# Usio, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Usio, Inc.](/companies/usio.md) (CIK 1088034)
- Form: 10-Q
- Filed: 2023-11-08
- Accepted by EDGAR: Nov 8, 2023, 21:12 ET
- Period: 2023-09-30
- Accession: 0001437749-23-030950
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1088034/000143774923030950/usio20230828_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1088034/000143774923030950/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $20.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $63.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $16.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $49.1m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $4.2m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $14.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $5.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $15.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$1.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$1.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $393 | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $1.6k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $70.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $222.5k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$720.9k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$501.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.04 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.02 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.02 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 20,098,244 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 20,101,686 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $41.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $587.5k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $69.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $7.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $121.3m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $130.5m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $113.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $115.7m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $0 | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-09-30 | $28.9k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-09-30 | $14.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 40,353 characters.

### 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 "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 2022 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 2022 Annual Report, including the audited consolidated financial statements and the notes contained therein.

### Overview

Usio, Inc. (collectively with its subsidiaries, "we," "our," "us," the "Company" or "Usio") was founded under the name Billserv Com, Inc. in July 1998 and incorporated in the State of Nevada. On June 26, 2019, we changed our corporate name from Payment Data Systems, Inc. to Usio, Inc. Our principal offices are located at 3611 Paesanos Parkway, Suite 300, San Antonio, TX 78231. Our telephone number is (210) 249-4100.

We provide integrated payment processing services to merchants and businesses, including all types of Automated Clearing House, or ACH, processing, credit, prepaid card and debit card-based processing services and statement preparation, presentment and mailing services.

In addition, we offer customizable prepaid cards which businesses use for expense management, incentives, refunds, claims and disbursements, as well as unique forms of compensation such as per diem payments, government disbursements, and similar payments. We also offer prepaid cards to consumers for use as a tool to stay on budget, manage allowances and share money with family and friends. Our UsioCard platform supports Apple Pay®, Samsung Pay™ and Google Pay™. Our PIN-less debit product allows merchants to debit and credit accounts in real-time. In our over 25-year history, we have created a loyal customer base that relies on us for our convenient, secure, innovative and adaptive services and technology, and we have built long-standing and valuable relationships with premier banking institutions such as Fifth-Third Bank, Sunrise Bank, and Wells Fargo Bank.

Our strategy is to drive growth through a leveraged, one to many, distribution model in the software development marketplace. Following the completion of the Singular Payments acquisition, we launched our payment facilitation, PayFac, platform called "PayFac-in-a-Box" in late 2018 targeting partnership opportunities with app and software developers in bill-centric verticals, such as legal, healthcare, property management, utilities and insurance. The PayFac-in-a-Box platform 'integration layer' offers a simple integration experience for technology companies who are looking to monetize payments within an existing base of downstream clients. We believe that the added value of offering our integration partners access to credit card, debit card, ACH and prepaid card issuance capabilities through a single vendor partner relationship in face-to-face, mobile and virtual payment acceptance environments provides a true single channel commerce experience through an application programming interface, API.

With the acquisition of the assets of Information Management Solutions, LLC, or IMS, in December 2020, we began to offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions through our wholly-owned subsidiary, Usio Output Solutions, Inc., or Output Solutions. This product offering provides an outsourced solution for document design, print and electronic delivery to potential customers and entities looking to reduce postage costs and increase efficiencies.

### Summary of Results

We believe that our success will continue to depend in large part on our ability to (a) grow revenues, (b) manage our operating expenses, (c) add quality customers to our client base, (d) meet evolving customer requirements, (e) adapt to technological changes in an emerging market, and (f) assimilate current and future acquisitions of companies and customer portfolios. We will continue to invest in our sales force and technology platforms to drive revenue growth. In particular, we are focused on growing our ACH merchants, adding new software integrators, growing our electronic bill presentment, document composition, document decomposition, printing and mailing services business while providing incremental services to existing merchants. In addition to our near-term growth opportunities, we are focused on leveraging and optimizing the infrastructure of our business allowing expansion of our payment processing and mail and printing capabilities without significantly increasing our operating costs. Total company revenues continue to grow, and net new client implementations and onboards occur regularly due to our ability to address the needs of our market.

