Usio, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS   Report of Independent Registered Public Accounting Firm 29 Consolidated Balance Sheets as of December 31, 2022 and 2021 31 Consolidated Statements of Operations for the years ended December 31, 2022 and 2021 32 Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2022 and 2021 33 Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021 34 Notes to Consolidated Financial Statements 35   28 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, 2022 and 2021, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows, for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America.   Basis of Opinion   These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As a part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.   Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.   Critical Audit Matters   The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.   29 Table of Contents   Intangible Assets – Customer Lists   Description of the Matter   As of December 31, 2022, the Company had intangible assets relating to acquired customer lists which are recorded at their cost basis net of accumulated amortization. On at least an annual basis, the company performs an analysis of the carrying value of these customer lists to evaluate the assets for impairment. The customer list is amortized over a five-year term and no impairment has been recognized on the customer list portfolios since their acquisition. We identified the customer list valuation as a critical audit matter because of the significant estimates and forward-looking assumptions used which could be affected by future economic and market conditions.   How We Addressed the Matter in Our Audit   To test the fair value of the Company's customer list intangible assets, our audit procedures included, among others, evaluating the Company's valuation model, evaluating the method and significant assumptions used, and testing the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We also evaluated whether the key factors considered in the evaluation were consistent with evidence obtained in other areas of the audit.   Deferred Tax Assets – Valuation Allowance   Description of the Matter   The Company recognizes deferred tax assets to the extent that it is expected that these assets are more likely than not to be realized. The Company evaluates the realizability of the deferred tax assets, and to the extent that the Company estimates that it is more likely than not that a benefit will not be realized, the carrying amount of the deferred tax assets is reduced with a valuation allowance. We identified the valuation of deferred tax assets as a critical audit matter because of the significant judgments made by management in projecting future taxable income.   How We Addressed the Matter in Our Audit   Our audit procedures related to projected future taxable income and the determination of whether it is more likely than not that the deferred tax assets will be realized included the evaluation of the reasonableness of management’s projected future taxable income. We compared the estimates to historical earnings and evaluated the inputs and assumptions used by management for developing future forecasts.   /s/ ADKF, P.C.   ADKF, P.C. San Antonio, Texas United States March 8, 2023   PCAOB ID 297   We have served as the Company's auditor since 2004.   30 Table of Contents     USIO, INC. CONSOLIDATED BALANCE SHEETS       December 31, 2022     December 31, 2021                     ASSETS                 Cash and cash equivalents   $ 5,709,117     $ 7,255,321   Accounts receivable, net     4,371,640       4,979,493   Settlement processing assets     49,737,068       63,824,646   Prepaid card load assets     20,170,761       36,590,893   Customer deposits     1,554,122       1,364,193   Inventory     507,355       434,532   Prepaid expenses and other     450,389       426,963   Current assets before merchant reserves     82,500,452       114,876,041   Merchant reserves     4,909,501       6,381,153   Total current assets     87,409,953       121,257,194                     Property and equipment, net     3,222,816       3,607,157                     Other assets:                 Intangibles, net     2,625,360       4,163,894   Deferred tax asset     1,504,000       1,504,000   Operating lease right-of-use assets     2,795,483       2,802,113   Other assets     355,357       345,357   Total other assets     7,280,200       8,815,364                     Total Assets   $ 97,912,969     $ 133,679,715                     LIABILITIES AND STOCKHOLDERS' EQUITY                 Current Liabilities:                 Accounts payable   $ 858,622     $ 1,400,100   Accrued expenses     3,721,108       2,325,665   Operating lease liabilities, current portion     617,319       504,027   Equipment loan, current portion     56,429       54,760   Settlement processing obligations     49,737,068       63,824,646   Prepaid card load obligations     20,170,761       36,590,893   Customer deposits     1,554,122       1,364,193   Deferred revenues     —       17,647   Current liabilities before merchant reserve obligations     76,715,429       106,081,931   Merchant reserve obligations     4,909,501       6,381,153   Total current liabilities     81,624,930       112,463,084                     Non-current liabilities:                 Equipment loan, non-current portion     14,994       71,434   Operating lease liabilities, non-current portion     2,338,947       2,476,291   Total liabilities     83,978,871       115,010,809                     Stockholders' Equity:                 Preferred stock, $ 0.01 par value, 10,000,000 shares authorized; - 0 - shares issued and outstanding in 2022 and 2021     —       —   Common stock, $ 0.001 par value, 200,000,000 shares authorized; 27,044,900 and 26,807,145 issued and 25,097,963  and 25,473,453 outstanding in 2022 and 2021 (see Note 11)     195,471       195,235   Additional paid-in capital     94,048,603       93,100,129   Treasury stock, at cost; 1,946,937 and 1,333,692 shares in 2022 and 2021 (see Note 11)     ( 3,749,027 )     ( 2,404,458 ) Deferred compensation     ( 5,697,900 )     ( 6,842,195 ) Accumulated deficit     ( 70,863,049 )     ( 65,379,805 ) Total stockholders' equity     13,934,098       18,668,906                     Total Liabilities and Stockholders' Equity   $ 97,912,969     $ 133,679,715     The accompanying notes are an integral part of these consolidated financial statements.   