Usio(USIO) - 2022 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited). Presents Usio, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, operations, cash flows, and equity Condensed Consolidated Balance Sheets Details Usio, Inc.'s financial position, including assets, liabilities, and equity, for Q1 2022 and FY 2021 Condensed Consolidated Balance Sheets | Metric | March 31, 2022 (Unaudited) ($) | December 31, 2021 ($) | | :-------------------------------- | :------------------------- | :------------------ | | Total Assets | $111,756,096 | $133,679,715 | | Total Liabilities | $94,216,289 | $115,010,809 | | Total Stockholders' Equity | $17,539,807 | $18,668,906 | | Cash and cash equivalents | $7,590,951 | $7,255,321 | | Settlement processing assets | $50,591,364 | $63,824,646 | | Prepaid card load assets | $28,846,980 | $36,590,893 | - Total assets decreased by 16.4% from $133.7 million at December 31, 2021, to $111.8 million at March 31, 2022, primarily due to reductions in settlement processing assets and prepaid card load assets[8] - Total liabilities decreased by 18.1% from $115.0 million at December 31, 2021, to $94.2 million at March 31, 2022, largely mirroring the decrease in settlement processing obligations and prepaid card load obligations[8][9] Condensed Consolidated Statements of Operations Summarizes Usio, Inc.'s financial performance, including revenues, expenses, and net loss, for Q1 2022 and 2021 Condensed Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2022 ($) | Three Months Ended March 31, 2021 ($) | Change (YoY) ($) | % Change (YoY) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | :------------- | | Revenues | $18,111,343 | $13,461,550 | $4,649,793 | 34.5% | | Cost of services | $14,602,214 | $10,554,313 | $4,047,901 | 38.4% | | Gross profit | $3,509,129 | $2,907,237 | $601,892 | 20.7% | | Total selling, general and administrative expenses | $5,060,763 | $3,609,956 | $1,450,807 | 40.2% | | Operating (loss) | $(1,551,634) | $(702,719) | $(848,915) | 120.8% | | Net (loss) | $(1,622,270) | $(720,252) | $(902,018) | 125.2% | | Basic (loss) per common share | $(0.08) | $(0.04) | $(0.04) | 100.0% | - Gross margin percentage decreased to 19.4% in Q1 2022 from 21.6% in Q1 2021, indicating increased revenue growth from business lines with lower profit margins[11][66][76] Condensed Consolidated Statements of Cash Flows Presents Usio, Inc.'s cash flows from operating, investing, and financing activities for Q1 2022 and 2021 Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Three Months Ended March 31, 2022 ($) | Three Months Ended March 31, 2021 ($) | | :------------------------------------------------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net (loss) | $(1,622,270) | $(720,252) | | Net cash provided (used) by operating activities | $(7,223,960) | $10,480,238 | | Net cash (used) by investing activities | $(72,069) | $(274,467) | | Net cash (used) provided by financing activities | $(79,982) | $116,542 | | Change in cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves | $(7,376,011) | $10,322,313 | | Cash, Cash Equivalents, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End of Period | $44,215,549 | $32,514,538 | - Operating activities shifted from providing $10.5 million in cash in Q1 2021 to using $7.2 million in Q1 2022, largely influenced by a significant decrease in prepaid card load obligations[13][86] Condensed Consolidated Statements of Stockholders' Equity Details changes in Usio, Inc.'s stockholders' equity, including common stock, paid-in capital, and accumulated deficit Condensed Consolidated Statements of Stockholders' Equity | Stockholders' Equity Item | Balance at Dec 31, 2021 ($) | Changes in Q1 2022 ($) | Balance at Mar 31, 2022 ($) | | :------------------------ | :---------------------- | :----------------- | :---------------------- | | Common Stock Shares | 26,807,145 | 61,600 | 26,868,745 | | Common Stock Amount | $195,235 | $62 | $195,297 | | Additional Paid-In Capital | $93,100,129 | $276,841 | $93,376,970 | | Treasury Stock | $(2,404,458) | $(66,494) | $(2,470,952) | | Deferred Compensation | $(6,842,195) | $282,762 | $(6,559,433) | | Accumulated Deficit | $(65,379,805) | $(1,622,270) | $(67,002,075) | | Total Stockholders' Equity | $18,668,906 | $(1,129,099) | $17,539,807 | - Total stockholders' equity decreased by $1,129,099 from December 31, 2021, to March 31, 2022, primarily due to the net loss for the period, partially offset by common stock issuances and deferred compensation amortization[14] Notes to Condensed Consolidated Financial Statements Provides detailed explanations of Usio, Inc.'s accounting policies, financial instruments, debt, equity, income taxes, and related events Note 1. Basis of Presentation Outlines the basis for interim financial statements, revenue recognition, balance sheet items, and new accounting pronouncements Revenue by Source | Revenue Source | Three Months Ended March 31, 2022 ($) | Three Months Ended March 31, 2021 ($) | Change (YoY) ($) | % Change (YoY) | | :------------------------------ | :-------------------------------- | :-------------------------------- | :----------- | :------------- | | ACH and complementary service revenue | $3,843,316 | $3,078,456 | $764,860 | 24.8% | | Credit card revenue | $6,768,222 | $5,723,709 | $1,044,513 | 18.2% | | Prepaid card services revenue | $2,768,447 | $886,576 | $1,881,871 | 212.3% | | Output solutions revenue | $4,731,358 | $3,772,809 | $958,549 | 25.4% | | Total revenue | $18,111,343 | $13,461,550 | $4,649,793 | 34.5% | - Deferred revenues decreased from $17,647 at December 31, 2021, to $4,412 at March 31, 2022[18] - The reserve for processing losses increased to $656,494 at March 31, 2022, from $623,494 at December 31, 2021[26] - The adoption of ASU 2016-13 (effective after December 25, 2022) is not expected to have a significant effect on the company's financial position or results of operations[28] Note 2. Leases Details the company's operating lease agreements for facilities and equipment, noting a 15.4% expense increase Operating Lease Expenses | Metric | Three Months Ended March 31, 2022 ($) | Three Months Ended March 31, 2021 ($) | | :-------------------- | :-------------------------------- | :-------------------------------- | | Operating lease expenses | $120,151 | $104,131 | Note 3. Accrued Expenses Summarizes accrued expenses, which increased by 22.3% due to higher other accrued expenses and accrued salaries Accrued Expenses by Category | Accrued Expense Category | March 31, 2022 ($) | December 31, 2021 ($) | | :----------------------- | :------------- | :---------------- | | Accrued commissions | $795,729 | $879,120 | | Reserve for processing losses | $656,494 | $623,494 | | Other accrued expenses | $536,530 | $226,888 | | Accrued taxes | $375,527 | $298,168 | | Accrued salaries | $479,930 | $297,995 | | Total accrued expenses | $2,844,210 | $2,325,665 | Note 4. Equipment Loan Describes the company's equipment loan for an Output Solutions sorter, including terms, interest rate, and Q1 2022 payments - Equipment loan for $165,996 at 3.95% interest rate, with a 36-month term ending March 20, 2024[33] - Current period payments on the equipment loan were $13,488[33] Note 5. Stockholders' Equity Details stock warrants issued, their valuation, vesting schedules, and cashless exercises impacting common stock - Warrant compensation costs amortized for the three months ended March 31, 2022 and 2021 were $8,985[34] - In February 2021, 19,795 shares of common stock were issued in a cashless exercise for 30,000 warrants from University FanCards, LLC[35] - In December 2020, warrants to purchase 945,599 shares were issued to Information Management Solutions, LLC at an exercise price of $4.23, valued at $552,283[37] Note 6. Net (Loss) Per Share Reports basic and diluted net loss per common share for Q1 2022 and Q1 2021, excluding anti-dilutive awards Net (Loss) Per Share Calculation | Metric | Three Months Ended March 31, 2022 ($) | Three Months Ended March 31, 2021 ($) | | :---------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Numerator for basic and diluted (loss) per share, net (loss) | $(1,622,270) | $(720,252) | | Denominator for basic (loss) per share, weighted average shares | 20,280,575 | 19,931,935 | | Basic (loss) per common share | $(0.08) | $(0.04) | | Diluted (loss) per common share | $(0.08) | $(0.04) | | Anti-dilutive awards and options | 5,244,902 | 5,094,991 | Note 7. Income Taxes Details the company's net deferred tax asset, valuation allowance, and total net operating loss carryforwards - Net deferred tax asset of approximately $1.5 million, with a valuation allowance of approximately $5.2 million[41] - Total net operating loss carryforwards are $29,455,176[44] Net Operating Loss Carryforwards | NOL Category | Amount ($) | | :------------------------------------------------ | :------------- | | NOLs expiring between 2022-2037 (pre-2017) | $20,041,484 | | NOLs generated from 2018 onwards (indefinite carryforward) | $9,413,692 | Note 8. Related Party Transactions Describes transactions with related parties, including purchases from a CEO co-owned entity and share repurchases from the CFO - Purchased $19,929 of corporate sportswear from Angry Pug Sportswear (50% owned by CEO Louis Hoch) during Q1 2022, an increase from $4,009 in FY 2021[45] - Repurchased 11,361 shares for $47,930 from CFO Tom Jewell on January 6, 2022, to cover his share of taxes[46] - Granted 319,900 common shares (10-year vesting) and 141,900 RSUs (3-year vesting) to employees and Directors on November 18, 2021, as performance bonuses[47] Note 9. COVID-19 Discusses COVID-19's impact on prepaid business revenue, labor availability, and supply chain issues for Output Solutions - Prepaid business line revenues increased due to partnerships with major cities for vaccine incentive and cash disbursement programs[51] - Experienced difficulty in recruiting and retaining certain employees due to limited labor availability[52] - Supply chain issues, specifically reduced paper supply and growing demand, are impacting the Output Solutions line of business[53] Note 10. Subsequent Events Details a lease amendment in San Antonio, Texas, for incremental space, commencing April 1, 2022 - Lease amendment for 6,628 square feet of incremental space in San Antonio, Texas[55] - Incremental annual rent ranges from $135,874 to $145,816[55] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's perspective on Usio, Inc.'s Q1 2022 financial performance, liquidity, cash flows, and strategic initiatives Forward-Looking Statements Disclaimer Warns that forward-looking statements involve risks and uncertainties, and actual results may differ materially - The report contains forward-looking statements that involve risks and uncertainties, and actual results may differ materially from those anticipated[56] - The company does not intend to update forward-looking statements after the report date, except as required by law[56] Name Change Notes the corporate name change from Payment Data Systems, Inc. to Usio, Inc. effective June 26, 2019 - The corporate name changed from Payment Data Systems, Inc. to Usio, Inc. effective June 26, 2019[58] Overview Provides an overview of Usio, Inc.'s integrated payment processing services and significant Q1 2022 revenue growth - Usio, Inc. provides integrated payment processing services including ACH, credit, prepaid card, and statement preparation/mailing services[59] Metric (Q1 2022 vs Q1 2021) | Metric (Q1 2022 vs Q1 2021) | % Change | | :-------------------------------- | :------- | | Credit card transactions processed | 48% | | Credit card dollars processed | 21% | | ACH (eCheck) transaction counts | 21% | | Electronic check dollars processed | 32% | | Prepaid card load volumes processed | 134% | | Prepaid card transaction counts processed | 270% | | Prepaid card purchase volume | 139% | | Total dollar volumes processed | 18.3% (from $1.86B to $2.2B) | - Revenue for Q1 2022 increased by 35% to $18.1 million, driven by growth in prepaid and PayFac business lines[65] Critical Accounting Policies Highlights key accounting policies for financial statement preparation, requiring management estimates and judgments - The financial statements are prepared in accordance with U.S. GAAP, requiring management to make estimates and judgments affecting reported amounts of assets, liabilities, revenues, and expenses[68] - Key critical accounting policies include those