UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

2017

or

[_]TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________.

Commission File Number: 000-30152

000-30152

PAYMENT DATA SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Nevada 98-0190072
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

12500 San Pedro, Ste. 120, San Antonio, TX 78216
(Address of principal executive offices) (Zip Code)

(210) 249-4100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [_] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [_]Accelerated filer [_]
Non-accelerated filer [_] (Do not check if a smaller reporting company)Smaller reporting company [X]
Emerging Growth Company [_]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  [_]
[_] Yes [X] No

As

Indicate the number of August 3, 2016, there were 12,075,806 shares of each of the issuer’s classes of common stock, $0.001 par value, outstanding.

as of the latest practicable date:
 

ClassOutstanding as of August 11, 2017
Common stock, $0.001 par value11,790,558




PAYMENT DATA SYSTEMS, INC.

INDEX

  Page
PART I – FINANCIAL INFORMATION
1
   
Item 1.
Financial Statements (Unaudited).
1
   
 
Condensed Consolidated Balance Sheets as of June 30, 20162017 and December 31, 20152016
1
   
 
Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 20162017 and 20152016
2
   
 
Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 20162017 and 20152016
3
   
 
Notes to Condensed Consolidated Financial Statements
4
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
10
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
1513
   
Item 4.
Controls and Procedures.
1513
   
PART II – OTHER INFORMATION
1513
   
Item 1.
Legal Proceedings.
1513
   
Item 1A.
Risk Factors.
1613
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
1715
   
Item 3.
Defaults Upon Senior Securities.
1715
   
Item 4.
Mine Safety Disclosures (Not applicable).
1715
   
Item 5.
Other Information.
1715
   
Item 6.6.
Exhibits.
1917





PART I–FINANCIAL INFORMATION

Item 1. Financial Statements.

PAYMENT DATA SYSTEMS, INC.

Condensed

CONDENSED CONSOLIDATED BALANCE SHEETS

  June 30, 2016 December 31, 2015
  (Unaudited)  
Assets        
Current assets:        
Cash and cash equivalents $4,378,405  $4,059,606 
Accounts receivable, net  1,070,236   1,135,384 
Settlement processing assets  25,071,987   39,797,232 
Prepaid expenses and other  217,416   149,118 
Current assets before restricted cash  30,738,044   45,141,340 
Restricted cash  18,316,160   17,972,065 
Total current assets  49,054,204   63,113,405 
         
Property and equipment, net  2,847,699   3,077,421 
         
Other assets:        
Intangibles, net  260,247   341,816 
Deferred tax asset  1,621,000   1,621,000 
Note receivable  200,000   - 
Other assets  202,298   202,849 
Total other assets  2,283,545   2,165,665 
         
Total assets $54,185,448  $68,356,491 
         
Liabilities and stockholders’ equity        
Current liabilities:        
Accounts payable $203,629  $143,180 
Accrued expenses  1,226,964   1,328,738 
Deferred revenues  33,000   - 
Settlement processing obligations  25,071,987   39,797,232 
Current liabilities before restricted cash  26,535,580   41,269,150 
Restricted cash  18,316,160   17,972,065 
Total current liabilities  44,851,740   59,241,215 
         
Stockholders’ equity:        
Preferred stock, $0.01 par value, 10,000,000 shares authorized; -0- shares outstanding at June 30, 2016 (unaudited) and December 31, 2015  -   - 
Common stock, $0.001 par value, 200,000,000 shares authorized; 12,419,816 and 12,379,537 issued, and 12,070,184 and 12,029,905 outstanding at June 30, 2016 (unaudited) and December 31, 2015, respectively  185,580   185,533 
Additional paid-in capital  64,449,901   64,302,498 
Treasury stock, at cost; 349,632 and 349,632 shares  (286,393)  (286,394)
Deferred compensation  (5,573,078)  (6,031,362)
Accumulated deficit  (49,442,302)  (49,054,999)
Total stockholders’ equity  9,333,708   9,115,276 
         
Total liabilities and stockholders’ equity $54,185,448  $68,356,491 

 June 30, 2017 December 31, 2016
 (Unaudited)  
Assets   
Current assets:   
Cash and cash equivalents$3,226,451
 $4,120,738
Accounts receivable, net882,103
 907,750
Settlement processing assets36,551,837
 43,851,311
Prepaid expenses and other228,739
 142,029
Notes receivable700,000
 200,000
Current assets before restricted cash41,589,130
 49,221,828
Restricted cash14,952,520
 15,803,641
Total current assets56,541,650
 65,025,469
    
Property and equipment, net2,418,688
 2,494,510
    
Other assets:   
Intangibles, net91,329
 172,899
Deferred tax asset1,621,000
 1,621,000
Other assets223,375
 200,808
Total other assets1,935,704
 1,994,707
    
Total assets$60,896,042
 $69,514,686
    
Liabilities and stockholders’ equity   
Current liabilities:   
Accounts payable$135,680
 $145,044
Accrued expenses733,417
 703,322
Settlement processing obligations36,551,837
 43,851,311
Current liabilities before restricted cash37,420,934
 44,699,677
Restricted cash14,952,520
 15,803,641
Total current liabilities52,373,454
 60,503,318
    
Stockholders’ equity:   
Preferred stock, $0.01 par value, 10,000,000 shares authorized; -0- shares outstanding at June 30, 2017 (unaudited) and December 31, 2016, respectively—
 —
Common stock, $0.001 par value, 200,000,000 shares authorized; 12,460,932 and 12,392,288 issued, and 11,790,558 and 11,795,939 outstanding at June 30, 2017 (unaudited) and December 31, 2016, respectively181,886
 181,818
Additional paid-in capital63,970,168
 63,881,365
Treasury stock, at cost; 670,374 and 596,349 shares at June 30, 2017 (unaudited) and December 31, 2016, respectively(827,088) (718,149)
Deferred compensation(3,729,817) (4,082,025)
Accumulated deficit(51,072,561) (50,251,641)
Total stockholders’ equity8,522,588
 9,011,368
    
Total liabilities and stockholders’ equity$60,896,042
 $69,514,686
See notes to condensed interim consolidated financial statements.

1



PAYMENT DATA SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

  Three Months Ended June 30, Six Months Ended June 30,
  2016 2015 2016 2015
         
Revenues $2,890,060  $3,424,756  $6,118,691  $7,167,216 
                 
Operating expenses:                
Cost of services  2,034,439   2,426,612   4,189,222   4,802,006 
Selling, general and administrative:                
Stock-based compensation  283,747   393,525   571,436   627,056 
Cancellation of stock-based compensation  -   -   -   (163,936)
Other expenses  801,540   419,838   1,409,889   937,018 
Depreciation and amortization  225,554   92,948   449,777   178,520 
Total operating expenses  3,345,280   3,332,923   6,620,324   6,380,664 
                 
Operating income (loss)  (455,220)  91,833   (501,633)  786,552 
                 
Other income and (expense):                
Interest income  24,974   19,358   46,985   38,358 
Other income (expense)  98,279   (32,305)  97,679   (32,409)
Total other income and (expense), net  123,253   (12,947)  144,664   5,949 
                 
Income (loss) before income taxes  (331,967)  78,886   (356,969)  792,501 
Income taxes  23,334   54,036   30,334   59,036 
                 
Net income (loss) $(355,301) $24,850  $(387,303) $733,465 
                 
Basic earnings per common share: $(0.05) $0.00  $(0.05) $0.10 
Diluted earnings per common share: $(0.05) $0.00  $(0.05) $0.06 
Weighted average common shares outstanding                
Basic  7,738,759   7,369,329   7,729,003   7,369,329 
Diluted  7,738,759   12,081,754   7,729,003   12,102,919 
(UNAUDITED)

 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
        
Revenues$2,550,441
 $2,890,060
 $5,361,185
 $6,118,691
        
Operating expenses:       
Cost of services1,854,406
 2,034,439
 3,722,351
 4,189,222
Selling, general and administrative:       
Stock-based compensation217,759
 283,747
 425,679
 571,436
Other expenses799,740
 801,540
 1,628,012
 1,409,889
Depreciation and amortization227,273
 225,554
 455,818
 449,777
Total operating expenses3,099,178
 3,345,280
 6,231,860
 6,620,324
        
Operating income (loss)(548,737) (455,220) (870,675) (501,633)
        
Other income and (expense):       
Interest income38,730
 24,974
 72,546
 46,985
Other income (expense)(2,653) 98,279
 (1,114) 97,679
Total other income and (expense), net36,077
 123,253
 71,432
 144,664
        
Income (loss) before income taxes(512,660) (331,967) (799,243) (356,969)
Income taxes21,677
 23,334
 21,677
 30,334
        
Net income (loss)$(534,337) $(355,301) $(820,920) $(387,303)
        
Basic earnings per common share:$(0.06) $(0.05) $(0.10) $(0.05)
Diluted earnings per common share:$(0.06) $(0.05) $(0.10) $(0.05)
Weighted average common shares outstanding       
Basic8,471,494
 7,738,759
 8,478,339
 7,729,003
Diluted8,471,494
 7,738,759
 8,478,339
 7,729,003
See notes to condensed interim consolidated financial statements.

