Usio, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm 25 Consolidated Balance Sheets as of December 31, 2023 and 2022 27 Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 28 Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2023 and 2022 29 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 30 Notes to Consolidated Financial Statements 31 24 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Usio, Inc. and Subsidiaries San Antonio, Texas Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Usio, Inc. and Subsidiaries (collectively referred to as the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows, for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Basis of Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As a part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 25 Table of Contents Intangible Assets – Customer Lists Description of the Matter As of December 31, 2023, the Company had intangible assets relating to acquired customer lists which are recorded at their cost basis net of accumulated amortization. On at least an annual basis, the Company performs an analysis of the carrying value of these customer lists to evaluate the assets for impairment. The customer list is amortized over a five-year term and no impairment has been recognized on the customer list portfolios since their acquisition. We identified the customer list valuation as a critical audit matter because of the significant estimates and forward-looking assumptions used which could be affected by future economic and market conditions. How We Addressed the Matter in Our Audit To test the fair value of the Company's customer list intangible assets, our audit procedures included, among others, evaluating the Company's valuation model, evaluating the method and significant assumptions used, and testing the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We also evaluated whether the key factors considered in the evaluation were consistent with evidence obtained in other areas of the audit. Deferred Tax Assets – Valuation Allowance Description of the Matter The Company recognizes deferred tax assets to the extent that it is expected that these assets are more likely than not to be realized. The Company evaluates the realizability of the deferred tax assets, and to the extent that the Company estimates that it is more likely than not that a benefit will not be realized, the carrying amount of the deferred tax assets is reduced with a valuation allowance. We identified the valuation of deferred tax assets as a critical audit matter because of the significant judgments made by management in projecting future taxable income. How We Addressed the Matter in Our Audit Our audit procedures related to projected future taxable income and the determination of whether it is more likely than not that the deferred tax assets will be realized included the evaluation of the reasonableness of management’s projected future taxable income. We compared the estimates to historical earnings and evaluated the inputs and assumptions used by management for developing future forecasts. /s/ ADKF, P.C. ADKF, P.C. San Antonio, Texas United States March 27, 2024 PCAOB ID 297 We have served as the Company's auditor since 2004. 26 Table of Contents USIO, INC. CONSOLIDATED BALANCE SHEETS December 31, 2023 December 31, 2022 ASSETS Cash and cash equivalents $ 7,155,687 $ 5,709,117 Accounts receivable, net 5,564,138 4,371,640 Settlement processing assets 44,899,603 49,737,068 Prepaid card load assets 31,578,973 20,170,761 Customer deposits 1,865,731 1,554,122 Inventory 422,808 507,355 Prepaid expenses and other 444,071 450,389 Current assets before merchant reserves 91,931,011 82,500,452 Merchant reserves 5,310,095 4,909,501 Total current assets 97,241,106 87,409,953 Property and equipment, net 3,660,092 3,222,816 Other assets: Intangibles, net 1,753,333 2,625,360 Deferred tax asset 1,504,000 1,504,000 Operating lease right-of-use assets 2,420,782 2,795,483 Other assets 355,357 355,357 Total other assets 6,033,472 7,280,200 Total Assets $ 106,934,670 $ 97,912,969 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 1,031,141 $ 858,622 Accrued expenses 3,801,278 3,721,108 Operating lease liabilities, current portion 633,616 617,319 Equipment loan, current portion 107,270 56,429 Settlement processing obligations 44,899,603 49,737,068 Prepaid card load obligations 31,578,973 20,170,761 Customer deposits 1,865,731 1,554,122 Current liabilities before merchant reserve obligations 83,917,612 76,715,429 Merchant reserve obligations 5,310,095 4,909,501 Total current liabilities 89,227,707 81,624,930 Non-current liabilities: Equipment loan, non-current portion 718,980 14,994 Operating lease liabilities, non-current portion 1,919,144 2,338,947 Total liabilities 91,865,831 83,978,871 Stockholders' Equity: Preferred stock, $ 0.01 par value, 10,000,000 shares authorized; - 0 - shares issued and outstanding in 2023 and 2022 — — Common stock, $ 0.001 par value, 200,000,000 shares authorized; 28,671,606 and 27,044,900 issued and 26,332,523 and 25,097,963 outstanding in 2023 and 2022 (see Note 11) 197,087 195,471 Additional paid-in capital 97,479,830 94,048,603 Treasury stock, at cost; 2,339,083 and 1,946,937 shares in 2023 and 2022 (see Note 11) ( 4,362,150 ) ( 3,749,027 ) Deferred compensation ( 6,907,775 ) ( 5,697,900 ) Accumulated deficit ( 71,338,153 ) ( 70,863,049 ) Total stockholders' equity 15,068,839 13,934,098 Total Liabilities and Stockholders' Equity $ 106,934,670 $ 97,912,969 The accompanying notes are an integral part of these consolidated financial statements. 27 Table of Contents USIO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS December 31, 2023 December 31, 2022 Revenues $ 82,591,109 $ 69,428,285 Cost of services 63,992,417 54,835,069 Gross profit 18,598,692 14,593,216 Selling, general and administrative: Stock-based compensation 2,222,969 2,072,041 Other expenses 16,216,690 15,000,487 Depreciation and Amortization 2,081,533 2,735,118 Total operating expenses 20,521,192 19,807,646 Operating (loss) ( 1,922,500 ) ( 5,214,430 ) Other income: Interest income 1,695,122 15,237 Other income (expense) 50,000 — Interest expense ( 5,202 ) ( 4,051 ) Other income and (expense), net 1,739,920 11,186 (Loss) before income taxes ( 182,580 ) ( 5,203,244 ) Federal income tax (benefit) — — State income tax expense 292,524 280,000 Income taxes 292,524 280,000 Net (Loss) $ ( 475,104 ) $ ( 5,483,244 ) (Loss) Per Share Basic (loss) per common share: $ ( 0.02 ) $ ( 0.27 ) Diluted (loss) per common share: $ ( 0.02 ) $ ( 0.27 ) Weighted average common shares outstanding (see Note 12) Basic 20,105,968 20,379,386 Diluted 20,105,968 20,379,386 The accompanying notes are an integral part of these consolidated financial statements. 28 Table of Contents USIO, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Additional Total Common Stock Paid - In Treasury Deferred Accumulated Stockholders' Shares Amount Capital Stock Compensation Deficit Equity Balance at December 31, 2021 26,807,145 $ 195,235 $ 93,100,129 $ ( 2,404,458 ) $ ( 6,842,195 ) $ ( 65,379,805 ) $ 18,668,906 Issuance of common stock under equity incentive plan 369,755 368 1,182,939 — ( 166,329 ) — 1,016,978 Warrant compensation cost — — 20,963 — - — 20,963 Reversal of deferred compensation amortization that did not vest ( 132,000 ) ( 132 ) ( 255,428 ) — 145,498 — ( 110,062 ) Deferred compensation amortization — — — — 1,165,126 — 1,165,126 Purchase of treasury stock — — — ( 1,344,569 ) — — ( 1,344,569 ) Net (loss) for the year — — — — — ( 5,483,244 ) ( 5,483,244 ) Balance at December 31, 2022 27,044,900 $ 195,471 $ 94,048,603 $ ( 3,749,027 ) $ ( 5,697,900 ) $ ( 70,863,049 ) $ 13,934,098 Issuance of common stock under equity incentive plan 1,731,506 1,731 3,619,315 — ( 2,650,505 ) — 970,541 Reversal of deferred compensation amortization that did not vest ( 115,000 ) ( 115 ) ( 188,088 ) — 103,091 — ( 85,112 ) Deferred compensation amortization — — — — 1,337,539 — 1,337,539 Non-cash return of treasury stock — — — ( 156,162 ) — — ( 156,162 ) Purchase of treasury stock — — — ( 456,961 ) — — ( 456,961 ) Net (loss) for the year — — — — — ( 475,104 ) ( 475,104 ) Balance at December 31, 2023 28,661,406 $ 197,087 $ 97,479,830 $ ( 4,362,150 ) $ ( 6,907,775 ) $ ( 71,338,153 ) $ 15,068,839 The accompanying notes are an integral part of these consolidated financial statements. 29 Table of Contents USIO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS December 31, 2023 December 31, 2022 Operating Activities Net (loss) $ ( 475,104 ) $ ( 5,483,244 ) Adjustments to reconcile net (loss) to net cash provided (used) by operating activities: Depreciation 1,209,506 1,196,584 Amortization 872,027 1,538,534 Employee stock-based compensation 2,190,369 2,072,041 Vendor stock-based compensation 32,600 — Amortization of warrant costs — 20,963 Non-cash revenue from return of treasury stock ( 156,162 ) — Changes in operating assets and liabilities: Accounts receivable ( 1,192,498 ) 607,853 Prepaid expenses and other 6,318 ( 23,426 ) Operating lease right-of-use assets 374,701 6,630 Other assets — ( 10,000 ) Inventory 84,547 ( 72,823 ) Accounts payable and accrued expenses 252,689 853,965 Operating lease liabilities ( 403,506 ) ( 24,052 ) Prepaid card load obligations 11,408,212 ( 16,420,132 ) Merchant reserves 400,594 ( 1,471,652 ) Customer deposits 311,609 189,929 Deferred revenue — ( 17,647 ) Net cash provided (used) by operating activities 14,915,902 ( 17,036,477 ) Investing Activities Purchases of property and equipment ( 834,964 ) ( 812,242 ) Net cash (used) by investing activities ( 834,964 ) ( 812,242 ) Financing Activities Payments on equipment loan ( 56,992 ) ( 54,771 ) Purchases of treasury stock ( 456,961 ) ( 1,344,569 ) Net cash (used) by financing activities ( 513,953 ) ( 1,399,340 ) Change in cash, cash equivalents, prepaid card loads, customer deposits and merchant reserves 13,566,985 ( 19,248,059 ) Cash, cash equivalents, prepaid card loads, customer deposits and merchant reserves, beginning of year 32,343,501 51,591,560 Cash, Cash Equivalents, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End of Year 45,910,486 32,343,501 Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 5,202 $ 4,051 Income taxes 116,204 269,500 Non-cash investing and financing activities: Issuance of deferred stock compensation 2,650,505 166,229 Non-cash transaction for acquisition of equipment in exchange for note payable 811,819 — The accompanying notes are an integral part of these consolidated financial statements. 30 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023 and 2022 Note 1. Description of Business and Summary of Significant Accounting Policies Organization: Usio, Inc., along with its subsidiaries, FiCentive, Inc., a Nevada corporation, and Zbill, Inc., a Nevada corporation, provides integrated electronic payment services, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH network to billers and retailers. The Company also has an additional wholly-owned subsidiary, Usio Output Solutions, Inc., which is the entity for the Output Solutions operations. In addition, the Company operates various product websites, such as www.usio.com, www.singularpayments.com, www.payfacinabox.com, www.ficentive.com, www.akimbocard.com, and www.usiooutput.com. Principles of Consolidation and Basis of Presentation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition: Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services. Revenue is recognized during the period in which the transactions are processed or when the related services are performed. The Company complies with ASC 606 - 10 and reports revenues at gross as a principal versus net as an agent. Although some of the Company's processing agreements vary with respect to specific credit risks, the Company has determined for each agreement it is acting in the principal role. Merchants may be charged for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through third -party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations. Certain card distributors remit payment of fees earned 45 days after the end of the processing period. Prepaid card distributors have payment terms of 30 days following the end of the month. Sales taxes billed are reported directly as a liability to the taxing authority and are not included in revenue. Usio Output Solutions, Inc. provides bill preparation, presentment and mailing services. Revenue from Output Solutions is recognized when the related services are performed for printing and delivered to USPS for postage. Year Ended December 31, 2023 2022 $ Change % Change ACH and complementary service revenue $ 14,888,973 $ 14,782,606 $ 106,367 1 % Credit card revenue 28,476,591 27,121,621 1,354,970 5 % Prepaid card services revenue 18,729,350 9,117,670 9,611,680 105 % Output solutions revenue 20,496,195 18,406,388 2,089,807 11 % Total Revenue $ 82,591,109 $ 69,428,285 $ 13,162,824 19 % Deferred Revenues: The Company records deferred revenues when it receives payments or issues invoices in advance of transferring control of promised goods or services to a customer. The advance consideration received from a customer is deferred until the Company provides the customer that product or service. The deferred revenue balances are as follows: 2023 2022 Deferred revenues, beginning of period $ — $ 17,647 Deferred revenues, end of period — — Revenue recognized in the period from amounts included in deferred revenues at the beginning of the period $ — $ 17,647 Cash and Cash Equivalents: Cash and cash equivalents includes cash and other money market instruments. The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. Settlement Processing Assets and Obligations: Settlement processing assets and obligations represent intermediary balances arising in our settlement process for merchants. Prepaid Card Load Assets: The Company maintains pre-funding accounts for its customers to facilitate prepaid card loads as initiated by our customer. These prepaid card load assets are carried on the Company's balance sheet with a corresponding liability. Customer Deposits: The Company holds customer deposits primarily for postage expenses to ensure the Company is not out of pocket for amounts billed daily by the United States Postal Service. These customer deposits are carried on the Company's balance sheet with a corresponding liability. 31 Table of Contents Merchant Reserves: The Company has merchant reserve requirements associated with Automated Clearing House, or ACH transactions. The merchant reserve assets are carried on the Company's balance sheet with a corresponding liability. Merchant Reserves are set for each merchant. Funds are collected from each merchant and held as collateral to minimize contingent liabilities associated with any losses that may occur under the merchant agreement. While this cash is not restricted in its use, the Company believes that designating this cash to collateralize Merchant Reserves strengthens its fiduciary standing with the Company's member sponsors and is in accordance with the guidelines set by the card networks. The reconciliation of cash and cash equivalents to cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves is as follows for each period presented: December 31, 2023 December 31, 2022 Beginning cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves: Cash and cash equivalents $ 5,709,117 $ 7,255,321 Prepaid card load assets 20,170,761 36,590,893 Customer deposits 1,554,122 1,364,193 Merchant reserves 4,909,501 6,381,153 Total $ 32,343,501 $ 51,591,560 Ending cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves: Cash and cash equivalents $ 7,155,687 $ 5,709,117 Prepaid card load assets 31,578,973 20,170,761 Customer deposits 1,865,731 1,554,122 Merchant reserves 5,310,095 4,909,501 Total $ 45,910,486 $ 32,343,501 Accounts Receivable/Allowance for Estimated Credit Losses: Accounts receivable are reported as outstanding principal net of an allowance for expected credit losses of $ 319,000 at December 31, 2023 and 2022 . The Company maintains an allowance for credit losses 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 credit losses 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 credit 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, 2023 and 2022 , inventory consisted primarily of printing and paper supplies used for Output Solutions. Property and Equipment: Property and equipment are stated at cost. Depreciation and amortization are computed on a straight-line method over the estimated useful lives of the related assets, ranging from three to ten years. Leasehold improvements are amortized over the lesser of the estimated useful lives or remaining lease period. Expenditures for maintenance and repairs are charged to expense as incurred. Accounting for Internal Use Software: The Company capitalizes the costs associated with software developed and / or software obtained for internal use. The software is capitalized when both the preliminary project stage is complete, and the software being developed is placed-in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (iii) interest costs incurred, when material, while developing internal-use software. The Company ceases capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose. For the years ended December 31, 2023 and December 31, 2022 , the Company capitalized $ 634,571 and $ 584,246 , respectively. Concentration of Credit Risk: Financial instruments that potentially expose the Company to credit risk consist of cash and cash equivalents, and accounts receivable. The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent account balances exceed the amount insured by the FDIC, which is $250,000. Accounts receivables potentially subject the Company to concentrations of credit risk. The Company’s customer base operates in a variety of industries and is geographically dispersed. The Company closely monitors extensions of credit. Estimated credit losses have been recorded in the consolidated financial statements. Recent credit losses have been within management's expectations. No customer accounted for more than 10% of revenues in 2023 or 2022 . 32 Table of Contents Fair Value of Financial Instruments: Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings are reflected in the accompanying consolidated financial statements at cost, which approximates fair value because of the short-term maturity of these instruments. Impairment of Long-Lived Assets and Intangible Assets: The Company reviews periodically, on at least an annual basis, the carrying value of its long-lived assets and intangible assets and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the fair value of a long-lived asset, determined based upon the estimated future cash inflows attributable to the asset, less estimated future cash outflows, is less than the carrying amount, an impairment loss is recognized. Reserve for Processing Losses: If, due to insolvency or bankruptcy of one of the Company’s merchant customers, or for any other reason, the Company is not able to collect amounts from its card processing, credit card, ACH or merchant prepaid customers that have been properly "charged back" by