What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-14 compared with 2024-11-06 · 135 added, 193 removed, 182 unchanged (64% of the section changed)

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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.

Combined with Output Solutions' printing and mailing services, 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.

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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.

The Company has recently adopted its "One Usio" strategy, designed to unify our brand, sales approach, and payments offerings.

Through this strategy, we are developing enhanced client onboarding features, superior customer management, improved reporting and fraud monitoring, alongside a consolidated sales and marketing team to better cross-sell our various payment methods and ancillary services.

Payment Acceptance.

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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.

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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 third quarter of 2024, our revenues increased 2% to $21.3 million, as compared to $21.0 million for the quarter ended September 30, 2023, due primarily to strong growth in our ACH and complimentary services line of business, helping to offset lower breakage revenues from our prepaid card line of business as the COVID incentive programs continued 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.

In the first quarter of 2025, our revenues increased 5% to $22.0 million, as compared to $21.0 million for the quarter ended March 31, 2024, due primarily to strong growth in our ACH and complimentary services line of business, helping to offset lower breakage revenues from our prepaid card line of business as the COVID incentive programs wound down during 2024.

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 decreased by $0.2 million, to $4.1 million as compared to $4.3 million in the prior year quarter.

For the nine months ended September 30, 2024, SG&A expenses were relatively flat, reflecting the incurrence 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.

However improved expense management, alongside workforce efficiencies due to new equipment in our Output Solutions line of business contributed to lower SG&A expenses in the third quarter.

While we anticipate slightly increased SG&A expense sequentially in the fourth quarter of 2024, we expect year over year SG&A to remain relatively flat.

By appropriately managing our expenses (which are discussed under "- Results of Operations - Other Selling, General and Administrative Expenses" below), we believe we can achieve better economies of scale, and drive revenue growth.

We believe that carefully evaluating our existing SG&A expenses, and balancing them against the need for client implementation and support, together with our technology staff driving product innovation, will guide our operational strategies while maintaining a focus on efficiencies and profitability.

Other SG&A expenses in the quarter were relatively flat, at $4.1 million as compared to $4.1 million in the prior year quarter.

As a result of improved expense management, alongside workforce efficiencies due to new equipment in our Output Solutions line of business, we anticipate year over year SG&A to remain relatively flat.

For more information, see "-Results of Operations - Other Selling, General and Administrative Expenses" below.

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We believe that 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.

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, RTP, 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.

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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 third quarter of 2024, the number of credit card transactions processed by us increased by 22% versus the third quarter of 2023.

The volume of credit card dollars processed during the third quarter of 2024 increased by 7% compared to the same time period in 2023.

During the first quarter of 2025, the number of credit card transactions processed by us increased by 65% versus the first quarter of 2024.

The volume of credit card dollars processed during the first quarter of 2025 increased by 17% compared to the same time period in 2024.

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 2024 increased by 25% compared to the third quarter of 2023.

Returned check transactions processed during the third quarter of 2024 increased by 18% compared to the third quarter of 2023.

Electronic check dollars processed during the third quarter of 2024 increased by 61% compared to the third 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 third quarter of 2024 increased by 21% compared to the third quarter of 2023.

Prepaid card transaction counts processed during the third quarter of 2024 increased by 56% compared to the third quarter of 2023.

Prepaid card purchase volume during the third quarter of 2024 increased by 23% compared to the third 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 third quarter of 2024 were $2.0 billion compared to $1.4 billion processed in the third quarter of 2023, up 46% over the prior year quarter, attributable to processing volume growth across all of our business lines.

The significant increases in transaction and processing volume growth were offset by the more competitive landscape in credit card processing, resulting in lower than expected revenue growth as the pricing rates for credit card processing are driven down by market competition.

This was compounded by continued attrition in the legacy customer base, who were typically onboarded at higher prices, reducing the impact of the transaction count and processing volume growth we experienced.

ACH (eCheck) transaction counts during the first quarter of 2025 increased by 36% compared to the first quarter of 2024.

Returned check transactions processed during the first quarter of 2025 increased by 24% compared to the first quarter of 2024.

Electronic check dollars processed during the first quarter of 2025 increased by 42% compared to the first quarter of 2024.

Prepaid card load volumes during the first quarter of 2025 decreased by 15% compared to the first quarter of 2024.

