What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-08 compared with 2022-03-17 · 179 added, 135 removed, 64 unchanged (83% of the section changed)

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.

FORWARD-LOOKING STATEMENTS DISCLAIMER

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties.

If used in this report, the words "will," "anticipate," "believe," "estimate," "intend," and other words or phrases of similar import are intended to identify forward-looking statements.

You should not place undue reliance on these forward-looking statements.

Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described in this report on Form 10-K and other reports we file with the Securities and Exchange Commission.

Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made.

We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.

This discussion and analysis should be read in conjunction with the audited consolidated financial statements and the notes thereto included in this report.

was founded under the name Billserv Com, Inc.

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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.

Our telephone number is (210) 249-4100. 

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.

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.

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 reported a net loss of $5.5 million and $0.3 million for the years ended December 31, 2022 and December 31, 2021, 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.

We had an accumulated deficit of $70.9 million at December 31, 2022.

In 2022, we processed $7.2 billion for all payment types, which was down 24% from the prior year volume of $9.5 billion total dollars processed due to our exit from the crypto space.

Total transactions processed were up 16% to a record 40.8 million. ACH or electronic check transaction processing volumes for 2022 decreased by 6% compared to 2021.

Returned check transactions increased by 31% in 2022 compared to 2021.

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Prepaid card load volume increased by 14% and transaction volume increased by 39%.

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

Material Trends and Uncertainties

On July 6, 2022, our largest cryptocurrency customer, Voyager Digital filed for bankruptcy protection and the cryptocurrency landscape encountered marked distress during 2022. Due to this bankruptcy, we lost a significant customer, and have pulled out of the cryptocurrency space, resulting in a meaningful loss of revenue and downturn in our ACH and complementary services business segment, which contributes substantial gross profit to the Company.

Our lost revenue in the ACH and complementary services business was approximately $0.8 million in 2022.

We continue to closely monitor the cryptocurrency environment, and the unique risks associated with cryptocurrencies, including technological, legal, and regulatory risks alongside the potentially consequential upsides associated with re-entering the market and offering our services.

On August 16, 2022, President Biden signed the Inflation Reduction Act, or IRA, which implemented a 1% excise tax on certain corporate stock repurchases.

On May 13 2022, the Board of Directors authorized a renewal of the buy-back program, with a limit up to $4 million of the Company's common stock with a three year duration.

As of December 31, 2022 the Company has repurchased $1.3 million of stock as part of its buy back program, of which $1.1 million qualifies under the IRA's 1% excise tax. Should the company opt to continue the repurchase of its securities on the open market, and the IRA remain in effect, we may continue to qualify for this tax in 2023, and future years.

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, the Company's 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 continues to recover to pre-COVID levels. 

The Company recorded an increase in revenues in its prepaid business line, as it was able to work in conjunction with major cities across the U.S.

to use its prepaid debit cards to facilitate the transfer of money via its 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. 

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.

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  may be impacted.

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

To date, the Company has 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, the Company will continue to monitor the overall impact on its operations and take necessary steps to ensure the safety of its employees and the well-being of its customers.

Critical Accounting Policies and Estimates

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.

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Description of Business and Summary of Significant Accounting Policies.

Reserve for Processing Losses

We establish allowances for negative customer balances and estimated transaction losses arising from processing customer transactions, such as chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery or unsatisfactory delivery of purchased items, account takeovers, Automated Clearing House returns, and insolvency.

Additions to the allowance are reflected in our cost of services on our consolidated statements of income (loss). The allowances are based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving collection and write-off patterns, and the mix of transaction and loss types, as well as current and projected factors such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company with its prepaid card holders.

Determining appropriate current expected transactional losses is an inherently uncertain process, and final losses may vary from our current estimates.

We regularly review and update our allowance estimates as new facts become known, and event occur that may impact the settlement or recovery of losses.

The allowances are maintained at a level we deem appropriate to adequately provide for current expected losses at the balance sheet date.

Reserve for Doubtful Accounts

We establish an allowance for accounts receivable, which represents our estimate of current expected allowances for doubtful accounts.

This evaluation process is subject to numerous estimates and judgements.

This allowance is primarily based on expectations of unrecoverable receivables based on historical losses, as well as forecasted trends in customer instability, and general market conditions.

The Company reviews this allowance quarterly on an account-by-account basis. Projected loss rates, inclusive of historical loss data and macroeconomic factors, are applied to the principal amount of our merchant and consumer receivables.

Determining appropriate current expected losses on our accounts receivable is an inherently uncertain process, and final losses may vary from our current estimates.

We regularly review and update our allowance estimates as new facts become known, and events occur that may impact the settlement or recovery of losses.

The allowances are maintained at a level we deem appropriate to adequately provide for current expected losses at the balance sheet date.

Accounting for Income Taxes

Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us.

Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authority.

Significant judgement is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties.

We review our tax positions yearly and adjust the balances as new information becomes available. 

Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years.

Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards.

We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings, and available tax planning strategies.

These rely heavily on estimates that are based on a number of factors, including historical data, and business forecasts.

to the extent deferred tax assets are not expected to be realized, we record a valuation allowance.

