Usio, Inc. (USIO, NASDAQ)
Industry: Software - Infrastructure
Annual report, fiscal year 2014


# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)

☑ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014.

o TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission File No. 000-30152

PAYMENT DATA SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

<table><tr><td>Nevada</td><td>98-0190072</td></tr><tr><td>(State or other jurisdiction of incorporation or organization)</td><td>(I.R.S. Employer Identification No.)</td></tr><tr><td>12500 San Pedro, Ste. 120, San Antonio, TX</td><td>78216</td></tr><tr><td>(Address of principal executive offices)</td><td>(Zip Code)</td></tr></table>

Registrant's telephone number, including area code (210) 249-4100

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act:

Common stock, par value $0.001 per

Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes ☑ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes ☑ No

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 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 90 days. ☑ Yes o 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 it was required to submit and post such files). ☑ Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not I contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or an amendment to this Form 10-K. o

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

Large accelerated filer

Non-accelerated filer

0

Accelerated filer

0

Smaller reporting company

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes ☑ No

The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 31, 2014, the last business day of the registrant's fiscal year was approximately $3,527,999 based on 48,999,990 shares of the registrant's common stock held by non-affiliates on December 31, 2014 at the closing price of $0.175 per share. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determinative should not be deemed an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.

As of March 24, 2015, the number of outstanding shares of the registrant's common stock was 184,534,791.

DOCUMENTS INCORPORATED BY REFERENCE: None.



## PAYMENT DATA SYSTEMS, INC.

## FORM 10-K
For the Year Ended December 31, 2014

INDEX

<table><tr><td></td><td></td><td>Page</td></tr><tr><td></td><td>PART I</td><td></td></tr><tr><td>Item 1.</td><td>Business</td><td>3</td></tr><tr><td>Item 1A.</td><td>Risk Factors.</td><td>9</td></tr><tr><td>Item 2.</td><td>Properties.</td><td>15</td></tr><tr><td>Item 3.</td><td>Legal Proceedings.</td><td>16</td></tr><tr><td>Item 4.</td><td>Mine Safety Disclosures (Not applicable).</td><td>16</td></tr><tr><td></td><td>PART II</td><td></td></tr><tr><td>Item 5.</td><td>Market for Registrant&#x27;s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.</td><td>17</td></tr><tr><td>Item 6.</td><td>Selected Financial Data.</td><td>18</td></tr><tr><td>Item 7.</td><td>Management&#x27;s Discussion and Analysis of Financial Condition and Results of Operations.</td><td>18</td></tr><tr><td>Item 7A.</td><td>Quantitative and Qualitative Disclosures about Market Risk.</td><td>21</td></tr><tr><td>Item 8.</td><td>Financial Statements and Supplementary Data.</td><td>22</td></tr><tr><td>Item 9.</td><td>Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.</td><td>37</td></tr><tr><td>Item 9A</td><td>Controls and Procedures.</td><td>37</td></tr><tr><td>Item 9B.</td><td>Other Information.</td><td>37</td></tr><tr><td></td><td>PART III</td><td></td></tr><tr><td>Item 10.</td><td>Directors, Executive Officers and Corporate Governance.</td><td>38</td></tr><tr><td>Item 11.</td><td>Executive Compensation.</td><td>40</td></tr><tr><td>Item 12.</td><td>Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.</td><td>44</td></tr><tr><td>Item 13.</td><td>Certain Relationships and Related Transactions, and Director Independence.</td><td>45</td></tr><tr><td>Item 14.</td><td>Principal Accounting Fees and Services.</td><td>46</td></tr><tr><td></td><td>PART IV</td><td></td></tr><tr><td>Item 15.</td><td>Exhibits, Financial Statement Schedules.</td><td>47</td></tr></table>

## FACTORS THAT MAY AFFECT FUTURE RESULTS

This Annual Report on Form 10-K and the documents incorporated herein by reference contain certain forward-looking statements as defined under the federal securities laws. Specifically, all statements other than statements of historical facts included in this Annual Report on Form 10-K regarding our financial performance, business strategy and plans and objectives of management for future operations and any other future events are forward-looking statements and based on our beliefs and assumptions. If used in this report, the words "anticipate," "believe," "estimate," "expect," "intend," and words or phrases of similar import are intended to identify forward-looking statements. Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties, and assumptions, including, but without limitation, those risks and uncertainties contained in the Risk Factors section of this Annual Report on Form 10-K and our other filings made with the SEC. Although we believe that our expectations are reasonable, we can give no assurance that such expectations will prove to be correct. Based upon changing conditions, any one or more of these events described herein as anticipated, believed, estimated, expected or intended may not occur. All prior and subsequent written and oral forward-looking statements attributable to our Company or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement. We do not intend to update any of the forward-looking statements after the date of this Annual Report to conform these statements to actual results or to changes in our expectations, except as required by law.



## ITEM 1. BUSINESS.

## General

We were founded in July 1998 and incorporated in the State of Nevada. Our primary operations consist of functioning as a processor of electronic payments for other companies. We provide integrated electronic payment processing services to merchants and businesses, including all types of Automated Clearing House, or ACH, processing, credit, prepaid card and debit card-based processing services.

The ACH network is a nationwide electronic funds transfer system that is regulated by the Federal Reserve and NACHA, the electronic payments association and provides for the clearing of electronic payments between participating financial institutions. Our ACH processing services enable merchants or businesses to both disburse and collect funds electronically using e-checks to transfer funds instead of traditional paper checks. An e-check is an electronic debit to a bank checking account that is initiated at the point-of-sale, on the Internet, over the telephone or via a bill payment sent through the mail and is processed using the ACH network. Our card-based processing services enable merchants to process both traditional card-present, or "swipe," transactions, as well as card-not-present transactions. A traditional card-present transaction occurs whenever a cardholder physically presents a credit or debit card to a merchant at the point-of-sale. A card-not-present transaction occurs whenever the customer does not physically present a payment card at the point-of-sale and may occur over the Internet, mail, fax or telephone. Our electronic payment processing may take place in a variety of forms and situations. For example, our capabilities allow merchants to convert a paper check to an e-check or receive card authorization at the point-of-sale, allow our merchants' respective customer service representatives to take e-check or card payments from their consumers by telephone, and enable their consumers to make e-check or card payments directly through the use of a web site or by calling an interactive voice response telephone system.

We also provide prepaid card processing services for merchants and consumers through our wholly-owned subsidiary, FiCentive, Inc. We offer MasterCard prepaid cards branded with our customers' corporation logos or trademarks. These prepaid cards can be used for various applications including payroll, corporate incentives, employee incentives, and general use. Some card programs allow the cards to be reloaded with funds, while others do not have that capability. In some cases, the cards can be used at Automatic Teller Machines, or ATMs, to withdraw cash.

Through our recently acquired business Akimbo Financial, Inc. we offer Visa prepaid cards to consumers for use as a tool to stay on budget, manage allowances and share money with family and friends. These prepaid cards can be linked to the consumers' bank accounts and loaded via direct deposits or bank transfers or loaded using Visa ReadyLink at many retail outlets or by loading pre-printed and approved personal or payroll checks using a smartphone. Consumers can also create up to five sub-cards. The prepaid cards can be used for purchases anywhere Visa debit cards are accepted or at ATMs to withdraw cash. It is our plan to move the Akimbo card program to operate on the MasterCard and associated networks and to our existing sponsoring bank, Sunrise Banks, N.A. We expect this transition will allow for us to capture enough savings of expenses to make the program cash-flow positive around June 30, 2015.

We provide integrated electronic payment processing services to merchants and businesses, including credit and debit card-based processing services and transaction processing via the ACH network. 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. We generate revenues by charging fees for the electronic processing of payment transactions or use of our prepaid cards and related services. We charge certain merchants for these processing services at a bundled rate based upon a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. We charge other merchant customers a flat fee per transaction, and may also charge miscellaneous fees to our customers, including fees for returns, monthly minimums, and other miscellaneous services. We charge consumers that use our billx.com online payment service a flat monthly fee that allows them to make a certain number of payments in a month. We also charge these consumers an additional fee for each payment that exceeds the contracted allowed number of payments in a given month. We charge consumers that use our prepaid card services fees for certain services and we earn revenue from network interchange when a card is used for signature or card-not-present purchases. We operate solely in the United States under two operating segments—Payment Data Systems, and FiCentive, Inc., which provides prepaid card processing.

Our web sites are www.paymentdata.com, www.ficentive.com and www.zbill.com. Information contained in our website does not constitute part of this annual report.



## Industry Background

In the United States, the use of non-paper based forms of payment, such as credit and debit cards, has risen steadily over the past several years. According to a 2013 Federal Reserve Payments study, the estimated number of non-cash payments increased 4.4% per year from 2009 to 2012, totaled $122.8 billion in 2012, with a value of $78.96 trillion. From 2009 to 2012, ACH, debit cards and prepaid cards grew at a compound annual growth rate of 5.1%, 7.7% and 15.8%, respectively, while credit card transactions only grew at an annual rate of 7.6%, and use of paper checks declined by 9.2%. Electronic payments, including payments made with cards and ACH, now collectively exceed three-quarters of all non-cash payments. Banking and financial institutions enable their account holders to use more check image deposit services which is also referred to as “remote deposit capture.” As a result, traditional paper trails are being replaced by speedier, more cost-effective and eco-friendly image exchanges.

The growth of electronic commerce has made the acceptance of card-based and other electronic forms of payment a necessity for businesses, both large and small, in order to remain competitive. We believe that the electronic payment processing industry will continue to benefit from the following trends:

## Favorable Demographics

As consumers age, we expect that they will continue to use the payment technology to which they have grown accustomed. More consumers are beginning to use card-based and other electronic payment methods for purchases at an earlier age. These consumers have witnessed the wide adoption of card products, technology innovations such as mobile phone payment applications, and widespread adoption of the Internet. They comprise an increasing percentage of the population and as they enter the work force, we expect purchases using electronic payment methods will become a larger percentage of total consumer spending. Because of the increasing adoption rate of the Internet, businesses have a growing opportunity to conduct commerce with their consumers and business partners over the Internet. We believe the increasing usage of smartphones as an instrument of payment will also create further opportunities for us in the future. We also believe that contactless payments like Apple Pay \( ^{TM} \)  will increase payment processing opportunities for us.

## Increased Electronic Payment Acceptance by Small Businesses

Small businesses are a vital component of the U.S. economy and are expected to contribute to the increased use of electronic payment methods. The lower costs associated with electronic payment methods are making these services more affordable to a larger segment of the small business market. In addition, we believe these businesses are experiencing increased pressure to accept electronic payment methods in order to remain competitive and to meet consumer expectations. As a result, many of these small businesses are seeking to provide customers with the ability to pay for merchandise and services using electronic payment methods, including those in industries have historically accepted cash and checks as the only forms of payment for their merchandise and services.

## Growth in Online Transactions

Market researchers expect continued growth in card-not-present transactions due to the steady growth of the Internet and electronic commerce. According to the U.S. Census Bureau, estimated retail e-commerce sales for 2014 were $304.9 billion, an increase of approximately 15.4% from $263.3 billion in 2013. We believe the prevalence of the Internet makes having an online presence a basic and necessary consideration for those operating a business today.

The growth of electronic commerce also has made the acceptance of card-based and other electronic forms of payment a necessity for today’s business. Forrester Research expects that e-commerce sales in the United States will keep growing at a 9.5% compound annual growth rate through 2018, translating to online retail sales of $414 billion in 2018, up from $263 billion in 2013. Companies, both large and small, continue to leverage the Internet in order to remain competitive, improve operational efficiencies, create new revenue streams and maximize the longevity and profitability of their customer relationships.

## Products and Services

Our service offerings are supported by our systems' infrastructure that integrates certain proprietary components with processing systems outsourced to third-party providers to offer our customers a flexible and secure payment process. We utilize a secure sockets layer architecture so that connections and information are secure from outside inspection. We also use 128-bit encryption for all electronic transactions that we process to make information unreadable as it passes over the Internet. Our systems' infrastructure allows us to work with our customers to build a customized electronic payment service offering tailored to their specific needs. We have designed and implemented our integrated payment systems to function as gateways between our customers and our third-party processing providers. Our systems provide for interfaces with our customers through which payment data is captured electronically and transferred through the connections we have with our processing providers. Our systems also provide a data warehousing capability so that all of payment data related to a customer can be stored in one place to facilitate efficient data retrieval and analysis. All confidential data stored within and outside the data warehouse is fully encrypted. We outsource our ACH transaction processing and card-based transaction processing to third-party providers. Our card-based processing system is capable of connecting with all of the major card-based processors in the United States.



We introduced a new product offering, a mobile payment application called iRemote Pay. iRemote Pay is specifically designed for both small and large merchant customers that have a need for a remote wireless point-of-sale application to accept credit cards, debit cards, Automated Clearing House, and cash payments. The application is currently designed to run on iPhone, iPad, iPod Touch devices and we intend to develop Android and Windows platforms in the future.

The components of our service offerings include all forms of ACH transaction processing, such as Represented Check, which is a consumer non-sufficient funds check that is represented for payment electronically rather than through the paper check collection system, and Accounts Receivable Check Conversion, which is a consumer paper check payment that is converted into an e-check. Our customers can initiate ACH transactions directly using an online terminal accessible through a website or we can initiate ACH transactions on their behalf. Our service offering also includes merchant account services for the processing of card-based transactions through the VISA, MasterCard, American Express, Discover, and JCB networks, including online terminal services accessed through a web site or retail services accessed via a physical terminal. We offer a proprietary web-based customer service application that combines both ACH and card processing capabilities that allows companies to process one-time and recurring payments via e-checks or credit cards at the request of their consumers. In addition, we offer an Interactive Voice Response telephone system to companies that accept payments directly from consumers over the telephone using e-checks or credit cards.

In addition to these electronic payment services, we are a prepaid card program manager and prepaid card processor. We develop and manage prepaid card programs on behalf of corporate clients who have customers that want prepaid cards that are branded with the entity's unique logo. We started issuing cards in October 2011 and hold bank sponsorship agreements with Sunrise Banks, N.A., formerly known as University National Bank, and Metropolitan Commercial Bank for our prepaid card program. We also have the ability to issue Discover, American Express, Visa, and MasterCard prepaid credit cards. We primarily create, manage and process prepaid card programs for corporate clients, tailored to each client's unique objectives to allow the client to issue prepaid cards to their customer base or employees as an incentive in the form of a rebate, commission, or other incentive. We also issue general purpose reloadable cards to consumers as an alternative to a traditional bank account. We believe our prepaid card product offering is competitive due to our proprietary systems and the ability to implement corporate-branded card programs in a shorter time frame than most of our competitors. We also believe our eight years of experience in processing and managing prepaid card programs is a competitive advantage over many of our competitors due to the industry being relatively new.

We also operate a consumer web site focused on providing bill payment services under the domain name www.billx.com, and manage all of the related back-end processing through our own proprietary processing engine. Consumers subscribe to the payment service and are allowed to make a certain number of payments each month for a flat monthly fee and are assessed a separate fee for any additional payments made over the limit. Our online payment processing service seeks to provide consumers with an efficient and secure interface for paying and managing bills via the Internet. We also sell this payment portal service as a private label solution to online financial services providers looking to provide online bill payment capabilities as part of their service offering to consumers. We also offer this service to other debit card issuers, as we are able to utilize the bill payment component of this service for payments made via debit cards, a patented process for which we own a perpetual license.

