What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-13 compared with 2020-11-12 · 50 added, 75 removed, 64 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 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.

With the acquisition of the assets of IMS in December 2020, we now offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services.

During the first quarter of 2021 , the volume of credit card transactions processed increased by 108% versus the first quarter of 2020 .

The amount of credit card dollars processed during the first quarter of 2021 increased by 60% compared to the same time period in 2020.

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.

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.

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 .

ACH (eCheck) transaction volumes during the first quarter of 2021 increased by 37% compared to the first quarter of 2020 .

Returned check transactions processed during the first quarter of 2021 increased by 24% compared to the first quarter of 2020 .

The increases in eCheck transactions and returned check transactions were primarily attributable to higher volumes of activity.

Prepaid card load volume during the first quarter of 2021 increased by 105% compared to the first quarter of 2020 .

Prepaid card transaction volumes during the first quarter of 2021 increased by 89% compared to the first quarter of 2020 .

These increases occurred primarily due to the continued implementation and sales of many prepaid government assistance programs including organizations such as 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., Dorcas International of Rhode Island, National Domestic Workers Alliance, Alliance for Open Society International (City of Baltimore) and Compton Community Development Corporation (Compton Pledges Guaranteed Income Program).

Total dollars processed for the first quarter of 2021 were $1.870 billion compared to $877 million in the first quarter of 2020 .

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 September 30,

ACH and complementary service revenue

Credit card revenue

Prepaid card services revenue

Total Revenue

Nine Months Ended September 30,

Three Months Ended March 31,

ACH and complementary service revenue

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Prepaid card services revenue

Output solutions revenue

Total Revenue

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.

Revenues for the quarter ended March 31, 2021 increased by 73.2% to $13.5 million, as compared to $7.8 million for the quarter ended March 31, 2020 .

Excluding the impact of the Output Solutions revenues, the organic growth was 24.6% versus the same period last year.

The revenue increases were across all business lines including incremental revenues from our Output Solutions plus double-digit gains in our other business lines as referenced above.

During the first quarter we saw a strong rebound in our ACH and complementary service category which was a reversal of recent negative trends.

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 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.

Cost of services increased by 81% to $10.6 million for the quarter ended March 31, 2021 , as compared to $5.8 million for the same period in the prior year.

The increase in the three month period ended March 31, 2021 , as compared to the same period in the prior year, was primarily due to the incremental Output Solutions business plus the cost of goods sold component of double-digit revenue growth in each of our business lines.

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

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.

Gross profits increased by 51% to $2.9 million for the quarter ended March 31, 2021 , as compared to $1.9 million for the same period in the prior year.

The increase in gross profit for the quarter ended March 31, 2021 , as compared to the same period in the prior year, was primarily a result of incremental profits from our Output Solutions business plus profits associated with our double-digit revenue growth in our other business lines.

Stock-based Compensation

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.

Stock-based compensation expenses increased to $327,715 for the quarter ended March 31, 2021 as compared to $287,710 for the quarter ended March 31, 2020 .

The increase was attributable to our stock grant on April 1, 2020 and incremental stock awards associated with the IMS acquisition.

Other Selling, General and Administrative Expenses

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.

Other selling, general and administrative expenses (SG&A) increased to $2.7 million for the quarters ended March 31, 2021 as compared to $2.1 million in the prior year.

The increase in other SG&A reflects our continued investment in our prepaid and PayFac growth initiatives and incremental SG&A expenses associated with the Output Solutions line of business.

Depreciation and Amortization

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.

Depreciation and amortization totaled $0.6 million and $0.4 million for the quarters ended March 31, 2021 and March 31, 2020 , respectively.

The incremental expense was associated with the amortization of the IMS customer list asset.

Other Income (Expense)

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.

Other income was $2,467 for the quarter ended March 31, 2021 compared to other income of $11,844 for the quarter ended March 31, 2020 .

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

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 reported a net loss of $0.7 million for the quarter ended March 31, 2021 , as compared to a net loss of $0.8 million for the same period in the prior year.

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.

To regain and sustain profitability, we must, among other things, incrementally grow and maintain our customer base, sell our ACH, credit card, prepaid product offerings and output solutions 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.

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Liquidity and Capital Resources

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.

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 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.

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.

At March 31, 2021 , we had $4.3 million of cash and cash equivalents, as compared to $5.0 million of cash and cash equivalents at December 31, 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.

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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 reported a net loss of $0.7 million for the quarter ended March 31, 2021 .

At March 31, 2021 , we had an accumulated deficit of $65.8 million.

Additionally, we had working capital of $5.6 million at March 31, 2021 and December 31, 2020 , respectively.

Net cash provided by operating activities, including merchant reserve funds, prepaid card load assets, customer deposits and net lease assets was $10.5 million and net cash used by operating activities of $1.7 million for the three months ended March 31, 2021 and March 31, 2020 , respectively.

Excluding merchant reserves, prepaid card load assets, customer deposits and lease right-of-use assets and liabilities, our cash used by operating activities was $0.6 million and $0.2 million for the three months ended March 31, 2021 and March 31, 2020 , 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 $582,347 and $536,405 for the nine months ended September 30, 2020 and September 30, 2019 , respectively.

Net cash used by investing activities was $274,467 and $152,654 for the three months ended March 31, 2021 and March 31, 2020 , 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 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.

Net cash provided from financing activities for the three months ended March 31, 2021 and March 31, 2020 was $0.1 million and $26,629 , respectively.

The 2021 cash provided from financing activities was primarily a result of proceeds from our equipment loan.

Material Trends and Uncertainties

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 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.

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.

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Any potential incremental financial impact is unknown at this time.

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 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.

While the closures were temporary, there is considerable uncertainty whether new closures will occur in hot spot areas.

We are implementing actions as prescribed by government health officials.

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.

We saw an increase in remote payment processing and our credit card processing.

We expect this trend to continue in the remainder of the year.

At this time, certain states are reducing mandated operating restrictions and efforts are underway to provide vaccinations to as many people as possible.

During 2020 and 2021, the government 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 doctor's 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 received an increase in revenues 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.

To date, we have not been impacted in the magnitude that other payment processors were, as our customer base had limited exposure to retail facing businesses.

Within 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 the well-being of our customers.

Off-Balance Sheet Arrangements

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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