What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-03-30 compared with 2020-03-30 · 117 added, 69 removed, 77 unchanged (71% of the section changed)

8 unchanged sentences

to Usio, Inc.

Our principle offices are located at 3611 Paesanos

Parkway, Suite 300, San Antonio, TX 78231.

Our principal offices are located at 3611 Paesanos Parkway, Suite 300, San Antonio, TX 78231.

Our telephone number is (210) 249-4100.

1 unchanged sentence

Information contained on our website does not constitute part of this prospectus.

We provide integrated payment processing services to merchants and businesses, including all types of Automated Clearing House, or ACH, processing, credit, prepaid card and debit card-based processing services.

We offer customizable prepaid cards companies use for expense management, incentives, refunds, claims and disbursements, unique forms of compensation like per diems, and more.

2 unchanged sentences

Our PIN-less debit product allows merchants to debit and credit accounts in real-time.

In our 20-year history, we have created a loyal customer base that relies on us for our convenient, secure, innovative and adaptive services and technology, and we have built long-standing and valuable relationships with premier banking institutions such as Fifth-Third Bank, Sunrise Bank, and Wells Fargo Bank.

Through our new PayFac-in-a-Box technology we offer a comprehensive money disbursement platform that allows businesses to pay their contractors, employees, or other recipients by choosing between a prepaid debit Mastercard, real-time deposit to a checking account, traditional ACH, direct deposit or paper check.

In our over 20-year history, we have created a loyal customer base that relies on us for our convenient, secure, innovative and adaptive services and technology, and we have built long-standing and valuable relationships with premier banking institutions such as Fifth-Third Bank, Sunrise Bank, and Wells Fargo Bank.

Through our Akimbo Now technology we offer a comprehensive money disbursement platform that allows businesses to pay their contractors, employees, or other recipients by choosing between a prepaid debit Mastercard, real-time deposit to a checking account, traditional ACH, direct deposit or paper check.

With the acquisition of the assets of Information Management Solutions, LLC in December 2020, we now offer additional services relating to 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.

Through the acquisition, we acquired new customers and their sales force.

We reported a net loss of $2.9 million and $5.1 million for the years ended December 31, 2020 and December 31, 2019 , respectively.

We have an accumulated deficit of $65.1 million at December 31, 2020 .

In 2019 , we processed a company record total dollar amount of more than $3.54 billion for all payment types, which increased by 5% compared to our prior year volume of $3.4 billion total dollars processed.

ACH or electronic check transaction processing volumes for 2019 increased by 8% compared to 2018 .

In 2020 , we processed $3.34 billion for all payment types, which was down by 5.6% from the record prior year volume of $3.54 billion total dollars processed.

Total transactions processed were up 19% to a record 18.2 million.

ACH or electronic check transaction processing volumes for 2020 decreased by 12% compared to 2019 .

Returned check transactions decreased by 29% in 2020 compared to 2019 .

17 unchanged sentences

Results of Operations

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.

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, the program management and processing of prepaid debit cards.

With the acquisition of the assets of Information Management Solutions, LLC in December 2020, we now offer additional output solution services relating to 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.

Three Months Ended December 31,

ACH and complementary service revenue

Credit card revenue

Prepaid card services revenue

Output solutions revenue

Total Revenue

Year Ended December 31,

ACH and complementary service revenue

Credit card revenue

Prepaid card services revenue

Output solutions revenue

Total Revenue

Total revenues for 2020 increased by 14.4% to $32.3 million from $28.2 million in 2019 .

The key drivers of the revenue growth were gains in our profitable ACH business plus revenue gains in our payment facilitation and prepaid growth initiatives.

The key drivers of the revenue growth were gains in our Prepaid business line associated with multiple contracts with major cities in the U.S.

facilitating disbursements to individuals and families in need of financial assistance and, growth in our PayFac business line.

2020 also included one month of financial results from our acquisition of Information Management Solutions which we re-branded as Usio Output Solutions.

Our ACH and complementary service revenues were down primarily as a result of the COVID pandemic and the adverse impact on our non-bank consumer lending business offset by gains in our PINless debit product.

Operating Expenses

3 unchanged sentences

Cost of services expense was $24.9 million and $22.3 million for 2020 and 2019 , respectively.

Cost of services expenses increased by $2.8 million , or 14.4% , in 2019 as compared to 2018 primarily due to increased credit card and prepaid processing volumes.

Cost of services expenses increased by $2.6 million, or 11.8% , in 2020 as compared to 2019 primarily due to increased transaction costs associated with our revenue growth.