31 Table of Contents     USIO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS       December 31, 2022     December 31, 2021                     Revenues   $ 69,428,285     $ 61,942,316   Cost of services     54,835,069       46,309,706   Gross profit     14,593,216       15,632,610                     Selling, general and administrative:                 Stock-based compensation     2,072,041       1,489,976   Other expenses     15,000,487       11,654,340   Depreciation and Amortization     2,735,118       2,643,675   Total operating expenses     19,807,646       15,787,991                     Operating (loss)     ( 5,214,430 )     ( 155,381 )                   Other income:                 Interest income     15,237       7,643   Other income (expense)     —       279   Interest expense     ( 4,051 )     ( 4,314 ) Other income and (expense), net     11,186       3,608                     (Loss) before income taxes     ( 5,203,244 )     ( 151,773 )                   Federal income tax (benefit)     —       ( 110,000 ) State income tax expense     280,000       279,861   Income taxes     280,000       169,861                     Net (Loss)   $ ( 5,483,244 )   $ ( 321,634 )                   (Loss) Per Share                 Basic (loss) per common share:   $ ( 0.27 )   $ ( 0.02 ) Diluted (loss) per common share:   $ ( 0.27 )   $ ( 0.02 ) Weighted average common shares outstanding (see Note 12)                 Basic     20,379,386       20,028,850   Diluted     20,379,386       20,028,850     The accompanying notes are an integral part of these consolidated financial statements.   32 Table of Contents     USIO, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY                       Additional                             Total       Common Stock     Paid - In     Treasury     Deferred     Accumulated     Stockholders'       Shares     Amount     Capital     Stock     Compensation     Deficit     Equity                                                                                                                       Balance at December 31, 2020     26,260,776     $ 194,692     $ 89,659,433     $ ( 2,165,721 )   $ ( 5,926,872 )   $ ( 65,058,171 )   $ 16,703,361                                                             Issuance of common stock under equity incentive plan     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                                                             Issuance of common stock under equity incentive plan     369,755       368       1,182,939       —       ( 166,329 )     —       1,016,978   Warrant compensation cost     —       —       20,963       —       —       —       20,963   Reversal of deferred compensation amortization that did not vest     ( 132,000 )     ( 132 )     ( 255,428 )     —       145,498       —       ( 110,062 ) Deferred compensation amortization     —       —       —       —       1,165,126       —       1,165,126   Purchase of treasury stock     —       —       —       ( 1,344,569 )     —       —       ( 1,344,569 ) Net (loss) for the year     —       —       —       —       —       ( 5,483,244 )     ( 5,483,244 )                                                           Balance at December 31, 2022     27,044,900     $ 195,471     $ 94,048,603     $ ( 3,749,027 )   $ ( 5,697,900 )   $ ( 70,863,049 )   $ 13,934,098     The accompanying notes are an integral part of these consolidated financial statements.   33 Table of Contents     USIO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS       December 31, 2022     December 31, 2021                     Operating Activities                 Net (loss)   $ ( 5,483,244 )   $ ( 321,634 ) Adjustments to reconcile net (loss) to net cash provided (used) by operating activities:                 Depreciation     1,196,584       771,808   Amortization     1,538,534       1,871,867   Bad Debt     —       151,951   Deferred federal income tax     —       ( 110,000 ) Non-cash stock-based compensation     2,072,041       1,489,976   Amortization of warrant costs     20,963       35,940   Changes in operating assets and liabilities:                 Accounts receivable     607,853       ( 2,267,806 ) Prepaid expenses and other     ( 23,426 )     ( 125,208 ) Operating lease right-of-use assets     6,630       ( 130,847 ) Other assets     ( 10,000 )     22,721   Inventory     ( 72,823 )     ( 258,066 ) Accounts payable and accrued expenses     853,965       1,410,472   Operating lease liabilities     ( 24,052 )     137,522   Prepaid card load obligations     ( 16,420,132 )     28,980,651   Merchant reserves     ( 1,471,652 )     ( 1,884,402 ) Customer deposits     189,929       58,897   Deferred revenue     ( 17,647 )     ( 48,925 ) Net cash provided (used) by operating activities     ( 17,036,477 )     29,784,917                     Investing Activities                 Purchases of property and equipment     ( 812,242 )     ( 1,273,039 ) Net cash (used) by investing activities     ( 812,242 )     ( 1,273,039 )                   Financing Activities                 Proceeds from equipment loan     —       165,996   Payments on equipment loan     ( 54,771 )     ( 39,802 ) Proceeds from private offering     —       1,000,000   Purchases of treasury stock     ( 1,344,569 )     ( 238,737 ) Net cash provided (used) by financing activities     ( 1,399,340 )     887,457                     Change in cash, cash equivalents, prepaid card loads, customer deposits and merchant reserves     ( 19,248,059 )     29,399,335   Cash, cash equivalents, prepaid card loads, customer deposits and merchant reserves, beginning of year     51,591,560       22,192,225                     Cash, Cash Equivalents, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End of Year   $ 32,343,501     $ 51,591,560                     Supplemental disclosures of cash flow information                 Cash paid during the period for:                 Interest   $ 4,051     $ 4,314   Income taxes     269,500       116,204   Non-cash transactions:                 Issuance of deferred stock compensation     166,330       2,164,361     The accompanying notes are an integral part of these consolidated financial statements.   34 Table of Contents   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 and 2021     Note 1. Description of Business and Summary of Significant Accounting Policies   Organization: Usio, Inc., along with its subsidiaries, FiCentive, Inc., a Nevada corporation, and Zbill, Inc., a Nevada corporation, provides integrated electronic payment services, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH network to billers and retailers. The Company also has an additional wholly-owned subsidiary, Usio Output Solutions, Inc., which is the entity for the Output Solutions operations. In addition, the Company operates various product websites, such as www.usio.com, www.singularpayments.com, www.payfacinabox.com, www.ficentive.com, www.akimbocard.com, and www.usiooutput.com.    Principles of Consolidation and Basis of Presentation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.   Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.   Revenue Recognition: Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services. Revenue is recognized during the period in which the transactions are processed or when the related services are performed. The Company complies with ASC 606 - 10 and reports revenues at gross as a principal versus net as an agent. Although some of the Company's processing agreements vary with respect to specific credit risks, the Company has determined for each agreement it is acting in the principal role. Merchants may be charged for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through third -party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations. Certain card distributors remit payment of fees earned 45 days after the end of the processing period. Prepaid card distributors have payment terms of 30 days following the end of the month. Sales taxes billed are reported directly as a liability to the taxing authority and are not included in revenue.  