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 November 4, 2024, the number of outstanding shares of the registrant's common stock was
INDEX
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Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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| Item 1A. |
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| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds. |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
USIO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 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 (Note 9) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ par value, shares authorized; -- shares outstanding at September 30, 2024 (unaudited) and December 31, 2023, respectively | ||||||||
| Common stock, $ par value, shares authorized; and issued, and and outstanding at September 30, 2024 (unaudited) and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost; and shares at September 30, 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 September 30, |
Nine Months Ended September 30, |
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| 2024 |
2023 |
2024 |
2023 |
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| Revenues |
$ | $ | $ | $ | ||||||||||||
| Cost of services |
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| Gross profit |
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| Selling, general and administrative expenses: |
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| Stock-based compensation |
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| Other SG&A |
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| Depreciation and amortization |
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| Total selling, general and administrative |
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| Operating (loss) |
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| Other income and (expense): |
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| Interest income |
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| Other income |
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| Interest expense |
( |
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| Other income, net |
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| (Loss) before income taxes |
( |
) | ( |
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) | ( |
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| Federal income tax (benefit) |
( |
) | ( |
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| State income tax expense |
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| Income tax expense (benefit) |
( |
) | ( |
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| Net income (loss) |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Basic income (loss) per common share: |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Diluted income (loss) per common share: |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Weighted average common shares outstanding |
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| Basic |
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| Diluted |
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See the accompanying notes to the condensed interim consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Deferred federal income tax | ( | ) | ||||||
| Employee stock-based compensation | ||||||||
| Vendor stock-based compensation | ||||||||
| Non-cash revenue from returned common stock | ( | ) | ||||||
| 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 provided by (used in) operating activities | ( | ) | ||||||
| Investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash (used in) investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Payments on equipment loan | ( | ) | ( | ) | ||||
| Proceeds from issuance of common stock | ||||||||
| 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 operating activities: | ||||||||
| Right of use assets obtained in exchange for operating lease liabilities | ||||||||
| Non-cash financing activity: | ||||||||
| Issuance of deferred stock compensation | ||||||||
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:
| September 30, | ||||||||
| 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 | $ | $ | ||||||
See the 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' |
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| Shares |
Amount |
Capital |
Stock |
Compensation |
Deficit |
Equity |
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| Balance at December 31, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||
| Issuance of common stock under equity incentive plan |
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| Deferred compensation amortization |
— | — | — | — | — | |||||||||||||||||||||||
| Purchase of treasury stock costs |
— | ( |
) | ( |
) | |||||||||||||||||||||||
| Net (loss) for the period |
— | ( |
) | ( |
) | |||||||||||||||||||||||
| Balance at March 31, 2024 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||
| Issuance of common stock under equity incentive plan |
( |
) | ||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan |
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| Reversal of deferred compensation amortization that did not vest |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
| Deferred compensation amortization |
— | — | — | — | — | |||||||||||||||||||||||
| Purchase of treasury stock costs |
— | ( |
) | ( |
) | |||||||||||||||||||||||
| Net income for the period |
— | |||||||||||||||||||||||||||
| Balance at June 30, 2024 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||
| Issuance of common stock under equity incentive plan |
||||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan |
||||||||||||||||||||||||||||
| Deferred compensation amortization |
— | |||||||||||||||||||||||||||
| Purchase of treasury stock costs |
— | ( |
) | ( |
) | |||||||||||||||||||||||
| Net income for the period |
— | |||||||||||||||||||||||||||
| Balance at September 30, 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 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||
| Issuance of common stock under equity incentive plan |
( |
) | ||||||||||||||||||||||||||
| Reversal of deferred compensation amortization that did not vest |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
| Deferred compensation amortization |
— | |||||||||||||||||||||||||||
| Purchase of treasury stock costs |
— | ( |
) | ( |
) | |||||||||||||||||||||||
| Non-cash return of common stock |
— | ( |
) | ( |
) | |||||||||||||||||||||||
| Net income for the period |
— | |||||||||||||||||||||||||||
| Balance at June 30, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||
| Issuance of common stock under equity incentive plan |
||||||||||||||||||||||||||||
| Deferred compensation amortization |
— | |||||||||||||||||||||||||||
| Purchase of treasury stock costs |
— | ( |
) | ( |
) | |||||||||||||||||||||||
| Net (loss) for the period |
— | ( |
) | ( |
) | |||||||||||||||||||||||
| Balance at September 30, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||
See the accompanying notes to the condensed interim 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 "third quarter" mean the three month period ended September 30, 2024 or 2023, as the case may be and unless otherwise noted.
Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition: Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services. Revenue is recognized during the period in which the transactions are processed or when the related services are performed. The Company complies with ASC 606-10 and reports revenues at gross as a principal versus net as an agent. Although some of the Company's processing agreements vary with respect to specific credit risks, the Company has determined that for each agreement it is acting in the principal role. 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 the United States Postal Services, or 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.