Prepaid card transaction counts processed during the first quarter of 2025 increased by 5% compared to the first quarter of 2024.

Prepaid card purchase volume during the first quarter of 2025 decreased by 8% compared to the first quarter of 2024.

These declines were primarily due to the plateauing and processing reductions in the existing client base.

These clients contributed significant load and purchase volumes in 2024 due to their rapid expansion after their onboarding and implementation as they built up their prepaid cardholder base.

These declines were compounded by delays in the integration of net new client implementations to replace the load and processing volume experience in the first quarter of 2024.

However, despite these declines, we believe revenues from our prepaid card line of business should start to better reflect our focus on growing programs with recurring revenues.

We continue to invest time and resources in the development of additional net new customers and clients that are at various stages of the implementation process.

Total dollar volumes processed across all business lines in the first quarter of 2025 were $2.0 billion compared to $1.5 billion processed in the first quarter of 2024, up 34% over the prior year quarter, attributable to processing volume growth in our credit card, and ACH and complementary services business lines, countering the decline of prepaid card processing volume.

For more information, see "- Results of Operations - Revenues."

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.

On May 13, 2022, and again on March 24, 2025, 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, 2024, the Company had repurchased approximately $1.4 million of stock as part of the buyback program for which the Company may be required to pay approximately $14,000 in excise tax.

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 2025 and future years.

During the nine months ended September 30, 2024, the Company had repurchased $393,766 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.

During the three months ended March 31, 2025, the Company repurchased $351,640 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 buybacks.

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 remained flat until September 2024 when the federal funds rate was lowered.

This resulted in the Company's receiving more favorable interest rates on its current cash balances, amounting to $0.9 million in interest earnings in the nine months ended September 30, 2024.

This resulted in the Company's receiving more favorable interest rates on its current cash balances, amounting to $0.5 million in interest earnings in the three months ended March 31, 2025.

Of this interest, $0.4 million was recognized as revenue in the respective business lines for which the cash balances are held, and $79,011 as interest income.

In September 2024, the Federal Reserve lowered the federal funds rate 0.50% which has resulted in lower interest earnings on our interest bearing cash accounts.

In September 2024, the Federal Reserve lowered the federal funds rate 0.50%, followed by a further 0.25% decline in each of November and December 2024, which has resulted in lower interest earnings on our interest-bearing cash accounts.

Should the Federal Reserve continue 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 been winding down in 2024, 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.

During the first quarter of 2025, global economic activity continued to be impacted by inflation and ongoing geopolitical concerns including the Russia – Ukraine and Hamas – Isreal conflicts.

Additionally, the uncertainty resulting from changes in international trade policies (including the potential for new or increased tariffs) created market volatility.

While the economy in the U.S.

remained resilient, concerns about the prospect of a recession in the future increased.

In addition, markets have been focused on the timing and amount of policy interest rate cuts by central banks globally.

Uncertainty and concerns about geopolitical risks, global central bank policies, inflation and trade policies, including tariffs, escalated over the course of the first quarter.

In April 2025, developments relating to tariffs intensified concerns over the global macroeconomic environment.

Volatility across financial markets rose and the prospect of a U.S.

recession increased further.

Uncertainty around the path forward and concerns over the potentially escalating effects of a trade war have created risks for the U.S.

and global economies.

If these conditions continue or worsen, they could adversely impact our future financial and operating results.

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.

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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 $925,528 as of September 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.

If, due to insolvency or bankruptcy of one of the Company’s merchant customers, or for any other reason, the Company is not able to collect amounts from its credit card, ACH or prepaid customers that have been properly "charged back" by the customer, or if a prepaid cardholder incurs a negative balance, the Company must bear the credit risk for the full amount of the transaction.

The Company may require cash deposits and other types of collateral from certain merchants to minimize any such risks.

In addition, the Company utilizes multiple systems and procedures to manage merchant risk.

ACH, prepaid and credit card merchant processing loss reserves are primarily determined by performing a historical analysis of the Company’s loss experience, considering other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company’s relationship with the Company’s prepaid card holders.

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

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

At March 31, 2025 and December 31, 2024, the Company’s reserve for processing losses was $541,521 and $897,116, respectively, and carried on the Company's balance sheet as an accrued expense, and in the statement of cash flows as a change in accrued expenses.

