Usio, Inc. 10-Q

Item 1. Financial Statements. USIO, INC. CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2024 December 31, 2023 (Unaudited) Assets Current assets: Cash and cash equivalents $ 8,392,317 $ 7,155,687 Accounts receivable, net 4,257,022 5,564,138 Settlement processing assets 59,549,564 44,899,603 Prepaid card load assets 22,065,567 31,578,973 Customer deposits 1,824,820 1,865,731 Inventory 400,002 422,808 Prepaid expenses and other 775,310 444,071 Current assets before merchant reserves 97,264,602 91,931,011 Merchant reserves 4,892,601 5,310,095 Total current assets 102,157,203 97,241,106 Property and equipment, net 3,304,601 3,660,092 Other assets: Intangibles, net 1,099,373 1,753,333 Deferred tax asset, net 4,690,053 1,504,000 Operating lease right-of-use assets 3,012,779 2,420,782 Other assets 340,285 355,357 Total other assets 9,142,490 6,033,472 Total assets $ 114,604,294 $ 106,934,670 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 579,618 $ 1,031,141 Accrued expenses 2,879,369 3,801,278 Operating lease liabilities, current portion 553,480 633,616 Equipment loan, current portion 192,206 107,270 Settlement processing obligations 59,549,564 44,899,603 Prepaid card load obligations 22,065,567 31,578,973 Customer deposits 1,824,820 1,865,731 Current liabilities before merchant reserve obligations 87,644,624 83,917,612 Merchant reserve obligations 4,892,601 5,310,095 Total current liabilities 92,537,225 89,227,707 Non-current liabilities: Equipment loan, net of current portion 562,923 718,980 Operating lease liabilities, net of current portion 2,573,100 1,919,144 Total liabilities 95,673,248 91,865,831 Commitments and contingencies (Note 9) Stockholders’ equity: Preferred stock, $ 0.01 par value, 10,000,000 shares authorized; - 0 - shares outstanding at September 30, 2024 (unaudited) and December 31, 2023, respectively — — Common stock, $ 0.001 par value, 200,000,000 shares authorized; 29,811,487 and 28,671,606 issued, and 27,216,864 and 26,332,523 outstanding at September 30, 2024 (unaudited) and December 31, 2023, respectively 198,226 197,087 Additional paid-in capital 99,447,552 97,479,830 Treasury stock, at cost; 2,594,623 and 2,339,083 shares at September 30, 2024 (unaudited) and December 31, 2023, respectively ( 4,755,916 ) ( 4,362,150 ) Deferred compensation ( 7,297,234 ) ( 6,907,775 ) Accumulated deficit ( 68,661,582 ) ( 71,338,153 ) Total stockholders’ equity 18,931,046 15,068,839 Total liabilities and stockholders’ equity $ 114,604,294 $ 106,934,670 See the accompanying notes to the condensed interim consolidated financial statements. 3 Table of Contents USIO, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Revenues $ 21,321,478 $ 20,982,761 $ 62,371,752 $ 63,935,603 Cost of services 16,425,321 16,325,793 47,822,086 49,121,210 Gross profit 4,896,157 4,656,968 14,549,666 14,814,393 Selling, general and administrative expenses: Stock-based compensation 569,772 594,815 1,529,106 1,677,258 Other SG&A 4,119,317 4,293,869 12,180,387 12,021,110 Depreciation and amortization 583,718 518,573 1,707,721 1,559,601 Total selling, general and administrative 5,272,807 5,407,257 15,417,214 15,257,969 Operating (loss) ( 376,650 ) ( 750,289 ) ( 867,548 ) ( 443,576 ) Other income and (expense): Interest income 125,564 49,769 348,188 116,649 Other income — 50,000 261,413 50,000 Interest expense ( 13,700 ) ( 393 ) ( 41,535 ) ( 1,588 ) Other income, net 111,864 99,376 568,066 165,061 (Loss) before income taxes ( 264,786 ) ( 650,913 ) ( 299,482 ) ( 278,515 ) Federal income tax (benefit) ( 3,186,053 ) — ( 3,186,053 ) — State income tax expense 70,000 70,000 210,000 222,524 Income tax expense (benefit) ( 3,116,053 ) 70,000 ( 2,976,053 ) 222,524 Net income (loss) $ 2,851,267 $ ( 720,913 ) $ 2,676,571 $ ( 501,039 ) Basic income (loss) per common share: $ 0.10 $ ( 0.03 ) $ 0.10 $ ( 0.02 ) Diluted income (loss) per common share: $ 0.10 $ ( 0.03 ) $ 0.10 $ ( 0.02 ) Weighted average common shares outstanding Basic 27,322,497 26,383,144 26,747,277 26,386,586 Diluted 27,322,497 26,383,144 26,747,277 26,386,586 See the accompanying notes to the condensed interim consolidated financial statements. 