## Relationships with Sponsors and Processors

We have agreements with several processors that provide to us, on a non-exclusive basis, transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools. In order to provide payment processing services for ACH transactions, we must maintain a relationship with an Originating Depository Financial Institution, or ODFI, in the Automated Clearing House, or ACH, network because we are not a bank and therefore we are not eligible to be an Originating Depository Financial Institution. For the ODFI portion of our ACH business, we have entered into agreements with the Fifth Third Bank and Generations Federal Credit Union. We are financially liable for all fees, fines, chargebacks and losses related to our ACH processing merchant customers. We may also require cash deposits and other types of collateral from certain merchants to mitigate any such risk. Similarly, in order to provide payment-processing services for Visa, MasterCard and Discover transactions, we must be sponsored by a financial institution that is a principal member of the respective Visa, MasterCard and Discover card associations. Merrick Bank and Wells Fargo Bank have, respectively, sponsored us under the designations Third Party Processor, or TPP, and Independent Sales Organization, or ISO with the Visa card association, and under the designations Third Party Servicer, or TPS, and Merchant Service Provider, or MSP, with the MasterCard card association. We have an agreement with TriSource Solutions, LLC and an agreement with Global Payments, Inc. through which their member banks, Merrick Bank and Wells Fargo, sponsor us for membership in the Visa, MasterCard, American Express, and Discover card associations and settle card transactions for our merchants. These agreements may be terminated by the processor if we materially breach the agreements and we do not cure the breach within 30 days, or if we enter bankruptcy or file for bankruptcy. We also maintain a bank sponsorship agreement with Sunrise Banks, N.A., formerly known as University National Bank, and Metropolitan Commercial Bank for our prepaid card programs. We are liable for any card-associated losses for cards that we issue that might incur a negative balance and we are liable for card association fines, fees and chargebacks.



Under our processing agreement with TriSource Solutions, we are financially liable for all fees, fines, chargebacks and losses related to our card processing merchant customers. Under our processing agreement with Global Payments, Inc., we are not financially liable for all fees, chargebacks and losses related to our card processing merchant customers, but we are liable for potential card association fines. If, due to insolvency or bankruptcy of our merchant customers, or for another reason, we are unable to collect from our merchant customers amounts that have been refunded to the cardholders because the cardholders properly initiated a chargeback transaction to reverse the credit card charges, we must bear the credit risk for the full amount of the cardholder transaction. We utilize a number of systems and procedures to evaluate and manage merchant risk, such as obtaining approval of prospective merchants from our processor and sponsor bank, setting transaction limits and monitoring account activity. We may also require cash deposits and other types of collateral from certain merchants to mitigate any such risk. We maintain a reserve for losses resulting from card processing and related chargebacks. We estimate our potential loss for chargebacks by performing a historical analysis of our chargeback loss experience with similar merchants and considering other factors that could affect that experience in the future, such as the types of card transactions processed and nature of the merchant relationship with their consumers.

We maintain a separate allowance for estimated losses resulting from the inability or failure of our merchant customers to make required payments for fees charged by us. Amounts due from customers may be deemed uncollectible because of merchant disputes, fraud, insolvency or bankruptcy. We determine the allowance based on an account-by-account review, taking into consideration such factors as the age of the outstanding receivable, historical pattern of collections and financial condition of the customer. We closely monitor extensions of credit and if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make contractual payments, additional allowances may be required.

## Sales and Marketing

We market and sell our products and services through direct contact by our sales personnel, as well as through non-exclusive resellers that act as an external sales force, with minimal direct investment in sales infrastructure and management. Our direct sales efforts are coordinated by a sales executive and supported by other employees who function in sales capacities. Our primary market focus is on companies generating high volumes of electronic payment transactions. We tailor our sales efforts to reach this market by pre-qualifying prospective sales leads through direct contact or market research. Our sales personnel typically initiate contact with prospective customers that we identify as meeting our target customer profile. We also market and sell our prepaid card program directly to corporations and to consumers through the Internet. We intend to continue to analyze our sales and marketing efforts in order to control costs, increase the effectiveness of our sales force, and broaden our reach through reseller initiatives and advantageous alliances.

## Customers

Our primary customers are merchants and businesses that use our Automated Clearing House and/or card-based processing services in order to provide their consumers with the ability to pay for goods and services without having to use cash or a paper check. These merchant customers operate in a variety of retail industries and are under contract with us to exclusively use the services that we provide to them. Most of our merchant customers have signed long-term contracts, generally with three-year terms, that provide for volume-based transaction fees. Our merchant accounts increased to 795 customers at December 31, 2014 from 735 customers at December 31, 2013.

We had one customer that accounted for 11% of our 2014 revenue. This customer utilized our ACH Processing services. No other customer accounted for more than 10% of revenues in 2014.

All of our customers, including those utilizing our billx.com Internet bill payment service on a recurring monthly basis to pay household bills, are consumers geographically dispersed throughout the United States. The service relationship between our billx.com customers and us is not contractual and the fee we charge for the service is not negotiable. We seek to retain customers by providing high levels of customer service. Customers also have incentive to continue using the service once activated due to their investment of time in setting up the service with their personal banking and payment information. The monthly average number of billx.com customers using our online payment service decreased to 244 in 2014 from 864 in 2013. We believe the decrease occurred due to customers opting to use their bank bill pay service over ours. We are also repositioning our bill pay service to sell to other prepaid card processors and to be an add-on service to our prepaid card programs that utilize our card programs as a bank account alternative.



## Competition

The payment processing industry is highly competitive. Many small and large companies compete with us in providing payment processing services and related services to a wide range of merchants. There are a number of large transaction processors, including First Data Merchant Services Corporation, Elavon Inc., and Vantiv, Inc. that serve a broad market spectrum from large to small merchants and provide banking, automatic teller machine, and other payment-related services and systems in addition to card-based payment processing. There are also a large number of smaller transaction processors that provide various services to small and medium-sized merchants. Many of our competitors have substantially greater capital resources than us and operate as subsidiaries of financial or bank holding companies, which may allow them on a consolidated basis to own and conduct depository and other banking activities that we do not have the regulatory authority to own or conduct. We believe that the principal competitive factors in our market include:

• quality of service;

• reliability of service;

• ability to evaluate, undertake and manage risk;

• speed in implementing payment processes;

• price and other financial terms; and

• multi-channel payment capability.

We believe that our specific focus on providing integrated payment processing solutions to merchants, in addition to our understanding of the needs and risks associated with providing payment processing services electronically, gives us a competitive advantage over other competitors, which have a narrower market perspective, and over competitors of a similar or smaller size that may lack our experience in the electronic payments industry. Furthermore, we believe we present a competitive distinction through the use of our internal technology to provide a single integrated payment storage or warehouse that consolidates, processes, tracks and reports all payments regardless of payment source or channel.

Our prepaid card offering is competitive due to our proprietary systems and our ability to create and establish corporate-branded card programs in a shorter time frame than most of our competitors. We also believe our eight years of experience in processing and managing prepaid card programs is a competitive advantage over many of our competitors due to the industry being relatively new. We also believe that the mobile application technology and advanced card holder websites we acquired through the Akimbo acquisition will provide us a competitive advantage in securing both consumer customers and business clients that have a need for a card program for their customer base.

## Trademarks and Domain Names

We own federally registered trademarks on the marks “Payment Data Systems, Inc.,” “Akimbo,” “FiCentive Innovations in Prepaid Card Solutions,” “Don’t change your bank, just your card” and “ZBILL” and their respective designs. We have also secured, among others, domain name registrations for:

• akim.bo;

• akimbocard.com;

• akimbodeals.com;

• akimbodebit.com;

• akimboit.com;

• akimbonews.com;

• akimboprepaid.com;

• akimbo.info;

• bill4u.com;

• billx.com;

• billxpress.com;

• billhelp.com;

• billserv.com;

• britneycard.com;

• carddeposit.com

• camercard.com;

• creditcardgateway.com;

• crpds.com;

• danicacard.com;

• debitpin.com;

• debitmax.com;

• debitservice.com;

• electragift.com;

• getcarmen.com;

• ficentive.com;

• fotogiftcards.com

• iremotepay.com;

• iremotepay.net;

• itshotcard.com;

• merchandisemastercard.com;

• myakimbo.com;

• nataliecard.com;

• nataliegiftcard.com;

• nataliegulbismastercard.com;

• nataliegulbiscard.com;

• newsakimbo.com;

• nsfdebit.com;

• omegabill.com;

• paymentdatasystems.com;

• paymentdata.org;

• paymentdata.com;

• paymentrecovery.com;

• paymentrecoverysystems.com;

• parishilontcard.com;

• gogreenmastercard.com;

• mipromesa.com;

• pdsnetwork.com;

• prepaidload.com;

• primacard.com;

• securepds.com;

• stardebit.com;

• streamprepaid.com;

• thatshotcard.com;

• viewbill.com; and

• zbill.com.



We rely on a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements, and other intellectual property protection methods to protect our services and related products.

## Patents

On January 11, 2008, we executed an agreement to sell selected patents and patent applications, including U.S. Patent No. 7,021,530, to PCT Software Data, LLC for net proceeds of approximately $750,000. The patents and patent applications sold relate to bill payments made with debit and stored value cards. We retained a worldwide, non-exclusive license under the patents for use with all current and future customers.

## Government Regulation

Our industry is highly regulated. Any new or changes made to U.S. federal, state and local laws, regulations, card network rules or other industry standards affecting our business may require significant development efforts or have an unfavorable impact to our financial results. Failure to comply with these laws and regulations may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of services and/or the imposition of civil and criminal penalties, including fines. Certain of our services are also subject to rules set by various payment networks, such as Visa and MasterCard.

## The Dodd-Frank Act

In the United States, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, into law on July 21, 2010. The Dodd-Frank Act caused significant structural reforms to the financial services industry. The Dodd-Frank Act regulates the fees charged or received by issuers for processing debit transactions and the transaction routing options available to merchants. The Dodd-Frank Act also established the Consumer Financial Protection Bureau to regulate consumer financial services, including many offered by our customers. Additionally, the Durbin Amendment to the Dodd-Frank Act provided that interchange fees that a card issuer or payment network receives or charges for debit transactions will now be regulated by the Federal Reserve and must be “reasonable and proportional” to the cost incurred by the card issuer in authorizing, clearing and settling the transaction. In addition, the Durbin Amendment contains prohibitions on network exclusivity and merchant routing restrictions.

The Dodd-Frank Act, when implemented in September 2011, caused interchange fees to be lowered on large bank-issued debit cards. The lowered interchange fees had a mild negative impact on our revenues, but increased our earnings due to the fact that we were able to keep our prices constant with our merchants. If our competitors start to pass the extra margin into savings to their merchants, we may be forced to follow their actions and become exposed to lower earnings on the debit card transactions for large banks. Our prepaid cards, while some of the transactions are processed on debit networks, are currently exempt from the Dodd-Frank Act.

## CARD Act

As an agent of, and third-party service provider to, our issuing banks, we are subject to indirect regulation and direct audit and examination by the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, or FRB, and the Federal Deposit Insurance Corporation.

On March 23, 2010, the FRB issued a final rule implementing Title IV of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, or CARD Act, which imposes requirements relating to disclosures, fees and expiration dates that are generally applicable to gift certificates, store gift cards and general-use prepaid cards. We believe that our general purpose reloadable prepaid cards, and the maintenance fees charged on our general purpose reloadable cards, are exempt from the requirements under this rule, as they fall within an express exclusion for cards which are reloadable and not marketed or labeled as a gift card or gift certificate. However, this exclusion is not available if the issuer, the retailer selling the card to a consumer or the program manager, promotes, even if occasionally, the use of the card as a gift card or gift certificate. As a result, we provide retailers with instructions and policies regarding the display and promotion of our general purpose reloadable cards. However, it is possible that despite our instructions and policies to the contrary, a retailer engaged in offering our general purpose reloadable cards to consumers could take an action with respect to one or more of the cards that would cause each similar card to be viewed as being marketed or labeled as a gift card, such as by placing our general purpose reloadable cards on a display which prominently features the availability of gift cards and does not separate or otherwise distinguish our general purpose reloadable cards from the gift cards. In such event, it is possible that such general purpose reloadable cards would lose their eligibility for such exclusion to the CARD Act and its requirements, and therefore could be deemed to be in violation of the CARD Act and the rule, which could result in the imposition of fines, the suspension of our ability to offer our general purpose reloadable cards, civil liability, criminal liability, and the inability of our issuing banks to apply certain fees to our general purpose reloadable cards, each of which would likely have a material adverse impact on our revenues.



In 2014, we resumed issuing gift card cards. Any gift cards we issue will be governed by the CARD Act and other various regulations. Any violations with our gift card issuance could result in the imposition of fines, the suspension of our ability to offer our gift cards, civil liability, criminal liability, and the inability of our issuing banks to apply certain fees to our gift cards, each of which would likely have a material adverse impact on our revenues.

## Anti-Money Laundering and Counter Terrorist Regulation

Our business is subject to U.S. federal anti-money laundering laws and regulations, including the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001, or collectively, the BSA. The BSA, among other things, requires money services businesses to develop and implement risk-based anti-money laundering programs, report large cash transactions and suspicious activity and maintain transaction records.

We are also subject to certain economic and trade sanctions programs that are administered by the Treasury Department’s Office of Foreign Assets Control, or OFAC, that prohibit or restrict transactions to or from or dealings with specified countries, their governments and, in certain circumstances, their nationals, narcotics traffickers, and terrorists or terrorist organizations.

Similar anti-money laundering, counter terrorist financing and proceeds of crime laws apply to movements of currency and payments through electronic transactions and to dealings with persons specified on lists maintained by organizations similar to OFAC in several other countries and which may impose specific data retention obligations or prohibitions on intermediaries in the payment process.

## Prepaid Services

Prepaid card programs managed by us are subject to various federal and state laws and regulations, which may include laws and regulations related to consumer and data protection, licensing, consumer disclosures, escheat, anti-money laundering, banking, trade practices and competition and wage and employment. As regulations evolve or change we may be required to obtain state licenses to expand our distribution network for prepaid cards, which licenses we may not be able to obtain. Furthermore, the CARD Act and the Federal Reserve’s Regulation E impose requirements on general-use prepaid cards, store gift cards and electronic gift certificates. These laws and regulations are evolving, unclear and sometimes inconsistent and subject to judicial and regulatory challenge and interpretation, and therefore the extent to which these laws and rules have application to, and their impact on, us, financial institutions, merchants or others is in flux. At this time we are unable to determine the impact that the clarification of these laws and their future interpretations, as well as new laws, may have on us, financial institutions, merchants or others in a number of jurisdictions. Prepaid services may also be subject to the rules and regulations of Visa, MasterCard and other payment networks with which we and the card issuers do business. The programs in place to process these products generally may be modified by the payment networks at their discretion and such modifications could also impact us, financial institutions, merchants and others.

## Employees

As of December 31, 2014, we had 17 full-time employees. We are not a party to any collective bargaining agreements. We believe that our relations with our employees are very good.

## Available Information

Our website is located at www.paymendtada.com. We make available on our website, free of charge, copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as applicable and as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission. Our website and the information contained therein or connected thereto are not intended to be incorporated into this annual report on Form 10-K.

You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room, located at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

## ITEM 1A. RISK FACTORS.

An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors and other information included in this annual report on Form 10-K. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected and you may lose some or all of your investment.



# RISKS RELATED TO OUR BUSINESS

We may not realize the anticipated opportunities from the Akimbo acquisition.

On December 22, 2014, we acquired substantially all the assets of Akimbo Financial, Inc. The success of the Akimbo acquisition will depend, in part, on our ability to realize the anticipated growth opportunities from integrating the acquired business with our business and banking sponsor, including integrating its services into our offering of products and services. Our success depends on the successful integration of our and the acquired business's operations and information and financial systems. We cannot assure you that we will be able to realize such opportunities or that our management will not be distracted by the integration of the acquired business.

If our security applications are not sufficient to address changing market conditions and customer concerns, we may incur significant losses and be unable to sell our services.

