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    USIO   US9173131080

USIO, INC.

(USIO)
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USIO : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (form 10-Q)

11/12/2020 | 04:03pm EDT

FORWARD-LOOKING STATEMENTS DISCLAIMER




This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. If used in this report, the words "anticipate,"
"believe," "estimate," "intend," and other words or phrases of similar import
are intended to identify forward-looking statements. You should not place undue
reliance on these forward-looking statements. Our actual results could differ
materially from those anticipated in the forward-looking statements for many
reasons, including the risks described in our annual report on Form 10-K and
other reports we file with the Securities and Exchange Commission. 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 our annual report on Form 10-K for the fiscal year
ended December 31, 2019, filed on March 30, 2020, including the audited
consolidated financial statements and the notes contained therein.



Name Change


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



Overview



We provide integrated electronic payment processing services to merchants and
businesses, including all types of Automated Clearing House, or ACH processing,
credit card, PINless debit, prepaid card and debit card-based processing
services. Through Akimbo, under the domain name www.akimbocard.com, we offer
MasterCard prepaid cards to consumers for use as a tool to stay on budget, to
manage allowances, and to share money with family and friends. We have further
developed our Akimbo platform to include Akimbo Now for businesses, Akimbo Gift
for consumers and support for Apple Pay®, Android Pay™ and Samsung Pay™.



During the third quarter of 2020, the volume of credit card transactions
processed increased by 81% versus the third quarter of 2019.  The amount of
credit card dollars processed during the third quarter of 2020 increased by
15% compared to the same time period in 2019. Both credit card transactions
processed and dollars processed were the highest in our history.  Both metrics
were achieved despite widespread third quarter industry weakness related to
COVID-19 impacts.  The continued growth in credit card metrics was primarily
attributable to our card processing growth initiatives with the Integrated
Payments (Payment Facilitation) segment due to increased penetration of multiple
industries including healthcare and legal.  In April, we experienced a decline
of nearly $10 million of credit card processing volume in the Singular portfolio
primarily attributable to mandated closures to dental and veterinary practices
in the portfolio. Revenues of these merchants increased in May and June 2020 and
throughout the third quarter returning to pre-COVID-19 revenue levels as these
merchants have reopened.



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ACH (eCheck) transaction volumes during the third quarter of 2020 decreased by
18% compared to the third quarter of 2019. Returned check transactions processed
during the third quarter of 2020 decreased by 39% compared to the third quarter
of 2019.  The decreases in eCheck transactions and returned check transactions
were primarily attributable to lower volumes experienced by our non-bank
consumer lending merchants as a result of COVID-19 impacts. While we experienced
sequential growth in both transactions and returned checks processed in the
third quarter as compared to the second quarter, we expect COVID-19 to continue
to hamper growth in our ACH business in the fourth quarter due to the increases
in unemployment and the effects on the consumer credit ratings. We have a high
degree of confidence the ACH business will recover once unemployment decreases
and as consumer government assistance programs are curtailed.



Prepaid card load volume during the third quarter of 2020 increased by
329% compared to the third quarter of 2019. Prepaid card transaction volumes
during the third quarter of 2020 increased by 170% compared to the third quarter
of 2019. These increases occurred primarily due to the implementation and sales
of many newly created prepaid government assistance programs including
organizations such as the Mayors Fund to Advance New York City, Greater
Washington Community Foundation (Washington DC Program), United Way of Central
and Northeastern Connecticut, Mayor's Fund for Los Angeles, New York Immigration
Coalition, One Fair Wage, Inc. and Dorcas International of RI.



Total dollars processed for the third quarter of 2020 were $852 million compared to $915 million in the third quarter of 2019.



Critical Accounting Policies



Our management's discussion and analysis of our financial condition and results
of operations is based upon our interim condensed consolidated financial
statements, which have been prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to the reported amounts of revenues and expenses, bad debt, investments,
intangible assets, income taxes, and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could differ
from these estimates under different assumptions or conditions. We consider the
accounting policies described in Note 1 to the Notes to the Interim Condensed
Consolidated Financial Statements to be critical because the nature of the
estimates or assumptions is material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility
of such matters to change or because the impact of the estimates and assumptions
on financial condition or operating performance is material.



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




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Results of Operations



Revenues


Our revenues are principally derived from providing integrated electronic payment services to merchants and businesses, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH, network and the program management and processing of prepaid debit cards.



