What changed in this filing

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Item 1. Financial Statements

2022-11-09 compared with 2022-08-11 · 201 added, 140 removed, 541 unchanged (39% of the section changed)

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CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2022

September 30, 2022

December 31, 2021

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Preferred stock, $ 0.01 par value, 10,000,000 shares authorized;

- 0 - shares outstanding at June 30, 2022 (unaudited) and December 31, 2021, respectively

- 0 - shares outstanding at September 30, 2022 (unaudited) and December 31, 2021, respectively

Common stock, $ 0.001 par value, 200,000,000 shares authorized;

26,837,978 and 26,807,145 issued, and 25,295,875 and 25,473,453 outstanding at June 30, 2022 (unaudited) and December 31, 2021, respectively

26,966,300 and 26,807,145 issued, and 25,263,333 and 25,473,453 outstanding at September 30, 2022 (unaudited) and December 31, 2021, respectively

195,391  

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Treasury stock, at cost;

1,542,103 and 1,333,692 shares at June 30, 2022 (unaudited) and December 31, 2021, respectively

1,702,967 and 1,333,692 shares at September 30, 2022 (unaudited) and December 31, 2021, respectively

( 3,299,099 )  

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Cost of services

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30,

Nine Months Ended September 30,

Operating activities:

Adjustments to reconcile net (loss) to net cash provided (used) by operating activities:

Non-cash stock-based compensation

Stock-based compensation

Amortization of warrant costs

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Purchases of treasury stock

Net cash provided (used) by financing activities

Net cash (used) by financing activities

Change in cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves

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Balance at June 30, 2022

Issuance of common stock under equity incentive plan

Warrant compensation costs

Reversal of deferred compensation amortization that did not vest

Deferred compensation amortization

Purchase of treasury stock costs

Net (loss) for the period

Balance at September 30, 2022

Balance at December 31, 2020

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Balance at June 30, 2021

Issuance of common stock under equity incentive plan

Warrant compensation cost

Cashless warrant exercise

Reversal of deferred compensation amortization that did not vest

Deferred compensation amortization

Purchase of treasury stock

Net income for the period

Balance at September 30, 2021

The accompanying notes are an integral part of these consolidated financial statements.

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31, 2021, as filed with the Securities and Exchange Commission on March 17, 2022.

Results of operations for interim periods are not necessarily indicative of results that may be expected for any other interim periods or the full fiscal year.

Results of operations for interim periods are not necessarily indicative of results that may be expected for any other interim periods or the full fiscal year. References in this quarterly report to "the quarter" or the "third quarter" mean the three month period ended September 30, 2022 or 2021 , as the case may be.

Use of Estimates:

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606 - 10  and reports revenues at gross as a principal versus net as an agent.

Although some of the Company's processing agreements vary with respect to specific credit risks, the Company has determined for each agreement it is acting in the principal role.

Merchants 

be charged for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction.

Certain merchant customers are charged a flat fee per transaction, while others 

Although some of the Company's processing agreements vary with respect to specific credit risks, the Company has determined that for each agreement it is acting in the principal role. Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through 

third -party networks are reported as gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations.

Merchants processing credit, debit, prepaid card, and ACH transactions may 

be charged for these services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction.

Certain merchant customers may 

also be charged miscellaneous fees, including fees for chargebacks or returns, monthly minimums, and other miscellaneous services.

Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through 

third -party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations.

Certain card distributors remit payment of fees earned 

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not  included in revenue. 

Usio Output Solutions, Inc.

provides bill preparation, presentment and mailing services.

Revenue from Output Solutions is recognized when the related services are performed for printing and delivered to USPS for postage.

Our wholly-owned subsidiary, Usio Output Solutions, Inc., or Output Solutions, provides bill preparation, presentment and mailing services.

Revenue from Output Solutions is recognized when the related services are performed for printing and delivered to the United States Postal Service, or USPS, for postage.

The following table presents the Company's revenues by source:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

ACH and complementary service revenue

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Deferred Revenues:

The Company records deferred revenues when it receives payments in advance of transferring control of promised goods or services to a customer.

The Company records deferred revenues as a liability when it receives payments in advance of transferring control of promised goods or services to a customer.

The advance consideration received from a customer is deferred until the Company provides the customer that product or service.

The deferred revenues totaled $ 0  and $ 17,647  at June 30, 2022 and December 31, 2021 , respectively.

The deferred revenues totaled $ 0  and $ 17,647  at September 30, 2022 and December 31, 2021 , respectively.

Cash and Cash Equivalents:

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Customer Deposits:

The Company holds customer deposits primarily for postage expenses to ensure the Company is not out of pocket for amounts billed daily by the United States Postal Service. 

These customer deposits are carried on the Company's balance sheet with a corresponding liability.

The Company holds customer deposits primarily for postage expenses to ensure the Company is not out of pocket for amounts billed daily by the USPS. These customer deposits are carried on the Company's balance sheet with a corresponding liability.

Merchant Reserves:

The Company has merchant reserve requirements associated with Automated Clearing House ("ACH") transactions.

