DOCUMENTS INCORPORATED BY REFERENCE:
Items 10,Usio, Inc. | ||
FORM 10-K | ||
For the Year Ended December 31, 2023 | ||
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Item 1C. | Cybersecurity | 17 |
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Item 9C. | Disclosure regarding Foreign Jurisdictions that Prevent Inspections | 43 |
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This Annual Report on Form 10-K and the documents incorporated herein by reference contain certain forward-looking statements as defined under the federal securities laws. Specifically, all statements other than statements of historical facts included in this Annual Report on Form 10-K regarding our financial performance, business strategy and plans and objectives of management for future operations and any other future events are forward-looking statements and based on our beliefs and assumptions. If used in this report, the words "will," "anticipate," "believe," "estimate," "expect," "intend," and words or phrases of similar import are intended to identify forward-looking statements. Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties, and assumptions, including, but without limitation, those risks and uncertainties contained in the Risk Factors section of this Annual Report on Form 10-K and our other filings made with the SEC. Although we believe that our expectations are reasonable, we can give no assurance that such expectations will prove to be correct. Based upon changing conditions, any one or more of these events described herein as anticipated, believed, estimated, expected or intended may not occur. All prior and subsequent written and oral forward-looking statements attributable to our Company or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement. We do not intend to update any of the forward-looking statements after the date of this Annual Report to conform these statements to actual results or to changes in our expectations, except as required by law.
Factors to consider when evaluating these forward-looking statements include, but are not limited to:
| • | Loss of key resellers could reduce our revenue growth. |
| • | If our security applications are breached by cyberattacks or are not adequate to address changing market conditions and customer concerns, we may incur significant losses and be unable to sell our services. |
| • | Our efforts to expand our product portfolio and market reach, including through acquisitions, may not succeed and may reduce our revenue growth and we may not achieve or maintain profitability. |
| • | We may need additional financing in the future. We may be unable to obtain additional financing or if we obtain financing it may not be on terms favorable to us. You may lose your entire investment. |
| • | Unauthorized disclosure of cardholder data, whether through breach of our computer systems or otherwise, could expose us to liability and protracted and costly litigation. |
EXPLANATORY NOTE
This Annual Report includes estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk.
INTELLECTUAL PROPERTY
We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products and the formulations for such products. Solely for convenience, some of the trademarks, trade names and copyrights referred to in this report are listed without the ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, trade names and copyrights. Please see “Business –Trademarks and Domain Names” for more information.
Other trademarks and trade names in this Annual Report are the property of their respective owners.
Unless the context indicates otherwise, all references in this Annual Report to “Usio,” the “Company,” “we,” “us,” and “our” refer to Usio, Inc. and its subsidiaries.
General
As a cloud-based, Fintech payment processor, we serve multiple industry verticals with technology that facilitates payment acceptance and funds disbursement in July 1998 and incorporated in the State of Nevada.a single, full-stack ecosystem. We provide
Since 1998, Usio has entered a number of market verticals within the payments industry in order to satisfy the growing payment needs of consumers and merchants across the United States. Beginning with our Electronic Bill Presentment and Payment, or EBPP, product that launched the Company, we entered into the electronic funds transfer space through the ACH network, developing ancillary and complementary products such as PINless debit card-based processing services. in 2016, and Remotely Created Checks, or RCC, account validation, and account inquiry in 2019. These supplementary product options offer customers access to faster and more convenient payment options and tools to improve operating efficiencies. Further, our credit card payment offering was expanded in 2017 with the development of Payment Facilitation, or PayFac, that utilizes our unique technology that allows for instant enrollment of merchants and combined our suite of payment options into an integrated platform for merchants and customers to utilize.
Through our wholly-owned subsidiary, FiCentive, Inc.,innovative Prepaid Debit Card platform, we offer a variety of prepaid card processing and program
With the growing need for faster payment methods, we continue to invest in technology that can help us further expand our suite of payment technology. With the rise of Real Time Payments, LLC. Singular Payments isor RTP, we began expansion into this market vertical in 2023, which serves as an alternative to ACH payments. As well, we continue to enhance our existing product offerings, with improvements in reporting, data management, fraud and risk monitoring, ease of access, and accelerations in client onboarding and implementation times. With our transition to a Fintech payments provider that relies upon innovative technology to process payments for merchantscloud-based platform, our speed, security, and scalability in healthcare and other niche markets nationwide. Singular is primarily focused on custom software integrations of their flat rate payment processing offerings and their proprietary, simpleis further expanded, allowing us to use electronic bill payment presentment and payment platform that allows merchants to streamlineseamlessly grow as the costly and labor intensive process of invoicing and collections. With the Singular Payments acquisition, we bought an existing portfolio of customers with a significant revenue stream and a talented sales force with significant experience in the credit card industry.
Payment Data Systems, Inc.
Our card-based processingpayment acceptance services enable merchants to process both traditional card-present, or "swipe" transactions, as well as card-not-present transactions. A traditional card-present transaction occurs whenever a card holder physically presents a credit or debit card to a merchant at the point-of-sale. A card-not-present transaction occurs whenever the customer does not physically present a payment card at the point-of-sale and may occur over the Internet, mail, fax or telephone.
Similarly, our PINless debit product allows merchants to debit and credit accounts in real-time.
Card-Based Services. Our card-based processing service, under the domain name www.billx.com system, which allows consumersservices enable merchants to process onlineboth traditional card-present, tap-and-pay, or "swipe" transactions, as well as card-not-present transactions. A traditional card-present transaction occurs whenever a card holder physically presents a credit or debit card to a merchant at the point-of-sale. A card-not-present transaction occurs whenever the customer does not physically present a payment card at the point-of-sale and may occur over the Internet, mail, or telephone. A tap-and-pay transaction occurs whenever a consumer taps their phone on a physical terminal utilizing third party wallet services like Apple Pay®, Samsung Pay™ and Google Pay™.
Payment Facilitation. Following the completion of the Singular Payments acquisition in 2017, we launched our payment facilitation, or PayFac, platform called "PayFac-in-a-Box" in late 2018 targeting partnership opportunities with app and software developers in bill-centric verticals, such as legal, healthcare, property management, utilities and insurance. The PayFac-in-a-Box platform 'integration layer' offers a simple integration experience for technology companies who are looking to monetize payments within an existing base of downstream clients. The added value of offering our integration partners access to pay any other individual, including familyreal-time merchant enrollment, credit card, debit card, ACH and friends.
Prepaid and general use. Some card programs allow the cards to be reloaded with funds, while others do not have that capability. In some cases, the cards can be used at Automatic Teller Machines, or ATMs, to withdraw cash.
As part of our Prepaid card-based processing services, wedevelop and manage a variety of Mastercard-branded prepaid card program types, including mobile applications.consumer reloadable, consumer gift, incentive, promotional, general and government disbursement and corporate expense cards. We also offer prepaid cards directly to consumers for use as a tool to stay on budget, manage allowances and share money with family and friends,friends. Our UsioCard platform supports Apple Pay®, Samsung Pay™ and businesses useGoogle Pay™.
In our over 20+year history, we have created a loyal customer base that relies on us for our convenient, secure, innovative and adaptive services and technology, and we have built long-standing and valuable relationships with premier banking institutions such as Fifth Third Bank, Sunrise Bank, TransPecos and others.
Electronic Billing. On December 15, 2020, we entered into the Akimbo platform to deliverbusiness of electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide varietyrange of payments from rewardsindustry verticals, including utilities and incentivesfinancial institutions through the acquisition of IMS. This product offering provides an outsourced solution for document design, print, and electronic delivery to regular payroll.potential customers and entities looking to reduce postage costs and increase efficiencies. This acquisition increased our ability to grow new revenue streams and allowed us to reenter the electronic bill presentment and payment revenue stream. The Akimbo platform provides instant issuance and real-time deliverysuccess of gift and
Industry Background and Trends
In the United States, the use of non-paper basednon-paper-based forms of payment, such as credit and debit cards, has risen steadily over the past several years. According to the 2016triennial 2022 Federal Reserve Payments Study, (issued every three years) and the Federal Reserve Payments Study: 2017 Annual Supplement,or FRPS, as updated through July 27, 2023, the estimated number of non-cash payments increased 5% per year from 2012continue to 2015, and totaled 144.1 billionincrease at accelerated rates. The FRPS reflects the effects of the COVID-19 pandemic which resulted in 2015. The total value of all non-cash payments was $178 trillion in 2015, up almost $17 trillion since 2012. The number of debit card payments, including payments with prepaid and non-prepaid cards, grew at an annual rate of 7% from 2012 to 2015 to 69.5 billion in 2015 and a dollar value of $2.56 trillion. In 2016, debit card payments grew at a rate of 6% versus 2015 and a dollar value increase of 5% versus 2015. The number of credit card payments grew at an annual rate of 8% from 2012 to 2015, increasing to 33.8 billion in 2015 and a dollar value of $3.16 trillion. In 2016 the number of credit card payments increased 10% versus 2015 and the dollar value increased 6% versus 2015. The 2017 Annual Supplement highlighted that for some time, the rate of growth of remote general-purpose card payments outpaced the rate of in-person cardnon-paper payments by 16% to 8%24% from 2015 to 2016. The number2019 through the end of ACH payments grew at an annual rate of 5% from 2012 to 2015 to 23.5 billion in 2015 and a dollar value of $145.3 trillion. In 2016, the number of ACH payments increased 5% versus 2015 along with a dollar increase of 5%. Electronic payments, including payments made with cards and ACH, collectively represent 85% of all non-cash payments. Banking and financial institutions enable their account holders to use more check image deposit services which is also referred to as “remote deposit capture.” As a result, traditional paper trails are being replaced by speedier, more cost-effective and eco-friendly image exchanges.
| • | The value of core noncash payments in the United States grew 9.5% per year since 2018, faster than in any previous FRPS measurement period since 2000. |
| • | The number of core non-cash payments, comprising debit card, credit card, ACH, and check payments, reached 204.5 billion in 2021, an increase of 30.7 billion from 2018. The value of these payments totaled $128.51 trillion in 2021, an increase of $31.47 trillion from 2018, more than twice the rate of increase in the previous three-year period (2015 to 2018). |
| • | ACH payments exhibited accelerating growth, increasing 8.3% per year by number and 12.7% per year by value from 2018 to 2021, and accounted for more than 90% of the rise in non-cash payments. |
| • | In 2021 ACH transfers grew to $91.85 trillion, representing 72% of core non-cash payments value. |
| • | Card payments continued to show robust growth from 2018 to 2021, collectively increasing 6.2% per year by number and 10% by value up from the 8.6% yearly rate of increase in the 2015 to 2018. |
| • | From 2015 to 2018, total card payments - the sum of credit card, non-prepaid debit card and prepaid debit card payments - increased 25.9 billion to reach 157 billion payments by number and increased $2.35 trillion to reach $9.43 trillion by value in 2018. |
| • | Within card payments, prepaid debit card payments had the highest growth rate in 2021 over 2018, by value, at 20.6%, compared with 13.7% per year for non-prepaid debit card payments and 7% for credit card payments. |
| • | Remote payments, by the end of 2020, represented 37.65% of the total number of card payments, having increased 7.2 billion by number and $37 billion in value over 2020. As a result, e-commerce comprised more than two-thirds of remote card payments by number, and 59.16% by value. |
| • | Chip authenticated payments accounted for 75.2% of in-person general-purpose card payments in 2020, compared with 2.0% in 2015, and grew 22.6% by number from 2018 to 2020. |
| • | From 2019 to 2020 innovative payment methods grew in popularity, such as contactless card, digital wallet, and P2P payments. |
Figure 1 (below) illustrates the overall growth in key non-cash metrics since the Federal Reserve Payments Study was first reported for the year 2000 and reflects the acceleration of growth in recent years.
Figure 2 (below) illustrates the overall growth in key cash metrics since the Federal Reserve Payments Study was first reported for the year 2000 and reflects the acceleration of growth in recent years.
Note: All estimates are on a triennial basis, except that card payments were also estimated for 2016, 2017, 2019, and 2020. Credit card payments include general-purpose and private-label versions. Prepaid debit card payments include general-purpose, private-label, and electronic benefits transfer, or EBT, versions. Estimates for prepaid debit card payments are not available for 2000 or 2003. The points mark years for which data were collected and estimates were produced. Lines connecting the points are linear interpolations.
Source: 2022 Federal Reserve Payments Study
We believe that the electronic payment processing industry will continue to benefit from the following trends:
Favorable Demographics
As consumers age, we expect that they will continue to use the payment technology to which they have grown accustomed. More consumers are beginning to use card-based and other electronic payment methods for purchases at an earlier age. These consumers have witnessed the wide adoption of card products, technology innovations such as mobile phone payment applications, and widespread adoption of the Internet.internet and a significant increase in card not present transactions and on-line shopping during COVID-19. As younger consumers comprise an increasing percentage of the population and as they enter the work force, we expect purchases using electronic payment methods will become a larger percentage of total consumer spending. We believe the increasing usage of smart phones as an instrument of payment will also create further opportunities for us in the future. We also believe that contact-less payments like Apple Pay®™, Samsung PayPay™ and Google Pay™ will increase payment processing opportunities for us.
Increased Electronic Payment Acceptance by Small Businesses
Small businesses are a vital component of the U.S. economy and are expected to contribute to the increased use of electronic payment methods. The lower costs associated with electronic payment methods are making these services more affordable to a larger segment of the small business market. In addition, we believe these businesses are experiencing increased pressure to accept electronic payment methods in order to remain competitive and to meet consumer expectations. As a result, many of these small businesses are seeking to provide customers with the ability to pay for merchandise and services using electronic payment methods, including those in industries that have historically accepted cash and checks as the only forms of payment for their merchandise and services.
Growth in Online Transactions
Market researchers expect continued growth in card-not-present transactions due to the steady growth of the Internetinternet and electronic commerce. According to the U.S. Census Bureau, estimated retail e-commerce sales for 20172023 were $453.5estimated at $1,118.7 billion, an increase of approximately 16%7.6% from 2016.2022.
Products and Services
Our suite of payment solutions is driven by a sophisticated infrastructure that merges our own technology with strategic alliances, offering secure, scalable, and resilient payment processing services. Leveraging the latest in cloud computing and cybersecurity, including Microsoft Azure's robust security features, we ensure the protection of data transmissions and transactions. Our adoption of Azure's hub-spoke architecture and other cutting-edge technologies supports enhanced performance and security, facilitating seamless integrations with third-party processors and offering tailored payment services to meet the specific requirements of our clients.
The platform supports secure data exchanges using state-of-the-art encryption standards and secure communication protocols, using the latest technology in best-practices encryption to safeguard electronic transactions across the internet. With comprehensive data warehousing, we offer efficient storage, retrieval, and data analysis, ensuring all sensitive information is encrypted and securely managed.
Payment Acceptance. Our service offerings are supported by our systems’ infrastructure that integrates certain proprietary components with processing systems outsourced to third-party providers to offer our customersencompass a flexible and secure payment process. We utilize secure sockets layer architecture so that connections and information are secure from outside inspection. We also use 128-bit encryption for all electronic transactions that we process to make information unreadable as it passes over the Internet. Our systems’ infrastructure allows us to work with our customers to build a customized electronic payment service offering tailored to their specific needs. We have designed and implemented our integrated payment systems to function as gateways between our customers and our third-party processing providers. Our systems provide for interfaces with our customers through which payment data is captured electronically and transferred through the connections we have with our processing providers. Our systems also provide a data warehousing capability so that all payment data related to a customer can be stored in one place to facilitate efficient data retrieval and analysis. All confidential data stored within and outside the data warehouse is fully encrypted. We outsource our ACH transaction processing and card-based transaction processing to third-party providers. Our card-based processing system is capable of connecting with all of the major card-based processors in the United States.
We extend merchant account services for the processing of card-based transactions through the VISA, MasterCard,across major card networks (VISA, Mastercard, American Express, Discover, JCB), supported by online and JCB networks, including onlinephysical terminal services accessed through a web site or retail services accessed via a physical terminal. We offer aaccess. Our proprietary web-based customer service application that combines bothplatform merges ACH and card processing capabilities, that allows companiesenabling businesses to process one-timehandle both e-checks and recurringcard payments via e-checks or credit cards at the requestefficiently.
The expansion of their consumers. In addition, we offer an Interactive Voice Response telephone system to companies that accept payments directly from consumers over the telephone using e-checks or credit cards.
Prepaid and Incentive Cards
Electronic Billing. Following the acquisition of Information Management Solutions, LLC, or IMS, we've enhanced and expanded our services to include electronic bill presentment and comprehensive document management solutions, catering to a wide array of industries. Our state-of-the-art digital printing capabilities, combined with our status as a seamless mailer with USPS, enable us to meet high-volume demands efficiently, ensuring we remain at the forefront of printing and mailing services. Output Solutions provides printing and mailing services to utilities, healthcare providers, credit unions, banks, governmental agencies, and manufacturing and other customers that want prepaid cards that are branded with the entity’s unique logo. We started issuing cards in October 2011have high volume billing and hold bank sponsorship agreements with Sunrise Banks, N.A., formerly known as University National Bank, and Metropolitan Commercial Bank for our prepaid card programs. We also have the ability to issue Discover, American Express, Visa, and MasterCard prepaid cards. We primarily create, manage and process prepaid card programs for corporate clients, tailored to each client’s unique objectives to allow the client to issue prepaid cards to their customer base or employees as an incentive in the formprinting needs.
Relationships with Sponsors and Processors
We have agreements with several processors that provide to us, on a non-exclusive basis,with transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools. In order to provide payment processing services for ACH transactions, we must maintain a relationship with an Originating Depository Financial Institution, or ODFI, in the ACH network because we are not a bank and therefore, we are not eligible to be an Originating Depository Financial Institution.ODFI. For the ODFI portion of our ACH business, we have entered into agreements with the Fifth Third Bank, Generations Federal Credit Union, North American Banking Company, or NABC, EvolveMetropolitan Commercial Bank and Trust and Metropolitan Commercial Bank.TransPecos Banks. We are financially liable for all fees, fines, charge backschargebacks, and losses related to our ACH processing merchant customers. We may also require cash deposits and other types of collateral from certain merchants to mitigate any such risk. Similarly, in order to provide payment-processing services for Visa, MasterCardMastercard and Discover transactions, we must be sponsored by a financial institution that is a principal member of the respective Visa, MasterCardMastercard and Discover card associations. Central Bank of St. Louis and Wells FargoFifth Third Bank have, respectively, sponsored us under the designations Third Party Processor, or TPP, and Independent Sales Organization, or ISO, with the Visa card association, and under the designations Third Party Servicer, or TPS, and Merchant Service Provider, or MSP, with the MasterCardMastercard card association. We have an agreement with TriSource Solutions, LLC and an agreement with Global Payments, Inc. through which their member banks, Central Bank of St. Louis and Wells Fargo,Fifth Third Bank, sponsor us for membership in the Visa, MasterCard,Mastercard, American Express, and Discover card associations and settle card transactions for our merchants. These agreements may be terminated by the processor if we materially breach the agreements and we do not cure the breach within 30 days, or if we enter bankruptcy or file for bankruptcy. We also maintain a bank sponsorship agreement with Sunrise Banks, N.A., formerly known as University National Bank, and Metropolitan Commercial Bank for our prepaid card programs. We are liable for any card-associated losses for cards that we issue that might incur a negative balance and we are liable for card association fines, fees and chargebacks.
Under our processing agreement with TriSource Solutions and Vantiv, we are financially liable for all fees, fines, chargebacks and losses related to our card processing merchant customers. Under our processing agreement with Global Payments, Inc., we are not financially liable for all fees, charge-backschargebacks and losses related to our card processing merchant customers, but we are liable for potential card association fines. If, due to insolvency or bankruptcy of our merchant customers, or for another reason, we are unable to collect from our merchant customers amounts that have been refunded to the cardholders because the cardholders properly initiated a charge-back transaction to reverse the credit card charges, we must bear the credit risk for the full amount of the card holder transaction. We utilize a number of systems and procedures to evaluate and manage merchant risk, such as obtaining approval of prospective merchants from our processor and sponsor bank, setting transaction limits and monitoring account activity. We may also require cash deposits and other types of collateral from certain merchants to mitigate any such risk. We maintain a reserve for losses resulting from card processing and related charge-backs.chargebacks. We estimate our potential loss for charge-backschargebacks by performing a historical analysis of our charge-back loss experience with similar merchants and considering other factors that could affect that experience in the future, such as the types of card transactions processed and nature of the merchant relationship with their consumers.
We are currently sponsored by PuebloEvolve Bank & Trust, TransPecos Bank and TrustCBW Bank in order to access certain regional debit networks. Through this sponsorshipthese sponsorships, we created a new service in late 2016 to provide both the issuance of real time credits and debits to a debit card holder via a regional network without havingusing a PIN. Regional networks are not affiliated with major credit card associations and operate independently. Through our sponsorshipsponsorships with PuebloEvolve Bank & Trust, TransPecos Bank and Trust,CBW Bank, we are financially liable for all fees, fines, charge backschargebacks and losses related to our PINless debit card processing for our merchant customers. We may also require cash deposits and other types of collateral from certain merchants to mitigate any such risk. The banking sponsor and each of the regional debit networks have the ability to terminate our access or anyone of our merchant’s access to process payments without notice. If either case occurs, our revenue could be negatively affected. In mid-JanuaryJanuary 2018, our previous sponsor, Pueblo Bank and Trust, terminated their relationship with our gateway provider and as a result we stopped processing PINless debit transactions.transactions for a short period of time. We have secured a relationship with another gatewayEvolve Bank & Trust and bank sponsorship relationship, but have not yet resumed processing of PINless debit transactions.
We maintain a separatean allowance for estimated losses resulting from the inability or failure of our merchant customers to make required payments for fees charged by us. Amounts due from customers may be deemed uncollectible because of merchant
Sales and Marketing
We marketsell and sellmarket our ACH products and services primarily through non-exclusive resellers that act as an external sales force, with minimal direct investment in sales infrastructure and management, as well as direct contact by our sales personnel. Our direct sales efforts are coordinated by two sales executives and supported by other employees who function in sales capacities. Our primary market focus is on companies generating high volumes of electronic payment transactions. We tailor our sales efforts to reach this market by pre-qualifying prospective sales leads through direct contact or market research. Our sales personnel typically initiate contact with prospective customers that we identify as meeting our targettargeted customer profile.
We also market and sell our prepaid card program directly to government entities, corporations and to consumers through the Internet. A major initiative for 2018 will be the packaging and cross selling of our platform of payment options across our portfolio of merchants. As a part of this major initiative, we will continue to analyze our sales and marketing efforts to optimize productivity, increase sales force effectiveness, broaden our reach through reseller initiatives and advantageous alliances and manage cost.
We also offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions. This service, which we began with the acquisition of IMS in December 2020, allows us to cross-sell existing service offerings to our customers.
Customers
Our customers are consumers, merchants, and businesses that use our Automated Clearing House and/or card-based processing services in order to provide their consumers with the ability to pay for goods and services without having to use cash or a paper check. These merchant customers operate in a variety of predominately retail industries and are under contract with us to exclusively use the services that we provide to them. Recent areas of customer focus have included system integrators, law firms, churches, charitable organizations, medical and dental clinics, doctor's offices, property management and homeowner associations, hospitality firms and municipalities. Most of our merchant customers have signed long-term contracts, generally with three-year terms, that provide for volume-based transaction fees. Our merchant accounts increased 12% to 1,8176,281 customers at December 31, 20172023 from 7105,601 customers at December 31, 2016. The significant increase in2022. Our customers was a result ofare geographically dispersed throughout the acquisition of the Singular Payments portfolio as of September 1, 2017.