                                                        Three Months Ended September 30,
                                              2020            2019          $ Change        % Change

ACH and complementary service revenue $ 2,063,458 $ 2,313,742 $ (250,284 ) (10.8 )% Credit card revenue

                          5,076,591       4,467,189         609,402           13.6 %
Prepaid card services revenue                  997,028         306,801         690,227          225.0 %
Total Revenue                              $ 8,137,077     $ 7,087,732     $ 1,049,345           14.8 %




                                                         Nine Months Ended September 30,
                                               2020             2019          $ Change        % Change

ACH and complementary service revenue $ 6,080,449 $ 7,029,953

  $  (949,504 )        (13.5 )%
Credit card revenue                          14,647,448       12,795,058       1,852,390           14.5 %
Prepaid card services revenue                 2,141,412        1,008,132       1,133,280          112.4 %
Total Revenue                              $ 22,869,309     $ 20,833,143     $ 2,036,166            9.8 %




Revenues for the quarter ended September 30, 2020 increased by 14.8% to
$8.1 million, as compared to $7.1 million for the quarter ended September 30,
2019. The revenue increase resulted primarily from revenue growth in our prepaid
and credit card portfolios offset by declines in our consumer lending portfolios
within our ACH business. Revenues for the nine months ended September 30,
2020 increased 9.8% to $22.9 million, as compared to $20.8 million for the
nine months ended September 30, 2019. The revenue increase resulted from growth
in our credit card and prepaid growth initiative programs offset by declines in
our consumer lending portfolios within our ACH business.



Cost of Services



Cost of services includes the cost of personnel dedicated to the creation and
maintenance of connections to third-party payment processors and the fees paid
to such third-party providers for electronic payment processing services.
Through our contractual relationships with our payment processors and sponsoring
banks, we process ACH and debit, credit or prepaid card transactions on behalf
of our customers and their consumers. 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 16% to $6.4 million for the quarter ended
September 30, 2020, as compared to $5.5 million for the same period in the prior
year. Cost of services increased by 9% to $17.9 million for the
nine months ended September 30, 2020, as compared to $16.4 million for the same
period in the prior year. The increases in the quarter and nine-month period
ended September 30, 2020, as compared to the same period in the prior year, were
primarily due to the increased credit card and prepaid transaction costs
associated with higher revenues.



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  Table of Contents



Gross Profit



Gross profit is the net profit existing after the cost of services. Gross
profits increased by 11% to $1.7 million for the quarter ended September 30,
2020, as compared to $1.5 million for the same period in the prior year. The
increase in gross profit for the quarter ended September 30, 2020, as compared
to the same period in the prior year, was primarily a result of higher profits
in our prepaid and credit card businesses offset by lower ACH profits from our
consumer lending merchants. Gross profits for the nine months ended September
30, 2020 increased by 11% to $4.9 million as compared to $4.4 million for the
same period in the prior year primarily as a result of strong revenue and gross
profit growth in our prepaid and credit card portfolios offset by lower profits
from our consumer lending merchants.



Stock-based Compensation



Stock-based compensation expenses decreased to $267,223 as a result of one-time
cancellations of previously recorded stock compensation expenses for the
quarter ended September 30, 2020 as compared to $315,259 for the quarter ended
September 30, 2019. Stock-based compensation expenses for the nine months
ended September 30, 2020 and 2019, were $903,326 and $954,770 respectively.



Other Selling, General and Administrative Expenses




Other selling, general and administrative expenses (SG&A) were flat at $2.0
million for the quarters ended September 30, 2020.  Other SG&A expenses for the
nine months ended September 30, 2020 increased by 6% to $6.0 million compared to
$5.6 for the nine months ended September 30, 2019.  The other SG&A increase
reflects our continued investment in our prepaid and PayFac growth initiatives.



Depreciation and Amortization

Depreciation and amortization totaled $0.4 million and $0.5 million for the quarters ended September 30, 2020 and September 30, 2019, respectively, and $1.2 million and $1.5 for the nine months ended September 30, 2020 and September 30, 2019, respectively.



Other Income (Expense)



Other income was $10,343 for the quarter ended September 30, 2020 compared to
other income of $21,389 for the quarter ended September 30, 2019.  For the
nine months ended September 30, 2020 and September 30, 2019, other income
was $23,712 and $66,660, respectively.  Lower interest-bearing merchant reserves
and lower interest rates drove the lower other income.



Net Loss



We reported a net loss of $0.9 million for the quarter ended September 30, 2020,
as compared to a net loss of $1.2 million for the same period in the prior
year. We reported a net loss of $3.1 million for the nine months ended September
30, 2020, as compared to a net loss of $3.6 million for the same period in the
prior year.



We may incur future operating losses. To regain and sustain profitability, we
must, among other things, incrementally grow and maintain our customer base,
sell our ACH, credit card and prepaid product 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.



We believe that our success will depend in large part on our ability to (a) grow
revenues, (b) manage our operating expenses, (c) add quality customers to our
client base, (d) meet evolving customer requirements, (e) adapt to technological
changes in an emerging market, and (f) assimilate current and future
acquisitions of companies and customer portfolios. We 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 and
providing incremental services to existing merchants. In addition to our
near-term growth opportunities, we are focused on leveraging and optimizing the
infrastructure of the organization allowing expansion of our payment processing
capabilities without significantly increasing our operating costs.



Liquidity and Capital Resources

At September 30, 2020, we had $11.4 million of cash and cash equivalents, as compared to $2.1 million of cash and cash equivalents at December 31, 2019.




We received funding under the Paycheck Protection Program, or PPP, as part of
the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act,
administered by the U.S. Small Business Administration. Under the terms of the
Note, we received total proceeds of $813,500 bearing interest at a rate of 1%
per annum with a maturity date of April 15, 2022. In addition, principal and
interest payments will be deferred for the first ten months of the loan. The
loan is subject to the terms and conditions applicable to loans administered by
the U.S. Small Business Administration under the CARES Act. We used the proceeds
for payroll costs and other permitted expenses. Under the terms of the PPP Loan,
the principal may be forgiven if the loan proceeds are used for qualifying
expenses as described in the CARES act, such as payroll costs, benefits, rent
and utilities. We filed the loan forgiveness documentation with the Small
Business Administration.  How much of the loan, if any, may be subject to
forgiveness will be determined by the Small Business Administration.



On July 1, 2020, Topline Capital Partners, LP purchased 1,796,407 unregistered shares of common stock at an offering price of $1.67 per share in a private offering. The gross proceeds to us from the private offering were $3.0 million.




On September 25, 2020, we entered into a placement agency agreement with
Ladenburg Thalmann & Company Inc. for the issuance and sale of an aggregate of
4,705,883 shares of common stock at an offering price of $1.70 per share in a
public offering. We agreed to pay Ladenburg a cash fee of equal to $0.12325 per
share of common stock sold in the offering as well as legal fees and expenses of
up to $100,000. The net proceeds to the Company from the public offering were
$7.4 million, after deducting the offering expenses and fees payable by the
Company.



Cash Flows



We reported a net loss of $0.9 million for the quarter ended September 30, 2020
and a net loss of $3.1 million for the nine months ended September 30, 2020. At
September 30, 2020, we had an accumulated deficit of $65.2 million.
Additionally, we had working capital of $10.4 million and $1.3 million at
September 30, 2020 and December 31, 2019, respectively.



Net cash provided by operating activities, including merchant reserve funds,
prepaid card load assets and net lease assets was $4.6 million and net cash used
by operating activities of $3.0 million for the nine months ended September 30,
2020 and September 30, 2019, respectively. Excluding merchant reserves, prepaid
card load assets and lease right-of-use assets and liabilities, our cash used by
operating activities was $1.0 million and $0.9 million for the nine months ended
September 30, 2020 and September 30, 2019, respectively. We continue to invest
resources and infrastructure in our prepaid and PayFac integrated payments
growth initiatives to achieve scale in these business lines.



Net cash used by investing activities was $582,347 and $536,405 for the nine
months ended September 30, 2020 and September 30, 2019, respectively. The
primary drivers of the capital expenditures were development costs associated
with internal use software capitalization.



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Table of Contents




Net cash provided from financing activities for the nine months ended September
30, 2020 and September 30, 2019 was $10.9 million and $1.7 million,
respectively.  The 2020 cash provided from financing activities was as a result
of the $813,500 proceeds from the PPP loan in April, 2020 plus the July proceeds
of $3.0 million from Topline Capital Partners, LP and net proceeds of $7.4
million from a public offering in September, 2020. The 2019 net cash provided by
financing activities was a result of the February 2019 public offering which
raised $1.8 million in net proceeds.



Material Trends and Uncertainties




In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the
World Health Organization, and the outbreak has spread to all parts of the
United States, including in the markets in which we operate. The ongoing
COVID-19 outbreaks have had a notable impact on general economic conditions,
including but not limited to the temporary closures of many businesses, "shelter
in place" and other governmental regulations, reduced consumer spending due to
both job losses and other effects attributable to the COVID-19.  There remain
many uncertainties as a result of the pandemic.



As a result of the spread of COVID-19, economic uncertainties could continue to
impact our operations. Any potential incremental financial impact is unknown at
this time. While we have seen a limited impact to our operations and results in
the third quarter of 2020, we cannot determine the long-term impact on our
business going forward. We experienced a decline in our ACH consumer lending
businesses during the second and third quarter. We also experienced an April
decline our Singular credit card portfolio primarily attributable to mandated
closures to dental practices in the portfolio. Revenues from these merchants
increased in starting in May and June 2020 and have returned to pre-COVID-19
levels as these merchants have reopened.



The COVID-19 pandemic has caused various business disruptions through mandated
and voluntary closings. While the closures were temporary, there is considerable
uncertainty whether new closures will occur in hot spot areas. We are
implementing actions as prescribed by government health officials. All of our
offices are currently open and we continue to monitor the impact of the COVID-19
outbreak closely.



We have limited exposure to retail, or face-to-face processing and our
non-face-to-face processing can continue should we have to operate remotely.  We
saw an increase in remote payment processing and our credit card processing.  We
expect this trend to continue in the remainder of the year.



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.

© Edgar Online, source Glimpses

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