Usio, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm 31 Consolidated Balance Sheets as of December 31, 2020 and 2019 33 Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 34 Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2020 and 2019 35 Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 36 Notes to Consolidated Financial Statements 37 30 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Usio, Inc. and Subsidiaries San Antonio, Texas Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Usio, Inc. and Subsidiaries (collectively referred to as the “Company”) as of December 31, 2020 and 2019 , and the related consolidated statements of operations, changes in stockholders’ equity and cash flows, for each of the two years in the period ended December 31, 2020 , and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Basis of Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As a part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 31 Table of Contents Intangible Assets – Customer Lists Description of the Matter As of December 31, 2020, the Company had intangible assets relating to acquired customer lists which are recorded at their cost basis net of accumulated amortization. On at least an annual basis, the company performs an analysis of the carrying value of these customer lists to evaluate the assets for impairment. The customer list is amortized over a five-year term and no impairment has been recognized on the customer list portfolios since their acquisition. We identified the customer list valuation as a critical audit matter because of the significant estimates and forward-looking assumptions used which could be affected by future economic and market conditions. How We Addressed the Matter in Our Audit To test the fair value of the Company's customer list intangible assets, our audit procedures included, among others, evaluating the Company's valuation model, evaluating the method and significant assumptions used, and testing the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We also evaluated whether the key factors considered in the evaluation were consistent with evidence obtained in other areas of the audit. Deferred Tax Assets – Valuation Allowance Description of the Matter The Company recognizes deferred tax assets to the extent that it is expected that these assets are more likely than not to be realized. The Company evaluates the realizability of the deferred tax assets, and to the extent that the Company estimates that it is more likely than not that a benefit will not be realized, the carrying amount of the deferred tax assets is reduced with a valuation allowance. We identified the valuation of deferred tax assets as a critical audit matter because of the significant judgments made by management in projecting future taxable income. How We Addressed the Matter in Our Audit Our audit procedures related to projected future taxable income and the determination of whether it is more likely than not that the deferred tax assets will be realized included the evaluation of the reasonableness of management’s projected future taxable income. We compared the estimates to historical earnings and evaluated the inputs and assumptions used by management for developing future forecasts. /s/ ADKF, P.C. ADKF, P.C. San Antonio, Texas March 29, 2021 We have served as the Company's auditor since 2004. 32 Table of Contents USIO, INC. CONSOLIDATED BALANCE SHEETS December 31, 2020 December 31, 2019 ASSETS Cash and cash equivalents $ 5,011,132 $ 2,137,580 Accounts receivable, net 2,863,638 1,274,001 Settlement processing assets 43,558,442 38,906,780 Prepaid card load assets 7,610,242 528,434 Customer deposits 1,305,296 — Inventory 176,466 — Prepaid expenses and other 301,755 183,575 Current assets before merchant reserves 60,826,971 43,030,370 Merchant reserves 8,265,555 10,016,904 Total current assets 69,092,526 53,047,274 Property and equipment, net 3,105,926 1,557,521 Other assets: Intangibles, net 6,035,761 2,676,427 Deferred tax asset 1,394,000 1,394,000 Operating lease right-of-use assets 2,671,266 2,480,902 Other assets 368,078 404,055 Total other assets 10,469,105 6,955,384 Total Assets $ 82,667,557 $ 61,560,179 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 851,349 $ 419,849 Accrued expenses 1,463,944 1,360,551 Operating lease liabilities, current portion 346,913 356,184 Settlement processing obligations 43,558,442 38,906,780 Prepaid card load obligations 7,610,242 528,434 Customer deposits 1,305,296 — Deferred revenues 66,572 123,529 Current liabilities before merchant reserve obligations 55,202,758 41,695,327 Merchant reserve obligations 8,265,555 10,016,904 Total current liabilities 63,468,313 51,712,231 Non-current liabilities: Operating lease liabilities, non-current portion 2,495,883 2,279,613 Total liabilities 65,964,196 53,991,844 Stockholders' Equity: Preferred stock, $0.01 par value, 10,000,000 shares authorized; -0- shares issued and outstanding in 2020 and 2019 — — Common stock, $0.001 par value, 200,000,000 shares authorized; 26,260,776 and 18,224,577 issued and 24,974,995 and 17,104,998 outstanding in 2020 and 2019 (see Note 12) 194,692 186,656 Additional paid-in capital 89,659,433 77,055,273 Treasury stock, at cost; 1,285,781 and 1,119,579 shares in 2020 and 2019 (see Note 12) (2,165,721 ) (1,885,452 ) Deferred compensation (5,926,872 ) (5,636,154 ) Accumulated deficit (65,058,171 ) (62,151,988 ) Total stockholders' equity 16,703,361 7,568,335 Total Liabilities and Stockholders' Equity $ 82,667,557 $ 61,560,179 The accompanying notes are an integral part of these consolidated financial statements. 33 Table of Contents USIO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS December 31, 2020 December 31, 2019 Revenues $ 32,251,823 $ 28,200,535 Cost of services 24,875,930 22,251,325 Gross profit 7,375,893 5,949,210 Selling, general and administrative: Stock-based compensation 1,475,328 1,292,419 Other expenses 8,139,219 7,697,267 Depreciation and Amortization 1,518,214 2,022,520 Total operating expenses 11,132,761 11,012,206 Operating (loss) (3,756,868 ) (5,062,996 ) Other income: Interest income 59,392 81,790 PPP Loan forgiveness 813,500 — Other income (expense) 902 (32,653 ) Other income and (expense), net 873,794 49,137 (Loss) before income taxes (2,883,074 ) (5,013,859 ) Income taxes 23,109 101,888 Net (Loss) $ (2,906,183 ) $ (5,115,747 ) (Loss) Per Share Basic (loss) per common share: $ (0.19 ) $ (0.39 ) Diluted (loss) per common share: $ (0.19 ) $ (0.39 ) Weighted average common shares outstanding (see Note 12) Basic 15,428,798 12,958,067 Diluted 15,428,798 12,958,067 The accompanying notes are an integral part of these consolidated financial statements. 