Usio, Inc. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD-LOOKING STATEMENTS DISCLAIMER This Quarterly Report on Form 10-Q (this "quarterly report" or this "report") 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 the 2023 Annual Report and other reports we file with the 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 unaudited interim condensed consolidated financial statements and the notes thereto included in this report, and the 2023 Annual Report, including the audited consolidated financial statements and the notes contained therein. Overview As a cloud-based, Fintech payment processor, we serve multiple industry verticals with technology that facilitates payment acceptance and funds disbursement in a single, full-stack ecosystem. We provide payment acceptance through multiple payment methods including: payment facilitation, prepaid card and electronic billing products and services to businesses, merchants and consumers. We seek to grow our business both organically through the continued development and enhancement of our products and services and through acquisitions of new products and services. We will continue to look for opportunities (both internally and externally) to enhance our offerings to meet customer demands as they arise. Since 1998, Usio has entered a number of market verticals within the payments industry in order to satisfy the growing payment needs of consumers and merchants across the United States. Beginning with our Electronic Bill Presentment and Payment, or EBPP, product that launched the Company, we entered into the electronic funds transfer space through the ACH network, developing ancillary and complementary products such as PINless debit in 2016, and Remotely Created Checks, or RCC, account validation, and account inquiry in 2019. These supplementary product options offer customers access to faster and more convenient payment options and tools to improve operating efficiencies. Further, our credit card payment offering was expanded in 2017 with the development of Payment Facilitation, or PayFac, that utilizes our unique technology that allows for instant enrollment of merchants and combined our suite of payment options into an integrated platform for merchants and customers to utilize. Through our innovative Prepaid Debit Card platform, we offer a variety of prepaid card products such as reloadable, incentive, promotional and corporate card programs. Combined with our printing and mailing services, through the acquisition of IMS in December of 2020, we can satisfy the diverse requirements of customer needs with physical and virtual document creation and distribution, including traditional paper checks. Our Consumer Choice product developed and debuted in 2022 that provides flexible ways to initiate a variety of payment distributions through a multitude of payment methods including physical prepaid and virtual cards, ACH, paper checks, real-time PINless debit and others. This offering allows us a superior opportunity to increase our cross-selling efforts through all of our payment methods. With the growing need for faster payment methods, we continue to invest in technology that can help us further expand our suite of payment technology. With the rise of Real Time Payments, or RTP, we began expansion into this market vertical in 2023, which serves as an alternative to ACH payments. As well, we continue to enhance our existing product offerings, with improvements in reporting, data management, fraud and risk monitoring, ease of access, and accelerations in client onboarding and implementation times. With our transition to a cloud-based platform, our speed, security, and scalability in payment processing is further expanded, allowing us to seamlessly grow as the market demands. Payment Acceptance. We provide integrated electronic payment processing services to merchants and businesses, including credit, and debit card-based processing services and electronic funds transfer via the ACH network. The ACH network is a nationwide electronic funds transfer system that is regulated by the Federal Reserve and the National Automatic Clearing House Association, or NACHA, the electronic payments association, and provides for the clearing of electronic payments between participating financial institutions. Our ACH processing services enable merchants or businesses to both disburse and collect funds electronically using e-checks instead of traditional paper checks. An e-check is an electronic debit to a bank checking account that is initiated at the point-of-sale, on the Internet, over the telephone, or via a bill payment sent through the mail via a physical check. E-checks are processed using the ACH network. We are one of nine companies that hold the prestigious NACHA certification for Third-Party Senders and were the second company to receive the certification and are the most tenured to hold the certification. Our payment acceptance services are delivered in a variety of forms and situations. For example, our capabilities allow merchants to convert a paper check to an e-check or receive card authorization at the point-of-sale, allow our merchants’ respective customer service representatives to take e-check or card payments from their consumers by telephone, and enable their consumers to make e-check or card payments directly through the use of a website or by calling an interactive voice response telephone system. Similarly, our PINless debit product allows merchants to debit and credit accounts in real-time. Card-Based Services. Our card-based processing services enable merchants to process both traditional card-present, tap-and-pay, or "swipe" transactions, as well as card-not-present transactions. A traditional card-present transaction occurs whenever a card holder