related to revenues and expenses, bad debt, investments, intangible assets, income taxes, and contingencies and litigation[68] Results of Operations Analyzes Usio, Inc.'s Q1 2022 financial results, including revenues, costs, gross profit, and net loss Revenues Total revenues for Q1 2022 increased by 35% to $18.1 million, driven by strong growth across all service categories Revenue by Source | Revenue Source | Three Months Ended March 31, 2022 ($) | Three Months Ended March 31, 2021 ($) | % Change | | :------------------------------ | :-------------------------------- | :-------------------------------- | :------- | | ACH and complementary service revenue | $3,843,316 | $3,078,456 | 25% | | Credit card revenue | $6,768,222 | $5,723,709 | 18% | | Prepaid card services revenue | $2,768,447 | $886,576 | 212% | | Output solutions revenue | $4,731,358 | $3,772,809 | 25% | | Total Revenue | $18,111,343 | $13,461,550 | 35% | Cost of Services Cost of services increased by 38% to $14.6 million in Q1 2022, primarily due to higher volume-based fees - Cost of services increased by $4.0 million, or 38%, to $14.6 million for Q1 2022[74] Gross Profit Gross profit increased by 21% to $3.5 million, but gross margin decreased to 19.4% due to lower-margin lines - Gross profits increased by 21% to $3.5 million for Q1 2022[76] - Gross margin percentage was 19.4% for Q1 2022, down from 21.6% in Q1 2021[76] Stock-based Compensation Stock-based compensation expenses increased by 68.0% to $550,682 for Q1 2022 compared to the prior year - Stock-based compensation expenses were $550,682 for Q1 2022, an increase of 68.0% from $327,715 in Q1 2021[77] Other Selling, General and Administrative Expenses Other SG&A expenses increased by 43% to $3.8 million in Q1 2022, reflecting growth investments - Other SG&A expenses were $3.8 million for Q1 2022, a 43% increase from $2.7 million in Q1 2021[79] - Included approximately $200,000 of one-time non-recurring items in Q1 2022 SG&A expenses[67] Depreciation and Amortization Depreciation and amortization expenses totaled $0.7 million for Q1 2022, a slight increase from Q1 2021 - Depreciation and amortization totaled $0.7 million for Q1 2022, compared to $0.6 million for Q1 2021[80] Other Income (Expense) Net other income and expense resulted in a $(636) expense for Q1 2022, a decrease from prior year - Other income and (expense), net, was $(636) for Q1 2022, compared to $2,467 for Q1 2021[81] Net Income (Loss) Net loss for Q1 2022 was $1.6 million, a significant increase from Q1 2021, due to higher expenses - Net loss for Q1 2022 was $1.6 million, compared to a net loss of $0.7 million for Q1 2021[82] - Future success depends on growing revenues, managing operating expenses, adding quality customers, meeting evolving requirements, adapting to technological changes, and assimilating acquisitions[83][84] Liquidity and Capital Resources Discusses Usio, Inc.'s cash and cash equivalents, accumulated deficit, and working capital position - Cash and cash equivalents increased slightly to $7.6 million at March 31, 2022, from $7.3 million at December 31, 2021[85] - The company reported an accumulated deficit of $67.0 million at March 31, 2022[85] - Working capital decreased slightly to $8.3 million at March 31, 2022, from $8.8 million at December 31, 2021[85] Cash Flows Analyzes Usio, Inc.'s cash flows from operating, investing, and financing activities for Q1 2022 and Q1 2021 - Net cash used by operating activities was $7.2 million for Q1 2022, a significant change from $10.5 million provided in Q1 2021[86] - Net cash used by investing activities was $72,069 for Q1 2022, primarily for capitalized software development and other capital investments[87] - Net cash used by financing activities was $79,982 for Q1 2022, compared to $116,542 provided in Q1 2021[88] Material Trends and Uncertainties Highlights risks related to the COVID-19 pandemic, including labor availability and supply chain issues - Risks related to the COVID-19 pandemic, including labor availability and supply chain issues, are discussed in Note 9 of the financial statements[90] Off-Balance Sheet Arrangements Confirms the absence of