34 Table of Contents USIO, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Additional Total Common Stock Paid - In Treasury Deferred Accumulated Stockholders' Shares Amount Capital Stock Compensation Deficit Equity Balance at December 31, 2018 17,129,680 $ 185,561 $ 74,568,627 $ (1,813,546 ) $ (6,270,675 ) $ (57,036,241 ) $ 9,633,726 Issuance of common stock, public offering 769,230 769 1,793,136 — — — 1,793,905 Issuance of common stock, employees, restricted 175,000 175 272,825 — (273,000 ) — — Issuance of common stock under equity incentive plan 156,667 157 397,999 — — — 398,156 Reversal of deferred compensation amortization that did not vest (6,000 ) (6 ) (13,254 ) — 13,260 — — Warrant compensation cost — — 35,940 — — — 35,940 Deferred compensation amortization — — — — 894,261 — 894,261 Purchase of treasury stock — — — (71,906 ) — — (71,906 ) Net (loss) for the year — — — — — (5,115,747 ) (5,115,747 ) Balance at December 31, 2019 18,224,577 $ 186,656 $ 77,055,273 $ (1,885,452 ) $ (5,636,154 ) $ (62,151,988 ) $ 7,568,335 Issuance of common stock under equity incentive plan 1,956,858 1,958 2,556,087 — (1,937,620 ) — 620,425 Warrant compensation cost — — 588,224 — — — 588,224 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 7,253,222 — — — 7,257,927 Issuance of common stock, private offering 1,796,407 1,796 2,998,204 — — — 3,000,000 Deferred compensation amortization — — — — 1,052,002 — 1,052,002 Purchase of treasury stock — — — (280,269 ) — — (280,269 ) Net (loss) for the year — — — — — (2,906,183 ) (2,906,183 ) Balance at December 31, 2020 26,260,776 $ 194,692 $ 89,659,433 $ (2,165,721 ) $ (5,926,872 ) $ (65,058,171 ) $ 16,703,361 The accompanying notes are an integral part of these consolidated financial statements. 35 Table of Contents USIO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS December 31, 2020 December 31, 2019 Operating Activities Net (loss) $ (2,906,183 ) $ (5,115,747 ) Adjustments to reconcile net (loss) to net cash provided (used) by operating activities: Depreciation 518,214 1,022,520 Amortization 1,000,000 1,000,000 Provision for loss on note receivable — 108,750 Non-cash stock-based compensation 1,475,328 1,292,419 Amortization of warrant costs 35,943 35,940 Changes in operating assets and liabilities: Accounts receivable (905,901 ) (59,646 ) Prepaid expenses and other (80,923 ) (81,853 ) Operating lease right-of-use assets (190,364 ) (2,480,902 ) Other assets 35,977 (97,298 ) Inventory (8,328 ) — Accounts payable and accrued expenses 534,893 619,505 Operating lease liabilities 206,999 2,635,797 Prepaid card load obligations 7,081,808 (7,045 ) Merchant reserves (1,751,349 ) (2,628,899 ) Customer deposits 1,305,296 — Deferred revenue (56,957 ) 103,529 Deferred rent — (79,748 ) Net cash provided (used) by operating activities 6,294,453 (3,732,678 ) Investing Activities Purchases of property and equipment (855,394 ) (647,383 ) Purchase of Information Management Solutions, LLC (IMS) (5,907,408 ) — Net cash (used) by investing activities (6,762,802 ) (647,383 ) Financing Activities Proceeds from PPP Loan Program 813,500 — Forgiveness of PPP Loan (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 (280,269 ) (71,906 ) Net cash provided by financing activities 9,977,656 1,721,999 Change in cash, cash equivalents, prepaid card loads, customer deposits and merchant reserves 9,509,307 (2,658,062 ) Cash, cash equivalents, prepaid card loads, customer deposits and merchant reserves, beginning of year 12,682,918 15,340,980 Cash, Cash Equivalents, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End of Year $ 22,192,225 $ 12,682,918 Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ — $ — Income taxes 93,525 82,206 Non-cash transactions: Issuance of stock warrants in exchange for purchase of IMS 552,283 — Issuance of deferred stock compensation 1,937,620 273,000 The accompanying notes are an integral part of these consolidated financial statements. 36 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2020 and 2019 Note 1. Description of Business and Summary of Significant Accounting Policies Organization: Usio, Inc., along with its subsidiaries, FiCentive, Inc., a Nevada corporation, and Zbill, Inc., a Nevada corporation, provides integrated electronic payment services, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH network to billers and retailers. The company also has an additional wholly-owned subsidiary, Usio Output Solutions, Inc., which is the entity for the Output Solutions operations. In addition, the Company operates various product websites, such as www.akimbocard.com , www.payfacinabox.com , and www.singularpayments.com . Principles of Consolidation and Basis of Presentation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition: Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services. Revenue is recognized during the period in which the transactions are processed or when the related services are performed. The Company complies with ASC 606-10 and reports revenues at gross as a principal versus net as an agent. Although some of the Company's processing agreements vary with respect to specific credit risks, the Company has determined for each agreement it is acting in the principal role. Merchants may be charged for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through third-party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations. Certain card distributors remit payment of fees earned 45 days after the end of the processing period. Prepaid card distributors have payment terms of 30 days following the end of the month. Sales taxes billed are reported directly as a liability to the taxing authority and are not included in revenue. Usio Output Solutions, Inc. provides bill preparation, presentment and mailing services. Revenue from Output solutions is recognized when the related services are performed for printing and delivered to USPS for postage. Year Ended December 31, 2020 2019 $ Change % Change ACH and complementary service revenue $ 8,471,705 $ 9,343,974 $ (872,269 ) (9.3 )% Credit card revenue 19,453,501 17,329,322 2,124,179 12.3 % Prepaid card services revenue 3,166,580 1,527,239 1,639,341 107.3 % Output solutions revenue 1,160,037 — 1,160,037 100.0 % Total Revenue $ 32,251,823 $ 28,200,535 $ 4,051,288 14.4 % Deferred Revenues: The Company records deferred revenues when it receives payments or issues invoices in advance of transferring control of promised goods or services to a customer. The advance consideration received from a customer is deferred until the Company provides the customer that product or service. At December 31, 2020 and 2019 , the deferred revenues totaled $66,572 and $123,529. The deferred revenue balances are as follows: 2020 2019 Deferred revenues, beginning of period $ 123,529 $ 20,000 Deferred revenues, end of period 66,572 123,529 Revenue recognized in the period from amounts included in deferred revenues at the beginning of the period $ 56,957 $ 20,000 Cash and Cash Equivalents: Cash and cash equivalents includes cash and other money market instruments. The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. Settlement Processing Assets and Obligations: Settlement processing assets and obligations represent intermediary balances arising in our settlement process for merchants. Prepaid Card Load Assets: The Company maintains pre-funding accounts for its customers to facilitate prepaid card loads as initiated by our customer. These prepaid card load assets are carried on the Company's balance sheet with a corresponding liability. Customer Deposits: The Company holds customer deposits primarily for postage expenses to ensure the Company is not out of pocket for amounts billed daily by the United States Postal Service. These customer deposits are carried on the Company's balance sheet with a corresponding liability. 