physically presents a credit or debit card to a merchant at the point-of-sale. A card-not-present transaction occurs whenever the customer does not physically present a payment card at the point-of-sale and may occur over the Internet, mail, or telephone. A tap-and-pay transaction occurs whenever a consumer taps their phone on a physical terminal utilizing third party wallet services like Apple Pay®, Samsung Pay™ and Google Pay™. Payment Facilitation. Following the completion of the Singular Payments acquisition in 2017, we launched our payment facilitation, or 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 real-time merchant enrollment, 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, or API. Prepaid and Incentive Card Services. Through our December 2014 acquisition of the assets of Akimbo Financial, Inc., we added a highly talented technical staff of industry subject matter experts and an innovative cardholder service platform including cardholder web and mobile applications and launched what is now our UsioCard business. As a result of this acquisition, through our subsidiary, FiCentive, Inc., 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. This comprehensive money disbursement platform allows businesses to pay their contractors, employees, or other recipients by choosing among a prepaid debit Mastercard, real-time deposit to a checking account, traditional ACH, direct deposit or paper check. These cardholder web and mobile applications have been fully integrated into FiCentive’s prepaid card core processor, and now support all program types and brands offered by FiCentive and its clients. As part of our Prepaid card-based processing services, we develop and manage a variety of Mastercard-branded prepaid card program types, including consumer reloadable, consumer gift, incentive, promotional, general and government disbursement and corporate expense cards. 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. Our UsioCard platform supports Apple Pay®, Samsung Pay™ and Google Pay™. 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, TransPecos and others. Electronic Billing. On December 15, 2020, we entered into the business of 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 of IMS. 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. This acquisition increased our ability to grow new revenue streams and allowed us to reenter the electronic bill presentment and payment revenue stream. The success of this new business line depends on our ability to realize the anticipated growth opportunities; we cannot provide any assurance that we will be able to realize these opportunities. 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 selling, general, and administrative 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 our business allowing expansion of our payment processing and mail and printing capabilities without significantly increasing our operating costs. We continue to seek ways to grow revenue, and net new client implementations and onboards occur regularly due to our ability to address the needs of our market. Growing Revenues. Revenue growth remains a consistent focus for the Company, as we strive to achieve expanded scale, and establish a strong reputation within the financial technologies space. This growth assists us in maintaining our diversified offerings, and remain relevant by developing payment platforms that address the current needs of our marketplace. In the second quarter of 2024, our revenues decreased 6% to $20.1 million, as compared to $21.4 million for the quarter ended June 30, 2023 due primarily to lower breakage revenues from our prepaid card line of business as the COVID incentive programs continue to wind down. These programs represented significant revenues in 2023, and were expected to decline in 2024 as they were wound down. Our processing volume and transactional metrics for prepaid, and the entire company, are growing, which we believe are strong indicators of future performance and revenue improvements. For more information, see "-Results of Operations - Revenues" below. Managing Other Selling, General and Administrative Expenses. By appropriately managing our expenses (which are discussed under "Other Selling, General and Administrative Expenses" below), we believe we can achieve better economies of scale, and drive revenue growth. Carefully evaluating our existing SG&A expenses, and balancing them against the need for client implementation, support, and our technology staff to drive product innovation, will guide our operational strategies while maintaining a focus on efficiencies and profitability. Other SG&A expenses in the quarter increased nominally by $0.1 million, to $4.0 million as compared to $3.9 million in the prior year quarter. Similarly, for the six months ended June 30, 2024, SG&A expenses were up $0.3 million, reflecting the occurrence of some one-time expenses related to marketing initiatives and increased travel to sales-related events during the first quarter of 2024, alongside increases in salary and employee benefit expenses. We believe these operating expenses will be nominally higher versus the prior year to support the anticipated acceleration in revenue growth. For more information, see "-Results of Operations - Other Selling, General and Administrative Expenses" below. Adding Quality Customers and Meeting Their Evolving Requirements. The addition of new, and quality customers, represents one of our largest opportunities to grow revenues, and stay relevant in the marketplace. We believe a large and quality client base allows us to stay in touch with the broader needs of the changing payment landscape, while providing a reliable book of business to help fund current and future operations. Our focus on addressing