2



PAYMENT DATA SYSTEMS, INC.

condensed

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

  Six months Ended June 30,
  2016 2015
     
Operating activities:        
Net income (loss) $(387,303) $733,465 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation  368,208   158,679 
Amortization  81,569   19,841 
Non-cash stock based compensation  571,436   627,056 
Cancellation of stock based compensation  -   (163,936)
Issuance of stock to consultant  34,300   - 
Changes in current assets and current liabilities:        
Accounts receivable  65,148   132,305 
Prepaid expenses and other  (68,298)  (29,437)
Other assets  551   27,564 
Accounts payable and accrued expenses  (41,325)  (161,673)
Deferred revenue  33,000   - 
Settlement processing assets, net  -   - 
Net cash provided by operating activities:  657,286   1,343,864 
         
Investing activities:        
Purchases of property and equipment  (138,487)  (555,778)
Note receivable  (200,000)  - 
Net cash (used) by investing activities:  (338,487)  (555,778)
         
Financing activities:        
         
Net cash (used) by financing activities:  -   - 
         
Change in cash and cash equivalents  318,799   788,086 
Cash and cash equivalents, beginning of period  4,059,606   2,803,455 
         
Cash and cash equivalents, end of period $4,378,405  $3,591,541 
         
         
Supplemental disclosure of cash flow information:        
Cash paid during the period for:        
Interest  -   - 
Income taxes $62,184   77,369 
(UNAUDITED)

 Six Months Ended June 30,
 2017 2016
Operating activities:   
Net income (loss)$(820,920) $(387,303)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:   
Depreciation374,249
 368,208
Amortization81,569
 81,569
Non-cash stock based compensation425,679
 571,436
Issuance of stock to consultant15,400
 34,300
Changes in current assets and current liabilities:   
Accounts receivable25,647
 65,148
Prepaid expenses and other(86,710) (68,298)
Other assets(22,567) 551
Accounts payable and accrued expenses20,731
 (41,325)
Deferred revenue—
 33,000
Net cash provided by operating activities:13,078
 657,286
    
Investing activities:   
Purchases of property and equipment(298,426) (138,487)
Notes receivable(500,000) (200,000)
Net cash (used) by investing activities:(798,426) (338,487)
    
Financing activities:   
Purchases of treasury stock(108,939) —
Net cash (used) by financing activities:(108,939) —
    
Change in cash and cash equivalents(894,287) 318,799
Cash and cash equivalents, beginning of period4,120,738
 4,059,606
    
Cash and cash equivalents, end of period$3,226,451
 $4,378,405
    
    
Supplemental disclosure of cash flow information:   
Cash paid during the period for:   
Interest—
 —
Income taxes$21,677
 62,184
See notes to condensed interim consolidated financial statements.

3



PAYMENT DATA SYSTEMS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Notes to INTERIM condensed Consolidated Financial Statements

(UNAUDITED)

Note 1. Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of Payment Data Systems, Inc. and its subsidiaries (the “Company”) have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company's financial position, results of operations and cash flows for such periods. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2015,2016, as filed with the Securities and Exchange Commission on March 30, 2016.April 6, 2017. Results of operations for interim periods are not necessarily indicative of results that may be expected for any other interim periods or the full fiscal year.


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

Revenue Recognition: Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services, and is recognized as revenue during the period the transactions are processed or when the related services are performed. Merchants may be charged for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through third-party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations (Visa, MasterCard and Discover). Revenue also includes any up-front fees for 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 term of the related service contract. Sales taxes billed are reported directly as a liability to the taxing authority, and are not included in revenue.
Cash and Cash Equivalents: Cash and cash equivalents includes cash and other money market instruments. The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. Beginning December 31, 2015, the Company separated Restricted cash and Settlement processing assets and obligations from Cash and cash equivalents.

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

Allowance for merchants. Funds settlement refers to the process of transferring funds for sales and credits between card issuers and merchants. For transactions processed on our systems, we use our internal network to provide funding instructions to financial institutions that in turn fund the merchants.

Restricted Cash: Restricted cash includes certain funds collected from our merchants that serve as collateral to minimize contingent liabilities associated with any losses that may occur under our agreement with the merchant. The funds may be used to offset any returned items or chargebacks to the Company and to indemnify the Company against third-party claims and any expenses that may be created by the customer as a result of any claim or fine.Estimated Losses: The Company may requiremaintains an allowance for estimated doubtful accounts resulting from the customer security depositinability or failure of the Company’s customers to make required payments. The Company determines the allowance for estimated doubtful account losses based on estimated transaction volumes, amounts and chargebacks and may revisean account-by-account review, taking into consideration such factors as the deposit based on periodic reviewage of the same items. Repaymentoutstanding balance, historical pattern of collections and financial condition of the deposit to the customer is generally within 90 to 180 days beyond the date the last item is processedcustomer. Past losses incurred by the Company on behalfdue to bad debts have been within its expectations. If the financial conditions of the customer. The customer security deposit does not accrue interestCompany’s customers were to deteriorate, resulting in an impairment of their ability to make contractual payments, additional allowances might be required. Estimates for doubtful account losses are variable based on the benefitvolume of transactions processed and could increase or decrease accordingly. At June 30, 2017 and December 31, 2016, the customer.

Company’s allowance for estimated doubtful accounts was $26,556and $26,556, respectively.

Accounting for Internal Use Software: The Company capitalizes the costs associated with software being developed or obtained for internal use when both the preliminary project stage is completed and it is probable that computer software being developed will be completed and placed-in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (iii) interest costs incurred, when material, while developing internal-use software. The Company ceases capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose. In 2015, the Company began to develop software for internal use, and salaries capitalized for software development were $447,259 at December 31, 2015, and are classified in Property and equipment on the balance sheet. In the quarter ended June 30, 2016, the Company capitalized an additional $22,694 to total $122,848 for the six months ended June 30, 2016.

Estimates: 2017, the Company capitalized $196,854 of such costs.

Valuation of Long-Lived and Intangible Assets:The preparationCompany assesses the impairment of financial statementslong-lived and intangible assets periodically, or at least annually, and whenever events or changes in conformity with U.S. generally accepted accounting principles requirescircumstances indicate that the carrying value may not be recoverable. Factors considered important, which could trigger an impairment review, include the following: significant under performance relative to historical or projected future cash flows; significant changes in the manner of use of the assets or the strategy of the overall business; and significant negative industry trends. When management to make estimatesdetermines that the carrying value of long-lived and assumptionsintangible assets may not be recoverable, impairment is measured as the excess of the assets’ carrying value


over the estimated fair value. No impairment losses were recorded in 2016 or during the six months ended June 30, 2017. Management is not aware of any impairment changes that may currently be required; however, the Company cannot predict the occurrence of events that might adversely affect the reported amountsvalues in the future.
Reserve for Processing Losses: If, due to insolvency or bankruptcy of assets and liabilities and disclosure of contingent assets and liabilities at the dateone of the financial statementsCompany’s merchant customers, or for any other reason, the Company is not able to collect amounts from its credit card, ACH or prepaid customers that have been properly "charged back" by the customer, or if a prepaid cardholder incurs a negative balance, the Company must bear the credit risk for the full amount of the transaction. The Company may require cash deposits and other types of collateral from certain merchants to minimize any such risk. In addition, the Company utilizes a number of systems and procedures to manage merchant risk. ACH, prepaid and credit card merchant processing loss reserves are primarily determined by performing a historical analysis of the Company’s loss experience and considering other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant relationship with its consumers and the reported amountsCompany’s relationship with the Company’s prepaid card holders. This reserve amount is subject to the risk that actual losses may be greater than the Company’s estimates. The Company has not incurred any significant processing losses to date. Estimates for processing losses are variable based on the volume of revenuestransactions processed and expenses duringcould increase or decrease accordingly. At June 30, 2017, the reporting period. Actual results could differCompany’s reserve for processing losses was $172,832 and was unchanged from those estimates.

4
December 31, 2016.
 

New Accounting Pronouncement: Pronouncement: In May 2014, the Financial Accounting Standards Board or FASB,(FASB) issued accounting standards update, ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)"  and a new accounting pronouncement regarding revenuesubsequent amendment to the standard in March 2016, ASU 2016-08 “Revenue from contractsContracts with customers. This newCustomers, Principal versus Agent Consideration (Reporting Revenue Gross versus Net)." The original standard and related amendments provides guidance on recognizing revenue, including a five step model to determine when revenue recognition is appropriate. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment to the standard clarifies implementation guidance on principal versus agent considerations. Adoption of the new standardstandards is effective for reporting periods beginning after December 15, 2017, with early adoption not permitted. The Company is currently reviewing gross versus net reporting pronouncements and evaluating 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.

In February 2016, the FASB issued, “Leases“Leases (Topic 842),”, which is intended to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities 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. The Company is currently evaluating the effectManagement does not expect that adopting this standard will have a significant impact on ourits financial statements and related disclosures.