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.

Accounts receivable are reported as outstanding principal net of an allowance for expected credit losses of $324,000 at March 31, 2025 and December 31, 2024.

The Company maintains an allowance for credit losses for estimated losses resulting from the inability or failure of its customers to make required payments.

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

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

If the financial condition of its customers deteriorates, resulting in an impairment of their ability to make contractual payments, additional allowances might be required.

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

The Company normally does not charge interest on accounts receivable.

Accounting for Income Taxes

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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.

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 and nine months ended September 30, 2024, the Company recorded an employee retention credit of $0.0 and $0.3 million respectively 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.

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 for each agreement it is acting in the principal role.

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

Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through third-party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations.

Certain card distributors remit payment of fees earned 45 days after the end of the processing period.

Prepaid card distributors have payment terms of 30 days following the end of the month.

Sales taxes billed are reported directly as a liability to the taxing authority and are not included in revenue.

Usio Output Solutions, Inc.

provides bill preparation, presentment and mailing services.

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

We also earn revenues from interest and fees earned on certain assets underlying customer balances.

Interest earned on assets directly related to our core business line operations are recorded in the revenue source underlying the associated customer balances.

Customer balances held on which the Company earns interest revenues include balances from our Automated Clearing House, or ACH, and complementary services, prepaid card services, and Output Solutions business lines.

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.

EBITDA, Adjusted EBITDA, and Adjusted EBITDA margins.

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.

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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 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 September 30, 2024, as compared to adjusted EBITDA of $0.4 million for the same period in the prior year.

The increase in adjusted EBITDA in the 2024 quarter was attributable to increased revenues, primarily from our ACH and complimentary services line of business, and a decrease in SG&A expenses, versus the prior year period.

We reported adjusted EBITDA of $2.4 million for the nine months ended September 30, 2024, as compared to adjusted EBITDA of $2.8 million for the nine months ended September 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 decreased, versus the prior year period.

The following tables set forth reconciliations of Operating Income (Loss) to EBITDA;

Management believes that EBITDA, Adjusted EBITDA, and Adjusted EBITDA margins 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 $0.7 million for the quarter ended March 31, 2025, as compared to Adjusted EBITDA of $0.8 million for the same period in the prior year.

The decrease in Adjusted EBITDA in the 2025 quarter was attributable to nominally decreased gross profits, and marginally increased SG&A expenses in the period.

Adjusted EBITDA margins were 3.0% in the period, as compared to Adjusted EBITDA margins of 3.8% for the same period in the prior year.

The decrease in Adjusted EBITDA margins was due primarily to lower interest revenues in the period, a high margin revenue source, which resulted in a reduction of gross profit percentage of revenue, and contributing reduced operating income, alongside marginally higher SG&A expenses versus the prior year period.

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

EBITDA to Adjusted EBITDA;

and Revenues to Adjusted EBITDA margins for the three and nine months ended September 30, 2024 and 2023.

Three Months Ended September 30,

Nine Months Ended September 30,

Reconciliation from Operating income (Loss) to Adjusted EBITDA:

Operating income (Loss)

and Revenues to Adjusted EBITDA margins for the three months ended March 31, 2025 and 2024.

Three Months Ended March 31,

Reconciliation from Operating (loss) to Adjusted EBITDA:

Operating (loss)

Depreciation and amortization

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Adjusted EBITDA margins

The following table is a reconciliation of net cash flow provided by (used in) operating activities to adjusted operating cash flows for the nine months ended September 30, 2024 and 2023.

September 30, 2024

September 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

Operating cash flow adjustments:

Prepaid card load obligations

Customer deposits

Merchant reserves

Operating lease right-of-use assets

Operating lease liabilities

Total adjustments to net cash provided by operating activities

Adjusted operating cash flows provided

We reported cash provided by adjusted operating cash flows of $2.4 million for the nine months ended September 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 $2.4 million provided in the nine months ended September 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 nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 was nominal, but primarily attributable to an increase in the Company's net operating loss, due to lower revenues, alongside minor increases in selling, general and administrative expense ("SG&A").

In previous periods, the Company reported the non-GAAP financial measure of adjusted operating cash flows, which excluded certain items from operating cash flows to provide a measure of cash generated from its core operations.

Beginning with the current reporting period, the Company is no longer presenting adjusted operating cash flows as a non-GAAP financial measure.

The decision to discontinue reporting adjusted operating cash flows was due to changes in the presentation of certain assets, specifically the movement of assets held for customers, into the financing activities section of our cash flow statement.

As a result of this reclassification, we believe that the need for the adjusted operating cash flows measure is no longer required, as the adjustments previously made to exclude these amounts are not necessary.

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.

EBITDA, Adjusted EBITDA, and Adjusted EBITDA margins 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.

EBITDA, Adjusted EBITDA, and Adjusted EBITDA margins 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

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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 September 30,

ACH and complementary services

Prepaid card services

Output Solutions

Interest - ACH and complementary services

Interest - Prepaid card services

Interest - Output Solutions

Total Revenue

Nine Months Ended September 30,

Three Months Ended March 31,

ACH and complementary services

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Total Revenue

Consolidated revenue for the quarter ended September 30, 2024 increased by 2% to $21.3 million, as compared to $21.0 million for the quarter ended September 30, 2023 due primarily to the 22% growth in our ACH and complimentary services business line, countering the lower breakage revenues from our prepaid card line of business, which declined 14% year over year, as COVID incentive programs continued to wind down.

Consolidated revenue for the quarter ended March 31, 2025 increased by 5% to $22.0 million, as compared to $21.0 million for the quarter ended March 31, 2024 due primarily to the 30% growth in our ACH and complimentary services business line, countering the lower breakage revenues from our prepaid card line of business, which declined 13% in the period, primarily as a result of the completion of large prepaid card programs that were effectively wound down completely by the close of the first quarter of 2024.

ACH and complementary services revenue growth was primarily attributable to an increase in ACH check dollar volume of 42%, an increase in transactions of 36%, and an increase in returned check transactions of 24%.

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Our Output Solutions lines of business were also up 4% in the quarter due to the addition of net new recurring billing;

Growth figures were hindered, however, due to the prior year period containing some one-time revenues.

Our credit card revenues were flat, due primarily to faster than expected attrition from our legacy credit card base;

however we've experienced continued success in our PayFac division, where revenues were up 27%.

As our PayFac book of business now matches our legacy credit card processing in total revenue contribution, the impact of its growth is anticipated to be more apparent in overall credit card processing growth figures.

Interest revenues on underlying customer assets recognized in the quarter ended September 30, 2024 were $0.6 million compared to interest revenues of $0.5 million in the quarter ended September 30, 2023 primarily due to higher interest rates and interest bearing cash deposits.

Consolidated revenue for the nine months ended September 30, 2024 decreased by 2% to $62.4 million, as compared to $63.9 million for the nine months ended September 30, 2023 due primarily to lower breakage revenues from our prepaid card line of business, which declined 25% year over year, as COVID incentive programs continued to wind down.

The Output Solutions line of business was also down 3%, 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, alongside a large check disbursement program in the third quarter of 2023.

Our ACH and complimentary services line of business grew by approximately 10% during the nine-month period of 2024, reflecting our efforts to add net new customers and processing volumes.

ACH check dollar volume increased by 41%, transactions increased by 13%, and return check transactions by 13%.

Growth was further complimented by our ancillary products such as Remote Check Creation (RCC) and PINless debit, which each exhibited strong growth during the nine months ended September 30, 2024.

Our credit card revenues were flat during the nine-month period, due primarily to faster than expected attrition from our legacy credit card base;

however we've experienced continued success in our PayFac division, where revenues were up 19% during the nine months ended September 30, 2024.

Interest revenues recognized in the nine months ended September 30, 2024 were $1.8 million compared to interest revenues of $0.7 million in the nine months ended September 30, 2023 primarily due to higher interest rates and interest bearing cash deposits.

however, delays in some net new customer implementations resulted in lower growth than anticipated.

Our credit card revenues were also up 4%, due primarily to continued success in our PayFac division, where revenues were up 25%, offsetting attrition from our legacy credit card base and increased competition.

As our PayFac book of business now exceeds our legacy credit card processing in total revenue contribution, the impact of its growth is anticipated to become more apparent in overall credit card processing growth figures in future periods.