4 Table of Contents USIO, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, 2024 2023 Operating activities: Net income (loss) $ 2,676,571 $ ( 501,039 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 1,053,761 905,701 Amortization 653,960 653,900 Deferred federal income tax ( 3,186,053 ) — Employee stock-based compensation 1,529,106 1,644,658 Vendor stock-based compensation — 32,600 Non-cash revenue from returned common stock — ( 156,162 ) Changes in current assets and current liabilities: Accounts receivable 1,307,116 ( 831,978 ) Prepaid expenses and other ( 331,239 ) ( 289,819 ) Operating lease right-of-use assets ( 591,997 ) 244,040 Other assets 15,072 — Inventory 22,806 106,516 Accounts payable and accrued expenses ( 1,373,432 ) 845,249 Operating lease liabilities 573,820 ( 267,553 ) Prepaid card load obligations ( 9,513,406 ) 38,668,841 Merchant reserves ( 417,494 ) 427,044 Customer deposits ( 40,911 ) 24,376 Net cash provided by (used in) operating activities ( 7,622,320 ) 41,506,374 Investing activities: Purchases of property and equipment ( 698,271 ) ( 587,451 ) Net cash (used in) investing activities ( 698,271 ) ( 587,451 ) Financing activities: Payments on equipment loan ( 71,121 ) ( 42,527 ) Proceeds from issuance of common stock 50,297 — Purchases of treasury stock ( 393,766 ) ( 68,967 ) Net cash (used in) financing activities ( 414,590 ) ( 111,494 ) Change in cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves ( 8,735,181 ) 40,807,429 Cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves, beginning of period 45,910,486 32,343,501 Cash, Cash Equivalents, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End of Period $ 37,175,305 $ 73,150,930 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 41,535 $ 1,588 Income taxes — 312,158 Non-cash operating activities: Right of use assets obtained in exchange for operating lease liabilities 963,487 — Non-cash financing activity: Issuance of deferred stock compensation 1,497,300 2,478,506 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: September 30, 2024 2023 Beginning 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 Ending cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves: Cash and cash equivalents $ 8,392,317 $ 7,396,285 Prepaid card load assets 22,065,567 58,839,602 Customer deposits 1,824,820 1,578,498 Merchant reserves 4,892,601 5,336,545 Total $ 37,175,305 $ 73,150,930 See the accompanying notes to the condensed interim consolidated financial statements. 5 Table of Contents USIO, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) Common Stock Additional Paid- In Treasury Deferred Accumulated Total Stockholders' Shares Amount Capital Stock Compensation Deficit Equity Balance at December 31, 2023 28,671,606 $ 197,087 $ 97,479,830 $ ( 4,362,150 ) $ ( 6,907,775 ) $ ( 71,338,153 ) $ 15,068,839 Issuance of common stock under equity incentive plan 107,600 107 153,118 — — — 153,225 Deferred compensation amortization — — — — 346,047 — 346,047 Purchase of treasury stock costs — — — ( 44,823 ) — — ( 44,823 ) Net (loss) for the period — — — — — ( 250,188 ) ( 250,188 ) Balance at March 31, 2024 28,779,206 $ 197,194 $ 97,632,948 $ ( 4,406,973 ) $ ( 6,561,728 ) $ ( 71,588,341 ) $ 15,273,100 Issuance of common stock under equity incentive plan 994,049 994 1,610,320 — ( 1,497,300 ) — 114,014 Issuance of common stock under employee stock purchase plan 6,180 6 10,504 — — — 10,510 Reversal of deferred compensation amortization that did not vest ( 15,000 ) ( 15 ) ( 31,305 ) — 31,320 — — Deferred compensation amortization — — — — 346,048 — 346,048 Purchase of treasury stock costs — — — ( 104,946 ) — — ( 104,946 ) Net income for the period — — — — — 75,492 75,492 Balance at June 30, 2024 29,764,435 $ 198,179 $ 99,222,467 $ ( 4,511,919 ) $ ( 7,681,660 ) $ ( 71,512,849 ) $ 15,714,218 Issuance of common stock under equity incentive plan 21,100 21 185,324 — — — 185,345 Issuance of common stock under employee stock purchase plan 25,952 26 39,761 — — — 39,787 Deferred compensation amortization — — — — 384,426 — 384,426 Purchase of treasury stock costs — — — ( 243,997 ) — — ( 243,997 ) Net income for the period — — — — — 2,851,267 2,851,267 Balance at September 30, 2024 29,811,487 $ 198,226 $ 99,447,552 $ ( 4,755,916 ) $ ( 7,297,234 ) $ ( 68,661,582 ) $ 18,931,046 Balance at December 31, 2022 27,044,900 $ 195,471 $ 94,048,603 $ ( 3,749,027 ) $ ( 5,697,900 ) $ ( 70,863,049 ) $ 