Usio(USIO) - 2019 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements, management's discussion, market risk, and controls Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and stockholders' equity, along with detailed notes explaining the accounting policies, significant balances, and recent accounting pronouncements. The company reported a net loss of $1,072,889 for the quarter ended March 31, 2019 Condensed Consolidated Balance Sheets This section provides a snapshot of the company's assets, liabilities, and equity at specific dates | Metric | March 31, 2019 | December 31, 2018 | | :-------------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $4,465,718 | $2,695,177 | | Total current assets | $52,421,903 | $60,905,668 | | Total assets | $62,028,324 | $68,215,512 | | Total current liabilities | $48,838,088 | $58,502,038 | | Total liabilities | $51,403,011 | $58,581,786 | | Total stockholders' equity | $10,625,313 | $9,633,726 | - Cash and cash equivalents increased by $1,770,541 from December 31, 2018, to March 31, 2019[10] - Total assets decreased by $6,187,188, and total liabilities decreased by $7,178,775 from December 31, 2018, to March 31, 2019[10] Condensed Consolidated Statements of Operations This section details the company's revenues, expenses, and net loss over specific periods | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Revenues | $6,588,032 | $5,843,665 | | Cost of services | $5,252,301 | $4,572,758 | | Gross profit | $1,335,731 | $1,270,907 | | Operating (loss) | $(1,095,964) | $(1,060,785) | | Net (loss) | $(1,072,889) | $(1,050,806) | | Basic (loss) per common share | $(0.09) | $(0.09) | | Diluted (loss) per common share | $(0.09) | $(0.09) | - Revenues increased by 12.7% from $5,843,665 in Q1 2018 to $6,588,032 in Q1 2019[14] - Net loss slightly increased from $(1,050,806) in Q1 2018 to $(1,072,889) in Q1 2019[14] Condensed Consolidated Statements of Cash Flows This section outlines the cash inflows and outflows from operating, investing, and financing activities | Cash Flow Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash (used) by operating activities | $(1,196,528) | $(239,087) | | Net cash (used) by investing activities | $(152,923) | $(29,502) | | Net cash provided (used) by financing activities | $1,772,083 | $(956,134) | | Change in cash, cash equivalents and merchant reserves | $422,632 | $(1,224,723) | - Net cash used by operating activities significantly increased from $(239,087) in Q1 2018 to $(1,196,528) in Q1 2019[17] - Financing activities provided $1,772,083 in Q1 2019, primarily due to a public offering, compared to cash used of $(956,134) in Q1 2018[17] Condensed Consolidated Statements of Stockholders' Equity This section shows changes in the company's equity components over specific periods | Equity Component | Balance at Dec 31, 2018 | Balance at Mar 31, 2019 | | :-------------------------------- | :---------------------- | :---------------------- | | Common Stock (Shares) | 17,129,680 | 17,961,132 | | Common Stock (Amount) | $185,561 | $186,392 | | Additional Paid-In Capital | $74,568,627 | $76,429,299 | | Treasury Stock | $(1,813,546) | $(1,835,368) | | Deferred Compensation | $(6,270,675) | $(6,045,880) | | Accumulated Deficit | $(57,036,241) | $(58,109,130) | | Total Stockholder's Equity | $9,633,726 | $10,625,313 | - Total stockholders' equity increased by $991,587 from December 31, 2018, to March 31, 2019, primarily due to a public offering[18] - Accumulated deficit increased by $1,072,889, reflecting the net loss for the period[18] Notes to Condensed Consolidated Financial Statements This section offers detailed explanations of accounting policies, significant balances, and transactions Note 1. Basis of Presentation This note explains the accounting principles, revenue recognition, and recent accounting standard adoptions - The Company recognizes revenue primarily from electronic payment transaction processing and related services on a gross basis, acting as the principal obligor[21][30] | Metric | March 31, 2019 | December 31, 2018 | | :-------------------------------- | :------------- | :---------------- | | Deferred revenues | $5,000 | $20,000 | | Allowance for estimated doubtful accounts | $50,575 | $55,212 | | Reserve for processing losses | $407,153 | $374,153 | - The Company capitalized $140,043 in internal use software costs for the three months ended March 31, 2019, a significant increase from $15,878 in the prior year period[27] - The Company adopted new