Reclassifications: Certain amounts from 2015 have been reclassified for comparative purposes for 2016.

5






Note 2. Notes Receivable
 

On February 2, 2016, the Company entered into a loan and security agreement with C2Go, Inc., a Nevada corporation, pursuant to which the Company agreed to loan 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 is senior, 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 is required to issue to the Company 5% of the issued and outstanding shares of common stock of C2Go as of the date of issuance, 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.
Upon an event of default the interest rate under the loan and security agreement will rise 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 has until August 16, 2017 to cure the payment default.  If C2Go does not make the payment at that time, the Company may choose to pursue its security interest in the Note, which was secured against C2Go's assets. The Company is in ongoing discussions with C2Go regarding the payment due on the note. C2Go has indicated there are ongoing discussions with an investor to raise money to cover the principal and the unpaid interest. Due to the uncertainty of the situation and “more likely than not” recognition threshold as of June 30, 2017, the Company has not recorded a loss reserve on the 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 does not accrue until the earlier of May 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. Thereafter, interest will accrue at a rate of ten percent per annum. Upon an event of default, interest will accrue at the maximum lawful rate or 15% per annum. The line of credit matures on November 1, 2019.
If the Singular Payments acquisition closes before interest accrues, any unpaid principal amount will be offset against the cash portion of the purchase price. If the acquisition does not close on or before interest accrues, any unpaid principal amount plus interest will have to be paid in 30 equal monthly installments. The note may be prepaid in whole or in part at any time and without a penalty.
The line of credit is secured by a security agreement of the same date granting a first security interest over all of Singular Payment’s property, inventory, proceeds, and intellectual property, among others, a membership interest pledge agreement over 100% of all Singular Payments, LLC membership interests, and a personal guaranty agreement by Vaden Landers, the sole owner of Singular Payments.

The term of the line of credit and letter of intent were extended on May 30, 2017 (through August 1, 2017) and subsequently, on August 2, 2017 (through August 31, 2017). In addition, the loan was increased to $600,000 on August 2, 2017. As of June 30, 2017, the Company has not recorded an allowance for credit losses on this note receivable.


Note 2.3. Accrued Expenses

Accrued expenses consisted of the following balances:

  June 30, 2016 December 31, 2015
     
Indemnification liability $425,000  $450,000 
Accrued commissions  264,501   440,232 
Reserve for merchant losses  248,868   248,868 
Other accrued expenses  152,730   112,414 
Accrued taxes  24,862   54,077 
Accrued salaries  111,003   23,147 
Total accrued expenses $1,226,964  $1,328,738 

 June 30, 2017 December 31, 2016
    
Accrued commissions$187,994
 $221,837
Reserve for merchant losses172,832
 172,832
Other accrued expenses322,336
 192,769
Accrued taxes17,753
 38,469
Accrued salaries32,502
 77,415
Total accrued expenses$733,417
 $703,322




Note 3.4. Net IncomeEarnings (Loss) Per Share

Basic earnings (loss) per share (EPS) were computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS differs from basic EPS due to the assumed conversion of potentially dilutive awards and options that were outstanding during the period. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net income (loss) for the three and six months ended June 30, 20162017 and 2015. All of the share numbers used are after the 1-for-15 reverse split effected on July 23, 2015 by using the June 30, 2015 share numbers and dividing by 15. Any fractional shares were rounded up.

2016.
  Three Months Ended June 30, Six Months Ended June 30,
  2016 2015 2016 2015
Numerator:                
Numerator for basic and diluted earnings per share, net income  available to common shareholders $(355,301) $24,850  $(387,303) $733,465 
Denominator:                
Denominator for basic earnings per share, weighted average shares outstanding  7,738,759   7,369,329   7,729,003   7,369,329 
Effect of dilutive securities  -   4,712,425   -   4,733,590 
Denominator for diluted earnings per share, adjust weighted average shares and assumed conversion  7,738,759   12,081,754   7,729,003   12,102,919 
Basic earnings (loss) per common share $(0.05) $0.00  $(0.05) $0.10 
Diluted earnings (loss) per common share and common share equivalent $(0.05) $0.00  $(0.05) $0.06 

  Three Months Ended June 30, Six Months Ended June 30,
  2017 2016 2017 2016
Numerator:        
Numerator for basic and diluted earnings per share, net income (loss) available to common shareholders $(534,337) $(355,301) $(820,920) $(387,303)
Denominator:        
Denominator for basic earnings per share, weighted average shares outstanding 8,471,494
 7,738,759
 8,478,339
 7,729,003
Effect of dilutive securities —
 —
 —
 —
Denominator for diluted earnings per share, adjust weighted average shares and assumed conversion 8,471,494
 7,738,759
 8,478,339
 7,729,003
Basic earnings (loss) per common share $(0.06) $(0.05) $(0.10) $(0.05)
Diluted earnings (loss) per common share and common share equivalent $(0.06) $(0.05) $(0.10) $(0.05)
The awards and options to purchase shares of common stock that were outstanding at June 30, 20162017 and 2015June 30, 2016 that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive, are as follows:

  Six Months Ended
June 30,
  2016 2015
Anti-dilutive awards and options  4,325,711   - 

6

 Six Months Ended June 30,
 2017 2016
Anti-dilutive awards and options3,352,831
 4,325,711




Note 4. Acquisition

On December 22, 2014, the Company acquired the assets of Akimbo to increase market share of prepaid debit card services.  The purchase price for the software, customer list, fixed5. Income Taxes

Deferred tax assets and goodwill was $3 million in common stock of the Company.  The Akimbo operationsliabilities are included in the Company’s consolidated financial statements from the date of acquisition.  The purchase price for Akimbo was allocatedrecorded based on the fair valuesdifference between financial reporting and tax basis of assets and liabilities and are measured by the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Deferred tax assets atare computed with the datepresumption that they will be realizable in future periods when taxable income is generated. Predicting the ability to realize these assets in future periods requires a great deal of acquisition as follows:

Software $2,585,385 
Equipment and other assets  2,252 
Customer list and contracts  396,824 
Goodwill  15,539 
Trade accounts payable  (300,000)
Indemnification liability  (450,000)
Total $2,250,000 

judgment by management. U.S. generally accepted accounting principles prescribe a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Income tax benefits that meet the “more likely than not” recognition threshold should be recognized. Goodwill is being amortized over 15 years for tax purposes.

Note 5. Income Taxes

The Company has recognized a deferred tax asset of $1.6 million and has recorded a valuation allowance of $12.2$12.7 million to reduce the other deferred tax assets. The Company reviewedreviews the assessment of the deferred tax asset and valuation allowance foron an annual basis or more often when events indicate a change to the period ending June 30, 2016 and will reevaluate the assessment onvaluation allowance may be warranted.
At December 31, 2016.

2016, the Company had available net operating loss carryforwards of approximately $40.2 million, which expire beginning in the year 2020. Approximately $0.1 million of the total net operating loss carryforward is subject to an IRS Section 382 limitation from 1999.

Management is not aware of any tax positions that would have a significant impact on the Company’s financial position.

Note 6. Related Party Transactions

Herb Authier

Nikole Killough
During the six months ended June 30, 20162017 and the year ended December 31, 2015, the Company paid Herb Authier a total of $24,231 and $45,750 in cash, respectively, for services related to network engineering and administration that he provided to the Company. Mr. Authier was the father-in-law of Louis Hoch, the Company’s President, Chief Executive Officer and Chief Operating Officer.

Louis Hoch

During the six months ending June 30, 2016, and the year ended December 31, 2015, the Company purchased a total of $2,250$0 and $857,$2,250, respectively, of corporate imprinted sportswear and caps from Angry Pug Sportswear.

Nikole Killough and Louis Hoch, the Company’s President and Chief Executive Officer, and Chief Operating Officer, is a co-ownerare each 50% owners of Angry Pug Sportswear.

Miguel Chapa

During the six months endingended June 30, 20162017 and the year ended December 31, 2015,2016, the Company received $24,876$7,407 and $20,901,$51,500, respectively, in revenue from Club Rio Maroc Bar, Lush Rooftop, and Nirvana Bar and Rock. Miguel Chapa, a member of ourthe Company’s Board of Directors, is an owner in Club Rio Maroc Bar, Lush Rooftop, and Nirvana Bar and Rock. Louis Hoch, the Company’s President Chief Executive Officer and Chief OperatingExecutive Officer, is also a minority owner in Lush Rooftop.

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Note 7. Employment Agreements

Pursuant to the Company’s respective employment agreements with Michael Long, Chairman, and Louis Hoch, President, Chief Executive Officer, and Chief Operating Officer, as amended, in the event of change in control, termination without cause, or non-renewal of the employment agreement the Company will be liable for separation payments, equaling an amount of (a) 2.95 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. The Company will also accelerate vesting of stock incentive awards, which as of June 30, 2016 are approximately $1.3 million each, and although it may not impact our cash position, will negatively affect our financial performance. The Company estimates the cash disbursements over time to be $1.5 to $2.0 million each for the respective agreements with Mr. Long and Mr. Hoch.

