Usio, Inc. 10-Q

Item 1. Financial Statements.   USIO, INC. CONDENSED CONSOLIDATED BALANCE SHEETS       March 31, 2022     December 31, 2021       (Unaudited)           Assets                 Current assets:                 Cash and cash equivalents   $ 7,590,951     $ 7,255,321   Accounts receivable, net     4,176,494       4,979,493   Settlement processing assets     50,591,364       63,824,646   Prepaid card load assets     28,846,980       36,590,893   Customer deposits     1,391,465       1,364,193   Inventory     430,285       434,532   Prepaid expenses and other     681,470       426,963   Current assets before merchant reserves     93,709,009       114,876,041   Merchant reserves     6,386,153       6,381,153   Total current assets     100,095,162       121,257,194                     Property and equipment, net     3,432,256       3,607,157                     Other assets:                 Intangibles, net     3,695,927       4,163,894   Deferred tax asset, net     1,504,000       1,504,000   Operating lease right-of-use assets     2,683,394       2,802,113   Other assets     345,357       345,357   Total other assets     8,228,678       8,815,364                     Total assets   $ 111,756,096     $ 133,679,715                     Liabilities and stockholders’ equity                 Current liabilities:                 Accounts payable   $ 1,181,275     $ 1,400,100   Accrued expenses     2,844,210       2,325,665   Operating lease liabilities, current portion     498,286       504,027   Equipment loan, current portion     55,303       54,760   Settlement processing obligations     50,591,364       63,824,646   Prepaid card load obligations     28,846,980       36,590,893   Customer deposits     1,391,465       1,364,193   Deferred revenues     4,412       17,647   Current liabilities before merchant reserve obligations     85,413,295       106,081,931   Merchant reserve obligations     6,386,153       6,381,153   Total current liabilities     91,799,448       112,463,084                     Non-current liabilities:                 Equipment loan, non-current portion     57,403       71,434   Operating lease liabilities, non-current portion     2,359,438       2,476,291   Total liabilities     94,216,289       115,010,809                     Stockholders’ equity:                 Preferred stock, $ 0.01 par value, 10,000,000 shares authorized; - 0 - shares outstanding at March 31, 2022 (unaudited) and December 31, 2021, respectively     —       —   Common stock, $ 0.001 par value, 200,000,000 shares authorized; 26,868,745 and 26,807,145 issued, and 25,517,835 and 25,473,453 outstanding at March 31, 2022 (unaudited) and December 31, 2021, respectively     195,297       195,235   Additional paid-in capital     93,376,970       93,100,129   Treasury stock, at cost; 1,350,910 and 1,333,692 shares at March 31, 2022 (unaudited) and December 31, 2021, respectively     ( 2,470,952 )     ( 2,404,458 ) Deferred compensation     ( 6,559,433 )     ( 6,842,195 ) Accumulated deficit     ( 67,002,075 )     ( 65,379,805 ) Total stockholders’ equity     17,539,807       18,668,906                     Total liabilities and stockholders’ equity   $ 111,756,096     $ 133,679,715     See the accompanying notes to the condensed interim consolidated financial statements.     1 Table of Contents     USIO, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)       Three Months Ended March 31,       2022     2021                     Revenues   $ 18,111,343     $ 13,461,550   Cost of services     14,602,214       10,554,313   Gross profit     3,509,129       2,907,237                     Selling, general and administrative:                 Stock-based compensation     550,682       327,715   Other SG&A expenses     3,795,146       2,660,034   Depreciation and amortization     714,935       622,207   Total selling, general and administrative expenses     5,060,763       3,609,956                     Operating (loss)     ( 1,551,634 )     ( 702,719 )                   Other income and (expense):                 Interest income     581       2,467   Interest expense     ( 1,217 )     —   Other income and (expense), net     ( 636 )     2,467                     (Loss) before income taxes     ( 1,552,270 )     ( 700,252 ) Income tax expense     70,000       20,000                     Net (loss)   $ ( 1,622,270 )   $ ( 720,252 )                   Basic (loss) per common share:   $ ( 0.08 )   $ ( 0.04 ) Diluted (loss) per common share:   $ ( 0.08 )   $ ( 0.04 ) Weighted average common shares outstanding                 Basic     20,280,575       19,931,935   Diluted     20,280,575       19,931,935     See the accompanying notes to the condensed interim consolidated financial statements.      2 Table of Contents     USIO, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)       Three Months Ended March 31,       2022     2021   Operating activities:                 Net (loss)   $ ( 1,622,270 )   $ ( 720,252 ) Adjustments to reconcile net (loss) to net cash provided (used) by operating activities:                 Depreciation     246,968       154,240   Amortization     467,967       467,967   Bad debt     —       15,046   Non-cash stock-based compensation     550,682       327,715   Amortization of warrant costs     8,985       8,985   Changes in current assets and current liabilities:                 Accounts receivable     802,999       ( 749,336 ) Prepaid expenses and other     ( 254,507 )     ( 222,910 ) Operating lease right-of-use assets     118,719       ( 79,080 ) Other assets     —       14,263   Inventory     4,247       ( 4,461 ) Accounts payable and accrued expenses     299,720       149,247   Operating lease liabilities     ( 122,594 )     78,948   Prepaid card load obligations     ( 7,743,913 )     10,945,232   Merchant reserves     5,000       51,907   Customer deposits     27,272       51,946   Deferred revenue     ( 13,235 )     ( 9,219 ) Net cash provided (used) by operating activities     ( 7,223,960 )     10,480,238                     Investing activities:                 Purchases of property and equipment     ( 72,069 )     ( 274,467 ) Net cash (used) by investing activities     ( 72,069 )     ( 274,467 )                   Financing activities:                 Proceeds from equipment loan     —       165,996   Payments on equipment loan     ( 13,488 )     —   Purchases of treasury stock     ( 66,494 )     ( 49,454 ) Net cash (used) provided by financing activities     ( 79,982 )     116,542                     Change in cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves     ( 7,376,011 )     10,322,313   Cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves, beginning of period     51,591,560       22,192,225                     Cash, Cash Equivalents, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End of Period   $ 44,215,549     $ 32,514,538                     Supplemental disclosure of cash flow information:                 Cash paid during the period for:                 Interest   $ 1,217     $ —   Income taxes     —       —   Non-cash transactions:                 Issuance of deferred stock compensation     12,330       —     See accompanying notes to the condensed interim consolidated financial statements.   3 Table of Contents     USIO, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)       Common Stock     Additional Paid- In     Treasury     Deferred     Accumulated     Total Stockholders'       Shares     Amount     Capital     Stock     Compensation     Deficit     Equity                                                             Balance at December 31, 2021     26,807,145     $ 195,235     $ 93,100,129     $ ( 2,404,458 )   $ ( 6,842,195 )   $ ( 65,379,805 )   $ 18,668,906                                                             Issuance of common stock under equity incentive plan     61,600       62       267,856       —       ( 12,330 )     —       255,588   Warrant compensation costs     —       —       8,985       —       —       —       8,985   Deferred compensation amortization     —       —       —       —       295,092       —       295,092   Purchase of treasury stock costs     —       —       —       ( 66,494 )     —       —       ( 66,494 ) Net (loss) for the period     —       —       —       —       —       ( 1,622,270 )     ( 1,622,270 )                                                           Balance at March 31, 2022     26,868,745     $ 195,297     $ 93,376,970     $ ( 2,470,952 )   $ ( 6,559,433 )   $ ( 67,002,075 )   $ 17,539,807                                                             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     51,000       51       120,484       —       —       —       120,535   Warrant compensation costs     —       —       8,985       —       —       —       8,985   Cashless warrant exercise     19,795       19       ( 19 )     —       —       —       —   Reversal of deferred compensation amortization that did not vest     ( 17,111 )     ( 17 )     ( 48,599 )     —       5,994       —       ( 42,622 ) Deferred compensation amortization     —       —       —       —       249,801       —       249,801   Purchase of treasury stock costs     —       —       —       ( 49,454 )     —       —       ( 49,454 ) Net (loss) for the period     —       —       —       —       —       ( 720,252 )     ( 720,252 )                                                           Balance at March 31, 2021     26,314,460     $ 194,745     $ 89,740,284     $ ( 2,215,175 )   $ ( 5,671,077 )   $ ( 65,778,423 )   $ 16,270,354     The accompanying notes are an integral part of these consolidated financial statements.   4 Table of Contents   USIO, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)     Note 1. Basis of Presentation   The accompanying unaudited interim condensed consolidated financial statements of Usio, Inc. and its subsidiaries (the “Company”) have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company's financial position, results of operations and cash flows for such periods. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10 -K for the year ended December  31, 2021, as filed with the Securities and Exchange Commission on March 17, 2022. Results of operations for interim periods are not necessarily indicative of results that may be expected for any other interim periods or the full fiscal year.   Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.   Revenue Recognition: Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services. Revenue is recognized during the period in which the transactions are processed or when the related services are performed. The Company complies with ASC  606 - 10  and reports revenues at gross as a principal versus net as an agent. Although some of the Company's processing agreements vary with respect to specific credit risks, the Company has determined for each agreement it is acting in the principal role. Merchants  may  be charged for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain merchant customers are charged a flat fee per transaction, while others  may  also be charged miscellaneous fees, including fees for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through  third -party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations. 