What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-26 compared with 2024-03-27 · 135 added, 104 removed, 150 unchanged (61% of the section changed)

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The added value of offering our integration partners access to credit card, debit card, ACH and prepaid card issuance capabilities through a single vendor partner relationship in face-to-face, mobile and virtual payment acceptance environments provides a true single channel commerce experience through an application programming interface, API.

As a result of the acquisition of the assets of Information Management Solutions, LLC, or IMS, in December 2020, we also offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions through our wholly-owned subsidiary, Usio Output Solutions, Inc., or Output Solutions.

As a result of the acquisition of substantially all of the assets of Information Management Solutions, LLC, or IMS, in December 2020, we also offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions through our wholly-owned subsidiary, Usio Output Solutions, Inc., or Output Solutions.

This product offering provides an outsourced solution for document design, print and electronic delivery to potential customers and entities looking to reduce postage costs and increase efficiencies.

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In addition to our near-term growth opportunities, we are focused on leveraging and optimizing the infrastructure of the organization allowing expansion of our payment processing and mail and printing capabilities without significantly increasing our operating costs.

We reported a net loss of $0.5 million and $5.5 million for the years ended December 31, 2023 and December 31, 2022, respectively.

We reported net income of $3.3 million and a net loss of $0.5 million for the years ended December 31, 2024 and December 31, 2023, respectively.

We had an accumulated deficit of $68.0 million at December 31, 2024.

In 2023, we processed $5.3 billion for all payment types, which was down 26% from the prior year volume of $7.2 billion total dollars processed due to our exit from the crypto space and attrition in legacy credit card processing portfolios driven by challenges competing in the Independent Sales Organization, or ISO, market while we focus on our PayFac distributed sales force and Independent Software Vendor, or ISV, market.

We believe this strategy will drive superior results over time.

Total transactions processed were down 9% to 37.2 million.

ACH or electronic check transactions processed for 2023 decreased by 20% compared to 2022.

Returned check transactions decreased by 15% in 2023 compared to 2022.

In 2024, we processed $7.1 billion for all payment types, which was up 33% from the prior year volume of $5.3 billion total dollars processed due to strong growth in our ACH and complimentary services business unit via organic growth and net new customer acquisitions.

In addition, success in our PayFac platform drove growth, and exceeded the attrition in our legacy credit card processing portfolios by focusing on our distributed sales force and Independent Software Vendor, or ISV, market.

We believe this strategy will continue to drive superior results over time.

Total transactions processed were up 26% to 46.9 million.

ACH or electronic check transactions processed for 2024 increased by 18.5% compared to 2023.

Returned check transactions increased by 17.1% in 2024 compared to 2023.

Credit card dollars processed in 2024 increased by 9.9% compared to 2023 and credit card transactions processed for 2024 increased by 23.8% compared to 2023.

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Prepaid card load volume increased by 34.8% and transaction volume increased by 45.1%.

These improved transactional metrics helped offset the significantly reduced revenues as part of the anticipated wind down of our COVID incentive card programs at the start of 2024.

These incentive programs contributed approximately $12.1 million in prepaid card services revenue during 2023 that needed to be replaced in 2024.

Our processing metrics help reflect the improved organic growth and sales activity that took place in the year as part of our initiative to minimize the impact of these expired programs, while also indicating a positive sign for continued growth in the future.

Material Trends and Uncertainties

On August 16, 2022, President Biden signed the Inflation Reduction Act, or IRA, which implemented a 1% excise tax on certain corporate stock repurchases, when repurchases of stock on an established securities market exceed $1 million in a tax year.

On May 13 2022, the Board of Directors authorized a renewal of the buy-back program, with a limit up to $4 million of the Company's common stock with a three year duration.

In the year ended December 31, 2023, the Company had repurchased $0.5 million of stock as part of its buyback program.

On May 13, 2022, and again on March 24, 2025, the Board of Directors authorized a renewal of the buy-back program, with a limit up to $4 million of the Company's common stock with a three year duration.

In the year ended December 31, 2024, the Company had repurchased approximately $1.4 million of stock as part of its buyback program for which the Company may be required to pay approximately $14,000 in excise tax.