We believe that the number of credit card transactions processed, ACH transaction counts, prepaid card volumes and total dollar volumes are the most critical measures to gauge the state of our business. During the third quarter of 2023, the number of credit card transactions processed by us increased by 2% versus the third quarter of 2022. The volume of credit card dollars processed during the third quarter of 2023 increased by 5% compared to the same time period in 2022. 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 2023 decreased by 21% compared to the third quarter of 2022. Returned check transactions processed during the third quarter of 2023 decreased by 31% compared to the third quarter of 2022. Electronic check dollars processed during the third quarter of 2023 decreased by 11% compared to the third quarter of 2022. The decreases in eCheck transactions, returns, and electronic check dollar volumes processed were primarily attributable to a softer market for our customers, resulting in less ACH traffic.

Prepaid card load volumes processed during the third quarter of 2023 increased by 239% compared to the third quarter of 2022. Prepaid card transaction counts processed during the third quarter of 2023 increased by 23% compared to the third quarter of 2022. Prepaid card purchase volume during the third quarter of 2023 increased by 152% compared to the third quarter of 2022. This increase occurred primarily due to the continued traction with, and implementation of, guaranteed income and government assistance programs alongside expansion in the corporate expense and healthcare markets.

Total dollar volumes processed across all business lines in the third quarter of 2023 were $1.4 billion compared to $1.4 billion processed in the third quarter of 2022, flat over the prior year quarter.

### Material Trends and Uncertainties

On July 6, 2022, our largest cryptocurrency customer, Voyager Digital, filed for bankruptcy protection and the cryptocurrency landscape encountered significant distress during 2022. Due to this bankruptcy, we lost a significant customer, and have pulled out of the cryptocurrency space, resulting in a meaningful loss of revenue and downturn in our ACH and complementary services business segment, which contributed substantial gross profit to the Company in previous periods. Our lost revenue in the ACH and complementary services business was approximately $3 million in third and fourth quarter of 2022 and $2 million in the first and second quarter of 2023. We continue to closely monitor the cryptocurrency environment, and the unique risks associated with cryptocurrencies, including technological, legal, and regulatory risks along with the potentially significant revenue opportunities associated with re-entering the market and offering our services.

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, 2022, the Company had repurchased $1.3 million of stock as part of the buyback program, of which $1.1 million is subject to the IRA's 1% excise tax. Should the Company continue the repurchase of its securities on the open market, and the IRA remains in effect, we may be subject to this tax in 2023 and future years. As of September 30, 2023 the Company had repurchased $69,589 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.

As the Federal Reserve works to fight economic inflation, the federal funds rate has experienced rapid growth in the past twelve months. This has resulted in the Company receiving more favorable interest rates on it's current cash balances, amounting to $512,089 in interest income in the three months ending September 30, 2023, and $823,861 in the nine months ended September 30, 2023. Should the Federal Reserve begin lowering the federal funds rate in the future, this incremental source of income would decline. We continue to work closely with our bank partners, to ensure we effectively manage our cash balances, and monitor the Federal Reserves monetary policy decisions.

### 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, bad debt, 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. This loss has been included in our results of operations for the nine months ended September 30, 2023. We do not expect similar processing losses in the immediate future. Currently, our reserve for processing losses is $793,528 as of September 30, 2023, to be used if future losses are incurred. The allowances are maintained at a level we deem appropriate to adequately provide for current expected losses at the balance sheet date.

#### Reserve for Doubtful Accounts

We establish an allowance for accounts receivable, which represents our estimate of current expected allowances for doubtful accounts. 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 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 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 on 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 margin tax and Tennessee franchise tax. Management is not aware of any tax positions that would have a significant impact on its financial position.

#### Revenue Recognition

Application of the accounting principles in GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Specifically, the determination of whether we are a principal to a transaction (gross revenue) or an agent (net revenue) can require considerable judgment. Further, we provide incentive payments to consumers and merchants. Evaluating whether these incentives are a payment to a customer, or consideration payable on behalf of a customer, requires judgment by management. Incentives determined to be made to a customer, or payable on behalf of a customer, are recorded as a reduction to gross revenue. Changes in judgments with respect to these assumptions and estimates could impact the amount of revenue recognized.