No customer accounted for more than 10% of revenues in 20172023 or 2016.
Competition
The payment processing industry is highly competitive. Many small and large companies compete with us in providing payment processing services and related services to a wide range of merchants. There are a number of large transaction processors, including First Data Merchant Services Corporation,Fiserv, Inc., Elavon Inc., WorldPay, Stripe and WorldPaySquare that serve a broad market spectrum from large to small merchants and provide banking, automatic teller machine, and other payment-related services and systems in addition to card-based payment processing. There are also a large number of smaller transaction processors that provide various services to small and medium-sizedmedium- sized merchants. Many of our competitors have substantially greater capital resources than us and operate as subsidiaries of financial or bank holding companies, which may allow them on a consolidated basis to own and conduct depository and other banking activities that we do not have the regulatory authority to own or conduct. We believe that the principal competitive factors in our market include:
• | quality of service; |
• | reliability of service; |
• | ability to evaluate, undertake and manage risk; |
• | ability to offer customized technology solutions; |
• | speed in implementing payment processes; |
• | price and other financial terms; and |
• | multi-channel payment capability. |
We believe that our specific focus on providing integrated payment processing solutions to merchants, in addition to our keen understanding of the needs and risks associated with providing payment processing services electronically, gives us a competitive advantage over other competitors, which have a narrower market perspective, and over competitors of a similar or smaller size that may lack our experience and expertise in the electronic payments industry. We believe this allows us to satisfy the market demands for risk management, and service reliability. Furthermore, we believe we present a competitive distinction through the use of our internal technology to provide a single integrated payment storage or warehouse that consolidates, processes, tracks and reports all payments regardless of payment source or channel. This integrated payments approach helps offer superior quality in service, alongside industry leading implementation times, and platform reliability. We also believe our customized technology solutions and high level of service gives usprovide a competitive advantage, particularly for smaller businesses that do not have large internal technology capabilities or the ability to comply with payment security regulations.
Due to our proprietary systems and our ability to create and establish corporate-branded card programs in a shorter time frameframes than mostour competitors, our prepaid card offerings are competitive with those of our competitors.much larger companies. We also believe more thanthat our ten plus years of prepaid industry experience in processing and managing prepaid card programs is a competitive advantage over many of our competitors due to the industry being relatively new.competitors. We believe our connectivity and the ability to process via the contactlesscontact-less networks of Apple Pay,Pay®, Samsung PayPay™ and Google PayPay™ are also competitive advantages. We also believe that the Akimbo mobile application (app) technology and advanced card holder websites provide us a competitive advantage in securing both consumers and business clients that have a need for a card program for their customer base. We alsoFinally, we believe we hold a significant competitive advantage over potential entrants into the prepaid industry since there isas a result of the significant barrier in obtaining bank sponsorship tosponsorships for prepaid card program management and an even a higher barrier tofor performing prepaid card processing.
Trademarks and Domain Names
We own federally registered trademarks on the marks “Usio,” “Payment Data Systems, Inc.,” “Akimbo,” “FiCentive Innovations in Prepaid Card Solutions,” “Don’t change your bank, just your card” and “ZBILL” and their respective designs. We have also secured, among others, domain name registrations for:
Some of our material websites are www.usio.com, www.payfacinabox.com, www.ficentive.com, www.akimbocard.com, and www.usiooutput.com. The inclusion of these website addresses in this Annual Report do not include or incorporate by reference the information on or accessible through these websites, and the information contained on or accessible through these websites should not be considered as part of this annual report on Form 10-K.
We rely on a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements, and other intellectual property protection methods to protect our services and related products.
Government Regulation
Our industry is highly regulated. Any new, or changes made to, U.S. federal, state and local laws, regulations, card network rules or other industry standards affecting our business may require significant development efforts or have an unfavorable impact to our financial results. Failure to comply with these laws and regulations may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of services and/or the imposition of civil and criminal penalties, including fines. Certain of our services are also subject to rules set by various payment networks, such as Visa and MasterCard.Mastercard.
President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, into law on July 21, 2010. The Dodd-Frank Act caused significant structural reforms to the financial services industry. The Dodd-Frank Act
The Dodd-Frank Act when implemented in September 2011, caused interchange fees to be lowered on large bank-issued debit cards. The lowered interchange fees had a mild negative impact on our revenues butand increased our earnings due to the fact that we were able to keep our prices constant with our merchants. If our competitors start to pass the extra margin into savings to their merchants, we may be forced to follow their actions and become exposed to lower earnings on the debit card transactions for large banks. Our prepaid cards, while some of the transactions are processed on debit networks, are currently exempt from the Dodd-Frank Act.
CARD Act
As an agent of, and third-party service provider to, our issuing banks, we are subject to indirect regulation and direct audit and examination by the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, or FRB, and the Federal Deposit Insurance Corporation.
On March 23, 2010, the FRB issued a final rule implementing Title IV of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, or CARD Act, which imposes requirements relating to disclosures, fees and expiration dates that are generally applicable to gift certificates, store gift cards and general-use prepaid cards. We believe that our general purpose reloadablere-loadable prepaid cards, and the maintenance fees charged on our general purpose reloadablere-loadable cards, are exempt from the requirements under this rule, as they fall within an express exclusion for cards which are reloadablere-loadable and not marketed or labeled as a gift card or gift certificate. However, this exclusion is not available if the issuer, the retailer selling the card to a consumer or the program manager, promotes, even if occasionally, the use of the card as a gift card or gift certificate. As a result, we provide retailers with instructions and policies regarding the display and promotion of our general purpose reloadablere-loadable cards. However, it is possible that despite our instructions and policies to the contrary, a retailer engaged in offering our general purpose reloadablere-loadable cards to consumers could take an action with respect to one or more of the cards that would cause each similar card to be viewed as being marketed or labeled as a gift card, such as by placing our general purpose reloadablere-loadable cards on a display which prominently features the availability of gift cards and does not separate or otherwise distinguish our general purpose reloadablere-loadable cards from the gift cards. In such event, it is possible that such general purpose reloadablere-loadable cards would lose their eligibility for such exclusion to the CARD Act and its requirements, and therefore we could be deemed to be in violation of the CARD Act and the rule, which could result in the imposition of fines, the suspension of our ability to offer our general purpose reloadablere-loadable cards, civil liability, criminal liability, and the inability of our issuing banks to apply certain fees to our general purpose reloadablere-loadable cards, each of which would likely have a material adverse impact on our revenues.
In 2014, we resumed issuing gift cards. Any gift cards we issue will be governed by the CARD Act and other various regulations. Any violations with our gift card issuance could result in the imposition of fines, the suspension of our ability to offer our gift cards, civil liability, criminal liability, and the inability of our issuing banks to apply certain fees to our gift cards, each of which would likely have a material adverse impact on our revenues.
Our business is subject to U.S. federal anti-money laundering laws and regulations, including the Bank Secrecy Act (BSA), as amended by the USA PATRIOT Act of 2001, or collectively, the BSA. The BSA, among other things, requires money services businesses to develop and implement risk-based anti-money laundering programs, report large cash transactions and suspicious activity and maintain transaction records. RecentlyOn September 29, 2017, the Financial Crimes Enforcement Network, or FinCEN, released rulesamended the Customer Due Diligence Rule, or CDD Rule, requiring the collection and verification of beneficial owners holding equal to or greater than 25% equity interest. We will beThe CDD Rule states that sole proprietorships-individual or spousal-and unincorporated associations are not legal entity customers as defined by the Rule, even though such businesses may file with the Secretary of State in order to register a trade name or establish a tax account. This is because neither a sole proprietorship nor an unincorporated association is a separate legal entity from the associated individual(s), and therefore beneficial ownership is not inherently obscured. The CDD Rule does not rely on the tax-exempt status of an entity as described in the Internal Revenue Code “IRC”. All nonprofit entities-whether or not tax-exempt-that are established as a nonprofit, or non-stock corporation, or similar entity that has been validly organized with the proper State authority are excluded from the ownership/equity prong of the requirement because nonprofit entities generally do not have ownership interests. As of May 2018, we are required to comply with the newcollect and verify beneficial owners holding equal to or greater than 25% equity interest based on rules which have a mandatory compliance date of May 2018.
We are also subject to certain economic and trade sanctions programs that are administered by the Treasury Department’s Office of Foreign Assets Control, or OFAC, that prohibit or restrict transactions to or from or dealings with specified countries, their governments and, in certain circumstances, their nationals, narcotics traffickers, and terrorists or terrorist organizations.
Similar anti-money laundering, counter terrorist financing and proceeds of crime laws apply to movements of currency and payments through electronic transactions and to dealings with persons specified on lists maintained by organizations similar to
Prepaid Services
Prepaid card programs managed by us are subject to various federal and state laws and regulations, which may include laws and regulations related to consumer and data protection, licensing, consumer disclosures, escheat, anti-money laundering, banking, trade practices and competition and wage and employment. As regulations evolve, or change, we may be required to obtain state licenses to expand our distribution network for prepaid cards, which licenses we may not be able to obtain. Furthermore, the CARD Act and the Federal Reserve’s Regulation E impose requirements on general-use prepaid cards, store gift cards and electronic gift certificates. These laws and regulations are evolving, unclear and sometimes inconsistent and subject to judicial and regulatory challenge and interpretation, and therefore the extent to which these laws and rules have application to, and their impact on, us, financial institutions, merchants or others is in flux. At this time, we are unable to determine the impact that the clarification of these laws and their future interpretations, as well as new laws, may have on us, financial institutions, merchants or others in a number of jurisdictions. Prepaid services may also be subject to the rules and regulations of Visa®, MasterCard ®Mastercard® and other payment networks with which we and the card issuers do business. The programs in place to process these products generally may be modified by the payment networks at their discretion and such modifications could also impact us, financial institutions, merchants and others.
Environmental Laws
We are subject to a variety of federal, state, local and foreign environmental, health and safety laws and regulations governing, among other things, the generation, storage, handling, use and transportation of hazardous materials; the emission and discharge of hazardous materials into the environment; and the health and safety of our employees. We have incurred and expect to continue to incur costs to maintain or achieve compliance with environmental, health and safety laws and regulations. To date, these costs have not been material to the Company.
Human Capital Resources
As of December 31, 2017,2023, we had 33126 full-time employees. We are not a party to any collective bargaining agreements. We believe that our relations with our employees are very good.
Growth and Development. Our strategy to develop and retain the best talent includes an emphasis on employee training and development. We promote our core values of ownership, innovation, camaraderie, service, authenticity and trust as an organization and offer awards to colleagues who exemplify these qualities. We require a mandatory online training curriculum for our employees that includes annual anti-harassment and anti-discrimination training.
Inclusion and Diversity. Our inclusion and diversity program focuses on our employees, workplace and community. We believe that our business is strengthened by a diverse workforce that reflects the communities in which we operate. We believe all of our employees should be treated with respect and equality, regardless of gender, ethnicity, sexual orientation, gender identity, religious beliefs or other characteristics. Inclusion and diversity remain a common thread in all of our human resource practices so that we can attract, develop and retain the best talent for our workforce.
Available Information
Usio was founded under the name Billserv.com, Inc. in July 1998 and incorporated in the State of Nevada. On June 26, 2019, we changed our corporate name from Payment Data Systems, Inc. to Usio, Inc. Our principal offices are located at 3611 Paesanos Parkway, Suite 300, San Antonio, TX 78231. Our telephone number is (210) 249-4100.
Our corporate website is located at www.paymentdata.com.www.usio.com. We make available on ourthis website, free of charge, copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as applicable and as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission. OurInterested persons can view such materials without charge under the "Investor Relations" section and then by clicking "Financials" on the Company's website, www.usio.com.
The inclusion of website addresses in this Annual Report does not include or incorporate by reference the information on or accessible through these websites, and the information contained thereinon or connected thereto areaccessible through these websites should not intended to be incorporated intoconsidered as part of this annual report on Form 10-K.
You may also read and copy any materials we file with or furnish to the SEC at the SEC’s Public Reference Room, located at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http:https://www.sec.gov.
An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors and other information included in this annual report on Form 10-K. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected, and you may lose some or all of your investment.
RISKS RELATED TO OUR BUSINESS
Loss of key resellers could reduce our revenue growth.
We rely on our reseller sales channel, which purchases and resells our end-to-end services to its own portfolio of merchant customers,customers. This channel is a strong contributor to our revenue growth. If a reseller switches to another transaction processor, shuts down, becomes insolvent, or enters the processing business themselves, we may no longer receive new merchant referrals from the reseller, and we risk losing existing merchants that were originally enrolled by the reseller, all of which could negatively affect our revenues and earnings.
If our security applications are breached by cyberattacks or are not sufficientadequate to address changing market conditions and customer concerns, we may incur significant losses and be unable to sell our services.
Unauthorized parties have attempted, and we expect that they will continue to attempt, to gain access to our systems or facilities through various means, including, but not limited to, hacking into our systems or facilities or those of our customers, partners, or vendors, and attempting to fraudulently induce users of our systems, including employees and customers, into disclosing user names, passwords, payment information, or other sensitive information used to gain access to such systems or facilities. This information may in turn be used to access our customers’ personal or proprietary information and payment data that are stored on or accessible through our information technology systems and those of third parties with whom we partner. Numerous and evolving cybersecurity threats, including advanced and persisting cyberattacks, cyberextortion, distributed denial-of-service attacks, ransomware, spear phishing and social engineering schemes, the introduction of computer viruses or other malware, and the physical destruction of all or portions of our information technology and infrastructure and those of third parties with whom we partner could compromise the confidentiality, availability, and integrity of the data in our systems. We may experience in the future, breaches of our security measures due to human error, malfeasance, insider threats, system errors or vulnerabilities, or other irregularities.
Any cyberattacks or data security breaches affecting our information technology or infrastructure or of our customers, partners, or vendors could have negative effects. For example, on December 25, 2021, we detected a ransomware attack that accessed and encrypted a small portion of our information technology systems. The unauthorized access included the download of non-payment processing related data files from our externally hosted Office 365 environment which is separate from our payment processing environment. Throughout the incident, we remained operational. Promptly upon the detection of the event, we launched an investigation, notified law enforcement and our insurance carrier, and engaged legal counsel, computer forensic firms and other incident response professionals. We also implemented a series of containment and remediation measures to address this situation and reinforce the security of our information technology systems. Our systems were not only fully restored and capable of resuming normal operations to the extent they were impaired, but enhanced following our immediate and long term response. Further preventative and proactive security measures were integrated, including incremental network and cloud defenses, implementation of third party cyber defense applications, structured incident response and disaster recovery plans, along with advanced employee cyber security training. We actively pursue any potential actions that will improve our existing systems. This cyber event had no material impact on the business, and no cardholder, or payments related data was compromised. Our direct losses associated with the cyber incident and its response were largely covered by our cybersecurity insurance, except for a deductible.
Our use of applications designed for premium data security and integrity to process electronic transactions may not be sufficient to address changing market conditions or the security and privacy concerns of existing and potential customers. If our security
applications are breached and sensitive data is lost or stolen, we could incur significant costs to not only assess and repair any damage to our systems, but also to reimburse customers for losses that occur from the fraudulent use of the data. We may also be subject to fines and penalties from the credit card associations or regulatory agencies in the event of the loss of confidential account information. Our insurance policies may not be adequate to compensate us for the potential costs and other losses arising from cybersecurity-related disruptions, failures, attacks or breaches. In addition, such insurance may not be available to us in the future on economically reasonable terms, or at all. Further, adverse publicity raising concerns about the safety or privacy of electronic transactions, or widely reported breaches of our or another provider's security, have the potential to undermine consumer confidence in the technology and could have a materially adverse effect on our business.Our efforts to expand our product portfolio and market reach, including through acquisitions, may not succeed and may reduce our revenue growth and we may not achieve or maintain profitability.
Since 2014, we have completed a total of four acquisitions which have allowed us to expand our product offerings. For example, we acquired the assets of IMS, a business of electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions on December 15, 2020. We also continue to invest in our established business lines and new markets, such as our payment facilitation, and prepaid card business. While we have grown the proportion of revenue from these newer products and services and we intend to continue to broaden the scope of products and services we offer, we may not be successful in maintaining or growing our current revenue streams or deriving any significant new revenue streams from these products and services. Failure to successfully broaden the scope of products and services that are attractive may inhibit our growth and harm our business. Furthermore, we expect to continue to expand our markets in the future, and we may have limited or no experience in such newer markets. We cannot assure you that any of our products or services will be widely accepted in any market or that they will continue to grow in revenue. Our offerings may present new and difficult technological, operational, regulatory, risks, and other challenges, and if we experience service disruptions, failures, or other issues, our business may be materially and adversely affected. Our expansion into newer markets may not lead to growth and may require significant management time and attention, and we may not be able to recoup our investments in a timely manner or at all. If any of this were to occur, it could damage our reputation, limit our growth, and materially and adversely affect our business.
We may need additional financing in the future. We may be unable to obtain additional financing or if we obtain financing it may not be on terms favorable to us. You may lose your entire investment.
Based on our current plans, we believe our existing cash and cash equivalents and cash flow from operations will be sufficient to fund our operating expense and capital requirements for at least 12 months, although we may need funds in the future. At December 31, 2023 we had $7.2 million of cash and cash equivalents, and for the year ended December 31, 2023, operating activities provided $14.9 million. After adjusting for the impact of operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations and merchant reserves included in the statement of cash flows, net cash provided by adjusted operating activities, was $2.8 million for the year ended December 31, 2023. Adjusted operating cash flow is viewed by the company as a superior indicator of the Company's operating performance and ability to fund acquisitions, capital expenditures and other investments and, in the absence of refinancing options, to repay debt obligations. Refer to Item 7, under the subsection "Management's Discussion and Analysis of Financial Condition and Results of Operations - Key Business Metrics - Non-GAAP Financial Measures" for our reconciliation of operating cash flows to adjusted operating cash flows. If our capital resources are insufficient to meet future capital requirements, we will have to raise additional funds by selling assets, borrowing money from a third party, or by selling debt or equity securities. If we are unable to obtain additional funds on terms favorable to us, we may be required to cease or reduce our operating activities. If we must cease or reduce our operating activities, you may lose your entire investment.
Unauthorized disclosure of cardholder data, whether through breach of our computer systems or otherwise, could expose us to liability and protracted and costly litigation.
We collect and store personal identifiable information about our cardholders, including names, addresses, social security numbers, driver’s license numbers and account numbers, and maintain a database of cardholder data relating to specific transactions, including account numbers, in order to process transactions and prevent fraud. As a result, we are required to comply with the privacy provisions of the Gramm-Leach-Bliley Act, various other federal and state privacy statutes and regulations, and the Payment Card Industry Data Security Standard, each of which is subject to change at any time. Compliance with these requirements is often difficult and costly, and our failure, or our distributors’ failure, to comply may result in significant fines or civil penalties, regulatory enforcement action, liability to our issuing banks and termination of our agreements with one or more of our issuing banks, each of which could have a material adverse effect on our financial position and/or operations. In addition, a significant breach could result in our Company being prohibited from processing transactions for any of the relevant card associations or network organizations, including Visa, Mastercard, American Express, Discover or regional debit networks, which would also have a significant material adverse impact on our financial position and/or operations.
Furthermore, if our computer systems are breached by unauthorized users, we may be subject to liability, including claims for unauthorized purchases with misappropriated bank card information, impersonation or similar fraud claims. We could also be subject to liability for claims relating to misuse of personal information, such as unauthorized marketing purposes, or failure to comply with laws governing notification of such breaches. These claims also could result in protracted and costly litigation. In addition, we could be subject to penalties or sanctions from the relevant card associations or network organizations.
If our efforts to protect the security of information about our customers, cardholders and vendors are unsuccessful, we may face additional costly government enforcement actions and private litigation, and our sales and reputation could suffer.
An important component of our business involves the receipt and storage of information about our cardholders and banking information. We have multiple programs and processes in place to detect and respond to data security incidents; however, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. In addition, hardware, software, or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud, trickery, or other forms of deceiving our vendors, contractors, and employees. If we, our customers, or our vendors experience significant data security breaches or fail to detect and appropriately respond to significant data security breaches, we could be exposed to government enforcement actions and private litigation. In addition, our cardholders and customers could lose confidence in our ability to protect their information, which could cause them to discontinue using our services.
If we do not adapt to rapid technological change, including as a result of artificial intelligence, our business may fail.
Our success depends on our ability to develop new and enhanced services and related products that meet ever changing customer needs.needs and industry standards. However, the market for our services is characterized by rapidly changing technology, evolving industry standards, emerging competition and frequent new and enhanced software, service and related product introductions. In addition, the software market is subject to rapid and substantial technological change. To remain successful, we must respond to new developments in hardware and semiconductor technology, operating systems, programming technology and computer capabilities. In many instances, new and enhanced services, products and technologies are in the emerging stages of development and marketing and are subject to the risks inherent in the development and marketing of new software, services and products. We may not successfully identify new service opportunities and develop and bringintroduce new and enhanced services and related products to market in a timely manner. Even if we do bring such services, products or technologies to market, they may not become commercially successful. Additionally, services, products or technologies developed by others may render our services and related products noncompetitive or obsolete. If we are unable, for technological or other reasons, to develop and introduce new services and products in a timely manner in response to changing market conditions or customer requirements, our business may fail.
Business interruptions or systems failures may impair the availability of our websites, applications, products or services, or otherwise harm our business.
Our systems and operations and those of our service providers and partners have experienced from time to time, and may experience in the future, business interruptions or degradation because of distributed denial-of-service and other cyberattacks, insider threats, hardware and software defects or malfunctions, human error, earthquakes, hurricanes, floods, fires, and other natural disasters, public health crises (including pandemics), power losses, disruptions in telecommunications services, fraud, military or political conflicts, terrorist attacks, computer viruses or other malware, or other events. A catastrophic event that results in a disruption or failure of our systems or operations could result in significant losses and require substantial recovery time and significant expenditures to resume or maintain operations, which could have a material adverse impact on our business, financial condition, and results of operations. Additionally, some of our systems, including those of companies we have acquired, are not fully redundant, and our disaster recovery planning may not be sufficient for all possible outcomes or events. As a provider of payment solutions, we are subject to heightened scrutiny by regulators that may require specific business continuity, resiliency and disaster recovery plans, and rigorous testing of such plans, which may be costly and time-consuming to implement, and may divert our resources from other business priorities.
We have experienced, and expect to continue to experience, system failures, cyberattacks, unplanned outages, and other events or conditions from time to time that have and may interrupt the availability, or reduce or adversely affect the speed or functionality, of our products and services. These events could result in future losses of revenue. A prolonged interruption in the availability or reduction in the availability, speed, or functionality of our products and services could materially harm our business. Frequent or persistent interruptions in our services could permanently harm our relationship with our customers and partners and our reputation. Moreover, if any system failure or similar event results in damage to our customers or their business partners, they could seek significant compensation or contractual penalties from us for their losses, and those claims, even if unsuccessful, would likely be time-consuming and costly for us to address, and could have other consequences described in this “Risk Factors” section under the caption “If our security applications are breached by cyberattacks or are not adequate to address changing market conditions and customer concerns, we may incur significant losses and be unable to sell our services.”
We have undertaken and continue to undertake certain system upgrades and re-platforming efforts designed to improve the availability, reliability, resiliency, and speed of our platform. These efforts are costly and time-consuming, involve significant technical risk, and may divert our resources from new features and products, and there can be no guarantee that these efforts will be effective. Frequent or persistent site interruptions could lead to regulatory scrutiny, significant fines and penalties, and mandatory and costly changes to our business practices, and ultimately could cause us to lose existing licenses that we need to operate or prevent or delay us from obtaining additional licenses that may be required for our business.