The Company has merchant reserve requirements associated with Automated Clearing House, or ACH, transactions.

The merchant reserve assets are carried on the Company's balance sheet with a corresponding liability.

Merchant Reserves are set for each merchant.

Funds are collected from each merchant and held as collateral to minimize contingent liabilities associated with any losses that may occur under the merchant agreement.

While this cash is not restricted in its use, the Company believes that designating this cash to collateralize Merchant Reserves strengthens its fiduciary standing with the Company's member sponsors and is in accordance with the guidelines set by the card networks.

Merchant Reserves are set for each merchant and funds are collected and held as collateral to minimize contingent liabilities associated with any losses that may occur.

While this cash is not restricted in its use, the Company believes that designating this cash to collateralize Merchant Reserves strengthens its standing with the Company's member sponsors and is in accordance with the guidelines set by the card networks.

Prepaid Card Load Assets:

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The reconciliation of cash and cash equivalents to cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves is as follows for each period presented:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Beginning cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves:

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The Company determines the allowance for estimated doubtful accounts receivable losses based on an account-by-account review, taking into consideration such factors as the age of the outstanding balance, historical pattern of collections, and financial condition of the customer.

Past losses incurred by the Company due to bad debts have been within its expectations.

If the financial conditions of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make contractual payments, additional allowances might be required.

During the 

nine months ended September 30, 2022  and the year ended 

December 31, 2021 , losses incurred by the Company due to bad debts were within its expectations.

If the financial conditions of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make contractual payments, additional losses may be incurred in future periods.

Estimates for doubtful account losses are variable based on the volume of transactions processed and could increase or decrease accordingly.

The allowance for estimated doubtful accounts was $ 319,000  at June 30, 2022 and December 31, 2021 .

The allowance for estimated doubtful accounts was $ 319,000  at September 30, 2022 and December 31, 2021 .

Inventory is stated at the lower of cost or net realizable value.

At June 30, 2022  and December 31, 2021, inventory consisted primarily of printing and paper supplies used for Output solutions.

At September 30, 2022  and December 31, 2021, inventory consisted primarily of printing and paper supplies used for Output Solutions.

Accounting for Internal Use Software:

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The Company ceases capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose.

In the six  months ended June 30, 2022 and June 30, 2021 , the Company capitalized $ 246,210 and $ 388,349 , respectively.

During the nine  months ended September 30, 2022 and September 30, 2021 , the Company capitalized $ 438,128  and $ 561,177 , respectively.

Valuation of Long-Lived and Intangible Assets:

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No impairment losses were recorded in 2021  or during the 

six months ended June 30, 2022 .

nine months ended September 30, 2022 .

Management is not aware of any impairment changes that may currently be required;

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Estimates for processing losses are variable based on the volume of transactions processed and could increase or decrease accordingly.

At June 30, 2022 and December 31, 2021 , the Company’s reserve for processing losses was $ 689,494  and $ 623,494  respectively.

At September 30, 2022 and December 31, 2021 , the Company’s reserve for processing losses was $ 722,494  and $ 623,494  respectively.

Legal Proceedings:

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To achieve this objective, the amendments in Topic 326 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. 

Topic 326 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies. 

The Company does not expect the adoption of the amendments in ASU 2016 - 13 to have a significant effect on its financial position and the results of its operations when such amendment is adopted.

Topic 326 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies. The Company does not expect the adoption of the amendments in ASU 2016 - 13 to have a significant effect on its financial position and the results of its operations when such amendment is adopted.

Accounting standards that have been issued or proposed by the FASB, the SEC or other standard setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

  Leases

The Company leases facilities and office equipment under various operating leases, which generally are expected to be renewed or replaced by other leases.

For the quarters ended June 30, 2022  and 2021 , operating lease expenses totaled $ 239,105  and $ 123,134 , respectively.

For each of the three months ended September 30, 2022  and 2021 , operating lease expenses totaled $ 152,401  and $ 117,689 , respectively.

Accrued Expenses

Accrued expenses consisted of the following balances:

June 30, 2022

September 30, 2022

December 31, 2021

Accrued commissions

$ 969,056  

$ 879,120  

Reserve for processing losses

722,494  

623,494  

Other accrued expenses

286,794  

226,888  

Accrued taxes

258,766  

298,168  

Accrued salaries

134,068  

297,995  

Total accrued expenses

$ 2,371,178  

$ 2,325,665  

Equipment Loan

On March 20, 2021, the Company entered into a debt arrangement to finance $ 165,996 for the purchase of an Output Solutions sorter.

The loan is for a period of 36 months with a maturity date of March 20, 2024.

The repayment amount is for 36  months at $ 4,902 per month.

Annual payments are $ 58,821 .

The financing is at an interest rate of 3.95 %. 

Current period payments on the equipment loan were $ 13,622 .

The loan is for a period of 36 months with a maturity date of March 20, 2024 and annual interest of 3.95 %.

Monthly principal and interest payments are required in the amount of $ 4,902 .

