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 "third quarter" mean thethree* month period ended* September 30, 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* mayalso 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 the United States Postal Services, or USPS, for postage. We also earn revenues from interest and fees earned on certain assets underlying customer balances. Interest earned on assets directly related to our core business line operations are recorded in the revenue source underlying the associated customer balances. Customer balances held on which the Company earns interest revenues include balances from our Automated Clearing House, or ACH, and complementary services, prepaid card services, and Output Solutions business lines.

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

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. The Company earns interest on these underlying processing assets, which is recognized as revenue in the ACH and complementary services business line.

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

Customer Deposits: The Company holds customer deposits primarily for postage expenses to ensure the Company 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. The Company earns interest on these customer deposits, which is recognized as revenue in the Output Solutions business line.

Merchant Reserves: The Company has merchant reserve requirements associated with ACH transactions. The merchant reserve assets are carried on the Company's balance sheet with a corresponding liability. Merchant reserves are established for each merchant and funds are collected and held as collateral to minimize contingent liabilities associated with any losses that* 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 Company earns interest on these merchant reserves, which is recognized as revenue in our ACH and complementary services business line.

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Accounts Receivable/Allowance for Estimated Credit Losses: The Company maintains an allowance for estimated credit losses resulting from the inability or failure of the Company’s customers to make required payments. The Company determines the allowance based on an account-by-account review, taking into consideration such factors as the age of the outstanding balance, historical pattern of collections, and financial condition of the customer to conform with Accounting Standards Update (ASU) Topic326. During thenine months ended* September 30, 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 $289,000 at September 30, 2024* and$319,000 at* December 31, 2023*.and carried on the Company's balance sheet in accounts receivable, and in the statement of cash flows as a change in accounts receivable.

Inventory: Inventory is stated at the lower of cost or net realizable value. At* September 30, 2024* and* December 31, 2023*, inventory consisted primarily of printing and paper supplies used for Output Solutions.

Accounting for Internal Use Software: The Company capitalizes the costs associated with software being developed or obtained for internal use when both the preliminary project stage is completed and it is probable that computer software being developed will be completed and placed in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (iii) interest costs incurred, when material, while developing internal-use software. The Company ceases capitalization of such costsno later than the point at which the project is substantially complete and ready for its intended purpose. During thenine months ended* September 30, 2024* and* September 30, 2023*, the Company capitalized software costs of $575,882 and $513,593, respectively.

Valuation of Long-Lived and Intangible Assets: The Company assesses the impairment of long-lived and intangible assets at least annually, and whenever events or changes in circumstances indicate that the carrying value* 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* maynot* 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 thenine months ended* September 30, 2024*. Management isnot aware of any impairment charges that* may*currently be required; however, the Company cannot predict the occurrence of events that might adversely affect the reported values in the future.

Reserve for Processing Losses:If, due to insolvency or bankruptcy 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 September 30, 2024* and* December 31, 2023*, the Company’s reserve for processing losses was $925,528 and $826,528, respectively, and carried on the Company's balance sheet as an accrued expense, and in the statement of cash flows as a change in accrued expenses.

Legal Proceedings:In addition to the legal proceedings disclosed in this quarterly report, the Company 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: 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.

**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 hadno effect on net income, total assets, total liabilities or equity.

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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* September 30, 2024* and2023, operating lease expenses totaled $135,123 and $132,574, respectively. For each of thenine months ended* September 30, 2024* and2023, operating lease expenses totaled $401,228 and $407,358, 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* September 30, 2024* and2023 were $0 and $14,312, respectively, and are reflected on the Company's Condensed Consolidated Statement of Cash Flows. Principal payments for thenine months ended* September 30, 2024* and2023 were $14,312 and $42,528, respectively. This loan was paid in full on its maturity date.

On* October 1, 2023**,* the Company entered into a debt arrangement to finance $811,819 for the purchase of an Output Solutions folder and inserter. The loan is for a period of 66 months with a maturity date of* April 5, 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* six months of the loan term. Total interest and principal payments on this folder and inserter equipment loan were $47,953 for thethree months ended* September 30, 2024*. Total interest and principal payments on this folder and inserter equipment loan were $98,121 for thenine months ended* September 30, 2024*.

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 d/b/a/ KDHM, LLC ("IMS" or "KDHM") which were issued in connection with our acquisition of IMS in* December 2020.IMS's warrants vest and become exercisable annually over three years inthree* equal tranches beginning on* December 15, 2021and became 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 $27,615 and $82,842 in each of thethree* andnine months ended* September 30, 2024and2023*, respectively.

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Note6. Net Income (Loss) Per Share

Basic income (loss) per share (EPS) was computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS differs from basic EPS due to the assumed conversion of potentially dilutive awards and options that were outstanding during the period. Holders of unvested restricted stock awards have the right to receive nonforfeitable dividends on the same basis as common shares; therefore, unvested restricted stock is considered a participating security for the purpose of calculating EPS. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net income (loss) for thethree andnine months ended* September 30, 2024* and* September 30, 2023*.

The warrants to purchase shares of common stock that were outstanding at* September 30, 2024* and* September 30, 2023* that werenot included in the computation of diluted earnings per share because the effect would have been anti-dilutive, are as follows:

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 $4.7 million recorded net of a valuation allowance of approximately $2.9 million. Management considered the realizability of this asset in light of historical operating results and forecasted results, and determined that more likely thannot that the Company will have taxable income in the future, and elected to decrease the valuation allowance by approximately $3.2 million during2024. The Company reviews the assessment of the deferred tax asset and valuation allowance on an annual basis or more often when events indicate that a change to the valuation allowance* may*be warranted.

Significant components of the Company's deferred tax asset are as follows for thenine months ended* September 30, 2024* and year ended* December 31, 2023*.

The tax provision for federal and state income tax is as follows for thenine months ended* September 30, 2024and2023*.

The reconciliation of federal income tax computed at the U.S. federal statutory tax rates to total income tax expense is as follows for thenine months ended* September 30, 2024* and year ended* December 31, 2023*.

At* December 31, 2023*, the Company had available net operating loss carryforwards of approximately $22.3 million. Net operating loss carryforwards ("NOLs") generated during or prior 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. 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 Sections382 and383 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 doesnot expect IRC Sections382 and383 to significantly impact the utilization of its NOLs and other tax carryforwards. If we were to experience an "ownership change," as determined under Section382 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 than50 percentage points byone or more*"5%* shareholders" (as defined in the IRC) at any time during a rollingthree-year period.

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

As of* September 30, 2024*, there are NOLs totaling approximately $13.0 million that have been generated since2017 that donot expire, and can be carried forward to future year to offset taxable income. The schedule below outlines when the Company's net operating losses for2018 and later years were generated.

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

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Note8. Related Party Transactions

Louis Hoch

During thenine months ended* September 30, 2024* and* September 30, 2023*, the Company purchased a total of $9,747 and $18,148, respectively, of corporate imprinted sportswear, promotional items, and caps from Angry Pug Sportswear. Louis Hoch, the Company’s Chairman of the Board, President, Chief Executive Officer and Chief Operating Officer, is a 50% owner of Angry Pug Sportswear.

Directors and Officers

On* June 21, 2024,the Company granted 966,000 shares of restricted common stock with a 10-year vesting period and 277,200 restricted stock units ("RSUs") with a 3-year vesting period to officers and employees as a performance bonus at an issue price of $1.55 per share. RSUs vest in equal tranches over 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 (160,000 shares), Michael White (120,000 shares), Greg Carter (80,000 shares), and Houston Frost (40,000 shares). Executive officers included in the RSU grant were Louis Hoch (21,000 RSUs), Michael White (18,000 RSUs), Greg Carter (18,000 RSUs),and Houston Frost (12,000 RSUs).

On* June 21, 2024,*the Company granted 84,000 RSUs with a 3-year vesting period to Non-employee Directors as a performance bonus at an issue price of $1.55 per share. Directors included in the RSU grant were Blaise Bender (21,000 RSUs), Brad Rollins (21,000 RSUs), Ernesto Beyer (21,000 RSUs) and Michelle Miller (21,000 RSUs).

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

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

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

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

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

Effective on* February 17, 2023,the Company entered into an employment agreement with Greg Carter, the Company’s Executive Vice President, Payment Acceptance. Under the terms of this agreement, Mr. Carter will receive an annual salary of$250,000, Override/Commissions of 10% of the actual cash commissions paid to salespersons under direct management of Mr. Carter, to be paid quarterly, and the payment of 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 RSUs with a 3-year vesting period to officers and employees as a performance bonus at an issue price of $1.75 per share. RSUs vest in equal tranches over 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 Non-employee Directors as a performance bonus at an issue price of $1.60 per share. Directors included in the RSU grant were Blaise Bender (21,000 RSUs), Brad Rollins (21,000 RSUs), Ernesto Beyer (21,000 RSUs) and Michelle Miller (6,000 RSUs).

Note9. Commitments and Contingencies

Legal Proceedings.

Ben Kauder, Nina Pioletti, & Triple Pay Play, Inc.

In2017, 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 informationnot generally known by the public at large, including butnot limited to, financial information, marketing plans, cost and operational/strategic plans, and sales presentations.

In* May 2021,Kauder resigned from Usio followed by Pioletti in July**2022.* Thereafter, Kauder and Pioletti formed Triple Pay Play, another payment processing company which directly competes with Usio. Upon information and belief, Kauder and Pioletti were working to form Triple Pay Play while employed by Usio, during Usio business hours, and while using Usio resources and Usio property.

On or about* June 21, 2023,*Usio filed suit against Kauder, Pioletti and Triple Pay Play for breach of contract and misappropriation of trade secrets and unfair business competition.

On* July 6, 2023,Kauder, Pioletti and Triple Pay Play filed a Motion to Dismiss for Lack of Jurisdiction. The motion was granted. Subsequently, in February**2024,* Usio refiled its case in Tennessee, where Kauder, Pioletti, and Triple Pay Play reside.

On* May 3, 2024,Kauder, Pioletti and Triple Pay Play filed a Motion to Dismiss Usio’s Complaint; this motion was heard August 5, 2024.The Judge didnot* make a ruling and is currently reviewing all materials filed in regards to this matter.

Greenwich Business Capital, LLC

On or about* September 25, 2019,Usio and Greenwich Business Capital LLC (“GBC”), entered into an Agreement for payment processing services (the “Agreement”). Pursuant to the terms of the Agreement, Usio effectively terminated the Agreement with GBC on October 31, 2023,by providing Greenwich with a30*-days written notice as required by the Agreement.

On* November 13, 2023,GBC filed lawsuit against Usio, alleging violations of the National Automated Clearing House Association (NACHA) rules in the State of Rhode Island Kent Superior Court. In early March**2024,* Usio filed a Motion to Dismiss for improper venue and failure to state a claim.

On* May 20, 2024,Usio’s Motion to Dismiss was heard in the State of Rhode Island Kent Superior Court. The Judge didnot* make a ruling and is currently reviewing all materials filed in regards to this matter.

KDHM, LLC

On* September 1, 2021,KDHM, LLC, an entity owned by the former owners of IMS, sued PDS Acquisition Corp, now known as Usio Output Solutions, Inc., in the73rd* 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 andthird*-party petition. Therein, we allege that neither KDHM nor its principals disclosed that KDHM wasnot accounting for the customer deposits in accordance with GAAP. KDHM andthird-party defendants, its principals Henry Minten and Thomas Dowe, affirmatively represented and warranted in section3.1(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 werenot 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 didnot disclose these additional customer deposits. KDHM and the defendants donot 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. Section2.1(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 Schedule2.1(b)(xi) of the Disclosure Schedules.” Finally, we discovered that KDHM didnot 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 werenot* yet printed and printed butnot yet mailed prior to the acquisition. Usio has requested a reconsideration of the motion, as it doesnot 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 Rule166*(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 Rule166*(g). On* May 2, 2024,the court denied Usio’s motion. On July 12, 2024,*we filed an appeal on the lower court's decision, which is pending review.

We havenot recorded a contingency in relation to this case, as we consider the risk of lose remote as related to this lawsuit.

Other proceedings

Aside from these proceedings, the Company* maybe involved in legal matters arising in the ordinary course of business from time to time. While we believe that such matters are currentlynot* material, there can beno assurance that matters arising in the ordinary course of business for which we are or could become involved in litigation willnot have a material adverse effect on our business, financial condition, or results of operations.

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