UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from ________ to ________.
Commission File Number:
USIO, INC.
(Exact name of registrant as specified in its charter)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name on each exchange on which registered |
| | | The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| | Smaller reporting company |
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| Emerging Growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
As of May 13, 2024, the number of outstanding shares of the registrant's common stock was
INDEX
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
USIO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2024 | December 31, 2023 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Settlement processing assets | ||||||||
| Prepaid card load assets | ||||||||
| Customer deposits | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other | ||||||||
| Current assets before merchant reserves | ||||||||
| Merchant reserves | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Other assets: | ||||||||
| Intangibles, net | ||||||||
| Deferred tax asset, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Other assets | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Operating lease liabilities, current portion | ||||||||
| Equipment loan, current portion | ||||||||
| Settlement processing obligations | ||||||||
| Prepaid card load obligations | ||||||||
| Customer deposits | ||||||||
| Current liabilities before merchant reserve obligations | ||||||||
| Merchant reserve obligations | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Equipment loan, net of current portion | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ par value, shares authorized; -- shares outstanding at March 31, 2024 (unaudited) and December 31, 2023, respectively | ||||||||
| Common stock, $ par value, shares authorized; and issued, and and outstanding at March 31, 2024 (unaudited) and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost; and shares at March 31, 2024 (unaudited) and December 31, 2023, respectively | ( | ) | ( | ) | ||||
| Deferred compensation | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See the accompanying notes to the condensed interim consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenues | $ | $ | ||||||
| Cost of services | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative expenses: | ||||||||
| Stock-based compensation | ||||||||
| Other SG&A | ||||||||
| Depreciation and amortization | ||||||||
| Total selling, general and administrative | ||||||||
| Operating income (loss) | ( | ) | ||||||
| Other income and (expense): | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other income, net | ||||||||
| Income (Loss) before income tax expense | ( | ) | ||||||
| Income tax expense | ||||||||
| Net income (Loss) | $ | ( | ) | $ | ||||
| Income (Loss) Per Share | ||||||||
| Basic income (loss) per common share: | $ | ( | ) | $ | ||||
| Diluted income (loss) per common share: | $ | ( | ) | $ | ||||
| Weighted average common shares outstanding | ||||||||
| Basic - common stock | ||||||||
| Basic - restricted stock awards | ||||||||
| Weighted average shares used to compute basic earnings per share | ||||||||
| Diluted | ||||||||
See the accompanying notes to the condensed interim consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Operating activities: | ||||||||
| Net (loss) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash (used in) operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Employee stock-based compensation | ||||||||
| Changes in current assets and current liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses and other | ( | ) | ( | ) | ||||
| Operating lease right-of-use assets | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ||||||
| Prepaid card load obligations | ( | ) | ( | ) | ||||
| Merchant reserves | ( | ) | ||||||
| Customer deposits | ( | ) | ||||||
| Net cash (used in) operating activities | ( | ) | ( | ) | ||||
| Investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash (used in) investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Payments on equipment loan | ( | ) | ( | ) | ||||
| Purchases of treasury stock | ( | ) | ( | ) | ||||
| Net cash (used in) financing activities | ( | ) | ( | ) | ||||
| Change in cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves | ( | ) | ( | ) | ||||
| Cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves, beginning of period | ||||||||
| Cash, Cash Equivalents, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End of Period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | ||||||||
| Non-cash financing activity: | ||||||||
| Issuance of deferred stock compensation | ||||||||
See accompanying notes to the condensed interim consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
| Common Stock | Additional Paid- In | Treasury | Deferred | Accumulated | Total Stockholders' | |||||||||||||||||||||||
| Shares | Amount | Capital | Stock | Compensation | Deficit | Equity | ||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Issuance of common stock under equity incentive plan | ||||||||||||||||||||||||||||
| Deferred compensation amortization | — | — | — | — | — | |||||||||||||||||||||||
| Purchase of treasury stock costs | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Net (loss) for the period | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Issuance of common stock under equity incentive plan | ( | ) | ||||||||||||||||||||||||||
| Deferred compensation amortization | — | — | — | — | — | |||||||||||||||||||||||
| Purchase of treasury stock costs | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Net income for the period | — | |||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements of Usio, Inc. and its subsidiaries (collectively, the “Company”) have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission" or the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles ("GAAP") have been omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company's financial position, results of operations and cash flows for such periods. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2023, as filed with the Commission on March 27, 2024 (the "2023 Annual Report"). Results of operations for interim periods are not necessarily indicative of results that may be expected for any other interim periods or the full fiscal year. References in this quarterly report to "the quarter" or the "first quarter" mean the three month period ended March 31, 2024 or 2023, as the case may be and unless otherwise noted.