accounting standards for revenue recognition (ASC 606), restricted cash (ASU 2016-18), and leases (Topic 842) effective January 1, 2018, and January 1, 2019, respectively. Lease adoption resulted in recognizing $2,688,412 in right-of-use assets and $2,775,259 in lease liabilities[30][31][32] Note 2. Leases This note details the company's operating lease commitments and related expenses | Period | Operating Leases (March 31, 2019) | | :-------------------------------- | :-------------------------------- | | 2019 (Remaining 9 months) | $226,743 | | 2020 | $336,301 | | 2021 | $336,644 | | 2022 | $344,554 | | 2023 | $350,915 | | Thereafter | $1,823,669 | | Total minimum lease payments | $3,418,826 | | Less imputed interest | $(669,333) | | Total lease liabilities | $2,749,493 | - Operating lease expense for the three months ended March 31, 2019, was $103,522, up from $71,839 in the prior year[37] Note 3. Note Receivable This note discusses the status and collection efforts for a specific note receivable - The Company is pursuing collection of a $145,000 principal amount from Mercury Investment Partners LLC, following a default judgment granted on December 21, 2018, related to a loan to C2Go, Inc[39][40] - A loss reserve on the note receivable was reduced from $72,500 to $36,250 from December 31, 2018, through March 31, 2019, reflecting a 'more likely than not' recognition threshold due to the default judgment[40] Note 4. Accrued Expenses This note itemizes and explains changes in various accrued liabilities | Accrued Expense | March 31, 2019 | December 31, 2018 | | :-------------------------------- | :------------- | :---------------- | | Accrued commissions | $246,601 | $243,317 | | Reserve for merchant losses | $407,153 | $374,153 | | Other accrued expenses | $1,037,027 | $582,720 | | Accrued taxes | $82,852 | $80,888 | | Accrued salaries | $183,411 | $107,118 | | Total accrued expenses | $1,957,044 | $1,388,196 | - Total accrued expenses increased by $568,848 from December 31, 2018, to March 31, 2019, primarily driven by an increase in 'Other accrued expenses'[42] Note 5. Stockholders' Equity This note describes transactions affecting stockholders' equity, including warrant issuances - The Company issued a warrant to University Fancards, LLC to purchase 150,000 shares of common stock, with 30,000 warrants vesting immediately and 120,000 vesting annually over 4 years[43][44] - The fair value of the warrants was $135,764, amortized as a reduction of revenues, with $8,985 recorded for the quarter ended March 31, 2019[44] Note 6. Net (Loss) Per Share This note presents the calculation of basic and diluted net loss per common share | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) available to common shareholders | $(1,072,889) | $(1,050,806) | | Weighted average shares outstanding (Basic & Diluted) | 12,621,857 | 12,026,622 | | Basic (loss) per common share | $(0.09) | $(0.09) | | Diluted (loss) per common share | $(0.09) | $(0.09) | - Anti-dilutive awards and options totaled 3,874,935 shares at March 31, 2019, and 3,877,750 shares at March 31, 2018[46] Note 7. Income Taxes This note provides information on deferred tax assets, valuation allowances, and net operating loss carryforwards - The Company recognized a deferred tax asset of approximately $1.4 million and a valuation allowance of approximately $8.9 million[49] - As of December 31, 2018, the Company had approximately $45.3 million in net operating loss carryforwards, expiring starting in 2022[50] Note 8. Related Party Transactions This note outlines transactions with entities and individuals affiliated with company management - The Company engaged in transactions with entities owned by its President and CEO, Louis Hoch, and Board member Miguel Chapa, including purchases from Angry Pug Sportswear and revenues from Lush Rooftop and BLVD Bar and Lounge[52][53][54] - The Company repurchased 11,860 shares of common stock from CFO Tom Jewell for $1.84 per share on January 6, 2019, to cover taxes[55] Note 9. Legal Proceedings This note updates on significant legal actions, including a default judgment on a note receivable - The Company obtained a default judgment against Mercury Investment Partners LLC on December 21, 2018, for an unpaid $145,000 principal from a C2Go loan, and is taking steps to domesticate the judgment for collection[57][58] - A loss reserve for the note receivable was reduced to $36,250 as of March 31, 2019, reflecting increased likelihood of recovery