13,934,098 Issuance of common stock under equity incentive plan 1,421,250 1,421 2,638,529 — ( 2,444,054 ) — 195,896 Deferred compensation amortization — — — — 308,676 — 308,676 Purchase of treasury stock costs — — — ( 8,529 ) — — ( 8,529 ) Net income for the period — — — — — 14,833 14,833 Balance at March 31, 2023 28,466,150 $ 196,892 $ 96,687,132 $ ( 3,757,556 ) $ ( 7,833,278 ) $ ( 70,848,216 ) $ 14,444,974 Issuance of common stock under equity incentive plan 111,456 111 354,199 — ( 34,452 ) — 319,858 Reversal of deferred compensation amortization that did not vest ( 115,000 ) ( 115 ) ( 188,088 ) — 103,091 — ( 85,112 ) Deferred compensation amortization — — — — 343,123 — 343,123 Purchase of treasury stock costs — — — ( 10,507 ) — — ( 10,507 ) Non-cash return of common stock — — — ( 156,162 ) — — ( 156,162 ) Net income for the period — — — — — 205,041 205,041 Balance at June 30, 2023 28,462,606 $ 196,888 $ 96,853,243 $ ( 3,924,225 ) $ ( 7,421,516 ) $ ( 70,643,175 ) $ 15,061,215 Issuance of common stock under equity incentive plan 43,800 44 252,212 — — — 252,256 Deferred compensation amortization — — — — 342,559 — 342,559 Purchase of treasury stock costs — — — ( 49,931 ) — — ( 49,931 ) Net (loss) for the period — — — — — ( 720,913 ) ( 720,913 ) Balance at September 30, 2023 28,506,406 $ 196,932 $ 97,105,455 $ ( 3,974,156 ) $ ( 7,078,957 ) $ ( 71,364,088 ) $ 14,885,186 See the accompanying notes to the condensed interim consolidated financial statements. 6 Table of Contents USIO, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. Basis of Presentation The accompanying unaudited interim condensed consolidated financial statements of Usio, Inc. and its subsidiaries (collectively, the “Company”) have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission" or the "SEC"). 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 unaudited 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, 2023, as filed with the Commission on March 27, 2024 ( the "2023 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 "third quarter" mean the three month period ended September 30, 2024 or 2023, as the case may be and unless otherwise noted. 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. 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 that 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. ("Output Solutions"), a wholly-owned subsidiary of Usio, 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 the United States Postal Services, or USPS, for postage. We also earn revenues from interest and fees earned on certain assets underlying customer balances. Interest earned on assets directly related to our core business line operations are recorded in the revenue source underlying the associated customer balances. Customer balances held on which the Company earns interest revenues include balances from our Automated Clearing House, or ACH, and complementary services, prepaid card services, and Output Solutions business lines. The following table presents the Company's consolidated revenues by source: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 ACH and complementary services $ 4,302,510 $ 3,528,133 $ 12,078,574 $ 10,948,012 Credit card 7,197,362 7,169,066 22,019,364 21,624,848 Prepaid card services 4,017,153 4,685,212 11,031,795 14,710,084 Output Solutions 5,253,388 5,138,030 15,478,180 15,945,447 Interest - ACH and complementary services 201,545 212,691 603,418 255,997 Interest - Prepaid card services 309,131 239,413 1,046,496 425,431 Interest - Output Solutions 40,389 10,216 113,925 25,784 Total revenue $ 21,321,478 $ 20,982,761 $ 62,371,752 $ 63,935,603 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. The Company earns interest on these underlying processing assets, which is recognized as revenue in the ACH and complementary services business line. Prepaid Card Load Assets and Obligations: 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. As the prepaid business line expands, card load assets will increase as funds are sent from customers to the Company. As customers begin to load cash onto cards, the balance of both the prepaid card asset and corresponding liability decrease. As these balances decrease, the Company recognizes processing revenue and cardholder fees. The Company earns interest on these prepaid card load assets and obligations, which is recognized as revenue in the prepaid card services business line. 