Revenue Recognition: Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services. Revenue is recognized during the period in which the transactions are processed or when the related services are performed. The Company complies with ASC 606-10 and reports revenues at gross as a principal versus net as an agent. Although some of the Company's processing agreements vary with respect to specific credit risks, the Company has determined that for each agreement it is acting in the principal role. 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. ("Output Solutions"), a wholly-owned subsidiary of Usio, Inc., provides bill preparation, presentment and mailing services. Revenue from Output Solutions is recognized when the related services are performed for printing and delivered to USPS for postage.
The following table presents the Company's consolidated revenues by source:
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| ACH and complementary services | $ | $ | ||||||
| Credit card | ||||||||
| Prepaid card services | ||||||||
| Output Solutions | ||||||||
| Total revenue | $ | $ | ||||||
Merchant Reserves: The Company has merchant reserve requirements associated with Automated Clearing House, or ACH, transactions. The merchant reserve assets are carried on the Company's balance sheet with a corresponding liability. Merchant reserves are set for each merchant and funds are collected and held as collateral to minimize contingent liabilities associated with any losses that may occur. While this cash is not restricted in its use, the Company believes that designating this cash to collateralize merchant reserves strengthens the Company's standing with its member sponsors and is in accordance with the guidelines set by the card networks.
The reconciliation of cash and cash equivalents to cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves is as follows for each period presented:
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Beginning cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Prepaid card load assets | ||||||||
| Customer deposits | ||||||||
| Merchant reserves | ||||||||
| Total | $ | $ | ||||||
| Ending cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Prepaid card load assets | ||||||||
| Customer deposits | ||||||||
| Merchant reserves | ||||||||
| Total | $ | $ | ||||||
Recently Adopted Accounting Pronouncements: In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326), to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in Topic 326 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Topic 326 is effective for fiscal years beginning after December 25, 2022, including interim periods within those fiscal years for smaller reporting companies. We adopted this guidance effective January 1, 2023 on a prospective basis. Our financial statements were not materially impacted upon adoption.
Accounting standards that have been issued or proposed by the FASB, the SEC or other standard setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company's consolidated financial statements upon adoption.
Note 2. Leases
The Company leases facilities and office equipment under various operating leases, which generally are expected to be renewed or replaced by other leases. For each of the three months ended March 31, 2024 and 2023, operating lease expenses totaled $
Note 3. Accrued Expenses
Accrued expenses consisted of the following balances:
| March 31, 2024 | December 31, 2023 | |||||||
| Accrued commissions | $ | $ | ||||||
| Reserve for processing losses | ||||||||
| Other accrued expenses | ||||||||
| Accrued taxes | ||||||||
| Accrued salaries | ||||||||
| Total accrued expenses | $ | $ | ||||||
Note 4. Equipment Loan
On March 20, 2021, the Company entered into a debt arrangement to finance $
On October 1, 2023, the Company entered into a debt arrangement to finance $
Note 5. Stockholders' Equity
Stock Warrants: On December 15, 2020, the Company issued warrants to purchase
Note 6. Net (Loss) Per Share
Basic income (loss) per share (EPS) was computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS differs from basic EPS due to the assumed conversion of potentially dilutive awards and options that were outstanding during the period. Unvested restricted stock awards have the right to receive nonforfeitable dividends on the same basis as common shares; therefore, unvested restricted stock is considered a participating security for the purpose of calculating EPS. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net income (loss) for the three months ended March 31, 2024 and March 31, 2023.