Should the Company opt to continue the repurchase of its securities on the open market, and the IRA remain in effect, we may qualify for this tax in 2025, and future years.

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If these conditions continue or worsen, they could adversely impact our future financial and operating results.

Changes in these factors are difficult to predict, and a change in one factor could affect other factors, which could result in adverse effects to our business, results of operations, financial condition, and cash flows.

Due to the higher interest rates set by the Federal Reserve, the Company was able to increase interest income in 2023.

As interest rates fluctuate depending on the Federal Reserve's target rates to combat inflation and unemployment, we may not be able to recognize similar levels of interest income in the future.

As the Federal Reserve has worked to fight economic inflation, the federal funds rate has experienced rapid growth from the beginning of 2022 into the third quarter of 2023, and remained flat until September 2024 when the federal funds rate was lowered.

This resulted in the Company's receiving more favorable interest rates on its current cash balances, amounting to $2.8 million in interest earnings in 2024.

Of this interest, $2.3 million was recognized as revenue in the respective business lines for which the cash balances are held, and $0.5 million as interest income.

In September 2024, the Federal Reserve lowered the federal funds rate 0.50%, followed by a further 0.25% decline in each of November and December 2024.

which has resulted in lower interest earnings on our interest bearing cash accounts.

Should the Federal Reserve continue lowering the federal funds rate in the future, this incremental source of income would decline.

We continue to work closely with our bank partners, to ensure we effectively manage our cash balances, and monitor the Federal Reserve's monetary policy decisions.

The Company continues to invest in growth initiatives to drive increased revenues, and profitability metrics.

However, sustaining growth at existing rates may not occur.

Such initiatives include our "One Usio" strategy, designed to unify our brand, sales approach, and payments offerings.

Through this strategy, we are developing enhanced client onboarding features, superior customer management, improved reporting and fraud monitoring, alongside a consolidated sales and marketing team to better cross-sell our various payment methods and ancillary services.

While we recognized high levels of growth in 2023, a significant portion of this growth was due to the Prepaid card business benefitting from outsized growth in 2022 and 2023 as a result of large incentive programs brought on by the Covid-19 pandemic.

Those programs have begun winding down, requiring new card programs and clients being brought on to replace prior revenues.

Those programs were wound down and completed during 2024, requiring new card programs and clients being brought on to replace prior revenues.

While we expect growth to continue, it is possible that we may not see similar rates of expansion moving forward.

Critical Accounting Policies and Estimates

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Reserve for Processing Losses

We establish allowances for negative customer balances and estimated transaction losses arising from processing customer transactions, such as chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery or unsatisfactory delivery of purchased items, account takeovers, Automated Clearing House returns, and insolvency.

Additions to the allowance are reflected in our cost of services on our consolidated statements of income (loss).

The allowances are based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving collection and write-off patterns, and the mix of transaction and loss types, as well as current and projected factors such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company with its prepaid card holders.

Determining appropriate current expected transactional losses is an inherently uncertain process, and final losses may vary from our current estimates.

We regularly review and update our allowance estimates as new facts become known, and event occur that may impact the settlement or recovery of losses.

The allowances are maintained at a level we deem appropriate to adequately provide for current expected losses at the balance sheet date.

Reserve for Expected Credit Losses

We establish an allowance for accounts receivable, which represents our estimate of current expected allowances for credit losses.

This evaluation process is subject to numerous estimates and judgements.

This allowance is primarily based on expectations of unrecoverable receivables based on historical losses, as well as forecasted trends in customer instability, and general market conditions.

The Company reviews this allowance quarterly on an account-by-account basis.

Projected loss rates, inclusive of historical loss data and macroeconomic factors, are applied to the principal amount of our merchant and consumer receivables.

Determining appropriate current expected losses on our accounts receivable is an inherently uncertain process, and final losses may vary from our current estimates.

We regularly review and update our allowance estimates as new facts become known, and events occur that may impact the settlement or recovery of losses.

The allowances are maintained at a level we deem appropriate to adequately provide for current expected losses at the balance sheet date.

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, 2024 and 2023, respectively, the Company’s reserve for processing losses was $897,116 and $826,528, respectively.

Accounts Receivable/Allowance for Estimated Credit Losses

Accounts receivable are reported as outstanding principal net of an allowance for expected credit losses of $324,000 at December 31, 2024 and 2023.

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.

Accounting for Income Taxes

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Revenue Recognition

Application of the accounting principles in U.S.

GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates.

Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting.

Specifically, the determination of whether we are a principal to a transaction (gross revenue) or an agent (net revenue) can require considerable judgment.

Further, we provide incentive payments to consumers and merchants.

Evaluating whether these incentives are a payment to a customer, or consideration payable on behalf of a customer, requires judgment.

Incentives determined to be made to a customer, or payable on behalf of a customer, are recorded as a reduction to gross revenue.

Changes in judgments with respect to these assumptions and estimates could impact the amount of revenue recognized.

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.

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.

Key Business Metrics - Non-GAAP Financial Measures

This filing includes non-GAAP financial measures, EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows, as defined in Regulation G of the Securities and Exchange Act of 1934, as amended.

The Company reports its financial results in compliance with GAAP, but believes that also discussing non-GAAP financial measures provides investors with financial measures it uses in the management of its business.

This report includes the following non-GAAP financial measures as defined in Regulation G adopted by the Commission:

EBITDA, adjusted EBITDA, and adjusted EBITDA margins.

The Company reports its financial results in compliance with GAAP, but believes that also discussing non-GAAP financial measures provides investors with financial measures the Company uses in the management of its business.

The Company defines EBITDA as operating income (loss), before interest, taxes, depreciation and amortization of intangibles.

The Company defines adjusted EBITDA as EBITDA, as defined above, plus non-cash stock option costs and certain non-recurring items, such as costs related to acquisitions.

The Company defines adjusted operating cash flow as net cash provided (used) by operating activities, less changes in prepaid card load obligations, customer deposits, merchant reserves and net operating lease assets and obligations.

These measures may not be comparable to similarly titled measures reported by other companies.

Management uses EBITDA, adjusted EBITDA, and adjusted operating cash flows as indicators of the Company's operating performance and ability to fund acquisitions, capital expenditures and other investments and, in the absence of refinancing options, to repay debt obligations.

Management believes EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows are helpful to investors in evaluating the Company's operating performance because non-cash costs and other items that management believes are not indicative of its results of operations are excluded.

We reported an adjusted EBITDA of $0.3 million for the quarter ended December 31, 2023, as compared to an adjusted EBITDA of $1.0 million for the same period in the prior year.

The Company defines adjusted EBITDA as EBITDA, as defined above, plus non-cash stock based compensation costs and certain non-recurring items, such as costs related to acquisitions.

The Company defines adjusted EBITDA margins as adjusted EBITDA, as defined above, divided by total revenues.

Management believes that EBITDA, adjusted EBITDA, and adjusted EBITDA margins are helpful to investors in evaluating the Company's operating performance because non-cash costs and other items that management believes are not indicative of its results of operations are excluded.

We reported adjusted EBITDA of $0.5 million for the quarter ended December 31, 2024, as compared to an adjusted EBITDA of $1.1 million for the same period in the prior year.

The decrease in adjusted EBITDA in the 2024 quarter was attributable to increases in SG&A combined with reduced profit margins.

We reported an adjusted EBITDA of $2.4 million for the twelve months ended December 31, 2023, as compared to an adjusted EBITDA loss of $0.4 million for the same period in the prior year.

The increase in adjusted EBITDA in 2023 was attributable to strong revenue growth contributing to increased gross profit versus the prior year, that outpaced our growth in SG&A.

We reported adjusted EBITDA of $2.9 million for the twelve months ended December 31, 2024, as compared to an adjusted EBITDA of $3.9 million for the same period in the prior year.

The decrease in adjusted EBITDA in 2024 was attributable to slightly lower revenues and profit margins, alongside increases in SG&A.

The following table is a reconciliation of Net Loss to EBITDA for the three and twelve months ended December 31, 2024 and 2023.

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Adjusted EBITDA margins

We reported cash provided by adjusted operating cash flows of $2.8 million for the twelve months ended December 31, 2023 (after adjusting for the impact of operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits, and merchant reserves), as compared to $0.7 million provided during the twelve months ended December 31, 2022.

Operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits and merchant reserves are deducted from operating cash flow, as we believe that these metrics do not serve in providing a clear picture of the true operational cash used or provided in a given time period.

These adjustments to net cash provided (used) by operating activities are not inclusive of any recurring expense items which are included in the calculation of operating income (loss), and only include changes in our assets and liabilities accounts on the balance sheet.

The Company believes Non-GAAP adjusted operating cash flow to be a more accurate indicator of cash contributions that can be used to sustain current and future business operations.

The increase in adjusted operating cash flows in the current year compared to the year prior was attributable to a decrease in the Company's net loss, due to revenue growth driving gross profit increases, at a rate that exceeded our SG&A increase versus the prior year.

The following table is a reconciliation from operating cash flow (used) to adjusted operating cash flow (used) for the twelve months ended December 31, 2023.

December 31, 2023

December 31, 2022

Reconciliation from Operating Cash Flow (used) to Non-GAAP Adjusted Operating Cash Flow (used):

Net cash provided (used) by operating activities

Operating cash flow (used) adjustments:

Prepaid card load obligations

Customer deposits

Merchant reserves

Operating lease right-of-use assets

Operating lease liabilities

Total adjustment of cash provided (used) by operating activities

Adjusted operating cash flows (used)

In previous periods, the Company reported the non-GAAP financial measure of adjusted operating cash flows, which excluded certain items from operating cash flows to provide a measure of cash generated from its core operations.

Beginning with the current reporting period, the Company is no longer presenting adjusted operating cash flows as a non-GAAP financial measure.

The decision to discontinue reporting adjusted operating cash flows is due to changes in the presentation of certain assets, specifically the movement of assets held for customers, into the financing activities section of our cash flow statement.

As a result of this reclassification, we believe that the need for the adjusted operating cash flows measure is no longer required, as the adjustments previously made to exclude these amounts are not necessary.

Use of Non-GAAP Financial Measures

EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flow should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

They are not measurements of our financial performance under GAAP and should not be considered as alternatives to revenue, net income, or cash provided (used) by operating activities, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses.

EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flow have limitations as analytical tools and you should not consider these Non-GAAP measures in isolation or as a substitute for analysis of our operating results as reported under GAAP.

EBITDA, adjusted EBITDA, and adjusted EBITDA margins should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

They are not measurements of our financial performance under GAAP and should not be considered as alternatives to revenue, or net income, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses.

EBITDA, adjusted EBITDA, and adjusted EBITDA margins have limitations as analytical tools and you should not consider these Non-GAAP measures in isolation or as a substitute for analysis of our operating results as reported under GAAP.

Results of Operations

Our revenues are principally derived from providing integrated electronic payment services to merchants and businesses, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH, network, the program management and processing of prepaid debit cards, and we also now offer additional output solution services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions.

Our revenues are principally derived from providing integrated electronic payment services to merchants and businesses, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH, network, the program management and processing of prepaid debit cards, and we also offer additional output solution services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions.

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.

Three Months Ended December 31,

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Output Solutions revenue

Interest - ACH and complementary services

Interest - Prepaid card services

Interest - Output Solutions

Total Revenue

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Output Solutions revenue

Interest - ACH and complementary services

Interest - Prepaid card services

Interest - Output Solutions

Total Revenue

Total revenues for 2023 increased by 19% to $82.6 million from $69.4 million in 2022.

Key drivers of the revenue growth include growth in our Prepaid business line as a result of sustained and growing relationships with major cities in the U.S.

by facilitating disbursements to individuals and families in need of financial assistance.

This growth was bolstered by gains in our Output solutions business line, thanks to our ability to capitalize on strong cross-selling efforts and execution on our well-developed pipeline of new business opportunities, along with growth in credit card revenues due to our PayFac business line's continued traction with independent software vendors, or ISVs.

Our ACH and complementary services revenues were up slightly on the year, after recovering from our exit from crypto following the loss of one of our largest customers, thanks to net new customer relationships and growth in our ancillary ACH services, such as RCC.