We recognize and measure uncertain tax positions in accordance with U.S.

GAAP, pursuant to which we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities.

As with all businesses, the Company’s tax returns are subject to periodic examination.

The Company’s federal returns for the past four years remain open to examination.

The Company is subject to the Texas margin tax and Tennessee franchise tax.

Management is not aware of any tax positions that would have a significant impact on its financial position.

Revenue Recognition

Application of the accounting principles in U.S.

GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates.

Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting.

Specifically, the determination of whether we are a principal to a transaction (gross revenue) or an agent (net revenue) can require considerable judgment.

Further, we provide incentive payments to consumers and merchants.

Evaluating whether these incentives are a payment to a customer, or consideration payable on behalf of a customer, requires judgment.

Incentives determined to be made to a customer, or payable on behalf of a customer, are recorded as a reduction to gross revenue.

Changes in judgments with respect to these assumptions and estimates could impact the amount of revenue recognized.

Key Business Metrics - Non-GAAP Financial Measures

This filing includes non-GAAP financial measures, EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows, 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.

The Company defines adjusted operating cash flow as net cash provided (used) by operating activities, less changes in prepaid card load obligations, customer deposits, merchant reserves and net operating lease assets and obligations.

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

Management uses EBITDA, adjusted EBITDA, and adjusted operating cash flows 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, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows 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. 

We reported an adjusted EBITDA of  $1.0 million for the quarter ended December 31, 2022, as compared to an adjusted EBITDA of $1.3 million for the same period in the prior year.

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

We reported an adjusted EBITDA loss of 

$0.4 million for the twelve months ended December 31, 2022, as compared to an adjusted EBITDA of $4.0 million for the same period in the prior year. The decrease in adjusted EBITDA in the current year was attributable to increases in SG&A combined with reduced profit margins.

The following table is a reconciliation of Net Loss to EBITDA for the three and twelve months ended December 31, 2022 and 2021.

Three Months Ended (unaudited)

Twelve Months Ended

December 31, 2022

December 31, 2021

December 31, 2022

December 31, 2021

Reconciliation from Operating (Loss) to Adjusted EBITDA:

Operating (Loss)

Depreciation and amortization

Non-cash stock-based compensation expense, net

Adjusted EBITDA

Calculation of Adjusted EBITDA margins:

Adjusted EBITDA

Adjusted EBITDA margins

We reported cash provided by adjusted operating cash flows of $0.7 million for the twelve months ended December 31, 2022 (after adjusting for the impact of operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits, and merchant reserves), as compared to $2.6 million provided in the twelve months ended December 31, 2021. 

Operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits and merchant reserves are deducted from operating cash flow, as these metrics do not serve in providing a clear picture of the true operational cash used or provided in a given time period.

These adjustments to net cash provided (used) by operating activities are not inclusive of any recurring expense items which are included in the calculation of operating income (loss), and only include changes in our assets and liabilities accounts on the balance sheet. The Company believes Non-GAAP adjusted operating cash flow to be a more accurate indicator of cash contributions that can be used to sustain current and future business operations. The decrease in adjusted operating cash flows in the current year compared to the year prior was attributable to an increase the Company's net loss, due to increases in SG&A combined with reduced profit margins.

The following table is a reconciliation from operating cash flow (used) to adjusted operating cash flow (used) for the twelve months ended December 31, 2022.

December 31, 2022

December 31, 2021

Reconciliation from net cash provided (used) by operating activities to Non-GAAP Adjusted Operating Cash Flow (used):

Net cash provided (used) by operating activities

Operating cash flow (used) adjustments:

Prepaid card load obligations

Customer deposits

Merchant reserves

Operating lease right-of-use assets

Operating lease liabilities

Total adjustments to net cash provided (used) by operating activities

Adjusted operating cash flows (used)

Use of Non-GAAP Financial Measures

EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flow should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. 

They are not measurements of our financial performance under GAAP and should not be considered as alternatives to revenue, net income, or cash provided (used) by operating activities, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses.

EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flow have limitations as analytical tools and you should not consider these Non-GAAP measures in isolation or as a substitute for analysis of our operating results as reported under GAAP.

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, the program management and processing of prepaid debit cards.

With the acquisition of the assets of Information Management Solutions, LLC in December 2020, we now offer additional output solution services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions.

With the acquisition of the assets of IMS 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,

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Total revenues for 2022 increased by 12% to $69.4 million from $61.9 million in 2021.

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.

Key drivers of the revenue growth include 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

This growth was bolstered by gains in our Output solutions business line, thanks to the capitalization of strong cross-selling efforts and execution on our well-developed pipeline of new business opportunities, along with growth in our Payfac business line due to continued traction with ISVs.

Our ACH and complementary services revenues were down slightly on the year, due to our exit from crypto following the loss of one of our largest customers, but its impact was minimized due to growth in our ACH return volume, and ancillary ACH services, such as RCC.

Cost of Services

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.

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Cost of services expenses increased by $8.5 million, or 18%, in 2022 as compared to 2021 primarily due to increased transaction costs associated with our revenue growth.