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.   The following table presents the Company's revenues by source:       Three Months Ended March 31,       2022     2021                     ACH and complementary service revenue   $ 3,843,316     $ 3,078,456   Credit card revenue     6,768,222       5,723,709   Prepaid card services revenue     2,768,447       886,576   Output solutions revenue     4,731,358       3,772,809   Total revenue   $ 18,111,343     $ 13,461,550     Deferred Revenues: The Company records deferred revenues when it receives payments in advance of transferring control of promised goods or services to a customer. The advance consideration received from a customer is deferred until the Company provides the customer that product or service. The deferred revenues totaled $ 4,412  and $ 17,647  at March 31, 2022 and December 31, 2021 , respectively.   Cash and Cash Equivalents: Cash and cash equivalents includes cash and other money market instruments. The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents.   Settlement Processing Assets and Obligations: Settlement processing assets and obligations represent intermediary balances arising in our settlement process for merchants.   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.   Merchant Reserves: The Company has merchant reserve requirements associated with Automated Clearing House ("ACH") transactions. The merchant reserve assets are carried on the Company's balance sheet with a corresponding liability. Merchant Reserves are set for each merchant. Funds are collected from each merchant and held as collateral to minimize contingent liabilities associated with any losses that may occur under the merchant agreement. While this cash is not restricted in its use, the Company believes that designating this cash to collateralize Merchant Reserves strengthens its fiduciary standing with the Company's member sponsors and is in accordance with the guidelines set by the card networks.   5 Table of Contents   Prepaid Card Load Assets: The Company maintains pre-funding accounts for its customers to facilitate prepaid card loads as initiated by the customer. These prepaid card load assets are carried on the Company's balance sheet with a corresponding liability.   The reconciliation of cash and cash equivalents to cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves is as follows for each period presented:       Three Months Ended March 31,       2022     2021                     Beginning 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                     Ending cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves:                 Cash and cash equivalents   $ 7,590,951     $ 4,284,360   Prepaid card load assets     28,846,980       18,555,474   Customer deposits     1,391,465       1,357,242   Merchant reserves     6,386,153       8,317,462   Total   $ 44,215,549     $ 32,514,538     Allowance for Estimated Losses: The Company maintains an allowance for estimated doubtful accounts receivable resulting from the inability or failure of the Company’s customers to make required payments. The Company determines the allowance for estimated doubtful accounts receivable losses based on an account-by-account review, taking into consideration such factors as the age of the outstanding balance, historical pattern of collections and financial condition of the customer. Past losses incurred by the Company due to bad debts have been within its expectations. If the financial conditions of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make contractual payments, additional allowances might be required. Estimates for doubtful account losses are variable based on the volume of transactions processed and could increase or decrease accordingly. The allowance for estimated doubtful accounts was $ 319,000  at March 31, 2022 and December 31, 2021 .   Inventory : Inventory is stated at the lower of cost or net realizable value. At March 31, 2022  and December 31, 2021, inventory consisted primarily of printing and paper supplies used for Output solutions.   Accounting for Internal Use Software: The Company capitalizes the costs associated with software being developed or obtained for internal use when both the preliminary project stage is completed, and it is probable that computer software being developed will be completed and placed-in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (iii) interest costs incurred, when material, while developing internal-use software. The Company ceases capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose. In the three  months ended March 31, 2022 and March 31, 2021 , the Company capitalized $ 136,864 and $ 187,914 , respectively.   Valuation of Long-Lived and Intangible Assets: The Company assesses the impairment of long-lived and intangible assets at least annually, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important, which could trigger an impairment review, include the following: significant under performance relative to historical or projected future cash flows; significant changes in the manner of use of the assets or the strategy of the overall business; and significant negative industry trends. When management determines that the carrying value of long-lived and intangible assets may not be recoverable, impairment is measured as the excess of the assets’ carrying value over the estimated fair value. No impairment losses were recorded in 2021  or during the  three months ended March 31, 2022 . Management is not aware of any impairment changes that may currently be required; however, the Company cannot predict the occurrence of events that might adversely affect the reported values in the future.   