For more information, see "- Summary of Results."

Interest revenues on underlying customer assets recognized in the quarter ended March 31, 2025 were $0.4 million compared to interest revenues of $0.6 million in the quarter ended March 31, 2024 primarily due to lower interest rates and interest bearing cash deposits.

Cost of Services

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

Cost of services increased by $0.1 million, or 1%, to $16.4 million for the quarter ended September 30, 2024, as compared to $16.3 million for the same period in the prior year, due to increased revenues driving similar increases in our processing, banking and transactional expenses.

Cost of services decreased by $1.3 million, or 3%, to $47.8 million for the nine months ended September 30, 2024, as compared to $49.1 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 increased by $1.1 million, or 7%, to $17.2 million for the quarter ended March 31, 2025, as compared to $16.1 million for the same period in the prior year, due to increased revenues driving similar increases in our processing, banking and transactional expenses.

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

Gross profit increased by 5% to $4.9 million for the quarter ended September 30, 2024, as compared to $4.7 million for the same period in the prior year.

Gross profit percentage of revenue was 23.0% for the quarter ended September 30, 2024, up slightly from 22.2% in the prior year period.

The increase in gross profit in the quarter ended September 30, 2024, as compared to the same period during the prior year, was primarily attributable to higher total revenues, in addition to improved margins.

The increase in gross profit percentage of revenue was due to the decrease in lower margin prepaid revenues that were present in the second half of 2023 as a result of Covid incentive programs, alongside some realized efficiencies and profitability in our Output Solutions line of business from the acquisition of new equipment in 2024.

Gross profit decreased by 2% to $14.5 million for the nine months ended September 30, 2024, as compared to $14.8 million for the same period in the prior year.

Gross profit percentage of revenue was 23.3% for the nine months ended September 30, 2024 as compared to 23.2% in the prior year period, effectively flat.

The decrease in gross profit in the nine months ended September 30, 2024, as compared to the same period during the prior year, was primarily attributable to lower revenues and corresponding gross profits from our Prepaid and Output solutions line of business, alongside reduced margins from our Prepaid card services business line associated with the Covid incentive program revenues in the first quarter of 2024 prior to improvement in the second and third quarters of 2024 as revenue attributable to the Covid incentive program declined.

Gross profit decreased by 1% to $4.8 million for the quarter ended March 31, 2025, as compared to $4.9 million for the same period in the prior year.

Gross profit percentage of revenue was 21.9% for the quarter ended March 31, 2025, down from 23.1% in the prior year period.

The decrease in gross profit in the quarter ended March 31, 2025, as compared to the same period during the prior year, was primarily attributable to lower gross profit percentage of revenue.

The decrease in gross profit percentage of revenue was primarily due to the decrease in interest revenues versus the prior year period.

In addition, ACH and complementary services segment revenue growth was strongest in the slightly less profitable complementary services.

Stock-based Compensation

Stock-based compensation expenses were $0.6 million for the quarter ended September 30, 2024 as compared to $0.6 million for the quarter ended September 30, 2023, with minor decreases versus the prior year period due to completed amortization of previously issued stock based awards.

Stock-based compensation expenses were $1.5 million for the nine months ended September 30, 2024 as compared to $1.7 million for the nine months ended September 30, 2023, the decrease was due to the completed amortization of previously issued stock based awards.

Stock-based compensation expenses were $0.4 million for the quarter ended March 31, 2025 as compared to $0.5 million for the quarter ended March 31, 2024, with minor decreases versus the prior year period due to completed amortization of previously issued stock based awards.

Other Selling, General and Administrative Expenses

Other SG&A expenses were $4.1 million for the quarter ended September 30, 2024 as compared to $4.3 million in the prior year quarter.

The decrease in other SG&A for the quarter ended September 30, 2024 reflects realized efficiencies in our workforce, driven by enhancements in equipment from our Output Solutions line of business reducing labor costs, alongside strategic spend management in our other lines of business, as we focus on improving profitability.

Further, the quarter ended September 30, 2023 included some one time expenses related to professional fees and marketing events, that were not incurred in the third quarter of 2024.

Other SG&A expenses were $12.2 million for the nine months ended September 30, 2024 as compared to $12.0 million in the prior year period.