Total revenues for 2024 decreased by 1% to $82.9 million from $84.1 million in 2023.

This decrease came entirely from our prepaid business line, which declined 25% as a result of the anticipated reduction in breakage revenues from COVID incentive programs, which began winding down in 2024.

The revenue lost from COVID incentive programs was approximately $12.1 million in 2024.

However, the lower revenues in our prepaid business line were partially mitigated thanks to the growth of existing relationships, and net new customers, specifically in the corporate and commercial card space.

The decline in the prepaid business line was further offset by gains in our ACH and complementary services business line of 12%, through continued sales efforts to grow our organic customer base, alongside net new client acquisitions.

Output solutions and credit card revenues were up slightly, 1% and 3% respectively.

This was due to new processing equipment being acquired in October 2023 for Output Solutions, and our PayFac business line's continued traction with independent software vendors, or ISVs.

The growth in our Payfac business line was 22%, countering the attrition in our legacy credit card portfolios, and now represents over 50% of total credit card processing revenues.

The growth in PayFac is anticipated to have a more significant impact overall credit card revenues.

Interest revenues were also up 55% on the year across all sectors, benefiting from higher interest rates, and improved management of our cash balances.

Cost of Services

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Cost of services expense was $63.3 million and $64.0 million for 2024 and 2023, respectively.

Cost of services expenses increased by $9.2 million, or 17%, in 2023 as compared to 2022 primarily due to increased transaction costs associated with our revenue growth.

Cost of services expenses decreased by $0.7 million, or 1%, in 2024 as compared to 2023 primarily due to decreased transaction costs associated with our lower revenues.

Gross profit is the net profit after deducting the cost of services.

Gross profit was $19.6 million and $20.1 million for 2024 and 2023, respectively.

Gross profit increased by $4.0 million, or 27%, in 2023 as compared to 2022.

The key drivers of the increased gross profit were attributable to strong revenue growth, and improved gross margin percentages due to improved profitability across our business lines with increased scale.

Gross profit decreased by $0.5 million, or 2%, in 2024 as compared to 2023.

The key drivers of the decreased gross profit were attributable to slightly lower revenues, though gross margin percentages were also down slightly from 23.9% in 2023 to 23.7% in 2024 resulting in lower total gross profits.

The decline in gross margin percentage was in large part due to the anticipated wind down of our highly profitable COVID incentive programs in 2024.

Stock-based Compensation

Stock-based compensation expense increased marginally to $2.2 million in 2023 from $2.1 million in 2022.

Stock-based compensation expense decreased slightly to $2.1 million in 2024 from $2.2 million in 2023.

Our stock-based compensation expenses for 2024 and 2023 represented the amortization of deferred compensation expenses related to incentive stock grants to employees, officers and directors.

The increase in stock-based compensation is primarily attributable to our February 8, 2023 employee stock grant.

Please refer to Note 8 to our Consolidated Financial Statements included elsewhere in this annual report for incremental information regarding these stock grants.

The decrease in stock-based compensation is primarily attributable to various three year RSUs and 10 year grants fully vesting during 2024.

These vesting offset the increase in stock-based compensation expense related to our June 21, 2024 stock grants.

Please refer to Notes 8 and 10 to our Consolidated Financial Statements included elsewhere in this annual report for incremental information regarding these stock grants.

Other Selling, General and Administrative Expenses

Other selling, general and administrative expenses, or SG&A, increased to $16.7 million in 2024 from $16.2 million in 2023.

The increase of $1.2 million, or 8%, represented continued investments in the Company's security and IT infrastructure to strengthen the Company's defense from cybersecurity risks.

Further investments were made to increase our customer success, implementations of merchant onboarding processes, and partner and client integrations strategy to sustain existing operations and future growth, as well as staffing and employee retention.

The increase of $0.5 million, or 3%, represented continued investments in staffing and employee retention through various hires and salary increases, alongside increased expenditures related to the Company's security and IT infrastructure to strengthen the Company's defense from cybersecurity risks.

Depreciation and Amortization

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These assets include property, plant, and equipment, along with intangible assets acquired through acquisition, or developed as internal use software.