We also rely on facilities, components, applications, and services supplied by third parties, including data center facilities and cloud data storage and processing services. From time to time, we have experienced interruptions in the provision of such facilities and services provided by these third parties. If these third parties experience operational interference or disruptions (including a cybersecurity incident), breach their agreements with us, or fail to perform their obligations and meet our expectations, our operations could be disrupted or otherwise negatively affected, which could result in customer dissatisfaction, regulatory scrutiny, and damage to our reputation and brands, and materially and adversely affect our business. While we maintain insurance policies intended to offset the financial impact we may experience from these risks, our coverage may be insufficient to compensate us for all losses caused by interruptions in our service as a result of systems failures and similar events.
In addition, any failure to successfully implement new information systems and technologies, or improvements or upgrades to existing information systems and technologies in a timely manner could have an adverse impact on our business, internal controls (including internal controls over financial reporting), results of operations, and financial condition.
Fraud by merchants or others could have an adverse effect on our operating results and financial condition.
We have potential liability for fraudulent bankcard, ACH and prepaid card transactions or credits initiated by merchants or others. Examples of merchant fraud include when a merchant knowingly uses a stolen or counterfeit bankcard, card number or bank account to record a false sales transaction, processes an invalid bankcard, or intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction. Criminals are using increasingly sophisticated methods to engage in illegal activities such as counterfeit and fraud. While we have systems and procedures designed to detect and reduce the impact of fraud, we cannot assure the effectiveness of these measures. It is possible that incidents of fraud could increase in the future. Failure to effectively manage risk and prevent fraud would increase our chargebacks liability or cause us to incur other liabilities, including regulatory and association fines, penalties and harm to our reputation. Increases in chargebacks or other liabilities could have an adverse effect on our operating results and financial condition.
We rely on our relationship with the Automated Clearing House network, and if the Federal Reserve rules were to change, our business could be adversely affected.
We have contractual relationships with Fifth Third Bank, North American Banking Company, or NABC, EvolveMetropolitan Commercial Bank, & Trust and Metropolitan CommercialTransPecos Bank, which are Originating Depository Financial Institutions, (ODFI)or ODFI, in the ACH network. The ACH network is a nationwide batch-oriented electronic funds transfer system that provides for the interbank clearing of electronic payments for participating financial institutions. An Originating Depository Financial InstitutionODFI is a participating financial institution that must abide by the provisions of the ACH Operating Rules and Guidelines. Through our relationships with Fifth ThirdMetropolitan Commercial Bank, Metropolitan CommercialTransPecos Bank, and NABC, we are able to process payment transactions on behalf of our customers and their consumers by submitting payment instructions in a prescribed ACH format. We pay volume-based fees to Metropolitan
If we lose key personnel or we are unable to attract, recruit, retain and develop qualified employees, our business, financial condition and results of operations may be adversely affected.
In order for us to successfully compete and grow, we must attract, recruit, retain and develop the necessary personnel who can provide the needed expertise and skills across the spectrum of our intellectual capital needs. The market for qualified personnel is highly competitive and we may not be successful in recruiting qualified personnel for needed skill sets or replacing current personnel who leave us. Failure to retain or attract key personnel and skill sets could have a material adverse effect on our business, financial condition and results of operations.
If our third-party card processing providers or our bank sponsors fail to comply with the applicable requirements of Visa, MasterCardMastercard and Discover credit card associations or if our current processors cancel or fail to renew our contracts, we may have to find a new third-party processing provider, which could increase our costs.
Substantially all of the card-based transactions we process involve the use of Visa, MasterCardMastercard or Discover credit cards. In order to provide payment-processing services for Visa, MasterCardMastercard and Discover transactions, we must be sponsored by a financial institution that is a principal member of the respective Visa, MasterCardMastercard and Discover card associations. Both Central Bank of St. Louis and Wells Fargo Bank have sponsored us under the designations Third Party Processor, or TPP, and Independent Sales Organization, or ISO, with the Visa card association, and under the designations Third Party Servicer, or TPS, and Merchant Service Provider, or MSP, with the MasterCardMastercard card association. We have agreements with TriSource Solutions, LLC, Card Connect / First Data Merchant Services Corp. and Global Payments Inc. through which their member banks, Central Bank of St. Louis and Wells Fargo Bank, sponsor us for membership in the Visa and MasterCardMastercard card associations, and settle card transactions for our merchants. If our third-party processing provider, TriSource Solutions, Card Connect or Global Payments, or our bank sponsors, Central Bank of St. Louis, Wells Fargo Bank, TransPecos Bank, CBW Bank or PuebloEvolve Bank and& Trust previously, with our PINless debit card product, fail to comply with the applicable requirements of the Visa, MasterCard,Mastercard, and Discover card associations, Visa, MasterCardMastercard or Discover could suspend or terminate the registration of our third-party processing provider. Also, our contracts with both of these third parties are subject to cancellation upon limited notice by either party. The cancellation of either contract, termination of their registration or any changes in the Visa, MasterCardMastercard or Discover rules that would impair the registration of our third-party processing provider could require us to stop providing such payment processing services if we are unable to enter into a similar agreement with another provider or sponsor at similar costs
We may not be able to obtain and maintain sufficient insurance coverage.
We insure against a majority of business risks, including liability for cyber incidents, and for director and officer liability. D&O and cyber insurance especially are becoming increasingly challenging to purchase and maintain due to market factors. Premiums and deductibles have been increasing, sometimes dramatically, and some insurers are cutting back on the number of companies they insure, causing the supply of insurance to lag behind demand. As a result of these factors, we may not be able to maintain such insurance on acceptable terms or be able to secure coverage and the coverage of our existing insurance may not be sufficient to offset existing or future claims. A successful claim against us with respect to uninsured liabilities or in excess of insurance coverage could have a material adverse effect on our business, financial condition, and results of operations.
We have incurred substantial losses in the past and may incur additional losses in the future.
We reported a net loss of $3,008,785$0.5 million and $1,196,642$5.5 million for the years ended December 31, 20172023 and December 31, 2016,2022, respectively. Including these results, we have an accumulated deficit of $53,260,426$71.3 million at December 31, 2017.2023. Our future operating results are not certain and we may incur future operating losses. On September 1, 2017, we acquired Singular Payments, LLC. Singular Payments was a credit card processing Independent Sales Organization comprised primarily of highly driven sales leaders and industry leaders. With the Singular Payments acquisition, we bought an existing portfolio of customers with a significant revenue stream and a talented sales force with significant experience in the credit card industry. This acquisition enhances our ability to grow new revenue streams and enhance existing revenue streams.
We may need to raise additional capital to pursue product development initiatives and to penetrate additional markets for the sale of our products in the future. We believe that we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means.means but we cannot assure you that we will be able to complete such a financing on terms acceptable to us or at all. If we are unable to secure additional capital, we may be required to curtail our research and development initiatives and take additional measures to reduce costs in order to conserve our cash in amounts sufficient to sustain operations and meet our obligations. These measures could cause significant delays in our efforts to expand our product offerings and customer base in the United States, which are critical to the realization of our business plan and to future operations.
We have recorded significant deferred tax assets, and we might never realize their full value, which would result in a charge against our earnings.
As of December 31, 2023, we had deferred tax assets of $1.5 million. Realization of our deferred tax assets is dependent upon our generating sufficient taxable income in future years to realize the tax benefit from those assets. Deferred tax assets are reviewed at least annually for realizability. A charge against our earnings would result if, based on the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized beyond our existing valuation allowance. This could be caused by, among other things, deterioration in performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the solutions sold by our business and a variety of other factors.
If a deferred tax asset net of our valuation allowance was determined to be not realizable in a future period, the charge to earnings would be recognized as an expense in our results of operations in the period the determination is made. Additionally, if we are unable to utilize our deferred tax assets, our cash flow available to fund operations could be adversely affected.
Depending on future circumstances, it is possible that we might never realize the full value of our deferred tax assets. Any future impairment charges related to a significant portion of our deferred tax assets would have an adverse effect on our financial condition and results of operations.
Our prepaid card revenues from the sale of services to merchants that accept MasterCardMastercard cards are dependent upon our continued MasterCardMastercard registration and financial institution sponsorship and, in some cases, continued participation in certain payment networks.
In order to provide processing services for our MasterCardMastercard prepaid card program, we must be either a member of a payment network or be registered as a prepaid processor of MasterCard.Mastercard. Sunrise Banks, N.A., formerly known as University National Bank, and Metropolitan Commercial Bank have has sponsored us under the designations Third Party Servicer, or TPS, and Merchant Service Provider, or MSP, with the MasterCardMastercard card association. Registration as a prepaid processor is dependent upon usour being sponsored by member clearing banks. If our sponsor banksbank should stop providing sponsorship for us, we would need to find another financial
If we fail to comply with the applicable requirements of the respective card networks, they could seek to fine us, suspend us or terminate our registrations. If our merchants or ISOs incur fines or penalties that we cannot collect from them, we could end up bearing the cost of fines or penalties.
In order to provide our transaction processing services, we are registered with Visa, MasterCardMastercard and Discover as service providers and transaction processors for member institutions and with other networks. As such, we are subject to card association and network rules that could subject us to a variety of fines or penalties that may be levied by the card networks for certain acts or omissions. The rules of the card networks are set by their boards, which may be influenced by banks that own their stock and, in the case of Discover by the card’s issuers, and some of those banks and issuers are our competitors with respect to these processing services. The termination of our registrations or our status as a service provider or transaction processor, or any changes in card association or other network rules or standards, including interpretation and implementation of the rules or standards, that increase the cost of doing business or limit our ability to provide transaction processing services to our customers, could have a material adverse effect on our business, operating results and financial condition. If a merchant or one of our resellers fails to comply with the applicable requirements of the card associations and networks, it could be subject to a variety of fines or penalties that may be levied by the card associations or networks. If we cannot collect such amounts from the applicable merchant or one of our resellers, we could end up bearing such fines or penalties, resulting in lower earnings for us.
If we fail to comply with complex and expanding consumer protection regulations, our business could be adversely affected.
The establishment of the federal Consumer Financial Protection Bureau, or CFPB, will likely expose us to increased regulatory oversight and possibly more burdensome regulation that could have an adverse impact on our revenue and profits. For example, on October 5, 2016, the CFPB issued a final rule to regulate certain prepaid accounts, or the Prepaid Account Rule. The Prepaid Account Rule mandates, among other things, extensive pre-purchase and post-purchase disclosures, expanded electronic billing statements, adherence to certain overdraft regulations for prepaid accounts that permit negative balances, and public posting of account agreements and submission to the CFPB which will then publish them on its website. The Prepaid Account Rule took effect on April 1, 2019, subject to certain exceptions. On January 25, 2018, the CFPB announced certain changes to the Prepaid Account Rule, including allowing the error resolution and liability limitations protections to apply prospectively, after a consumer’s identity has been verified, and providing more flexibility to credit cards linked to digital wallets. On February 27, 2019, the CFPB also announced a streamline electronic submission system, or Collect, for prepaid account issuers to submit their prepaid account agreements, including fee information, to the CFPB. All prepaid account agreements offered as of April 1, 2019 must be uploaded to Collect by May 1, 2019. Thereafter, prepaid account issuers must make a submission to the CFPB within 30 days after a new agreement is offered, a previously submitted agreement is amended, or a previously submitted agreement is no longer offered. Compliance with existing and new obligations as result of further expanding consumer protections regulations, could result in increased compliance costs for us, our issuing banks and our distributors, and may therefore have a negative impact on the profitability of our business.
We are subject to extensive and complex federal and state regulation and new regulations and/or changes to existing regulations could adversely affect our business.
As an agent of, and third-party service provider to, our issuing banks, we are subject to indirect regulation and direct audit and examination by the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, or the FRB, and the Federal Deposit Insurance Corporation.
On March 23, 2010, the FRB issued a final rule implementing Title IV of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, or CARD Act, which imposes requirements relating to disclosures, fees and expiration dates that are generally applicable to gift certificates, store gift cards and general-use prepaid cards. We believe that our general-purpose reloadablere-loadable prepaid cards, and the maintenance fees charged on our general-purpose reloadablere-loadable cards, are exempt from the requirements under this rule, as they fall within an express exclusion for cards which are reloadablere-loadable and not marketed or labeled as a gift card or gift certificate. However, this exclusion is not available if the issuer, the retailer selling the card to a consumer or the program manager, promotes, even if occasionally, the use of the card as a gift card or gift certificate. As a result, we provide retailers with specific instructions and policies regarding the display and promotion of our general-purpose reloadablere-loadable cards. However, it is possible that despite our instructions and policies to the contrary, a retailer engaged in offering our general-purpose reloadablere-loadable cards to consumers could take an action with respect to one or more of the cards that would cause each similar card to be viewed as being marketed or labeled as a gift card, such as by placing our general-purpose reloadablere-loadable cards on a display which prominently features the availability of gift cards and does not separate or otherwise distinguish our general purpose reloadablere-loadable cards from the gift cards. In such event, it is possible that such general-purpose reloadablere-loadable cards would lose their eligibility for such exclusion to the CARD Act and its requirements, and therefore could be deemed to be in violation of the CARD Act and the rule, which could result in the imposition of fines, the suspension of our ability to offer our general-purpose reloadablere-loadable cards, civil liability, criminal liability, and the inability of our issuing banks to apply certain fees to our general-purpose reloadablere-loadable cards, each of which would likely have a material adverse impact on our revenues.
In 2014, we resumed issuing gift cards. Any gift cards we issue will be governed by the CARD act and other various regulations. Any violations with our gift card issuance could result in the imposition of fines, the suspension of our ability to offer our gift cards, civil liability, criminal liability, and the inability of our issuing banks to apply certain fees to our gift cards, each of which would likely have a material adverse impact on our revenues.
As the laws applicable to our business, and those of our distributors and issuing banks, change frequently, are often unclear and may differ or conflict between jurisdictions, ensuring compliance has become more difficult and costly. Any failure, or perceived failure, by us, our issuing banks or our distributors to comply with all applicable statutes and regulations could result in fines, penalties, regulatory enforcement actions, civil liability, criminal liability, and/or limitations on our ability to operate our business, each of which could significantly harm our reputation and have a material adverse impact on our business, results of operations and financial condition.
State and federal legislatures and regulatory authorities have become increasingly focused upon the regulation of the financial services industry and continue to adopt new legislation which could result in significant changes in the regulatory landscape for financial institutions, which cancould include our bank sponsors, and other financial services companies, such as our Company.
If our software fails, and we need to repair or replace it, or we become subject to warranty claims, our costs could increase.
Our software products could contain errors or “bugs” that could adversely affect the performance of services or damage a user’s data. We attempt to limit our potential liability for warranty claims through technical audits and limitation-of-liability provisions in our customer agreements. However,agreements; however, these measures may not be effective in limiting our exposure to warranty claims. We have not experienced a significant increase in software errors or warranty claims. Despite the existence of various security precautions, our computer infrastructure may also be vulnerable to viruses or similar disruptive problems caused by our customers or third parties gaining access to our processing system.
We depend on the efficient and uninterrupted operation of our computer network systems, software, data center and telecommunications networks, as well as the systems and services of third parties. Our systems and operations or those of our third-party providers could be exposed to damage or interruption from, among other things, fire, natural disaster, power loss, telecommunications failure, terrorist acts, war, unauthorized entry, human error, and computer viruses or other defects. Defects in our systems or those of third parties, errors or delays in the processing of payment transactions, telecommunications failures or other difficulties could result in loss of revenue, loss of merchants, loss of merchant and cardholder data, harm to our business or reputation, exposure to fraud losses or other liabilities, negative publicity, additional operating and development costs, and/or diversion of technical and other resources. We perform the vast majority of our disaster recovery operations ourselves, though we utilize select third parties for some aspects of recovery. To the extent we outsource our disaster recovery, we are at risk of the vendor’s unresponsiveness in the event of breakdowns in our systems.
Our card programs are subject to strict regulation under federal law regarding anti-money laundering and anti-terrorist financing. Failure to comply with such laws, or abuse of our card programs for purposes of money laundering or terrorist financing, could have a material adverse impact on our business.
Provisions of the USA PATRIOT Act, the Bank Secrecy Act and other federal law impose substantial regulation of financial institutions designed to prevent use of financial services for purposes of money laundering or terrorist financing. Increasing regulatory scrutiny of our industry with respect to money laundering and terrorist financing matters could result in more aggressive enforcement of such laws or more onerous regulation, which could have a material adverse impact on our business. In addition, abuse of our prepaid card programs for purposes of money laundering or terrorist financing, notwithstanding our efforts to prevent such abuse through our regulatory compliance and risk management programs, could cause reputational risk or other harm that would have a material adverse impact on our business.
Effective September 27, 2011, the Financial Crimes Enforcement Network of the U.S. Department of the Treasury, or FinCEN, issued a final rule regarding the applicability of the Bank Secrecy Act’s anti-money laundering provisions to prepaid products and other matters related to the regulation of money services businesses. This rule created additional obligations for entities, including our distributors, engaged in the provision and sale of certain prepaid products, including our prepaid debit cards, such as the obligation for sellers of prepaid debit cards to obtain identification information from the purchaser at the point-of-sale. Compliance with these obligations may result in increased compliance costs for us, our issuing banks and our distributors, and may therefore have a negative impact on the profitability of our business.
We will be liable for separation payments in case of change in control, termination without cause, non-renewal of the agreement, death, or disability under the employment agreement with our Chairman, President, Chief Executive Officer, and Chief Operating Officer, Mr. Hoch, which could have an adverse effect on our cash position and on our financial results.
Pursuant to our employment agreement, as amended, with Louis Hoch, Chairman, President, Chief Executive Officer, and Chief Operating Officer, in the event of change in control, termination without cause, termination by employee, or non-renewal of the employment agreement, we will be liable for separation payments, equaling an amount of (a) 2.95 times the respective base salary and bonus payments, plus (b) a pro rata portion of the respective annual bonus based on the number of days elapsed in the year prior, plus (c) 2.0 times the respective base salary for non-competition, and (d) continuing other benefits. We estimate the cash disbursements over time to be $4.0 million for the agreement with Mr. Hoch.
In the case of termination of the agreement due to death of the executive, we will be liable for separation payments, equaling an amount of 2.95 times the respective base salary. The deferred compensation does not include amounts paid or accrued to executive for bonuses or bonus compensation, benefits or equity awards. Unpaid and unearned bonus compensation or bonus deferred compensation is forfeited. No deferred compensation will be due as long as we and/or an insurance company continues to pay executive’s base salary, minus any monthly base salary already paid to the executive prior to his death pursuant to the executive’s disability, to the executive’s estate for a period of up to 36 months. If these continuing payments cease before 36 months, we will have to pay the executive’s estate the deferred compensation minus any base salary payments within 30 days of the cessation. We estimate the cash disbursements over time to be approximately $2.4 million for the agreement with Mr. Hoch. Further, all stock options issued to the executive and all restricted stock granted to executive shall continue on their established vesting schedule.
In the case of termination of the agreement due to disability without death, we will be liable for separation payments, equaling an amount of disability benefits constituting base salary for three years. We estimate the cash disbursement over time to be $2.4 million for the agreement with Mr. Hoch. Unpaid and unearned bonus compensation or bonus deferred compensation is forfeited. Further, all stock options issued to the executive and all restricted stock granted to executive shall continue on their established vesting schedule. No further compensation will be due for compliance with the agreements’ non-compete, non-solicitation and disparagement clauses.
Depending on when such an event might occur, it could have a substantial adverse effect on our operating capital and cash on hand. If our cash position is not sufficient, we may need to raise additional cash which could involve selling equity securities which would dilute our shareholders. In addition, the loss of our Chairman or Chief Executive Officer may adversely affect our business and results of operations.
We are subject to the privacy requirements of the California Consumer Privacy Act.
The California Consumer Privacy Act of 2018, or CCPA, went into effect on January 1, 2020. The CCPA imposes expansive data privacy and data protection requirements for the data of California residents, and provides for significant penalties for non-compliance. The CCPA underwent multiple amendments prior to coming into effect and while enforcement actions may not be brought by the California attorney general until July 1, 2020 it remains unclear how various provisions of the CCPA will be interpreted and enforced. Further, on November 3, 2020, the California voters passed the California Privacy Rights and Enforcement Act, or CPRA, which replaces the CCPA effective January 1, 2023. The CPRA alters the scope of covered businesses, adds a new category of sensitive personal information and grants certain consumer rights, such as a right to opt out and a right to delete. The effects of this legislation potentially are far-reaching, however, and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to achieve compliance. The CCPA and the CPRA impose obligations that are new and burdensome, and we may face challenges in addressing their requirements and making necessary changes to our policies and practices and may incur significant expenses in an effort to do so. Any failure, real or perceived, by us to comply with evolving regulatory requirements, interpretations, or orders, other local, state, federal, or international privacy, data protection, information security, or consumer protection-related laws and regulations, could cause our customers unease and materially and adversely affect our business.
We depend on Louis A. Hoch, our Chairman, President, Chief Executive and Chief Operating Officer, and if he ceased to be active in our management, our business may not be successful.
Our success depends to a significant degree upon the continued contributions of our key management, marketing, service and related product development and operational personnel, including our President and Chief Executive and Chief Operating Officer, Louis A. Hoch. We entered into an employment agreement with Mr. Hoch in February 2007 and update his agreement as changes are required. The terms of the agreement prohibit the executive from competing with us for a period of two years from the executive’s date of termination. Our business may not be successful if, for any reason, Mr. Hoch ceases to be active in our management.
Risks associated with reduced levels of consumer spending could adversely affect our revenues and earnings.
Significant portions of our revenue and earnings are derived from fees from processing consumer ACH, prepaid, credit, and debit card transactions. We are exposed to general economic conditions that affect consumer confidence, consumer spending, consumer discretionary income or changes in consumer purchasing habits. A general reduction in consumer spending in the United States or in any other country where we do business could adversely affect our revenues and earnings.
We are subject to risks and write-offs resulting from fraudulent activities and losses from overdrawn cardholder accounts that could adversely impact our financial performance and results of operations.
Our prepaid cards expose us to threats involving the misuse of such cards, collusion, fraud, identity theft and systemic attacks on our systems. Although a large portion of fraudulent activity is addressed through the chargebackcharge-back systems and procedures maintained by the card association networks, we are often responsible for other losses due to merchant and cardholder fraud. No system or procedures established to detect and reduce the impact of fraud are entirely effective and weeffective. We recorded no fraud losses of $573,281 and $299,162, respectively, in 2017 or
Our prepaid cardholders can in some circumstances incur charges in excess of the funds available in their accounts and are liable for the resulting overdrawn account balance. Although we generally decline authorization attempts for amounts that exceed the available balance in a cardholder’sprepaid cardholders account, the application of the card association networks’ rules and regulations, the timing of the settlement of transactions and the assessment of subscription, maintenance or other fees can, among other things, result in overdrawn card accounts. As of December 31, 2017, our cardholders’ overdrawn account balances totaled $12,700.
Although we maintain reserves for fraud and other losses, our exposure to these types of risks may exceed our reserve levels for a variety of reasons, including our failure to predict the actual recovery rate, failure to effectively manage risk and failure to prevent fraud. Accordingly, our business, results of operations and financial condition could be materially and adversely affected to the extent that we incur losses resulting from overdrawn cardholder accounts and fraudulent activity that exceed our designated reserves or if we determine that it is necessary to increase our reserves substantially in order to address any increased recovery risk.