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. The Company earns interest on these customer deposits, which is recognized as revenue in the Output Solutions business line. Merchant Reserves: The Company has merchant reserve requirements associated with ACH transactions. The merchant reserve assets are carried on the Company's balance sheet with a corresponding liability. Merchant reserves are established for each merchant and funds are collected and held as collateral to minimize contingent liabilities associated with any losses that may occur. While this cash is not restricted in its use, the Company believes that designating this cash to collateralize merchant reserves strengthens the Company's standing with its member sponsors and is in accordance with the guidelines set by the card networks. The Company earns interest on these merchant reserves, which is recognized as revenue in our ACH and complementary services business line. 7 Table of Contents Accounts Receivable/Allowance for Estimated Credit Losses: The Company maintains an allowance for estimated credit losses resulting from the inability or failure of the Company’s 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 to conform with Accounting Standards Update (ASU) Topic 326 . During the nine months ended September 30, 2024 and the year ended December 31, 2023, there were no credit losses incurred. In the past, losses incurred by the Company due to credit losses 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 credit losses are variable based on the volume of transactions processed and could increase or decrease accordingly. The allowance for credit losses was $ 289,000 at September 30, 2024 and $319,000 at December 31, 2023 .and carried on the Company's balance sheet in accounts receivable, and in the statement of cash flows as a change in accounts receivable. Inventory : Inventory is stated at the lower of cost or net realizable value. At September 30, 2024 and December 31, 2023 , inventory consisted primarily of printing and paper supplies used for Output Solutions. Accounting for Internal Use Software: The Company capitalizes the costs associated with software being developed or obtained for internal use when both the preliminary project stage is completed and it is probable that computer software being developed will be completed and placed in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (iii) interest costs incurred, when material, while developing internal-use software. The Company ceases capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose. During the nine months ended September 30, 2024 and September 30, 2023 , the Company capitalized software costs of $ 575,882 and $ 513,593 , respectively. Valuation of Long-Lived and Intangible Assets: The Company assesses the impairment of long-lived and intangible assets at least annually, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important, which could trigger an impairment review, include the following: significant 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. No impairment losses were recorded in 2023 or during the nine months ended September 30, 2024 . Management is not aware of any impairment charges that may currently be required; however, the Company cannot predict the occurrence of events that might adversely affect the reported values in the future. Reserve for Processing Losses: If, due to insolvency or bankruptcy of one of the Company’s merchant customers, or for any other reason, the Company is not able to collect amounts from its credit card, ACH or prepaid customers that have been properly "charged back" by the customer, or if a prepaid cardholder incurs a negative balance, the Company must bear the credit risk for the full amount of the transaction. The Company may require cash deposits and other types of collateral from certain merchants to minimize any such risks. In addition, the Company utilizes multiple systems and procedures to manage merchant risk. ACH, prepaid and credit card merchant processing loss reserves are primarily determined by performing a historical analysis of the Company’s loss experience, considering