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Numerator: | ||||||||
| Numerator for basic and diluted income (loss) per share, net (loss) available to common shareholders | $ | ( | ) | $ | ||||
| Denominator: | ||||||||
| Common stock | ||||||||
| Restricted stock awards | ||||||||
| Denominator for basic income (loss) per share, weighted average shares outstanding | ||||||||
| Effect of dilutive securities | ||||||||
| Denominator for diluted earnings per share, adjusted for weighted average shares and assumed conversion | ||||||||
| Basic income (loss) per common share | $ | ( | ) | $ | ||||
| Diluted income (loss) per common share and common share equivalent | $ | ( | ) | $ | ||||
The awards and options to purchase shares of common stock that were outstanding at March 31, 2024 and March 31, 2023 that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive, are as follows:
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Anti-dilutive awards and options | ||||||||
Note 7. Income Taxes
Deferred tax assets and liabilities are recorded based on the difference between financial reporting and tax basis of assets and liabilities and are measured by the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Deferred tax assets are computed with the presumption that they will be realizable in future periods when taxable income is generated. Predicting the ability to realize these assets in future periods requires judgment by management. GAAP prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Income tax benefits that meet the “more likely than not” recognition threshold are recognized.
The Company has recognized a deferred tax asset of approximately $
At December 31, 2023, the Company had available net operating loss carryforwards of approximately $
The schedule below outlines when the Company's net operating losses for 2017 and prior years were generated and the year they may expire.
| Tax Year End | NOL | Expiration | ||||||
| 2005 | $ | 2025 | ||||||
| 2006 | 2026 | |||||||
| 2007 | 2027 | |||||||
| 2008 | 2028 | |||||||
| 2009 | 2029 | |||||||
| 2010 | 2030 | |||||||
| 2013 | 2033 | |||||||
| 2016 | 2036 | |||||||
| 2017 | 2037 | |||||||
| Total | $ | |||||||
Management is not aware of any tax positions that would have a significant impact on the Company’s financial position.
Note 8. Related Party Transactions
Louis Hoch
During the three months ended March 31, 2024 and March 31, 2023, the Company purchased a total of $
Directors and Officers
On February 24, 2024, we repurchased
On February 24, 2024, we repurchased
On November 18, 2023, we repurchased
On November 18, 2023, we repurchased
Effective on February 17, 2023, the Company entered into an employment agreement with Greg Carter, the Company’s Executive Vice President, Payment Acceptance. Under the terms of this agreement, Mr. Carter will receive an annual salary of Override/Commissions of
On February 8, 2023, the Company granted
On March 16, 2023, the Company granted
On November 30, 2023, Tom Jewell, the Senior Vice President, Chief Financial Officer, and principal financial and accounting officer of the Company, notified the Company of his intention to retire. On December 11, 2023, Mr. Jewell entered into a Separation and Mutual Release of Claims Agreement (“Separation Agreement”) with the Company. Pursuant to the Separation Agreement, Mr. Jewell will be paid installment payments equal to his current base salary until and including April 18, 2024. Additionally, Mr. Jewell will be permitted to retain any unvested Company stock options or other equity awards, which shall vest in accordance with the applicable schedules. Mr. Jewell will also receive all employee benefits including, but not limited to, health, dental, vision and life insurances that he was receiving prior to his execution of the Agreement until April 18, 2024.
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
Usio, Inc. (collectively with its subsidiaries, "we," "our," "us," the "Company" or "Usio") was founded under the name Billserv Com, Inc. in July 1998 and incorporated in the State of Nevada. On June 26, 2019, we changed our corporate name from Payment Data Systems, Inc. to Usio, Inc. Our principal offices are located at 3611 Paesanos Parkway, Suite 300, San Antonio, TX 78231. Our telephone number is (210) 249-4100.
We provide integrated payment processing services to merchants and businesses, including all types of Automated Clearing House, or ACH, processing, credit, prepaid card and debit card-based processing services and statement preparation, presentment and mailing services.
In addition, we offer customizable prepaid cards which businesses use for expense management, incentives, refunds, claims and disbursements, as well as unique forms of compensation such as per diem payments, government disbursements, and similar payments. We also offer prepaid cards to consumers for use as a tool to stay on budget, manage allowances and share money with family and friends. Our UsioCard platform supports Apple Pay®, Samsung Pay™ and Google Pay™. Our PIN-less debit product allows merchants to debit and credit accounts in real-time. In our over 25-year history, we have created a loyal customer base that relies on us for our convenient, secure, innovative and adaptive services and technology, and we have built long-standing and valuable relationships with premier banking institutions such as Fifth-Third Bank, Sunrise Bank, and Wells Fargo Bank.