Usio Output Solutions, Inc. provides bill preparation, presentment and mailing services. Revenue from Output Solutions is recognized when the related services are performed for printing and delivered to USPS for postage.       Year Ended December 31,       2022     2021     $ Change     % Change                                     ACH and complementary service revenue   $ 14,782,606     $ 15,432,787     $ ( 650,181 )     ( 4 )% Credit card revenue     27,121,621       25,174,579       1,947,042       8 % Prepaid card services revenue     9,117,670       6,542,651       2,575,019       39 % Output solutions revenue     18,406,388       14,792,299       3,614,089       24 % Total Revenue   $ 69,428,285     $ 61,942,316     $ 7,485,969       12 %   Deferred Revenues: The Company records deferred revenues when it receives payments or issues invoices in advance of transferring control of promised goods or services to a customer. The advance consideration received from a customer is deferred until the Company provides the customer that product or service.   The deferred revenue balances are as follows:       2022     2021                     Deferred revenues, beginning of period   $ 17,647     $ 66,572   Deferred revenues, end of period     —       17,647   Revenue recognized in the period from amounts included in deferred revenues at the beginning of the period   $ 17,647     $ 48,925     Cash and Cash Equivalents: Cash and cash equivalents includes cash and other money market instruments. The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents.   Settlement Processing Assets and Obligations: Settlement processing assets and obligations represent intermediary balances arising in our settlement process for merchants.   Prepaid Card Load Assets: The Company maintains pre-funding accounts for its customers to facilitate prepaid card loads as initiated by our customer.  These prepaid card load assets are carried on the Company's balance sheet with a corresponding liability.   Customer Deposits: The   Company holds customer deposits primarily for postage expenses to ensure the Company is not out of pocket for amounts billed daily by the United States Postal Service.  These customer deposits are carried on the Company's balance sheet with a corresponding liability.       35 Table of Contents   Merchant Reserves: The Company has merchant reserve requirements associated with Automated Clearing House, or ACH transactions. The merchant reserve assets are carried on the Company's balance sheet with a corresponding liability. Merchant Reserves are set for each merchant. Funds are collected from each merchant and held as collateral to minimize contingent liabilities associated with any losses that may occur under the merchant agreement. While this cash is not restricted in its use, the Company believes that designating this cash to collateralize Merchant Reserves strengthens its fiduciary standing with the Company's member sponsors and is in accordance with the guidelines set by the card networks.     The reconciliation of cash and cash equivalents to cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves is as follows for each period presented:       December 31, 2022     December 31, 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   $ 5,709,117     $ 7,255,321   Prepaid card load assets     20,170,761       36,590,893   Customer deposits     1,554,122       1,364,193   Merchant reserves     4,909,501       6,381,153   Total   $ 32,343,501     $ 51,591,560     Accounts Receivable/Allowance for Estimated Losses: Accounts receivable are reported as outstanding principal net of an allowance for doubtful accounts of $ 319,000  at December 31, 2022 and 2021 .   The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability or failure of its customers to make required payments. The Company determines the allowance based on an account-by-account review, taking into consideration such factors as the age of the outstanding balance, historical pattern of collections and financial condition of the customer. Past losses incurred by the Company due to bad debts have been within its expectations. If the financial condition of its customers deteriorates, resulting in an impairment of their ability to make contractual payments, additional allowances might be required. Estimates for bad debt losses are variable based on the volume of transactions processed and could increase or decrease accordingly. The Company normally does not charge interest on accounts receivable.   Inventory : Inventory is stated at the lower of cost or net realizable value. At December 31, 2022 and 2021 , inventory consisted primarily of printing and paper supplies used for Output Solutions.   Property and Equipment: Property and equipment are stated at cost. Depreciation and amortization are computed on a straight-line method over the estimated useful lives of the related assets, ranging from three to ten years. Leasehold improvements are amortized over the lesser of the estimated useful lives or remaining lease period. Expenditures for maintenance and repairs are charged to expense as incurred.   Accounting for Internal Use Software: The Company capitalizes the costs associated with software developed and / or software obtained for internal use. The software is capitalized when both the preliminary project stage is complete, and the software being developed is placed-in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (iii) interest costs incurred, when material, while developing internal-use software. The Company ceases capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose. For the years ended December 31, 2022 and December 31, 2021 , the Company capitalized $ 584,246 and $ 735,813 , respectively.   Concentration of Credit Risk: Financial instruments that potentially expose the Company to credit risk consist of cash and cash equivalents, and accounts receivable. The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent account balances exceed the amount insured by the FDIC, which is $250,000. Accounts receivables potentially subject the Company to concentrations of credit risk. The Company’s customer base operates in a variety of industries and is geographically dispersed. The Company closely monitors extensions of credit. Estimated credit losses have been recorded in the consolidated financial statements. Recent credit losses have been within management's expectations. No customer accounted for more than 10% of revenues in 2022 or 2021 .   36 Table of Contents   Fair Value of Financial Instruments: Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings are reflected in the accompanying consolidated financial statements at cost, which approximates fair value because of the short-term maturity of these instruments.   Impairment of Long-Lived Assets and Intangible Assets: The Company reviews periodically, on at least an annual basis, the carrying value of its long-lived assets and intangible assets and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the fair value of a long-lived asset, determined based upon the estimated future cash inflows attributable to the asset, less estimated future cash outflows, is less than the carrying amount, an impairment loss is recognized.   Reserve for Processing Losses: If, due to insolvency or bankruptcy of one of the Company’s merchant customers, or for any other reason, the Company is not able to collect amounts from its card processing, credit card, ACH or merchant prepaid customers that have been properly "charged back" by the customer or if a prepaid cardholder incurs a negative balance, the Company must bear the credit risk for the full amount of the transaction. The Company may require cash deposits and other types of collateral from certain merchants to minimize any such risk. In addition, the Company utilizes a number of systems and procedures to manage merchant risk. ACH, prepaid and credit card merchant processing loss reserves are primarily determined by performing a historical analysis of our loss experience and considering other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company with its prepaid card holders. This reserve amount is subject to the risk that actual losses may be greater than our estimates. The Company has not incurred any significant processing losses to date. Estimates for processing losses vary based on the volume of transactions processed and could increase or decrease accordingly. The Company evaluates its risk for such transactions and estimates its potential processing losses based primarily on historical experience and other relevant factors. At December 31, 2022 and 2021 , respectively, the Company’s reserve for processing losses was $ 755,494 and $ 623,494 , respectively.   Advertising Costs: Advertising is expensed as incurred. The Company incurred approximately $ 94,000 and $ 179,000 in advertising costs in 2022 and 2021 , respectively.   Income Taxes: Deferred tax assets and liabilities are recorded based on difference between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Deferred tax assets are computed with the presumption that they will be realizable in future periods when taxable income is generated. Predicting the ability to realize these assets in future periods requires a great deal of judgment by management. U.S. generally accepted accounting principles prescribe a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Income tax benefits that meet the “more likely than not” recognition threshold should be recognized. Goodwill is amortized over 15 years for tax purposes.   As with all businesses, the Company’s tax returns are subject to periodic examination. The Company’s federal returns for the past four years remain open to examination. The Company is subject to the Texas margin tax and Tennessee franchise tax. Management is not aware of any tax positions that would have a significant impact on its financial position.   Stock-Based Compensation: The Company recognizes as compensation expense all share-based payment awards made to employees and directors, including grants of stock options and warrants, based on estimated fair values. Fair value is generally determined based on the closing price of the Company’s common stock on the date of grant.   401 (k) Plan: The Company has a defined contribution plan, or 401 (k) Plan, pursuant to Section 401 (k) of the Internal Revenue Code. All eligible full and part-time employees of the Company who meet certain age requirements may participate in the 401 (k) Plan. Participants may contribute between 1 % and 15 % of their pre-tax compensation, but not in excess of the maximum allowable under the Code. The 401 (k) Plan allows for discretionary and matching contributions by the Company. In 2022 , the Company matched 100 % of employee contributions up to 3 % and 50 % of the employee contribution over 3 % with a maximum employer contribution of 5 %. The Company made matching contributions of $ 262,530 and $ 212,870 in 2022 and 2021 , respectively.   37 Table of Contents   Earnings (Loss) Per Share: Basic and diluted (loss) per common share are calculated by dividing earnings by the weighted average number of common shares outstanding during the period.   New Accounting Pronouncements : In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016 - 13, Financial Instruments - Credit Losses (Topic 326 ), to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.  To achieve this objective, the amendments in Topic 326 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  Topic 326 is effective for fiscal years beginning after December 25, 2022, including interim periods within those fiscal years for smaller reporting companies.  The Company does not expect the adoption of the amendments in ASU 2016 - 13 to have a significant effect on its financial position and the results of its operations when such amendment is adopted.   Accounting standards that have been issued or proposed by the FASB, the SEC or other standard setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.   38 Table of Contents       Note 2. Property and Equipment   Property and equipment consisted of the following at December 31:       2022     2021   Software   $ 7,053,905     $ 6,455,040   Equipment     2,530,498       2,418,421   Furniture and fixtures     818,522       732,153   Leasehold improvements     207,624       192,692   Total property and equipment     10,610,549       9,798,306   Less: accumulated depreciation     ( 7,387,732 )     ( 6,191,149 ) Net property and equipment   $ 3,222,816     $ 3,607,157       Note 3. 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, 2022)  and goodwill of $ 9,759 . The intangible asset was fully amortized as of December 31, 2017. The fair value of the customer list and contracts was calculated using the net present value of the projected gross profit to be generated by the customer list over a period of 36 months beginning in January 2015 and was amortized over 3 years at $ 163,139 annually.   Goodwill was determined based on the purchase price paid over the assets acquired and has an indefinite life, which is tested for impairment annually.   Singular Payments, LLC Acquisition ( 2017 )   On September 1, 2017, we acquired all of the membership interest of Singular Payments, LLC. The intangibles acquired in such acquisition consist of customer list assets of $ 5,000,000 at cost (net of accumulated amortization of $ 5,000,000 at December 31, 2022). The fair value of the customer list was calculated using the net present value of the projected gross profit to be generated by the customer list over 60 months beginning in September 2017 and ending in August 2022. Amortization expense in 2022 and 2021 was $ 666,667 and $ 1,000,000 respectively.   