37 Table of Contents Merchant Reserves: The Company has merchant reserve requirements associated with Automated Clearing House, or ACH transactions. The merchant reserve assets are carried on the Company's balance sheet with a corresponding liability. Merchant Reserves are set for each merchant. Funds are collected from each merchant and held as collateral to minimize contingent liabilities associated with any losses that may occur under the merchant agreement. While this cash is not restricted in its use, the Company believes that designating this cash to collateralize Merchant Reserves strengthens its fiduciary standing with the Company's member sponsors and is in accordance with the guidelines set by the card networks. The reconciliation of cash and cash equivalents to cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves is as follows for each period presented: December 31, 2020 December 31, 2019 Beginning cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves: Cash and cash equivalents $ 2,137,580 $ 2,159,698 Prepaid card load assets 528,434 535,479 Customer deposits — — Merchant reserves 10,016,904 12,645,803 Total $ 12,682,918 $ 15,340,980 Ending cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves: Cash and cash equivalents $ 5,011,132 $ 2,137,580 Prepaid card load assets 7,610,242 528,434 Customer deposits 1,305,296 — Merchant reserves 8,265,555 10,016,904 Total $ 22,192,225 $ 12,682,918 Accounts Receivable/Allowance for Estimated Losses: Accounts receivable are reported as outstanding principal net of an allowance for doubtful accounts of $205,522 and $123,165 at December 31, 2020 and 2019 , respectively. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability or failure of its customers to make required payments. The Company determines the allowance based on an account-by-account review, taking into consideration such factors as the age of the outstanding balance, historical pattern of collections and financial condition of the customer. Past losses incurred by the Company due to bad debts have been within its expectations. If the financial condition of its customers deteriorates, resulting in an impairment of their ability to make contractual payments, additional allowances might be required. Estimates for bad debt losses are variable based on the volume of transactions processed and could increase or decrease accordingly. The Company normally does not charge interest on accounts receivable. Inventory : Inventory is stated at the lower of cost or net realizable value. At December 31, 2020, inventory consisted primarily of printing and paper supplies used for Output solutions. Property and Equipment: Property and equipment are stated at cost. Depreciation and amortization are computed on a straight-line method over the estimated useful lives of the related assets, ranging from three to ten years. Leasehold improvements are amortized over the lesser of the estimated useful lives or remaining lease period. Expenditures for maintenance and repairs are charged to expense as incurred. Accounting for Internal Use Software: The Company capitalizes the costs associated with software developed and / or software obtained for internal use. The software is capitalized when both the preliminary project stage is complete, and the software being developed is placed-in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (iii) interest costs incurred, when material, while developing internal-use software. The Company ceases capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose. For the years ended December 31, 2020 and December 31, 2019 , the Company capitalized $759,923 and $518,785, respectively. Concentration of Credit Risk: Financial instruments that potentially expose the Company to credit risk consist of cash and cash equivalents, and accounts receivable. The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent account balances exceed the amount insured by the FDIC, which is $250,000. Accounts receivables potentially subject the Company to concentrations of credit risk. The Company’s customer base operates in a variety of industries and is geographically dispersed. The Company closely monitors extensions of credit. Estimated credit losses have been recorded in the consolidated financial statements. Recent credit losses have been within management's expectations. No customer accounted for more than 10% of revenues in 2020 or 2019 . 38 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, 2020 and 2019 , respectively, the Company’s reserve for processing losses was $515,199 and $506,153, respectively. Advertising Costs: Advertising is expensed as incurred. The Company incurred approximately $59,000 and $114,000 in advertising costs in 2020 and 2019 , respectively. Income Taxes: Deferred tax assets and liabilities are recorded based on difference between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Deferred tax assets are computed with the presumption that they will be realizable in future periods when taxable income is generated. Predicting the ability to realize these assets in future periods requires a great deal of judgment by management. U.S. generally accepted accounting principles prescribe a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Income tax benefits that meet the “more likely than not” recognition threshold should be recognized. Goodwill is amortized over 15 years for tax purposes. As with all businesses, the Company’s tax returns are subject to periodic examination. The Company’s federal returns for the past four years remain open to examination. The Company is subject to the Texas margin tax and Tennessee franchise tax. Management is not aware of any tax positions that would have a significant impact on its financial position. The Company has approximately $39.4 million of net operating loss carryforwards. However, the Company cannot predict with reasonable certainty whether all of the available net operating loss carryforwards will be realized in future periods. Accordingly, a valuation allowance has been provided to reduce the net deferred tax assets to $1.4 million. Management does not anticipate a significant change in the assessment and will review the deferred tax asset balance at December 31, 2021, or earlier as events may warrant. Stock-Based Compensation: The Company recognizes as compensation expense all share-based payment awards made to employees and directors, including grants of stock options and warrants, based on estimated fair values. Fair value is generally determined based on the closing price of the Company’s common stock on the date of grant. 401(k) Plan: The Company has a defined contribution plan, or 401(k) Plan, pursuant to Section 401(k) of the Internal Revenue Code. All eligible full and part-time employees of the Company who meet certain age requirements may participate in the 401(k) Plan. Participants may contribute between 1% and 15% of their pre-tax compensation, but not in excess of the maximum allowable under the Code. The 401(k) Plan allows for discretionary and matching contributions by the Company. In 2020 , the Company matched 100% of employee contributions up to 3% and 50% of the employee contribution over 3% with a maximum employer contribution of 5%. The Company made matching contributions of $152,835 and $126,436 in 2020 and 2019 , respectively. 39 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. Recently Adopted Accounting Pronouncements: In February 2016, the FASB issued , "Leases (Topic 842)." This update requires that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with terms of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. Similar to previous guidance, the update continues to differentiate between finance leases and operating leases, however this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. The updated guidance leaves the accounting for leases by lessors largely unchanged from existing GAAP. The guidance became effective for the Company on January 1, 2019. As a lessee, this standard primarily impacted the Company's accounting for leased facilities and office equipment, for which the Company recognized right of use assets of $2,688,412 and a corresponding lease liability of $2,775,259 on the Company's consolidated balance sheet on January 1, 2019. The Company adopted these provisions on January 1, 2019 using the optional transition method that permits the Company to apply the new disclosure requirements in 2019 and continue to present comparative period information as required under FASB ASC Topic 840, "Leases." The Company did not have a cumulative-effect adjustment to the opening balance of retained earnings at the date of adoption. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed it to exclude leases with an initial term of 12 months or less from the right-of-use assets and liabilities. Adoption of the standards had no impact on the Company's results of operations or liquidity. If the Company determines that an arrangement is or contains a lease, the Company recognizes a right-of-use (ROU) asset and lease liability at the commencement date of the lease. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Lease expenses for lease payments are recognized on a straight-line basis over the lease term. In June 2018, the FASB issued ASU 2018-07 , Compensation - Stock Compensation which expands the scope of current guidance to include all share-based payment arrangements related to the acquisition of goods or services from both non-employees and employees. The guidance is effective for the Company for all fiscal years beginning after December 15, 2018. The Company adopted the new standard on January 1, 2019. The adoption of the new standard did not result in a change to the previously presented financial statements. New Accounting Pronouncements : In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326), to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in Topic 326 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Topic 326 is effective for fiscal years beginning after December 25, 2022, including interim periods within those fiscal years for smaller reporting companies. The Company does not expect the adoption of the amendments in ASU 2016-13 to have a significant effect on its financial position and the results of its operations when such amendment is adopted. Accounting standards that have been issued or proposed by the FASB, the SEC or other standard setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. 40 Table of Contents Note 2. Acquisition of Information Management Solutions, LLC. On December 15, 2020, the Company entered into an asset purchase agreement to purchase substantially all the assets of Information Management Solutions, LLC ("IMS"), a Texas limited liability company in the business of electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions. The total purchase price consideration consisted of a cash payment of $5,907,408 at closing and warrant considerations valued at $552,283. The warrants were comprised of 945,599 unregistered warrants to purchase shares of common stock of Usio, Inc., or 945,599 shares of common stock, $0.001 par value per share, with an exercise price of $4.23 per share. The final number of warrants was determined by dividing $2,000,000 by the 5-day weighted average closing price for the four trading days preceding the closing date and the closing day, or $2.115 per share. The exercise price of the warrants was determined by multiplying the 5-day weighted average closing price by the number 2. The warrants vest in three equal installments on the first, second and third anniversary of the closing date and have a term of five years from vest. The purchase price was allocated to the net assets acquired based upon their estimated fair values as follows: Estimated Fair Estimated Useful Value Life (in years) Accounts receivable $ 683,736 Inventory 168,138 Fixed assets 1,211,225 5 Prepaid expenses 29,849 Other assets 7,408 Customer list 3,807,052 5 Total Cash Consideration $ 5,907,408 Customer list $ 552,283 Total Warrant Consideration $ 552,283 Total Purchase Price $ 6,459,691 The 2020 consolidated statement of operations includes 1 month of IMS operations, which is approximately $1.2 million of revenue and $0.6 million of gross profit. Unaudited Pro Forma Information The Company estimates that the revenues and net income for the periods below that would have been reported if the IMS acquisition would have taken place on the first day of the Company's 2019 calendar year would be as follows and includes pro-forma adjustments to normalize results in line with future operating performance: 2020 2019 Revenues $ 45,184,678 $ 41,809,997 Gross Profit 9,251,517 8,099,868 Net (Loss) (3,127,387 ) (4,909,074 ) Income per share: Basic $ (0.17 ) $ (0.28 ) Diluted $ (0.17 ) $ (0.28 ) Amounts set forth above are not necessarily indicative of the results that would have been obtained had the IMS acquisition had taken place on the first day of the Company's 2019 calendar year or of the results that may be achieved by the combined enterprise in the future. Note 3. Note Receivable C2Go Note Receivable Under a loan and security agreement dated February 2, 2016, we loaned the principal amount of $200,000 to C2Go, Inc. with an interest rate of 10% per annum for a term of 18 months. The loan was secured by a first lien on all assets of C2Go. C2Go defaulted under the note by failing to repay the loan plus interest on August 2, 2017. On December 7, 2017, we entered into a note purchase and settlement agreement with C2Go and Mercury Investment Partners LLC. There are no assurances that we will be able to recover the remaining $145,000 principal and there are no assurances there will be any assets for us to recover from its lien on all the assets of C2Go if payment in full of the obligation is not made. The loss reserve on the note receivable as of December 31, 2020 and 2019 , was $145,000 reflecting a "more likely than not" recognition threshold. 41 Table of Contents Note 4. Property and Equipment Property and equipment consisted of the following at December 31: 2020 2019 Software $ 5,724,971 $ 4,951,648 Equipment 2,137,364 891,838 Furniture and fixtures 492,347 444,576 Leasehold improvements 170,583 170,583 Total property and equipment 8,525,265 6,458,645 Less: accumulated depreciation (5,419,339 ) (4,901,124 ) Net property and equipment $ 3,105,926 $ 1,557,521 Note 5. Intangibles Akimbo Financial, Inc. Acquisition (2015) On December 22, 2014, we acquired substantially all of the assets of Akimbo Financial, Inc. The intangibles acquired in the acquisition consist of the customer list and contracts at cost of $396,824 (net of accumulated amortization of $396,824 at December 31, 2020) and goodwill of $9,759. The intangible asset was fully amortized as of December 31, 2017. The fair value of the customer list and contracts was calculated using the net present value of the projected gross profit to be generated by the customer list over a period of 36 months beginning in January 2015 and was amortized over 3 years at $163,139 annually. Goodwill was determined based on the purchase price paid over the assets acquired and has an indefinite life, which is tested for impairment annually. Singular Payments, LLC Acquisition (2017) On September 1, 2017, we acquired all of the membership interest of Singular Payments, LLC. The intangibles acquired in such acquisition consist of customer list assets of $5,000,000 at cost (net of accumulated amortization of $3,333,333 at December 31, 2020). The fair value of the customer list was calculated using the net present value of the projected gross profit to be generated by the customer list over 60 months beginning in September 2017 and ending in August 2022. Amortization expense in 2020 and 2019 was $1,000,000. Annual amortization expense will be $1,000,000 per year through the year 2021 and $666,667 in the year 2022. Information Management Solutions, LLC Acquisition (2020) On December 15, 2020, we acquired substantially all of assets of Information Management Solutions, LLC. The intangibles acquired in such acquisition consist of customer list assets of $4,359,335 at cost. The fair value of the customer list was calculated using the net present value of the projected gross profit to be generated by the customer list over 60 months beginning in January 2021 and ending in December 2025. Annual amortization expense will be $871,867 per year through the year 2025. Note 6. Valuation Accounts Valuation and allowance accounts included the following at December 31: Net Charged Balance to Balance End Beginning of Costs and of Year Expenses Transfers Net Write-Off Year 2020 Allowance for doubtful accounts $ 123,165 $ 96,000 $ — $ (13,643 ) $ 205,522 Reserve for processing losses 506,153 132,000 — (122,954 ) 515,199 2019 Allowance for doubtful accounts $ 55,212 $ 89,613 $ — $ (21,660 ) $ 123,165 Reserve for processing losses 374,153 132,000 — — 506,153 42 Table of Contents Note 7. PPP Loan The Company received funding under the Paycheck Protection Program (PPP) as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), administered by the U.S. Small Business Administration. Under the terms of the Note, the Company received total proceeds of $813,500 bearing interest at a rate of 1% per annum with a maturity date of April 15, 2022. In addition, principal and interest payments will be deferred for the first ten months of the loan. The loan is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. The Company used the proceeds for payroll costs and other permitted expenses. Under the terms of the PPP, the principal may be forgiven if the loan proceeds are used for qualifying expenses as described in the CARES act, such as payroll costs, benefits, rent and utilities. The Company's loan forgiveness was approved in full by the U.S. Small Business Administration on December 14, 2020 and is accounted for as income in 2020 under FASB ASC 470. Note 8. Accrued Expenses Accrued expenses consisted of the following balances at December 31: 2020 2019 Accrued commissions $ 373,154 $ 530,908 Reserve for processing losses 515,199 506,153 Other accrued expenses 225,412 92,385 Accrued taxes 132,363 99,850 Accrued salaries 217,816 131,255 Total accrued expenses $ 1,463,944 $ 1,360,551 Note 9. Operating Leases The Company leases approximately 10,535 square feet of office space for its San Antonio, TX executive offices and operations. Rental expense under the operating lease was $136,713 and $199,702 for the years ended December 31, 2020 and 2019 , respectively. The lease expires on July 31, 2024. The Company leases approximately 3,794 square feet of office space for its Nashville, Tennessee sales offices and operations. Rental expense under the operating lease was $81,474 and $112,108 for the years ended December 31, 2020 and 2019 , respectively. The lease expires on April 30, 2023. The Company assumed a lease in San Antonio, Texas as a part of the Information Management Solutions, LLC acquisition for its Output Solutions employees and warehouse operations. The lease has a remaining life of 45 months and expires on September 30, 2024. The space leased is 22,400 square feet. Annual rents during the lease term range from $123,554 to $133,703. On January 1, 2021, the Company entered into a lease in Austin, Texas commencing on January 1, 2021 for its Austin technology organization. The lease is for a period of 25 months and expires on January 31, 2023. The space leased is 1,890 square feet. Annual rents during the lease term is $55,755. On March 15, 2021, the Company entered into a lease amendment to the existing lease in San Antonio, Texas commencing April 1, 2021 and expiring on September 30, 2024 running concurrently with the existing lease. The incremental space leased is 2,734 square feet. The incremental annual rent during the lease term ranges from $56,047 to $60,148. The Company also leased select computer equipment for a period of 36 months beginning in May, 2016. The lease expired in April, 2019. Additionally, the Company has various copier equipment with leases that have not expired. Rental expense under the operating lease was $12,729 and $25,000 for the years ended December 31, 2020 and 2019 , respectively. The weighted average remaining lease term is 6.86 years. The weighted average discount rate is 4.52% The Company recognized total operating lease expense of approximately $360,000 and $450,000 for the years ended December 31, 2020 and 2019 , respectively. In 2020 , the operating lease expense of $360,000 consisted of $245,000 of fixed operating expense and $115,000 of interest expense. The maturities of lease liabilities are as follows at December 31, 2020 : Year ended December 31, 2021 $ 349,913 2022 479,023 2023 488,802 2024 447,645 2025 353,990 Thereafter 1,112,689 Total minimum lease payments 3,232,062 Less imputed interest (389,266 ) Total lease liabilities $ 2,842,796 43 Table of Contents Note 10. Related Party Transactions Louis Hoch During the year ended December 31, 2020 and 2019 , the Company purchased $9,885.72 and $13,831, respectively, of corporate imprinted sportswear, promotional items and caps from Angry Pug Sportswear. Louis Hoch, President and Chief Executive Officer is a 50% owner of Angry Pug Sportswear. Miguel Chapa During the year ended December 31, 2020 and 2019 , the Company received $0 and $6,665 in revenue from Lush Rooftop. Miguel Chapa, a former member of the Board of Directors, was an owner in Lush Rooftop. Louis Hoch, President and Chief Executive Officer, was an owner in Lush Rooftop. The relationship with Lush Rooftop ended in September, 2019 when the business was sold. During the year ended December 31, 2020 and 2019 , respectively, the Company received $3,219 and $24,363 in revenue from BLVD Bar and Lounge. Miguel Chapa, a former member of the Board of Directors, was an owner in BLVD Bar and Lounge. Louis Hoch, President and Chief Executive Officer, was also an owner in BLVD Bar and Lounge. In May 2020, Mr. Chapa and Mr. Hoch sold all their interests in BLVD. Officers and Directors On January 6, 2019, the Company repurchased 11,860 shares for $21,822 in a private transaction at the closing price on January 6, 2019 from employees to cover the respective employee's share of taxes for shares that vested on that day for Tom Jewell, Chief Financial Officer to cover taxes. On January 6, 2020, the Company repurchased 11,860 shares of common stock for $20,636 at the closing price on January 6, 2020 from Tom Jewell, the Company's Chief Financial Officer to cover taxes. On January 6, 2021, the Company repurchased 11,860 shares for $38,545 in a private transaction at the closing price on January 6, 2021 of $3.25 per share from Tom Jewell, the Company's Chief Financial Officer, to cover his share of taxes. The Company granted 1,444,000 shares of common stock with a 10-year vesting period and 103,000 restricted stock units (RSUs) with a 3-year vesting period to employees and Directors as a performance bonus on April 1, 2020 at an issue price of $1.08 per share. Executive officers and Directors included in the grant were Louis Hoch (300,000 shares), Tom Jewell (200,000 shares), Blaise Bender (10,000 RSUs), Brad Rollins (30,000 RSUs) and Miguel Chapa (30,000 RSUs). As approved by the Company's Compensation Committee, on November 1, 2020, the Company issued 136,891 shares of common stock to Mr. Louis Hoch, the Company's Chief Executive Officer, valued at $216,000 at the closing price of $1.5779 per share from October 15, 2020 in satisfaction of the terms of the additional bonus of the employment agreement. As part of the transaction, on November 1, 2020, the Company repurchased 54,756 shares at the closing price of $1.5779 on October 15, 2020 from Mr. Hoch to cover withholding taxes due. Note 11. Income Taxes Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax asset are as follows at December 31: 2020 2019 Deferred tax assets: Net operating loss carryforwards $ 8,277,000 $ 10,753,000 Depreciation and amortization 827,000 668,000 Non-cash compensation (225,000 ) (69,000 ) Other 49,000 46,000 Valuation Allowance (7,534,000 ) (10,004,000 ) Deferred tax asset $ 1,394,000 $ 1,394,000 Management has reviewed its net deferred asset position, and due to the history of operating losses has determined that the application of a valuation allowance at December 31, 2020 and 2019 is warranted. If applicable, the Company would recognize interest expense and penalties related to uncertain tax positions in interest expense. As of December 31, 2020 , the Company had not accrued any interest or penalties related to uncertain tax provisions. 44 Table of Contents The Company has net operating loss carryforwards for tax purposes of approximately $39.4 million. Net operating loss carryforwards prior to 2017 are available to offset taxable income of future periods and begin to expire in 2021. Effective for tax years ending in 2018 or later, net operating losses cannot be carried back but can be carried forward to future tax years indefinitely, subject to annual limitations for utilization. Approximately $0.5 million of the total net operating loss is subject to an IRS Section 382 limitation from 1999. The tax provision for federal and state income tax is as follows for the years ended December 31: 2020 2019 Current provision: Federal $ — $ — State 118,057 101,888 118,057 101,888 Deferred provision: Federal expense — — Expense for income taxes $ 118,057 $ 101,888 The reconciliation of federal income tax computed at the U.S. federal statutory tax rates to total income tax expense is as follows for the years ended December 31: 2020 2019 Income tax (benefit) at 21% $ (610,000 ) $ (1,074,000 ) Change in valuation allowance (2,470,000 ) 1,102,000 Permanent and other differences 3,080,000 (28,000 ) Alternative minimum tax and state taxes 118,057 101,888 Income tax expense $ 118,057 $ 101,888 Note 12. Stock Options, Incentive Plans, Stock Awards, and Employee Benefit Plan Stock Option Plans: The Company’s 2015 Equity Incentive Plan provides for the grant of incentive stock options as defined in Section 422 of the Internal Revenue Code and the grant of Stock Options, Restricted Stock, Restricted Stock Units, Performance Awards, or other Awards to employees, non-employee directors, and consultants. The Board of Directors has authorized 5,000,000 shares of common capital stock for issuance under the 2015 Equity Incentive Plan, including automatic increases provided for in the 2015 Equity Incentive Plan through fiscal year 2025. The number of shares of common stock reserved for issuance under the 2015 Equity Incentive Plan will automatically increase, with no further action by the stockholders, on the first business day of each fiscal year during the term of the 2015 Equity Incentive Plan, beginning January 1, 2016, in an amount equal to 5% of the issued and outstanding shares of common stock on the last day of the immediately preceding year, or such lesser amount if so determined by the Board or the Plan Administrator. During 2020 , the Company granted 1,634,000 shares of stock to several employees as incentive compensation or new-hire bonuses. During 2020 , the Company issued 332,267 restricted stock units to employees as a new hire bonus and directors. Treasury Stock : The Company also purchased 121,867 shares of common stock with a value of $227,766 to cover the employee's share of tax liabilities related to the vesting of commons stock and restricted stock units. Stock Awards : The Company has granted restricted stock awards to its employees at different periods from 2005 through 2020. The majority of the shares granted to those employees vest 10 years from the grant date and are forfeited in the event that the recipient’s employment relationship with the Company is terminated prior to vesting. 45 Table of Contents During 2020 , a portion of the restricted stock awards were granted, but not issued and are not listed as outstanding in the financial statements for 2020 . Stock-based compensation expense related to stock and restricted stock awards was $1,475,328 for 2020 and $1,292,419 for 2019 . A summary of stock awards outstanding and 2020 activities are as follows: Weighted Average Weighted Average Contractual Aggregate Intrinsic Stock Awards Shares Exercise Price Remaining Life Value Outstanding, December 31, 2019 4,023,780 $ 2.25 Granted 1,634,000 1.20 Vested (106,667 ) — Forfeited (450,000 ) — Outstanding, December 31, 2020 5,101,113 $ 1.96 6.94 $ 0.71 Expected to Vest after December 31, 2020 5,101,113 $ 1.96 6.94 $ 0.71 As of December 31, 2020 , there were $5,926,872 of unrecognized compensation costs related to the un-vested share-based compensation arrangements granted. The cost is expected to be recognized over the weighted average remaining contractual life of 6.94 years. The aggregate intrinsic value represents the difference between the weighted average exercise price and the closing price of the Company’s stock on December 31, 2020 , or $2.67. Employee Stock Purchase Plan : The Company established the 1999 Employee Stock Purchase Plan (“ESPP”) under the requirements of Section 423 of the Internal Revenue Code to allow eligible employees to purchase the Company’s common stock at regular intervals. Participating employees may purchase common stock through voluntary payroll deductions at the end of each participation period at a purchase price equal to 85% of the lower of the fair market value of the common stock at the beginning or the end of the participation period. The Company issued -0- shares from the ESPP in 2020 and 2019 , respectively. The ESPP is no longer active. Stock Warrants : On August 21, 2018, the Company issued University Fancards, LLC a warrant to purchase 150,000 shares of the Company's common stock. 30,000 warrants vested immediately upon the date on which the first financial transaction was processed on a card account issued under the prepaid agreement, which occurred on October 5, 2018. 120,000 warrants vest annually over 4 years in 30,000 warrant increments beginning on July 31, 2019 and becoming fully vested on July 31, 2022. The exercise price for the 30,000 warrants that vested immediately on October 5, 2018 was $1.80 per share. The exercise price for the remaining 120,000 warrants will be the lesser of $2.00 per share or one hundred and twenty percent (120%) of the market price of the Company's common stock on the vesting date of the warrant. The warrants were valued using the Black-Scholes option pricing model. Assumptions used were as follows: (i) the fair value of the underlying stock was $0.94 for the 30,000 warrants and $0.90 for the 120,000 warrants; (ii) the risk-free interest rate is 2.77%; (iii) the contractual life is 5 years; (iv) the dividend yield of 0%; and (v) the volatility is 64.6%. The fair value of the warrants amounted to $135,764 and will be amortized over the life of the warrants as a reduction of revenues. The reduction of revenues recorded for the year ended December 31, 2020 and 2019 was $35,943 and $35,940, respectively. On August 12, 2020, the Company issued 27,051 shares of common stock to University FanCards, LLC in a cashless exercise at $3.46 per common share in exchange for 60,000 warrants exercised by FanCards, LLC. On February 5, 2021, the Company issued 19,795 shares of common stock to University FanCards, LLC in a cashless exercise at $5.88 per common share in exchange for 30,000 warrants exercised by FanCards, LLC. On December 15, 2020, the Company issued to Information Management Solutions, LLC warrants to purchase 945,599 unregistered warrants to purchase shares of Usio, Inc. or 945,599 shares of our common stock, $0.001 par value per share, with an exercise price of $4.23. The warrants were valued using the Black-Scholes option pricing model. Assumptions used were as follows: (i) the fair value of the underlying stock was $0.58; (ii) the risk-free interest rate is 0.09%; (iii) the contractual life is 5 years; (iv) the dividend yield of 0%; and (v) the volatility is 59.9%. The fair value of the warrants amounted to $552,283 and will be recorded as an increase in the customer list asset and have a term of five years from time of vest. 46 Table of Contents Note 13. Net (Loss) per Share Basic (loss) per share (EPS) was computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS differs from basic EPS due to the assumed conversion of potentially dilutive options that were outstanding during the period. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net (loss). 2020 2019 Numerator: Numerator for basic and diluted earnings per share, net (loss) available to common shareholders $ (2,906,183 ) $ (5,115,747 ) Denominator: Denominator for basic (loss) per share, weighted average shares outstanding 15,428,798 12,958,067 Effect of dilutive securities-stock options and restricted awards — — Denominator for diluted (loss) per share, adjusted weighted average shares and assumed conversion 15,428,798 12,958,067 Basic (loss) per common share $ (0.19 ) $ (0.39 ) Diluted (loss) per common share and common share equivalent $ (0.19 ) $ (0.39 ) The awards and options to purchase shares of common stock that were outstanding at December 31, 2020 and 2019 that were not included in the computation of diluted (loss) per share because the effect would have been anti-dilutive, are as follows: Year Ended December 31, 2020 2019 Anti-dilutive awards and options 4,946,222 4,023,780 Note 14. Concentration of Credit Risk and Significant Customers The Company has no significant off-balance sheet or concentrations of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company currently maintains the majority of its cash and cash equivalent balance with one financial institution. No customers account for more than 10% of the revenues of the company. Note 15. Legal Proceedings C2Go Note Receivable Under a loan and security agreement dated February 2, 2016, we loaned the principal amount of $200,000 to C2Go, Inc. with an interest rate of 10% per annum for a term of 18 months. The loan was secured by a first lien on all assets of C2Go. C2Go defaulted under the note by failing to repay the loan plus interest on August 2, 2017. On December 7, 2017, we entered into a note purchase and settlement agreement with C2Go and Mercury Investment Partners LLC. There are no assurances that we will be able to recover the remaining $145,000 principal and there are no assurances there will be any assets for us to recover from its lien on all the assets of C2Go if payment in full of the obligation is not made. The loss reserve on the note receivable as of December 31, 2020 and 2019 , was $145,000 reflecting a "more likely than not" recognition threshold. Vaden Landers On January 19, 2021, the Company initiated a lawsuit in Bexar County, Texas against its former Chief Revenue Officer, Vaden Landers. In the lawsuit, which is styled: Usio, Inc. v. Vaden Landers , Cause No. 2021CI01069, 407th Judicial District Court, Bexar County, Texas, the Company alleges that Mr. Landers violated the provisions of his employment agreement dated September 1, 2017 - specifically that Mr. Landers violated his non-compete obligations. The state court lawsuit only seeks injunctive relief against Mr. Landers. The Company also instituted an action before the American Arbitration Association on February 2, 2021. 47 Table of Contents Mr. Landers has refused to participate in the arbitration proceeding and has not filed an answer in the proceeding. Mr. Landers has answered the state court lawsuit, denying the Company's allegations. Mr. Landers has also asserted counterclaim against the Company for breach of contract, tortious interference with contract and defamation. Mr. Landers seeks damages in excess of $1,000,000. The Company denies Mr. Landers’ allegations and does not believe that his counterclaims have any merit. Through its investigation, the Company has learned that Mr. Landers committed other violations of his employment agreement and intends to pursue those claims in arbitration. Both the state court litigation and the arbitration are in their initial stages and no discovery has been conducted by the parties. Aside from the lawsuits described above, the Company may be involved in legal matters arising in the ordinary course of business from time to time. While the Company believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation will not have a material adverse effect on our business, financial condition or results of operations. Note 16. COVID-19 The ongoing COVID-19 pandemic has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses, “shelter in place” and other governmental regulations, reduced consumer spending due to both job losses and other effects attributable to the COVID-19 pandemic. There remain many uncertainties as a result of the pandemic. As a result of the spread of COVID-19, economic uncertainties could continue to impact our operations. Any potential incremental financial impact is unknown at this time. At this time, certain states are reducing mandated operating restrictions and efforts are underway to provide vaccinations to as many people as possible. During 2020 and 2021, government issued several rounds of COVID-19 relief and stimulus payments and other programs to stimulate economic activity and facilitate an economic recovery. The Company's business was initially adversely affected as doctors offices, dental offices, veterinarian offices and non-bank consumer lending accounts were ordered closed in connection with curbing the spread of the pandemic. As these doctors, dental and veterinarian offices re-opened, these businesses quickly recovered and returned to levels higher than pre-COVID. Consumer lending merchants were adversely affected by COVID relief payments made during the pandemic and the pause placed on past due amounts owed. The level of activity for consumer lending merchants has not returned to pre-COVID levels. We received a gain during COVID in our prepaid business line, as we were able to work in conjunction with major cities across the U.S. to use our prepaid debit cards to facilitate the transfer of money via our debit cards from city foundations to the local residents in need of financial assistance. The impacts and recovery from the COVID-19 pandemic are still a work in process. We were impacted in the magnitude of other payment processors as our customer base had limited exposure to retail facing businesses. With that framework, we will continue to monitor the overall impact on our operations and take necessary steps to ensure the safety of our employees and the well being of our customers. 48 Table of Contents Note 17. Subsequent Events On January 6, 2021, the Company repurchased 11,860 shares of common stock for $20,636 at the closing price on January 6, 2021 from Tom Jewell, the Company's Chief Financial Officer to cover taxes. In early January, 2021, the Company's largest ACH customer went bankrupt and stopped processing transactions. The customer represented 15% of our total ACH volume in 2020 and 1.12% of revenue for the Company. The volume loss has been more than offset by organic growth from existing ACH clients to the extent the Company processed more ACH transactions in January 2021 than in January 2020 and the Company will process more ACH transactions in the first quarter of 2021 as compared to the same period in 2020. On January 1, 2021, the Company entered into a lease in Austin, Texas commencing on January 1, 2021 for its Austin technology organization. The lease is for a period of 25 months and expires on January 31, 2023. The space leased is 1,890 square feet. Annual rents during the lease term is $55,755. On February 5, 2021, the Company issued 19,795 shares of common stock to University FanCards, LLC in a cashless exercise at $5.88 per common share in exchange for 30,000 warrants exercised by FanCards, LLC. On March 15, 2021, the Company entered into a lease amendment to the existing lease in San Antonio, Texas commencing April 1, 2021 and expiring on September 30, 2024 running concurrently with the existing lease. The incremental space leased is 2,734 square feet. The incremental annual rent during the lease term ranges from $56,047 to $60,148. On March 20, 2021, the Company entered into a debit arrangement to finance $165,996 for the purchase of an Output Solutions sorter. The loan is for a period of 36 months with a maturity date of March 20, 2024. The repayment amount is for 35 months at $4,901.79 per month and a final payment of $4,901.88. Annual payments are $58,821. The financing is at an interest rate of 3.95%. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.