Our use of applications designed for premium data security and integrity to process electronic transactions may not be sufficient to address changing market conditions or the security and privacy concerns of existing and potential customers. If our security applications are breached and sensitive data is lost or stolen, we could incur significant costs to not only assess and repair any damage to our systems, but also to reimburse customers for losses that occur from the fraudulent use of the data. We may also be subject to fines and penalties from the credit card associations or regulatory agencies in the event of the loss of confidential account information. Further, adverse publicity raising concerns about the safety or privacy of electronic transactions, or widely reported breaches of our or another provider's security, have the potential to undermine consumer confidence in the technology and could have a materially adverse effect on our business.

If we do not adapt to rapid technological change, our business may fail.

Our success depends on our ability to develop new and enhanced services and related products that meet changing customer needs. However, the market for our services is characterized by rapidly changing technology, evolving industry standards, emerging competition and frequent new and enhanced software, service and related product introductions. In addition, the software market is subject to rapid and substantial technological change. To remain successful, we must respond to new developments in hardware and semiconductor technology, operating systems, programming technology and computer capabilities. In many instances, new and enhanced services, products and technologies are in the emerging stages of development and marketing, and are subject to the risks inherent in the development and marketing of new software, services and products. We may not successfully identify new service opportunities, and develop and bring new and enhanced services and related products to market in a timely manner. Even if we do bring such services, products or technologies to market, they may not become commercially successful. Additionally, services, products or technologies developed by others may render our services and related products noncompetitive or obsolete. If we are unable, for technological or other reasons, to develop and introduce new services and products in a timely manner in response to changing market conditions or customer requirements, our business may fail.

We rely on our relationship with the Automated Clearing House network and if the Federal Reserve rules were to change, our business could be adversely affected.

We have contractual relationships with Fifth Third Bank and Generations Federal Credit Union, both of which are Originating Depository Financial Institutions in the Automated Clearing House network. The ACH network is a nationwide batch-oriented electronic funds transfer system that provides for the interbank clearing of electronic payments for participating financial institutions. An Originating Depository Financial Institution is a participating financial institution that must abide by the provisions of the ACH Operating Rules and Guidelines. Through our relationships with Fifth Third Bank and Generations Federal Credit Union, we are able to process payment transactions on behalf of our customers and their consumers by submitting payment instructions in a prescribed ACH format. We pay volume-based fees to Fifth Third Bank and Generations Federal Credit Union for debit and credit transactions processed each month, and pay fees for other transactions such as returns and notices of change to bank accounts. These fees are part of our agreed-upon cost structures with the banks. If the Federal Reserve rules were to change to introduce restrictions or modify access to the Automated Clearing House, our business could be materially adversely affected. Further, if either or both of Fifth Third Bank and Generations Federal Credit Union were to cancel our respective contract with the bank, our business could be materially affected. At this time, we believe we could find and enter into an agreement with another bank sponsor on similar contractual terms, but no assurances can be made.

If our third-party card processing providers or our bank sponsors fail to comply with the applicable requirements of Visa, MasterCard and Discover credit card associations, we may have to find a new third-party processing provider, which could increase our costs.

Substantially all of the card-based transactions we process involve the use of Visa, MasterCard or Discover credit cards. In order to provide payment-processing services for Visa, MasterCard and Discover transactions, we must be sponsored by a financial institution that is a principal member of the respective Visa, MasterCard and Discover card associations. Both Merrick Bank and Wells Fargo Bank have sponsored us under the designations Third Party Processor, or TPP, and Independent Sales Organization, or ISO, with the Visa card association, and under the designations Third Party Servicer, or TPS, and Merchant Service Provider, or MSP, with the MasterCard card association. We have an agreement with TriSource Solutions, LLC and an agreement with Global Payments, Inc. through which their member banks, Merrick Bank and HSBC, sponsor us for membership in the Visa and MasterCard card associations, and settle card transactions for our merchants. If our third-party processing provider, TriSource Solutions, LLC, or Global Payments, or our bank sponsors, Merrick Bank or Wells Fargo Bank, fail to comply with the applicable requirements of the Visa, MasterCard, and Discover card associations, Visa, MasterCard or Discover could suspend or terminate the registration of our third-party processing provider. Also, our contracts with both of these third parties is subject to cancellation upon limited notice by either party. The cancellation of either contract, termination of their registration or any changes in the Visa, MasterCard or Discover rules that would impair the registration of our third-party processing provider could require us to stop providing such payment processing services if we are unable to enter into a similar agreement with another provider or sponsor at similar costs and upon similar contractual terms. Additionally, changing our bank sponsor could adversely affect our relationship with our merchants if the new sponsor provides inferior service or charges higher costs.



Although we reported net income of $3,838,288 for year ended December 31, 2014 we still have an accumulated deficit of $50,071,087. In 2013 we were not profitable, with a loss of $ 789,039. This was due to lower ACH transaction volumes and prepaid card volumes in 2013, which, ultimately, resulted in reduced revenue for that year. In the last quarter of 2013, we initiated ACH transaction processing for newly acquired customers that led to dramatic increases in ACH transaction volumes. Our 2014 ACH (electronic check) processing volumes were the highest in the history of the company. In 2014, our ACH transaction volumes were up more than 522% as compared to 2013. Overall credit card processing volumes for all of 2014 were also the highest in the history of the company.

However, our future operating results are not certain. We may incur future operating losses. We may need to raise additional capital to pursue product development initiatives and to penetrate markets for the sale of our products in the future. We believe that we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means. If we are unable to secure additional capital, we may be required to curtail our research and development initiatives and take additional measures to reduce costs in order to conserve our cash in amounts sufficient to sustain operations and meet our obligations. These measures could cause significant delays in our efforts to expand our product offerings and customer base in the United States, which are critical to the realization of our business plan and to future operations.

Our prepaid card revenues from the sale of services to merchants that accept MasterCard cards are dependent upon our continued MasterCard registration and financial institution sponsorship and, in some cases, continued participation in certain payment networks.

In order to provide processing services for our MasterCard prepaid card program, we must be either a member of a payment network or be registered as a prepaid processor of MasterCard. Sunrise Banks, N.A, formerly known as University National Bank, and Metropolitan Commercial Bank have sponsored us under the designations TPS and MSP with the MasterCard card association. Registration as a prepaid processor is dependent upon us being sponsored by member clearing banks. If our sponsor banks should stop providing sponsorship for us, we would need to find another financial institution to provide those services or we would need to be a member, either of which could prove to be difficult and/or more expensive. If we are unable to find a replacement financial institution to provide sponsorship or become a member of the association, we may no longer be able to provide prepaid processing services to our MasterCard customers, which would negatively impact our revenues and earnings.

If we fail to comply with the applicable requirements of the respective card networks, they could seek to fine us, suspend us or terminate our registrations. If our merchants or ISOs incur fines or penalties that we cannot collect from them, we could end up bearing the cost of fines or penalties.

In order to provide our transaction processing services, we are registered with Visa, MasterCard and Discover as service providers and transaction processors for member institutions and with other networks. As such, we are subject to card association and network rules that could subject us to a variety of fines or penalties that may be levied by the card networks for certain acts or omissions. The rules of the card networks are set by their boards, which may be influenced by banks that own their stock and, in the case of Discover by the card's issuers, and some of those banks and issuers are our competitors with respect to these processing services. The termination of our registrations or our status as a service provider or transaction processor, or any changes in card association or other network rules or standards, including interpretation and implementation of the rules or standards, that increase the cost of doing business or limit our ability to provide transaction processing services to our customers, could have a material adverse effect on our business, operating results and financial condition. If a merchant or one of our resellers fails to comply with the applicable requirements of the card associations and networks, it could be subject to a variety of fines or penalties that may be levied by the card associations or networks. If we cannot collect such amounts from the applicable merchant or one of our resellers, we could end up bearing such fines or penalties, resulting in lower earnings for us.

We rely on a key customer and if we lose this customer, our revenues may decline.

We had one customer that accounted for 11% of our 2014 revenue. This customer utilized our ACH Processing services. No other customer accounted for more than 10% of revenues in 2014. If we lose this customer without adding other customers, our revenues may decrease which could adversely affect our profitability, if we are profitable at that time.

We are subject to extensive and complex federal and state regulation and new regulations and/or changes to existing regulations could adversely affect our business.

As an agent of, and third-party service provider to, our issuing banks, we are subject to indirect regulation and direct audit and examination by the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, or the FRB, and the Federal Deposit Insurance Corporation.

On March 23, 2010, the FRB issued a final rule implementing Title IV of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, or CARD Act, which imposes requirements relating to disclosures, fees and expiration dates that are generally applicable to gift certificates, store gift cards and general-use prepaid cards. We believe that our general purpose reloadable prepaid cards, and the maintenance fees charged on our general purpose reloadable cards, are exempt from the requirements under this rule, as they fall within an express exclusion for cards which are reloadable and not marketed or labeled as a gift card or gift certificate. However, this exclusion is not available if the issuer, the retailer selling the card to a consumer or the program manager, promotes, even if occasionally, the use of the card as a gift card or gift certificate. As a result, we provide retailers with instructions and policies regarding the display and promotion of our general purpose reloadable cards. However, it is possible that despite our instructions and policies to the contrary, a retailer engaged in offering our general purpose reloadable cards to consumers could take an action with respect to one or more of the cards that would cause each similar card to be viewed as being marketed or labeled as a gift card, such as by placing our general purpose reloadable cards on a display which prominently features the availability of gift cards and does not separate or otherwise distinguish our general purpose reloadable cards from the gift cards. In such event, it is possible that such general purpose reloadable cards would lose their eligibility for such exclusion to the CARD Act and its requirements, and therefore could be deemed to be in violation of the CARD Act and the rule, which could result in the imposition of fines, the suspension of our ability to offer our general purpose reloadable cards, civil liability, criminal liability, and the inability of our issuing banks to apply certain fees to our general purpose reloadable cards, each of which would likely have a material adverse impact on our revenues.



As the laws applicable to our business, and those of our distributors and issuing banks, change frequently, are often unclear and may differ or conflict between jurisdictions, ensuring compliance has become more difficult and costly. Any failure, or perceived failure, by us, our issuing banks or our distributors to comply with all applicable statutes and regulations could result in fines, penalties, regulatory enforcement actions, civil liability, criminal liability, and/or limitations on our ability to operate our business, each of which could significantly harm our reputation and have a material adverse impact on our business, results of operations and financial condition.

State and federal legislatures and regulatory authorities have become increasingly focused upon the regulation of the financial services industry and continue to adopt new legislation which could result in significant changes in the regulatory landscape for financial institutions, which can include our bank sponsors, and other financial services companies, such as our Company. For example, the establishment of the federal Consumer Financial Protection Bureau, or CFPB, will likely expose us to increased regulatory oversight and possibly more burdensome regulation that could have an adverse impact on our revenue and profits. In December 2014, the CFPB issued a notice of proposed rulemaking regarding regulation of the prepaid card industry, although no final rule has yet been published. The proposal would establish disclosure requirements specific to prepaid accounts that would require financial institutions to provide certain disclosures to consumers prior to and after the acquisition of a prepaid account and require prepaid account issuers to provide the CFPB with terms and conditions for prepaid accounts, among others.

Our card programs are subject to strict regulation under federal law regarding anti-money laundering and anti-terrorist financing. Failure to comply with such laws, or abuse of our card programs for purposes of money laundering or terrorist financing, could have a material adverse impact on our business.

Provisions of the USA PATRIOT Act, the Bank Secrecy Act and other federal law impose substantial regulation of financial institutions designed to prevent use of financial services for purposes of money laundering or terrorist financing. Increasing regulatory scrutiny of our industry with respect to money laundering and terrorist financing matters could result in more aggressive enforcement of such laws or more onerous regulation, which could have a material adverse impact on our business. In addition, abuse of our prepaid card programs for purposes of money laundering or terrorist financing, notwithstanding our efforts to prevent such abuse through our regulatory compliance and risk management programs, could cause reputational or other harm that would have a material adverse impact on our business.

Effective September 27, 2011, the Financial Crimes Enforcement Network of the U.S. Department of the Treasury, or FinCEN, issued a final rule regarding the applicability of the Bank Secrecy Act's anti-money laundering provisions to prepaid products and other matters related to the regulation of money services businesses. This rule created additional obligations for entities, including our distributors, engaged in the provision and sale of certain prepaid products, including our prepaid debit cards, such as the obligation for sellers of prepaid debit cards to obtain identification information from the purchaser at the point-of-sale. Compliance with these obligations may result in increased compliance costs for us, our issuing banks and our distributors, and may therefore have a negative impact on the profitability of our business.

Unauthorized disclosure of cardholder data, whether through breach of our computer systems or otherwise, could expose us to liability and protracted and costly litigation.

We collect and store personal identifiable information about our cardholders, including names, addresses, social security numbers, driver's license numbers and account numbers, and maintain a database of cardholder data relating to specific transactions, including account numbers, in order to process transactions and prevent fraud. As a result, we are required to comply with the privacy provisions of the Gramm-Leach-Bliley Act, various other federal and state privacy statutes and regulations, and the Payment Card Industry Data Security Standard, each of which is subject to change at any time. Compliance with these requirements is often difficult and costly, and our failure, or our distributors' failure, to comply may result in significant fines or civil penalties, regulatory enforcement action, liability to our issuing banks and termination of our agreements with one or more of our issuing banks, each of which could have a material adverse effect on our financial position and/or operations. In addition, a significant breach could result in our Company being prohibited from processing transactions for any of the relevant card associations or network organizations, including Visa, MasterCard, American Express, Discover or regional debit networks, which would also have a significant material adverse impact on our financial position and/or operations.

Furthermore, if our computer systems are breached by unauthorized users, we may be subject to liability, including claims for unauthorized purchases with misappropriated bank card information, impersonation or similar fraud claims. We could also be subject to liability for claims relating to misuse of personal information, such as unauthorized marketing purposes, or failure to comply with laws governing notification of such breaches. These claims also could result in protracted and costly litigation. In addition, we could be subject to penalties or sanctions from the relevant card associations or network organizations.

If our efforts to protect the security of information about our customers, cardholders and vendors are unsuccessful, we may face additional costly government enforcement actions and private litigation, and our sales and reputation could suffer.

An important component of our business involves the receipt and storage of information about our cardholders and banking information. We have multiple programs and processes in place to detect and respond to data security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. In addition, hardware, software, or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud, trickery, or other forms of deceiving our vendors, contractors, and employees. If we, our customers, or our vendors experience significant data security breaches or fail to detect and appropriately respond to significant data security breaches, we could be exposed to government enforcement actions and private litigation. In addition, our cardholders and customers could lose confidence in our ability to protect their information, which could cause them to discontinue using our services.



We depend on Michael R. Long and Louis A. Hoch, and if these officers ceased to be active in our management, our business may not be successful.

Our success depends to a significant degree upon the continued contributions of our key management, marketing, service and related product development and operational personnel, including our Chairman and Chief Executive Officer Michael R. Long, and our President and Chief Operating Officer, Louis A. Hoch. We entered into employment agreements with Mr. Long and Mr. Hoch, respectively, in February 2007. The terms of the agreements are substantially similar and prohibit the executive from competing with us for a period of two years from the executive's date of termination. Our business may not be successful if, for any reason, either or both of these officers cease to be active in our management.

If our software fails, and we need to repair or replace it, or we become subject to warranty claims, our costs could increase.

Our software products could contain errors or “bugs” that could adversely affect the performance of services or damage a user’s data. We attempt to limit our potential liability for warranty claims through technical audits and limitation-of-liability provisions in our customer agreements. However, these measures may not be effective in limiting our exposure to warranty claims. We have not experienced a significant increase in software errors or warranty claims. Despite the existence of various security precautions, our computer infrastructure may also be vulnerable to viruses or similar disruptive problems caused by our customers or third parties gaining access to our processing system. If our software fails, and we need to replace or repair it, or we become subject to warranty claims, our costs could significantly increase.