6 Table of Contents   Reserve for Processing Losses:  If, due to insolvency or bankruptcy of one of the Company’s merchant customers, or for any other reason, the Company is not able to collect amounts from its credit card, ACH or prepaid customers that have been properly "charged back" by the customer, or if a prepaid cardholder incurs a negative balance, the Company must bear the credit risk for the full amount of the transaction. The Company may require cash deposits and other types of collateral from certain merchants to minimize any such risks. In addition, the Company utilizes multiple systems and procedures to manage merchant risk. ACH, prepaid and credit card merchant processing loss reserves are primarily determined by performing a historical analysis of the Company’s loss experience, considering other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company’s relationship with the Company’s prepaid card holders. This reserve amount is subject to the risk that actual losses may be greater than the Company’s estimates. The Company has not incurred any significant processing losses to date. Estimates for processing losses are variable based on the volume of transactions processed and could increase or decrease accordingly. At March 31, 2022 and December 31, 2021 , the Company’s reserve for processing losses was $ 656,494  and $ 623,494  respectively.   Legal Proceedings: T he Company may be involved in legal matters arising in the ordinary course of business from time to time. While the Company believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation will not have a material adverse effect on its business, financial condition or results of operations.   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.     7 Table of Contents   Note 2.   Leases   The Company leases facilities and office equipment under various operating leases, which generally are expected to be renewed or replaced by other leases. For the quarters ended March 31, 2022  and 2021 , operating lease expenses totaled $ 120,151  and $ 104,131 , respectively.   Note 3. Accrued Expenses   Accrued expenses consisted of the following balances:       March 31, 2022     December 31, 2021                     Accrued commissions   $ 795,729     $ 879,120   Reserve for processing losses     656,494       623,494   Other accrued expenses     536,530       226,888   Accrued taxes     375,527       298,168   Accrued salaries     479,930       297,995   Total accrued expenses   $ 2,844,210     $ 2,325,665     Note 4. 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 period payments on the equipment loan were $ 13,488 .   Note 5. Stockholders' Equity   Stock Warrants : On August 21, 2018, the Company issued University FanCards, LLC a warrant to purchase 150,000 shares of the Company's common stock. 30,000 warrants vested immediately upon the date on which the first financial transaction was processed on a card account issued under the prepaid agreement, which occurred on October 5, 2018. 120,000 warrants vest annually over 4 years in 30,000 warrant increments beginning on July 31, 2019 and becoming fully vested on July 31, 2022. The exercise price for the 30,000 warrants that vested immediately on October 5, 2018 was $ 1.80 per share. The exercise price for the remaining 120,000 warrants will be the lesser of $ 2.00 per share or one hundred and twenty percent ( 120 %) of the market price of the Company's common stock on the vesting date of the warrant. The warrants were valued using the Black-Scholes option pricing model. Assumptions used were as follows: (i) the fair value of the underlying stock was $ 0.94 for the 30,000 warrants and $ 0.90 for the 120,000 warrants; (ii) the risk-free interest rate is 2.77%; (iii) the contractual life is 5 years; (iv) the dividend yield is 0%; and (v) the volatility is 64.6 %. The fair value of the warrants was $ 135,764 which will be amortized over the life of the warrants as a reduction of revenues. The reduction of revenues recorded for the three months ended March 31, 2022 and 2021 was $ 8,985 .   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 September 1, 2021, the Company issued 19,950  shares of common stock to University FanCards, LLC in a cashless exercise at $ 5.97 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 shares of Usio, Inc. or 945,599 shares of common stock, $ 0.001 par value per share, with an exercise price of $ 4.23 .  945,599 warrants vest annually over 3 years in three equal tranches beginning on December 15, 2021  and becoming fully vested on December 15, 2023. 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.   8 Table of Contents   Note 6. Net (Loss) Per Share   Basic (loss) per share (EPS) was computed by dividing net (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS differs from basic EPS due to the assumed conversion of potentially dilutive awards and options that were outstanding during the period. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net (loss) for the  three months ended March 31, 2022 and March 31, 2021 .       