Our strategy is to drive growth through a leveraged, one to many, distribution model in the software development marketplace. Following the completion of the Singular Payments acquisition, we launched our payment facilitation, PayFac, platform called "PayFac-in-a-Box" in late 2018 targeting partnership opportunities with app and software developers in bill-centric verticals, such as legal, healthcare, property management, utilities and insurance. The PayFac-in-a-Box platform 'integration layer' offers a simple integration experience for technology companies who are looking to monetize payments within an existing base of downstream clients. We believe that the added value of offering our integration partners access to credit card, debit card, ACH and prepaid card issuance capabilities through a single vendor partner relationship in face-to-face, mobile and virtual payment acceptance environments provides a true single channel commerce experience through an application programming interface, or API.
With the acquisition of the assets of Information Management Solutions, LLC, or IMS, in December 2020, we began to offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions through our wholly-owned subsidiary, Usio Output Solutions, Inc., or Output Solutions. This product offering provides an outsourced solution for document design, print and electronic delivery to potential customers and entities looking to reduce postage costs and increase efficiencies.
Summary of Results
We believe that our success will continue to depend in large part on our ability to (a) grow revenues, (b) manage our operating expenses, (c) add quality customers to our client base, (d) meet evolving customer requirements, (e) adapt to technological changes in an emerging market, and (f) assimilate current and future acquisitions of companies and customer portfolios. We will continue to invest in our sales force and technology platforms to drive revenue growth. In particular, we are focused on growing our ACH merchants, adding new software integrators, growing our electronic bill presentment, document composition, document decomposition, printing and mailing services business while providing incremental services to existing merchants. In addition to our near-term growth opportunities, we are focused on leveraging and optimizing the infrastructure of 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.
We believe that the number of credit card transactions processed, ACH transaction counts, prepaid card volumes and total dollar volumes are the most critical measures to gauge the state of our business. During the first quarter of 2024, the number of credit card transactions processed by us increased by 18% versus the first quarter of 2023. The volume of credit card dollars processed during the first quarter of 2024 increased by 8% 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 first quarter of 2024 increased by 4% compared to the first quarter of 2023. Returned check transactions processed during the first quarter of 2024 increased by 9% compared to the first quarter of 2023. Electronic check dollars processed during the first quarter of 2024 increased by 22% compared to the first 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 first quarter of 2024 increased by 108% compared to the first quarter of 2023. Prepaid card transaction counts processed during the first quarter of 2024 increased by 26% compared to the first quarter of 2023. Prepaid card purchase volume during the first quarter of 2024 increased by 42% compared to the first 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 first quarter of 2024 were $1.5 billion compared to $1.2 billion processed in the first quarter of 2023, up 19% 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 March 31, 2024 the Company had repurchased $44,823 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.
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.
As the Federal Reserve worked to fight economic inflation, the federal funds rate 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 receiving more favorable interest rates on its current cash balances, amounting to $764,125 in interest income in the three months ended March 31, 2024. 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. However, sustaining growth at existing rates may not occur. 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.
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.
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 $859,528 as of March 31, 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.
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.
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 an adjusted EBITDA of $0.1 million for the quarter ended March 31, 2024, as compared to an adjusted EBITDA of $1.0 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.
The following tables set forth reconciliations of Operating Income (Loss) to EBITDA; EBITDA to Adjusted EBITDA; and Revenues to Adjusted EBITDA margins for the three months ended March 31, 2024 and 2023.
| Three Months Ended March 31, |
||||||||
| 2024 |
2023 |
|||||||
| Reconciliation from Operating income (Loss) to Adjusted EBITDA: |
||||||||
| Operating income (Loss) |
$ | (930,728 | ) | $ | 5,993 | |||
| Depreciation and amortization |
576,154 | 518,029 | ||||||
| EBITDA |
(354,574 | ) | 524,022 | |||||
| Non-cash stock-based compensation expense, net |
499,273 | 504,574 | ||||||
| Adjusted EBITDA |
$ | 144,699 | $ | 1,028,596 | ||||
| Calculation of Adjusted EBITDA margins: |
||||||||
| Revenues |
$ | 20,321,615 | $ | 21,446,244 | ||||
| Adjusted EBITDA |
$ | 144,699 | $ | 1,028,596 | ||||
| Adjusted EBITDA margins |
0.7 | % | 4.8 | % | ||||
The following table is a reconciliation of net cash flow provided by (used in) operating activities to adjusted operating cash flows for the three months ended March 31, 2024 and 2023.
