds would be returned, KDHM and its principal have held these funds hostage. Section 2.1(b)(x) of the agreement provides that the purchased assets includes “All of Seller’s deposits from its customer, including without limitation, those customer deposits listed on Schedule 2.1(b)(xi) of the Disclosure Schedules.” Finally, we discovered that KDHM did not provide us with all customer lists, which are identified as purchased asset under the agreement. We demanded the missing customer lists, but they have yet to be provided to us per the agreement.
In our counterclaims and third-party petition, we assert causes of action for fraud, breach of contract and conversion. At this time, the parties have not engaged in any written discovery or depositions and no trial date has been set.
We consider the risk of loss as remote related to this lawsuit.
Aside from these proceedings above, we may be involved in legal matters arising in the ordinary course of business from time to time. While we believe that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which we are or could become involved in litigation will not have a material adverse effect on our business, financial condition or results of operations.
There have been no material changes from risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the Securities and Exchange Commission on March 30, 2021.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Recent Sales of Unregistered Securities
On September 1, 2021, we issued 19,950 shares 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.
We relied on the Section 4(a)(2) exemption from securities registration under the federal securities laws for transactions not involving any public offering. No advertising or general solicitation was employed in offering the securities. The securities were issued to an accredited investor. The securities were offered for investment purposes only and not for the purpose of resale or distribution. The transfer thereof was appropriately restricted by us.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On November 2, 2016, we announced that our Board of Directors authorized the repurchase of up to $1 million of our common shares from time to time on the open market, in block transactions, or in privately negotiated transactions. On January 9, 2018, the Board of Directors added an additional $2 million to the buyback plan. The program began on November 16, 2016 and ended on September 29, 2019. At September 29, 2019 when the program ended, $1,374,049 was available under the repurchase plan. On November 7, 2019, the Board of Directors approved the renewal of the share buy-back program. The Board approved a limit of $1,420,000 which was rolled over from the prior buyback program with a three-year duration. The new buyback program terminates on the earliest of September 30, 2022, the date the funds are exhausted, or the date the Board of Directors, at its sole discretion, terminates or suspends the program. The program is used for the purchase of stock from employees and directors, and for open-market purchases through a broker. During the three months ended September 30, 2021, 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 | ||||||||||||
| July 1 - July 31, 2021 |
4,152 | $ | 5.98 | 961,163 | $ | 1,010,546 | ||||||||||
| August 1 - August 31, 2021 |
14,715 | $ | 5.56 | 975,878 | $ | 928,757 | ||||||||||
| September 1 - September 30, 2021 |
2,077 | $ | 6.01 | 977,878 | $ | 916,265 | ||||||||||
| Total |
20,944 | $ | 916,265 | |||||||||||||
On January 6, 2021, we repurchased 11,860 shares for $38,545 in a private transaction at a closing price on January 6, 2021 of $3.25 per share from Tom Jewell, our Chief Financial Officer to cover his share of taxes.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
None.
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Description |
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| 3.1 |
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| 3.2 |
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| 3.3 |
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| 3.4 |
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| 3.5 |
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| 3.6 | Amendment to the Amended and Restated By-laws (included as exhibit A to Schedule 14C filed April 18, 2007, and incorporated herein by reference). | |
| 10.1 |
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| 10.2 |
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| 10.3 |
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| 10.4 |
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| 10.5 |
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| 10.6 |
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| 10.7 |
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| 10.8 |
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| 10.9 |
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| 10.10 |
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| 10.11 |
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| 10.12 |
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| 10.13 |
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| 10.14 |
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| 10.15 |
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| 10.16 |
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| 10.17 |
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| 10.18 |
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| 10.19 |
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| 10.20† |
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| 10.35 | 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). | |
| 10.36 | 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). | |
| 10.37 | 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). | |
| 10.38 | 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). |
| 101.SCH |
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Inline XBRL Taxonomy Extension Schema Document (filed herewith). |
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| 101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith). |
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| 101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith). |
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| 101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith). |
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| 101.PRE |
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Inline XBRL Taxonomy Presentation Linkbase Document (filed herewith). |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
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| † |
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Confidential treatment has been granted for portions of this agreement. |
| + | The schedules to the exhibit have been omitted from this filing pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish copies of any such schedules to the SEC upon request. | |
| * | Filed herewith. |
Copies of above exhibits not contained herein are available to any stockholder, upon written request to: Chief Financial Officer, Usio, Inc., 3611 Paesanos Parkway, Suite 300, San Antonio, TX 78231.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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USIO, INC |
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| Date: November 10, 2021 |
By: |
/s/ Louis A. Hoch |
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Louis A. Hoch |
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Chief Executive Officer |
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(Principal Executive Officer) |
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| Date: November 10, 2021 | By: |
/s/ Tom Jewell |
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Tom Jewell |
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Chief Financial Officer |
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(Principal Accounting Officer) |
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