In the case of termination of the agreement due to death of the executive, the Company will be liable for separation payments, equaling an amount of (a) 2.95 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 to death, and (c) continuing other benefits. The Company estimates the cash disbursements over time to be around to be $1.0 million each for the respective agreements with Mr. Long and Mr. Hoch.

In the case of termination of the agreement due to disability without death, the Company will be liable for separation payments, equaling an amount of (a) 2.95 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 to death, plus (c) continuing other benefits, plus (d) disability benefits constituting salary for 3 years. The Company estimates the cash disbursement over time to be $1.8 to $2.2 million for each for the respective agreements with Mr. Long and Mr. Hoch.

The Compensation Committee of the Board of Directors has indicated it is in the process of renegotiating the amendments to the employment agreements with respect to the death and disability separation payments, which, if finalized, would greatly reduce the amounts due in those instances. Both Mr. Long and Mr. Hoch have agreed that the 5th amendment to the employment agreements should have only allowed for deferred compensation in the case of death calculations using only the executive’s salary and nothing for bonus compensation or any other benefits and or deferred compensation in the case of disability the only deferred compensation will be the continuation of only salary payments for thirty-six months to be paid by the company and or any disability insurance carrier. Both Mr. Long and Mr. Hoch have agreed to execute the amendments once the Compensation Committee approves the changes. While there is no guarantee that these amendments will be executed, both management and the Compensation Committee have indicated this is their intent.

Note 8. Purchases of Equity Securities

On December 27, 2006, the Company issued 589,488 shares of common stock for compensation purposes subject to a ten year vesting schedule. These shares will vest on December 27, 2016. Assuming the price of the Company’s common stock is $2.00 on the day of vesting, the recipients’ share of taxes will be approximately $400,000 to $500,000, depending on respective individual income tax rates. The Company has no legal obligation to assist recipients with their share of taxes, however, the Company may choose to pay cash bonuses, or repurchase shares from the recipient to assist in paying some or all of the taxes due. If the Company elects to repurchase shares from the recipients, such repurchase would require Board of Director approval and Audit Committee review.

8


Note 9. Reverse Stock Split

On July 23, 2015, pursuant to shareholder and board approval, the Company effected a 1-for-15 reverse stock split of the outstanding common stock by filing a certificate of change with the Secretary of State of the State of Nevada and obtaining approval by the Financial Industry Regulatory Authority. The number of the Company’s authorized common shares remained unchanged at 200,000,000 shares, par value $0.001 per share, after the reverse stock split. The number of the Company’s authorized preferred stock remains unchanged at 10,000,000 shares, par value $0.01 per share.

As a result of the reverse split, the Company issued 1,117 shares due to rounding of fractional shares because the Company agreed to issue to each shareholder a full share for any fractional shares that resulted from the reverse split.

All figures and calculations using a share count assuming the 1-for-15 reverse stock split even if the numbers were for a period prior to the reverse stock split.



Note 10.7. Legal Proceedings

The Company was involved in a lawsuit with a customer that alleged it did not warn or stop the processing of $181,709 in fraudulent credit transactions from occurring.  The Company believes that the customer breached the Company’s processing agreement and that a security breach occurred because of the customer’s lack of controls over the login and password information utilized by the customer to process transactions resulting in the customer becoming a victim of a malware attack.  The agreement between the customer and the Company has a limitation of liability provision that allows for the maximum liability of the Company to not exceed the amount of fees of a single month of service. 

On April 29, 2015, Brightmoore Church filed a notice of voluntary dismissal, which the Court accepted on April 30, 2015, and dismissed the lawsuit without prejudice. On November 3, 2015, the Company filed a lawsuit against Brightmoore Church  in the District Court for the judicial district of Bexar County, Texas, alleging a breach of contract by Brightmoore Church resulting in the fraudulent credit transactions described before and demanding payment of damages. On March 24,26, 2016, the Company entered into a settlement agreement with Brightmoore Church and on March 28, 2016, the Company filed to dismiss the lawsuit for no consideration. The case was dismissed by Brightmoore Church on April 4, 2016.

On March 1, 2016, the Company was granted a temporary restraining order against Shelby Systems, Inc. by the District Court for the judicial district of Bexar County, Texas to prevent Shelby Systems from, among others, publishing false information about the Company and interfering with the Company’s customers after the termination of the Company’s referral agreement with Shelby Systems. On July 5, 2016, the Company agreed to dismiss the lawsuit with no further fees due Shelby Systems which netted the Company $97,493 in income.

On June 26, 2015, Michael McFarland, derivatively on behalf the Company, and individually on behalf of himself and all other similarly situated shareholders of the Company, filedre-filed a class-action lawsuit in United States District Court, District of Nevada.Nevada that had been previously filed and dismissed. The suit alleges breach of fiduciary duties and unjust enrichment by the Company’s Board of Directors and certain executive officers and directors in connection with excessive and unfair compensation paid or awarded during fiscal years 2013 and 2014. The lawsuit seeks disgorgement of excessive compensation as well as damages in an unspecified amount. As of March 17, 2016 the Court signed an order dismissing the claims against Peter Kirby and Michael Long, but did not rule as to the other defendants. On March 22,In July 2016, the Company filed an unopposeda motion for final judgment as to everyone else and confirmed again withdismiss the Plaintiff that they do not opposecase. In January 2017, the court granted a partial dismissal of the wholeclaims and suggested the plaintiffs re-file their petition. Subsequently, the Company re-filed a motion to dismiss the case. On April 5, 2016,May 18, 2017, the case was dismissed without prejudice.

On April 26, 2016, Michael McFarland, derivativelycourt held a hearing on behalf the Company, re- filed the same class-action lawsuit in United States District Court, District of Nevada.

motion to dismiss. The court's decision is still pending.

The Company believes the claims areclaim is without merit and it is unlikely that a loss will be incurred,incurred; therefore, the Company has not accrued for a potential loss. However, the outcomes of the disputes are still uncertain and it is possible the Company may incur legal fees and losses in the future.

Aside from the lawsuitslawsuit described above, the Company may be involved in legal matters arising in the ordinary course of business from time to time. While the Company believes 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 is or could become involved in litigation will not have a material adverse effect on the Company’s business, financial condition or results of operations.

9





Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

FORWARD-LOOKING STATEMENTS DISCLAIMER

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. 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 our 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 should be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes thereto included in this report, and our annual report on Form 10-K for the fiscal year ended December 31, 2015,2016, filed March 30, 2016,April 6, 2017, including the audited consolidated financial statements and the notes contained therein.

Overview

We provide integrated electronic payment processing services to merchants and businesses, including all types of Automated Clearing House, or ACH, processing, credit, Pinless debit, prepaid card and debit card-based processing services. 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 our recently acquired business Akimbo, under the domain name www.akimbocard.com, we offer VisaMasterCard prepaid cards to consumers for use as a tool to stay on budget, manage allowances and share money with family and friends. The Akimbo MasterCard program became live on our processing platform in early April 2015. The Akimbo Visa card program was decommissioned of all services on May 30, 2015 and the card customers were transitioned to the Akimbo MasterCard card program. Since then weWe have further developed our Akimbo platform to include Akimbo Now for businesses, Akimbo Gift for consumers and support for Apple Pay™.

We reported a net loss of $820,920 for the six months ended June 30, 2017 and a net loss of $387,303 for the six months ended June 30, 2016 and net income of $1,016,088 for year ended December 31, 2015.2016. Second quarter 20162017 credit card processing (transaction) volumes processed were the fourth highest in company history, with the number of transactions processed up 4%down 46% over the second quarter of 2015.2016.  Credit card dollars processed during the second quarter of 20162017 decreased 4%5% compared to the same time period in 2015. Electronic check transaction (ACH)2016. The major reason for the decline was the exit of a large fast food retailer that was a low margin business.
ACH (eCheck) volumes during the second quarter of 20162017 were down 17%15% over the same time period in 2015.

2016. Returned Check transactions processed during the second quarter of 2017 were down 12% over the same period in 2016. Total dollars processed for the second quarter of 2017 exceeded $613 million. The major reason for the decreases in ACH and returned check transactions was the sale of a customer portfolio. The same customer is building a new portfolio of customers and expects to recover the volume in the future.

Due to our strong sales pipeline, we believe the downward trend in ACH transactions processed will reverseimprove in the second halffourth quarter of 20162017 and early 2017.2018. We also expect to see an increase in the number of enrolled merchant customers, for whom we provide processing for credit and debit card transactions, and we expect to add new clients from our sales pipeline, which we believe will create increased transaction volumes. We believe we will returnOur prepaid credit card transactions should continue to profitability we experienced in years 2015grow and 2014 in the foreseeable future, but it is possible that we will not regain profitability. our recently implemented PIN-less debit transactions should also grow.
We may incur future operating losses. To regain and sustain profitability, we must, among other things, grow and maintain our customer base, implement a successful marketing strategy, 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.
We believe that our success will depend in large part on our ability to (a) grow revenues, (b) effectively manage our operating expenses, (b)(c) add quality customers to our client base, (c)(d) meet evolving customer requirements, and (d)(e) adapt to technological changes in an emerging market.market, and (f) properly assimilate current and future acquisitions of companies and or customer portfolios. Accordingly, we intend to focus on customer acquisition activities and outsource some of our processing services to third parties to allow us to maintain an efficient operating infrastructure and to expand our operations without significantly increasing our fixed operating expenses.

