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Item 1. Financial Statements

2023-05-03 compared with 2022-11-09 · 243 added, 261 removed, 481 unchanged (51% of the section changed)

1 unchanged sentence

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2022

March 31, 2023

December 31, 2022

72 unchanged sentences

1,554,122  

Deferred revenues

17,647  

Current liabilities before merchant reserve obligations

10 unchanged sentences

14,994  

71,434  

Operating lease liabilities, non-current portion

6 unchanged sentences

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

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

- 0 - shares outstanding at March 31, 2023 (unaudited) and December 31, 2022, respectively

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

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

28,466,150 and 27,044,900 issued, and 26,514,903 and 25,097,963 outstanding at March 31, 2023 (unaudited) and December 31, 2022, respectively

196,892  

4 unchanged sentences

Treasury stock, at cost;

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

1,951,247 and 1,946,937 shares at March 31, 2023 (unaudited) and December 31, 2022, respectively

( 3,757,556 )  

14 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Cost of services

4 unchanged sentences

Total selling, general and administrative expenses

Operating income (loss)

Operating (loss)

Other income and (expense):

12 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30,

Three Months Ended March 31,

Operating activities:

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

Net income (loss)

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

Stock-based compensation

10 unchanged sentences

Deferred revenue

Net cash provided (used) by operating activities

Net cash (used) by operating activities

Investing activities:

2 unchanged sentences

Financing activities:

Proceeds from equipment loan

Payments on equipment loan

14 unchanged sentences

Issuance of common stock under equity incentive plan

Warrant compensation costs

Deferred compensation amortization

Purchase of treasury stock costs

Net (loss) for the period

Net income for the period

Balance at March 31, 2023

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 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, 2021

1 unchanged sentence

Warrant compensation costs

Cashless warrant exercise

Reversal of deferred compensation amortization that did not vest

Deferred compensation amortization

2 unchanged sentences

Balance at March 31, 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 income for the period

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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The accompanying unaudited interim condensed consolidated financial statements of Usio, Inc.

and its subsidiaries (the “Company”) have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.

and its subsidiaries (collectively, the “Company”) have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been omitted pursuant to such rules and regulations.

2 unchanged sentences

31, 2022, as filed with the Securities and Exchange Commission on March 8, 2023.

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.

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 "first quarter" mean the three month period ended March 31, 2023 

or 2022  , as the case may be.

Use of Estimates:

The preparation of financial statements in conformity with U.S.

generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

 The preparation of financial statements in conformity with U.S.

generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates.

Revenue Recognition:

Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services. Revenue is recognized during the period in which the transactions are processed or when the related services are performed.

The Company complies with ASC 

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 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 

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 

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 

3 unchanged sentences

Sales taxes billed are reported directly as a liability to the taxing authority and are 

not  included in revenue. 

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 September 30,

Nine Months Ended September 30,

not  included in revenue.

Our subsidiary, 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.

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

Three Months Ended March 31,

ACH and complementary service revenue

1 unchanged sentence

$ 3,843,316  

$ 10,985,722  

$ 10,813,806  

Credit card revenue

1 unchanged sentence

6,768,222  

20,495,984  

18,791,129  

Prepaid card services revenue

1 unchanged sentence

2,768,447  

5,733,428  

3,968,764  

Output solutions revenue

1 unchanged sentence

4,731,358  

13,507,655  

10,942,062  

Total revenue

1 unchanged sentence

$ 18,111,343  

$ 50,722,789  

$ 44,515,761  

Deferred Revenues:

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 September 30, 2022 and December 31, 2021 , respectively.

Cash and Cash Equivalents:

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Settlement processing assets and obligations represent intermediary balances arising in our settlement process for merchants.

Prepaid Card Load Assets:

The Company maintains pre-funding accounts for its customers to facilitate prepaid card loads as initiated by the customer.

These prepaid card load assets are carried on the Company's balance sheet with a corresponding liability.

Customer Deposits:

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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:

The Company maintains pre-funding accounts for its customers to facilitate prepaid card loads as initiated by the customer.

These prepaid card load assets are carried on the Company's balance sheet with a corresponding liability.

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

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 September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

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

2 unchanged sentences

$ 7,255,321  

$ 5,011,132  

Prepaid card load assets

1 unchanged sentence

36,590,893  

7,610,242  

Customer deposits

1 unchanged sentence

1,364,193  

1,305,296  

Merchant reserves

3 unchanged sentences

$ 51,591,560  

$ 28,493,156  

$ 24,283,981  

$ 51,591,560  

$ 22,192,225  

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

2 unchanged sentences

$ 7,590,951  

$ 4,613,123  

$ 5,939,834  

Prepaid card load assets

1 unchanged sentence

28,846,980  

15,318,411  

15,084,868  

Customer deposits

1 unchanged sentence

1,391,465  

1,585,586  

1,505,324  

Merchant reserves

3 unchanged sentences

$ 44,215,549  

$ 27,171,849  

$ 29,791,179  

$ 27,171,849  

$ 29,791,179  

Allowance for Estimated Losses:

2 unchanged sentences

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.

three months ended March 31, 2023  and the year ended 

December 31, 2022 , there were no losses due to bad debt.

In the past, 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 September 30, 2022 and December 31, 2021 .

The allowance for estimated doubtful accounts was $ 319,000  at March 31, 2023 and December 31, 2022 .

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

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

At March 31, 2023  and December 31, 2022, inventory consisted primarily of printing and paper supplies used for Output Solutions.

Accounting for Internal Use Software:

2 unchanged sentences

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.

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

During the three  months ended March 31, 2023 and March 31, 2022 , the Company capitalized $ 207,732 and $ 136,864 , respectively.

Valuation of Long-Lived and Intangible Assets:

7 unchanged sentences

No impairment losses were recorded in 2022  or during the 

nine months ended September 30, 2022 .

three months ended March 31, 2023 .

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

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This reserve amount is subject to the risk that actual losses may be greater than the Company’s estimates.

The Company has not incurred any significant processing losses to date.

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

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

In the quarter ended March 31, 2023, we incurred $ 833,485 in merchant processing losses as a result of fraudulent activity and identity fraud from multiple merchants, of which $ 755,494 was deducted from our reserve for processing losses.

We do not expect similar processing losses in the immediate future;

however, in the quarter, we are replenishing our reserve for processing losses by the amount of $ 200,000 in the event that future losses are incurred. Estimates for processing losses are variable based on the volume of transactions processed and could increase or decrease accordingly.

At March 31, 2023 and December 31, 2022 , the Company’s reserve for processing losses was $ 386,789  and $ 755,494  respectively.

Legal Proceedings:

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While the Company believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation will not have a material adverse effect on its business, financial condition or results of operations.

New Accounting Pronouncements :

Recently Adopted Accounting Pronouncements :

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2016 - 13, Financial Instruments - Credit Losses (Topic 326 ), to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. 

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.

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 adopted the amendments effective January 1, 2023, and it has not had a material impact on its financial position and the results of its operations.

The Company will continue to monitor the adoption of this amendment in order to evaluate if it has any material effect on its financial position and results of operations.

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.

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

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

For each of the three months ended March 31, 2023  and 2022 , operating lease expenses totaled $ 179,901  and $ 120,151 , respectively.

Accrued Expenses

Accrued expenses consisted of the following balances:

September 30, 2022

March 31, 2023

December 31, 2022

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Payments for the 

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

three months ended March 31, 2023  and 

2022 were $ 13,488 .

Stockholders' Equity

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and (v) the volatility is 64.6 %.

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 nine months ended September 30, 2022 and 2021 was $ 20,965 and $ 26,955 respectively.

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

The reduction of revenues as a result of this amortization recorded for the three months ended March 31, 2023 and 2022 was $ 0 and $ 8,985 respectively.

As of July 31, 2022, the remaining, unvested warrants expired, and the Company is no longer recording a reduction of revenues associated with the amortization of their fair value.

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.

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and (v) the volatility is 59.9 %.

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

Net (Loss) Per Share

Basic (loss) per share (EPS) was computed by dividing net (loss) by the weighted average number of shares of common stock outstanding during the period.

The fair value of the warrants amounted to $ 552,283  and is being recorded as an increase in the customer list asset and has a term of five years from time of vesting.

The incremental depreciation expense associated with the fair value of the warrants in the three months ended 

March 31, 2023 and 2022  was $ 27,614 .

Net Income (Loss) Per Share

Basic income (loss) per share (EPS) was computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period.

Diluted EPS differs from basic EPS due to the assumed conversion of potentially dilutive awards and options that were outstanding during the period.

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

Three Months Ended September 30,

Nine Months Ended September 30,

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

three months ended March 31, 2023 and March 31, 2022 .

Three Months Ended March 31,

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

$ 14,833  

$ 141,234  

$ ( 5,332,385 )  

$ ( 1,622,270 )

2 unchanged sentences

20,280,575  

20,322,934  

19,986,279  

Effect of dilutive securities

3 unchanged sentences

20,280,575  

20,322,934  

19,986,279  

Basic income (loss) per common share

$ 0.00  

$ 0.01  

$ ( 0.26 )  

Diluted income (loss) per common share and common share equivalent

$ 0.00  

$ 0.01  

$ ( 0.26 )  

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,

The awards and options to purchase shares of common stock that were outstanding at March 31, 2023 and March 31, 2022 that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive, are as follows:

Three Months Ended March 31,

Anti-dilutive awards and options

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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.

The Company has recognized a net deferred tax asset of approximately $ 1.5 million and has recorded a valuation allowance of approximately $ 4.6 million against the other deferred tax assets.

The Company reviews the assessment of the deferred tax asset and valuation allowance on an annual basis or more often when events indicate that a change to the valuation allowance may be warranted.

14 unchanged sentences

$ 10,931,710  

$ 20,041,484  

Effective for tax years ending in 2018, net operating losses can be carried forward to future years indefinitely. Net operating losses generated in 

2018  and later total $ 9,413,692 .

The below table outlines our net operating losses generated in 

2018  and after.

$ 4,410,916  

2,730,461  

2,272,315  

$ 9,413,692  

Total loss carryforwards

$ 29,455,176  

Management is not aware of any tax positions that would have a significant impact on the Company’s financial position.

Related Party Transactions

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.

During the three months ended March 31, 2023 and 

March 31, 2022 , the Company purchased a total of $ 1,835 and $ 19,929 , 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.

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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 

Effective on 

February 17, 2023 ,  the Company entered into an employment agreement with Greg Carter, the Company’s Executive Vice President, Payment Acceptance.

Under the terms of this agreement, Mr.

Carter will receive an annual salary of 

 Override/Commissions of 

10 % of the actual cash commissions paid to salespersons under direct management of Mr.

Carter to be paid quarterly;

and the payment of a 

one -time signing bonus of $ 40,000 . 

The Company granted 

2 unchanged sentences

273,000  restricted stock units (RSUs) with a 

3 -year vesting period to employees and Directors as a performance bonus on 

November 18, 2021 

3 -year vesting period to employees and Directors as a performance bonus on February 8, 2023 

at an issue price of $ 1.75  per share.

1 unchanged sentence

10 -year restricted stock grant were Louis Hoch ( 330,000  shares), Tom Jewell ( 200,000  shares), Greg Carter ( 100,000  shares) and Houston Frost ( 100,000  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 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 

Executive officers included in the RSU grant were Louis Hoch ( 33,000  RSUs), Tom Jewell ( 21,000  RSUs), Greg Carter ( 12,000  RSUs) and Houston Frost ( 12,000  RSUs).

The Company granted 

69,000  RSUs with a 

3 -year vesting period to Directors as a performance bonus on March 16, 2023 

at an issue price of $ 1.60 per share.

Directors included in the RSU grant were Blaise Bender ( 21,000  RSUs), Brad Rollins ( 21,000  RSUs), Ernesto Beyer ( 21,000  RSUs) and Michelle Miller ( 6,000  RSUs).

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.

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.

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.  

 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. 

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.

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. 

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.

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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. 

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.

Subsequent Events

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 . 

The impacts and recovery from the COVID- 19  pandemic are still a work in process. To date, we do not believe that the Company has been adversely impacted to the same 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.

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

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

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

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 our annual report on Form 10-K and other reports we file with the Securities and Exchange Commission.

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.

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This discussion and analysis should be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes thereto included in this report, and our annual report on Form 10-K for the fiscal year ended December 31, 2022, filed on March 8, 2023, including the audited consolidated financial statements and the notes contained therein.

Effective on June 26, 2019, we changed our corporate name from Payment Data Systems, Inc.

was founded under the name Billserv Com, Inc.

in July 1998 and incorporated in the State of Nevada.

On June 26, 2019, we changed our corporate name from Payment Data Systems, Inc.

to Usio, Inc.

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

Our telephone number is (210) 249-4100. 

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.

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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.

We believe that 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 began to 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

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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

Our management’s discussion and analysis of our financial condition and results of operations is based upon our interim condensed consolidated financial statements, which have been prepared in accordance with U.S.

During the first quarter of 2023, the number of credit card transactions processed by us increased by 24% versus the first quarter of 2022. The volume of credit card dollars processed during the first quarter of 2023 increased by 8% compared to the same time period in 2022.

Both the number of credit card transactions and dollars processed by us during the three months ended March 31, 2023 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 first quarter of 2023 decreased by 25% compared to the first quarter of 2022.

Returned check transactions processed during the first quarter of 2023 decreased by 8% compared to the first quarter of 2022. Electronic check dollars processed during the first quarter of 2023 decreased by 54% compared to the first quarter of 2022.

The decreases in eCheck transactions, returns, and electronic check dollar volumes processed were primarily attributable to our withdrawal from the cryptocurrency space following the filing for bankruptcy protection by Voyager Digital on July 6, 2022 and the subsequent decline in processing and revenues in our ACH and complimentary services revenue line of business.

Prepaid card load volumes processed during the first quarter of 2023 decreased by 19% compared to the first quarter of 2022.

Prepaid card transaction counts processed during the first quarter of 2023 decreased by 46% compared to the first quarter of 2022.

Prepaid card purchase volume during the first quarter of 2023 decreased by 10% compared to the first quarter of 2022. 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. Prepaid remains involved with guaranteed income and government assistance programs, is expanding its footprint in the corporate expense and healthcare markets, and has established a relationship with MoviePass.

Total dollar volumes processed across all business lines in the first quarter of 2023 were $1.2 billion compared to $2.2 billion processed in the first quarter of 2022 primarily as a result of the decrease in cryptocurrency activity and the winding down of COVID-19 government assistance programs.

Material Trends and Uncertainties

On July 6, 2022, our largest cryptocurrency customer, Voyager Digital, filed for bankruptcy protection and the cryptocurrency landscape encountered significant 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 contributed substantial gross profit to the Company.

Our lost revenue in the ACH and complementary services business was approximately $0.8 million in 2022 and $0.5 million in the quarter ended March 31, 2023.

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 had 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 qualify for this tax in 2023, and future years.

In March 31, 2023 the Company purchased $8,494 of stock as part of it's stock buy back program that may become eligible for the IRA's 1% excise tax, if the Company meets the IRA's 1% excise tax repurchase minimum of $1 million in stock buy backs.

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.

While the general activity of COVID related disbursement programs has largely declined, we currently recognize revenues associated with these programs, and expect to continue recognizing revenues through 2023 and the start of 2024.

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, existing revenues, 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.

generally accepted accounting principles.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

On an ongoing basis, we evaluate our estimates, including those related to the reported amounts of revenues and expenses, bad debt, investments, intangible assets, income taxes, and contingencies and litigation.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results could differ from these estimates under different assumptions or conditions.

We consider the accounting policies described in Note 1 to the Notes to the Interim Condensed Consolidated Financial Statements to be critical because the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change or because the impact of the estimates and assumptions on financial condition or operating performance is material.

We consider these accounting policies to be critical because the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change or because the impact of the estimates and assumptions on financial condition or operating performance is material.

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

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.

In the quarter ended March 31, 2023, we incurred $833,485 in merchant processing losses as a result of fraudulent activity and identify fraud from multiple merchants, of which $755,494 was taken to our reserve for processing losses.

We do not expect similar processing losses in the immediate future, however in the quarter, we are replenishing our reserve for processing losses by the amount of $200,000 for a total balance of $386,789 in the event that future losses are incurred.

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 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.

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

The Company reports its financial results in compliance with GAAP, but believes that also discussing non-GAAP financial measures provides investors with financial measures the Company 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 EBITDA margins as adjusted EBITDA, as defined above, divided by total revenues.

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.

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 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,

Management uses EBITDA, adjusted EBITDA, adjusted EBITDA margins 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 adjusted EBITDA of  $1.0 million for the quarter ended March 31, 2023, as compared to an adjusted EBITDA loss of $0.3 for the same period in the prior year.

The increase in adjusted EBITDA in the 2023 quarter was attributable to minimal increases in SG&A combined with strong revenue growth and increased profit margins.

The following tables set forth reconciliations of Operating income (loss) to EBITDA;

EBITDA to Adjusted EBITDA;

and Revenues to Adjusted EBITDA margins for the three months ended March 31, 2023 and 2022.

Three Months Ended March 31,

Reconciliation from Operating income (Loss) to Adjusted EBITDA:

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Adjusted EBITDA margins

We reported cash provided by adjusted operating cash flows of $1.3 million for the three months ended March 31, 2023 (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 $0.5 million provided in the three months ended March 31, 2022. 

These adjustments to net cash (used) by operating activities do not include 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 increase in adjusted operating cash flows in the 2023 quarter compared to the 2022 quarter was primarily attributable to an increase the Company's net income, due to strong growth in revenue with improved profit margins, alongside relatively flat increases in SG&A.

The following table is a reconciliation of operating cash flow (used) to adjusted operating cash flow (used) for the three months ended March 31, 2023 and 2022.

March 31, 2023

March 31, 2022

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

Net cash (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 (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 flows 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 flows 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 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

Credit card revenue

Prepaid card services revenue

Output solutions revenue

Total Revenue

Nine Months Ended September 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 program management and processing of prepaid debit cards. With the acquisition of the assets of IMS in December 2020, we began to 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 March 31,

ACH and complementary service revenue

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Total Revenue

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.

Consolidated Revenue for the quarter ended March 31, 2023 increased by 18% to $21.4 million, as compared to $18.1 million for the quarter ended March 31, 2022 due to continued traction and growth in our Prepaid and Output Solutions lines of business, despite declines in our ACH and complimentary services business sectors.

These declines were a result of our ACH business withdrawing from the cryptocurrency industry subsequent to the bankruptcy of Voyager Digital. ACH activity was substantially higher in the quarter ended March 31, 2022 as compared to the same quarter ended 

March 31, 2023 as a result of our exit from the cryptocurrency industry following the bankruptcy of Voyager Digital.

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.

Through our contractual relationships with our payment processors and sponsoring banks, we process ACH and debit, credit or prepaid card transactions on behalf of our customers and their consumers.

Through our contractual relationships with our payment processors and sponsoring banks, we process ACH and debit, credit and prepaid card transactions on behalf of our customers and their consumers.

We pay volume-based fees for debit, credit, ACH and prepaid transactions initiated through these processors or sponsoring banks, and pay fees for other transactions such as returns, notices of change to bank accounts and file transmission.

Cost of service fees also include fees paid to referral agents and partners.

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.

Cost of services increased by $1.9 million, or 13%, to $16.5 million for the quarter ended March 31, 2023, as compared to $14.6 million for the same period in the prior year due to increased revenue growth. 

