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, 2022.
☐ 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. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required that required a recovery analysis of incentive-based
compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2022, was $38,541,584 based on 15,860,735 shares of
the registrant’s common stock held by non-affiliates on June 30, 2022 at the closing price of $2.43 per share as reported on the Nasdaq Stock Market. For
purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates.
As of March 3, 2023, the number of outstanding shares of the registrant's common stock was 26,392,315.
Table of Contents
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 2023 Annual Meeting of Stockholders to be held on June 20, 2023
Table of Contents
Usio, Inc.
FORM 10-K
For the Year Ended December 31, 2022
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 9C.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Business.
Risk Factors.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
[Reserved]
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.
Disclosure regarding Foreign Jurisdictions that Prevent Inspections
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 "will," "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.
Factors to consider when evaluating these forward-looking statements include, but are not limited to:
• Loss of key resellers could reduce our revenue growth.
•
•
•
•
If our security applications are breached by cyberattacks or are not adequate to address changing market conditions and customer concerns, we may
incur significant losses and be unable to sell our services.
Our efforts to expand our product portfolio and market reach, including through acquisitions, may not succeed and may reduce our revenue growth and
we may not achieve or maintain profitability.
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.
Unauthorized disclosure of cardholder data, whether through breach of our computer systems or otherwise, could expose us to liability and protracted
and costly litigation.
EXPLANATORY NOTE
This Annual Report includes estimates and other statistical data made by independent parties and by us relating to market size and growth and other data
about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In
addition, projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily
subject to a high degree of uncertainty and risk.
We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, logos
and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products
and the formulations for such products. Solely for convenience, some of the trademarks, trade names and copyrights referred to in this report are listed
without the ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, trade names and copyrights.
Please see “Business –Trademarks and Domain Names” for more information.
Other trademarks and trade names in this Annual Report are the property of their respective owners.
Unless the context indicates otherwise, all references in this Annual Report to “Usio,” the “Company,” “we,” “us,” and “our” refer to Usio, Inc. and its
subsidiaries.
Table of Contents
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.
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's 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, or IMS, in December 2020, we also 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. This product offering provides an outsourced solution for document design,
print and electronic delivery to potential customers and entities looking to reduce postage costs and increase efficiencies.
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 via a physical check. E-checks are processed using the ACH
network. We are one of ten companies that hold the prestigious NACHA certification for Third-Party Senders and were the second company to receive the
certification and are the most tenured to hold the certification.
Our card-based processing services enable merchants to process both traditional card-present, tap-and-pay, or "swipe" transactions, as well as card-not-
present transactions. A traditional card-present transaction occurs whenever a card holder physically presents a credit or debit card to a merchant at the
point-of-sale. A card-not-present transaction occurs whenever the customer does not physically present a payment card at the point-of-sale and may occur
over the Internet, mail, fax or telephone. A tap-and-pay transaction occurs whenever a consumer taps their phone on a physical terminal utilizing third party
wallet services like Apple Pay®, Samsung Pay™ and Google Pay™.
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 and government 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 IMS and entered into the business of electronic bill presentment, document
composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals,
including utilities and financial institutions. Through the acquisition, 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 this new business line will continue to depend on our ability to realize the anticipated growth
opportunities and we cannot provide any assurance that we will be able to realize these opportunities.
Our websites are www.usio.com, www.payfacinabox.com, www.ficentive.com, www.akimbocard.com, and www.usiooutput.com. Information contained
on our websites do not constitute part of, and are not incorporated by reference into, this annual report.
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 triennial 2019 Federal Reserve Payments Study, or FRPS, as updated through January 14, 2022, the estimated number of non-cash payments continue
to increase at accelerated rates. The FRPS reflects the effects of the COVID-19 pandemic.
• 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. During the COVID-19 pandemic the
share of ACH grew even further, outpacing card and check who declined in value from 2019 to 2020. From 2019 to 2020, ACH grew by 1.38% by
number and 2.45% by value.
• 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. In 2020, card payments were the most used method of noncash
payments by number, exceeding ACH and check, whereas by value, ACH exceeded card and check.
• 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. The total number of card payments declined from 2019 to 2020 for the first time since the number of
card payments has been recorded by the FRPS., driven by a decline of in-person card payments. Some of the decline of in-person card payments was
offset by remote payments late in 2020.
• From 2015 to 2018, 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.
• From 2019 to 2020 innovative payment methods grew in popularity, such as contactless card, digital wallet, and P2P payments.
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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, or EBT, versions. Estimates for prepaid debit
card payments are not displayed for 2000 and 2003 because only EBT was collected.
Source: 2021 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 2022 were estimated at $1,034.1 billion, an increase of approximately 7.7% from 2021.
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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 parts of our card-based transaction processing to third-party providers. Our
card-based processing system can connect and communicate 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 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 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 2021 and into early 2022, we transitioned from a traditional data center to a cloud provider. This transition provides greater speed and capacity, allowing
us to process transactions faster per second. We continue to develop process improvements with a focus on new tools designed to grow sales while
improving our internal reporting capabilities. On the client facing front, we continue to develop enhancements to our hosted payment pages, enrollment and
onboarding tools for resellers and monthly reporting and new transaction reporting.
Largely due to our NACHA certification and significant volume of transactions, we obtained a sponsoring bank and implemented a direct connection into
the Fed ACH system and the sole use of a bank routing number. Through this direct connection terminal, we control the entire data flow. 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, municipalities, 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. Output Solutions provides printing and mailing services to
utilities, healthcare providers, credit unions, banks, governmental agencies, and manufacturing and other customers that have high volume billing and
printing needs. We provide full color digital printing services, producing statements, checks, notices, postcards, envelopes, newsletters, and other items. We
utilize the latest technology inkjet printers and print 2-up on rolls of paper that are over 17 miles long, producing up to 58,800 full-color images per hour. In
2021 we became a seamless mailer with the USPS. This allows us to drop mailings 24 hours a day, 2 days per week.
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,
chargebacks, 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, chargebacks 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
chargebacks. We estimate our potential loss for chargebacks 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 and CBW Bank to access certain regional debit networks. Through these sponsorships, 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 and
CBW Bank, we are financially liable for all fees, fines, chargebacks 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 and subsequently secured a sponsoring relationship in 2021 with CBW Bank.
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 11% to 5,601 customers at December 31, 2022 from 5,039 customers at
December 31, 2021. Our customers are geographically dispersed throughout the United States.
No customer accounted for more than 10% of revenues in 2022 or 2021.
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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 provide 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 plus 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 “Usio,” “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.payfacinabox.com, www.ficentive.com, www.akimbocard.com, and www.usiooutput.com. The
inclusion of these website addresses in this Annual Report do not include or incorporate by reference the information on or accessible through these
websites, and the information contained on or accessible through these websites should not be considered as part of this annual report on Form 10-K.
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.
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 or CFPB to regulate consumer financial services, including many services offered to our customers. These rules clarify the prepaid
regulatory 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.
Environmental Laws
We are subject to a variety of federal, state, local and foreign environmental, health and safety laws and regulations governing, among other things, the
generation, storage, handling, use and transportation of hazardous materials; the emission and discharge of hazardous materials into the environment; and
the health and safety of our employees. We have incurred and expect to continue to incur costs to maintain or achieve compliance with environmental,
health and safety laws and regulations. To date, these costs have not been material to the Company.
Employees
As of December 31, 2022, we had 117 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. Interested persons can view such materials without charge under the "Investor
Relations" section and then by clicking "Financials" on the Company's website, www.usio.com.
The inclusion of website addresses in this Annual Report does not include or incorporate by reference the information on or accessible through these
websites, and the information contained on or accessible through these websites should not be considered as part of this annual report on Form 10-K.
You may also read and copy any materials we file with or furnish to 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 https://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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RISKS RELATED TO OUR BUSINESS
Loss of key resellers could reduce our revenue growth.
We rely on our reseller sales channel, which purchases and resells our end-to-end services to its own portfolio of merchant customers. This channel 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.
If our security applications are breached by cyberattacks or are not adequate to address changing market conditions and customer concerns, we may incur
significant losses and be unable to sell our services.
Unauthorized parties have attempted, and we expect that they will continue to attempt, to gain access to our systems or facilities through various means,
including, but not limited to, hacking into our systems or facilities or those of our customers, partners, or vendors, and attempting to fraudulently induce
users of our systems, including employees and customers, into disclosing user names, passwords, payment information, or other sensitive information used
to gain access to such systems or facilities. This information may in turn be used to access our customers’ personal or proprietary information and payment
data that are stored on or accessible through our information technology systems and those of third parties with whom we partner. Numerous and evolving
cybersecurity threats, including advanced and persisting cyberattacks, cyberextortion, distributed denial-of-service attacks, ransomware, spear phishing and
social engineering schemes, the introduction of computer viruses or other malware, and the physical destruction of all or portions of our information
technology and infrastructure and those of third parties with whom we partner could compromise the confidentiality, availability, and integrity of the data in
our systems. We may experience in the future, breaches of our security measures due to human error, malfeasance, insider threats, system errors or
vulnerabilities, or other irregularities.
Any cyberattacks or data security breaches affecting our information technology or infrastructure or of our customers, partners, or vendors could have
negative effects. For example, on December 25, 2021, we detected a ransomware attack that accessed and encrypted a small portion of our information
technology systems. The unauthorized access included the download of non-payment processing related data files from our externally hosted Office 365
environment which is separate from our payment processing environment. Throughout the incident, we remained operational. Promptly upon the detection
of the event, we launched an investigation, notified law enforcement and our insurance carrier, and engaged legal counsel, computer forensic firms and
other incident response professionals. We also implemented a series of containment and remediation measures to address this situation and reinforce the
security of our information technology systems. Our systems were not only fully restored and capable of resuming normal operations to the extent they
were impaired, but enhanced following our immediate and long term response. Further preventative and proactive security measures were integrated,
including incremental network and cloud defenses, implementation of third party cyber defense applications, structured incident response and disaster
recovery plans, along with advanced employee cyber security training. We actively pursue any potential actions that will improve our existing systems.
This cyber event had no material impact on the business, and no cardholder, or payments related data was compromised. Our direct losses associated with
the cyber incident and its response were largely covered by our cybersecurity insurance, except for a deductible.
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. Our insurance policies may not be adequate to compensate us for the potential costs and other losses arising
from cybersecurity-related disruptions, failures, attacks or breaches. In addition, such insurance may not be available to us in the future on economically
reasonable terms, or at all. 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.
Our efforts to expand our product portfolio and market reach, including through acquisitions, may not succeed and may reduce our revenue growth and we
may not achieve or maintain profitability.
We acquired the assets of IMS, a 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 on December 15, 2020.
Since 2014, we have completed a total of four acquisitions. We also continue to invest in our established business lines and new markets, such as our
payment facilitation, and prepaid card business. While we have grown the proportion of revenue from these newer products and services and we intend to
continue to broaden the scope of products and services we offer, we may not be successful in maintaining or growing our current revenue streams or
deriving any significant new revenue streams from these products and services. Failure to successfully broaden the scope of products and services that are
attractive may inhibit our growth and harm our business. Furthermore, we expect to continue to expand our markets in the future, and we may have limited
or no experience in such newer markets. We cannot assure you that any of our products or services will be widely accepted in any market or that they will
continue to grow in revenue. Our offerings may present new and difficult technological, operational, regulatory, risks, and other challenges, and if we
experience service disruptions, failures, or other issues, our business may be materially and adversely affected. Our expansion into newer markets may not
lead to growth and may require significant management time and attention, and we may not be able to recoup our investments in a timely manner or at all.
If any of this were to occur, it could damage our reputation, limit our growth, and materially and adversely affect our business.
