Usio Inc

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note1. Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of Usio, Inc. and its subsidiaries (collectively, the “Company”) have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission" or the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles ("GAAP") have been omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company's financial position, results of operations and cash flows for such periods. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form10-K for the year ended* December**31,* 2023, as filed with the Commission on* March 27, 2024 (the"2023* Annual Report"). Results of operations for interim periods arenot necessarily indicative of results that* maybe expected for any other interim periods or the full fiscal year. References in this quarterly report to "the quarter" or the "first quarter" mean thethree* month period ended* March 31, 2024or2023,* as the case* may*be and unless otherwise noted.

**Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition:Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services. Revenue is recognized during the period in which the transactions are processed or when the related services are performed. The Company complies with ASC606-10 and reports revenues at gross as a principal versus net as an agent. Although some of the Company's processing agreements vary with respect to specific credit risks, the Company has determined that for each agreement it is acting in the principal role. Merchants maybe 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 throughthird-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 earned45 days after the end of the processing period. Prepaid card distributors have payment terms of30 days following the end of the month. Sales taxes billed are reported directly as a liability to the taxing authority and arenot included in revenue. Usio Output Solutions, Inc. ("Output Solutions"), a wholly-owned subsidiary of Usio, Inc., provides bill preparation, presentment and mailing services. Revenue from Output Solutions is recognized when the related services are performed for printing and delivered to USPS for postage.

The following table presents the Company's consolidated revenues by source:

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 of90 days or less to be cash equivalents.

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

**Prepaid Card Load Assets and Obligations: The Company maintains pre-funding accounts for its customers to facilitate prepaid card loads as initiated by the customer. These prepaid card load assets are carried on the Company's balance sheet with a corresponding liability. As the prepaid business line continues to expand, card load assets will increase as funds are sent from customers to the Company. As customers begin to load cash onto cards, the balance of both the prepaid card asset and corresponding liability decrease. As these balances decrease, the Company recognizes processing revenue and cardholder fees.

Customer Deposits: The Company holds customer deposits primarily for postage expenses to ensure the Company isnot out of pocket for amounts billed daily by the USPS. These customer deposits are carried on the Company's balance sheet with a corresponding liability.

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 and funds are collected and held as collateral to minimize contingent liabilities associated with any losses that* mayoccur. While this cash isnot* restricted in its use, the Company believes that designating this cash to collateralize merchant reserves strengthens the Company's standing with its member sponsors and is in accordance with the guidelines set by the card networks.

The reconciliation of cash and cash equivalents to cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves is as follows for each period presented:

Accounts Receivable/Allowance for Estimated Credit Losses: The Company maintains an allowance for estimated credit losses resulting from the inability or failure of the Company’s customers to make required payments. The Company determines the allowance based on an account-by-account review, taking into consideration such factors as the age of the outstanding balance, historical pattern of collections, and financial condition of the customer. During thethree months ended* March 31, 2024* and the year ended* December 31, 2023,there wereno* credit losses incurred. In the past, losses incurred by the Company due to credit losses were within its expectations. If the financial conditions of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make contractual payments, additional losses* maybe incurred in future periods. Estimates for credit losses are variable based on the volume of transactions processed and could increase or decrease accordingly. The allowance for credit losses was $319,000 at March 31, 2024* and* December 31, 2023*.

Inventory: Inventory is stated at the lower of cost or net realizable value. At March 31, 2024 and* December 31, 2023*, inventory consisted primarily of printing and paper supplies used for Output Solutions.

Accounting for Internal Use Software: The Company capitalizes the costs associated with software being developed or obtained for internal use when both the preliminary project stage is completed and it is probable that computer software being developed will be completed and placed in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (iii) interest costs incurred, when material, while developing internal-use software. The Company ceases capitalization of such costsno later than the point at which the project is substantially complete and ready for its intended purpose. During thethree months ended* March 31, 2024* and* March 31, 2023*, the Company capitalized software costs of $115,473 and $207,732, respectively.

Valuation of Long-Lived and Intangible Assets: The Company assesses the impairment of long-lived and intangible assets at least annually, and whenever events or changes in circumstances indicate that the carrying value maynot* be recoverable. Factors considered important, which could trigger an impairment review, include the following: significant underperformance relative to historical or projected future cash flows; significant changes in the manner of use of the assets or the strategy of the overall business; and significant negative industry trends. When management determines that the carrying value of long-lived and intangible assets* may*not* be recoverable, impairment is measured as the excess of the assets’ carrying value over the estimated fair value. No impairment losses were recorded in2023 or during thethree months ended* March 31, 2024*. Management isnot aware of any impairment changes that* may*currently be required; however, the Company cannot predict the occurrence of events that might adversely affect the reported values in the future.

Reserve for Processing Losses:If, due to insolvency or bankruptcy ofone of the Company’s merchant customers, or for any other reason, the Company isnot able to collect amounts from its credit card, ACH or prepaid customers that have been properly "charged back" by the customer, or if a prepaid cardholder incurs a negative balance, the Company must bear the credit risk for the full amount of the transaction. The Company* mayrequire cash deposits and other types of collateral from certain merchants to minimize any such risks. In addition, the Company utilizes multiple systems and procedures to manage merchant risk. ACH, prepaid and credit card merchant processing loss reserves are primarily determined by performing a historical analysis of the Company’s loss experience, considering other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company’s relationship with the Company’s prepaid card holders. This reserve amount is subject to the risk that actual losses maybe greater than the Company’s estimates. Estimates for processing losses are variable based on the volume of transactions processed and could increase or decrease accordingly. At March 31, 2024* and* December 31, 2023*, the Company’s reserve for processing losses was $859,528 and $826,528, respectively, carried on the Company's balance sheet as an accrued expense.

Legal Proceedings:In addition to the legal proceedings disclosed in this quarterly report, the Company maybe involved in legal matters arising in the ordinary course of business from time to time. Litigation is subject to inherent uncertainties, and an adverse result in the legal proceedings disclosed in this quarterly report or other matters that mayarise from time to time* may*harm our business.

Recently Adopted Accounting Pronouncements: In* June 2016**,* the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)No. 2016-13, Financial Instruments - Credit Losses (Topic326), to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in Topic326 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Topic326 is effective for fiscal years beginning after* December 25, 2022**,* including interim periods within those fiscal years for smaller reporting companies. We adopted this guidance effective* January 1, 2023on a prospective basis. Our financial statements werenot* materially impacted upon adoption.

Accounting standards that have been issued or proposed by the FASB, the SEC or other standard setting bodies that donot require adoption until a future date arenot expected to have a material impact on the Company's consolidated financial statements upon adoption.

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Note2. Leases

The Company leases facilities and office equipment under various operating leases, which generally are expected to be renewed or replaced by other leases. For each of thethree months ended* March 31, 2024* and2023, operating lease expenses totaled $132,574 and $179,901, respectively.

Note3. Accrued Expenses

Accrued expenses consisted of the following balances:

Note4. Equipment Loan

On* March 20, 2021,the Company entered into a debt arrangement to finance $165,996 for the purchase of an Output Solutions sorter. The loan was for a period of 36 months with a maturity date of March 20, 2024and annual interest of 3.95%. Monthly principal and interest payments were required in the amount of $4,902. Principal payments for thethree* months ended* March 31, 2024* and2023 were $14,312 and $13,488, respectively, and are reflected on the Company's Condensed Consolidated Statement of Cash Flows. This loan was paid in full on its maturity date.

On* October 1, 2023**,* the Company entered into a debt arrangement to finance $811,819 for the purchase of an Output Solutions folder and inserter. The loan is for a period of 66 months with a maturity date of* April 5, 2029and annual interest of 6.75%. Monthly principal and interest payments are required in the amount of $16,017, with interest only payments required for thefirst* 6 months of the loan term. Total interest and principal payments on this folder and inserter equipment loan were $13,481 for thefirst quarter of2024.

Note5. Stockholders' Equity

Stock Warrants: On* December**15,* 2020, the Company issued warrants to purchase 945,599 shares of the Company's common stock with an initial exercise price of $4.23 per share, subject to adjustment as provided in the warrant agreement governing the warrants, to Information Management Solutions, LLC ("Management Solutions"). Management Solutions' warrants vest and become exercisable annually over three years inthree equal tranches beginning on* December 15, 2021and become fully vested on December 15, 2023.Each warrant is exercisable for a period offive years beginning on the date it vests. At the time of issuance, these warrants were valued using the Black-Scholes option pricing model. Assumptions used were as follows: (i) the fair value of the underlying stock was $0.58 per share; (ii) the risk-free interest rate was 0.09%; (iii) the contractual life was 5 years; (iv) the dividend yield was 0%; and (v) the volatility was 59.9%. The fair value of the warrants amounted to $552,283 and was recorded as an increase in the customer list asset and a corresponding amount to additional paid in capital. The amortization of these warrants, which is included in the total amortization expense of the customer list intangible asset, totaled $27,614 in each of thethree* months ended* March 31, 2024and2023*.

Note6. Net (Loss) Per Share

Basic income (loss) per share (EPS) was computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS differs from basic EPS due to the assumed conversion of potentially dilutive awards and options that were outstanding during the period. Unvested restricted stock awards have the right to receive nonforfeitable dividends on the same basis as common shares; therefore, unvested restricted stock is considered a participating security for the purpose of calculating EPS. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net income (loss) for thethree months ended* March 31, 2024* and* March 31, 2023*.

The awards and options to purchase shares of common stock that were outstanding at* March 31, 2024* and* March 31, 2023* that werenot included in the computation of diluted earnings per share because the effect would have been anti-dilutive, are as follows:

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Note7. 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 thannot” recognition threshold are recognized.

The Company has recognized a deferred tax asset of approximately $1.5 million recorded net of a valuation allowance of approximately $6.1 million. The Company reviews the assessment of the deferred tax asset and valuation allowance on an annual basis or more often when events indicate that a change to the valuation allowance* may*be warranted.

At* December 31, 2023*, the Company had available net operating loss carryforwards of approximately $23.3 million. Net operating loss carryforwards generated during or prior to2017 are available to offset taxable income of future periods and expire20 years after the loss was generated. Net operating loss carryforwards generated after2017 donot expire.

The schedule below outlines when the Company's net operating losses for2017 and prior years were generated and the year they* may*expire.

Management isnot aware of any tax positions that would have a significant impact on the Company’s financial position.

Note8. Related Party Transactions

Louis Hoch

During thethree months ended* March 31, 2024* and* March 31, 2023*, the Company purchased a total of $0 and $1,835, respectively, of corporate imprinted sportswear, promotional items, and caps from Angry Pug Sportswear. Louis Hoch, the Company’s Chairman of the Board, President, Chief Executive Officer and Chief Operating Officer, is a 50% owner of Angry Pug Sportswear.

Directors and Officers

On* February 24, 2024,we repurchased 2,075 shares of our common stock for $3,258 in a private transaction based on the $1.57 per share closing price on February 24, 2024*from Tom Jewell, the Company's former Chief Financial Officer, to cover his share of taxes in connection with equity grants.

On* February 24, 2024,we repurchased 4,911 shares of our common stock for $7,710 in a private transaction based on the $1.57 per share closing price on February 24, 2024*from Louis Hoch, the Company's Chairman, President, Chief Executive Officer and Chief Operating Officer, to cover his share of taxes in connection with equity grants.

On* November 18, 2023,we repurchased 2,619 shares of our common stock for $4,452 in a private transaction based on the $1.70 per share closing price on November 18, 2023*from Tom Jewell, the Company's former Chief Financial Officer, to cover his share of taxes in connection with equity grants.

On* November 18, 2023,we repurchased 3,927 shares of our common stock for $6,675 in a private transaction based on the $1.70 per share closing price on November 18, 2023*from Louis Hoch, the Company's Chairman, President, Chief Executive Officer and Chief Operating Officer, to cover his share of taxes in connection with equity grants.

Effective on* February 17, 2023,the Company entered into an employment agreement with Greg Carter, the Company’s Executive Vice President, Payment Acceptance. Under the terms of this agreement, Mr. Carter will receive an annual salary of$250,000, Override/Commissions of 10% of the actual cash commissions paid to salespersons under direct management of Mr. Carter, to be paid quarterly, and the payment of aone*-time signing bonus of $40,000.

On* February 8, 2023,the Company granted 1,403,000 shares of restricted common stock with a 10-year vesting period and 273,000 restricted stock units ("RSUs") with a 3-year vesting period to employees and Directors as a performance bonus at an issue price of $1.75 per share. RSUs vest in equal tranches over their3*-year vesting period, while10-year grants are cliff vesting, and vest in full at the conclusion of their 10-year vesting period. Upon vesting, employees and Directors will receive issued shares. Executive officers and Directors included in the 10-year restricted stock grant were Louis Hoch (330,000 shares), Tom Jewell (200,000 shares), Greg Carter (100,000 shares) and Houston Frost (100,000 shares). Executive officers included in the RSU grant were Louis Hoch (33,000 RSUs), Tom Jewell (21,000 RSUs), Greg Carter (12,000 RSUs) and Houston Frost (12,000 RSUs).

On* March 16, 2023,*the Company granted 69,000 RSUs with a 3-year vesting period to Directors as a performance bonus at an issue price of $1.60 per share. Directors included in the RSU grant were Blaise Bender (21,000 RSUs), Brad Rollins (21,000 RSUs), Ernesto Beyer (21,000 RSUs) and Michelle Miller (6,000 RSUs).

On* November 30, 2023,Tom Jewell, the Senior Vice President, Chief Financial Officer, and principal financial and accounting officer of the Company, notified the Company of his intention to retire. On December 11, 2023,Mr. Jewell entered into a Separation and Mutual Release of Claims Agreement (“Separation Agreement”) with the Company. Pursuant to the Separation Agreement, Mr. Jewell will be paid installment payments equal to his current base salary until and including April 18, 2024.Additionally, Mr. Jewell will be permitted to retain any unvested Company stock options or other equity awards, which shall vest in accordance with the applicable schedules. Mr. Jewell will also receive all employee benefits including, butnot* limited to, health, dental, vision and life insurances that he was receiving prior to his execution of the Agreement until* April 18, 2024.*