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Critical Accounting Policies

General


Our management’s discussion and analysis of financial condition and results of operations is based upon our interim condensed 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, revenues 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, bad debt, 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 following 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.

Revenue Recognition

Revenue consists primarily

For a summary of fees generated through the electronic processing of payment transactions and related services, and is recognized as revenue during the period the transactions are processed or when the related services are performed. Merchants may be charged for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through third-party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations (Visa, MasterCard and Discover). Revenue also includes any up-front fees for 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 term of the related service contract. Sales taxes billed are reported directly as a liabilityCritical Accounting Policies, please refer to the taxing authority, and are not included in revenue.

Reserve for Processing Losses

If, dueNotes to insolvency or bankruptcyInterim Consolidated Financial Statements, Note 1, Basis of one of our merchant customers, or for any other reason, we are not able to collect amounts from our credit card, ACH or prepaid customers that have been properly "charged back" by the customer, or if a prepaid cardholder incurs a negative balance, we must bear the credit risk for the full amount of the transaction. We may require cash deposits and other types of collateral from certain merchants to minimize any such risk. In addition, we utilize a number of systems and procedures to manage merchant risk. ACH, prepaid and credit card merchant processing loss reserves are primarily determined by performing a historical analysis of our loss experience and considering other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant relationship with its consumers and our relationship with our prepaid card holders. This reserve amount is subject to the risk that actual losses may be greater than our estimates. We have not incurred any significant processing losses to date. Estimates for processing losses are variable based on the volume of transactions processed and could increase or decrease accordingly. At June 30, 2016 our reserve for processing losses was $248,868 and was the same at December 31, 2015.

11
Presentation.

Settlement Processing Assets and Obligations

Settlement processing assets and obligations represent intermediary balances arising in our settlement process for merchants. Funds settlement refers to the process of transferring funds for sales and credits between card issuers and merchants. For transactions processed on our systems, we use our internal network to provide funding instructions to financial institutions that in turn fund the merchants.

Restricted Cash

Restricted cash includes certain funds collected from our merchants that serve as collateral to minimize contingent liabilities associated with any losses that may occur under our agreement with the merchant. The funds may be used to offset any returned items or chargebacks to the Company and to indemnify the Company against third-party claims and any expenses that may be created by the customer as a result of any claim or fine. The Company may require the customer 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.

Bad Debts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability or failure of our customers to make required payments. We determine the allowance for doubtful accounts 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 us due to bad debts have been within our expectations. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make contractual payments, additional allowances might be required. Estimates for bad debt losses are variable based on the volume of transactions processed and could increase or decrease accordingly. At June 30, 2016 and December 31, 2015, our allowance for doubtful accounts was $30,938 and $35,033, respectively.

Valuation of Long-Lived and Intangible Assets

We assess the impairment of long-lived and intangible assets periodically, or at least annually, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important, which could trigger an impairment review, include the following: significant underperformance relative to historical or projected future cash flows; significant changes in the manner of use of the assets or the strategy of the overall business; and significant negative industry trends. When management determines that the carrying value of long-lived and intangible assets may not be recoverable, impairment is measured as the excess of the assets’ carrying value over the estimated fair value. No impairment losses were recorded in 2015 or during the six months ended June 30, 2016. Management is not aware of any impairment changes that may currently be required; however, we cannot predict the occurrence of events that might adversely affect the reported values in the future.

Income Taxes

Deferred tax assets and liabilities are recorded based on the difference between financial reporting and tax bases of assets and liabilities and are measured by the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Deferred tax assets are computed with the presumption that they will be realizable in future periods when taxable income is generated. Predicting the ability to realize these assets in future periods requires a great deal of judgment by management. U.S. generally accepted accounting principles prescribe a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Income tax benefits that meet the “more likely than not” recognition threshold should be recognized. Goodwill is amortized over 15 years for tax purposes.

At December 31, 2015, we had available net operating loss carryforwards of approximately $39.7 million, which expire beginning in the year 2020. Approximately $0.1 million of the total net operating loss is subject to an IRS Section 382 limitation from 1999. However, we cannot predict with reasonable certainty that all of the available net operating loss carryforwards will be realized in future periods. Accordingly, we recorded a valuation allowance of $12.2 million. As of December 31, 2015 we recognized net deferred tax assets of $1.6 million. The Company reviewed the assessment of the deferred tax asset and valuation allowance for the period ended June 30, 2016 and will reevaluate the assessment on December 31, 2016.

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Management is not aware of any tax positions that would have a significant impact on our financial position.

Results of Operations

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 and the program management and processing of prepaid debit cards. We also operate an online payment processing service for consumers under the domain name www.billx.com and sell this service as a private-label application to resellers.

Revenues


Revenues for the quarter ended June 30, 20162017 decreased 16%11.8% to $2,890,060,$2,550,441, as compared to $3,424,756$2,890,060 for the quarter ended June 30, 2015.2016. Revenues for the six months ended June 30, 20162017 decreased 15%12.4% to $6,118,691,$5,361,185, as compared to $7,167,216$6,118,691 for the six months ended June 30, 2015.2016. The decrease for the quarter and six months ended June 30, 2016,2017, as compared to the same periodperiods in the prior year, was due to the decreases in the volume of ACH processing transactions, and return transactions processed.

processed primarily due to a customer selling a portion of their portfolio and starting the process to rebuild their portfolio.

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 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 decreased 16%8.8% to $2,034,439$1,854,406 for the quarter ended June 30, 2016,2017, as compared to $2,426,612$2,034,439 for the same period in the prior year. Cost of services decreased 13%11.1% to $4,189,222$3,722,351 for the six months ended June 30, 2016,2017, as compared to $4,802,006$4,189,222 for the same period in the prior year. The decrease for the quarter and six months ended June 30, 2016,2017, as compared to the same periodperiods in the prior year, was primarily due to the decrease in the volume of ACH processing transactions, and return transactions processed.

Stock-based Compensation

Stock-based compensation expenses were $283,747$217,759 and $393,525$283,747 for the quarters ended June 30, 20162017 and June 30, 2015,2016, respectively. Stock-based compensation expenses were $571,436$425,679 and $627,056$571,436 for the six months ended June 30, 20162017 and June 30, 2015,2016, respectively. The decrease in stock-based compensation expense is due to shares that vested or were canceled in December 20152016 that we no longer have to amortize.

Cancellation of stock-based compensation expense (income) was $0 and $0 for the quarters ended June 30, 2016 and June 30, 2015, respectively and $0 and $163,936 of income for the six months ended June 30, 2016 and June 30, 2015, respectively. This amount represents non-vested stock-based awards to former employees that were expensed in prior years that were cancelled during the six months ended June 30, 2015.

are fully amortized.



Other Selling, General and Administrative Expenses

Other selling, general and administrative expenses increased 91%decreased 0.2% to $801,540$799,740 for the quarter ended June 30, 2016,2017, as compared to $419,838$801,540 for the same period in the prior year. The increase in other selling, general and administrative expenses for the three months ended June 30, 2016, as compared to the same period in the prior year, represented increases in salaries and benefits of approximately $212,000, investor outreach fees of approximately $85,000; marketing and advertising of approximately $58,000, and an increase in legal and professional fees of approximately $27,000.

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Other selling, general and administrative expenses increased 50%15% to $1,409,889$1,628,012 the six months ended June 30, 2016,2017, as compared to $937,018$1,409,889 for the same period in the prior year. The increase in other selling, general and administrative expenses for the six months ended June 30, 2016,2017, as compared to the same period in the prior year, represented an increase in salariesadvertising, marketing, press releases and benefits of approximately $418,000, a decrease in cancellation of stock based compensation of $163,936, increase in investor outreach fees of approximately $158,000, decrease in bonuses of $90,000, increase in marketing and advertising of approximately $61,000, an increase in director compensation of $38,500, and an increase in legal and professional fees of approximately $30,000.

expenses.

Depreciation and Amortization

Depreciation and amortization totaled $225,554$227,273 for the quarter ended June 30, 2016,2017, compared to depreciation and amortization of $92,948$225,554 for the same period in 2015.2016. Depreciation and amortization totaled $449,777$455,818 for the six months ended June 30, 2016,2017, compared to depreciation and amortization of $178,520$449,777 for the same period in the prior year. The increases are primarily due to a change in the useful life
Other Income (Expense)
Other income (expense) netted income of $36,077 and $71,432 for $2,585,385 of software acquired from Akimbo from 10 years to 5 years in the quarter and six months ended December 31, 2015.