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 and cash flow from operations will be sufficient to fund our operating
expense and capital requirements for at least 12 months, although we may need funds in the future. At December 31, 2022 we had $5.7 million of cash and
cash equivalents, and for the year ended December 31, 2022, we used $17.0 million in operating activities. However, 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 provided by adjusted operating activities, was $0.7 million for the year ended December 31, 2022. Adjusted operating cash flow is viewed by the
company as a superior indicator of the Company's operating performance and ability to fund acquisitions, capital expenditures and other investments and,
in the absence of refinancing options, to repay debt obligations. Refer to Item 7, under the subsection "Key Business Metrics - Non-GAAP Financial
Measures" for our reconciliation of operating cash flows to adjusted operating cash flows. If our capital resources are insufficient to meet future capital
requirements, we will have to raise additional funds by selling assets, borrowing money from a third party, or by selling debt or equity securities. 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.
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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.
Business interruptions or systems failures may impair the availability of our websites, applications, products or services, or otherwise harm our business.
Our systems and operations and those of our service providers and partners have experienced from time to time, and may experience in the future, business
interruptions or degradation because of distributed denial-of-service and other cyberattacks, insider threats, hardware and software defects or malfunctions,
human error, earthquakes, hurricanes, floods, fires, and other natural disasters, public health crises (including pandemics), power losses, disruptions in
telecommunications services, fraud, military or political conflicts, terrorist attacks, computer viruses or other malware, or other events. A catastrophic event
that results in a disruption or failure of our systems or operations could result in significant losses and require substantial recovery time and significant
expenditures to resume or maintain operations, which could have a material adverse impact on our business, financial condition, and results of operations.
Additionally, some of our systems, including those of companies we have acquired, are not fully redundant, and our disaster recovery planning may not be
sufficient for all possible outcomes or events. As a provider of payment solutions, we are subject to heightened scrutiny by regulators that may require
specific business continuity, resiliency and disaster recovery plans, and rigorous testing of such plans, which may be costly and time-consuming to
implement, and may divert our resources from other business priorities.
We have experienced, and expect to continue to experience, system failures, cyberattacks, unplanned outages, and other events or conditions from time to
time that have and may interrupt the availability, or reduce or adversely affect the speed or functionality, of our products and services. These events could
result in future losses of revenue. A prolonged interruption in the availability or reduction in the availability, speed, or functionality of our products and
services could materially harm our business. Frequent or persistent interruptions in our services could permanently harm our relationship with our
customers and partners and our reputation. Moreover, if any system failure or similar event results in damage to our customers or their business partners,
they could seek significant compensation or contractual penalties from us for their losses, and those claims, even if unsuccessful, would likely be time-
consuming and costly for us to address, and could have other consequences described in this “Risk Factors” section under the caption “If our security
applications are breached by cyberattacks or are not adequate to address changing market conditions and customer concerns, we may incur significant
losses and be unable to sell our services.”
We have undertaken and continue to undertake certain system upgrades and re-platforming efforts designed to improve the availability, reliability,
resiliency, and speed of our platform. These efforts are costly and time-consuming, involve significant technical risk, and may divert our resources from
new features and products, and there can be no guarantee that these efforts will be effective. Frequent or persistent site interruptions could lead to
regulatory scrutiny, significant fines and penalties, and mandatory and costly changes to our business practices, and ultimately could cause us to lose
existing licenses that we need to operate or prevent or delay us from obtaining additional licenses that may be required for our business.
We also rely on facilities, components, applications, and services supplied by third parties, including data center facilities and cloud data storage and
processing services. From time to time, we have experienced interruptions in the provision of such facilities and services provided by these third parties. If
these third parties experience operational interference or disruptions (including a cybersecurity incident), breach their agreements with us, or fail to perform
their obligations and meet our expectations, our operations could be disrupted or otherwise negatively affected, which could result in customer
dissatisfaction, regulatory scrutiny, and damage to our reputation and brands, and materially and adversely affect our business. While we maintain
insurance policies intended to offset the financial impact we may experience from these risks, our coverage may be insufficient to compensate us for all
losses caused by interruptions in our service as a result of systems failures and similar events.
In addition, any failure to successfully implement new information systems and technologies, or improvements or upgrades to existing information systems
and technologies in a timely manner could have an adverse impact on our business, internal controls (including internal controls over financial reporting),
results of operations, and financial condition.
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 IMS.
On December 15, 2020, we entered into an asset purchase agreement to purchase substantially all the assets of 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. 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 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 cryptocurrency 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. For example, on July 6, 2022, our largest cryptocurrency customer filed for bankruptcy protection and the cryptocurrency landscape
encountered significant distress during 2022. This resulted in a meaningful loss of revenue and downturn in our ACH and complementary services business
segment of approximately $0.8 million in 2022.
Further, the rapidly evolving regulatory landscape with respect to cryptocurrency may subject us to inquiries or investigations from regulators and
governmental authorities, require us to make product changes, restrict or discontinue product offerings, and implement additional and potentially costly
controls. If we become subject to and fail to comply with regulations, requirements, prohibitions or other obligations applicable to us, we could face
regulatory or other enforcement actions and potential fines and other consequences.
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.
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.
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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, 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 ODFI 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, and NABC, 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, 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, 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, CBW
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 may not be able to obtain and maintain sufficient insurance coverage.
We insure against a majority of business risks, including liability for cyber incidents, and for director and officer liability. D&O and cyber insurance
especially are becoming increasingly challenging to purchase and maintain due to market factors. Premiums and deductibles have been increasing,
sometimes dramatically, and some insurers are cutting back on the number of companies they insure, causing the supply of insurance to lag behind demand.
As a result of these factors, we may not be able to maintain such insurance on acceptable terms or be able to secure coverage and the coverage of our
existing insurance may not be sufficient to offset existing or future claims. A successful claim against us with respect to uninsured liabilities or in excess of
insurance coverage could have a material adverse effect on our business, financial condition, and results of operations.
We have incurred substantial losses in the past and may incur additional losses in the future.
We reported a net loss of $5.5 million and $0.3 million for the years ended December 31, 2022 and December 31, 2021, respectively. Including these
results, we have an accumulated deficit of $70.9 million at December 31, 2022. 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.
We have recorded significant deferred tax assets, and we might never realize their full value, which would result in a charge against our earnings.
As of December 31, 2022, we had deferred tax assets of $1.5 million. Realization of our deferred tax assets is dependent upon our generating sufficient
taxable income in future years to realize the tax benefit from those assets. Deferred tax assets are reviewed at least annually for realizability. A charge
against our earnings would result if, based on the available evidence, it is more likely than not that some portion of the deferred tax asset will not be
realized beyond our existing valuation allowance. This could be caused by, among other things, deterioration in performance, adverse market conditions,
adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the solutions sold by our business and a variety
of other factors.
If a deferred tax asset net of our valuation allowance was determined to be not realizable in a future period, the charge to earnings would be recognized as
an expense in our results of operations in the period the determination is made. Additionally, if we are unable to utilize our deferred tax assets, our cash
flow available to fund operations could be adversely affected.
Depending on future circumstances, it is possible that we might never realize the full value of our deferred tax assets. Any future impairment charges
related to a significant portion of our deferred tax assets would have an adverse effect on our financial condition and results of operations.
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.
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 employment agreement with our Chairman, 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 employment agreement, as amended, with Louis Hoch, Chairman, President, Chief Executive Officer, and Chief Operating Officer, in the
event of change in control, termination without cause, termination by employee, 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 $3.1 million for the agreement with Mr. Hoch.
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 $1.9 million for the agreement with 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 $1.9 million for the agreement with 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 Chairman, 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 we fail to consistently source inventory for our Output Solutions line of business, our financial condition and results of operations may be adversely
affected.
Due to the COVID-19 pandemic, supply chain issues have resulted in a reduced supply, and growing demand of paper and paper products utilized in our
Output Solutions line of business. Sourcing inventory remains a key challenge to execute jobs and projects with existing and new customers. If we cannot
continue to acquire sufficient inventory stock, the successful completion, margins, and growth of the Output Solutions may be impacted.
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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 $299,162 and $136,608, respectively, in 2022 and 2021. We experienced an increase in fraudulent accounts in
2022 as a result of massively expanding prepaid growth. 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.
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.
Acquisitions may involve significant cash expenditures, debt issuances, equity issuances, operating losses and expenses. Acquisitions involve numerous
other risks, including:
• diversion of management time and attention from daily operations;
• difficulties integrating acquired businesses, technologies and personnel into our business;
• difficulties in obtaining and verifying the financial statements and other business information of acquired businesses;
• inability to obtain required regulatory approvals;
• potential loss of key employees, key contractual relationships or key customers of acquired companies or of ours;
• assumption of the liabilities and exposure to unforeseen liabilities of acquired companies; and
• dilution of interests of holders of our common stock through the issuance of equity securities or equity-linked securities.
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 chargebacks, 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, 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.
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.
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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 2022, our stock price fluctuated between $1.22 and $4.58. 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.
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.
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.
We may issue additional equity securities, or engage in other transactions that could dilute our book value or affect the priority of our Common Stock,
which may adversely affect the market price of our Common Stock.
Our articles of incorporation allow our Board to issue up to 200,000,000 shares of Common Stock. Our Board may determine from time to time that we
need to raise additional capital by issuing Common Stock or other equity securities. Except as otherwise described in this Annual Report, we are not
restricted from issuing additional securities, including securities that are convertible into or exchangeable for, or that represent the right to receive, shares of
our Common Stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control,
we cannot predict or estimate the amount, timing, or nature of any future offerings, or the prices at which such offerings may be affected. Additional equity
offerings may dilute the holdings of our existing stockholders or reduce the market price of our Common Stock, or both. Holders of our Common Stock are
not entitled to pre-emptive rights or other protections against dilution. New investors also may have rights, preferences and privileges that are senior to, and
that adversely affect, the then-current holders of our Common Stock. Additionally, if we raise additional capital by making offerings of debt or shares of
preferred stock, upon our liquidation, holders of our debt securities and shares of preferred stock, and lenders with respect to other borrowings, may receive
distributions of our available assets before the holders of our Common Stock.
We may issue shares of preferred stock with greater rights than our Common Stock.
Subject to the rules of The Nasdaq Stock Market, our articles of incorporation authorize our board of directors to issue one or more series of preferred stock
and set the terms of the preferred stock without seeking any further approval from holders of our Common Stock. Any preferred stock that is issued may
rank ahead of our Common Stock in terms of dividends, priority and liquidation premiums and may have greater voting rights than our Common Stock.
We have not paid any cash dividends in the past and have no plans to issue cash dividends in the future, which could cause our Common Stock to have a
lower value than that of similar companies which do pay cash dividends.
We have not paid any cash dividends on our Common Stock to date and do not anticipate any cash dividends being paid to holders of our Common Stock in
the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board.
While our dividend policy will be based on the operating results and capital needs of the business, it is anticipated that any earnings will be retained to
finance our future expansion. As we have no plans to issue cash dividends in the future, our Common Stock could be less desirable to other investors and as
a result, the value of our Common Stock may decline, or fail to reach the valuations of other similarly situated companies that pay cash dividends.
Shares eligible for future sale may depress our stock price.
As of March 3, 2023, we had 26,392,315 shares of Common Stock outstanding of which 4,986,167 shares were held by affiliates. All of the shares of
Common Stock held by affiliates are restricted or control securities under Rule 144 promulgated under the Securities Act of 1933, as amended (the
“Securities Act”). Sales of shares of Common Stock under Rule 144 or another exemption under the Securities Act or pursuant to a registration statement
could have a material adverse effect on the price of our Common Stock and could impair our ability to raise additional capital through the sale of equity
securities. Furthermore, all Common Stock beneficially owned by persons who are not our affiliates and have beneficially owned such shares for at least
one year may be sold at any time by these existing stockholders in accordance with Rule 144 of the Securities Act. However, there can be no assurance that
any of these existing stockholders will sell any or all of their Common Stock and there may be a lack of supply of, or demand for, our Common Stock on
The Nasdaq Stock Market. In the case of a lack of supply of our Common Stock offered in the market, the trading price of our Common Stock may rise to
an unsustainable level, particularly in instances where institutional investors may be discouraged from purchasing our Common Stock because they are
unable to purchase a block of our Common Stock in the open market due to a potential unwillingness of our existing stockholders to sell the amount of
Common Stock at the price offered by such investors and the greater influence individual investors have in setting the trading price. In the case of a lack of
market demand for our Common Stock, the trading price of our Common Stock could decline significantly and rapidly after our listing.
Your percentage of ownership in our Common Stock may be diluted in the future.
In the future, the percentage ownership in our Common Stock owned by our stockholders may be diluted because of equity issuances for acquisitions,
capital market transactions or otherwise, including equity awards that we expect to be granting to our directors, officers and employees. Such issuances
may have a dilutive effect on our earnings per share, which could materially adversely affect the market price of our Common Stock.
Our directors and officers have substantial control over us.
Our directors and executive officers, together with their affiliates and related persons, beneficially owned, in the aggregate, approximately 19% of our
outstanding Common Stock as of March 3, 2023. These stockholders have the ability to substantially control our operations and direct our policies
including the outcome of matters submitted to our stockholders for approval, such as the election of directors and any acquisition or merger, consolidation
or sale of all or substantially all of our assets.
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Market conditions could negatively impact our business, results of operations, cash flows and financial condition.
GENERAL RISK FACTORS
The market in which we operate is affected by a number of factors that are largely beyond our control but can nonetheless have a potentially significant,
negative impact on us. These factors include, among other things:
• changes in interest rates and credit spreads;
• the availability of credit, including the price, terms, and conditions under which it can be obtained;
• slower growth or recession or reduced consumer spending;
• inflation;
• competition;
• the impact of COVID-19 generally and on the economy and the capital markets, including the measures taken by governmental authorities to address it;
• the actual and perceived state of the economy and public capital markets generally;
•
amendments or repeals of legislation, or changes in regulations or regulatory interpretations thereof, and transitions of government, including uncertainty
regarding any of the foregoing; and
• the rise of international conflicts.
Changes in these factors are difficult to predict, and a change in one factor could affect other factors, which could result in adverse effects to our business,
results of operations, financial condition, and cash flows.
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 $150,129 and $143,149 for the years ended December 31, 2022 and 2021, 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, 2022 and 2021 were $102,976 and $85,122, respectively. We will not be entering into a lease extension,
or new lease agreement in Nashville, Tennessee upon the expiration of this current lease agreement.
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. Rental expense for the years ended December 31, 2022 and 2021 was $112,504 and $107,647
respectively.
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. Rental expense for the year ended December 31, 2022 and
2021 was $83,610 and $81,353 respectively. On January 26, 2023, the Company entered into a lease amendment commencing on February 1, 2023,
extending the term of the existing lease for a period of 23 months and expiring on January 31, 2025.
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. Rental expense for the year ended December 31, 2022 and 2021 was $46,658 and $34,125 respectively.
On October 19, 2021, the Company entered into a lease amendment to the existing lease in San Antonio, Texas commencing on April 1, 2022 and expiring
on September 24, 2024 running concurrently with the existing lease. The incremental space lease is 6,628 square feet. The incremental annual rent during
the lease term ranges from $135,874 to $145,816. Rental expense for the year ended December 31, 2022 was $75,269
We believe that our existing and new properties will be adequate to meet our needs through December 31, 2023.
ITEM 3. LEGAL PROCEEDINGS.
KDHM, LLC
On September 1, 2021, KDHM, LLC sued PDS Acquisition Corp, now known as Usio Output Solutions, Inc., in the District Court of Bexar County, Texas
claiming a breach of the asset purchase agreement executed by the parties on December 14, 2020. The lawsuit alleges that due to a mistake, accident, or
inadvertence, certain customer deposits in the amount of $317,000 were improperly transferred to us.
We believe that plaintiff's claims in the lawsuit have no merit and contradict the express terms of the asset purchase agreement. As a result of this post sale
dispute, we discovered that KDHM, LLC, and its principals, made certain misrepresentations and breached the terms of the asset purchase agreement.
On September 28, 2021, we filed an answer generally denying plaintiff’s allegations. On October 5, 2021, we filed a counterclaim and third-party petition.
Therein, we allege that neither KDHM nor its principals disclosed that KDHM was not accounting for the customer deposits in accordance with Generally
Accepted Accounting Principles. Yet, KDHM, and third-party defendants its principals Henry Minten and Thomas Dowe, affirmatively represented and
warranted in section 3.1(e) of the agreement that “[the]Annual Financial Statements and the Interim Financial Statements have been prepared from the
books and records of Seller in accordance with GAAP applied on a consistent basis.”
We also discovered that KDHM by and through its principals failed to disclose that $305,000 in additional customer deposits existed and these deposits
were not conveyed to us as required by the agreement. KDHM, Minten and Dowe provided us with fraudulent and misleading profit and loss statements
that did not disclose these additional customer deposits. KDHM and the defendants do not dispute that these additional customer deposits exist and that
they were purchased by Usio. However, despite a written representation that these funds would be returned, KDHM and its principal have held these funds
hostage. Section 2.1(b)(x) of the agreement provides that the purchased assets includes “All of Seller’s deposits from its customer, including without
limitation, those customer deposits listed on Schedule 2.1(b)(xi) of the Disclosure Schedules.” Finally, we discovered that KDHM did not provide us with
all customer lists, which are identified as purchased asset under the agreement. We demanded the missing customer lists, but they have yet to be provided
to us per the agreement.
In our counterclaims and third-party petition, we assert causes of action for fraud, breach of contract and conversion. At this time, the parties are engaging
in written discovery and working on scheduling the depositions of the parties.
We consider the risk of loss as remote related to this lawsuit.
Aside from these proceedings above, the Company may be involved in legal matters arising in the ordinary course of business from time to time. While we
believe that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which we are or
could become involved in litigation will not have a material adverse effect on our business, financial condition or results of operations.
ITEM 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
On June 15, 2021, our common stock was uplisted and is now listed on the Nasdaq Global Market® 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, and
"USIO" since June 26, 2019.
Holders
On March 3, 2023, 26,392,315 shares of our common stock were issued and outstanding. As of March 3, 2023, there were 3,548 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.
Sales of Unregistered Securities
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, 2022 and 2021 was $20,963 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 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 share in
exchange for 30,000 warrants exercised by FanCards, LLC.
On September 1, 2021, the Company issued 19,950 shares of common stock to University FanCards, LLC in a cashless exercise at $5.97 per share in
exchange for 30,000 warrants exercised by FanCards, LLC.
On December 15, 2020, the Company issued warrants to purchase 945,599 unregistered warrants to purchase shares of Usio, Inc. for 945,599 shares of our
common stock, with an exercise price of $4.23 to IMS. 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.
All of the warrants described above and the shares of common stock issued upon exercise of the warrants were issued pursuant to the exemption set forth in
Section 4(a)(2) of the Securities Act of 1933, as amended.
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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. On May 13, 2022, the Board of Directors authorized a
renewal of the buy-back program, with a limit up to $4 million of the Company's common stock with a three year duration. The new buyback program
terminates on the earliest of May 15, 2025, the date the funds are exhausted, or the date the Board of Directors, at its sole discretion, terminates or suspends
the program. The program is used for the purchase of stock from employees and directors, and for open-market purchases through a broker. The following
table shows our fourth quarter of 2022 stock purchases under the buyback plan as of December 31, 2022:
(a)
Total number
of
shares (or
units)
Period
purchased
(c)
Total number of
shares
(or units)
purchased as
part of publicly
announced plans
or
(d)
Maximum
number (or
approximate
dollar
value) of shares
(or
units) that may yet
be
purchased under
the
programs
plans or programs
(b)
Average price
paid
per share (or
unit)
October 1, 2022 to October 31, 2022
November 1, 2022 to November 30, 2022
December 1, 2022 to December 31, 2022
Total
184,019 $
54,606 $
4,722 $
243,347
1.71
2.24
2.03
1,537,928 $
1,592,534 $
1,597,256 $
$
2,861,854
2,739,288
2,729,688
2,729,688
On January 6, 2022, we repurchased 11,361 shares for $47,930 in a private transaction at the closing price on January 6, 2022 of $4.21 per share from Tom
Jewell, the Company's Chief Financial Officer, to cover his share of taxes.
On October 4, 2022, we repurchased 26,234 shares for $42,761 in a private transaction at the closing price on October 4, 2022 of $1.63 per share from
Louis Hoch, the Company's Chairman, President, Chief Executive Officer and Chief Operating Officer, to cover his share of taxes.
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS DISCLAIMER
This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. If used in this report, the words "will,"
"anticipate," "believe," "estimate," "intend," and other words or phrases of similar import are intended to identify forward-looking statements. You should
not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking
statements for many reasons, including the risks described in this report on Form 10-K and other reports we file with the Securities and Exchange
Commission. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on
which the statements are made. We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to
actual results or to changes in our expectations, except as required by law.
This discussion and analysis should be read in conjunction with the audited consolidated financial statements and the notes thereto included in this report.
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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.
We provide integrated payment processing services to merchants and businesses, including all types of Automated Clearing House, or ACH, processing,
credit, prepaid card and debit card-based processing services and statement preparation, presentment and mailing services.
In addition, we offer customizable prepaid cards which companies use for expense management, incentives, refunds, claims and disbursements, as well as
unique forms of compensation such as per diem payments, government disbursements, and similar payments. We also offer prepaid cards to consumers for
use as a tool to stay on budget, manage allowances and share money with family and friends. Our UsioCard platform supports Apple Pay®, Samsung
Pay™ and Google Pay™. Our PIN-less debit product allows merchants to debit and credit accounts in real-time. In our over 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.
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.
With the acquisition of the assets of Information Management Solutions, LLC, or IMS, 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 our wholly-owned subsidiary, Usio Output Solutions, Inc., or Output
Solutions. This product offering provides an outsourced solution for document design, print and electronic delivery to potential customers and entities
looking to reduce postage costs and increase efficiencies.
Summary of Results
We believe that our success will continue to depend in large part on our ability to (a) grow revenues, (b) manage our operating expenses, (c) add quality
customers to our client base, (d) meet evolving customer requirements, (e) adapt to technological changes in an emerging market, and (f) assimilate current
and future acquisitions of companies and customer portfolios. We will continue to invest in our sales force and technology platforms to drive revenue
growth. In particular, we are focused on growing our ACH merchants, adding new software integrators, growing our electronic bill presentment, document
composition, document decomposition, printing and mailing services business while providing incremental services to existing merchants. In addition to
our near-term growth opportunities, we are focused on leveraging and optimizing the infrastructure of the organization allowing expansion of our payment
processing and mail and printing capabilities without significantly increasing our operating costs.
We reported a net loss of $5.5 million and $0.3 million for the years ended December 31, 2022 and December 31, 2021, respectively. We had an
accumulated deficit of $70.9 million at December 31, 2022.
In 2022, we processed $7.2 billion for all payment types, which was down 24% from the prior year volume of $9.5 billion total dollars processed due to our
exit from the crypto space. Total transactions processed were up 16% to a record 40.8 million. ACH or electronic check transaction processing volumes for
2022 decreased by 6% compared to 2021. Returned check transactions increased by 31% in 2022 compared to 2021. Credit card dollars processed in 2022
increased by 10% compared to 2021 and credit card transactions processed for 2022 increased by 44% compared to 2021. Both the credit card dollars and
transactions processed represent all-time records for the Company. Prepaid card load volume increased by 14% and transaction volume increased by 39%.
Material Trends and Uncertainties
On July 6, 2022, our largest cryptocurrency customer, Voyager Digital filed for bankruptcy protection and the cryptocurrency landscape encountered
marked distress during 2022. Due to this bankruptcy, we lost a significant customer, and have pulled out of the cryptocurrency space, resulting in a
meaningful loss of revenue and downturn in our ACH and complementary services business segment, which contributes substantial gross profit to the
Company. Our lost revenue in the ACH and complementary services business was approximately $0.8 million in 2022. We continue to closely monitor the
cryptocurrency environment, and the unique risks associated with cryptocurrencies, including technological, legal, and regulatory risks alongside the
potentially consequential upsides associated with re-entering the market and offering our services.