Our business strategy includes identifying businesses and assets to acquire, and if we cannot integrate acquisitions into our company successfully, we may have limited growth.
Our success partially depends upon our ability to identify and acquire undervalued businesses and merchant portfolios within our industry. Although we believe that there are companies and portfolios available for potential acquisition that might offer attractive business opportunities, we may not be able to make any acquisitions, and if we do make acquisitions, they may not be profitable. As a result, our business may not grow orand regain profitability.
Acquisitions may not be able to regain or sustain profitability.
| • | diversion of management time and attention from daily operations; |
| • | difficulties integrating acquired businesses, technologies and personnel into our business; |
| • | difficulties in obtaining and verifying the financial statements and other business information of acquired businesses; |
| • | inability to obtain required regulatory approvals; |
| • | potential loss of key employees, key contractual relationships or key customers of acquired companies or of ours; |
| • | assumption of the liabilities and exposure to unforeseen liabilities of acquired companies; and |
| • | dilution of interests of holders of our common stock through the issuance of equity securities or equity-linked securities. |
If we do not manage our credit risks related to our merchant accounts, we may incur significant losses.
We rely on the Federal Reserve’s Automated Clearing House system for electronic fund transfers and the Visa, MasterCardMastercard and Discover associations for settlement of payments by credit or debit card on behalf of our merchant customers. In our use of these established payment clearance systems, we generally bear the credit risks arising from returned transactions caused by insufficient funds, stop payment orders, closed accounts, frozen accounts, unauthorized use, disputes, customer charge backs,chargebacks, theft or fraud. Consequently, we assume the credit risk of merchant disputes, fraud, insolvency or bankruptcy in the event we attempt to recover funds related to such transactions from our customers. We have not experienced a significant increase in the rate of returned transactions or incurred any losses with respect to such transactions. We utilize a number of systems and procedures to manage and limit credit risks, but if these actions are not successful in managing such risks, we may incur significant losses.
We have adopted certain measures that may make it more difficult for a third party to acquire control of our Company.
Our Board of Directors isDirector members are classified into three classes of directors serving staggered three-year terms. Such classification of the Board of Directors expands the time required to change the composition of athe majority of directors and may tend to discourage a proxy contest or other takeover bid for our company.
RISKS RELATED TO OUR INDUSTRY
The electronic commerce market is evolving and if it does not grow, we may not be able to sell sufficient services to make our business viable.
The electronic commerce market is a service industry that continues to grow significantly. If the electronic commerce market fails to grow or grows slower than anticipated, or if we, despite an investment of significant resources, are unable to adapt to meet
Changes in regulation of electronic commerce and related financial services industries could increase our costs and limit our business opportunities.
We believe that we are not required to be licensed by the Office of the Comptroller of the Currency, the Federal Reserve Board, or other federal or state agencies that regulate or monitor banks or other types of providers of electronic commerce services. It is possible that a federal or state agency will attempt to regulate providers of electronic commerce services, which could impede our ability to do business in the regulator's jurisdiction. Our business has also been affected by anti-terrorism legislation, such as the USA PATRIOT Act. Banking-related provisions of the USA PATRIOT Act have been implemented as additions to the banking rules regarding monetary instrument sales record keeping requirements and tracking of cash movements. In our capacity as an agent for Sunrise Banks, N.A., formerly known as University National Bank, and Metropolitan Commercial Bank, the issuing banksbank for our prepaid card programs and in our capacity as an agent for Fifth ThirdMetropolitan Commercial Bank, NABC and NACB,TransPecos Bank, the sponsoring banks for our ACH services, we are required to comply with these rules. We are also required to implement a Customer Identification Program and establish an Anti-Money Laundering program and to report any suspected money laundering to the appropriate agencies. Our compliance with such regulations increases our responsibilities and costs associated with the administration of our debit card programs. We are also subject to various laws and regulations relating to commercial transactions, such as the Uniform Commercial Code, and may be subject to the electronic funds transfer rules embodied in Regulation E, promulgated by the Federal Reserve Board. Given the expansion of the electronic commerce market, the Federal Reserve Board might revise Regulation E or adopt new rules for electronic funds transfer affecting users other than consumers. Because of growth in the electronic commerce market, Congress has held hearings on whether to regulate providers of services and transactions in the electronic commerce market. It is possible that Congress or individual states could enact laws regulating the electronic commerce market. If enacted, such laws, rules and regulations could be imposed on our business and industry and could increase our costs or limit our business opportunities.
If we cannot compete successfully in our industry, we could lose market share and our costs could increase.
Portions of the electronic commerce market are becoming increasingly competitive. We expect to face growing competition in all areas of the electronic payment processing market. New companies could emerge and compete for merchants of all sizes. We expect competition to increase from both established and emerging companies and that such increased competition could lower our market share and increase our costs. Moreover, our current and potential competitors, many of whom have greater financial, technical, marketing and other resources than us, may respond more quickly than us to new or emerging technologies or could expand to compete directly against us in any or all of our target markets. Accordingly, it is possible that current or potential competitors could rapidly acquire market share. We may not be able to compete against current or future competitors successfully. Additionally, competitive pressures may increase our costs, which could lower our earnings, if any.
Our stock price is volatile, and you may not be able to sell your shares at a price higher than what you paid.
The market for our common stock is highly volatile. In 2017,2023, our stock price fluctuated between $1.17$1.45 and $4.10.$2.36. The trading price of our common stock could be subject to wide fluctuations in response to, among other things, quarterly variations in operating and financial results, announcements of technological innovations or new products by our competitors or us, changes in prices of our products and services or our competitors' products and services, changes in product mix, or changes in our revenue and revenue growth rates.
If security or industry analysts publish reports that are interpreted negatively by the investment community, publish negative research reports about our business, cease coverage of our company or fail to regularly publish reports or us, our share price could decline.
The trading for our common stock depends, to some extent, on the research and reports that security or industry analyst publish about us, our business, our market and our competitors. We do not have any control over these analysts or the information contained in their reports. If one or more analysts publish reports that are interpreted negatively by the investment community or have a negative tone about our business, financial or operating performance or industry, our share price could decline. In addition, if a majority of our analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price to decline.
Additional stock issuances could result in significant dilution to our stockholders.
We may issue additional equity securities to raise capital, make buyingacquisitions or sellingfor a variety of other purposes. Any such stock issuances will result in dilution to existing holders of our securities difficultstock. We rely on equity-based compensation as an important tool in recruiting and retaining employees. The amount of dilution due to future equity-based compensation issued to our employees and other additional issuances could be substantial.
Pursuant to our 2015 Equity Incentive Plan (the “2015 Plan”), our management is authorized to grant stock options to our employees, directors and consultants. There are 5,000,000 shares of Common Stock reserved for issuance under the 2015 Plan. Additionally, the number of shares of our Common Stock reserved for issuance under our 2015 Plan automatically increases on January 1 of each year, beginning on January 1, 2022, and continuing through and including January 1, 2031, by 5% of the total number of shares of our capital stock outstanding on December 31 of the preceding calendar year (determined on an as-converted to voting common stock basis, without regard to any limitations on the conversion of the non-voting common stock), or a lesser number of shares determined by our board of directors. As of December 31, 2023, we had granted awards under the 2015 Plan for 7,889,455 shares of Common Stock and have 5,510,845 shares still reserved.
In addition, pursuant to our 2023 Employee Stock Purchase Plan (“ESPP”), we have reserved 2,500,000 shares of Common Stock. 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. As of December 31, 2023, no shares of our Common Stock had been purchased pursuant to the ESPP.
Unless our board of directors elects not to increase the number of shares available for future grant pursuant to our 2015 Plan and ESPP each year, our stockholders may experience additional dilution, which may makecould cause our stock less liquid and make it harder for investorsprice to buy and sellfall.
We may issue additional equity securities, or engage in other transactions that could dilute our shares.
Our articles of incorporation allow our Board to issue up to 200,000,000 shares of Common Stock. Our Board may determine from time to time that we need to raise additional capital by issuing Common Stock or other equity securities. Except as otherwise described in this Annual Report, we are not restricted from issuing additional securities, including securities that are convertible into or exchangeable for, or that represent the right to receive, shares of our Common Stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of any future offerings, or the prices at which such offerings may be affected. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our Common Stock, or both. Holders of our Common Stock are not entitled to pre-emptive rights or other protections against dilution. New investors also may have rights, preferences and privileges that are senior to, and that adversely affect, the then-current holders of our Common Stock. Additionally, if we raise additional capital by making offerings of debt or shares of preferred stock, upon our liquidation, holders of our debt securities and shares of preferred stock, and lenders with respect to other borrowings, may receive distributions of our available assets before the holders of our Common Stock.
We may issue shares of preferred stock with greater rights than our Common Stock.
Subject to the rules of The Nasdaq Stock Market, our articles of incorporation authorize our board of directors to issue one or more series of preferred stock and set the terms of the preferred stock without seeking any further approval from holders of our Common Stock. Any preferred stock that is issued may rank ahead of our Common Stock in terms of dividends, priority and liquidation premiums and may have greater voting rights than our Common Stock.
We have not paid any cash dividends in the past and have no plans to issue cash dividends in the future, which could cause our Common Stock to have a lower value than that of similar companies which do pay cash dividends.
We have not paid any cash dividends on our Common Stock to date and do not anticipate any cash dividends being paid to holders of our Common Stock in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board.
While our dividend policy will be based on the operating results and capital needs of the business, it is anticipated that any earnings will be retained to finance our future expansion. As we have no plans to issue cash dividends in the future, our Common Stock could be less desirable to other investors and as a result, the value of our Common Stock may decline, or fail to reach the valuations of other similarly situated companies that pay cash dividends.
Shares eligible for future sale may depress our stock price.
As of March 22, 2024, we had 26,342,459 shares of Common Stock outstanding of which 4,992,659 shares were held by affiliates. All of the shares of Common Stock held by affiliates are restricted or control securities under Rule 144 promulgated under the Securities Act of 1933, as amended (the “Securities Act”). Sales of shares of Common Stock under Rule 144 or another exemption under the Securities Act or pursuant to a registration statement could have a material adverse effect on the price of our Common Stock and could impair our ability to raise additional capital through the sale of equity securities. Furthermore, all Common Stock beneficially owned by persons who are not our affiliates and have beneficially owned such shares for at least one year may be sold at any time by these existing stockholders in accordance with Rule 144 of the Securities Act. However, there can be no assurance that any of these existing stockholders will sell any or all of their Common Stock and there may be a lack of supply of, or demand for, our securities.Common Stock on The Nasdaq Stock Market. In the case of a lack of supply of our Common Stock offered in the market, the trading price of our Common Stock may rise to an unsustainable level, particularly in instances where institutional investors may be discouraged from purchasing our Common Stock because they are unable to purchase a block of our Common Stock in the open market due to a potential unwillingness of our existing stockholders to sell the amount of Common Stock at the price offered by such investors and the greater influence individual investors have in setting the trading price. In the case of a lack of market demand for our Common Stock, the trading price of our Common Stock could decline significantly and rapidly after our listing.
Our directors and officers have substantial control over us.
Our directors and executive officers, together with their affiliates and related persons, beneficially owned, in the aggregate, approximately 19% of our outstanding Common Stock as of March 22, 2024. These stockholders have the ability to substantially control our operations and direct our policies including the outcome of matters submitted to our stockholders for approval, such as the election of directors and any acquisition or merger, consolidation or sale of all or substantially all of our assets.
GENERAL RISK FACTORS
Market conditions could negatively impact our business, results of operations, cash flows and financial condition.
The market in which we operate is affected by a number of factors that are largely beyond our control but can nonetheless have a potentially significant, negative impact on us. These factors include, among other things:
| • | changes in interest rates and credit spreads; |
| • | the availability of credit, including the price, terms, and conditions under which it can be obtained; |
| • | slower growth or recession or reduced consumer spending; |
| • | inflation; |
| • | competition; |
| • | the actual and perceived state of the economy and public capital markets generally; |
| • | amendments or repeals of legislation, or changes in regulations or regulatory interpretations thereof, and transitions of government, including uncertainty regarding any of the foregoing; and |
| • | the rise of international conflicts. |
Changes in these factors are difficult to predict, and a change in one factor could affect other factors, which could result in adverse effects to our business, results of operations, financial condition, and cash flows.
The broader implications of the macroeconomic environment, including uncertainty around recent international conflicts including the Russia and Ukraine conflict, supply chain shortages, a recession globally or in markets in which we operate, higher inflation rates, higher interest rates, and other related global economic conditions, remain unknown. A deterioration in macroeconomic conditions could continue to increase the risk of lower consumer spending, merchant and consumer bankruptcy, insolvency, business failure, higher credit losses, or other business interruption, which may adversely impact our business. If these conditions continue or worsen, they could adversely impact our future financial and operating results.
Not Applicable.
We recognize the importance of assessing, identifying, and managing material risks associated with cybersecurity threats, as such term is defined in Item 106(a) of Regulation S-K. These risks include, among other things: operational risks, intellectual property theft, fraud, extortion, harm to employees or customers and violation of data privacy or security laws.
Identifying and assessing cybersecurity risk is integrated into our overall risk management systems and processes. Cybersecurity risks related to our business, technical operations, privacy and compliance issues are identified and addressed through a multi-faceted approach including third party assessments, internal IT Audit, IT security, governance, risk and compliance reviews. To defend, detect and respond to cybersecurity incidents, we, among other things: conduct proactive privacy and cybersecurity reviews of systems and applications, audit applicable data policies, perform penetration testing using external third-party tools and techniques to test security controls, conduct employee training, monitor emerging laws and regulations related to data protection and information security (including our consumer products) and implement appropriate changes.
We have implemented incident response and breach management processes which have four overarching and interconnected stages: 1) preparation for a cybersecurity incident, 2) detection and analysis of a security incident, 3) containment, eradication and recovery, and 4) post-incident analysis. Such incident responses are overseen by leaders from our Information Security, Network Administration, Compliance and Legal teams regarding matters of cybersecurity.
Security events and data incidents are evaluated, ranked by severity and prioritized for response and remediation. Incidents are evaluated to determine materiality as well as operational and business impact, and reviewed for privacy impact.
We also conduct tabletop exercises to simulate responses to cybersecurity incidents. Our team of cybersecurity professionals then collaborate with technical and business stakeholders across our business units to further analyze the risk to the company, and form detection, mitigation and remediation strategies.
As part of the above processes, we regularly engage external auditors and consultants to assess our internal cybersecurity programs and compliance with applicable practices and standards. As of 2023, our Information Security Management System has been certified to conform to SOC 2 Type 2 and PCI, and are working to conform to ISO 27001.
Our risk management program also assesses third party risks, and we perform third-party risk management to identify and mitigate risks from third parties such as vendors, suppliers, and other business partners associated with our use of third-party service providers. Cybersecurity risks are evaluated when determining the selection and oversight of applicable third-party service providers and potential fourth-party risks when handling and/or processing our employee, business or customer data. In addition to new vendor onboarding, we perform risk management during third-party cybersecurity compromise incidents to identify and mitigate risks to us from third-party incidents.
We describe whether and how risks from identified cybersecurity threats, including as a result of any previous cybersecurity incidents, have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations, or financial condition, under the heading “If our security applications are breached by cyberattacks or are not adequate to address changing market conditions and customer concerns, we may incur significant losses and be unable to sell our services” included as part of our risk factor disclosures at Item 1A of this Annual Report on Form 10-K.
The Board of Directors is responsible for overseeing the Company’s enterprise risk, and has established its Risk and Cybersecurity Committee with specific responsibility for overseeing cybersecurity threats, among other things. The Company’s cybersecurity organization is led by the CTO, who is responsible for assessing and managing material risks from cybersecurity threats and reports to Usio’s CEO, CAO, and Legal team, as well as to the Risk and Cybersecurity Committee. The CTO has served in this role for 16 years, and more than 20 years with the Company developing, maintaining, and securing our corporate network and information technology systems. The CTO holds a bachelor's degree in Information Technology from the University of Texas at San Antonio with over 11 years of previous software and hardware systems engineering experience.
The CTO and the Cybersecurity Management Board monitor the prevention, mitigation, detection and remediation of cybersecurity incidents through their management of, and participation in, the cybersecurity risk management and strategy processes described above, including through the operation of the Company’s incident response plans, which include escalation to the CTO and the Cybersecurity Management Board, as appropriate. As discussed above, the CTO reports out to the Risk and Cybersecurity Committee about cybersecurity threat risks, among other cybersecurity related matters, at least quarterly.
We entered into a new lease in San Antonio, Texas commencing on May 1, 2018.2018 for our headquarters and operations. The lease is for a period of 75 months and expires on July 31, 2024. The space leased ranges from 6,000 square feet to 10,535 square feet. Annual rents during the lease term will range from $117,000 to $232,000.
We also entered into a lease in Nashville, TNTennessee commencing on March 1, 2018.2018 for our Nashville based sales organization. The lease is for a period of 62 months and expiresexpiring on April 30, 2023. The space leased is 3,794 square feet. Annual rents during the lease term range from $109,000$117,000 to $122,000.
On December 15, 2020, we assumed a lease in San Antonio, Texas as a part of the Information Management Solutions, LLC acquisition for our employees and warehouse operations. The lease has a remaining life of 45 months and expires on September 30, 2024. The space leased is 22,400 square feet. Annual rents during the lease term range from $123,554 to $133,703. Rental expense for the years ended December 31, 2023 and 2022 was $117,836 and $112,504 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 26, 2023, the Company entered into a lease amendment commencing on February 1, 2023, extending the term of the existing lease for a period of 23 months and expiring on January 31, 2025. The space leased is 1,890 square feet. Rental expense for the year ended December 31, 2023 and 2022 was $79,467 and $83,610 respectively.
On March 15, 2021, we entered into a lease amendment to our existing lease in San Antonio, Texas commencing April 1, 2021 and expiring on September 30, 2024 running concurrently with the existing lease. The incremental space leased is 2,734 square feet. The incremental annual rent during the lease term ranges from $56,047 to $60,148. Rental expense for the year ended December 31, 2023 and 2022 was $48,113 and $46,658 respectively.
On October 19, 2021, the Company entered into a lease amendment to the existing lease in San Antonio, Texas commencing on April 1, 2022 and expiring on September 24, 2024 running concurrently with the existing lease. The incremental space lease is 6,628 square feet. The incremental annual rent during the lease term ranges from $135,874 to $145,816. Rental expense for the year ended December 31, 2023 and 2022 was $104,375 and $75,269 respectively.
We believe that our existing and new properties will be adequate to meet our needs through December 31, 2018.
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; 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 it relates 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 of 2022. Thereafter, Kauder and Pioletti formed Triple Pay Play, another payment processing company which competes with the same services as 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 August 28, 2017, our wholly-owned subsidiary, FiCentive,or about June 21, 2023, USIO filed suit against Ben Kauder, Nina Pioletti and Triple Pay Play for breach of contract and misappropriation of trade secrets and unfair business competition.
On July 6, 2023, Ben Kauder, Nina Pioletti and Triple Pay Play filed a Motion to Dismiss for Lack of Jurisdiction. The motion was granted. Subsequently, in February of 2024, USIO refiled its case in Tennessee, where Kauder, Nina, and Triple Pay Play reside.
Currently, this case is in the early-stage discovery.
GREENWICH BUSINESS CAPITAL, LLC
On or about September 25, 2019, Usio, Inc., filed a lawsuit against C2Go, Inc. alleging multiple defaults under the loan(USIO) and security agreement executed February 2, 2016. Under the loan agreement, FiCentive loaned a principal amount of $200,000 to C2Go with an interest rate of 10% per annum for a term of 18 months. The loan was secured by a first lien on all assets of C2Go. C2Go defaulted under the note by failing to repay the loan plus interest on August 2, 2017. The case is pending in Bexar County, San Antonio, Texas.
On November 13, 2023, GBC filed lawsuit against USIO, alleging violations of the obligationNACHA rules. In early March of 2024, USIO filed a Motion to Dismiss for improper venue and failure to state a claim. The motion is set to be heard in May of 2024.
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 in the lawsuit have no merit and contradict the express terms of the asset purchase agreement. As a result of this post-sale dispute, we 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 made.
We also 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. KDHM, Minten and Dowe provided us with fraudulent and misleading profit and loss 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 customer, 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.
In our counterclaims and third-party petition, we assert causes of action for fraud, breach of contract and conversion.
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 Usio Output Solutions, Inc. 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; the court granted the motion in favor of KDHM. However, USIO believes the court erred in granting the motion and ultimately filed a motion for reconsideration on March 19, 2024.
Usio’s Motion for Reconsideration of Order Granting Plaintiff’s Supplemental Rule 166(g) Motion is set to be heard on March 28, 2024.
OTHER PROCEEDINGS
Aside from these proceedings, the lawsuit described above, weCompany 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.
Not applicable.
Market Information On June 15, 2021, our common stock Holders On March Dividends We have never declared or paid cash or stock dividends, and we have no plans to pay any such dividends in the foreseeable future. Instead, we intend to reinvest our earnings, if any. Securities Authorized for Issuance under Equity Compensation Plans The information required to be disclosed by Item 201(d) of Regulation S-K, “Securities Authorized for Issuance Under Equity Compensation Plans,” is incorporated herein by reference. Refer to Item 12 of Part III of this annual report on Form 10-K for additional information. Purchases of Equity Securities by the Issuer and Affiliated Purchasers On November 2, 2016, we announced that our Board of Directors authorized the repurchase of up to $1 million of our common stock from time to time on the open market, in block transactions, or in privately negotiated transactions. On January 9, 2018, the Board of Directors added an additional $2 million to the buyback plan. The (d) (c) Maximum number (or Total number of shares approximate dollar (a) (or units) purchased as value) of shares (or Total number of (b) part of publicly units) that may yet be shares (or units) Average price paid announced plans or purchased under the Period purchased per share (or unit) programs plans or programs October 1, 2023 to October 31, 2023 November 1, 2023 to November 30, 2023 December 1, 2023 to December 31, 2023 Total FORWARD-LOOKING STATEMENTS DISCLAIMER This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. If used in this report, the words "will," "anticipate," "believe," "estimate," "intend," and other words or phrases of similar import are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described in this annual report on Form 10-K and other reports we file with the Securities and Exchange Commission. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made. We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law. This discussion and analysis Overview Usio, Inc. was founded under the name Billserv Com, Inc. in We serve multiple industry verticals with technology that facilitates payment acceptance and funds disbursement in a single, full-stack ecosystem. We provide payment acceptance, card-based processing, prepaid card, payment facilitation and electronic billing products and services to businesses, merchants and consumers. In addition, we offer customizable prepaid cards which companies use for expense management, incentives, refunds, claims and disbursements, as well as unique forms of compensation such as per diem payments, government disbursements, and similar We also offer payment facilitation, or PayFac services through a As a result of Summary of Results We believe that our success will continue to depend in large part on our ability to (a) We reported a net loss of $0.5 million and $5.5 million for the years ended December 31, 2023 and December 31, 2022, respectively. We had an accumulated deficit of $71.3 million at December 31, 2023. In 2023, we processed $5.3 billion for all payment types, which was down 26% from the prior year volume of $7.2 billion total dollars processed due to our exit from the crypto space and attrition in legacy credit card processing portfolios driven by challenges competing in the Independent Sales Organization, or ISO, market while we focus on our PayFac distributed sales force and Independent Software Vendor, or ISV, market. We believe this strategy will drive superior results over time. Total transactions processed were down 9% to 37.2 million. ACH or electronic check transactions processed for 2023 decreased by 20% compared to 2022. Returned check transactions decreased by 15% in 2023 compared to 2022. Credit card dollars processed in 2023 increased by 6% compared to 2022 and credit card transactions processed for 2023 increased by 9% compared to 2022. Both the credit card dollars and transactions processed represent all-time records for the Company. Prepaid card load volume increased by 76% and transaction volume increased by 52%. Material Trends and Uncertainties On August 16, 2022, President Biden signed the Inflation Reduction Act, or IRA, which implemented a 1% excise tax on certain corporate stock repurchases, when repurchases of stock on an established securities market exceed $1 million in a tax year. On May 13 2022, the Board of Directors authorized a renewal of the buy-back program, with a limit up to $4 million of the Company's common stock with a three year duration. In the year ended December 31, 2023, the Company had repurchased $0.5 million of stock as part of its buyback program. Should the Company opt to continue the repurchase of its securities on the open market, and the IRA remain in effect, we The broader implications of the macroeconomic environment, including uncertainty around recent international conflicts including the Russia and Ukraine conflict, supply chain shortages, a recession globally or in markets in which we operate, higher inflation rates, higher interest rates, and other related global economic conditions, remain unknown. A deterioration in macroeconomic conditions could continue to increase the risk of lower consumer spending, merchant and consumer bankruptcy, insolvency, business failure, higher credit losses, or other business interruption, which may adversely impact our business. Changes in these factors are difficult to predict, and a change in one factor could affect other factors, which could result in adverse effects to our business, results of operations, financial condition, and cash flows. Due to the higher interest rates set by the Federal Reserve, the Company was able to increase interest income in 2023. As interest rates fluctuate depending on the Federal Reserve's target rates to combat inflation and unemployment, we may not be The Company continues to invest in growth Critical Accounting Policies General Our management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to the reported amounts of revenues and expenses, For a summary of critical accounting policies, please refer to the Notes to Consolidated Financial Statements, Reserve for Processing Losses We establish allowances for negative customer balances and estimated transaction losses arising from processing customer transactions, such as chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery or unsatisfactory delivery of purchased items, account takeovers, Automated Clearing House returns, and insolvency. Additions to the allowance are reflected in our cost of services on our consolidated statements of income (loss). The allowances are based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving collection and write-off patterns, and the mix of transaction and loss types, as well as current and projected factors such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company with its prepaid card holders. Determining appropriate current expected transactional losses is an inherently uncertain process, and final losses may vary from our current estimates. We regularly review and update our allowance estimates as new facts become known, and event occur that may impact the settlement or recovery of losses. The allowances are maintained at a level we deem appropriate to adequately provide for current expected losses at the balance sheet date. Reserve for Expected Credit Losses We establish an allowance for accounts receivable, which represents our estimate of current expected allowances for credit losses. This evaluation process is subject to numerous estimates and judgements. This allowance is primarily based on expectations of unrecoverable receivables based on historical losses, as well as forecasted trends in customer instability, and general market conditions. The Company reviews this allowance quarterly on an account-by-account basis. Projected loss rates, inclusive of historical loss data and macroeconomic factors, are applied to the principal amount of our merchant and consumer receivables. Determining appropriate current expected losses on our accounts receivable is an inherently uncertain process, and final losses may vary from our current estimates. We regularly review and update our allowance estimates as new facts become known, and events occur that may impact the settlement or recovery of losses. The allowances are maintained at a level we deem appropriate to adequately provide for current expected losses at the balance sheet date. 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. Revenue Recognition Application of the accounting principles in U.S. GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Specifically, the determination of whether we are a principal to a transaction (gross revenue) or an agent (net revenue) can require considerable judgment. Further, we provide incentive payments to consumers and merchants. Evaluating whether these incentives are a payment to a customer, or consideration payable on behalf of a customer, requires judgment. Incentives determined to be made to a customer, or payable on behalf of a customer, are recorded as a reduction to gross revenue. Changes in judgments with respect to these assumptions and estimates could impact the amount of revenue recognized. Key Business Metrics - Non-GAAP Financial Measures This filing includes non-GAAP financial measures, EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows, as defined in Regulation G of the Securities and Exchange Act of 1934, as amended. The Company reports its financial results in compliance with GAAP, but believes that also discussing non-GAAP financial measures provides investors with financial measures it uses in the management of its business. The Company defines EBITDA as operating income (loss), before interest, taxes, depreciation and amortization of intangibles. The Company defines adjusted EBITDA as EBITDA, as defined above, plus non-cash stock option costs and certain non-recurring items, such as costs related to acquisitions. The Company defines adjusted operating cash flow as net cash provided (used) by operating activities, less changes in prepaid card load obligations, customer deposits, merchant reserves and net operating lease assets and obligations. These measures may not be comparable to similarly titled measures reported by other companies. Management uses EBITDA, adjusted EBITDA, and adjusted operating cash flows as indicators of the Company's operating performance and ability to fund acquisitions, capital expenditures and other investments and, in the absence of refinancing options, to repay debt obligations. Management believes EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flows are helpful to investors in evaluating the Company's operating performance because non-cash costs and other items that management believes are not indicative of its results of operations are excluded. We reported an adjusted EBITDA of $0.3 million for the quarter ended December 31, 2023, as compared to an adjusted EBITDA of $1.0 million for the same period in the prior year. The decrease in adjusted EBITDA in the 2023 quarter was attributable to increases in SG&A combined with reduced profit margins. We reported an adjusted EBITDA of $2.4 million for the twelve months ended December 31, 2023, as compared to an adjusted EBITDA loss of $0.4 million for the same period in the prior year. The increase in adjusted EBITDA in 2023 was attributable to strong revenue growth contributing to increased gross profit versus the prior year, that outpaced our growth in SG&A. The following table is a reconciliation of Net Loss to EBITDA for the three and twelve months ended December 31, 2023 and 2022. Three Months Ended (unaudited) Twelve Months Ended December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 Reconciliation from Operating Income/(Loss) to Adjusted EBITDA: Operating Income/(Loss) Depreciation and amortization EBITDA Non-cash stock-based compensation expense, net Adjusted EBITDA Calculation of Adjusted EBITDA margins: Revenues Adjusted EBITDA Adjusted EBITDA margins We reported cash provided by adjusted operating cash flows of $2.8 million for the twelve months ended December 31, 2023 (after adjusting for the impact of operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits, and merchant reserves), as compared to $0.7 million provided during the twelve months ended December 31, 2022. Operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits and merchant reserves are deducted from operating cash flow, as we believe that these metrics do not serve in providing a clear picture of the true operational cash used or provided in a given time period. These adjustments to net cash provided (used) by operating activities are not inclusive of any recurring expense items which are included in the calculation of operating income (loss), and only include changes in our assets and liabilities accounts on the balance sheet. The Company believes Non-GAAP adjusted operating cash flow to be a more accurate indicator of cash contributions that can be used to sustain current and future business operations. The increase in adjusted operating cash flows in the current year compared to the year prior was attributable to a decrease in the Company's net loss, due to revenue growth driving gross profit increases, at a rate that exceeded our SG&A increase versus the prior year. The following table is a reconciliation from operating cash flow (used) to adjusted operating cash flow (used) for the twelve months ended December 31, 2023. December 31, 2023 December 31, 2022 Reconciliation from Operating Cash Flow (used) to Non-GAAP Adjusted Operating Cash Flow (used): Net cash provided (used) by operating activities Operating cash flow (used) adjustments: Prepaid card load obligations Customer deposits Merchant reserves Operating lease right-of-use assets Operating lease liabilities Total adjustment of cash provided (used) by operating activities Adjusted operating cash flows (used) Use of Non-GAAP Financial Measures EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flow should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. They are not measurements of our financial performance under GAAP and should not be considered as alternatives to revenue, net income, or cash provided (used) by operating activities, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA, adjusted EBITDA, adjusted EBITDA margins and adjusted operating cash flow have limitations as analytical tools and you should not consider these Non-GAAP measures in isolation or as a substitute for analysis of our operating results as reported under GAAP. Revenues Our revenues are principally derived from providing integrated electronic payment services to merchants and businesses, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, or ACH, network, Three Months Ended December 31, 2023 2022 $ Change % Change ACH and complementary service revenue Credit card revenue Prepaid card services revenue Output solutions revenue Total Revenue Year Ended December 31, 2023 2022 $ Change % Change ACH and complementary service revenue Credit card revenue Prepaid card services revenue Output solutions revenue Total Revenue Total revenues for Cost of Services Cost of services includes the cost of personnel dedicated to the creation and maintenance of connections to third-party payment processors and the fees paid to such third-party providers for electronic payment processing services. Through our contractual relationships with our payment processors and sponsoring banks, we Gross Profit Gross profit is the net profit after deducting the cost of services. Gross profit was $18.6 million and $14.6 million for 2023 and 2022, respectively. Gross profit increased by $4.0 million, or 27%, in 2023 as compared to 2022. The key drivers of the increased Stock-based Compensation Stock-based compensation Other Selling, General and Other selling, general and administrative expenses, or SG&A, increased to Depreciation and Amortization Depreciation and amortization expense consist of the reduction in value of our tangible and intangible assets over their useful life. These assets include property, plant, and equipment, along with intangible assets acquired through acquisition, or developed as internal use software. Depreciation and amortization expense decreased to $2.1 million in 2023 as compared to $2.7 million in 2022. The decrease of $0.6 million, or 24%, was primarily Other Income Interest income increased to Income tax expense was Net income tax expense reported was $292,524 in Net Income (Loss) We reported a net loss of Liquidity and Capital Resources Our primary sources of liquidity are available cash and cash equivalents and cash flows provided by operations and, if an appropriate opportunity presents itself, the sale of debt or equity securities, although we may not be able to complete any financing on terms acceptable to us, if at all. At December 31, We reported a net loss of We have in the past, and may in the future, utilize equipment loans in order to finance the cost of particular pieces of equipment. On 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. Payments on this equipment loan were $9,894. We cannot assure you that such financing may be available to us on terms acceptable to us, or at all, in the future. From time to time we have sold shares of our common stock in order to provide us liquidity. For example, on November 19, 2021, Voyager Digital purchased 142,857 unregistered shares of common stock at an offering price of Cash Flows Net cash provided by Net cash used by investing activities was Net cash Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The Board of Directors and Stockholders Usio, Inc. and Subsidiaries San Antonio, Texas Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of 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 audits. 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 audits 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 audits, 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 audits 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 audits 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 audits provide 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. 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. San Antonio, Texas March CONSOLIDATED BALANCE SHEETS December 31, 2023 December 31, 2022 ASSETS Cash and cash equivalents Accounts receivable, net Settlement processing assets Prepaid card load assets Customer deposits Inventory Prepaid expenses and other Current assets before merchant reserves Merchant reserves Total current assets Property and equipment, net Other assets: Intangibles, net Deferred tax asset Operating lease right-of-use assets Other assets Total other assets Total Assets LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable Accrued expenses Operating lease liabilities, current portion Equipment loan, current portion Settlement processing obligations Prepaid card load obligations Customer deposits Current liabilities before merchant reserve obligations Merchant reserve obligations Total current liabilities Non-current liabilities: Equipment loan, non-current portion Operating lease liabilities, non-current portion Total liabilities Stockholders' Equity: Preferred stock, $0.01 par value, 10,000,000 shares authorized; -0- shares issued and outstanding in 2023 and 2022 Common stock, $0.001 par value, 200,000,000 shares authorized; 28,671,606 and 27,044,900 issued and 26,332,523 and 25,097,963 outstanding in 2023 and 2022 (see Note 11) Additional paid-in capital Treasury stock, at cost; 2,339,083 and 1,946,937 shares in 2023 and 2022 (see Note 11) Deferred compensation Accumulated deficit Total stockholders' equity Total Liabilities and Stockholders' Equity The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF OPERATIONS December 31, 2023 December 31, 2022 Revenues Cost of services Gross profit Selling, general and administrative: Stock-based compensation Other expenses Depreciation and Amortization Total operating expenses Operating (loss) Other income: Interest income Other income (expense) Interest expense Other income and (expense), net (Loss) before income taxes Federal income tax (benefit) State income tax expense Income taxes Net (Loss) (Loss) Per Share Basic (loss) per common share: Diluted (loss) per common share: Weighted average common shares outstanding (see Note 12) Basic Diluted The accompanying notes are an integral part of these consolidated financial statements. 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, 2021 Issuance of common stock under equity incentive plan Warrant compensation cost Reversal of deferred compensation amortization that did not vest Deferred compensation amortization Purchase of treasury stock Net (loss) for the year Balance at December 31, 2022 Issuance of common stock under equity incentive plan Reversal of deferred compensation amortization that did not vest Deferred compensation amortization Non-cash return of treasury stock Purchase of treasury stock Net (loss) for the year Balance at December 31, 2023 The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS December 31, 2023 December 31, 2022 Operating Activities Net (loss) Adjustments to reconcile net (loss) to net cash provided (used) by operating activities: Depreciation Amortization Employee stock-based compensation Vendor stock-based compensation Amortization of warrant costs Non-cash revenue from return of treasury stock Changes in operating assets and liabilities: Accounts receivable Prepaid expenses and other Operating lease right-of-use assets Other assets Inventory Accounts payable and accrued expenses Operating lease liabilities Prepaid card load obligations Merchant reserves Customer deposits Deferred revenue Net cash provided (used) by operating activities Investing Activities Purchases of property and equipment Net cash (used) by investing activities Financing Activities Payments on equipment loan Purchases of treasury stock Net cash (used) by financing activities Change in cash, cash equivalents, prepaid card loads, customer deposits and merchant reserves Cash, cash equivalents, prepaid card loads, customer deposits and merchant reserves, beginning of year Cash, Cash Equivalents, Prepaid Card Load Assets, Customer Deposits and Merchant Reserves, End of Year Supplemental disclosures of cash flow information Cash paid during the period for: Interest Income taxes Non-cash investing and financing activities: Issuance of deferred stock compensation Non-cash transaction for acquisition of equipment in exchange for note payable The accompanying notes are an integral part of these consolidated financial statements. December 31, Note 1. Description of Business and Summary of Significant Accounting Policies Organization: Principles of Consolidation and Basis of Presentation: Use of Estimates: Revenue Recognition: Year Ended December 31, 2023 2022 $ Change % Change ACH and complementary service revenue Credit card revenue Prepaid card services revenue Output solutions revenue Total Revenue Deferred Revenues: The Company records deferred revenues when it receives payments or issues invoices in advance of transferring control of promisedgoods 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 deferred revenue balances are as follows: 2023 2022 Deferred revenues, beginning of period Deferred revenues, end of period Revenue recognized in the period from amounts included in deferred revenues at the beginning of the period Cash and Cash Equivalents: Settlement Processing Assets and Obligations: 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. Customer Deposits: TheCompany 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. Merchant Reserves: The Company has merchant reserve requirements associated with Automated Clearing House, or ACH transactions. The merchantreserve assets are carried on the Company's balance sheet with a corresponding liability. Merchant Reserves are set for each merchant. Funds are collected from The reconciliation of cash and cash equivalents to cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves is as December 31, 2023 December 31, 2022 Beginning cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves: Cash and cash equivalents Prepaid card load assets Customer deposits Merchant reserves Total Ending cash, cash equivalents, prepaid card load assets, customer deposits and merchant reserves: Cash and cash equivalents Prepaid card load assets Customer deposits Merchant reserves Total Accounts Receivable/Allowance for Estimated Credit Losses: The Company maintains an allowance for Inventory: Inventory is stated at the lower of cost or net realizable value. At December 31, 2023 and 2022, inventory consisted primarily of printing and paper supplies used for Output Solutions. Property and Equipment: Accounting for Internal Use Software: Concentration of Credit Risk: Fair Value of Financial Instruments: Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings arereflected 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: Reserve for Processing Losses: Advertising Costs: Income Taxes: 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: 401(k) Plan: Earnings (Loss) Per Share: Basic and diluted Recently Adopted Accounting Accounting standards that have been issued or proposed by the FASB, Note Property and equipment consisted of the following at December 31: 2023 2022 Software Equipment Furniture and fixtures Leasehold improvements Total property and equipment Less: accumulated depreciation Net property and equipment Note Akimbo Financial, Inc. Acquisition On December 22, 2014, we acquired substantially all of the assets of Akimbo Financial, Inc. The intangibles acquired in the acquisition consist of the customer list and contracts at cost of $396,824 (net of accumulated amortization of Goodwill was determined based on the purchase price paid over the assets acquired and has an indefinite life, which is tested for impairment annually. Singular Payments, LLC Acquisition On September 1, 2017, we acquired all of the membership interest of Singular Payments, 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 $2,615,761 at December 31, 2023). 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 will be Note 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 2023 Allowance for expected credit losses Reserve for processing losses 2022 Allowance for expected credit losses Reserve for processing losses Note 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%. Current year payments on the Equipment Loan were $54,634. 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 $9,894. Note 6. Accrued Expenses Accrued expenses consisted of the following balances at December 31: 2023 2022 Accrued commissions Reserve for processing losses Other accrued expenses Accrued taxes Accrued salaries Total accrued expenses Note The Company leases approximately The Company 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 has a remaining life of 45 months and expires on September 30, 2024. The space leased is 22,400 square feet. Annual rents during the lease term range from $123,554 to $133,703. Rental expense for the years ended December 31, 2023 and 2022 was $117,836 and $112,504 respectively. On January 1, 2021, we entered into a lease in Austin, Texas commencing on January 1, 2021 for our Austin technology organization. The lease is for a period of 25 months and expires on January 31, 2023. The space leased is 1,890 square feet. Rental expense for the years ended December 31, 2023 and 2022 was $79,467 and $83,610 respectively. On January 26, 2023, the Company entered into a lease amendment commencing on February 1, 2023, extending the term of the existing lease for a period of 23 months and expiring on January 31, 2025. On March 15, 2021, we entered into a lease amendment to our existing lease in San Antonio, Texas commencing April 1, 2021 and expiring on September 30, 2024 running concurrently with the existing lease. The incremental space leased is 2,734 square feet. The incremental annual rent during the lease term ranges from $56,047 to $60,148. Rental expense for the years ended December 31, 2023 and 2022 was $48,113 and $46,658 respectively. On October 19, 2021, the Company entered into a lease amendment to the existing lease in San Antonio, Texas commencing April 1, 2022 and expiring on September 24, 2024 running concurrently with the existing lease. The incremental space lease is 6,628 square feet. The incremental annual rent during the lease term ranges from $135,874 to $145,816. Rental expense for the year ended December 31, The Company The weighted average remaining lease term is 4.20 years. The weighted average discount rate is 4.47% The Company recognized total operating lease expense of approximately $674,000 and $711,000 for the The maturities of lease liabilities are as follows at December 31, Year ended December 31, 2024 2025 2026 2027 2028 Thereafter Total minimum lease payments Less imputed interest Total lease liabilities Note Louis Hoch During the year ended December 31, Officers and Directors On January 6, 2022, we repurchased 11,361 shares for $47,930 in a private transaction at the On October 4, 2022, we repurchased 26,234 shares for $42,761 in a private transaction at the closing price on October 4, 2022 of $1.63 per share from Louis Hoch, the Company's Chairman, President, Chief Executive Officer and On November 18, 2023 we repurchased 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 repurchased 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. On February 8, 2022, the Company On June 26, 2022, the Company granted 66,667 RSUs with a 3-year vesting period to Elizabeth Michelle Miller for joining the Board of Directors Effective on February 17, 2023, the Company entered into an employment agreement with Greg Carter, the Company’s Executive Vice President, Payment Acceptance. Under the terms of this agreement, Mr. Carter will receive an annual salary of $250,000, Override/Commissions of 10% of the actual cash commissions paid to salespersons under direct management of Mr. Carter, to be paid quarterly, and the payment of a one-time signing bonus of $40,000. On February 8, 2023, the Company granted 1,403,000 shares of restricted common stock with a 10-year vesting period and 273,000 RSUs with a 3-year vesting period to employees and Directors as a performance bonus at an issue price of $1.75 per share. Executive officers and Directors included in 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 Note Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax 2023 2022 Deferred tax assets: Net operating loss carryforwards Depreciation and amortization Non-cash compensation Other Total Valuation Allowance Deferred tax asset Management has reviewed its net deferred asset position, and due to the history of operating losses has determined that the application of a valuation allowance at December 31, The Company has net operating loss carryforwards for tax purposes of approximately Tax Year End NOL Expiration 2005 2006 2007 2008 2009 2010 2013 2016 2017 Total Effective for tax years ending in 2018 or later, net operating The tax provision for federal and state income tax is as follows for the 2023 2022 Current provision: Federal State Deferred provision: Federal expense (benefit) Expense for income taxes The reconciliation of federal income tax computed at the U.S. federal statutory tax rates to total income tax expense 2023 2022 Income tax (benefit) at 21% Change in valuation allowance Permanent and other differences Federal income tax (benefit) State taxes Income tax expense Note Stock Option Plans: Treasury Stock Stock Awards During Stock-based compensation expense related to stock A summary of stock awards outstanding and Weighted Average Weighted Average Contractual Aggregate Intrinsic Stock Awards Shares Exercise Price Remaining Life Value Outstanding, December 31, 2022 Granted Vested Forfeited Outstanding, December 31, 2023 Expected to Vest after December 31, 2023 As of December 31, 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, Employee Stock Purchase Plan The 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 the date hereof, no shares of our common stock have been purchased under the ESPP. Stock Warrants: On December 15,2020, the Company issued Note Basic 2023 2022 Numerator: Numerator for basic and diluted earnings per share, net (loss) available to common shareholders Denominator: Denominator for basic (loss) per share, weighted average shares outstanding Effect of dilutive securities-stock options and restricted awards Denominator for diluted (loss) per share, adjusted weighted average shares and assumed conversion Basic (loss) per common share Diluted (loss) per common share and common share equivalent The awards and options to purchase shares of common stock that were outstanding at December 31, Year Ended December 31, 2023 2022 Anti-dilutive awards and options Note 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. Note 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; 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 In May 2021, Kauder resigned from USIO followed by Pioletti in July of 2022. Thereafter, Kauder and Pioletti formed Triple Pay Play, another payment processing company which competes with the same services as 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 Ben Kauder, Nina Pioletti and Triple Pay Play for breach of contract and misappropriation of trade secrets and unfair business competition. On July 6, 2023, Ben Kauder, Nina Pioletti and Triple Pay Play filed a Motion to Dismiss for Lack of Jurisdiction. The motion was granted. Subsequently, in February Currently, this case is in the early-stage discovery. GREENWICH BUSINESS CAPITAL, LLC On or about September 25, 2019, Usio, Inc. On November 13, 2023, GBC filed lawsuit against USIO, alleging violations of the NACHA rules. In early March of 2024, USIO filed a Motion to Dismiss for improper venue and failure to state a claim. The motion is set to be heard in May of 2024. 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 in the lawsuit have no 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 also 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. KDHM, Minten and Dowe provided us with fraudulent and misleading profit and loss 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 In our counterclaims and third-party petition, we assert causes of action for fraud, breach of contract and conversion. 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 Usio Output Solutions, Inc. 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; the court granted the motion in favor of KDHM. However, USIO believes the court erred in granting the motion and ultimately filed a motion for reconsideration on March 19, 2024. Usio’s Motion for Reconsideration of Order Granting Plaintiff’s Supplemental Rule 166(g) Motion is set to be OTHER PROCEEDINGS Aside from these proceedings, the Company None. Evaluation of Disclosure Controls and Procedures Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for our Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management conducted an assessment of the effectiveness of our internal Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all controls issues and instances of fraud, if any, within the Company have been detected Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting that occurred during the None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. The information required by this Item is incorporated by reference to the definitive proxy statement for our Item 405 of Regulation S-K requires the disclosure of, based upon our review of the forms submitted to us during and with respect to our most recent fiscal year, any known failure by any director, officer, or beneficial owner of more than ten percent of any class of our securities, or any other person subject to Section 16 of the Exchange Act, Code of Ethics We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Our code of ethics was filed as Exhibit 14.1 to our Procedure for Nominating Directors We have not made any material changes to the procedures by which security holders may recommend nominees to our Board of Directors. We consider recommendations for director candidates from our directors, officers, employees, stockholders, customers and vendors. Stockholders wishing to nominate individuals to serve as directors may submit such nominations, along with a nominee's qualifications, to our Board of Directors at The information required by this Item is incorporated by reference to the The information required by this Item is incorporated by reference to the The information required to be disclosed by Item 201(d) of Regulation S-K, “Securities Authorized for Issuance Under Equity Compensation Plans,” appears under the caption “Equity Compensation Plan Information” in the The information required by this Item is incorporated by reference to the The information required by this Item is incorporated by reference to the (a)(1) Consolidated Financial Statements. The following documents are filed in Part II, Item 8 of this annual report on Form 10-K: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, Consolidated Statements of Operations for the years ended December 31, Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, (a)(2) Financial Statement Schedules. All financial statement schedules have been omitted as they are not required, not applicable, or the required information is otherwise included. (a)(3) Exhibits Exhibit Number Description 3.1 Amended and Restated Articles of Incorporation 3.2 Amendment to the Amended and Restated Articles of Incorporation (included as exhibit A to the Schedule 14C filed April 18, 2007, and incorporated herein by reference). 3.3 Certificate of Change Filed Pursuant to NRS 78.209 (included as exhibit 3.1 to the Form 8-K filed July 23, 2015, and incorporated herein by reference). 3.4 10.1* Employment Agreement between the Company and Louis A. Hoch, dated February 27, 2007 (included as exhibit 10.2 to the Form 8-K filed March 2, 2007, and incorporated herein by reference). 10.2* First Amendment to Employment Agreement between the Company and Louis A. Hoch, dated November 12, 2009 10.3* Second Amendment to Employment Agreement between the Company and Louis A. Hoch, dated April 12, 2010 (included as exhibit 10.17 to the Form 10-K filed April 15, 2010, and incorporated herein by reference). 10.4 Bank Sponsorship Agreement between the Company and University National Bank, dated August 29, 2011 (included as exhibit 10.18 to the Form 10-K filed April 3, 2012, and incorporated herein by reference). 10.5* Third Amendment to Employment Agreement between the Company and Louis A. Hoch, dated January 14, 2011 (included as exhibit 10.20 to the Form 10-K filed April 3, 2012, and incorporated herein by reference). 14.1 Code of Ethics (included as exhibit 14.1 to the Form 21.1 23.1 31.1 31.2 32.1 101.INS Inline XBRL Instance Document (filed herewith). 101.SCH Inline XBRL Taxonomy Extension Schema Document (filed herewith). 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith). 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith). 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith). 101.PRE Inline XBRL Taxonomy Presentation Linkbase Document (filed herewith). Copies of the above exhibits not contained herein are available to any stockholder, upon written request to: Chief Financial Officer, Usio, Inc., 3611 Paesanos Parkway, Suite 300, San Antonio, TX 78231. None. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Usio, Inc. Date: March 27, 2024 By: /s/ Louis A. Hoch Louis A. Hoch Chief Executive Officer (Principal Executive Officer) Michael White Chief (Principal Financial and Accounting Officer) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Louis A. Hoch President, Chief Executive Officer, and Director (Principal Executive Ourhaswas uplisted and is now listed on the Nasdaq Global Market® Exchange under the ticker symbol "USIO". Prior to that change our common stock had been listed on the Nasdaq Capital Markets Exchange under the ticker symbol “PYDS” since August 11, 2015. Prior to that our common stock was quoted on the OTCQB, the OTC market tier for companies that are reporting with the SEC,2015, and on the OTC Bulletin Board, or OTCBB, also under the ticker symbol “PYDS”.The following table sets forth the high and low trading prices for our common stock for each quarter during the last two fiscal years. The prices reported below reflect inter-dealer prices and are without adjustments for retail markups, markdowns or commissions, and may not necessarily represent actual transactions. High Low 2017 First Quarter $ 2.23 $ 1.21 Second Quarter $ 2.65 $ 1.17 Third Quarter $ 2.59 $ 1.19 Fourth Quarter $ 4.10 $ 1.35 2016 First Quarter $ 2.30 $ 1.55 Second Quarter $ 2.10 $ 1.16 Third Quarter $ 2.40 $ 1.00 Fourth Quarter $ 3.80 $ 1.57 15, 2018, 15,872,57822, 2024, 26,342,459 shares of our common stock were issued and outstanding. As of March 15, 2018,22, 2024, there were 913,377 stockholders of record of our common stock.Recent SalesOn November 15, 2017, we issued 10,000 shares of unregistered equity securities valued at $2.47 per share to a consultant for investor relations services.We relied on the Section 4(a) (2) exemption from securities registration under the federal securities laws for transactions not involving any public offering. No advertising or general solicitation was employed in offering the securities. The securities were issued to an accredited investor. The securities were offered for investment purposes only and not for the purpose of resale or distribution. The transfer thereof was appropriately restricted by us.funds available at December 31, 2017 were $455,030 and after the increase are $2,455,030. The program began on November 16, 2016 and will be available until all funds are exhausted, orended on September 29, 2019. At September 29, 2019 unless terminated earlier by us.when the program ended, $1,419,701 was available under the repurchase plan. The program may bewas used for purchases of stock from employees and directors; and for open-market purchases through a broker. On November 7, 2019, the Board of Directors approved the renewal of the share buyback program. The Board approved a limit of $1,420,000 which was rolled over from the prior buyback program with a three-year duration. On May 13, 2022, the Board of Directors authorized a renewal of the buy-back program, with a limit up to $4 million of the Company's common stock with a three year duration. The new buyback program terminates on the earliest of May 15, 2025, the date the funds are exhausted, 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. The following table shows our recentfourth quarter of 2023 stock purchases under the buyback plan as of December 31, 2017:Period October 1, 2017 to October 31, 2017 817 $ 1.43 321,109 $ 457,389 November 1, 2017 to November 30, 2017 653 $ 2.48 322,579 $ 455,770 December 1, 2017 to December 31, 2017 490 $ 1.51 323,069 $ 455,030 Total 76,352 $ 455,030 On January 8, 2018 and January 9, 2018, we repurchased 397,845 shares for $956,128 in a private transaction at the closing price on January 9, 2018 from employees to cover the respective employee's share of taxes for shares that vested on that day, as approved by our Audit Committee and Board of Directors on the same day, with the respective directors recusing themselves. The share buyback included share purchases for Michael Long ($380,342), Chairman of the Board, Louis Hoch ($380,342), President and Chief Executive Officer and Tom Jewell ($32,650), Chief Financial Officer as approved by the Audit Committee of the Board of Directors and the Board of Directors as of January 9, 2018. 346 $ 2.02 346 $ 2,659,425 11,753 $ 1.71 11,753 $ 2,639,381 198,447 $ 1.85 198,447 $ 2,271,392 210,546 $ 2,271,392 SELECTED FINANCIAL DATA.As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.The following of our financial condition and results of operations should be read in conjunction with ourthe audited consolidated financial statements and the notes thereto and other financial information included elsewhere in this annual report on Form 10-K. This report contains forward-looking statements. When usedreport.this report,July 1998 and incorporated in the words “anticipates,” “suggests,” “estimates,” “plans,” “projects,” “continue,” “ongoing,” “potential,” “expect,” “predict,” “believe,” “intend,” “may,” “will,” “should,” “could,” “would,” “proposal,”State of Nevada. On June 26, 2019, we changed our corporate name from Payment Data Systems, Inc. to Usio, Inc. Our principal offices are located at 3611 Paesanos Parkway, Suite 300, San Antonio, TX 78231. Our telephone number is (210) 249-4100. expressions are intended to identify forward-looking statements. Actual results in future periods may differ materially from those expressed or implied in such forward-looking statements as a result of a number of factors, including, but not limited to, the risks discussed under the heading "Risk Factors" in this annual report on and elsewhere in this annual report on Form 10-K.OverviewWe provide integrated electronic payment processing services to merchants and businesses, including all types of Automated Clearing House, or ACH, processing, credit, prepaid card and debit card-based processing services.payments. We also operate an online payment processing service, under the domain name www.billx.com system, which allows consumers to process online payments to pay any other individual, including family and friends. Through Akimbo, under the domain name www.akimbocard.com, we offer MasterCard prepaid cards to consumers for use as a tool to stay on budget, manage allowances and share money with familyThe AkimboOur UsioCard platform includes Akimbo Now for businesses, Akimbo Gift for consumers and support forsupports Apple Pay®, Android Pay™, and Samsung Pay™ and Google Pay™.On September 1, 2017, we acquired Singular Payments, LLC, a Florida limited liability company Our PINless debit product allows merchants to debit and credit card processoraccounts in real-time. In our over 25-year history, we have created a loyal customer base that relies on us for our convenient, secure, innovative and adaptive services and technology, and we have built long-standing and valuable relationships with premier banking institutions such as Fifth-Third Bank, Sunrise Bank, and Wells Fargo Bank.purchase price of $5 million. With Singular Payments we acquired new customers and their sales force. The former owner of Singular Payments, Vaden Landers, became our Chief Revenue Officer. We bought an existing portfolio of customers with a significant revenue stream and a talented sales force with significant experience inleveraged, one to many, distribution model. Following the credit card industry. The successcompletion of the Singular Payments acquisition, will continuewe launched our payment facilitation, PayFac, platform called "PayFac-in-a-Box" in late 2018 targeting partnership opportunities with app and software developers in bill-centric verticals, such as legal, healthcare, property management, utilities and insurance. The PayFac-in-a-Box platform 'integration layer' offers a simple integration experience for technology companies who are looking to depend, in part, onmonetize payments within an existing base of downstream clients. The added value of offering our abilityintegration partners access to realize the anticipated growth opportunities from integrating the acquired business with our business and banking sponsor, including integrating its services into our offering of products and services. Our success depends on the successful integration of our and the acquired business’s operations and information and financial systems.We reported a net loss of $3,008,785 and $1,196,642 for the years ended December 31, 2017 and December 31, 2016, respectively. We have an accumulated deficit of $53,260,426 at December 31, 2017.In 2017, we processed a total dollar amount of more than $2.8 billion for all payment types which decreased by 3% compared to our record volume of $3.3 billion total dollars processed in 2016. ACH or electronic check transaction processing volumes for 2017 decreased 15% compared to 2016. Returned check transactions were down 13% in 2017 compared to 2016. Credit card dollars processed in 2017 increased by 78% compared to 2016 and credit card, processing volumes for 2017 increased by 34% compared to 2016debit card, ACH and represent the highest volumeprepaid card issuance capabilities through a single vendor partner relationship in our history. Credit card transaction volumes during the fourth quarterface-to-face, mobile and virtual payment acceptance environments provides a true single channel commerce experience through an application programming interface, API. 2017 set company records, with the number of transactions up 199% and credit card dollars processed up 274% compared to the fourth quarter of 2016. The growth in credit card processing volume was due to the acquisition of the assets of Information Management Solutions, LLC, or IMS, in December 2020, we also offer additional services relating to electronic bill presentment, document composition, document decomposition and printing and mailing services serving hundreds of customers representing a wide range of industry verticals, including utilities and financial institutions through our wholly-owned subsidiary, Usio Output Solutions, Inc., or Output Solutions. This product offering provides an outsourced solution for document design, print and electronic delivery to potential customers and transactions from Singular Payments, LLC on September 1, 2017.To regainentities looking to reduce postage costs and sustain profitability, we must, among other things, continue to grow our top line revenues, grow and maintain our customer base, enhance and continue to refine existing and new successful marketing strategies, continue to maintain and upgrade our technology and transaction processing systems, provide superior customer service, respond to competitive developments, attract, retain and motivate qualified personnel, and respond to unforeseen industry developments and other factors.aggressively drive top line growth,grow revenues, (b) add talented sales people,manage our operating expenses, (c) add quality customers to our client base, (d) meet evolving customer requirements, (e) adapt to technological changes in an ever changingemerging market, and (f) be opportunisticassimilate current and future acquisitions of companies and customer portfolios. We will continue to invest in identifyingour sales force and acquiring portfolios that expand or complementtechnology platforms to drive revenue growth, and assess the needs of the market to both enhance and maintain our existing customer baseproduct set, alongside the incorporation of new features and (g) effectively managepayment processing products. In particular, we are focused on growing our ACH merchants, adding new software integrators, growing our electronic bill presentment, document composition, document decomposition, printing and mailing services business while also providing incremental services to existing merchants. In addition to our near-term growth opportunities, we are focused on leveraging and optimizing the infrastructure of the organization allowing expansion of our payment processing and mail and printing capabilities without significantly increasing our operating expensescosts.aggressively scalemay qualify for this tax in 2024, and future years.Our near term objectives willIf these conditions continue or worsen, they could adversely impact our future financial and operating results.focused on aggressively driving top lineable to recognize similar levels of interest income in the future. and identifying and acquiring portfolios that complement and support our growth strategy. We will continuously assess our resources ability to achieve our targeted growth and continuously enhance our technology platforminitiatives to drive our competitive advantage.bad debt,credit losses, investments, intangible assets, income taxes, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. We consider the followingthese accounting policies to be critical because the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change or because the impact of the estimates and assumptions on financial condition or operating performance is material. $ (771,712 ) $ (90,814 ) $ (1,922,500 ) $ (5,214,430 ) 521,932 571,650 2,081,533 2,735,118 (249,780 ) 480,836 159,033 (2,479,312 ) 545,711 531,666 2,222,969 2,072,041 $ 295,931 $ 1,012,502 $ 2,382,002 $ (407,271 ) $ 19,362,718 $ 18,705,496 $ 82,591,109 $ 69,428,285 295,931 1,012,502 2,382,002 (407,271 ) 1.5 % 5.4 % 2.9 % (0.6 )% $ 14,915,902 $ (17,036,477 ) (11,408,212 ) 16,420,132 (311,609 ) (189,929 ) (400,594 ) 1,471,652 (374,701 ) (6,630 ) 403,506 24,052 $ (12,091,610 ) $ 17,719,277 $ 2,824,292 $ 682,800 and the program management and processing of prepaid debit cards. Wecards, and we also operate an online payment processing service for consumers under the domain name www.billx.comnow offer additional output solution services relating to electronic bill presentment, document composition, document decomposition and sell this service asprinting and mailing services serving hundreds of customers representing a private-label application to resellers. wide range of industry verticals, including utilities and financial institutions. $ 3,940,961 $ 3,796,884 $ 144,077 4 % 6,851,743 6,625,637 226,106 3 % 4,019,266 3,384,242 635,024 19 % 4,550,748 4,898,733 (347,985 ) (7 )% $ 19,362,718 $ 18,705,496 $ 657,222 4 % $ 14,888,973 $ 14,782,606 $ 106,367 1 % 28,476,591 27,121,621 1,354,970 5 % 18,729,350 9,117,670 9,611,680 105 % 20,496,195 18,406,388 2,089,807 11 % $ 82,591,109 $ 69,428,285 $ 13,162,824 19 % 20172023 increased 21%by 19% to $14,571,158$82.6 million from $12,076,358 for 2016. The increased revenues for 2017 were primarily attributed to incremental revenues$69.4 million in 2022. Key drivers of the revenue growth include growth in our Prepaid business line as a result of sustained and growing relationships with major cities in the Singular Payments, LLC acquisition completedU.S. by facilitating disbursements to individuals and families in need of financial assistance. This growth was bolstered by gains in our Output solutions business line, thanks to our ability to capitalize on September 1, 2017.Operating Expenses are able to process ACH and debit, credit or prepaid card transactions on behalf of our customers and their consumers. We pay volume-based fees for debit, credit, ACH and prepaid transactions initiated through these processors or sponsoring banks, and pay fees for other transactions such as returns, notices of change to bank accounts and file transmission. Cost of services expenses were $10,802,932expense was $64.0 million and $8,293,354$54.8 million for 20172023 and 2016,2022, respectively. Cost of services expenses increased $2,509,578by $9.2 million, or 30%17%, in 20172023 as compared to 20162022 primarily becausedue to increased transaction costs associated with our revenue growth.credit card processing volumesgross profit were attributable to strong revenue growth, and improved gross margin percentages due to improved profitability across our business lines with increased credit card processing expenses associated with the acquired Singular Payments, LLC revenues. expenses decreasedexpense increased marginally to $968,141 for 2017$2.2 million in 2023 from $1,314,778 for 2016.$2.1 million in 2022. Our stock-based compensation expenses for 20172023 and 20162022 represented the amortization of deferred compensation expenses related to incentive stock grants to employees, officers and directors. The decreaseincrease in stock compensation expense was related to stock grants vesting (fully expensed) in December 2016 and the cancellation of a significant stock grant in 2016.Cancellation of stock-based compensation expense (income) was $0is primarily attributable to our February 8, 2023 employee stock grant. Please refer to Note 8 to our Consolidated Financial Statements included elsewhere in this annual report for incremental information regarding these stock grants.($261,208) for the years ended December 31, 2017 and December 31, 2016 respectively. The 2016 amount resulted from a non-vested stock-based awards to a former employee that was forfeited during 2016.$4,378,969 for 2017,$16.2 million in 2023 from $3,188,407 for 2016.$15.0 million in 2022. The increase of $1,190,562,$1.2 million, or 37%8%, represented continued investments in other selling, generalthe Company's security and administrative expenses for 2017IT infrastructure to strengthen the Company's defense from cybersecurity risks. Further investments were made to increase our customer success, implementations of merchant onboarding processes, and partner and client integrations strategy to sustain existing operations and future growth, as well as staffing and employee retention.dueattributable to incremental salaries and benefits and other operating expenses associated with the completed depreciation of customer list assets from our 2017 acquisition of Singular Payments, LLC on September 1, 2017.Depreciation and AmortizationDepreciation and amortization was $1,258,132 for 2017 as compared to $901,600 for 2016. The increase of $356,532, or 40%, was primarily due to amortization of intangible assets purchased as part of the Singular Payments, LLC acquisition on September 1, 2017.$100,964$1.7 million in 20172023 from $97,322$15,237 in 20162022 due to higher interest bearinginterest-bearing cash balances. Other income (expense) was $1,583$44,798 for 2017,2023, as compared to $99,277expense of $4,051 for 2016. The 2016 other income was a settlement award related to the Shelby lawsuit.2022. $274,316$292,524 in 2023 and $32,668$280,000 in 2017 and 2016, respectively.2022. The income tax expense represents amounts incurred under the Texas margin tax and includes an increaseTennessee franchise tax.federal taxes as a result of adjusting our deferred tax asset to reflect lower prospective tax rates as a result to the new tax legislation implemented2023, and $280,000 in December, 2017.$3,008,785$0.5 million and $1,196,642$5.5 million for the years ended December 31, 20172023 and 2016,December 31, 2022, respectively. The decrease in profitability isnet loss was primarily related to our strong revenue growth driving increased gross profits versus the factors described above.2017,2023, we had $4,800,554$7.2 million of cash and cash equivalents, as compared to $4,120,738$5.7 million of cash and cash equivalents at December 31, 2016.2022. The increase in cash for 2017 was primarily duea result of the decrease in net loss, combined with reduced stock repurchases in 2023 versus 2022. For the year ended December 31, 2023 net cash provided by operating activities was $14.9 million and for the year ended December 31, 2022, cash used by operations was $17.0 million. We expect available cash and cash equivalents and internally generated funds to $2,725,340 raisedbe sufficient to support working capital needs, capital expenditures (including acquisitions), and our debt service obligations. We believe we have sufficient liquidity to operate for at least the next 12 months from the date of filing this report. Cash from operating activities is dependent on our net income (loss), less depreciation, amortization, credit losses, deferred federal income tax, non-cash stock-based compensation, the amortization of warrant costs, and net of the changes in our operating assets and liabilities. These assets and liabilities include our accounts receivable, prepaid expenses, operating lease right-of-use assets, inventory, other assets, accounts payable and accrued expenses, operating lease liabilities, prepaid card load obligations, merchant reserves, customer deposits, and deferred revenues. To the extent we require other sources of capital, we may seek a public offeringcommercial line of credit or sell debt or equity securities, although we may not be able to complete any financing on December 26, 2017 offset by $1,500,000 in cash paid for acquisition of Singular Payments, LLC.$3,008,785$0.5 million and a net loss of $1,196,642$5.5 million for the years ended December 31, 20172023 and December 31, 2016,2022, respectively. Additionally, we reported working capital of $4,790,715$8.0 million and $4,522,151$5.8 million at December 31, 20172023 and 2016,2022, respectively.December 21, 2017,March 20, 2021, we entered into a placement agency agreement with Maxim Group LLC with respectdebt arrangement to finance $165,996 for the issuance and salepurchase of an aggregateOutput Solutions sorter. The loan is for a period of 1,176,00036 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%. Payments in 2023 on this equipment loan were $54,634.$2.55$7.00 per share in a publicprivate offering. We agreed to pay Maxim a cash fee of equal to 6% of the aggregateThe gross proceeds raised in the offering and legal fees and expenses of up to $50,000. The net proceeds to us from the publicprivate offering were $2,725,340, after deducting the offering expenses$1,000,000. We have also sold securities in public offerings from time to time. For example, in September 2020, we sold 4,705,883 shares of our common stock and fees payablereceived net proceeds of approximately $8 million. We cannot assure you that we will be able to sell shares of our equity securities on terms acceptable to us or at all.us.Theoperating activities totaled $14.9 million for 2023 as compared to net cash used by operating activities totaled $110,277of $17.0 million in 2022. After adjusting for 2017 as compared tothe impact of operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations and merchant reserves included in the statement of cash flows, net cash provided by adjusted operating activities of $848,438 in 2016. The reduction inwas $2.8 million for the year ended December 31, 2023 and net cash provided by adjusted operating activities was $0.7 million for the year ended December 31, 2022. Operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations, customer deposits and merchant reserves are deducted from operating cash flow, as we believe these metrics do not serve in providing a clear picture of the true operational cash used or provided in a given time period. The Company believes Non-GAAP adjusted operating cash flow to be a more accurate indicator of cash contributions that can be used to sustain current and future business operations. The increase in net cash generated by adjusted operating activities in 2023 (after adjusting for the impact of operating lease right-of-use assets, operating lease liabilities, prepaid card load obligations and merchant reserves) was primarily attributable to higher operating expenses and a higherdecreases in our net loss for 2017.$1,822,337$0.8 million for 20172023 and $355,551 for 2016.$0.8 million in 2022. The increasedecrease in net cash used by investing activities for 2017, as comparedwas due to reduced expenditures on the prior year was related to the $1,500,000purchase of cash paid for the Singular Payments, LLC acquisition.providedused by financing activities for 20172023 was $2,612,430$0.5 million compared to net cash used by financing activities of $431,755$1.4 million for 2016.2022. The 2017 cash provided by financing activities was a result of a public offering which raised $2,725,340decrease in December 2017. In 2016 net cash used by financing activities represents purchaseswas primarily attributable to a reduction in stock repurchases in 2023, a decrease of certain sharesapproximately $0.9 million over 2022.Loan and Security Agreement with C2Go, Inc.Under a loan and security agreement dated February 2, 2016, our wholly-owned subsidiary FiCentive, Inc. loaned a principal amount of $150,000 to C2Go, Inc. with an interest rate of 10% per annum for a term of 18 months. The loan was secured by a first lien on all assets of C2Go. C2Go defaulted under the note by failing to repay the loan plus interest on August 2, 2017. A lawsuit filed by FiCentive is pending in Bexar County, San Antonio, Texas. On December 7, 2017, we entered into a note purchase and settlement agreement with C2Go and Mercury Investment Partners LLC. Pursuant to the note purchase and settlement agreement Mercury Investment Partners agreed to purchase the note and the rights secured by the security agreement with all rights and obligations and pay to FiCentive a sum of $200,000 in three installments. The first installment of $50,000 was paid on December 7, 2017. The second installment of $50,000 is due on April 30, 2018, and the remaining amount of $100,000 is due on October 31, 2018. In return, FiCentive agreed to waive all interest due and payable under the terms of the C2Go loan. There are no assurances that we will be able to recover the remaining $150,000 principal and that there are no assurances there will be any assets for us to recover from our lien on all the assets of C2Go, Inc. if payment in full of the obligation is not made.Payment Data Systems,Payment Data Systems,Usio, Inc. and Subsidiaries (collectively referred to as the “Company”) as of December 31, 20172023 and 2016,2022, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows, for each of the two-yearstwo years in the period ended December 31, 2017,2023, 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, 20172023 and 20162022 and the results of its operations and its cash flows for each of the years thenin the two-year period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America.Akin, Doherty, Klein & Feuge,ADKF, P.C.Akin, Doherty, Klein & Feuge,30, 2018PAYMENT DATA SYSTEMS,USIO, INC. $ 7,155,687 $ 5,709,117 5,564,138 4,371,640 44,899,603 49,737,068 31,578,973 20,170,761 1,865,731 1,554,122 422,808 507,355 444,071 450,389 91,931,011 82,500,452 5,310,095 4,909,501 97,241,106 87,409,953 3,660,092 3,222,816 1,753,333 2,625,360 1,504,000 1,504,000 2,420,782 2,795,483 355,357 355,357 6,033,472 7,280,200 $ 106,934,670 $ 97,912,969 $ 1,031,141 $ 858,622 3,801,278 3,721,108 633,616 617,319 107,270 56,429 44,899,603 49,737,068 31,578,973 20,170,761 1,865,731 1,554,122 83,917,612 76,715,429 5,310,095 4,909,501 89,227,707 81,624,930 718,980 14,994 1,919,144 2,338,947 91,865,831 83,978,871 — — 197,087 195,471 97,479,830 94,048,603 (4,362,150 ) (3,749,027 ) (6,907,775 ) (5,697,900 ) (71,338,153 ) (70,863,049 ) 15,068,839 13,934,098 $ 106,934,670 $ 97,912,969 December 31, 2017 December 31, 2016 ASSETS Cash and cash equivalents $ 4,800,554 $ 4,120,738 Accounts receivable, net 969,674 907,750 Settlement processing assets 38,027,984 43,851,311 Prepaid expenses and other 176,945 142,029 Note receivable 150,000 200,000 Current assets before restricted cash 44,125,157 49,221,828 Restricted cash 14,977,468 15,803,641 Total current assets 59,102,625 65,025,469 Property and equipment, net 2,105,186 2,494,510 Other assets: Intangibles, net 4,676,427 172,899 Deferred tax asset 1,394,000 1,621,000 Other assets 157,565 200,808 Total other assets 6,227,992 1,994,707 Total Assets $ 67,435,803 $ 69,514,686 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 300,736 $ 145,044 Accrued expenses 1,006,262 703,322 Settlement processing obligations 38,027,984 43,851,311 Current liabilities before restricted cash 39,334,982 44,699,677 Restricted cash 14,977,468 15,803,641 Total current liabilities 54,312,450 60,503,318 Stockholders' Equity: Preferred stock, $0.01 par value, 10,000,000 shares authorized; -0- shares outstanding in 2017 and 2016 — — Common stock, $0.001 par value, 200,000,000 shares authorized; 16,874,235 and 12,392,288 issued and 16,201,634 and 11,795,939 outstanding in 2017 and 2016 (see Note 11) 186,299 181,818 Additional paid-in capital 74,041,083 63,881,365 Treasury stock, at cost; 672,601 and 596,349 shares in 2017 and 2016 (see Note 11) (831,059 ) (718,149 ) Deferred compensation (7,012,544 ) (4,082,025 ) Accumulated deficit (53,260,426 ) (50,251,641 ) Total stockholders' equity 13,123,353 9,011,368 Total Liabilities and Stockholders' Equity $ 67,435,803 $ 69,514,686 PAYMENT DATA SYSTEMS,USIO, INC. $ 82,591,109 $ 69,428,285 63,992,417 54,835,069 18,598,692 14,593,216 2,222,969 2,072,041 16,216,690 15,000,487 2,081,533 2,735,118 20,521,192 19,807,646 (1,922,500 ) (5,214,430 ) 1,695,122 15,237 50,000 — (5,202 ) (4,051 ) 1,739,920 11,186 (182,580 ) (5,203,244 ) — — 292,524 280,000 292,524 280,000 $ (475,104 ) $ (5,483,244 ) $ (0.02 ) $ (0.27 ) $ (0.02 ) $ (0.27 ) 20,105,968 20,379,386 20,105,968 20,379,386 December 31, 2017 December 31, 2016 Revenues $ 14,571,158 $ 12,076,358 Operating expenses: Cost of services 10,802,932 8,293,354 Selling, general and administrative: Stock-based compensation 968,141 1,314,778 Cancellation of stock-based compensation — (261,208 ) Other expenses 4,378,969 3,188,407 Depreciation and amortization 1,258,132 901,600 Total operating expenses 17,408,174 13,436,931 Operating (loss) (2,837,016 ) (1,360,573 ) Other income: Interest income 100,964 97,322 Other income 1,583 99,277 Other income, net 102,547 196,599 (Loss) before income taxes (2,734,469 ) (1,163,974 ) Income taxes 274,316 32,668 Net (Loss) $ (3,008,785 ) $ (1,196,642 ) Earnings (Loss) Per Share Basic earnings (loss) per common share: $ (0.33 ) $ (0.15 ) Diluted earnings (loss) per common share: $ (0.33 ) $ (0.15 ) Weighted average common shares outstanding (see Note 12) Basic 8,995,883 7,838,197 Diluted 8,995,883 7,838,197 PAYMENT DATA SYSTEMS,USIO, INC. 26,807,145 $ 195,235 $ 93,100,129 $ (2,404,458 ) $ (6,842,195 ) $ (65,379,805 ) $ 18,668,906 369,755 368 1,182,939 — (166,329 ) — 1,016,978 — — 20,963 — - — 20,963 (132,000 ) (132 ) (255,428 ) — 145,498 — (110,062 ) — — — — 1,165,126 — 1,165,126 — — — (1,344,569 ) — — (1,344,569 ) — — — — — (5,483,244 ) (5,483,244 ) 27,044,900 $ 195,471 $ 94,048,603 $ (3,749,027 ) $ (5,697,900 ) $ (70,863,049 ) $ 13,934,098 1,731,506 1,731 3,619,315 — (2,650,505 ) — 970,541 (115,000 ) (115 ) (188,088 ) — 103,091 — (85,112 ) — — — — 1,337,539 — 1,337,539 — — — (156,162 ) — — (156,162 ) — — — (456,961 ) — — (456,961 ) — — — — — (475,104 ) (475,104 ) 28,661,406 $ 197,087 $ 97,479,830 $ (4,362,150 ) $ (6,907,775 ) $ (71,338,153 ) $ 15,068,839 Additional Paid - In Capital Treasury Stock Deferred Compensation Accumulated Deficit Total Stockholder's Equity Common Stock Shares Amount Balance at December 31, 2015 12,379,537 $ 185,533 $ 64,302,498 $ (286,394 ) $ (6,031,362 ) $ (49,054,999 ) $ 9,115,276 Issuance of common stock, restricted 30,000 30 51,670 — — — 51,700 Issuance of common stock, restricted, Akimbo settlement 167,153 168 419,053 — — — 419,221 Deferred compensation amortization — — — — 914,902 — 914,902 Issuance of common stock under equity incentive plan 82,265 87 329,019 — 70,768 — 399,874 Purchase of treasury stock — — — (431,755 ) — — (431,755 ) Reversal of deferred compensation amortization that did not vest (266,667 ) (4,000 ) (1,220,875 ) — 963,667 — (261,208 ) Net (loss) for the year — — — — — (1,196,642 ) (1,196,642 ) Balance at December 31, 2016 12,392,288 $ 181,818 $ 63,881,365 $ (718,149 ) $ (4,082,025 ) $ (50,251,641 ) $ 9,011,368 Issuance of common stock, restricted 20,000 20 40,180 — — — 40,200 Issuance of common stock, employees, restricted 1,395,334 1,395 3,082,293 — (3,083,688 ) — — Issuance of common stock under equity incentive plan 375,461 375 814,596 — (630,000 ) — 184,971 Issuance of common stock, Singular Payments, LLC acquisition 1,515,152 1,515 3,498,485 — — — 3,500,000 Issuance of common stock, public offering 1,176,000 1,176 2,724,164 — — — 2,725,340 Deferred compensation amortization — — — — 783,169 — 783,169 Purchase of treasury stock — — — (112,910 ) — — (112,910 ) Net (loss) for the year — — — — — (3,008,785 ) (3,008,785 ) Balance at December 31, 2017 16,874,235 $ 186,299 $ 74,041,083 $ (831,059 ) $ (7,012,544 ) $ (53,260,426 ) $ 13,123,353 PAYMENT DATA SYSTEMS,USIO, INC. $ (475,104 ) $ (5,483,244 ) 1,209,506 1,196,584 872,027 1,538,534 2,190,369 2,072,041 32,600 — — 20,963 (156,162 ) — (1,192,498 ) 607,853 6,318 (23,426 ) 374,701 6,630 — (10,000 ) 84,547 (72,823 ) 252,689 853,965 (403,506 ) (24,052 ) 11,408,212 (16,420,132 ) 400,594 (1,471,652 ) 311,609 189,929 — (17,647 ) 14,915,902 (17,036,477 ) (834,964 ) (812,242 ) (834,964 ) (812,242 ) (56,992 ) (54,771 ) (456,961 ) (1,344,569 ) (513,953 ) (1,399,340 ) 13,566,985 (19,248,059 ) 32,343,501 51,591,560 45,910,486 32,343,501 $ 5,202 $ 4,051 116,204 269,500 2,650,505 166,229 811,819 — December 31, 2017 December 31, 2016 Operating Activities Net (loss) $ (3,008,785 ) $ (1,196,642 ) Adjustments to reconcile net (loss) to net cash (used) provided by operating activities: Depreciation 761,660 738,461 Amortization 496,472 163,139 Bad debt expense 71,667 — Goodwill — 5,777 Non-cash stock based compensation 968,141 1,314,778 Cancellation of stock based compensation — (261,208 ) Issuance of stock to consultant 40,200 51,700 Issuance of stock to Akimbo to settle Indemnification liability — 419,221 Deferred income tax 227000 — Changes in operating assets and liabilities: Accounts receivable (133,591 ) 227,634 Prepaid expenses and other (34,916 ) 7,089 Other assets 43,243 2,041 Accounts payable and accrued expenses 458,632 (623,552 ) Net cash (used) provided by operating activities (110,277 ) 848,438 Investing Activities Purchases of property and equipment (372,337 ) (155,551 ) Purchase of Singular Payments, LLC (900,000 ) — Advance to Singular Payments, LLC (600,000 ) — Note receivable 50,000 (200,000 ) Net cash (used) by investing activities (1,822,337 ) (355,551 ) Financing Activities Proceeds from public offering, net of expenses 2,725,340 — Purchases of treasury stock (112,910 ) (431,755 ) Net cash (used) by financing activities 2,612,430 (431,755 ) Change in cash and cash equivalents 679,816 61,132 Cash and cash equivalents, beginning of year 4,120,738 4,059,606 Cash and Cash Equivalents, End of Year $ 4,800,554 $ 4,120,738 Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ — $ — Income taxes $ 45,000 $ 48,164 Non-cash transactions: Issuance of common stock in exchange for purchases of Singular Payments, LLC 3,500,000 — Forgiveness of note receivable in exchange for purchase of Singular Payments, LLC 600,000 — Issuance of deferred stock compensation 3,713,688 — The accompanying notes are an integral partTable of these consolidated financial statements.ContentsDECEMBER2017 AND 2016Payment Data Systems,Usio, Inc., along with its subsidiaries, FiCentive, Inc., a Nevada corporation, and Zbill, Inc., a Nevada corporation, provides integratedelectronic payment services, including credit and debit card-based processing services and transaction processing via the Automated Clearing House, (“ACH”)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 the Output Solutions operations. In addition, the Company operates an Internet electronic payment processing service for consumers under the domain name www.billx.com and various other product websites, such as akimbocard.comwww.usio.com, www.singularpayments.com, www.payfacinabox.com, www.ficentive.com, www.akimbocard.com, and singularpayments.com.intercompanyinter-company accounts and transactions have been eliminated in consolidation.services, andservices.Revenue is recognized as revenue during the period in which the transactions are processed or when the related services are performed. The Company complies with ASC 605-45-45606-10 and reports revenues at gross as a principal versus net as an agent. Although some of the Company’sCompany's processing agreements vary with respect to specific credit risks, the Company has determined that for each agreement it is acting in the principal role. Merchants may be charged for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through third-partythird-party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations (Visa, MasterCard, and Discover). Revenue also includes any up-frontassociations. Certain card distributors remit payment of fees forearned 45 days after the work involved in implementing the basic functionality required to provide electronic payment processing services to a customer. Revenue from such implementation fees is recognized over the termend of the related service contract.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. $ 14,888,973 $ 14,782,606 $ 106,367 1 % 28,476,591 27,121,621 1,354,970 5 % 18,729,350 9,117,670 9,611,680 105 % 20,496,195 18,406,388 2,089,807 11 % $ 82,591,109 $ 69,428,285 $ 13,162,824 19 % $ — $ 17,647 — — $ — $ 17,647 Restricted Cash: Restricted cash includes certain fundsour merchants that serveeach merchant and held as collateral to minimize contingent liabilities associated with any losses that may occur under our agreementthe 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 merchant. The funds may be used to offset any returned items or chargebacks toCompany's member sponsors and is in accordance with the Company and to indemnify the Company against third-party claims and any expenses that may be createdguidelines set by the card networks.a result of any claim or fine. The Company may require the customer to provide a security deposit based on estimated transaction volumes, amounts and chargebacks and may revise the deposit based on periodic review of the same items. Repayment of the deposit to the customer is generally within 90 to 180 days beyond the date the last item is processed by the Company on behalf of the customer. The customer security deposit does not accrue interest to the benefit of the customer. $ 5,709,117 $ 7,255,321 20,170,761 36,590,893 1,554,122 1,364,193 4,909,501 6,381,153 $ 32,343,501 $ 51,591,560 $ 7,155,687 $ 5,709,117 31,578,973 20,170,761 1,865,731 1,554,122 5,310,095 4,909,501 $ 45,910,486 $ 32,343,501 Receivablereceivable are reported as outstanding principal net of an allowance for doubtful accounts expected credit lossesof $61,223 and $26,556$319,000 at December 31, 2017 2023 and 2016, respectively.doubtful accountscredit 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 bad debtscredit losses have been within its expectations. If the financial condition of the Company'sits customers were to deteriorate,deteriorates, resulting in an impairment of their ability to make contractual payments, additionalbad debtcredit 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.useuse.The software is capitalized when both the preliminary project stage is completedcomplete, and it is probable that computerthe software being developed will be completed andis 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, 20172023 and December 31, 2016,2022, the Company capitalized $267,869$634,571 and $136,537,$584,246, respectively.($250,000).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 although the relatively small number of customers increases the risk.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 20172023 or 2016.2022.2017 2023 and 2016,2022, respectively, the Company’s reserve for processing losses was $172,832.$100,000$16,500 and $46,000$94,000 in advertising costs in 20172023 and 2016, 2022,respectively.The Company has approximately $41.3 million of net operating loss carryforwards. However, the Company cannot predict with reasonable certainty that all of the available net operating loss carryforwards will be realized in future periods. Accordingly, a valuation allowance has been provided to reduce the net deferred tax assets to $1.4 million. Management does not anticipate a significant change in the 6 months after the assessment and will review the deferred tax asset balance at June 30, 2018, or earlier as events may warrant.401(k)(the “401(k) Plan”)or 401(k) Plan, pursuant to Section 401(k)401(k) of the Internal Revenue Code. All eligible full andpart-time employees of the Company who meet certain age requirements may participate in the 401(k)401(k) Plan. Participants may contribute between 1% and 15%80% of their pre-tax compensation, but not in excess of the maximum allowable under the Code. The 401(k)401(k) Plan allows for discretionary and matching contributions by the Company. In 2017,2023, the Company matched 100% of employee contributions up to 3% and 50% of the employee contribution over 3% with a maximum employer contribution of 5%4%. The Company made matching contributions of $65,478$280,619 and $52,905$262,530 in 20172023 and 2016,2022, respectively. earnings (loss) per common share are calculated by dividing earnings by the weighted average number of commonshares outstanding during the period.NewPronouncement: May 2014, June 2016, the Financial Accounting Standards Board (FASB) issued accounting standards update, ASU 2014-9, “Revenue from ContractsAccounting Standards Update (ASU) No.2016-13,Financial Instruments - Credit Losses (Topic 326), to provide financial statement users with Customers (Topic 606)more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a subsequent amendment toreporting entity at each reporting date. To achieve this objective, the standardamendments in March 2016, ASU 2016-8 “Revenue from ContractsTopic 326 replace the incurred loss impairment methodology in current GAAP with Customers, Principal versus Agent Consideration (Reporting Revenue Gross versus Net). The original standard provides guidance on recognizing revenue, including a five step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amountmethodology that reflects theexpected credit losses and requires consideration of a broader range of reasonable and supportable information to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard, as amended,inform credit loss estimates. Topic 326 is effective for for fiscal years andbeginning after December 25, 2022, including interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted. The amendment allows companies to use either a full retrospective or a modified retrospective approach to adoptfor smaller reporting companies. We adopted this ASU. The Company has evaluated the potential impact that the adoption of this standard will have on its financial position, results of operations, and related disclosures, and will adopt the provisions of this new standard in the first quarter of 2018. The Company functions as the merchant of record and has primary responsibility for providing end-to-end payment processing services for its clients. The Company's clients contract with the Company for all credit card processing services including transaction authorization, settlement, dispute resolution, security and risk management solutions, reporting and other value-added services. As such, the Company is the primary obligor in these transactions and is solely responsible for all processing costs, including interchange fees. Further, the Company sets prices as it deems reasonable for each merchant. The gross fees the Company collects are intended to cover the interchange, assessments and other processing fees and include the Company's margin on transactions processed. For these reasons, the Company is the principal obligor in the contractual relationship with its customers and therefor, the Company records its revenues, including interchange and assessments guidance effective January 1 2023 on a grossprospective basis. The Company's existing revenue recognition process will remain intact and we will continue to record revenues at the gross amount billed due to its primary responsibility for providing end-to-end payment processing services for its clients.In February 2016,Our financial statements were not materially impacted upon adoption. For additional information, see "Note 4 - Valuation Accounts."issued, “Leases (Topic 842),” which is intendedthe SEC or other standard setting bodies that do not require adoption until a future date are not expected to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilitieshave a material impact on the balance sheet and disclosing key information about leasing arrangements. A lessee will be required to recognize on the balance sheet an asset (right to use) and a liability (lease obligation) for leases with terms of more than 12 months. Accounting by lessors will remain largely unchanged from current U.S. generally accepted accounting principles. The new standard is effective for public companies for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. Management does not expect that adopting this standard will have a significant impact on itsconsolidated financial statements and related disclosures.upon adoption.In November 2016, the FASB issued ASU 2016-18, Statementthe statement of financial position and the statement of cash flow must be disclosed. The update requires retrospective application to all periods presented. The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company has evaluated this updated requirement and will adopt this policy in 2018.Note 2. Acquisition of Singular Payments, LLC.On September 1, 2017, the Company entered into a membership interest purchase agreement with Singular Payments, LLC (“Singular”), a Florida limited liability company in the business of credit card processing, pursuant to which the Company agreed to purchase all of the membership interest in Singular Payments, LLC. The aggregate purchase price was $5,000,000 and consisted of a cash payment of $1,500,000 at closing, minus the balance on the outstanding note receivable of $600,000 and subject to adjustment based on net working capital, and $3,500,000 in shares of common stock, or 1,515,152 shares of the Company's common stock, $0.001 par value per share, valued at $2.31 per share. Such shares are unregistered and subject to a lock-up agreement of 24 months.The final number of shares issued, and the related value per each such share, was determined using the volume-weighted average daily closing price for the shares of common stock for the 5 business days immediately preceding September 1, 2017, or $2.31.The purchase price was allocated to the net assets acquired based upon their estimated fair values as follows: Estimated Fair Estimated Useful Value Life Customer list $ 5,000,000 5 Years Total $ 5,000,000 The 2017 consolidated statement of operations includes 4 months of Singular operations, which is approximately $3.7 million of revenue and $0.6 million of operating loss.Unaudited Pro Forma InformationThe Company estimates that the revenues and net income for the periods below that would have been reported if the Singular acquisition would have taken place on the first day of the Company's 2016 calendar year would be as follows: 2017 2016 Revenues $ 22,079,244 $ 23,000,000 Gross Profit 4,521,507 5,146,325 Net (Loss) (3,804,700 ) (2,568,074 ) Income per share: Basic $ (0.37 ) $ (0.27 ) Diluted $ (0.37 ) $ (0.27 ) Amounts set forth above are not necessarily indicative of the results that would have been obtained had the Singular acquisition had taken place on the first day of the Company's 2016 calendar year or of the results that may be achieved by the combined enterprise in the future.3. Note ReceivableOn February 2, 2016, the Company entered into a loan and security agreement with C2Go, Inc., a Nevada corporation, pursuant to which the Company loaned a principal amount of $200,000 to C2Go with an interest rate of 10% per annum for a term of 18 months. C2Go’s obligations under the loan and security agreement are secured by a first lien on all assets of C2Go. The debt issenior, and any future debt incurred by C2Go must be subordinated to the debt of the loan and security agreement. Upon maturity of the debt, C2Go was required to issue to the Company 5% of the issued and outstanding shares of common stock of C2Go, on a fully diluted basis, giving effect to any convertible securities, warrants, etc., such shares being validly issued, fully-paid and non-assessable shares for no additional consideration. C2Go defaulted on the Note, therefore the interest rate under the loan and security agreement rose to 18% per annum. The full principal of the note, plus accrued and unpaid interest, was due to be repaid on or before August 2, 2017. C2Go did not make any payment on that date. Pursuant to the Note, C2Go had until August 16, 2017 to cure the payment default. The default was not cured. On August 28, 2017, the Company filed a lawsuit against C2Go, Inc, alleging multiple defaults under the loan and security agreement. The case is pending in Bexar County, San Antonio, TX. On December 7, 2017, the Company entered into an agreement jointly with C2Go and Mercury Investment Partners LLC whereby upon the receipt in full of the $200,000, full release of all obligations of C2Go to the Company will occur. Under the agreement, FiCentive, Inc. received $50,000 due upon signing of the agreement on December 7, 2017. The Company is owed $50,000 due on April 30, 2018 and a final payment of $100,000 due on or before October 31, 2018. Upon payment in full of the $200,000 owed, the Company agreed to waive all interest due and payable under the terms of the loan. There are no assurances that the Company will be able to recover the remaining $150,000 principal and there are no assurances there will be any assets for the Company to recover from its lien on all the assets of C2Go, Inc. if payment in full of the obligation is not made. At September 30, 2017, the Company wrote off the accrued interest of $31,667 previously recognized on the C2Go note receivable. As of December 31, 2017, the Company has $ 0 recorded as an allowance for credit losses on this note receivable.On March 7, 2017, the Company agreed to provide $500,000 to Singular Payments, LLC, a Florida limited liability company, under a secured line of credit promissory note. Interest on the note did not accrue until the earlier of August 31, 2017, the date of closing and funding the Company’s proposed acquisition of Singular Payments or the termination of a non-binding letter of intent regarding the proposed acquisition; or until such mutually agreed upon extended date. The loan was increased to $600,000 on August 2, 2017. The Singular Payments, LLC acquisition closed on September 1, 2017. The note receivable was applied to the cash purchase price as part of the Purchase Agreement.Note 4.2. Property and Equipment 2017 2016 Software $ 4,060,964 $ 3,692,474 Equipment 813,000 812,049 Furniture and fixtures 217,345 214,450 Leasehold improvements 25,353 25,353 Total property and equipment 5,116,662 4,744,326 Less: accumulated depreciation (3,011,476 ) (2,249,816 ) Net property and equipment $ 2,105,186 $ 2,494,510 $ 7,688,476 $ 7,053,905 3,542,707 2,530,498 818,522 818,522 207,624 207,624 12,257,329 10,610,548 (8,597,237 ) (7,387,732 ) $ 3,660,092 $ 3,222,816 5.3. Intangibles(2015)$396,824)$396,824 at December 31, 2023) and goodwill of $9,759 acquired in the purchase of the assets of Akimbo Financial, Inc. in 2015.$9,759. The intangible asset iswas fully amortized at as of December 31, 2017. The fair value of the customer list and contracts was calculated using the net present value of the projected gross profit to be generated by the customer list over a period of 36 months beginning in January 2015 and was amortized over 3 years at $163,139 annually.(2017)LLCLLC. The intangibles acquired in such acquisition consist of customer list assets of $5,000,000 at cost (net of accumulated amortization of $333,333) acquired in the purchase of the membership interest of Singular Payments, LLC in 2017.$5,000,000 at December 31, 2023). 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 the next 6020172023 and 2022 was $333,333. $0 and $666,667 respectively.$1,000,000.$871,867 per year through the year 2025.6.4. Valuation Accounts $ 319,000 $ — $ — $ — $ 319,000 755,494 71,034 — — 826,528 $ 319,000 $ — $ — $ — $ 319,000 623,494 132,000 — — 755,494 Transfers Net Write-Off 2017 Allowance for doubtful accounts $ 26,556 $ 71,667 $ — $ (37,000 ) $ 61,223 Reserve for processing losses $ 172,832 — — $ 172,832 2016 Allowance for doubtful accounts $ 35,033 $ — $ — $ (8,477 ) $ 26,556 Reserve for processing losses $ 248,868 — — $ (76,036 ) $ 172,832 7. Accrued ExpensesAccrued expenses consisted of the following balances at December 31: 2017 2016 Accrued commissions $ 331,214 $ 221,837 Reserve for merchant losses 172,832 172,832 Other accrued expenses 387,882 192,769 Accrued taxes 45,129 38,469 Accrued salaries 69,205 77,415 Total accrued expenses $ 1,006,262 $ 703,322 $ 2,433,353 $ 1,479,580 826,528 755,494 246,444 821,167 294,953 320,854 — 344,013 $ 3,801,278 $ 3,721,108 8.7. Operating Leases7,20010,535 square feet of office space that housesfor its principalSan Antonio, TX executive offices and operations. Rental expense under the operating lease was approximately $197,300$157,682 and $158,200$150,129 for the years ended December 31, 2017 2023 and 2016,2022, respectively. The lease expires on April 30, 2018.assumed ongoing obligationsleased approximately 3,794 square feet of the Singular Payments' leasedoffice space infor its Nashville, TN and St. Augustine, FL to house theirTennessee sales offices and operations. Rental expense under the operating leaseslease was $25,236$36,995 and $102,976 for the years ended December 31, 2023 and 2022, respectively. The lease expired on April 30, 2023. We did enter into a lease extension, or new lease agreement in Nashville, Tennessee upon the expiration of the lease agreement.2017.alsohas various copier equipment with leases select computer equipment over a 36 month period initiated in May, 2016. The lease expires in April, 2019.that have not expired. Rental expense under the operating lease was $72,000$6,546 and $12,729 for the yearyears ended December 31, 2017 2023 and $45,5002022, respectively.yearyears ended December 31, 2016. The future2023 and 2022, respectively. In 2023, the operating lease paymentsexpense of $674,000 consisted of $544,000 of fixed operating expense and $130,000 of interest expense.2017 are as follows: $ 633,616 454,928 447,683 447,683 447,683 478,836 2,910,429 (357,669 ) $ 2,552,760 Year ended December 31, 2018 $ 125,400 2019 72,000 2020 28,000 2021 1,000 9.8. Related Party Transactions2017 2023 and 2016,2022, the Company purchased $1,826$24,389 and $2,250,$22,835, respectively, of corporate imprinted sportswear, promotional items and caps from Angry Pug Sportswear. Louis Hoch, the Company’sChairman, President, Chief Executive Officer, and Chief ExecutiveOperating Officer is a 50% owner of Angry Pug Sportswear.Miguel ChapaDuringyear ended December 31, 2017closing price on January 6, 2022 of $4.21 per share from Tom Jewell, the Company's former Chief Financial Officer, to cover his share of taxes.2016, Chief Operating Officer, to cover his share of taxes.received $29,555 and $51,500 in revenue from Lush Rooftop. Miguel Chapa,granted 1,000 RSUs with a member3-year vesting period to Houston Frost as a performance bonus at an issue price of our$3.32 per share.isat an ownerissue price of $2.28 per share.Lush Rooftop.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 Company’sRSU grant were Louis Hoch (33,000 RSUs), Tom Jewell (21,000 RSUs), Greg Carter (12,000 RSUs) and Houston Frost (12,000 RSUs).Chief Executive Officer, isprincipal 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 a minority owner in Lush Rooftop.10.9. Income TaxesOn December 22, 2017, the President of the United States signed the Tax Cuts and Jobs Act (“U.S. Tax Reform”), which enacts a wide range of changes to the U.S. corporate income tax system. The impact of U.S. Tax Reform primarily represents the Company’s estimates of revaluing the Company’s U.S. deferred tax assets and liabilities based on the rates at which they are expected to be recognized in the future. For U.S. federal purposes the corporate statutory income tax rate was reduced from 35% to 21%, effective for the 2018 tax year. Based on the Company’s historical financial performance, at December 31, 2017, the net deferred tax asset position was remeasured at the lower corporate rate of 21% and a tax expense was recognized to adjust net deferred tax assets to the reduced value.assets and liabilitiesasset are as follows at December 31: 2017 2016 Deferred tax assets: Net operating loss carryforwards $ 8,665,000 $ 13,676,000 Depreciation and amortization 322,000 313,000 Non-cash compensation 627,000 279,000 Other 23,000 23,000 Valuation Allowance (8,243,000 ) (12,670,000 ) Deferred tax asset $ 1,394,000 $ 1,621,000 $ 4,686,000 $ 5,024,000 1,137,000 1,159,000 1,649,000 (117,000 ) 124,000 69,000 7,596,000 6,135,000 (6,092,000 ) (4,631,000 ) $ 1,504,000 $ 1,504,000 2017 2023 and December 31, 20162022 is warranted. If applicable, the Company would recognize interest expense and penalties related to uncertain tax positions in interest expense. As of December 31, 2017,2023, the Company had not accrued any interest or penalties related to uncertain tax provisions.$41.3 million that begin$23.3 million. Net operating loss carryforwards prior to 2017 are available to offset taxable income of future periods and expire in20 years after the loss was generated. The schedule below outlines when our pre-2017 net operating losses were generated and the year 2021. Approximately $0.1 million of the totalthey may expire. $ 1,768,851 2025 1,350,961 2026 1,740,724 2027 918,960 2028 835,322 2029 429,827 2030 504,862 2033 474,465 2036 1,267,336 2037 $ 9,291,308 loss islosses cannot be carried back but can be carried forward to future tax years indefinitely, subject to an IRS Section 382 limitation from 1999.yearyears ended December 31: 2017 2016 Current provision: Federal $ — $ — State 47,316 32,668 47,316 32,668 Deferred provision: Federal expense 227,000 — Expense for income taxes $ 274,316 $ 32,668 $ — $ — 292,524 280,000 292,524 280,000 — — $ 292,524 $ 280,000 (benefit) is as follows for the yearyears ended December 31: $ (99,772 ) $ (1,134,200 ) (1,361,228 ) (581,000 ) 1,461,000 1,715,200 — — 292,524 280,000 $ 292,524 $ 280,000 2017 2016 Income tax expense (benefit) at 34% $ (1,023,000 ) $ (407,000 ) Change in valuation allowance 4,427,000 331,000 Permanent and other differences (2,557,000 ) 76,000 Deferred tax impact of enacted tax rate and law changes (620,000 ) — Alternative minimum tax and Texas margin tax 47,316 32,668 Income tax expense (benefit) $ 274,316 $ 32,668 11.10. Stock Options, Incentive Plans, Stock Awards, and Employee Benefit Plan Stock 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 2017,2023, the Company granted 1,695,334 restricted273,000 shares of stock to several employees officers and directors.as incentive compensation or new-hire bonuses. During 2017,2023, the Company granted 66,667 restricted stock units to one director and 105,000402,900 restricted stock units to employees eitherand directors as a new hire bonus or performance bonus.During 2017, theThe Company purchased 56,973 shares with a value of $89,250 to cover the employee’s and director’s share to tax liabilities related to stock grants maturing on December 27, 2016. The Company also purchased 19,37926,606 shares of common stock with a value of $23,760 through Wedbush under an agreement where shares were purchased at market at$47,382 to cover the discretionemployee's share of Wedbush.2017.2023. The majority of the sharesgranted to those employees vest 10 years from the grant date and isare forfeited in the event that the recipient’s employment relationship with the Company is terminated prior to vesting.The Company granted 300,000 shares of common stock with a 10 year vesting period to Vaden Landers as a part of his employment agreement. The Company granted 1,395,334 shares of stock to employees and directors as a performance bonus. Executive offices included in the grant were Louis Hoch (300,000 shares) and Tom Jewell (150,000 shares).The Company entered into a Director’s agreement with Brad Rollins in 2017 where the director received 66,667 restricted stock units, pursuant and subject to the terms of the Company’s 2015 Equity Incentive Plan. The initial 22,223 shares vests on May 1, 2018, the second installment of 22,222 shares vesting on May 1, 2019, and the third installment of 22,222 shares vests on May 1, 2020. 2017,2023, a portion of the restricted stock awards were granted, but not issued and are not listed as outstanding in the2017. 2023.options and restricted stock awards was $968,141 for 2017$2.2 million in 2023 and $968,141 for 2016.20172023 activities are as follows:Stock Awards Shares Outstanding, December 31, 2016 3,361,276 $ 1.85 Granted 1,695,334 2.23 Vested 36,674 — Forfeited — — Outstanding, December 31, 2017 5,019,936 $ 1.98 8.51 $ 2,773,236 Expected to Vest after December 31, 2017 5,019,936 $ 1.98 8.51 $ 2,773,236 4,982,900 $ 2.27 1,520,000 1.74 3,000 — 115,000 — 6,384,900 $ 2.17 5.13 $ (0.45 ) 6,384,900 $ 2.17 5.13 $ (0.45 ) 2017,2023, there were $7,012,544was $6,907,775 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 8.515.13 years.2017,2023, or $2.53.Company establishedCompany's board of directors adopted the 19992023 Employee Stock Purchase Plan (“ESPP”(the “ESPP”) and the Company's stockholders approved the ESPP in July 2023. The ESPP was adopted under the requirements of Section 423 of theInternal 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. -0-warrants to purchase 945,599 unregistered warrants to purchase shares of Usio, Inc. for 945,599 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 5 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 will be recorded as an increase in the customer list asset and have a term of five years from the ESPP in 2017 and 2016, respectively. The ESPP is no longer active.Stock Warrants: There were no stock warrants as of December 31, 2017 and December 31, 2016.12. Earnings (loss)11. Net (Loss) per Share earnings (loss) per share (EPS) werewas computed by dividing net income 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 options that were outstanding during the period. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net income (loss). 2017 2016 Numerator: Numerator for basic and diluted earnings per share, net (loss) available to common shareholders $ (3,008,785 ) $ (1,196,642 ) Denominator: Denominator for basic earnings per share, weighted average shares outstanding 8,995,883 7,838,197 Effect of dilutive securities-stock options and restricted awards — — Denominator for diluted earnings per share, adjusted weighted average shares and assumed conversion 8,995,883 7,838,197 Basic (loss) per common share $ (0.33 ) $ (0.15 ) Diluted (loss) per common share and common share equivalent $ (0.33 ) $ (0.15 ) $ (475,104 ) $ (5,483,244 ) 20,105,968 20,379,386 — — 20,105,968 20,379,386 $ (0.02 ) $ (0.27 ) $ (0.02 ) $ (0.27 ) 2017 2023 and 20162022 that were not included in the computation of diluted earnings (loss) per share because the effect would have been anti-dilutive, are as follows: 6,384,900 4,982,900 2017 2016 Anti-dilutive awards and options 3,595,939 3,361,276 13.12. Concentration of Credit Risk and Significant Customers14.13. Legal ProceedingsUnderloancondition of employment, Kauder and security agreement dated Pioletti agreed to be bound by certain USIO policies, including as it relates 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.2, 2016, our wholly-owned subsidiary FiCentive,of 2024, USIO refiled its case in Tennessee, where Kauder, Nina, and Triple Pay Play reside. loaned a principal amount of $150,000 to C2Go, Inc. with an interest rate of 10% per annum for a term of 18 months. The loan was secured by a first lien on all assets of C2Go. C2Go defaulted under the note by failing to repay the loan plus interest on August 2, 2017. A lawsuit filed by FiCentive is pending in Bexar County, San Antonio, Texas. On December 7, 2017, the Company, (USIO) and Greenwich Business Capital LLC (“GBC”), entered into a note purchase and settlement agreement with C2Go and Mercury Investment Partners LLC.an Agreement for payment processing services (the “Agreement”). Pursuant to the note purchase and settlement agreement Mercury Investment Partners agreed to purchase the note and the rights secured by the security agreement with all rights and obligations and pay to FiCentive a sum of $200,000 in three installments. The first installment of $50,000 was paid on December 7, 2017. The second installment of $50,000 is due on April 30, 2018, and the remaining amount of $100,000 is due on October 31, 2018. In return, FiCentive agreed to waive all interest due and payable under the terms of the C2Go loan. There are Agreement, USIO effectively terminated the Agreement with GBC on October 31, 2023, by providing Greenwich with a 30-days written notice as required by the Agreement. assurances merit and contradict the express terms of the asset purchase agreement. As a result of this post-sale dispute, we discovered that KDHM, LLC and its principals made certain misrepresentations and breached the terms of the asset purchase agreement. Company willpurchased assets include “All of Seller’s deposits from its customer, 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.able to recover the remaining $150,000 principal and that there are no assurances there will be any assets forheard on March 28, 2024.to recover from our lien on all the assets of C2Go, Inc. if payment in full of the obligation is not made.Aside from the lawsuit described above, the Company may be involved in legal matters arising in the ordinary course of business from time to time. While the Company believeswe believe that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company iswe are or could become involved in litigation will not have a material adverse effect on our business, financial condition, or results of operations.Note 15. Subsequent EventsOn January 9, 2018, the Board of Directors amended the Stock Buyback Plan adding an additional $2 million dollars to the plan to be available for stock buybacks. After the amendment, the total plan amount available is now $3 million. With the incremental plan funds available, the net funds available after the authorized incremental funds is $2,455,030.On January 8, 2018 and January 9, 2018, the Company repurchased 397,845 shares in a private transaction at the closing price on January 8, 2018 and January 9, 2018 from officers, employees and director's to cover the respective employees', officers' and directors' share of taxes for shares that vested on that day, as approved by the Audit Committee and the Board of Directors on the same day, with the respective officers and directors recusing themselves. The value of the treasury shares purchased to cover the taxes was $956,128. The share buyback included share purchases for Michael Long, Chairman of the Board, Louis Hoch, President and Chief Executive Officer and Tom Jewell, Chief Financial Officer as approved by the Audit Committee of the Board of Directors and the Board of Directors as of January 9, 2018.In mid-January 2018, Pueblo Bank and Trust, terminated their relationship with the Company's gateway provider and as a result the Company stopped processing PINless debit transactions. The Company has secured a relationship with another gateway and bank sponsorship relationship, but has not yet resumed processing of PINless debit transactions.In anticipation of the existing principal executive office lease expiration on April 30, 2018, the Company entered into a new lease in San Antonio, TX commencing on or about May 1, 2018. The operating lease is for a period of 76 months and expires on or about July 31, 2024. The space leased ranges from 6,000 square feet to 10,535 square feet. Annual rents during the lease term will range from $117,000 to $232,000.In order to consolidate the Singular Payments' sales offices and operations, the company entered into a lease in Nashville, Tennessee commencing on or about March 1, 2018. The operating lease is for a period of 62 months and expires on April 30, 2023. The space leased is 3,794 square feet. Annual rents during the lease term range from $109,000 to $122,000.(the “Exchange Act”))or the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 20172023 are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management's assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance that the control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met.controlcontrols over financial reporting as of December 31, 20172023 based on criteria established in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management concluded that, as of December 31, 2017,2023, our internal control over financial reporting was effective.quarteryear ended December 31, 20172023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.None.20182024 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2017 (the “20182023, or the 2024 Proxy Statement”).(“or reporting person”)person, to file timely a report required by Section 16(a) of the Exchange Act. This disclosure is contained in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the 20182024 Proxy Statement.annualquarterly report on Form 10-K10-Q for the yearquarter ended December 31, 2003June 30, 2015 on March 30, 2004.August 14, 2015. We will provide a copy of our code of ethics to any person without charge, upon request. Requests should be addressed to: Payment Data Systems,Usio, Inc., Attn: Investor Relations Department, 12500 San Pedro,3611 Paesanos Parkway, Suite 120,300, San Antonio, Texas 78216.Payment Data Systems,Usio, Inc., 12500 San Pedro,3611 Paesanos Parkway, Suite 120,300, San Antonio, Texas, 78216,78231, and the Board of Directors will consider such nominee. The Board of Directors selects the director candidates slated for election. We do not have a separately designated nominating committee in light of resource allocations made byNominations and Corporate Governance Committee, which reviews and make recommendations to the Board of Directors in its business judgment.20182024 Proxy Statement.20182024 Proxy Statement.20182024 Proxy Statement and such information is incorporated by reference into this report.20182024 Proxy Statement.20182024 Proxy Statement.20172023 and 201620172023 and 201620172023 and 201620172023 and 2016(a)(3) ExhibitsExhibit NumberDescription3.1(included(included as exhibit 3.1 to the Form 10-KSB filed March 31, 2006, and incorporated herein by reference). Amended andCertificate of Amendment of Restated By-lawsArticles of Incorporation of Usio, Inc., as amended, effective June 26, 2019 (included as exhibit 3.23.1 to the Form 10-KSB8-K filed March 31, 2006,July 1, 2019, and incorporated herein by reference). 3.5 Amendment to the Amended and Restated By-laws (included as exhibit 3.1 to the Form 8-K filed December 1, 2023, and incorporated herein by reference). 4.1 1999 Employee Stock Purchase PlanDescription of Securities (included as exhibit 4.3 to the Form S-8, File No. 333-30958, filed February 23, 2000, and incorporated herein by reference). 10.1Lease Agreement between the Company and Frost National Bank, Trustee for a Designated Trust, dated August 22, 2003 (included as exhibit 10.3 to the Form 10-Q filed November 14, 2003, and incorporated herein by reference).10.2Employment Agreement between the Company and Michael R. Long, dated February 27, 2007 (included as exhibit 10.1 to the Form 8-K filed March 2, 2007, and incorporated herein by reference).10.3 10.4First Amendment to Employment Agreement between the Company and Michael R. Long, dated November 12, 2009 (included as exhibit 10.15 to the Form 10-Q filed November 16, 2009, and incorporated herein by reference).10.5(included(included as exhibit 10.16 to the Form 10-Q filed November 16, 2009, and incorporated herein by reference). 10.6Second Amendment to Employment Agreement between the Company and Michael R. Long, dated April 12, 2010 (included as exhibit 10.16 to the Form 10-K filed April 15, 2010, and incorporated herein by reference).10.7 10.8 10.9Third Amendment to Employment Agreement between the Company and Michael R. Long, dated January 14, 2011 (included as exhibit 10.19 to the Form 10-K filed April 3, 2012, and incorporated herein by reference).10.1010.30* Usio, Inc. Employee Stock Purchase Plan (included as Appendix A to the Definitive Proxy Statement on Schedule 14A filed on June 2, 2023 and incorporated herein by reference). 10.4110.31*Share PurchaseNinth Amendment to Employment Agreement between Usio, Inc. and Louis A. Hoch, dated December 21, 2017, by and among Payment Data Systems, Inc., CVI Investments, Inc., Hudson Bay Maser Fund Ltd., Special Situations Fund III QP, L.P., Special Situations Private Equity Fund, L.P. and Special Situations Cayman Fund, L.P.February 1, 2024 (included as exhibit 10.210.1 to the Form 8-K filed December 22, 2017,on February 1, 2024, and incorporated herein by reference). 10.4210.4310.4414.110-K10-Q filed March 30, 2004,August 14, 2015, and incorporated herein by reference). 16.1Letter from Ernst and Young LLP toSubsidiaries of the Securities and Exchange Commission dated February 10, 2004Company (filed herewith). (included as exhibit 16 to the Form 8-K filed February 11, 2004, and incorporated herein by reference). 21.1SubsidiariesConsent of the Company (filedADKF, P.C. (filed herewith). 23.1Consent of Akin Doherty Klein & Feuge, P.C. (filed herewith).31.1 97.1 Clawback Policy (filed herewith) 101.INS †104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) † Confidential treatment has been granted for portions of this agreement. + The schedules to the exhibit have been omitted from this filing pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish copies of any such schedules to the SEC upon request. * Management Compensatory Plan or Arrangement Payment Data Systems, Inc.Date: March 27, 2024 By: /s/ Michael White Date: March 30, 2018By: /s/ Louis A. HochLouis A. HochExecutiveAccounting Officer(Principal Executive Officer)Date: March 30, 2018By:/s/ Tom JewellTom JewellChief Financial Officer Date: March 30, 201827, 2024By: /s/ Michael R. LongWhite Michael R. LongWhite Chairman of the BoardChief Accounting Officer(Principal Financial and Accounting Officer) Date: March 30, 2018By:/s/ Tom JewellTom JewellChief Financial Officer (Principal Financial and Accounting Officer)Date: March 30, 201827, 2024By: /s/ Louis A. Hoch OfficerOfficer) Date: March 30, 201827, 2024By: /s/ Steve HuffmanBlaise Bender Steve HuffmanBlaise BenderDirector Date: March 27, 2024 By: /s/ Ernesto Beyer Ernesto Beyer Director Date: March 30, 201827, 2024By: /s/ Miguel A. ChapaBradley Rollins Miguel A. ChapaBradley Rollins Director Date: March 30, 201827, 2024By: /s/ Bradley RollinsElizabeth Michelle Miller Bradley RollinsElizabeth Michelle Miller Director