post-judgment[58] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations for the quarter ended March 31, 2019. It highlights revenue growth driven by ACH and prepaid portfolios, increased operating expenses due to growth initiatives, and a net loss. The Company also discusses its liquidity, capital resources, and future growth strategies Overview This section describes the company's electronic payment processing services and key operational metrics - The Company provides integrated electronic payment processing services, including ACH, credit, PINless debit, and prepaid card services, and operates Akimbo prepaid card platforms[63] | Metric | Q1 2019 | Q1 2018 | Change (YoY) | | :-------------------------------- | :------ | :------ | :----------- | | Credit card transactions processed | -4% | N/A | Decrease | | Credit card dollars processed | +7% | N/A | Increase | | ACH (eCheck) transaction volumes | +20% | N/A | Increase | | Returned check transactions processed | +16% | N/A | Increase | | Total dollars processed | $856M | $783M | +9.3% | | Net loss | $(1,072,889) | $(1,050,806) | +2.1% | - The Company anticipates continued revenue increases in ACH and returned check revenues, and expects incremental revenues from PayFac integrated payments and prepaid growth initiatives in Q2 2019[66] Critical Accounting Policies This section highlights the significant accounting policies and estimates used in financial statement preparation - Management's discussion relies on interim condensed consolidated financial statements prepared in accordance with U.S. GAAP, requiring estimates and judgments for assets, liabilities, revenues, and expenses[69] - Key accounting policies, including revenue recognition, deferred revenues, merchant reserves, and recently adopted pronouncements, are detailed in Note 1 to the financial statements[69][70] Results of Operations This section analyzes the company's financial performance, including revenue, cost of services, and net loss Revenues This section discusses the drivers and changes in the company's revenue streams - Revenues for Q1 2019 increased by 12.7% to $6.6 million, up from $5.8 million in Q1 2018, primarily driven by growth in ACH and prepaid portfolios[72] Cost of Services This section explains the factors contributing to changes in the cost of services - Cost of services increased by 14.9% to $5.3 million in Q1 2019 from $4.6 million in Q1 2018, mainly due to increased transaction volume and higher referral fees[74] Gross Profit This section details the company's gross profit and the factors influencing its change - Gross profit increased by 5.1% to $1,335,731 in Q1 2019 from $1,270,907 in Q1 2018, primarily due to growth in the highly profitable ACH business[75] Stock-based Compensation This section reports on the trends and amounts of stock-based compensation expenses - Stock-based compensation expenses decreased from $0.4 million in Q1 2018 to $0.3 million in Q1 2019, due to the net decrease in amortization as grants are fully amortized[76] Other Selling, General and Administrative Expenses This section explains the changes in the company's SG&A expenses - Other selling, general and administrative expenses increased by 10.9% to $1.7 million in Q1 2019 from $1.5 million in Q1 2018, mainly due to investments in Prepaid and PayFac growth initiatives[77] Depreciation and Amortization This section presents the depreciation and amortization expenses for the period - Depreciation and amortization totaled $486,548 in Q1 2019, a slight increase from $458,663 in Q1 2018[78] Other Income (Expense) This section details non-operating income and expenses - Other income increased to $23,075 in Q1 2019 from $9,979 in Q1 2018[79] Net Loss This section reports the company's overall net loss for the period - The Company reported a net loss of $1,072,889 for Q1 2019, compared to a net loss of $1,050,806 for Q1 2018[80] Liquidity and Capital Resources This section assesses the company's cash position, capital structure, and funding activities Cash Flows This section analyzes cash generated or used by operating, investing, and financing activities - Cash and cash equivalents increased to $4.5 million at March 31, 2019, from $2.7 million at December 31, 2018[81] - Net proceeds from a public offering in February 2019 amounted to $1.8 million, used for general corporate purposes and working capital[82] - Net cash used by operating activities (including merchant reserve funds) was $1.2 million in Q1 2019, compared to $0.2 million in Q1 2018[84] - Net cash generated from financing activities was $1.8 million in Q1 2019, a significant improvement from $1.0 million cash used in Q1 2018, primarily due to the public offering[86] Off-Balance Sheet Arrangements This section confirms the absence of material off-balance sheet financial commitments - The Company currently has no off-balance sheet arrangements that have or are reasonably likely to have a material effect on its financial condition or results of operations[87] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk - The Company, as a smaller reporting company, is exempt from providing quantitative and qualitative disclosures about market risk[88] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the Company's disclosure controls and procedures, concluding they were effective as of March 31, 2019. No material changes in internal control over financial reporting occurred during the quarter Evaluation of Disclosure Controls and Procedures This section reports on the effectiveness of disclosure controls - The Chief Executive and Chief Financial Officers concluded that the Company's disclosure controls and procedures were effective as of March 31, 2019[89] Changes in Internal Control over Financial Reporting This section confirms no material changes in internal controls - There were no material changes in the Company's internal control over financial reporting during the quarter ended March 31, 2019[90] PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section details the ongoing legal proceedings related to a defaulted loan to C2Go, Inc., which was subsequently to be purchased by Mercury Investment Partners LLC. The Company has secured a default judgment against Mercury Investment Partners and is actively pursuing collection - The Company filed suit against Mercury Investment Partners in Bexar County District Court and was granted a default judgment on December 21, 2018, for an unpaid $145,000 principal[91][92] - Legal counsel is preparing documents to domesticate the Texas judgment to facilitate collection, and the loss reserve on the note receivable was reduced to $36,250[91][93] Item 1A. Risk Factors The Company states that there have been no material changes to the risk factors previously disclosed in its annual report on Form 10-K for the fiscal year ended December 31, 2018 - No material changes have occurred in the risk factors since the filing of the annual report on Form 10-K for the fiscal year ended December 31, 2018[95] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports that the Company did not issue any unregistered equity securities during the quarter. It also details the Company's stock repurchase program, including repurchases from officers and directors to cover tax obligations Recent Sales of Unregistered Securities This section confirms no unregistered equity securities were issued during the quarter - The Company did not issue any unregistered equity securities during the quarter ended March 31, 2019[97] Purchases of Equity Securities by the Issuer and Affiliated Purchasers This section details the company's stock repurchase program and related transactions - The Board of Directors authorized a stock repurchase program, with $1,450,462 remaining available at March 31, 2019[98] | Period | Total number of shares purchased | Average price paid per share | | :-------------------------------- | :------------------------------- | :--------------------------- | | January 1 - January 31, 2019 | 11,860 | $1.84 | - On January 6, 2019, the Company repurchased 11,860 shares from CFO Tom Jewell at $1.84 per share to cover taxes[98] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities during the period - There were no defaults upon senior securities[100] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[101] Item 5. Other Information The Company reported no other information required under this item - No other information is reported under this item[102] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including articles of incorporation, employment agreements, bank sponsorship agreements, and certifications - The report includes various exhibits such as Amended and Restated Articles of Incorporation, Employment Agreements, Bank Sponsorship Agreements, and Certifications[103][105][108] SIGNATURES This section lists the executive officers who certified the accuracy of the financial report - The report is signed by Louis A. Hoch, Chief Executive Officer, and Tom Jewell, Chief Financial Officer, on May 15, 2019[113]