### Key Business Metrics - Non-GAAP Financial Measures

This filing includes the following non-GAAP financial measures as defined in Regulation G of the Securities Exchange Act of 1934, as amended (the "Exchange Act"): EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows. The Company reports its financial results in compliance with GAAP, but believes that also discussing non-GAAP financial measures provides investors with financial measures the Company uses in the management of its business. The Company defines EBITDA as operating income (loss), before interest, taxes, depreciation and amortization of intangibles. The Company defines adjusted EBITDA as EBITDA, as defined above, plus non-cash stock option costs and certain non-recurring items, such as costs related to acquisitions. The Company defines adjusted EBITDA margins as adjusted EBITDA, as defined above, divided by total revenues. The Company defines adjusted operating cash flow as net cash provided (used) by operating activities, less changes in prepaid card load obligations, customer deposits, merchant reserves and net operating lease assets and obligations. Operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits and merchant reserves are deducted from operating cash flow, as management believes that these metrics do not serve in providing a clear picture of the true operational cash used or provided in a given time period. These measures may not be comparable to similarly titled measures reported by other companies. Management uses EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows as key indicators of the Company's operating performance and ability to fund acquisitions, capital expenditures and other investments and, in the absence of refinancing options, to repay debt obligations.

Management also believes that EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows are helpful to investors in evaluating the Company's operating performance because non-cash costs and other items that management believes are not indicative of its results of operations are excluded.

We reported an adjusted EBITDA loss of $0.1 million for the quarter ended September 30, 2023, as compared to an adjusted EBITDA loss of $0.5 million for the same period in the prior year. The increase in adjusted EBITDA in the 2023 quarter was attributable to strong revenue growth and increased profit margins versus the prior year period.

The following tables set forth reconciliations of Operating Income (Loss) to EBITDA; EBITDA to Adjusted EBITDA; and Revenues to Adjusted EBITDA margins for the three months ended September 30, 2023 and 2022.

| Reconciliation from Operating (Loss) to Adjusted EBITDA: | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Operating (Loss) | $(1,212,609) | $(1,701,555) | $(1,150,788) | $(5,123,616) |
| Depreciation and amortization | 518,573 | 640,599 | 1,559,601 | 2,163,468 |
| EBITDA | (694,036) | (1,060,956) | 408,813 | (2,960,148) |
| Non-cash stock-based compensation expense, net | 594,815 | 515,992 | 1,677,258 | 1,540,375 |
| Adjusted EBITDA | $(99,221) | $(544,964) | $2,086,071 | $(1,419,773) |
| Calculation of Adjusted EBITDA margins: |  |  |  |  |
| Revenues | $20,520,441 | $16,395,760 | $63,228,391 | $50,722,789 |
| Adjusted EBITDA | (99,221) | (544,964) | 2,086,071 | (1,419,773) |
| **Adjusted EBITDA margins** | (0.5)% | (3.3)% | 3.3% | (2.8)% |

The following table is a reconciliation of operating cash flow provided (used) to adjusted operating cash flow provided (used) for the nine months ended September 30, 2023 and 2022.

| Reconciliation from net cash provided (used) by operating activities to Non-GAAP Adjusted Operating Cash Flow (used): | September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: |
| Net cash provided (used) by operating activities | $41,506,374 | $(22,841,434) |
| Operating cash flow (used) adjustments: |  |  |
| Prepaid card load obligations | (38,668,841) | 21,272,482 |
| Customer deposits | (24,376) | (221,393) |
| Merchant reserves | (427,044) | 726,424 |
| Operating lease right-of-use assets | (244,040) | 130,699 |
| Operating lease liabilities | 267,553 | (138,361) |
| Total adjustments to net cash provided (used) by operating activities | $(39,096,748) | $21,769,851 |
| Adjusted operating cash flows provided (used) | $2,409,626 | $(1,071,583) |