off-balance sheet arrangements with a material effect on financial condition - The company has no off-balance sheet arrangements that are reasonably likely to have a material effect on its financial condition or results of operations[91] Item 3. Quantitative and Qualitative Disclosures About Market Risk. As a smaller reporting company, Usio, Inc. is not required to provide detailed market risk disclosures - The company, as a smaller reporting company, is not required to provide quantitative and qualitative disclosures about market risk[92] Item 4. Controls and Procedures. Management concluded that disclosure controls and procedures were effective, with no material changes in internal control Evaluation of Disclosure Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2022 - The Chief Executive and Chief Financial Officers concluded that disclosure controls and procedures were effective as of March 31, 2022[93] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred during Q1 2022 - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2022[94] PART II – OTHER INFORMATION Item 1. Legal Proceedings. Details a lawsuit with KDHM, LLC regarding an asset purchase agreement, with Usio, Inc. denying claims and filing counterclaims - KDHM, LLC sued PDS Acquisition Corp (now Usio Output Solutions, Inc.) on September 1, 2021, alleging improper transfer of $317,000 in customer deposits[96] - Usio, Inc. believes KDHM's claims lack merit and has filed counterclaims for fraud, breach of contract, and conversion, alleging misrepresentations, undisclosed additional customer deposits ($305,000), and missing customer lists[97][98][99] - The company considers the risk of loss related to this lawsuit as remote[100] Item 1A. Risk Factors. No material changes to risk factors previously disclosed in the annual report on Form 10-K for FY 2021 - No material changes from risk factors previously disclosed in the annual report on Form 10-K for the fiscal year ended December 31, 2021[101] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. No unregistered securities issued in Q1 2022; details share buy-back program, including CFO transaction Recent Sales of Unregistered Securities The company did not issue any unregistered securities during the quarter ended March 31, 2022 - The company did not issue unregistered securities during the quarter ended March 31, 2022[103] Purchases of Equity Securities by the Issuer and Affiliated Purchasers Details share repurchases under the buy-back program, including a transaction with the CFO for taxes Share Buy-Back Program Activity | Period | Total number of shares purchased | Average price paid per share ($) | Maximum dollar value remaining under program ($) | | :-------------------------- | :------------------------------- | :--------------------------- | :------------------------------------------- | | January 1 - January 31, 2022 | 14,623 | $3.95 | $823,900 | | February 1 - February 28, 2022 | 1,068 | $3.45 | $820,219 | | March 1 - March 31, 2022 | 1,527 | $3.31 | $815,168 | | Total (Q1 2022) | 17,218 | $3.95 | $815,168 | - The share buy-back program, renewed on November 7, 2019, with a limit of $1,420,000, terminates on the earliest of September 30, 2022, fund exhaustion, or Board termination[104] - On January 6, 2022, 11,361 shares were repurchased for $47,930 from CFO Tom Jewell to cover his share of taxes[104] Item 3. Defaults Upon Senior Securities. The company reported no defaults upon senior securities - No defaults upon senior securities were reported[105] Item 4. Mine Safety Disclosures (Not applicable). This item is not applicable to the company's operations - Mine Safety Disclosures are not applicable to the registrant[106] Item 5. Other Information. No other information was reported for this item - No other information was reported for this item[107] Item 6. Exhibits. Lists exhibits filed with Form 10-Q, including corporate governance documents, agreements, and certifications - Exhibits include Amended and Restated Articles of Incorporation, By-laws, Employment Agreements, Bank Sponsorship Agreements, Asset Purchase Agreements, Warrant Agreements, and Certifications[109][110][112]