We depend on the efficient and uninterrupted operation of our computer network systems, software, data center and telecommunications networks, as well as the systems and services of third parties. Our systems and operations or those of our third-party providers could be exposed to damage or interruption from, among other things, fire, natural disaster, power loss, telecommunications failure, terrorist acts, war, unauthorized entry, human error, and computer viruses or other defects. Defects in our systems or those of third parties, errors or delays in the processing of payment transactions, telecommunications failures or other difficulties could result in loss of revenue, loss of merchants, loss of merchant and cardholder data, harm to our business or reputation, exposure to fraud losses or other liabilities, negative publicity, additional operating and development costs, and/or diversion of technical and other resources. We perform the vast majority of disaster recovery operations ourselves, though we utilize select third parties for some aspects of recovery. To the extent we outsource our disaster recovery, we are at risk of the vendor’s unresponsiveness in the event of breakdowns in our systems.

Loss of key resellers could reduce our revenue growth.

Our reseller sales channel, which purchases and resells our end-to-end services to its own portfolio of merchant customers, is a strong contributor to our revenue growth. If a reseller switches to another transaction processor, shuts down, becomes insolvent, or enters the processing business themselves, we may no longer receive new merchant referrals from the reseller, and we risk losing existing merchants that were originally enrolled by the reseller, all of which could negatively affect our revenues and earnings.

Risks associated with reduced levels of consumer spending could adversely affect our revenues and earnings.

Significant portions of our revenue and earnings are derived from fees from processing consumer ACH, prepaid, credit, and debit card transactions. We are exposed to general economic conditions that affect consumer confidence, consumer spending, consumer discretionary income or changes in consumer purchasing habits. A general reduction in consumer spending in the United States or in any other country where we do business could adversely affect our revenues and earnings.

Fraud by merchants or others could have an adverse effect on our operating results and financial condition.

We have potential liability for fraudulent bankcard, ACH and prepaid card transactions or credits initiated by merchants or others. Examples of merchant fraud include when a merchant knowingly uses a stolen or counterfeit bankcard, card number or bank account to record a false sales transaction, processes an invalid bankcard, or intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction. Criminals are using increasingly sophisticated methods to engage in illegal activities such as counterfeit and fraud. While we have systems and procedures designed to detect and reduce the impact of fraud, we cannot assure the effectiveness of these measures. It is possible that incidents of fraud could increase in the future. Failure to effectively manage risk and prevent fraud would increase our chargeback liability or cause us to incur other liabilities including regulatory and association fines, penalties and harm to our reputation. Increases in chargebacks or other liabilities could have an adverse effect on our operating results and financial condition.

Increases in credit card network fees may result in the loss of customers or a reduction in our earnings.

From time to time, the card networks, including Visa, MasterCard, and Discover, increase the fees (interchange and assessment fees) that they charge processors such as us. We may attempt to pass these increases along to our merchant customers, but this strategy might result in the loss of those customers to our competitors who do not pass along the increases. If competitive practices prevent our passing along such increased fees to our merchant customers in the future, we may have to absorb all or a portion of such increases thereby increasing our operating costs and reducing our earnings.



We are subject to risks and write-offs resulting from fraudulent activities and losses from overdrawn cardholder accounts that could adversely impact our financial performance and results of operations.

Our prepaid cards expose us to threats involving the misuse of such cards, collusion, fraud, identity theft and systemic attacks on our systems. Although a large portion of fraudulent activity is addressed through the chargeback systems and procedures maintained by the card association networks, we are often responsible for other losses due to merchant and cardholder fraud. No system or procedures established to detect and reduce the impact of fraud are entirely effective and we recorded less than $10,000 in losses due to fraud in 2014. Although we actively devote efforts to effectively manage risk and prevent fraud, we could nevertheless experience an increase in fraud losses over our historical experience.

Our cardholders can in some circumstances incur charges in excess of the funds available in their accounts and are liable for the resulting overdrawn account balance. Although we generally decline authorization attempts for amounts that exceed the available balance in a cardholder’s account, the application of the card association networks’ rules and regulations, the timing of the settlement of transactions and the assessment of subscription, maintenance or other fees can, among other things, result in overdrawn card accounts. As of December 31, 2014, our cardholders’ overdrawn account balances totaled less than $5,000.

Although we maintain reserves for fraud and other losses, our exposure to these types of risks may exceed our reserve levels for a variety of reasons, including our failure to predict the actual recovery rate, failure to effectively manage risk and failure to prevent fraud. Accordingly, our business, results of operations and financial condition could be materially and adversely affected to the extent that we incur losses resulting from overdrawn cardholder accounts and fraudulent activity that exceed our designated reserves or if we determine that it is necessary to increase our reserves substantially in order to address any increased recovery risk.

Our business strategy includes identifying businesses and assets to acquire, and if we cannot integrate acquisitions into our company successfully, we may have limited growth.

Our success partially depends upon our ability to identify and acquire undervalued businesses and merchant portfolios within our industry. Although we believe that there are companies and portfolios available for potential acquisition that might offer attractive business opportunities, we may not be able to make any acquisitions, and if we do make acquisitions, they may not be profitable. As a result, our business may not grow or sustain profitability.

If we do not manage our growth, then we may not be able to sustain profitability.

In order to manage our growth successfully, we will have to continue to improve our operational, management and financial systems and expand our work force. A significant increase in our customer base may necessitate the hiring of a significant number of additional personnel, qualified candidates for which, at the time needed, may be in short supply. In addition, the expansion and adaptation of our computer and administrative infrastructure will require substantial operational, management and financial resources. Although we believe that our current infrastructure is adequate to meet the needs of our customers in the foreseeable future, we may not be able to expand and adapt our infrastructure to meet additional demand on a timely basis, at a commercially reasonable cost, or at all. If our management is unable to manage growth effectively, hire needed personnel, expand and adapt our computer infrastructure and improve our operational, management, and financial systems and controls, we may not sustain profitability.

If we do not manage our credit risks related to our merchant accounts, we may incur significant losses.

We rely on the Federal Reserve’s Automated Clearing House system for electronic fund transfers and the Visa, MasterCard and Discover associations for settlement of payments by credit or debit card on behalf of our merchant customers. In our use of these established payment clearance systems, we generally bear the credit risks arising from returned transactions caused by insufficient funds, stop payment orders, closed accounts, frozen accounts, unauthorized use, disputes, customer charge backs, theft or fraud. Consequently, we assume the credit risk of merchant disputes, fraud, insolvency or bankruptcy in the event we attempt to recover funds related to such transactions from our customers. We have not experienced a significant increase in the rate of returned transactions or incurred any losses with respect to such transactions. We utilize a number of systems and procedures to manage and limit credit risks, but if these actions are not successful in managing such risks, we may incur significant losses.

We have adopted certain measures that may make it more difficult for a third party to acquire control of our Company.

Our Board of Directors is classified into three classes of directors serving staggered three-year terms. Such classification of the Board of Directors expands the time required to change the composition of a majority of directors and may tend to discourage a proxy contest or other takeover bid for our company.

## RISKS RELATED TO OUR INDUSTRY

The electronic commerce market is relatively new and if it does not grow, we may not be able to sell sufficient services to make our business viable.

The electronic commerce market is a relatively new and growing service industry. If the electronic commerce market fails to grow or grows slower than anticipated, or if we, despite an investment of significant resources, are unable to adapt to meet changing customer requirements or technological changes in this emerging market, or if our services and related products do not maintain a proportionate degree of acceptance in this growing market, our business may not grow and could even fail. Additionally, the security and privacy concerns of existing and potential customers may inhibit the growth of the electronic commerce market in general, and our customer base and revenues, in particular. Similar to the emergence of the credit card and automatic teller machine industries, we and other organizations serving the electronic commerce market must educate users that electronic transactions use encryption technology and other electronic security measures that make electronic transactions more secure than paper-based transactions.



We believe that we are not required to be licensed by the Office of the Comptroller of the Currency, the Federal Reserve Board, or other federal or state agencies that regulate or monitor banks or other types of providers of electronic commerce services. It is possible that a federal or state agency will attempt to regulate providers of electronic commerce services, which could impede our ability to do business in the regulator's jurisdiction. Our business has also been affected by anti-terrorism legislation, such as the USA PATRIOT Act. Banking-related provisions of the USA PATRIOT Act have been implemented as additions to the banking rules regarding monetary instrument sales record keeping requirements and tracking of cash movements. In our capacity as an agent for Sunrise Banks, N.A, formerly known as University National Bank, and Metropolitan Commercial Bank, the issuing banks for our prepaid card programs and in our capacity as an agent for Fifth Third Bank and Generations Federal Credit Union, the sponsoring banks for our ACH services, we are required to comply with these rules. We are also required to implement a Customer Identification Program and establish an Anti-Money Laundering program and to report any suspected money laundering to the appropriate agencies. Our compliance with such regulations increases our responsibilities and costs associated with the administration of our debit card programs. We are also subject to various laws and regulations relating to commercial transactions, such as the Uniform Commercial Code, and may be subject to the electronic funds transfer rules embodied in Regulation E, promulgated by the Federal Reserve Board. Given the expansion of the electronic commerce market, the Federal Reserve Board might revise Regulation E or adopt new rules for electronic funds transfer affecting users other than consumers. Because of growth in the electronic commerce market, Congress has held hearings on whether to regulate providers of services and transactions in the electronic commerce market. It is possible that Congress or individual states could enact laws regulating the electronic commerce market. If enacted, such laws, rules and regulations could be imposed on our business and industry and could increase our costs or limit our business opportunities.

If we cannot compete successfully in our industry, we could lose market share and our costs could increase.

Portions of the electronic commerce market are becoming increasingly competitive. We expect to face growing competition in all areas of the electronic payment processing market. New companies could emerge and compete for merchants of all sizes. We expect competition to increase from both established and emerging companies and that such increased competition could lower our market share and increase our costs. Moreover, our current and potential competitors, many of whom have greater financial, technical, marketing and other resources than us, may respond more quickly than us to new or emerging technologies or could expand to compete directly against us in any or all of our target markets. Accordingly, it is possible that current or potential competitors could rapidly acquire market share. We may not be able to compete against current or future competitors successfully. Additionally, competitive pressures may increase our costs, which could lower our earnings, if any.

## RISKS RELATED TO OUR COMMON STOCK

Our stock price is volatile and you may not be able to sell your shares at a price higher than what you paid.

The market for our common stock is highly volatile. In 2014, our closing stock price fluctuated between $0.067 and $0.185. The trading price of our common stock could be subject to wide fluctuations in response to, among other things, quarterly variations in operating and financial results, announcements of technological innovations or new products by our competitors or us, changes in prices of our products and services or our competitors' products and services, changes in product mix, or changes in our revenue and revenue growth rates.

“Penny stock” rules may make buying or selling our securities difficult which may make our stock less liquid and make it harder for investors to buy and sell our shares.

Trading in our securities is subject to the SEC’s “penny stock” rules and it is anticipated that trading in our securities will continue to be subject to the penny stock rules for the foreseeable future. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer who recommends our securities to persons other than prior customers and accredited investors must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by these requirements may discourage broker-dealers from recommending transactions in our securities, which could severely limit the liquidity of our securities and consequently adversely affect the market price for our securities.

## ITEM 2. PROPERTIES.

Our headquarters and operations are housed in approximately 4,500 square feet of leased office space in San Antonio, Texas. Rental expense under the operating lease was approximately $100,000 and $75,000 for the years ended December 31, 2014 and 2013, respectively. During February 2015, we executed a fourth amendment to our lease, which extended the term of the lease for a period of 38 months, or until April 30, 2018.

During February 2015, we executed a new lease for approximately 2,700 square feet of office space in San Antonio, Texas. This office space will be utilized by our FiCentive, Inc. subsidiary. The lease commences on March 1, 2015 for 38 months, or until April 30, 2018. The rental cost is approximately $5,000 per month.

We believe that our properties will be adequate to meet our needs through December 31, 2015.



## ITEM 3. LEGAL PROCEEDINGS.

On December 18, 2014, Brightmoor Christian Church filed a lawsuit in the United States District Court for the Eastern District of Michigan against us. Since the filing of the lawsuit, we have been engaged in on-going settlement discussions. The lawsuit alleges that we did not warn or stop the processing of $181,709 in fraudulent credit transactions from occurring and Brightmoor incurred losses. We believe that Brightmoor breached our processing agreement and a security breach occurred because of the Brightmoor's lack of any controls over the login and password information utilized by Brightmoor to process transactions that resulted in Brightmoor becoming a victim of a malware attack. Our agreement with Brightmoor 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. While we believe the claims of Brightmoor are without merit, and it is less likely than not that the loss will be incurred, the outcome of the dispute is still uncertain. Accordingly, we have not accrued for a potential loss beyond the current balance in the reserve for losses on merchant account. Our unrecovered funds incurred to-date for this dispute, not including attorney fees, are $13,710.

Aside from the lawsuit 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 4. MINE SAFETY DISCLOSURES.

Not applicable.



## PART II

## ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

## Market Information

Our common stock is quoted on the OTCQB, the OTC market tier for companies that are reporting with the SEC, and on the OTC Bulletin Board, or OTCBB, under the ticker symbol "PYDS."

The following table sets forth the high and low closing prices for our common stock for each quarter during the last two fiscal years. The prices reported below reflect inter-dealer prices and are without adjustments for retail markups, markdowns or commissions, and may not necessarily represent actual transactions.

2014

<table><tr><td></td><td colspan="2">High</td><td colspan="2">Low</td></tr><tr><td>First Quarter</td><td>$     0.119</td><td>$     0.067</td><td></td><td></td></tr><tr><td>Second Quarter</td><td>$     0.110</td><td>$     0.075</td><td></td><td></td></tr><tr><td>Third Quarter</td><td>$     0.135</td><td>$     0.095</td><td></td><td></td></tr><tr><td>Fourth Quarter</td><td>$     0.185</td><td>$     0.115</td><td></td><td></td></tr></table>

2013

<table><tr><td></td><td colspan="2">High</td><td colspan="2">Low</td></tr><tr><td>First Quarter</td><td>$     0.195</td><td>$     0.1235</td><td></td><td></td></tr><tr><td>Second Quarter</td><td>$     0.180</td><td>$     0.066</td><td></td><td></td></tr><tr><td>Third Quarter</td><td>$     0.100</td><td>$     0.030</td><td></td><td></td></tr><tr><td>Fourth Quarter</td><td>$     0.050</td><td>$     0.110</td><td></td><td></td></tr></table>

## Holders

On March 24 2015, 184,534,791 shares of our common stock were issued and outstanding. As of March 24, 2015, there were approximately 3,864 stockholders of record of our common stock.

## Dividends

We have never declared or paid cash or stock dividends, and we have no plans to pay any such dividends in the foreseeable future. Instead, we intend to reinvest our earnings, if any.

## Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information as of December 31, 2014 with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance:

<table><tr><td></td><td>Number of securities to be issued upon exercise of outstanding options</td><td>Weighted-average exercise price of outstanding options</td><td>Number of securities remaining available for future issuance under compensation plan</td></tr><tr><td>Equity compensation plans approved by security holders</td><td>1,454,421</td><td>$     0.082</td><td>-</td></tr><tr><td>Equity compensation plans not approved by security holders</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Total</td><td>1,454,421</td><td>$     0.082</td><td>-</td></tr></table>

Our 1999 Employee Comprehensive Stock Plan and our 1999 Non-Employee Director Plan terminated according to the respective terms of the Plans in 2010. Options issued under the now terminated Plans remain in effect according to the terms set on the day each option was issued. No options were exercised in 2014 or 2013.



## Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

On January 14, 2014, we granted an employee 74,075 unregistered shares of our common stock for employee compensation as a new hire bonus. These shares were valued at $0.067 per share or $5,000.

On December 23, 2014, we granted 4,000,000 unregistered shares of our common stock for employee compensation as a new hire bonus to Houston Frost, our Senior Vice President of Corporate Development and Prepaid Products. These shares were valued at $0.17 per share, or $680,000. 1,800,000 shares vest at a rate of 50,000 shares per month from January 31, 2015 to December 21, 2017. The remaining 2,200,000 shares vest on January 31, 2025.