We reported cash provided by adjusted operating cash flows of $2.4 million for the nine months ended September 30, 2023 (after adjusting for the impact of operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits, and merchant reserves), as compared to $1.1 million used in the nine months ended September 30, 2022. Operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits and merchant reserves are deducted from operating cash flow, as these metrics do not serve in providing a clear picture of the true operational cash used or provided in a given time period. These adjustments to net cash provided (used) by operating activities do not include any recurring expense items which are included in the calculation of operating income (loss), and only include changes in our assets and liabilities accounts on the balance sheet. The Company believes non-GAAP adjusted operating cash flow to be a more accurate indicator of cash contributions that can be used to sustain current and future business operations. The increase in adjusted operating cash flows in the 2023 quarter compared to the 2022 quarter was primarily attributable to a decrease the Company's net loss, due to strong growth in revenue with improved profit margins, alongside nominal increases in selling, general and administrative expense ("SG&A").

### Use of Non-GAAP Financial Measures

EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. They are not measurements of our financial performance under GAAP and should not be considered as alternatives to revenue, net income (loss), or cash provided (used) by operating activities, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows have limitations as analytical tools and you should not consider these non-GAAP measures in isolation or as a substitute for analysis of our operating results as reported under GAAP.

### Results of Operations

#### Revenues

Our revenues are principally derived from providing integrated electronic payment services to merchants and businesses, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH, network and program management and processing of prepaid debit cards. With the acquisition of the assets of IMS in December 2020, we began to offer additional output solution services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions.

|  | Three Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| ACH and complementary service revenue | $3,528,133 | $3,242,794 | $285,339 | 9% |
| Credit card revenue | 7,169,066 | 6,842,065 | 327,001 | 5% |
| Prepaid card services revenue | 4,685,212 | 1,576,871 | 3,108,341 | 197% |
| Output solutions revenue | 5,138,030 | 4,734,030 | 404,000 | 9% |
| Total Revenue | $20,520,441 | $16,395,760 | $4,124,681 | 25% |

|  | Nine Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| ACH and complementary service revenue | $10,948,012 | $10,985,722 | $(37,710) | (0)% |
| Credit card revenue | 21,624,848 | 20,495,984 | 1,128,864 | 6% |
| Prepaid card services revenue | 14,710,084 | 5,733,428 | 8,976,656 | 157% |
| Output solutions revenue | 15,945,447 | 13,507,655 | 2,437,792 | 18% |
| Total Revenue | $63,228,391 | $50,722,789 | $12,505,602 | 25% |

Consolidated revenue for the quarter ended September 30, 2023 increased by 25% to $20.5 million, as compared to $16.4 million for the quarter ended September 30, 2022 due to continued traction and growth in our prepaid card and Output Solutions lines of business, with modest growth in our ACH and credit card lines of business, as our Payfac strategy continues to be implemented, and ACH now compares more favorably to fiscal quarters following our exit from the crypto space in July of 2022, resulting in a return of positive quarterly growth metrics.

Consolidated revenue for the nine months ended September 30, 2022 increased by 25% to $63.2 million, as compared to $50.7 million for the nine months ended September 30, 2022 primarily as a result of strong growth in our prepaid card and Output Solutions lines of business as a result of new client implementation and the execution and expansion of existing customer contracts. Declines in ACH revenues were primarily the result of the Company's withdrawal from the crypto market in July of 2022.

#### 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 $3.1 million, or 23%, to $16.3 million for the quarter ended September 30, 2023, as compared to $13.3 million for the same period in the prior year, due to increased revenue growth driving similar increases to our processing, banking and transactional expenses.

Cost of services increased by $8.3 million, or 20%, to $49.1 million for the nine months ended September 30, 2023, as compared to $40.8 million for the same period in the prior year, due to increased revenue growth driving similar increases to our processing, banking and transactional expenses.

#### Gross Profit

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

Gross profit increased by 34% to $4.2 million for the quarter ended September 30, 2023, as compared to $3.1 million for the same period in the prior year. Similarly, gross margin percentage of revenue was 20.4% for the quarter ended September 30, 2023 as compared to 19.1% in the prior year period. The increase in gross profit and gross margin percentage in the quarter ended September 30, 2023, as compared to the same period during the prior year, was primarily attributable to strong revenue growth and improved gross profit metrics across all business lines, driven by more favorable pricing in the quarter.

Gross profit increased by 42% to $14.1 million for the nine months ended September 30, 2023, as compared to $9.9 million for the same period in the prior year. Similarly, gross margin percentage was 22.3% for the nine months ended September 30, 2023 as compared to 19.5% in the prior year period. The increase in gross profit and gross margin percentage in the nine months ended September 30, 2023, as compared to the same period during the prior year, was primarily attributable to strong revenue growth and improved gross profit metrics across all business lines, driven by more favorable pricing on the year.

#### Stock-based Compensation

Stock-based compensation expenses were $0.6 million for the quarter ended September 30, 2023 as compared to $0.5 million for the quarter ended September 30, 2022, an increase of 15.3% due to stock grants made to retain and attract employees.

Stock-based compensation expenses were $1.7 million for the nine months ended September 30, 2023 as compared to $1.5 million for the nine months ended September 30, 2022, a marginal increase of 8.9% due to stock grants made to retain and attract employees.

#### Other Selling, General and Administrative Expenses

Other selling, general and administrative expenses, or other SG&A, were $4.3 million for the quarter ended September 30, 2023 as compared to $3.7 million in the prior year quarter. The increase in other SG&A for the quarter ended September 30, 2023 reflects the occurrence of some one-time expenses related to professional services and marketing initiatives alongside increased travel to sales-related events during the quarter. Other SG&A expenses are expected to reduce in subsequent quarters.

Other selling, general and administrative expenses, or other SG&A, were $12.0 million for the nine months ended September 30, 2023 as compared to $11.3 million in the prior year nine-month period, a 6% increase. The increase in other SG&A for the nine months ended September 30, 2022 reflects the occurrence of some one-time expenses related to professional services and marketing initiatives alongside increased travel to sales-related events during the quarter ended September 30, 2023. Other SG&A expenses are expected to reduce in subsequent quarters.

#### Depreciation and Amortization

Depreciation and amortization expense consists of the reduction in value of our tangible and intangible assets over their useful life. These assets include property, plant, and equipment, along with intangible assets acquired through acquisition, or developed as internal use software.

Depreciation and amortization expense totaled $0.5 million and $0.6 million for the quarters ended September 30, 2023 and 2022, respectively. The decrease in depreciation and amortization expense was due to the completed amortization of intangible assets, reducing overall depreciation and amortization expense versus the same period a year ago.

Depreciation and amortization expense totaled $1.6 million and $2.2 million for the nine months ended September 30, 2023 and 2022, respectively. The decrease in depreciation and amortization expense was due to the completed amortization of intangible assets, reducing overall depreciation and amortization expense versus the same period a year ago.

#### Other Income (Expense)

Other income (expense), net was $561,696 for the quarter ended September 30, 2023 compared to $1,785 for the quarter ended September 30, 2022. Higher interest-bearing merchant reserves and interest rates drove the increased interest income.

Other income (expense), net was $872,273 for the nine months ended September 30, 2023 compared to $1,231 for the nine months ended September 30, 2022. Higher interest-bearing merchant reserves and interest rates drove the increased interest income.

#### Net Income (Loss)

We reported a net loss of $0.7 million for the quarter ended September 30, 2023, as compared to a net loss of $1.8 million for the same period in the prior year. The increase in net income was attributable to increases in revenue combined with increased profit margins.

We reported a net loss of $0.5 million for the nine months ended September 30, 2023, as compared to a net loss of $5.3 million for the same period in the prior year. The increase in net income was attributable to increases in revenue combined with increased profit margins.

We may incur future operating losses. To maintain, grow and achieve profitability, we must, among other things, continue to incrementally grow and maintain our customer base, sell our ACH, credit card, prepaid product offerings and Output Solutions offerings to existing and new customers, implement successful marketing strategies, maintain and upgrade our technology and transaction-processing systems, provide superior customer service, respond to competitive developments, attract, retain and motivate personnel, and respond to unforeseen industry developments among other factors.

### Liquidity and Capital Resources

Our primary sources of liquidity are available cash and cash equivalents and cash flows provided by operations. As of September 30, 2023, we had cash and cash equivalents of $7.4 million. For the nine months ended September 30, 2023, cash provided by operations was $41.5 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, bad debt, deferred federal income tax, non-cash stock-based compensation, the amortization of warrant costs, and net of the changes in our operating assets and liabilities. These assets and liabilities include our accounts receivable, prepaid expenses, operating lease right-of-use assets, inventory, other assets, accounts payable and accrued expenses, operating lease liabilities, prepaid card load obligations, merchant reserves, customer deposits, and deferred revenues.

We reported a net loss of $0.7 million for the quarter ended September 30, 2023. At September 30, 2023, we had an accumulated deficit of $71.4 million. Additionally, we had working capital of $7.5 million and $5.8 million at September 30, 2023 and December 31, 2022, respectively.

From time to time we have sold shares of our common stock in order to provide us liquidity. For example, on November 19, 2021, Voyager Digital purchased 142,857 unregistered shares of common stock at a price of $7.00 per share in a private offering. The gross proceeds to us from the private offering were $1,000,000. On May 9, 2023, Voyager Digital returned 142,857 shares of common stock, valued at a price of $1.09 per share, in a non-cash transaction to satisfy payment obligations related to the wind down of their payment disbursement needs following their bankruptcy. This transaction was recognized as revenue for services rendered and as shares returned to treasury stock in the quarter ended June 30, 2023. We have also sold securities in public offerings from time to time. For example, in September 2020, we sold 4,705,883 shares of our common stock and received net proceeds of approximately $8 million. We cannot assure you that we will be able to sell shares of our equity securities on terms acceptable to us or at all in the future.

### Cash Flows

Net cash provided by operating activities, including merchant reserve funds, prepaid card load assets, customer deposits and net operating lease assets for the nine months ended September 30, 2023 was $41.5 million, as compared to net cash used by operating activities of $22.8 million for the nine months ended September 30, 2022. The increase in cash provided by operating activities was due to the increase in prepaid card load obligations versus the same period last year. 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 as compared to cash used by operating activities of $1.1 million for the nine months ended September 30, 2023 and 2022, respectively. Operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits and merchant reserves are deducted from operating cash flow, as management believes that these metrics do not serve in providing a clear picture of the true operational cash used or provided in a given time period. The Company believes non-GAAP adjusted operating cash flow to be a more accurate indicator of cash contributions that can be used to sustain current and future business operations. For more information relating to this Non-GAAP financial measure, including a reconciliation from net cash provided (used) by operating activities to Non-GAAP adjusted Operating Cash Flow (used), please see "Key Business Metrics - Non-GAAP Financial Measures" in this Report. This increase in cash provided by operating activities was primarily attributable to a decrease in the Company's net loss, due to strong growth in revenue with improved profit margins, alongside nominal increases in SG&A. 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 by investing activities was $587,451 as compared to cash used by investing activities of $642,764 for the nine months ended September 30, 2023 and 2022, respectively. The primary drivers of our investing activities were capital expenditures associated with capitalized software development costs and other capital investments associated with growing our business lines and associated employee counts. The decrease in cash used by investing activities was primarily attributable to the reduced amount of fixed asset purchases relative to the same period a year ago.

Net cash used by financing activities for the nine months ended September 30, 2023 was $111,494 and net cash used by financing activities for the nine months ended September 30, 2022 was $935,513. The decrease in cash used by financing activities was due to the Company's stock buyback program and the increased quantity of treasury stock purchased in 2022.

### 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.

## Market risk

As filed, 253 characters.

As a smaller reporting company as defined by Rule 12b-2 of 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.

## Controls and procedures

As filed, 1,874 characters.

### 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, 2023 were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Commission rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive and Chief Financial Officers, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our evaluation of disclosure controls and procedures included an evaluation of certain components of our internal control over financial reporting. Management’s assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance, as a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met.

### Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Nov 8, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-030950. Last ingested by Listed: Oct 24, 2026, 15:02 ET. No prices; not investment advice.