Usio, Inc. 10-Q

Item 1. Financial Statements.   USIO, INC. CONDENSED CONSOLIDATED BALANCE SHEETS       March 31, 2023     December 31, 2022       (Unaudited)           Assets                 Current assets:                 Cash and cash equivalents   $ 6,763,813     $ 5,709,117   Accounts receivable, net     5,218,249       4,371,640   Settlement processing assets     42,586,985       49,737,068   Prepaid card load assets     18,812,954       20,170,761   Customer deposits     1,575,075       1,554,122   Inventory     494,457       507,355   Prepaid expenses and other     461,005       450,389   Current assets before merchant reserves     75,912,538       82,500,452   Merchant reserves     4,744,615       4,909,501   Total current assets     80,657,153       87,409,953                     Property and equipment, net     3,139,932       3,222,816                     Other assets:                 Intangibles, net     2,407,393       2,625,360   Deferred tax asset, net     1,504,000       1,504,000   Operating lease right-of-use assets     2,826,942       2,795,483   Other assets     355,358       355,357   Total other assets     7,093,693       7,280,200                     Total assets   $ 90,890,778     $ 97,912,969                     Liabilities and stockholders’ equity                 Current liabilities:                 Accounts payable   $ 851,824     $ 858,622   Accrued expenses     4,856,157       3,721,108   Operating lease liabilities, current portion     537,034       617,319   Equipment loan, current portion     57,380       56,429   Settlement processing obligations     42,586,985       49,737,068   Prepaid card load obligations     18,812,954       20,170,761   Customer deposits     1,575,075       1,554,122   Current liabilities before merchant reserve obligations     69,277,409       76,715,429   Merchant reserve obligations     4,744,615       4,909,501   Total current liabilities     74,022,024       81,624,930                     Non-current liabilities:                 Equipment loan, non-current portion     —       14,994   Operating lease liabilities, non-current portion     2,423,780       2,338,947   Total liabilities     76,445,804       83,978,871                     Stockholders’ equity:                 Preferred stock, $ 0.01 par value, 10,000,000 shares authorized; - 0 - shares outstanding at March 31, 2023 (unaudited) and December 31, 2022, respectively     —       —   Common stock, $ 0.001 par value, 200,000,000 shares authorized; 28,466,150 and 27,044,900 issued, and 26,514,903 and 25,097,963 outstanding at March 31, 2023 (unaudited) and December 31, 2022, respectively     196,892       195,471   Additional paid-in capital     96,687,132       94,048,603   Treasury stock, at cost; 1,951,247 and 1,946,937 shares at March 31, 2023 (unaudited) and December 31, 2022, respectively     ( 3,757,556 )     ( 3,749,027 ) Deferred compensation     ( 7,833,278 )     ( 5,697,900 ) Accumulated deficit     ( 70,848,216 )     ( 70,863,049 ) Total stockholders’ equity     14,444,974       13,934,098                     Total liabilities and stockholders’ equity   $ 90,890,778     $ 97,912,969     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,       2023     2022                     Revenues   $ 21,446,244     $ 18,111,343   Cost of services     16,544,429       14,602,214   Gross profit     4,901,815       3,509,129                     Selling, general and administrative:                 Stock-based compensation     504,574       550,682   Other SG&A expenses     3,873,219       3,795,146   Depreciation and amortization     518,029       714,935   Total selling, general and administrative expenses     4,895,822       5,060,763                     Operating (loss)     5,993       ( 1,551,634 )                   Other income and (expense):                 Interest income     92,928       581   Interest expense     ( 662 )     ( 1,217 ) Other income and (expense), net     92,266       ( 636 )                   Income (Loss) before income taxes     98,259       ( 1,552,270 ) Income tax expense     83,426       70,000                     Net income (Loss)   $ 14,833     $ ( 1,622,270 )                   Income (Loss) Per Share                 Basic income (loss) per common share:   $ 0.00     $ ( 0.08 ) Diluted income (loss) per common share:   $ 0.00     $ ( 0.08 ) Weighted average common shares outstanding                 Basic     20,122,972       20,280,575   Diluted     26,508,872       20,280,575     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,       2023     2022   Operating activities:                 Net income (loss)   $ 14,833     $ ( 1,622,270 ) Adjustments to reconcile net income (loss) to net cash (used) by operating activities:                 Depreciation     300,061       246,968   Amortization     217,968       467,967   Stock-based compensation     504,574       550,682   Amortization of warrant costs     —       8,985   Changes in current assets and current liabilities:                 Accounts receivable     ( 846,609 )     802,999   Prepaid expenses and other     ( 10,616 )     ( 254,507 ) Operating lease right-of-use assets     ( 31,459 )     118,719   Other assets     ( 1 )     —   Inventory     12,898       4,247   Accounts payable and accrued expenses     1,128,251       299,720   Operating lease liabilities     4,548       ( 122,594 ) Prepaid card load obligations     ( 1,357,807 )     ( 7,743,913 ) Merchant reserves     ( 164,886 )     5,000   Customer deposits     20,953       27,272   Deferred revenue     —       ( 13,235 ) Net cash (used) by operating activities     ( 207,292 )     ( 7,223,960 )                   Investing activities:                 Purchases