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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020.
☐ TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ________
Commission File No. 000-30152
USIO, INC.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
98-0190072
(I.R.S. Employer Identification No.)
3611 Paesanos Parkway, Suite 300, San Antonio, TX
(Address of principal executive offices)
78231
(Zip Code)
Registrant’s telephone number, including area code (210) 249-4100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, par value $0.001 per share
Trading symbol(s)
USIO
Name on each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐Yes ☒] No
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. ☒ Yes ☐ No
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).
☒Yes ☐ No
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 ☐
Non-accelerated filer ☒
Accelerated filer ☐
Smaller reporting company ☒
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 has filed a report and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its
audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes [X] No
The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2020, was $20,800,000 based on 10,661,703 shares of the
registrant’s common stock held by non-affiliates on June 30, 2020 at the closing price of $1.95 per share as reported on the Nasdaq Capital Market. For
purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates.
As of March 18, 2021, the number of outstanding shares of the registrant's common stock was 25,030,668.
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DOCUMENTS INCORPORATED BY REFERENCE: Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting Compliance), 11, 12,
13 and 14 of Part III will incorporate by reference information from the registrant’s proxy statement to be filed with the Securities and Exchange Commission
in connection with the solicitation of proxies for the registrant’s 2021 Annual Meeting of Stockholders.
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Usio, Inc.
FORM 10-K
For the Year Ended December 31, 2020
INDEX
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Business.
Risk Factors.
Properties.
Legal Proceedings.
Mine Safety Disclosures (Not applicable).
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Selected Financial Data.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures about Market Risk.
Financial Statements and Supplementary Data.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
PART III
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
Principal Accounting Fees and Services.
PART IV
Exhibits, Financial Statement Schedules.
Form 10-K Summary.
Signatures.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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This Annual Report on Form 10-K and the documents incorporated herein by reference contain certain forward-looking statements as defined under the
federal securities laws. Specifically, all statements other than statements of historical facts included in this Annual Report on Form 10-K regarding our
financial performance, business strategy and plans and objectives of management for future operations and any other future events are forward-looking
statements and based on our beliefs and assumptions. If used in this report, the words "anticipate," "believe," "estimate," "expect," "intend," and words or
phrases of similar import are intended to identify forward-looking statements. Such statements reflect our current view with respect to future events and are
subject to certain risks, uncertainties, and assumptions, including, but without limitation, those risks and uncertainties contained in the Risk Factors section
of this Annual Report on Form 10-K and our other filings made with the SEC. Although we believe that our expectations are reasonable, we can give no
assurance that such expectations will prove to be correct. Based upon changing conditions, any one or more of these events described herein as anticipated,
believed, estimated, expected or intended may not occur. All prior and subsequent written and oral forward-looking statements attributable to our Company
or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement. We do not intend to update any of the forward-looking
statements after the date of this Annual Report to conform these statements to actual results or to changes in our expectations, except as required by law.
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ITEM 1. BUSINESS.
General
PART I
Usio, Inc. 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. Our website is located at www.usio.com. Information contained on our website does not constitute part of this report.
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. We offer customizable prepaid cards companies use for expense management, incentives,
refunds, claims and disbursements, unique forms of compensation like per diems, and more. 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. Usio Card 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 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, and Wells Fargo Bank.
Through our Akimbo Now technology we offer a comprehensive money disbursement platform that allows businesses to pay their contractors, employees, or
other recipients by choosing between a prepaid debit Mastercard, real-time deposit to a checking account, traditional ACH, direct deposit or paper check.
With the acquisition of the assets of Information Management Solutions, LLC in December 2020, we now 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 the acquisition, we acquired new customers and their sales force.
Usio, Inc. We provide integrated electronic payment processing services to merchants and businesses, including credit and debit card-based processing
services and transaction processing 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. E-checks are processed using the ACH network. We are one of seven
companies that hold the prestigious NACHA certification for Third-Party Senders, and were the second company to receive the certification.
Our card-based processing services enable merchants to process both traditional card-present, 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, fax or telephone.
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. 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.
Our electronic payment processing may take place 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 to 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.
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FiCentive, Inc. We provide prepaid card issuance services for corporate clients and consumers through our wholly-owned subsidiary, FiCentive, Inc. We
develop and manage a variety of Mastercard-branded prepaid card program types, including consumer reloadable, consumer gift, incentive, promotional,
general disbursement and corporate expense cards.
Usio Card: Through our December 2014 acquisition of the assets of Akimbo Financial, Inc., we also added a highly talented technical staff of industry
subject matter experts and an innovative cardholder service platform including cardholder web and mobile applications. 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.
Output Solutions: On December 15, 2020, we acquired the assets of Information Management Solutions, LLC ("IMS") in 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, we acquired new customers and their sales force. We bought an
existing portfolio of customers with a significant revenue stream. This acquisition increased our ability to grow new revenue streams and allows us to reenter
the electronic bill presentment and payment revenue stream. The success of the IMS will continue to depend on our ability to realize the anticipated growth
opportunities. We cannot assure you that we will be able to realize the anticipated growth opportunities.
Our websites
www.akimbocard.com, and www.usiooutput.com. Information contained on our websites does not constitute part of this annual report.
are www.usio.com, www.singularpayments.com, www.payfacinabox.com, www.singularbillpay.com, www.ficentive.com,
Industry Background
In the United States, the use of non-paper-based forms of payment, such as credit and debit cards, has risen steadily over the past several years. According to
the 2019 Federal Reserve Payments Study (issued every three years), the estimated number of non-cash payments continue to increase at accelerated rates.
- The number of core non-cash payments, comprising debit card, credit card, ACH, and check payments, reached 174.2 billion in 2018, an increase
of 30.6 billion from 2015. The value of these payments totaled $97.04 trillion in 2018, an increase of $10.25 trillion from 2015.
- ACH payments exhibited accelerating growth, increasing 6.0% by number and 7.2% by value from 2015 to 2018.
- In 2018, for the first time, the number of ACH payments (16.6 billion) exceeded the number of check payments (14.5 billion). In 2000, in contrast, the
number of ACH payments was 2.1 billion compared to 42.6 billion check payments.
- Card payments continued to show robust growth from 2015 to 2018, collectively increasing 8.9% per year by number and 8.6% by value up from the
6.8% yearly rate of increase in the 2012 to 2015.
- Since 2015, total card payments - the sum of credit card, non-prepaid debit card and prepaid debit card payments - increased 29.7 billion to reach
131.2 billion payments by number and increased $1.56 trillion to reach $7.08 trillion by value in 2018.
- Within card payments, there was a surge in prepaid and non-prepaid debit card payments by number relative to credit card payments from 2015 to
2018, a change from previous reporting periods. Prepaid debit card payments had the highest growth rate, by number, at 10.5%, compared with 8.7%
for non-prepaid debit card payments and 9.3% for credit card payments from 2015 to 2018.
- Remote payments continued to grow as a share of total general-purpose card payments. The number of remote payments increased 20.5% from 2015
to 2018, compared with in-person payments, which grew 5.8%. Over the same period, the value of remote payments increased 14.4%, compared to in-
person payments, which increased 4.0%.
- Chip authenticated payments accounted for more than half of the value of in-person general-purpose card payments in 2018, compared with 2.0% in
2015.
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Figure 1 (below) illustrates the overall growth in key non-cash metrics since the Federal Reserve Payments Study was first
reported for the year 2000 and reflects the acceleration of growth in recent years.
Note: All estimates are on a triennial basis. Card payments are also estimated for 2016 and 2017. Card payments include general-purpose and private-label
versions. Prepaid debit card payments include general-purpose, private-label, and electronic benefits transfer (EBT) versions. Estimates for prepaid debit card
payments are not displayed for 2000 and 2003 because only EBT was collected.
Source: 2019 Federal Reserve Payments Study
The growth of electronic commerce has made the acceptance of card-based and other electronic forms of payment a necessity for businesses, both large and
small, in order to remain competitive. We believe that the electronic payment processing industry will continue to benefit from the following trends:
Favorable Demographics
As consumers age, we expect that they will continue to use the payment technology to which they have grown accustomed. More consumers are beginning to
use card-based and other electronic payment methods for purchases at an earlier age. These consumers have witnessed the wide adoption of card products,
technology innovations such as mobile phone payment applications, widespread adoption of the Internet and a significant increase in card not present
transactions and on-line shopping during COVID-19 work from home mandates. As younger consumers comprise an increasing percentage of the population
and as they enter the work force, we expect purchases using electronic payment methods will become a larger percentage of total consumer spending. We
believe the increasing usage of smart phones as an instrument of payment will also create further opportunities for us in the future. We also believe that
contact-less payments like Apple Pay®, Samsung Pay™ and Google Pay™ will increase payment processing opportunities for us.
Increased Electronic Payment Acceptance by Small Businesses
Small businesses are a vital component of the U.S. economy and are expected to contribute to the increased use of electronic payment methods. The lower
costs associated with electronic payment methods are making these services more affordable to a larger segment of the small business market. In addition, we
believe these businesses are experiencing increased pressure to accept electronic payment methods in order to remain competitive and to meet consumer
expectations. As a result, many of these small businesses are seeking to provide customers with the ability to pay for merchandise and services using
electronic payment methods, including those in industries that have historically accepted cash and checks as the only forms of payment for their merchandise
and services.
Growth in Online Transactions
Market researchers expect continued growth in card-not-present transactions due to the steady growth of the Internet and electronic commerce. According to
the U.S. Census Bureau, estimated retail e-commerce sales for 2019 were estimated at $601.7 billion, an increase of approximately 14.9% from 2018.
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Products and Services
All of our service offerings are supported by our systems’ infrastructure that integrates certain proprietary components with processing systems outsourced to
third-party providers to offer our customers a flexible and secure payment process. We utilize secure sockets layer architecture so that connections and
information are secure from outside inspection. We also use 128-bit encryption for all electronic transactions that we process to make information unreadable
as it passes over the Internet. Our systems’ infrastructure allows us to work with our customers to build a customized electronic payment service offering
tailored to the customer's specific needs. We have designed and implemented our integrated payment systems to function as gateways between our customers
and our third-party processing providers. Our systems provide for interfaces with our customers through which payment data is captured electronically and
transferred through the connections we have with our processing providers. Our systems also provide a data warehousing capability so that all payment data
related to a customer can be stored in one place to facilitate efficient data retrieval and analysis. All confidential data stored within and outside the data
warehouse is fully encrypted. We outsource our ACH transaction processing and card-based transaction processing to third-party providers. Our card-based
processing system is capable of connecting with all of the major card-based processors in the United States.
Payment Processing. The components of our service offerings include all forms of ACH transaction processing, such as Represented Check, which is a
consumer non-sufficient funds check that is presented for payment electronically rather than through the paper check collection system, and Accounts
Receivable Check Conversion, which is a consumer paper check payment that is converted into an e-check. Our customers can initiate ACH transactions
directly using an online terminal accessible through a website or we can initiate ACH transactions on their behalf. Our service offering also includes
merchant account services for the processing of card-based transactions through the VISA, Mastercard, American Express, Discover, and JCB networks,
including online terminal services accessed through a website or retail services accessed via a physical terminal. We offer a proprietary web-based customer
service application that combines both ACH and card processing capabilities that allows companies to process one-time and recurring payments via e-checks
or credit cards at the request of their consumers. In addition, we offer an Interactive Voice Response telephone system to companies that accept payments
directly from consumers over the telephone using e-checks or credit cards.
Significant innovations to our payment systems have included launching a brand new client facing web application that allows customers to more easily
manage their payments; an Apple® iOS Software Development Kit, or SDK, that enables developers to easily integrate payment acceptance into their
applications; and a new PINless debit service that allows merchants to debit and credit accounts in real time.
In 2019, our platform expanded to include remotely created check, or RCC, processing. An RCC is a digital image of a paper item originated with proper
authorization from consumer checking account information held on file, but without the consumer's original signature. Our RCC gateway allows our
merchants to automate billing, payment acceptance and customer management. In addition, it provides visibility into the status of payments and accelerates
cash flow. Merchants and lenders with high return rates can utilize remotely created checks as an ACH alternative. It reduces the chances of fraud by
validating account information upfront and is compliant with the Uniform Commercial Code, Regulation CC, Regulation J and the Check 21 Act.
In 2020 (and into 2021), we are transitioning from a traditional data center to a cloud provider. The transition provides greater speed and capacity, allowing
the Company to process transactions faster per second. We developed process improvements with a focus on new tools designed to grow sales while
improving our internal reporting capabilities. On the client facing front, we developed enhancements to our hosted payment pages, enrollment and
onboarding tools for resellers and monthly reporting and new transaction reporting. For ACH processing, we developed our direct connection terminal into
the FED. Through this direct connection terminal, we control the entire data flow and allows a later window for data transmission.
Largely due to our NACHA certification, we obtained a sponsoring bank and implemented a direct connection into the Fed ACH system and the sole use of a
bank routing number. This connection allows us to lower overall processing costs, offer later cut off times, speed up the boarding process for merchants, and
increase oversight into our ACH processing traffic.
We will continue to enhance our service offerings to meet customer demands as they arise.
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Prepaid and Incentive Card Issuance. We also provide a variety of prepaid and incentive card issuance services and operate a prepaid core processing
platform. We are a program manager and have card issuance agreements with Sunrise Banks, N.A. and Metropolitan Commercial Bank. We develop and
manage a variety of prepaid card program types, including consumer reloadable, consumer gift, incentive, promotional, general disbursement and corporate
expense cards, primarily on behalf of our corporate clients and government entities. We exclusively issue Mastercard branded cards currently, but our
platform also supports the issuance of Visa and Discover branded card programs. In addition, we design, develop and operate feature-rich cardholder web and
mobile applications. These web and mobile applications can be branded and customized by corporate clients. In addition, our clients can also brand or white-
label physical cards and card package materials, as well as digital cards stored in popular mobile wallets. Clients can order and load virtual and physical cards
in bulk using a batch processing system available 24 hours a day, 7 days a week through the web or secure file transfer protocol, FTP. There are also more
than 75 API endpoints available for direct client integrations. In addition to providing card issuance and money disbursement solutions to corporate clients,
we issue general purpose consumer reloadable cards direct to consumers under the Akimbo and Stream card brands. These consumer card programs work as
bank account alternatives or companion cards used for household budgets and allowances. Our card issuance platform is integrated to Mastercard’s Digital
Enablement Services, or MDES, enabling full control of card provisioning to all popular mobile wallets, including Apple Pay®, Google Pay™ and Samsung
Pay™. This integration has allowed our platform to offer several unique features to both cardholders and our corporate clients, including in-app provisioning,
customized mobile wallet branding, and the real-time delivery of and access to the digital card prior to the receipt of the corresponding physical card. In
general, our proprietary, full-stack card issuance and processing platform provides us with several competitive advantages as compared to other program
managers and prepaid card providers. Our platform offers several features unavailable with nearly any other prepaid card processors. In addition, the
platform and the current size of our organization enables us to prototype and deploy custom solutions much quicker than the competition. This is highlighted
by the fact that several large / Fortune 500 tech and payments companies currently use our platform for research and developments purposes.
Output Solutions. With the acquisition of the assets of Information Management Solutions, LLC in December 2020, we now 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 the acquisition, we acquired new customers and their
sales force.
Relationships with Sponsors and Processors
We have agreements with several processors that provide to us, on a non-exclusive basis, transaction processing and transmittal, transaction authorization and
data capture, and access to various reporting tools. In order to provide payment processing services for ACH transactions, we must maintain a relationship
with an Originating Depository Financial Institution, or ODFI, in the ACH network because we are not a bank and therefore, we are not eligible to be an
ODFI. For the ODFI portion of our ACH business, we have entered into agreements with the Fifth Third Bank, North American Banking Company, or
NABC, Evolve Bank & Trust, Metropolitan Commercial Bank and TransPecos Banks. We are financially liable for all fees, fines, charge backs and losses
related to our ACH processing merchant customers. We may also require cash deposits and other types of collateral from certain merchants to mitigate any
such risk. Similarly, in order to provide payment-processing services for Visa, Mastercard and Discover transactions, we must be sponsored by a financial
institution that is a principal member of the respective Visa, Mastercard and Discover card associations. Central Bank of St. Louis and Wells Fargo Bank
have, respectively, sponsored us under the designations Third Party Processor, or TPP, and Independent Sales Organization, or ISO, with the Visa card
association, and under the designations Third Party Servicer, or TPS, and Merchant Service Provider, or MSP, with the Mastercard card association. We have
an agreement with TriSource Solutions, LLC and an agreement with Global Payments, Inc. through which their member banks, Central Bank of St. Louis and
Wells Fargo Bank, sponsor us for membership in the Visa, Mastercard, American Express, and Discover card associations and settle card transactions for our
merchants. These agreements may be terminated by the processor if we materially breach the agreements and we do not cure the breach within 30 days, or if
we enter bankruptcy or file for bankruptcy. We also maintain a bank sponsorship agreement with Sunrise Banks, N.A. and Metropolitan Commercial Bank
for our prepaid card programs. We are liable for any card-associated losses for cards that we issue that might incur a negative balance and we are liable for
card association fines, fees and chargebacks.
Under our processing agreement with TriSource Solutions and Vantiv, we are financially liable for all fees, fines, chargebacks and losses related to our card
processing merchant customers. Under our processing agreement with Global Payments, Inc., we are not financially liable for all fees, charge-backs and
losses related to our card processing merchant customers, but we are liable for potential card association fines. If, due to insolvency or bankruptcy of our
merchant customers, or for another reason, we are unable to collect from our merchant customers amounts that have been refunded to the cardholders
because the cardholders properly initiated a charge-back transaction to reverse the credit card charges, we must bear the credit risk for the full amount of the
card holder transaction. We utilize a number of systems and procedures to evaluate and manage merchant risk, such as obtaining approval of prospective
merchants from our processor and sponsor bank, setting transaction limits and monitoring account activity. We may also require cash deposits and other types
of collateral from certain merchants to mitigate any such risk. We maintain a reserve for losses resulting from card processing and related charge-backs. We
estimate our potential loss for charge-backs by performing a historical analysis of our charge-back loss experience with similar merchants and considering
other factors that could affect that experience in the future, such as the types of card transactions processed and nature of the merchant relationship with their
consumers.
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We are currently sponsored by Evolve Bank & Trust to access certain regional debit networks. Through this sponsorship, we created a new service in late
2016 to provide both the issuance of real time credits and debits to a debit card holder via a regional network without using a PIN. Regional networks are not
affiliated with major credit card associations and operate independently. Through our sponsorship with Evolve Bank & Trust, we are financially liable for all
fees, fines, charge backs and losses related to our PINless debit card processing for our merchant customers. We may also require cash deposits and other
types of collateral from certain merchants to mitigate any such risk. The banking sponsor and each of the regional debit networks have the ability to terminate
our access or anyone of our merchant’s access to process payments without notice. If either case occurs, our revenue could be negatively affected. In January
2018, our old sponsor, Pueblo Bank and Trust, terminated their relationship with our gateway provider and as a result we stopped processing PINless debit
transactions for a short period of time. We secured a relationship with Evolve Bank & Trust and have resumed processing PINless debit transactions. We are
in the process of securing a second bank sponsor that will provide access for additional merchant networks.
We maintain an allowance for estimated losses resulting from the inability or failure of our merchant customers to make required payments for fees charged
by us. Amounts due from customers may be deemed uncollectible because of merchant disputes, fraud, insolvency or bankruptcy. We determine the
allowance based on an account-by-account review, taking into consideration such factors as the age of the outstanding receivable, historical pattern of
collections and financial condition of the customer. We closely monitor extensions of credit and if the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make contractual payments, additional allowances may be required.