other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company’s relationship with the Company’s prepaid card holders. This reserve amount is subject to the risk that actual losses may be greater than the Company’s estimates. Estimates for processing losses are variable based on the volume of transactions processed and could increase or decrease accordingly. At September 30, 2024 and December 31, 2023 , the Company’s reserve for processing losses was $ 925,528 and $ 826,528 , respectively, and carried on the Company's balance sheet as an accrued expense, and in the statement of cash flows as a change in accrued expenses. Legal Proceedings: In addition to the legal proceedings disclosed in this quarterly report, the Company may be involved in legal matters arising in the ordinary course of business from time to time. Litigation is subject to inherent uncertainties, and an adverse result in the legal proceedings disclosed in this quarterly report or other matters that may arise from time to time may harm our business. Recently Adopted Accounting Pronouncements : 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 Company's consolidated financial statements upon adoption. Reclassifications: We have reclassified certain prior period amounts in the accompanying consolidated financial statements in order to be consistent with the current period presentation. These reclassifications had no effect on net income, total assets, total liabilities or equity. 8 Table of Contents Note 2. Leases The Company leases facilities and office equipment under various operating leases, which generally are expected to be renewed or replaced by other leases. For each of the three months ended September 30, 2024 and 2023 , operating lease expenses totaled $ 135,123 and $ 132,574 , respectively. For each of the nine months ended September 30, 2024 and 2023 , operating lease expenses totaled $ 401,228 and $ 407,358 , respectively. Note 3. Accrued Expenses Accrued expenses consisted of the following balances: September 30, 2024 December 31, 2023 Accrued commissions $ 772,472 $ 2,433,353 Reserve for processing losses 925,528 826,528 Other accrued expenses 745,293 246,444 Accrued taxes 237,132 294,953 Accrued salaries 198,944 — Total accrued expenses $ 2,879,369 $ 3,801,278 Note 4. Equipment Loan On March 20, 2021, the Company entered into a debt arrangement to finance $ 165,996 for the purchase of an Output Solutions sorter. The loan was for a period of 36 months with a maturity date of March 20, 2024 and annual interest of 3.95 %. Monthly principal and interest payments were required in the amount of $ 4,902 . Principal payments for the three months ended September 30, 2024 and 2023 were $ 0 and $ 14,312 , respectively, and are reflected on the Company's Condensed Consolidated Statement of Cash Flows. Principal payments for the nine months ended September 30, 2024 and 2023 were $ 14,312 and $ 42,528 , respectively. This loan was paid in full on its maturity date. 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 , with interest only payments required for the first six months of the loan term. Total interest and principal payments on this folder and inserter equipment loan were $ 47,953 for the three months ended September 30, 2024 . Total interest and principal payments on this folder and inserter equipment loan were $ 98,121 for the nine months ended September 30, 2024 . Note 5. Stockholders' Equity Stock Warrants : On December 15, 2020, the Company issued warrants to purchase 945,599 shares of the Company's common stock with an initial exercise price of $ 4.23 per share, subject to adjustment as provided in the warrant agreement governing the warrants, to Information Management Solutions, LLC d/b/a/ KDHM, LLC ("IMS" or "KDHM") which were issued in connection with our acquisition of IMS in December 2020. IMS's warrants vest and become exercisable annually over three years in three equal tranches beginning on December 15, 2021 and became fully vested on December 15, 2023. Each warrant is exercisable for a period of five years beginning on the date it vests. 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 5 years; (iv) the dividend yield was 0%; and (v) the volatility was 59.9%. The fair value of the warrants amounted to $ 552,283 and was recorded as an increase in the customer list asset and a corresponding amount to additional paid in capital. The amortization of these warrants, which is included in the total amortization expense of the customer list intangible asset, totaled $ 27,615 and $ 82,842 in each of the three and nine months ended September 30, 2024 and 2023 , respectively. 9 Table of Contents 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. Holders of unvested restricted stock awards have the right to receive nonforfeitable dividends on the same basis as common shares; therefore, unvested restricted stock is considered a participating security for the purpose of calculating EPS. 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 nine months ended September 30, 2024 and September 30, 2023 . Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Numerator: Numerator for basic and diluted income (loss) per share, net income (loss) available to common shareholders $ 2,851,267 $ ( 720,913 ) $ 2,676,571 $ ( 501,039 ) Denominator: Denominator for basic income (loss) per share, weighted average shares outstanding 27,322,497 26,383,144 26,747,277 26,386,586 Effect of dilutive securities — — — — Denominator for diluted earnings per share, adjusted for weighted average shares and assumed conversion 27,322,497 26,383,144 26,747,277 26,386,586 Basic income (loss) per common share $ 0.10 $ ( 0.03 ) $ 0.10 $ ( 0.02 ) Diluted income (loss) per common share and common share equivalent $ 0.10 $ ( 0.03 ) $ 0.10 $ ( 0.02 ) The warrants to purchase shares of common stock that were outstanding at September 30, 2024 and September 30, 2023 that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive, are as follows: Nine Months Ended September 30, 2024 2023 Anti-dilutive warrants 945,599 945,599 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 deferred tax asset of approximately $ 4.7 million recorded net of a valuation allowance of approximately $ 2.9 million. Management considered the realizability of this asset in light of historical operating results and forecasted results, and determined that more likely than not that the Company will have taxable income in the future, and elected to decrease the valuation allowance by approximately $ 3.2 million during 2024. 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. Significant components of the Company's deferred tax asset are as follows for the nine months ended September 30, 2024 and year ended December 31, 2023 . September 30, 2024 December 31, 2023 Deferred tax assets: Net operating loss carryforwards $ 4,690,051 $ 4,686,000 Depreciation and amortization 1,137,000 1,137,000 Non-cash compensation 1,649,000 1,649,000 Other 124,000 124,000 Total 7,600,051 7,596,000 Valuation Allowance ( 2,909,998 ) ( 6,092,000 ) Deferred tax asset $ 4,690,053 $ 1,504,000 The tax provision for federal and state income tax is as follows for the nine months ended September 30, 2024 and 2023 . Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023 Current provision: Federal $ — $ — State 210,000 222,524 210,000 222,524 Deferred provision: Federal income tax (benefit) ( 3,186,053 ) — Income tax expense (benefit) $ ( 2,976,053 ) $ 222,524 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 nine months ended September 30, 2024 and year ended December 31, 2023 . Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023 Income tax (benefit) at 21% $ ( 62,891 ) $ ( 58,488 ) Change in valuation allowance ( 3,182,002 ) — Permanent and other differences 58,840 58,488 State taxes 210,000 222,524 Income tax expense (benefit) $ ( 2,976,053 ) $ 222,524 At December 31, 2023 , the Company had available net operating loss carryforwards of approximately $ 22.3 million. Net operating loss carryforwards ("NOLs") 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 generated after 2017 do not expire. Our ability to use our NOLs during this period will be dependent on our ability to generate taxable income, and the NOLs could expire before we generate sufficient taxable income. Pursuant to Sections 382 and 383 of the Internal Revenue Code ("IRC"), federal and state tax laws impose significant restrictions on the utilization of net operating loss and other tax carryforwards in the event of a change in ownership of the Company. The Company does not expect IRC Sections 382 and 383 to significantly impact the utilization of its NOLs and other tax carryforwards. If we were to experience an "ownership change," as determined under Section 382 of the IRC, our ability to offset taxable income arising after the ownership change with NOLs arising prior to the ownership change would be limited, possibly substantially. An ownership change would establish an annual limitation on the amount of our pre-change NOLs we could utilize to offset our taxable income in any future taxable year to an amount generally equal to the value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt rate. In general, an ownership change will occur if there is a cumulative increase in our ownership of more than 50 percentage points by one or more "5% shareholders" (as defined in the IRC) at any time during a rolling three -year period. The schedule below outlines when the Company's net operating losses for 2017 and prior years were generated and the year they may expire. Tax Year End NOL Expiration 2005 $ 1,788,157 2025 2006 1,350,961 2026 2007 1,740,724 2027 2008 918,960 2028 2009 835,322 2029 2010 429,827 2030 2013 504,862 2033 2016 474,465 2036 2017 1,267,336 2037 Total $ 9,310,614 As of September 30, 2024 , there are NOLs totaling approximately $ 13.0 million that have been generated since 2017 that do not expire, and can be carried forward to future year to offset taxable income. The schedule below outlines when the Company's net operating losses for 2018 and later years were generated. Tax Year End NOL 2018 $ 4,410,916 2019 2,730,461 2020 2,272,315 2022 3,609,279 Total $ 13,022,971 Total loss carryforwards $ 22,333,585 Management is not aware of any tax positions that would have a significant impact on the Company's financial position or results of operations. 10 Table of Contents Note 8. Related Party Transactions Louis Hoch During the nine months ended September 30, 2024 and September 30, 2023 , the Company purchased a total of $ 9,747 and $ 18,148 , respectively, of corporate imprinted sportswear, promotional items, and caps from Angry Pug Sportswear. Louis Hoch, the Company’s Chairman of the Board, President, Chief Executive Officer and Chief Operating Officer, is a 50 % owner of Angry Pug Sportswear. Directors and Officers On June 21, 2024, the Company granted 966,000 shares of restricted common stock with a 10 -year vesting period and 277,200 restricted stock units ("RSUs") with a 3 -year vesting period to officers and employees as a performance bonus at an issue price of $ 1.55 per share. RSUs vest in equal tranches over their 3 -year vesting period, while 10 -year grants are cliff vesting, and vest in full at the conclusion of their 10 -year vesting period. Upon vesting, employees and Directors will receive issued shares. Executive officers and Directors included in the 10 -year restricted stock grant were Louis Hoch ( 160,000 shares), Michael White ( 120,000 shares), Greg Carter ( 80,000 shares), and Houston Frost ( 40,000 shares). Executive officers included in the RSU grant were Louis Hoch ( 21,000 RSUs), Michael White ( 18,000 RSUs), Greg Carter ( 18,000 RSUs),and Houston Frost ( 12,000 RSUs). On June 21, 2024, the Company granted 84,000 RSUs with a 3 -year vesting period to Non-employee Directors as a performance bonus at an issue price of $ 1.55 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 ( 21,000 RSUs). On February 24, 2024, we repurchased 2,075 shares of our common stock for $ 3,258 in a private transaction based on the $ 1.57 per share closing price on February 24, 2024 from Tom Jewell, the Company's former Chief Financial Officer, to cover his share of taxes in connection with equity grants. On February 24, 2024, we repurchased 4,911 shares of our common stock for $ 7,710 in a private transaction based on the $ 1.57 per share closing price on February 24, 2024 from Louis Hoch, the Company's Chairman, President, Chief Executive Officer and Chief Operating Officer, to cover his share of taxes in connection with equity grants. 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 was paid installment payments equal to his base salary at the time of his retirement until and including April 18, 2024. Additionally, Mr. Jewell was permitted to retain any unvested Company stock options or other equity awards, which shall vest in accordance with the applicable schedules. Mr. Jewell also received all employee benefits including, but not limited to, health, dental, vision and life insurances that he was receiving prior to his execution of the Separation Agreement until April 18, 2024. On November 18, 2023, we repurchased 2,619 shares of our common stock for $ 4,452 in a private transaction based on the $ 1.70 per share closing price on November 18, 2023 from Tom Jewell, the Company's former Chief Financial Officer, to cover his share of taxes in connection with equity grants. On November 18, 2023, we repurchased 3,927 shares of our common stock for $ 6,675 in a private transaction based on the $ 1.70 per share closing price on November 18, 2023 from Louis Hoch, the Company's Chairman, President, Chief Executive Officer and Chief Operating Officer, to cover his share of taxes in connection with equity grants. 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 officers and employees as a performance bonus at an issue price of $ 1.75 per share. RSUs vest in equal tranches over their 3 -year vesting period, while 10 -year grants are cliff vesting, and vest in full at the conclusion of their 10 -year vesting period. Upon vesting, employees and Directors will receive issued shares. 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 Non-employee 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). Note 9. Commitments and Contingencies 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 and, 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 related 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 2022. Thereafter, Kauder and Pioletti formed Triple Pay Play, another payment processing company which directly competes with 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 Kauder, Pioletti and Triple Pay Play for breach of contract and misappropriation of trade secrets and unfair business competition. On July 6, 2023, Kauder, Pioletti and Triple Pay Play filed a Motion to Dismiss for Lack of Jurisdiction. The motion was granted. Subsequently, in February 2024, Usio refiled its case in Tennessee, where Kauder, Pioletti, and Triple Pay Play reside. On May 3, 2024, Kauder, Pioletti and Triple Pay Play filed a Motion to Dismiss Usio’s Complaint; this motion was heard August 5, 2024. The Judge did not make a ruling and is currently reviewing all materials filed in regards to this matter. Greenwich Business Capital, LLC On or about September 25, 2019, 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 National Automated Clearing House Association (NACHA) rules in the State of Rhode Island Kent Superior Court. In early March 2024, Usio filed a Motion to Dismiss for improper venue and failure to state a claim. On May 20, 2024, Usio’s Motion to Dismiss was heard in the State of Rhode Island Kent Superior Court. The Judge did not make a ruling and is currently reviewing all materials filed in regards to this matter. 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 contradict the express terms of the asset purchase agreement, and we intend to continue to vigorously defend this matter. As a result of this post-sale dispute, we subsequently 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 subsequently 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. We believe that KDHM, Minten and Dowe provided us with fraudulent and misleading financial 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 customers, 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. 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 Output Solutions 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 and the court granted the motion in favor of KDHM. However, Usio believes the court erred in granting the motion and filed a motion for reconsideration on March 19, 2024. On March 28, 2024, the court heard Usio’s Motion for Reconsideration of Order Granting Plaintiff’s Supplemental Rule 166 (g). On May 2, 2024, the court denied Usio’s motion. On July 12, 2024, we filed an appeal on the lower court's decision, which is pending review. We have not recorded a contingency in relation to this case, as we consider the risk of lose remote as related to this lawsuit. 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. 11 Table of Contents