Information Management Solutions, LLC Acquisition ( 2020 )   On December  15, 2020, we acquired substantially all of assets of Information Management Solutions, LLC. The intangibles acquired in such acquisition consist of customer list assets of $ 4,359,335  at cost (net of accumulated amortization of $ 1,743,734 at December 31, 2022). The fair value of the customer list was calculated using the net present value of the projected gross profit to be generated by the customer list over 60 months beginning in January 2021  and ending in December 2025. Annual amortization expense will be $ 871,867  per year through the year 2025.     Note 4. Valuation Accounts   Valuation and allowance accounts included the following at December 31:               Net Charged                               Balance     to                     Balance End       Beginning of     Costs and                     of       Year     Expenses     Transfers     Net Write-Off     Year   2022                                         Allowance for doubtful accounts   $ 319,000     $ —     $ —     $ —     $ 319,000   Reserve for processing losses     623,494       132,000       —       —       755,494   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     39 Table of Contents     Note 5. Loans   Equipment Loan   On March 20, 2021, the Company entered into a debt arrangement to finance $ 165,996 for the purchase of an Output Solutions sorter. The loan is for a period of 36 months with a maturity date of March 20, 2024. The repayment amount is for 36  months at $ 4,902 per month. Annual payments are $ 58,821 . The financing is at an interest rate of 3.95 %.  Current year payments on the Equipment Loan were $ 54,634 .     Note 6. Accrued Expenses   Accrued expenses consisted of the following balances at December 31:       2022     2021                     Accrued commissions   $ 1,479,580     $ 879,120   Reserve for processing losses     755,494       623,494   Other accrued expenses     821,167       226,888   Accrued taxes     320,854       298,168   Accrued salaries     344,013       297,995   Total accrued expenses   $ 3,721,108     $ 2,325,665       Note 7. 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 $ 150,129 and $ 143,149 for the years ended December 31, 2022 and 2021 , respectively. The lease expires on July 31, 2024.   The Company leases approximately 3,794 square feet of office space for its Nashville, Tennessee sales offices and operations. Rental expense under the operating lease was $ 102,976 and $ 85,122 for the years ended December 31, 2022 and 2021 , respectively. The lease expires on April 30, 2023.  We will not be entering into a lease extension, or new lease agreement in Nashville, Tennessee upon the expiration of this current lease agreement.   The Company assumed a lease in San Antonio, Texas as a part of the Information Management Solutions, LLC acquisition for its Output Solutions employees and warehouse operations.  The lease has a remaining life of 45  months and expires on September 30, 2024. The space leased is 22,400  square feet. Annual rents during the lease term range from $ 123,554 to $ 133,703 . Rental expense for the years ended  December 31, 2022 and 2021  was $ 112,504 and $ 107,647 respectively.   On January 1, 2021, we entered into a lease in Austin, Texas commencing on January 1, 2021  for our Austin technology organization. The lease is for a period of 25  months and expires on January 31, 2023. The space leased is 1,890 square feet. Rental expense for the years ended  December 31, 2022 and 2021  was $ 83,610 and $ 81,353 respectively. On January 26, 2023, the Company entered into a lease amendment commencing on February 1, 2023, extending the term of the existing lease for a period of 23 months and expiring on January 31, 2025.   On March 15, 2021, we entered into a lease amendment to our existing lease in San Antonio, Texas commencing April 1, 2021 and expiring on September 30, 2024 running concurrently with the existing lease.   The incremental space leased is 2,734 square feet.   The incremental annual rent during the lease term ranges from $ 56,047 to $ 60,148 . Rental expense for the years ended  December 31, 2022 and 2021  was $ 46,658 and $ 34,125 respectively.   On October 19, 2021, the Company entered into a lease amendment to the existing lease in San Antonio, Texas commencing April 1, 2022  and expiring on September 24, 2024 running concurrently with the existing lease.  The incremental space lease is 6,628 square feet.   The incremental annual rent during the lease term ranges from $ 135,874 to $ 145,816 . Rental expense for the year ended December 32, 2022 was $ 75,269   The Company has various copier equipment with leases that have not expired. Rental expense under the operating lease was $ 12,729  and $ 25,000  for the years ended December 31, 2022 and 2021 , respectively.   The weighted average remaining lease term is 5.27  years. The weighted average discount rate is 4.17 %   The Company recognized total operating lease expense of approximately $ 711,000  and $ 591,000  for the years ended December 31, 2022 and 2021 , respectively. In 2022 , the operating lease expense of $ 711,000  consisted of $ 577,000  of fixed operating expense and $ 134,000  of interest expense.   The maturities of lease liabilities are as follows at December 31, 2022 :   Year ended December 31,                   2023   $ 617,319   2024     554,916   2025     518,935   2026     414,138   2027     414,138   Thereafter     917,081   Total minimum lease payments     3,436,527   Less imputed interest     ( 480,261 ) Total lease liabilities   $ 2,956,266     40 Table of Contents     Note 8. Related Party Transactions   Louis Hoch   During the year ended December 31, 2022 and 2021 , the Company purchased $ 22,835 and $ 4,009 , respectively, of corporate imprinted sportswear, promotional items and caps from Angry Pug Sportswear. Louis Hoch, Chairman, President, Chief Executive Officer, and Chief Operating Officer is a 50 % owner of Angry Pug Sportswear.   Officers and Directors   On January 6, 2021, the Company repurchased 11,860 shares for $ 38,545  in a private transaction at the closing price on January 6, 2021 of $ 3.25  per share from Tom Jewell, the Company's Chief Financial Officer, to cover his share of taxes.   On January 6, 2022, we repurchased 11,361 shares for $ 47,930 in a private transaction at the closing price on January 6, 2022  of $ 4.21 per share from Tom Jewell, the Company's Chief Financial Officer, to cover his share of taxes.   On October 4, 2022, we repurchased 26,234 shares for $ 42,761 in a private transaction at the closing price on October 4, 2022  of $ 1.63 per share from Louis Hoch, the Company's Chairman, President, Chief Executive Officer and Chief Operating Officer, to cover his share of taxes.   The Company granted  319,900  shares of restricted common stock with a  10 -year vesting period and  141,900  restricted stock units (RSUs) with a  3 -year vesting period to employees and Directors as a performance bonus on   November 18, 2021  at an issue price of $ 6.39  per share. Executive officers and Directors included in the  10 -year restricted stock grant were Louis Hoch ( 100,000  shares), Tom Jewell ( 50,000  shares), Greg Carter ( 30,000  shares) and Houston Frost ( 25,000  shares). Executive officers and Directors included in the RSU grant were Louis Hoch ( 30,000  shares), Tom Jewell ( 21,000  shares), Greg Carter ( 9,000  shares) Houston Frost ( 6,000  shares), Blaise Bender ( 12,000  RSUs), Brad Rollins ( 12,000  RSUs) and Ernesto Beyer ( 12,000  RSUs).   On  April 1, 2021,  the Company granted  1,444,000  shares of restricted common stock with a  10 -year vesting period and  103,000  restricted stock units (RSUs) with a  3 -year vesting period to employees and Directors as a performance bonus at an issue price of $ 1.08  per share. Executive officers and Directors included in the grants were Louis Hoch ( 300,000  shares), Tom Jewell ( 200,000  shares), Blaise Bender ( 10,000  RSUs) and Brad Rollins ( 30,000  RSUs).     Note 9. Income Taxes   Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.   Significant components of the Company’s deferred tax asset are as follows at December 31:       2022     2021                     Deferred tax assets:                 Net operating loss carryforwards   $ 5,024,000     $ 5,942,000   Depreciation and amortization     1,159,000       999,000   Non-cash compensation     ( 117,000 )     ( 326,000 ) Other     69,000       101,000   Total     6,135,000       6,716,000   Valuation Allowance     ( 4,631,000 )     ( 5,212,000 ) Deferred tax asset   $ 1,504,000     $ 1,504,000     Management has reviewed its net deferred asset position, and due to the history of operating losses has determined that the application of a valuation allowance at December 31, 2022 and 2021 is warranted. If applicable, the Company would recognize interest expense and penalties related to uncertain tax positions in interest expense. As of December 31, 2022 , the Company had not accrued any interest or penalties related to uncertain tax provisions.   41 Table of Contents   The Company has net operating loss carryforwards for tax purposes of approximately $ 23.9 million. Net operating loss carryforwards prior to 2017 are available to offset taxable income of future periods and expire 20 years after the loss was generated. The Net operating loss carryforward that expired in 2022 was in the amount of $ 9.1 million. The schedule below outlines when our pre- 2017 net operating losses were generated and the year they may expire.   Tax Year End   NOL     Expiration   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   $ 10,931,710             Effective for tax years ending in 2018 or later, net operating losses cannot be carried back but can be carried forward to future tax years indefinitely, subject to annual limitations for utilization. Net operating losses generated in 2018 and later total approximately $ 12,994,000 .   The tax provision for federal and state income tax is as follows for the years ended December 31:       2022     2021                     Current provision:                 Federal   $ —     $ —   State     280,000       279,861         280,000       279,861                     Deferred provision:                 Federal expense (benefit)     —       ( 110,000 )                   Expense for income taxes   $ 280,000     $ 169,861     The reconciliation of federal income tax computed at the U.S. federal statutory tax rates to total income tax expense is as follows for the years ended December 31:       2022     2021                     Income tax (benefit) at 21 %   $ (1,134,200 )   $ (67,543 ) Change in valuation allowance     ( 581,000 )     ( 2,322,000 ) Permanent and other differences     1,715,200       2,389,543   Federal income tax (benefit)     —       ( 110,000 ) State taxes     280,000       279,861                     Income tax expense   $ 280,000     $ 169,861         42 Table of Contents   Note 10. Stock Options, Incentive Plans, Stock Awards, and Employee Benefit Plan   Stock Option Plans: The Company’s 2015 Equity Incentive Plan provides for the grant of incentive stock options as defined in Section 422 of the Internal Revenue Code and the grant of Stock Options, Restricted Stock, Restricted Stock Units, Performance Awards, or other Awards to employees, non-employee directors, and consultants. The Board of Directors has authorized 5,000,000 shares of common capital stock for issuance under the 2015 Equity Incentive Plan, including automatic increases provided for in the 2015 Equity Incentive Plan through fiscal year 2025. The number of shares of common stock reserved for issuance under the 2015 Equity Incentive Plan will automatically increase, with no further action by the stockholders, on the first business day of each fiscal year during the term of the 2015 Equity Incentive Plan, beginning January 1, 2016, in an amount equal to 5 % of the issued and outstanding shares of common stock on the last day of the immediately preceding year, or such lesser amount if so determined by the Board or the Plan Administrator. During 2022 , the Company granted 103,000 shares of stock to several employees as incentive compensation or new-hire bonuses. During 2022 , the Company granted 291,867  restricted stock units to employees and directors as a new hire bonus or as incentive compensation.   Treasury Stock : The Company purchased 105,805 shares of common stock with a value of $ 227,975 to cover the employee's share of tax liabilities related to the vesting of commons stock and restricted stock units in 2022.   Stock Awards : The Company has granted restricted stock awards to its employees at different periods from 2005 through 2022. The majority of the shares granted to those employees vest 10 years from the grant date and are forfeited in the event that the recipient’s employment relationship with the Company is terminated prior to vesting.   During 2022 , a portion of the restricted stock awards were granted, but not issued and are not listed as outstanding in the financial statements for 2022 .   Stock-based compensation expense related to stock and restricted stock awards was $ 2.1  million in  2022 and $ 1.5  million in  2021 .   A summary of stock awards outstanding and 2022 activities are as follows:                       Weighted Average                       Weighted Average     Contractual     Aggregate Intrinsic   Stock Awards   Shares     Exercise Price     Remaining Life     Value   Outstanding, December 31, 2021     5,241,902     $ 2.25                   Granted     103,000       1.61                   Vested     230,002       —                   Forfeited     132,000       —                                                     Outstanding, December 31, 2022     4,982,900     $ 2.27       5.06     $ ( 0.62 )                                   Expected to Vest after December 31, 2022     4,982,900     $ 2.27       5.06     $ ( 0.62 )   As of December 31, 2022 , there was $ 5,697,900  of unrecognized compensation costs related to the un-vested share-based compensation arrangements granted. The cost is expected to be recognized over the weighted average remaining contractual life of 5.06 years.   The aggregate intrinsic value represents the difference between the weighted average exercise price and the closing price of the Company’s stock on December 31, 2022 , or $ 1.65 .   Employee Stock Purchase Plan : The Company established the 1999 Employee Stock Purchase Plan (“ESPP”) under the requirements of Section 423 of the Internal Revenue Code to allow eligible employees to purchase the Company’s common stock at regular intervals. Participating employees may purchase common stock through voluntary payroll deductions at the end of each participation period at a purchase price equal to 85 % of the lower of the fair market value of the common stock at the beginning or the end of the participation period. The Company issued - 0 - shares from the ESPP in 2022 and 2021 , respectively. The ESPP is no longer active.   Stock Warrants : On August 21, 2018, the Company issued University Fancards, LLC a warrant to purchase 150,000 shares of the Company's common stock. 30,000 warrants vested immediately upon the date on which the first financial transaction was processed on a card account issued under the prepaid agreement, which occurred on October 5, 2018. 120,000 warrants vest annually over 4 years in 30,000 warrant increments beginning on July 31, 2019 and becoming fully vested on July 31, 2022. The exercise price for the 30,000 warrants that vested immediately on October 5, 2018 was $ 1.80 per share. The exercise price for the remaining 120,000 warrants will be the lesser of $ 2.00 per share or one hundred and twenty percent ( 120 %) of the market price of the Company's common stock on the vesting date of the warrant. The warrants were valued using the Black-Scholes option pricing model. Assumptions used were as follows: (i) the fair value of the underlying stock was $ 0.94 for the 30,000 warrants and $ 0.90 for the 120,000 warrants; (ii) the risk-free interest rate is 2.77%; (iii) the contractual life is 5 years; (iv) the dividend yield of 0%; and (v) the volatility is 64.6 %. The fair value of the warrants amounted to $ 135,764 and will be amortized over the life of the warrants as a reduction of revenues. The reduction of revenues recorded for the year ended December 31, 2022 and 2021 was $ 20,963 and $ 35,940  respectively.   On August 12, 2020, the Company issued 27,051 shares of common stock to University FanCards, LLC in a cashless exercise at $ 3.46 per share in exchange for 60,000 warrants exercised by FanCards, LLC.    On February 5, 2021, the Company issued 19,795  shares of common stock to University FanCards, LLC in a cashless exercise at $ 5.88  per share in exchange for 30,000 warrants exercised by FanCards, LLC.    On September 1, 2021, the Company issued 19,950 shares of common stock to University FanCards, LLC in a cashless exercise at $ 5.97 per share in exchange for 30,000 warrants exercised by FanCards, LLC.   On December  15, 2020, the Company issued warrants to purchase 945,599 unregistered warrants to purchase shares of Usio, Inc. for 945,599 shares of our common stock, with an exercise price of $ 4.23 to IMS.  The warrants were valued using the Black-Scholes option pricing model. Assumptions used were as follows: (i) the fair value of the underlying stock was $0.58; (ii) the risk-free interest rate is 0.09%; (iii) the contractual life is 5 years; (iv) the dividend yield of 0%; and (v) the volatility is 59.9 %. The fair value of the warrants amounted to $ 552,283  and will be recorded as an increase in the customer list asset and have a term of five years from time of vest.     43 Table of Contents     Note 11. Net (Loss) per Share   Basic (loss) per share (EPS) was computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS differs from basic EPS due to the assumed conversion of potentially dilutive options that were outstanding during the period. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net (loss).       2022     2021                     Numerator:                 Numerator for basic and diluted earnings per share, net (loss) available to common shareholders   $ ( 5,483,244 )   $ ( 321,634 ) Denominator:                 Denominator for basic (loss) per share, weighted average shares outstanding     20,379,386       20,028,850   Effect of dilutive securities-stock options and restricted awards     —       —   Denominator for diluted (loss) per share, adjusted weighted average shares and assumed conversion     20,379,386       20,028,850   Basic (loss) per common share   $ ( 0.27 )   $ ( 0.02 ) Diluted (loss) per common share and common share equivalent   $ ( 0.27 )   $ ( 0.02 )   The awards and options to purchase shares of common stock that were outstanding at December 31, 2022 and 2021 that were not included in the computation of diluted (loss) per share because the effect would have been anti-dilutive, are as follows:       Year Ended       December 31,       2022     2021   Anti-dilutive awards and options     4,982,900       5,241,902       Note 12. 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.         44 Table of Contents   Note 13. Legal Proceedings   KDHM, LLC   On September 1, 2021, KDHM, LLC sued PDS Acquisition Corp, now known as Usio Output Solutions, Inc., in the District Court of Bexar County, Texas claiming a breach of the asset purchase agreement executed by the parties on December 14, 2020. The lawsuit alleges that due to a mistake, accident, or inadvertence, certain customer deposits in the amount of $ 317,000  were improperly transferred to us.   We believe that plaintiff's claims in the lawsuit have no merit and contradict the express terms of the asset purchase agreement. As a result of this post sale dispute, we discovered that KDHM, LLC, and its principals, made certain misrepresentations and breached the terms of the asset purchase agreement.    On September 28, 2021, we filed an answer generally denying plaintiff’s allegations.  On October 5, 2021, we filed a counterclaim and third -party petition.  Therein, we allege that neither KDHM nor its principals disclosed that KDHM was not accounting for the customer deposits in accordance with Generally Accepted Accounting Principles.  Yet, KDHM, and third -party defendants its principals Henry Minten and Thomas Dowe, affirmatively represented and warranted in section 3.1 (e) of the agreement that “[t]Annual Financial Statements and the Interim Financial Statements have been prepared from the books and records of Seller in accordance with GAAP applied on a consistent basis.”    We also discovered that KDHM by and through its principals failed to disclose that $ 305,000  in additional customer deposits existed and these deposits were not conveyed to us as required by the agreement.  KDHM, Minten and Dowe provided us with fraudulent and misleading profit and loss statements that did not disclose these additional customer deposits.  KDHM and the defendants do not dispute that these additional customer deposits exist and that they were purchased by Usio.  However, despite a written representation that these funds would be returned, KDHM and its principal have held these funds hostage.  Section 2.1 (b)( x ) of the agreement provides that the purchased assets includes “All of Seller’s deposits from its customer, including without limitation, those customer deposits listed on Schedule 2.1 (b)(xi) of the Disclosure Schedules.”  Finally, we discovered that KDHM did not provide us with all customer lists, which are identified as purchased asset under the agreement.  We demanded the missing customer lists, but they have yet to be provided to us per the agreement.   In our counterclaims and third -party petition, we assert causes of action for fraud, breach of contract and conversion.  At this time, the parties are engaging in written discovery and working on scheduling the depositions of the parties.   We consider the risk of loss as remote related to this lawsuit.   Aside from these proceedings above, the Company may be involved in legal matters arising in the ordinary course of business from time to time. While we believe that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which we are or could become involved in litigation will not have a material adverse effect on our business, financial condition or results of operations.   Note 14. COVID- 19   The ongoing COVID- 19  pandemic has had a notable impact on general economic conditions, including but  not  limited to the temporary closures of many businesses, “shelter in place” and other governmental regulations, reduced consumer spending due to both job losses and other effects attributable to the COVID- 19  pandemic. There remain many uncertainties as a result of the pandemic.  As a result of the spread of COVID- 19,  economic uncertainties could continue to impact our operations. Any potential incremental financial impact is unknown at this time.   During  2020  and  2021,  the government issued several rounds of COVID- 19  relief and stimulus payments and other programs to stimulate economic activity and facilitate an economic recovery.     In   April  and   May  of  2020,  the Company's business was adversely affected as doctor's offices, dental offices, veterinarian offices and non-bank consumer lending accounts were ordered closed in connection with curbing the spread of the pandemic.   As these doctors, dental and veterinarian offices re-opened, these businesses quickly recovered and returned to levels higher than pre-COVID.   Consumer lending merchants were adversely affected by COVID relief payments made during the pandemic and a pause placed on past due amounts owed.   The level of activity for consumer lending merchants continues to recover to pre-COVID levels.  The Company recorded an increase in revenues in its prepaid business line, as it was able to work in conjunction with major cities across the U.S. to use its prepaid debit cards to facilitate the transfer of money via its debit cards from city foundations to the local residents in need of financial assistance.  The efforts have included the disbursement of funds to encourage vaccinations.    Since  2020,  the Company has experienced some difficulty in recruiting and retaining certain categories of employees due to limited labor availability.  The Company continues to monitor labor availability and is taking necessary steps to retain employees and recruit employees to fill open positions.   Due to the COVID- 19  pandemic and global economic challenges, supply chain issues have resulted in a reduced supply, and growing demand of paper and paper products utilized in our Output Solutions line of business. Sourcing inventory remains a key challenge to execute jobs and projects with existing and new customers. While these efforts have been successful thus far, if the Company cannot continue to acquire sufficient inventory stock, the successful completion, margins, and growth of Output Solutions   may  be impacted.   The impacts and recovery from the COVID- 19  pandemic are still a work in process.  To date, the Company has  not  been adversely impacted in the magnitude that other payment processors were, as our customer base had limited exposure to retail facing businesses.   Within that framework, the Company will continue to monitor the overall impact on its operations and take necessary steps to ensure the safety of its employees and the well-being of its customers.   45 Table of Contents   Note 15. Cyber Event   On December 25, 2021, we detected a ransomware attack that accessed and encrypted a small portion of our information technology systems. The unauthorized access included the download of non-payment processing related data files from our externally hosted Office 365 environment which is separate from our payment processing environment. Throughout the incident, we remained operational. Promptly upon the detection of the event, we launched an investigation, notified law enforcement and our insurance carrier, and engaged legal counsel, computer forensic firms and other incident response professionals. We also implemented a series of containment and remediation measures to address this situation and reinforce the security of our information technology systems. Our systems were not only fully restored and capable of resuming normal operations to the extent they were impaired, but enhanced following our immediate and long term response.    This cyber event had no material impact on the business, and no cardholder, or payments related data was compromised. The Company has undertaken and continues to undertake certain system upgrades and re-platforming efforts designed to improve the security, availability, reliability, resiliency, and speed of its information technology systems in order to prevent and mitigate such events in the future, and believe this incident to be resolved.     Note 16. Subsequent Events   The Company granted  1,403,000 shares of restricted common stock with a  10 -year vesting period and  273,000 restricted stock units (RSUs) with a  3 -year vesting period to employees and Directors as a performance bonus on   February 8, 2023  at an issue price of $ 1.75 per share. Executive officers and Directors included in the  10 -year restricted stock grant were Louis Hoch ( 330,000  shares), Tom Jewell ( 200,000  shares), Greg Carter ( 100,000  shares) and Houston Frost ( 100,000  shares). Executive officers included in the RSU grant were Louis Hoch ( 33,000  shares), Tom Jewell ( 21,000  shares), Greg Carter ( 12,000  shares) and Houston Frost ( 12,000  shares).   Effective on February 17, 2023,  the Company entered into an employment agreement with Greg Carter, the Company’s Executive Vice President, Payment Acceptance. Under the terms of this agreement, Mr. Carter will receive an annual salary of $250,000; Override/Commissions of 10 % of the actual cash commissions paid to salespersons under direct management of Mr. Carter to be paid quarterly, and the payment of a one -time signing bonus of $ 40,000 .    On January 26, 2023, the Company entered into a lease amendment to the existing lease in Austin, Texas commencing on February 1, 2023, extending the term of our existing lease in for a period of 24 months and expiring on January 31, 2025.     ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.   None.