Note 1. Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of Usio, Inc. and its subsidiaries (collectively, the “Company”) have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles ("GAAP") have been omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company's financial position, results of operations and cash flows for such periods. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended  December 31, 2022, as filed with the Commission on  March 8, 2023, and as amended by Form 10-K/A Amendment No. 1 filed with the Commission on May 1, 2023 (together, the "2022 Annual Report"). Results of operations for interim periods are not necessarily indicative of results that  may be expected for any other interim periods or the full fiscal year. References in this quarterly report to "the quarter" or the "second quarter" mean the three month period ended  June 30, 2023 or 2022, as the case may be and unless otherwise noted.

 i Use of Estimates: The preparation of financial statements in conformity with GAAP 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.

 i 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.

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

 i 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.

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

 i Allowance for Estimated Losses: The Company maintains an allowance for estimated doubtful accounts receivable resulting from the inability or failure of the Company’s customers to make required payments. The Company determines the allowance for estimated doubtful accounts receivable losses based on an account-by-account review, taking into consideration such factors as the age of the outstanding balance, historical pattern of collections, and financial condition of the customer. During the six months ended June 30, 2023 and the year ended  December 31, 2022, there were no losses due to bad debt. In the past, losses incurred by the Company due to bad debts were within its expectations. If the financial conditions of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make contractual payments, additional losses  may be incurred in future periods. Estimates for doubtful account losses are variable based on the volume of transactions processed and could increase or decrease accordingly. The allowance for estimated doubtful accounts was $ i 319,000 at June 30, 2023 and December 31, 2022. / 

 i Inventory: Inventory is stated at the lower of cost or net realizable value. At June 30, 2023 and December 31, 2022, inventory consisted primarily of printing and paper supplies used for Output Solutions.

 i Accounting for Internal Use Software: The Company capitalizes the costs associated with software being developed or obtained for internal use when both the preliminary project stage is completed and it is probable that computer software being developed will be completed and placed in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (iii) interest costs incurred, when material, while developing internal-use software. The Company ceases capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose. During the six months ended June 30, 2023 and June 30, 2022, the Company capitalized software costs of $ i 378,197 and $ i 246,210, respectively. / 

 i 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 underperformance 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.  i No impairment losses were recorded in 2022 or during the six months ended June 30, 2023. Management is not aware of any impairment changes that may currently be required; however, the Company cannot predict the occurrence of events that might adversely affect the reported values in the future. / 

 i 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. Estimates for processing losses are variable based on the volume of transactions processed and could increase or decrease accordingly. At June 30, 2023 and December 31, 2022, the Company’s reserve for processing losses was $ i 769,789 and $ i 755,494, respectively. / 

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

Note 2. Leases

The Company leases facilities and office equipment under various operating leases, which generally are expected to be renewed or replaced by other leases. For each of the three months ended June 30, 2023 and 2022, operating lease expenses totaled $ i 257,038 and $ i 239,105, respectively.

Note 3. Accrued Expenses

Accrued expenses consisted of the following balances:

Note 4. Equipment Loan

On March 20, 2021, the Company entered into a debt arrangement to finance $ i 165,996 for the purchase of an Output Solutions sorter. The loan is for a period of  i 36 months with a maturity date of March 20, 2024 and annual interest of  i 3.95%. Monthly principal and interest payments are required in the amount of $ i 4,902. Principal payments for the three months ended  June 30, 2023 and 2022 were $ i 14,171 and $ i 13,622, respectively.

Note 5. Stockholders' Equity

Stock Warrants: On August 21, 2018, the Company issued University FanCards, LLC warrants to purchase  i 150,000 shares of the Company's common stock, which were subject to the following vesting schedule: (i)  i 30,000 warrants vested upon the date on which the first financial transaction was processed, which occurred on October 5, 2018; and (ii)  i 120,000 warrants vested annually over  i 4 years in  i 30,000 warrant increments beginning on July 31, 2019 and ending on July 31, 2022. The exercise price for the initial 30,000 warrants was $ i 1.80 per share. The exercise price for the remaining  i 120,000 warrants was the lesser of $ i 2.00 per share or one hundred and twenty percent ( i 120%) of the market price of the Company's common stock on the vesting date of the warrant. At the time of issuance, the warrants were valued using the Black-Scholes option pricing model. Assumptions used were as follows: (i) the fair value of the underlying stock was $ i 0.94 per share for the 30,000 warrants and $ i 0.90 per share for the 120,000 warrants; (ii) the risk-free interest rate is 2.77%; (iii) the contractual life is  i 5 years; (iv) the dividend yield is 0%; and (v) the volatility is  i 64.6%. The fair value of the warrants was $ i 135,764, which was amortized over the life of the warrants as a reduction of revenues. The reduction of revenues as a result of this amortization recorded for the six months ended June 30, 2023 and 2022 was $ i 0 and $ i 17,970, respectively.

On July 31, 2022, the remaining, unvested warrants expired, and the Company is no longer recording a reduction of revenues associated with the amortization of their fair value.

On December 15, 2020, the Company issued warrants to purchase  i 945,599 shares of the Company's common stock with an exercise price of $ i 4.23 per share to Information Management Solutions, LLC ("Management Solutions"). The Management Solutions' warrants vest annually over  i 3 years in three equal tranches beginning on December 15, 2021 and become fully vested on December 15, 2023. At the time of issuance, these warrants were valued using the Black-Scholes option pricing model. Assumptions used were as follows: (i) the fair value of the underlying stock was $0.58 per share; (ii) the risk-free interest rate was 0.09%; (iii) the contractual life was  i 5 years; (iv) the dividend yield was 0%; and (v) the volatility was  i 59.9%. The fair value of the warrants amounted to $ i 552,283 and was recorded as an increase in the customer list asset and has a term of five years from time of vesting. The amortization of these warrants, which is included in the total amortization expense of the customer list intangible asset, totaled $ i 55,228 in the six months ended  June 30, 2023 and 2022.

Note 6. Net Income (Loss) Per Share

Basic income (loss) per share (EPS) was computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS differs from basic EPS due to the assumed conversion of potentially dilutive awards and options that were outstanding during the period. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net income (loss) for the three and six months ended June 30, 2023 and June 30, 2022.

The awards and options to purchase shares of common stock that were outstanding at June 30, 2023 and June 30, 2022 that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive, are as follows:

Note 7. Income Taxes

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

The Company has recognized a net deferred tax asset of approximately $ i 1.5 million and has recorded a valuation allowance of approximately $ i 4.6 million against the other deferred tax assets. The Company reviews the assessment of the deferred tax asset and valuation allowance on an annual basis or more often when events indicate that a change to the valuation allowance may be warranted.

At  December 31, 2022, the Company had available net operating loss carryforwards of approximately $ i 23.9 million. Net operating loss carryforwards generated during or prior to 2017 are available to offset taxable income of future periods and expire 20 years after the loss was generated. 

Net operating loss carryforwards totaling $ i 9.1 million expired in 2022. The schedule below outlines when the Company's net operating losses for 2017 and prior years were generated and the year they  may expire.

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

Note 8. Related Party Transactions

Louis Hoch