customer needs has allowed us to maintain a consistent presence and build a strong reputation in niche markets such as the lending, legal, government, and healthcare fields amongst others. Adapt to Technological Changes. We maintain a committed focus on the ever changing technological landscape within the payments ecosystem. We believe by regularly attending payments focused conferences, webinars, and training sessions, alongside our consistent communication with customers and clients, enables us to be informed of the most current, and future, applications and evolutions of financial technologies. This allows us to implement new feature functionality to existing products, and introduce new payment methods. This has led to our evolution from being an EBPP provider at the Company's founding, to the diverse payment provider we are today, with offerings such as ACH processing, PINless debit, prepaid card issuance, and credit card processing, especially in the digital marketplace, to match the need for diversified payment options in an increasingly ecommerce driven world. Assimilating Current and Future Acquisitions. Acquisitions have been a key element in our growth focused strategy, both to add net new customers, and enhance our suite of payment technologies. This is evident through our acquisition of Akimbo Financial, Inc., Singular Payments, and IMS, which allowed us to introduce new offerings such as prepaid card issuance, PayFac, and electronic bill presentment, all of which represent significant portions of our current revenues. The assimilation of those acquisitions were critical in both the retention of purchased assets, and their growth, through cross-selling, and implementation into our broader infrastructure that allows for increased diversity of offerings and support. We cannot assure you that we will be able to complete any acquisitions in the future. 10 Table of Contents In addition to the factors discussed above, we believe that processing volume and transaction counts are a vital measure which indicate our addition and implementation of net new customers, and growth from existing customers, which we believe correlate to both current and future revenues. The change in credit card processing volume, ACH transaction counts, and prepaid card purchase volume are the most direct metrics that drive revenues in their respective business lines, while prepaid card load volumes specifically, are an indicator of future revenue change within the prepaid card business line. While there are many components to the revenues of our business units that could impact revenue growth or decline, these processing metrics offer an indication to the current health of our overall company and success in our strategies to grow the business. During the second quarter of 2024, the number of credit card transactions processed by us increased by 19% versus the second quarter of 2023. The volume of credit card dollars processed during the second quarter of 2024 increased by 10% compared to the same time period in 2023. 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 second quarter of 2024 increased by 10% compared to the second quarter of 2023. Returned check transactions processed during the second quarter of 2024 increased by 13% compared to the second quarter of 2023. Electronic check dollars processed during the second quarter of 2024 increased by 36% compared to the second quarter of 2023. The increases in eCheck transactions, returns, and electronic check dollar volumes processed were primarily attributable to traction in our ACH sales efforts driving new merchant onboarding and processing. Prepaid card load volumes processed during the second quarter of 2024 increased by 55% compared to the second quarter of 2023. Prepaid card transaction counts processed during the second quarter of 2024 increased by 58% compared to the second quarter of 2023. Prepaid card purchase volume during the second quarter of 2024 increased by 39% compared to the second quarter of 2023. This increase occurred primarily due to the continued traction with, and implementation of, corporate expense and healthcare markets, alongside guaranteed income and government assistance programs. Total dollar volumes processed across all business lines in the second quarter of 2024 were $1.7 billion compared to $1.3 billion processed in the second quarter of 2023, up 29% over the prior year quarter, attributable to processing volume growth across all of our business lines. Material Trends and Uncertainties 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, our Board of Directors authorized a renewal of the Company's stock buyback program (the "buyback program"), with a repurchase limit equal to $4 million of the Company's common stock and a three year duration. As of December 31, 2023, the Company had repurchased $0.5 million of stock as part of the buyback program. Should the Company continue the repurchase of its securities on the open market, and the IRA remains in effect, we may be subject to this tax in 2024 and future years. As of June 30, 2024 the Company had repurchased $149,769 of stock as part of the buyback program, which may become subject to the IRA's 1% excise tax if the Company meets or exceeds the IRA's 1% excise tax repurchase minimum of $1 million in stock buy backs. The broader implications of the macroeconomic environment, including uncertainty around recent international conflicts including the Russia - Ukraine and Israel - Hamas conflicts, supply chain shortages, a recession globally or in markets in which we operate, higher inflation rates, higher interest rates, and other related global economic conditions, remain unknown. A deterioration in macroeconomic conditions could continue to increase the risk of lower consumer spending, merchant