Usio, Inc. 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.   The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto, and other financial information included elsewhere in this annual report on Form 10-K. This report contains forward-looking statements. When used in this report, the words “anticipates,” “suggests,” “estimates,” “plans,” “projects,” “continue,” “ongoing,” “potential,” “expect,” “predict,” “believe,” “intend,” “may,” “will,” “should,” “could,” “would,” “proposal,” and similar expressions are intended to identify forward-looking statements. Actual results in future periods may differ materially from those expressed or implied in such forward-looking statements as a result of a number of factors, including, but not limited to, the risks discussed under the heading "Risk Factors" in this annual report on and elsewhere in this annual report on Form 10-K.   Overview   Usio, Inc. was founded under the name Billserv Com, Inc. in July 1998 and incorporated in the State of Nevada. On June 26, 2019, we changed our corporate name from Payment Data Systems, Inc. to Usio, Inc. Our principal offices are located at 3611 Paesanos Parkway, Suite 300, San Antonio, TX 78231. Our telephone number is (210) 249-4100. Our website is located at www.usio.com. Information contained on our website does not constitute part of this prospectus.   24 Table of Contents   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 and statement preparation, presentment and mailing services.   We offer customizable prepaid cards companies use for expense management, incentives, refunds, claims and disbursements, unique forms of compensation like per diems, government disbursements, and more. We also offer prepaid cards to consumers for use as a tool to stay on budget, manage allowances and share money with family and friends. UsioCard platform supports Apple Pay®, Samsung Pay™ and Google Pay™. Our PIN-less debit product allows merchants to debit and credit accounts in real-time. 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 $0.3 million and $2.9 million for the years ended December 31, 2021 and December 31, 2020, respectively. We have an accumulated deficit of $65.4 million at December 31, 2021.   In 2021, we processed $9.5 billion for all payment types, which was up 184% from the prior year volume of $3.34 billion total dollars processed. Total transactions processed were up 94% to a record 35.3 million. ACH or electronic check transaction processing volumes for 2021 increased by 93% compared to 2020. Returned check transactions increased by 81% in 2021 compared to 2020. Credit card dollars processed in 2021 increased by 42% compared to 2020 and credit card transactions processed for 2021 increased by 76% compared to 2020. Both the credit card dollars and transactions processed represent all-time records for the Company. Prepaid card load volume increased by 32% and transaction volume increased by 135%.   To become and sustain profitability, we must, among other things, continue to grow our top line revenues, grow and maintain our customer base, enhance and continue to refine existing and new successful marketing strategies, continue to maintain and upgrade our technology and transaction processing systems, provide superior customer service, respond to competitive developments, attract, retain and motivate qualified personnel, and respond to unforeseen industry developments and other factors.   We believe that our success will depend in large part on our ability to (a) aggressively drive top line growth, (b) add talented sales people, (c) add quality customers, (d) meet evolving customer requirements, (e) adapt to technological changes in an ever changing market, (f) be opportunistic in identifying and acquiring portfolios that expand or complement our existing customer base and (g) effectively manage our operating expenses as we aggressively scale the business. Our near-term objectives will be focused on aggressively driving top line growth and identifying and acquiring portfolios and or companies that complement and support our growth strategy. We will continuously assess the ability of our employees and other resources to achieve our targeted growth and continuously enhance our technology platform to drive our competitive advantage.   Critical Accounting Policies   General   Our management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to the reported amounts of revenues and expenses, bad debt, investments, intangible assets, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. We consider these accounting policies to be critical because the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change or because the impact of the estimates and assumptions on financial condition or operating performance is material.   For a summary of critical accounting policies, please refer to the Notes to Consolidated Financial Statements, Note 1. Description of Business and Summary of Significant Accounting Policies.   Results of Operations   Revenues   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.   25 Table of Contents   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,       2021     2020     $ Change     % Change                                     ACH and complementary service revenue   $ 4,618,891     $ 2,391,256     $ 2,227,635       93 % Credit card revenue     6,383,450       4,806,053       1,577,397       33 % Prepaid card services revenue     2,573,887       1,025,168       1,548,719       151 % Output solutions revenue     3,850,237       1,160,037       2,690,200       232 % Total Revenue   $ 17,426,465     $ 9,382,514     $ 8,043,951       86 %         Year Ended December 31,       2021     2020     $ Change     % Change                                     ACH and complementary service revenue   $ 15,432,787     $ 8,471,705     $ 6,961,082       82 % Credit card revenue     25,174,579       19,453,501       5,721,078       29 % Prepaid card services revenue     6,542,651       3,166,580       3,376,071       107 % Output solutions revenue     14,792,299       1,160,037       13,632,262       1,175 % Total Revenue   $ 61,942,316     $ 32,251,823     $ 29,690,493       92 %   Total revenues for 2021 increased by 92% to $61.9 million from $32.3 million in 2020. Key drivers of the revenue growth include our ACH and complementary service revenues, as a result of strong relationships with cryptocurrency brokers and fintech micro-lending. This growth was bolstered by gains in our Payfac business line due to continued traction with ISVs, and our Prepaid business line associated with sustained, and growing relationships with major cities in the U.S. facilitating disbursements to individuals and families in need of financial assistance. 2021 also marked the first full year of revenue from the Output Solutions line of business, acquired in December 2020.   Operating Expenses   Cost of services includes the cost of personnel dedicated to the creation and maintenance of connections to third-party payment processors and the fees paid to such third-party providers for electronic payment processing services. Through our contractual relationships with our payment processors and sponsoring banks, we process ACH and debit, credit or prepaid card transactions on behalf of our customers and their consumers. We pay volume-based fees for debit, credit, ACH and prepaid transactions initiated through these processors or sponsoring banks, and pay fees for other transactions such as returns, notices of change to bank accounts and file transmission. Cost of services expense was $46.3 million and $24.9 million for 2021 and 2020, respectively. Cost of services expenses increased by $21.4 million, or 86%, in 2021 as compared to 2020 primarily due to increased transaction costs associated with our revenue growth.   Gross Profit   Gross profit is the net profit after deducting the cost of services. Gross profits were $15.6 million and $7.4 million for 2021 and 2020, respectively. Gross profit increased by $8.3 million, or 112%, in 2021 as compared to 2020. The key drivers of the profit growth were incremental profits associated with revenue growth in our ACH, Output Solutions, Prepaid, and Credit Card portfolios.   Stock-based Compensation   Stock-based compensation expense remained flat at $1.5 million in 2021 and 2020. Our stock-based compensation expenses for 2021 and 2020 represented the amortization of deferred compensation expenses related to incentive stock grants to employees, officers and directors.   Other Selling, General and Administrative Expenses   Other selling, general and administrative expenses increased to $11.7 million in 2021 from $8.1 million in 2020. The increase of $3.5 million, or 43% 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 $2.6 million in 2021 as compared to $1.5 million in 2020. The increase of $1.1 million, or 74%, was primarily attributable to the depreciation of the Output Solutions acquisition.   Other Income   Interest income decreased to $7,643 in 2021 from $59,392 in 2020 due to lower interest-bearing cash balances. Other income (expense) was $279 for 2021, as compared to expense of $902 for 2020.    26 Table of Contents   Income Taxes   Income tax expense was $279,861 in 2021 and $23,109 in 2020. Federal income tax benefit in 2021 was $110,000, and $94,948 in 2020. 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 tax expense reported was $169,861 in 2021, and $23,109 in 2020.   Net Income (Loss)   We reported a net loss of $0.3 million and $2.9 million for the years ended December 31, 2021 and December 31, 2020, respectively. The reduction in net loss was primarily related to our increased gross profits generated by our growing lines of business.   Liquidity and Capital Resources   At December 31, 2021, we had $7.3 million of cash and cash equivalents, as compared to $5.0 million of cash and cash equivalents at December 31, 2020.   We reported a net loss of $0.3 million and  $2.9 million for the years ended December 31, 2021 and 2020, respectively.  Additionally, we reported working capital of $8.8 million and $5.6 million at December 31, 2021 and 2020, respectively.   On November 19, 2021, Voyager Digital purchased 142,857 unregistered shares of common stock at an offering price of $7.00 per share in a private offering. The gross proceeds to us from the private offering were $1,000,000.   In 2020 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 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 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.   Cash Flows   Net cash provided by operating activities totaled $29.8 million for 2021 as compared to net cash provided by operating activities of $6.3 million in 2020. 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 generated by operating activities was $2.6 million for the year ended December 31, 2021 and net cash used by operating activities $0.4 million for the year ended December 31, 2020. The increase in net cash generated by operating activities in 2021 was primarily attributable to increases in our Prepaid card load obligations and lack of incremental customer deposits in our Output Solutions business.   Net cash used by investing activities was $1.3 million for 2021 and $6.8 million in 2020. The decrease in investing activities is due to 2020's inclusion of a cash payment to Information Managements Solutions, LLC for $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 2021 was $0.9 million compared to cash from financing activities of $10.0 million for 2020.   The 2021 cash provided by financing activities was the result of:   On November 19, 2021, Voyager Digital purchased 142,857 unregistered shares of common stock at an offering price of $7.00 per share in a private offering. The gross proceeds to us from the private offering were $1,000,000.   On March 20, 2021, the Company entered into a debt arrangement to finance $165,996 for the purchase of an Output Solutions sorter. Net Proceeds from the equipment loan totaled $126,194 to the Company.   A decrease in cash provided by financing activities includes treasury stock purchases of $238,737.   The 2020 cash provided by financing activities was the result of:    $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 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.   A decrease in cash provided by financing activities includes treasury stock purchases of $280,269.   27 Table of Contents     Material Trends and Uncertainties   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.   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.     In April and May of 2020, our business was 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 a pause placed on past due amounts owed.   The level of activity for consumer lending merchants has somewhat 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 efforts have included the disbursement of funds to encourage vaccinations.    The Company has recently experienced some difficulty in recruiting and retaining certain categories of employees due to limited resource availability.  The Company continues to monitor resource availability and is taking necessary steps to retain employees and recruit employees to fill open positions.   Due to the COVID-19 pandemic, supply chain issues have resulted in a reduced supply, and growing demand of paper and paper products utilized in our Output Solutions line of business. Sourcing inventory remains a key challenge to execute jobs and projects with existing and new customers. If we cannot continue to acquire sufficient inventory stock, the successful completion, margins, and growth of the Output Solutions may be impacted.   The impacts and recovery from the COVID-19 pandemic are still a work in process.  To date, we have not been adversely 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.     28 Table of Contents   Warrants   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. 120,000 warrants vest annually over 4 years in 30,000 warrant increments beginning on July 31, 2019 and becoming fully vested on July 31, 2022. The exercise price for the 30,000 warrants that vested immediately on October 5, 2018 was $1.80 per share. 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 September 1, 2021, the Company issued 19,950 shares of common stock to University FanCards, LLC in a cashless exercise at $5.97 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 is recorded as an increase in the customer list asset and have a term of five years from time of vest.   Off-Balance Sheet Arrangements   We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.