On December 29, 2014, we issued 13,456,940 unregistered shares of our common stock for the acquisition of the Akimbo Financial, Inc. business. These shares were valued at $0.1672 per share or $2,250,000.

On December 29, 2014, we issued 18,924,490 unregistered shares of our common stock in incentive stock grants vesting over 10 years. These shares were valued at $0.17 per share or $3,217,163. In addition, we transferred 5,575,510 shares of treasury stock in incentive stock grants vesting over 10 years. The treasury stock was valued at $0.17 per share or $947,837 for an aggregate of 24,500,000 shares or $4,165,000.

On March 3, 2015, we granted 4,000,000 unregistered shares of our common stock for employee compensation as a new hire bonus to Habib Yunus, our Senior Vice President and Chief Financial Officer. These shares were valued at $0.295 per share, or $1,180,000 and vest on March 2, 2025.

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

We did not repurchase any of our common stock during the years ended December 31, 2014 and 2013.

## ITEM 6. SELECTED FINANCIAL DATA.

As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

## ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto, and other financial information included elsewhere in this annual report on Form 10-K. This report contains forward-looking statements. When used in this report, the words “expects,” “anticipates,” “suggests,” “believes,” “intends,” “estimates,” “plans,” “projects,” “continue,” “ongoing,” “potential,” “expect,” “predict,” “believe,” “intend,” “may,” “will,” “should,” “could,” “would,” “proposal,” and similar expressions are intended to identify forward-looking statements. Actual results in future periods may differ materially from those expressed or implied in such forward-looking statements as a result of a number of factors, including, but not limited to, the risks discussed under the heading “Risk Factors” in this annual report on and elsewhere in this annual report on Form 10-K.

## Overview

We provide integrated electronic payment processing services to merchants and businesses, including all types of Automated Clearing House, or ACH, processing, credit, prepaid card and debit card-based processing services. 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 Visa prepaid cards to consumers for use as a tool to stay on budget, manage allowances and share money with family and friends. It is our plan to move the Akimbo card program to operate on the MasterCard and associated networks and to our existing sponsoring bank, Sunrise Banks, N.A. We expect this transition will allow for us to capture enough savings of expenses to make the program cash flow positive around June 30, 2015.



Although we reported net income of $3,838,288 for year ended December 31, 2014 we still have an accumulated deficit was $50,071,087. In 2013 we were not profitable, with a loss of $ 789,039. This was due to lower ACH transaction volumes and prepaid card volumes in 2013, which, ultimately, resulted in reduced revenue for that year. In the last quarter of 2013, we initiated ACH transaction processing for newly acquired customers that led to dramatic increases in ACH transaction volumes. Our 2014 ACH (electronic check) processing volumes were the highest in the history of the company. In 2014, our ACH transaction volumes were up more than 522% as compared to 2013. Overall credit card processing volumes for all of 2014 were also the highest in the history of the company. Credit cards dollars processed during 2014 were up 14% over 2013 and credit cards transactions processed during the fourth quarter were up 43% over 2013. Nearly three billion dollars of payments were processed by us in 2014. The total of $2.978 billion greatly exceeded last year's amount of $630 million and set a record for dollars processed in a year for the company. We believe these trends will continue for the foreseeable future. We also expect to see an increase in the number of our enrolled merchant customers, for whom we provide processing for credit and debit card transactions, and we expect to add new clients to our sales pipeline, which we believe will create increased transaction volumes. We believe the profitability we experienced in 2014 will continue for the foreseeable future, but the extent of our future operating results and the ultimate timing of our profitability is not certain. We may incur future operating losses. To 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) manage our operating expenses, (b) add quality customers to our client base, (c) meet evolving customer requirements and (d) adapt to technological changes in an emerging market. 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 expand our operations without significantly increasing our fixed operating expenses.

## Critical Accounting Policies

## General

Our management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to the reported amounts of revenues and expenses, 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 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. We comply with ASC 605-45-45 and report revenues gross as a principal versus net as an agent. Although some of our processing agreements vary with respect to certain credit risks we have determined that for each agreement we are acting in the principal role. Merchants may be charged for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through third-party networks are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations (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.

## Reserve for Processing Losses

If, due to insolvency or bankruptcy 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 the experience in the future, such as the types of transactions processed and nature of the merchant relationship with its consumers and us 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 vary based on the volume of transactions processed and could increase or decrease accordingly. At December 31, 2014 and 2013, our reserve for processing losses was $272,365 and $297,365, respectively.

## Customer Deposits

Customer deposits include security deposits that we may require for certain customers and cash held in transit that we collected on behalf of all of our customers via our ACH processing service. The security deposit is used to offset any returned items or chargebacks to us and to indemnify us against third-party claims and any expenses that maybe 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 after the date on which the last item is processed by us. 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 December 31, 2014 and 2013, our allowance for doubtful accounts was $45,663 and $49,782, respectively.

## Marketable Securities

We classify our marketable security investment portfolio as either held to maturity, available-for-sale, or trading. At December 31, 2014, all our marketable securities were classified as trading. Securities classified as trading are carried at fair value with unrealized gains and losses included in the consolidated statement of operations. Classification as current or non-current is based primarily on whether there is an active public market for such security, as well as the daily trading volume of a security relative to our ownership position. Gains or losses from the sale or redemption of the marketable securities are determined using the specific identification method.

## 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 2014 or 2013. 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.

It is our judgment that as of December 31, 2014 we will recognize deferred tax assets of $1.6 million. However, we cannot predict with reasonable certainty that all of the available net operating loss carryforwards will be realized in future periods. Accordingly, a valuation allowance has been provided to reduce the net deferred tax assets to $1.6 million. At December 31, 2014, we had available net operating loss carry-forwards of approximately $40.8 million, which expire beginning in the year 2020. Approximately $0.4 million of the total net operating loss 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 our financial position.

## Results of Operations

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. Total revenues for 2014 increased 159% to $13,395,131 from $5,180,362 for 2013. The increase in revenues for 2014 is primarily attributed to increases in the volume of ACH processing transactions, return transactions and credit card and debit card processing transactions, processed for our newly acquired customers.

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 was $9,216,904 and $4,205,466 for 2014 and 2013, respectively. The increase of $5,011,438 or 119% in cost of services for 2014 as compared to 2013 was primarily due to the increases in the volume of credit card and debit card processing transactions, ACH processing transactions, and return transactions processed for our newly acquired customers and existing customers.

Stock-based compensation expenses decreased slightly to $291,980 for 2014 from $293,080 for 2013. Our stock-based compensation expenses for 2014 and 2013 represented the amortization of deferred compensation expenses related to incentive stock grants to employees.



Other selling, general and administrative expenses increased to $1,600,287 for 2014, from $1,405,594 for 2013. The $194,693 or 14% increase in other selling, general and administrative expenses for 2014 was principally due to an increase in employee bonus compensation of approximately $96,000, marketing materials of approximately $29,000, office rent expense of approximately $26,000, and other expenses of approximately $29,000. Depreciation was $40,953 for 2014, as compared to $31,654 for 2013. The increase of $9,299 or 29% was primarily due to increased fixed asset purchases for our growing business.

Other income (expense) was $111,055 income for 2014, as compared to ($1,350) expense for 2013. The increase was primarily due to the increase in interest earned on higher cash balances of $66,786 for 2014 compared to $1,957 for 2013. In addition, other income (expense) were comprised of unrealized gains on our marketable securities of $10,958 for 2014 compared to unrealized losses of $4,017 for the prior year.

Income taxes (benefit) expense were ($1,482,226) and $32,257 in 2014 and 2013, respectively. In 2013 this primarily represented amounts incurred under the Texas margin tax. The tax benefit in 2014 was primarily the result of us recognizing deferred tax benefit at December 31, 2014 of $1,621,000, net of alternative minimum tax and Texas margin tax.

We reported a net income of $3,838,288 for 2014, as compared to net loss of 789,039 for 2013. The turnaround is related to the factors described above.

## Liquidity and Capital Resources

At December 31, 2014, we had $54,984,851 of cash and cash equivalents, as compared to $26,573,771 of cash and cash equivalents at December 31, 2013. The increase in cash for 2014 was primarily due to customer deposit payables of $52,186,396, which represented an increase of $26,446,233 in customer deposit payables for 2014 that was directly associated with the increase in ACH transaction volumes for our newly acquired customers and the associated cash reserve requirements we placed on some of those customers. We expect customer deposits to increase as we expect to add new clients from whom we will require cash reserves.

We reported net income of $3,838,288 for year ended December 31, 2014. However, we reported a net loss of $789,039 for the year ended December 31, 2013. Additionally, we reported working capital of $2,854,080 and $368,149 at December 31, 2014 and 2013, respectively.

Net cash provided by operating activities was $28,452,852 for 2014 as compared to $23,177,620 for 2013. The increase in net cash used by operating activities for 2014 was primarily attributable to a $26,446,233 increase in customer deposit payables, which consisted of cash held in transit that we collected on behalf of our merchants via our ACH processing service, as compared to a $23,625,041 increase in customer deposit payables for the same period in the prior year, and an increase in net income of $3,838,288 for 2014 compared to a net loss of $789,039 for the same period in the prior year.

Net cash used by investing activities was $36,772 for 2014 and $62,385 for 2013. The decrease in net cash used by investing activities for 2014, as compared to the prior year was related to a reduction in the acquisition of equipment.

Net cash used by financing activities for 2014 was $0 compared to $301,255 for 2013, which represents our purchase in the first quarter of 2013 of certain shares of common stock owned by Michael Long, our Chief Executive Officer and, at that time, our Chief Financial Officer, and Louis Hoch, our President and Chief Operating Officer, as satisfaction in full of certain outstanding amounts Mr. Long and Mr. Hoch owed to us.

## 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<table><tr><td>Report of Independent Registered Public Accounting Firm</td><td>23</td></tr><tr><td>Consolidated Balance Sheets as of December 31, 2014 and 2013</td><td>24</td></tr><tr><td>Consolidated Statements of Operations for the years ended December 31, 2014 and 2013</td><td>25</td></tr><tr><td>Consolidated Statement of Changes in Stockholders&#x27; Equity for the years ended December 31, 2014 and 2013</td><td>26</td></tr><tr><td>Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013</td><td>27</td></tr><tr><td>Notes to Consolidated Financial Statements</td><td>28</td></tr></table>



The Board of Directors and Stockholders
Payment Data Systems, Inc. and Subsidiaries
San Antonio, Texas

We have audited the accompanying consolidated balance sheets of Payment Data Systems, Inc. and Subsidiaries (collectively referred to as the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2014 and 2013, and the consolidated results of their operations and cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Akin, Doherty, Klein & Feuge, P.C.

Akin, Doherty, Klein & Feuge, P.C.
San Antonio, Texas
March 30, 2015



## PAYMENT DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS

<table><tr><td rowspan="2"></td><td>December 31, 2014</td><td>December 31, 2013</td></tr><tr><td></td><td></td></tr><tr><td>ASSETS</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 54,989,851</td><td>$ 26,573,771</td></tr><tr><td>Accounts receivable, net</td><td>1,037,208</td><td>585,037</td></tr><tr><td>Deferred tax asset, current</td><td>773,000</td><td>-</td></tr><tr><td>Prepaid expenses and other</td><td>129,258</td><td>98,966</td></tr><tr><td>Total current assets</td><td>56,929,317</td><td>27,257,774</td></tr><tr><td>Property and equipment, net</td><td>2,705,517</td><td>122,061</td></tr><tr><td>Other assets:</td><td></td><td></td></tr><tr><td>Marketable securities</td><td>38,408</td><td>27,450</td></tr><tr><td>Intangibles</td><td>412,363</td><td>-</td></tr><tr><td>Deferred tax asset, noncurrent</td><td>848,000</td><td>-</td></tr><tr><td>Other assets</td><td>165,704</td><td>121,144</td></tr><tr><td>Total other assets</td><td>1,464,475</td><td>148,594</td></tr><tr><td>Total Assets</td><td>$ 61,099,309</td><td>$ 27,528,429</td></tr><tr><td>LIABILITIES AND STOCKHOLDERS&#x27; EQUITY</td><td></td><td></td></tr><tr><td>Current Liabilities:</td><td></td><td></td></tr><tr><td>Accounts payable</td><td>$ 37,808</td><td>$ 60,818</td></tr><tr><td>Accrued expenses</td><td>1,851,033</td><td>1,088,644</td></tr><tr><td>Customer deposits payable</td><td>52,186,396</td><td>25,740,163</td></tr><tr><td>Total current liabilities</td><td>54,075,237</td><td>26,889,625</td></tr><tr><td>Stockholders&#x27; Equity:</td><td></td><td></td></tr><tr><td>Common stock, $0.001 par value, 200,000,000 shares authorized; 184,176,582 and 147,721,077 issued and 179,181,338 and 137,150,323 outstanding</td><td>184,177</td><td>147,721</td></tr><tr><td>Additional paid-in capital</td><td>62,989,131</td><td>56,873,423</td></tr><tr><td>Treasury stock, at cost; 4,995,244 and 10,570,754 shares</td><td>(238,157)</td><td>(1,241,750)</td></tr><tr><td>Deferred compensation</td><td>(5,839,992)</td><td>(1,286,970)</td></tr><tr><td>Accumulated deficit</td><td>(50,071,087)</td><td>(53,853,620)</td></tr><tr><td>Total stockholders&#x27; equity</td><td>7,024,072</td><td>638,804</td></tr><tr><td>Total Liabilities and Stockholders&#x27; Equity</td><td>$ 61,099,309</td><td>$ 27,528,429</td></tr></table>

The accompanying notes are an integral part of these consolidated financial statements



## PAYMENT DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<table><tr><td rowspan="2"></td><td>Year ended December 31, 2014</td><td>Year ended December 31, 2013</td></tr><tr><td></td><td></td></tr><tr><td>Revenues</td><td>$ 13,395,131</td><td>$ 5,180,362</td></tr><tr><td>Operating expenses:</td><td></td><td></td></tr><tr><td>Cost of services</td><td>9,216,904</td><td>4,205,466</td></tr><tr><td>Selling, general and administrative:</td><td></td><td></td></tr><tr><td>Stock-based compensation</td><td>291,980</td><td>293,080</td></tr><tr><td>Other expenses</td><td>1,600,287</td><td>1,405,594</td></tr><tr><td>Depreciation</td><td>40,953</td><td>31,654</td></tr><tr><td>Total operating expenses</td><td>11,150,124</td><td>5,935,794</td></tr><tr><td>Operating income (loss)</td><td>2,245,007</td><td>(755,432)</td></tr><tr><td>Other income (expense):</td><td></td><td></td></tr><tr><td>Other income (expense)</td><td>111,055</td><td>(1,350)</td></tr><tr><td>Other income (expense), net</td><td>111,055</td><td>(1,350)</td></tr><tr><td>Income (loss) before income taxes</td><td>2,356,062</td><td>(756,782)</td></tr><tr><td>Income taxes (benefit) expense</td><td>(1,482,226)</td><td>32,257</td></tr><tr><td>Net Income (loss)</td><td>$ 3,838,288</td><td>$ (789,039)</td></tr><tr><td>Earnings (loss) Per Share</td><td></td><td></td></tr><tr><td>Basic earnings (loss) per common share:</td><td>$ 0.04</td><td>$ (0.01)</td></tr><tr><td>Diluted earnings (loss) per common share:</td><td>$ 0.03</td><td>$ (0.01)</td></tr><tr><td>Weighted average common shares outstanding</td><td></td><td></td></tr><tr><td>Basic</td><td>97,081,064</td><td>96,899,022</td></tr><tr><td>Diluted</td><td>138,845,896</td><td>96,899,022</td></tr></table>

The accompanying notes are an integral part of these consolidated financial statements



## PAYMENT DATA SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<table><tr><td rowspan="2"></td><td colspan="2">Common Stock</td><td rowspan="2">Additional Paid - In Capital</td><td rowspan="2">Treasury Stock</td><td rowspan="2">Deferred Compensation</td><td rowspan="2">Accumulated Deficit</td><td rowspan="2">Total Stockholders&#x27; Equity</td></tr><tr><td>Shares</td><td>Amount</td></tr><tr><td>Balance at December 31, 2012</td><td>147,721,077</td><td>$ 147,721</td><td>$ 56,873,423</td><td>$ (238,158)</td><td>$ (1,580,050)</td><td>$ (53,064,581)</td><td>$ 2,138,355</td></tr><tr><td>Purchase of treasury stock</td><td>-</td><td>-</td><td>-</td><td>(1,003,592)</td><td>-</td><td>-</td><td>(1,003,592)</td></tr><tr><td>Deferred compensation amortization</td><td>-</td><td>-</td><td>-</td><td>-</td><td>293,080</td><td>-</td><td>293,080</td></tr><tr><td>Net income for the year</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>(789,039)</td><td>(789,039)</td></tr><tr><td>Balance at December 31, 2013</td><td>147,721,077</td><td>147,721</td><td>56,873,423</td><td>$ (1,241,750)</td><td>(1,286,970)</td><td>(53,853,620)</td><td>638,804</td></tr><tr><td>Issuance of common stock, restricted</td><td>74,075</td><td>74</td><td>4,926</td><td>-</td><td>-</td><td>-</td><td>5,000</td></tr><tr><td>Issuance of common stock, restricted, for Akimbo Financial Inc. Acquisition</td><td>13,456,940</td><td>13,457</td><td>2,236,543</td><td>-</td><td>-</td><td>-</td><td>2,250,000</td></tr><tr><td>Issuance of common stock, restricted, under deferred compensation plan</td><td>22,924,490</td><td>22,925</td><td>3,874,239</td><td>-</td><td>(3,897,164)</td><td>-</td><td>-</td></tr><tr><td>Transfer of treasury stock, restricted, under deferred compensation plan</td><td>-</td><td>-</td><td>-</td><td>1,003,593</td><td>(947,838)</td><td>(55,755)</td><td>-</td></tr><tr><td>Deferred compensation amortization</td><td>-</td><td>-</td><td>-</td><td>-</td><td>291,980</td><td>-</td><td>291,980</td></tr><tr><td>Net income for the year</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>3,838,288</td><td>3,838,288</td></tr><tr><td>Balance at December 31, 2014</td><td>184,176,582</td><td>$ 184,177</td><td>$ 62,989,131</td><td>$ (238,157)</td><td>$ (5,839,992)</td><td>$ (50,071,087)</td><td>$ 7,024,072</td></tr></table>



## PAYMENT DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<table><tr><td></td><td>Year Ended December 31, 2014</td><td>Year Ended December 31, 2013</td></tr><tr><td>Operating Activities</td><td></td><td></td></tr><tr><td>Net income (loss)</td><td>$ 3,838,288</td><td>$ (789,039)</td></tr><tr><td>Adjustments to reconcile net income (loss) to net cash provided by operating activities:</td><td></td><td></td></tr><tr><td>Depreciation</td><td>40,953</td><td>31,654</td></tr><tr><td>Non-cash stock based compensation</td><td>291,980</td><td>293,080</td></tr><tr><td>Unrealized (gain) loss on marketable securities</td><td>(10,958)</td><td>4,017</td></tr><tr><td>Deferred income tax (benefit)</td><td>(1,621,000)</td><td>-</td></tr><tr><td>Changes in operating assets and liabilities:</td><td></td><td></td></tr><tr><td>Accounts receivable</td><td>(452,171)</td><td>(181,734)</td></tr><tr><td>Prepaid expenses and other</td><td>(30,292)</td><td>15,733</td></tr><tr><td>Other assets</td><td>(44,560)</td><td>(68,451)</td></tr><tr><td>Accounts payable and accrued expenses</td><td>(5,621)</td><td>251,194</td></tr><tr><td>Customer deposits payable</td><td>26,446,233</td><td>23,625,041</td></tr><tr><td>Deferred revenue</td><td>-</td><td>(3,875)</td></tr><tr><td>Net cash provided by operating activities</td><td>28,452,852</td><td>23,177,620</td></tr><tr><td>Investing Activities</td><td></td><td></td></tr><tr><td>Purchases of property and equipment</td><td>(36,772)</td><td>(62,385)</td></tr><tr><td>Net cash (used) by investing activities</td><td>(36,772)</td><td>(62,385)</td></tr><tr><td>Financing Activities</td><td></td><td></td></tr><tr><td>Purchases of treasury stock</td><td>-</td><td>(301,255)</td></tr><tr><td>Net cash (used) by financing activities</td><td>-</td><td>(301,255)</td></tr><tr><td>Change in cash and cash equivalents</td><td>28,416,080</td><td>22,813,980</td></tr><tr><td>Cash and cash equivalents, beginning of year</td><td>26,573,771</td><td>3,759,791</td></tr><tr><td>Cash and Cash Equivalents, End of Year</td><td>$ 54,989,851</td><td>$ 26,573,771</td></tr><tr><td>Non-cash items:</td><td></td><td></td></tr><tr><td>Settlement of related party receivable with treasury stock</td><td>$ -</td><td>$ 702,337</td></tr><tr><td>Acquisition of Akimbo Financial Inc. for common shares</td><td>$ 2,250,000</td><td>$ -</td></tr><tr><td>Supplemental Disclosures</td><td></td><td></td></tr><tr><td>Cash paid for interest</td><td>$ 151</td><td>$ 710</td></tr><tr><td>Cash paid for income taxes</td><td>$ 44,937</td><td>$ 41,408</td></tr></table>

The accompanying notes are an integral part of these consolidated financial statements.



# PAYMENT DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 AND 2013

## Note 1. Description of Business and Summary of Significant Accounting Policies

Organization: Payment Data Systems, Inc., along with its subsidiaries, FiCentive, Inc., a Nevada corporation; Zbill, Inc., a Nevada corporation, provides integrated electronic payment services, including credit and debit card-based processing services and transaction processing via the Automated Clearing House (“ACH”) network to billers and retailers. In addition, the Company operates an Internet electronic payment processing service for consumers under the domain name www.billx.com and various other product websites including the newly acquired akimbocard.com website.

Principles of Consolidation and Basis of Presentation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

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

Revenue Recognition: Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services, and is recognized as revenue during the period the transactions are processed or when the related services are performed. The Company complies with ASC 605-45-45 and reports revenues gross as a principal versus net as an agent. Although some of the Company’s processing agreements vary with respect to certain credit risks, the Company has determined that for each agreement it is acting in the principal role. Merchants may be charged for these processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of credit, debit, and prepaid card transactions that are authorized and captured through third-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. Cash also includes customer deposits.

Accounts Receivable: Accounts receivable are reported at outstanding principal net of an allowance for doubtful accounts of $45,663 and $49,782 at December 31, 2014 and 2013, respectively. The allowance is generally determined based on historical trends and an account-by-account review. Accounts are charged off when collection efforts have failed and the account is deemed uncollectible. The Company normally does not charge interest on accounts receivable.

Marketable Securities: The Company classifies its marketable security investment portfolio as either held to maturity, available-for-sale, or trading. At December 31, 2014, all of the Company’s marketable securities were trading. Securities classified as trading are carried at fair value with unrealized gains and losses included in the consolidated statement of operations. Classification as current or non-current is based primarily on whether there is an active public market for such security, as well as the daily trading volume of a security relative to the Company’s ownership position. Gains or losses from the sale or redemption of the marketable securities are determined using the specific identification method.

Property and Equipment: Property and equipment are stated at cost. Depreciation and amortization are computed on a straight-line method over the estimated useful lives of the related assets, ranging from three to seven years. Leasehold improvements are amortized over the lesser of the estimated useful lives or remaining lease period. Expenditures for maintenance and repairs are charged to expense as incurred.

Customer Deposits: Customer deposits include security deposits that may be required by the Company from certain customers and cash held in transit that we collected on behalf of all our customers via our ACH processing service. The security deposit is 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.

Concentration of Credit Risk: Financial instruments that potentially expose the Company to credit risk consist of cash and cash equivalents, and accounts receivable. The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent of balances in excess of amounts that are insured by the FDIC ($250,000). Accounts receivables potentially subject the Company to concentrations of credit risk. The Company’s customer base operates in a variety of industries and is geographically dispersed, however, the relatively small number of customers increases the risk. The Company closely monitors extensions of credit and credit losses have been provided for in the consolidated financial statements and have been within management’s expectations. For the year ended December 31, 2014, 11% of the Company’s total revenues were from sales to one customer. This customer utilized the Company’s ACH services.



The Company’s operations in one industry accounts for 66% of revenue in 2014 and 24% of revenue in 2013.

Fair Value of Financial Instruments: Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings are reflected in the accompanying consolidated financial statements at cost, which approximates fair value because of the short-term maturity of these instruments.

Impairment of Long-Lived Assets and Intangible Assets: The Company periodically reviews, on at least an annual basis, the carrying value of its long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent fair value of a long-lived asset, determined based upon the estimated future cash inflows attributable to the asset, less estimated future cash outflows, is less than the carrying amount, an impairment loss is recognized.

Reserve for Processing Losses: If, due to insolvency or bankruptcy of one of the Company’s merchant customers, or for any other reason, the Company is not able to collect amounts from its card processing credit card, ACH or merchant prepaid customers that have been properly "charged back" by the customer or if a prepaid cardholder incurs a negative balance, the Company must bear the credit risk for the full amount of the transaction. The Company may require cash deposits and other types of collateral from certain merchants to minimize any such risk. In addition, the Company utilizes a number of systems and procedures to manage merchant risk. ACH, prepaid and credit card merchant processing loss reserves are primarily determined by performing a historical analysis of our loss experience and considering other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant relationship with its consumers and the Company with its prepaid card holders. This reserve amount is subject to the risk that actual losses may be greater than our estimates. The Company has not incurred any significant processing losses to date. Estimates for processing losses vary based on the volume of transactions processed and could increase or decrease accordingly. The Company evaluates its risk for such transactions and estimates its potential processing losses based primarily on historical experience and other relevant factors. At December 31, 2014 and 2013, the Company’s reserve for processing losses was $272,365 and $297,365, respectively.

Advertising Costs: Advertising is expensed as incurred. The Company incurred approximately $700, and $23,600 in advertising costs in 2014 and 2013, respectively.

Income Taxes: Deferred tax assets and liabilities are recorded based on differences between financial reporting and tax bases of assets and liabilities and are measured using 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.

As with all businesses, the Company’s tax returns are subject to periodic examination. The Company’s federal returns for the past four years remain open to examination. The Company is subject to the Texas margin tax. Management is not aware of any tax positions that would have a significant impact on its financial position.

Stock-Based Compensation: The Company recognizes as compensation expense all share-based payment awards made to employees and directors, including grants of stock options and warrants, based on estimated fair values. Fair value is generally determined based on the closing price of the Company’s common stock on the date of grant.

Earnings Per Share: Basic and diluted earnings per common share are calculated by dividing earnings by the weighted average number of common shares outstanding during the period.

New Accounting Pronouncement: In May 2014, the Financial Accounting Standards Board issued a new accounting pronouncement regarding revenue from contracts with customers. This new standard 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. Adoption of the new standard is effective for reporting periods beginning after December 15, 2016, with early adoption not permitted. The Company is currently 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 2017.

## Note 2. Acquisition of Akimbo Financial, Inc.

On December 22, 2014, the Company entered into an Asset Purchase Agreement with Akimbo Financial, Inc. (“Akimbo”), a Texas corporation in the business of prepaid card program management, pursuant to which the Company agreed to purchase substantially all of the assets of Akimbo, including certain assumed liabilities, subject to the exclusions, terms and conditions set forth in the Asset Purchase Agreement. The aggregate purchase price for the Akimbo business and assets was $3 million in unregistered, restricted shares of the Company’s common stock, reduced dollar for dollar by the amount of post-closing adjustments.



The Company delivered the shares of its common stock in two tranches. The first tranche was $2 million in unregistered, restricted shares of common stock, less $300,000, equaling 10,167,466 shares of common stock; and the second tranche of $1 million in unregistered, restricted shares, less $450,000, equaling 3,289,473 shares of common stock, was paid prior to year end.

The final number of shares to be issued, and the related value per each such share (the “Share Price”), was determined using the average daily closing price for the shares of common stock for the 10 business days immediately preceding December 22, 2014 (whether the shares are issued and delivered as part of the first tranche, second tranche, on April 15, 2015 or on the one-year anniversary of December 22, 2014). The Closing Date was December 22, 2014, thus the Share Price was $0.1672.

As part of the Asset Purchase Agreement, the Company entered into a Transition Agreement which provides for the continuation of the Akimbo business. Under the terms of the Transition Agreement, Akimbo will provide services to customer cardholders in the ordinary course of business, and deduct any contract costs from the contract revenues for a period of 180 days following December 22, 2014. In case of a negative net revenue, the Company agreed to pay Akimbo the necessary difference up to a total amount of $300,000.

The assets the Company acquired with the Akimbo business include, among others, all assets, rights, properties and privileges of every kind and nature, real and personal, tangible and intangible, absolute and contingent, used by Akimbo in the operation of the business, owned or leased by Akimbo, such as software, equipment, insurances, permits, contracts and intellectual property rights. In conjunction with the Asset Purchase Agreement, the Company is also hired most of the employees of Akimbo. Additionally, in connection with the Asset Purchase Agreement, Akimbo agreed not to compete with the Company, solicit or hire any customer, supplier, licensee, licensor, franchisee, employee, consultant or other business relation for a period of 5 years.

The purchase price has been allocated to the net assets acquired based upon their estimated fair values as follows:

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

The unaudited proforma results presented below include the effects of the Akimbo acquisition as if it had been consummated on January 1, 2014. The proforma results include eliminations for processing fees, services, office expense and interest, which was a duplicate expense.

<table><tr><td>Proforma revenue</td><td>$ 13,600,000</td></tr><tr><td>Proforma net income</td><td>2,000,000</td></tr><tr><td>Proforma earnings per share</td><td>$ 0.02</td></tr><tr><td>Proforma diluted earnings per share</td><td>$ 0.01</td></tr></table>

## Note 3. Fair Value Measurements

ASC Topic 820 established a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The three levels of the fair value hierarchy defined by the standard are as follows:

• Level 1: Quoted prices are available in active markets for identical assets or liabilities;

- Level 2: Quoted prices in active markets for similar assets and liabilities that are observable for the asset or liability; or

- Level 3: Unobservable pricing inputs that are generally less observable from objective sources, such as discounted cash flow models or valuations.



Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The following table sets forth by level within the fair value hierarchy the Company's financial assets and liabilities that are accounted for at fair value.

<table><tr><td rowspan="2">Recurring Fair Value Measures Assets:</td><td colspan="4">December 31, 2014</td></tr><tr><td>Level 1</td><td>Level 2</td><td>Level 3</td><td>Total</td></tr><tr><td>Marketable securities</td><td>$ 38,408</td><td>-</td><td>-</td><td>$ 38,408</td></tr><tr><td>Liabilities:</td><td></td><td></td><td></td><td></td></tr><tr><td>None</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td></td><td colspan="4">December 31, 2013</td></tr><tr><td>Recurring Fair Value Measures Assets:</td><td>Level 1</td><td>Level 2</td><td>Level 3</td><td>Level 1</td></tr><tr><td>Marketable securities</td><td>$ 27,450</td><td>-</td><td>-</td><td>$ 27,450</td></tr><tr><td>Liabilities:</td><td></td><td></td><td></td><td></td></tr><tr><td>None</td><td>-</td><td>-</td><td>-</td><td>-</td></tr></table>

The Company’s financial instruments relate to its trading marketable securities, which are valued using quoted market prices.

Adjustments to fair value are recorded in the consolidated statement of operations.

## Note 4. Property and Equipment

Property and equipment consisted of the following at December 31:

<table><tr><td></td><td>2014</td><td>2013</td></tr><tr><td>Furniture and fixtures</td><td>$ 175,856</td><td>$ 175,856</td></tr><tr><td>Equipment</td><td>640,716</td><td>626,278</td></tr><tr><td>Software</td><td>2,958,486</td><td>348,515</td></tr><tr><td>Leasehold improvements</td><td>15,992</td><td>15,992</td></tr><tr><td>Total property and equipment</td><td>3,791,050</td><td>1,166,641</td></tr><tr><td>Less: accumulated depreciation</td><td>(1,085,533)</td><td>(1,044,580)</td></tr><tr><td></td><td></td><td></td></tr><tr><td>Net property and equipment</td><td>$ 2,705,517</td><td>$ 122,061</td></tr></table>

## Note 5. Intangibles

Intangibles consist of customer list and contracts of $396,824 and goodwill of $15,539 acquired in the purchase of the assets of Akimbo Financial, Inc. The fair value of the customer list and contracts was calculated using the net present value of the projected gross profit to be generated by the customer list over the next 36 months beginning in January 2015 and will be amortized over 3 years at $132,275 annually.

Goodwill was determined based on the purchase price paid over the assets acquired and has an indefinite life which will be tested for impairment annually.



## Note 6. Valuation Accounts

Valuation and allowance accounts included the following at December 31:

<table><tr><td></td><td>Balance Beginning of Year</td><td>Net Charged to Costs and Expenses</td><td>Transfers</td><td>Net Write-Off</td><td>Balance End of Year</td></tr><tr><td>2014</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Allowance for doubtful accounts</td><td>$ 49,782</td><td>$ -</td><td>$ -</td><td>$ (4,119)</td><td>$ 45,663</td></tr><tr><td>Reserve for processing losses</td><td>297,365</td><td>-</td><td>(25,000)</td><td>-</td><td>272,365</td></tr><tr><td>2013</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Allowance for doubtful accounts</td><td>$ 50,362</td><td>$ -</td><td>$ -</td><td>$ (580)</td><td>$ 49,782</td></tr><tr><td>Reserve for processing losses</td><td>214,560</td><td>-</td><td>82,805</td><td>-</td><td>297,365</td></tr></table>

## Note 7. Accrued Expenses

Accrued expenses consisted of the following balances at December 31:

<table><tr><td></td><td></td><td>2014</td><td>2013</td></tr><tr><td>Accrued salaries</td><td></td><td>$ 158,380</td><td>$ 142,071</td></tr><tr><td>Reserve for merchant losses</td><td></td><td>272,365</td><td>297,365</td></tr><tr><td>Accrued commissions</td><td></td><td>460,977</td><td>350,188</td></tr><tr><td>Accrued taxes</td><td></td><td>125,194</td><td>51,820</td></tr><tr><td>Other accrued expenses</td><td></td><td>128,345</td><td>247,200</td></tr><tr><td>Assumed liabilities</td><td></td><td>255,772</td><td>-</td></tr><tr><td>Indemnification liability</td><td></td><td>450,000</td><td>-</td></tr><tr><td>Total accrued expenses</td><td></td><td>$ 1,851,033</td><td>$ 1,088,644</td></tr></table>

## Note 8. Operating Leases

The Company currently leases approximately 4,500 square feet of office space that houses its principal executive offices and operations. Rental expense under the operating lease was approximately $100,000 and $75,000 for the years ended December 31, 2014 and 2013, respectively. During February 2015, the Company executed a fourth amendment to our lease, which extended the term of the lease for a period of 38 months, or until April 30, 2018.

During February 2015, the Company executed a new lease for approximately 2,700 square feet of office space in San Antonio, Texas. This office space will be utilized by the Company’s FiCentive, Inc. subsidiary. The lease commences on March 1, 2015 for 38 months, or until April 30, 2018. The rental cost is approximately $5,000 per month.

Future minimum lease payments at December 31, 2014 are as follows:

<table><tr><td colspan="2">Year ending December 31</td></tr><tr><td>2015</td><td>139,685</td></tr><tr><td>2016</td><td>144,500</td></tr><tr><td>2017</td><td>140,686</td></tr><tr><td>2018</td><td>45,654</td></tr></table>



## Note 9. Related Party Transactions

## Michael R. Long and Louis A. Hoch

On March 11, 2013, in accordance with the Company’s employment agreements with Mr. Long and Mr. Hoch, the Company accepted shares of the Company’s common stock owned by Mr. Long and Mr. Hoch as satisfaction in full for the remaining amounts owed to the Company as annual payments due to the loss on margin loans guaranteed by the Company for Mr. Long and Mr. Hoch in 2002.

On March 11, 2013, the Company also agreed to purchase additional shares of its common stock owned by Mr. Long and Mr. Hoch, valued at $156,852 and $144,403, respectively, in lieu of the issuances of cash bonuses to Mr. Long and Mr. Hoch. Such bonuses were intended to compensate the executives for their service. As a result, the Company incurred a one-time reduction in cash of $301,255.

Accordingly, on March 11, 2013, the Company accepted an aggregate of 2,969,459 shares of the Company’s common stock valued at $534,503, and an aggregate of 2,606,051 shares of the Company’s common stock valued at $469,089 from Mr. Long and Mr. Hoch, respectively, as satisfaction in full of their aggregated outstanding amounts of $702,337 owed to the Company and aggregated compensation of $301,255 paid to Mr. Long and Mr. Hoch in lieu of cash bonuses. The common stock accepted from Mr. Long and Mr. Hoch was valued at $0.18 per share, which was the closing price of the common stock on March 1, 2013. The common stock accepted from Mr. Long and Mr. Hoch was recorded as treasury stock and the Company no longer carries a “Related Party Receivable” on its balance sheet.

Accordingly, following the completion of these transactions, the Company has no remaining receivables or payables related to Mr. Long, Mr. Hoch or any other officer of the Company at December 31, 2014 or 2013.

## Herb Authier

During the years ended December 31, 2014 and 2013, the Company paid Herb Authier a total of $42,000 and $35,400 in cash, respectively, for services related to network engineering and administration that he provided to the Company. Mr. Authier is the father-in-law of Louis Hoch, the Company’s President and Chief Operating Officer.

## Nikole Hoch

During the year ended December 31, 2014, the Company purchased $6,227 of corporate imprinted sportswear and caps from Angry Pug Sportswear. Nikole Hoch, the spouse of our President and Chief Operating Officer Louis Hoch, is the sole owner of Angry Pug Sportswear.

## Note 10. Income Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31:

<table><tr><td></td><td>2014</td><td>2013</td></tr><tr><td>Current:</td><td></td><td></td></tr><tr><td>Depreciation and other items</td><td>$ 773,000</td><td>-</td></tr><tr><td>Current deferred tax assets</td><td>$ 773,000</td><td>$ -</td></tr><tr><td>Non-current:</td><td></td><td></td></tr><tr><td>Deferred tax assets:</td><td></td><td></td></tr><tr><td>Net operating loss carryforwards</td><td>$ 13,094,000</td><td>$ 14,831,000</td></tr><tr><td>Depreciation and other items</td><td>-</td><td>25,000</td></tr><tr><td>Valuation Allowance</td><td>(12,246,000)</td><td>(14,856,000)</td></tr><tr><td>Non-current deferred tax assets</td><td>$ 848,000</td><td>$ -</td></tr></table>



Management has reviewed its net deferred asset position, and due to the history of operating losses has determined that the application of a valuation allowance at December 31, 2014 and December 31, 2013 is warranted. If applicable, the Company would recognize interest expense and penalties related to uncertain tax positions in interest expense. As of December 31, 2014, the Company had not accrued any interest or penalties related to uncertain tax provisions.

The Company has net operating loss carryforwards for tax purposes of approximately $40.8 million that begin to expire in the year 2020. Approximately $0.4 million of the total net operating loss is subject to an IRS Section 382 limitation from 1999.

The tax provision for federal and state income tax is as follows for the year ended December 31:

<table><tr><td></td><td>2014</td><td>2013</td></tr><tr><td>Current provision:</td><td></td><td></td></tr><tr><td>Federal</td><td>$ 45,000</td><td>$ -</td></tr><tr><td>State</td><td>93,774</td><td>32,257</td></tr><tr><td></td><td>138,774</td><td>32,257</td></tr><tr><td>Deferred provision:</td><td></td><td></td></tr><tr><td>Federal (benefit)</td><td>(1,621,000)</td><td>-</td></tr><tr><td>(Benefit) expense for income taxes</td><td>$ (1,482,226)</td><td>$ 32,257</td></tr></table>

The reconciliation of federal income tax computed at the U.S. federal statutory tax rates to total income tax expense (benefit) is as follows for the year ended December 31:

<table><tr><td></td><td>2014</td><td>2013</td></tr><tr><td>Income tax expense (benefit) at 34%</td><td>$ 769,179</td><td>$ (251,000)</td></tr><tr><td>Change in valuation allowance</td><td>(1,725,000)</td><td>126,000</td></tr><tr><td>Utilization of NOL carryforward</td><td>(884,559)</td><td>-</td></tr><tr><td>Permanent and other differences</td><td>219,380</td><td>125,000</td></tr><tr><td>Alternative minimum tax and Texas margin tax</td><td>138,774</td><td>32,257</td></tr><tr><td>Income tax expense (benefit)</td><td>$ (1,482,226)</td><td>$ 32,257</td></tr></table>

## Note 11. Stock Options, Incentive Plans, Stock Awards, and Employee Benefit Plan

Stock Option Plans: The Company’s 1999 Employee Comprehensive Stock Plan (“Employee Plan”) provides qualified incentive stock options (“ISOs”) and non-qualified stock options (“NQSOs”) as well as restricted stock grants to key employees. Under the terms of the Employee Plan, the exercise price of ISOs must be equal to 100% of the fair market value on the date of grant (or 110% of fair market value in the case of an ISO granted to a 10% stockholder/grantee). There is no price requirement for NQSOs, other than that the option price must exceed the par value of the common stock. The Company reserved 30,000,000 shares of its common stock for issuance pursuant to the Employee Plan. The Employee Plan terminated in 2010.

The 1999 Non-Employee Director Plan (“Director Plan”) was approved by the Board of Directors and stockholders to provide non-employee directors options to purchase shares of common stock at 100% of fair market value on the date of grant. The Company reserved 1,500,000 shares of its common stock for issuance pursuant to the Director Plan. The Director Plan terminated in 2010.

The Company currently has no active stock option or incentive plan under which options or shares may be issued. Options issued under the now terminated Plans remain in effect according to the terms set on the day each option was respectively issued. No options were exercised in 2014 or 2013. A summary of option activity is as follows:

<table><tr><td>Options</td><td>Shares</td><td>Weighted Average Exercise Price</td><td>Weighted Average Contractual Remaining Life</td><td>Aggregate Intrinsic Value</td></tr><tr><td>Outstanding, December 31, 2013</td><td>1,454,421</td><td>$ 0.082</td><td></td><td></td></tr><tr><td>Granted</td><td>-</td><td>-</td><td></td><td></td></tr><tr><td>Vested</td><td>-</td><td>-</td><td></td><td></td></tr><tr><td>Forfeited</td><td>-</td><td>-</td><td></td><td></td></tr><tr><td>Outstanding, December 31, 2014</td><td>1,454,421</td><td>$ 0.082</td><td>0.99</td><td>$ -</td></tr><tr><td>Expected to Vest after December 31, 2014</td><td>1,454,421</td><td>$ 0.082</td><td>0.99</td><td>$ -</td></tr></table>



Stock Awards: The Company has granted restricted stock awards to its employees at different periods from 2005 through 2014. The majority of the shares granted to those employees vest 10 years from the grant date, and are forfeited in the event that the recipient's employment relationship with the Company is terminated prior to vesting. The Company has one employment agreement that grants 1,800,000 shares that vest 50,000 shares monthly beginning January 31, 2015 for 3 years. The fair value of the restricted stock award granted to the Company's employees is amortized to expense on a straight-line basis over the vesting period of the restricted stock award. Restricted stock awards are issued and reported as outstanding in the financial statements for 2014 and 2013 as of the date that the physical shares were issued to the employee by the Company's transfer agent. Stock-based compensation expense related to stock options and restricted stock awards was $296,980 for 2014 and $293,080 for 2013. The following table presents a summary of the Company's restricted stock awards outstanding at December 31, 2014:

<table><tr><td>Stock Awards</td><td>Shares</td><td>Weighted Average Exercise Price</td><td>Weighted Average Contractual Remaining Life</td><td>Aggregate Intrinsic Value</td></tr><tr><td>Outstanding, December 31, 2013</td><td>40,251,301</td><td>$ 0.08</td><td></td><td></td></tr><tr><td>Granted</td><td>28,500,000</td><td>$ 0.17</td><td></td><td></td></tr><tr><td>Vested</td><td>-</td><td>-</td><td></td><td></td></tr><tr><td>Forfeited</td><td>-</td><td>-</td><td></td><td></td></tr><tr><td>Outstanding, December 31, 2014</td><td>68,751,301</td><td>$ 0.12</td><td>6.10</td><td>$ 3,510,482</td></tr><tr><td>Expected to Vest after December 31, 2014</td><td>68,751,301</td><td>$ 0.12</td><td>6.10</td><td>$ 3,510,482</td></tr></table>

As of December 31, 2014, there was approximately $5,840,000 of total unrecognized compensation costs related to the unvested share-based compensation arrangements granted. The cost is expected to be recognized over the weighted average remaining contractual life of 6.10 years.

Employee Stock Purchase Plan: The Company established the 1999 Employee Stock Purchase Plan (“(“ESPP”) under the requirements of Section 423 of the Internal Revenue Code to allow eligible employees to purchase the Company’s common stock at regular intervals. Participating employees may purchase common stock through voluntary payroll deductions at the end of each participation period at a purchase price equal to 85% of the lower of the fair market value of the common stock at the beginning or the end of the participation period. The Company issued 74,075 and -0- shares from the ESPP in 2014 or 2013, respectively. The ESPP is no longer active.

401(k) Plan: The Company has a defined contribution plan (the “401(k) Plan”) pursuant to Section 401(k) of the Internal Revenue Code. All eligible full and part-time employees of the Company who meet certain age requirements may participate in the 401(k) Plan. Participants may contribute between 1% and 15% of their pre-tax compensation, but not in excess of the maximum allowable under the Code. The 401(k) Plan allows for discretionary and matching contributions by the Company. In 2014, the Company matched 100% of employee contributions up to 3% and 50% of the employee contribution over 3% with a maximum employee contribution of 5%. The Company made matching contributions of $30,858 and $0 in 2014 and 2013, respectively.

## Note 12. Earnings (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 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).

<table><tr><td></td><td>2014</td><td>2013</td></tr><tr><td>Numerator:</td><td></td><td></td></tr><tr><td>Numerator for basic and diluted earnings (loss) per share, net income (loss) available to common shareholders</td><td>$ 3,838,288</td><td>$ (789,039)</td></tr><tr><td>Denominator:</td><td></td><td></td></tr><tr><td>Denominator for basic earnings (loss) per share, weighted average shares outstanding</td><td>97,081,064</td><td>96,899,022</td></tr><tr><td>Effect of dilutive securities-stock options and restricted awards</td><td>41,764,832</td><td>-</td></tr><tr><td>Denominator for diluted earnings per share, adjusted weighted average shares and assumed conversion</td><td>138,845,896</td><td>96,899,022</td></tr><tr><td>Basic earnings (loss) per common share</td><td>$ 0.04</td><td>$ (0.01)</td></tr><tr><td>Diluted earnings (loss) per common share and common share equivalent</td><td>$ 0.03</td><td>$ (0.01)</td></tr></table>



The awards and options to purchase shares of common stock that were outstanding at December 31, 2014 and 2013 that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive, are as follows:

<table><tr><td></td><td>2014</td><td>2013</td></tr><tr><td>Anti-dilutive awards and options</td><td>N/A</td><td>13,664,270</td></tr></table>

## Note 13. Stock Warrants

There were no outstanding warrants as of December 31, 2014 or December 31, 2013.