Three Months Ended March 31,       2022     2021   Numerator:                 Numerator for basic and diluted (loss) per share, net (loss) available to common shareholders   $ ( 1,622,270 )   $ ( 720,252 ) Denominator:                 Denominator for basic (loss) per share, weighted average shares outstanding     20,280,575       19,931,935   Effect of dilutive securities     —       —   Denominator for diluted earnings per share, adjust weighted average shares and assumed conversion     20,280,575       19,931,935   Basic (loss) per common share   $ ( 0.08 )   $ ( 0.04 ) Diluted (loss) per common share and common share equivalent   $ ( 0.08 )   $ ( 0.04 )   The awards and options to purchase shares of common stock that were outstanding at March 31, 2022 and March 31, 2021 that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive, are as follows:       Three Months Ended March 31,       2022     2021   Anti-dilutive awards and options     5,244,902       5,094,991     9 Table of Contents   Note 7. Income Taxes   Deferred tax assets and liabilities are recorded based on the difference between financial reporting and tax basis of assets and liabilities and are measured by the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Deferred tax assets are computed with the presumption that they will be realizable in future periods when taxable income is generated. Predicting the ability to realize these assets in future periods requires judgment by management. U.S. generally accepted accounting principles prescribe a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Income tax benefits that meet the “more likely than not” recognition threshold should be recognized.   The Company has recognized a net deferred tax asset of approximately $ 1.5 million and has recorded a valuation allowance of approximately $ 5.2  million against the other deferred tax assets. The Company reviews the assessment of the deferred tax asset and valuation allowance on an annual basis or more often when events indicate that a change to the valuation allowance may be warranted.   At  December 31, 2021 , the Company had available net operating loss carryforwards 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.    Net operating loss carryforwards totaling $ 10.7 million expired in  2021. The schedule below outlines when the Company's 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, net operating losses can be carried forward to future years indefinitely. 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     Management is not aware of any tax positions that would have a significant impact on the Company’s financial position.   Note 8. Related Party Transactions   Louis Hoch   During the three months ended March 31, 2022 and the year ended December 31, 2021 , the Company purchased a total of $ 19,929 and $ 4,009 , respectively, of corporate imprinted sportswear and caps from Angry Pug Sportswear. Louis Hoch, the Company’s President and Chief Executive Officer, is a 50 % owner of Angry Pug Sportswear.   Directors and Officers   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 January 6, 2021, the Company repurchased 11,860 shares of common stock at a closing price of $ 3.25 per share from Tom Jewell, the Company's Chief Financial Officer to cover taxes due.   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).   On April 1, 2021, the Company granted 1,444,000 shares of common stock with a 10 -year vesting period and 103,000 restricted stock units (RSUs) with a 3 -year vesting period to employees and Directors as a performance bonus at an issue price of $ 1.08 per share. Executive officers and Directors included in the grant were Louis Hoch ( 300,000 shares), Tom Jewell ( 200,000 shares), Blaise Bender ( 10,000 RSUs) and Brad Rollins ( 30,000 RSUs).   Note 9. COVID- 19   The ongoing COVID- 19  pandemic has had a notable impact on general economic conditions, including but  not  limited to the temporary closures of many businesses, “shelter in place” and other governmental regulations, reduced consumer spending due to both job losses and other effects attributable to the COVID- 19  pandemic. There remain many uncertainties as a result of the pandemic.  As a result of the spread of COVID- 19,  economic uncertainties could continue to impact our operations. Any potential incremental financial impact is unknown at this time.   During  2020  and  2021,  the government issued several rounds of COVID- 19  relief and stimulus payments and other programs to stimulate economic activity and facilitate an economic recovery.     In  April  and  May  of  2020,  the Company's business was adversely affected as doctor's offices, dental offices, veterinarian offices and non-bank consumer lending accounts were ordered closed in connection with curbing the spread of the pandemic.   As these doctors, dental and veterinarian offices re-opened, these businesses quickly recovered and returned to levels higher than pre-COVID.   Consumer lending merchants were adversely affected by COVID relief payments made during the pandemic and a pause placed on past due amounts owed.   The level of activity for consumer lending merchants continues to recover to pre-COVID levels.  The Company recorded an increase in revenues in its prepaid business line, as it was able to work in conjunction with major cities across the U.S. to use its prepaid debit cards to facilitate the transfer of money via its debit cards from city foundations to the local residents in need of financial assistance.  The efforts have included the disbursement of funds to encourage vaccinations.    The Company has recently experienced some difficulty in recruiting and retaining certain categories of employees due to limited labor availability.  The Company continues to monitor labor availability and is taking necessary steps to retain employees and recruit employees to fill open positions.   Due to the COVID- 19  pandemic and global economic challenges, supply chain issues have resulted in a reduced supply, and growing demand of paper and paper products utilized in our Output Solutions line of business. Sourcing inventory remains a key challenge to execute jobs and projects with existing and new customers. If the Company cannot continue to acquire sufficient inventory stock, the successful completion, margins, and growth of Output Solutions  may  be impacted.   The impacts and recovery from the COVID- 19  pandemic are still a work in process.  To date, the Company has not  been adversely impacted in the magnitude that other payment processors were, as our customer base had limited exposure to retail facing businesses.   Within that framework, the Company will continue to monitor the overall impact on its operations and take necessary steps to ensure the safety of its employees and the well-being of its customers.     Note 10. Subsequent Events   On  October 19, 2021 ,  the Company entered into a lease amendment to the existing lease in San Antonio, Texas commencing on April 1, 2022  and expiring on  September 24, 2024  running concurrently with the existing lease.  The incremental space lease is  6,628  square feet.   The incremental annual rent during the lease term ranges from $ 135,874  to $ 145,816 .       10 Table of Contents Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.   FORWARD-LOOKING STATEMENTS DISCLAIMER   This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. If used in this report, the words "anticipate," "believe," "estimate," "intend," and other words or phrases of similar import are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described in our annual report on Form 10-K and other reports we file with the Securities and Exchange Commission. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made. We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.   This discussion and analysis should be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes thereto included in this report, and our annual report on Form 10-K for the fiscal year ended December 31, 2021, filed on March 17, 2022, including the audited consolidated financial statements and the notes contained therein.   Name Change   Effective on June 26, 2019, we changed our corporate name from Payment Data Systems, Inc. to Usio, Inc.   Overview   We provide integrated payment processing services to merchants and businesses, including all types of Automated Clearing House, or ACH, processing, credit, prepaid card and debit card-based processing services and statement preparation, presentment and mailing services.   We offer customizable prepaid cards companies use for expense management, incentives, refunds, claims and disbursements, unique forms of compensation like per diems, government disbursements, and more. We also offer prepaid cards to consumers for use as a tool to stay on budget, manage allowances and share money with family and friends. UsioCard platform supports Apple Pay®, Samsung Pay™ and Google Pay™. Our PIN-less debit product allows merchants to debit and credit accounts in real-time. In our over 20-year history, we have created a loyal customer base that relies on us for our convenient, secure, innovative and adaptive services and technology, and we have built long-standing and valuable relationships with premier banking institutions such as Fifth-Third Bank, Sunrise Bank, and Wells Fargo Bank.   During the first quarter of 2022, the amount of credit card transactions processed increased by 48% versus the first quarter of 2021.  The volume of credit card dollars processed during the first quarter of 2022 increased by 21% compared to the same time period in 2021. Both credit card transactions processed and dollars processed were the highest in our history.  The continued growth in credit card metrics was primarily attributable to our PayFac growth initiatives driving increased penetration across multiple industries including healthcare and legal.    ACH (eCheck) transaction counts during the first quarter of 2022 increased by 21% compared to the first quarter of 2021. Returned check transactions processed during the first quarter of 2022 increased by 32% compared to the first quarter of 2021.  Electronic check dollars processed during the first quarter of 2022 increased by 32% compared to the first quarter of 2021. The increases in eCheck transactions, returned check transactions and electronic check dollar volumes processed were primarily attributable to higher activity levels primarily in the cryptocurrency and FinTech lending industries.    Prepaid card load volumes processed during the first quarter of 2022 increased by 134% compared to the first quarter of 2021. Prepaid card transaction counts processed during the first quarter of 2022 increased by 270% compared to the first quarter of 2021. Prepaid card purchase volume during the first quarter of 2022 increased by 139% compared to the first quarter of 2021. These increases occurred primarily due to the continued associations with many government assistance programs including organizations such as New York City Economic Development Corporation, City of Houston, Harris County, TX, Open Society International (City of Baltimore), and Greater Washington Community Foundation (Washington DC) with their vaccine incentive and cash disbursement programs.  We also continue to support numerous guaranteed income programs including the Arlington Community Foundation, E.A.T (Equity and Transformation) Chicago, and Hudson UP, the City of Denver's Basic Income Project.   Total dollar volumes processed for the first quarter of 2022 were $2.2 billion compared to $1,860 million processed in the first quarter of 2021.   Revenues for the quarter ended March 31, 2022 increased by 35% to $18.1 million, as compared to $13.5 million for the quarter ended March 31, 2021 due to continued traction and growth in our prepaid and PayFac lines of business. Accordingly, cost of services increased by $4.0 million, or 38% to $14.6 million for the quarter ended March 31, 2022, as compared to $10.6 million for the same period in the prior year. Gross profits increased by 21% to $3.5 million for the quarter ended March 31, 2022, as compared to $2.9 million for the same period in the prior year, however the gross margin percentage was 19.4% for the quarter ended March 31, 2022 as compared to 21.6% in the prior year period. The decrease in gross margin percentage in the quarter ended March 31, 2022, as compared to the same period a prior year ago, is attributable to increased revenue growth from business lines with lower profit margins.   Other selling, general and administrative expenses (other SG&A) were $3.8 million for the quarter ended March 31, 2022 as compared to $2.7 million in the prior year, a 43% increase versus the prior year period. We reported a net loss of $1.6 million for the quarter ended March 31, 2022, as compared to a net loss of $0.7 million for the same period in the prior year. The increase reflects continued investments in our ACH, PayFac, Prepaid and Output Solutions business lines, a substantial portion of which represents an investment in strengthening our infrastructure to not only support our current growth, but specifically to assure we can provide the service levels in customer support for the anticipated new cardholders. Included in first quarter selling, general and administrative expenses include approximately $200,000 of one-time non-recurring items.   Critical Accounting Policies   Our management’s discussion and analysis of our financial condition and results of operations is based upon our interim condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to the reported amounts of revenues and expenses, bad debt, investments, intangible assets, income taxes, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. We consider the accounting policies described in Note 1 to the Notes to the Interim Condensed Consolidated Financial Statements to be critical because the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change or because the impact of the estimates and assumptions on financial condition or operating performance is material.   For a summary of Critical Accounting Policies, please refer to the Notes to Interim Condensed Consolidated Financial Statements, Note 1, Basis of Presentation.   11 Table of Contents   Results of Operations   Revenues   Our revenues are principally derived from providing integrated electronic payment services to merchants and businesses, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH, network and the program management and processing of prepaid debit cards.  With the acquisition of the assets of IMS in December 2020, we now offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services through our Output Solutions entity.       Three Months Ended March 31,       2022     2021     $ Change     % Change                                     ACH and complementary service revenue   $ 3,843,316     $ 3,078,456     $ 764,860       25 % Credit card revenue     6,768,222       5,723,709       1,044,513       18 % Prepaid card services revenue     2,768,447       886,576       1,881,871       212 % Output solutions revenue     4,731,358       3,772,809       958,549       25 % Total Revenue   $ 18,111,343     $ 13,461,550     $ 4,649,793       35 %   Revenues for the quarter ended March 31, 2022 increased by 35% to $18.1 million, as compared to $13.5 million for the quarter ended March 31, 2021. During the first quarter we saw continued growth in our ACH and complementary service category from strong transaction growth in our cryptocurrency and FinTech lending businesses.    Cost of Services   Cost of services includes the cost of personnel dedicated to the creation and maintenance of connections to third-party payment processors and the fees paid to such third-party providers for electronic payment processing services. Through our contractual relationships with our payment processors and sponsoring banks, we process ACH and debit, credit or prepaid card transactions on behalf of our customers and their consumers. We pay volume-based fees for debit, credit, ACH and prepaid transactions initiated through these processors or sponsoring banks, and pay fees for other transactions such as returns, notices of change to bank accounts and file transmission. Cost of service fees also include fees paid to referral agents and partners.   Cost of services increased by $4.0 million, or 38%, to $14.6 million for the quarter ended March 31, 2022, as compared to $10.6 million for the same period in the prior year.    Gross Profit   Gross profit is the net profit existing after the cost of services.   Gross profits increased by 21% to $3.5 million for the quarter ended March 31, 2022, as compared to $2.9 million for the same period in the prior year. The increase in gross profit for the quarter ended March 31, 2022, as compared to the same period in the prior year, was primarily a result of incremental profits from our existing business lines.  The gross margin percentage was 19.4% for the quarter ended March 31, 2022 as compared to 21.6% in the prior year period. The decrease in gross margin percentage in the quarter ended March 31, 2022, as compared to the same period a prior year ago, is attributable to increased revenue growth from business lines with lower profit margins.   Stock-based Compensation   Stock-based compensation expenses were $550,682 for the quarter ended March 31, 2022 as compared to $327,715 for the quarter ended March 31, 2021, an increase of 68.0%.    12 Table of Contents   Other Selling, General and Administrative Expenses   Other selling, general and administrative expenses (other SG&A) were $3.8 million for the quarter ended March 31, 2022 as compared to $2.7 million in the prior year, a 43% increase versus the prior year period. The increase in other SG&A for the quarter ended March 31, 2022 reflects the incremental costs associated with our continued investment in our prepaid and PayFac growth initiatives.     Depreciation and Amortization     Depreciation and amortization totaled $0.7 million and $0.6 million for the quarters ended March 31, 2022 and March 31, 2021, respectively.    Other Income (Expense)   Other income and expense, net was ($636) for the quarter ended March 31, 2022 compared to $2,467 for the quarter ended March 31, 2021. Lower interest-bearing merchant reserves and lower interest rates drove the lower interest income as well as interest expense associated with our equipment loan.   Net Income (Loss)   We reported a net loss of $1.6 million for the quarter ended March 31, 2022, as compared to a net loss of $0.7 million for the same period in the prior year. The increase in net loss in the current quarter was attributable to increases in SG&A combined with reduced profit margins.   We may incur future operating losses. To maintain, grow and sustain profitability, we must, among other things, continue to incrementally grow and maintain our customer base, sell our ACH, credit card, prepaid product offerings and output solutions offerings to existing and new customers, implement successful marketing strategies, maintain and upgrade our technology and transaction-processing systems, provide superior customer service, respond to competitive developments, attract, retain and motivate personnel, and respond to unforeseen industry developments among other factors.   We believe that our success will continue to depend in large part on our ability to (a) grow revenues, (b) manage our operating expenses, (c) add quality customers to our client base, (d) meet evolving customer requirements, (e) adapt to technological changes in an emerging market, and (f) assimilate current and future acquisitions of companies and customer portfolios. We will continue to invest in our sales force and technology platforms to drive revenue growth. In particular, we are focused on growing our ACH merchants, adding new software integrators, growing our electronic bill presentment, document composition, document decomposition, printing and mailing services business while providing incremental services to existing merchants. In addition to our near-term growth opportunities, we are focused on leveraging and optimizing the infrastructure of the organization allowing expansion of our payment processing and mail and printing capabilities without significantly increasing our operating costs.   Liquidity and Capital Resources   At March 31, 2022, we had $7.6 million of cash and cash equivalents, as compared to $7.3 million of cash and cash equivalents at December 31, 2021.   We reported a net loss of $1.6 million for the quarter ended March 31, 2022. At March 31, 2022, we had an accumulated deficit of $67.0 million. Additionally, we had working capital of $8.3 million and $8.8 million at March 31, 2022 and December 31, 2021, respectively.   Cash Flows   Net cash used by operating activities, including merchant reserve funds, prepaid card load assets, customer deposits and net operating lease assets for the three months ended March 31, 2022 was $7.2 million, and net cash provided for the three months ended March 31, 2021 was $10.5 million. Excluding merchant reserves, prepaid card load assets, customer deposits and lease right-of-use assets and liabilities, our cash provided by operating activities was $0.5 million and cash used by operating activities was $0.6 million for the three months ended March 31, 2022 and March 31, 2021, respectively. We continue to invest resources and infrastructure in our business to achieve scale across all business lines.   Net cash used by investing activities was $72,069 and $274,467 for the three months ended March 31, 2022 and March 31, 2021, respectively. The primary drivers of our investing activities were capital expenditures associated with capitalized software development costs and other capital investments associated with growing our business lines and associated employee counts.   Net cash used by financing activities for the three months ended March 31, 2022  was $79,982 and net cash provided by financing activities for the three months ended March 31, 2021 was $116,542, respectively.  The 2021 cash provided by financing activities was from net proceeds from our equipment loan offset by treasury stock transactions.    13 Table of Contents   Material Trends and Uncertainties   Please refer to Note 9 of our financial statements included in this report that describe certain risks in connection with the Covid-19 pandemic.   Off-Balance Sheet Arrangements   We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.   Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.   As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.