Sales and Marketing
We market and sell our ACH products and services primarily through non-exclusive resellers that act as an external sales force, with minimal direct
investment in sales infrastructure and management, as well as direct contact by our sales personnel. Our direct sales efforts are coordinated by two sales
executives and supported by other employees who function in sales capacities. Our primary market focus is on companies generating high volumes of
electronic payment transactions. We tailor our sales efforts to reach this market by pre-qualifying prospective sales leads through direct contact or market
research. Our sales personnel typically initiate contact with prospective customers that we identify as meeting our targeted customer profile.
On September 1, 2017, we acquired Singular Payments, LLC. Singular Payments was a credit card processing Independent Sales Organization, or ISO,
comprised primarily of highly driven sales leaders and industry leaders. Through the Singular Payments acquisition, we also acquired an existing portfolio of
customers with a significant revenue stream and a talented sales force with significant experience in the credit card industry.
We also market and sell our prepaid card program directly to government entities, corporations and to consumers through the Internet. A major initiative will
be the packaging and cross selling of our platform of payment options across our portfolio of merchants. As a part of this major initiative, we will continue to
analyze our sales and marketing efforts to optimize productivity, increase sales force effectiveness, broaden our reach through reseller initiatives and
advantageous alliances and effectively optimize sales and marketing expenses while meeting our revenue and profit objectives.
With the acquisition of the assets of Information Management Solutions, LLC in December 2020, we now 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 the acquisition, we acquired new customers and their sales force and the ability to
cross-sell existing service offerings to IMS customers and new Output Solutions services to existing Usio customers.
Customers
Our customers are merchants and businesses that use our Automated Clearing House and/or card-based processing services in order to provide their
consumers with the ability to pay for goods and services without having to use cash or a paper check. These merchant customers operate in a variety of
predominately retail industries and are under contract with us to exclusively use the services that we provide to them. Recent areas of customer focus have
included system integrators, churches, charitable organizations, medical and dental clinics, doctor's offices, property management and homeowner
associations, hospitality firms and municipalities. Most of our merchant customers have signed long-term contracts, generally with three-year terms, that
provide for volume-based transaction fees. Our merchant accounts increased 30% to 4,984 customers at December 31, 2020 from 3,830 customers at
December 31, 2019. Our customers are geographically dispersed throughout the United States.
No customer accounted for more than 10% of revenues in 2020 or 2019.
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Competition
The payment processing industry is highly competitive. Many small and large companies compete with us in providing payment processing services and
related services to a wide range of merchants. There are a number of large transaction processors, including Fiserv, Inc., Elavon Inc., WorldPay, Stripe and
Square that serve a broad market spectrum from large to small merchants and provide banking, automatic teller machine, and other payment-related services
and systems in addition to card-based payment processing. There are also a large number of smaller transaction processors that provide various services to
small and medium- sized merchants. Many of our competitors have substantially greater capital resources than us and operate as subsidiaries of financial or
bank holding companies, which may allow them on a consolidated basis to own and conduct depository and other banking activities that we do not have the
regulatory authority to own or conduct. We believe that the principal competitive factors in our market include:
• quality of service;
• reliability of service;
• ability to evaluate, undertake and manage risk;
• ability to offer customized technology solutions;
• speed in implementing payment processes;
• price and other financial terms; and
• multi-channel payment capability.
We believe that our specific focus on providing integrated payment processing solutions to merchants, in addition to our keen understanding of the needs and
risks associated with providing payment processing services electronically, gives us a competitive advantage over other competitors, which have a narrower
market perspective, and over competitors of a similar or smaller size that may lack our experience and expertise in the electronic payments industry.
Furthermore, we believe we present a competitive distinction through our internal technology to provide a single integrated payment warehouse that
consolidates, processes, tracks and reports all payments regardless of payment source or channel. We also believe our customized technology solutions and
high level of service provides a competitive advantage, particularly for smaller businesses that do not have large internal technology capabilities or the ability
to comply with payment security regulations.
Our prepaid card offerings are competitive due to our proprietary systems and our ability to create and establish corporate-branded card programs in shorter
time frames than our competitors. We also believe that our ten years of prepaid industry experience in processing and managing prepaid card programs is a
competitive advantage over many of our competitors. We believe our connectivity and the ability to process via the contact-less networks of Apple Pay®,
Samsung Pay™ and Google Pay™ are competitive advantages. We also believe that the Akimbo mobile application technology and advanced card holder
websites provide a competitive advantage in securing both consumers and business clients that have a need for a card program for their customer base. We
also believe we hold a significant competitive advantage over potential entrants into the prepaid industry as a result of the significant barrier in obtaining
bank sponsorships for prepaid card program management and an even higher barrier for performing prepaid card processing.
Trademarks and Domain Names
We own federally registered trademarks on the marks “Payment Data Systems, Inc.,” “Akimbo,” “FiCentive Innovations in Prepaid Card Solutions,” “Don’t
change your bank, just your card” and “ZBILL” and their respective designs.
Some of our material websites are www.usio.com, www.singularpayments.com, www.payfacinabox.com, www.singularbillpay.com, www.ficentive.com,
www.akimbocard.com, and www.usiooutput.com.
We rely on a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements, and other intellectual property
protection methods to protect our services and related products.
Patents
On January 11, 2008, we executed an agreement to sell selected patents and patent applications, including U.S. Patent No. 7,021,530, to PCT Software Data,
LLC for net proceeds of approximately $750,000. The patents and patent applications sold relate to bill payments made with debit and stored value cards. We
retained a worldwide, non-exclusive license under the patents for use with all current and future customers.
Government Regulation
Our industry is highly regulated. Any new, or changes made to, U.S. federal, state and local laws, regulations, card network rules or other industry standards
affecting our business may require significant development efforts or have an unfavorable impact to our financial results. Failure to comply with these laws
and regulations may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of services and/or the
imposition of civil and criminal penalties, including fines. Certain of our services are also subject to rules set by various payment networks, such as Visa and
Mastercard.
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The Dodd-Frank Act
President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, into law on July 21, 2010. The Dodd-
Frank Act caused significant structural reforms to the financial services industry. The Dodd-Frank Act regulates the fees charged or received by issuers for
processing debit transactions and the transaction routing options available to merchants. The Dodd-Frank Act also established the Consumer Financial
Protection Bureau (CFPB) to regulate consumer financial services, including many services offered to our customers. These rules clarify the regulatory
prepaid landscape for consumer access to disclosures, fees and statements, error resolution, limited liability and overdrafts. Additionally, the Durbin
Amendment to the Dodd-Frank Act provided that interchange fees that a card issuer or payment network receives or charges for debit transactions will now
be regulated by the Federal Reserve and must be “reasonable and proportional” to the cost incurred by the card issuer in authorizing, clearing and settling the
transaction. In addition, the Durbin Amendment contains prohibitions on network exclusivity and merchant routing restrictions.
The Dodd-Frank Act caused interchange fees to be lowered on large bank-issued debit cards. The lowered interchange fees had a mild negative impact on our
revenues and increased our earnings due to the fact that we were able to keep our prices constant with our merchants. If our competitors start to pass the extra
margin into savings to their merchants, we may be forced to follow their actions and become exposed to lower earnings on the debit card transactions for
large banks.
CARD Act
As an agent of, and third-party service provider to, our issuing banks, we are subject to indirect regulation and direct audit and examination by the Office of
Thrift Supervision, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, or FRB, and the Federal Deposit
Insurance Corporation.
On March 23, 2010, the FRB issued a final rule implementing Title IV of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, or
CARD Act, which imposes requirements relating to disclosures, fees and expiration dates that are generally applicable to gift certificates, store gift cards and
general-use prepaid cards. We believe that our general purpose re-loadable prepaid cards, and the maintenance fees charged on our general purpose re-
loadable cards, are exempt from the requirements under this rule, as they fall within an express exclusion for cards which are re-loadable and not marketed or
labeled as a gift card or gift certificate. However, this exclusion is not available if the issuer, the retailer selling the card to a consumer or the program
manager, promotes, even if occasionally, the use of the card as a gift card or gift certificate. As a result, we provide retailers with instructions and policies
regarding the display and promotion of our general purpose re-loadable cards. However, it is possible that despite our instructions and policies to the
contrary, a retailer engaged in offering our general purpose re-loadable cards to consumers could take an action with respect to one or more of the cards that
would cause each similar card to be viewed as being marketed or labeled as a gift card, such as by placing our general purpose re-loadable cards on a display
which prominently features the availability of gift cards and does not separate or otherwise distinguish our general purpose re-loadable cards from the gift
cards. In such event, it is possible that such general purpose re-loadable cards would lose their eligibility for such exclusion to the CARD Act and its
requirements, and therefore we could be deemed to be in violation of the CARD Act and the rule, which could result in the imposition of fines, the
suspension of our ability to offer our general purpose re-loadable cards, civil liability, criminal liability, and the inability of our issuing banks to apply certain
fees to our general purpose re-loadable cards, each of which would likely have a material adverse impact on our revenues.
In 2014, we resumed issuing gift cards. Any gift cards we issue will be governed by the CARD Act and other various regulations. Any violations with our
gift card issuance could result in the imposition of fines, the suspension of our ability to offer our gift cards, civil liability, criminal liability, and the inability
of our issuing banks to apply certain fees to our gift cards, each of which would likely have a material adverse impact on our revenues.
Anti-Money Laundering and Counter Terrorist Regulation
Our business is subject to U.S. federal anti-money laundering laws and regulations, including the Bank Secrecy Act (BSA), as amended by the USA
PATRIOT Act of 2001, or collectively, the BSA. The BSA, among other things, requires money services businesses to develop and implement risk-based
anti-money laundering programs, report large cash transactions and suspicious activity and maintain transaction records. On September 29, 2017, the
Financial Crimes Enforcement Network, or FinCEN, amended the Customer Due Diligence Rule, or CDD Rule, requiring the collection and verification of
beneficial owners holding equal to or greater than 25% equity interest. The CDD Rule states that sole proprietorships-individual or spousal-and
unincorporated associations are not legal entity customers as defined by the Rule, even though such businesses may file with the Secretary of State in order to
register a trade name or establish a tax account. This is because neither a sole proprietorship nor an unincorporated association is a separate legal entity from
the associated individual(s), and therefore beneficial ownership is not inherently obscured. The CDD Rule does not rely on the tax-exempt status of an entity
as described in the Internal Revenue Code “IRC”. All nonprofit entities-whether or not tax-exempt-that are established as a nonprofit, or non-stock
corporation, or similar entity that has been validly organized with the proper State authority are excluded from the ownership/equity prong of the requirement
because nonprofit entities generally do not have ownership interests. As of May 2018, we are required to collect and verify beneficial owners holding equal
to or greater than 25% equity interest based on rules promulgated by FinCEN.
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We are also subject to certain economic and trade sanctions programs that are administered by the Treasury Department’s Office of Foreign Assets Control,
or OFAC, that prohibit or restrict transactions to or from or dealings with specified countries, their governments and, in certain circumstances, their nationals,
narcotics traffickers, and terrorists or terrorist organizations.
Similar anti-money laundering, counter terrorist financing and proceeds of crime laws apply to movements of currency and payments through electronic
transactions and to dealings with persons specified on lists maintained by organizations similar to OFAC in several other countries and which may impose
specific data retention obligations or prohibitions on intermediaries in the payment process.
Prepaid Services
Prepaid card programs managed by us are subject to various federal and state laws and regulations, which may include laws and regulations related to
consumer and data protection, licensing, consumer disclosures, escheat, anti-money laundering, banking, trade practices and competition and wage and
employment. As regulations evolve, or change, we may be required to obtain state licenses to expand our distribution network for prepaid cards, which
licenses we may not be able to obtain. Furthermore, the CARD Act and the Federal Reserve’s Regulation E impose requirements on general-use prepaid
cards, store gift cards and electronic gift certificates. These laws and regulations are evolving, unclear and sometimes inconsistent and subject to judicial and
regulatory challenge and interpretation, and therefore the extent to which these laws and rules have application to, and their impact on, us, financial
institutions, merchants or others is in flux. At this time, we are unable to determine the impact that the clarification of these laws and their future
interpretations, as well as new laws, may have on us, financial institutions, merchants or others in a number of jurisdictions. Prepaid services may also be
subject to the rules and regulations of Visa®, Mastercard® and other payment networks with which we and the card issuers do business. The programs in
place to process these products generally may be modified by the payment networks at their discretion and such modifications could also impact us, financial
institutions, merchants and others.
Employees
As of December 31, 2020, we had 89 full-time employees. We are not a party to any collective bargaining agreements. We believe that our relations with our
employees are very good.
Available Information
Our website is located at www.usio.com. We make available on our website, free of charge, copies of our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports, as applicable and as soon as reasonably practicable after we electronically file or
furnish such materials to the U.S. Securities and Exchange Commission. Our website and the information contained therein or connected thereto are not
intended to be incorporated into this annual report on Form 10-K.
You may also read and copy any materials we file with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors and other information included
in this annual report on Form 10-K. If any of the following risks actually occur, our business, financial condition or results of operations could be materially
and adversely affected and you may lose some or all of your investment.
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We could experience adverse financial effects due to strain on the global economic environment.
RISKS RELATED TO OUR BUSINESS
The ongoing COVID-19 pandemic has 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 pandemic. 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.
At this time, certain states are reducing mandated operating restrictions and efforts are underway to provide vaccinations to as many people as possible.
During 2020 and early 2021 the government issued several rounds of COVID-19 relief and stimulus payments, and other programs to stimulate economic
activity and facilitate an economic recovery.
Our business was initially adversely affected as doctor's offices, dental offices, veterinarian offices and non-bank consumer lending accounts which were
ordered closed in connection with curbing the spread of the pandemic. As these doctors, dental and veterinarian offices re-opened, these businesses quickly
recovered and returned to levels higher than pre-COVID. Consumer lending merchants were adversely affected by COVID relief payments made during the
pandemic and the pause placed on past due amounts owed. The level of activity for consumer lending merchants has not returned to pre-COVID levels. We
achieved a gain during COVID in our Prepaid business line, as we were able to work in conjunction with major cities across the U.S. to use our prepaid debit
cards to facilitate the transfer of money via our debit cards from city foundations to the local residents in need of financial assistance.
The impacts and recovery from the COVID-19 pandemic are still a work in process. We were not impacted in the magnitude of other payment processors as
our customer base had limited exposure to retail facing businesses. Within that framework, we will continue to monitor the overall impact on our operations
and take necessary steps to ensure the safety of our employees and the well-being of our customers.
Loss of key resellers could reduce our revenue growth.
Our reseller sales channel, which purchases and resells our end-to-end services to its own portfolio of merchant customers, is a strong contributor to our
revenue growth. If a reseller switches to another transaction processor, shuts down, becomes insolvent, or enters the processing business themselves, we may
no longer receive new merchant referrals from the reseller, and we risk losing existing merchants that were originally enrolled by the reseller, all of which
could negatively affect our revenues and earnings. In early 2021, we lost one of our largest ACH customers because it is going out of business. If we do not
attract new customers or expand our relationships with other existing customers our revenues could be adversely affected.
We may need additional financing in the future. We may be unable to obtain additional financing or if we obtain financing it may not be on terms favorable to
us. You may lose your entire investment.
Based on our current plans, we believe our existing cash and cash equivalents will be sufficient to fund our operating expense and capital requirements for at
least 12 months, although we may need funds in the future. If our capital resources are insufficient to meet future capital requirements, we will have to raise
additional funds. If we are unable to obtain additional funds on terms favorable to us, we may be required to cease or reduce our operating activities. If we
must cease or reduce our operating activities, you may lose your entire investment.
We may be liable for employment taxes for vesting equity awards granted to employees in the past.
In the past we have granted equity awards, including restricted stock awards, to certain of our employees, including to our executive officers and directors.
Upon vesting of these awards, we are liable for employment withholding taxes payable in cash. Some of these amounts may be substantial which may impact
our business and results of operations.
We may not realize the opportunities from our acquisition of Information Management Solutions, LLC.
On December 15, 2020, we entered into an asset purchase agreement to purchase substantially all the assets of Information Management Solutions, LLC, a
Texas limited liability company in 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,
we acquired new customers and their sales force. We bought an existing portfolio of customers with a significant revenue stream. This acquisition increased
our ability to grow new revenue streams and allows the Company to reenter the electronic bill presentment and payment revenue stream. The success of the
IMS acquisition will continue to depend on our ability to realize the anticipated growth opportunities. We cannot assure you that we will be able to realize the
anticipated growth opportunities.
If our security applications are not adequate to address changing market conditions and customer concerns, we may incur significant losses and be unable to
sell our services.
Our use of applications designed for premium data security and integrity to process electronic transactions may not be sufficient to address changing market
conditions or the security and privacy concerns of existing and potential customers. If our security applications are breached and sensitive data is lost or
stolen, we could incur significant costs to not only assess and repair any damage to our systems, but also to reimburse customers for losses that occur from
the fraudulent use of the data. We may also be subject to fines and penalties from the credit card associations or regulatory agencies in the event of the loss of
confidential account information. Further, adverse publicity raising concerns about the safety or privacy of electronic transactions, or widely reported
breaches of our or another provider's security, have the potential to undermine consumer confidence in the technology and could have a materially adverse
effect on our business.
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If we do not adapt to rapid technological change, our business may fail.
Our success depends on our ability to develop new and enhanced services and related products that meet ever changing customer needs. However, the market
for our services is characterized by rapidly changing technology, evolving industry standards, emerging competition and frequent new and enhanced
software, service and related product introductions. In addition, the software market is subject to rapid and substantial technological change. To remain
successful, we must respond to new developments in hardware and semiconductor technology, operating systems, programming technology and computer
capabilities. In many instances, new and enhanced services, products and technologies are in the emerging stages of development and marketing are subject
to the risks inherent in the development and marketing of new software, services and products. We may not successfully identify new service opportunities,
develop and bring new and enhanced services and related products to market in a timely manner. Even if we do bring such services, products or technologies
to market, they may not become commercially successful. Additionally, services, products or technologies developed by others may render our services and
related products noncompetitive or obsolete. If we are unable, for technological or other reasons, to develop and introduce new services and products in a
timely manner in response to changing market conditions or customer requirements, our business may fail.
We rely on our relationship with the Automated Clearing House network, and if the Federal Reserve rules were to change, our business could be adversely
affected.
We have contractual relationships with Fifth Third Bank, North American Banking Company, or NABC, Evolve Bank & Trust, Metropolitan Commercial
Bank and TransPecos Bank, which are Originating Depository Financial Institutions, or ODFI, in the ACH network. The ACH network is a nationwide
batch-oriented electronic funds transfer system that provides for the interbank clearing of electronic payments for participating financial institutions. An
Originating Depository Financial Institution is a participating financial institution that must abide by the provisions of the ACH Operating Rules and
Guidelines. Through our relationships with Fifth Third Bank, Metropolitan Commercial Bank, NABC and Evolve Bank & Trust, we process payment
transactions on behalf of our customers and their consumers by submitting payment instructions in a prescribed ACH format. We pay volume-based fees to
Metropolitan Commercial Bank, Fifth Third Bank, Evolve Bank & Trust and NABC for debit and credit transactions processed each month, and pay fees for
other transactions such as returns and notices of change to bank accounts. These fees are part of our agreed-upon cost structures with the banks. If the Federal
Reserve rules were to introduce restrictions or modify access to the Automated Clearing House, our business could be materially adversely affected. Further,
if either, two or all four of Fifth Third Bank, Metropolitan Commercial Bank, Evolve Bank & Trust and NABC were to cancel our respective contract with
the bank, our business could be materially affected. At this time, we believe we could find and enter into additional agreements with other bank sponsors on
similar contractual terms, but no assurances can be made.