| March 31, 2024 |
March 31, 2023 |
|||||||
| Reconciliation from net cash (used in) operating activities to Non-GAAP Adjusted Operating Cash Flows: |
||||||||
| Net cash provided by (used in) operating activities |
$ | (2,791,434 | ) | $ | (207,292 | ) | ||
| Operating cash flow adjustments: |
||||||||
| Prepaid card load obligations |
2,880,095 | 1,357,807 | ||||||
| Customer deposits |
57,468 | (20,953 | ) | |||||
| Merchant reserves |
(12,000 | ) | 164,886 | |||||
| Operating lease right-of-use assets |
(102,394 | ) | 31,459 | |||||
| Operating lease liabilities |
107,243 | (4,548 | ) | |||||
| Total adjustments to net cash provided by operating activities |
$ | 2,930,412 | $ | 1,528,651 | ||||
| Adjusted operating cash flows provided |
$ | 138,978 | $ | 1,321,359 | ||||
We reported cash provided by adjusted operating cash flows of $0.1 million for the three months ended March 31, 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 three months ended March 31, 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 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 on the balance sheet. The Company believes non-GAAP adjusted operating cash flow to be a more accurate indicator of cash contributions that can be used to sustain current and future business operations. The decrease in adjusted operating cash flows in the 2024 quarter compared to the 2023 quarter 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").
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 revenues are principally derived from providing integrated electronic payment services to merchants and businesses, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH, network and program management and processing of prepaid debit cards. With the acquisition of the assets of IMS in December 2020, we began to offer additional Output Solutions services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions.
| Three Months Ended March 31, |
||||||||||||||||
| 2024 |
2023 |
$ Change |
% Change |
|||||||||||||
| ACH and complementary services |
$ | 3,881,734 | $ | 3,340,722 | $ | 541,012 | 16 | % | ||||||||
| Credit card |
7,560,734 | 7,339,898 | 220,836 | 3 | % | |||||||||||
| Prepaid card services |
3,341,224 | 4,807,404 | (1,466,180 | ) | (30 | )% | ||||||||||
| Output Solutions |
5,537,923 | 5,958,220 | (420,297 | ) | (7 | )% | ||||||||||
| Total Revenue |
$ | 20,321,615 | $ | 21,446,244 | $ | (1,124,629 | ) | (5 | )% | |||||||
Consolidated revenue for the quarter ended March 31, 2024 decreased by 5% to $20.3 million, as compared to $21.4 million for the quarter ended March 31, 2023 due primarily to lower breakage revenues from our prepaid card line of business as the COVID incentive programs wind down. The Output Solutions lines of business were also down 7%, as a result of challenging comparables to the prior year period which contained higher levels of one time revenues related to government tax forms and voter card jobs. There was modest growth in our ACH and credit card lines of business, as our Payfac strategy continues to be implemented, 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 as our sales effort to board net new customers and processing volumes is reflected.
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 $0.4 million, or 3%, to $16.1 million for the quarter ended March 31, 2024, as compared to $16.5 million for the same period in the prior year, due to lower revenues driving similar declines in our processing, banking and transactional expenses.
Gross Profit
Gross profit is the net profit existing after the cost of services.
Gross profit decreased by 14% to $4.2 million for the quarter ended March 31, 2024, as compared to $4.9 million for the same period in the prior year. Similarly, gross margin percentage of revenue was 20.7% for the quarter ended March 31, 2024 as compared to 22.9% in the prior year period. The decrease in gross profit and gross margin percentage in the quarter ended March 31, 2024, as compared to the same period during the prior year, was primarily attributable to lower revenues and gross profit metrics from our Prepaid card services and Output solutions lines of business.
Stock-based Compensation
Stock-based compensation expenses were $0.5 million for the quarter ended March 31, 2024 as compared to $0.5 million for the quarter ended March 31, 2023, flat versus the prior year period.