The cost of services growth outpaced our revenue growth largely due to a shift in business mix over the year.

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

Gross profits were $14.6 million and $15.6 million for 2022 and 2021, 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.

Gross profit decreased by $1.0 million, or 7%, in 2022 as compared to 2021.

The key drivers of the decreased gross profits were attributable to a decline in our ACH business unit, our highest margin portfolio, due to our exit from the crypto space in July of 2022 along with increased revenue contributions from our lower margin business lines, Prepaid, Output Solutions, and Credit Card .

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.

Stock-based compensation expense increased to $2.1 million in 2022 from $1.5 million in 2021. Our stock-based compensation expenses for 2022 and 2021 represented the amortization of deferred compensation expenses related to incentive stock grants to employees, officers and directors.

The increase in stock-based compensation is primarily attributable to our November 18, 2021 employee stock grant.

Please refer to Note 8 for incremental information regarding this stock grant.

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.

Other selling, general and administrative expenses, or SG&A, increased to $15.0 million in 2022 from $11.7 million in 2021.

The increase of $3.3 million, or 29%, represented continued investments in 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.

Depreciation and Amortization

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 expense increased to $2.7 million in 2022 as compared to $2.6 million in 2021.

The increase of $1.1 million, or 74%, was primarily attributable to the depreciation of the Output Solutions acquisition.

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. 

The increase of $0.09 million, or 3.5%, was primarily attributable to the depreciation of incremental intangible assets.

Interest income increased to $15,237 in 2022 from $7,643 in 2021 due to higher interest-bearing cash balances.

Other income (expense) was $0 for 2022, as compared to expense of $279 for 2021. 

Income tax expense was $280,000 in 2022 and $169,861 in 2021.

Federal income tax benefit in 2022 was $0, and $110,000 in 2021.

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

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

Net income tax expense reported was $280,000 in 2022, and $279,861 in 2020.

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We reported a net loss of $5.5 million and $0.3 million for the years ended December 31, 2022 and December 31, 2021, respectively.

The reduction in net loss was primarily related to our increased gross profits generated by our growing lines of business.

The increase in net loss was primarily related to our decreased gross profits generated by a shifting business mix, alongside increases in SG&A expenses versus the prior year.

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.

Our primary sources of liquidity are available cash and cash equivalents and cash flows provided by operations and, if an appropriate opportunity presents itself, the sale of debt or equity securities, although we may not be able to complete any financing on terms acceptable to us, if at all.

At December 31, 2022, we had $5.7 million of cash and cash equivalents, as compared to $7.3 million of cash and cash equivalents at December 31, 2021. 

The decrease was primarily as a result of our repurchasing approximately $1.1 million of our stock during 2022.

For the year ended December 31, 2022 net cash used by operating activities was $17.0 million and for the year ended December 31, 2021, cash provided by operations was $29.8 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.

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

Cash from operating activities is dependent on our net income (loss), less depreciation, amortization, bad debt, deferred federal income tax, non-cash stock-based compensation, the amortization of warrant costs, and net of the changes in our operating assets and liabilities.

These assets and liabilities include our accounts receivable, prepaid expenses, operating lease right-of-use assets, inventory, other assets, accounts payable and accrued expenses, operating lease liabilities, prepaid card load obligations, merchant reserves, customer deposits, and deferred revenues.

We reported a net loss of $5.5 million and  $0.3 million for the years ended December 31, 2022 and 2021, respectively. 

Additionally, we reported working capital of $5.8 million and $8.8 million at December 31, 2022 and 2021, 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.

From time to time we have sold shares of our common stock in order to provide us liquidity.

For example, 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.

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.

We have also sold securities in public offerings from time to time.

For example, in September 2020, we sold 4,705,883 shares of our common stock and received net proceeds of approximately $8 million.

We cannot assure you that we will be able to sell shares of our equity securities on terms acceptable to us or at all.

Net cash used by operating activities totaled $17.0 million for 2022 as compared to net cash provided by operating activities of $29.8 million in 2021.

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 adjusted operating activities was $0.7 million for the year ended December 31, 2022 and net cash provided by adjusted operating activities was $2.6 million for the year ended December 31, 2021.

The Company believes Non-GAAP adjusted operating cash flow to be a more accurate indicator of cash contributions that can be used to sustain current and future business operations. The decrease in net cash generated by adjusted operating activities in 2022 (after adjusting for the impact of operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations and merchant reserves) was primarily attributable to increases in our net loss related to increased SG&A and reduced gross profits.

Net cash used by investing activities was $0.8 million for 2022 and $1.3 million in 2021.

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.

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.

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.

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.

The decrease in investing activities was due to reduced expenditures on the purchase of property and equipment.

Net cash used from financing activities for 2022 was $1.4 million compared to net cash provided from financing activities of $0.9 million for 2021.

The decrease in cash provided (used) by financing activities was primarily attributable to treasury stock purchases of $1.3 million in 2022, an increase of approximately $1.1 million over 2021 and the impact of a $1.0 million private placement of our common stock in 2021.

We did not conduct any offerings of securities in 2022.

Off-Balance Sheet Arrangements

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Item 7. Management’s Discussion and Analysis