If our third-party card processing providers or our bank sponsors fail to comply with the applicable requirements of Visa, Mastercard and Discover credit
card associations, we may have to find a new third-party processing provider, which could increase our costs.
Substantially all of the card-based transactions we process involve the use of Visa, Mastercard or Discover credit cards. In order to provide payment-
processing services for Visa, Mastercard and Discover transactions, we must be sponsored by a financial institution that is a principal member of the
respective Visa, Mastercard and Discover card associations. Both Central Bank of St. Louis and Wells Fargo Bank have sponsored us under the designations
Third Party Processor, or TPP, and Independent Sales Organization, or ISO, with the Visa card association, and under the designations Third Party Servicer,
or TPS, and Merchant Service Provider, or MSP, with the Mastercard card association. We have agreements with TriSource Solutions, LLC, Card Connect /
First Data Merchant Services Corp. and Global Payments Inc. through which their member banks, Central Bank of St. Louis and Wells Fargo Bank, sponsor
us for membership in the Visa and Mastercard card associations, and settle card transactions for our merchants. If our third-party processing provider,
TriSource Solutions, Card Connect or Global Payments, or our bank sponsors, Central Bank of St. Louis, Wells Fargo Bank or Evolve Bank & Trust fail to
comply with the applicable requirements of the Visa, Mastercard, and Discover card associations, Visa, Mastercard or Discover could suspend or terminate
the registration of our third-party processing provider. Also, our contracts with both of these third parties are subject to cancellation upon limited notice by
either party. The cancellation of either contract, termination of their registration or any changes in the Visa, Mastercard or Discover rules that would impair
the registration of our third-party processing provider could require us to stop providing such payment processing services if we are unable to enter into a
similar agreement with another provider or sponsor at similar costs and upon similar contractual terms. Additionally, changing our bank sponsor could
adversely affect our relationship with our merchants if the new sponsor provides inferior service or charges higher costs.
We have incurred substantial losses in the past and may incur additional losses in the future.
We reported a net loss of $2.9 million and $5.1 million for the years ended December 31, 2020 and December 31, 2019, respectively. Including these results,
we have an accumulated deficit of $65.1 million at December 31, 2020. Our future operating results are not certain and we may incur future operating losses.
We may need to raise additional capital to pursue product development initiatives and to penetrate additional markets for the sale of our products in the
future. We believe that we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or
other means. If we are unable to secure additional capital, we may be required to curtail our research and development initiatives and take additional
measures to reduce costs in order to conserve our cash in amounts sufficient to sustain operations and meet our obligations. These measures could cause
significant delays in our efforts to expand our product offerings and customer base in the United States, which are critical to the realization of our business
plan and to future operations.
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Our prepaid card revenues from the sale of services to merchants that accept Mastercard cards are dependent upon our continued Mastercard registration
and financial institution sponsorship and, in some cases, continued participation in certain payment networks.
In order to provide processing services for our Mastercard prepaid card program, we must be either a member of a payment network or be registered as a
prepaid processor of Mastercard. Sunrise Banks, N.A. and Metropolitan Commercial Bank have sponsored us under the designations Third Party Servicer, or
TPS, and Merchant Service Provider, or MSP, with the Mastercard card association. Registration as a prepaid processor is dependent upon us being
sponsored by member clearing banks. If our sponsor banks should stop providing sponsorship for us, we would need to find another financial institution to
provide those services or we would need to be a member, either of which could prove to be difficult and/or more expensive. If we are unable to find a
replacement financial institution to provide sponsorship or become a member of the association, we may no longer be able to provide prepaid processing
services to our Mastercard customers, which would negatively impact our revenues and earnings.
If we fail to comply with the applicable requirements of the respective card networks, they could seek to fine us, suspend us or terminate our registrations.
In order to provide our transaction processing services, we are registered with Visa, Mastercard and Discover as service providers and transaction processors
for member institutions and with other networks. As such, we are subject to card association and network rules that could subject us to a variety of fines or
penalties that may be levied by the card networks for certain acts or omissions. The rules of the card networks are set by their boards, which may be
influenced by banks that own their stock and, in the case of Discover by the card’s issuers, and some of those banks and issuers are our competitors with
respect to these processing services. The termination of our registrations or our status as a service provider or transaction processor, or any changes in card
association or other network rules or standards, including interpretation and implementation of the rules or standards, that increase the cost of doing business
or limit our ability to provide transaction processing services to our customers, could have a material adverse effect on our business, operating results and
financial condition. If a merchant or one of our resellers fails to comply with the applicable requirements of the card associations and networks, it could be
subject to a variety of fines or penalties that may be levied by the card associations or networks. If we cannot collect such amounts from the applicable
merchant or one of our resellers, we could end up bearing such fines or penalties, resulting in lower earnings for us.
We are subject to extensive and complex federal and state regulation and new regulations and/or changes to existing regulations could adversely affect our
business.
As an agent of, and third-party service provider to, our issuing banks, we are subject to indirect regulation and direct audit and examination by the Office of
Thrift Supervision, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, or the FRB, and the Federal
Deposit Insurance Corporation.
On March 23, 2010, the FRB issued a final rule implementing Title IV of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, or
CARD Act, which imposes requirements relating to disclosures, fees and expiration dates that are generally applicable to gift certificates, store gift cards and
general-use prepaid cards. We believe that our general-purpose re-loadable prepaid cards, and the maintenance fees charged on our general-purpose re-
loadable cards, are exempt from the requirements under this rule, as they fall within an express exclusion for cards which are re-loadable and not marketed or
labeled as a gift card or gift certificate. However, this exclusion is not available if the issuer, the retailer selling the card to a consumer or the program
manager, promotes, even if occasionally, the use of the card as a gift card or gift certificate. As a result, we provide retailers with specific instructions and
policies regarding the display and promotion of our general-purpose re-loadable cards. However, it is possible that despite our instructions and policies to the
contrary, a retailer engaged in offering our general-purpose re-loadable cards to consumers could take an action with respect to one or more of the cards that
would cause each similar card to be viewed as being marketed or labeled as a gift card, such as by placing our general-purpose re-loadable cards on a display
which prominently features the availability of gift cards and does not separate or otherwise distinguish our general purpose re-loadable cards from the gift
cards. In such event, it is possible that such general-purpose re-loadable cards would lose their eligibility for such exclusion to the CARD Act and its
requirements, and therefore could be deemed to be in violation of the CARD Act and the rule, which could result in the imposition of fines, the suspension of
our ability to offer our general-purpose re-loadable cards, civil liability, criminal liability, and the inability of our issuing banks to apply certain fees to our
general-purpose re-loadable cards, each of which would likely have a material adverse impact on our revenues.
In 2014, we resumed issuing gift cards. Any gift cards we issue will be governed by the CARD act and other various regulations. Any violations with our gift
card issuance could result in the imposition of fines, the suspension of our ability to offer our gift cards, civil liability, criminal liability, and the inability of
our issuing banks to apply certain fees to our gift cards, each of which would likely have a material adverse impact on our revenues.
As the laws applicable to our business, and those of our distributors and issuing banks, change frequently, are often unclear and may differ or conflict
between jurisdictions, ensuring compliance has become more difficult and costly. Any failure, or perceived failure, by us, our issuing banks or our
distributors to comply with all applicable statutes and regulations could result in fines, penalties, regulatory enforcement actions, civil liability, criminal
liability, and/or limitations on our ability to operate our business, each of which could significantly harm our reputation and have a material adverse impact
on our business, results of operations and financial condition.
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State and federal legislatures and regulatory authorities have become increasingly focused upon the regulation of the financial services industry and continue
to adopt new legislation which could result in significant changes in the regulatory landscape for financial institutions, which could include our bank
sponsors, and other financial services companies, such as our Company.
If our merchants or ISOs incur fines or penalties that we cannot collect from them, we could end up bearing the cost of fines or penalties.
In order to provide our transaction processing services, we are registered with Visa, Mastercard and Discover as service providers and transaction processors
for member institutions and with other networks. As such, we are subject to card association and network rules that could subject us to a variety of fines or
penalties that may be levied by the card networks for certain acts or omissions. The rules of the card networks are set by their boards, which may be
influenced by banks that own their stock and, in the case of Discover by the card’s issuers, and some of those banks and issuers are our competitors with
respect to these processing services. The termination of our registrations or our status as a service provider or transaction processor, or any changes in card
association or other network rules or standards, including interpretation and implementation of the rules or standards, that increase the cost of doing business
or limit our ability to provide transaction processing services to our customers, could have a material adverse effect on our business, operating results and
financial condition. If a merchant or one of our resellers fails to comply with the applicable requirements of the card associations and networks, it could be
subject to a variety of fines or penalties that may be levied by the card associations or networks. If we cannot collect such amounts from the applicable
merchant or one of our resellers, we could end up bearing such fines or penalties, resulting in lower earnings for us.
If we fail to comply with complex and expanding consumer protection regulations, our business could be adversely affected.
The establishment of the federal Consumer Financial Protection Bureau, or CFPB, will likely expose us to increased regulatory oversight and possibly more
burdensome regulation that could have an adverse impact on our revenue and profits. On October 5, 2016, the CFPB issued a final rule to regulate certain
prepaid accounts, or the Prepaid Account Rule. The Prepaid Account Rule mandates, among other things, extensive pre-purchase and post-purchase
disclosures, expanded electronic billing statements, adherence to certain overdraft regulations for prepaid accounts that permit negative balances, and public
posting of account agreements and submission to the CFPB which will then publish them on its website. The Prepaid Account Rule took effect on April 1,
2019, subject to certain exceptions. On January 25, 2018, the CFPB announced certain changes to the Prepaid Account Rule, including allowing the error
resolution and liability limitations protections to apply prospectively, after a consumer’s identity has been verified, and providing more flexibility to credit
cards linked to digital wallets. On February 27, 2019, the CFPB also announced a streamline electronic submission system, or Collect, for prepaid account
issuers to submit their prepaid account agreements, including fee information, to the CFPB. All prepaid account agreements offered as of April 1, 2019 must
be uploaded to Collect by May 1, 2019. Thereafter, prepaid account issuers must make a submission to the CFPB within 30 days after a new agreement is
offered, a previously submitted agreement is amended, or a previously submitted agreement is no longer offered. Compliance with these obligations may
result in increased compliance costs for us, our issuing banks and our distributors, and may therefore have a negative impact on the profitability of our
business.
Our card programs are subject to strict regulation under federal law regarding anti-money laundering and anti-terrorist financing. Failure to comply with
such laws, or abuse of our card programs for purposes of money laundering or terrorist financing, could have a material adverse impact on our business.
Provisions of the USA PATRIOT Act, the Bank Secrecy Act and other federal law impose substantial regulation of financial institutions designed to prevent
use of financial services for purposes of money laundering or terrorist financing. Increasing regulatory scrutiny of our industry with respect to money
laundering and terrorist financing matters could result in more aggressive enforcement of such laws or more onerous regulation, which could have a material
adverse impact on our business. In addition, abuse of our prepaid card programs for purposes of money laundering or terrorist financing, notwithstanding our
efforts to prevent such abuse through our regulatory compliance and risk management programs, could cause reputational risk or other harm that would have
a material adverse impact on our business.
Effective September 27, 2011, the Financial Crimes Enforcement Network of the U.S. Department of the Treasury, or FinCEN, issued a final rule regarding
the applicability of the Bank Secrecy Act’s anti-money laundering provisions to prepaid products and other matters related to the regulation of money
services businesses. This rule created additional obligations for entities, including our distributors, engaged in the provision and sale of certain prepaid
products, including our prepaid debit cards, such as the obligation for sellers of prepaid debit cards to obtain identification information from the purchaser at
the point-of-sale. Compliance with these obligations may result in increased compliance costs for us, our issuing banks and our distributors, and may
therefore have a negative impact on the profitability of our business.
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We are subject to the privacy requirements of the California Consumer Privacy Act.
The California Consumer Privacy Act of 2018, or CCPA, went into effect on January 1, 2020. The CCPA imposes expansive data privacy and data protection
requirements for the data of California residents, and provides for significant penalties for non-compliance. The CCPA underwent multiple amendments prior
to coming into effect and while enforcement actions may not be brought by the California attorney general until July 1, 2020 it remains unclear how various
provisions of the CCPA will be interpreted and enforced. Further, on November 3, 2020, the California voters passed the California Privacy Rights and
Enforcement Act, or CPRA, which replaces the CCPA effective January 1, 2023. The CPRA alters the scope of covered businesses, adds a new category of
sensitive personal information and grants certain consumer rights, such as a right to opt out and a right to delete. The effects of this legislation potentially are
far-reaching, however, and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to
achieve compliance. The CCPA and the CPRA impose obligations that are new and burdensome, and we may face challenges in addressing their
requirements and making necessary changes to our policies and practices and may incur significant expenses in an effort to do so. Any failure, real or
perceived, by us to comply with evolving regulatory requirements, interpretations, or orders, other local, state, federal, or international privacy, data
protection, information security, or consumer protection-related laws and regulations, could cause our customers unease and materially and adversely affect
our business.
Unauthorized disclosure of cardholder data, whether through breach of our computer systems or otherwise, could expose us to liability and protracted and
costly litigation.
We collect and store personal identifiable information about our cardholders, including names, addresses, social security numbers, driver’s license numbers
and account numbers, and maintain a database of cardholder data relating to specific transactions, including account numbers, in order to process transactions
and prevent fraud. As a result, we are required to comply with the privacy provisions of the Gramm-Leach-Bliley Act, various other federal and state privacy
statutes and regulations, and the Payment Card Industry Data Security Standard, each of which is subject to change at any time. Compliance with these
requirements is often difficult and costly, and our failure, or our distributors’ failure, to comply may result in significant fines or civil penalties, regulatory
enforcement action, liability to our issuing banks and termination of our agreements with one or more of our issuing banks, each of which could have a
material adverse effect on our financial position and/or operations. In addition, a significant breach could result in our Company being prohibited from
processing transactions for any of the relevant card associations or network organizations, including Visa, Mastercard, American Express, Discover or
regional debit networks, which would also have a significant material adverse impact on our financial position and/or operations.
Furthermore, if our computer systems are breached by unauthorized users, we may be subject to liability, including claims for unauthorized purchases with
misappropriated bank card information, impersonation or similar fraud claims. We could also be subject to liability for claims relating to misuse of personal
information, such as unauthorized marketing purposes, or failure to comply with laws governing notification of such breaches. These claims also could result
in protracted and costly litigation. In addition, we could be subject to penalties or sanctions from the relevant card associations or network organizations.
If our efforts to protect the security of information about our customers, cardholders and vendors are unsuccessful, we may face additional costly government
enforcement actions and private litigation, and our sales and reputation could suffer.
An important component of our business involves the receipt and storage of information about our cardholders and banking information. We have multiple
programs and processes in place to detect and respond to data security incidents; however, because the techniques used to obtain unauthorized access, disable
or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these
techniques or implement adequate preventive measures. In addition, hardware, software, or applications we develop or procure from third parties may
contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt
to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud, trickery, or other forms of deceiving our
vendors, contractors, and employees. If we, our customers, or our vendors experience significant data security breaches or fail to detect and appropriately
respond to significant data security breaches, we could be exposed to government enforcement actions and private litigation. In addition, our cardholders and
customers could lose confidence in our ability to protect their information, which could cause them to discontinue using our services.
If crypto-currency rules and regulations increase or the interest in trading in cryptocurrencies subsides, our revenues could decrease.
Various governmental and regulatory bodies, including legislative and executive bodies, in the United States may adopt new laws and regulations, or new
interpretations of existing laws and regulations may be issued by such bodies or the judiciary, which may adversely impact the development of the crypto
economy as a whole or our customers who operate in the crypto economy. Such legal and regulatory rules could have adverse effects on the crypto
economy, in particular by changing how our customers operate their business, how their products and services are regulated, and what products or services
they and or their competitors can offer, requiring changes to their compliance and risk mitigation measures, imposing new licensing requirements, or
imposing a total ban on certain crypto asset transactions, as has occurred in certain jurisdictions in the past. These regulatory concerns could affect our
customers in the crypto industry coupled with a subsiding of interest or enthusiasm for the crypto industry could adversely impact our payment processing
volumes and revenues.
We will be liable for separation payments in case of change in control, termination without cause, non-renewal of the agreement, death, or disability under
the respective employment agreements with our Chairman, Mr. Long and our President, Chief Executive Officer, and Chief Operating Officer, Mr. Hoch,
which could have an adverse effect on our cash position and on our financial results.
Pursuant to our respective employment agreements, as amended, with Michael Long, Chairman, and Louis Hoch, President, Chief Executive Officer, and
Chief Operating Officer, in the event of change in control, termination without cause, or non-renewal of the employment agreement, we will be liable for
separation payments, equaling an amount of (a) 2.95 times the respective base salary and bonus payments, plus (b) a pro rata portion of the respective annual
bonus based on the number of days elapsed in the year prior, plus (c) 2.0 times the respective base salary for non-competition, and (d) continuing other
benefits. We estimate the cash disbursements over time to be $1.5 to $2.0 million each for the respective agreements with Mr. Long and Mr. Hoch.
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In the case of termination of the agreement due to death of the executive, we will be liable for separation payments, equaling an amount of 2.95 times the
respective base salary. The deferred compensation does not include amounts paid or accrued to executive for bonuses or bonus compensation, benefits or
equity awards. Unpaid and unearned bonus compensation or bonus deferred compensation is forfeited. No deferred compensation will be due as long as we
and/or an insurance company continues to pay executive’s base salary, minus any monthly base salary already paid to the executive prior to his death
pursuant to the executive’s disability, to the executive’s estate for a period of up to 36 months. If these continuing payments cease before 36 months, we will
have to pay the executive’s estate the deferred compensation minus any base salary payments within 30 days of the cessation. We estimate the cash
disbursements over time to be approximately $1.0 million each for the respective agreements with Mr. Long and Mr. Hoch. Further, all stock options issued
to the executive and all restricted stock granted to executive shall continue on their established vesting schedule.
In the case of termination of the agreement due to disability without death, we will be liable for separation payments, equaling an amount of disability
benefits constituting base salary for 3 years. We estimate the cash disbursement over time to be $0.7 to $0.8 million for each for the respective agreements
with Mr. Long and Mr. Hoch. Unpaid and unearned bonus compensation or bonus deferred compensation is forfeited. Further, all stock options issued to the
executive and all restricted stock granted to executive shall continue on their established vesting schedule. No further compensation will be due for
compliance with the agreements’ non-compete, non-solicitation and disparagement clauses.
Depending on when such an event might occur, it could have a substantial adverse effect on our operating capital and cash on hand. If our cash position is not
sufficient, we may need to raise additional cash which could involve selling equity securities which would dilute our shareholders. In addition, the loss of our
Chairman or Chief Executive Officer may adversely affect our business and results of operations.
We depend on Louis A. Hoch, our President, Chief Executive and Chief Operating Officer, and if he ceased to be active in our management, our business may
not be successful.
Our success depends to a significant degree upon the continued contributions of our key management, marketing, service and related product development
and operational personnel, including our President and Chief Executive and Chief Operating Officer, Louis A. Hoch. We entered into an employment
agreement with Mr. Hoch in February 2007 and update his agreement as changes are required. The terms of the agreement prohibit the executive from
competing with us for a period of two years from the executive’s date of termination. Our business may not be successful if, for any reason, Mr. Hoch ceases
to be active in our management.
If we lose key personnel or we are unable to attract, recruit, retain and develop qualified employees, our business, financial condition and results of
operations may be adversely affected.
In order for us to successfully compete and grow, we must attract, recruit, retain and develop the necessary personnel who can provide the needed expertise
and skills across the spectrum of our intellectual capital needs. The market for qualified personnel is highly competitive and we may not be successful in
recruiting qualified personnel for needed skill sets or replacing current personnel who leave us. Failure to retain or attract key personnel and skill sets could
have a material adverse effect on our business, financial condition and results of operations.
If our software fails, and we need to repair or replace it, or we become subject to warranty claims, our costs could increase.
Our software products could contain errors or “bugs” that could adversely affect the performance of services or damage a user’s data. We attempt to limit our
potential liability for warranty claims through technical audits and limitation-of-liability provisions in our customer agreements; however, these measures
may not be effective in limiting our exposure to warranty claims. We have not experienced a significant increase in software errors or warranty claims.
Despite the existence of various security precautions, our computer infrastructure may also be vulnerable to viruses or similar disruptive problems caused by
our customers or third parties gaining access to our processing system.
We depend on the efficient and uninterrupted operation of our computer network systems, software, data center and telecommunications networks, as well as
the systems and services of third parties. Our systems and operations or those of our third-party providers could be exposed to damage or interruption from,
among other things, fire, natural disaster, power loss, telecommunications failure, terrorist acts, war, unauthorized entry, human error, and computer viruses
or other defects. Defects in our systems or those of third parties, errors or delays in the processing of payment transactions, telecommunications failures or
other difficulties could result in loss of revenue, loss of merchants, loss of merchant and cardholder data, harm to our business or reputation, exposure to
fraud losses or other liabilities, negative publicity, additional operating and development costs, and/or diversion of technical and other resources. We perform
the majority of our disaster recovery operations ourselves, though we utilize select third parties for some aspects of recovery. To the extent we outsource our
disaster recovery, we are at risk of the vendor’s unresponsiveness in the event of breakdowns in our systems.
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Risks associated with reduced levels of consumer spending could adversely affect our revenues and earnings.
Significant portions of our revenue and earnings are derived from fees from processing consumer ACH, prepaid, credit, and debit card transactions. We are
exposed to general economic conditions that affect consumer confidence, consumer spending, consumer discretionary income or changes in consumer
purchasing habits. A general reduction in consumer spending in the United States or in any other country where we do business could adversely affect our
revenues and earnings.
Fraud by merchants or others could have an adverse effect on our operating results and financial condition.
We have potential liability for fraudulent bankcard, ACH and prepaid card transactions or credits initiated by merchants or others. Examples of merchant
fraud include when a merchant knowingly uses a stolen or counterfeit bankcard, card number or bank account to record a false sales transaction, processes an
invalid bankcard, or intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction. Criminals are using increasingly
sophisticated methods to engage in illegal activities such as counterfeit and fraud. While we have systems and procedures designed to detect and reduce the
impact of fraud, we cannot assure the effectiveness of these measures. It is possible that incidents of fraud could increase in the future. Failure to effectively
manage risk and prevent fraud would increase our chargebacks liability or cause us to incur other liabilities, including regulatory and association fines,
penalties and harm to our reputation. Increases in chargebacks or other liabilities could have an adverse effect on our operating results and financial
condition.
Increases in credit card network fees may result in the loss of customers or a reduction in our earnings.
From time to time, the card networks, including Visa, Mastercard, and Discover, increase the fees (interchange and assessment fees) that they charge
processors such as us. We may attempt to pass these increases along to our merchant customers, but this strategy might result in the loss of those customers to
our competitors who do not pass along the increases. If competitive practices prevent our passing along such increased fees to our merchant customers in the
future, we may have to absorb all or a portion of such increases thereby increasing our operating costs and reducing our earnings.
We are subject to risks and write-offs resulting from fraudulent activities and losses from overdrawn cardholder accounts that could adversely impact our
financial performance and results of operations.
Our prepaid cards expose us to threats involving the misuse of such cards, collusion, fraud, identity theft and systemic attacks on our systems. Although a
large portion of fraudulent activity is addressed through the charge-back systems and procedures maintained by the card association networks, we are often
responsible for other losses due to merchant and cardholder fraud. No system or procedures established to detect and reduce the impact of fraud are entirely
effective. We recorded fraud losses of $116,613 and $147,362, respectively, in 2020 and 2019. We experienced a reduction in fraud accounts in 2020 as a
result of implementing an invite-only platform to reduce the ability of fraudsters to enroll on the platform and create accounts. Although we actively devote
efforts to effectively manage risk and prevent fraud, we could nevertheless experience future increases in fraud losses over our historical experience.
Our prepaid cardholders can in some circumstances incur charges in excess of the funds available in their accounts and are liable for the resulting overdrawn
account balance. Although we generally decline authorization attempts for amounts that exceed the available balance in a prepaid cardholders account, the
application of the card association networks’ rules and regulations, the timing of the settlement of transactions and the assessment of subscription,
maintenance or other fees can, among other things, result in overdrawn card accounts. As of December 31, 2020, our prepaid cardholders’ overdrawn account
balances totaled $17,604.
Although we maintain reserves for fraud and other losses, our exposure to these types of risks may exceed our reserve levels for a variety of reasons,
including our failure to predict the actual recovery rate, failure to effectively manage risk and failure to prevent fraud. Accordingly, our business, results of
operations and financial condition could be materially and adversely affected to the extent that we incur losses resulting from overdrawn cardholder accounts
and fraudulent activity that exceed our designated reserves or if we determine that it is necessary to increase our reserves substantially in order to address any
increased recovery risk.
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Our business strategy includes identifying businesses and assets to acquire, and if we cannot integrate acquisitions into our company successfully, we may
have limited growth.
Our success partially depends upon our ability to identify and acquire undervalued businesses and merchant portfolios within our industry. Although we
believe that there are companies and portfolios available for potential acquisition that might offer attractive business opportunities, we may not be able to
make any acquisitions, and if we do make acquisitions, they may not be profitable. As a result, our business may not grow and regain profitability.
If we do not manage our growth, then we may not be able to regain or sustain profitability.
In order to manage our growth successfully, we will have to continue to improve our operational, management and financial systems and expand our work
force. A significant increase in our customer base may necessitate the hiring of a significant number of additional personnel, qualified candidates for which,
at the time needed, may be in short supply. In addition, the expansion and adaptation of our computer and administrative infrastructure will require
substantial operational, management and financial resources. Although we believe that our current infrastructure is adequate to meet the needs of our
customers in the foreseeable future, we may not be able to expand and adapt our infrastructure to meet additional demand on a timely basis, at a
commercially reasonable cost, or at all. If our management is unable to manage growth effectively, hire needed personnel, expand and adapt our computer
infrastructure and improve our operational, management, and financial systems and controls, we may not regain profitability.
If we do not manage our credit risks related to our merchant accounts, we may incur significant losses.
We rely on the Federal Reserve’s Automated Clearing House system for electronic fund transfers and the Visa, Mastercard and Discover associations for
settlement of payments by credit or debit card on behalf of our merchant customers. In our use of these established payment clearance systems, we generally
bear the credit risks arising from returned transactions caused by insufficient funds, stop payment orders, closed accounts, frozen accounts, unauthorized use,
disputes, customer charge backs, theft or fraud. Consequently, we assume the credit risk of merchant disputes, fraud, insolvency or bankruptcy in the event
we attempt to recover funds related to such transactions from our customers. We have not experienced a significant increase in the rate of returned
transactions or incurred any losses with respect to such transactions. We utilize a number of systems and procedures to manage and limit credit risks, but if
these actions are not successful in managing such risks, we may incur significant losses.
We have adopted certain measures that may make it more difficult for a third party to acquire control of our Company.
Our Board of Director members are classified into three classes of directors serving staggered three-year terms. Such classification of the Board of Directors
expands the time required to change the composition of the majority of directors and may discourage a proxy contest or other takeover bid for our company.
RISKS RELATED TO OUR INDUSTRY
The electronic commerce market is evolving and if it does not grow, we may not be able to sell sufficient services to make our business viable.
The electronic commerce market is a service industry that continues to grow significantly. If the electronic commerce market fails to grow or grows slower
than anticipated, or if we, despite an investment of significant resources, are unable to adapt to meet changing customer requirements or technological
changes in this emerging market, or if our services and related products do not maintain a proportionate degree of acceptance in this growing market, our
business may not grow and could even fail. Additionally, the security and privacy concerns of existing and potential customers may inhibit the growth of the
electronic commerce market in general, and our customer base and revenues, in particular. Similar to the emergence of the credit card and automatic teller
machine industries, we and other organizations serving the electronic commerce market must educate users that electronic transactions use encryption
technology and other electronic security measures that make electronic transactions more secure than paper-based transactions.
Changes in regulation of electronic commerce and related financial services industries could increase our costs and limit our business opportunities.
We believe that we are not required to be licensed by the Office of the Comptroller of the Currency, the Federal Reserve Board, or other federal or state
agencies that regulate or monitor banks or other types of providers of electronic commerce services. It is possible that a federal or state agency will attempt to
regulate providers of electronic commerce services, which could impede our ability to do business in the regulator's jurisdiction. Our business has also been
affected by anti-terrorism legislation, such as the USA PATRIOT Act. Banking-related provisions of the USA PATRIOT Act have been implemented as
additions to the banking rules regarding monetary instrument sales record keeping requirements and tracking of cash movements. In our capacity as an agent
for Sunrise Banks, N.A. and Metropolitan Commercial Bank, the issuing banks for our prepaid card programs and in our capacity as an agent for Fifth Third
Bank, Evolve Bank & Trust, Metropolitan Commercial Bank, NABC and TransPecos Bank, the sponsoring banks for our ACH services, we are required to
comply with these rules. We are also required to implement a Customer Identification Program and establish an Anti-Money Laundering program and to
report any suspected money laundering to the appropriate agencies. Our compliance with such regulations increases our responsibilities and costs associated
with the administration of our debit card programs. We are also subject to various laws and regulations relating to commercial transactions, such as the
Uniform Commercial Code, and may be subject to the electronic funds transfer rules embodied in Regulation E, promulgated by the Federal Reserve Board.
Given the expansion of the electronic commerce market, the Federal Reserve Board might revise Regulation E or adopt new rules for electronic funds
transfer affecting users other than consumers. Because of growth in the electronic commerce market, Congress has held hearings on whether to regulate
providers of services and transactions in the electronic commerce market. It is possible that Congress or individual states could enact laws regulating the
electronic commerce market. If enacted, such laws, rules and regulations could be imposed on our business and industry and could increase our costs or limit
our business opportunities.
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If we cannot compete successfully in our industry, we could lose market share and our costs could increase.
Portions of the electronic commerce market are becoming increasingly competitive. We expect to face growing competition in all areas of the electronic
payment processing market. New companies could emerge and compete for merchants of all sizes. We expect competition to increase from both established
and emerging companies and that such increased competition could lower our market share and increase our costs. Moreover, our current and potential
competitors, many of whom have greater financial, technical, marketing and other resources than us, may respond more quickly than us to new or emerging
technologies or could expand to compete directly against us in any or all of our target markets. Accordingly, it is possible that current or potential competitors
could rapidly acquire market share. We may not be able to compete against current or future competitors successfully. Additionally, competitive pressures
may increase our costs, which could lower our earnings, if any.
Our stock price is volatile, and you may not be able to sell your shares at a price higher than what you paid.
RISKS RELATED TO OUR COMMON STOCK
The market for our common stock is highly volatile. In 2020, our stock price fluctuated between $0.75 and $3.72. The trading price of our common stock
could be subject to wide fluctuations in response to, among other things, quarterly variations in operating and financial results, announcements of
technological innovations or new products by our competitors or us, changes in prices of our products and services or our competitors' products and services,
changes in product mix, or changes in our revenue and revenue growth rates.
“Penny stock” rules may make buying or selling our securities difficult which may make our stock less liquid and make it harder for investors to buy and sell
our shares.
Trading in our securities is subject to the SEC’s “penny stock” rules, and it is anticipated that trading in our securities will continue to be subject to the penny
stock rules for the foreseeable future. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of
less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer who recommends our securities to persons other than prior
customers and accredited investors must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser's
written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers
must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The
additional burdens imposed upon broker-dealers by these requirements may discourage broker-dealers from recommending transactions in our securities,
which could severely limit the liquidity of our securities and consequently adversely affect the market price for our securities.
If security or industry analysts publish reports that are interpreted negatively by the investment community, publish negative research reports about our
business, cease coverage of our company or fail to regularly publish reports or us, our share price could decline.
The trading for our common stock depends, to some extent, on the research and reports that security or industry analyst publish about us, our business, our
market and our competitors. We do not have any control over these analysts or the information contained in their reports. If one or more analysts publish
reports that are interpreted negatively by the investment community or have a negative tone about our business, financial or operating performance or
industry, our share price could decline. In addition, if a majority of our analysts cease coverage of our company or fail to regularly publish reports on us, we
could lose visibility in the financial markets, which could cause our share price to decline.
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Additional stock issuances could result in significant dilution to our stockholders.
We may issue additional equity securities to raise capital, make acquisitions or for a variety of other purposes. Any such stock issuances will result in dilution
to existing holders of our stock. We rely on equity-based compensation as an important tool in recruiting and retaining employees. The amount of dilution
due to future equity-based compensation issued to our employees and other additional issuances could be substantial.
ITEM 2. PROPERTIES.
We entered into a lease in San Antonio, Texas commencing on May 1, 2018 for our headquarters and operations. The lease is for a period of 75 months and
expires on July 31, 2024. The space leased ranges from 6,000 square feet to 10,535 square feet. Annual rents during the lease term will range from $117,000
to $232,000. Rental expense under the lease was $136,713 and $199,702 for the years ended December 31, 2020 and 2019, respectively.
We also entered into a lease in Nashville, Tennessee commencing on March 1, 2018 for our Nashville based sales organization. The lease is for a period of 62
months and expires on April 30, 2023. The space leased is 3,794 square feet. Annual rents during the lease term range from $117,000 to $122,000. Rental
expense for the years ended December 31, 2020 and 2019 were $81,474 and $112,108, respectively.
On December 15, 2020, we assumed a lease in San Antonio, Texas as a part of the Information Management Solutions, LLC acquisition for our employees
and warehouse operations. The lease has a remaining life of 45 months and expires on September 30, 2024. The space leased is 22,400 square feet. Annual
rents during the lease term range from $123,554 to $133,703.
On January 1, 2021, we entered into a lease in Austin, Texas commencing on January 1, 2021 for our Austin technology organization. The lease is for a
period of 25 months and expires on January 31, 2023. The space leased is 1,890 square feet. Annual rents during the lease term is $55,755.
On March 15, 2021, we entered into a lease amendment to our existing lease in San Antonio, Texas commencing April 1, 2021 and expiring on September
30, 2024 running concurrently with the existing lease. The incremental space leased is 2,734 square feet. The incremental annual rent during the lease term
ranges from $56,047 to $60,148.
We believe that our existing and new properties will be adequate to meet our needs through December 31, 2021.
ITEM 3. LEGAL PROCEEDINGS.
C2Go Note Receivable
Under a loan and security agreement dated February 2, 2016, we loaned the principal amount of $200,000 to C2Go, Inc. with an interest rate of 10% per
annum for a term of 18 months. The loan was secured by a first lien on all assets of C2Go. C2Go defaulted under the note by failing to repay the loan plus
interest on August 2, 2017. On December 7, 2017, we entered into a note purchase and settlement agreement with C2Go and Mercury Investment Partners
LLC. There are no assurances that we will be able to recover the remaining $145,000 principal and there are no assurances there will be any assets for us to
recover from our lien on all the assets of C2Go if payment in full of the obligation is not made. The loss reserve on the note receivable as of December 31,
2020 and 2019, was $145,000 reflecting a "more likely than not" recognition threshold.
Vaden Landers
On January 19, 2021, we initiated a lawsuit in Bexar County, Texas against our former Chief Revenue Officer, Vaden Landers. In the lawsuit, which is
styled: Usio, Inc. v. Vaden Landers, Cause No. 2021CI01069, 407th Judicial District Court, Bexar County, Texas, we allege that Mr. Landers violated the
provisions of his employment agreement dated September 1, 2017 - specifically his non-compete obligations. The state court lawsuit only seeks injunctive
relief against Landers. We also instituted an action before the American Arbitration Association on February 2, 2021.
Mr. Landers has refused to participate in the arbitration proceeding and has not filed an answer in the proceeding. Mr. Landers has answered the state court
lawsuit, denying our allegations. Mr. Landers has also asserted counterclaim against us for breach of contract, tortious interference with contract and
defamation. Mr. Landers seeks damages in excess of $1,000,000. We deny Mr. Landers’ allegations and do not believe that his counterclaims have any
merit.
Through our investigation, we learned that Mr. Landers committed other violations of his employment agreement and intend to pursue those claims in
arbitration. Both the state court litigation and the arbitration are in their initial stages and no discovery has been conducted by the parties.
Aside from the lawsuits described above, we 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 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
Market Information
Effective on June 26, 2019 we changed our corporate name from Payment Data Systems, Inc. to Usio, Inc. Our common stock is listed under the Nasdaq
Capital Markets Exchange under the ticker symbol "USIO". Prior to that change, our common stock had been listed on the Nasdaq Capital Markets Exchange
under the ticker symbol “PYDS” since August 11, 2015. Prior to that our common stock was quoted on the OTCQB, the OTC market tier for companies that
are reporting with the SEC, and on the OTC Bulletin Board, or OTCBB, also under the ticker symbol “PYDS”.
Holders
On March 18, 2021, 25,030,668 shares of our common stock were issued and outstanding. As of March 18, 2021, there were 3,886 stockholders of record of
our common stock.
Dividends
We have never declared or paid cash or stock dividends, and we have no plans to pay any such dividends in the foreseeable future. Instead, we intend to
reinvest our earnings, if any.
Securities Authorized for Issuance under Equity Compensation Plans
The information required to be disclosed by Item 201(d) of Regulation S-K, “Securities Authorized for Issuance Under Equity Compensation Plans,” is
incorporated herein by reference. Refer to Item 12 of Part III of this annual report on Form 10-K for additional information.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
Since September 30, 2020, we issued the following unregistered securities.
On December 15, 2020, we issued 945,599 warrants to purchase 945,599 shares of our common stock, $0.001 par value per share, with an exercise price of
$4.23 per share to Information Management Solutions, LLC. The warrants vest in two installments of 315,200 on December 15, 2021 and December 15,
2022 and one installment of 315,199 on December 15, 2023. The warrants have a term of five years from vest.
On February 5, 2021, we issued 19,795 shares of common stock to University FanCards, LLC upon the cashless exercise of 30,000 warrants with an exercise
price of $2.00. The shares were valued at $5.88 per share.
We relied on the Section 4(a)(2) exemption from securities registration under the federal securities laws for transactions not involving any public offering. No
advertising or general solicitation was employed in offering the securities. The securities were issued to an accredited investor. The securities were offered
for investment purposes only and not for the purpose of resale or distribution. The transfer thereof was appropriately restricted by us.
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On November 2, 2016, we announced that our Board of Directors authorized the repurchase of up to $1 million of our common stock from time to time on
the open market, in block transactions, or in privately negotiated transactions. On January 9, 2018, the Board of Directors added an additional $2 million to
the buyback plan. The 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 repurchase plan. The program was used for purchases of stock from employees and directors; and for open-market
purchases through a broker. On November 7, 2019, the Board of Directors approved the renewal of the share buyback program. The Board approved a limit
of $1,420,000 which was rolled over from the prior buyback program with a three-year duration. The new buyback program terminates on the earliest of
September 30, 2022, the date all funds have been exhausted, or the date the Board of Directors, at its sole discretion, terminates or suspends the program. The
Board of Directors ratified share purchases between September 29, 2019 and November 7, 2019 and such share repurchases count against the newly
approved dollar limit. $1,120,409 were available at December 31, 2020 under this program. The following table shows our recent stock purchases under the
buyback plan as of December 31, 2020:
(d)
Maximum number
(or
approximate
dollar
(c)
Total number of
shares
(or units)
purchased as
(a)
Total number
of
shares (or
units)
Period
purchased
(b)
Average price
paid
per share (or
unit)
part of publicly
announced plans
or
value) of shares (or
units) that may yet
be
purchased under
the
programs
plans or programs
October 1, 2020 to October 31, 2020
November 1, 2020 to November 30, 2020
Total
1,186 $
62,296 $
63,482
1.52
1.58
874,009 $
936,305 $
$
1,218,570
1,120,409
1,120,409
On January 6, 2019, we repurchased 11,860 shares for $21,822 in a private transaction at the closing price on January 6, 2019 of $1.84 per share from Tom
Jewell, the Company's Chief Financial Officer, to cover his share of taxes.
On January 6, 2020, we repurchased 11,860 shares for $20,636 in a private transaction at the closing price on January 6, 2020 of $1.74 per share from Tom
Jewell, the Company's Chief Financial Officer, to cover his share of taxes.
On November 1, 2020, we repurchased 54,756 shares for $86,399 in a private transaction at the closing price of $1.5779 on October 15, 2020 per share from
Louis Hoch, the Company's Chief Executive Officer to cover his share of his taxes.
On January 6, 2021, we repurchased 11,860 shares for $38,545 in a private transaction at the closing price on January 6, 2021 of $3.25 per share from Tom
Jewell, the Company's Chief Financial Officer, to cover his share of taxes.
ITEM 6. SELECTED FINANCIAL DATA.
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial
statements and notes thereto, and other financial information included elsewhere in this annual report on Form 10-K. This report contains forward-looking
statements. When used in this report, the words “anticipates,” “suggests,” “estimates,” “plans,” “projects,” “continue,” “ongoing,” “potential,” “expect,”
“predict,” “believe,” “intend,” “may,” “will,” “should,” “could,” “would,” “proposal,” and similar expressions are intended to identify forward-looking
statements. Actual results in future periods may differ materially from those expressed or implied in such forward-looking statements as a result of a number
of factors, including, but not limited to, the risks discussed under the heading "Risk Factors" in this annual report on and elsewhere in this annual report on
Form 10-K.
Overview
Usio, Inc. 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. Our website is located at www.usio.com. Information contained on our website does not constitute part of this
prospectus.
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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.
We offer customizable prepaid cards companies use for expense management, incentives, refunds, claims and disbursements, unique forms of compensation
like per diems, and more. 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. 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 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, and Wells Fargo Bank.
Through our Akimbo Now technology we offer a comprehensive money disbursement platform that allows businesses to pay their contractors, employees, or
other recipients by choosing between a prepaid debit Mastercard, real-time deposit to a checking account, traditional ACH, direct deposit or paper check.
With the acquisition of the assets of Information Management Solutions, LLC in December 2020, we now 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 the acquisition, we acquired new customers and their sales force.
We reported a net loss of $2.9 million and $5.1 million for the years ended December 31, 2020 and December 31, 2019, respectively. We have an
accumulated deficit of $65.1 million at December 31, 2020.
In 2020, we processed $3.34 billion for all payment types, which was down by 5.6% from the record prior year volume of $3.54 billion total dollars
processed. Total transactions processed were up 19% to a record 18.2 million. ACH or electronic check transaction processing volumes for 2020 decreased
by 12% compared to 2019. Returned check transactions decreased by 29% in 2020 compared to 2019. Credit card dollars processed in 2020 increased by
14% compared to 2019 and credit card transactions processed for 2020 increased by 58% compared to 2019. Both the credit card dollars and transactions
processed represent all-time records for the Company. Prepaid card load volume increased by 162% and transaction volume increased by 97%.
To regain and sustain profitability, we must, among other things, continue to grow our top line revenues, grow and maintain our customer base, enhance and
continue to refine existing and new successful marketing strategies, continue to maintain and upgrade our technology and transaction processing systems,
provide superior customer service, respond to competitive developments, attract, retain and motivate qualified personnel, and respond to unforeseen industry
developments and other factors.
We believe that our success will depend in large part on our ability to (a) aggressively drive top line growth, (b) add talented sales people, (c) add quality
customers, (d) meet evolving customer requirements, (e) adapt to technological changes in an ever changing market, (f) be opportunistic in identifying and
acquiring portfolios that expand or complement our existing customer base and (g) effectively manage our operating expenses as we aggressively scale the
business. Our near-term objectives will be focused on aggressively driving top line growth and identifying and acquiring portfolios that complement and
support our growth strategy. We will continuously assess the ability of our employees and other resources to achieve our targeted growth and continuously
enhance our technology platform to drive our competitive advantage.
Critical Accounting Policies
General
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 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, 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 the following
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 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 Consolidated Financial Statements, Note 1. Description of Business and Summary
of Significant Accounting Policies.
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, the program management and processing of
prepaid debit cards.
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With the acquisition of the assets of Information Management Solutions, LLC in December 2020, we now 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.
ACH and complementary service revenue
Credit card revenue
Prepaid card services revenue
Output solutions revenue
Total Revenue
ACH and complementary service revenue
Credit card revenue
Prepaid card services revenue
Output solutions revenue
Total Revenue
Three Months Ended December 31,
2020
2019
$ Change
% Change
$
$
2,391,256 $
4,806,053
1,025,168
1,160,037
9,382,514 $
2,314,021 $
4,534,265
519,106
—
7,367,392 $
77,235
271,788
506,062
1,160,037
2,015,122
3.3%
6.0%
97.5%
100.0%
27.4%
2020
Year Ended December 31,
$ Change
2019
% Change
$
$
8,471,705 $
19,453,501
3,166,580
1,160,037
32,251,823 $
9,343,974 $
17,329,322
1,527,239
—
28,200,535 $
(872,269)
2,124,179
1,639,341
1,160,037
4,051,288
(9.3)%
12.3%
107.3%
100.0%
14.4%
Total revenues for 2020 increased by 14.4% to $32.3 million from $28.2 million in 2019. The key drivers of the revenue growth were gains in our Prepaid
business line associated with multiple contracts with major cities in the U.S. facilitating disbursements to individuals and families in need of financial
assistance and, growth in our PayFac business line. 2020 also included one month of financial results from our acquisition of Information Management
Solutions which we re-branded as Usio Output Solutions. Our ACH and complementary service revenues were down primarily as a result of the COVID
pandemic and the adverse impact on our non-bank consumer lending business offset by gains in our PINless debit product.
Operating Expenses
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 services expense was $24.9 million and $22.3 million for 2020 and 2019, respectively. Cost of
services expenses increased by $2.6 million, or 11.8%, in 2020 as compared to 2019 primarily due to increased transaction costs associated with our revenue
growth.
Gross Profit
Gross profit is the net profit after deducting the cost of services. Gross profits were $7.4 million and $5.9 million for 2020 and 2019, respectively. Gross
profit increased by $1.4 million, or 24.0%, in 2020 as compared to 2019. The key drivers of the profit growth were incremental profits associated
with revenue growth in our Prepaid, Credit Card and Output Solutions portfolios.
Stock-based Compensation
Stock-based compensation expense increased by $0.2 million in 2020 to $1.5 million from $1.3 million in 2019. The increase in stock-based compensation
was a result of the stock grants during 2019 and 2020. Our stock-based compensation expenses for 2020 and 2019 represented the amortization of deferred
compensation expenses related to incentive stock grants to employees, officers and directors.
Other Selling, General and Administrative Expenses
Other selling, general and administrative expenses increased to $8.1 million in 2020 from $7.7 million in 2019. The increase of $0.4 million, or
5.7% represented continued investments in people and related expenses associated primarily with our support of payment facilitation and prepaid growth
initiatives.
Depreciation and Amortization
Depreciation and amortization expense decreased to $1.5 million in 2020 as compared to $2.0 million in 2019. The decrease of $0.5 million, or 24.9%, was
primarily attributable to the full depreciation in 2019 of certain assets.
Other Income
Interest income decreased to $59,392 in 2020 from $81,790 in 2019 due to lower interest-bearing cash balances. Other income (expense) was $902 for 2020,
as compared to expense of $32,653 for 2019. Other income and expense included $813,500 of incremental income associated with the forgiveness of our
U.S. Small Business Administration Payroll Protection Plan (PPP) loan in December, 2020.
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Income Taxes
Income tax expense was $23,109 in 2020 and $101,888 in 2019. The income tax expense represents amounts incurred under the Texas margin tax and
Tennessee franchise tax offset by refunds of federal taxes paid.
Net Income (Loss)
We reported a net loss of $2.9 million and $5.1 million for the years ended December 31, 2020 and December 31, 2019, respectively. The reduction in net
loss was primarily related to our increased gross profits generated plus forgiveness of our PPP loan.
Liquidity and Capital Resources
At December 31, 2020, we had $5.0 million of cash and cash equivalents, as compared to $2.1 million of cash and cash equivalents at December 31, 2019.
We reported a net loss of $2.9 million and $5.1 million for the years ended December 31, 2020 and 2019, respectively. Additionally, we reported working
capital of $5.6 million and $1.3 million at December 31, 2020 and 2019, respectively.
We received funding under the Paycheck Protection Program (PPP) as part of the Coronavirus Aid, Relief, and Economic Security Act (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, 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. Our loan forgiveness was approved in full by the U.S. Small
Business Administration on December 14, 2020.
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 us from the public offering were
$7.4 million, after deducting the offering expenses and fees payable by us.
On February 14, 2019, we entered into a placement agency agreement with Maxim Group LLC with respect to the issuance and sale of an aggregate of
769,230 shares of common stock at an offering price of $2.60 per share in a public offering. We agreed to pay Maxim a cash fee of equal to 6% of the
aggregate gross proceeds raised in the offering and legal fees and expenses of up to $40,000. The net proceeds to us from the public offering were $1.8
million, after deducting the offering expenses and fees payable by us. The proceeds were used for general corporate purposes and working capital.
Cash Flows
Net cash provided by operating activities totaled $6.3 million for 2020 as compared to net cash used by operating activities of $3.7 million in 2019. After
adjusting for the impact of operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations and merchant reserves included in the
statement of cash flows, net cash used by operating activities was $0.4 million and $1.3 million for the year ended December 31, 2020 and 2019,
respectively. The increase in net cash generated by operating activities in 2020 was primarily attributable to increases in our Prepaid card loads and customer
deposits acquired with our 2020 acquisition of Information Management Solutions, LLC.
Net cash used by investing activities was $6.8 million for 2020 and $0.6 million in 2019. The increase in investing activities includes the cash payment to
Information Managements Solutions, LLC of $5.9 million associated with our acquisition and capitalization of internal-use software projects and other
capital expenditures.
Net cash provided from financing activities for 2020 was $10.0 million compared to cash from financing activities of $1.7 million for 2019. The cash
provided by financing activities were as a result of:
The $10.0 million of proceeds from financing activities included $813,500 from PPP Loan proceeds, gross proceeds of $3.0 million from a private offering
with Topline Capital Partners, LP and net proceeds of $7.4 million from Ladenburg, Thalmann & Company, Inc. from a public offering (per below) and net
of Forgiveness of the PPP Loan in the amount of $813,500 and Treasury stock purchases of $280,269.
We received funding under the Paycheck Protection Program (PPP) as part of the Coronavirus Aid, Relief, and Economic Security Act (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, 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. Our loan forgiveness was approved in full by the U.S. Small
Business Administration on December 14, 2020.
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.
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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 us from the public offering were
$7.4 million, after deducting the offering expenses and fees payable by us.
Overall, our cash position improved significantly as a result of financing activities completed in 2020.
The 2019 cash provided by financing activities was the result of a public offering which raised $1.8 million in net proceeds. On February 14, 2019, we
entered into a placement agency agreement with Maxim Group LLC with respect to the issuance and sale of an aggregate of 769,230 shares of common stock
at an offering price of $2.60 per share in a public offering. We agreed to pay Maxim Group, LLC a cash fee of equal to 6% of the aggregate gross proceeds
raised in the offering and legal fees and expenses of up to $40,000. The net proceeds to us from the public offering were $1.8 million, after deducting the
offering expenses and fees payable by us. We used the funds for general corporate purposes and working capital.
Material Trends and Uncertainties
The ongoing COVID-19 pandemic has 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 pandemic. 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.
At this time, certain states are reducing mandated operating restrictions and efforts are underway to provide vaccinations to as many people as possible. The
government has issued several rounds of COVID-19 relief and stimulus payments and other programs to stimulate economic activity and facilitate an
economic recovery.
Our business was initially adversely affected as doctors offices, dental offices, veterinarian offices and non-bank consumer lending accounts were ordered
closed in connection with curbing the spread of the pandemic. As these doctors, dental and veterinarian offices re-opened, these businesses quickly
recovered and returned to levels higher than pre-COVID. Consumer lending merchants were adversely affected by COVID relief payments made during the
pandemic and the pause placed on past due amounts owed. The level of activity for consumer lending merchants has not returned to pre-COVID levels. We
did receive a gain during COVID in our prepaid business line, as we were able to work in conjunction with major cities across the U.S. to use our prepaid
debit cards to facilitate the transfer of money via our debit cards from city foundations to the local residents in need of financial assistance.
The impacts and recovery from the COVID-19 pandemic are still a work in process. We were not impacted in the magnitude of other payment processors as
our customer base had limited exposure to retail facing businesses. With that framework, we will continue to monitor the overall impact on our operations
and take necessary steps to ensure the safety of our employees and customers.
We continue to monitor the impact of the COVID-19 pandemic closely.
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Warrants
On August 21, 2018, we issued to University Fancards, LLC warrants to purchase 150,000 shares of our common stock. 30,000 warrants vested immediately
upon the date on which the first financial transaction was processed on a card account issued under the prepaid agreement, which occurred on October 5,
2018. 120,000 warrants vest annually over 4 years in 30,000 warrant increments beginning on July 31, 2019 and becoming fully vested on July 31, 2022. The
exercise price for the 30,000 warrants that vested immediately on October 5, 2018 was $1.80 per share. The exercise price for the remaining 120,000
warrants will be the lesser of $2.00 per share or 120% of the market price of our common stock on the vesting date of the warrant.
On August 12, 2020, we issued 27,051 shares of common stock to University FanCards, LLC in a cashless exercise at $3.46 per common share in exchange
for 60,000 warrants exercised by FanCards, LLC. On February 5, 2021, we issued 19,795 shares of common stock to University FanCards, LLC in a cashless
exercise at $5.88 per common share in exchange for 30,000 warrants exercised by FanCards, LLC.
On December 15, 2020, we issued to Information Management Solutions, LLC warrants to purchase 945,599 shares of our common stock, $0.001 par value
per share, with an exercise price of $4.23 per share. The warrants were valued using the Black-Scholes option pricing model. Assumptions used were as
follows: (i) the fair value of the underlying stock was $0.58; (ii) the risk-free interest rate is 0.09%; (iii) the contractual life is 5 years; (iv) the dividend yield
of 0%; and (v) the volatility is 59.9%. The fair value of the warrants amounted to $552,283 and will be recorded as an increase in the customer list asset and
have a term of five years from time of vest.
Loan and Security Agreement with C2Go, Inc.
Under a loan and security agreement dated February 2, 2016, we loaned the principal amount of $200,000 to C2Go, Inc. with an interest rate of 10% per
annum for a term of 18 months. The loan was secured by a first lien on all assets of C2Go. C2Go defaulted under the note by failing to repay the loan plus
interest on August 2, 2017. On December 7, 2017, we entered into a note purchase and settlement agreement with C2Go and Mercury Investment Partners
LLC.
There are no assurances that we will be able to recover the remaining $145,000 principal and there are no assurances there will be any assets for us to recover
from its lien on all the assets of C2Go if payment in full of the obligation is not made. The loss reserve on the note receivable as of December 31, 2020 and
2019, was $145,000 reflecting a "more likely than not" recognition threshold.
Off-Balance Sheet Arrangements
We 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the years ended December 31, 2020 and 2019
Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
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31
33
34
35
36
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Usio, Inc. and Subsidiaries
San Antonio, Texas
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Usio, Inc. and Subsidiaries (collectively referred to as the “Company”) as of December
31, 2020 and 2019, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows, for each of the two years in the
period ended December 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019 and the results of its
operations and its cash flows for each of the years in the two-year period ended December 31, 2020 in conformity with accounting principles generally
accepted in the United States of America.
Basis of Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As a part of our audits, we are required to obtain an understanding of
internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter
in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Intangible Assets – Customer Lists
Description of the Matter
As of December 31, 2020, the Company had intangible assets relating to acquired customer lists which are recorded at their cost basis net of accumulated
amortization. On at least an annual basis, the company performs an analysis of the carrying value of these customer lists to evaluate the assets for impairment.
The customer list is amortized over a five-year term and no impairment has been recognized on the customer list portfolios since their acquisition. We
identified the customer list valuation as a critical audit matter because of the significant estimates and forward-looking assumptions used which could be
affected by future economic and market conditions.
How We Addressed the Matter in Our Audit
To test the fair value of the Company's customer list intangible assets, our audit procedures included, among others, evaluating the Company's valuation
model, evaluating the method and significant assumptions used, and testing the completeness and accuracy of the underlying data supporting the significant
assumptions and estimates. We also evaluated whether the key factors considered in the evaluation were consistent with evidence obtained in other areas of
the audit.
Deferred Tax Assets – Valuation Allowance
Description of the Matter
The Company recognizes deferred tax assets to the extent that it is expected that these assets are more likely than not to be realized. The Company evaluates
the realizability of the deferred tax assets, and to the extent that the Company estimates that it is more likely than not that a benefit will not be realized, the
carrying amount of the deferred tax assets is reduced with a valuation allowance. We identified the valuation of deferred tax assets as a critical audit matter
because of the significant judgments made by management in projecting future taxable income.
How We Addressed the Matter in Our Audit
Our audit procedures related to projected future taxable income and the determination of whether it is more likely than not that the deferred tax assets will be
realized included the evaluation of the reasonableness of management’s projected future taxable income. We compared the estimates to historical earnings
and evaluated the inputs and assumptions used by management for developing future forecasts.
/s/ ADKF, P.C.
ADKF, P.C.
San Antonio, Texas
March 29, 2021
We have served as the Company's auditor since 2004.
32
USIO, INC.
CONSOLIDATED BALANCE SHEETS
Table of Contents
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
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
Settlement processing obligations
Prepaid card load obligations
Customer deposits
Deferred revenues
Current liabilities before merchant reserve obligations
Merchant reserve obligations
Total current liabilities
Non-current liabilities:
Operating lease liabilities, non-current portion
Total liabilities
Stockholders' Equity:
December 31, 2020 December 31, 2019
$
5,011,132 $
2,863,638
43,558,442
7,610,242
1,305,296
176,466
301,755
60,826,971
8,265,555
69,092,526
2,137,580
1,274,001
38,906,780
528,434
—
—
183,575
43,030,370
10,016,904
53,047,274
3,105,926
1,557,521
6,035,761
1,394,000
2,671,266
368,078
10,469,105
2,676,427
1,394,000
2,480,902
404,055
6,955,384
$
82,667,557 $
61,560,179
$
851,349 $
1,463,944
346,913
43,558,442
7,610,242
1,305,296
66,572
55,202,758
8,265,555
63,468,313
419,849
1,360,551
356,184
38,906,780
528,434
—
123,529
41,695,327
10,016,904
51,712,231
2,495,883
65,964,196
2,279,613
53,991,844
Preferred stock, $0.01 par value, 10,000,000 shares authorized; -0- shares issued and outstanding in 2020
and 2019
—
—
Common stock, $0.001 par value, 200,000,000 shares authorized; 26,260,776 and 18,224,577 issued and
24,974,995 and 17,104,998 outstanding in 2020 and 2019 (see Note 12)
Additional paid-in capital
Treasury stock, at cost; 1,285,781 and 1,119,579 shares in 2020 and 2019 (see Note 12)
Deferred compensation
Accumulated deficit
Total stockholders' equity
194,692
89,659,433
(2,165,721)
(5,926,872)
(65,058,171)
16,703,361
186,656
77,055,273
(1,885,452)
(5,636,154)
(62,151,988)
7,568,335
Total Liabilities and Stockholders' Equity
$
82,667,557 $
61,560,179
The accompanying notes are an integral part of these consolidated financial statements.