The following table presents the Company's consolidated revenues by source:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| ACH and complementary services | $ | $ | $ | $ | ||||||||||||
| Credit card | ||||||||||||||||
| Prepaid card services | ||||||||||||||||
| Output Solutions | ||||||||||||||||
| Interest - ACH and complementary services | ||||||||||||||||
| Interest - Prepaid card services | ||||||||||||||||
| Interest - Output Solutions | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Cash and Cash Equivalents: Cash and cash equivalents includes cash and other money market instruments. The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents.
Settlement Processing Assets and Obligations: Settlement processing assets and obligations represent intermediary balances arising in our settlement process for merchants. The Company earns interest on these underlying processing assets, which is recognized as revenue in the ACH and complementary services business line.
Prepaid Card Load Assets and Obligations: The Company maintains pre-funding accounts for its customers to facilitate prepaid card loads as initiated by the customer. These prepaid card load assets are carried on the Company's balance sheet with a corresponding liability. As the prepaid business line expands, card load assets will increase as funds are sent from customers to the Company. As customers begin to load cash onto cards, the balance of both the prepaid card asset and corresponding liability decrease. As these balances decrease, the Company recognizes processing revenue and cardholder fees. The Company earns interest on these prepaid card load assets and obligations, which is recognized as revenue in the prepaid card services business line.
Customer Deposits: The Company holds customer deposits primarily for postage expenses to ensure the Company is not out of pocket for amounts billed daily by the USPS. These customer deposits are carried on the Company's balance sheet with a corresponding liability. The Company earns interest on these customer deposits, which is recognized as revenue in the Output Solutions business line.
Merchant Reserves: The Company has merchant reserve requirements associated with ACH transactions. The merchant reserve assets are carried on the Company's balance sheet with a corresponding liability. Merchant reserves are established 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 Company earns interest on these merchant reserves, which is recognized as revenue in our ACH and complementary services business line.
Accounts Receivable/Allowance for Estimated Credit Losses: The Company maintains an allowance for estimated credit losses resulting from the inability or failure of the Company’s 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 to conform with Accounting Standards Update (ASU) Topic 326. During the nine months ended September 30, 2024 and the year ended December 31, 2023, there were no credit losses incurred. In the past, losses incurred by the Company due to credit losses were within its expectations. If the financial conditions of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make contractual payments, additional losses may be incurred in future periods. Estimates for credit losses are variable based on the volume of transactions processed and could increase or decrease accordingly. The allowance for credit losses was $
Inventory: Inventory is stated at the lower of cost or net realizable value. At September 30, 2024 and December 31, 2023, inventory consisted primarily of printing and paper supplies used for Output Solutions.
Accounting for Internal Use Software: The Company capitalizes the costs associated with software being developed or obtained for internal use when both the preliminary project stage is completed and it is probable that computer software being developed will be completed and placed in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (iii) interest costs incurred, when material, while developing internal-use software. The Company ceases capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose. During the nine months ended September 30, 2024 and September 30, 2023, the Company capitalized software costs of $
Valuation of Long-Lived and Intangible Assets: The Company assesses the impairment of long-lived and intangible assets at least annually, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important, which could trigger an impairment review, include the following: significant underperformance relative to historical or projected future cash flows; significant changes in the manner of use of the assets or the strategy of the overall business; and significant negative industry trends. When management determines that the carrying value of long-lived and intangible assets may not be recoverable, impairment is measured as the excess of the assets’ carrying value over the estimated fair value.
Reserve for Processing Losses: 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 September 30, 2024 and December 31, 2023, the Company’s reserve for processing losses was $
Legal Proceedings: In addition to the legal proceedings disclosed in this quarterly report, the Company may be involved in legal matters arising in the ordinary course of business from time to time. Litigation is subject to inherent uncertainties, and an adverse result in the legal proceedings disclosed in this quarterly report or other matters that may arise from time to time may harm our business.
Recently Adopted Accounting Pronouncements: 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 September 30, 2024 and 2023, operating lease expenses totaled $
Note 3. Accrued Expenses
Accrued expenses consisted of the following balances:
| September 30, 2024 |
December 31, 2023 |
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| Accrued commissions |
$ | $ | ||||||
| Reserve for processing losses |
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| Other accrued expenses |
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| Accrued taxes |
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| Accrued salaries |
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| 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 Income (Loss) Per Share
Basic income (loss) per share (EPS) was computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS differs from basic EPS due to the assumed conversion of potentially dilutive awards and options that were outstanding during the period. Holders of 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 and nine months ended September 30, 2024 and September 30, 2023.
| Three Months Ended September 30, |
Nine Months Ended September 30, |
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| 2024 |
2023 |
2024 |
2023 |
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| Numerator: |
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| Numerator for basic and diluted income (loss) per share, net income (loss) available to common shareholders |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Denominator: |
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| Denominator for basic income (loss) per share, weighted average shares outstanding |
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| Effect of dilutive securities |
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| Denominator for diluted earnings per share, adjusted for weighted average shares and assumed conversion |
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| Basic income (loss) per common share |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Diluted income (loss) per common share and common share equivalent |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
The warrants to purchase shares of common stock that were outstanding at September 30, 2024 and September 30, 2023 that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive, are as follows:
| Nine Months Ended September 30, |
||||||||
| 2024 |
2023 |
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| Anti-dilutive warrants |
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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 $
Significant components of the Company's deferred tax asset are as follows for the nine months ended September 30, 2024 and year ended December 31, 2023.
| September 30, 2024 | December 31, 2023 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | $ | ||||||
| Depreciation and amortization | ||||||||
| Non-cash compensation | ||||||||
| Other | ||||||||
| Total | ||||||||
| Valuation Allowance | ( | ) | ( | ) | ||||
| Deferred tax asset | $ | $ | ||||||
The tax provision for federal and state income tax is as follows for the nine months ended September 30, 2024 and 2023.
| Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | |||||||
| Current provision: | ||||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| Deferred provision: | ||||||||
| Federal income tax (benefit) | ( | ) | ||||||
| Income tax expense (benefit) | $ | ( | ) | $ | ||||
The reconciliation of federal income tax computed at the U.S. federal statutory tax rates to total income tax expense is as follows for the nine months ended September 30, 2024 and year ended December 31, 2023.
| Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | |||||||
| Income tax (benefit) at 21% | $ | ( | ) | $ | ( | ) | ||
| Change in valuation allowance | ( | ) | ||||||
| Permanent and other differences | ||||||||
| State taxes | ||||||||
| Income tax expense (benefit) | $ | ( | ) | $ | ||||
At December 31, 2023, the Company had available net operating loss carryforwards of approximately $
Pursuant to Sections 382 and 383 of the Internal Revenue Code ("IRC"), federal and state tax laws impose significant restrictions on the utilization of net operating loss and other tax carryforwards in the event of a change in ownership of the Company. The Company does not expect IRC Sections 382 and 383 to significantly impact the utilization of its NOLs and other tax carryforwards. If we were to experience an "ownership change," as determined under Section 382 of the IRC, our ability to offset taxable income arising after the ownership change with NOLs arising prior to the ownership change would be limited, possibly substantially. An ownership change would establish an annual limitation on the amount of our pre-change NOLs we could utilize to offset our taxable income in any future taxable year to an amount generally equal to the value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt rate. In general, an ownership change will occur if there is a cumulative increase in our ownership of more than 50 percentage points by one or more "5% shareholders" (as defined in the IRC) at any time during a rolling three-year period.
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 | $ | |||||||
As of September 30, 2024, there are NOLs totaling approximately $
| Tax Year End | NOL | |||
| 2018 | $ | |||
| 2019 | ||||
| 2020 | ||||
| 2022 | ||||
| Total | $ | |||
| Total loss carryforwards | $ | |||
Management is not aware of any tax positions that would have a significant impact on the Company's financial position or results of operations.
Note 8. Related Party Transactions
Louis Hoch
During the nine months ended September 30, 2024 and September 30, 2023, the Company purchased a total of $
Directors and Officers
On June 21, 2024, the Company granted
On June 21, 2024, the Company granted
On February 24, 2024, we repurchased
On February 24, 2024, we repurchased
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 was paid installment payments equal to his base salary at the time of his retirement until and including April 18, 2024. Additionally, Mr. Jewell was permitted to retain any unvested Company stock options or other equity awards, which shall vest in accordance with the applicable schedules. Mr. Jewell also received all employee benefits including, but not limited to, health, dental, vision and life insurances that he was receiving prior to his execution of the Separation Agreement until April 18, 2024.
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
Note 9. Commitments and Contingencies
Legal Proceedings.
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 2022. Thereafter, Kauder and Pioletti formed Triple Pay Play, another payment processing company which directly competes with 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 Kauder, Pioletti and Triple Pay Play for breach of contract and misappropriation of trade secrets and unfair business competition.
On July 6, 2023, Kauder, Pioletti and Triple Pay Play filed a Motion to Dismiss for Lack of Jurisdiction. The motion was granted. Subsequently, in February 2024, Usio refiled its case in Tennessee, where Kauder, Pioletti, and Triple Pay Play reside.
On May 3, 2024, Kauder, Pioletti and Triple Pay Play filed a Motion to Dismiss Usio’s Complaint; this motion was heard August 5, 2024. The Judge did not make a ruling and is currently reviewing all materials filed in regards to this matter.
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 the State of Rhode Island Kent Superior Court. In early March 2024, Usio filed a Motion to Dismiss for improper venue and failure to state a claim.
On May 20, 2024, Usio’s Motion to Dismiss was heard in the State of Rhode Island Kent Superior Court. The Judge did not make a ruling and is currently reviewing all materials filed in regards to this matter.
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 $
We believe that plaintiff's claims contradict the express terms of the asset purchase agreement, and we intend to continue to vigorously defend this matter. As a result of this post-sale dispute, we subsequently 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 subsequently discovered that KDHM by and through its principals failed to disclose that $
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 Output Solutions 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. On July 12, 2024, we filed an appeal on the lower court's decision, which is pending review.
We have not recorded a contingency in relation to this case, as we consider the risk of lose remote as related to this lawsuit.
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.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS DISCLAIMER
This Quarterly Report on Form 10-Q (this "quarterly report" or this "report") contains forward-looking statements that involve risks and uncertainties. If used in this report, the words "will," "anticipate," "believe," "estimate," "intend," and other words or phrases of similar import are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described in the 2023 Annual Report and other reports we file with the Commission. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made. We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.
This discussion and analysis should be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes thereto included in this report, and the 2023 Annual Report, including the audited consolidated financial statements and the notes contained therein.
Overview
As a cloud-based, Fintech payment processor, we serve multiple industry verticals with technology that facilitates payment acceptance and funds disbursement in a single, full-stack ecosystem. We provide payment acceptance through multiple payment methods including: payment facilitation, prepaid card and electronic billing products and services to businesses, merchants and consumers. We seek to grow our business both organically through the continued development and enhancement of our products and services and through acquisitions of new products and services. We will continue to look for opportunities (both internally and externally) to enhance our offerings to meet customer demands as they arise.
Since 1998, Usio has entered a number of market verticals within the payments industry in order to satisfy the growing payment needs of consumers and merchants across the United States. Beginning with our Electronic Bill Presentment and Payment, or EBPP, product that launched the Company, we entered into the electronic funds transfer space through the ACH network, developing ancillary and complementary products such as PINless debit in 2016, and Remotely Created Checks, or RCC, account validation, and account inquiry in 2019. These supplementary product options offer customers access to faster and more convenient payment options and tools to improve operating efficiencies. Further, our credit card payment offering was expanded in 2017 with the development of Payment Facilitation, or PayFac, that utilizes our unique technology that allows for instant enrollment of merchants and combined our suite of payment options into an integrated platform for merchants and customers to utilize.
Through our innovative Prepaid Debit Card platform, we offer a variety of prepaid card products such as reloadable, incentive, promotional and corporate card programs. Combined with our printing and mailing services, through the acquisition of IMS in December of 2020, we can satisfy the diverse requirements of customer needs with physical and virtual document creation and distribution, including traditional paper checks. Our Consumer Choice product developed and debuted in 2022 that provides flexible ways to initiate a variety of payment distributions through a multitude of payment methods including physical prepaid and virtual cards, ACH, paper checks, real-time PINless debit and others. This offering allows us a superior opportunity to increase our cross-selling efforts through all of our payment methods.
With the growing need for faster payment methods, we continue to invest in technology that can help us further expand our suite of payment technology. With the rise of Real Time Payments, or RTP, we began expansion into this market vertical in 2023, which serves as an alternative to ACH payments. As well, we continue to enhance our existing product offerings, with improvements in reporting, data management, fraud and risk monitoring, ease of access, and accelerations in client onboarding and implementation times. With our transition to a cloud-based platform, our speed, security, and scalability in payment processing is further expanded, allowing us to seamlessly grow as the market demands.
Payment Acceptance. We provide integrated electronic payment processing services to merchants and businesses, including credit, and debit card-based processing services and electronic funds transfer via the ACH network. The ACH network is a nationwide electronic funds transfer system that is regulated by the Federal Reserve and the National Automatic Clearing House Association, or NACHA, the electronic payments association, and provides for the clearing of electronic payments between participating financial institutions. Our ACH processing services enable merchants or businesses to both disburse and collect funds electronically using e-checks instead of traditional paper checks. An e-check is an electronic debit to a bank checking account that is initiated at the point-of-sale, on the Internet, over the telephone, or via a bill payment sent through the mail via a physical check. E-checks are processed using the ACH network. We are one of nine companies that hold the prestigious NACHA certification for Third-Party Senders and were the second company to receive the certification and are the most tenured to hold the certification.
Our payment acceptance services are delivered in a variety of forms and situations. For example, our capabilities allow merchants to convert a paper check to an e-check or receive card authorization at the point-of-sale, allow our merchants’ respective customer service representatives to take e-check or card payments from their consumers by telephone, and enable their consumers to make e-check or card payments directly through the use of a website or by calling an interactive voice response telephone system.
Similarly, our PINless debit product allows merchants to debit and credit accounts in real-time utilizing the debit card networks.
Card-Based Services. Our card-based processing services enable merchants to process both traditional card-present, tap-and-pay, or "swipe" transactions, as well as card-not-present transactions. A traditional card-present transaction occurs whenever a card holder physically presents a credit or debit card to a merchant at the point-of-sale. A card-not-present transaction occurs whenever the customer does not physically present a payment card at the point-of-sale and may occur over the Internet, mail, or telephone. A tap-and-pay transaction occurs whenever a consumer taps their phone on a physical terminal utilizing third party wallet services like Apple Pay®, Samsung Pay™ and Google Pay™.
Payment Facilitation. Following the completion of the Singular Payments acquisition in 2017, we launched our payment facilitation, or PayFac, platform called "PayFac-in-a-Box" in late 2018 targeting partnership opportunities with app and software developers in bill-centric verticals, such as legal, healthcare, property management, utilities and insurance. The PayFac-in-a-Box platform 'integration layer' offers a simple integration experience for technology companies who are looking to monetize payments within an existing base of downstream clients. The added value of offering our integration partners access to real-time merchant enrollment, credit card, debit card, ACH and prepaid card issuance capabilities through a single vendor partner relationship in face-to-face, mobile and virtual payment acceptance environments provides a true single channel commerce experience through an application programming interface, or API.
Prepaid and Incentive Card Services. Through our December 2014 acquisition of the assets of Akimbo Financial, Inc., we added a highly talented technical staff of industry subject matter experts and an innovative cardholder service platform including cardholder web and mobile applications and launched what is now our UsioCard business. As a result of this acquisition, through our subsidiary, FiCentive, Inc., we offer customizable prepaid cards which customers use for expense management, incentives, refunds, claims and disbursements, as well as unique forms of compensation such as per diem payments, government disbursements, and similar payments. This comprehensive money disbursement platform allows businesses to pay their contractors, employees, or other recipients by choosing among a prepaid debit Mastercard, real-time deposit to a checking account, traditional ACH, direct deposit or paper check. These cardholder web and mobile applications have been fully integrated into FiCentive’s prepaid card core processor, and now support all program types and brands offered by FiCentive and its clients.
As part of our Prepaid card-based processing services, we develop and manage a variety of Mastercard-branded prepaid card program types, including consumer reloadable, consumer gift, incentive, promotional, general and government disbursement and corporate expense cards. We also offer prepaid cards to consumers for use as a tool to stay on budget, manage allowances and share money with family and friends. Our UsioCard platform supports Apple Pay®, Samsung Pay™ and Google Pay™.
In our over 20+year history, we have created a loyal customer base that relies on us for our convenient, secure, innovative and adaptive services and technology, and we have built long-standing and valuable relationships with premier banking institutions such as Fifth Third Bank, Sunrise Bank, TransPecos and others.
Electronic Billing. On December 15, 2020, we entered into the business of electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions through the acquisition of IMS. This product offering provides an outsourced solution for document design, print, and electronic delivery to potential customers and entities looking to reduce postage costs and increase efficiencies. This acquisition increased our ability to grow new revenue streams and allowed us to reenter the electronic bill presentment and payment revenue stream. The success of this new business line depends on our ability to realize the anticipated growth opportunities; we cannot provide any assurance that we will be able to realize these opportunities.
Summary of Results
We believe that our success will continue to depend in large part on our ability to (a) grow revenues, (b) manage our selling, general, and administrative expenses, (c) add quality customers to our client base, (d) meet evolving customer requirements, (e) adapt to technological changes in an emerging market, and (f) assimilate current and future acquisitions of companies and customer portfolios. We will continue to invest in our sales force and technology platforms to drive revenue growth. In particular, we are focused on growing our ACH merchants, adding new software integrators, growing our electronic bill presentment, document composition, document decomposition, printing and mailing services business while providing incremental services to existing merchants. In addition to our near-term growth opportunities, we are focused on leveraging and optimizing the infrastructure of our business allowing expansion of our payment processing and mail and printing capabilities without significantly increasing our operating costs. We continue to seek ways to grow revenue, and net new client implementations and onboards occur regularly due to our ability to address the needs of our market.
Growing Revenues. Revenue growth remains a consistent focus for the Company, as we strive to achieve expanded scale, and establish a strong reputation within the financial technologies space. This growth assists us in maintaining our diversified offerings, and remain relevant by developing payment platforms that address the current needs of our marketplace. In the 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.
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. For more information, see "-Results of Operations - Other Selling, General and Administrative Expenses" below.
Adding Quality Customers and Meeting Their Evolving Requirements. The addition of new, and quality customers, represents one of our largest opportunities to grow revenues, and stay relevant in the marketplace. We believe a large and quality client base allows us to stay in touch with the broader needs of the changing payment landscape, while providing a reliable book of business to help fund current and future operations. Our focus on addressing customer needs has allowed us to maintain a consistent presence and build a strong reputation in niche markets such as the lending, legal, government, and healthcare fields amongst others.
Adapt to Technological Changes. We maintain a committed focus on the ever changing technological landscape within the payments ecosystem. We believe by regularly attending payments focused conferences, webinars, and training sessions, alongside our consistent communication with customers and clients, enables us to be informed of the most current, and future, applications and evolutions of financial technologies. 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.
Assimilating Current and Future Acquisitions. Acquisitions have been a key element in our growth focused strategy, both to add net new customers, and enhance our suite of payment technologies. This is evident through our acquisition of Akimbo Financial, Inc., Singular Payments, and IMS, which allowed us to introduce new offerings such as prepaid card issuance, PayFac, and electronic bill presentment, all of which represent significant portions of our current revenues. The assimilation of those acquisitions were critical in both the retention of purchased assets, and their growth, through cross-selling, and implementation into our broader infrastructure that allows for increased diversity of offerings and support. We cannot assure you that we will be able to complete any acquisitions in the future.
In addition to the factors discussed above, we believe that processing volume and transaction counts are a vital measure which indicate our addition and implementation of net new customers, and growth from existing customers, which we believe correlate to both current and future revenues. The change in credit card processing volume, ACH transaction counts, and prepaid card purchase volume are the most direct metrics that drive revenues in their respective business lines, while prepaid card load volumes specifically, are an indicator of future revenue change within the prepaid card business line. While there are many components to the revenues of our business units that could impact revenue growth or decline, these processing metrics offer an indication to the current health of our overall company and success in our strategies to grow the business. During the 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. 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.
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. 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.
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. Of this interest, $1.8 million was recognized as revenue in the respective business lines for which the cash balances are held, and $348,188 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. 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.
Changes in these factors are difficult to predict, and a change in one factor could affect other factors, which could result in adverse effects to our business, results of operations, financial condition, and cash flows.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to the reported amounts of revenues and expenses, credit losses, investments, intangible assets, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. We consider these accounting policies to be critical because the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for such highly uncertain matters or due to the susceptibility of such matters to change or because the impact of the estimates and assumptions on financial condition or operating performance is material.
For a summary of Critical Accounting Policies, please refer to the Notes to Interim Condensed Consolidated Financial Statements, Note 1, Basis of Presentation.
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.
Reserve for Expected Credit Losses
We establish an allowance for accounts receivable, which represents our estimate of current expected allowances for credit losses. This evaluation process is subject to numerous estimates and judgements. This allowance is primarily based on expectations of unrecoverable receivables based on historical losses, as well as forecasted trends in customer instability, and general market conditions. The Company reviews this allowance quarterly on an account-by-account basis. Projected loss rates, inclusive of historical loss data and macroeconomic factors, are applied to the principal amount of our merchant and consumer receivables.
Determining appropriate current expected credit losses on our accounts receivable is an inherently uncertain process, and final losses may vary from our current estimates. We regularly review and update our allowance estimates as new facts become known, and events occur that may impact the settlement or recovery of losses. The allowances are maintained at a level we deem appropriate to adequately provide for current expected credit losses at the balance sheet date.
Accounting for Income Taxes
Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authority. Significant judgement is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We review our tax positions yearly and adjust the balances as new information becomes available.
Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings, and available tax planning strategies. These rely heavily on estimates that are based on a number of factors, including historical data, and business forecasts. To the extent deferred tax assets are not expected to be realized, we record a valuation allowance.
We recognize and measure uncertain tax positions in accordance with GAAP, pursuant to which we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities.
As with all businesses, the Company’s tax returns are subject to periodic examination. The Company’s federal returns for the past four years remain open to examination. The Company is subject to the Texas franchise tax and Tennessee franchise tax. Management is not aware of any tax positions that would have a significant impact on its financial position.
Revenue Recognition
Application of the accounting principles in GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Specifically, the determination of whether we are a principal to a transaction (gross revenue) or an agent (net revenue) can require considerable judgment. Further, we provide incentive payments to consumers and merchants. Evaluating whether these incentives are a payment to a customer, or consideration payable on behalf of a customer, requires judgment by management. Incentives determined to be made to a customer, or payable on behalf of a customer, are recorded as a reduction to gross revenue. Changes in judgments with respect to these assumptions and estimates could impact the amount of revenue recognized.
CARES Act
On March 11, 2021, President Biden signed the American Rescue Plan Act (“ARPA”). The ARPA includes several provisions, such as measures that expand the employee retention credit, previously enacted under the CARES Act, and extending the applicable period through December 31, 2024. Measures not related to income-based taxes within the CARES Act include allowing eligible employers subject to closure due to the COVID-19 pandemic to receive a 50% credit on qualified wages against their employment taxes each quarter, with any excess credits eligible for refunds.
As there is no authoritative guidance under GAAP for accounting for grants to for-profit business entities, the Company accounts for the grant by analogy to Accounting Standards Codification 450-30 – Gain Contingencies (“ASC 450-30”). During the three 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.
