Note

Description of Business and Summary of Significant Accounting Policies

Organization:

Usio, Inc., along with its subsidiaries, FiCentive, Inc., a Nevada corporation, and Zbill, Inc., a Nevada corporation, provides integrated

electronic payment services, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH network to billers and retailers. The company also has an additional wholly-owned subsidiary, Usio Output Solutions, Inc., which is the entity for the Output Solutions operations. In addition, the Company operates various product websites, such as

www.akimbocard.com

www.payfacinabox.com

and

www.singularpayments.com

Principles of Consolidation and Basis of Presentation:

The accompanying consolidated financial statements include the accounts of the Company and its

wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates:

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make

estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition:

Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services.

Revenue is recognized during the period in which the transactions are processed or when the related services are performed. The Company complies with ASC

606

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

days after the end of the processing period. Prepaid card distributors have payment terms of

days following the end of the month. Sales taxes billed are reported directly as a liability to the taxing authority and are

not

included in revenue. Usio Output Solutions, Inc. provides bill preparation, presentment and mailing services. Revenue from Output solutions is recognized when the related services are performed for printing and delivered to USPS for postage.

	Year Ended December 31,
	2020		2019		$ Change			% Change

ACH and complementary service revenue	$	8,471,705	$	9,343,974	$	(872,269	)		(9.3	)%
Credit card revenue		19,453,501		17,329,322		2,124,179			12.3	%
Prepaid card services revenue		3,166,580		1,527,239		1,639,341			107.3	%
Output solutions revenue		1,160,037		—		1,160,037			100.0	%
Total Revenue	$	32,251,823	$	28,200,535	$	4,051,288			14.4	%

Deferred Revenues:

The Company records deferred revenues when it receives payments or issues invoices in advance of transferring control of promised

goods or services to a customer. The advance consideration received from a customer is deferred until the Company provides the customer that product or service. At

December 31, 2020

and

2019

, the deferred revenues totaled

$66,572

and

$123,529.

The deferred revenue balances are as follows:

	2020		2019

Deferred revenues, beginning of period	$	123,529	$	20,000
Deferred revenues, end of period		66,572		123,529
Revenue recognized in the period from amounts included in deferred revenues at the beginning of the period	$	56,957	$	20,000

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

days or less to be cash equivalents.

Settlement Processing Assets and Obligations:

Settlement processing assets and obligations represent intermediary balances arising in our settlement

process for merchants.

Prepaid Card Load Assets:

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

Customer Deposits:

The

Company holds customer deposits primarily for postage expenses to ensure the Company is

not

out of pocket for amounts billed daily by the United States Postal Service. These customer deposits are carried on the Company's balance sheet with a corresponding liability.

Merchant Reserves:

The Company has merchant reserve requirements associated with Automated Clearing House, or ACH transactions. The merchant

reserve assets are carried on the Company's balance sheet with a corresponding liability. Merchant Reserves are set for each merchant. Funds are collected from each merchant and held as collateral to minimize contingent liabilities associated with any losses that

may

occur under the merchant agreement. While this cash is

not

restricted in its use, the Company believes that designating this cash to collateralize Merchant Reserves strengthens its fiduciary standing with the Company's member sponsors and is in accordance with the guidelines set by the card networks.

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

	December 31, 2020		December 31, 2019

Beginning cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves:
Cash and cash equivalents	$	2,137,580	$	2,159,698
Prepaid card load assets		528,434		535,479
Customer deposits		—		—
Merchant reserves		10,016,904		12,645,803
Total	$	12,682,918	$	15,340,980

Ending 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

Accounts Receivable/Allowance for Estimated Losses:

Accounts receivable are reported as outstanding principal net of an allowance for doubtful accounts

$205,522

and

$123,165

December 31, 2020

and

2019

, respectively.