of property and equipment     ( 217,735 )     ( 72,069 ) Net cash (used) by investing activities     ( 217,735 )     ( 72,069 )                   Financing activities:                 Payments on equipment loan     ( 13,488 )     ( 13,488 ) Purchases of treasury stock     ( 8,529 )     ( 66,494 ) Net cash (used) by financing activities     ( 22,017 )     ( 79,982 )                   Change in cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves     ( 447,044 )     ( 7,376,011 ) Cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves, beginning of period     32,343,501       51,591,560                     Cash, Cash Equivalents, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End of Period   $ 31,896,457     $ 44,215,549                     Supplemental disclosure of cash flow information:                 Cash paid during the period for:                 Interest   $ 662     $ 1,217   Income taxes     13,426       —   Non-cash transactions:                 Issuance of deferred stock compensation     2,444,054       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, 2022     27,044,900     $ 195,471     $ 94,048,603     $ ( 3,749,027 )   $ ( 5,697,900 )   $ ( 70,863,049 )   $ 13,934,098                                                             Issuance of common stock under equity incentive plan     1,421,250       1,421       2,638,529       —       ( 2,444,054 )     —       195,896   Deferred compensation amortization     —       —       —       —       308,676       —       308,676   Purchase of treasury stock costs     —       —       —       ( 8,529 )     —       —       ( 8,529 ) Net income for the period     —       —       —       —       —       14,833       14,833                                                             Balance at March 31, 2023     28,466,150     $ 196,892     $ 96,687,132     $ ( 3,757,556 )   $ ( 7,833,278 )   $ ( 70,848,216 )   $ 14,444,974                                                             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     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 (collectively, 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, 2022, as filed with the Securities and Exchange Commission on March 8, 2023. 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. References in this quarterly report to "the quarter" or the "first quarter" mean the three month period ended March 31, 2023  or 2022  , as the case may be.   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. Our subsidiary, 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 consolidated revenues by source:       Three Months Ended March 31,       2023     2022                     ACH and complementary service revenue   $ 3,340,722     $ 3,843,316   Credit card revenue     7,339,898       6,768,222   Prepaid card services revenue     4,807,404       2,768,447   Output solutions revenue     5,958,220       4,731,358   Total revenue   $ 21,446,244     $ 18,111,343     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 the 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 USPS. 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, 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 and funds are collected and held as collateral to minimize contingent liabilities associated with any losses that may occur. While this cash is not restricted in its use, the Company believes that designating this cash to collateralize Merchant reserves strengthens the Company's standing with its 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:       Three Months Ended March 31,       2023     2022                     Beginning 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                     Ending cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves:                 Cash and cash equivalents   $ 6,763,813     $ 7,590,951   Prepaid card load assets     18,812,954       28,846,980   Customer deposits     1,575,075       1,391,465   Merchant reserves     4,744,615       6,386,153   Total   $ 31,896,457     $ 44,215,549     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. During the  three months ended March 31, 2023  and the year ended  December 31, 2022 , there were no losses due to bad debt. In the past, losses incurred by the Company due to bad debts were 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 losses may be incurred in future periods. 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, 2023 and December 31, 2022 .   Inventory : Inventory is stated at the lower of cost or net realizable value. At March 31, 2023  and December 31, 2022, 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. During the three  months ended March 31, 2023 and March 31, 2022 , the Company capitalized $ 207,732 and $ 136,864 , 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 2022  or during the  three months ended March 31, 2023 . Management is not aware of any impairment changes that may currently be required; however, the Company cannot predict the occurrence of events that might adversely affect the reported values in the future.   Reserve for Processing Losses:  If, due to insolvency or bankruptcy of one of the Company’s merchant customers, or for any other reason, the Company is not able to collect amounts from its credit card, ACH or prepaid customers that have been properly "charged back" by the customer, or if a prepaid cardholder incurs a negative balance, the Company must bear the credit risk for the full amount of the transaction. The Company may require cash deposits and other types of collateral from certain merchants to minimize any such risks. In addition, the Company utilizes multiple systems and procedures to manage merchant risk. ACH, prepaid and credit card merchant processing loss reserves are primarily determined by performing a historical analysis of the Company’s loss experience, considering other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company’s relationship with the Company’s prepaid card holders. This reserve amount is subject to the risk that actual losses may be greater than the Company’s estimates. In the quarter ended March 31, 2023, we incurred $ 833,485 in merchant processing losses as a result of fraudulent activity and identity fraud from multiple merchants, of which $ 755,494 was deducted from our reserve for processing losses. We do not expect similar processing losses in the immediate future; however, in the quarter, we are replenishing our reserve for processing losses by the amount of $ 200,000 in the event that future losses are incurred. Estimates for processing losses are variable based on the volume of transactions processed and could increase or decrease accordingly. At March 31, 2023 and December 31, 2022 , the Company’s reserve for processing losses was $ 386,789  and $ 755,494  respectively.   Legal Proceedings: The Company may be involved in legal matters arising in the ordinary course of business from time to time. While the Company believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation will not have a material adverse effect on its business, financial condition or results of operations.   Recently Adopted 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 15, 2022, including interim periods within those fiscal years for smaller reporting companies. The Company adopted the amendments effective January 1, 2023, and it has not had a material impact on its financial position and the results of its operations. The Company will continue to monitor the adoption of this amendment in order to evaluate if it has any material effect on its financial position and results of operations.   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.   5 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 each of the three months ended March 31, 2023  and 2022 , operating lease expenses totaled $ 179,901  and $ 120,151 , respectively.     Note 3. Accrued Expenses   Accrued expenses consisted of the following balances:       March 31, 2023     December 31, 2022                     Accrued commissions   $ 3,190,497     $ 1,479,580   Reserve for processing losses     386,789       755,494   Other accrued expenses     752,687       821,167   Accrued taxes     387,152       320,854   Accrued salaries     139,032       344,013   Total accrued expenses   $ 4,856,157     $ 3,721,108       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 and annual interest of 3.95 %. Monthly principal and interest payments are required in the amount of $ 4,902 . Payments for the  three months ended March 31, 2023  and  2022 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 which were subject to the following vesting schedule: (i)  30,000 warrants vested upon the date on which the first financial transaction was processed, which occurred on October 5, 2018; and (ii)  120,000 warrants vested annually over 4 years in 30,000 warrant increments beginning on July 31, 2019 and ending on July 31, 2022. The exercise price for the initial 30,000 warrants was $ 1.80 per share. The exercise price for the remaining 120,000 warrants was 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. At the time of issuance, 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 was amortized over the life of the warrants as a reduction of revenues. The reduction of revenues as a result of this amortization recorded for the three months ended March 31, 2023 and 2022 was $ 0 and $ 8,985 respectively. As of July 31, 2022, the remaining, unvested warrants expired, and the Company is no longer recording a reduction of revenues associated with the amortization of their fair value.   On August 12, 2020, the Company issued 27,051 shares of our 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 our 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 our 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  shares of the Company's common stock with an exercise price of $ 4.23 per share to Information Management Solutions, LLC. The Management Solutions' warrants vest annually over 3 years in three equal tranches beginning on December 15, 2021  and become fully vested on December 15, 2023. At the time of issuance, these 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 is being recorded as an increase in the customer list asset and has a term of five years from time of vesting. The incremental depreciation expense associated with the fair value of the warrants in the three months ended  March 31, 2023 and 2022  was $ 27,614 .   Note 6. Net Income (Loss) Per Share   Basic income (loss) per share (EPS) was computed by dividing net income (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 income (loss) for the  three months ended March 31, 2023 and March 31, 2022 .       Three Months Ended March 31,       2023     2022   Numerator:                 Numerator for basic and diluted income (loss) per share, net income (loss) available to common shareholders   $ 14,833     $ ( 1,622,270 ) Denominator:                 Denominator for basic income (loss) per share, weighted average shares outstanding     20,122,972       20,280,575   Effect of dilutive securities     6,385,900       —   Denominator for diluted earnings per share, adjust weighted average shares and assumed conversion     26,508,872       20,280,575   Basic income (loss) per common share   $ 0.00     $ ( 0.08 ) Diluted income (loss) per common share and common share equivalent   $ 0.00     $ ( 0.08 )   The awards and options to purchase shares of common stock that were outstanding at March 31, 2023 and March 31, 2022 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,       2023     2022   Anti-dilutive awards and options     6,385,900       5,244,902     6 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 are recognized.   The Company has recognized a net deferred tax asset of approximately $ 1.5 million and has recorded a valuation allowance of approximately $ 4.6 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, 2022 , the Company had available net operating loss carryforwards 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.    Net operating loss carryforwards totaling $ 9.1 million expired in  2022. 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   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             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, 2023 and  March 31, 2022 , the Company purchased a total of $ 1,835 and $ 19,929 , respectively, of corporate imprinted sportswear and caps from Angry Pug Sportswear. Louis Hoch, the Company’s Chairman of the Board, 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 in the vesting of stock compensation issued via a  3 -year RSU.   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 .    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  RSUs), Tom Jewell ( 21,000  RSUs), Greg Carter ( 12,000  RSUs) and Houston Frost ( 12,000  RSUs).   The Company granted  69,000  RSUs with a  3 -year vesting period to Directors as a performance bonus on March 16, 2023  at an issue price of $ 1.60 per share. Directors included in the RSU grant were Blaise Bender ( 21,000  RSUs), Brad Rollins ( 21,000  RSUs), Ernesto Beyer ( 21,000  RSUs) and Michelle Miller ( 6,000  RSUs).   7 Table of Contents     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.    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, we do not believe that the Company has been adversely impacted to the same 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.   8 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 "will," "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 this 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, 2022, filed on March 8, 2023, including the audited consolidated financial statements and the notes contained therein.   Overview   Usio, Inc. was founded under the name Billserv Com, Inc. in July 1998 and incorporated in the State of Nevada. On June 26, 2019, we changed our corporate name from Payment Data Systems, Inc. to Usio, Inc. Our principal offices are located at 3611 Paesanos Parkway, Suite 300, San Antonio, TX 78231. Our telephone number is (210) 249-4100.    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.   In addition, we offer customizable prepaid cards which companies use for expense management, incentives, refunds, claims and disbursements, as well as unique forms of compensation such as per diem payments, government disbursements, and similar payments. 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. Our 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.   Our strategy is to drive growth through a leveraged, one to many, distribution model in the software development marketplace. Following the completion of the Singular Payments acquisition, we launched our payment facilitation, PayFac, platform called "PayFac-in-a-Box" in late 2018 targeting partnership opportunities with app and software developers in bill-centric verticals, such as legal, healthcare, property management, utilities and insurance. The PayFac-in-a-Box platform 'integration layer' offers a simple integration experience for technology companies who are looking to monetize payments within an existing base of downstream clients. We believe that the added value of offering our integration partners access to credit card, debit card, ACH and prepaid card issuance capabilities through a single vendor partner relationship in face-to-face, mobile and virtual payment acceptance environments provides a true single channel commerce experience through an application programming interface, API.   With the acquisition of the assets of Information Management Solutions, LLC, or IMS, in December 2020, we began to offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions through our wholly-owned subsidiary, Usio Output Solutions, Inc., or Output Solutions.  This product offering provides an outsourced solution for document design, print and electronic delivery to potential customers and entities looking to reduce postage costs and increase efficiencies.   Summary of Results   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.   We believe that the number of credit card transactions processed, ACH transaction counts, prepaid card volumes and total card volumes are the most critical measures to gauge the state of our business. During the first quarter of 2023, the number of credit card transactions processed by us increased by 24% versus the first quarter of 2022. The volume of credit card dollars processed during the first quarter of 2023 increased by 8% compared to the same time period in 2022. Both the number of credit card transactions and dollars processed by us during the three months ended March 31, 2023 were the highest in our history. The continued growth in credit card metrics was primarily attributable to our PayFac strategy to drive increased penetration across multiple industries including healthcare and legal.    ACH (eCheck) transaction counts during the first quarter of 2023 decreased by 25% compared to the first quarter of 2022. Returned check transactions processed during the first quarter of 2023 decreased by 8% compared to the first quarter of 2022. Electronic check dollars processed during the first quarter of 2023 decreased by 54% compared to the first quarter of 2022. The decreases in eCheck transactions, returns, and electronic check dollar volumes processed were primarily attributable to our withdrawal from the cryptocurrency space following the filing for bankruptcy protection by Voyager Digital on July 6, 2022 and the subsequent decline in processing and revenues in our ACH and complimentary services revenue line of business.   Prepaid card load volumes processed during the first quarter of 2023 decreased by 19% compared to the first quarter of 2022. Prepaid card transaction counts processed during the first quarter of 2023 decreased by 46% compared to the first quarter of 2022. Prepaid card purchase volume during the first quarter of 2023 decreased by 10% compared to the first quarter of 2022. This decrease occurred primarily due to the continued wind down of 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. Prepaid remains involved with guaranteed income and government assistance programs, is expanding its footprint in the corporate expense and healthcare markets, and has established a relationship with MoviePass.   Total dollar volumes processed across all business lines in the first quarter of 2023 were $1.2 billion compared to $2.2 billion processed in the first quarter of 2022 primarily as a result of the decrease in cryptocurrency activity and the winding down of COVID-19 government assistance programs.   Material Trends and Uncertainties   On July 6, 2022, our largest cryptocurrency customer, Voyager Digital, filed for bankruptcy protection and the cryptocurrency landscape encountered significant distress during 2022. Due to this bankruptcy, we lost a significant customer, and have pulled out of the cryptocurrency space, resulting in a meaningful loss of revenue and downturn in our ACH and complementary services business segment, which contributed substantial gross profit to the Company. Our lost revenue in the ACH and complementary services business was approximately $0.8 million in 2022 and $0.5 million in the quarter ended March 31, 2023. We continue to closely monitor the cryptocurrency environment, and the unique risks associated with cryptocurrencies, including technological, legal, and regulatory risks alongside the potentially consequential upsides associated with re-entering the market and offering our services.   On August 16, 2022, President Biden signed the Inflation Reduction Act, or IRA, which implemented a 1% excise tax on certain corporate stock repurchases. On May 13, 2022, the Board of Directors authorized a renewal of the buy-back program, with a limit up to $4 million of the Company's common stock with a three year duration. As of December 31, 2022 the Company had repurchased $1.3 million of stock as part of its buy back program, of which $1.1 million qualifies under the IRA's 1% excise tax. Should the company opt to continue the repurchase of its securities on the open market, and the IRA remain in effect, we may qualify for this tax in 2023, and future years. In March 31, 2023 the Company purchased $8,494 of stock as part of it's stock buy back program that may become eligible for the IRA's 1% excise tax, if the Company meets the IRA's 1% excise tax repurchase minimum of $1 million in stock buy backs.   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. While the general activity of COVID related disbursement programs has largely declined, we currently recognize revenues associated with these programs, and expect to continue recognizing revenues through 2023 and the start of 2024.   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, existing revenues, 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.   Critical Accounting Policies and Estimates   Our management’s discussion and analysis of financial condition and results of operations is based upon our 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, revenue 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, 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 these accounting policies 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.   Reserve for Processing Losses   We establish allowances for negative customer balances and estimated transaction losses arising from processing customer transactions, such as chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery or unsatisfactory delivery of purchased items, account takeovers, Automated Clearing House returns, and insolvency. Additions to the allowance are reflected in our cost of services on our consolidated statements of income (loss). The allowances are based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving collection and write-off patterns, and the mix of transaction and loss types, as well as current and projected factors such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company with its prepaid card holders.   Determining appropriate current expected transactional losses is an inherently uncertain process, and final losses may vary from our current estimates. We regularly review and update our allowance estimates as new facts become known, and event occur that may impact the settlement or recovery of losses. In the quarter ended March 31, 2023, we incurred $833,485 in merchant processing losses as a result of fraudulent activity and identify fraud from multiple merchants, of which $755,494 was taken to our reserve for processing losses. We do not expect similar processing losses in the immediate future, however in the quarter, we are replenishing our reserve for processing losses by the amount of $200,000 for a total balance of $386,789 in the event that future losses are incurred. The allowances are maintained at a level we deem appropriate to adequately provide for current expected losses at the balance sheet date.   Reserve for Doubtful Accounts   We establish an allowance for accounts receivable, which represents our estimate of current expected allowances for doubtful accounts. This evaluation process is subject to numerous estimates and judgements. This allowance is primarily based on expectations of unrecoverable receivables based on historical losses, as well as forecasted trends in customer instability, and general market conditions. The Company reviews this allowance quarterly on an account-by-account basis. Projected loss rates, inclusive of historical loss data and macroeconomic factors, are applied to the principal amount of our merchant and consumer receivables.   Determining appropriate current expected losses on our accounts receivable is an inherently uncertain process, and final losses may vary from our current estimates. We regularly review and update our allowance estimates as new facts become known, and events occur that may impact the settlement or recovery of losses. The allowances are maintained at a level we deem appropriate to adequately provide for current expected losses at the balance sheet date.   Accounting for Income Taxes   Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authority. Significant judgement is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We review our tax positions yearly and adjust the balances as new information becomes available.    Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings, and available tax planning strategies. These rely heavily on estimates that are based on a number of factors, including historical data, and business forecasts. to the extent deferred tax assets are not expected to be realized, we record a valuation allowance.   We recognize and measure uncertain tax positions in accordance with U.S. GAAP, pursuant to which we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities.   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.   Revenue Recognition   Application of the accounting principles in U.S. GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Specifically, the determination of whether we are a principal to a transaction (gross revenue) or an agent (net revenue) can require considerable judgment. Further, we provide incentive payments to consumers and merchants. Evaluating whether these incentives are a payment to a customer, or consideration payable on behalf of a customer, requires judgment. Incentives determined to be made to a customer, or payable on behalf of a customer, are recorded as a reduction to gross revenue. Changes in judgments with respect to these assumptions and estimates could impact the amount of revenue recognized.   9 Table of Contents   Key Business Metric - Non-GAAP Financial Measures   This filing includes the following non-GAAP financial measures as defined in Regulation G of the Securities Exchange Act of 1934, as amended; EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows. The Company reports its financial results in compliance with GAAP, but believes that also discussing non-GAAP financial measures provides investors with financial measures the Company uses in the management of its business. The Company defines EBITDA as operating income (loss), before interest, taxes, depreciation and amortization of intangibles. The Company defines adjusted EBITDA as EBITDA, as defined above, plus non-cash stock option costs and certain non-recurring items, such as costs related to acquisitions. The Company defines adjusted EBITDA margins as adjusted EBITDA, as defined above, divided by total revenues. The Company defines adjusted operating cash flow as net cash provided (used) by operating activities, less changes in prepaid card load obligations, customer deposits, merchant reserves and net operating lease assets and obligations. Operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits and merchant reserves are deducted from operating cash flow, as these metrics do not serve in providing a clear picture of the true operational cash used or provided in a given time period. These measures may not be comparable to similarly titled measures reported by other companies. Management uses EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows as indicators of the Company's operating performance and ability to fund acquisitions, capital expenditures and other investments and, in the absence of refinancing options, to repay debt obligations.    Management believes EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows are helpful to investors in evaluating the Company's operating performance because non-cash costs and other items that management believes are not indicative of its results of operations are excluded.    We reported adjusted EBITDA of  $1.0 million for the quarter ended March 31, 2023, as compared to an adjusted EBITDA loss of $0.3 for the same period in the prior year. The increase in adjusted EBITDA in the 2023 quarter was attributable to minimal increases in SG&A combined with strong revenue growth and increased profit margins.   The following tables set forth reconciliations of Operating income (loss) to EBITDA; EBITDA to Adjusted EBITDA; and Revenues to Adjusted EBITDA margins for the three months ended March 31, 2023 and 2022.       Three Months Ended March 31,       2023     2022                     Reconciliation from Operating income (Loss) to Adjusted EBITDA:                 Operating income (Loss)   $ 5,993     $ (1,551,634 ) Depreciation and amortization     518,029       714,935   EBITDA     524,022       (836,699 ) Non-cash stock-based compensation expense, net     504,574       550,682   Adjusted EBITDA   $ 1,028,596     $ (286,017 )                                     Calculation of Adjusted EBITDA margins:                 Revenues   $ 21,446,244     $ 18,111,343   Adjusted EBITDA     1,028,596       (286,017 ) Adjusted EBITDA margins     4.8 %     (1.6 )%   We reported cash provided by adjusted operating cash flows of $1.3 million for the three months ended March 31, 2023 (after adjusting for the impact of operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits, and merchant reserves), as compared to $0.5 million provided in the three months ended March 31, 2022.  Operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits and merchant reserves are deducted from operating cash flow, as these metrics do not serve in providing a clear picture of the true operational cash used or provided in a given time period. These adjustments to net cash (used) by operating activities do not include any recurring expense items which are included in the calculation of operating income (loss), and only include changes in our assets and liabilities accounts on the balance sheet. The Company believes Non-GAAP adjusted operating cash flow to be a more accurate indicator of cash contributions that can be used to sustain current and future business operations. The increase in adjusted operating cash flows in the 2023 quarter compared to the 2022 quarter was primarily attributable to an increase the Company's net income, due to strong growth in revenue with improved profit margins, alongside relatively flat increases in SG&A.   The following table is a reconciliation of operating cash flow (used) to adjusted operating cash flow (used) for the three months ended March 31, 2023 and 2022.       March 31, 2023     March 31, 2022                     Reconciliation from net cash provided (used) by operating activities to Non-GAAP Adjusted Operating Cash Flow (used):                 Net cash (used) by operating activities   $ (207,292 )   $ (7,223,960 ) Operating cash flow (used) adjustments:                 Prepaid card load obligations     1,357,807       7,743,913   Customer deposits     (20,953 )     (27,272 ) Merchant reserves     164,886       (5,000 ) Operating lease right-of-use assets     31,459       (118,719 ) Operating lease liabilities     (4,548 )     122,594   Total adjustments to net cash (used) by operating activities   $ 1,528,651     $ 7,715,516   Adjusted operating cash flows (used)   $ 1,321,359     $ 491,556     Use of Non-GAAP Financial Measures   EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. They are not measurements of our financial performance under GAAP and should not be considered as alternatives to revenue, net income, or cash provided (used) by operating activities, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows have limitations as analytical tools and you should not consider these Non-GAAP measures in isolation or as a substitute for analysis of our operating results as reported under GAAP.   10 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 program management and processing of prepaid debit cards. With the acquisition of the assets of IMS in December 2020, we began to offer additional output solution services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions.       Three Months Ended March 31,       2023     2022     $ Change     % Change                                     ACH and complementary service revenue   $ 3,340,722     $ 3,843,316     $ (502,594 )     (13 )% Credit card revenue     7,339,898       6,768,222       571,676       8 % Prepaid card services revenue     4,807,404       2,768,447       2,038,957       74 % Output solutions revenue     5,958,220       4,731,358       1,226,862       26 % Total Revenue   $ 21,446,244     $ 18,111,343     $ 3,334,901       18 %   Consolidated Revenue for the quarter ended March 31, 2023 increased by 18% to $21.4 million, as compared to $18.1 million for the quarter ended March 31, 2022 due to continued traction and growth in our Prepaid and Output Solutions lines of business, despite declines in our ACH and complimentary services business sectors. These declines were a result of our ACH business withdrawing from the cryptocurrency industry subsequent to the bankruptcy of Voyager Digital. ACH activity was substantially higher in the quarter ended March 31, 2022 as compared to the same quarter ended  March 31, 2023 as a result of our exit from the cryptocurrency industry following the bankruptcy of Voyager Digital.   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 and 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 $1.9 million, or 13%, to $16.5 million for the quarter ended March 31, 2023, as compared to $14.6 million for the same period in the prior year due to increased revenue growth.    11 Table of Contents   Gross Profit   Gross profit is the net profit existing after the cost of services.   Gross profit increased by 40% to $4.9 million for the quarter ended March 31, 2023, as compared to $3.5 million for the same period in the prior year. Similarly, the gross margin percentage was 22.9% for the quarter ended March 31, 2023 as compared to 19.4% in the prior year period. The increase in gross profit and margin percentage in the quarter ended March 31, 2023, as compared to the same period during the prior year, was primarily attributable to improved profitability metrics across all business lines, driven by more favorable pricing in the quarter.   Stock-based Compensation   Stock-based compensation expenses were $0.5 million for the quarter ended March 31, 2023 as compared to $0.6 million for the quarter ended March 31, 2022, a marginal decrease of 8.4% due to the vesting and forfeiture of various equity grants over the year.   Other Selling, General and Administrative Expenses   Other selling, general and administrative expenses (other SG&A) were $3.9 million for the quarter ended March 31, 2023 as compared to $3.8 million in the prior year, a 2% increase. The increase in other SG&A for the quarter ended March 31, 2023 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 support our current growth. These investments include enhanced security and IT infrastructure, as well as staffing and employee retention.    Depreciation and Amortization     Depreciation and amortization expense consist of the reduction in value of our tangible and intangible assets over their useful life. These assets include property, plant, and equipment, along with intangible assets acquired through acquisition, or developed as internal use software.   Depreciation and amortization totaled $0.5 million and $0.7 million for the quarters ended March 31, 2023 and March 31, 2022, respectively. Depreciation and amortization expense decreased in the quarter due to the completed amortization of intangible assets, reducing overall depreciation and amortization expenses versus the same period a year ago.    Other Income (Expense)   Other income and expense, net was $92,266 for the quarter ended March 31, 2023 compared to $636 for the quarter ended March 31, 2022. Higher interest-bearing merchant reserves and interest rates drove the increased interest income.   Net Income (Loss)   We reported a net income of $0.0 million for the quarter ended March 31, 2023, as compared to a net loss of $1.6 million for the same period in the prior year. The decrease in net loss in the current quarter was attributable to increases in revenue combined with increased 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.   Liquidity and Capital Resources   Our primary sources of liquidity are available cash and cash equivalents and cash flows provided by operations. As of March 31, 2023, we had cash and cash equivalents of  $6.8 million. For the three months ended March 31, 2023, cash used by operations was $0.2 million. We expect available cash and cash equivalents and internally generated funds to be sufficient to support working capital needs, capital expenditures (including acquisitions), and our debt service obligations. We believe we have sufficient liquidity to operate for at least the next 12 months from the date of filing this report. Cash from operating activities is dependent on our net income (loss), less depreciation, amortization, bad debt, deferred federal income tax, non-cash stock-based compensation, the amortization of warrant costs, and net of the changes in our operating assets and liabilities. These assets and liabilities include our accounts receivable, prepaid expenses, operating lease right-of-use assets, inventory, other assets, accounts payable and accrued expenses, operating lease liabilities, prepaid card load obligations, merchant reserves, customer deposits, and deferred revenues.   We reported a net loss of $0.0 million for the quarter ended March 31, 2023. At March 31, 2023, we had an accumulated deficit of $70.8 million. Additionally, we had working capital of $6.6 million and $5.8 million at March 31, 2023 and December 31, 2022, respectively.   From time to time we have sold shares of our common stock in order to provide us liquidity. For example, on November 19, 2021, Voyager Digital purchased 142,857 unregistered shares of common stock at a price of $7.00 per share in a private offering. The gross proceeds to us from the private offering were $1,000,000. We have also sold securities in public offerings from time to time. For example, in September 2020, we sold 4,705,883 shares of our common stock and received net proceeds of approximately $8 million. We cannot assure you that we will be able to sell shares of our equity securities on terms acceptable to us or at all in the future.   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, 2023 was $0.2 million, as compared to net cash used by operating activities of $7.2 million for the three months ended March 31, 2022. Excluding merchant reserves, prepaid card load assets, customer deposits and lease right of use assets and liabilities, our cash provided by operating activities was $1.3 million as compared to cash provided by operating activities of $0.5 million for the three months ended March 31, 2023 and March 31, 2022, respectively. This increase in cash provided by operating activities was primarily attributable to an increase the Company's net income, due to strong growth in revenue with improved profit margins, alongside relatively flat increases in SG&A. We continue to invest resources and infrastructure in our business to achieve scale across all business lines.   Net cash used by investing activities was $217,735 as compared to cash used by investing activities of $72,069 for the three months ended March 31, 2023 and March 31, 2022, 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. The decrease in cash used by investing activities was primarily attributable to the reduced amount of fixed asset purchases relative to the same period a year ago.   Net cash used by financing activities for the three months ended March 31, 2023 was $22,017 and net cash used by financing activities for the three months ended March 31, 2022 was $79,982, respectively. The decrease in cash used by financing activities was due to the Company's stock buyback program, and increased quantity of treasury stock purchased in 2022.   12 Table of Contents   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.