Other Income (Expense)

Other income (expense), were incomeJune 30, 2017 compared to incomes of $123,253 and $144,664 for the quarter and six months ended June 30, 2016, compared to net expense of $12,947 and net income of $5,949 for the quarter and six months ended June 30, 2015, respectively. The increasedecrease in income for the quarter and six months, as compared to the same periods in the prior year is primarily due to the settlement of a legal case in 2016 in our favor resulting in $97,493.

$97,493 of other income.

Interest income was $24,974$38,730 and $19,358,$24,974, for the quarters ended June 30, 20162017 and June 30, 2015,2016, respectively. The increase in interest for the quarter, as compared to the same period in the prior year was primarily due to the increase in interest earned on higher cash balances.

Interest income was $46,985$72,546 and $38,358,$46,985, for the six months ended June 30, 20162017 and June 30, 2015,2016, respectively. The increase in interest for the six months, as compared to the same period in the prior year was primarily due to the increase in interest earned on higher cash balances.

We reported a net loss of $355,301$534,337 and $387,303$820,920 for the quarter and six months ended June 30, 2016,2017, as compared to a net incomeloss of $24,850$355,301 and $733,465$387,303 for the same periods in the prior year.

Liquidity and Capital Resources

At June 30, 2016,2017, we had $4,378,405$3,226,451 of cash and cash equivalents, as compared to $4,059,606$4,120,738 of cash and cash equivalents at December 31, 2015.2016. The increasedecrease in cash for the six months ended June 30, 20152017 was primarily due to cash generated from operations. Beginning with December 31, 2015 we separated Restricted cash and Settlement processing assets and obligations from Cash and cash equivalents. We have reclassified the 2015 balance sheeta note receivable issued related to the same format so thatpotential Singular transaction and continued capital investments related to prepaid card technologies.
We reported a net loss of $820,920 for the presentation is consistent with the 2016 presentation.

We reportedsix months ended June 30, 2017 and a net loss of $387,303 for the first two quarters of 2016 and net income of $1,016,088 for the yearsix months ended December 31, 2015 and at June 30, 20162016. At June 30, 2017, we have an accumulated deficit of $49,442,302.$51,072,561. Additionally, we reportedhave working capital of $4,202,464$4,168,196 and $3,872,190$4,522,151 at June 30, 2017 and June 30, 2016, and December 31, 2015, respectively.

Net cash provided by operating activities was $657,286$13,078 and $1,343,864$657,286 for the six months ended June 30,2017 and 2016, and 2015, respectively. The decrease in net cash provided by operating activities for the six months ended June 30, 20162017 as compared to the same period in the prior year was attributable to a higher net operating loss and lower net income.

revenues.

Net cash used by investing activities was $338,487$798,426 for the six months ended June 30, 2016,2017, as compared to net cash used by investing activities of $555,778$338,487 for the same period in the prior year; the decreaseincrease in net cash used for investing activities was primarily due to lowerincreased software capitalization of expenses incurred forand the development of software upgrades for internal use.Singular Payment LLC note receivable. Net cash used by financing activities was $108,939 for the six months ended June 30, 2017 and $0 for the six months ended June 30, 2016. The financing activities represented treasury stock purchases.
On February 2, 2016, we, through our wholly-owned subsidiary FiCentive, Inc., loaned C2Go, Inc. $200,000. 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 has until August 16, 2017 to cure the payment default.  If C2Go does not make the payment at that time, we may choose to pursue our security interest in the Note, which was secured against C2Go's assets.  We do not know at this time if we can recover sufficient funds from pursuing our security interest against C2Go to cover the full amount of principal, interest and collection costs. We are in ongoing discussions with C2Go regarding the payment due on the note. C2Go has indicated there are ongoing discussions with an investor to raise money to cover the principal and the unpaid interest. Due to the uncertainty of the situation and “more likely than not” recognition threshold as of June 30, 2015.

14
2017, we have not recorded a loss reserve on the note receivable.



Off-Balance Sheet Arrangements

We currently 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.


Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

RISK.

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.

Item 4. CONTROLS AND PROCEDURES.

PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive and Chief Financial Officers, 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 (the “Exchange Act”)) as of the end of the period covered by this quarterly report on Form 10-Q. Based on that evaluation, our Chief Executive and Chief Financial Officers concluded that our disclosure controls and procedures as of June 30, 20162017 were 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 and Chief Financial Officers, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our evaluation of disclosure controls and procedures included an evaluation of certain 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.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended June 30, 20162017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II – OTHER INFORMATION

Item
Item 1. Legal Proceedings.

We were involved in a lawsuit with a customer that alleged we did not warn or stop the processing of $181,709 in fraudulent credit transactions from occurring.  We believe that the customer breached our processing agreement and that a security breach occurred because of the customer’s lack of controls over the login and password information utilized by the customer to process transactions resulting in the customer becoming a victim of a malware attack.  Our agreement with the customer has a limitation of liability provision that allows for our maximum liability to not exceed the amount of fees of a single month of service. 


On April 29, 2015, Brightmoore Church filed a notice of voluntary dismissal, which the Court accepted on April 30, 2015, and dismissed the lawsuit without prejudice. On November 3, 2015, we filed a lawsuit against Brightmoore Church  in the District Court for the judicial district of Bexar County, Texas, alleging a breach of contract by Brightmoore Church resulting in the fraudulent credit transactions described before and demanding payment of damages. On March 24,26, 2016, we entered into a settlement agreement with Brightmoore Church and on March 28, 2016, we filed to dismiss the lawsuit for no consideration. The case was dismissed by Brightmoore Church on April 4, 2016.

On March 1, 2016, we were granted a temporary restraining order against Shelby Systems, Inc. by the District Court for the judicial district of Bexar County, Texas to prevent Shelby Systems from, among others, publishing false information about the Company and interfering with our customers after the termination of our referral agreement with Shelby Systems. On July 5, 2016, we agreed to dismiss the lawsuit with no further fees due Shelby Systems which netted us $97,493 in income.

On June 26, 2015, Michael McFarland, derivatively on behalf the Company, and individually on behalf of himself and all other similarly situated shareholders of the Company, filedre-filed a class-action lawsuit in United States District Court, District of Nevada.Nevada that had been previously filed and dismissed. The suit alleges breach of fiduciary duties and unjust enrichment by the our Board of Directors and certain executive officers and directors in connection with excessive and unfair compensation paid or awarded during fiscal years 2013 and 2014. The lawsuit seeks disgorgement of excessive compensation as well as damages in an unspecified amount. As of March 17,In July 2016, we filed a motion to dismiss the Court signed an order dismissingcase. In January 2017, the claims against Peter Kirby and Michael Long, but did not rule as to the other defendants. On March 22, 2016,e filed an unopposed motion for final judgment as to everyone else and confirmed again with the Plaintiff that they do not opposecourt granted a partial dismissal of the wholeclaims and suggested the plaintiffs re-file their petition. Subsequently, we re-filed a motion to dismiss the case. On April 5, 2016,May 18, 2017, the case was dismissed without prejudice.

15
court held a hearing on the motion to dismiss. The court's decision is still pending.
 

On April 26, 2016, Michael McFarland, derivatively on behalf the Company, re-filed the same class-action lawsuit in United States District Court, District of Nevada.

We believe this claim is without merit and it is unlikely that a loss will be incurred, thereforeincurred. Therefore, we have not accrued for a potential loss. However, the outcome of the dispute is still uncertain and it is possible we may incur legal fees and losses in the future.

Aside from the lawsuitslawsuit described above, we 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.




Item
Item 1A. RISK FACTORS.

Except as discussed below, there have been no material changes from risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2015,2016, as filed with the Securities and Exchange Commission on March 30, 2016.

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 respective employment agreements with our Chairman, Mr. Long and our President, Chief Executive Officer, and Chief Operating Officer, Mr. Hoch, which will have an adverse effect on our cash position and on our financial results.

Pursuant to the our respective employment agreements with Michael Long, Chairman, and Louis Hoch, President, Chief Executive Officer, and Chief Operating Officer, as amended, in the event of change in control, termination without cause, or non-renewal of the employment agreement we will be liable for separation payments, equaling an amount of (a) 2.95 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 will also accelerate vesting of stock incentive awards, which as of June 30, 2016 are approximately $1.3 million each, and although may not impact our cash position, will negatively affect our financial performance. We estimate the cash disbursements over time to be $1.5 to $2.0 million each for the respective agreements with Mr. Long and 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 (a) 2.95 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 to death, and (c) continuing other benefits. We estimate the cash disbursements over time to be around to be $1.0 million each for the respective agreements with Mr. Long and Mr. Hoch.

In the case of termination of the agreement due to disability without death, we will be liable for separation payments, equaling an amount of (a) 2.95 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 to death, plus (c) continuing other benefits, plus (d) disability benefits constituting salary for 3 years. We estimate the cash disbursement over time to be $1.8 to $2.2 million for each for the respective agreements with Mr. Long and Mr. Hoch.

In addition, the amendments clarify that in case of death or disability no further compensation will be due for compliance with the agreements’ non-compete, non-solicitation and disparagement clause.

The Compensation Committee of the Board of Directors has indicated it is in the process of renegotiating the amendments to the employment agreements with respect to the death and disability separation payments, which, if finalized, would greatly reduce the amounts due in those instances. Both Mr. Long and Mr. Hoch have agreed that the 5th amendment to the employment agreements should have only allowed for deferred compensation in the case of death calculations using only the executive’s salary and nothing for bonus compensation or any other benefits and or deferred compensation in the case of disability the only deferred compensation will be the continuation of only salary payments for thirty-six months to be paid by the company and or any disability insurance carrier. Both Mr. Long and Mr. Hoch have agreed to execute the amendments once the Compensation Committee approves the changes. While there is no guarantee that these amendments will be executed, both management and the Compensation Committee have indicated this is their intent.

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.

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April 6, 2017.





Item 2. Unregistered Sales of Equity SecuritiesUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

PROCEEDS


Recent Sales of Unregistered Securities
On May 15, 20162017, we issued 10,000 shares of unregistered equity securities valued at $1.53$1.54 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.

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. The program began on November 16, 2016 and will be available until all funds are exhausted, or September 29, 2019, unless terminated earlier by us. The program may be used for purchases of stock from employees and directors; and for open-market purchases through a broker. During the six months ended June 30, 2017, we made the following stock repurchases:

Period 
(a)
Total number of shares (or units) purchased
 
(b)
Average price paid per share (or unit)
 
(c)
Total number of shares (or units) purchased as part of publicly announced plans or programs
 
(d)
Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
March 1 - 31, 2017  23,262  $1.33   23,262  $537,281 
April 1 - 30, 2017  4,000  $1.54   4,000  $531,107 
May 1 - 31, 2017  29,751  $1.72   29,751  $479,842 
June 1 - 30, 2017  17,019  $1.22   17,019  $459,000 
Total  74,032  $1.47   74,032  $459,000 

Item 3. Defaults Upon Senior Securities.

None.


Item 4. MINE SAFETY DISCLOSURES.

Not applicable.


Item 5. Other Information.

On August 1, 2016, Kirk E. Taylor resigned as chairOTHER INFORMATION.

As disclosed previously, we extended a line of credit and note receivable related to the potential acquisition of Singular Payments, LLC. The term of the Audit Committeenote receivable was extended on August 2, 2017 through August 31, 2017 and as a memberthe amount of our Boardthe note receivable was increased to $600,000 due to the extended time needed to complete due diligence and finalize the transaction. Similarly, the term of Directors.

the letter of intent with Singular Payments, LLC for the acquisition of all membership interests in Singular Payments, LLC by us was extended through August 31, 2017.

On August 3,February 2, 2016, we, entered into amendmentsthrough our wholly-owned subsidiary FiCentive, Inc., loaned C2Go, Inc. $200,000. 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 employment agreementsNote, C2Go has until August 16, 2017 to cure the payment default.  If C2Go does not make the payment at that time, we may choose to pursue our security interest in the Note, which was secured against C2Go's assets.  We do not know at this time if we can recover sufficient funds from pursuing our security interest against C2Go to cover the full amount of principal, interest and collection costs. We are in ongoing discussions with Michael R. LongC2Go regarding the payment due on the note. C2Go has indicated there are ongoing discussions with an investor to raise money to cover the principal and Louis A. Hoch, respectively,the unpaid


interest. Due to update their agreementsthe uncertainty of the situation and responsibilities.

17

The amendments reflect the change in corporate responsibilities“more likely than not” recognition threshold as of August 5, 2016, with Mr. Hoch assuming the role of Chief Executive Officer in addition to his position as our President, Chief Operating Officer and Vice Chairman of the Board of Directors and Mr. Long remaining Chairman of the Board. The foregoing change in responsibilities will11, 2017, we have not trigger any termination, nor any obligations to pay deferred compensation, nor compensation for the non-compete obligation during such time that Michael Long remains employed as Chairman of the Board, Louis A. Hoch remains employed as Chief Executive Officer and the individuals who serverecorded a loss reserve on the Board of Directors continue to constitute at least a majority of the Board of Directors; provided, however, any person who becomes a director subsequent to August 3, 2016, whose election or nomination for election was approved by a vote of at least a majority of the directors then constituting the incumbent board, shall for purposes of this amendment be considered a member of the incumbent board.

Further, the amount of deferred compensation owed to the executive officers in case of termination due to death or disability was amended to comprise an amount equal to 2.95 times of the executive’s base salary and bonus compensation, as such terms are defined in the employment agreements. For the avoidance of doubt, the deferred compensation does not include amounts paid or accrued to executive for benefits or equity awards. Further bonus compensation is forfeited. Further, all stock options issued to the executive and all restricted stock granted to executive shall continue on their vesting schedule. In case of disability, no deferred compensation will be due as long as the Company and/or an insurance continues to pay executive’s base salary for a period of up to 36 months. In addition, the amendments clarify that in case of death or disability no further compensation will be due for compliance with the agreements’ non-compete, non-solicitation and disparagement clause.

The Compensation Committee of the Board of Directors has indicated it is in the process of renegotiating the amendments to the employment agreements with respect to the death and disability separation payments, which, if finalized, would greatly reduce the amounts due in those instances. Both Mr. Long and Mr. Hoch have agreed that the 5th amendment to the employment agreements should have only allowed for deferred compensation in the case of death calculations using only the executive’s salary and nothing for bonus compensation or any other benefits and or deferred compensation in the case of disability the only deferred compensation will be the continuation of only salary payments for thirty-six months to be paid by the company and or any disability insurance carrier. Both Mr. Long and Mr. Hoch have agreed to execute the amendments once the Compensation Committee approves the changes. While there is no guarantee that these amendments will be executed, both management and the Compensation Committee have indicated this is their intent.

18
note receivable.



Item 6. Exhibits.

Exhibit Exhibit
Description
NumberDescription
   
3.1
Amended and Restated Articles of Incorporation (included as exhibit 3.1 to the Form 10-KSB filed March 31, 2006, and incorporated herein by reference).
   
3.2
Amended and Restated By-laws (included as exhibit 3.2 to the Form 10-KSB filed March 31, 2006, and incorporated herein by reference).
   
3.3
Articles of Amendment to the Amended and Restated By-laws (included as exhibit A to the Schedule 14C filed April 18, 2007, and incorporated herein by reference).
   
4.1Amended and Restated 1999 Employee Comprehensive Stock Plan (included as exhibit 4.1 to the Form S-8 filed May 25, 2006, and incorporated herein by reference).
10.1 
4.2Amended and Restated 1999 Non-Employee Director Plan (included as exhibit 10.2 to the Form 8-K filed January 3, 2006, and incorporated herein by reference).
4.3Employee Stock Purchase Plan (included as exhibit 4.3 to the Form S-8, File No. 333-30958, filed February 23, 2000, and incorporated herein by reference).
10.1
Lease Agreement by and between the Company and Frost National Bank, Trustee for a Designated Trust, dated August 22, 2003 (included(included as exhibit 10.3 to the Form 10-Q filed November 14, 2003, and incorporated herein by reference).
   
10.2
Employment Agreement by and 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
Employment Agreement by and 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).
   
10.4
Affiliate Office Agreement by and between the Company and Network 1 Financial, Inc.Inc (included as exhibit 10.11 to the Form SB-2 filed April 28, 2004, and incorporated herein by reference).
   
10.5Stock Purchase Agreement between the Company and Robert D. Evans, dated January 18, 2007 (included as exhibit 10.1 to the Form 8-K filed January 23, 2007, and incorporated herein by reference).
 
10.6Stock Purchase Agreement between the Company and Robert D. Evans, dated March 1, 2007 (included as exhibit 10.1 to the Form 8-K filed March 5, 2007, and incorporated herein by reference).
10.7
First Amendment to Employment Agreement by and 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).
   
10.610.8
First Amendment to Employment Agreement by and between the Company and Louis A. Hoch, dated November 12, 2009 (included as exhibit 10.16 to the Form 10-Q filed November 16, 2009, and incorporated herein by reference).

19

10.710.9
Second Amendment to Employment Agreement by and 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).
   
10.810.10
Second Amendment to Employment Agreement by and 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).
   
10.910.11
Bank Sponsorship Agreement by and 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).
   
10.1010.12
Third Amendment to Employment Agreement by and 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).
   
10.1110.13
Third Amendment to Employment Agreement by and 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).
   
10.1210.14
Fourth Amendment to Employment Agreement by and between the Company and Michael R. Long, dated July 2, 2012 (included as exhibit 10.18 to the Form 10-Q filed August 20, 2012, and incorporated herein by reference).
   
10.1310.15
Fourth Amendment to Employment Agreement by and between the Company and Louis A. Hoch, dated July 2, 2012 (included as exhibit 10.19 to the Form 10-Q filed August 20, 2012, and incorporated herein by reference).
   