Other Selling, General and Administrative Expenses
Other selling, general and administrative expenses, or other SG&A, were $4.1 million for the quarter ended March 31, 2024 as compared to $3.9 million in the prior year quarter. The modest increase in other SG&A for the quarter ended March 31, 2024 reflects the occurrence of some one-time expenses related to marketing initiatives and increased travel to sales-related events during the quarter, 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 $0.6 million and $0.5 million for the quarters ended March 31, 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.
Other Income (Expense)
Other income (expense), net was $0.8 million for the quarter ended March 31, 2024 compared to $0.1 million for the quarter ended March 31, 2023. Higher interest-bearing merchant reserves and interest rates drove the increased interest income.
Net Income (Loss)
We reported a net loss of $0.3 million for the quarter ended March 31, 2024, as compared to a net income of $0.01 million for the same period in the prior year. The decrease in net income was attributable to decreases in revenue combined with decreased profit margins.
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 offerings and Output Solutions offerings to existing and new customers, implement successful marketing strategies, maintain and upgrade our technology and transaction-processing systems, provide superior customer service, respond to competitive developments, attract, retain and motivate personnel, and respond to unforeseen industry developments among other factors.
Liquidity and Capital Resources
Our primary sources of liquidity are available cash and cash equivalents and cash flows provided by operations. As of March 31, 2024, we had cash and cash equivalents of $7.1 million. For the three months ended March 31, 2024, cash used in operations was $2.8 million. We expect available cash and cash equivalents and internally generated funds to be sufficient to support working capital needs, capital expenditures (including acquisitions), and our debt service obligations. We believe we have sufficient liquidity to operate for at least the next 12 months from the date of filing this report. Cash from operating activities is dependent on our net income (loss), less depreciation, amortization, 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 loss of $0.3 million for the quarter ended March 31, 2024. At March 31, 2024, we had an accumulated deficit of $71.6 million. Additionally, we had working capital of $8.7 million and $8.0 million at March 31, 2024 and December 31, 2023, respectively.
From time to time we have sold shares of our common stock in order to provide us liquidity. For example, on November 19, 2021, Voyager Digital purchased 142,857 unregistered shares of common stock at a price of $7.00 per share in a private offering. The gross proceeds to us from the private offering were $1,000,000. 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.
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 three months ended March 31, 2024 was $2.8 million, as compared to net cash used in operating activities of $0.2 million for the three months ended March 31, 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 $0.1 million for the three months ended March 31, 2024 as compared to cash used in operating activities of $1.3 million for the three months ended March 31, 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 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. 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. 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. This increase in cash used in operating activities 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 $0.2 million for the three months ended March 31, 2024 as compared to cash used in investing activities of $0.2 million for the three months ended March 31, 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 decrease in cash used in investing activities was primarily attributable to the reduced amount of fixed asset purchases relative to the same period a year ago.
Net cash used in financing activities for the three months ended March 31, 2024 was $0.1 million and net cash used in financing activities for the three months ended March 31, 2023 was $0.02 million.
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.
Item 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive and Chief Financial Officers, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q. Based on that evaluation, our Chief Executive and Chief Financial Officers concluded that our disclosure controls and procedures as of March 31, 2024 were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Commission rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive and Chief Financial Officers, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our evaluation of disclosure controls and procedures included an evaluation of certain components of our internal control over financial reporting. Management’s assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance, as a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
BEN KAUDER, NINA PIOLETTI, & TRIPLE PAY PLAY, INC.
In 2017, Usio acquired Singular Payments, Inc. (“Singular”), another payment processing company with offices in Nashville, Tennessee and St. Augustine, Florida.
Ben Kauder and Nina Pioletti were executives of Singular and, after the acquisition, Usio hired them as executive-level employees. Usio hired Kauder to serve as Senior Vice President of Integrated Payments, and Pioletti was hired to serve as Director of Sales. As a condition of employment, Kauder and Pioletti agreed to be bound by certain Usio policies, including as related to preserving the confidentiality of Usio’s proprietary information. As Usio executives, Kauder and Pioletti were afforded access to and contributed to the development of Usio’s trade secrets and other proprietary information not generally known by the public at large, including but not limited to financial information, marketing plans, cost and operational/strategic plans, and sales presentations.
In May 2021, Kauder resigned from Usio followed by Pioletti in July of 2022. Thereafter, Kauder and Pioletti formed Triple Pay Play, another payment processing company which competes with the same services as Usio. Upon information and belief, Kauder and Pioletti were working to form Triple Pay Play while employed by Usio, during Usio business hours, and while using Usio resources and Usio property.
On or about June 21, 2023, Usio filed suit against Ben Kauder, Nina Pioletti and Triple Pay Play for breach of contract and misappropriation of trade secrets and unfair business competition.
On July 6, 2023, Ben Kauder, Nina Pioletti and Triple Pay Play filed a Motion to Dismiss for Lack of Jurisdiction. The motion was granted. Subsequently, in February of 2024, Usio refiled its case in Tennessee, where Kauder, Nina, and Triple Pay Play reside.
Currently, this case is pending in the Chancery Court of Maury County, Tennessee and is in the early-stage discovery.
GREENWICH BUSINESS CAPITAL, LLC
On or about September 25, 2019, Usio and Greenwich Business Capital LLC (“GBC”), entered into an Agreement for payment processing services (the “Agreement”). Pursuant to the terms of the Agreement, Usio effectively terminated the Agreement with GBC on October 31, 2023, by providing Greenwich with a 30-days written notice as required by the Agreement.
On November 13, 2023, GBC filed lawsuit against Usio, alleging violations of the National Automated Clearing House Association (NACHA) rules. In early March of 2024, Usio filed a Motion to Dismiss for improper venue and failure to state a claim. The motion is set to be heard in May of 2024 in the State of Rhode Island Kent, SC. Superior Court.
KDHM, LLC
On September 1, 2021, KDHM, LLC, an entity owned by the former owners of IMS, sued PDS Acquisition Corp, now known as Usio Output Solutions, Inc., in the 73rd District Court of Bexar County, Texas claiming a breach of the asset purchase agreement executed by the parties on December 14, 2020. The lawsuit alleges that due to a mistake, accident, or inadvertence, certain customer deposits in the amount of $317,000 were improperly transferred to us.
We believe that plaintiff's claims in the lawsuit have no merit and contradict the express terms of the asset purchase agreement. As a result of this post-sale dispute, we discovered that KDHM, LLC and its principals made certain misrepresentations and breached the terms of the asset purchase agreement.
On September 28, 2021, we filed an answer generally denying the plaintiff’s allegations. On October 5, 2021, we filed a counterclaim and third-party petition. Therein, we allege that neither KDHM nor its principals disclosed that KDHM was not accounting for the customer deposits in accordance with GAAP. KDHM and third-party defendants, its principals Henry Minten and Thomas Dowe, affirmatively represented and warranted in section 3.1(e) of the asset purchase agreement that “[t]he Annual Financial Statements and the Interim Financial Statements have been prepared from the books and records of Seller in accordance with GAAP applied on a consistent basis.”
We also discovered that KDHM by and through its principals failed to disclose that $305,000 in additional customer deposits existed and that these deposits were not conveyed to us as required by the asset purchase agreement. KDHM, Minten and Dowe provided us with fraudulent and misleading profit and loss statements that did not disclose these additional customer deposits. KDHM and the defendants do not dispute that these additional customer deposits existed and that they were purchased by Usio. However, despite a written representation that these funds would be returned, KDHM and its principals have held these funds hostage. Section 2.1(b)(x) of the asset purchase agreement provides that the purchased assets include “All of Seller’s deposits from its customer, including without limitation, those customer deposits listed on Schedule 2.1(b)(xi) of the Disclosure Schedules.” Finally, we discovered that KDHM did not provide us with all customer lists, which are identified as purchased assets under the agreement.
In our counterclaims and third-party petition, we assert causes of action for fraud, breach of contract and conversion.
On August 18, 2023, the judge granted a summary motion entitling KDHM to deposits for customer accounts that were printed and mailed prior to the acquisition, and Usio Output Solutions, Inc. was entitled to deposits for accounts that were not yet printed and printed but not yet mailed prior to the acquisition. Usio has requested a reconsideration of the motion, as it does not consider that deposits are only owed to KDHM if they were earned and offset against accounts receivable.
On March 4, 2024, the court held a hearing on KDHM’s Supplemental Rule 166(G) Motion and the court granted the motion in favor of KDHM. However, Usio believes the court erred in granting the motion and filed a motion for reconsideration on March 19, 2024.
