What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-12 compared with 2020-08-14 · 68 added, 67 removed, 71 unchanged (66% of the section changed)

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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™.

During the second quarter of 2020 , the volume of credit card transactions processed increased by 26% versus the second quarter of 2019 .

The amount of credit card dollars processed during the second quarter of 2020 increased by 2% compared to the same time period in 2019.

Credit card transactions processed were the highest in our history and dollars processed were the second highest in the Company's history.

Both metrics were achieved despite widespread second quarter industry weakness related to COVID-19 impacts.

The continued growth in credit card metrics was primarily attributable to our card processing growth initiatives with the Integrated Payments (Payment Facilitation) segment due to increased penetration of multiple industries including healthcare and legal verticals.

We experienced an April decline of nearly $10 million of credit card processing volume in the Singular portfolio primarily attributable to mandated closures to dental practices in the portfolio.

Revenues of these merchants increased in May and June 2010 and have returned to pre-COVID-19 revenue levels as these merchants have reopened.

ACH (eCheck) transaction volumes during the second quarter of 2020 decreased by 21% compared to the second quarter of 2019 .

Returned check transactions processed during the second quarter of 2020 decreased by 50% compared to the second quarter of 2019 .

The decreases in eCheck transactions and returned check transactions were primarily attributable to lower volumes experienced by our consumer lending merchants as a result of COVID-19 impacts.

We expect COVID-19 to continue to hamper growth in the Company's ACH business in the third quarter due to the increases in unemployment and the effects on the consumer credit ratings.

The Company has a high degree of confidence the ACH business will recover once unemployment decreases and as consumer government assistance programs are curtailed.

Prepaid card load volume during the second quarter of 2020 increased by 64% compared to the second quarter of 2019 .

Prepaid card transaction volumes during the second quarter of 2020 increased by 47% compared to the second quarter of 2019 .

These increases occurred primarily due to the implementation and sales of newly created prepaid government assistance programs.

Total dollars processed for the second quarter of 2020 were $694 million compared to $876 million in the second quarter of 2019 .

We reported a net loss of $1.3 million for the three months ended June 30, 2020 compared to a net loss of $1.3 million for the three months ended June 30, 2019 .

We reported a net loss of $2.1 million for the six months ended June 30, 2020 compared to a net loss of $2.3 million for the three months ended June 30, 2019 .

We may incur future operating losses.

To regain and sustain profitability, we must, among other things, incrementally grow and maintain our customer base, sell our ACH, credit card and prepaid product 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 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 continue to invest in our sales force to drive revenue growth.

In particular, we are focused on growing our ACH merchants, adding new software integrators and 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 capabilities without significantly increasing our operating costs.

During the third quarter of 2020 , the volume of credit card transactions processed increased by 81% versus the third quarter of 2019 .

The amount of credit card dollars processed during the third quarter of 2020 increased by 15% compared to the same time period in 2019.

Both credit card transactions processed and dollars processed were the highest in our history.

Both metrics were achieved despite widespread third quarter industry weakness related to COVID-19 impacts.

In April, we experienced a decline of nearly $10 million of credit card processing volume in the Singular portfolio primarily attributable to mandated closures to dental and veterinary practices in the portfolio.

Revenues of these merchants increased in May and June 2020 and throughout the third quarter returning to pre-COVID-19 revenue levels as these merchants have reopened.

ACH (eCheck) transaction volumes during the third quarter of 2020 decreased by 18% compared to the third quarter of 2019 .

Returned check transactions processed during the third quarter of 2020 decreased by 39% compared to the third quarter of 2019 .

The decreases in eCheck transactions and returned check transactions were primarily attributable to lower volumes experienced by our non-bank consumer lending merchants as a result of COVID-19 impacts.

While we experienced sequential growth in both transactions and returned checks processed in the third quarter as compared to the second quarter, we expect COVID-19 to continue to hamper growth in our ACH business in the fourth quarter due to the increases in unemployment and the effects on the consumer credit ratings.

We have a high degree of confidence the ACH business will recover once unemployment decreases and as consumer government assistance programs are curtailed.

Prepaid card load volume during the third quarter of 2020 increased by 329% compared to the third quarter of 2019 .

Prepaid card transaction volumes during the third quarter of 2020 increased by 170% compared to the third quarter of 2019 .