and consumer bankruptcy, insolvency, business failure, higher credit losses, or other business interruption, which may adversely impact our business. If these conditions continue or worsen, they could adversely impact our future financial and operating results. As the Federal Reserve has worked to fight economic inflation, the federal funds rate has experienced rapid growth from the beginning of 2022 into the third quarter of 2023, and has remained flat since then. This has resulted in the Company's receiving more favorable interest rates on its current cash balances, amounting to $1,435,398 in interest earnings in the six months ended June 30, 2024. Of this interest, $1,212,774 was recognized as revenue in the respective business lines for which the cash balances are held, and $222,624 as interest income. Should the Federal Reserve begin lowering the federal funds rate in the future, this incremental source of income would decline. We continue to work closely with our bank partners, to ensure we effectively manage our cash balances, and monitor the Federal Reserve's monetary policy decisions. The Company continues to invest in growth initiatives to drive increased revenues, and profitability metrics. While we recognized high levels of growth in 2023, a significant portion of this growth was due to the Prepaid card business benefitting from outsized growth in 2022 and 2023 as a result of large incentive programs brought on by the Covid-19 pandemic. Those programs have begun winding down, requiring new card programs and clients being brought on to replace prior revenues. While we expect growth to continue, it is possible that we may not see similar rates of expansion moving forward. Changes in these factors are difficult to predict, and a change in one factor could affect other factors, which could result in adverse effects to our business, results of operations, financial condition, and cash flows. 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 GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to the reported amounts of revenues and expenses, credit losses, investments, intangible assets, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. We consider these accounting policies to be critical because the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for such highly uncertain matters or due to 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. 11 Table of Contents 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, ACH 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 events 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 identity fraud from multiple merchants, of which $755,494 was taken from our reserve for processing losses. Subsequent to the first quarter of 2023, we have not had, and do not expect to have in the immediate future, similar processing losses, although there can be no assurance that such losses will not occur. Our reserve for processing losses was $892,528 as of June 30, 2024, to be used if 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, and are recorded on the Company's balance sheet as an accrued expense. Reserve for Expected Credit Losses We establish an allowance for accounts receivable, which represents our estimate of current expected allowances for credit losses. 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 credit 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 credit 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 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 upon 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 franchise 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 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 by management. 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. CARES Act On March 11, 2021, President Biden signed the American Rescue Plan Act (“ARPA”). The ARPA includes several provisions, such as measures that expand the employee retention credit, previously enacted under the CARES Act, and extending the applicable period through December 31, 2024. Measures not related to income-based taxes within the CARES Act include allowing eligible employers subject to closure due to the COVID-19 pandemic to receive a 50% credit on qualified wages against their employment taxes each quarter, with any excess credits eligible for refunds. As there is no authoritative guidance under GAAP for accounting for grants to for-profit business entities, the Company accounts for the grant by analogy to Accounting Standards Codification 450-30 – Gain Contingencies (“ASC 450-30”). During the three months ended June 30, 2024, the Company recorded an employee retention credit of $0.3 million upon confirmation of eligibility for the employee retention credit. The employee retention credit is recorded in other income in the consolidated statement of operations. Reclassifications We have reclassified certain prior period amounts in the accompanying consolidated financial statements in order to be consistent with the current period presentation. These reclassifications had no effect on net income, total assets, total liabilities or equity. 12 Table of Contents Key Business Metrics - Non-GAAP Financial Measures This report includes the following non-GAAP financial measures as defined in Regulation G adopted by the Commission: 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 management believes that 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, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows as key 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 also believes that 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 $0.8 million for the quarter ended June 30, 2024, as compared to adjusted EBITDA of $1.3 million for the same period in the prior year. The decrease in adjusted EBITDA in the 2024 quarter was attributable to lower revenues as breakage from the COVID related incentive programs within our Prepaid card business wind down, alongside decreased profit margins, as a result of those high margin breakage revenues declining, versus the prior year period. We reported adjusted EBITDA of $1.6 million for the six months ended June 30, 2024, as compared to adjusted EBITDA of $2.4 million for the six months ended June 30, 2023. The decrease in adjusted EBITDA was attributable to lower revenues as breakage from the COVID related incentive programs within our Prepaid card business wind down, versus the prior year period. 