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

1 unchanged sentence

Gross profit increased by $1.4 million, or 24.0% , in 2020 as compared to 2019 .

The key drivers of the profit growth were gains in our profitable ACH business plus profit growth in credit card portfolios.

The key drivers of the profit growth were incremental profits associated with revenue growth in our Prepaid, Credit Card and Output Solutions portfolios.

Stock-based Compensation

Stock-based compensation expense was consistent year to year at $1.3 million in 2019 and 2018 .

Stock-based compensation expense increased by $0.2 million in 2020 to $1.5 million from $1.3 million in 2019 .

The increase in stock-based compensation was a result of the stock grants during 2019 and 2020.

Our stock-based compensation expenses for 2020 and 2019 represented the amortization of deferred compensation expenses related to incentive stock grants to employees, officers and directors.

1 unchanged sentence

Other selling, general and administrative expenses increased to $8.1 million in 2020 from $7.7 million in 2019 .

The increase of $1.5 million , or 23.8% represented incremental investments in people and related expenses associated with our payment facilitation and prepaid growth initiatives.

The increase of $0.4 million, or 5.7% represented continued investments in people and related expenses associated primarily with our support of payment facilitation and prepaid growth initiatives.

Depreciation and Amortization

Depreciation and amortization expense increased to $2.0 million in 2019 as compared to $1.9 million in 2018 .

The increase of $0.1 million , or 7.8% , was primarily due to the depreciation of incremental asset purchases and amortization of internal use software projects capitalized.

Interest income increased to $81,790 in 2019 from $76,551 in 2018 due to better management of interest-bearing cash balances.

Other income (expense) was expense of $32,653 for 2019 , as compared to expense of $77 for 2018 .

The driver of the incremental expense was the disposal of Payment Data Systems fixed assets retired from service as a result of the Company's name change to Usio, Inc.

Depreciation and amortization expense decreased to $1.5 million in 2020 as compared to $2.0 million in 2019 .

The decrease of $0.5 million, or 24.9% , was primarily attributable to the full depreciation in 2019 of certain assets.

Interest income decreased to $59,392 in 2020 from $81,790 in 2019 due to lower interest-bearing cash balances.

Other income (expense) was $902 for 2020 , as compared to expense of $32,653 for 2019 .

Other income and expense included $813,500 of incremental income associated with the forgiveness of our U.S.

Small Business Administration Payroll Protection Plan (PPP) loan in December, 2020.

Income tax expense was $23,109 in 2020 and $101,888 in 2019 .

The income tax expense represents amounts incurred under the Texas margin tax and Tennessee franchise tax.

The income tax expense represents amounts incurred under the Texas margin tax and Tennessee franchise tax offset by refunds of federal taxes paid.

Net Income (Loss)

We reported a net loss of $2.9 million and $5.1 million for the years ended December 31, 2020 and December 31, 2019 , respectively.

The decrease in profitability is primarily related to our incremental investments in our payment facilitation and prepaid growth initiatives.

The reduction in net loss was primarily related to our increased gross profits generated plus forgiveness of our PPP loan.

Liquidity and Capital Resources

At December 31, 2020 , we had $5.0 million of cash and cash equivalents, as compared to $2.1 million of cash and cash equivalents at December 31, 2019 .

We reported a net loss of $5.1 million and a net loss of $3.8 million for the years ended December 31, 2019 and 2018 , respectively.

We reported a net loss of $2.9 million and $5.1 million for the years ended December 31, 2020 and 2019 , respectively.

Additionally, we reported working capital of $5.6 million and $1.3 million at December 31, 2020 and 2019 , respectively.

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

Small Business Administration.

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 ten months of the loan.

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

Small Business Administration under the CARES Act.

We used the proceeds for payroll costs and other permitted expenses.

Under the terms of the PPP, 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.

Our loan forgiveness was approved in full by the U.S.

Small Business Administration on December 14, 2020.

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 us from the public offering were $7.4 million, after deducting the offering expenses and fees payable by us.

On February 14, 2019, we entered into a placement agency agreement with Maxim Group LLC with respect to the issuance and sale of an aggregate of 769,230 shares of common stock at an offering price of $2.60 per share in a public offering.

2 unchanged sentences

The proceeds were used for general corporate purposes and working capital.

Net cash used by operating activities totaled $3.7 million for 2019 as compared to net cash used by operating activities of $2.8 million in 2018 .

Net cash provided by operating activities totaled $ 6.3 million for 2020 as compared to net cash used by operating activities of $ 3.7 million in 2019 .

After adjusting for the impact of operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations and merchant reserves included in the statement of cash flows, net cash used by operating activities was $ 0.4 million and $ 1.3 million for the year ended December 31, 2020 and 2019 , respectively.