Payments for the 

three and nine months ended September 30, 2022 were $ 13,762 and $ 40,872 , respectively.

Stockholders' Equity

Stock Warrants :

On August 21, 2018, the Company issued University FanCards, LLC a warrant to purchase 150,000 shares of the Company's 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 one hundred and twenty percent ( 120 %) of the market price of the Company's common stock on the vesting date of the warrant.

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

On August 21, 2018, the Company issued University FanCards, LLC a warrant to purchase 150,000 shares of the Company's common stock which were subject to the following vesting schedule:

30,000 warrants vested upon the date on which the first financial transaction was processed, which occurred on October 5, 2018;

and (ii) 

120,000 warrants vested annually over 4 years in 30,000 warrant increments beginning on July 31, 2019 and ending on July 31, 2022.

The exercise price for the initial 30,000 warrants was $ 1.80 per share.

The exercise price for the remaining 120,000 warrants was the lesser of $ 2.00 per share or one hundred and twenty percent ( 120 %) of the market price of the Company's common stock on the vesting date of the warrant.

At the time of issuance, the warrants were valued using the Black-Scholes option pricing model.

Assumptions used were as follows:

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The fair value of the warrants was $ 135,764 which will be amortized over the life of the warrants as a reduction of revenues.

The reduction of revenues recorded for the six months ended June 30, 2022 and 2021 was $ 17,970 .

On August 12, 2020, the Company 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, the Company 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.

The reduction of revenues recorded for the nine months ended September 30, 2022 and 2021 was $ 20,965 and $ 26,955 respectively.

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

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

On September 1, 2021, the Company issued 19,950  shares of our common stock to University FanCards, LLC in a cashless exercise at $ 5.97 per share in exchange for 30,000 warrants exercised by FanCards, LLC.

On December 

15, 2020, the Company issued to Information Management Solutions, LLC warrants to purchase 945,599 unregistered shares of Usio, Inc.

or 945,599 shares of common stock, $ 0.001 par value per share, with an exercise price of $ 4.23 . 

945,599 warrants vest annually over 3 years in three equal tranches beginning on December 15, 2021 

and becoming fully vested on December 15, 2023.

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

15, 2020, the Company issued warrants to purchase 945,599  shares of the Company's common stock with an exercise price of $ 4.23 per share to Information Management Solutions, LLC. The Management Solutions' warrants vest annually over 3 years in three equal tranches beginning on December 15, 2021 

and become fully vested on December 15, 2023.

At the time of issuance, these warrants were valued using the Black-Scholes option pricing model.

Assumptions used were as follows:

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The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net (loss) for the 

three and six months ended June 30, 2022 and June 30, 2021 .

Three Months Ended June 30,

Six Months Ended June 30,

three and nine months ended September 30, 2022 and September 30, 2021 .

Three Months Ended September 30,

Nine Months Ended September 30,

Numerator for basic and diluted income (loss) per share, net income (loss) available to common shareholders

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$ ( 0.26 )  

The awards and options to purchase shares of common stock that were outstanding at June 30, 2022 and June 30, 2021 that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive, are as follows:

Six Months Ended June 30,

The awards and options to purchase shares of common stock that were outstanding at September 30, 2022 and September 30, 2021 that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive, are as follows:

Nine Months Ended September 30,

Anti-dilutive awards and options

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Income tax benefits that meet the “more likely than not”

recognition threshold should be recognized.

recognition threshold are recognized.

The Company has recognized a net deferred tax asset of approximately $ 1.5 million and has recorded a valuation allowance of approximately $ 5.2  million against the other deferred tax assets.

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Related Party Transactions

During the six months ended June 30, 2022 and the year ended December 31, 2021 , the Company purchased a total of $ 19,929 and $ 4,009 , respectively, of corporate imprinted sportswear and caps from Angry Pug Sportswear.

Louis Hoch, the Company’s President and Chief Executive Officer, is a 50 % owner of Angry Pug Sportswear.

During the nine months ended September 30, 2022 and the year ended December 31, 2021 , the Company purchased a total of $ 22,478 and $ 4,009 , respectively, of corporate imprinted sportswear and caps from Angry Pug Sportswear.

Louis Hoch, the Company’s Chairman of the Board, President, and Chief Executive Officer, is a 50 % owner of Angry Pug Sportswear.

Directors and Officers

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January 6, 2022 

of $ 4.21  per share from Tom Jewell, the Company's Chief Financial Officer, to cover his share of taxes.

On January 6, 2021, the Company repurchased 11,860 shares of common stock at a closing price of $ 3.25 per share from Tom Jewell, the Company's Chief Financial Officer to cover taxes due.

of $ 4.21  per share from Tom Jewell, the Company's Chief Financial Officer, to cover his share of taxes in the vesting of stock compensation issued via a 

On January 6, 2021, the Company repurchased 11,860 shares of common stock at a closing price of $ 3.25 per share from Tom Jewell, the Company's Chief Financial Officer to cover his share of taxes in the vesting of stock compensation issued via a 

The Company granted 

319,900  shares of common stock with a 

319,900  shares of restricted common stock with a 

10 -year vesting period and 

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Executive officers and Directors included in the 

10 -year grant were Louis Hoch ( 100,000  shares), Tom Jewell ( 50,000  shares), Greg Carter ( 30,000  shares) and Houston Frost ( 25,000  shares).

10 -year restricted stock grant were Louis Hoch ( 100,000  shares), Tom Jewell ( 50,000  shares), Greg Carter ( 30,000  shares) and Houston Frost ( 25,000  shares).

Executive officers and Directors included in the RSU grant were Louis Hoch ( 30,000  shares), Tom Jewell ( 21,000  shares), Greg Carter ( 9,000  shares) Houston Frost ( 6,000  shares), Blaise Bender ( 12,000  RSUs), Brad Rollins ( 12,000  RSUs) and Ernesto Beyer ( 12,000  RSUs).

On April 1, 2021, the Company granted 1,444,000 shares of common stock with a 10 -year vesting period and 103,000 restricted stock units (RSUs) with a 3 -year vesting period to employees and Directors as a performance bonus at an issue price of $ 1.08 per share.

Executive officers and Directors included in the grant were Louis Hoch ( 300,000 shares), Tom Jewell ( 200,000 shares), Blaise Bender ( 10,000 RSUs) and Brad Rollins ( 30,000 RSUs).

On April 1, 2021, the Company granted 1,444,000 shares of restricted common stock with a 10 -year vesting period and 103,000 restricted stock units (RSUs) with a 3 -year vesting period to employees and Directors as a performance bonus at an issue price of $ 1.08 per share.

Executive officers and Directors included in the grants were Louis Hoch ( 300,000 shares), Tom Jewell ( 200,000 shares), Blaise Bender ( 10,000 RSUs) and Brad Rollins ( 30,000 RSUs).

The ongoing COVID- 19  pandemic has had a notable impact on general economic conditions, including but 

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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 labor availability. 

Since 2020, the Company has experienced some difficulty in recruiting and retaining certain categories of employees due to limited labor availability. 

The Company continues to monitor labor availability and is taking necessary steps to retain employees and recruit employees to fill open positions.

Due to the COVID- 19  pandemic and global economic challenges, 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 the Company cannot continue to acquire sufficient inventory stock, the successful completion, margins, and growth of Output Solutions 

While these efforts have been successful thus far, if the Company cannot continue to acquire sufficient inventory stock, the successful completion, margins, and growth of Output Solutions 

The impacts and recovery from the COVID- 19  pandemic are still a work in process. 

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Subsequent Events

In early July, 2022, the Company's largest ACH customer filed chapter 11 bankruptcy and stopped processing transactions.

The customer represented 49 % of our total ACH transaction volume in 2021 and 8 % of revenue for the Company.

The Company's revenue and cash flows will be impacted if the customer does not resume full operations.

Following the close of the quarter ended 

September 30, 2022  the Company has bought 135,578  incremental shares of stock on the open-market as part of its stock buyback program in the amount of $ 232,611 . 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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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.

In addition, we offer customizable prepaid cards which companies use for expense management, incentives, refunds, claims and disbursements, as well as unique forms of compensation such as per diem payments, government disbursements, and similar payments.

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™

Our UsioCard platform supports Apple Pay®, Samsung Pay™

and Google Pay™.

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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.

During the second quarter of 2022, the amount of credit card transactions processed increased by 35% versus the second quarter of 2021. 

The volume of credit card dollars processed during the second quarter of 2022 increased by 9% compared to the same time period in 2021.

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

The continued growth in credit card metrics was primarily attributable to our PayFac growth initiatives driving increased penetration across multiple industries including healthcare and legal. 

ACH (eCheck) transaction counts during the second quarter of 2022 decreased by 8% compared to the second quarter of 2021.

Returned check transactions processed during the second quarter of 2022 increased by 39% compared to the second quarter of 2021. 

Electronic check dollars processed during the second quarter of 2022 decreased by 16% compared to the second quarter of 2021.

The decreases in eCheck transactions and electronic check dollar volumes processed were primarily attributable to significant higher cryptocurrency activity levels in the prior year period versus the current year period.

Increases in returned check transactions was primarily attributable to the continued recovery of the consumer lending market following its decline due to COVID-19.

Prepaid card load volumes processed during the second quarter of 2022 increased by 81% compared to the second quarter of 2021.

Prepaid card transaction counts processed during the second quarter of 2022 increased by 190% compared to the second quarter of 2021.

Prepaid card purchase volume during the second quarter of 2022 increased by 139% compared to the second quarter of 2021. These increases occurred primarily due to the continued associations with many government assistance programs including organizations such as New York City Economic Development Corporation, City of Houston, Harris County, TX, Open Society International (City of Baltimore), and Greater Washington Community Foundation (Washington DC) with their vaccine incentive and cash disbursement programs. 

We also continue to support numerous guaranteed income programs including the Arlington Community Foundation, E.A.T (Equity and Transformation) Chicago, and Hudson UP, the City of Denver's Basic Income Project.