On March 28, 2024, the court heard Usio’s Motion for Reconsideration of Order Granting Plaintiff’s Supplemental Rule 166(g). On May 2, 2024, the court denied Usio’s motion. We are currently in the process of appealing the decision.
OTHER PROCEEDINGS
Aside from these proceedings, the Company may be involved in legal matters arising in the ordinary course of business from time to time. While we believe that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which we are or could become involved in litigation will not have a material adverse effect on our business, financial condition, or results of operations.
There have been no material changes from risk factors previously disclosed in the 2023 Annual Report.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Recent Sales of Unregistered Securities
We did not issue unregistered securities during the quarter ended March 31, 2024.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On November 2, 2016, we announced that our Board of Directors authorized the buyback program, pursuant to which the Company may repurchase up to $1 million in shares of our common stock from time to time in the open market, in block transactions, or in privately negotiated transactions. On January 9, 2018, our Board of Directors added an additional $2 million to the buyback program. The buyback program began on November 16, 2016 and ended on September 29, 2019. At September 29, 2019 when the program ended, $1,374,049 was available under the buyback program. On November 7, 2019, our Board of Directors approved the renewal of the buyback program. The Board approved a limit of $1,420,000, which was rolled over from the buyback program prior to renewal, with a three-year duration. On May 13, 2022, our Board of Directors authorized another renewal of the buyback program, with a limit equal to $4 million of the Company's common stock and a three year duration. The buyback program, as renewed most recently, terminates on the earliest of May 15, 2025, the date the funds are exhausted, or the date our Board of Directors, at its sole discretion, terminates or suspends the buyback program. The buyback program is used for the repurchase of stock from employees and directors, and for open-market purchases through a broker. During the three months ended March 31, 2024, we made the following stock repurchases:
| Period |
(a) Total number of shares (or units) purchased |
(b) Average price paid per share (or unit) |
(c) Total number of shares (or units) purchased as part of publicly announced plans or programs |
(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs |
||||||||||||
| January 1 - January 31, 2024 |
5,887 | $ | 1.68 | 5,887 | $ | 2,261,410 | ||||||||||
| February 1 - February 29, 2024 |
20,745 | $ | 1.58 | 20,745 | $ | 2,228,724 | ||||||||||
| March 1 - March 31, 2024 |
1,232 | $ | 1.75 | 1,232 | $ | 2,226,570 | ||||||||||
| Total |
27,864 | 27,864 | $ | 2,226,570 | ||||||||||||
Item 3. Defaults Upon Senior Securities.
None.
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
| Exhibit |
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| Number |
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Description |
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| 3.1 |
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| 3.2 |
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| 3.3 |
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| 3.4 |
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| 3.5 |
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Amended and Restated By-laws (included as exhibit 3.1 to the Form 8-K filed December 1, 2023, and incorporated herein by reference). |
| 4.1 | Description of Securities (included as exhibit 4.1 to the Form 10-K for the year ended December 31, 2023 filed on March 27, 2024) | |
| 10.1* |
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| 10.2* |
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| 10.3* |
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| 10.4 |
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| 10.5* |
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| 10.6* |
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| 10.7 |
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| 10.8* |
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| 10.9* |
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| 10.10* |
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| 101.SCH |
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Inline XBRL Taxonomy Extension Schema Document (filed herewith). |
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| 101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith). |
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| 101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith). |
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| 101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith). |
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| 101.PRE |
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Inline XBRL Taxonomy Presentation Linkbase Document (filed herewith). |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
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| † |
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Confidential treatment has been granted for portions of this agreement. |
| + | The schedules to the exhibit have been omitted from this filing pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish copies of any such schedules to the Commission upon request. | |
| * | Management Compensatory Plan or Arrangement |
Copies of above exhibits not contained herein are available to any stockholder, upon written request to: Chief Financial Officer, Usio, Inc., 3611 Paesanos Parkway, Suite 300, San Antonio, TX 78231.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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USIO, INC |
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| Date: May 15, 2024 |
By: |
/s/ Louis A. Hoch |
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Louis A. Hoch |
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Chief Executive Officer |
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(Principal Executive Officer) |
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| Date: May 15, 2024 | By: |
/s/ Michael White |
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Michael White |
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Chief Accounting Officer |
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(Principal Accounting and Financial Officer) |
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