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 and six months ended June 30, 2024 and 2023. Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Reconciliation from Operating income (Loss) to Adjusted EBITDA: Operating income (Loss) $ (208,941 ) $ 230,694 $ (490,898 ) $ 306,713 Depreciation and amortization 547,849 522,999 1,124,003 1,041,028 EBITDA 338,908 753,693 633,105 1,347,741 Non-cash stock-based compensation expense, net 460,061 577,869 959,334 1,082,443 Adjusted EBITDA $ 798,969 $ 1,331,562 $ 1,592,439 $ 2,430,184 Calculation of Adjusted EBITDA margins: Revenues $ 20,079,888 $ 21,436,572 $ 41,050,274 $ 42,952,842 Adjusted EBITDA $ 798,969 $ 1,331,562 $ 1,592,439 $ 2,430,184 Adjusted EBITDA margins 4.0 % 6.2 % 3.9 % 5.7 % The following table is a reconciliation of net cash flow provided by (used in) operating activities to adjusted operating cash flows for the six months ended June 30, 2024 and 2023. June 30, 2024 June 30, 2023 Reconciliation from net cash (used in) operating activities to Non-GAAP Adjusted Operating Cash Flow: Net cash provided by (used in) operating activities $ (3,064,283 ) $ 27,770,210 Operating cash flow adjustments: Prepaid card load obligations 3,522,055 (26,227,715 ) Customer deposits 57,725 (9,070 ) Merchant reserves 458,256 (231,539 ) Operating lease right-of-use assets (236,367 ) (114,956 ) Operating lease liabilities 246,945 134,979 Total adjustments to net cash provided by operating activities $ 4,048,614 $ (26,448,301 ) Adjusted operating cash flows provided $ 984,331 $ 1,321,909 We reported cash provided by adjusted operating cash flows of $1.0 million for the six months ended June 30, 2024 (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 $1.3 million provided in the six months ended June 30, 2023. 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 we believe that 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 by (used in) 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 as stated in our consolidated 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 for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was primarily attributable to an increase the Company's net loss, due to lower revenues and profit margins, alongside nominal increases in selling, general and administrative expense ("SG&A"). 13 Table of Contents 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 (loss), or cash provided by (used in) 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 Revenues Our revenue is 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. In addition, through Output Solutions services we provide 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. We also earn revenue from interest and fees earned on certain assets underlying the associated customer balances. Customer balances on which the Company earns interest revenue include balances from our ACH and complementary services, prepaid card services, and Output Solutions business lines. Three Months Ended June 30, 2024 2023 $ Change % Change ACH and complementary services $ 3,894,330 $ 4,079,157 $ (184,827 ) (5 )% Credit card 7,261,268 7,115,884 145,384 2 % Prepaid card services 3,673,418 5,217,468 (1,544,050 ) (30 )% Output Solutions 4,686,869 4,849,197 (162,328 ) (3 )% Interest - ACH and complementary services 190,233 40,361 149,872 371 % Interest - Prepaid card services 334,624 125,058 209,566 168 % Interest - Output Solutions 39,146 9,447 29,699 314 % Total Revenue $ 20,079,888 $ 21,436,572 $ (1,356,684 ) (6 )% Six Months Ended June 30, 2024 2023 $ Change % Change ACH and complementary services $ 7,776,064 $ 7,419,879 $ 356,185 5 % Credit card 14,822,002 14,455,782 366,220 3 % Prepaid card services 7,014,642 10,024,872 (3,010,230 ) (30 )% Output Solutions 10,224,792 10,807,417 (582,625 ) (5 )% Interest - ACH and complementary services 401,873 43,306 358,567 828 % Interest - Prepaid card services 737,365 186,018 551,347 296 % Interest - Output Solutions 73,536 15,568 57,968 372 % Total Revenue $ 41,050,274 $ 42,952,842 $ (1,902,568 ) (4 )% Consolidated revenue for the quarter ended June 30, 2024 decreased by 6% to $20.1 million, as compared to $21.4 million for the quarter ended June 30, 2023 due primarily to lower breakage revenues from our prepaid card line of business as COVID incentive programs continue to wind down. The ACH and complementary services, and Output Solutions lines of business were also down 5% and 3%, respectively, as a result of slightly reduced recurring customer billing in the quarter. There was modest growth in our credit card line of business, as the growth related to our Payfac strategy continues to be implemented outpacing the attrition in our legacy credit card line of business. Interest revenues on underlying customer assets recognized in the quarter ended June 30, 2024 were $0.6 million compared to interest revenues of $0.2 million in the quarter ended June 30, 2023 primarily due to higher interest rates. Consolidated revenue for the six months ended June 30, 2024 decreased by 4% to $41.1 million, as compared to $43.0 million for the six months ended June 30, 2023 due primarily to lower breakage revenues from our prepaid card