On August 16, 2022, President Biden signed the Inflation Reduction Act, or IRA, which implemented a 1% excise tax on certain corporate stock
repurchases. On May 13 2022, the Board of Directors authorized a renewal of the buy-back program, with a limit up to $4 million of the Company's
common stock with a three year duration. As of December 31, 2022 the Company has repurchased $1.3 million of stock as part of its buy back program, of
which $1.1 million qualifies under the IRA's 1% excise tax. Should the company opt to continue the repurchase of its securities on the open market, and the
IRA remain in effect, we may continue to qualify for this tax in 2023, and future years.
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.
During 2020 and 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.
In April and May of 2020, the Company's business was adversely affected as doctor's 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 a pause placed on past due amounts owed. The level of activity for consumer lending merchants continues to
recover to pre-COVID levels. The Company recorded an increase in revenues in its prepaid business line, as it was able to work in conjunction with major
cities across the U.S. to use its prepaid debit cards to facilitate the transfer of money via its debit cards from city foundations to the local residents in need
of financial assistance. The efforts have included the disbursement of funds to encourage vaccinations.
Since 2020, the Company has experienced some difficulty in recruiting and retaining certain categories of employees due to limited labor availability. The
Company continues to monitor labor availability and is taking necessary steps to retain employees and recruit employees to fill open positions.
Due to the COVID-19 pandemic and global economic challenges, supply chain issues have resulted in a reduced supply, and growing demand of paper and
paper products utilized in our Output Solutions line of business. Sourcing inventory remains a key challenge to execute jobs and projects with existing and
new customers. While these efforts have been successful thus far, if the Company cannot continue to acquire sufficient inventory stock, the successful
completion, margins, and growth of Output Solutions may be impacted.
The impacts and recovery from the COVID-19 pandemic are still a work in process. To date, the Company has not been adversely impacted in the
magnitude that other payment processors were, as our customer base had limited exposure to retail facing businesses. Within that framework, the
Company will continue to monitor the overall impact on its operations and take necessary steps to ensure the safety of its employees and the well-being of
its customers.
Critical Accounting Policies and Estimates
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 these accounting policies to be critical because the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment
necessary to account for 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.
Reserve for Processing Losses
We establish allowances for negative customer balances and estimated transaction losses arising from processing customer transactions, such as
chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery or unsatisfactory delivery of purchased items, account
takeovers, Automated Clearing House returns, and insolvency. Additions to the allowance are reflected in our cost of services on our consolidated
statements of income (loss). The allowances are based on known facts and circumstances, internal factors including experience with similar cases,
historical trends involving collection and write-off patterns, and the mix of transaction and loss types, as well as current and projected factors such as the
types of transactions processed and nature of the merchant relationship with its consumers and the Company with its prepaid card holders.
Determining appropriate current expected transactional losses is an inherently uncertain process, and final losses may vary from our current estimates. We
regularly review and update our allowance estimates as new facts become known, and event occur that may impact the settlement or recovery of losses.
The allowances are maintained at a level we deem appropriate to adequately provide for current expected losses at the balance sheet date.
Reserve for Doubtful Accounts
We establish an allowance for accounts receivable, which represents our estimate of current expected allowances for doubtful accounts. This evaluation
process is subject to numerous estimates and judgements. This allowance is primarily based on expectations of unrecoverable receivables based on
historical losses, as well as forecasted trends in customer instability, and general market conditions. The Company reviews this allowance quarterly on an
account-by-account basis. Projected loss rates, inclusive of historical loss data and macroeconomic factors, are applied to the principal amount of our
merchant and consumer receivables.
Determining appropriate current expected losses on our accounts receivable is an inherently uncertain process, and final losses may vary from our current
estimates. We regularly review and update our allowance estimates as new facts become known, and events occur that may impact the settlement or
recovery of losses. The allowances are maintained at a level we deem appropriate to adequately provide for current expected losses at the balance sheet
date.
Accounting for Income Taxes
Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us. Tax laws are complex and subject to different
interpretations by the taxpayer and respective government taxing authority. Significant judgement is required in determining our tax expense and in
evaluating our tax positions, including evaluating uncertainties. We review our tax positions yearly and adjust the balances as new information becomes
available.
Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary
differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We
evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources,
including reversal of taxable temporary differences, forecasted operating earnings, and available tax planning strategies. These rely heavily on estimates
that are based on a number of factors, including historical data, and business forecasts. to the extent deferred tax assets are not expected to be realized, we
record a valuation allowance.
We recognize and measure uncertain tax positions in accordance with U.S. GAAP, pursuant to which we only recognize the tax benefit from an uncertain
tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities.
As with all businesses, the Company’s tax returns are subject to periodic examination. The Company’s federal returns for the past four years remain open to
examination. The Company is subject to the Texas margin tax and Tennessee franchise tax. Management is not aware of any tax positions that would have a
significant impact on its financial position.
Revenue Recognition
Application of the accounting principles in U.S. GAAP related to the measurement and recognition of revenue requires us to make judgments and
estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate
accounting. Specifically, the determination of whether we are a principal to a transaction (gross revenue) or an agent (net revenue) can require considerable
judgment. Further, we provide incentive payments to consumers and merchants. Evaluating whether these incentives are a payment to a customer, or
consideration payable on behalf of a customer, requires judgment. Incentives determined to be made to a customer, or payable on behalf of a customer, are
recorded as a reduction to gross revenue. Changes in judgments with respect to these assumptions and estimates could impact the amount of revenue
recognized.
Key Business Metrics - Non-GAAP Financial Measures
This filing includes non-GAAP financial measures, EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows, as defined
in Regulation G of the Securities and Exchange Act of 1934, as amended. The Company reports its financial results in compliance with GAAP, but believes
that also discussing non-GAAP financial measures provides investors with financial measures it uses in the management of its business. The Company
defines EBITDA as operating income (loss), before interest, taxes, depreciation and amortization of intangibles. The Company defines adjusted EBITDA
as EBITDA, as defined above, plus non-cash stock option costs and certain non-recurring items, such as costs related to acquisitions. The Company defines
adjusted operating cash flow as net cash provided (used) by operating activities, less changes in prepaid card load obligations, customer deposits, merchant
reserves and net operating lease assets and obligations. These measures may not be comparable to similarly titled measures reported by other companies.
Management uses EBITDA, adjusted EBITDA, and adjusted operating cash flows as indicators of the Company's operating performance and ability to fund
acquisitions, capital expenditures and other investments and, in the absence of refinancing options, to repay debt obligations.
Management believes EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows are helpful to investors in evaluating the
Company's operating performance because non-cash costs and other items that management believes are not indicative of its results of operations are
excluded.
We reported an adjusted EBITDA of $1.0 million for the quarter ended December 31, 2022, as compared to an adjusted EBITDA of $1.3 million for the
same period in the prior year. The decrease in adjusted EBITDA in the current quarter was attributable to increases in SG&A combined with reduced profit
margins.
We reported an adjusted EBITDA loss of $0.4 million for the twelve months ended December 31, 2022, as compared to an adjusted EBITDA of $4.0
million for the same period in the prior year. The decrease in adjusted EBITDA in the current year was attributable to increases in SG&A combined with
reduced profit margins.
The following table is a reconciliation of Net Loss to EBITDA for the three and twelve months ended December 31, 2022 and 2021.
Reconciliation from Operating (Loss) to Adjusted EBITDA:
Operating (Loss)
Depreciation and amortization
EBITDA
Non-cash stock-based compensation expense, net
Adjusted EBITDA
Calculation of Adjusted EBITDA margins:
Revenues
Adjusted EBITDA
Adjusted EBITDA margins
Three Months Ended (unaudited)
December 31,
2022
December 31,
2021
Twelve Months Ended
December 31,
2022
December 31,
2021
$
$
$
(90,814) $
571,650
480,836
531,666
1,012,502 $
(1,497) $
759,407
757,910
501,409
1,259,319 $
(5,214,430) $
2,735,118
(2,479,312)
2,072,041
(407,271) $
(155,381)
2,643,675
2,488,294
1,489,976
3,978,270
18,705,496 $
1,012,502
17,426,465 $
1,259,319
69,428,285 $
(407,271)
61,942,316
3,978,270
5.4%
7.2%
(0.6)%
6.4%
We reported cash provided by adjusted operating cash flows of $0.7 million for the twelve months ended December 31, 2022 (after adjusting for the impact
of operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits, and merchant reserves), as compared to
$2.6 million provided in the twelve months ended December 31, 2021. Operating lease right-of-use assets, operating lease liabilities, prepaid card load
obligations, customer deposits and merchant reserves are deducted from operating cash flow, as these metrics do not serve in providing a clear picture of
the true operational cash used or provided in a given time period. These adjustments to net cash provided (used) by operating activities are not inclusive of
any recurring expense items which are included in the calculation of operating income (loss), and only include changes in our assets and liabilities accounts
on the balance sheet. The Company believes Non-GAAP adjusted operating cash flow to be a more accurate indicator of cash contributions that can be
used to sustain current and future business operations. The decrease in adjusted operating cash flows in the current year compared to the year prior was
attributable to an increase the Company's net loss, due to increases in SG&A combined with reduced profit margins.
The following table is a reconciliation from operating cash flow (used) to adjusted operating cash flow (used) for the twelve months ended December 31,
2022.
December 31, 2022 December 31, 2021
Reconciliation from net cash provided (used) by operating activities to Non-GAAP Adjusted Operating Cash
Flow (used):
Net cash provided (used) by operating activities
Operating cash flow (used) adjustments:
Prepaid card load obligations
Customer deposits
Merchant reserves
Operating lease right-of-use assets
Operating lease liabilities
Total adjustments to net cash provided (used) by operating activities
Adjusted operating cash flows (used)
Use of Non-GAAP Financial Measures
$
(17,036,477) $
29,784,917
16,420,132
(189,929)
1,471,652
(6,630)
24,052
17,719,277 $
682,800 $
(28,980,651)
(58,897)
1,884,402
130,847
(137,522)
(27,161,821)
2,623,096
$
$
EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flow should be considered in addition to, not as a substitute for, or
superior to, financial measures calculated in accordance with GAAP. They are not measurements of our financial performance under GAAP and should not
be considered as alternatives to revenue, net income, or cash provided (used) by operating activities, as applicable, or any other performance measures
derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA, adjusted EBITDA, adjusted
EBITDA margins and adjusted operating cash flow have limitations as analytical tools and you should not consider these Non-GAAP measures in isolation
or as a substitute for analysis of our operating results as reported under GAAP.
Results of Operations
Revenues
Our revenues are principally derived from providing integrated electronic payment services to merchants and businesses, including credit and debit card-
based processing services and transaction processing via the Automated Clearing House, or ACH, network, the program management and processing of
prepaid debit cards.
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With the acquisition of the assets of IMS 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,
2022
2021
$ Change
% Change
3,796,884 $
6,625,637
3,384,242
4,898,733
18,705,496 $
4,618,891 $
6,383,450
2,573,887
3,850,237
17,426,465 $
(822,007)
242,187
810,355
1,048,496
1,279,031
(18)%
4%
31%
27%
7%
2022
Year Ended December 31,
$ Change
2021
% Change
14,782,606 $
27,121,621
9,117,670
18,406,388
69,428,285 $
15,432,787 $
25,174,579
6,542,651
14,792,299
61,942,316 $
(650,181)
1,947,042
2,575,019
3,614,089
7,485,969
(4)%
8%
39%
24%
12%
$
$
$
$
Total revenues for 2022 increased by 12% to $69.4 million from $61.9 million in 2021. Key drivers of the revenue growth include our Prepaid business line
associated with sustained, and growing relationships with major cities in the U.S. facilitating disbursements to individuals and families in need of financial
assistance. This growth was bolstered by gains in our Output solutions business line, thanks to the capitalization of strong cross-selling efforts and
execution on our well-developed pipeline of new business opportunities, along with growth in our Payfac business line due to continued traction with ISVs.
Our ACH and complementary services revenues were down slightly on the year, due to our exit from crypto following the loss of one of our largest
customers, but its impact was minimized due to growth in our ACH return volume, and ancillary ACH services, such as RCC.
Cost of Services
Cost of services includes the cost of personnel dedicated to the creation and maintenance of connections to third-party payment processors and the fees paid
to such third-party providers for electronic payment processing services. Through our contractual relationships with our payment processors and sponsoring
banks, we process ACH and debit, credit or prepaid card transactions on behalf of our customers and their consumers. We pay volume-based fees for debit,
credit, ACH and prepaid transactions initiated through these processors or sponsoring banks, and pay fees for other transactions such as returns, notices of
change to bank accounts and file transmission. Cost of services expense was $54.8 million and $46.3 million for 2022 and 2021, respectively. Cost of
services expenses increased by $8.5 million, or 18%, in 2022 as compared to 2021 primarily due to increased transaction costs associated with our revenue
growth. The cost of services growth outpaced our revenue growth largely due to a shift in business mix over the year.
Gross Profit
Gross profit is the net profit after deducting the cost of services. Gross profits were $14.6 million and $15.6 million for 2022 and 2021, respectively. Gross
profit decreased by $1.0 million, or 7%, in 2022 as compared to 2021. The key drivers of the decreased gross profits were attributable to a decline in our
ACH business unit, our highest margin portfolio, due to our exit from the crypto space in July of 2022 along with increased revenue contributions from our
lower margin business lines, Prepaid, Output Solutions, and Credit Card .
Stock-based Compensation
Stock-based compensation expense increased to $2.1 million in 2022 from $1.5 million in 2021. Our stock-based compensation expenses for 2022 and
2021 represented the amortization of deferred compensation expenses related to incentive stock grants to employees, officers and directors. The increase in
stock-based compensation is primarily attributable to our November 18, 2021 employee stock grant. Please refer to Note 8 for incremental information
regarding this stock grant.
Other Selling, General and Administrative Expenses
Other selling, general and administrative expenses, or SG&A, increased to $15.0 million in 2022 from $11.7 million in 2021. The increase of $3.3 million,
or 29%, represented continued investments in preparation for increased service requirements for growing card holders in our prepaid line of business,
security and IT infrastructure, as well as staffing and employee retention.
Depreciation and Amortization
Depreciation and amortization expense consist of the reduction in value of our tangible and intangible assets over their useful life. These assets include
property, plant, and equipment, along with intangible assets acquired through acquisition, or developed as internal use software.
Depreciation and amortization expense increased to $2.7 million in 2022 as compared to $2.6 million in 2021. The increase of $0.09 million, or 3.5%, was
primarily attributable to the depreciation of incremental intangible assets.
Other Income
Interest income increased to $15,237 in 2022 from $7,643 in 2021 due to higher interest-bearing cash balances. Other income (expense) was $0 for 2022, as
compared to expense of $279 for 2021.
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Income Taxes
Income tax expense was $280,000 in 2022 and $169,861 in 2021. Federal income tax benefit in 2022 was $0, and $110,000 in 2021. The income tax
expense represents amounts incurred under the Texas margin tax and Tennessee franchise tax.
Net income tax expense reported was $280,000 in 2022, and $279,861 in 2020.
Net Income (Loss)
We reported a net loss of $5.5 million and $0.3 million for the years ended December 31, 2022 and December 31, 2021, respectively. The increase in net
loss was primarily related to our decreased gross profits generated by a shifting business mix, alongside increases in SG&A expenses versus the prior year.
Liquidity and Capital Resources
Our primary sources of liquidity are available cash and cash equivalents and cash flows provided by operations and, if an appropriate opportunity presents
itself, the sale of debt or equity securities, although we may not be able to complete any financing on terms acceptable to us, if at all. At December 31,
2022, we had $5.7 million of cash and cash equivalents, as compared to $7.3 million of cash and cash equivalents at December 31, 2021. The decrease was
primarily as a result of our repurchasing approximately $1.1 million of our stock during 2022. For the year ended December 31, 2022 net cash used by
operating activities was $17.0 million and for the year ended December 31, 2021, cash provided by operations was $29.8 million. We expect available cash
and cash equivalents and internally generated funds to be sufficient to support working capital needs, capital expenditures (including acquisitions), and our
debt service obligations. We believe we have sufficient liquidity to operate for at least the next 12 months from the date of filing this report. Cash from
operating activities is dependent on our net income (loss), less depreciation, amortization, bad debt, deferred federal income tax, non-cash stock-based
compensation, the amortization of warrant costs, and net of the changes in our operating assets and liabilities. These assets and liabilities include our
accounts receivable, prepaid expenses, operating lease right-of-use assets, inventory, other assets, accounts payable and accrued expenses, operating lease
liabilities, prepaid card load obligations, merchant reserves, customer deposits, and deferred revenues.
We reported a net loss of $5.5 million and $0.3 million for the years ended December 31, 2022 and 2021, respectively. Additionally, we reported working
capital of $5.8 million and $8.8 million at December 31, 2022 and 2021, respectively.
From time to time we have sold shares of our common stock in order to provide us liquidity. For example, on November 19, 2021, Voyager Digital
purchased 142,857 unregistered shares of common stock at an offering price of $7.00 per share in a private offering. The gross proceeds to us from the
private offering were $1,000,000. We have also sold securities in public offerings from time to time. For example, in September 2020, we sold 4,705,883
shares of our common stock and received net proceeds of approximately $8 million. We cannot assure you that we will be able to sell shares of our equity
securities on terms acceptable to us or at all.
Cash Flows
Net cash used by operating activities totaled $17.0 million for 2022 as compared to net cash provided by operating activities of $29.8 million in 2021. 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 generated by adjusted operating activities was $0.7 million for the year ended December 31, 2022 and net cash
provided by adjusted operating activities was $2.6 million for the year ended December 31, 2021. Operating lease right-of-use assets, operating lease
liabilities, prepaid card load obligations, customer deposits and merchant reserves are deducted from operating cash flow, as these metrics do not serve in
providing a clear picture of the true operational cash used or provided in a given time period. The Company believes Non-GAAP adjusted operating cash
flow to be a more accurate indicator of cash contributions that can be used to sustain current and future business operations. The decrease in net cash
generated by adjusted operating activities in 2022 (after adjusting for the impact of operating lease right-of-use assets, operating lease liabilities, prepaid
card load obligations and merchant reserves) was primarily attributable to increases in our net loss related to increased SG&A and reduced gross profits.
Net cash used by investing activities was $0.8 million for 2022 and $1.3 million in 2021. The decrease in investing activities was due to reduced
expenditures on the purchase of property and equipment.
Net cash used from financing activities for 2022 was $1.4 million compared to net cash provided from financing activities of $0.9 million for 2021. The
decrease in cash provided (used) by financing activities was primarily attributable to treasury stock purchases of $1.3 million in 2022, an increase of
approximately $1.1 million over 2021 and the impact of a $1.0 million private placement of our common stock in 2021. We did not conduct any offerings
of securities in 2022.
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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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Table of Contents
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, 2022 and 2021
Consolidated Statements of Operations for the years ended December 31, 2022 and 2021
Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021
Notes to Consolidated Financial Statements
28
29
31
32
33
34
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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, 2022 and 2021, 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, 2022, 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, 2022 and 2021 and the results of its
operations and its cash flows for each of the years in the two-year period ended December 31, 2022 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, 2022, 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 United States
March 8, 2023
PCAOB ID 297
We have served as the Company's auditor since 2004.
30
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
Equipment loan, 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:
Equipment loan, non-current portion
Operating lease liabilities, non-current portion
Total liabilities
Stockholders' Equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; -0- shares issued and outstanding in 2022
and 2021
Common stock, $0.001 par value, 200,000,000 shares authorized; 27,044,900 and 26,807,145 issued and
25,097,963 and 25,473,453 outstanding in 2022 and 2021 (see Note 11)
Additional paid-in capital
Treasury stock, at cost; 1,946,937 and 1,333,692 shares in 2022 and 2021 (see Note 11)
Deferred compensation
Accumulated deficit
Total stockholders' equity
December 31, 2022 December 31, 2021
$
5,709,117 $
4,371,640
49,737,068
20,170,761
1,554,122
507,355
450,389
82,500,452
4,909,501
87,409,953
7,255,321
4,979,493
63,824,646
36,590,893
1,364,193
434,532
426,963
114,876,041
6,381,153
121,257,194
3,222,816
3,607,157
2,625,360
1,504,000
2,795,483
355,357
7,280,200
4,163,894
1,504,000
2,802,113
345,357
8,815,364
$
97,912,969 $
133,679,715
$
858,622 $
3,721,108
617,319
56,429
49,737,068
20,170,761
1,554,122
—
76,715,429
4,909,501
81,624,930
1,400,100
2,325,665
504,027
54,760
63,824,646
36,590,893
1,364,193
17,647
106,081,931
6,381,153
112,463,084
14,994
2,338,947
83,978,871
71,434
2,476,291
115,010,809
—
—
195,471
94,048,603
(3,749,027)
(5,697,900)
(70,863,049)
13,934,098
195,235
93,100,129
(2,404,458)
(6,842,195)
(65,379,805)
18,668,906
Total Liabilities and Stockholders' Equity
$
97,912,969 $
133,679,715
The accompanying notes are an integral part of these consolidated financial statements.
31
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
Other income (expense)
Interest expense
Other income and (expense), net
(Loss) before income taxes
Federal income tax (benefit)
State income tax expense
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, 2022 December 31, 2021
$
69,428,285 $
54,835,069
14,593,216
61,942,316
46,309,706
15,632,610
2,072,041
15,000,487
2,735,118
19,807,646
1,489,976
11,654,340
2,643,675
15,787,991
(5,214,430)
(155,381)
15,237
—
(4,051)
11,186
7,643
279
(4,314)
3,608
(5,203,244)
(151,773)
—
280,000
280,000
(110,000)
279,861
169,861
(5,483,244) $
(321,634)
(0.27) $
(0.27) $
(0.02)
(0.02)
20,379,386
20,379,386
20,028,850
20,028,850
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
32
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, 2020
26,260,776 $
194,692 $ 89,659,433 $ (2,165,721) $ (5,926,872) $ (65,058,171) $ 16,703,361
Issuance of common stock under equity
incentive plan
Warrant compensation cost
Cashless warrant exercise
Reversal of deferred compensation
amortization that did not vest
Issuance of common stock, private
offering
Deferred compensation amortization
Purchase of treasury stock
Net (loss) for the year
536,878
—
39,745
535 2,750,204
35,940
—
(39)
39
—
—
—
(2,168,347)
—
—
—
—
—
582,392
35,940
—
(173,111)
(173)
(345,267)
—
241,295
—
(104,145)
142,857
—
—
—
142
—
—
—
999,858
—
—
—
—
—
(238,737)
—
—
1,011,729
—
—
—
—
—
(321,634)
1,000,000
1,011,729
(238,737)
(321,634)
Balance at December 31, 2021
26,807,145 $
195,235 $ 93,100,129 $ (2,404,458) $ (6,842,195) $ (65,379,805) $ 18,668,906
Issuance of common stock under equity
incentive plan
Warrant compensation cost
Reversal of deferred compensation
amortization that did not vest
Deferred compensation amortization
Purchase of treasury stock
Net (loss) for the year
369,755
—
368 1,182,939
20,963
—
—
—
(166,329)
—
—
—
1,016,978
20,963
(132,000)
—
—
—
(132)
—
—
—
—
(255,428)
—
—
— (1,344,569)
—
—
145,498
1,165,126
—
—
—
—
—
(5,483,244)
(110,062)
1,165,126
(1,344,569)
(5,483,244)
Balance at December 31, 2022
27,044,900 $
195,471 $ 94,048,603 $ (3,749,027) $ (5,697,900) $ (70,863,049) $ 13,934,098
The accompanying notes are an integral part of these consolidated financial statements.
33
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
Bad Debt
Deferred federal income tax
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
Net cash provided (used) by operating activities
Investing Activities
Purchases of property and equipment
Net cash (used) by investing activities
Financing Activities
Proceeds from equipment loan
Payments on equipment loan
Proceeds from private offering
Purchases of treasury stock
Net cash provided (used) by financing activities
December 31, 2022 December 31, 2021
$
(5,483,244) $
(321,634)
1,196,584
1,538,534
—
—
2,072,041
20,963
607,853
(23,426)
6,630
(10,000)
(72,823)
853,965
(24,052)
(16,420,132)
(1,471,652)
189,929
(17,647)
(17,036,477)
771,808
1,871,867
151,951
(110,000)
1,489,976
35,940
(2,267,806)
(125,208)
(130,847)
22,721
(258,066)
1,410,472
137,522
28,980,651
(1,884,402)
58,897
(48,925)
29,784,917
(812,242)
(812,242)
(1,273,039)
(1,273,039)
—
(54,771)
—
(1,344,569)
(1,399,340)
165,996
(39,802)
1,000,000
(238,737)
887,457
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
(19,248,059)
51,591,560
29,399,335
22,192,225
Cash, Cash Equivalents, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End
of Year
$
32,343,501 $
51,591,560
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest
Income taxes
Non-cash transactions:
Issuance of deferred stock compensation
$
4,051 $
269,500
4,314
116,204
166,330
2,164,361
The accompanying notes are an integral part of these consolidated financial statements.
34
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
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.usio.com, www.singularpayments.com,
www.payfacinabox.com, www.ficentive.com, www.akimbocard.com, and www.usiooutput.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
2022
Year Ended December 31,
$ Change
2021
% Change
$
$
14,782,606 $
27,121,621
9,117,670
18,406,388
69,428,285 $
15,432,787 $
25,174,579
6,542,651
14,792,299
61,942,316 $
(650,181)
1,947,042
2,575,019
3,614,089
7,485,969
(4)%
8%
39%
24%
12%
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.
The deferred revenue balances are as follows:
2022
2021
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
$
$
17,647 $
—
17,647 $
66,572
17,647
48,925
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.
35
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:
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
December 31, 2022 December 31, 2021
$
$
$
$
7,255,321 $
36,590,893
1,364,193
6,381,153
51,591,560 $
5,709,117 $
20,170,761
1,554,122
4,909,501
32,343,501 $
5,011,132
7,610,242
1,305,296
8,265,555
22,192,225
7,255,321
36,590,893
1,364,193
6,381,153
51,591,560
Accounts Receivable/Allowance for Estimated Losses: Accounts receivable are reported as outstanding principal net of an allowance for doubtful accounts
of $319,000 at December 31, 2022 and 2021.
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, 2022 and 2021, 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, 2022 and December 31, 2021, the Company capitalized $584,246 and
$735,813, 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 2022 or 2021.
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Table of Contents
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, 2022 and 2021,
respectively, the Company’s reserve for processing losses was $755,494 and $623,494, respectively.
Advertising Costs: Advertising is expensed as incurred. The Company incurred approximately $94,000 and $179,000 in advertising costs in 2022 and 2021,
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.
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 2022, 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 $262,530 and $212,870 in 2022 and 2021, respectively.
37
Table of Contents
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.
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.
38
Table of Contents
Note 2. 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 3. Intangibles
Akimbo Financial, Inc. Acquisition (2015)
2022
2021
$
$
7,053,905 $
2,530,498
818,522
207,624
10,610,549
(7,387,732)
3,222,816 $
6,455,040
2,418,421
732,153
192,692
9,798,306
(6,191,149)
3,607,157
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, 2022) 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 $5,000,000 at December 31, 2022). 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 2022 and 2021 was $666,667 and $1,000,000 respectively.
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 (net of accumulated amortization of $1,743,734 at December 31, 2022). 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 4. Valuation Accounts
Valuation and allowance accounts included the following at December 31:
2022
Allowance for doubtful accounts
Reserve for processing losses
2021
Allowance for doubtful accounts
Reserve for processing losses
Balance
Beginning of
Year
Net Charged
to
Costs and
Expenses
$
$
319,000 $
623,494
— $
132,000
205,522 $
515,199
151,951 $
132,000
39
Balance End
of
Year
Net Write-Off
Transfers
— $
—
— $
—
— $
—
(38,473) $
(23,705)
319,000
755,494
319,000
623,494
Table of Contents
Note 5. Loans
Equipment Loan
On March 20, 2021, the Company entered into a debt 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 36 months at $4,902 per month. Annual payments are $58,821.
The financing is at an interest rate of 3.95%. Current year payments on the Equipment Loan were $54,634.
Note 6. 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 7. Operating Leases
2022
2021
$
$
1,479,580 $
755,494
821,167
320,854
344,013
3,721,108 $
879,120
623,494
226,888
298,168
297,995
2,325,665
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 $150,129 and $143,149 for the years ended December 31, 2022 and 2021, 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 $102,976 and $85,122 for the years ended December 31, 2022 and 2021, respectively. The lease expires on April 30, 2023. We will not
be entering into a lease extension, or new lease agreement in Nashville, Tennessee upon the expiration of this current lease agreement.
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. Rental expense for the years ended December 31, 2022 and 2021 was $112,504
and $107,647 respectively.
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. Rental expense for the years ended December 31, 2022 and
2021 was $83,610 and $81,353 respectively. On January 26, 2023, the Company entered into a lease amendment commencing on February 1, 2023,
extending the term of the existing lease for a period of 23 months and expiring on January 31, 2025.
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. Rental expense for the years ended December 31, 2022 and 2021 was $46,658 and $34,125 respectively.
On October 19, 2021, the Company entered into a lease amendment to the existing lease in San Antonio, Texas commencing April 1, 2022 and expiring on
September 24, 2024 running concurrently with the existing lease. The incremental space lease is 6,628 square feet. The incremental annual rent during the
lease term ranges from $135,874 to $145,816. Rental expense for the year ended December 32, 2022 was $75,269
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, 2022 and 2021, respectively.
The weighted average remaining lease term is 5.27 years. The weighted average discount rate is 4.17%
The Company recognized total operating lease expense of approximately $711,000 and $591,000 for the years ended December 31, 2022 and 2021,
respectively. In 2022, the operating lease expense of $711,000 consisted of $577,000 of fixed operating expense and $134,000 of interest expense.
The maturities of lease liabilities are as follows at December 31, 2022:
Year ended December 31,
2023
2024
2025
2026
2027
Thereafter
Total minimum lease payments
Less imputed interest
Total lease liabilities
$
$
617,319
554,916
518,935
414,138
414,138
917,081
3,436,527
(480,261)
2,956,266
40
Table of Contents
Note 8. Related Party Transactions
Louis Hoch
During the year ended December 31, 2022 and 2021, the Company purchased $22,835 and $4,009, respectively, of corporate imprinted sportswear,
promotional items and caps from Angry Pug Sportswear. Louis Hoch, Chairman, President, Chief Executive Officer, and Chief Operating Officer is a 50%
owner of Angry Pug Sportswear.
Officers and Directors
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.
On January 6, 2022, we repurchased 11,361 shares for $47,930 in a private transaction at the closing price on January 6, 2022 of $4.21 per share from Tom
Jewell, the Company's Chief Financial Officer, to cover his share of taxes.
On October 4, 2022, we repurchased 26,234 shares for $42,761 in a private transaction at the closing price on October 4, 2022 of $1.63 per share from
Louis Hoch, the Company's Chairman, President, Chief Executive Officer and Chief Operating Officer, to cover his share of taxes.
The Company granted 319,900 shares of restricted common stock with a 10-year vesting period and 141,900 restricted stock units (RSUs) with a 3-year
vesting period to employees and Directors as a performance bonus on November 18, 2021 at an issue price of $6.39 per share. Executive officers and
Directors included in the 10-year restricted stock grant were Louis Hoch (100,000 shares), Tom Jewell (50,000 shares), Greg Carter (30,000 shares) and
Houston Frost (25,000 shares). Executive officers and Directors included in the RSU grant were Louis Hoch (30,000 shares), Tom Jewell (21,000 shares),
Greg Carter (9,000 shares) Houston Frost (6,000 shares), Blaise Bender (12,000 RSUs), Brad Rollins (12,000 RSUs) and Ernesto Beyer (12,000 RSUs).
On April 1, 2021, the Company granted 1,444,000 shares of restricted 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 at an issue price of $1.08 per share. Executive officers and
Directors included in the grants were Louis Hoch (300,000 shares), Tom Jewell (200,000 shares), Blaise Bender (10,000 RSUs) and Brad Rollins
(30,000 RSUs).
Note 9. 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
Total
Valuation Allowance
Deferred tax asset
2022
2021
$
$
5,024,000 $
1,159,000
(117,000)
69,000
6,135,000
(4,631,000)
1,504,000 $
5,942,000
999,000
(326,000)
101,000
6,716,000
(5,212,000)
1,504,000
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, 2022 and 2021 is warranted. If applicable, the Company would recognize interest expense and penalties related to uncertain tax
positions in interest expense. As of December 31, 2022, the Company had not accrued any interest or penalties related to uncertain tax provisions.
41
Table of Contents
The Company has net operating loss carryforwards for tax purposes of approximately $23.9 million. Net operating loss carryforwards prior to 2017 are
available to offset taxable income of future periods and expire 20 years after the loss was generated. The Net operating loss carryforward that expired in
2022 was in the amount of $9.1 million. The schedule below outlines when our pre-2017 net operating losses were generated and the year they may expire.
Tax Year End
2004
2005
2006
2007
2008
2009
2010
2013
2016
2017
Total
NOL
Expiration
1,621,096
1,788,157
1,350,961
1,740,724
918,960
835,322
429,827
504,862
474,465
1,267,336
10,931,710
$
2024
2025
2026
2027
2028
2029
2030
2033
2036
2037
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. Net operating losses generated in 2018 and later total approximately $12,994,000.
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 (benefit)
Expense for income taxes
2022
2021
$
— $
280,000
280,000
—
279,861
279,861
—
(110,000)
$
280,000 $
169,861
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
Federal income tax (benefit)
State taxes
Income tax expense
2022
2021
$
(1,134,200) $
(581,000)
1,715,200
—
280,000
(67,543)
(2,322,000)
2,389,543
(110,000)
279,861
$
280,000 $
169,861
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Table of Contents
Note 10. 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 2022, the Company granted 103,000 shares of stock to several employees as incentive compensation or new-hire bonuses. During
2022, the Company granted 291,867 restricted stock units to employees and directors as a new hire bonus or as incentive compensation.
Treasury Stock: The Company purchased 105,805 shares of common stock with a value of $227,975 to cover the employee's share of tax liabilities related
to the vesting of commons stock and restricted stock units in 2022.
Stock Awards: The Company has granted restricted stock awards to its employees at different periods from 2005 through 2022. 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.
During 2022, a portion of the restricted stock awards were granted, but not issued and are not listed as outstanding in the financial statements for 2022.
Stock-based compensation expense related to stock and restricted stock awards was $2.1 million in 2022 and $1.5 million in 2021.
A summary of stock awards outstanding and 2022 activities are as follows:
Weighted
Average
Stock Awards
Outstanding, December 31, 2021
Granted
Vested
Forfeited
Weighted
Average
Exercise Price
Contractual
Remaining
Life
Shares
5,241,902 $
103,000
230,002
132,000
2.25
1.61
—
—
Outstanding, December 31, 2022
4,982,900 $
2.27
5.06 $
Expected to Vest after December 31, 2022
4,982,900 $
2.27
5.06 $
Aggregate
Intrinsic
Value
(0.62)
(0.62)
As of December 31, 2022, there was $5,697,900 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 5.06 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, 2022, or $1.65.
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 2022 and 2021,
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, 2022 and 2021 was $20,963 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 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 share in
exchange for 30,000 warrants exercised by FanCards, LLC.
On September 1, 2021, the Company issued 19,950 shares of common stock to University FanCards, LLC in a cashless exercise at $5.97 per share in
exchange for 30,000 warrants exercised by FanCards, LLC.
On December 15, 2020, the Company issued warrants to purchase 945,599 unregistered warrants to purchase shares of Usio, Inc. for 945,599 shares of our
common stock, with an exercise price of $4.23 to IMS. 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 11. 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).
2022
2021
Numerator:
Numerator for basic and diluted earnings per share, net (loss) available to common shareholders
$
(5,483,244) $
(321,634)
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
20,379,386
—
20,379,386
(0.27) $
(0.27) $
20,028,850
—
20,028,850
(0.02)
(0.02)
$
$
The awards and options to purchase shares of common stock that were outstanding at December 31, 2022 and 2021 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 12. Concentration of Credit Risk and Significant Customers
Year Ended
December 31,
2022
2021
4,982,900
5,241,902
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.
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Note 13. Legal Proceedings
KDHM, LLC
On September 1, 2021, KDHM, LLC sued PDS Acquisition Corp, now known as Usio Output Solutions, Inc., in the District Court of Bexar County, Texas
claiming a breach of the asset purchase agreement executed by the parties on December 14, 2020. The lawsuit alleges that due to a mistake, accident, or
inadvertence, certain customer deposits in the amount of $317,000 were improperly transferred to us.
We believe that plaintiff's claims in the lawsuit have no merit and contradict the express terms of the asset purchase agreement. As a result of this post sale
dispute, we discovered that KDHM, LLC, and its principals, made certain misrepresentations and breached the terms of the asset purchase agreement.
On September 28, 2021, we filed an answer generally denying plaintiff’s allegations. On October 5, 2021, we filed a counterclaim and third-party petition.
Therein, we allege that neither KDHM nor its principals disclosed that KDHM was not accounting for the customer deposits in accordance with Generally
Accepted Accounting Principles. Yet, KDHM, and third-party defendants its principals Henry Minten and Thomas Dowe, affirmatively represented and
warranted in section 3.1(e) of the agreement that “[t]Annual Financial Statements and the Interim Financial Statements have been prepared from the books
and records of Seller in accordance with GAAP applied on a consistent basis.”
We also discovered that KDHM by and through its principals failed to disclose that $305,000 in additional customer deposits existed and these deposits
were not conveyed to us as required by the agreement. KDHM, Minten and Dowe provided us with fraudulent and misleading profit and loss statements
that did not disclose these additional customer deposits. KDHM and the defendants do not dispute that these additional customer deposits exist and that
they were purchased by Usio. However, despite a written representation that these funds would be returned, KDHM and its principal have held these funds
hostage. Section 2.1(b)(x) of the agreement provides that the purchased assets includes “All of Seller’s deposits from its customer, including without
limitation, those customer deposits listed on Schedule 2.1(b)(xi) of the Disclosure Schedules.” Finally, we discovered that KDHM did not provide us with
all customer lists, which are identified as purchased asset under the agreement. We demanded the missing customer lists, but they have yet to be provided
to us per the agreement.
In our counterclaims and third-party petition, we assert causes of action for fraud, breach of contract and conversion. At this time, the parties are engaging
in written discovery and working on scheduling the depositions of the parties.
We consider the risk of loss as remote related to this lawsuit.
Aside from these proceedings above, the Company may be involved in legal matters arising in the ordinary course of business from time to time. While we
believe that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which we are or
could become involved in litigation will not have a material adverse effect on our business, financial condition or results of operations.
Note 14. 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.
During 2020 and 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.
In April and May of 2020, the Company's business was adversely affected as doctor's 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 a pause placed on past due amounts owed. The level of activity for consumer lending merchants continues to
recover to pre-COVID levels. The Company recorded an increase in revenues in its prepaid business line, as it was able to work in conjunction with major
cities across the U.S. to use its prepaid debit cards to facilitate the transfer of money via its debit cards from city foundations to the local residents in need
of financial assistance. The efforts have included the disbursement of funds to encourage vaccinations.
Since 2020, the Company has experienced some difficulty in recruiting and retaining certain categories of employees due to limited labor availability. The
Company continues to monitor labor availability and is taking necessary steps to retain employees and recruit employees to fill open positions.
Due to the COVID-19 pandemic and global economic challenges, supply chain issues have resulted in a reduced supply, and growing demand of paper and
paper products utilized in our Output Solutions line of business. Sourcing inventory remains a key challenge to execute jobs and projects with existing and
new customers. While these efforts have been successful thus far, if the Company cannot continue to acquire sufficient inventory stock, the successful
completion, margins, and growth of Output Solutions may be impacted.
The impacts and recovery from the COVID-19 pandemic are still a work in process. To date, the Company has not been adversely impacted in the
magnitude that other payment processors were, as our customer base had limited exposure to retail facing businesses. Within that framework, the
Company will continue to monitor the overall impact on its operations and take necessary steps to ensure the safety of its employees and the well-being of
its customers.
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Note 15. Cyber Event
On December 25, 2021, we detected a ransomware attack that accessed and encrypted a small portion of our information technology systems. The
unauthorized access included the download of non-payment processing related data files from our externally hosted Office 365 environment which is
separate from our payment processing environment. Throughout the incident, we remained operational. Promptly upon the detection of the event, we
launched an investigation, notified law enforcement and our insurance carrier, and engaged legal counsel, computer forensic firms and other incident
response professionals. We also implemented a series of containment and remediation measures to address this situation and reinforce the security of our
information technology systems. Our systems were not only fully restored and capable of resuming normal operations to the extent they were impaired, but
enhanced following our immediate and long term response.
This cyber event had no material impact on the business, and no cardholder, or payments related data was compromised. The Company has undertaken and
continues to undertake certain system upgrades and re-platforming efforts designed to improve the security, availability, reliability, resiliency, and speed of
its information technology systems in order to prevent and mitigate such events in the future, and believe this incident to be resolved.
Note 16. Subsequent Events
The Company granted 1,403,000 shares of restricted common stock with a 10-year vesting period and 273,000 restricted stock units (RSUs) with a 3-year
vesting period to employees and Directors as a performance bonus on February 8, 2023 at an issue price of $1.75 per share. Executive officers and
Directors included in the 10-year restricted stock grant were Louis Hoch (330,000 shares), Tom Jewell (200,000 shares), Greg Carter (100,000 shares) and
Houston Frost (100,000 shares). Executive officers included in the RSU grant were Louis Hoch (33,000 shares), Tom Jewell (21,000 shares), Greg Carter
(12,000 shares) and Houston Frost (12,000 shares).
Effective on February 17, 2023, the Company entered into an employment agreement with Greg Carter, the Company’s Executive Vice President, Payment
Acceptance. Under the terms of this agreement, Mr. Carter will receive an annual salary of $250,000; Override/Commissions of 10% of the actual cash
commissions paid to salespersons under direct management of Mr. Carter to be paid quarterly, and the payment of a one-time signing bonus of $40,000.
On January 26, 2023, the Company entered into a lease amendment to the existing lease in Austin, Texas commencing on February 1, 2023, extending the
term of our existing lease in for a period of 24 months and expiring on January 31, 2025.
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, 2022 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, 2022 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, 2022, our internal control over financial reporting was effective.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our
internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all controls issues and instances of fraud, if any, within the Company have been
detected
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the year ended December 31, 2022 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
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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 2023 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, 2022, or the 2023 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 2023 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 2023 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 2023 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 2023 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 2023 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference to the 2023 Proxy Statement.
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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:
PART IV
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Operations for the years ended December 31, 2022 and 2021
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021 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.
48
Table of Contents
(a)(3) Exhibits
Exhibit
Number
Description
3.1
3.2
3.3
3.4
3.5
3.6
4.1
10.1*
10.2*
10.3*
10.4
10.5*
10.6*
10.7
10.8*
10.9*
10.10*
10.11*
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).
Description of Securities
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 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 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 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).
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).
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).
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 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).
49
Table of Contents
10.12*
10.13
10.14
10.15*
10.16*
10.17*
10.18
10.19*
10.20*
10.21+
10.22+
10.23
10.24
10.25
10.26
10.27
10.28
10.29*
10.30*
10.31
10.32
10.33*
10.34*
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).
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).
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).
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)
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 (included as
exhibit 10.40 to the Form 10-K filed on March 30, 2021, and incorporated herein by reference).
First amendment to lease between Information Management Systems, LLC and Industrial Properties Corp. dated April 4, 2013 (included
as exhibit 10.41 to the Form 10-K filed on March 30, 2021, and incorporated herein by reference).
Second amendment to lease between Information Management Systems, LLC and Industrial Properties Corp. dated March 5, 2018
(included as exhibit 10.42 to the Form 10-K filed on March 30, 2021, and incorporated herein by reference).
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 (included as exhibit 10.43 to the Form 10-K filed on March 30, 2021, and
incorporated herein by reference).
Lease agreement between the Company and Smartyfi, LLC for Austin offices dated January 1, 2021 (included as exhibit 10.44 to the
Form 10-K filed on March 30, 2021, and incorporated herein by reference).
First amendment to lease between the Company and Paesanos Office Building, LLC for San Antonio offices dated March 15, 2021
(included as exhibit 10.45 to the Form 10-K filed on March 30, 2021, and incorporated herein by reference).
Seventh Amendment to Employment Agreement between the Company and Louis A. Hoch, dated April 18, 2021 (included as exhibit
10.1 to the Form 8-K filed on April 21, 2021, and incorporated herein by reference).
Fourth Amendment to Employment Agreement between the Company and Tom Jewell, dated April 18, 2021 (included as exhibit 10.2 to
the Form 8-K filed on April 21, 2021, and incorporated herein by reference).
Second Amendment to Lease agreement between the Company and Paesanos Office Building, LLC for San Antonio offices, dated
October 19, 2021 (included as exhibit 10.43 to the Form 10-Q filed on November 10, 2021, and incorporated herein by reference).
Securities Purchase Agreement between the Company and Voyager Digital Holdings, Inc. dated November 19, 2021 (included as exhibit
10.1 to the Form 8-K filed on November 23, 2021, and incorporated herein by reference).
Fifth Amendment to the Employment Agreement between the Company and Tom Jewell, dated November 22, 2021 (included as exhibit
10.2 to the Form 8-K filed on November 23, 2021, and incorporated herein by reference).
Employment Agreement Dated February 17, 2023 between Usio Inc and Greg Carter, the Company's Executive Vice President of
Payment Acceptance
14.1
Code of Ethics (included as exhibit 14.1 to the Form 10-Q filed August 14, 2015, and incorporated herein by reference).
50
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
Inline XBRL Instance Document (filed herewith).
101.SCH
Inline XBRL Taxonomy Extension Schema Document (filed herewith).
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith).
101.PRE
Inline XBRL Taxonomy Presentation Linkbase Document (filed herewith).
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
†
+
*
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.
Management Compensatory Plan or Arrangement
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.
51
Table of Contents
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 8, 2023
Date: March 8, 2023
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 8, 2023
By: /s/ Tom Jewell
Tom Jewell
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 8, 2023
By: /s/ Louis A. Hoch
Louis A. Hoch
President, Chief Executive Officer, and Director
(Principal Executive Officer)
Date: March 8, 2023
Date: March 8, 2023
Date: March 8, 2023
Date: March 8, 2023
By: /s/ Blaise Bender
Blaise Bender
Director
By: /s/ Ernesto Beyer
Ernesto Beyer
Director
By: /s/ Bradley Rollins
Bradley Rollins
Director
By: /s/ Michelle Miller
Michelle Miller
Director
52
Exhibit 4.1
DESCRIPTION OF SECURITIES
Our amended and restated articles of incorporation authorize us to issue 200,000,000 shares of common stock, par value $0.001 per share and 10,000,000
shares of preferred stock, par value $0,001 per share. As of March 3, 2023, we had 26,392,315 shares of common stock and no shares of preferred stock
outstanding.
Common Stock
The following description of our common stock, may not be complete and is subject to, and qualified in its entirety by reference to, Nevada law and the
actual terms and provisions contained in our amended and restated articles of incorporation and our bylaws, each as amended from time to time.
Voting Rights: Each outstanding share of our common stock is entitled to one vote per share of record on all matters submitted to a vote of stockholders
and to vote together as a single class for the election of directors and in respect of other corporate matters. At a meeting of stockholders at which a quorum
is present, for all matters other than the election of directors, an affirmative vote of the majority of shares entitled to vote on a matter and that are
represented either in person or by proxy at a meeting of stockholders decides all questions, unless the matter is one upon which a different vote is required
by express provision of law or our amended and restated articles incorporation or our bylaws. Directors will be elected by a plurality of the votes of the
shares present at a meeting. Holders of shares of common stock do not have cumulative voting rights with respect to the election of directors or any other
matter.
Dividends: Holders of our common stock are entitled to receive dividends or other distributions when, as and if declared by our board of directors. The
right of our board of directors to declare dividends, however, is subject to any rights of the holders of other classes of our capital stock, any indebtedness
outstanding from time to time and the availability of sufficient funds, as determined under Nevada law, to pay dividends.
Preemptive Rights: The holders of our common stock do not have preemptive rights to purchase or subscribe for any of our capital stock or other securities
Redemption: Shares of our common stock are not subject to redemption by operation of a sinking fund or otherwise.
Liquidation Rights: In the event of any liquidation, dissolution, or winding up of our company, subject to the rights, if any, of the holders of other classes
of our capital stock, the holders of shares of our common stock are entitled to receive any of our assets available for distribution to our stockholders ratably
in proportion to the number of shares held by them.
Listing: Our common stock is traded on the Nasdaq Capital Market under the symbol “USIO.”
Transfer Agent and Registrar: The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, LLC, 6201 15th
Avenue, Brooklyn, NY 11219, telephone (718) 921-8200.
Preferred Stock
Under our amended and restated articles of incorporation, as amended, we have the authority to issue 10,000,000 shares of preferred stock, par value $0.01
per share, which are issuable in series on terms to be determined by our board of directors. Accordingly, our board of directors is authorized, without action
by the stockholders, to issue preferred stock from time to time with such dividend, liquidation, conversion, voting, redemption, sinking fund and other
rights and restrictions as it may determine. All shares of any one series of our preferred stock will be identical, except that shares of any one series issued at
different times may differ as to the dates from which dividends may be cumulative. The Board may determine:
● the distinctive designation of each series and the number of shares that will constitute the series;
● the voting rights, if any, of shares of the series and the terms and conditions of the voting rights;
● the dividend rate on the shares of the series, the dates on which dividends are payable, any restriction, limitation or condition upon the payment of
dividends, whether dividends will be cumulative, and the dates from and after which dividends shall accumulate;
● the prices at which, and the terms and conditions on which, the shares of the series may be redeemed, if the shares are redeemable;
● the terms and conditions of a sinking or purchase fund for the purchase or redemption of shares of the series, if such a fund is provided;
● any preferential amount payable upon shares of the series in the event of the liquidation, dissolution or winding up of, or upon the distribution of any
of our assets; and
● the prices or rates of conversion or exchange at which, and the terms and conditions on which, the shares of the series may be converted or
exchanged into other securities, if the shares are convertible or exchangeable.
If our board of directors decides to issue any shares of preferred stock, it may discourage or make more difficult a merger, tender offer, business
combination or proxy contest, assumption of control by a holder of a large block of our securities, or the removal of incumbent management, even if these
events were favorable to the interests of stockholders. Our board of directors, without stockholder approval, may issue preferred stock with voting and
conversion rights and dividend and liquidation preferences that may adversely affect the holders of our other equity or debt securities.
Certain Provisions of Nevada Law And Our Charter And Bylaws
The following paragraphs summarize certain provisions of Nevada law and our restated articles of incorporation, as amended, and our amended and
restated bylaws, as amended. The summary does not purport to be complete and is subject to and qualified in its entirety by reference to Nevada law and to
our restated certificate of incorporation, as amended, and our amended and restated bylaws, as amended, copies of which are on file with the SEC as
exhibits to reports previously filed by us.
General
Certain provisions of our amended and restated articles of incorporation, as amended, and our amended and restated bylaws and Nevada law could make
our acquisition by a third party, a change in our incumbent management, or a similar change in control more difficult, including:
● An acquisition of us by means of a tender or exchange offer;
● An acquisition of us by means of a proxy contest or otherwise; or
● The removal of a majority or all of our incumbent officers and directors.
These provisions, which are summarized below, are likely to discourage certain types of coercive takeover practices and inadequate takeover bids. These
provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that these
provisions help to protect our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us, and that
this benefit outweighs the potential disadvantages of discouraging such a proposal because our ability to negotiate with the proponent could result in an
improvement of the terms of the proposal. The existence of these provisions which are described below could limit the price that investors might otherwise
pay in the future for our securities.
Articles of Incorporation and Bylaws
Authorized But Unissued Capital Stock. We have shares of common stock and preferred stock available for future issuance without stockholder approval,
subject to any limitations imposed by the listing standards of any securities exchange on which our stock may be listed. We may utilize these additional
shares for a variety of corporate purposes, including for future public offerings to raise additional capital or facilitate corporate acquisitions or for payment
as a dividend on our capital stock. The existence of unissued and unreserved common stock and preferred stock may enable our board of directors to issue
shares to persons friendly to current management or to issue preferred stock with terms that could have the effect of making it more difficult for a third
party to acquire, or could discourage a third party from seeking to acquire, a controlling interest in our company by means of a merger, tender offer, proxy
contest, or otherwise. In addition, if we issue preferred stock, the issuance could adversely affect the voting power of holders of common stock and the
likelihood that such holders will receive dividend payments and payments upon liquidation.
Blank Check Preferred Stock. Our board of directors, without stockholder approval, has the authority under our amended and restated articles of
incorporation, as amended, to issue preferred stock with rights superior to the rights of the holders of common stock. As a result, preferred stock could be
issued quickly and easily, could impair the rights of holders of common stock, and could be issued with terms calculated to delay or prevent a change in
control or make removal of management more difficult.
Election of Directors. Our amended and restated bylaws provide that a majority of directors then in office may fill any vacancy occurring on our board of
directors, even though less than a quorum may then be in office. These provisions may discourage a third party from voting to remove incumbent directors
and simultaneously gaining control of our board of directors by filling the vacancies created by that removal with its own nominees.
Removal of Directors. A director may be removed from office only by the affirmative vote of two-thirds or more of the combined voting power of the then
issued and outstanding shares of our capital stock entitled to vote in the election of directors, voting together as a single class.
Anti-takeover Effects of Nevada Law
Business Combinations with Interested Stockholders
The “business combination with interested stockholders” provisions of Sections 78.411 to 78.444, inclusive, of the Nevada Revised Statutes, or NRS,
generally prohibit a Nevada corporation with at least 200 stockholders of record from engaging in various “combination” transactions with any interested
stockholder for a period of two years after the date of the transaction in which the person became an interested stockholder, unless the combination is
approved by our board of directors prior to the date the interested stockholder obtained such status or the combination is approved by our board of directors
and at such time or thereafter is approved at a meeting of the stockholders by the affirmative vote of stockholders representing at least 60% of the
outstanding voting power held by disinterested stockholders, and extends beyond the expiration of the two-year period, unless:
● the combination was approved by our board of directors prior to the person becoming an interested stockholder or the transaction by which the
person first became an interested stockholder was approved by our board of directors before the person became an interested stockholder or the
combination is later approved by a majority of the voting power held by disinterested stockholders; or
● if the consideration to be paid by the interested stockholder is at least equal to the highest of: (a) the highest price per share paid by the interested
stockholder within the two years immediately preceding the date of the announcement of the combination or in the transaction in which it became an
interested stockholder, whichever is higher; (b) the market value per share of common stock on the date of announcement of the combination and
the date the interested stockholder acquired the shares, whichever is higher; or (c) for holders of preferred stock, the highest liquidation value of the
preferred stock, if it is higher.
Notwithstanding the foregoing, NRS 78.411 to 78.444, inclusive, do not apply to any combination of a resident domestic corporation with an interested
stockholder after the expiration of four years after the person first became an interested stockholder.
A “combination” is generally defined to include mergers or consolidations or any sale, lease exchange, mortgage, pledge, transfer, or other disposition, in
one transaction or a series of transactions, with an “interested stockholder” having: (a) an aggregate market value equal to more than 5% of the aggregate
market value of the assets of the corporation, (b) an aggregate market value equal to more than 5% of the aggregate market value of all outstanding voting
shares of the corporation, (c) more than 10% of the earning power or net income of the corporation, and (d) certain other transactions with an interested
stockholder or an affiliate or associate of an interested stockholder.
In general, an “interested stockholder” is a person who, together with affiliates and associates, owns (or within two years, did own) 10% or more of a
corporation’s voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage
attempts to acquire our company even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the
prevailing market price.
A Nevada corporation may “opt out” of these provisions either with an express provision in its original articles of incorporation or in an amendment to its
articles of incorporation or bylaws approved by its stockholders. However, we have not opted out, and do not currently intend to opt out of, these
provisions. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire
us.
Control Share Acquisitions
The “control share” provisions of Sections 78.378 to 78.3793, inclusive, of the NRS apply to “issuing corporations” that are Nevada corporations with at
least 200 stockholders of record, including at least 100 stockholders of record who are Nevada residents, and that conduct business directly or indirectly in
Nevada. The control share statute prohibits an acquirer, under certain circumstances, from voting its shares of a target corporation’s stock after crossing
certain ownership threshold percentages, unless the acquirer obtains approval of the target corporation’s disinterested stockholders. The statute specifies
three thresholds: one-fifth or more but less than one-third, one-third but less than a majority, and a majority or more, of the outstanding voting power.
Generally, once an acquirer crosses one of the above thresholds, those shares in an offer or acquisition and acquired within 90 days thereof become “control
shares” and such control shares are deprived of the right to vote until disinterested stockholders restore the right. These provisions also provide that if
control shares are accorded full voting rights and the acquiring person has acquired a majority or more of all voting power, all other stockholders who do
not vote in favor of authorizing voting rights to the control shares are entitled to demand payment for the fair value of their shares in accordance with
statutory procedures established for dissenters’ rights.
A corporation may elect to not be governed by, or “opt out” of, the control share provisions by making an election in its articles of incorporation or bylaws,
provided that the opt-out election must be in place on the 10th day following the date an acquiring person has acquired a controlling interest, that is,
crossing any of the three thresholds described above. We have not opted out of the control share statutes, and will be subject to these statutes if we are an
“issuing corporation” as defined in such statutes.
The effect of the Nevada control share statutes is that the acquiring person, and those acting in association with the acquiring person, will obtain only such
voting rights in the control shares as are conferred by a resolution of the stockholders at an annual or special meeting. The Nevada control share law, if
applicable, could have the effect of discouraging takeovers of our company.
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-3 (No. 333-97869, No. 333-221178, and No. 333-251140) Form S-8
(No. 333-82530, No. 333-122312, No. 333-125510, No. 333-134451, No. 333-206521, No. 333-221184, No. 333-231645 and No. 333-266036) of our
report dated March 8, 2023, with respect to the consolidated financial statements of Usio, Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 2022.
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 8, 2023
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, 2022;
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: May 8, 2023
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, 2022;
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: May 8, 2023
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, 2022 (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: May 8, 2023
Date: May 8, 2023
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)