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability or failure of its customers to make required payments. The Company determines the allowance based on an account-by-account review, taking into consideration such factors as the age of the outstanding balance, historical pattern of collections and financial condition of the customer. Past losses incurred by the Company due to bad debts have been within its expectations. If the financial condition of its customers deteriorates, resulting in an impairment of their ability to make contractual payments, additional allowances might be required. Estimates for bad debt losses are variable based on the volume of transactions processed and could increase or decrease accordingly. The Company normally does

not

charge interest on accounts receivable.

Inventory

: Inventory is stated at the lower of cost or net realizable value. At

December 31, 2020,

inventory consisted primarily of printing and paper supplies used for Output solutions.

Property and Equipment:

Property and equipment are stated at cost. Depreciation and amortization are computed on a straight-line method over the

estimated useful lives of the related assets, ranging from

three

ten

years. Leasehold improvements are amortized over the lesser of the estimated useful lives or remaining lease period. Expenditures for maintenance and repairs are charged to expense as incurred.

Accounting for Internal Use Software:

The Company capitalizes the costs associated with software developed and / or software obtained for internal use.

The software is capitalized when both the preliminary project stage is complete, and the software being developed is placed-in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (iii) interest costs incurred, when material, while developing internal-use software. The Company ceases capitalization of such costs

later than the point at which the project is substantially complete and ready for its intended purpose. For the years ended

December 31, 2020

and

December 31, 2019

, the Company capitalized

$759,923

and

$518,785,

respectively.

Concentration of Credit Risk:

Financial instruments that potentially expose the Company to credit risk consist of cash and cash equivalents, and accounts

receivable. The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent account balances exceed the amount insured by the FDIC, which is

$250,000.

Accounts receivables potentially subject the Company to concentrations of credit risk. The Company's customer base operates in a variety of industries and is geographically dispersed. The Company closely monitors extensions of credit. Estimated credit losses have been recorded in the consolidated financial statements. Recent credit losses have been within management's expectations.

customer accounted for more than

10%

of revenues in

2020

2019

Fair Value of Financial Instruments:

Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings are

reflected in the accompanying consolidated financial statements at cost, which approximates fair value because of the short-term maturity of these instruments.

Impairment of Long-Lived Assets and Intangible Assets:

The Company reviews periodically, on at least an annual basis, the carrying value of its long-lived

assets and intangible assets and whenever events or changes in circumstances indicate that the carrying value

may

not

be recoverable. To the extent the fair value of a long-lived asset, determined based upon the estimated future cash inflows attributable to the asset, less estimated future cash outflows, is less than the carrying amount, an impairment loss is recognized.

Reserve for Processing Losses:

If, due to insolvency or bankruptcy of

one

of the Company's merchant customers, or for any other reason, the Company is

not

able to collect amounts from its card processing, credit card, ACH or merchant prepaid customers that have been properly "charged back" by the customer or if a prepaid cardholder incurs a negative balance, the Company must bear the credit risk for the full amount of the transaction. The Company

may

require cash deposits and other types of collateral from certain merchants to minimize any such risk. In addition, the Company utilizes a number of systems and procedures to manage merchant risk. ACH, prepaid and credit card merchant processing loss reserves are primarily determined by performing a historical analysis of our loss experience and considering other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company with its prepaid card holders. This reserve amount is subject to the risk that actual losses

may

be greater than our estimates. The Company has

not

incurred any significant processing losses to date. Estimates for processing losses vary based on the volume of transactions processed and could increase or decrease accordingly. The Company evaluates its risk for such transactions and estimates its potential processing losses based primarily on historical experience and other relevant factors. At

December 31, 2020

and

2019

, respectively, the Company's reserve for processing losses was

$515,199

and

$506,153,

respectively.

Advertising Costs:

Advertising is expensed as incurred. The Company incurred approximately

$59,000

and

$114,000

in advertising costs in

2020

and

2019

respectively.

Income Taxes:

Deferred tax assets and liabilities are recorded based on difference between financial reporting and tax basis of assets and liabilities and are

measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Deferred tax assets are computed with the presumption that they will be realizable in future periods when taxable income is generated. Predicting the ability to realize these assets in future periods requires a great deal of judgment by management. U.S. generally accepted accounting principles prescribe a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Income tax benefits that meet the “more likely than

not”

recognition threshold should be recognized. Goodwill is amortized over

years for tax purposes.

As with all businesses, the Company's tax returns are subject to periodic examination. The Company's federal returns for the past

four

years remain open to examination. The Company is subject to the Texas margin tax and Tennessee franchise tax. Management is

not

aware of any tax positions that would have a significant impact on its financial position.

The Company has approximately

$39.4

million of net operating loss carryforwards. However, the Company cannot predict with reasonable certainty whether all of the available net operating loss carryforwards will be realized in future periods. Accordingly, a valuation allowance has been provided to reduce the net deferred tax assets to

$1.4

million. Management does

not

anticipate a significant change in the assessment and will review the deferred tax asset balance at

December 31, 2021,

or earlier as events

may

warrant.

Stock-Based Compensation:

The Company recognizes as compensation expense all share-based payment awards made to employees and directors,

including grants of stock options and warrants, based on estimated fair values. Fair value is generally determined based on the closing price of the Company's common stock on the date of grant.

401

(k) Plan:

The Company has a defined contribution plan, or

401

(k) Plan, pursuant to Section

401

(k) of the Internal Revenue Code. All eligible full and

part-time employees of the Company who meet certain age requirements

may

participate in the

401

(k) Plan. Participants

may

contribute between

and

15%

of their pre-tax compensation, but

not

in excess of the maximum allowable under the Code. The

401

(k) Plan allows for discretionary and matching contributions by the Company. In

2020

, the Company matched

100%

of employee contributions up to

and

50%

of the employee contribution over

with a maximum employer contribution of

5%.

The Company made matching contributions of

$152,835

and

$126,436

2020

and

2019

, respectively.

Earnings (Loss) Per Share:

Basic and diluted (loss) per common share are calculated by dividing earnings by the weighted average number of common

shares outstanding during the period.

Recently Adopted Accounting Pronouncements:

February 2016,

the FASB issued

, "Leases (Topic

842

)."

This update requires that

a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with terms of

months or less, a lessee is permitted to make an accounting policy election by class of underlying asset

not

to recognize lease assets and liabilities. Similar to previous guidance, the update continues to differentiate between finance leases and operating leases, however this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. The updated guidance leaves the accounting for leases by lessors largely unchanged from existing GAAP. The guidance became effective for the Company on

January 1, 2019.

As a lessee, this standard primarily impacted the Company's accounting for leased facilities and office equipment, for which the Company recognized right of use assets of

$2,688,412

and a corresponding lease liability of

$2,775,259

on the Company's consolidated balance sheet on

January 1, 2019.

The Company adopted these provisions on

January 1, 2019

using the optional transition method that permits the Company to apply the new disclosure requirements in

2019

and continue to present comparative period information as required under FASB ASC Topic

840,

"Leases." The Company did

not

have a cumulative-effect adjustment to the opening balance of retained earnings at the date of adoption. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed it to exclude leases with an initial term of

months or less from the right-of-use assets and liabilities. Adoption of the standards had

impact on the Company's results of operations or liquidity.

If the Company determines that an arrangement is or contains a lease, the Company recognizes a right-of-use (ROU) asset and lease liability at the commencement date of the lease. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do

not

provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company's lease terms

may

include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Lease expenses for lease payments are recognized on a straight-line basis over the lease term.

June 2018,

the FASB issued ASU

2018

, Compensation - Stock Compensation

which expands the scope of current guidance to include all share-based payment arrangements related to the acquisition of goods or services from both non-employees and employees. The guidance is effective for the Company for all fiscal years beginning after

December 15, 2018.

The Company adopted the new standard on

January 1, 2019.

The adoption of the new standard did

not

result in a change to the previously presented financial statements.

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

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.