The minor increase in other SG&A expenses for the nine months ended September 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 offset by realized efficiencies in our workforce, driven by enhancements in equipment from our Output Solutions line of business reducing labor costs, alongside strategic spend management in our other lines of business, as we focus on improving profitability.

Other SG&A expenses were $4.1 million for the quarter ended March 31, 2025 as compared to $4.1 million in the prior year quarter.

The essentially flat SG&A for the quarter ended March 31, 2025 reflects realized efficiencies in our workforce, driven by enhancements in equipment from our Output Solutions line of business reducing labor costs, alongside strategic spending management in our other lines of business, allowing revenues to increase without commensurate increases in our SG&A expenses.

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 expense totaled $0.6 million and $0.5 million for the quarters ended September 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.

Depreciation and amortization expense totaled $1.7 million and $1.6 million for the nine months ended September 30, 2024 and 2023, respectively.

Other income, net was $0.1 million for the quarter ended September 30, 2024 compared to $0.1 million for the quarter ended September 30, 2023.

This increase was the result of an increase in interest-bearing assets and higher interest rates which drove the increased interest income.

Other income, net was $0.6 million for the nine months ended September 30, 2024 compared to $0.2 million for the nine months ended September 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 received in the quarter ended June 30, 2024.

Federal income tax benefit was $3,186,053 in the three months ended September 30, 2024, and $0 in the three months ended September 30, 2023.

The federal income tax benefit was a result of an increase to our deferred tax asset following a review of the realizability of our prior valuation allowance and deferred tax asset.

The Company projects that future revenue growth will continue to outpace growth in expenses, resulting in continued taxable income in the future.

State income tax expense in the three months ended September 30, 2024 and 2023 was $70,000 and $70,000, respectively.

Federal income tax benefit was $3,186,053 in the nine months ended September 30, 2024 and $0 in the nine months ended September 30, 2023.

The federal income tax benefit was a result of an increase to our deferred tax asset following a review of the realizability of our prior valuation allowance and deferred tax asset, and determination that the Company will have taxable income in the future.

State income tax expense in the nine months ended September 30, 2024 and 2023 was $210,000 and $222,524 respectively.

The Company has recognized a deferred tax asset of approximately $4.7 million recorded net of a valuation allowance of approximately $2.9 million at September 30, 2024, The net income tax benefit reported was $3,116,053 at September 30, 2024 and net income tax expense was $70,000 for the three months ended September 30, 2023.

The increase in net income tax benefit was due to the increase of our deferred tax asset as a result of decreasing our valuation allowance by approximately $3.2 million during the quarter ended September 30, 2024.

The decrease was the result of management's considering the realizability of this net operating loss carry forward in light of historical operating results and forecasted results.

The Company projects that future revenue growth will continue to outpace growth in expenses, resulting in continued taxable income in the future.

For more information, please refer to Notes to Interim Condensed Consolidated Financial Statements, Note 7.

Income Taxes.

The net income tax benefit reported was $2,976,053 for the nine months ended September 30, 2024 and net income tax expense was $222,524 for the nine months ended September 30, 2023.

The increase in net income tax benefit was due to the increased of our deferred tax asset as a result of decreasing our valuation allowance by approximately $3.2 million during the quarter ended September 30, 2024.

The decrease was the result of management's considering the realizability of this asset in light of historical operating results and forecasted results.

For more information, please refer to Notes to Interim Condensed Consolidated Financial Statements, Note 7.

Income Taxes.

Net Income (Loss)

We reported net income of $2.9 million for the quarter ended September 30, 2024, as compared to a net loss of $0.7 million for the same period in the prior year.

The increase in net income was driven primarily by the federal income tax benefit, as a result of the decrease in our valuation allowance, described above, combined with increased revenues, slightly increased gross profit margins, and reduced SG&A.

We reported net income of $2.7 million for the nine months ended September 30, 2024, as compared to a net loss of $0.5 million for the same period in the prior year.

The increase in net income was driven primarily by the federal income tax benefit, as a result of the decrease in our valuation allowance, described above, combined with reduced SG&A.

Depreciation and amortization expense totaled $0.5 million and $0.6 million for the quarters ended March 31, 2025 and 2024, respectively.

The decrease in depreciation and amortization expense was due to the completed amortization of intangible assets, specifically related to capitalized labor for our internal use software, decreasing overall depreciation and amortization expense versus the same period a year ago.

Other income, net was $0.1 million for the quarter ended March 31, 2025 compared to $0.1 million for the quarter ended March 31, 2024.

State income tax expense in the three months ended March 31, 2025 and 2024 was $62,554 and $70,000, respectively.

We reported a net loss of $0.2 million for the quarter ended March 31, 2025, as compared to a net loss of $0.3 million for the same period in the prior year.

The decrease in net loss was driven primarily by higher revenues, alongside lower stock-based compensation and depreciation and amortization expenses countering slightly lower gross profits and interest income.

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, 2024, we had cash and cash equivalents of $8.4 million.

For the nine months ended September 30, 2024, cash used in operations was $7.6 million.

As of March 31, 2025, we had cash and cash equivalents of $8.7 million.

For the three months ended March 31, 2025, cash provided by operations was $1.4 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.

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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 intangible assets, 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 net income of $2.7 million for the nine months ended September 30, 2024.

At September 30, 2024, we had an accumulated deficit of $68.7 million.

Additionally, we had working capital of $9.6 million and $8.0 million at September 30, 2024 and December 31, 2023, respectively.

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, merchant reserves, customer deposits, and deferred revenues.

We reported a net loss of $0.2 million for the three months ended March 31, 2025 compared to a net loss of $0.3 million for the three months ended March 31, 2024.

We had an accumulated deficit of $68.3 million and $68.0 million at March 31, 2025 and December 31, 2024, respectively.

Additionally, we had working capital of $10.2 million and $10.2 million at March 31, 2025 and December 31, 2024, respectively.

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

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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 in operating activities, including merchant reserve funds, prepaid card load assets, customer deposits and net operating lease assets for the nine months ended September 30, 2024 was $7.6 million, as compared to net cash provided by operating activities of $41.5 million for the nine months ended September 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 $2.4 million for the nine months ended September 30, 2024 as compared to cash used in operating activities of $2.4 million for the nine months ended September 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.

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.

Adjusted operating cash flow for the nine months ended September 30, 2024 was approximately $2.4 million, relatively flat versus the nine months ended September 30, 2023.

The Company has an unsecured revolving line of credit with a maximum borrowing capacity of $475,000.

The facility was established on May 29, 2024, and matures on June 5, 2026.

As of March 31, 2025, no amounts had been drawn under this line of credit since its origination.

This line of credit was secured to support the bond requirement in the KDHM lawsuit appeal but remains fully available.

The Company has an irrevocable letter of credit in the amount of $474,229, issued on June 3, 2024, with a maturity date of July 3, 2025.

This letter of credit was obtained as part of the bonding requirement for the KDHM lawsuit appeal and has not been drawn upon since its issuance.

These credit facilities were arranged to comply with legal requirements related to the Company’s appeal and provide additional liquidity resources if needed.

Management continues to monitor its financial position and believes that existing cash balances, along with these credit facilities, are sufficient to meet operational needs and legal obligations.

Net cash provided by operating activities for the three months ended March 31, 2025 was $1.4 million, as compared to net cash provided by operating activities of $0.1 million for the three months ended March 31, 2024.

The increase in cash provided by operating activities was due primarily to the larger decrease in accounts receivable, alongside improved net income, and reduced depreciation expense versus the same period last year.

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 $0.7 million for the nine months ended September 30, 2024 as compared to cash used in investing activities of $0.6 million for the nine months ended September 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.

Net cash used in investing activities was $0.3 million for the three months ended March 31, 2025 as compared to cash used in investing activities of $0.2 million for the three months ended March 31, 2024.

The primary driver of our investing activities was 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 and capitalization of internal use software relative to the same period a year ago.

Net cash used in financing activities for the nine months ended September 30, 2024 was $0.4 million and net cash used in financing activities for the nine months ended September 30, 2023 was $0.1 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.

Net cash provided by financing activities for the three months ended March 31, 2025 was $3.6 million and net cash used in financing activities for the three months ended March 31, 2024 was $6.8 million.

The increase in cash provided by financing activities was primarily attributable to the increase in assets held for customers, which includes settlement processing and prepaid card load assets relative to the same period a year ago.

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 2. Management’s Discussion and Analysis