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

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.

Gross profit increased by 40% to $4.9 million for the quarter ended March 31, 2023, as compared to $3.5 million for the same period in the prior year.

Similarly, the gross margin percentage was 22.9% for the quarter ended March 31, 2023 as compared to 19.4% in the prior year period.

The increase in gross profit and margin percentage in the quarter ended March 31, 2023, as compared to the same period during the prior year, was primarily attributable to improved profitability metrics across all business lines, driven by more favorable pricing in the quarter.

Stock-based Compensation

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. 

Stock-based compensation expenses were $0.5 million for the quarter ended March 31, 2023 as compared to $0.6 million for the quarter ended March 31, 2022, a marginal decrease of 8.4% due to the vesting and forfeiture of various equity grants over the year.

Other Selling, General and Administrative Expenses

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.

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. 

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.

Other selling, general and administrative expenses (other SG&A) were $3.9 million for the quarter ended March 31, 2023 as compared to $3.8 million in the prior year, a 2% increase. The increase in other SG&A for the quarter ended March 31, 2023 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 enhanced security and IT infrastructure, as well as staffing and employee retention. 

Depreciation and Amortization  

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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. 

Depreciation and amortization totaled $0.5 million and $0.7 million for the quarters ended March 31, 2023 and March 31, 2022, respectively.

Depreciation and amortization expense decreased in the quarter due to the completed amortization of intangible assets, reducing overall depreciation and amortization expenses versus the same period a year ago. 

Other Income (Expense)

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.

Other income and expense, net was $92,266 for the quarter ended March 31, 2023 compared to $636 for the quarter ended March 31, 2022.

Higher interest-bearing merchant reserves and interest rates drove the increased interest income.

Net Income (Loss)

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 reported a net income of $0.0 million for the quarter ended March 31, 2023, as compared to a net loss of $1.6 million for the same period in the prior year. The decrease in net loss in the current quarter was attributable to increases in revenue combined with increased profit margins.

We may incur future operating losses.

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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 

As of March 31, 2023, we had cash and cash equivalents of 

$6.8 million.

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

For the three months ended March 31, 2023, cash used by operations was $0.2 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 $642,764 and $999,493 for the nine months ended September 30, 2022 and September 30, 2021, respectively.

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 $0.0 million for the quarter ended March 31, 2023.

At March 31, 2023, we had an accumulated deficit of $70.8 million.

Additionally, we had working capital of $6.6 million and $5.8 million at March 31, 2023 and December 31, 2022, respectively.

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 a price of $7.00 per share in a private offering.

The gross proceeds to us from the private offering were $1,000,000.

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 in the future.

Net cash used by operating activities, including merchant reserve funds, prepaid card load assets, customer deposits and net operating lease assets for the three months ended March 31, 2023 was $0.2 million, as compared to net cash used by operating activities of $7.2 million for the three months ended March 31, 2022.

Excluding merchant reserves, prepaid card load assets, customer deposits and lease right of use assets and liabilities, our cash provided by operating activities was $1.3 million as compared to cash provided by operating activities of $0.5 million for the three months ended March 31, 2023 and March 31, 2022, respectively.

This increase in cash provided by operating activities was primarily attributable to an increase the Company's net income, due to strong growth in revenue with improved profit margins, alongside relatively flat increases in SG&A. We continue to invest resources and infrastructure in our business to achieve scale across all business lines.

Net cash used by investing activities was $217,735 as compared to cash used by investing activities of $72,069 for the three months ended March 31, 2023 and March 31, 2022, 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.

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

Please refer to Note 9 of our financial statements included in this report that describe certain risks in connection with the Covid-19 pandemic.

Net cash used by financing activities for the three months ended March 31, 2023 was $22,017 and net cash used by financing activities for the three months ended March 31, 2022 was $79,982, respectively.

The decrease in cash used by financing activities was due to the Company's stock buyback program, and increased quantity of treasury stock purchased in 2022.

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements