Usio(USIO) - 2021 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Usio, Inc., including the balance sheets, statements of operations, cash flows, and stockholders' equity, along with detailed notes explaining accounting policies, significant transactions, and financial position changes for the quarter ended March 31, 2021 Condensed Consolidated Balance Sheets | Metric | March 31, 2021 (Unaudited) | December 31, 2020 | Change | | :----------------------------- | :------------------- | :------------------ | :----- | | Total Assets | $86,902,551 | $82,667,557 | +5.1% | | Total Liabilities | $70,632,197 | $65,964,196 | +7.1% | | Total Stockholders' Equity | $16,270,354 | $16,703,361 | -2.6% | - Prepaid card load assets significantly increased from $7.61 million at December 31, 2020, to $18.56 million at March 31, 2021, with a corresponding increase in prepaid card load obligations[8] Condensed Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | YoY Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Revenues | $13,461,550 | $7,771,679 | +73.2% | | Cost of services | $10,554,313 | $5,843,395 | +80.6% | | Gross profit | $2,907,237 | $1,928,284 | +50.8% | | Operating (loss) | $(702,719) | $(869,327) | -19.2% | | Net (loss) | $(720,252) | $(835,009) | -13.8% | | Basic (loss) per common share | $(0.04) | $(0.06) | -33.3% | - Output Solutions revenue, acquired in December 2020, contributed $3.77 million to total revenue in Q1 2021[19] Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------- | :-------------------------------- | :-------------------------------- | | Operating | $10,480,238 | $(1,654,473) | | Investing | $(274,467) | $(152,654) | | Financing | $116,542 | $(26,629) | - The significant increase in cash from operating activities was largely due to a $10.95 million increase in prepaid card load obligations[14] Condensed Consolidated Statements of Stockholders' Equity | Metric | December 31, 2020 | March 31, 2021 | Change | | :----------------------- | :---------------- | :--------------- | :----- | | Total Stockholders' Equity | $16,703,361 | $16,270,354 | -2.6% | - Net loss for the period was $(720,252), contributing to the decrease in equity[15] Notes to Condensed Consolidated Financial Statements Note 1. Basis of Presentation - Revenue is primarily from electronic payment processing and bill preparation/mailing services, recognized gross as a principal[18] | Revenue Source | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------------------- | :-------------------------------- | :-------------------------------- | | ACH and complementary service | $3,078,456 | $2,237,746 | | Credit card revenue | $5,723,709 | $4,982,658 | | Prepaid card services revenue | $886,576 | $551,275 | | Output solutions revenue | $3,772,809 | — | | Total revenue | $13,461,550 | $7,771,679 | - The company maintains merchant reserves and prepaid card load assets with corresponding liabilities on the balance sheet[22][23] Note 2. Acquisition of Information Management Solutions, LLC. - Acquisition of IMS on December 15, 2020, for $5,907,408 cash and $552,283 in warrants[31] - IMS contributed approximately $1.2 million in revenue and $0.6 million in gross profit in December 2020[33] Note 3. Leases | Lease Expense | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------ | :-------------------------------- | :-------------------------------- | | Operating | $104,131 | $68,086 | - Total lease liabilities as of March 31, 2021, are $2,921,744[35] Note 4. Accrued Expenses | Accrued Expense Category | March 31, 2021 | December 31, 2020 | | :----------------------- | :------------- | :---------------- | | Accrued commissions | $623,662 | $373,154 | | Reserve for merchant losses | $548,199 | $515,199 | | Accrued salaries | $360,154 | $217,816 | | Total accrued expenses | $1,971,192 | $1,463,944 | Note 5. Equipment Loan - Secured a $165,996 equipment loan on March 20, 2021, at 3.95% interest for 36 months[37] Note 6. Stockholders' Equity - Issued 945,599 warrants to Information Management Solutions, LLC on December 15, 2020, with an exercise price of $4.23, valued at $552,283[40] - Granted 1,444,000 shares of common stock and 103,000 restricted stock units (RSUs) to employees and directors on April 1, 2020[41] - Raised $3.0 million gross proceeds from a private offering of 1,796,407 shares on July 1, 2020, and $7.4 million net proceeds from a public offering of 4,705,883 shares on September 25, 2020[42][43] Note 7. Net (Loss) Per Share | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net (loss) available to common shareholders | $(720,252) | $(835,009) | | Basic (loss) per common share | $(0.04) | $(0.06) | | Diluted (loss) per common share | $(0.04) | $(0.06) | | Weighted average common shares outstanding (Basic/Diluted) | 19,931,935 | 13,127,229 | Note 8. Income Taxes - Recognized a deferred tax asset of approximately $1.4 million and a valuation allowance of $7.5 million[49] - Net operating loss carryforwards of approximately $39.4 million available at December 31, 2020, with some expiring in 2021 and others carrying forward indefinitely[50] Note 9. Related Party Transactions - Repurchased 11,860 shares of common stock from CFO Tom Jewell on January 6, 2021, for $38,545 to cover taxes[53][118] - CEO Louis Hoch's company, Angry Pug Sportswear, had no purchases from the company in Q1 2021, down from $9,886 in 2020[52] Note 10. COVID-19 - Doctor, dental, and veterinarian offices quickly recovered to pre-COVID levels, while consumer lending merchants remain below pre-COVID activity[58][59][103] - Prepaid business revenues increased due to partnerships with cities for government assistance programs using prepaid debit cards[59][103] Note 11. Legal Proceedings - Lawsuit and arbitration initiated against former Chief Revenue Officer Vaden Landers on January 19, 2021, for violating non-compete obligations[61][110] Note 12. Subsequent Events - CEO Louis Hoch's annual base salary increased from $350,000 to $566,000, effective April 18, 2021, with the cancellation of his $216,000 annual bonus[67][121] - CFO Tom Jewell's employment agreement term extended to two years, with an additional year's base salary payout upon change of control[68][122] 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 performance and condition for the three months ended March 31, 2021, highlighting significant revenue growth driven by the IMS acquisition and organic expansion in payment processing, discussing changes in operating expenses, and detailing liquidity, capital resources, and the ongoing impact of the COVID-19 pandemic Overview - Company provides integrated electronic payment processing services (ACH, credit, PINless debit, prepaid card) and, post-IMS acquisition, electronic bill presentment and mailing[72] | Metric | Q1 2021 vs Q1 2020 | | :----------------------------- | :----------------- | | Credit card transactions processed | +108% | | Credit card dollars processed | +60% | | ACH (eCheck) transaction volumes | +37% | | Prepaid card load volume | +105% | | Prepaid card transaction volumes | +89% | | Total dollars processed | $1.870 billion vs $877 million | Critical Accounting Policies - Financial statements require estimates and judgments affecting reported amounts of assets, liabilities, revenues, and expenses, particularly for revenue recognition, bad debt, investments, intangible assets, income taxes, and contingencies[78] Results of Operations Revenues | Revenue Source | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :----------------------------- | :-------------------------------- | :-------------------------------- | :------- | :------- | | ACH and complementary service | $3,078,456 | $2,237,746 | $840,710 | 37.6% | | Credit card revenue | $5,723,709 | $4,982,658 | $741,051 | 14.9% | | Prepaid card services revenue | $886,576 | $551,275 | $335,301 | 60.8% | | Output solutions revenue | $3,772,809 | — | $3,772,809 | 100.0% | | Total Revenue | $13,461,550 | $7,771,679 | $5,689,871 | 73.2% | - Organic revenue growth was 24.6% year-over-year, excluding Output Solutions[82] Cost of Services | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | % Change | | :-------------- | :-------------------------------- | :-------------------------------- | :------- | | Cost of services | $10,554,313 | $5,843,395 | +81% | Gross Profit | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | % Change | | :----------- | :-------------------------------- | :-------------------------------- | :------- | | Gross profit | $2,907,237 | $1,928,284 | +51% | Stock-based Compensation | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------- | :-------------------------------- | :-------------------------------- | | Stock-based compensation | $327,715 | $287,710 | Other Selling, General and Administrative Expenses | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------- | :-------------------------------- | :-------------------------------- | | Other SG&A expenses | $2,660,034 | $2,122,106 | Depreciation and Amortization | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Depreciation and amortization | $622,207 | $387,795 | Other Income (Expense) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------ | :-------------------------------- | :-------------------------------- | | Other income (expense), net | $2,467 | $11,844 | Net Loss | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------- | :-------------------------------- | :-------------------------------- | | Net (loss) | $(720,252) | $(835,009) | - Company focuses on growing revenues, managing operating expenses, adding quality customers, meeting evolving requirements, adapting to technological changes, and assimilating acquisitions to achieve profitability[93] Liquidity and Capital Resources | Metric | March 31, 2021 | December 31, 2020 | | :---------------------- | :------------- | :---------------- | | Cash and cash equivalents | $4.3 million | $5.0 million | - Raised $3.0 million gross from a private offering and $7.4 million net from a public offering in 2020[94][95] Cash Flows | Cash Flow Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------- | :-------------------------------- | :-------------------------------- | | Operating | $10.5 million | $(1.7) million | | Investing | $(0.27) million | $(0.15) million | | Financing | $0.1 million | $(0.03) million | - Excluding merchant reserves, prepaid card load assets, customer deposits, and lease assets/liabilities, cash used by operating activities was $0.6 million in Q1 2021[97] Material Trends and Uncertainties - COVID-19 led to initial adverse effects on doctor, dental, veterinarian offices, and non-bank consumer lending, with the former recovering and the latter still below pre-COVID levels[103] - Prepaid business revenues increased due to government assistance programs using prepaid debit cards for financial aid[103] Off-Balance Sheet Arrangements - No material off-balance sheet arrangements exist[105] Item 3. Quantitative and Qualitative Disclosures About Market Risk. As a smaller reporting company, Usio, Inc. is electing scaled disclosure reporting obligations and is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, Usio, Inc. is exempt from providing quantitative and qualitative disclosures about market risk[106] Item 4. Controls and Procedures. Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2021, and concluded they were effective in ensuring timely and accurate reporting, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were deemed effective as of March 31, 2021[108] - No material changes in internal control over financial reporting occurred during Q1 2021[109] PART II – OTHER INFORMATION Item 1. Legal Proceedings. The company initiated a lawsuit and arbitration against its former Chief Revenue Officer, Vaden Landers, on January 19, 2021, alleging violations of his non-compete agreement, with Mr. Landers filing counterclaims which the company denies, and both proceedings are in their initial stages - Lawsuit and arbitration initiated against former Chief Revenue Officer Vaden Landers on January 19, 2021, for violating non-compete obligations[110] - Mr. Landers filed counterclaims, including for a declaratory judgment on non-compete unenforceability and breach of employment agreement, which the company denies[112] Item 1A. Risk Factors. There have been no material changes to the risk factors previously disclosed in the company's annual report on Form 10-K for the fiscal year ended December 31, 2020 - No material changes to risk factors since the Form 10-K filed on March 30, 2021[115] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. On February 5, 2021, the company issued 19,795 shares of common stock in a cashless exercise of warrants by University FanCards, LLC, and detailed its ongoing share buy-back program, under which 15,122 shares were repurchased during Q1 2021, including 11,860 shares from the CFO to cover taxes - Issued 19,795 shares of common stock to University FanCards, LLC in a cashless warrant exercise on February 5, 2021[116] | Period | Total shares purchased | Average price paid per share | Maximum dollar value remaining under program | | :------------------------- | :--------------------- | :--------------------------- | :------------------------------------------- | | January 1 - January 31, 2021 | 14,825 | $3.20 | $1,072,909 | | February 1 - March 1, 2021 | 297 | $6.58 | $1,070,955 | | Total | 15,122 | | $1,070,955 | Item 3. Defaults Upon Senior Securities. The company reported no defaults upon senior securities during the period - No defaults upon senior securities[119] Item 4. Mine Safety Disclosures (Not applicable). This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[120] Item 5. Other Information. Subsequent to the reporting period, on April 18, 2021, the Compensation Committee approved amendments to the employment agreements of CEO Louis Hoch and CFO Tom Jewell, increasing Mr. Hoch's annual base salary to $566,000, replacing his annual bonus, and extending Mr. Jewell's term to two years, with an additional year's base salary payout upon a change of control - CEO Louis Hoch's annual base salary increased from $350,000 to $566,000, effective April 18, 2021, with the cancellation of his $216,000 annual bonus[121] - CFO Tom Jewell's employment agreement term extended to two years, with an additional year's base salary payout upon change of control[122] Item 6. Exhibits. This section lists all exhibits filed with the Form 10-Q, including articles of incorporation, by-laws, employment agreements, bank sponsorship agreements, asset purchase agreements, warrant agreements, and certifications - Lists various corporate documents, employment agreements, and financial agreements filed as exhibits[124][125][126][129][133]