These increases occurred primarily due to the implementation and sales of many newly created prepaid government assistance programs including organizations such as the Mayors Fund to Advance New York City, Greater Washington Community Foundation (Washington DC Program), United Way of Central and Northeastern Connecticut, Mayor's Fund for Los Angeles, New York Immigration Coalition, One Fair Wage, Inc.

and Dorcas International of RI.

Total dollars processed for the third quarter of 2020 were $852 million compared to $915 million in the third quarter of 2019 .

Critical Accounting Policies

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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.

Three Months Ended June 30,

Three Months Ended September 30,

ACH and complementary service revenue

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Total Revenue

Six Months Ended June 30,

Nine Months Ended September 30,

ACH and complementary service revenue

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Total Revenue

Revenues for the quarter ended June 30, 2020 decreased by 2.7% to $7.0 million, as compared to $7.2 million for the quarter ended June 30, 2019 .

The revenue decrease resulted primarily from declines in processing volumes by our consumer lending merchants offset by revenue growth in our growth initiative programs in the credit card and prepaid portfolios.

Revenues for the six months ended June 30, 2020 increased 7.2% to $14.7 million, as compared to $13.7 million for the six months ended June 30, 2019 .

The revenue increase resulted from growth in our credit card and prepaid growth initiative programs offset by declines in our ACH and return check processing volumes.

Revenues for the quarter ended September 30, 2020 increased by 14.8% to $8.1 million, as compared to $7.1 million for the quarter ended September 30, 2019 .

The revenue increase resulted primarily from revenue growth in our prepaid and credit card portfolios offset by declines in our consumer lending portfolios within our ACH business.

Revenues for the nine months ended September 30, 2020 increased 9.8% to $22.9 million, as compared to $20.8 million for the nine months ended September 30, 2019 .

The revenue increase resulted from growth in our credit card and prepaid growth initiative programs offset by declines in our consumer lending portfolios within our ACH business.

Cost of Services

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Cost of service fees also include fees paid to referral agents and partners.

Cost of services increased by 1% to $5.7 million for the quarter ended June 30, 2020 , as compared to $5.6 million for the same period in the prior year.

Cost of services increased by 6% to $11.5 million for the six months ended June 30, 2020 , as compared to $10.8 million for the same period in the prior year.

The increases in the quarter and six -month period ended June 30, 2020 , as compared to the same period in the prior year, were primarily due to the increased credit card and prepaid transaction costs associated with higher revenues.

Cost of services increased by 16% to $6.4 million for the quarter ended September 30, 2020 , as compared to $5.5 million for the same period in the prior year.

Cost of services increased by 9% to $17.9 million for the nine months ended September 30, 2020 , as compared to $16.4 million for the same period in the prior year.

The increases in the quarter and nine -month period ended September 30, 2020 , as compared to the same period in the prior year, were primarily due to the increased credit card and prepaid transaction costs associated with higher revenues.

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

Gross profits decreased by 18% to $1.3 million for the quarter ended June 30, 2020 , as compared to $1.6 million for the same period in the prior year.

The decrease in gross profit for the quarter ended June 30, 2020 , as compared to the same period in the prior year, was primarily a result of lower ACH revenues and profits as a result of COVID-19 impacts on consumer lending merchants.

Gross profits for the six months ended June 30, 2020 increased by 11% to $3.2 million as compared to $2.9 million for the same period in the prior year primarily as a result of strong revenue and gross profit growth in the quarter ended March 31, 2020 .

The increase in gross profit for the six months ended June 30, 2020 , as compared to the same period in the prior year, was primarily driven by gains in profitability from our credit card and prepaid portfolios.

Gross profits increased by 11% to $1.7 million for the quarter ended September 30, 2020 , as compared to $1.5 million for the same period in the prior year.

The increase in gross profit for the quarter ended September 30, 2020 , as compared to the same period in the prior year, was primarily a result of higher profits in our prepaid and credit card businesses offset by lower ACH profits from our consumer lending merchants.

Gross profits for the nine months ended September 30, 2020 increased by 11% to $4.9 million as compared to $4.4 million for the same period in the prior year primarily as a result of strong revenue and gross profit growth in our prepaid and credit card portfolios offset by lower profits from our consumer lending merchants.

Stock-based Compensation

Stock-based compensation expenses were relatively unchanged at $348,393 and $356,103 for the quarters ended June 30, 2020 and 2019 , respectively.

Stock-based compensation expenses for the six months ended June 30, 2020 and 2019 , were relatively unchanged at $636,103 and $639,511 respectively.

Stock-based compensation expenses decreased to $267,223 as a result of one-time cancellations of previously recorded stock compensation expenses for the quarter ended September 30, 2020 as compared to $315,259 for the quarter ended September 30, 2019 .

Stock-based compensation expenses for the nine months ended September 30, 2020 and 2019 , were $903,326 and $954,770 respectively.

Other Selling, General and Administrative Expenses

Other selling, general and administrative expenses (SG&A) decreased by 6% to $1.9 million for the quarter ended June 30, 2020 , as compared to $2.0 million for the same period in the prior year.

The decrease in other selling, general and administrative expenses for the quarter ended June 30, 2020 was primarily attributable to lower travel and travel related expenses in 2020 related to COVID-19 travel restrictions coupled with lower one-time expenses.

Other SG&A expenses for the six months ended June 30, 2020 increased by 10% to $4.0 million compared to $3.6 for the six months ended June 30, 2019 .

The increase was the result of a 27.7% increase in other SG&A expenses in the quarter ended March 31, 2020 versus the expenses in the quarter ended March 31, 2019 due to investments in the prepaid and PayFac growth initiatives.

Other selling, general and administrative expenses (SG&A) were flat at $2.0 million for the quarters ended September 30, 2020 .

Other SG&A expenses for the nine months ended September 30, 2020 increased by 6% to $6.0 million compared to $5.6 for the nine months ended September 30, 2019 .

The other SG&A increase reflects our continued investment in our prepaid and PayFac growth initiatives.

Depreciation and Amortization

Depreciation and amortization totaled $0.4 million and $0.5 million for the quarters ended June 30, 2020 and June 30, 2019 , respectively, and $0.8 million and $1.0 for the six months ended June 30, 2020 and June 30, 2019 , respectively.

Depreciation and amortization totaled $0.4 million and $0.5 million for the quarters ended September 30, 2020 and September 30, 2019 , respectively, and $1.2 million and $1.5 for the nine months ended September 30, 2020 and September 30, 2019 , respectively.

Other Income (Expense)

Other income was $1,525 for the quarter ended June 30, 2020 compared to other income of $22,196 for the quarter ended June 30, 2019 .

For the six months ended June 30, 2020 and June 30, 2019 , other income was $13,369 and $45,271 , respectively.

Other income was $10,343 for the quarter ended September 30, 2020 compared to other income of $21,389 for the quarter ended September 30, 2019 .

For the nine months ended September 30, 2020 and September 30, 2019 , other income was $23,712 and $66,660 , respectively.

Lower interest-bearing merchant reserves and lower interest rates drove the lower other income.

We reported a net loss of $1.3 million for the quarter ended June 30, 2020 , as compared to a net loss of $1.3 million for the same period in the prior year.

We reported a net loss of $2.1 million for the six months ended June 30, 2020 , as compared to a net loss of $2.3 million for the same period in the prior year.

We reported a net loss of $0.9 million for the quarter ended September 30, 2020 , as compared to a net loss of $1.2 million for the same period in the prior year.

We reported a net loss of $3.1 million for the nine months ended September 30, 2020 , as compared to a net loss of $3.6 million for the same period in the prior year.

We may incur future operating losses.

We 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 and providing incremental services to existing merchants.

Liquidity and Capital Resources

At June 30, 2020 , we had $1.8 million of cash and cash equivalents, as compared to $2.1 million of cash and cash equivalents at December 31, 2019 .

At September 30, 2020 , we had $11.4 million of cash and cash equivalents, as compared to $2.1 million of cash and cash equivalents at December 31, 2019 .

We received funding under the Paycheck Protection Program, or PPP, as part of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, administered by the U.S.

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Under the terms of the Note, we received total proceeds of $813,500 bearing interest at a rate of 1% per annum with a maturity date of April 15, 2022.

In addition, principal and interest payments will be deferred for the first six months of the loan.

In addition, principal and interest payments will be deferred for the first ten months of the loan.

The loan is subject to the terms and conditions applicable to loans administered by the U.S.

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Under the terms of the PPP Loan, the principal may be forgiven if the loan proceeds are used for qualifying expenses as described in the CARES act, such as payroll costs, benefits, rent and utilities.

The Company's loan forgiveness documentation is in the process of being filed with the Small Business Administration.

The determination of how much of the loan, if any, may be subject to forgiveness will be determined by the Small Business Administration.

We filed the loan forgiveness documentation with the Small Business Administration.

How much of the loan, if any, may be subject to forgiveness will be determined by the Small Business Administration.

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.

We reported a net loss of $1.3 million for the quarter ended June 30, 2020 and a net loss of $2.1 million for the six months ended June 30, 2020 .

At June 30, 2020 , we had an accumulated deficit of $64.3 million.

Additionally, we had working capital of $0.7 million and $1.3 million at June 30, 2020 and December 31, 2019 , respectively.

Net cash provided by operating activities, including merchant reserve funds, prepaid card load assets and net lease assets was $16.4 million and net cash used by operating activities of $2.4 million for the six months ended June 30, 2020 and June 30, 2019 , respectively.

Excluding merchant reserves, prepaid card load assets and lease right-of-use assets and liabilities, our cash used by operating activities was $0.7 million and $1.1 million for the six months ended June 30, 2020 and June 30, 2019 , respectively.

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 loss of $0.9 million for the quarter ended September 30, 2020 and a net loss of $3.1 million for the nine months ended September 30, 2020 .

At September 30, 2020 , we had an accumulated deficit of $65.2 million.

Additionally, we had working capital of $10.4 million and $1.3 million at September 30, 2020 and December 31, 2019 , respectively.

Net cash provided by operating activities, including merchant reserve funds, prepaid card load assets and net lease assets was $4.6 million and net cash used by operating activities of $3.0 million for the nine months ended September 30, 2020 and September 30, 2019 , respectively.

Excluding merchant reserves, prepaid card load assets and lease right-of-use assets and liabilities, our cash used by operating activities was $1.0 million and $0.9 million for the nine months ended September 30, 2020 and September 30, 2019 , respectively.

We continue to invest resources and infrastructure in our prepaid and PayFac integrated payments growth initiatives to achieve scale in these business lines.

Net cash used by investing activities was $334,688 and $333,205 for the six months ended June 30, 2020 and June 30, 2019 , respectively.

Net cash used by investing activities was $582,347 and $536,405 for the nine months ended September 30, 2020 and September 30, 2019 , respectively.

The primary drivers of the capital expenditures were development costs associated with internal use software capitalization.

Net cash provided from financing activities for the six months ended June 30, 2020 and June 30, 2019 was $0.7 million and $1.7 million, respectively.

The 2020 cash provided from financing activities was as a result of the $813,500 proceeds from the PPP loan in April, 2020.

Net cash provided from financing activities for the nine months ended September 30, 2020 and September 30, 2019 was $10.9 million and $1.7 million, respectively.

The 2020 cash provided from financing activities was as a result of the $813,500 proceeds from the PPP loan in April, 2020 plus the July proceeds of $3.0 million from Topline Capital Partners, LP and net proceeds of $7.4 million from a public offering in September, 2020.

The 2019 net cash provided by financing activities was a result of the February 2019 public offering which raised $1.8 million in net proceeds.

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In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization, and the outbreak has spread to all parts of the United States, including in the markets in which we operate.

The COVID-19 outbreak 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, and there are many unknowns.

As a result of the spread of COVID-19, economic uncertainties have arisen which could impact our operations.

The ongoing COVID-19 outbreaks have 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.

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.

While we have seen a large impact to our operations and results in the second quarter of 2020 , we cannot determine the long-term impact on our business going forward.

We experienced a decline in our ACH consumer lending business during the second quarter.

While we have seen a limited impact to our operations and results in the third quarter of 2020 , we cannot determine the long-term impact on our business going forward.

We experienced a decline in our ACH consumer lending businesses during the second and third quarter.

We also experienced an April decline our Singular credit card portfolio primarily attributable to mandated closures to dental practices in the portfolio.

Revenues from these merchants increased in May and June 2020 and have returned to pre-COVID-19 levels as these merchants have reopened.

Revenues from these merchants increased in starting in May and June 2020 and have returned to pre-COVID-19 levels as these merchants have reopened.

The COVID-19 pandemic has caused various business disruptions through mandated and voluntary closings.

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We are implementing actions as prescribed by government health officials.

All of our offices are currently open.

We continue to monitor the impact of the COVID-19 outbreak closely.

All of our offices are currently open and we continue to monitor the impact of the COVID-19 outbreak closely.

We have limited exposure to retail, or face-to-face processing and our non-face-to-face processing can continue should we have to operate remotely.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis