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, 2021 and 2020 33 Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 34 Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2021 and 2020 35 Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 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, 2021 and 2020, 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, 2021, 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, 2021 and 2020 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021 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, 2021, the Company had intangible assets relating to acquired customer lists which are recorded at their cost basis net of accumulated amortization. On at least an annual basis, the company performs an analysis of the carrying value of these customer lists to evaluate the assets for impairment. The customer list is amortized over a five-year term and no impairment has been recognized on the customer list portfolios since their acquisition. We identified the customer list valuation as a critical audit matter because of the significant estimates and forward-looking assumptions used which could be affected by future economic and market conditions.   How We Addressed the Matter in Our Audit   To test the fair value of the Company's customer list intangible assets, our audit procedures included, among others, evaluating the Company's valuation model, evaluating the method and significant assumptions used, and testing the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We also evaluated whether the key factors considered in the evaluation were consistent with evidence obtained in other areas of the audit.   Deferred Tax Assets – Valuation Allowance   Description of the Matter   The Company recognizes deferred tax assets to the extent that it is expected that these assets are more likely than not to be realized. The Company evaluates the realizability of the deferred tax assets, and to the extent that the Company estimates that it is more likely than not that a benefit will not be realized, the carrying amount of the deferred tax assets is reduced with a valuation allowance. We identified the valuation of deferred tax assets as a critical audit matter because of the significant judgments made by management in projecting future taxable income.   How We Addressed the Matter in Our Audit   Our audit procedures related to projected future taxable income and the determination of whether it is more likely than not that the deferred tax assets will be realized included the evaluation of the reasonableness of management’s projected future taxable income. We compared the estimates to historical earnings and evaluated the inputs and assumptions used by management for developing future forecasts.     /s/ ADKF, P.C.   ADKF, P.C. San Antonio, Texas United States March 17, 2022   PCAOB ID 297   We have served as the Company's auditor since 2004.   32 Table of Contents     USIO, INC. CONSOLIDATED BALANCE SHEETS       December 31, 2021     December 31, 2020                     ASSETS                 Cash and cash equivalents   $ 7,255,321     $ 5,011,132   Accounts receivable, net     4,979,493       2,863,638   Settlement processing assets     63,824,646       43,558,442   Prepaid card load assets     36,590,893       7,610,242   Customer deposits     1,364,193       1,305,296   Inventory     434,532       176,466   Prepaid expenses and other     426,963       301,755   Current assets before merchant reserves     114,876,041       60,826,971   Merchant reserves     6,381,153       8,265,555   Total current assets     121,257,194       69,092,526                     Property and equipment, net     3,607,157       3,105,926                     Other assets:                 Intangibles, net     4,163,894       6,035,761   Deferred tax asset     1,504,000       1,394,000   Operating lease right-of-use assets     2,802,113       2,671,266   Other assets     345,357       368,078   Total other assets     8,815,364       10,469,105                     Total Assets   $ 133,679,715     $ 82,667,557                     LIABILITIES AND STOCKHOLDERS' EQUITY                 Current Liabilities:                 Accounts payable   $ 1,400,100     $ 851,349   Accrued expenses     2,325,665       1,463,944   Operating lease liabilities, current portion     504,027       346,913   Equipment loan, current portion     54,760       —   Settlement processing obligations     63,824,646       43,558,442   Prepaid card load obligations     36,590,893       7,610,242   Customer deposits     1,364,193       1,305,296   Deferred revenues     17,647       66,572   Current liabilities before merchant reserve obligations     106,081,931       55,202,758   Merchant reserve obligations     6,381,153       8,265,555   Total current liabilities     112,463,084       63,468,313                     Non-current liabilities:                 Equipment loan, non-current portion     71,434       —   Operating lease liabilities, non-current portion     2,476,291       2,495,883   Total liabilities     115,010,809       65,964,196                     Stockholders' Equity:                 Preferred stock, $0.01 par value, 10,000,000 shares authorized; - 0 - shares issued and outstanding in 2021 and 2020     —       —   Common stock, $0.001 par value, 200,000,000 shares authorized; 26,807,145 and 26,260,776 issued and 25,473,453 and 24,974,995 outstanding in 2021 and 2020 (see Note 11)     195,235       194,692   Additional paid-in capital     93,100,129       89,659,433   Treasury stock, at cost; 1,333,692 and 1,285,781 shares in 2021 and 2020 (see Note 11)     ( 2,404,458 )     ( 2,165,721 ) Deferred compensation     ( 6,842,195 )     ( 5,926,872 ) Accumulated deficit     ( 65,379,805 )     ( 65,058,171 ) Total stockholders' equity     18,668,906       16,703,361                     Total Liabilities and Stockholders' Equity   $ 133,679,715     $ 82,667,557     The accompanying notes are an integral part of these consolidated financial statements.   33 Table of Contents     USIO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS       December 31, 2021     December 31, 2020                     Revenues   $ 61,942,316     $ 32,251,823   Cost of services     46,309,706       24,875,930   Gross profit     15,632,610       7,375,893                     Selling, general and administrative:                 Stock-based compensation     1,489,976       1,475,328   Other expenses     11,654,340       8,139,219   Depreciation and Amortization     2,643,675       1,518,214   Total operating expenses     15,787,991       11,132,761                     Operating (loss)     ( 155,381 )     ( 3,756,868 )                   Other income:                 Interest income     7,643       59,392   PPP Loan forgiveness     —       813,500   Other income (expense)     279       —   Interest expense     ( 4,314 )     902   Other income and (expense), net     3,608       873,794                     (Loss) before income taxes     ( 151,773 )     ( 2,883,074 )                   Federal income tax (benefit)     ( 110,000 )     ( 94,948 ) State income tax expense     279,861       118,057   Income taxes     169,861       23,109                     Net (Loss)   $ ( 321,634 )   $ ( 2,906,183 )                   (Loss) Per Share                 Basic (loss) per common share:   $ ( 0.02 )   $ ( 0.19 ) Diluted (loss) per common share:   $ ( 0.02 )   $ ( 0.19 ) Weighted average common shares outstanding (see Note 12)                 Basic     20,028,850       15,428,798   Diluted     20,028,850       15,428,798     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, 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                                                             Issuance of common stock under equity incentive plan     536,878       535       2,750,204       —       ( 2,168,347 )     —       582,392   Warrant compensation cost     —       —       35,940       —       —       —       35,940   Cashless warrant exercise     39,745       39       ( 39 )     —       —       —       —   Reversal of deferred compensation amortization that did not vest     ( 173,111 )     ( 173 )     ( 345,267 )     —       241,295       —       ( 104,145 ) Issuance of common stock, private offering     142,857       142       999,858       —       —       —       1,000,000   Deferred compensation amortization     —       —       —       —       1,011,729       —       1,011,729   Purchase of treasury stock     —       —       —       ( 238,737 )     —       —       ( 238,737 ) Net (loss) for the year     —       —       —       —       —       ( 321,634 )     ( 321,634 )                                                           Balance at December 31, 2021     26,807,145     $ 195,235     $ 93,100,129     $ ( 2,404,458 )   $ ( 6,842,195 )   $ ( 65,379,805 )   $ 18,668,906     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, 2021     December 31, 2020                     Operating Activities                 Net (loss)   $ ( 321,634 )   $ ( 2,906,183 ) Adjustments to reconcile net (loss) to net cash provided by operating activities:                 Depreciation     771,808       518,214   Amortization     1,871,867       1,000,000   Bad Debt     151,951       96,000   Deferred federal income tax     ( 110,000 )     —   Non-cash stock-based compensation     1,489,976       1,475,328   Amortization of warrant costs     35,940       35,943   Changes in operating assets and liabilities:                 Accounts receivable     ( 2,267,806 )     ( 1,001,901 ) Prepaid expenses and other     ( 125,208 )     ( 80,923 ) Operating lease right-of-use assets     ( 130,847 )     ( 190,364 ) Other assets     22,721       35,977   Inventory     ( 258,066 )     ( 8,328 ) Accounts payable and accrued expenses     1,410,472       534,893   Operating lease liabilities     137,522       206,999   Prepaid card load obligations     28,980,651       7,081,808   Merchant reserves     ( 1,884,402 )     ( 1,751,349 ) Customer deposits     58,897       1,305,296   Deferred revenue     ( 48,925 )     ( 56,957 ) Net cash provided by operating activities     29,784,917       6,294,453                     Investing Activities                 Purchases of property and equipment     ( 1,273,039 )     ( 855,394 ) Purchase of Information Management Solutions, LLC (IMS)     —       ( 5,907,408 ) Net cash (used) by investing activities     ( 1,273,039 )     ( 6,762,802 )                   Financing Activities                 Proceeds from PPP Loan Program     —       813,500   Forgiveness of PPP Loan     —       ( 813,500 ) Proceeds from equipment loan     165,996       —   Payments on equipment loan     ( 39,802 )     —   Proceeds from public offering, net of expenses     —       7,257,925   Proceeds from private offering     1,000,000       3,000,000   Purchases of treasury stock     ( 238,737 )     ( 280,269 ) Net cash provided by financing activities     887,457       9,977,656                     Change in cash, cash equivalents, prepaid card loads, customer deposits and merchant reserves     29,399,335       9,509,307   Cash, cash equivalents, prepaid card loads, customer deposits and merchant reserves, beginning of year     22,192,225       12,682,918                     Cash, Cash Equivalents, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End of Year   $ 51,591,560     $ 22,192,225                     Supplemental disclosures of cash flow information                 Cash paid during the period for:                 Interest   $ 4,314     $ —   Income taxes     116,204       93,525   Non-cash transactions:                 Issuance of stock warrants in exchange for purchase of IMS     —       552,283   Issuance of deferred stock compensation     2,164,361       1,937,620     The accompanying notes are an integral part of these consolidated financial statements.   36 Table of Contents   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2021 and 2020     Note 1. Description of Business and Summary of Significant Accounting Policies   Organization: Usio, Inc., along with its subsidiaries, FiCentive, Inc., a Nevada corporation, and Zbill, Inc., a Nevada corporation, provides integrated electronic payment services, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH network to billers and retailers. The company also has an additional wholly-owned subsidiary, Usio Output Solutions, Inc., which is the entity for the Output Solutions operations. In addition, the Company operates various product websites, such as www.usio.com, www.singularpayments.com, www.payfacinabox.com, www.singularbillpay.com, www.ficentive.com, www.akimbocard.com, and www.usiooutput.com.    Principles of Consolidation and Basis of Presentation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.   Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.   Revenue Recognition: Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services. Revenue is recognized during the period in which the transactions are processed or when the related services are performed. The Company complies with ASC 606 - 10 and reports revenues at gross as a principal versus net as an agent. Although some of the Company's processing agreements vary with respect to specific credit risks, the Company has determined for each agreement it is acting in the principal role. Merchants may be charged for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through third -party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations. Certain card distributors remit payment of fees earned 45 days after the end of the processing period. Prepaid card distributors have payment terms of 30 days following the end of the month. Sales taxes billed are reported directly as a liability to the taxing authority and are not included in revenue.  Usio Output Solutions, Inc. provides bill preparation, presentment and mailing services. Revenue from Output Solutions is recognized when the related services are performed for printing and delivered to USPS for postage.       Year Ended December 31,       2021     2020     $ Change     % Change                                     ACH and complementary service revenue   $ 15,432,787     $ 8,471,705     $ 6,961,082       82 % Credit card revenue     25,174,579       19,453,501       5,721,078       29 % Prepaid card services revenue     6,542,651       3,166,580       3,376,071       107 % Output solutions revenue     14,792,299       1,160,037       13,632,262       1,175 % Total Revenue   $ 61,942,316     $ 32,251,823     $ 29,690,493       92 %   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, 2021 and 2020 , the deferred revenues totaled $ 17,647 and $ 66,572 respectively.   The deferred revenue balances are as follows:       2021     2020                     Deferred revenues, beginning of period   $ 66,572     $ 123,529   Deferred revenues, end of period     17,647       66,572   Revenue recognized in the period from amounts included in deferred revenues at the beginning of the period   $ 48,925     $ 56,957     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, 2021     December 31, 2020                     Beginning 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                     Ending cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves:                 Cash and cash equivalents   $ 7,255,321     $ 5,011,132   Prepaid card load assets     36,590,893       7,610,242   Customer deposits     1,364,193       1,305,296   Merchant reserves     6,381,153       8,265,555   Total   $ 51,591,560     $ 22,192,225     Accounts Receivable/Allowance for Estimated Losses: Accounts receivable are reported as outstanding principal net of an allowance for doubtful accounts of $ 319,000 and $ 205,522 at December 31, 2021 and 2020 , 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, 2021 and 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, 2021 and December 31, 2020 , the Company capitalized $ 735,813  and $ 759,923 , 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 2021 or 2020 .   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, 2021 and 2020 , respectively, the Company’s reserve for processing losses was $ 623,494 and $ 515,199 , respectively.   Advertising Costs: Advertising is expensed as incurred. The Company incurred approximately $ 179,000  and $ 59,000 in advertising costs in 2021 and 2020 , 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 $ 29.5  million of net operating loss carryforwards available to offset future taxable income. 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 increase the net deferred tax assets to $ 1.5  million. Management considered the realizability of this asset in light of historical operating results and forecasted results, and elected to decrease the valuation allowance by $ 110,000 during 2021. The valuation allowance is reviewed annually at year-end by management.   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 2021 , 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 $ 212,870 and $ 152,835 in 2021 and 2020 , 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.   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.   Reclassification of Prior Year Presentation : Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. A reclassification has been made to the Statement of Cash Flows for the year ended December 31, 2020 to identify Bad Debt totaling $ 96,000  previously reported in accounts receivable. A reclassification has been made to the Statement of Operations for the year ended December 31, 2020 to identify a federal income tax benefit totaling $ 94,948 . This change in classification does not affect previously reported total cash flows in the Statement of Cash Flows or income in the Statement of Operations.   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 was approximately $ 1.2  million of revenue. The first full year of operations from the Output Solutions unit exceeded our expectations, achieving $ 14.8  million in top line revenue for The Company in 2021, exceeding expectations.   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.     41 Table of Contents       Note 3. Property and Equipment   Property and equipment consisted of the following at December 31:       2021     2020   Software   $ 6,455,040     $ 5,724,971   Equipment     2,418,421       2,137,364   Furniture and fixtures     732,153       492,347   Leasehold improvements     192,692       170,583   Total property and equipment     9,798,306       8,525,265   Less: accumulated depreciation     ( 6,191,149 )     ( 5,419,339 ) Net property and equipment   $ 3,607,157     $ 3,105,926       Note 4. 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, 2021)  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 $ 4,333,333 at December 31, 2021). 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 2021 and 2020 was $ 1,000,000 . Annual amortization expense will be $ 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 (net of accumulated amortization of $ 871,867 at December 31, 2021). 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 5. 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   2021                                         Allowance for doubtful accounts   $ 205,522     $ 151,951     $ —     $ ( 38,473 )   $ 319,000   Reserve for processing losses     515,199       132,000       —       ( 23,705 )     623,494   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     42 Table of Contents     Note 6. Loans   Equipment Loan   On March 20, 2021, the Company entered into a debt arrangement to finance $ 165,996 for the purchase of an Output Solutions sorter. The loan is for a period of 36 months with a maturity date of March 20, 2024. The repayment amount is for 36  months at $ 4,902 per month. Annual payments are $ 58,821 . The financing is at an interest rate of 3.95 %.  Current year payments on the Equipment Loan were $ 26,446 .   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 7. Accrued Expenses   Accrued expenses consisted of the following balances at December 31:       2021     2020                     Accrued commissions   $ 879,120     $ 373,154   Reserve for processing losses     623,494       515,199   Other accrued expenses     226,888       225,412   Accrued taxes     298,168       132,363   Accrued salaries     297,995       217,816   Total accrued expenses   $ 2,325,665     $ 1,463,944       Note 8. 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 $ 143,149 and $ 136,713 for the years ended December 31, 2021 and 2020 , 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 $ 85,122  and $ 81,474 for the years ended December 31, 2021 and 2020 , 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 . Rental expense for the year ended  December 31, 2021  was $ 107,647 .   On January 1, 2021, we entered into a lease in Austin, Texas commencing on January 1, 2021  for our Austin technology organization. The lease is for a period of 25  months and expires on January 31, 2023. The space leased is 1,890 square feet. Rental expense for the year ended  December 31, 2021  was $ 81,353 .   On March 15, 2021, we entered into a lease amendment to our existing lease in San Antonio, Texas commencing April 1, 2021 and expiring on September 30, 2024 running concurrently with the existing lease.   The incremental space leased is 2,734 square feet.   The incremental annual rent during the lease term ranges from $ 56,047 to $ 60,148 .  Rental expense for the year ended  December 31, 2021  was $ 34,125 .   On October 19, 2021, the Company entered into a lease amendment to the existing lease in San Antonio, Texas commencing at a date to be determined and expiring on September 24, 2024 running concurrently with the existing lease.  The incremental space lease is 6,628 square feet.   The incremental annual rent during the lease term ranges from $ 135,874 to $ 145,816 .   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, 2021 and 2020 , respectively.   The weighted average remaining lease term is 5.27  years. The weighted average discount rate is 4.17 %   The Company recognized total operating lease expense of approximately $ 591,000  and $ 360,000  for the years ended December 31, 2021 and 2020 , respectively. In 2021 , the operating lease expense of $ 591,000  consisted of $ 457,000  of fixed operating expense and $ 134,000  of interest expense.   The maturities of lease liabilities are as follows at December 31, 2021 :   Year ended December 31,                   2022   $ 621,802   2023     554,916   2024     518,935   2025     414,138   2026     414,138   Thereafter     917,081   Total minimum lease payments     3,441,010   Less imputed interest     ( 460,692 ) Total lease liabilities   $ 2,980,318     43 Table of Contents     Note 9. Related Party Transactions   Louis Hoch   During the year ended December 31, 2021 and 2020 , the Company purchased $ 4,009  and $ 9,886 , 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.   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.   Tom Jewell   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.   On January 6, 2022, we repurchased 11,361 shares for $ 47,930 in a private transaction at the closing price on January 6, 2022  of $ 4.21 per share from Tom Jewell, the Company's Chief Financial Officer, to cover his share of taxes.   Officers and Directors   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), Houston Frost ( 150,000 shares), Blaise Bender ( 10,000 RSUs), and Brad Rollins ( 30,000 RSUs).   The Company granted 319,900 shares of common stock with a 10 -year vesting period and 141,900 restricted stock units (RSUs) with a 3 -year vesting period to employees and Directors as a performance bonus on November 18, 2021  at an issue price of $ 6.39 per share. Executive officers and Directors included in the 10 -year grant were Louis Hoch ( 100,000 shares), Tom Jewell ( 50,000 shares), Greg Carter ( 30,000 shares) and Houston Frost ( 25,000 shares). Executive officers and Directors included in the RSU grant were Louis Hoch ( 30,000 shares), Tom Jewell ( 21,000 shares), Greg Carter ( 9,000 shares) Houston Frost ( 6,000 shares), Blaise Bender ( 12,000 RSUs), Brad Rollins ( 12,000 RSUs) and Ernesto Beyer ( 12,000 RSUs).     Note 10. 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:       2021     2020                     Deferred tax assets:                 Net operating loss carryforwards   $ 5,942,000     $ 8,277,000   Depreciation and amortization     999,000       827,000   Non-cash compensation     ( 326,000 )     ( 225,000 ) Other     101,000       49,000   Valuation Allowance     ( 5,212,000 )     ( 7,534,000 ) Deferred tax asset   $ 1,504,000     $ 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, 2021 and 2020 is warranted. If applicable, the Company would recognize interest expense and penalties related to uncertain tax positions in interest expense. As of December 31, 2021 , 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 $ 29.5  million. Net operating loss carryforwards prior to 2017 are available to offset taxable income of future periods and expire 20 years after the loss was generated. The Net operating loss carryforward that expired in 2021 was in the amount of $ 10.7 million. The schedule below outlines when our pre- 2017 net operating losses were generated and the year they may expire.   Tax Year End   NOL     Expiration   2002   $ 9,109,774       2022   2004     1,621,096       2024   2005     1,788,157       2025   2006     1,350,961       2026   2007     1,740,724       2027   2008     918,960       2028   2009     835,322       2029   2010     429,827       2030   2013     504,862       2033   2016     474,465       2036   2017     1,267,336       2037   Total   $ 20,041,484             Effective for tax years ending in 2018 or later, net operating losses cannot be carried back but can be carried forward to future tax years indefinitely, subject to annual limitations for utilization. Net operating losses generated in 2018 and later total $ 9,413,692 . The below table outlines our net operating losses generated in 2018 and after.   Tax Year End   NOL   2018   $ 4,410,916   2019     2,730,461   2020     2,272,315   Total   $ 9,413,692   Total loss carryforwards   $ 29,455,176     The tax provision for federal and state income tax is as follows for the years ended December 31:       2021     2020                     Current provision:                 Federal   $ —     $ ( 94,948 ) State     279,861       118,057         279,861       23,109                     Deferred provision:                 Federal expense (benefit)     ( 110,000 )     —                     Expense for income taxes   $ 169,861     $ 23,109     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:       2021     2020                     Income tax (benefit) at 21%   $ ( 67,543 )   $ ( 610,000 ) Change in valuation allowance     ( 2,322,000 )     ( 2,470,000 ) Permanent and other differences     2,389,543       3,080,000   Federal income tax (benefit)     (110,000 )     (94,948)   State taxes     279,861       118,057                     Income tax expense   $ 169,861     $ 23,109       Note 11. 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 2021 , the Company granted 339,900 shares of stock to several employees as incentive compensation or new-hire bonuses. During 2021 , the Company granted 237,900 restricted stock units to employees and directors as a new hire bonus or as incentive compensation.   Treasury Stock : The Company purchased 48,814 shares of common stock with a value of $ 238,737 to cover the employee's share of tax liabilities related to the vesting of commons stock and restricted stock units in 2021.   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 2021 , a portion of the restricted stock awards were granted, but not issued and are not listed as outstanding in the financial statements for 2021 .   Stock-based compensation expense related to stock and restricted stock awards was $ 1,489,976 for 2021 and $ 1,475,328  for 2020 .   A summary of stock awards outstanding and 2021 activities are as follows:                       Weighted Average                       Weighted Average     Contractual     Aggregate Intrinsic   Stock Awards   Shares     Exercise Price     Remaining Life     Value   Outstanding, December 31, 2020     5,101,113     $ 1.96                   Granted     339,900       6.37                   Vested     26,000       —                   Forfeited     173,111       —                                                     Outstanding, December 31, 2021     5,241,902     $ 2.25       5.74     $ 2.11                                     Expected to Vest after December 31, 2021     5,241,902     $ 2.25       5.74     $ 2.11     As of December 31, 2021 , there was $ 6,842,195  of unrecognized compensation costs related to the un-vested share-based compensation arrangements granted. The cost is expected to be recognized over the weighted average remaining contractual life of 5.74  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, 2021 , or $ 4.36 .   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 2021 and 2020 , 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, 2021 and 2020 was $ 35,940 and $ 35,943  respectively.   On August 12, 2020, the Company issued 27,051 shares of common stock to University FanCards, LLC in a cashless exercise at $ 3.46 per share in exchange for 60,000 warrants exercised by FanCards, LLC.    On February 5, 2021, the Company issued 19,795  shares of common stock to University FanCards, LLC in a cashless exercise at $ 5.88  per share in exchange for 30,000 warrants exercised by FanCards, LLC.    On September 1, 2021, the Company issued 19,950 shares of common stock to University FanCards, LLC in a cashless exercise at $ 5.97 per share in exchange for 30,000 warrants exercised by FanCards, LLC.   On December  15, 2020, the Company issued 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 12. 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).       2021     2020                     Numerator:                 Numerator for basic and diluted earnings per share, net (loss) available to common shareholders   $ ( 321,634 )   $ ( 2,906,183 ) Denominator:                 Denominator for basic (loss) per share, weighted average shares outstanding     20,028,850       15,428,798   Effect of dilutive securities-stock options and restricted awards     —       —   Denominator for diluted (loss) per share, adjusted weighted average shares and assumed conversion     20,028,850       15,428,798   Basic (loss) per common share   $ ( 0.02 )   $ ( 0.19 ) Diluted (loss) per common share and common share equivalent   $ ( 0.02 )   $ ( 0.19 )   The awards and options to purchase shares of common stock that were outstanding at December 31, 2021 and 2020 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,       2021     2020   Anti-dilutive awards and options     5,241,902       5,101,113       Note 13. 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.         47 Table of Contents   Note 14. Legal Proceedings   Vaden Landers   On January 19, 2021, we initiated a lawsuit in Bexar County, Texas against our former Chief Revenue Officer, Vaden Landers.  In the lawsuit, which is styled: Usio, Inc. v. Vaden Landers , Cause No. 2021CI01069, 407th Judicial District Court, Bexar County, Texas, we allege that Mr. Landers violated the provisions of his employment agreement dated September 1, 2017 - specifically his non-compete obligations.  The state court lawsuit only seeks injunctive relief against Landers.  We also instituted an action before the American Arbitration Association on February 2, 2021.   Mr. Landers initially refused to participate in the arbitration proceeding.  After hearings in Bexar County state court proceeding, all of the parties' claims, excluding Mr. Lander's claims for defamation and tortious interference with contract, were ordered to be heard by the American Arbitration Association.  We deny Mr. Landers’ allegations and do not believe that his counterclaims have any merit.   On or about April 27, 2021, Mr. Landers filed his answering statement and counterclaim against us in the arbitration proceeding. Therein, Mr. Landers alleged a variety of defenses to our claim that Landers violated the non-compete provisions of his employment agreement.  Mr. Landers also asserted a counterclaim for a declaratory judgment finding the non-compete provisions are unenforceable.  Mr. Landers further alleged that we breached the terms of his employment agreement because Mr. Landers' resignation was for good reason thus entitling Mr. Landers to deferred compensation.  We deny Mr. Landers' allegations.   Through our investigation, we have learned that Mr. Landers committed other violations of his employment agreement and we intend to pursue those claims in arbitration.  Both the state court litigation and the arbitration are in their initial stages. We have obtained certain documents from Mr. Landers in the state court proceeding.   In the arbitration, the parties have both submitted motions to the arbitration panel on the initial legal question of whether the non-compete is enforceable.  On September 16, 2021, the arbitration panel ruled the non-competition provisions in Mr. Landers' employment agreement were enforceable.  The panel reserved ruling on the scope of the restrictions contained therein pending discovery.  The arbitration panel held that the non-compete provisions need to be reformed to more specifically set forth the competition restrictions applicable to Mr. Landers.   On February 7, 2022, we and Mr. Landers, resolved the state court litigation pending in San Antonio, Bexar County, Texas and the separate litigation pending before the American Arbitration Association, both of which related to certain conduct by Mr. Landers both prior to and after his resignation. Pursuant to the settlement agreement, Landers paid us $ 13,742.50 , which represents one -half of our costs incurred in the arbitration proceedings.  In exchange for this payment, both parties dismissed their respective claims with prejudice without the admission of any liability.    KDHM, LLC   On September 1, 2021, KDHM, LLC sued PDS Acquisition Corp, now known as Usio Output Solutions, Inc., claiming a breach of the asset purchase agreement executed by the parties on December 14, 2020. The lawsuit alleges that due to a mistake, accident, or inadvertence, certain customer deposits in the amount of $ 317,000  were improperly transferred to us.   We believe that plaintiff's claims in the lawsuit have no merit and contradict the express terms of the asset purchase agreement. As a result of this post sale dispute, we discovered that KDHM, LLC, and its principals, made certain misrepresentations and breached the terms of the asset purchase agreement.    On September 28, 2021, we filed an answer generally denying plaintiff’s allegations.  On October 5, 2021, we filed a counterclaim and third -party petition.  Therein, we allege that neither KDHM nor its principals disclosed that KDHM was not accounting for the customer deposits in accordance with Generally Accepted Accounting Principles.  Yet, KDHM, and third -party defendants its principals Henry Minten and Thomas Dowe, affirmatively represented and warranted in section 3.1 (e) of the agreement that “[t]Annual Financial Statements and the Interim Financial Statements have been prepared from the books and records of Seller in accordance with GAAP applied on a consistent basis.”    We also discovered that KDHM by and through its principals failed to disclose that $ 305,000  in additional customer deposits existed and these deposits were not conveyed to us as required by the agreement.  KDHM, Minten and Dowe provided us with fraudulent and misleading profit and loss statements that did not disclose these additional customer deposits.  KDHM and the defendants do not dispute that these additional customer deposits exist and that they were purchased by Usio.  However, despite a written representation that these funds would be returned, KDHM and its principal have held these funds hostage.  Section 2.1 (b)( x ) of the agreement provides that the purchased assets includes “All of Seller’s deposits from its customer, including without limitation, those customer deposits listed on Schedule 2.1 (b)(xi) of the Disclosure Schedules.”  Finally, we discovered that KDHM did not provide us with all customer lists, which are identified as purchased asset under the agreement.  We demanded the missing customer lists, but they have yet to be provided to us per the agreement.   In our counterclaims and third -party petition, we assert causes of action for fraud, breach of contract and conversion.  At this time, the parties are engaging in written discovery and working on scheduling the depositions of the parties.   We consider the risk of loss as remote related to this lawsuit.   Aside from these proceedings above, the Company may be involved in legal matters arising in the ordinary course of business from time to time. While we believe that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which we are or could become involved in litigation will not have a material adverse effect on our business, financial condition or results of operations.   Note 15. COVID- 19   The ongoing COVID- 19 pandemic has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses, “shelter in place” and other governmental regulations, reduced consumer spending due to both job losses and other effects attributable to the COVID- 19 pandemic. There remain many uncertainties as a result of the pandemic.  As a result of the spread of COVID- 19, economic uncertainties could continue to impact our operations. Any potential incremental financial impact is unknown at this time.   During 2020 and 2021, the government issued several rounds of COVID- 19 relief and stimulus payments and other programs to stimulate economic activity and facilitate an economic recovery.     In April and May of 2020, our business was adversely affected as doctor's offices, dental offices, veterinarian offices and non-bank consumer lending accounts were ordered closed in connection with curbing the spread of the pandemic.   As these doctors, dental and veterinarian offices re-opened, these businesses quickly recovered and returned to levels higher than pre-COVID.   Consumer lending merchants were adversely affected by COVID relief payments made during the pandemic and a pause placed on past due amounts owed.   The level of activity for consumer lending merchants has somewhat returned to pre-COVID levels.  We received an increase in revenues 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 efforts have included the disbursement of funds to encourage vaccinations.    The Company has recently experienced some difficulty in recruiting and retaining certain categories of employees due to limited resource availability.  The Company continues to monitor resource availability and is taking necessary steps to retain employees and recruit employees to fill open positions.   Due to the COVID- 19 pandemic, supply chain issues have resulted in a reduced supply, and growing demand of paper and paper products utilized in our Output Solutions line of business. Sourcing inventory remains a key challenge to execute jobs and projects with existing and new customers. If we cannot continue to acquire sufficient inventory stock, the successful completion, margins, and growth of the Output Solutions may be impacted.   The impacts and recovery from the COVID- 19 pandemic are still a work in process.  To date, we have not been adversely impacted in the magnitude that other payment processors were, as our customer base had limited exposure to retail facing businesses.   Within that framework, 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 16. Cyber Event On December 25, 2021, the Company detected a ransomware attack that accessed and encrypted a small portion of its information technology systems. The unauthorized access included the download of non-payment processing related data files from an externally hosted Office 365 environment which is separate from the Company's payment processing environment. Throughout the incident, the Company remained operational. Promptly upon the detection of the event, the Company launched an investigation, notified law enforcement, its insurance carrier, and engaged legal counsel, computer forensic firms and other incident response professionals. The Company also implemented a series of containment and remediation measures to address this situation and reinforce the security of our information technology systems.   This cyber event had no material impact on the business, and no cardholder, or payments related data was compromised. The Company has undertaken and continues to undertake certain system upgrades and re-platforming efforts designed to improve the security, availability, reliability, resiliency, and speed of its information technology systems in order to prevent and mitigate such events in the future.   Note 17. Subsequent Events On January 6, 2022, the Company repurchased 11,361 shares for $ 47,930 in a private transaction at the closing price on January 6, 2022  of $ 4.21 per share from Tom Jewell, the Company's Chief Financial Officer, to cover his share of taxes.   On October 19, 2021, the Company entered into a lease amendment to the existing lease in San Antonio, Texas commencing at a date to be determined in 2022 and expiring on September 24, 2024 running concurrently with the existing lease.  The incremental space lease is 6,628 square feet.   The incremental annual rent during the lease term ranges from $ 135,874 to $ 145,816 .   ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.   None.