33
USIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Table of Contents
Revenues
Cost of services
Gross profit
Selling, general and administrative:
Stock-based compensation
Other expenses
Depreciation and Amortization
Total operating expenses
Operating (loss)
Other income:
Interest income
PPP Loan forgiveness
Other income (expense)
Other income and (expense), net
(Loss) before income taxes
Income taxes
Net (Loss)
(Loss) Per Share
Basic (loss) per common share:
Diluted (loss) per common share:
Weighted average common shares outstanding (see Note 12)
Basic
Diluted
December 31, 2020 December 31, 2019
$
32,251,823 $
24,875,930
7,375,893
28,200,535
22,251,325
5,949,210
1,475,328
8,139,219
1,518,214
11,132,761
1,292,419
7,697,267
2,022,520
11,012,206
(3,756,868)
(5,062,996)
59,392
813,500
902
873,794
81,790
—
(32,653)
49,137
(2,883,074)
23,109
(5,013,859)
101,888
(2,906,183) $
(5,115,747)
(0.19) $
(0.19) $
(0.39)
(0.39)
15,428,798
15,428,798
12,958,067
12,958,067
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
34
Table of Contents
USIO, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
Total
Common Stock
Shares
Amount
Paid - In Treasury
Capital
Stock
Deferred
Compensation
Accumulated Stockholders'
Deficit
Equity
Balance at December 31, 2018
17,129,680 $
185,561 $ 74,568,627 $ (1,813,546) $ (6,270,675) $ (57,036,241) $ 9,633,726
Issuance of common stock, public offering
Issuance of common stock, employees,
restricted
Issuance of common stock under equity
incentive plan
Reversal of deferred compensation
amortization that did not vest
Warrant compensation cost
Deferred compensation amortization
Purchase of treasury stock
Net (loss) for the year
769,230
769 1,793,136
—
—
—
1,793,905
175,000
175
272,825
—
(273,000)
—
—
156,667
157
397,999
—
—
—
398,156
(6,000)
—
—
—
—
(6)
—
—
—
—
(13,254)
35,940
—
—
—
—
—
—
(71,906)
—
13,260
—
894,261
—
—
—
—
—
—
(5,115,747)
—
35,940
894,261
(71,906)
(5,115,747)
Balance at December 31, 2019
18,224,577 $
186,656 $ 77,055,273 $ (1,885,452) $ (5,636,154) $ (62,151,988) $ 7,568,335
1,956,858
—
27,051
Issuance of common stock under equity
incentive plan
Warrant compensation cost
Cashless warrant exercise
Reversal of deferred compensation
amortization that did not vest
(450,000)
Issuance of common stock, public offering 4,705,883
Issuance of common stock, private offering 1,796,407
—
Deferred compensation amortization
—
Purchase of treasury stock
—
Net (loss) for the year
1,958 2,556,087
588,224
(27)
—
27
—
—
—
(1,937,620)
—
—
—
—
—
620,425
588,224
—
(450)
(791,550)
4,705 7,253,222
1,796 2,998,204
—
—
—
—
—
—
—
—
—
—
(280,269)
—
594,900
—
—
1,052,002
—
—
—
—
—
—
—
(2,906,183)
(197,100)
7,257,927
3,000,000
1,052,002
(280,269)
(2,906,183)
Balance at December 31, 2020
26,260,776 $
194,692 $ 89,659,433 $ (2,165,721) $ (5,926,872) $ (65,058,171) $ 16,703,361
The accompanying notes are an integral part of these consolidated financial statements.
35
Table of Contents
USIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating Activities
Net (loss)
Adjustments to reconcile net (loss) to net cash provided (used) by operating activities:
Depreciation
Amortization
Provision for loss on note receivable
Non-cash stock-based compensation
Amortization of warrant costs
Changes in operating assets and 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
Deferred revenue
Deferred rent
Net cash provided (used) by operating activities
Investing Activities
Purchases of property and equipment
Purchase of Information Management Solutions, LLC (IMS)
Net cash (used) by investing activities
Financing Activities
Proceeds from PPP Loan Program
Forgiveness of PPP Loan
Proceeds from public offering, net of expenses
Proceeds from private offering
Purchases of treasury stock
Net cash provided by financing activities
December 31, 2020 December 31, 2019
$
(2,906,183) $
(5,115,747)
518,214
1,000,000
—
1,475,328
35,943
(905,901)
(80,923)
(190,364)
35,977
(8,328)
534,893
206,999
7,081,808
(1,751,349)
1,305,296
(56,957)
—
6,294,453
(855,394)
(5,907,408)
(6,762,802)
813,500
(813,500)
7,257,925
3,000,000
(280,269)
9,977,656
1,022,520
1,000,000
108,750
1,292,419
35,940
(59,646)
(81,853)
(2,480,902)
(97,298)
—
619,505
2,635,797
(7,045)
(2,628,899)
—
103,529
(79,748)
(3,732,678)
(647,383)
—
(647,383)
—
—
1,793,905
—
(71,906)
1,721,999
Change in cash, cash equivalents, prepaid card loads, customer deposits and merchant reserves
Cash, cash equivalents, prepaid card loads, customer deposits and merchant reserves, beginning of year
9,509,307
12,682,918
(2,658,062)
15,340,980
Cash, Cash Equivalents, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End of
Year
$
22,192,225 $
12,682,918
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest
Income taxes
Non-cash transactions:
Issuance of stock warrants in exchange for purchase of IMS
Issuance of deferred stock compensation
$
— $
93,525
552,283
1,937,620
—
82,206
—
273,000
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Note 1. Description of Business and Summary of Significant Accounting Policies
Organization: Usio, Inc., along with its subsidiaries, FiCentive, Inc., a Nevada corporation, and Zbill, Inc., a Nevada corporation, provides integrated
electronic payment services, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH
network to billers and retailers. The company also has an additional wholly-owned subsidiary, Usio Output Solutions, Inc., which is the entity for the Output
Solutions operations. In addition, the Company operates various product websites, such as www.akimbocard.com, www.payfacinabox.com, and
www.singularpayments.com.
Principles of Consolidation and Basis of Presentation: The accompanying consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 for each agreement it is acting in the principal role. Merchants may be charged for these processing services at a
bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain
merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees for chargebacks or returns,
monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are
authorized and captured through third-party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to
credit card associations. Certain card distributors remit payment of fees earned 45 days after the end of the processing period. Prepaid card distributors have
payment terms of 30 days following the end of the month. Sales taxes billed are reported directly as a liability to the taxing authority and are not included in
revenue. Usio Output Solutions, Inc. provides bill preparation, presentment and mailing services. Revenue from Output solutions is recognized when the
related services are performed for printing and delivered to USPS for postage.
ACH and complementary service revenue
Credit card revenue
Prepaid card services revenue
Output solutions revenue
Total Revenue
2020
Year Ended December 31,
$ Change
2019
% Change
$
$
8,471,705 $
19,453,501
3,166,580
1,160,037
32,251,823 $
9,343,974 $
17,329,322
1,527,239
—
28,200,535 $
(872,269)
2,124,179
1,639,341
1,160,037
4,051,288
(9.3)%
12.3%
107.3%
100.0%
14.4%
Deferred Revenues: The Company records deferred revenues when it receives payments or issues invoices in advance of transferring control of promised
goods or services to a customer. The advance consideration received from a customer is deferred until the Company provides the customer that product or
service. At December 31, 2020 and 2019, the deferred revenues totaled $66,572 and $123,529.
The deferred revenue balances are as follows:
2020
2019
Deferred revenues, beginning of period
Deferred revenues, end of period
Revenue recognized in the period from amounts included in deferred revenues at the beginning of the
period
$
$
123,529 $
66,572
20,000
123,529
56,957 $
20,000
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.
Prepaid Card Load Assets: The Company maintains pre-funding accounts for its customers to facilitate prepaid card loads as initiated by our
customer. These prepaid card load assets are carried on the Company's balance sheet with a corresponding liability.
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 United States Postal Service. These customer deposits are carried on the Company's balance sheet with a corresponding liability.
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Table of Contents
Merchant Reserves: The Company has merchant reserve requirements associated with Automated Clearing House, or ACH transactions. The merchant
reserve assets are carried on the Company's balance sheet with a corresponding liability. Merchant Reserves are set for each merchant. Funds are collected
from each merchant and held as collateral to minimize contingent liabilities associated with any losses that may occur under the merchant agreement. While
this cash is not restricted in its use, the Company believes that designating this cash to collateralize Merchant Reserves strengthens its fiduciary standing with
the Company's member sponsors and is in accordance with the guidelines set by the card networks.
The reconciliation of cash and cash equivalents to cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves is as follows for
each period presented:
December 31, 2020 December 31, 2019
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
2,137,580 $
528,434
—
10,016,904
12,682,918 $
5,011,132 $
7,610,242
1,305,296
8,265,555
22,192,225 $
2,159,698
535,479
—
12,645,803
15,340,980
2,137,580
528,434
—
10,016,904
12,682,918
$
$
$
Accounts Receivable/Allowance for Estimated Losses: Accounts receivable are reported as outstanding principal net of an allowance for doubtful accounts of
$205,522 and $123,165 at December 31, 2020 and 2019, respectively.
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability or failure of its customers to make required
payments. The Company determines the allowance based on an account-by-account review, taking into consideration such factors as the age of the
outstanding balance, historical pattern of collections and financial condition of the customer. Past losses incurred by the Company due to bad debts have been
within its expectations. If the financial condition of its customers deteriorates, resulting in an impairment of their ability to make contractual payments,
additional allowances might be required. Estimates for bad debt losses are variable based on the volume of transactions processed and could increase or
decrease accordingly. The Company normally does not charge interest on accounts receivable.
Inventory: Inventory is stated at the lower of cost or net realizable value. At December 31, 2020, inventory consisted primarily of printing and paper supplies
used for Output solutions.
Property and Equipment: Property and equipment are stated at cost. Depreciation and amortization are computed on a straight-line method over the estimated
useful lives of the related assets, ranging from three to ten years. Leasehold improvements are amortized over the lesser of the estimated useful lives or
remaining lease period. Expenditures for maintenance and repairs are charged to expense as incurred.
Accounting for Internal Use Software: The Company capitalizes the costs associated with software developed and / or software obtained for internal use. The
software is capitalized when both the preliminary project stage is complete, and the software being developed is 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. For the years ended December 31, 2020 and December 31, 2019, the Company capitalized $759,923 and $518,785,
respectively.
Concentration of Credit Risk: Financial instruments that potentially expose the Company to credit risk consist of cash and cash equivalents, and accounts
receivable. The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent account
balances exceed the amount insured by the FDIC, which is $250,000. Accounts receivables potentially subject the Company to concentrations of credit risk.
The Company’s customer base operates in a variety of industries and is geographically dispersed. The Company closely monitors extensions of credit.
Estimated credit losses have been recorded in the consolidated financial statements. Recent credit losses have been within management's expectations. No
customer accounted for more than 10% of revenues in 2020 or 2019.
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Fair Value of Financial Instruments: Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings are
reflected in the accompanying consolidated financial statements at cost, which approximates fair value because of the short-term maturity of these
instruments.
Impairment of Long-Lived Assets and Intangible Assets: The Company reviews periodically, on at least an annual basis, the carrying value of its long-lived
assets and intangible assets and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the fair
value of a long-lived asset, determined based upon the estimated future cash inflows attributable to the asset, less estimated future cash outflows, is less than
the carrying amount, an impairment loss is recognized.
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 card processing, credit card, ACH or merchant 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 risk. In addition, the Company utilizes a number of 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 our loss experience and 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 with its prepaid card holders. This reserve amount is subject to the risk that actual
losses may be greater than our estimates. The Company has not incurred any significant processing losses to date. Estimates for processing losses vary based
on the volume of transactions processed and could increase or decrease accordingly. The Company evaluates its risk for such transactions and estimates its
potential processing losses based primarily on historical experience and other relevant factors. At December 31, 2020 and 2019, respectively, the Company’s
reserve for processing losses was $515,199 and $506,153, respectively.
Advertising Costs: Advertising is expensed as incurred. The Company incurred approximately $59,000 and $114,000 in advertising costs in 2020 and 2019,
respectively.
Income Taxes: Deferred tax assets and liabilities are recorded based on difference between financial reporting and tax basis of assets and liabilities and are
measured using 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 a great deal of judgment by management. U.S. generally accepted accounting principles prescribe 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 should
be recognized. Goodwill is amortized over 15 years for tax purposes.
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.
The Company has approximately $39.4 million of net operating loss carryforwards. However, the Company cannot predict with reasonable certainty whether
all of the available net operating loss carryforwards will be realized in future periods. Accordingly, a valuation allowance has been provided to reduce the net
deferred tax assets to $1.4 million. Management does not anticipate a significant change in the assessment and will review the deferred tax asset balance at
December 31, 2021, or earlier as events may warrant.
Stock-Based Compensation: The Company recognizes as compensation expense all share-based payment awards made to employees and directors, including
grants of stock options and warrants, based on estimated fair values. Fair value is generally determined based on the closing price of the Company’s common
stock on the date of grant.
401(k) Plan: The Company has a defined contribution plan, or 401(k) Plan, pursuant to Section 401(k) of the Internal Revenue Code. All eligible full and
part-time employees of the Company who meet certain age requirements may participate in the 401(k) Plan. Participants may contribute between 1% and
15% of their pre-tax compensation, but not in excess of the maximum allowable under the Code. The 401(k) Plan allows for discretionary and matching
contributions by the Company. In 2020, the Company matched 100% of employee contributions up to 3% and 50% of the employee contribution over 3%
with a maximum employer contribution of 5%. The Company made matching contributions of $152,835 and $126,436 in 2020 and 2019, respectively.
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Earnings (Loss) Per Share: Basic and diluted (loss) per common share are calculated by dividing earnings by the weighted average number of common
shares outstanding during the period.
Recently Adopted Accounting Pronouncements: In February 2016, the FASB issued, "Leases (Topic 842)." This update requires that a lessee recognize in the
statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term.
For leases with terms of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease
assets and liabilities. Similar to previous guidance, the update continues to differentiate between finance leases and operating leases, however this distinction
now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows.
The updated guidance leaves the accounting for leases by lessors largely unchanged from existing GAAP. The guidance became effective for the Company
on January 1, 2019. As a lessee, this standard primarily impacted the Company's accounting for leased facilities and office equipment, for which the
Company recognized right of use assets of $2,688,412 and a corresponding lease liability of $2,775,259 on the Company's consolidated balance sheet on
January 1, 2019.
The Company adopted these provisions on January 1, 2019 using the optional transition method that permits the Company to apply the new disclosure
requirements in 2019 and continue to present comparative period information as required under FASB ASC Topic 840, "Leases." The Company did not have
a cumulative-effect adjustment to the opening balance of retained earnings at the date of adoption. The Company elected the package of practical expedients
permitted under the transition guidance within the new standard, which, among other things, allowed it to exclude leases with an initial term of 12 months or
less from the right-of-use assets and liabilities. Adoption of the standards had no impact on the Company's results of operations or liquidity.
If the Company determines that an arrangement is or contains a lease, the Company recognizes a right-of-use (ROU) asset and lease liability at the
commencement date of the lease. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the
Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date
based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses its
incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating
lease ROU asset also includes any lease payments made and excludes lease incentives. The Company's lease terms may include options to extend or
terminate the lease when it is reasonably certain that it will exercise that option. Lease expenses for lease payments are recognized on a straight-line basis
over the lease term.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation which expands the scope of current guidance to include all share-based
payment arrangements related to the acquisition of goods or services from both non-employees and employees. The guidance is effective for the Company
for all fiscal years beginning after December 15, 2018. The Company adopted the new standard on January 1, 2019. The adoption of the new standard did not
result in a change to the previously presented financial statements.
New Accounting Pronouncements: In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-
13, Financial Instruments - Credit Losses (Topic 326), to provide financial statement users with more decision-useful information about the expected credit
losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the
amendments in Topic 326 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and
requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Topic 326 is effective for fiscal years
beginning after December 25, 2022, including interim periods within those fiscal years for smaller reporting companies. The Company does not expect the
adoption of the amendments in ASU 2016-13 to have a significant effect on its financial position and the results of its operations when such amendment is
adopted.
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 consolidated financial statements upon adoption.
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Note 2. Acquisition of Information Management Solutions, LLC.
On December 15, 2020, the Company entered into an asset purchase agreement to purchase substantially all the assets of Information Management Solutions,
LLC ("IMS"), a Texas limited liability company in 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. The total
purchase price consideration consisted of a cash payment of $5,907,408 at closing and warrant considerations valued at $552,283. The warrants were
comprised of 945,599 unregistered warrants to purchase shares of common stock of Usio, Inc., or 945,599 shares of common stock, $0.001 par value per
share, with an exercise price of $4.23 per share.
The final number of warrants was determined by dividing $2,000,000 by the 5-day weighted average closing price for the four trading days preceding the
closing date and the closing day, or $2.115 per share. The exercise price of the warrants was determined by multiplying the 5-day weighted average closing
price by the number 2. The warrants vest in three equal installments on the first, second and third anniversary of the closing date and have a term of five
years from vest.
The purchase price was allocated to the net assets acquired based upon their estimated fair values as follows:
Accounts receivable
Inventory
Fixed assets
Prepaid expenses
Other assets
Customer list
Total Cash Consideration
Customer list
Total Warrant Consideration
Total Purchase Price
Estimated Fair
Value
Estimated Useful
Life (in years)
5
5
$
$
$
$
$
683,736
168,138
1,211,225
29,849
7,408
3,807,052
5,907,408
552,283
552,283
6,459,691
The 2020 consolidated statement of operations includes 1 month of IMS operations, which is approximately $1.2 million of revenue and $0.6 million of gross
profit.
Unaudited Pro Forma Information
The Company estimates that the revenues and net income for the periods below that would have been reported if the IMS acquisition would have taken place
on the first day of the Company's 2019 calendar year would be as follows and includes pro-forma adjustments to normalize results in line with future
operating performance:
Revenues
Gross Profit
Net (Loss)
Income per share:
Basic
Diluted
2020
45,184,678 $
9,251,517
(3,127,387)
2019
41,809,997
8,099,868
(4,909,074)
(0.17) $
(0.17) $
(0.28)
(0.28)
$
$
$
Amounts set forth above are not necessarily indicative of the results that would have been obtained had the IMS acquisition had taken place on the first day
of the Company's 2019 calendar year or of the results that may be achieved by the combined enterprise in the future.
Note 3. Note Receivable
C2Go Note Receivable
Under a loan and security agreement dated February 2, 2016, we loaned the principal amount of $200,000 to C2Go, Inc. with an interest rate of 10% per
annum for a term of 18 months. The loan was secured by a first lien on all assets of C2Go. C2Go defaulted under the note by failing to repay the loan plus
interest on August 2, 2017. On December 7, 2017, we entered into a note purchase and settlement agreement with C2Go and Mercury Investment Partners
LLC.
There are no assurances that we will be able to recover the remaining $145,000 principal and there are no assurances there will be any assets for us to recover
from its lien on all the assets of C2Go if payment in full of the obligation is not made. The loss reserve on the note receivable as of December 31, 2020 and
2019, was $145,000 reflecting a "more likely than not" recognition threshold.
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Table of Contents
Note 4. Property and Equipment
Property and equipment consisted of the following at December 31:
Software
Equipment
Furniture and fixtures
Leasehold improvements
Total property and equipment
Less: accumulated depreciation
Net property and equipment
Note 5. Intangibles
Akimbo Financial, Inc. Acquisition (2015)
2020
2019
$
$
5,724,971 $
2,137,364
492,347
170,583
8,525,265
(5,419,339)
3,105,926 $
4,951,648
891,838
444,576
170,583
6,458,645
(4,901,124)
1,557,521
On December 22, 2014, we acquired substantially all of the assets of Akimbo Financial, Inc. The intangibles acquired in the acquisition consist of the
customer list and contracts at cost of $396,824 (net of accumulated amortization of $396,824 at December 31, 2020) and goodwill of $9,759. The intangible
asset was fully amortized as of December 31, 2017. The fair value of the customer list and contracts was calculated using the net present value of the
projected gross profit to be generated by the customer list over a period of 36 months beginning in January 2015 and was amortized over 3 years at $163,139
annually.
Goodwill was determined based on the purchase price paid over the assets acquired and has an indefinite life, which is tested for impairment annually.
Singular Payments, LLC Acquisition (2017)
On September 1, 2017, we acquired all of the membership interest of Singular Payments, LLC. The intangibles acquired in such acquisition consist of
customer list assets of $5,000,000 at cost (net of accumulated amortization of $3,333,333 at December 31, 2020). The fair value of the customer list was
calculated using the net present value of the projected gross profit to be generated by the customer list over 60 months beginning in September 2017 and
ending in August 2022. Amortization expense in 2020 and 2019 was $1,000,000. Annual amortization expense will be $1,000,000 per year through the year
2021 and $666,667 in the year 2022.
Information Management Solutions, LLC Acquisition (2020)
On December 15, 2020, we acquired substantially all of assets of Information Management Solutions, LLC. The intangibles acquired in such acquisition
consist of customer list assets of $4,359,335 at cost. The fair value of the customer list was calculated using the net present value of the projected gross profit
to be generated by the customer list over 60 months beginning in January 2021 and ending in December 2025. Annual amortization expense will be
$871,867 per year through the year 2025.
Note 6. Valuation Accounts
Valuation and allowance accounts included the following at December 31:
2020
Allowance for doubtful accounts
Reserve for processing losses
2019
Allowance for doubtful accounts
Reserve for processing losses
Balance
Beginning of
Year
Net Charged
to
Costs and
Expenses
$
$
123,165 $
506,153
96,000 $
132,000
55,212 $
374,153
89,613 $
132,000
42
Net Write-Off
Balance End
of
Year
Transfers
— $
—
— $
—
(13,643) $
(122,954)
(21,660) $
—
205,522
515,199
123,165
506,153
Table of Contents
Note 7. PPP Loan
The Company received funding under the Paycheck Protection Program (PPP) as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES
Act), administered by the U.S. Small Business Administration. Under the terms of the Note, the Company 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. The Company used the proceeds for payroll costs and other permitted expenses. Under the terms of the PPP, 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.
The Company's loan forgiveness was approved in full by the U.S. Small Business Administration on December 14, 2020 and is accounted for as income in
2020 under FASB ASC 470.
Note 8. Accrued Expenses
Accrued expenses consisted of the following balances at December 31:
Accrued commissions
Reserve for processing losses
Other accrued expenses
Accrued taxes
Accrued salaries
Total accrued expenses
Note 9. Operating Leases
2020
2019
$
$
373,154 $
515,199
225,412
132,363
217,816
1,463,944 $
530,908
506,153
92,385
99,850
131,255
1,360,551
The Company leases approximately 10,535 square feet of office space for its San Antonio, TX executive offices and operations. Rental expense under the
operating lease was $136,713 and $199,702 for the years ended December 31, 2020 and 2019, respectively. The lease expires on July 31, 2024.
The Company leases approximately 3,794 square feet of office space for its Nashville, Tennessee sales offices and operations. Rental expense under the
operating lease was $81,474 and $112,108 for the years ended December 31, 2020 and 2019, respectively. The lease expires on April 30, 2023.
The Company assumed a lease in San Antonio, Texas as a part of the Information Management Solutions, LLC acquisition for its Output Solutions
employees and warehouse operations. The lease has a remaining life of 45 months and expires on September 30, 2024. The space leased is 22,400 square
feet. Annual rents during the lease term range from $123,554 to $133,703.
On January 1, 2021, the Company entered into a lease in Austin, Texas commencing on January 1, 2021 for its Austin technology organization. The lease is
for a period of 25 months and expires on January 31, 2023. The space leased is 1,890 square feet. Annual rents during the lease term is $55,755.
On March 15, 2021, the Company entered into a lease amendment to the existing lease in San Antonio, Texas commencing April 1, 2021 and expiring on
September 30, 2024 running concurrently with the existing lease. The incremental space leased is 2,734 square feet. The incremental annual rent during the
lease term ranges from $56,047 to $60,148.
The Company also leased select computer equipment for a period of 36 months beginning in May, 2016. The lease expired in April, 2019. Additionally, the
Company has various copier equipment with leases that have not expired. Rental expense under the operating lease was $12,729 and $25,000 for the years
ended December 31, 2020 and 2019, respectively.
The weighted average remaining lease term is 6.86 years. The weighted average discount rate is 4.52%
The Company recognized total operating lease expense of approximately $360,000 and $450,000 for the years ended December 31, 2020 and 2019,
respectively. In 2020, the operating lease expense of $360,000 consisted of $245,000 of fixed operating expense and $115,000 of interest expense.
The maturities of lease liabilities are as follows at December 31, 2020:
Year ended December 31,
2021
2022
2023
2024
2025
Thereafter
Total minimum lease payments
Less imputed interest
Total lease liabilities
43
$
$
349,913
479,023
488,802
447,645
353,990
1,112,689
3,232,062
(389,266)
2,842,796
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Note 10. Related Party Transactions
Louis Hoch
During the year ended December 31, 2020 and 2019, the Company purchased $9,885.72 and $13,831, respectively, of corporate imprinted sportswear,
promotional items and caps from Angry Pug Sportswear. Louis Hoch, President and Chief Executive Officer is a 50% owner of Angry Pug Sportswear.
Miguel Chapa
During the year ended December 31, 2020 and 2019, the Company received $0 and $6,665 in revenue from Lush Rooftop. Miguel Chapa, a former member
of the Board of Directors, was an owner in Lush Rooftop. Louis Hoch, President and Chief Executive Officer, was an owner in Lush Rooftop. The
relationship with Lush Rooftop ended in September, 2019 when the business was sold.
During the year ended December 31, 2020 and 2019, respectively, the Company received $3,219 and $24,363 in revenue from BLVD Bar and Lounge.
Miguel Chapa, a former member of the Board of Directors, was an owner in BLVD Bar and Lounge. Louis Hoch, President and Chief Executive Officer,
was also an owner in BLVD Bar and Lounge. In May 2020, Mr. Chapa and Mr. Hoch sold all their interests in BLVD.
Officers and Directors
On January 6, 2019, the Company repurchased 11,860 shares for $21,822 in a private transaction at the closing price on January 6, 2019 from employees to
cover the respective employee's share of taxes for shares that vested on that day for Tom Jewell, Chief Financial Officer to cover taxes.
On January 6, 2020, the Company repurchased 11,860 shares of common stock for $20,636 at the closing price on January 6, 2020 from Tom Jewell, the
Company's Chief Financial Officer to cover taxes.
On January 6, 2021, the Company repurchased 11,860 shares for $38,545 in a private transaction at the closing price on January 6, 2021 of $3.25 per share
from Tom Jewell, the Company's Chief Financial Officer, to cover his share of taxes.
The Company granted 1,444,000 shares of common stock with a 10-year vesting period and 103,000 restricted stock units (RSUs) with a 3-year vesting
period to employees and Directors as a performance bonus on April 1, 2020 at an issue price of $1.08 per share. Executive officers and Directors included in
the grant were Louis Hoch (300,000 shares), Tom Jewell (200,000 shares), Blaise Bender (10,000 RSUs), Brad Rollins (30,000 RSUs) and Miguel Chapa
(30,000 RSUs).
As approved by the Company's Compensation Committee, on November 1, 2020, the Company issued 136,891 shares of common stock to Mr. Louis Hoch,
the Company's Chief Executive Officer, valued at $216,000 at the closing price of $1.5779 per share from October 15, 2020 in satisfaction of the terms of the
additional bonus of the employment agreement. As part of the transaction, on November 1, 2020, the Company repurchased 54,756 shares at the closing price
of $1.5779 on October 15, 2020 from Mr. Hoch to cover withholding taxes due.
Note 11. Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company’s deferred tax asset are as follows at December 31:
Deferred tax assets:
Net operating loss carryforwards
Depreciation and amortization
Non-cash compensation
Other
Valuation Allowance
Deferred tax asset
2020
2019
$
$
8,277,000 $
827,000
(225,000)
49,000
(7,534,000)
1,394,000 $
10,753,000
668,000
(69,000)
46,000
(10,004,000)
1,394,000
Management has reviewed its net deferred asset position, and due to the history of operating losses has determined that the application of a valuation
allowance at December 31, 2020 and 2019 is warranted. If applicable, the Company would recognize interest expense and penalties related to uncertain tax
positions in interest expense. As of December 31, 2020, the Company had not accrued any interest or penalties related to uncertain tax provisions.
44
Table of Contents
The Company has net operating loss carryforwards for tax purposes of approximately $39.4 million. Net operating loss carryforwards prior to 2017 are
available to offset taxable income of future periods and begin to expire in 2021. Effective for tax years ending in 2018 or later, net operating losses cannot be
carried back but can be carried forward to future tax years indefinitely, subject to annual limitations for utilization. Approximately $0.5 million of the total
net operating loss is subject to an IRS Section 382 limitation from 1999.
The tax provision for federal and state income tax is as follows for the years ended December 31:
Current provision:
Federal
State
Deferred provision:
Federal expense
Expense for income taxes
2020
2019
$
— $
118,057
118,057
—
101,888
101,888
—
—
$
118,057 $
101,888
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 years ended
December 31:
Income tax (benefit) at 21%
Change in valuation allowance
Permanent and other differences
Alternative minimum tax and state taxes
Income tax expense
2020
2019
$
(610,000) $
(2,470,000)
3,080,000
118,057
(1,074,000)
1,102,000
(28,000)
101,888
$
118,057 $
101,888
Note 12. Stock Options, Incentive Plans, Stock Awards, and Employee Benefit Plan
Stock Option Plans: The Company’s 2015 Equity Incentive Plan provides for the grant of incentive stock options as defined in Section 422 of the Internal
Revenue Code and the grant of Stock Options, Restricted Stock, Restricted Stock Units, Performance Awards, or other Awards to employees, non-employee
directors, and consultants. The Board of Directors has authorized 5,000,000 shares of common capital stock for issuance under the 2015 Equity Incentive
Plan, including automatic increases provided for in the 2015 Equity Incentive Plan through fiscal year 2025. The number of shares of common stock reserved
for issuance under the 2015 Equity Incentive Plan will automatically increase, with no further action by the stockholders, on the first business day of each
fiscal year during the term of the 2015 Equity Incentive Plan, beginning January 1, 2016, in an amount equal to 5% of the issued and outstanding shares of
common stock on the last day of the immediately preceding year, or such lesser amount if so determined by the Board or the Plan Administrator. During
2020, the Company granted 1,634,000 shares of stock to several employees as incentive compensation or new-hire bonuses. During 2020, the Company
issued 332,267 restricted stock units to employees as a new hire bonus and directors.
Treasury Stock: The Company also purchased 121,867 shares of common stock with a value of $227,766 to cover the employee's share of tax liabilities
related to the vesting of commons stock and restricted stock units.
Stock Awards: The Company has granted restricted stock awards to its employees at different periods from 2005 through 2020. The majority of the shares
granted to those employees vest 10 years from the grant date and are forfeited in the event that the recipient’s employment relationship with the Company is
terminated prior to vesting.
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Table of Contents
During 2020, a portion of the restricted stock awards were granted, but not issued and are not listed as outstanding in the financial statements for 2020.
Stock-based compensation expense related to stock and restricted stock awards was $1,475,328 for 2020 and $1,292,419 for 2019.
A summary of stock awards outstanding and 2020 activities are as follows:
Weighted
Average
Stock Awards
Outstanding, December 31, 2019
Granted
Vested
Forfeited
Weighted
Average
Contractual
Remaining
Life
Shares
Exercise Price
4,023,780 $
1,634,000
(106,667)
(450,000)
2.25
1.20
—
—
Outstanding, December 31, 2020
5,101,113 $
1.96
6.94 $
Expected to Vest after December 31, 2020
5,101,113 $
1.96
6.94 $
Aggregate
Intrinsic
Value
0.71
0.71
As of December 31, 2020, there were $5,926,872 of unrecognized compensation costs related to the un-vested share-based compensation arrangements
granted. The cost is expected to be recognized over the weighted average remaining contractual life of 6.94 years.
The aggregate intrinsic value represents the difference between the weighted average exercise price and the closing price of the Company’s stock on
December 31, 2020, or $2.67.
Employee Stock Purchase Plan: The Company established the 1999 Employee Stock Purchase Plan (“ESPP”) under the requirements of Section 423 of the
Internal Revenue Code to allow eligible employees to purchase the Company’s common stock at regular intervals. Participating employees may purchase
common stock through voluntary payroll deductions at the end of each participation period at a purchase price equal to 85% of the lower of the fair market
value of the common stock at the beginning or the end of the participation period. The Company issued -0- shares from the ESPP in 2020 and 2019,
respectively. The ESPP is no longer active.
Stock Warrants: On August 21, 2018, the Company issued University Fancards, LLC a warrant to purchase 150,000 shares of the Company's common stock.
30,000 warrants vested immediately upon the date on which the first financial transaction was processed on a card account issued under the prepaid
agreement, which occurred on October 5, 2018. 120,000 warrants vest annually over 4 years in 30,000 warrant increments beginning on July 31, 2019 and
becoming fully vested on July 31, 2022. The exercise price for the 30,000 warrants that vested immediately on October 5, 2018 was $1.80 per share. The
exercise price for the remaining 120,000 warrants will be the lesser of $2.00 per share or one hundred and twenty percent (120%) of the market price of the
Company's common stock on the vesting date of the warrant. The warrants were valued using the Black-Scholes option pricing model. Assumptions used
were as follows: (i) the fair value of the underlying stock was $0.94 for the 30,000 warrants and $0.90 for the 120,000 warrants; (ii) the risk-free interest rate
is 2.77%; (iii) the contractual life is 5 years; (iv) the dividend yield of 0%; and (v) the volatility is 64.6%. The fair value of the warrants amounted to
$135,764 and will be amortized over the life of the warrants as a reduction of revenues. The reduction of revenues recorded for the year ended December 31,
2020 and 2019 was $35,943 and $35,940, respectively.
On August 12, 2020, the Company issued 27,051 shares of common stock to University FanCards, LLC in a cashless exercise at $3.46 per common share in
exchange for 60,000 warrants exercised by FanCards, LLC. On February 5, 2021, the Company issued 19,795 shares of common stock to University
FanCards, LLC in a cashless exercise at $5.88 per common share in exchange for 30,000 warrants exercised by FanCards, LLC.
On December 15, 2020, the Company issued to Information Management Solutions, LLC warrants to purchase 945,599 unregistered warrants to purchase
shares of Usio, Inc. or 945,599 shares of our common stock, $0.001 par value per share, with an exercise price of $4.23. The warrants were valued using the
Black-Scholes option pricing model. Assumptions used were as follows: (i) the fair value of the underlying stock was $0.58; (ii) the risk-free interest rate is
0.09%; (iii) the contractual life is 5 years; (iv) the dividend yield of 0%; and (v) the volatility is 59.9%. The fair value of the warrants amounted to
$552,283 and will be recorded as an increase in the customer list asset and have a term of five years from time of vest.
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Note 13. Net (Loss) per Share
Basic (loss) per share (EPS) was computed by dividing net income 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 options that were outstanding during the period. The
following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net (loss).
2020
2019
Numerator:
Numerator for basic and diluted earnings per share, net (loss) available to common shareholders
$
(2,906,183) $
(5,115,747)
Denominator:
Denominator for basic (loss) per share, weighted average shares outstanding
Effect of dilutive securities-stock options and restricted awards
Denominator for diluted (loss) per share, adjusted weighted average shares and assumed conversion
Basic (loss) per common share
Diluted (loss) per common share and common share equivalent
15,428,798
—
15,428,798
(0.19) $
(0.19) $
12,958,067
—
12,958,067
(0.39)
(0.39)
$
$
The awards and options to purchase shares of common stock that were outstanding at December 31, 2020 and 2019 that were not included in the computation
of diluted (loss) per share because the effect would have been anti-dilutive, are as follows:
Anti-dilutive awards and options
Note 14. Concentration of Credit Risk and Significant Customers
Year Ended
December 31,
2020
2019
4,946,222
4,023,780
The Company has no significant off-balance sheet or concentrations of credit risk such as foreign exchange contracts, option contracts or other foreign
hedging arrangements. The Company currently maintains the majority of its cash and cash equivalent balance with one financial institution. No customers
account for more than 10% of the revenues of the company.
Note 15. Legal Proceedings
C2Go Note Receivable
Under a loan and security agreement dated February 2, 2016, we loaned the principal amount of $200,000 to C2Go, Inc. with an interest rate of 10% per
annum for a term of 18 months. The loan was secured by a first lien on all assets of C2Go. C2Go defaulted under the note by failing to repay the loan plus
interest on August 2, 2017. On December 7, 2017, we entered into a note purchase and settlement agreement with C2Go and Mercury Investment Partners
LLC.
There are no assurances that we will be able to recover the remaining $145,000 principal and there are no assurances there will be any assets for us to recover
from its lien on all the assets of C2Go if payment in full of the obligation is not made. The loss reserve on the note receivable as of December 31, 2020 and
2019, was $145,000 reflecting a "more likely than not" recognition threshold.
Vaden Landers
On January 19, 2021, the Company initiated a lawsuit in Bexar County, Texas against its former Chief Revenue Officer, Vaden Landers. In the lawsuit,
which is styled: Usio, Inc. v. Vaden Landers, Cause No. 2021CI01069, 407th Judicial District Court, Bexar County, Texas, the Company alleges that Mr.
Landers violated the provisions of his employment agreement dated September 1, 2017 - specifically that Mr. Landers violated his non-compete obligations.
The state court lawsuit only seeks injunctive relief against Mr. Landers. The Company also instituted an action before the American Arbitration Association
on February 2, 2021.
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Table of Contents
Mr. Landers has refused to participate in the arbitration proceeding and has not filed an answer in the proceeding. Mr. Landers has answered the state court
lawsuit, denying the Company's allegations. Mr. Landers has also asserted counterclaim against the Company for breach of contract, tortious interference
with contract and defamation. Mr. Landers seeks damages in excess of $1,000,000. The Company denies Mr. Landers’ allegations and does not believe that
his counterclaims have any merit.
Through its investigation, the Company has learned that Mr. Landers committed other violations of his employment agreement and intends to pursue those
claims in arbitration. Both the state court litigation and the arbitration are in their initial stages and no discovery has been conducted by the parties.
Aside from the lawsuits described above, the Company may be involved in legal matters arising in the ordinary course of business from time to time. While
the Company believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which
the Company is or could become involved in litigation will not have a material adverse effect on our business, financial condition or results of operations.
Note 16. COVID-19
The ongoing COVID-19 pandemic has 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 pandemic. 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.
At this time, certain states are reducing mandated operating restrictions and efforts are underway to provide vaccinations to as many people as possible.
During 2020 and 2021, government issued several rounds of COVID-19 relief and stimulus payments and other programs to stimulate economic activity and
facilitate an economic recovery.
The Company's business was initially adversely affected as doctors offices, dental offices, veterinarian offices and non-bank consumer lending accounts were
ordered closed in connection with curbing the spread of the pandemic. As these doctors, dental and veterinarian offices re-opened, these businesses quickly
recovered and returned to levels higher than pre-COVID. Consumer lending merchants were adversely affected by COVID relief payments made during the
pandemic and the pause placed on past due amounts owed. The level of activity for consumer lending merchants has not returned to pre-COVID levels. We
received a gain during COVID in our prepaid business line, as we were able to work in conjunction with major cities across the U.S. to use our prepaid debit
cards to facilitate the transfer of money via our debit cards from city foundations to the local residents in need of financial assistance.
The impacts and recovery from the COVID-19 pandemic are still a work in process. We were impacted in the magnitude of other payment processors as our
customer base had limited exposure to retail facing businesses. With that framework, we will continue to monitor the overall impact on our operations and
take necessary steps to ensure the safety of our employees and the well being of our customers.
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Note 17. Subsequent Events
On January 6, 2021, the Company repurchased 11,860 shares of common stock for $20,636 at the closing price on January 6, 2021 from Tom Jewell, the
Company's Chief Financial Officer to cover taxes.
In early January, 2021, the Company's largest ACH customer went bankrupt and stopped processing transactions. The customer represented 15% of our total
ACH volume in 2020 and 1.12% of revenue for the Company. The volume loss has been more than offset by organic growth from existing ACH clients to the
extent the Company processed more ACH transactions in January 2021 than in January 2020 and the Company will process more ACH transactions in the
first quarter of 2021 as compared to the same period in 2020.
On January 1, 2021, the Company entered into a lease in Austin, Texas commencing on January 1, 2021 for its Austin technology organization. The lease is
for a period of 25 months and expires on January 31, 2023. The space leased is 1,890 square feet. Annual rents during the lease term is $55,755.
On February 5, 2021, the Company issued 19,795 shares of common stock to University FanCards, LLC in a cashless exercise at $5.88 per common share in
exchange for 30,000 warrants exercised by FanCards, LLC.
On March 15, 2021, the Company entered into a lease amendment to the existing lease in San Antonio, Texas commencing April 1, 2021 and expiring on
September 30, 2024 running concurrently with the existing lease. The incremental space leased is 2,734 square feet. The incremental annual rent during the
lease term ranges from $56,047 to $60,148.
On March 20, 2021, the Company entered into a debit arrangement to finance $165,996 for the purchase of an Output Solutions sorter. The loan is for a
period of 36 months with a maturity date of March 20, 2024. The repayment amount is for 35 months at $4,901.79 per month and a final payment of
$4,901.88. Annual payments are $58,821. The financing is at an interest rate of 3.95%.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer and, our Chief Financial Officer, the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act as of the
end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures as of December 31, 2020 are 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 SEC rules and forms,
and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to
allow timely decisions regarding required reasonable assurance that such information is accumulated and communicated to our management. Our disclosure
controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our
disclosure controls and procedures include 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 that the 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.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for our Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our
management conducted an assessment of the effectiveness of our internal controls over financial reporting as of December 31, 2020 based on criteria
established in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, our management concluded that, as of December 31, 2020, our internal control over financial reporting was effective.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2020 that has materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this Item is incorporated by reference to the definitive proxy statement for our 2021 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2020, or the 2021 Proxy Statement.
Item 405 of Regulation S-K requires the disclosure of, based upon our review of the forms submitted to us during and with respect to our most recent fiscal
year, any known failure by any director, officer, or beneficial owner of more than ten percent of any class of our securities, or any other person subject to
Section 16 of the Exchange Act, or reporting person, to file timely a report required by Section 16(a) of the Exchange Act. This disclosure is contained in the
section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2021 Proxy Statement.
Code of Ethics
We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and
persons performing similar functions. Our code of ethics was filed as Exhibit 14.1 to our quarterly report on Form 10-Q for the quarter ended June 30, 2015
on August 14, 2015. We will provide a copy of our code of ethics to any person without charge, upon request. Requests should be addressed to: Usio, Inc.,
Attn: Investor Relations Department, 3611 Paesanos Parkway, Suite 300, San Antonio, Texas 78231.
Procedure for Nominating Directors
We have not made any material changes to the procedures by which security holders may recommend nominees to our Board of Directors.
We consider recommendations for director candidates from our directors, officers, employees, stockholders, customers and vendors. Stockholders wishing to
nominate individuals to serve as directors may submit such nominations, along with a nominee's qualifications, to our Board of Directors at Usio, Inc., 3611
Paesanos Parkway, Suite 300, San Antonio, Texas, 78231, and the Board of Directors will consider such nominee. The Board of Directors selects the director
candidates slated for election. We have a designated Nominations and Corporate Governance Committee, which reviews and make recommendations to the
Board of Directors with respect to proposed director candidates.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the 2021 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is incorporated by reference to the 2021 Proxy Statement.
The information required to be disclosed by Item 201(d) of Regulation S-K, “Securities Authorized for Issuance Under Equity Compensation Plans,” appears
under the caption “Equity Compensation Plan Information” in the 2021 Proxy Statement and such information is incorporated by reference into this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to the 2021 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference to the 2021 Proxy Statement.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Consolidated Financial Statements.
The following documents are filed in Part II, Item 8 of this annual report on Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the years ended December 31, 2020 and 2019
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2020 and 2019 Consolidated
Statements of Cash Flows for the years ended December 31, 2020 and 2019 Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules.
All financial statement schedules have been omitted as they are not required, not applicable, or the required information is otherwise included.
51
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(a)(3) Exhibits
Exhibit
Number
Description
3.1
3.2
3.3
3.4
3.5
3.6
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Amended and Restated Articles of Incorporation (included as exhibit 3.1 to the Form 10-KSB filed March 31, 2006, and
incorporated herein by reference).
Amendment to the Amended and Restated Articles of Incorporation (included as exhibit A to the Schedule 14C filed April 18, 2007,
and incorporated herein by reference).
Certificate of Change Filed Pursuant to NRS 78.209 (included as exhibit 3.1 to the Form 8-K filed July 23, 2015, and incorporated
herein by reference).
Certificate of Amendment of Restated Articles of Incorporation of Usio, Inc., as amended, effective June 26, 2019 (included as exhibit
3.1 to the Form 8-K filed July 1, 2019, and incorporated herein by reference).
Amended and Restated By-laws (included as exhibit 3.2 to the Form 10-KSB filed March 31, 2006, and incorporated herein by reference).
Amendment to the Amended and Restated By-laws (included as exhibit A to Schedule 14C filed April18,2007, and incorporated herein by
reference).
Employment Agreement between the Company and Michael R. Long, dated February 27, 2007 (included as exhibit 10.1 to the Form 8-
K filed March 2, 2007, and incorporated herein by reference).
Employment Agreement between the Company and Louis A. Hoch, dated February 27, 2007 (included as exhibit 10.2 to the Form 8-
K filed March 2, 2007, and incorporated herein by reference).
First Amendment to Employment Agreement between the Company and Michael R. Long, dated November 12, 2009 (included as
exhibit 10.15 to the Form 10-Q filed November 16, 2009, and incorporated herein by reference).
First Amendment to Employment Agreement between the Company and Louis A. Hoch, dated November 12, 2009 (included as
exhibit 10.16 to the Form 10-Q filed November 16, 2009, and incorporated herein by reference).
Second Amendment to Employment Agreement between the Company and Michael R. Long, dated April 12, 2010 (included as
exhibit 10.16 to the Form 10-K filed April 15, 2010, and incorporated herein by reference).
Second Amendment to Employment Agreement between the Company and Louis A. Hoch, dated April 12, 2010 (included as exhibit 10.17
to the Form 10-K filed April 15, 2010, and incorporated herein by reference).
Bank Sponsorship Agreement between the Company and University National Bank, dated August 29, 2011 (included as exhibit 10.18 to the
Form 10-K filed April 3, 2012, and incorporated herein by reference).
Third Amendment to Employment Agreement between the Company and Michael R. Long, dated January 14, 2011 (included as
exhibit 10.19 to the Form 10-K filed April 3, 2012, and incorporated herein by reference).
Third Amendment to Employment Agreement between the Company and Louis A. Hoch, dated January 14, 2011 (included as exhibit 10.20
to the Form 10-K filed April 3, 2012, and incorporated herein by reference).
10.10
Fourth Amendment to Employment Agreement between the Company and Michael R. Long, dated July 2, 2012 (included as exhibit 10.18
to the Form 10-Q filed August 20, 2012, and incorporated herein by reference).
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Table of Contents
10.11
10.12
10.13
10.14
Fourth Amendment to Employment Agreement between the Company and Louis A. Hoch, dated July 2, 2012 (included as exhibit 10.19 to
the Form 10-Q filed August 20, 2012, and incorporated herein by reference).
Asset Purchase Agreement between the Company and Akimbo Financial, Inc., dated December 22, 2014 (included as exhibit 10.1 to
the Form 8-K filed December 24, 2014, and incorporated herein by reference).
Bank Sponsorship Agreement between the Company and Metropolitan Commercial Bank, dated December 11, 2014 (included as
exhibit 10.26 to the Form 10-K filed March 30, 2015, and incorporated herein by reference).
Loan and Security Agreement between C2Go, Inc., as Debtor, and FiCentive, Inc., as Lender, dated February 2, 2016 (included as
exhibit 10.1 to the Form 8-K filed February 8, 2016, and incorporated herein by reference).
10.15†
Prepaid Card Marketing and Processing Agreement between FiCentive, Inc. and C2Go, Inc., dated February 2, 2016 (included as
exhibit 10.2 to the Form 8-K filed February 8, 2016, and incorporated herein by reference).
10.16
10.17
10.18
10.19
10.20
10.21
Fifth Amendment to Employment Agreement between the Company and Michael R. Long, dated August 3, 2016 (included as exhibit 10.1
to the Form 8-K filed August 9, 2016, and incorporated herein by reference).
Fifth Amendment to Employment Agreement between the Company and Louis A. Hoch, dated August 3, 2016 (included as exhibit 10.2 to
the Form 8-K filed August 9, 2016, and incorporated herein by reference).
Sixth Amendment to Employment Agreement between the Company and Michael R. Long, dated September 8, 2016 (included as
exhibit 10.1 to the Form 8-K filed September 14, 2016, and incorporated herein by reference).
Sixth Amendment to Employment Agreement between the Company and Louis A. Hoch, dated September 8, 2016 (included as
exhibit 10.2 to the Form 8-K filed September 14, 2016, and incorporated herein by reference).
Employment Agreement between the Company and Tom Jewell, dated January 6, 2017 (included as exhibit 10.1 to the Form 8-K
filed January 6, 2017, and incorporated herein by reference).
Independent Director Agreement between the Company and Brad Rollins, dated May 5, 2017 (included as exhibit 10.1 to the Form 8-
K, filed May 11, 2017, and incorporated herein by reference).
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Table of Contents
10.22†
Membership Interest Purchase Agreement among the Company, Singular Payments, LLC and Vaden Landers, dated September 1, 2017
(included as exhibit 10.1 to the Form 8-K, filed September 8, 2017, and incorporated herein by reference).
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
Employment Agreement between the Company and Vaden Landers, dated September 1, 2017 (included as exhibit 10.2 to the Form 8-
K, filed September 8, 2017, and incorporated herein by reference).
First Amendment to Employment Agreement between the Company and Tom Jewell, dated November 27, 2017 (included as exhibit
10.1 to the Form 8-K, filed November 28, 2017, and incorporated herein by reference).
Settlement Agreement among C2Go. Inc., FiCentive, Inc. and Mercury Investment Partners LLC, dated December 7, 2017
(included as exhibit 10.42 to the Form 10-K filed March 30, 2018, and incorporated herein by reference).
Lease Agreement between the Company and Blauners Paesanos Parkway LP, dated February 9, 2018 (included as exhibit 10.43 to
the Form 10-K filed March 30, 2018, and incorporated herein by reference).
Lease Agreement between the Company and RP Circle 1 Building, LLC, dated December 11, 2017 (included as exhibit 10.44 to
the Form 10-K filed March 30, 2018, and incorporated herein by reference).
Second Amendment to Employment Agreement between the Company and Tom Jewell, dated November 28, 2018 (included as
exhibit 10.1 go the Form 8-K filed November 28, 2018, and incorporated herein by reference).
Placement Agency Agreement between the Company and Maxim Group, LLC, dated February 12, 2019 (included as exhibit 10.1 to
the Form 8-K filed February 13, 2019, and incorporated herein by reference).
Share Purchase Agreement among the Company, Sabby Healthcare Master Fund, Ltd. and Sabby Volatility Warrant Master Fund,
Ltd., dated February 12, 2019 (included as exhibit 10.2 to the Form 8-K filed February 13, 2019, and incorporated herein by reference).
Independent Director Agreement between the Company and Blaise Bender, dated April 1, 2019 (included as exhibit 10.2 to the Form 8-
K filed April 3, 2019, and incorporated herein by reference).
10.32+
Securities Purchase Agreement between Company and Topline Capital Partners, L.P. dated July 1, 2020 (included as exhibit 10.1 and
incorporated by reference)
10.33
10.34
10.35
10.36
10.37
10.38+
10.39+
10.40
10.41
10.42
10.43
10.44
10.45
14.1
16.1
2015 Equity Incentive Plan (included as Appendix B to the Definitive Proxy Statement on Schedule 14A filed on June 5, 2015 and
incorporated herein by reference)
Warrant Agreement between the Company and University FanCards, LLC dated August 21, 2018 (included as exhibit 10.41 to the form
10-Q filed on November 12, 2020, and incorporated by reference)
Independent Director Agreement dated August 29,2020, by and between the Company and Ernesto Beyer (included as exhibit 10.1 to the
Form 8-K filed on August 31, 2020, and incorporated by reference)
Underwriting Agreement between the Company and Ladenburg Thalmann &Co., Inc. as representative, dated September 23, 2020
(included as exhibit 1.1 to the Form 8-K filed on September 25, 2020, and incorporated herein by reference)
Third Amendment to the Employment Agreement between the Company and Tom Jewell, effective October 12, 2020 (included as exhibit
10.1 to the Form 8-K filed on October 28, 2020, and incorporated herein by reference)
Asset Purchase Agreement between the Company and Information Management Solutions, LLC dated December 15, 2020 (included as
exhibit 10.2 to the Form 8-K filed on December 18, 2020, and incorporated herein by reference)
Warrant Agreement between the Company and Information Management Solutions, LLC dated December 15, 2020, (included as exhibit
10.2 to the Form 8-K filed on December 18, 2020, and incorporated herein by reference)
Lease agreement between Information Management Systems, LLC and Industrial Properties Corp. dated June 16, 2011 (filed herewith).
First amendment to lease between Information Management Systems, LLC and Industrial Properties Corp. dated April 4, 2013 (filed
herewith).
Second amendment to lease between Information Management Systems, LLC and Industrial Properties Corp. dated March 5, 2018 (filed
herewith).
Third amendment to lease between the Company as successor to Information Management Systems, LLC and ICON IPC TX Property
Owner Pool 6 West/Southwest, LLC, dated December 22, 2020 (filed herewith).
Lease agreement between the Company and Smartyfi, LLC for Austin offices dated January 1, 2021 (filed herewith).
First amendment to lease between the Company and Paesanos Office Building, LLC for San Antonio offices dated March 15, 2021 (filed
herewith).
Code of Ethics (included as exhibit 14.1 to the Form 10-Q filed August 14, 2015, and incorporated herein by reference).
Letter from Ernst and Young LLP to the Securities and Exchange Commission dated February 10, 2004 (included as exhibit 16 to
the Form 8-K filed February 11, 2004, and incorporated herein by reference).
54
Table of Contents
21.1
23.1
31.1
31.2
32.1
Subsidiaries of the Company (filed herewith).
Consent of ADKF, P.C. (filed herewith).
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of the Chief Executive Officer and the /Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101.INS
XBRL Instance Document (filed herewith).
101.SCH
XBRL Taxonomy Extension Schema Document (filed herewith).
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (filed herewith).
101.PRE
XBRL Taxonomy Presentation Linkbase Document (filed herewith).
†
+
Confidential treatment has been granted for portions of this agreement.
The schedules to the exhibit have been omitted from this filing pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish
copies of any such schedules to the SEC upon request.
Copies of the 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.
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ITEM 16. FORM 10-K SUMMARY
None.
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: March 30, 2021
Date: March 30, 2021
Usio, Inc.
By: /s/ Louis A. Hoch
Louis A. Hoch
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Tom Jewell
Tom Jewell
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Date: March 30, 2021
By: /s/ Michael R. Long
Michael R. Long
Chairman of the Board
Date: March 30, 2021
By: /s/ Tom Jewell
Tom Jewell
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 30, 2021
By: /s/ Louis A. Hoch
Louis A. Hoch
President, Chief Executive Officer, and Director
(Principal Executive Officer)
Date: March 30, 2021
Date: March 30, 2021
Date: March 30, 2021
By: /s/ Blaise Bender
Blaise Bender
Director
By: /s/ Ernesto Beyer
Ernesto Beyer
Director
By: /s/ Bradley Rollins
Bradley Rollins
Director
56
Exhibit 10.40
Exhibit 10.41
Exhibit 10.42
Exhibit 10.43
Exhibit 10.44
Exhibit 10.45
Usio, Inc.
Subsidiaries of the Registrant
EXHIBIT 21.1
Subsidiary Legal Name
Jurisdiction of Incorporation
FiCentive, Inc.
ZBILL, Inc.
Nevada
Nevada
Usio Output Solutions, Inc.
Nevada
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the registration statements on Form S-8 (No. 333-206521, No. 333-221184, and No. 333-231645) of our
report dated March 29, 2021, with respect to the consolidated financial statements of Usio, Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 2020.
Exhibit 23.1
We further consent to our designation as an expert in accounting and auditing.
/s/ ADKF, P.C.
ADKF, P.C.
San Antonio, Texas
March 29, 2021
I, Louis A. Hoch, certify that:
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
EXHIBIT 31.1
1.
2.
3.
4.
5.
a.
b.
c.
d.
a.
b.
I have reviewed this Annual Report on Form 10-K of Usio, Inc. for the year ended December 31, 2020;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
As the registrant’s certifying officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
As the registrant’s certifying officer, I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 30, 2021
By: /s/ Louis A. Hoch
Louis A. Hoch
Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
I, Tom Jewell, certify that:
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
1.
2.
3.
4.
5.
a.
b.
c.
d.
a.
b.
I have reviewed this Annual Report on Form 10-K of Usio, Inc. for the year ended December 31, 2020;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
As the registrant’s certifying officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
As the registrant’s certifying officer, I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 30, 2021
By: /s/ Tom Jewell
Tom Jewell
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
EXHIBIT 32.1
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the
undersigned officers of Usio, Inc., a Nevada corporation (the “Company”), do hereby certify, to such officer’s knowledge, that:
The Annual Report on Form 10-K for the year ended December 31, 2020 (the “Form 10-K”) of the Company fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: March 30, 2021
Date: March 30, 2021
By: /s/ Louis A. Hoch
Louis A. Hoch
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Tom Jewell
Tom Jewell
Chief Financial Officer
(Principal Financial and Accounting Officer)