Total dollar volumes processed across all business lines in the second quarter of 2022 were $2.4 billion compared to $2.7 billion processed in the second quarter of 2021.

Our strategy is to drive growth through a leveraged, one to many, distribution model in the software development marketplace.

Following the completion of the Singular Payments acquisition, we launched our payment facilitation, PayFac, platform called "PayFac-in-a-Box" in late 2018 targeting partnership opportunities with app and software developers in bill-centric verticals, such as legal, healthcare, property management, utilities and insurance.

The PayFac-in-a-Box platform 'integration layer' offers a simple integration experience for technology companies who are looking to monetize payments within an existing base of downstream clients.

The added value of offering our integration partners access to credit card, debit card, ACH and prepaid card issuance capabilities through a single vendor partner relationship in face-to-face, mobile and virtual payment acceptance environments provides a true single channel commerce experience through an application programming interface, API.

With the acquisition of the assets of Information Management Solutions, LLC, or IMS, 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 our wholly-owned subsidiary, Usio Output Solutions, Inc., or Output Solutions.  This product offering provides an outsourced solution for document design, print and electronic delivery to potential customers and entities looking to reduce postage costs and increase efficiencies.

Summary of Results

We believe that our success will continue to 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 will 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, growing our electronic bill presentment, document composition, document decomposition, printing and mailing services business while 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 and mail and printing capabilities without significantly increasing our operating costs.

We believe that the number of credit card transactions processed, ACH transaction counts, prepaid card volumes and total card volumes are the most critical measures to gauge the state of our business.

During the third quarter of 2022, the number of credit card transactions processed by us increased by 41% versus the third quarter of 2021. 

The volume of credit card dollars processed during the third quarter of 2022 increased by 7% compared to the same time period in 2021.

Both the number of credit card transactions and dollars processed by us during the three months ended September 30, 2022 were the highest in our history. 

The continued growth in credit card metrics was primarily attributable to our PayFac strategy to drive increased penetration across multiple industries including healthcare and legal. 

ACH (eCheck) transaction counts during the third quarter of 2022 decreased by 4% compared to the third quarter of 2021.

Returned check transactions processed during the third quarter of 2022 increased by 72% compared to the third quarter of 2021. 

Electronic check dollars processed during the third quarter of 2022 decreased by 36% compared to the third quarter of 2021.

The decreases in eCheck transactions and electronic check dollar volumes processed were primarily attributable to significantly higher cryptocurrency activity levels in the prior year period versus the current year period.

Increases in returned check transactions were primarily attributable to the continued recovery of the consumer lending market following its decline due to COVID-19.

Prepaid card load volumes processed during the third quarter of 2022 decreased by 41% compared to the third quarter of 2021.

Prepaid card transaction counts processed during the third quarter of 2022 increased by 5% compared to the third quarter of 2021.

Prepaid card purchase volume during the third quarter of 2022 decreased by 26% compared to the third quarter of 2021. This decrease occurred primarily due to the continued wind down of government assistance programs including organizations such as New York City Economic Development Corporation, City of Houston, Harris County, TX, Open Society International (City of Baltimore), and Greater Washington Community Foundation (Washington DC) with their vaccine incentive and cash disbursement programs. 

We continue to support numerous guaranteed income programs including the Arlington Community Foundation, E.A.T (Equity and Transformation) Chicago, and Hudson UP, the City of Denver's Basic Income Project.

Total dollar volumes processed across all business lines in the third quarter of 2022 were $2.4 billion compared to $2.7 billion processed in the third quarter of 2021 primarily as a result of the decrease in cryptocurrency activity and the winding down of COVID-19 government assistance programs.

Critical Accounting Policies

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For a summary of Critical Accounting Policies, please refer to the Notes to Interim Condensed Consolidated Financial Statements, Note 1, Basis of Presentation.

Key Business Metric - Non-GAAP Financial Measures

This filing includes non-GAAP financial measures, EBITDA and adjusted EBITDA, as defined in Regulation G of the Securities and Exchange Act of 1934, as amended.

The Company reports its financial results in compliance with GAAP, but believes that also discussing non-GAAP financial measures provides investors with financial measures it uses in the management of its business.

The Company defines EBITDA as operating income (loss), before interest, taxes, depreciation and amortization of intangibles.

The Company defines adjusted EBITDA as EBITDA, as defined above, plus non-cash stock option costs and certain non-recurring items, such as costs related to acquisitions.

These measures may not be comparable to similarly titled measures reported by other companies.

Management uses EBITDA and adjusted EBITDA as indicators of the Company's operating performance and ability to fund acquisitions, capital expenditures and other investments and, in the absence of refinancing options, to repay debt obligations.

Management believes EBITDA and adjusted EBITDA are helpful to investors in evaluating the Company's operating performance because non-cash costs and other items that management believes are not indicative of its results of operations are excluded.

EBITDA and adjusted EBITDA are supplemental non-GAAP measures, which have limitations as an analytical tool.

Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.

Non-GAAP financial measures do not reflect a comprehensive system of accounting, may differ from GAAP measures with the same names, and may differ from non-GAAP financial measures with the same or similar names that are used by other companies. 

We reported an adjusted EBITDA loss of  $0.5 million for the quarter ended September 30, 2022, as compared to an adjusted EBITDA of $1.2 for the same period in the prior year.

The increase in adjusted EBITDA loss in the current quarter was attributable to increases in SG&A combined with reduced profit margins.

We reported an adjusted EBITDA loss of  $1.4 million for the nine months ended September 30, 2022, as compared to an adjusted EBITDA of $2.7 million for the same period in the prior year. The increase in adjusted EBITDA loss in the current year was attributable to increases in SG&A combined with reduced profit margins.

The following table is a reconciliation of Net Income to EBITDA for the three and nine months ended September 30, 2022 and 2021.

Three Months Ended September 30,

Nine Months Ended September 30,

Reconciliation from Operating income (Loss) to Adjusted EBITDA:

Operating income (Loss)

Depreciation and amortization

Non-cash stock-based compensation expense, net

Adjusted EBITDA

Calculation of Adjusted EBITDA margins:

Adjusted EBITDA

Adjusted EBITDA margins

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.  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 through our Output Solutions entity.

Three Months Ended June 30,

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. 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 through our wholly-owned Output Solutions subsidiary.

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, 2022 increased by 6% to $16.2 million, as compared to $15.2 million for the quarter ended June 30, 2021 due to continued traction and growth in our prepaid and PayFac lines of business, despite a minor decline in our ACH and complimentary services business sector.

This decline was a result of 

ACH competing against an outsized year ago quarter when cryptocurrency activity was at its peak.

During the second quarter we saw continued growth in our prepaid card services category due to strong relationships with government and municipality card programs. 

Revenues for the six months ended June 30, 2022 increased by 20% to $34.3 million, as compared to $28.7 million for the six months ended June 30, 2021. 

Revenues for the quarter ended September 30, 2022 increased by 4% to $16.4 million, as compared to $15.8 million for the quarter ended September 30, 2021 due to continued traction and growth in our PayFac and Output Solutions lines of business, despite declines in both our Prepaid, and ACH and complimentary services business sectors.

These declines were a result of 

our ACH business achieving a record 2021 quarter when cryptocurrency activity was substantially higher as compared with the same period in 2022, along with the wind down of COVID-19 relief programs which were at their peak in the third and fourth quarter of 2021.

Revenues for the nine months ended September 30, 2022 increased by 14% to $50.7 million, as compared to $44.5 million for the nine months ended September 30, 2021 primarily as a result of continued growth in our prepaid card services category, and strong performance from our wholly-owned Output Solutions subsidiary.

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 $1.9 million, or 17%, to $13.0 million for the quarter ended June 30, 2022, as compared to $11.1 million for the same period in the prior year. 

Cost of services increased by $5.9 million, or 27%, to $27.6 million for the six months ended June 30, 2022, as compared to $21.7 million for the same period in the prior year. 

Increases in cost of services are due to growing revenues and their associated costs, compounded by more significant revenue growth in lower margin lines of business, versus ACH, which is our most profitable business line.

Cost of services increased by $1.5 million, or 13%, to $13.3 million for the quarter ended September 30, 2022, as compared to $11.8 million for the same period in the prior year. 

Cost of services increased by $7.4 million, or 22%, to $40.8 million for the nine months ended September 30, 2022, as compared to $33.4 million for the same period in the prior year. 

Increases in cost of services in both the three and nine months ended September 30, 2022 as compared to the same periods a year ago were due to proportionally greater revenue growth in lower margin business lines.

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

Gross profits decreased by 21% to $3.3 million for the quarter ended June 30, 2022, as compared to $4.1 million for the same period in the prior year.

Similarly, the gross margin percentage was 20.1% for the quarter ended June 30, 2022 as compared to 27.1% in the prior year period.

The decrease in gross profits and margin percentage in the quarter ended June 30, 2022, as compared to the same period a prior year ago, is attributable to increased revenue contribution from business lines with lower profit margins, as well as decreased ACH and complementary service revenues, a high margin business.

Gross profits decreased by 4% to $6.8 million for the six months ended June 30, 2022, as compared to $7.0 million for the same period in the prior year.

Similarly, the gross margin percentage was 19.7% for the six months ended June 30, 2022 as compared to 24.5% in the prior year period.

The decrease in gross profits and margin percentage in the six months ended June 30, 2022, as compared to the same period a prior year ago, is attributable to increased revenue contribution from business lines with lower profit margins.

Gross profits decreased by 22% to $3.1 million for the quarter ended September 30, 2022, as compared to $4.0 million for the same period in the prior year.

Similarly, the gross margin percentage was 19.1% for the quarter ended September 30, 2022 as compared to 25.5% in the prior year period.

The decrease in gross profits and margin percentage in the quarter ended September 30, 2022, as compared to the same period during the prior year, was primarily attributable to increased revenue contribution from business lines with lower profit margins, as well as decreased ACH and complementary service revenues, a higher margin business.

Gross profits decreased by 11% to $9.9 million for the nine months ended September 30, 2022, as compared to $11.1 million for the same period in the prior year.

Similarly, the gross margin percentage was 19.5% for the nine months ended September 30, 2022 as compared to 24.9% in the prior year period.

The decrease in gross profits and margin percentage in the nine months ended September 30, 2022, as compared to the prior year was primarily attributable to increased revenue contribution from business lines with lower profit margins.

Stock-based Compensation

Stock-based compensation expenses were $0.5 million for the quarter ended June 30, 2022 as compared to $0.3 million for the quarter ended June 30, 2021, an increase of 49.3%. 

Stock-based compensation expenses were $1.0 million for the six months ended June 30, 2022 as compared to $0.6 million for the six months ended June 30, 2021, an increase of 58.8%. 

Stock-based compensation expenses were $0.5 million for the quarter ended September 30, 2022 as compared to $0.3 million for the quarter ended September 30, 2021, an increase of 50.2% due to incremental stock compensation from new hires, along with the Company's 10-year and 3-year stock vesting for performance compensation entered into on November 18, 2021. 

Stock-based compensation expenses were $1.5 million for the nine months ended September 30, 2022 as compared to $1.0 million for the nine months ended September 30, 2021, an increase of 55.8% due to incremental stock compensation from new hires, along with the Company's 10-year and 3-year stock vesting for performance compensation entered into on November 18, 2021. 

Other Selling, General and Administrative Expenses

Other selling, general and administrative expenses (other SG&A) were $3.8 million for the quarter ended June 30, 2022 as compared to $2.8 million in the prior year, a 35% increase versus the prior year period. The increase in other SG&A for the quarter ended June 30, 2022 reflects continued investments in our ACH, PayFac, Prepaid and Output Solutions business lines, a substantial portion of which represents an investment in strengthening our infrastructure to support our current growth.

These investments include preparation for increased service requirements for growing card holders in our prepaid line of business, security and IT infrastructure, as well as staffing and employee retention. Beginning in the third quarter, we believe expenses should start to decrease due to a reduction in customer service and other prepaid services expenses attributable to the loss of any existing or anticipated Voyager card programs.

Other selling, general and administrative expenses (other SG&A) were $7.6 million for the six months ended June 30, 2022 as compared to $5.5 million in the prior year, a 39% increase versus the prior year period. The increase in other SG&A for the six months ended June 30, 2022 reflects continued investments in our ACH, PayFac, Prepaid and Output Solutions business lines, a substantial portion of which represents an investment in strengthening our infrastructure to support our current growth.

Other selling, general and administrative expenses (other SG&A) were $3.7 million for the quarter ended September 30, 2022 as compared to $2.8 million in the prior year, a 29% increase. The increase in other SG&A for the quarter ended September 30, 2022 reflects continued investments in our ACH, PayFac, Prepaid and Output Solutions business lines, a substantial portion of which represents an investment in strengthening our infrastructure to support our current growth.

Other selling, general and administrative expenses (other SG&A) were $11.3 million for the nine months ended September 30, 2022 as compared to $8.3 million in the prior year, a 36% increase. The increase in other SG&A for the nine months ended September 30, 2022 reflects continued investments in our ACH, PayFac, Prepaid and Output Solutions business lines, a substantial portion of which represents an investment in strengthening our infrastructure to support our current growth.

Depreciation and Amortization  

Depreciation and amortization totaled $0.8 million and $0.6 million for the quarters ended June 30, 2022 and June 30, 2021, respectively. 

Depreciation and amortization totaled $1.5 million and $1.2 million for the six months ended June 30, 2022 and June 30, 2021, respectively. 

Depreciation and amortization expense consist of the reduction in value of our tangible and intangible assets over their useful life.

These assets include property, plant, and equipment, along with intangible assets acquired through acquisition, or developed as internal use software.

Depreciation and amortization totaled $0.6 million and $0.6 million for the quarters ended September 30, 2022 and September 30, 2021, respectively.

Depreciation and amortization expense was flat in the quarter due to the completed amortization of intangible assets in the third quarter, reducing overall depreciation and amortization expenses to the same levels they were in the same period a year ago. 

Depreciation and amortization totaled $2.2 million and $1.9 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. This change was due primarily to the overall increase in intangible assets being amortized versus the same period a year ago. 

Other Income (Expense)

Other income and expense, net was $82 for the quarter ended June 30, 2022 compared to $685 for the quarter ended June 30, 2021. Lower interest-bearing merchant reserves and lower interest rates drove the lower interest income as well as interest expense associated with our equipment loan.

Other income and expense, net was ($554) for the six months ended June 30, 2022 compared to $3,152 for the six months ended June 30, 2021. Lower interest-bearing merchant reserves and lower interest rates drove the lower interest income as well as interest expense associated with our equipment loan.

Other income and expense, net was $1,785 for the quarter ended September 30, 2022 compared to $287 for the quarter ended September 30, 2021. Lower interest-bearing merchant reserves and lower interest rates drove the lower interest income as well as interest expense associated with our equipment loan.

Other income and expense, net was $1,231 for the nine months ended September 30, 2022 compared to $3,439 for the nine months ended September 30, 2021. Lower interest-bearing merchant reserves and lower interest rates drove the lower interest income as well as interest expense associated with our equipment loan.

Net Income (Loss)

We reported a net loss of $1.9 million for the quarter ended June 30, 2022, as compared to a net income of $0.2 million for the same period in the prior year. The increase in net loss in the current quarter was attributable to increases in SG&A combined with reduced profit margins.

We reported a net loss of $3.6 million for the six months ended June 30, 2022, as compared to a net loss of $0.5 million for the same period in the prior year. The increase in net loss in the current quarter was attributable to increases in SG&A combined with reduced profit margins.

We reported a net loss of $1.8 million for the quarter ended September 30, 2022, as compared to a net income of $0.1 million for the same period in the prior year. The increase in net loss in the current quarter was attributable to increases in SG&A combined with reduced profit margins.

We reported a net loss of $5.3 million for the nine months ended September 30, 2022, as compared to a net loss of $0.4 million for the same period in the prior year. The increase in net loss in the current quarter was attributable to increases in SG&A combined with reduced profit margins.

We may incur future operating losses.

To maintain, grow and sustain profitability, we must, among other things, continue to 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 will continue to invest in our sales force and technology platforms to drive revenue growth.

Liquidity and Capital Resources

At June 30, 2022, we had $5.1 million of cash and cash equivalents, as compared to $7.3 million of cash and cash equivalents at December 31, 2021.

We reported a net loss of $1.9 million for the quarter ended June 30, 2022.

At June 30, 2022, we had an accumulated deficit of $68.9 million.

Additionally, we had working capital of $6.8 million and $8.8 million at June 30, 2022 and December 31, 2021, respectively.

Net cash used by operating activities, including merchant reserve funds, prepaid card load assets, customer deposits and net operating lease assets for the six months ended June 30, 2022 was $22.1 million, and net cash provided for the six months ended June 30, 2021 was $2.6 million.

Excluding merchant reserves, prepaid card load assets, customer deposits and lease right-of-use assets and liabilities, our cash used by operating activities was $1.2 million and cash provided by operating activities was $1.1 million for the six months ended June 30, 2022 and June 30, 2021, respectively.

Our primary sources of liquidity are available cash and cash equivalents and cash flows provided by operations.

As of September 30, 2022, we had cash and cash equivalents of 

$4.6 million.

For the nine months ended September 30, 2022, cash used in operations was $22.8 million.

We expect available cash and cash equivalents and internally generated funds to be sufficient to support working capital needs, capital expenditures (including acquisitions), and our debt service obligations.

In addition, we may also receive proceeds, if an opportunity presents itself,  from the sale of assets and/or the sale of debt or equity securities, although we may not be able to complete such a sale or any such financing on terms acceptable to us, if at all.

We believe we have sufficient liquidity to operate for at least the next 12 months from the date of filing this report.

We reported a net loss of $1.8 million for the quarter ended September 30, 2022.

At September 30, 2022, we had an accumulated deficit of $70.7 million.

Additionally, we had working capital of $5.6 million and $8.8 million at September 30, 2022 and December 31, 2021, respectively.

Net cash used by operating activities, including merchant reserve funds, prepaid card load assets, customer deposits and net operating lease assets for the nine months ended September 30, 2022 was $22.8 million, as compared to net cash provided by operating activities of $8.7 million for the nine months ended September 30, 2021.

Excluding merchant reserves, prepaid card load assets, customer deposits and lease right of use assets and liabilities, our cash used by operating activities was $1.1 million and cash provided by operating activities was $2.0 for the nine months ended September 30, 2022 and September 30, 2021, respectively.

We continue to invest resources and infrastructure in our business to achieve scale across all business lines.

Net cash used by investing activities was $411,818 and $533,854 for the six months ended June 30, 2022 and June 30, 2021, respectively.

Net cash used by investing activities was $642,764 and $999,493 for the nine months ended September 30, 2022 and September 30, 2021, respectively.

The primary drivers of our investing activities were capital expenditures associated with capitalized software development costs and other capital investments associated with growing our business lines and associated employee counts.

Net cash used by financing activities for the six months ended June 30, 2022 was $573,699 and net cash provided by financing activities for the three months ended June 30, 2021 was $73,511, respectively. 

The 2021 cash provided by financing activities was from net proceeds from our equipment loan offset by treasury stock transactions. 

The decrease in cash used by investing activities was primarily attributable to the reduced amount of fixed asset purchases relative to the same period a year ago.

Net cash used by financing activities for the nine months ended September 30, 2022 was $935,513 and net cash used by financing activities for the nine months ended September 30, 2021 was $58,800, respectively.

The increase in cash used by financing activities was due to the Company's stock buyback program, and increased quantity of treasury stock purchased in 2022. The 2021 cash used by financing activities included the net proceeds from our equipment loan offset by treasury stock transactions. 

Material Trends and Uncertainties

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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 1. Financial Statements