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 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; 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, |
|||||||||||||||
| 2024 |
2023 |
2024 |
2023 |
|||||||||||||
| Reconciliation from Operating income (Loss) to Adjusted EBITDA: |
||||||||||||||||
| Operating income (Loss) |
$ | (376,650 | ) | $ | (750,289 | ) | $ | (867,548 | ) | $ | (443,576 | ) | ||||
| Depreciation and amortization |
583,718 | 518,573 | 1,707,721 | 1,559,601 | ||||||||||||
| EBITDA |
207,068 | (231,716 | ) | 840,173 | 1,116,025 | |||||||||||
| Non-cash stock-based compensation expense, net |
569,772 | 594,815 | 1,529,106 | 1,677,258 | ||||||||||||
| Adjusted EBITDA |
$ | 776,840 | $ | 363,099 | $ | 2,369,279 | $ | 2,793,283 | ||||||||
| Calculation of Adjusted EBITDA margins: |
||||||||||||||||
| Revenues |
$ | 21,321,478 | $ | 20,982,761 | $ | 62,371,752 | $ | 63,935,603 | ||||||||
| Adjusted EBITDA |
$ | 776,840 | $ | 363,099 | $ | 2,369,279 | $ | 2,793,283 | ||||||||
| Adjusted EBITDA margins |
3.6 | % | 1.7 | % | 3.8 | % | 4.4 | % | ||||||||
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 |
$ | (7,622,320 | ) | $ | 41,506,374 | |||
| Operating cash flow adjustments: |
||||||||
| Prepaid card load obligations |
9,513,406 | (38,668,841 | ) | |||||
| Customer deposits |
40,911 | (24,376 | ) | |||||
| Merchant reserves |
417,494 | (427,044 | ) | |||||
| Operating lease right-of-use assets |
591,997 | (244,040 | ) | |||||
| Operating lease liabilities |
(573,820 | ) | 267,553 | |||||
| Total adjustments to net cash provided by operating activities |
$ | 9,989,988 | $ | (39,096,748 | ) | |||
| Adjusted operating cash flows provided |
$ | 2,367,668 | $ | 2,409,626 | ||||
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").
Use of Non-GAAP Financial Measures
EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. They are not measurements of our financial performance under GAAP and should not be considered as alternatives to revenue, net income (loss), or cash provided by (used in) operating activities, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows have limitations as analytical tools and you should not consider these non-GAAP measures in isolation or as a substitute for analysis of our operating results as reported under GAAP.
Results of Operations
Revenues
Our revenue is principally derived from providing integrated electronic payment services to merchants and businesses, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH, network and program management and processing of prepaid debit cards. In addition, through Output Solutions we provide electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions. We also earn revenue from interest and fees earned on certain assets underlying the associated customer balances. Customer balances on which the Company earns interest revenue include balances from our ACH and complementary services, prepaid card services, and Output Solutions business lines.
| Three Months Ended September 30, |
||||||||||||||||
| 2024 |
2023 |
$ Change |
% Change |
|||||||||||||
| ACH and complementary services |
$ | 4,302,510 | $ | 3,528,133 | $ | 774,377 | 22 | % | ||||||||
| Credit card |
7,197,362 | 7,169,066 | 28,296 | 0 | % | |||||||||||
| Prepaid card services |
4,017,153 | 4,685,212 | (668,059 | ) | (14 | )% | ||||||||||
| Output Solutions |
5,253,388 | 5,138,030 | 115,358 | 2 | % | |||||||||||
| Interest - ACH and complementary services |
201,545 | 212,691 | (11,146 | ) | (5 | )% | ||||||||||
| Interest - Prepaid card services |
309,131 | 239,413 | 69,718 | 29 | % | |||||||||||
| Interest - Output Solutions |
40,389 | 10,216 | 30,173 | 295 | % | |||||||||||
| Total Revenue |
$ | 21,321,478 | $ | 20,982,761 | $ | 338,717 | 2 | % | ||||||||
| Nine Months Ended September 30, |
||||||||||||||||
| 2024 |
2023 |
$ Change |
% Change |
|||||||||||||
| ACH and complementary services |
$ | 12,078,574 | $ | 10,948,012 | $ | 1,130,562 | 10 | % | ||||||||
| Credit card |
22,019,364 | 21,624,848 | 394,516 | 2 | % | |||||||||||
| Prepaid card services |
11,031,795 | 14,710,084 | (3,678,289 | ) | (25 | )% | ||||||||||
| Output Solutions |
15,478,180 | 15,945,447 | (467,267 | ) | (3 | )% | ||||||||||
| Interest - ACH and complementary services |
603,418 | 255,997 | 347,421 | 136 | % | |||||||||||
| Interest - Prepaid card services |
1,046,496 | 425,431 | 621,065 | 146 | % | |||||||||||
| Interest - Output Solutions |
113,925 | 25,784 | 88,141 | 342 | % | |||||||||||
| Total Revenue |
$ | 62,371,752 | $ | 63,935,603 | $ | (1,563,851 | ) | (2 | )% | |||||||
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. ACH and complementary services revenue growth was primarily attributable to an increase in ACH check dollar volume of 61%, an increase in transactions of 25%,and an increase in returned check transactions of 18%. Our ACH business also benefited from an increase in revenue from ancillary product offerings, such as RCC and PINless debit. Our Output Solutions lines of business were also up 2% 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. 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 prospectively.
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.
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 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.
Gross Profit
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.
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.
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.
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 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. The increase in depreciation and amortization expense was due to the amortization of intangible assets, specifically related to capitalized labor for our internal use software, increasing overall depreciation and amortization expense versus the same period a year ago, countered in part by the completed amortization of intangible assets.
Other Income
Other income, net was $0.1 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.
Income Taxes
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.
We may incur future operating losses. To maintain, grow and achieve profitability, we must, among other things, continue to incrementally grow and maintain our customer base, sell our ACH, credit card, prepaid product and Output Solutions offerings to existing and new customers, implement successful marketing strategies, maintain and upgrade our technology and transaction-processing systems, provide superior customer service, respond to competitive developments, attract, retain and motivate personnel, and respond to unforeseen industry developments among other factors.
Liquidity and Capital Resources
Our primary sources of liquidity are available cash and cash equivalents and cash flows provided by operations. As of 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. 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 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.
From time to time we have sold shares of our common stock in order to provide liquidity. For example, on November 19, 2021, Voyager Digital purchased 142,857 unregistered shares of common stock at a price of $7.00 per share in a private offering. The gross proceeds from the private offering were $1,000,000. On May 9, 2023, Voyager Digital returned 142,857 shares of common stock, valued at a price of $1.09 per share, in a non-cash transaction to satisfy payment obligations related to the wind down of their payment disbursement needs following their bankruptcy. This transaction was recognized as revenue for services rendered and as shares returned to treasury stock in the quarter ended June 30, 2023. We have also sold securities in public offerings from time to time. For example, in September 2020, we sold 4,705,883 shares of our common stock and received net proceeds of approximately $8 million. We cannot assure you that we will be able to sell shares of our equity securities on terms acceptable to us or at all in the future.
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 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. Operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits and merchant reserves are deducted from operating cash flow, as management believes that these metrics do not serve in providing a clear picture of the true operational cash used or provided in a given time period. For more information relating to this Non-GAAP financial measure, including a reconciliation from net cash provided by (used in) operating activities to Non-GAAP adjusted Operating Cash Flow (used), please see "Key Business Metrics - Non-GAAP Financial Measures" in this report. 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. 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. 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.
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 September 30, 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. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met.
Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 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 2022. Thereafter, Kauder and Pioletti formed Triple Pay Play, another payment processing company which directly competes with 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 Kauder, Pioletti and Triple Pay Play for breach of contract and misappropriation of trade secrets and unfair business competition.
On July 6, 2023, Kauder, Pioletti and Triple Pay Play filed a Motion to Dismiss for Lack of Jurisdiction. The motion was granted. Subsequently, in February 2024, Usio refiled its case in Tennessee, where Kauder, Pioletti, and Triple Pay Play reside.
On May 3, 2024, Kauder, Pioletti and Triple Pay Play filed a Motion to Dismiss Usio’s Complaint; this motion was heard August 5, 2024. The Judge did not make a ruling and is currently reviewing all materials filed in regards to this matter.
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 the State of Rhode Island Kent Superior Court. In early March 2024, Usio filed a Motion to Dismiss for improper venue and failure to state a claim.
On May 20, 2024, Usio’s Motion to Dismiss was heard in the State of Rhode Island Kent Superior Court. The Judge did not make a ruling and is currently reviewing all materials filed in regards to this matter.
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 contradict the express terms of the asset purchase agreement, and we intend to continue to vigorously defend this matter. As a result of this post-sale dispute, we subsequently 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 subsequently 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. We believe that KDHM, Minten and Dowe provided us with fraudulent and misleading financial 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 customers, 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.
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 Output Solutions 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. On July 12, 2024, we filed an appeal on the lower court's decision, which is pending review.
We have not recorded a contingency in relation to this case, as we consider the risk of lose remote as related to this lawsuit.
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 September 30, 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, $1,419,701 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 September 30, 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 |
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| July 1 - July 31, 2024 |
36,062 | $ | 1.59 | 36,062 | $ | 2,064,263 | ||||||||||
| August 1 - August 31, 2024 |
65,672 | $ | 1.53 | 65,672 | $ | 1,963,785 | ||||||||||
| September 1 - September 30, 2024 |
60,423 | $ | 1.43 | 60,423 | $ | 1,877,627 | ||||||||||
| Total |
162,157 | 162,157 | $ | 1,877,627 | ||||||||||||
Item 3. Defaults Upon Senior Securities.
None.
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
During the three months ended September 30, 2024 , director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement" (in each case, as defined in Item 408 of Regulation S-K).
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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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| 10.7 |
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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: November 6, 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: November 6, 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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