the customer or if a prepaid cardholder incurs a negative balance, the Company must bear the credit risk for the full amount of the transaction. The Company may require cash deposits and other types of collateral from certain merchants to minimize any such risk. In addition, the Company utilizes a number of systems and procedures to manage merchant risk. ACH, prepaid and credit card merchant processing loss reserves are primarily determined by performing a historical analysis of our loss experience and considering other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company with its prepaid card holders. This reserve amount is subject to the risk that actual losses may be greater than our estimates. The Company has not incurred any significant processing losses to date. Estimates for processing losses vary based on the volume of transactions processed and could increase or decrease accordingly. The Company evaluates its risk for such transactions and estimates its potential processing losses based primarily on historical experience and other relevant factors. At December 31, 2023 and 2022 , respectively, the Company’s reserve for processing losses was $ 826,528 and $ 755,494 , respectively. Advertising Costs: Advertising is expensed as incurred. The Company incurred approximately $ 16,500 and $ 94,000 in advertising costs in 2023 and 2022 , respectively. Income Taxes: Deferred tax assets and liabilities are recorded based on difference between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Deferred tax assets are computed with the presumption that they will be realizable in future periods when taxable income is generated. Predicting the ability to realize these assets in future periods requires a great deal of judgment by management. U.S. generally accepted accounting principles prescribe a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Income tax benefits that meet the “more likely than not” recognition threshold should be recognized. Goodwill is amortized over 15 years for tax purposes. As with all businesses, the Company’s tax returns are subject to periodic examination. The Company’s federal returns for the past four years remain open to examination. The Company is subject to the Texas margin tax and Tennessee franchise tax. Management is not aware of any tax positions that would have a significant impact on its financial position. Stock-Based Compensation: The Company recognizes as compensation expense all share-based payment awards made to employees and directors, including grants of stock options and warrants, based on estimated fair values. Fair value is generally determined based on the closing price of the Company’s common stock on the date of grant. 401 (k) Plan: The Company has a defined contribution plan, or 401 (k) Plan, pursuant to Section 401 (k) of the Internal Revenue Code. All eligible full and part-time employees of the Company who meet certain age requirements may participate in the 401 (k) Plan. Participants may contribute between 1 % and 80 % 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 2023 , the Company matched 100 % of employee contributions up to 3 % and 50 % of the employee contribution over 3 % with a maximum employer contribution of 4 %. The Company made matching contributions of $ 280,619 and $ 262,530 in 2023 and 2022 , respectively. 33 Table of Contents Earnings (Loss) Per Share: Basic and diluted (loss) per common share are calculated by dividing earnings by the weighted average number of common shares outstanding during the period. Recently Adopted Accounting Pronouncements : In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016 - 13, Financial Instruments - Credit Losses (Topic 326 ), to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in Topic 326 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Topic 326 is effective for fiscal years beginning after December 25, 2022, including interim periods within those fiscal years for smaller reporting companies. We adopted this guidance effective January 1 2023 on a prospective basis. Our financial statements were not materially impacted upon adoption. For additional information, see "Note 4 - Valuation Accounts." 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. 34 Table of Contents Note 2. Property and Equipment Property and equipment consisted of the following at December 31: 2023 2022 Software $ 7,688,476 $ 7,053,905 Equipment 3,542,707 2,530,498 Furniture and fixtures 818,522 818,522 Leasehold improvements 207,624 207,624 Total property and equipment 12,257,329 10,610,548 Less: accumulated depreciation ( 8,597,237 ) ( 7,387,732 ) Net property and equipment $ 3,660,092 $ 3,222,816 Note 3. Intangibles Akimbo Financial, Inc. Acquisition ( 2015 ) On December 22, 2014, we acquired substantially all of the assets of Akimbo Financial, Inc. The intangibles acquired in the acquisition consist of the customer list and contracts at cost of $ 396,824 (net of accumulated amortization of $ 396,824 at December 31, 2023 ) and goodwill of $ 9,759 . The intangible asset was fully amortized as of December 31, 2017. The fair value of the customer list and contracts was calculated using the net present value of the projected gross profit to be generated by the customer list over a period of 36 months beginning in January 2015 and was amortized over 3 years at $ 163,139 annually. Goodwill was determined based on the purchase price paid over the assets acquired and has an indefinite life, which is tested for impairment annually. Singular Payments, LLC Acquisition ( 2017 ) On September 1, 2017, we acquired all of the membership interest of Singular Payments, LLC. The intangibles acquired in such acquisition consist of customer list assets of $ 5,000,000 at cost (net of accumulated amortization of $ 5,000,000 at December 31, 2023 ). The fair value of the customer list was calculated using the net present value of the projected gross profit to be generated by the customer list over 60 months beginning in September 2017 and ending in August 2022. Amortization expense in 2023 and 2022 was $ 0 and $ 666,667 respectively. Information Management Solutions, LLC Acquisition ( 2020 ) On December 15, 2020, we acquired substantially all of assets of Information Management Solutions, LLC. The intangibles acquired in such acquisition consist of customer list assets of $ 4,359,335 at cost (net of accumulated amortization of $ 2,615,761 at December 31, 2023 ). The fair value of the customer list was calculated using the net present value of the projected gross profit to be generated by the customer list over 60 months beginning in January 2021 and ending in December 2025. Annual amortization expense will be $ 871,867 per year through the year 2025. Note 4. Valuation Accounts Valuation and allowance accounts included the following at December 31: Net Charged Balance to Balance End Beginning of Costs and of Year Expenses Transfers Net Write-Off Year 2023 Allowance for expected credit losses $ 319,000 $ — $ — $ — $ 319,000 Reserve for processing losses 755,494 71,034 — — 826,528 2022 Allowance for expected credit losses $ 319,000 $ — $ — $ — $ 319,000 Reserve for processing losses 623,494 132,000 — — 755,494 35 Table of Contents Note 5. Loans Equipment Loans On March 20, 2021, the Company entered into a debt arrangement to finance $ 165,996 for the purchase of an Output Solutions sorter. The loan is for a period of 36 months with a maturity date of March 20, 2024. The repayment amount is for 36 months at $ 4,902 per month. Annual payments are $ 58,821 . The financing is at an interest rate of 3.95 %. Current year payments on the Equipment Loan were $ 54,634 . On October 1, 2023, the Company entered into a debt arrangement to finance $ 811,819 for the purchase of an Output Solutions folder and inserter. The loan is for a period of 66 months with a maturity date of April 5, 2029 and annual interest of 6.75 %. Monthly principal and interest payments are required in the amount of $ 16,017 . Current year payments on the Equipment Loan were $ 9,894 . Note 6. Accrued Expenses Accrued expenses consisted of the following balances at December 31: 2023 2022 Accrued commissions $ 2,433,353 $ 1,479,580 Reserve for processing losses 826,528 755,494 Other accrued expenses 246,444 821,167 Accrued taxes 294,953 320,854 Accrued salaries — 344,013 Total accrued expenses $ 3,801,278 $ 3,721,108 Note 7. Operating Leases The Company leases approximately 10,535 square feet of office space for its San Antonio, TX executive offices and operations. Rental expense under the operating lease was $ 157,682 and $ 150,129 for the years ended December 31, 2023 and 2022 , respectively. The lease expires on July 31, 2024. The Company leased approximately 3,794 square feet of office space for its Nashville, Tennessee sales offices and operations. Rental expense under the operating lease was $ 36,995 and $ 102,976 for the years ended December 31, 2023 and 2022 , respectively. The lease expired on April 30, 2023. We did enter into a lease extension, or new lease agreement in Nashville, Tennessee upon the expiration of the lease agreement. The Company assumed a lease in San Antonio, Texas as a part of the Information Management Solutions, LLC acquisition for its Output Solutions employees and warehouse operations. The lease has a remaining life of 45 months and expires on September 30, 2024. The space leased is 22,400 square feet. Annual rents during the lease term range from $ 123,554 to $ 133,703 . Rental expense for the years ended December 31, 2023 and 2022 was $ 117,836 and $ 112,504 respectively. On January 1, 2021, we entered into a lease in Austin, Texas commencing on January 1, 2021 for our Austin technology organization. The lease is for a period of 25 months and expires on January 31, 2023. The space leased is 1,890 square feet. Rental expense for the years ended December 31, 2023 and 2022 was $ 79,467 and $ 83,610 respectively. On January 26, 2023, the Company entered into a lease amendment commencing on February 1, 2023, extending the term of the existing lease for a period of 23 months and expiring on January 31, 2025. On March 15, 2021, we entered into a lease amendment to our existing lease in San Antonio, Texas commencing April 1, 2021 and expiring on September 30, 2024 running concurrently with the existing lease. The incremental space leased is 2,734 square feet. The incremental annual rent during the lease term ranges from $ 56,047 to $ 60,148 . Rental expense for the years ended December 31, 2023 and 2022 was $ 48,113 and $ 46,658 respectively. On October 19, 2021, the Company entered into a lease amendment to the existing lease in San Antonio, Texas commencing April 1, 2022 and expiring on September 24, 2024 running concurrently with the existing lease. The incremental space lease is 6,628 square feet. The incremental annual rent during the lease term ranges from $ 135,874 to $ 145,816 . Rental expense for the year ended December 31, 2023 and 2022 was $ 104,375 and $ 75,269 respectively. The Company has various copier equipment with leases that have not expired. Rental expense under the operating lease was $ 6,546 and $ 12,729 for the years ended December 31, 2023 and 2022 , respectively. The weighted average remaining lease term is 4.20 years. The weighted average discount rate is 4.47 % The Company recognized total operating lease expense of approximately $ 674,000 and $ 711,000 for the years ended December 31, 2023 and 2022 , respectively. In 2023 , the operating lease expense of $ 674,000 consisted of $ 544,000 of fixed operating expense and $ 130,000 of interest expense. The maturities of lease liabilities are as follows at December 31, 2023 : Year ended December 31, 2024 $ 633,616 2025 454,928 2026 447,683 2027 447,683 2028 447,683 Thereafter 478,836 Total minimum lease payments 2,910,429 Less imputed interest ( 357,669 ) Total lease liabilities $ 2,552,760 36 Table of Contents Note 8. Related Party Transactions Louis Hoch During the year ended December 31, 2023 and 2022 , the Company purchased $ 24,389 and $ 22,835 , respectively, of corporate imprinted sportswear, promotional items and caps from Angry Pug Sportswear. Louis Hoch, Chairman, President, Chief Executive Officer, and Chief Operating Officer is a 50 % owner of Angry Pug Sportswear. Officers and Directors On January 6, 2022, we repurchased 11,361 shares for $ 47,930 in a private transaction at the closing price on January 6, 2022 of $ 4.21 per share from Tom Jewell, the Company's former Chief Financial Officer, to cover his share of taxes. On October 4, 2022, we repurchased 26,234 shares for $ 42,761 in a private transaction at the closing price on October 4, 2022 of $ 1.63 per share from Louis Hoch, the Company's Chairman, President, Chief Executive Officer and Chief Operating Officer, to