Depreciation and amortization expense decreased to $2.1 million in 2023 as compared to $2.7 million in 2022.

The decrease of $0.6 million, or 24%, was primarily attributable to the completed depreciation of customer list assets from our 2017 acquisition of Singular Payments.

Interest income increased to $1.7 million in 2023 from $15,237 in 2022 due to higher interest-bearing cash balances.

Other income (expense) was $44,798 for 2023, as compared to expense of $4,051 for 2022.

Income tax expense was $292,524 in 2023 and $280,000 in 2022.

The income tax expense represents amounts incurred under the Texas margin tax and Tennessee franchise tax.

Net income tax expense reported was $292,524 in 2023, and $280,000 in 2022.

Depreciation and amortization expense increased to $2.3 million in 2024 as compared to $2.1 million in 2023.

The increase of $0.2 million, or 9%, was primarily attributable to our continued investment in our internal use software, which is continually being developed to offer new or improved consumer offerings.

Interest income increased to $0.5 million in 2024 from $0.2 million in 2023 due to higher interest-bearing cash balances.

Other income was $1.7 million for 2024, as compared to expense of $0.1 million for 2023 due to the employee retention tax credit recorded under the CARES Act, and extended by the ARPA, received in the year ended December 31, 2024, recorded as other income in our consolidated statement of operations.

State income tax expense was $449,227 in 2024 and $292,524 in 2023.

The state income tax expense represents amounts incurred under the Texas margin tax.

Net income tax benefit reported was $2.6 million in 2024, and an expense of $0.3 million in 2023 due to the decrease in our valuation allowance of approximately $3.0 million, increased our deferred tax asset to approximately $4.7 million, resulting in a federal income tax benefit to the Company of $3.0 million.

Please refer to Note 9 to our Consolidated Financial Statements included elsewhere in this annual report for incremental information regarding this deferred tax asset.

Net Income (Loss)

We reported a net loss of $0.5 million and $5.5 million for the years ended December 31, 2023 and December 31, 2022, respectively.

The decrease in net loss was primarily related to our strong revenue growth driving increased gross profits versus the prior year, at a rate that outpaced our increased in SG&A alongside significant improvements in interest income.

Income (loss) before income taxes was $0.7 million in 2024 and a loss of $0.2 million in 2023, due primarily to $1.7 million recorded as part of the employee retention tax credit issued under the CARES act.

We reported a net income of $3.3 million and a net loss of $0.5 million for the years ended December 31, 2024 and December 31, 2023, respectively.

The increase in net income (loss) was due to the decrease in our valuation allowance of approximately $3.0 million, increased our deferred tax asset to approximately $4.7 million, resulting in a federal income tax benefit to the Company of $3.0 million.

Please refer to Note 9 to our Consolidated Financial Statements included elsewhere in this annual report for additional information regarding this deferred tax asset.

Liquidity and Capital Resources

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At December 31, 2024, we had $8.1 million of cash and cash equivalents, as compared to $7.2 million of cash and cash equivalents at December 31, 2023.

The increase was primarily a result of the decrease in net loss, combined with reduced stock repurchases in 2023 versus 2022.

For the year ended December 31, 2023 net cash provided by operating activities was $14.9 million and for the year ended December 31, 2022, cash used by operations was $17.0 million.

The increase was primarily a result of the increase in net income.

For the year ended December 31, 2024 net cash provided by operating activities was $2.9 million and for the year ended December 31, 2023, cash provided by operations was $3.5 million due primarily to the increase of prepaid expenses and decrease in merchant reserves.

We expect available cash and cash equivalents and internally generated funds to be sufficient to support working capital needs, capital expenditures (including acquisitions), and our debt service obligations.

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Cash from operating activities is dependent on our net income (loss), less depreciation, amortization, credit losses, deferred federal income tax, non-cash stock-based compensation, the amortization of warrant costs, and net of the changes in our operating assets and liabilities.

These assets and liabilities include our accounts receivable, prepaid expenses, operating lease right-of-use assets, inventory, other assets, accounts payable and accrued expenses, operating lease liabilities, prepaid card load obligations, merchant reserves, customer deposits, and deferred revenues.

These assets and liabilities include our accounts receivable, prepaid expenses, operating lease right-of-use assets, inventory, other assets, accounts payable and accrued expenses, operating lease liabilities, merchant reserves, customer deposits, and deferred revenues.

To the extent we require other sources of capital, we may seek a commercial line of credit or sell debt or equity securities, although we may not be able to complete any financing on terms acceptable to us, if at all.

We reported a net loss of $0.5 million and $5.5 million for the years ended December 31, 2023 and 2022, respectively.

We reported net income of $3.3 million and a net loss $0.5 million for the years ended December 31, 2024 and 2023, respectively.

Additionally, we reported working capital of $10.2 million and $8.0 million at December 31, 2024 and 2023, respectively.

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We cannot assure you that such financing may be available to us on terms acceptable to us, or at all, in the future.

As of December 31, 2024, the Company maintains an undrawn line of credit and an outstanding letter of credit,

both of which were established in connection with a bond required for the Company's appeal of the court’s decision in the KDHM lawsuit.

The Company has an unsecured revolving line of credit with a maximum borrowing capacity of $475,000.

The facility was established on May 29, 2024, and matures on June 5, 2026.

As of December 31, 2024, no amounts had been drawn under this line of credit since its origination.

This line of credit was secured to support the bond requirement in the KDHM lawsuit appeal, but remains fully available.

The Company has an irrevocable letter of credit in the amount of $474,229, issued on June 3, 2024, with a maturity date of July 3, 2025.

This letter of credit was obtained as part of the bonding requirement for the KDHM lawsuit appeal and has not been drawn upon since its issuance.

These credit facilities were arranged to comply with legal requirements related to the Company’s appeal and provide additional liquidity resources if needed.

Management continues to monitor its financial position and believes that existing cash balances, along with these credit facilities, are sufficient to meet operational needs and legal obligations.

From time to time, we have sold shares of our common stock in order to provide us liquidity.

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For example, in September 2020, we sold 4,705,883 shares of our common stock and received net proceeds of approximately $8 million.

We cannot assure you that we will be able to sell shares of our equity securities on terms acceptable to us or at all.

Net cash provided by operating activities totaled $14.9 million for 2023 as compared to net cash used by operating activities of $17.0 million in 2022.

After adjusting for the impact of operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations and merchant reserves included in the statement of cash flows, net cash provided by adjusted operating activities was $2.8 million for the year ended December 31, 2023 and net cash provided by adjusted operating activities was $0.7 million for the year ended December 31, 2022.

Operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits and merchant reserves are deducted from operating cash flow, as we believe these metrics do not serve in providing a clear picture of the true operational cash used or provided in a given time period.

The Company believes Non-GAAP adjusted operating cash flow to be a more accurate indicator of cash contributions that can be used to sustain current and future business operations.

The increase in net cash generated by adjusted operating activities in 2023 (after adjusting for the impact of operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations and merchant reserves) was primarily attributable to decreases in our net loss related to increased interest income, revenue, and gross profit growth.

We cannot assure you that in the future we will be able to sell shares of our equity securities on terms acceptable to us or at all.

Net cash provided by operating activities totaled $2.9 million for 2024 as compared to net cash provided by operating activities of $3.5 million in 2023.

The decrease in cash provided by operating activities was driven primarily by increases in prepaid expenses, and decreases in merchant reserves.

Net cash used by investing activities was $0.9 million for 2024 and $0.8 million in 2023.

The decrease in investing activities was due to reduced expenditures on the purchase of property and equipment.

Net cash used by financing activities for 2023 was $0.5 million compared to net cash used by financing activities of $1.4 million for 2022.

The decrease in cash used by financing activities was primarily attributable to a reduction in stock repurchases in 2023, a decrease of approximately $0.9 million over 2022.

The minor increase in investing activities was due to increased expenditures in property and equipment.

Net cash used by financing activities for 2024 was $5.1 million compared to net cash provided by financing activities of $6.1 million for 2023.

The increase in cash used by financing activities was primarily attributable to changes in the balance of our assets held for customers related to their payment processing, and in increase of treasury stock repurchases in 2024 by approximately $1.0 million over 2023.

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis