Usio, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm - Pannell Kerr Forster of Texas P.C. 36 Report of Independent Registered Public Accounting Firm - ADKF P.C. 38 Consolidated Balance Sheets as of December 31, 2024 and 2023 40 Consolidated Statements of Operations for the years ended December 31, 2024 and 2023 41 Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2024 and 2023 42 Consolidated Statements of Cash Flows for the years ended December 31, 2024 and 2023 43 Notes to Consolidated Financial Statements 44 35 Table of Contents Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Usio, Inc. and Subsidiaries Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of Usio, Inc. and Subsidiaries (collectively referred to as the “Company”) as of December 31, 2024, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows, for the year ended December 31, 2024, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and the results of its operations and its cash flows for the year ended December 31, 2024 in conformity with accounting principles generally accepted in the United States of America. Basis of Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As a part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matter The critical audit matters communicated below is a matter arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 36 Table of Contents Deferred Tax Assets – Valuation Allowance Description of the Matter The Company recognizes deferred tax assets to the extent that it is expected that these assets are more likely than not to be realized. The Company evaluates the realizability of the deferred tax assets, and to the extent that the Company estimates that it is more likely than not that a benefit will not be realized, the carrying amount of the deferred tax assets is reduced with a valuation allowance. We identified the valuation of deferred tax assets as a critical audit matter because of the significant judgments made by management in projecting future taxable income. How We Addressed the Matter in Our Audit Our audit procedures related to projected future taxable income and the determination of whether it is more likely than not that the deferred tax assets will be realized included the evaluation of the reasonableness of management’s projected future taxable income. We compared the forecast of future taxable income estimates to historical earnings and evaluated the inputs, assumptions and trends used by management for developing a forecast of future taxable income. /s/ Pannell Kerr Forster of Texas, P.C. Houston, Texas United States March 26, 2025 PCAOB ID 342 We have served as the Company's auditor since 2024. 37 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Usio, Inc. and Subsidiaries Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of Usio, Inc. and Subsidiaries (collectively referred to as the “Company”) as of December 31, 2023, and the related consolidated statement of operations, changes in stockholders’ equity and cash flows, for the year in the period ended December 31, 2023, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and the results of its operations and its cash flows for the year in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Basis of Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As a part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 38 Table of Contents Intangible Assets – Customer Lists Description of the Matter As of December 31, 2023, the Company had intangible assets relating to acquired customer lists which are recorded at their cost basis net of accumulated amortization. On at least an annual basis, the Company performs an analysis of the carrying value of these customer lists to evaluate the assets for impairment. The customer list is amortized over a five-year term and no impairment has been recognized on the customer list portfolios since their acquisition. We identified the customer list valuation as a critical audit matter because of the significant estimates and forward-looking assumptions used which could be affected by future economic and market conditions. How We Addressed the Matter in Our Audit To test the fair value of the Company's customer list intangible assets, our audit procedures included, among others, evaluating the Company's valuation model, evaluating the method and significant assumptions used, and testing the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We also evaluated whether the key factors considered in the evaluation were consistent with evidence obtained in other areas of the audit. Deferred Tax Assets – Valuation Allowance Description of the Matter The Company recognizes deferred tax assets to the extent that it is expected that these assets are more likely than not to be realized. The Company evaluates the realizability of the deferred tax assets, and to the extent that the Company estimates that it is more likely than not that a benefit will not be realized, the carrying amount of the deferred tax assets is reduced with a valuation allowance. We identified the valuation of deferred tax assets as a critical audit matter because of the significant judgments made by management in projecting future taxable income. How We Addressed the Matter in Our Audit Our audit procedures related to projected future taxable income and the determination of whether it is more likely than not that the deferred tax assets will be realized included the evaluation of the reasonableness of management’s projected future taxable income. We compared the estimates to historical earnings and evaluated the inputs and assumptions used by management for developing future forecasts. /s/ ADKF, P.C. ADKF, P.C. San Antonio, Texas United States March 27, 2024 PCAOB ID 297 We served as the Company's auditor from 2004 to 2023. 39 Table of Contents USIO, INC. CONSOLIDATED BALANCE SHEETS December 31, 2024 December 31, 2023 ASSETS Cash and cash equivalents $ 8,056,891 $ 7,155,687 Accounts receivable 5,053,639 5,564,138 Accounts receivable, tax credit 1,494,612 — Settlement processing assets 47,104,006 44,899,603 Prepaid card load assets 25,648,688 31,578,973 Customer deposits 1,918,805 1,865,731 Inventory 403,796 422,808 Prepaid expenses and other 585,500 444,071 Current assets before merchant reserves 90,265,937 91,931,011 Merchant reserves 4,890,101 5,310,095 Total current assets 95,156,038 97,241,106 Property and equipment, net 3,194,818 3,660,092 Other assets: Intangibles, net 881,346 1,753,333 Deferred tax asset 4,580,440 1,504,000 Operating lease right-of-use assets 3,037,928 2,420,782 Other assets 357,877 355,357 Total other assets 8,857,591 6,033,472 Total Assets $ 107,208,447 $ 106,934,670 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 1,256,819 $ 1,031,141 Accrued expenses 3,366,925 3,801,278 Operating lease liabilities, current portion 612,680 633,616 Equipment loan, current portion 147,581 107,270 Settlement processing obligations 47,104,006 44,899,603 Prepaid card load obligations 25,648,688 31,578,973 Customer deposits 1,918,805 1,865,731 Current liabilities before merchant reserve obligations 80,055,504 83,917,612 Merchant reserve obligations 4,890,101 5,310,095 Total current liabilities 84,945,605 89,227,707 Non-current liabilities: Equipment loan, non-current portion 571,862 718,980 Operating lease liabilities, non-current portion 2,534,017 1,919,144 Total liabilities 88,051,484 91,865,831 Commitments and contingencies (Note 14) Stockholders' Equity: Preferred stock, $ 0.01 par value, 10,000,000 shares authorized; - 0 - shares issued and outstanding in 2024 and 2023 — — Common stock, $ 0.001 par value, 200,000,000 shares authorized; 29,902,415 and 28,671,606 issued and 26,609,651 and 26,332,523 outstanding in 2024 and 2023 (see Note 12) 198,317 197,087 Additional paid-in capital 99,676,457 97,479,830 Treasury stock, at cost; 3,292,764 and 2,339,083 shares in 2024 and 2023 (see Note 12) ( 5,770,592 ) ( 4,362,150 ) Deferred compensation ( 6,914,563 ) ( 6,907,775 ) Accumulated deficit ( 68,032,656 ) ( 71,338,153 ) Total stockholders' equity 19,156,963 15,068,839 Total Liabilities and Stockholders' Equity $ 107,208,447 $ 106,934,670 The accompanying notes are an integral part of these consolidated financial statements. 40 Table of Contents USIO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS December 31, 2024 December 31, 2023 Revenues $ 82,931,840 $ 84,066,245 Cost of services 63,317,396 63,992,417 Gross profit 19,614,444 20,073,828 Selling, general and administrative: Stock-based compensation 2,093,406 2,222,969 Other expenses 16,728,081 16,216,690 Depreciation and Amortization 2,263,302 2,081,533 Total operating expenses 21,084,789 20,521,192 Operating loss ( 1,470,345 ) ( 447,364 ) Other income: Interest income 464,746 219,986 Other income 1,737,685 50,000 Interest expense ( 53,802 ) ( 5,202 ) Other income, net 2,148,629 264,784 Income (Loss) before income taxes 678,284 ( 182,580 ) Federal income tax (benefit) ( 3,076,440 ) — State income tax expense 449,227 292,524 Income taxes ( 2,627,213 ) 292,524 Net Income (Loss) $ 3,305,497 $ ( 475,104 ) Earnings (Loss) Per Share Basic income (loss) per common share: $ 0.12 $ ( 0.02 ) Diluted income (loss) per common share: $ 0.12 $ ( 0.02 ) Weighted average common shares outstanding (see Note 12) Basic 26,852,129 26,490,868 Diluted 26,852,129 26,490,868 The accompanying notes are an integral part of these consolidated financial statements. 41 Table of Contents USIO, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Additional Total Common Stock Paid - In Treasury Deferred Accumulated Stockholders' Shares Amount Capital Stock Compensation Deficit Equity Balance at December 31, 2022 27,044,900 $ 195,471 $ 94,048,603 $ ( 3,749,027 ) $ ( 5,697,900 ) $ ( 70,863,049 ) $ 13,934,098 Issuance of common stock under equity incentive plan 1,731,506 1,731 3,619,315 — ( 2,650,505 ) — 970,541 Reversal of deferred compensation amortization that did not vest ( 115,000 ) ( 115 ) ( 188,088 ) — 103,091 — ( 85,112 ) Deferred compensation amortization — — — — 1,337,539 — 1,337,539 Non-cash return of treasury stock — — — ( 156,162 ) — — ( 156,162 ) Purchase of treasury stock — — — ( 456,961 ) — — ( 456,961 ) Net loss — — — — — ( 475,104 ) ( 475,104 ) Balance at December 31, 2023 28,661,406 $ 197,087 $ 97,479,830 $ ( 4,362,150 ) $ ( 6,907,775 ) $ ( 71,338,153 ) $ 15,068,839 Issuance of common stock under equity incentive plan 1,189,050 1,178 2,130,336 — ( 1,497,300 ) — 634,214 Issuance of common stock under employee stock purchase plan 66,959 67 97,596 — — — 97,663 Reversal of deferred compensation amortization that did not vest ( 15,000 ) ( 15 ) ( 31,305 ) — 31,320 — — Deferred compensation amortization — — — — 1,459,192 — 1,459,192 Purchase of treasury stock — — — ( 1,408,442 ) — — ( 1,408,442 ) Net income — — — — — 3,305,497 3,305,497 Balance at December 31, 2024 29,902,415 $ 198,317 $ 99,676,457 $ ( 5,770,592 ) $ ( 6,914,563 ) $ ( 68,032,656 ) $ 19,156,963 The accompanying notes are an integral part of these consolidated financial statements. 42 Table of Contents USIO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS December 31, 2024 December 31, 2023 Operating Activities Net income (loss) $ 3,305,497 $ ( 475,104 ) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation 1,391,315 1,209,506 Amortization 871,987 872,027 Loss on disposal of equipment 18,340 — Deferred federal income tax ( 3,076,440 ) — Employee stock-based compensation 2,093,406 2,190,369 Vendor stock-based compensation — 32,600 Non-cash revenue from return of treasury stock — ( 156,162 ) Changes in operating assets and liabilities: Accounts receivable 510,499 ( 1,192,498 ) Accounts receivable, tax credit ( 1,494,612 ) — Prepaid expenses and other ( 141,429 ) 6,318 Operating lease right-of-use assets ( 617,146 ) 374,701 Other assets ( 2,520 ) — Inventory 19,012 84,547 Accounts payable and accrued expenses ( 208,675 ) 252,689 Operating lease liabilities 593,937 ( 403,506 ) Merchant reserves ( 419,994 ) 400,594 Customer deposits 53,074 311,609 Net cash provided by operating activities 2,896,251 3,507,690 Investing Activities Purchases of property and equipment ( 991,881 ) ( 834,964 ) Sale of equipment 47,500 — Net cash used by investing activities ( 944,381 ) ( 834,964 ) Financing Activities Payments on equipment loan ( 106,807 ) ( 56,992 ) Proceeds from issuance of common stock 97,663 — Purchases of treasury stock ( 1,408,442 ) ( 456,961 ) Assets held for customers ( 3,725,882 ) 6,570,747 Net cash provided (used) by financing activities ( 5,143,468 ) 6,056,794 Change in cash, cash equivalents, customer deposits and merchant reserves ( 3,191,598 ) 8,729,520 Cash, cash equivalents, customer deposits and merchant reserves, beginning of year 90,810,089 82,080,569 Cash, Cash Equivalents, Settlement Processing Assets, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End of Year $ 87,618,491 $ 90,810,089 Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 53,802 $ 5,202 Income taxes 290,144 116,204 Non-cash operating activities: Right of use assets obtained in exchange for operating lease liabilities $ 1,156,543 $ — Non-cash investing and financing activities: Issuance of deferred stock compensation $ 1,497,300 $ 2,650,505 Non-cash transaction for acquisition of equipment in exchange for note payable — 811,819 The reconciliation of cash and cash equivalents to cash, cash equivalents, customer deposits and merchant reserves is as follows for each period presented: December 31, 2024 December 31, 2023 Beginning cash, cash equivalents, settlement processing assets, prepaid card load assets, customer deposits and merchant reserves: Cash and cash equivalents $ 7,155,687 $ 5,709,117 Settlement processing assets 44,899,603 49,737,068 Prepaid card load assets 31,578,973 20,170,761 Customer deposits 1,865,731 1,554,122 Merchant reserves 5,310,095 4,909,501 Total $ 90,810,089 $ 82,080,569 Ending cash, cash equivalents, settlement processing assets, prepaid card load assets, customer deposits and merchant reserves: Cash and cash equivalents $ 8,056,891 $ 7,155,687 Settlement processing assets 47,104,006 44,899,603 Prepaid card load assets 25,648,688 31,578,973 Customer deposits 1,918,805 1,865,731 Merchant reserves 4,890,101 5,310,095 Total $ 87,618,491 $ 90,810,089 The accompanying notes are an integral part of these consolidated financial statements. 43 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Note 1. Description of Business and Summary of Significant Accounting Policies Organization: Usio, Inc., along with its subsidiaries, FiCentive, Inc., a Nevada corporation, and Zbill, Inc., a Nevada corporation, provides integrated electronic payment services, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH network to billers and retailers. The Company also has an additional wholly-owned subsidiary, Usio Output Solutions, Inc., which is the entity for Output Solutions' operations. In addition, the Company operates various product websites, such as www.usio.com, www.singularpayments.com, www.payfacinabox.com, www.ficentive.com, www.akimbocard.com, and www.usiooutput.com. Principles of Consolidation and Basis of Presentation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition: Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services. Revenue is recognized during the period in which the transactions are processed or when the related services are performed. The Company complies with ASC 606 - 10 and reports revenues at gross as a principal versus net as an agent. Although some of the Company's processing agreements vary with respect to specific credit risks, the Company has determined for each agreement it is acting in the principal role. Merchants may be charged for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through third -party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations. Certain card distributors remit payment of fees earned 45 days after the end of the processing period. Prepaid card distributors have payment terms of 30 days following the end of the month. Sales taxes billed are reported directly as a liability to the taxing authority and are not included in revenue. Usio Output Solutions, Inc. provides bill preparation, presentment and mailing services. Revenue from Output Solutions is recognized when the related services are performed for printing and delivered to USPS for postage. 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. Year Ended December 31, 2024 2023 $ Change % Change ACH and complementary service revenue $ 16,678,324 $ 14,888,973 $ 1,789,351 12 % Credit card revenue 29,267,546 28,476,591 790,955 3 % Prepaid card services revenue 14,080,650 18,729,350 ( 4,648,700 ) ( 25 )% Output Solutions revenue 20,618,996 20,496,195 122,801 1 % Interest - ACH and complementary services 789,717 495,972 293,745 59 % Interest - Prepaid card services 1,345,679 932,048 413,631 44 % Interest - Output Solutions 150,928 47,116 103,812 220 % Total Revenue $ 82,931,840 $ 84,066,245 $ ( 1,134,405 ) ( 1 )% Deferred Revenues: The Company records deferred revenues when it receives payments or issues invoices in advance of transferring control of promised goods or services to a customer. The advance consideration received from a customer is deferred until the Company provides the customer that product or service. The Company had no deferred revenues in 2024 or 2023 . 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: The Company maintains pre-funding accounts for its customers to facilitate prepaid card loads as initiated by our customer. These prepaid card load assets are carried on the Company's balance sheet with a corresponding liability. 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 United States Postal Service. 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. 44 Table of Contents Merchant Reserves: The Company has merchant reserve requirements associated with Automated Clearing House, or ACH transactions. The merchant reserve assets are carried on the Company's balance sheet with a corresponding liability. Merchant Reserves are set for each merchant. Funds are collected from each merchant and held as collateral to minimize contingent liabilities associated with any losses that may occur under the merchant agreement. While this cash is not restricted in its use, the Company believes that designating this cash to collateralize Merchant Reserves strengthens its fiduciary standing with the Company's member sponsors and is in accordance with the guidelines set by the card networks. The Company earns interest on these merchant reserves, which is recognized as revenue in our ACH and complementary services business line. 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. Inventory : Inventory is stated at the lower of cost or net realizable value. At December 31, 2024 and 2023 , inventory consisted primarily of printing and paper supplies used for Output Solutions. Property and Equipment: Property and equipment are stated at cost. Depreciation and amortization are computed on a straight-line method over the estimated useful lives of the related assets, ranging from three to ten years. Leasehold improvements are amortized over the lesser of the estimated useful lives or remaining lease period. Expenditures for maintenance and repairs are charged to expense as incurred. Accounting for Internal Use Software: The Company capitalizes the costs associated with software developed and / or software obtained for internal use. The software is capitalized when both the preliminary project stage is complete, and the software being developed is placed-in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (iii) interest costs incurred, when material, while developing internal-use software. The Company ceases capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose. For the years ended December 31, 2024 and December 31, 2023 , the Company capitalized $ 796,004 and $ 634,571 , respectively. Concentration of Credit Risk: Financial instruments that potentially expose the Company to credit risk consist of cash and cash equivalents, and accounts receivable. The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent account balances exceed the amount insured by the FDIC, which is $250,000. Accounts receivables potentially subject the Company to concentrations of credit risk. The Company’s customer base operates in a variety of industries and is geographically dispersed. The Company closely monitors extensions of credit. Estimated credit losses have been recorded in the consolidated financial statements. Recent credit losses have been within management's expectations. No customer accounted for more than 10% of revenues in 2024 or 2023 . 45 Table of Contents Fair Value Measurements: The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: • Level 1 inputs - unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date; • Level 2 inputs - other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability; and • Level 3 inputs - unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings are reflected in the accompanying consolidated financial statements at cost, which approximates fair value because of the short-term maturity of these instruments. Impairment of Long-Lived Assets and Intangible Assets: The Company reviews periodically, on at least an annual basis, the carrying value of its long-lived assets and intangible assets and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the fair value of a long-lived asset, determined based upon the estimated future cash inflows attributable to the asset, less estimated future cash outflows, is less than the carrying amount, an impairment loss is recognized. Reserve for Processing Losses: If, due to insolvency or bankruptcy of one of the Company’s merchant customers, or for any other reason, the Company is not able to collect amounts from its card processing, credit card, ACH or merchant prepaid customers that have been properly "charged back" by the customer or if a prepaid cardholder incurs a negative balance, the Company must bear the credit risk for the full amount of the transaction. The Company may require cash deposits and other types of collateral from certain merchants to minimize any such risk. In addition, the Company utilizes a number of systems and procedures to manage merchant risk. ACH, prepaid and credit card merchant processing loss reserves are primarily determined by performing a historical analysis of our loss experience and considering other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company with its prepaid card holders. This reserve amount is subject to the risk that actual losses may be greater than our estimates. The Company has not incurred any significant processing losses to date. Estimates for processing losses vary based on the volume of transactions processed and could increase or decrease accordingly. The Company evaluates its risk for such transactions and estimates its potential processing losses based primarily on historical experience and other relevant factors. At December 31, 2024 and 2023 , respectively, the Company’s reserve for processing losses was $ 897,116 and $ 826,528 , respectively. Advertising Costs: Advertising is expensed as incurred. The Company incurred approximately $ 20,173 and $ 16,500 in advertising costs in 2024 and 2023 , respectively. Accounting for Income Taxes : Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authority. Significant judgement is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We review our tax positions yearly and adjust the balances as new information becomes available. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings, and available tax planning strategies. These rely heavily on estimates that are based on a number of factors, including historical data, and business forecasts. To the extent deferred tax assets are not expected to be realized, we record a valuation allowance. We recognize and measure uncertain tax positions in accordance with U.S. GAAP, pursuant to which we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. As with all businesses, the Company’s tax returns are subject to periodic examination. The Company’s federal returns for the past four years remain open to examination. The Company is subject to the Texas margin tax and Tennessee franchise tax. Management is not aware of any tax positions that would have a significant impact on its financial position. Stock-Based Compensation: The Company recognizes as compensation expense all share-based payment awards made to employees and directors, including grants of stock options and warrants, based on estimated fair values. Fair value is generally determined based on the closing price of the Company’s common stock on the date of grant. 401 (k) Plan: The Company has a defined contribution plan, or 401 (k) Plan, pursuant to Section 401 (k) of the Internal Revenue Code. All eligible full and part-time employees of the Company who meet certain age requirements may participate in the 401 (k) Plan. Participants may contribute between 1 % and 80 % of their pre-tax compensation, but not in excess of the maximum allowable under the Code. The 401 (k) Plan allows for discretionary and matching contributions by the Company. In 2024 , the Company matched 100 % of employee contributions up to 3 % and 50 % of the employee contribution over 3 % with a maximum employer contribution of 4 %. The Company made matching contributions of $ 205,485 and $ 280,619 in 2024 and 2023 , respectively. Earnings (Loss) Per Share: The Company’s basic net income (loss) per common share is based on the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per common share is calculated using the treasury stock method and is based on the weighted average number of common shares and all potentially dilutive common shares outstanding during the year which includes common stock options and warrants. When a net loss per common share exists, all potentially dilutive common shares outstanding are anti-dilutive and are therefore excluded from the calculation of diluted weighted average shares outstanding. See “Note 11 – Net Income (Loss) per Share” for further discussion. 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 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. 46 Table of Contents Note 2. Property and Equipment Property and equipment consisted of the following at December 31: 2024 2023 Software $ 8,562,604 $ 7,688,476 Equipment 3,624,209 3,542,707 Furniture and fixtures 841,182 818,522 Leasehold improvements 221,216 207,624 Total property and equipment 13,249,211 12,257,329 Less: accumulated depreciation ( 10,054,393 ) ( 8,597,237 ) Net property and equipment $ 3,194,818 $ 3,660,092 Note 3. Intangibles Information Management Solutions, LLC Acquisition ( 2020 ) On December 15, 2020, we acquired substantially all of assets of Information Management Solutions, LLC. The intangibles acquired in such acquisition consist of customer list assets of $ 4,359,335 at cost (net of accumulated amortization of $ 3,487,748 at December 31, 2024 ). The fair value of the customer list was calculated using the net present value of the projected gross profit to be generated by the customer list over 60 months beginning in January 2021 and ending in December 2025. Annual amortization expense is $ 871,867 per year through the year 2025. Note 4. Valuation Accounts Valuation and allowance accounts included the following at December 31: Net Charged Balance to Balance End Beginning of Costs and of Year Expenses Transfers Net Write-Off Year 2024 Allowance for expected credit losses $ 319,000 $ 34,310 $ — $ ( 29,310 ) $ 324,000 Reserve for processing losses 826,528 70,588 — — 897,116 2023 Allowance for expected credit losses $ 319,000 $ — $ — $ — $ 319,000 Reserve for processing losses 755,494 71,034 — — 826,528 Accounts receivables, net and contract liabilities consist of the following as of: December 31, 2024 December 31, 2023 January 1, 2023 Trade $ 6,548,251 $ 5,564,138 $ 4,375,167 Related Party — — — Accounts receivable, net $ 6,548,251 $ 5,564,138 $ 4,375,167 Contract liabilities $ — $ — $ — 47 Table of Contents Note 5. Loans Equipment Loans On March 20, 2021, the Company entered into a debt arrangement to finance $ 165,996 for the purchase of an Output Solutions sorter. The loan is for a period of 36 months with a maturity date of March 20, 2024. The repayment amount is for 36 months at $ 4,902 per month. Annual payments are $ 58,821 . The financing is at an interest rate of 3.95 %. The Equipment Loan was paid off in its entirety in 2024 with total year payments of $ 14,536 . On October 1, 2023, the Company entered into a debt arrangement to finance $ 811,819 for the purchase of an Output Solutions folder and inserter. The loan is for a period of 66 months with a maturity date of April 5, 2029 and annual interest of 6.75 %. Monthly principal and interest payments are required in the amount of $ 16,017 . Current year payments on the Equipment Loan were $ 146,074 . 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. Line of Credit 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. Letter of Credit 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. Future payments on current debt arrangements are as follows at December 31, 2024 : Year ended December 31, Amount Due Remaining Balance 2025 $ 147,581 $ 571,862 2026 158,043 413,819 2027 169,048 244,771 2028 180,818 63,953 2029 63,953 — Total payments $ 719,443 48 Table of Contents Note 6. Accrued Expenses Accrued expenses consisted of the following balances at December 31: 2024 2023 Accrued commissions $ 425,486 $ 2,433,353 Reserve for processing losses 897,116 826,528 Other accrued expenses 881,925 246,444 Accrued taxes 474,561 294,953 Accrued salaries 687,837 — Total accrued expenses $ 3,366,925 $ 3,801,278 49 Table of Contents Note 7. Operating Leases The Company leases approximately 10,535 square feet of office space for its San Antonio, TX executive offices and operations. On October 19, 2021 we renewed our lease, to run concurrently with our additional leased space in the same building. The lease expires on December 31, 2025. Rental expense under the operating lease was $ 165,817 and $ 157,682 for the years ended December 31, 2024 and 2023 , respectively. On March 15, 2021, we entered into a lease amendment to our existing lease in San Antonio, Texas commencing April 1, 2021. On October 19, 2021 we renewed our lease, to run concurrently with our additional leased space in the same building. The lease expires on December 31, 2025. The incremental space leased is 2,734 square feet. The incremental annual rent during the lease term ranges from $ 57,000 to $ 60,000 . Rental expense for the years ended December 31, 2024 and 2023 was $ 49,653 and $ 48,113 , respectively. On October 19, 2021, the Company entered into a lease amendment to the existing lease in San Antonio, Texas commencing April 1, 2022. The lease expires on December 31, 2025. The incremental space lease is 6,628 square feet. The incremental annual rent during the lease term ranges from $ 144,000 to $ 156,000 . Rental expense for the years ended December 31, 2024 and 2023 was $ 109,355 and $ 75,269 , respectively. The Company leased approximately 3,794 square feet of office space for its Nashville, Tennessee sales offices and operations. Rental expense under the operating lease was $ 0 and $ 36,995 for the years ended December 31, 2024 and 2023 , respectively. The lease expired on April 30, 2023. We did not enter into a lease extension, or new lease agreement in Nashville, Tennessee upon the expiration of the lease agreement. The Company assumed a lease in San Antonio, Texas as a part of the Information Management Solutions, LLC acquisition for its Output Solutions employees and warehouse operations. The lease had a remaining life of 45 months and expired on September 30, 2024. On September 16, 2024 the Company entered into a lease amendment commencing on October 1, 2024, extending the term of the existing lease for a period of 60 months, expiring on September 30, 2029. The space leased is 22,400 square feet. Annual rents during the lease term range from $ 174,000 to $ 225,000 . Rental expense for the years ended December 31, 2024 and 2023 was $ 135,489 and $ 117,836 , respectively. On January 1, 2021, we entered into a lease in Austin, Texas commencing on January 1, 2021 for our Austin technology organization. On January 31, 2024, the Company entered into a lease amendment commencing on February 1, 2024, extending the term of the existing lease for a period of 24 months and expiring on January 31, 2027. The space leased is 1,890 square feet. Rental expense for the years ended December 31, 2024 and 2023 was $ 83,610 and $ 79,467 , respectively. The Company has various copier equipment with leases that have not expired. Rental expense under the operating leases was $ 8,921 and $ 6,546 for the years ended December 31, 2024 and 2023 , respectively. The weighted average remaining lease term is 3.49 years. The weighted average discount rate is 4.42 % The Company recognized total operating lease expense of approximately $ 660,000 and $ 674,000 for the years ended December 31, 2024 and 2023 , respectively. In 2024 , the operating lease expense of $ 660,000 consisted of $ 544,000 of fixed operating expense and $ 116,000 of interest expense. We believe that our existing and new properties will be adequate to meet our needs through December 31, 2025. The maturities of lease liabilities are as follows at December 31, 2024 : Year ended December 31, 2025 $ 659,941 2026 728,121 2027 728,121 2028 648,426 2029 641,182 Thereafter 206,848 Total minimum lease payments 3,612,639 Less imputed interest ( 465,942 ) Total lease liabilities 3,146,697 Less current portion ( 612,680 ) Long-term portion $ 2,534,017 50 Table of Contents Note 8. Related Party Transactions Louis Hoch During the years ended December 31, 2024 and 2023 , the Company purchased $ 21,900 and $ 24,389 , respectively, of corporate imprinted sportswear, promotional items and caps from Angry Pug Sportswear. Louis Hoch, Chairman, President, Chief Executive Officer, and Chief Operating Officer is a 50 % owner of Angry Pug Sportswear. Officers and Directors On December 29, 2024, we withheld 208,615 shares of our common stock for $ 302,492 in a private transaction based on the $ 1.45 per share closing price on December 29, 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 18, 2024, we withheld 3,935 shares of our common stock for $ 5,784 in a private transaction based on the $ 1.47 per share closing price on November 18, 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 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 withheld 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 withheld 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 will be paid installment payments equal to his current base salary until and including April 18, 2024. Additionally, Mr. Jewell will be permitted to retain any unvested Company stock options or other equity awards which shall vest in accordance with the applicable schedules. Mr. Jewell will also receive all employee benefits including, but not limited to, health, dental, vision and life insurances that he was receiving prior to his execution of the Agreement until April 18, 2024. On February 8, 2023, the Company granted 1,403,000 shares of restricted common stock with a 10 -year vesting period and 273,000 RSUs with a 3 -year vesting period to employees and Directors as a performance bonus at an issue price of $ 1.75 per share. Executive officers and Directors included in the 10 -year restricted stock grant were Louis Hoch ( 330,000 shares), Tom Jewell ( 200,000 shares), Greg Carter ( 100,000 shares) and Houston Frost ( 100,000 shares). Executive officers included in the RSU grant were Louis Hoch ( 33,000 RSUs), Tom Jewell ( 21,000 RSUs), Greg Carter ( 12,000 RSUs) and Houston Frost ( 12,000 RSUs). On March 16, 2023, the Company granted 69,000 RSUs with a 3 -year vesting period to Directors as a performance bonus at an issue price of $ 1.60 per share. Directors included in the RSU grant were Blaise Bender ( 21,000 RSUs), Brad Rollins ( 21,000 RSUs), Ernesto Beyer ( 21,000 RSUs) and Michelle Miller ( 6,000 RSUs). On November 18, 2023 we withheld 2,619 shares for $ 4,452 in a private transaction at a closing price on November 18, 2023 of $ 1.70 per share from Tom Jewell, the Company's former Chief Financial Officer, to cover his share of taxes. On November 18, 2023 we withheld 3,927 shares for $ 6,675 in a private transaction at a closing price on November 18, 2023 of $ 1.70 per share from Louis Hoch, the Company's Chairman, President, Chief Executive Officer and Chief Operating Officer, to cover his share of taxes. Note 9. 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 $ 4.6 million recorded net of a valuation allowance of approximately $ 2.7 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 $ 3.6 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. If applicable, the Company would recognize interest expense and penalties related to uncertain tax positions in interest expense. As of December 31, 2024 , the Company had not accrued any interest or penalties related to uncertain tax provisions. Significant components of the Company’s deferred tax assets are as follows at December 31: 2024 2023 Deferred tax assets: Net operating loss carryforwards $ 4,582,000 $ 4,686,000 Depreciation and amortization 1,296,000 1,137,000 Non-cash compensation 1,119,000 1,649,000 Processing losses 188,394 175,673 Other 61,000 124,000 Total 7,369,306 8,169,281 Valuation Allowance ( 2,665,954 ) ( 6,267,673 ) Deferred tax asset $ 4,580,440 $ 1,504,000 51 Table of Contents At December 31, 2024 , the Company had available net operating loss carryforwards of approximately $ 21.8 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 $ 1,275,415 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 $ 8,797,872 As of December 31, 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 years 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 $ 21,820,843 The tax provision for federal and state income tax is as follows for the years ended December 31: 2024 2023 Current provision: Federal $ — $ — State 449,227 292,524 449,227 292,524 Deferred provision: Federal expense (benefit) ( 3,076,440 ) — Expense (benefit) for income taxes $ ( 2,627,213 ) $ 292,524 The reconciliation of federal income tax expense (benefit) computed at the U.S. federal statutory tax rates to total income tax expense (benefit) is as follows for the years ended December 31: 2024 2023 Income tax (benefit) at 21 % $ 142,440 $ ( 38,342 ) Change in valuation allowance ( 3,576,665 ) ( 1,361,228 ) Permanent and other differences 458,460 1,399,570 State taxes 348,552 292,524 Income tax expense (benefit) $ ( 2,627,213 ) $ 292,524 52 Table of Contents Note 10. Stock Options, Incentive Plans, Stock Awards, and Employee Benefit Plan Stock Option Plans: The Company’s 2015 Equity Incentive Plan provides for the grant of incentive stock options as defined in Section 422 of the Internal Revenue Code and the grant of Stock Options, Restricted Stock, Restricted Stock Units, Performance Awards, or other Awards to employees, non-employee directors, and consultants. The Board of Directors has authorized 5,000,000 shares of common capital stock for issuance under the 2015 Equity Incentive Plan, including automatic increases provided for in the 2015 Equity Incentive Plan through fiscal year 2025. The number of shares of common stock reserved for issuance under the 2015 Equity Incentive Plan will automatically increase, with no further action by the stockholders, on the first business day of each fiscal year during the term of the 2015 Equity Incentive Plan, beginning January 1, 2016, in an amount equal to 5 % of the issued and outstanding shares of common stock on the last day of the immediately preceding year, or such lesser amount if so determined by the Board or the Plan Administrator. During 2024 , the Company issued 966,000 shares of common stock to several employees as incentive compensation or new-hire bonuses. During 2024 , the Company granted 277,200 restricted stock units to employees and directors as a new hire bonus or as incentive compensation. Treasury Stock : The Company withheld 408,305 shares of common stock with a value of $ 597,568 to cover the employee's share of tax liabilities related to the vesting of commons stock and restricted stock units in 2024 . In addition, the Company repurchased 408,305 shares of common stock on the open market with a value of $ 810,874 as part of its stock buy-back program in 2024 . The Company withheld 26,606 shares of common stock with a value of $ 47,382 to cover the employee's share of tax liabilities related to the vesting of common stock and restricted stock units in 2023 , in addition to 222,683 shares of common stock on the open market with a value of $ 410,860 as part of its stock buy-back program. Stock Awards : The Company has granted restricted stock awards to its employees at different periods from 2005 through 2024 . The majority of the shares granted to those employees vest 10 years from the grant date and are forfeited in the event that the recipient’s employment relationship with the Company is terminated prior to vesting. Stock awards that have not yet vested are fully participating shares for the purposes of calculating earnings per share. During 2024 , a portion of the restricted stock awards were granted, but not issued and are not listed as outstanding in the financial statements for 2024 . Stock-based compensation expense related to stock and restricted stock awards was $ 2.1 million in 2024 and $ 2.2 million in 2023 . A summary of stock awards outstanding and 2024 activities are as follows: Weighted Average Weighted Average Contractual Stock Awards Shares Grant Price Remaining Life Outstanding, December 31, 2023 6,384,900 $ 2.17 Granted 966,000 1.55 Vested ( 1,563,345 ) — Forfeited ( 15,000 ) — Outstanding, December 31, 2024 5,772,555 $ 1.95 6.27 Expected to Vest after December 31, 2024 5,772,555 $ 1.95 6.27 As of December 31, 2024 , there was $ 6,914,563 of unrecognized compensation costs related to the un-vested share-based compensation arrangements granted. The cost is expected to be recognized over the weighted average remaining contractual life of 6.27 years. The aggregate intrinsic value represents the difference between the weighted average exercise price and the closing price of the Company’s stock on December 31, 2024 , or $ 1.95 . Employee Stock Purchase Plan : The Company's board of directors adopted the 2023 Employee Stock Purchase Plan (the “ESPP”) and the Company's stockholders approved the ESPP in July 2023. The ESPP was adopted under the requirements of Section 423 of the Internal Revenue Code to allow eligible employees to purchase the Company’s common stock at regular intervals. Participating employees may purchase common stock through voluntary payroll deductions at the end of each participation period at a purchase price equal to 85 % of the lower of the fair market value of the common stock at the beginning or the end of the participation period. The ESPP initially authorized the issuance of 2,500,000 shares of our common stock under purchase rights granted to our employees or to employees of any of our designated affiliates. The number of shares of our common stock reserved for issuance automatically increases on January 1 of each calendar year, beginning on January 1, 2024 through December 31, 2033, by the lesser of (i) 1 % of the total number of shares of our common stock outstanding on the last day of the fiscal year before the date of the automatic increase (determined on an as-converted to voting common stock basis); and (ii) such number of shares of common stock that would cause the aggregate number of shares of common stock then reserved for issuance under the ESPP to not exceed 2,500,000 shares; provided that before the date of any such increase, our board of directors may determine that there will be no increase or that such increase will be for a lesser number of shares. As of December 31, 2024 , 66,959 shares of our common stock have been purchased under the ESPP. Stock Warrants : On December 15, 2020, the Company issued warrants to purchase 945,599 unregistered shares of our common stock, with an exercise price of $ 4.23 to IMS. The warrants were valued using the Black-Scholes option pricing model. Assumptions used were as follows: (i) the fair value of the underlying stock was $0.58; (ii) the risk-free interest rate is 0.09%; (iii) the contractual life is five years; (iv) the dividend yield of 0%; and (v) the volatility is 59.9%. The fair value of the warrants amounted to $ 552,283 and was recorded as an increase in the customer list asset and have a term of five years from time of vest. 53 Table of Contents Note 11. Net Income (Loss) per Share Basic net income (loss) per share (EPS) was computed by dividing net income by the weighted average number of shares of common stock outstanding during the period in addition to stock awards that have not yet vested, as they are fully participating shares for the calculation of earnings per share. Diluted EPS differs from basic EPS due to the assumed conversion of potentially dilutive options and warrants that were outstanding during the period using the treasury stock method. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net income (loss). 2024 2023 Numerator: Numerator for basic and diluted earnings per share, net income (loss) available to common shareholders $ 3,305,497 $ ( 475,104 ) Denominator: Denominator for basic net income (loss) per share, weighted average shares outstanding 26,852,129 26,490,868 Effect of dilutive securities-stock options and warrants — — Denominator for diluted net income (loss) per share, adjusted weighted average shares and assumed conversion 26,852,129 26,490,868 Basic net income (loss) per common share $ 0.12 $ ( 0.02 ) Diluted net income (loss) per common share and common share equivalents $ 0.12 $ ( 0.02 ) The warrants to purchase shares of common stock that were outstanding at December 31, 2024 and 2023 that were not included in the computation of diluted net income (loss) per share because the effect would have been anti-dilutive, are as follows: Year Ended December 31, 2024 2023 Anti-dilutive warrants 945,599 945,599 Note 12. Concentration of Credit Risk and Significant Customers The Company has no significant off-balance sheet or concentrations of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company currently maintains the majority of its cash and cash equivalent balance with one financial institution. No customers account for more than 10% of the revenues of the company. 54 Table of Contents Note 13. Commitments and Contingencies 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. On March 14, 2025 the motion was denied, with future proceedings to continue at a date yet to be determined. We have not recorded a contingency in relation to this case, as we consider the risk of loss remote as related to this lawsuit. GREENWICH BUSINESS CAPITAL, LLC On or about September 25, 2019, Usio and Greenwich Business Capital LLC, or GBC, entered into an Agreement for payment processing services. Usio effectively terminated the agreement with GBC on October 31, 2023, by providing GBC with the requisite 30 -days written notice. On November 13, 2023, GBC filed lawsuit against Usio, alleging violations of the 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. On December 6, 2024, the Judge ruled in favor of Usio and dismissed the case. We did not record a contingency in relation to this case. 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. As part of the July 12, 2024 appeal, Usio was required to obtain a bond in the amount of $ 474,229 . See Note 5 for more information. We have not recorded a contingency in relation to this case, as we consider the risk of loss 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. 55 Table of Contents Note 14. Subsequent Events On March 24, 2025 the Board of Directors authorized a renewal of the Company's buy-back program, with a limit up to $ 4 million of the Company's common stock with a three year duration or the date the Board of Directors, at its sole discretion, terminates or suspends the program. The program is used for the purchase of stock from employees and directors, and for open-market purchases through a broker. 56 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.