10.16Confidential Compromise Settlement Agreement and Full and Final Release by and between FiCentive, Inc. and SmartCard Marketing Systems, Inc., dated November 20, 2012 (included as exhibit 10.1 to the Form 8-K filed November 28, 2012).
10.14 
10.17
First Amendment to Lease Agreement dated August 22, 2003 by and between the Company and Frost National Bank, Trustee for a Designated Trust, dated February 6, 2006 (included as exhibit 10.17 to the Form 10-K filed April 1, 2013, and incorporated herein by reference).
   
10.1510.18
Second Amendment to Lease Agreement, dated August 22, 2003, by and between the Company and Frost National Bank, Trustee for a Designated Trust, dated October 7, 2009 (included as exhibit 10.18 to the Form 10-K filed April 1, 2013, and incorporated herein by reference).
   
10.1610.19
Third Amendment to Lease Agreement dated August 22, 2003 by and between the Company and Frost National Bank, Trustee for a Designated Trust, dated October 12, 2013 (included as exhibit 10.19 to the Form 10-K filed April 1, 2013, and incorporated herein by reference).
   


10.20
10.17
Asset Purchase Agreement dated December 22, 2014, by and between Akimbo Financial, Inc. and Payment Data Systems, Inc.the Company, dated December 22, 2014 (included as exhibit 10.1 to the Form 8-K filed December 23,24, 2014, and incorporated herein by reference).
   
10.1810.21
Transition Agreement dated December 22, 2014, by and between Akimbo Financial, Inc. and Payment Data Systems, Inc. (includedthe Company, dated December 22, 2014 (included as exhibit 10.2 to the Form 8-K filed December 23,24, 2014, and incorporated herein by reference).
   
10.1910.22
Employment Agreement by and between the Company and Houston Frost, dated December 23, 2014 by and between Payment Data Systems, Inc. and Houston Frost (included as exhibit 10.3 to the Form 8-K filed December 23,24, 2014, and incorporated herein by reference).

20

10.2010.23
Employment Agreement by and between the Company and Habib Yunus, dated March 3, 2015 by and between Payment Data Systems, Inc. and Habib Yunus (included as exhibit 10.1 to the Form 8-K filed March 6, 2015, and incorporated herein by reference).
   
10.2110.24
Fourth Amendment to Lease Agreement, dated August 22, 2003, by and between Payment Data Systems, Inc.the Company and Domicilio OC, LLC as successor-in-interest to Frost National Bank, dated February 12, 2015 (included as exhibit 10.24 to the Form 10-K filed March 30, 2015, and incorporated herein by reference).
   
10.2210.25
Lease Agreement dated February 12, 2015, by and between FiCentive, Inc. and Domicilio OC, LLC, dated February 12, 2015 (included as exhibit 10.25 to the Form 10-K filed March 30, 2015, and incorporated herein by reference).
   
10.2310.26
Bank Sponsorship Agreement by and between the Company and Metropolitan Commercial Bank, dated December 11, 2014 (included as exhibit 10.26 to the Form 10-K filed March 30, 2015, and incorporated herein by reference).
   
10.2410.27
2015 Equity Incentive Plan (included as appendix B to the Schedule 14A filed June 15, 2015, and incorporated herein by reference).
10.25
Independent Director Agreement by and between the Company and Kirk Taylor, dated April 24, 2015 by and between Payment Data Systems, Inc. and Kirk Taylor (included(included as exhibit 10.27 to the Form 10-Q filed August 14, 2015, and incorporated herein by reference).
   
10.2610.28
Independent Director Agreement by and between the Company and Dr. Peter Kirby, dated April 24, 2015 by and between Payment Data Systems, Inc. and Dr. Peter Kirby (included as exhibit 10.28 to the Form 10-Q filed August 14, 2015, and incorporated herein by reference).
   
10.2710.29
Independent Director Agreement by and between the Company and Miguel A. Chapa, dated April 24, 2015 by and between Payment Data Systems, Inc. and Miguel A. Chapa (included as exhibit 10.29 to the Form 10-Q filed August 14, 2015, and incorporated herein by reference).
   
10.2810.30
Loan and Security Agreement dated February 2, 2016, by and between C2Go, Inc., as Debtor and FiCentive, Inc., as Lender. (includedLender, dated February 2, 2016 (Included as exhibit 10.1 to the Form 8-K filed February 8, 2016, and incorporated herein by reference).
   
10.29†10.31†
Card Marketing and Processing Agreement dated February 2, 2016, by and between FiCentive, Inc. and C2Go, Inc., dated February 2, 2016 (included as exhibit 10.2 to the Form 8-K filed February 8, 2016, and incorporated herein by reference).
   
10.3010.32

Fifth Amendment to Employment Agreement by and between the Company and Michael R. Long, dated August 3, 2016 (included as exhibit 10.1 to the Form 8-K filed August 9, 2016, and incorporated herein by reference).

   
10.31

10.33

Fifth Amendment to Employment Agreement by and between the Company and Louis A. Hoch, dated August 3, 2016 (included(included as exhibit 10.2 to the Form 8-K filed August 9, 2016, and incorporated herein by reference).

   
10.32
Sixth Amendment to Employment Agreement by and between the Company and Michael R. Long, dated September 8, 2016 (included as exhibit 10.1 to the Form 8-K filed September 14, 2016, and incorporated herein by reference).
10.33
Sixth Amendment to Employment Agreement by and between the Company and Louis A. Hoch, dated September 8, 2016 (included as exhibit 10.2 to the Form 8-K filed September 14, 2016, and incorporated herein by reference).
10.34
Employment Agreement by and between Tom Jewell and Payment Data Systems, Inc., dated January 6, 2017 (included as exhibit 10.1 to the Form 8-K filed January 6, 2017, and incorporated herein by reference).
10.35
Line of Credit Promissory Note by and between Singular Payments, LLC, as Borrower, and the Company, as Lender, dated March 7, 2017 (included as exhibit 10.1 to the Form 8-K filed March 13, 2017, and incorporated herein by reference).
10.36
Security Agreement by and between Singular Payments, LLC, as Debtor, and the Company, as Secured Party, dated March 7, 2017 (included as exhibit 10.2 to the Form 8-K filed March 13, 2017, and incorporated herein by reference).
10.37
Membership Interest Pledge Agreement by and between Vaden Landers, as Pledgor, and the Company, as Lender, dated March 7, 2017 (included as exhibit 10.3 to the Form 8-K filed March 13, 2017, and incorporated herein by reference).


10.38
Guaranty Agreement by and between Vaden Landers, as Borrower, and the Company, as Lender, dated March 7, 2017 (included as exhibit 10.4 to the Form 8-K filed March 13, 2017, and incorporated herein by reference).
10.39
Separation and Release of Claims Agreement by and between the Company and Habib Yunus, dated March 17, 2017 (included as exhibit 10.1 to the Form 8-K filed March 23, 2017, and incorporated herein by reference).
10.40
Independent Director Agreement by and between the Company and Steve Huffman, dated November 11, 2016 (included as exhibit 10.41 to the Form 10-K filed April 6, 2017, and incorporated herein by reference).
10.41
Independent Director Agreement by and between the Company and Brad Rollins, dated May 5, 2017 (included as exhibit 10.1 to the Form 8-K filed May 11, 2017, and incorporated herein by reference).
10.42
Amendment No. 1 to the Line of Credit Promissory Note by and between the Company and Singular Payments, LLC, dated June 6, 2017 (included as exhibit 10.1 to the Form 8-K filed June 8, 2017, and incorporated herein by reference).
10.43
First Amended and Restated Line of Credit Promissory Note by and between the Company and Singular Payments, LLC, dated August 2, 2017 (included as exhibit 10.1 to the Form 8-K filed August 7, 2017, and incorporated herein by reference).
14.1
Code of Ethics (included as exhibit 14.1 to the Form 10-K filed March 30, 2004, and incorporated herein by reference).
   
16.1
Letter from Ernst and Young LLP to the Securities and Exchange Commission dated February 10, 2004 (included as exhibit 16 to the Form 8-K filed February 11, 2004, and incorporated herein by reference).
   
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
   
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
   
32.1
Certification of the Chief Executive Officer and the Chief/Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed(filed herewith).
   
101.INS101.INS XBRL Instance Document (filed herewith).
   
101.SCH101.SCH XBRL Taxonomy Extension Schema Document (filed herewith).
   
101.CAL101.CALXBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
   
101.DEF101.DEFXBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
   
101.LAB101.LABXBRL Taxonomy Extension Label Linkbase Document (filed herewith).
   
101.PRE101.PREXBRL Taxonomy Presentation Linkbase Document (filed herewith).



† Confidential treatment has been granted with respect to certain portions of this agreement.

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SIGNATURES

Pursuant to the requirements 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.

 Payment Data Systems, Inc.PAYMENT DATA SYSTEMS, INC
   
   
Date: August 15, 201614, 2017By:/s/ Louis A. Hoch
  Louis A. Hoch
  Chief Executive Officer
  (Principal Executive Officer)

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