Usio, Inc. - Quarter Report: 2020 September (Form 10-Q)

 

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________.

 

Commission File Number:000-30152

 

USIO, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		98-0190072
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3611 Paesanos Parkway, Suite 300, San Antonio, TX		78231
(Address of principal executive offices)		(Zip Code)

(210) 249-4100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading symbol(s)	Name on each exchange on which registered
Common stock, par value $0.001 per share	USIO	The Nasdaq Stock Market LLC

 

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 ☐	Accelerated filer ☐
Non-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 is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No

 

As of November 9, 2020, the number of outstanding shares of the registrant's common stock was 24,759,545.

 

 

 

 

USIO, INC.

INDEX

 

		Page
PART I – FINANCIAL INFORMATION		1
Item 1.	Financial Statements (Unaudited).	1
	Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2020 and 2019	2
	Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2020 and 2019	3
	Condensed Consolidated Statements of Stockholders' Equity for the Three and Nine Months ended September 30, 2020 and 2019	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	15
Item 4.	Controls and Procedures.	16
PART II – OTHER INFORMATION		16
Item 1.	Legal Proceedings.	16
Item 1A.	Risk Factors.	16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	17
Item 3.	Defaults Upon Senior Securities.	17
Item 4.	Mine Safety Disclosures (Not applicable).	17
Item 5.	Other Information.	17
Item 6.	Exhibits.	18

 

 

 

		September 30, 2020				December 31, 2019
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	11,405,119			$	2,137,580
Accounts receivable, net			1,219,370				1,274,001
Settlement processing assets			24,079,975				38,906,780
Prepaid card load assets			7,906,580				528,434
Prepaid expenses and other			185,109				183,575
Current assets before merchant reserves			44,796,153				43,030,370
Merchant reserves			8,234,404				10,016,904
Total current assets			53,030,557				53,047,274
Property and equipment, net			1,729,614				1,557,521
Other assets:
Intangibles, net			1,926,426				2,676,427
Deferred tax asset			1,394,000				1,394,000
Operating lease right-of-use assets			2,308,736				2,480,902
Other assets			422,418				404,055
Total other assets			6,051,580				6,955,384
Total assets		$	60,811,751			$	61,560,179
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	405,334			$	419,849
Accrued expenses			1,303,757				1,360,551
Operating lease liabilities, current portion			236,700				356,184
Settlement processing obligations			24,079,975				38,906,780
Prepaid card load obligations			7,906,580				528,434
Deferred revenues			83,824				123,529
PPP Loan payable, current portion			342,096				—
Current liabilities before merchant reserve obligations			34,358,266				41,695,327
Merchant reserve obligations			8,234,404				10,016,904
Total current liabilities			42,592,670				51,712,231
Non-current liabilities:
PPP Loan payable, non-current portion			471,404				—
Operating lease liabilities, non-current portion			2,230,639				2,279,613
Total liabilities			45,294,713				53,991,844
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; -0- shares outstanding at September 30, 2020 (unaudited) and December 31, 2019, respectively			—				—
Common stock, $0.001 par value, 200,000,000 shares authorized; 25,887,785 and 18,224,577 issued, and 24,665,486 and 17,104,998 outstanding at September 30, 2020 (unaudited) and December 31, 2019, respectively			194,318				186,656
Additional paid-in capital			88,392,782				77,055,273
Treasury stock, at cost; 1,222,299 and 1,119,579 shares at September 30, 2020 (unaudited) and December 31, 2019, respectively			(2,065,763	)			(1,885,452	)
Deferred compensation			(5,793,116	)			(5,636,154	)
Accumulated deficit			(65,211,183	)			(62,151,988	)
Total stockholders’ equity			15,517,038				7,568,335
Total liabilities and stockholders’ equity		$	60,811,751			$	61,560,179

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2020				2019				2020				2019
Revenues		$	8,137,077			$	7,087,732			$	22,869,309			$	20,833,143
Cost of services			6,414,807				5,539,314				17,933,089				16,383,149
Gross profit			1,722,270				1,548,418				4,936,220				4,449,994
Selling, general and administrative:
Stock-based compensation			267,223				315,259				903,326				954,770
Other SG&A expenses			1,976,191				1,969,877				5,955,221				5,602,171
Depreciation and amortization			390,216				491,749				1,160,255				1,475,291
Total selling, general and administrative expenses			2,633,630				2,776,885				8,018,802				8,032,232
Operating (loss)			(911,360	)			(1,228,467	)			(3,082,582	)			(3,582,238	)
Other income and (expense):
Interest income			10,157				20,781				22,800				66,475
Other income (expense)			186				608				912				185
Other income and (expense), net			10,343				21,389				23,712				66,660
(Loss) before income taxes			(901,017	)			(1,207,078	)			(3,058,870	)			(3,515,578	)
Income tax expense			35,000				31,956				325				71,956
Net (loss)		$	(936,017	)		$	(1,239,034	)		$	(3,059,195	)		$	(3,587,534	)
Basic (loss) per common share:		$	(0.06	)		$	(0.09	)		$	(0.22	)		$	(0.28	)
Diluted (loss) per common share:		$	(0.06	)		$	(0.09	)		$	(0.22	)		$	(0.28	)
Weighted average common shares outstanding
Basic			15,474,171				13,054,962				13,924,803				12,906,206
Diluted			15,474,171				13,054,962				13,924,803				12,906,206

 

		Nine Months Ended September 30,
		2020				2019
Operating activities:
Net (loss)		$	(3,059,195	)		$	(3,587,534	)
Adjustments to reconcile net (loss) to net cash provided / (used) by operating activities:
Depreciation			410,254				725,291
Amortization			750,001				750,000
Non-cash stock-based compensation			903,326				954,770
Amortization of warrant costs			26,958				26,955
Changes in current assets and current liabilities:
Accounts receivable			54,631				55,504
Prepaid expenses and other			(1,534	)			(111,230	)
Operating lease right-of-use assets			172,166				(2,547,803	)
Other assets			(18,363	)			(26,665	)
Accounts payable and accrued expenses			(71,309	)			294,717
Operating lease liabilities			(168,458	)			2,700,742
Prepaid card load obligations			7,378,146				189,854
Merchant reserves			(1,782,500	)			(2,443,899	)
Deferred revenue			(39,705	)			116,765
Deferred rent			—				(79,748	)
Net cash provided (used) by operating activities			4,554,418				(2,982,281	)
Investing activities:
Purchases of property and equipment			(582,347	)			(536,405	)
Net cash (used) by investing activities			(582,347	)			(536,405	)
Financing activities:
Proceeds from PPP Loan Program			813,500				—
Proceeds from public offering, net of expenses			7,257,925				1,793,905
Proceeds from private offering			3,000,000				—
Purchases of treasury stock			(180,311	)			(52,584	)
Net cash provided by financing activities			10,891,114				1,741,321
Change in cash, cash equivalents, prepaid card load assets and merchant reserves			14,863,185				(1,777,365	)
Cash, cash equivalents, prepaid card load assets and merchant reserves, beginning of period			12,682,918				15,340,980
Cash, Cash Equivalents, Prepaid Card Load Assets and Merchant Reserves, End of Period		$	27,546,103			$	13,563,615
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	—			$	—
Income taxes			93,525				82,206
Non-cash transactions:
Issuance of deferred stock compensation			1,559,520				—

 

		Common Stock								Additional Paid- In				Treasury				Deferred				Accumulated				Total Stockholders'
		Shares				Amount				Capital				Stock				Compensation				Deficit				Equity
Balance at December 31, 2019			18,224,577			$	186,656			$	77,055,273			$	(1,885,452	)		$	(5,636,154	)		$	(62,151,988	)		$	7,568,335
Issuance of common stock under equity incentive plan			51,000				51				59,440				—				—				—				59,491
Warrant compensation costs			—				—				8,985				—				—				—				8,985
Deferred compensation amortization			—				—				—				—				228,219				—				228,219
Purchase of treasury stock			—				—				—				(26,629	)			—				—				(26,629	)
Net (loss) for the period			—				—				—				—				—				(835,009	)			(835,009	)
Balance at March 31, 2020			18,275,577			$	186,707			$	77,123,698			$	(1,912,081	)		$	(5,407,935	)		$	(62,986,997	)		$	7,003,392
Issuance of common stock under equity incentive plan			1,500,544				1,500				1,641,304				—				(1,559,520	)			—				83,284
Warrant compensation costs			—				—				8,988				—				—				—				8,988
Deferred compensation amortization			—				—				—				—				267,207				—				267,207
Purchase of treasury stock			—				—				—				(55,819	)			—				—				(55,819	)
Net (loss) for the period			—				—				—				—				—				(1,288,169	)			(1,288,169	)
Balance at June 30, 2020			19,776,121			$	188,207			$	78,773,990			$	(1,967,900	)		$	(6,700,248	)		$	(64,275,166	)		$	6,018,883
Issuance of common stock under equity incentive plan			32,323				32				149,961				—				—				—				149,993
Warrant compensation costs			—				—				8,985				—				—				—				8,985
Cashless warrant exercise			27,051				27				(27	)			—				—				—				—
Reversal of deferred compensation amortization that did not vest			(450,000	)			(450	)			(791,550	)			—				594,900				—				(197,100	)
Issuance of common stock, public offering			4,705,883				4,705				7,253,220				—				—				—				7,257,925
Issuance of common stock, private offering			1,796,407				1,797				2,998,203				—				—				—				3,000,000
Deferred compensation amortization			—				—				—				—				312,232				—				312,232
Purchase of treasury stock			—				—				—				(97,863	)			—				—				(97,863	)
Net (loss) for the period			—				—				—				—				—				(936,017	)			(936,017	)
Balance at September 30, 2020			25,887,785			$	194,318			$	88,392,782			$	(2,065,763	)		$	(5,793,116	)		$	(65,211,183	)		$	15,517,038
Balance at December 31, 2018			17,129,680			$	185,561			$	74,568,627			$	(1,813,546	)		$	(6,270,675	)		$	(57,036,241	)		$	9,633,726
Issuance of common stock, public offering			769,230				769				1,793,136				—				—				—				1,793,905
Issuance of common stock under equity incentive plan			62,222				62				58,551				—				—				—				58,613
Warrant compensation cost			—				—				8,985				—				—				—				8,985
Deferred compensation amortization			—				—				—				—				224,795				—				224,795
Purchase of treasury stock			—				—				—				(21,822	)			—				—				(21,822	)
Net (loss) for the period			—				—				—				—				—				(1,072,889	)			(1,072,889	)
Balance at March 31, 2019			17,961,132			$	186,392			$	76,429,299			$	(1,835,368	)		$	(6,045,880	)		$	(58,109,130	)		$	10,625,313
Issuance of common stock under equity incentive plan			53,445				53				133,462				—				—				—				133,515
Warrant compensation cost			—				—				8,985				—				—				—				8,985
Deferred compensation amortization			—				—				—				—				222,585				—				222,585
Reversal of deferred stock compensation that did not vest			(6,000	)			(6	)			(13,254	)			—				13,260				—				—
Purchase of treasury stock			—				—				—				(28,693	)			—				—				(28,693	)
Net (loss) for the period			—				—				—				—				—				(1,275,611	)			(1,275,611	)
Balance at June 30, 2019			18,008,577			$	186,439			$	76,558,492			$	(1,864,061	)		$	(5,810,035	)		$	(59,384,741	)		$	9,686,094
Issuance of common stock under equity incentive plan			2,500				3				92,483				—				—				—				92,486
Warrant compensation cost			—				—				8,985				—				—				—				8,985
Deferred compensation amortization			—				—				—				—				224,464				—				224,464
Reversal of deferred stock compensation that did not vest			—				—				(1,691	)			—				—				—				(1,691	)
Purchase of treasury stock			—				—				—				(2,069	)			—				—				(2,069	)
Net (loss) for the period			—				—				—				—				—				(1,239,034	)			(1,239,034	)
Balance at September 30, 2019			18,011,077			$	186,442			$	76,658,269			$	(1,866,130	)		$	(5,585,571	)		$	(60,623,775	)		$	8,769,235

 

Note 1. Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements of Usio, Inc. and its subsidiaries (the “Company”) have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company's financial position, results of operations and cash flows for such periods. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 30, 2020. Results of operations for interim periods are not necessarily indicative of results that may be expected for any other interim periods or the full fiscal year.

 

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. Sales taxes billed are reported directly as a liability to the taxing authority and are not included in revenue.

 

The following table presents the Company's payment processing service revenues by source:

 

 

Deferred Revenues: The Company records deferred revenues when it receives payments 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 revenues totaled $83,824 and $123,529 at September 30, 2020 and December 31, 2019, respectively.

 

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.

 

Merchant Reserves: The Company has merchant reserve requirements associated with Automated Clearing House ("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 our fiduciary standing with the Company's member sponsors and is in accordance with the guidelines set by the card networks.

 

 

Prepaid Card Load Assets: The Company maintains pre-funding accounts for its customers to facilitate prepaid card loads as initiated by the customer. These prepaid card load assets are carried on the Company's balance sheet with a corresponding liability.

 

The reconciliation of cash and cash equivalents to cash, cash equivalents, prepaid card load assets and merchant reserves is as follows for each period presented:

 

 

Allowance for Estimated Losses: The Company maintains an allowance for estimated doubtful accounts receivable resulting from the inability or failure of the Company’s customers to make required payments. The Company determines the allowance for estimated doubtful accounts receivable losses 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 conditions of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make contractual payments, additional allowances might be required. Estimates for doubtful account losses are variable based on the volume of transactions processed and could increase or decrease accordingly. The allowance for estimated doubtful accounts was $236,891 and $123,165 at September 30, 2020 and December 31, 2019, respectively.

 

Accounting for Internal Use Software: The Company capitalizes the costs associated with software being developed or obtained for internal use when both the preliminary project stage is completed, and it is probable that computer software being developed will be completed and placed-in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (iii) interest costs incurred, when material, while developing internal-use software. The Company ceases capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose. In the three months ended September 30, 2020 and September 30, 2019, the Company capitalized $178,311 and $147,459, respectively.

 

Valuation of Long-Lived and Intangible Assets: The Company assesses the impairment of long-lived and intangible assets at least annually, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important, which could trigger an impairment review, include the following: significant under performance relative to historical or projected future cash flows; significant changes in the manner of use of the assets or the strategy of the overall business; and significant negative industry trends. When management determines that the carrying value of long-lived and intangible assets may not be recoverable, impairment is measured as the excess of the assets’ carrying value over the estimated fair value. No impairment losses were recorded in 2019 or during the nine months ended September 30, 2020. Management is not aware of any impairment changes that may currently be required; however, the Company cannot predict the occurrence of events that might adversely affect the reported values in the future.

 

 

Reserve for Processing Losses: If, due to insolvency or bankruptcy of one of the Company’s merchant customers, or for any other reason, the Company is not able to collect amounts from its credit card, ACH or prepaid customers that have been properly "charged back" by the customer, or if a prepaid cardholder incurs a negative balance, the Company must bear the credit risk for the full amount of the transaction. The Company may require cash deposits and other types of collateral from certain merchants to minimize any such risks. In addition, the Company utilizes multiple systems and procedures to manage merchant risk. ACH, prepaid and credit card merchant processing loss reserves are primarily determined by performing a historical analysis of the Company’s loss experience, considering other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company’s relationship with the Company’s prepaid card holders. This reserve amount is subject to the risk that actual losses may be greater than the Company’s estimates. The Company has not incurred any significant processing losses to date. Estimates for processing losses are variable based on the volume of transactions processed and could increase or decrease accordingly. At September 30, 2020 and December 31, 2019, the Company’s reserve for processing losses was $491,659 and $506,153 respectively.

 

Recently Adopted Accounting Pronouncements: In February 2016, the FASB issued, "Leases (Topic 842)." This update requires that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with initial terms of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. Similar to previous guidance, the update continues to differentiate between finance leases and operating leases, however this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. The updated guidance leaves the accounting for leases by lessors largely unchanged from existing GAAP. The guidance became effective for the Company on January 1, 2019. As a lessee, this standard primarily impacted the Company's accounting for leased facilities and office equipment, for which the Company recognized right of use assets of $2,688,412 and a corresponding lease liability of $2,775,259 on the Company's consolidated balance sheet on January 1, 2019.

 

The Company adopted these provisions on January 1, 2019 using the optional transition method that permits the Company to apply the new disclosure requirements in 2019 and continue to present comparative period information as required under FASB ASC Topic 840, "Leases." The Company did not have a cumulative-effect adjustment to the opening balance of retained earnings at the date of adoption. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed it to exclude leases with an initial term of 12 months or less from the right-of-use assets and liabilities. Adoption of the standards had no impact on the Company's results of operations or liquidity.

 

If the Company determines that an arrangement is or contains a lease, the Company recognizes a right-of-use (ROU) asset and lease liability at the commencement date of the lease. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Lease expenses for lease payments are recognized on a straight-line basis over the lease term.

 

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation which expands the scope of current guidance to include all share-based payment arrangements related to the acquisition of goods or services from both non-employees and employees. The guidance is effective for the Company for all fiscal years beginning after December 15, 2018. The Company adopted the new standard on January 1, 2019. The adoption of the new standard did not result in a change to the previously presented financial statements.

 

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.

 

 

 

Note 2.  Leases

 

The Company leases facilities and office equipment under various operating leases, which generally are expected to be renewed or replaced by other leases. For the quarter ended September 30, 2020 and 2019, operating lease expenses totaled $58,039 and $66,223, respectively.  For the nine months ended September 30, 2020 and 2019, operating lease expenses totaled $186,731 and $183,225, respectively.

 

Operating lease liabilities as of September 30, 2020 will require the following payments:

 

 

Note 3. Accrued Expenses

 

Accrued expenses consisted of the following balances:

 

 

 

Note 4. PPP Loan Payable

 

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

 

 

Note 5. Stockholders' Equity

 

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 will 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 is 0%; and (v) the volatility is 64.6%. The fair value of the warrants was $135,764 which will be amortized over the life of the warrants as a reduction of revenues. The reduction of revenues recorded for the nine months ended September 30, 2020 and 2019 was $26,958 and $26,955, respectively.

 

On August 12, 2020, the Company issued 27,051 shares of common stock to University FanCards, LLC in a cashless exercise at $3.46 per common share in exchange for 60,000 warrants exercised by FanCards, LLC.

 

Equity Transactions: On February 14, 2019, the Company entered into a placement agency agreement with Maxim Group LLC for the issuance and sale of an aggregate of 769,230 shares of common stock at an offering price of $2.60 per share in a public offering. The Company agreed to pay Maxim a cash fee equal to 6% of the aggregate gross proceeds raised in the offering as well as legal fees and expenses of up to $40,000. The net proceeds to the Company from the public offering were $1.8 million, after deducting the offering expenses and fees payable by the Company.

 

On April 1, 2020, the Company granted 1,444,000 shares of common stock with a 10-year vesting period and 103,000 restricted stock units (RSUs) with a 3-year vesting period to employees and Directors as a performance bonus at an issue price of $1.08 per share. Executive officers and Directors included in the grant were Louis Hoch (300,000 shares), Vaden Landers (150,000 shares), Tom Jewell (200,000 shares), Blaise Bender (10,000 RSUs), Brad Rollins (30,000 RSUs) and Miguel Chapa (30,000 RSUs).

 

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

 

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

 

 

 

Note 6. Net (Loss) Per Share

 

Basic (loss) per share (EPS) was computed by dividing net (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS differs from basic EPS due to the assumed conversion of potentially dilutive awards and options that were outstanding during the period. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net (loss) for the three and nine months ended September 30, 2020 and September 30, 2019.

 

 

The awards and options to purchase shares of common stock that were outstanding at September 30, 2020 and September 30, 2019 that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive, are as follows:

 

 

 

 

Note 7. Income Taxes

 

Deferred tax assets and liabilities are recorded based on the difference between financial reporting and tax basis of assets and liabilities, and are measured by the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Deferred tax assets are computed with the presumption that they will be realizable in future periods when taxable income is generated. Predicting the ability to realize these assets in future periods requires judgment by management. 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.

 

The Company has recognized a deferred tax asset of approximately $1.4 million and has recorded a valuation allowance of approximately $10.0 million against the other deferred tax assets. The Company reviews the assessment of the deferred tax asset and valuation allowance on an annual basis or more often when events indicate that a change to the valuation allowance may be warranted.

 

At December 31, 2019, the Company had available net operating loss carryforwards of approximately $48.2 million. Net operating loss carryforwards prior to 2017 are available to offset taxable income of future periods and begin to expire in 2021. Effective for tax years ending in 2018, net operating losses can be carried forward to future years indefinitely. Approximately $0.1 million of the total net operating loss carryforward is subject to an IRS Section 382 limitation from 1999.

 

Management is not aware of any tax positions that would have a significant impact on the Company’s financial position.

 

Note 8. Related Party Transactions

 

Louis Hoch

 

During the nine months ended September 30, 2020 and the year ended December 31, 2019, the Company purchased a total of $4,831 and $13,831, respectively, of corporate imprinted sportswear and caps from Angry Pug Sportswear. Louis Hoch, the Company’s President and Chief Executive Officer, is a 50% owner of Angry Pug Sportswear.

 

Miguel Chapa and Louis Hoch

 

During the nine months ended September 30, 2020 and the year ended December 31, 2019, the Company received $0 and $6,665, respectively, in revenue from Lush Rooftop. Miguel Chapa, a former member of our Board of Directors, was an owner of Lush Rooftop. Louis Hoch, the Company’s President and Chief Executive Officer, was also a minority owner of Lush Rooftop. The relationship ended in September, 2019 when the business was sold.

 

During the nine months ended September 30, 2020 and the year ended December 31, 2019, the Company received $3,219 and $24,363, respectively, in revenue from BLVD Bar and Lounge. Miguel Chapa, a former member of the Company's Board of Directors, was an owner in BLVD Bar and Lounge. Louis Hoch, the Company’s President and Chief Executive Officer, was also an owner of BLVD Bar and Lounge. In May 2020, both Mr. Chapa and Mr. Hoch sold all their interests in BLVD.  The Company retained the card processing business.

 

Directors and Officers

 

On January 6, 2020, the Company repurchased 11,860 shares of common stock at a closing price of $1.74 per share from Tom Jewell, the Company's Chief Financial Officer to cover taxes due.

 

On January 6, 2019, the Company repurchased 11,860 shares of common stock at a closing price of $1.84 per share from Tom Jewell, the Company's Chief Financial Officer to cover taxes due.

 

The Company granted 1,444,000 shares of common stock with a 10-year vesting period and 103,000 restricted stock units (RSUs) with a 3-year vesting period to employees and Directors as a performance bonus on April 1, 2020 at an issue price of $1.08 per share. Executive officers and Directors included in the grant were Louis Hoch (300,000 shares), Vaden Landers (150,000 shares), Tom Jewell (200,000 shares), Blaise Bender (10,000 RSUs), Brad Rollins (30,000 RSUs) and Miguel Chapa (30,000 RSUs).

 

As approved by the Company's Compensation Committee, on November 1, 2020, we issued 136,891 shares of common stock to Mr. Louis Hoch, the Company's Chief Executive Officer, valued at $216,000 at the closing price of $1.5779 per share from October 15, 2020 in satisfaction of the terms of the additional bonus of the employment agreement. As part of the transaction, on November 1, 2020, the Company repurchased 54,756 shares from Mr. Hoch to cover withholding taxes due.

 

Note 9. COVID-19

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

 

 

Note 10. Legal Proceedings

 

The Company may be involved in legal matters arising in the ordinary course of business from time to time. While the Company believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation will not have a material adverse effect on its business, financial condition or results of operations.

 

 

 

Note 11. Subsequent Events

 

As approved by the Company's Compensation Committee, on November 1, 2020, the Company issued 136,891 shares of common stock to Mr. Louis Hoch, the Company's Chief Executive Officer, valued at $216,000 at the closing price of $1.5779 per share from October 15, 2020 in satisfaction of the terms of the additional bonus of the employment agreement. As part of the transaction, on November 1, 2020, the Company repurchased 54,756 shares from Mr. Hoch to cover withholding taxes due.