cover his share of taxes. On November 18, 2023 we repurchased 2,619 shares for $ 4,452 in a private transaction at a closing price on November 18, 2023 of $ 1.70 per share from Tom Jewell, the Company's former Chief Financial Officer, to cover his share of taxes. On November 18, 2023 we repurchased 3,927 shares for $ 6,675 in a private transaction at a closing price on November 18, 2023 of $ 1.70 per share from Louis Hoch, the Company's Chairman, President, Chief Executive Officer and Chief Operating Officer, to cover his share of taxes. On February 8, 2022, the Company granted 1,000 RSUs with a 3 -year vesting period to Houston Frost as a performance bonus at an issue price of $ 3.32 per share. On June 26, 2022, the Company granted 66,667 RSUs with a 3 -year vesting period to Elizabeth Michelle Miller for joining the Board of Directors at an issue price of $ 2.28 per share. Effective on February 17, 2023, the Company entered into an employment agreement with Greg Carter, the Company’s Executive Vice President, Payment Acceptance. Under the terms of this agreement, Mr. Carter will receive an annual salary of $250,000, Override/Commissions of 10 % of the actual cash commissions paid to salespersons under direct management of Mr. Carter, to be paid quarterly, and the payment of a one -time signing bonus of $ 40,000 . On February 8, 2023, the Company granted 1,403,000 shares of restricted common stock with a 10 -year vesting period and 273,000 RSUs with a 3 -year vesting period to employees and Directors as a performance bonus at an issue price of $ 1.75 per share. Executive officers and Directors included in the 10 -year restricted stock grant were Louis Hoch ( 330,000 shares), Tom Jewell ( 200,000 shares), Greg Carter ( 100,000 shares) and Houston Frost ( 100,000 shares). Executive officers included in the RSU grant were Louis Hoch ( 33,000 RSUs), Tom Jewell ( 21,000 RSUs), Greg Carter ( 12,000 RSUs) and Houston Frost ( 12,000 RSUs). On March 16, 2023, the Company granted 69,000 RSUs with a 3 -year vesting period to Directors as a performance bonus at an issue price of $ 1.60 per share. Directors included in the RSU grant were Blaise Bender ( 21,000 RSUs), Brad Rollins ( 21,000 RSUs), Ernesto Beyer ( 21,000 RSUs) and Michelle Miller ( 6,000 RSUs). On November 30, 2023, Tom Jewell, the Senior Vice President, Chief Financial Officer, and principal financial and accounting officer of the Company notified the Company of his intention to retire. On December 11, 2023, Mr. Jewell entered into a Separation and Mutual Release of Claims Agreement (“Separation Agreement”) with the Company. Pursuant to the Separation Agreement, Mr. Jewell will be paid installment payments equal to his current base salary until and including April 18, 2024. Additionally, Mr. Jewell will be permitted to retain any unvested Company stock options or other equity awards which shall vest in accordance with the applicable schedules. Mr. Jewell will also receive all employee benefits including, but not limited to, health, dental, vision and life insurances that he was receiving prior to his execution of the Agreement until April 18, 2024. Note 9. Income Taxes Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax asset are as follows at December 31: 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 4,686,000 $ 5,024,000 Depreciation and amortization 1,137,000 1,159,000 Non-cash compensation 1,649,000 ( 117,000 ) Other 124,000 69,000 Total 7,596,000 6,135,000 Valuation Allowance ( 6,092,000 ) ( 4,631,000 ) Deferred tax asset $ 1,504,000 $ 1,504,000 Management has reviewed its net deferred asset position, and due to the history of operating losses has determined that the application of a valuation allowance at December 31, 2023 and 2022 is warranted. If applicable, the Company would recognize interest expense and penalties related to uncertain tax positions in interest expense. As of December 31, 2023 , the Company had not accrued any interest or penalties related to uncertain tax provisions. 37 Table of Contents The Company has net operating loss carryforwards for tax purposes of approximately $ 23.3 million. Net operating loss carryforwards prior to 2017 are available to offset taxable income of future periods and expire 20 years after the loss was generated. The schedule below outlines when our pre- 2017 net operating losses were generated and the year they may expire. Tax Year End NOL Expiration 2005 $ 1,768,851 2025 2006 1,350,961 2026 2007 1,740,724 2027 2008 918,960 2028 2009 835,322 2029 2010 429,827 2030 2013 504,862 2033 2016 474,465 2036 2017 1,267,336 2037 Total $ 9,291,308 Effective for tax years ending in 2018 or later, net operating losses cannot be carried back but can be carried forward to future tax years indefinitely, subject to annual limitations for utilization. Net operating losses generated in 2018 and later total approximately $ 13,023,000 . The tax provision for federal and state income tax is as follows for the years ended December 31: 2023 2022 Current provision: Federal $ — $ — State 292,524 280,000 292,524 280,000 Deferred provision: Federal expense (benefit) — — Expense for income taxes $ 292,524 $ 280,000 The reconciliation of federal income tax computed at the U.S. federal statutory tax rates to total income tax expense is as follows for the years ended December 31: 2023 2022 Income tax (benefit) at 21 % $ ( 99,772 ) $ ( 1,134,200 ) Change in valuation allowance ( 1,361,228 ) ( 581,000 ) Permanent and other differences 1,461,000 1,715,200 Federal income tax (benefit) — — State taxes 292,524 280,000 Income tax expense $ 292,524 $ 280,000 38 Table of Contents Note 10. Stock Options, Incentive Plans, Stock Awards, and Employee Benefit Plan Stock Option Plans: The Company’s 2015 Equity Incentive Plan provides for the grant of incentive stock options as defined in Section 422 of the Internal Revenue Code and the grant of Stock Options, Restricted Stock, Restricted Stock Units, Performance Awards, or other Awards to employees, non-employee directors, and consultants. The Board of Directors has authorized 5,000,000 shares of common capital stock for issuance under the 2015 Equity Incentive Plan, including automatic increases provided for in the 2015 Equity Incentive Plan through fiscal year 2025. The number of shares of common stock reserved for issuance under the 2015 Equity Incentive Plan will automatically increase, with no further action by the stockholders, on the first business day of each fiscal year during the term of the 2015 Equity Incentive Plan, beginning January 1, 2016, in an amount equal to 5 % of the issued and outstanding shares of common stock on the last day of the immediately preceding year, or such lesser amount if so determined by the Board or the Plan Administrator. During 2023 , the Company granted 273,000 shares of stock to several employees as incentive compensation or new-hire bonuses. During 2023 , the Company granted 402,900 restricted stock units to employees and directors as a new hire bonus or as incentive compensation. Treasury Stock : The Company purchased 26,606 shares of common stock with a value of $ 47,382 to cover the employee's share of tax liabilities related to the vesting of commons stock and restricted stock units in 2023. Stock Awards : The Company has granted restricted stock awards to its employees at different periods from 2005 through 2023. The majority of the shares granted to those employees vest 10 years from the grant date and are forfeited in the event that the recipient’s employment relationship with the Company is terminated prior to vesting. During 2023 , a portion of the restricted stock awards were granted, but not issued and are not listed as outstanding in the financial statements for 2023 . Stock-based compensation expense related to stock and restricted stock awards was $ 2.2 million in 2023 and $ 2.1 million in 2022 . A summary of stock awards outstanding and 2023 activities are as follows: Weighted Average Weighted Average Contractual Aggregate Intrinsic Stock Awards Shares Exercise Price Remaining Life Value Outstanding, December 31, 2022 4,982,900 $ 2.27 Granted 1,520,000 1.74 Vested 3,000 — Forfeited 115,000 — Outstanding, December 31, 2023 6,384,900 $ 2.17 5.13 $ ( 0.45 ) Expected to Vest after December 31, 2023 6,384,900 $ 2.17 5.13 $ ( 0.45 ) As of December 31, 2023 , there was $ 6,907,775 of unrecognized compensation costs related to the un-vested share-based compensation arrangements granted. The cost is expected to be recognized over the weighted average remaining contractual life of 5.13 years. The aggregate intrinsic value represents the difference between the weighted average exercise price and the closing price of the Company’s stock on December 31, 2023 , or $ 1.72 . Employee Stock Purchase Plan : The Company's board of directors adopted the 2023 Employee Stock Purchase Plan (the “ESPP”) and the Company's stockholders approved the ESPP in July 2023. The ESPP was adopted under the requirements of Section 423 of the Internal Revenue Code to allow eligible employees to purchase the Company’s common stock at regular intervals. Participating employees may purchase common stock through voluntary payroll deductions at the end of each participation period at a purchase price equal to 85 % of the lower of the fair market value of the common stock at the beginning or the end of the participation period. The ESPP initially authorized the issuance of 2,500,000 shares of our common stock under purchase rights granted to our employees or to employees of any of our designated affiliates. The number of shares of our common stock reserved for issuance automatically increases on January 1 of each calendar year, beginning on January 1, 2024 through December 31, 2033, by the lesser of (i) 1 % of the total number of shares of our common stock outstanding on the last day of the fiscal year before the date of the automatic increase (determined on an as-converted to voting common stock basis); and (ii) such number of shares of common stock that would cause the aggregate number of shares of common stock then reserved for issuance under the ESPP to not exceed 2,500,000 shares; provided that before the date of any such increase, our board of directors may determine that there will be no increase or that such increase will be for a lesser number of shares. As of the date hereof, no shares of our common stock have been purchased under the ESPP. Stock Warrants : On December 15, 2020, the Company issued warrants to purchase 945,599 unregistered warrants to purchase shares of Usio, Inc. for 945,599 shares of our common stock, with an exercise price of $ 4.23 to IMS. The warrants were valued using the Black-Scholes option pricing model. Assumptions used were as follows: (i) the fair value of the underlying stock was $0.58; (ii) the risk-free interest rate is 0.09%; (iii) the contractual life is 5 years; (iv) the dividend yield of 0%; and (v) the volatility is 59.9%. The fair value of the warrants amounted to $ 552,283 and will be recorded as an increase in the customer list asset and have a term of five years from time of vest. 39 Table of Contents Note 11. Net (Loss) per Share Basic (loss) per share (EPS) was computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS differs from basic EPS due to the assumed conversion of potentially dilutive options that were outstanding during the period. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net (loss). 2023 2022 Numerator: Numerator for basic and diluted earnings per share, net (loss) available to common shareholders $ ( 475,104 ) $ ( 5,483,244 ) Denominator: Denominator for basic (loss) per share, weighted average shares outstanding 20,105,968 20,379,386 Effect of dilutive securities-stock options and restricted awards — — Denominator for diluted (loss) per share, adjusted weighted average shares and assumed conversion 20,105,968 20,379,386 Basic (loss) per common share $ ( 0.02 ) $ ( 0.27 ) Diluted (loss) per common share and common share equivalent $ ( 0.02 ) $ ( 0.27 ) The awards and options to purchase shares of common stock that were outstanding at December 31, 2023 and 2022 that were not included in the computation of diluted (loss) per share because the effect would have been anti-dilutive, are as follows: Year Ended December 31, 2023 2022 Anti-dilutive awards and options 6,384,900 4,982,900 Note 12. Concentration of Credit Risk and Significant Customers The Company has no significant off-balance sheet or concentrations of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company currently maintains the majority of its cash and cash equivalent balance with one financial institution. No customers account for more than 10% of the revenues of the company. 40 Table of Contents Note 13. Legal Proceedings BEN KAUDER, NINA PIOLETTI, & TRIPLE PAY PLAY, INC. In 2017, USIO acquired Singular Payments, Inc. (“Singular”), another payment processing company with offices in Nashville, Tennessee and St. Augustine, Florida. Ben Kauder and Nina Pioletti were executives of Singular; after the acquisition, USIO hired them as executive-level employees. USIO hired Kauder to serve as Senior Vice President of Integrated Payments, and Pioletti was hired to serve as Director of Sales. As a condition of employment, Kauder and Pioletti agreed to be bound by certain USIO policies, including as it relates to preserving the confidentiality of USIO’s proprietary information. As USIO executives, Kauder and Pioletti were afforded access to and contributed to the development of USIO’s trade secrets and other proprietary information not generally known by the public at large, including but not limited to financial information, marketing plans, cost and operational/strategic plans, and sales presentations. In May 2021, Kauder resigned from USIO followed by Pioletti in July of 2022. Thereafter, Kauder and Pioletti formed Triple Pay Play, another payment processing company which competes with the same services as USIO. Upon information and belief, Kauder and Pioletti were working to form Triple Pay Play while employed by USIO, during USIO business hours, and while using USIO resources and USIO property. On or about June 21, 2023, USIO filed suit against Ben Kauder, Nina Pioletti and Triple Pay Play for breach of contract and misappropriation of trade secrets and unfair business competition. On July 6, 2023, Ben Kauder, Nina Pioletti and Triple Pay Play filed a Motion to Dismiss for Lack of Jurisdiction. The motion was granted. Subsequently, in February of 2024, USIO refiled its case in Tennessee, where Kauder, Nina, and Triple Pay Play reside. Currently, this case is in the early-stage discovery. GREENWICH BUSINESS CAPITAL, LLC On or about September 25, 2019, Usio, Inc., (USIO) and Greenwich Business Capital LLC (“GBC”), entered into an Agreement for payment processing services (the “Agreement”). Pursuant to the terms of the Agreement, USIO effectively terminated the Agreement with GBC on October 31, 2023, by providing Greenwich with a 30 -days written notice as required by the Agreement. On November 13, 2023, GBC filed lawsuit against USIO, alleging violations of the NACHA rules. In early March of 2024, USIO filed a Motion to Dismiss for improper venue and failure to state a claim. The motion is set to be heard in May of 2024. KDHM, LLC On September 1, 2021, KDHM, LLC, an entity owned by the former owners of IMS, sued PDS Acquisition Corp, now known as Usio Output Solutions, Inc., in the 73rd District Court of Bexar County, Texas claiming a breach of the asset purchase agreement executed by the parties on December 14, 2020. The lawsuit alleges that due to a mistake, accident, or inadvertence, certain customer deposits in the amount of $ 317,000 were improperly transferred to us. We believe that plaintiff's claims in the lawsuit have no merit and contradict the express terms of the asset purchase agreement. As a result of this post-sale dispute, we discovered that KDHM, LLC and its principals made certain misrepresentations and breached the terms of the asset purchase agreement. On September 28, 2021, we filed an answer generally denying the plaintiff’s allegations. On October 5, 2021, we filed a counterclaim and third -party petition. Therein, we allege that neither KDHM nor its principals disclosed that KDHM was not accounting for the customer deposits in accordance with GAAP. KDHM and third -party defendants, its principals Henry Minten and Thomas Dowe, affirmatively represented and warranted in section 3.1 (e) of the asset purchase agreement that “[t]he Annual Financial Statements and the Interim Financial Statements have been prepared from the books and records of Seller in accordance with GAAP applied on a consistent basis.” We also discovered that KDHM by and through its principals failed to disclose that $ 305,000 in additional customer deposits existed and that these deposits were not conveyed to us as required by the asset purchase agreement. KDHM, Minten and Dowe provided us with fraudulent and misleading profit and loss statements that did not disclose these additional customer deposits. KDHM and the defendants do not dispute that these additional customer deposits existed and that they were purchased by Usio. However, despite a written representation that these funds would be returned, KDHM and its principals have held these funds hostage. Section 2.1 (b)( x ) of the asset purchase agreement provides that the purchased assets include “All of Seller’s deposits from its customer, including without limitation, those customer deposits listed on Schedule 2.1 (b)(xi) of the Disclosure Schedules.” Finally, we discovered that KDHM did not provide us with all customer lists, which are identified as purchased assets under the agreement. In our counterclaims and third -party petition, we assert causes of action for fraud, breach of contract and conversion. On August 18, 2023, the judge granted a summary motion entitling KDHM to deposits for customer accounts that were printed and mailed prior to the acquisition, and Usio Output Solutions, Inc. was entitled to deposits for accounts that were not yet printed and printed but not yet mailed prior to the acquisition. Usio has requested a reconsideration of the motion, as it does not consider that deposits are only owed to KDHM if they were earned and offset against accounts receivable. On March 4, 2024, the court held a hearing on KDHM’s Supplemental Rule 166 (G) Motion; the court granted the motion in favor of KDHM. However, USIO believes the court erred in granting the motion and ultimately filed a motion for reconsideration on March 19, 2024. Usio’s Motion for Reconsideration of Order Granting Plaintiff’s Supplemental Rule 166 (g) Motion is set to be heard on March 28, 2024. OTHER PROCEEDINGS Aside from these proceedings, the Company may be involved in legal matters arising in the ordinary course of business from time to time. While we believe that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which we are or could become involved in litigation will not have a material adverse effect on our business, financial condition, or results of operations. 41 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.