The increase in net cash used by operating activities in 2019 was primarily attributable to higher operating expenses associated with our payment facilitation and prepaid growth initiatives and the resulting incremental net loss for 2019 .

The increase in net cash generated by operating activities in 2020 was primarily attributable to increases in our Prepaid card loads and customer deposits acquired with our 2020 acquisition of Information Management Solutions, LLC.

Net cash used by investing activities was $ 6.8 million for 2020 and $ 0.6 million in 2019 .

The capital expenditures were relatively consistent during 2019 and 2018 and primarily represented capitalization of internal-use software projects.

Net cash provided from financing activities for 2019 was $1.7 million compared to cash used by financing activities of $1.0 million for 2018 .

The increase in investing activities includes the cash payment to Information Managements Solutions, LLC of $5.9 million associated with our acquisition and capitalization of internal-use software projects and other capital expenditures.

Net cash provided from financing activities for 2020 was $ 10.0 million compared to cash from financing activities of $ 1.7 million for 2019 .

The cash provided by financing activities were as a result of:

The $10.0 million of proceeds from financing activities included $813,500 from PPP Loan proceeds, gross proceeds of $3.0 million from a private offering with Topline Capital Partners, LP and net proceeds of $7.4 million from Ladenburg, Thalmann & Company, Inc.

from a public offering (per below) and net of Forgiveness of the PPP Loan in the amount of $813,500 and Treasury stock purchases of $280,269.

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

Small Business Administration.

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 ten months of the loan.

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

Small Business Administration under the CARES Act.

We used the proceeds for payroll costs and other permitted expenses.

Under the terms of the PPP, 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.

Our loan forgiveness was approved in full by the U.S.

Small Business Administration on December 14, 2020.

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 us from the public offering were $7.4 million, after deducting the offering expenses and fees payable by us.

Overall, our cash position improved significantly as a result of financing activities completed in 2020.

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

On February 14, 2019, the Company entered into a placement agency agreement with Maxim Group LLC with respect to the issuance and sale of an aggregate of 769,230 shares of common stock at an offering price of $2.60 per share in a public offering.

The Company agreed to pay Maxim Group, LLC a cash fee of equal to 6% of the aggregate gross proceeds raised in the offering and legal fees and expenses of up to $40,000 .

The net proceeds to the Company from the public offering were $1.8 million , after deducting the offering expenses and fees payable by the Company.

The funds were used for general corporate purposes and working capital.

In 2018 , the net cash used by financing activities primarily represented purchases of certain shares of common stock owned by officers, employees and directors to offset taxes owed primarily related to the vesting of a 10-year stock grant issued in 2008 that vested on January 9, 2018.

We do not have another large stock grant vesting until October 2022.

Until that time, we anticipate that purchases of stock as a part of our buyback program will be limited to the vesting of restricted stock units and will be of a smaller magnitude.

We agreed to pay Maxim Group, LLC a cash fee of equal to 6% of the aggregate gross proceeds raised in the offering and legal fees and expenses of up to $40,000.

The net proceeds to us from the public offering were $1.8 million, after deducting the offering expenses and fees payable by us.

We used the funds for general corporate purposes and working capital.

Material Trends and Uncertainties

In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus has recently been recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread in the United States, including in the markets in which the Company operates.

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.

Any potential financial impact is unknown at this time.

While we have not seen a large impact to our operations and results in the first quarter of 2020, it is too early to predict how our business may be affected in the future.

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

While the disruption is currently expected to be temporary, there is considerable uncertainty around the duration of these closings.

We are implementing actions as prescribed by government health officials.

All of our offices are closed and our employees work remotely.

we can continue to operate remotely as needed and continue to assist our customers.

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

Because our revenues are affected by processing volumes, we could experience slowing revenues as a result of widespread business closures as mandated by public orders.

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

We may see an increase in remote payment processing and our credit card business.

On August 21, 2018, we issued University Fancards, LLC warrants to purchase 150,000 shares of our common stock.

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 reducing mandated operating restrictions and efforts are underway to provide vaccinations to as many people as possible.

The government has issued several rounds of COVID-19 relief and stimulus payments and other programs to stimulate economic activity and facilitate an economic recovery.

Our business was initially adversely affected as doctors 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 the pause placed on past due amounts owed.

The level of activity for consumer lending merchants has not returned to pre-COVID levels.

We did receive a gain during COVID 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 impacts and recovery from the COVID-19 pandemic are still a work in process.

We were not impacted in the magnitude of other payment processors as our customer base had limited exposure to retail facing businesses.

With 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 customers.

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

On August 21, 2018, we issued to University Fancards, LLC warrants to purchase 150,000 shares of our common stock.

30,000 warrants vested immediately upon the date on which the first financial transaction was processed on a card account issued under the prepaid agreement, which occurred on October 5, 2018.

2 unchanged sentences

The exercise price for the remaining 120,000 warrants will be the lesser of $2.00 per share or 120% of the market price of our common stock on the vesting date of the warrant.

On August 12, 2020, we issued 27,051 shares of common stock to University FanCards, LLC in a cashless exercise at $3.46 per common share in exchange for 60,000 warrants exercised by FanCards, LLC.

On February 5, 2021, we issued 19,795 shares of common stock to University FanCards, LLC in a cashless exercise at $5.88 per common share in exchange for 30,000 warrants exercised by FanCards, LLC.

On December 15, 2020, we issued to Information Management Solutions, LLC warrants to purchase 945,599 shares of our common stock, $0.001 par value per share, with an exercise price of $4.23 per share.

The warrants were valued using the Black-Scholes option pricing model.

Assumptions used were as follows:

(i) the fair value of the underlying stock was $0.58;

(ii) the risk-free interest rate is 0.09%;

(iii) the contractual life is 5 years;

(iv) the dividend yield of 0%;

and (v) the volatility is 59.9%.

The fair value of the warrants amounted to $552,283 and will be recorded as an increase in the customer list asset and have a term of five years from time of vest.

Loan and Security Agreement with C2Go, Inc.

Under a loan and security agreement dated February 2, 2016, the Company loaned the principal amount of $200,000 to C2Go, Inc.

Under a loan and security agreement dated February 2, 2016, we loaned the principal amount of $200,000 to C2Go, Inc.

with an interest rate of 10% per annum for a term of 18 months.

1 unchanged sentence

C2Go defaulted under the note by failing to repay the loan plus interest on August 2, 2017.

On December 7, 2017, the Company entered into a note purchase and settlement agreement with C2Go and Mercury Investment Partners LLC.

Pursuant to the note purchase and settlement agreement, Mercury Investment Partners agreed to purchase the note and the rights secured by the security agreement with all rights and obligations and to pay to a sum of $200,000 in three installments.

The first installment of $50,000 was paid on December 7, 2017.

The second installment of $50,000 was due on April 30, 2018, and the remaining amount of $100,000 was due on October 31, 2018.

In return, the Company agreed to waive all interest due and payable under the terms of the C2Go loan.

Mercury Investment Partners has not paid the amount due April 30, 2018 or the amount due on October 31, 2018.

The Company issued a letter of default.

The Company agreed to extend the due date of the $50,000 payment due April 30, 2018 to May 16, 2018.

$5,000 of the $50,000 due was received on July 5, 2018.

On or about August 14, 2018, a notice of default was sent to Mercury Investment Partners.

Mercury Investment Partners did not respond to the letter or make payment in full to the Company.

On September 4, 2018, the Company filed suit against Mercury Investment Partners in Bexar County District Court.

The default judgment against Mercury Investment Partners was granted on December 21, 2018.

The Company retained the services of legal counsel to represent the Company in collecting on the judgment.

Counsel has domesticated the Texas judgment and the Company was issued a lien on a property owned by Mercury that is valued over $1.0 million by the court.

The Company is unsure if any equity exists which would allow the Company to potentially recover the funds owed.

On or about June 7, 2019, Mercury Investment Partners was served a subpoena to produce certain documents on July 3, 2019 in Colorado.

A representative of Mercury Investment Partners did not appear in court on the assigned date and time.

Subsequently, Mercury placed the property up for sale though Mercury is aware the Company has a valid lien in place on the property.

There are no assurances that the Company will be able to recover the remaining $145,000 principal and there are no assurances there will be any assets for the Company to recover from its lien on all the assets of C2Go if payment in full of the obligation is not made.

The loss reserve on the note receivable as of December 31, 2019 and 2018 , respectively was $145,000 and $36,250 reflecting a "more likely than not" recognition threshold.

On December 7, 2017, we entered into a note purchase and settlement agreement with C2Go and Mercury Investment Partners LLC.

There are no assurances that we will be able to recover the remaining $145,000 principal and there are no assurances there will be any assets for us to recover from its lien on all the assets of C2Go if payment in full of the obligation is not made.

The loss reserve on the note receivable as of December 31, 2020 and 2019 , was $145,000 reflecting a "more likely than not" recognition threshold.

Off-Balance Sheet Arrangements

3 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis