usio20200630

10-Q 1 usio20210331_10q.htm FORM 10-Q usio20200630_10q.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________.

Commission File Number:000-30152

USIO, INC.

(Exact name of registrant as specified in its charter)

Nevada		98-0190072
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



3611 Paesanos Parkway, Suite 300, San Antonio, TX		78231
(Address of principal executive offices)		(Zip Code)

(210) 249-4100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name on each exchange on which registered
Common stock, par value $0.001 per share	USIO	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging Growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No

As of May 10, 2021, the number of outstanding shares of the registrant's common stock was 25,056,033.

USIO, INC.

INDEX

		Page
PART I – FINANCIAL INFORMATION		1

Item 1.	Financial Statements (Unaudited).	1

	Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020	1

	Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2021 and 2020	2

	Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2021 and 2020	3

	Condensed Consolidated Statements of Stockholders' Equity for the Three Months ended March 31, 2021 and 2020	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	16

Item 4.	Controls and Procedures.	17

PART II – OTHER INFORMATION		17

Item 1.	Legal Proceedings.	17

Item 1A.	Risk Factors.	17

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	18

Item 3.	Defaults Upon Senior Securities.	18

Item 4.	Mine Safety Disclosures (Not applicable).	18

Item 5.	Other Information.	18

Item 6.	Exhibits.	19

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

USIO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2021			December 31, 2020
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	4,284,360		$	5,011,132
Accounts receivable, net		3,597,928			2,863,638
Settlement processing assets		36,792,386			43,558,442
Prepaid card load assets		18,555,474			7,610,242
Customer deposits		1,357,242			1,305,296
Inventory		180,927			176,466
Prepaid expenses and other		524,665			301,755
Current assets before merchant reserves		65,292,982			60,826,971
Merchant reserves		8,317,462			8,265,555
Total current assets		73,610,444			69,092,526

Property and equipment, net		3,226,152			3,105,926

Other assets:
Intangibles, net		5,567,794			6,035,761
Deferred tax asset		1,394,000			1,394,000
Operating lease right-of-use assets		2,750,346			2,671,266
Other assets		353,815			368,078
Total other assets		10,065,955			10,469,105

Total assets	$	86,902,551		$	82,667,557

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	493,348		$	851,349
Accrued expenses		1,971,192			1,463,944
Operating lease liabilities, current portion		427,609			346,913
Equipment loan, current portion		53,135			—
Settlement processing obligations		36,792,386			43,558,442
Prepaid card load obligations		18,555,474			7,610,242
Customer deposits		1,357,242			1,305,296
Deferred revenues		57,353			66,572
Current liabilities before merchant reserve obligations		59,707,739			55,202,758
Merchant reserve obligations		8,317,462			8,265,555
Total current liabilities		68,025,201			63,468,313

Non-current liabilities:
Equipment loan, non-current portion		112,861			—
Operating lease liabilities, non-current portion		2,494,135			2,495,883
Total liabilities		70,632,197			65,964,196

Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; -0- shares outstanding at March 31, 2021 (unaudited) and December 31, 2020, respectively		—			—
Common stock, $0.001 par value, 200,000,000 shares authorized; 26,314,460 and 26,260,776 issued, and 25,013,557 and 24,974,995 outstanding at March 31, 2021 (unaudited) and December 31, 2020, respectively		194,745			194,692
Additional paid-in capital		89,740,284			89,659,433
Treasury stock, at cost; 1,300,903 and 1,285,781 shares at March 31, 2021 (unaudited) and December 31, 2020, respectively		(2,215,175	)		(2,165,721	)
Deferred compensation		(5,671,077	)		(5,926,872	)
Accumulated deficit		(65,778,423	)		(65,058,171	)
Total stockholders’ equity		16,270,354			16,703,361

Total liabilities and stockholders’ equity	$	86,902,551		$	82,667,557

See the accompanying notes to the condensed interim consolidated financial statements.

Table of Contents

USIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended March 31,
	2021			2020

Revenues	$	13,461,550		$	7,771,679
Cost of services		10,554,313			5,843,395
Gross profit		2,907,237			1,928,284

Selling, general and administrative:
Stock-based compensation		327,715			287,710
Other SG&A expenses		2,660,034			2,122,106
Depreciation and amortization		622,207			387,795
Total selling, general and administrative expenses		3,609,956			2,797,611

Operating (loss)		(702,719	)		(869,327	)

Other income and (expense):
Interest income		2,467			11,156
Other income (expense)		—			688
Other income and (expense), net		2,467			11,844

(Loss) before income taxes		(700,252	)		(857,483	)
Income tax expense		20,000			(22,474	)

Net (loss)	$	(720,252	)	$	(835,009	)

Basic (loss) per common share:	$	(0.04	)	$	(0.06	)
Diluted (loss) per common share:	$	(0.04	)	$	(0.06	)
Weighted average common shares outstanding
Basic		19,931,935			13,127,229
Diluted		19,931,935			13,127,229

See the accompanying notes to the condensed interim consolidated financial statements.

Table of Contents

USIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended March 31,
	2021			2020
Operating activities:
Net (loss)	$	(720,252	)	$	(835,009	)
Adjustments to reconcile net (loss) to net cash provided (used) by operating activities:
Depreciation		154,240			137,795
Amortization		467,967			250,000
Bad debt		15,046			—
Non-cash stock-based compensation		327,715			287,710
Amortization of warrant costs		8,985			8,985
Changes in current assets and current liabilities:
Accounts receivable		(749,336	)		191,693
Prepaid expenses and other		(222,910	)		(58,844	)
Operating lease right-of-use assets		(79,080	)		56,727
Other assets		14,263			(20,694	)
Inventory		(4,461	)		—
Accounts payable and accrued expenses		149,247			(165,975	)
Operating lease liabilities		78,948			(54,767	)
Prepaid card load obligations		10,945,232			53,141
Merchant reserves		51,907			(1,492,000	)
Customer deposits		51,946			—
Deferred revenue		(9,219	)		(13,235	)
Net cash provided (used) by operating activities		10,480,238			(1,654,473	)

Investing activities:
Purchases of property and equipment		(274,467	)		(152,654	)
Net cash provided by investing activities		(274,467	)		(152,654	)

Financing activities:
Proceeds from equipment loan		165,996			—
Purchases of treasury stock		(49,454	)		(26,629	)
Net cash provided (used) by financing activities		116,542			(26,629	)

Change in cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves		10,322,313			(1,833,756	)
Cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves, beginning of period		22,192,225			12,682,918

Cash, Cash Equivalents, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End of Period	$	32,514,538		$	10,849,162

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	—		$	—
Income taxes		—			—
Non-cash transactions:
Issuance of deferred stock compensation		—			—

See accompanying notes to the condensed interim consolidated financial statements.

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, 2020		26,260,776		$	194,692		$	89,659,433		$	(2,165,721	)	$	(5,926,872	)	$	(65,058,171	)	$	16,703,361

Issuance of common stock under equity incentive plan		51,000			51			120,484			—			—			—			120,535
Warrant compensation costs		—			—			8,985			—			—			—			8,985
Cashless warrant exercise		19,795			19			(19	)		—			—			—			—
Reversal of deferred compensation amortization that did not vest		(17,111	)		(17	)		(48,599	)		—			5,994			—			(42,622	)
Deferred compensation amortization		—			—			—			—			249,801			—			249,801
Purchase of treasury stock costs		—			—			—			(49,454	)		—			—			(49,454	)
Net (loss) for the period		—			—			—			—			—			(720,252	)		(720,252	)

Balance at March 31, 2021		26,314,460		$	194,745		$	89,740,284		$	(2,215,175	)	$	(5,671,077	)	$	(65,778,423	)	$	16,270,354

Balance at December 31, 2019		18,224,577		$	186,656		$	77,055,273		$	(1,885,452	)	$	(5,636,154	)	$	(62,151,988	)	$	7,568,335

Issuance of common stock under equity incentive plan		51,000			51			59,440			—			—			—			59,491
Warrant compensation costs		—			—			8,985			—			—			—			8,985
Deferred compensation amortization		—			—			—			—			228,219			—			228,219
Purchase of treasury stock costs		—			—			—			(26,629	)		—			—			(26,629	)
Net (loss) for the period		—			—			—			—			—			(835,009	)		(835,009	)

Balance at March 31, 2020		18,275,577		$	186,707		$	77,123,698		$	(1,912,081	)	$	(5,407,935	)	$	(62,986,997	)	$	7,003,392

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

USIO, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of Usio, Inc. and its subsidiaries (the “Company”) have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company's financial position, results of operations and cash flows for such periods. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission on March 30, 2021. Results of operations for interim periods are not necessarily indicative of results that may be expected for any other interim periods or the full fiscal year.

Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition: Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services and bill preparation, presentment and mailing services. Revenue is recognized during the period in which the transactions are processed or when the related services are performed. The Company complies with ASC 606-10 and reports revenues at gross as a principal versus net as an agent. Although some of the Company's processing agreements vary with respect to specific credit risks, the Company has determined for each agreement it is acting in the principal role. Merchants may be charged for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through third-party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations. Certain card distributors remit payment of fees earned 45 days after the end of the processing period. Prepaid card distributors have payment terms of 30 days following the end of the month. Sales taxes billed are reported directly as a liability to the taxing authority and are not included in revenue. Usio Output Solutions, Inc. provides bill preparation, presentment and mailing services. Revenue from Output solutions is recognized when the related services are performed for printing and delivered to USPS for postage.

The following table presents the Company's payment processing service revenues by source:

	Three Months Ended March 31,
	2021		2020

ACH and complementary service revenue	$	3,078,456	$	2,237,746
Credit card revenue		5,723,709		4,982,658
Prepaid card services revenue		886,576		551,275
Output solutions revenue		3,772,809		—
Total revenue	$	13,461,550	$	7,771,679

Deferred Revenues: The Company records deferred revenues when it receives payments in advance of transferring control of promised goods or services to a customer. The advance consideration received from a customer is deferred until the Company provides the customer that product or service. The deferred revenues totaled $57,353 and $66,572 at March 31, 2021 and December 31, 2020, respectively.

Cash and Cash Equivalents: Cash and cash equivalents includes cash and other money market instruments. The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents.

Settlement Processing Assets and Obligations: Settlement processing assets and obligations represent intermediary balances arising in our settlement process for merchants.

Customer Deposits: The Company holds customer deposits primarily for postage expenses to ensure the Company is not out of pocket for amounts billed daily by the United States Postal Service. These customer deposits are carried on the Company's balance sheet with a corresponding liability.

Merchant Reserves: The Company has merchant reserve requirements associated with Automated Clearing House ("ACH") transactions. The merchant reserve assets are carried on the Company's balance sheet with a corresponding liability. Merchant Reserves are set for each merchant. Funds are collected from each merchant and held as collateral to minimize contingent liabilities associated with any losses that may occur under the merchant agreement. While this cash is not restricted in its use, the Company believes that designating this cash to collateralize Merchant Reserves strengthens our fiduciary standing with the Company's member sponsors and is in accordance with the guidelines set by the card networks.

Table of Contents

Prepaid Card Load Assets: The Company maintains pre-funding accounts for its customers to facilitate prepaid card loads as initiated by the customer. These prepaid card load assets are carried on the Company's balance sheet with a corresponding liability.

The reconciliation of cash and cash equivalents to cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves is as follows for each period presented:

	Three Months Ended March 31,
	2021		2020

Beginning cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves:
Cash and cash equivalents	$	5,011,132	$	2,137,580
Prepaid card load assets		7,610,242		528,434
Customer deposits		1,305,296		—
Merchant reserves		8,265,555		10,016,904
Total	$	22,192,225	$	12,682,918

Ending cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves:
Cash and cash equivalents	$	4,284,360	$	1,742,683
Prepaid card load assets		18,555,474		581,575
Customer deposits		1,357,242		—
Merchant reserves		8,317,462		8,524,904
Total	$	32,514,538	$	10,849,162

Allowance for Estimated Losses: The Company maintains an allowance for estimated doubtful accounts receivable resulting from the inability or failure of the Company’s customers to make required payments. The Company determines the allowance for estimated doubtful accounts receivable losses based on an account-by-account review, taking into consideration such factors as the age of the outstanding balance, historical pattern of collections and financial condition of the customer. Past losses incurred by the Company due to bad debts have been within its expectations. If the financial conditions of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make contractual payments, additional allowances might be required. Estimates for doubtful account losses are variable based on the volume of transactions processed and could increase or decrease accordingly. The allowance for estimated doubtful accounts was $205,000 and $205,522 at March 31, 2021 and December 31, 2020, respectively.

Inventory: Inventory is stated at the lower of cost or net realizable value. At March 31, 2021 and December 31, 2020, inventory consisted primarily of printing and paper supplies used for Output solutions.

Accounting for Internal Use Software: The Company capitalizes the costs associated with software being developed or obtained for internal use when both the preliminary project stage is completed, and it is probable that computer software being developed will be completed and placed-in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (iii) interest costs incurred, when material, while developing internal-use software. The Company ceases capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose. In the three months ended March 31, 2021 and March 31, 2020, the Company capitalized $187,914 and $135,419, 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 2020 or during the three months ended March 31, 2021. 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.

Table of Contents

Reserve for Processing Losses: If, due to insolvency or bankruptcy of one of the Company’s merchant customers, or for any other reason, the Company is not able to collect amounts from its credit card, ACH or prepaid customers that have been properly "charged back" by the customer, or if a prepaid cardholder incurs a negative balance, the Company must bear the credit risk for the full amount of the transaction. The Company may require cash deposits and other types of collateral from certain merchants to minimize any such risks. In addition, the Company utilizes multiple systems and procedures to manage merchant risk. ACH, prepaid and credit card merchant processing loss reserves are primarily determined by performing a historical analysis of the Company’s loss experience, considering other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company’s relationship with the Company’s prepaid card holders. This reserve amount is subject to the risk that actual losses may be greater than the Company’s estimates. The Company has not incurred any significant processing losses to date. Estimates for processing losses are variable based on the volume of transactions processed and could increase or decrease accordingly. At March 31, 2021 and December 31, 2020, the Company’s reserve for processing losses was $548,199 and $515,199 respectively.

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.

Note 2. Acquisition of Information Management Solutions, LLC.

On December 15, 2020, the Company entered into an asset purchase agreement to purchase substantially all the assets of Information Management Solutions, LLC ("IMS"), a Texas limited liability company in the business of electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions. The total purchase price consideration consisted of a cash payment of $5,907,408 at closing and warrant considerations valued at $552,283. The warrants were comprised of 945,599 unregistered warrants to purchase shares of common stock of Usio, Inc., or 945,599 shares of common stock, $0.001 par value per share, with an exercise price of $4.23 per share.

The final number of warrants was determined by dividing $2,000,000 by the 5-day weighted average closing price for the four trading days preceding the closing date and the closing day, or $2.115 per share. The exercise price of the warrants was determined by multiplying the 5-day weighted average closing price by the number 2. The warrants vest in three equal installments on the first, second and third anniversary of the closing date and have a term of five years from vest.

The purchase price was allocated to the net assets acquired based upon their estimated fair values as follows:

	Estimated Fair		Estimated Useful
	Value		Life (in years)

Accounts receivable	$	683,736
Inventory		168,138
Fixed assets		1,211,225		5
Prepaid expenses		29,849
Other assets		7,408
Customer list		3,807,052		5
Total Cash Consideration	$	5,907,408

Customer list	$	552,283
Total Warrant Consideration	$	552,283

Total Purchase Price	$	6,459,691

The 2020 consolidated statement of operations included one month of IMS operations, which was approximately $1.2 million of revenue and $0.6 million of gross profit.

Unaudited Pro Forma Information

The unaudited proforma results including the effects of the IMS acquisition as if it had been consummated on January 1, 2019 were included in a Form 8-K/A filed on March 3, 2021 and summarized in the Form 10-K filed on March 30, 2021.

Note 3. Leases

The Company leases facilities and office equipment under various operating leases, which generally are expected to be renewed or replaced by other leases. For the quarter ended March 31, 2021 and 2020, operating lease expenses totaled $104,131 and $68,086, respectively.

Operating lease liabilities as of March 31, 2021 will require the following payments:

2021	$	415,422
2022		563,818
2023		495,565
2024		458,787
2025		353,990
Thereafter		1,115,689
Total minimum lease payments		3,403,271
Less imputed interest		(481,527	)
Total lease liabilities	$	2,921,744

Note 4. Accrued Expenses

Accrued expenses consisted of the following balances:

	March 31, 2021		December 31, 2020

Accrued commissions	$	623,662	$	373,154
Reserve for merchant losses		548,199		515,199
Other accrued expenses		291,552		225,412
Accrued taxes		147,625		132,363
Accrued salaries		360,154		217,816
Total accrued expenses	$	1,971,192	$	1,463,944

Note 5. Equipment Loan

On March 20, 2021, the Company entered into a debit arrangement to finance $165,996 for the purchase of an Output Solutions sorter. The loan is for a period of 36 months with a maturity date of March 20, 2024. The repayment amount is for 36 months at $4,902 per month. Annual payments are $58,821. The financing is at an interest rate of 3.95%.

Note 6. Stockholders' Equity

Stock Warrants: On August 21, 2018, the Company issued University FanCards, LLC a warrant to purchase 150,000 shares of the Company's common stock. 30,000 warrants vested immediately upon the date on which the first financial transaction was processed on a card account issued under the prepaid agreement, which occurred on October 5, 2018. 120,000 warrants will vest annually over 4 years in 30,000 warrant increments beginning on July 31, 2019 and becoming fully vested on July 31, 2022. The exercise price for the 30,000 warrants that vested immediately on October 5, 2018 was $1.80 per share. The exercise price for the remaining 120,000 warrants will be the lesser of $2.00 per share or one hundred and twenty percent (120%) of the market price of the Company's common stock on the vesting date of the warrant. The warrants were valued using the Black-Scholes option pricing model. Assumptions used were as follows: (i) the fair value of the underlying stock was $0.94 for the 30,000 warrants and $0.90 for the 120,000 warrants; (ii) the risk-free interest rate is 2.77%; (iii) the contractual life is 5 years; (iv) the dividend yield is 0%; and (v) the volatility is 64.6%. The fair value of the warrants was $135,764 which will be amortized over the life of the warrants as a reduction of revenues. The reduction of revenues recorded for the three months ended March 31, 2021 and 2020 was $8,985.

On August 12, 2020, the Company issued 27,051 shares of common stock to University FanCards, LLC in a cashless exercise at $3.46 per common share in exchange for 60,000 warrants exercised by FanCards, LLC.

On February 5, 2021, the Company issued 19,795 shares of common stock to University FanCards, LLC in a cashless exercise at $5.88 per common share in exchange for 30,000 warrants exercised by FanCards, LLC.

On December 15, 2020, the Company issued to Information Management Solutions, LLC warrants to purchase 945,599 unregistered warrants to purchase shares of Usio, Inc. or 945,599 shares of common stock, $0.001 par value per share, with an exercise price of $4.23. The warrants were valued using the Black-Scholes option pricing model. Assumptions used were as follows: (i) the fair value of the underlying stock was $0.58; (ii) the risk-free interest rate is 0.09%; (iii) the contractual life is 5 years; (iv) the dividend yield of 0%; and (v) the volatility is 59.9%. The fair value of the warrants amounted to $552,283 and will be recorded as an increase in the customer list asset and have a term of five years from time of vest.

Equity Transactions: On April 1, 2020, the Company granted 1,444,000 shares of common stock with a 10-year vesting period and 103,000 restricted stock units (RSUs) with a 3-year vesting period to employees and Directors as a performance bonus at an issue price of $1.08 per share. Executive officers and Directors included in the grant were Louis Hoch (300,000 shares), Tom Jewell (200,000 shares), Blaise Bender (10,000 RSUs) and Brad Rollins (30,000 RSUs).

On July 1, 2020, Topline Capital Partners, LP purchased 1,796,407 unregistered shares of common stock at an offering price of $1.67 per share in a private offering. The gross proceeds to the Company from the private offering were $3.0 million.

On September 25, 2020, the Company entered into a placement agency agreement with Ladenburg Thalmann & Company Inc. for the issuance and sale of an aggregate of 4,705,883 shares of common stock at an offering price of $1.70 per share in a public offering. The Company agreed to pay Ladenburg a cash fee of equal to $0.12325 per share of common stock sold in the offering as well as legal fees and expenses of up to $100,000. The net proceeds to the Company from the public offering were $7.4 million, after deducting the offering expenses and fees payable by the Company.

Note 7. Net (Loss) Per Share

Basic (loss) per share (EPS) was computed by dividing net (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS differs from basic EPS due to the assumed conversion of potentially dilutive awards and options that were outstanding during the period. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net (loss) for the three months ended March 31, 2021 and March 31, 2020.

	Three Months Ended March 31,
	2021			2020
Numerator:
Numerator for basic and diluted (loss) per share, net (loss) available to common shareholders	$	(720,252	)	$	(835,009	)
Denominator:
Denominator for basic (loss) per share, weighted average shares outstanding		19,931,935			13,127,229
Effect of dilutive securities		—			—
Denominator for diluted earnings per share, adjust weighted average shares and assumed conversion		19,931,935			13,127,229
Basic (loss) per common share	$	(0.04	)	$	(0.06	)
Diluted (loss) per common share and common share equivalent	$	(0.04	)	$	(0.06	)

The awards and options to purchase shares of common stock that were outstanding at March 31, 2021 and March 31, 2020 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,
	2021		2020
Anti-dilutive awards and options		5,094,991		4,023,780

Note 8. Income Taxes

Deferred tax assets and liabilities are recorded based on the difference between financial reporting and tax basis of assets and liabilities and are measured by the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Deferred tax assets are computed with the presumption that they will be realizable in future periods when taxable income is generated. Predicting the ability to realize these assets in future periods requires judgment by management. U.S. generally accepted accounting principles prescribe a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Income tax benefits that meet the “more likely than not” recognition threshold should be recognized.

The Company has recognized a deferred tax asset of approximately $1.4 million and has recorded a valuation allowance of approximately $7.5 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, 2020, the Company had available net operating loss carryforwards of approximately $39.4 million. Net operating loss carryforwards prior to 2017 are available to offset taxable income of future periods and begin to expire in 2021. Effective for tax years ending in 2018, net operating losses can be carried forward to future years indefinitely. Approximately $0.5 million of the total net operating loss carryforward is subject to an IRS Section 382 limitation from 1999.

Management is not aware of any tax positions that would have a significant impact on the Company’s financial position.

Note 9. Related Party Transactions

Louis Hoch

During the three months ended March 31, 2021 and the year ended December 31, 2020, the Company purchased a total of $0 and $9,886, respectively, of corporate imprinted sportswear and caps from Angry Pug Sportswear. Louis Hoch, the Company’s President and Chief Executive Officer, is a 50% owner of Angry Pug Sportswear.

Directors and Officers

On January 6, 2021, the Company repurchased 11,860 shares of common stock at a closing price of $3.25 per share from Tom Jewell, the Company's Chief Financial Officer to cover taxes due.

On January 6, 2020, the Company repurchased 11,860 shares of common stock at a closing price of $1.74 per share from Tom Jewell, the Company's Chief Financial Officer to cover taxes due.

The Company granted 1,444,000 shares of common stock with a 10-year vesting period and 103,000 restricted stock units (RSUs) with a 3-year vesting period to employees and Directors as a performance bonus on April 1, 2020 at an issue price of $1.08 per share. Executive officers and Directors included in the grant were Louis Hoch (300,000 shares), Tom Jewell (200,000 shares), Blaise Bender (10,000 RSUs) and Brad Rollins (30,000 RSUs).

As approved by the Company's Compensation Committee, on November 1, 2020, the Company issued 136,891 shares of common stock to Mr. Louis Hoch, the Company's Chief Executive Officer, valued at $216,000 at the closing price of $1.5779 per share from October 15, 2020 in satisfaction of the terms of the additional bonus of the employment agreement. As part of the transaction, on November 1, 2020, the Company repurchased 54,756 shares from Mr. Hoch to cover withholding taxes due.

Note 10. COVID-19

The ongoing COVID-19 pandemic has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses, “shelter in place” and other governmental regulations, reduced consumer spending due to both job losses and other effects attributable to the COVID-19 pandemic. There remain many uncertainties as a result of the pandemic. As a result of the spread of COVID-19, economic uncertainties could continue to impact our operations. Any potential incremental financial impact is unknown at this time.

At this time, most states are reducing mandated operating restrictions and efforts are underway to provide vaccinations to as many people as possible. During 2020 and 2021, the U.S. government issued several rounds of COVID-19 relief and stimulus payments and other programs to stimulate economic activity and facilitate an economic recovery.

The Company's business was initially adversely affected as 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 the pause placed on past due amounts owed. The level of activity for consumer lending merchants has not returned to pre-COVID levels. The Company received an increase in revenues in its prepaid business line, as the Company was able to work in conjunction with major cities across the U.S. to use the Company's prepaid debit cards to facilitate the transfer of money via debit cards from city foundations to the local residents in need of financial assistance.

The impacts and recovery from the COVID-19 pandemic are still a work in process. The Company was not impacted in the magnitude of other payment processors as its customer base had limited exposure to retail facing businesses. Within that framework, the Company will continue to monitor the overall impact on its operations and take necessary steps to ensure the safety of its employees and the well-being of its customers.

Note 11. Legal Proceedings

Vaden Landers

On January 19, 2021, the Company initiated a lawsuit in Bexar County, Texas against its former Chief Revenue Officer, Vaden Landers. In the lawsuit, which is styled: Usio, Inc. v. Vaden Landers, Cause No. 2021CI01069, 407th Judicial District Court, Bexar County, Texas, the Company alleges that Mr. Landers violated the provisions of his employment agreement dated September 1, 2017 - specifically that Mr. Landers violated his non-compete obligations. The state court lawsuit only seeks injunctive relief against Mr. Landers. The Company also instituted an action before the American Arbitration Association on February 2, 2021.

Mr. Landers initially refused to participate in the arbitration proceeding. After hearings in Bexar County state court proceeding, all of the parties' claims, excluding Mr. Lander's claims for defamation and tortious interference with contract, were ordered to be heard by the American Arbitration Association. The Company denies Mr. Landers’ allegations and does not believe that his counterclaims have any merit.

On or about April 27, 2021, Mr. Landers filed his Answering Statement and Counterclaim against Usio in the arbitration proceeding. Therein, Mr. Landers alleged a variety of defenses to the Company's claim that Mr. Landers violated the non-compete provisions of his Employment Agreement. Mr. Landers also asserts a counterclaim for a declaratory judgment finding the non-compete provisions are unenforceable. Mr. Landers further alleges that the Company breached the terms of his Employment Agreement because Mr. Landers' resignation was for Good Reason thus entitling Mr. Landers to deferred compensation. The Company denies Mr. Landers' allegations.

Through its investigation, the Company has learned that Mr. Landers committed other violations of his employment agreement and intends to pursue those claims in arbitration. Both the state court litigation and the arbitration are in their initial stages. The Company recently served Mr. Landers with a request for production of documents in the Bexar County state court proceeding, but Mr. Landers has not responded at this time.

Aside from the proceedings above, the Company may be involved in legal matters arising in the ordinary course of business from time to time. While the Company believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation will not have a material adverse effect on its business, financial condition or results of operations.

Note 12. Subsequent Events

On April 18, 2021, the Company's Compensation Committee approved an amendment to the employment agreement with Louis Hoch, the Company's Chief Executive Officer. Under the terms of the amendment, Mr. Hoch's annual base salary increases from $350,000 to $566,000 beginning April 18, 2021. Mr. Hoch's entitlement to an annual bonus of $216,000 per year was cancelled as a result of the base salary increase.

The Compensation Committee also approved a change of the term of the employment agreement of Tom Jewell, the Company's Chief Financial Officer, from one to two years with a renewal of one-year increments. The committee further approved the payout of one additional year of Mr. Jewell's base salary upon a change of control in addition to what he was already entitled to under the employment agreement.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

FORWARD-LOOKING STATEMENTS DISCLAIMER

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. If used in this report, the words "anticipate," "believe," "estimate," "intend," and other words or phrases of similar import are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described in our annual report on Form 10-K and other reports we file with the Securities and Exchange Commission. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made. We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.

This discussion and analysis should be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes thereto included in this report, and our annual report on Form 10-K for the fiscal year ended December 31, 2020, filed on March 30, 2021, including the audited consolidated financial statements and the notes contained therein.

Name Change

Effective on June 26, 2019 we changed our corporate name from Payment Data Systems, Inc. to Usio, Inc.

Overview

We provide integrated electronic payment processing services to merchants and businesses, including all types of Automated Clearing House, or ACH processing, credit card, PINless debit, prepaid card and debit card-based processing services. Through Akimbo, under the domain name www.akimbocard.com, we offer MasterCard prepaid cards to consumers for use as a tool to stay on budget, to manage allowances, and to share money with family and friends. We have further developed our Akimbo platform to include Akimbo Now for businesses, Akimbo Gift for consumers and support for Apple Pay®, Android Pay™ and Samsung Pay™. With the acquisition of the assets of IMS in December 2020, we now offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services.

During the first quarter of 2021, the volume of credit card transactions processed increased by 108% versus the first quarter of 2020. The amount of credit card dollars processed during the first quarter of 2021 increased by 60% compared to the same time period in 2020. Both credit card transactions processed and dollars processed were the highest in our history. The continued growth in credit card metrics was primarily attributable to our card processing growth initiatives with the Integrated Payments (Payment Facilitation) segment due to increased penetration of multiple industries including healthcare and legal.

ACH (eCheck) transaction volumes during the first quarter of 2021 increased by 37% compared to the first quarter of 2020. Returned check transactions processed during the first quarter of 2021 increased by 24% compared to the first quarter of 2020. The increases in eCheck transactions and returned check transactions were primarily attributable to higher volumes of activity.

Prepaid card load volume during the first quarter of 2021 increased by 105% compared to the first quarter of 2020. Prepaid card transaction volumes during the first quarter of 2021 increased by 89% compared to the first quarter of 2020. These increases occurred primarily due to the continued implementation and sales of many prepaid government assistance programs including organizations such as Greater Washington Community Foundation (Washington DC Program), United Way of Central and Northeastern Connecticut, Mayor's Fund for Los Angeles, New York Immigration Coalition, One Fair Wage, Inc., Dorcas International of Rhode Island, National Domestic Workers Alliance, Alliance for Open Society International (City of Baltimore) and Compton Community Development Corporation (Compton Pledges Guaranteed Income Program).

Total dollars processed for the first quarter of 2021 were $1.870 billion compared to $877 million in the first quarter of 2020.

Critical Accounting Policies

Our management’s discussion and analysis of our financial condition and results of operations is based upon our interim condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to the reported amounts of revenues and expenses, bad debt, investments, intangible assets, income taxes, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. We consider the accounting policies described in Note 1 to the Notes to the Interim Condensed Consolidated Financial Statements to be critical because the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change or because the impact of the estimates and assumptions on financial condition or operating performance is material.

For a summary of Critical Accounting Policies, please refer to the Notes to Interim Condensed Consolidated Financial Statements, Note 1, Basis of Presentation.

Results of Operations

Revenues

Our revenues are principally derived from providing integrated electronic payment services to merchants and businesses, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH, network and the program management and processing of prepaid debit cards.

	Three Months Ended March 31,
	2021		2020		$ Change		% Change

ACH and complementary service revenue	$	3,078,456	$	2,237,746	$	840,710		37.6	%
Credit card revenue		5,723,709		4,982,658		741,051		14.9	%
Prepaid card services revenue		886,576		551,275		335,301		60.8	%
Output solutions revenue		3,772,809		—		3,772,809		100.0	%
Total Revenue	$	13,461,550	$	7,771,679	$	5,689,871		73.2	%

Revenues for the quarter ended March 31, 2021 increased by 73.2% to $13.5 million, as compared to $7.8 million for the quarter ended March 31, 2020. Excluding the impact of the Output Solutions revenues, the organic growth was 24.6% versus the same period last year. The revenue increases were across all business lines including incremental revenues from our Output Solutions plus double-digit gains in our other business lines as referenced above. During the first quarter we saw a strong rebound in our ACH and complementary service category which was a reversal of recent negative trends.

Cost of Services

Cost of services includes the cost of personnel dedicated to the creation and maintenance of connections to third-party payment processors and the fees paid to such third-party providers for electronic payment processing services. Through our contractual relationships with our payment processors and sponsoring banks, we process ACH and debit, credit or prepaid card transactions on behalf of our customers and their consumers. We pay volume-based fees for debit, credit, ACH and prepaid transactions initiated through these processors or sponsoring banks, and pay fees for other transactions such as returns, notices of change to bank accounts and file transmission. Cost of service fees also include fees paid to referral agents and partners.

Cost of services increased by 81% to $10.6 million for the quarter ended March 31, 2021, as compared to $5.8 million for the same period in the prior year. The increase in the three month period ended March 31, 2021, as compared to the same period in the prior year, was primarily due to the incremental Output Solutions business plus the cost of goods sold component of double-digit revenue growth in each of our business lines.

Table of Contents

Gross Profit

Gross profit is the net profit existing after the cost of services. Gross profits increased by 51% to $2.9 million for the quarter ended March 31, 2021, as compared to $1.9 million for the same period in the prior year. The increase in gross profit for the quarter ended March 31, 2021, as compared to the same period in the prior year, was primarily a result of incremental profits from our Output Solutions business plus profits associated with our double-digit revenue growth in our other business lines.

Stock-based Compensation

Stock-based compensation expenses increased to $327,715 for the quarter ended March 31, 2021 as compared to $287,710 for the quarter ended March 31, 2020. The increase was attributable to our stock grant on April 1, 2020 and incremental stock awards associated with the IMS acquisition.

Other Selling, General and Administrative Expenses

Other selling, general and administrative expenses (SG&A) increased to $2.7 million for the quarters ended March 31, 2021 as compared to $2.1 million in the prior year. The increase in other SG&A reflects our continued investment in our prepaid and PayFac growth initiatives and incremental SG&A expenses associated with the Output Solutions line of business.

Depreciation and Amortization

Depreciation and amortization totaled $0.6 million and $0.4 million for the quarters ended March 31, 2021 and March 31, 2020, respectively. The incremental expense was associated with the amortization of the IMS customer list asset.

Other Income (Expense)

Other income was $2,467 for the quarter ended March 31, 2021 compared to other income of $11,844 for the quarter ended March 31, 2020. Lower interest-bearing merchant reserves and lower interest rates drove the lower other income.

Net Loss

We reported a net loss of $0.7 million for the quarter ended March 31, 2021, as compared to a net loss of $0.8 million for the same period in the prior year.

We may incur future operating losses. To regain and sustain profitability, we must, among other things, incrementally grow and maintain our customer base, sell our ACH, credit card, prepaid product offerings and output solutions offerings to existing and new customers, implement successful marketing strategies, maintain and upgrade our technology and transaction-processing systems, provide superior customer service, respond to competitive developments, attract, retain and motivate personnel, and respond to unforeseen industry developments among other factors.

We believe that our success will 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 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 and 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 capabilities without significantly increasing our operating costs.

Liquidity and Capital Resources

At March 31, 2021, we had $4.3 million of cash and cash equivalents, as compared to $5.0 million of cash and cash equivalents at December 31, 2020.

On September 25, 2020, we entered into a placement agency agreement with Ladenburg Thalmann & Company Inc. for the issuance and sale of an aggregate of 4,705,883 shares of common stock at an offering price of $1.70 per share in a public offering. We agreed to pay Ladenburg a cash fee of equal to $0.12325 per share of common stock sold in the offering as well as legal fees and expenses of up to $100,000. The net proceeds to the Company from the public offering were $7.4 million, after deducting the offering expenses and fees payable by the Company.

Cash Flows

We reported a net loss of $0.7 million for the quarter ended March 31, 2021. At March 31, 2021, we had an accumulated deficit of $65.8 million. Additionally, we had working capital of $5.6 million at March 31, 2021 and December 31, 2020, respectively.

Net cash provided by operating activities, including merchant reserve funds, prepaid card load assets, customer deposits and net lease assets was $10.5 million and net cash used by operating activities of $1.7 million for the three months ended March 31, 2021 and March 31, 2020, respectively. Excluding merchant reserves, prepaid card load assets, customer deposits and lease right-of-use assets and liabilities, our cash used by operating activities was $0.6 million and $0.2 million for the three months ended March 31, 2021 and March 31, 2020, respectively. We continue to invest resources and infrastructure in our prepaid and PayFac integrated payments growth initiatives to achieve scale in these business lines.

Net cash used by investing activities was $274,467 and $152,654 for the three months ended March 31, 2021 and March 31, 2020, respectively. The primary drivers of the capital expenditures were development costs associated with internal use software capitalization.

Table of Contents

Net cash provided from financing activities for the three months ended March 31, 2021 and March 31, 2020 was $0.1 million and $26,629, respectively. The 2021 cash provided from financing activities was primarily a result of proceeds from our equipment loan.

Material Trends and Uncertainties

At this time, certain states are reducing mandated operating restrictions and efforts are underway to provide vaccinations to as many people as possible. During 2020 and 2021, the government issued several rounds of COVID-19 relief and stimulus payments and other programs to stimulate economic activity and facilitate an economic recovery.

Our business was initially 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 the pause placed on past due amounts owed. The level of activity for consumer lending merchants has not returned to pre-COVID levels. We received an increase in revenues in our prepaid business line, as we were able to work in conjunction with major cities across the U.S. to use our prepaid debit cards to facilitate the transfer of money via our debit cards from city foundations to the local residents in need of financial assistance.

The impacts and recovery from the COVID-19 pandemic are still a work in process. To date, we have not been impacted in the magnitude that other payment processors were, as our customer base had limited exposure to retail facing businesses. Within that framework, we will continue to monitor the overall impact on our operations and take necessary steps to ensure the safety of our employees and the well-being of our customers.

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.

Table of Contents

Item 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive and Chief Financial Officers, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report on Form 10-Q. Based on that evaluation, our Chief Executive and Chief Financial Officers concluded that our disclosure controls and procedures as of March 31, 2021 were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive and Chief Financial Officers, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our evaluation of disclosure controls and procedures included an evaluation of certain components of our internal control over financial reporting. Management’s assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance that the control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

Vaden Landers

On January 19, 2021, we initiated a lawsuit in Bexar County, Texas against our former Chief Revenue Officer, Vaden Landers. In the lawsuit, which is styled: Usio, Inc. v. Vaden Landers, Cause No. 2021CI01069, 407th Judicial District Court, Bexar County, Texas, we allege that Mr. Landers violated the provisions of his employment agreement dated September 1, 2017 - specifically that Mr. Landers violated his non-compete obligations. The state court lawsuit only seeks injunctive relief against Mr. Landers. The Company also instituted an action before the American Arbitration Association on February 2, 2021.

Mr. Landers initially refused to participate in the arbitration proceeding. After hearings in Bexar County state court proceeding, all of the parties' claims, excluding Mr. Lander's claims for defamation and tortious interference with contract, were ordered to be heard by the American Arbitration Association. We deny Mr. Landers’ allegations and do not believe that his counterclaims have any merit.

On or about April 27, 2021, Mr. Landers filed his Answering Statement and Counterclaim against Usio in the arbitration proceeding. Therein, Mr. Landers alleged a variety of defenses to Usio's claim that Landers violated the non-compete provisions of his employment agreement. Mr. Landers also asserts a counterclaim for a declaratory judgment finding the non-compete provisions are unenforceable. Mr. Landers further alleges that Usio breached the terms of his employment agreement because Mr. Landers' resignation was for good reason thus entitling Mr. Landers to deferred compensation. We deny Mr. Landers' allegations.

Through our investigation, we have learned that Mr. Landers committed other violations of his employment agreement and intends to pursue those claims in arbitration. Both the state court litigation and the arbitration are in their initial stages. Usio recently served Mr. Landers with a request for production of documents in the Bexar County state court proceeding, but he has not responded at this time.

Aside from these proceedings above, we 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.

Item 1A. RISK FACTORS.

There have been no material changes from risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the Securities and Exchange Commission on March 30, 2021.

Table of Contents

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Recent Sales of Unregistered Securities

On February 5, 2021, we issued 19,795 shares of common stock to University FanCards, LLC in a cashless exercise at $5.88 per common share in exchange for 30,000 warrants exercised by FanCards, LLC.

We relied on the Section 4(a)(2) exemption from securities registration under the federal securities laws for transactions not involving any public offering. No advertising or general solicitation was employed in offering the securities. The securities were issued to an accredited investor. The securities were offered for investment purposes only and not for the purpose of resale or distribution. The transfer thereof was appropriately restricted by us.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On November 2, 2016, we announced that our Board of Directors authorized the repurchase of up to $1 million of our common shares from time to time on the open market, in block transactions, or in privately negotiated transactions. On January 9, 2018, the Board of Directors added an additional $2 million to the buyback plan. The program began on November 16, 2016 and ended on September 29, 2019. At September 29, 2019 when the program ended, $1,374,049 was available under the repurchase plan. On November 7, 2019, the Board of Directors approved the renewal of the share buy-back program. The Board approved a limit of $1,420,000 which was rolled over from the prior buyback program with a three-year duration. The new buyback program terminates on the earliest of September 30, 2022, the date the funds are exhausted, or the date the Board of Directors, at its sole discretion, terminates or suspends the program. The program is used for the purchase of stock from employees and directors, and for open-market purchases through a broker. During the three months ended March 31, 2021, we made the following stock repurchases:

Period	(a) Total number of shares (or units) purchased		(b) Average price paid per share (or unit)		(c) Total number of shares (or units) purchased as part of publicly announced plans or programs		(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs

January 1 - January 31, 2021		14,825	$	3.20		951,130	$	1,072,909
February 1 - March 1, 2021		297	$	6.58		951,427	$	1,070,955
Total		15,122					$	1,070,955

On January 6, 2021, we repurchased 11,860 shares for $38,545 in a private transaction at a closing price on January 6, 2021 of $3.25 per share from Tom Jewell, our Chief Financial Officer to cover his share of taxes.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. MINE SAFETY DISCLOSURES.

Not applicable.

Item 5. OTHER INFORMATION.

On April 18, 2021, our Compensation Committee approved an amendment to the employment agreement with Louis Hoch, our Chief Executive Officer. Under the terms of the amendment, Mr. Hoch's annual base salary increases from $350,000 to $566,000 beginning April 18, 2021. Mr. Hoch's entitlement to an annual bonus of $216,000 per year was cancelled as a result of the base salary increase.

The Compensation Committee also approved a change of the term of the employment agreement of Tom Jewell, our Chief Financial Officer, from one to two years with a renewal of one-year increments. The committee further approved the payout of one additional year of Mr. Jewell's base salary upon a change of control in addition to what he was already entitled to under the employment agreement.

Table of Contents

Item 6. Exhibits.

Exhibit
Number		Description

3.1		Amended and Restated Articles of Incorporation (included as exhibit 3.1 to the Form 10-KSB filed March 31, 2006, and incorporated herein by reference).

3.2		Amendment to Restated Articles of Incorporation (included as exhibit A to the Schedule 14C filed April 18, 2007, and incorporated herein by reference).

3.3		Certificate of Change Filed Pursuant to NRS 78.209 (included as exhibit 3.1 to the Form 8-K filed July 23, 2015, and incorporated herein by reference).

3.4		Articles of Amendment of Restated Articles of Incorporation of Usio, Inc., as amended, effective June 26, 2019 (included as exhibit 3.1 to the Form 8-K filed July 1, 2019, and incorporated herein by reference).

3.5		Amended and Restated By-laws (included as exhibit 3.2 to the Form 10-KSB filed March 31, 2006, and incorporated herein by reference).

3.6		Amendment to the Amended and Restated By-laws (included as exhibit A to Schedule 14C filed April 18, 2007, and incorporated herein by reference).

10.1		Employment Agreement between the Company and Michael R. Long, dated February 27, 2007 (included as exhibit 10.1 to the Form 8-K filed March 2, 2007, and incorporated herein by reference).

10.2		Employment Agreement between the Company and Louis A. Hoch, dated February 27, 2007 (included as exhibit 10.2 to the Form 8-K filed March 2, 2007, and incorporated herein by reference).

10.3		First Amendment to Employment Agreement between the Company and Michael R. Long, dated November 12, 2009 (included as exhibit 10.15 to the Form 10-Q filed November 16, 2009, and incorporated herein by reference).

10.4		First Amendment to Employment Agreement between the Company and Louis A. Hoch, dated November 12, 2009 (included as exhibit 10.16 to the Form 10-Q filed November 16, 2009, and incorporated herein by reference).

10.5		Second Amendment to Employment Agreement between the Company and Michael R. Long, dated April 12, 2010 (included as exhibit 10.16 to the Form 10-K filed April 15, 2010, and incorporated herein by reference).

10.6		Second Amendment to Employment Agreement between the Company and Louis A. Hoch, dated April 12, 2010 (included as exhibit 10.17 to the Form 10-K filed April 15, 2010, and incorporated herein by reference).

10.7		Bank Sponsorship Agreement between the Company and University National Bank, dated August 29, 2011 (included as exhibit 10.18 to the Form 10-K filed April 3, 2012, and incorporated herein by reference).

10.8		Third Amendment to Employment Agreement between the Company and Michael R. Long, dated January 14, 2011 (included as exhibit 10.19 to the Form 10-K filed April 3, 2012, and incorporated herein by reference).

10.9		Third Amendment to Employment Agreement between the Company and Louis A. Hoch, dated January 14, 2011 (included as exhibit 10.20 to the Form 10-K filed April 3, 2012, and incorporated herein by reference).

10.10		Fourth Amendment to Employment Agreement between the Company and Michael R. Long, dated July 2, 2012 (included as exhibit 10.18 to the Form 10-Q filed August 20, 2012, and incorporated herein by reference).

10.11		Fourth Amendment to Employment Agreement between the Company and Louis A. Hoch, dated July 2, 2012 (included as exhibit 10.19 to the Form 10-Q filed August 20, 2012, and incorporated herein by reference).

Table of Contents

10.12		Asset Purchase Agreement, dated December 22, 2014, by and between Akimbo Financial, Inc. and Payment Data Systems, Inc. (included as exhibit 10.1 to the Form 8-K filed December 24, 2014, and incorporated herein by reference).

10.13		Bank Sponsorship Agreement between the Company and Metropolitan Commercial Bank, dated December 11, 2014 (included as exhibit 10.26 to the Form 10-K filed March 30, 2015, and incorporated herein by reference).

10.14		Fifth Amendment to Employment Agreement between the Company and Michael R. Long, dated August 3, 2016 (included as exhibit 10.1 to the Form 8-K filed August 9, 2016, and incorporated herein by reference).

10.15		Fifth Amendment to Employment Agreement between the Company and Louis A. Hoch, dated August 3, 2016 (included as exhibit 10.2 to the Form 8-K filed August 9, 2016, and incorporated herein by reference).

10.16		Sixth Amendment to Employment Agreement between the Company and Michael R. Long, dated September 8, 2016 (included as exhibit 10.1 to the Form 8-K filed September 14, 2016, and incorporated herein by reference).

10.17		Sixth Amendment to Employment Agreement between the Company and Louis A. Hoch, dated September 8, 2016 (included as exhibit 10.2 to the Form 8-K filed September 14, 2016, and incorporated herein by reference).

10.18		Employment agreement between Tom Jewell and Payment Data Systems, Inc., dated January 6, 2017 (included as exhibit 10.1 to the Form 8-K filed January 6, 2017, and incorporated herein by reference).

10.19		Independent Director Agreement, dated May 5, 2017, by and between Payment Data Systems, Inc. and Brad Rollins (included as exhibit 10.1 to the Form 8-K, filed May 11, 2017, and incorporated herein by reference).

10.20†		Membership Interest Purchase Agreement, dated September 1, 2017, by and among Payment Data Systems, Inc., Singular Payments, LLC and Vaden Landers (included as exhibit 10.1 to the Form 8-K, filed September 8, 2017, and incorporated herein by reference).

Table of Contents

10.21		Employment Agreement, dated September 1, 2017, by and between Payment Data Systems, Inc. and Vaden Landers (included as exhibit 10.2 to the Form 8-K, filed September 8, 2017, and incorporated herein by reference).

10.22		First Amendment to Employment Agreement, dated November 27, 2017, by and between Payment Data Systems, Inc. and Tom Jewell (included as exhibit 10.1 to the Form 8-K, filed November 28, 2017, and incorporated herein by reference).

10.23		Lease Agreement dated February 9, 2018 between Payment Data Systems, Inc. and Blauners Paesanos Parkway LP (included as exhibit 10.43 to the Form 10-K, filed March 30, 2018, and incorporated herein by reference).

10.24		Lease Agreement between Payment Data Systems, Inc. and RP Circle 1 Building, LLC dated December 11, 2017 (included as exhibit 10.44 to the Form 10-K, filed March 30, 2018, and incorporated herein by reference).

10.25		Second Amendment to Employment Agreement between the Company and Tom Jewell, dated November 28, 2018 (included as exhibit 10.1 go the Form 8-K filed November 28, 2018, and incorporated herein by reference).

10.26		Independent Director Agreement dated April 1, 2019, by and between Payment Data Systems, Inc. and Blaise Bender (included as exhibit 10.2 to the Form 8-K filed April 3, 2019, and incorporated herein by reference).

10.27+		Securities Purchase Agreement between Usio, Inc. and Topline Capital Partners, L.P. dated July 1, 2020 (included as exhibit 10.1 to the Form 8-K filed on July 6, 2020, and incorporated herein by reference).

10.28		2015 Equity Incentive Plan (included as Appendix B to the Definitive Proxy Statement filed June 5, 2015, and incorporated herein by reference).

10.29		Warrant Agreement between the Company and University FanCards, LLC dated August 21, 2018 (included as exhibit 10.41 to the Form 10-Q filed on November 12, 2020, and incorporated herein by reference).

10.30		Independent Director Agreement dated August 29, 2020, by and between the Company and Ernesto Beyer (included as exhibit 10.1 to the Form 8-K filed on August 31, 2020, and incorporated herein by reference).

10.31		Underwriting Agreement between the Company and Ladenburg Thalmann & Co., Inc. as representative, dated September 23, 2020 (included as exhibit 1.1 to the Form 8-K filed on September 25, 2020, and incorporated herein by reference).

10.32		Third Amendment to the Employment Agreement between the Company and Tom Jewell, effective October 12, 2020 (included as exhibit 10.1 to the Form 8-K filed on October 28, 2020, and incorporated herein by reference).

10.33+		Asset Purchase Agreement between the Company and Information Management Solutions, LLC dated December 15, 2020 (included as exhibit 10.2 to the Form 8-K filed on December 18, 2020, and incorporated herein by reference).

10.34+		Warrant Agreement between the Company and Information Management Solutions, LLC dated December 15, 2020 (included as exhibit 10.2 to the Form 8-K filed on December 18, 2020, and incorporated herein by reference).

10.35		Lease agreement between Information Management Systems, LLC and Industrial Properties Corp. dated June 16, 2011 (included as exhibit 10.40 to the Form 10-K filed on March 30, 2021, and incorporated herein by reference).

10.36		First amendment to lease between Information Management Systems, LLC and Industrial Properties Corp. dated April 4, 2013 (included as exhibit 10.41 to the Form 10-K filed on March 30, 2021, and incorporated herein by reference).

10.37		Second amendment to lease between Information Management Systems, LLC and Industrial Properties Corp. dated March 5, 2018 (included as exhibit 10.42 to the Form 10-K filed on March 30, 2021, and incorporated herein by reference).

10.38		Third amendment to lease between the Company as successor to Information Management Systems, LLC and ICON IPC TX Property Owner Pool 6 West/Southwest, LLC, dated December 22, 2020 (included as exhibit 10.43 to the Form 10-K filed on March 30, 2021, and incorporated herein by reference).

10.39		Lease agreement between the Company and Smartyfi, LLC for Austin offices dated January 1, 2021 (included as exhibit 10.44 to the Form 10-K filed on March 30, 2021, and incorporated herein by reference).

10.40		First amendment to lease between the Company and Paesanos Office Building, LLC for San Antonio offices dated March 15, 2021 (included as exhibit 10.45 to the Form 10-K filed on March 30, 2021, and incorporated herein by reference).

10.41		Seventh Amendment to Employment Agreement between Usio, Inc. and Louis A. Hoch, dated April 18, 2021 (included as exhibit 10.1 to the Form 8-K filed on April 21, 2021, and incorporated herein by reference).

10.42		Fourth Amendment to Employment Agreement between Usio, Inc. and Tom Jewell, dated April 18, 2021 (included as exhibit 10.2 to the Form 8-K filed on April 21, 2021, and incorporated herein by reference).

14.1		Code of Ethics (included as exhibit 14.1 to the Form 10-K filed March 30, 2004, and incorporated herein by reference).

16.1		Letter from Ernst and Young LLP to the Securities and Exchange Commission dated February 10, 2004 (included as exhibit 16 to the Form 8-K filed February 11, 2004, and incorporated herein by reference).

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1		Certification of the Chief Executive Officer and the /Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

101.INS		XBRL Instance Document (filed herewith).

Table of Contents

101.SCH		XBRL Taxonomy Extension Schema Document (filed herewith).

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).

101.LAB		XBRL Taxonomy Extension Label Linkbase Document (filed herewith).

101.PRE		XBRL Taxonomy Presentation Linkbase Document (filed herewith).

†		Confidential treatment has been granted for portions of this agreement.
+		The schedules to the exhibit have been omitted from this filing pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish copies of any such schedules to the SEC upon request.
*		Filed herewith.

Copies of above exhibits not contained herein are available to any stockholder, upon written request to: Chief Financial Officer, Usio, Inc., 3611 Paesanos Parkway, Suite 300, San Antonio, TX 78231.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	USIO, INC


Date: May 13, 2021	By:	/s/ Louis A. Hoch
		Louis A. Hoch
		Chief Executive Officer
		(Principal Executive Officer)

Date: May 13, 2021	By:	/s/ Tom Jewell
		Tom Jewell
		Chief Financial Officer
		(Principal Accounting Officer)

SEC Form 10-Q filed by Usio, Inc.