line of business as COVID incentive programs continue to wind down. The Output Solutions line of business was also down 5%, as a result of challenging comparables to the prior year period which included higher levels of one time revenues related to printing government tax forms and voter cards. There was growth in our ACH and credit card lines of business, as the growth related to our Payfac strategy continues to be implemented, outpacing the attrition in our legacy credit card books of business, and ACH now compares more favorably to fiscal quarters following our exit from the crypto space in July of 2022, resulting in a return of positive quarterly growth metrics reflecting our efforts to add net new customers and processing volumes. Interest revenues recognized in the six months ended June 30, 2024 were $1.2 million compared to interest revenues of $0.2 million in the six months ended June 30, 2023 primarily due to higher interest rates. 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 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 decreased by $1.0 million, or 6%, to $15.3 million for the quarter ended June 30, 2024, as compared to $16.3 million for the same period in the prior year, due to lower revenues driving similar declines in our processing, banking and transactional expenses. Cost of services decreased by $1.4 million, or 4%, to $31.4 million for the six months ended June 30, 2024, as compared to $32.8 million for the same period in the prior year, due to lower revenues driving similar declines in our processing, banking and transactional expenses. 14 Table of Contents Gross Profit Gross profit is the net profit existing after the cost of services. Gross profit decreased by 7% to $4.8 million for the quarter ended June 30, 2024, as compared to $5.2 million for the same period in the prior year. Similarly, gross margin percentage of revenue was 23.9% for the quarter ended June 30, 2024 as compared to 24.2% in the prior year period. The decrease in gross profit, and gross margin percentage in the quarter ended June 30, 2024, as compared to the same period during the prior year was primarily attributable to lower revenues and profitability from our Output solutions line of business. Gross profit decreased by 5% to $9.7 million for the six months ended June 30, 2024, as compared to $10.2 million for the same period in the prior year. Similarly, gross margin percentage of revenue was 23.5% for the six months ended June 30, 2024 as compared to 23.6% in the prior year period. The decrease in gross profit and gross margin percentage in the six months ended June 30, 2024, as compared to the same period during the prior year, was primarily attributable to lower revenues and gross profit from our Output solutions line of business, alongside reduced margins from our Prepaid card services business line in the first quarter of 2024 prior to improvement in the second quarter of 2024. Stock-based Compensation Stock-based compensation expenses were $0.5 million for the quarter ended June 30, 2024 as compared to $0.6 million for the quarter ended June 30, 2023, nominally lower versus the prior year period due to the completed amortization of previously issued stock based compensation. Stock-based compensation expenses were $1.0 million for the six months ended June 30, 2024 as compared to $1.1 million for the six months ended June 30, 2023, nominally lower versus the prior year period due to the completed amortization of previously issued stock based compensation. Other Selling, General and Administrative Expenses Other SG&A expenses were $4.0 million for the quarter ended June 30, 2024 as compared to $3.9 million in the prior year quarter. The modest increase in other SG&A for the quarter ended June 30, 2024 reflects moderate increases due to salary and employee benefit increases. Other SG&A expenses were $8.1 million for the six months ended June 30, 2024 as compared to $7.7 million in the prior year quarter. The increase in other SG&A expenses for the six months ended June 30, 2024 reflects the occurrence of some one-time expenses related to marketing initiatives, and increased travel to sales-related events during the first quarter of 2024, alongside moderate increases in salary and employee benefit expenses. Depreciation and Amortization Depreciation and amortization expense consists 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 totaled $0.5 million and $0.5 million for the quarters ended June 30, 2024 and 2023, respectively. Depreciation and amortization expense was effectively flat versus the same period a year ago as the amortization of net new intangible assets and completed amortization of prior intangible assets were essentially equal, resulting in effectively no change from the current to prior year period. Depreciation and amortization expense totaled $1.1 million and $1.0 million for the six months ended June 30, 2024 and 2023, respectively. The increase in depreciation and amortization expense was due to the amortization of intangible assets, specifically related to capitalized labor for our internal use software, increasing overall depreciation and amortization expense versus the same period a year ago, countered in part by the completed amortization of intangible assets. Other Income Other income, net was $0.4 million for the quarter ended June 30, 2024 compared to $0.0 million for the quarter ended June 30, 2023. This increase was the result of an increase in interest-bearing assets and higher interest rates which drove the increased interest income alongside the receipt of an employee retention tax credit issued under the CARES Act, and extended by the ARPA, receivable in the quarter ended June 30, 2024. Other income, net was $0.5 million for the six months ended June 30, 2024 compared to $0.1 million for the six months ended June 30, 2023. This increase was the result of an increase in interest-bearing assets and higher interest rates which drove the increased interest income alongside the receipt of an employee retention tax credit issued under the CARES Act, and extended by the ARPA, and receivable in the quarter ended June 30, 2024. Net Income (Loss) We reported a net income of $0.1 million for the quarter ended June 30, 2024, as compared to net income of $0.2 million for the same period in the prior year. The decrease in net income was attributable to a decrease in revenue combined with slightly increased SG&A. We reported a net loss of $0.2 million for the six months ended June 30, 2024, as compared to net income of $0.2 million for the same period in the prior year. The decrease in net income was attributable to a decrease in revenue combined with decreased profit margins, and slightly increased SG&A. We may incur future operating losses. To maintain, grow and achieve profitability, we must, among other things, continue to incrementally grow and maintain our customer base, sell our ACH, credit card, prepaid product and Output Solutions offerings to existing and new customers, implement successful marketing strategies, maintain and upgrade our technology and transaction-processing systems, provide superior customer service, respond to competitive developments, attract, retain and motivate personnel, and respond to unforeseen industry developments among other factors. Liquidity and Capital Resources Our primary sources of liquidity are available cash and cash equivalents and cash flows provided by operations. As of June 30, 2024, we had cash and cash equivalents of $7.5 million. For the six months ended June 30, 2024, cash used in operations was $3.1 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, credit losses, 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 income of $0.1 million for the quarter ended June 30, 2024. At June 30, 2024, we had an accumulated deficit of $71.5 million. Additionally, we had working capital of $9.4 million and $8.0 million at June 30, 2024 and December 31, 2023, respectively. From time to time we have sold shares of our common stock in order to provide 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 from the private offering were $1,000,000. On May 9, 2023, Voyager Digital returned 142,857 shares of common stock, valued at a price of $1.09 per share, in a non-cash transaction to satisfy payment obligations related to the wind down of their payment disbursement needs following their bankruptcy. This transaction was recognized as revenue for services rendered and as shares returned to treasury stock in the quarter ended June 30, 2023. 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. 15 Table of Contents Cash Flows Net cash used in operating activities, including merchant reserve funds, prepaid card load assets, customer deposits and net operating lease assets for the six months ended June 30, 2024 was $3.1 million, as compared to net cash provided by operating activities of $27.8 million for the six months ended June 30, 2023. The increase in cash used in operating activities was due to the larger decrease in prepaid card load obligations versus the same period last year, alongside lower accounts payable and accrued expenses. Excluding merchant reserves, prepaid card load assets, customer deposits and lease right of use assets and liabilities, our cash provided by operating activities was $1.0 million for the six months ended June 30, 2024 as compared to cash used in operating activities of $1.3 million for the six months ended June 30, 2023. The Company believes the non-GAAP measure adjusted operating cash flow is a more accurate indicator of cash contributions that can be used to sustain current and future business operations. 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 management believes that these metrics do not serve in providing a clear picture of the true operational cash used or provided in a given time period. For more information relating to this Non-GAAP financial measure, including a reconciliation from net cash provided by (used in) operating activities to Non-GAAP adjusted Operating Cash Flow (used), please see "Key Business Metrics - Non-GAAP Financial Measures" in this report. Operating cash flow for the six months ended June 30, 2024 was approximately $1.0 million, a decrease of approximately $0.3 million from the six months ended June 30, 2023. This decrease was primarily attributable to an increase in the Company's net loss, due to lower revenues and profit margins, alongside nominal increases in SG&A, and the decrease in our accrued expenses. We continue to invest resources in the infrastructure of our business such as the retention, and acquisition of employees, sales-related travel, and marketing efforts to achieve scale across all business lines. Net cash used in investing activities was $0.5 million for the six months ended June 30, 2024 as compared to cash used in investing activities of $0.4 million for the six months ended June 30, 2023. 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 increase in cash used in investing activities was primarily attributable to the increased amount of fixed asset purchases relative to the same period a year ago. Net cash used in financing activities for the six months ended June 30, 2024 was $0.2 million and net cash used in financing activities for the six months ended June 30, 2023 was $0.05 million. The increase in cash used in financing activities was primarily attributable to the increased quantity of stock re-purchases relative to the same period a year ago. Off-Balance Sheet Arrangements We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.