## Note 14. Legal Proceedings

The Company is involved in a lawsuit with a customer that alleges 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 a security breach occurred because of the customer’s lack of any controls over the login and password information utilized by the customer to process transactions that resulted 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.

While the Company believes the claims of the customer are without merit, the outcome of the dispute is still uncertain. The Company believes that any potential loss or judgment amount does not need to be accounted for at this time beyond the current balance in the reserve for losses on merchant account.

Aside from the lawsuit described above, the Company may be involved in legal matters arising in the ordinary course of business from time to time. While the Company 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.

## Note 15. Subsequent Events

On March 3, 2015, the Company hired Habib Yunus as the Company’s Senior Vice President and Chief Financial Officer.



None.

## ITEM 9A. CONTROLS AND PROCEDURES.

## Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and, at that time our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, our Chief Executive Officer / Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2014 are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer / Chief Financial Officer, as appropriate, to allow timely decisions regarding required reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management's assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance that the control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met.

## Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for our Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2014 based on criteria established in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management concluded that, as of December 31, 2014, our internal control over financial reporting was effective.

## Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## ITEM 9B. OTHER INFORMATION.

None.



## PART III

## ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

## Michael R. Long, age 70 - Chief Executive Officer, and Chairman of the Board

Mr. Long has served as our Chief Executive Officer and Chairman of our Board of Directors since July 1998. He has also held the position of our Chief Financial Officer from September 2003 to March 2015, in addition to his other positions with us. Mr. Long has more than thirty years of senior executive management and systems development experience in six publicly traded companies, as well as experience operating a systems consulting business. Before assuming the highest position with our Company, Mr. Long was Vice President of Information Technology at Billing Concepts, Inc., the largest third party billing clearinghouse for the telecommunications industry. Mr. Long's career experience also includes financial services industry business development for Andersen Consulting and several executive positions in publicly traded telecommunications and financial services companies. Mr. Long is a valuable member of our Board due to his depth of operating, strategic, systems development, transactional, and senior management experience in our industry. Additionally, Mr. Long has held positions of increasing responsibility at our Company and holds an intimate knowledge of our Company due to his longevity in the industry and with us.

## Louis A. Hoch, age 49 - President, Chief Operating Officer and Vice Chairman of the Board

Mr. Hoch has served as our President, Chief Operating Officer, and a director of our Company since July 1998, and also serves as Vice Chairman of our Board of Directors and as Chief Executive Officer of our wholly-owned subsidiary FiCeintive, Inc. Mr. Hoch is a valuable member of our Board as he has over twenty years of management experience, sixteen years of which were at a senior executive level in large systems development, and he is an expert in payment processing, call center operations and service bureau operations. He holds inventor status on U.S. Patent No. 7,021,530 (“System and method for managing and processing stored-value cards and bill payment therefrom.”). Mr. Hoch has held various key management positions with U.S. Long Distance, Billing Concepts, Inc. and Andersen Consulting. Mr. Hoch holds a BBA in Computer Information Systems and an MBA in International Business Management, both from Our Lady of the Lake University Business School.

## Larry Morrison, age 55 – Senior Vice President, Sales and Marketing Officer

Mr. Morrison has served as our Vice President, Sales and Marketing Officer since July 2003. Mr. Morrison has over twenty-five years of experience in all aspects of sales and sales management. Before joining our Company to oversee all sales and marketing functions, Mr. Morrison served as a major accounts executive for a tier one telecommunications provider and vice president of sales and operations for a major two-way communications firm. His background also includes management and implementation of large government communication systems installations both domestic and abroad.

## Houston Frost, Ph.D., age 33- Senior Vice President Corporate Development and Prepaid Products

Mr. Frost has served as our Senior Vice President Corporate Development and Prepaid Products since December 2014. Prior to joining us, Mr. Frost served as President and Chief Executive Officer of Akimbo Financial, Inc. since its inception Mr. Frost co-founded Akimbo in January 2010 motivated by a desire to reinvent the prepaid card with the concept of creating a network of card members that facilitated free and instant money delivery to friends and family. Mr. Frost has more than five years of experience in the prepaid and payments industry and eight years of experience in financial services. Prior to Akimbo, Mr. Frost worked in New York as an Associate at JPMorgan Chase & Co. on the Fixed-Income Strategy team. Mr. Frost earned his Ph.D. in Chemical and Biological Engineering from Northwestern University in 2007 and a Bachelor's of Science in Chemical and Biological Engineering from the University of Colorado.

## Habib Yunus, CPA, age 39 – Senior Vice President and Chief Financial Officer

Effective March 3, 2015, we hired Habib Yunus to serve as our Chief Financial Officer, Senior Vice President and our Principal Financial and Accounting Officer. Mr. Yunus has more than 15 years of experience in accounting, finance and investing. Prior to joining us, Mr. Yunus was the Managing Director and founder of W NRG (Energy) Advisory LLC since January 2013, focused on advising clients on energy investments, joint venture transactions, project management and market research in North America for Asian investors. Before founding W Energy Advisory, from September 2010 to January 2013, Mr. Yunus was the lead project manager for Toyota Tsusho America, Inc., an oil and gas investment company, where in 2012 he originated and negotiated a $602 million joint venture between Toyota Tsusho Corporation (Japan) and Encana Corporation. Prior to his position at Toyota Tsusho America, Inc., he served as the Head of Tax and Special Assistant to the CFO of Shinsei Bank Ltd. in Tokyo, Japan from July 2004 to June 2010. Before joining Shinsei Bank, for 7 years he held various positions of increasing responsibility at Deloitte and Touche, LLP, a public accounting firm, most recently serving as a Corporate Tax Manager with a focus on international structuring and cross-border transactions with special emphasis in structuring inbound investments. Mr. Yunus was previously Chair of the Audit Committee of Millennium India Acquisition Company, Inc. from October 2013 to March 2014. Mr. Yunus holds a Bachelor of Arts in Accounting and a Masters of Accounting with a tax specialization both from the University of Florida. Mr. Yunus is licensed by the state of Georgia as a Certified Public Accountant.

## Peter G. Kirby, Ph.D. SPHR CM, age 75 - Director

Dr. Kirby has served a director of our Company since June 2001. Dr. Kirby has distinguished himself in professional and community activities in a career that spanned over thirty-five years. He is an accomplished public speaker and has provided consulting services to Fortune 100 firms. Dr. Kirby has published numerous works in the fields of management, decision-making and human resources. He has been a director on many university advisory councils and boards and has served on many charitable committees and foundations. Dr. Kirby retired in 2006 as a tenured professor of management at Our Lady of the Lake University in San Antonio, Texas, where he taught for seventeen years. Dr. Kirby served as Chair of the QFN Economic Development Corporation, a Canadian corporation, from April 2007 to May 2008. Dr. Kirby is a valuable member of our Board due to his depth of strategic and management experience.



## OTHER INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

None of our directors or executive officers have been involved in any bankruptcy or criminal proceedings, nor have there been any judgments or injunctions brought against any of our directors or executive officers during the last ten years that we consider material to the evaluation of the ability and integrity of any director or executive officer.

## SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and persons who own more than 10% of a registered class of our securities to file reports of beneficial ownership and changes in beneficial ownership with the Securities and Exchange Commission on Forms 3 (Initial Statement of Beneficial Ownership), 4 (Statement of Changes of Beneficial Ownership of Securities) and 5 (Annual Statement of Beneficial Ownership of Securities). Officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of copies of such reports furnished to us by our officers and directors, we believe that, during the fiscal year ended December 31, 2014, no person required to file reports under Section 16(a) of the Securities Exchange Act of 1934 failed to file such reports on a timely basis during such fiscal year, except two Form 4s filed by Mr. Hoch were late by one day, one Form 4 was late by 2 days. All trades were executed under a 10(b)5-1 trading plan in which Mr. Hoch did not specify any specific trading days or trading conditions that would give him knowledge of when a trade should occur. As a result, Mr. Hoch was not aware of trade executions in a timely manner. Also, Mr. Kirby, a director, filed one Form 4 seven days late because Mr. Kirby's EDGAR codes had expired and he had to get a new passphrase issued to regenerate new EDGAR codes.

## CODE OF ETHICS

We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Our code of ethics was filed as Exhibit 14.1 to our annual report on Form 10-K for the year ended December 31, 2003 on March 30, 2004. We will provide a copy of our code of ethics to any person without charge, upon request. Requests should be addressed to: Payment Data Systems, Inc., Attn: Investor Relations Department, 12500 San Pedro, Suite 120, San Antonio, Texas 78216.

## PROCEDURE FOR NOMINATING DIRECTORS

We have not made any material changes to the procedures by which security holders may recommend nominees to our Board of Directors.

We consider recommendations for director candidates from our directors, officers, employees, stockholders, customers and vendors. Stockholders wishing to nominate individuals to serve as directors may submit such nominations, along with a nominee's qualifications, to our Board of Directors at Payment Data Systems, Inc., 12500 San Pedro, Suite 120, San Antonio, Texas, 78216, and the Board of Directors will consider such nominee. The Board of Directors selects the director candidates slated for election. We do not have a separately designated nominating committee in light of resource allocations made by the Board of Directors in its business judgment.

## COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors is responsible for establishing broad corporate policies and reviewing our overall performance rather than day-to-day operations. The Board’s primary responsibility is to oversee management of our Company and, in so doing, serve the best interests of our Company and our stockholders.

## AUDIT COMMITTEE

We have a separately designated audit committee, and its membership consists solely of our independent director, Dr. Peter Kirby. We do not currently have an “audit committee financial expert,” as defined in Item 407(d)(5)(ii) of Regulation S-K serving on our Audit Committee. We have been unable to find a suitable replacement for the independent director who satisfies the definition of “audit committee financial expert.” We are still seeking an independent director to serve as the audit committee financial expert and to serve on the Audit Committee alongside Dr. Kirby.



## ITEM 11. EXECUTIVE COMPENSATION.

The following table sets forth the compensation for the fiscal years ended December 31, 2014 and 2013 awarded to, earned by, or paid to (i) our Principal Executive Officer; and (ii) our two most highly compensated executive officer. We refer to the individuals included in the Summary Compensation Table as our “named executive officers.”

Summary Compensation Table for the Fiscal Years Ended December 31, 2014 and 2013

<table><tr><td>Name and Principal Position</td><td>Year Ended Dec. 31,</td><td>Salary (\()</td><td>Bonus (\))</td><td>Stock Awards (\)) (1)(2)</td><td>All Other Compensation (\)) (3)</td><td>Total (\))</td></tr><tr><td>Michael R. Long</td><td>2014</td><td>255,000(4)</td><td>25,000(5)</td><td>87,248</td><td>14,930</td><td>382,166</td></tr><tr><td>Chairman, Chief</td><td>2013</td><td>255,000(4)</td><td>20,000(5)</td><td>87,248</td><td>12,129</td><td>374,377</td></tr><tr><td>Executive Officer and Chief Financial Officer (8)</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Louis A. Hoch</td><td>2014</td><td>235,000(6)</td><td>45,000(7)</td><td>107,432</td><td>14,138</td><td>401,570</td></tr><tr><td>Vice Chairman, President and Chief Operating Officer</td><td>2013</td><td>235,000(6)</td><td>-</td><td>107,432</td><td>3,403</td><td>345,835</td></tr><tr><td>Larry Morrison</td><td>2014</td><td>110,000</td><td>11,500</td><td>18,582</td><td>6,649</td><td>146,731</td></tr><tr><td>Senior Vice President, Sales and Marketing Officer</td><td>2013</td><td>110,000</td><td>-</td><td>18,582</td><td>1,702</td><td>130,284</td></tr><tr><td>Kenneth Keller</td><td>2014</td><td>104,200</td><td>9,000</td><td>21,856</td><td>4,343</td><td>139,399</td></tr><tr><td>Senior Vice President, Chief Technology Officer</td><td>2013</td><td>104,200</td><td>-</td><td>21,856</td><td>947</td><td>127,003</td></tr></table>

(1) In this column, the figure represents the amount recognized by the executive during this period for financial statement reporting purposes only and is not compensation earned by the executive. The fair value of each restricted stock award is amortized to expense on a straight-line basis over the vesting period of the restricted stock award. The aggregate grant date fair value of the stock award was calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. See Note 11 of the Notes to our Financial Statements contained elsewhere in this annual report on Form 10-K for a discussion of all assumptions made by us in determining values of our stock awards.

(2) There were no stock options granted to any of our named executive officers during fiscal year 2014 or 2013.

(3) This column reflects premiums paid by us for term life insurance coverage and Company matching for the 401(k) plan on behalf of the named executive officer.

(4) In 2014 & 2013, Mr. Long elected to receive a base salary of $255,000 per annum in lieu of the base salary of $375,000 that would have been due to him for 2014 & 2013 under the employment agreement effective February 27, 2007. No deferred compensation is owed to Mr. Long for 2014 or 2013.

(5) Mr. Long’s 2014 and 2013 bonus compensation consisted of one-time cash bonuses of $25,000 and $20,000, respectively. All bonus compensation was granted pursuant to the terms of our employment agreement with Mr. Long, as amended.

(6) In 2014 & 2013, Mr. Hoch elected to receive a base salary of $235,000 per annum in lieu of the base salary of $350,000 that would have been due to him for 2014 and 2013 under the employment agreement effective February 27, 2007. No deferred compensation is owed to Mr. Hoch for 2014 & 2013.

(7) Mr. Hoch’s 2014 bonus compensation consisted of one-time cash bonus of $45,000. All bonus compensation was granted pursuant to the terms of our employment agreement with Mr. Hoch, as amended.

(8) On March 3, 2015, Mr. Long resigned as our Chief Financial Officer and we hired Mr. Habib Yunus as our new Chief Financial Officer.



## Narrative to Summary Compensation Table

## Named Executive Officer Employment Agreements

We entered into an employment agreement with Michael R. Long effective February 27, 2007. Under the agreement, Mr. Long agreed to serve as our Chairman of the Board, Chief Executive Officer and, at the time of the transaction, our Chief Financial Officer. The agreement provides for base annual salaries of $190,000 for 2007, $300,000 for 2008 and $375,000 for each year thereafter, unless increased by us. In addition, Mr. Long will receive an annual bonus of $216,000 during the term of the agreement to be paid in cash or stock at our sole discretion. Upon execution of the agreement, Mr. Long received a cash payment of $15,000, 500,000 shares of common stock from our Employee Plan, and an aggregate of 2,500,000 shares of restricted common stock that vest annually in increments of 500,000 shares beginning on February 28, 2009. On November 12, 2009, we executed an amendment to our employment agreement with Mr. Long. Under the terms of the amended employment agreement, Mr. Long agreed to reduce his annual base salary for 2009 to $190,000 from $375,000. On April 12, 2010, we executed a second amendment to our employment agreement with Mr. Long. Under the terms of the amended employment agreement, Mr. Long under the terms of the amended employment agreement, Mr. Long under the terms of the amended employment agreement with Mr. Long. Under the terms of the amended employment agreement, Mr. Long agreed to reduce his annual base salary for 2010 to $24,000 from $375,000, and to change the annual bonus limit from 100% of current salary to 100% of the highest salary received in any year of the agreement. On January 14, 2011, we executed a third amendment to our employment agreement with Mr. Long. Under the terms of the amended employment agreement, Mr. Long agreed to reduce his annual base salary for 2011 to $24,000 from $375,000. On 2012, Mr. Long elected to receive a base salary of $190,000 per annum in lieu of the base salary of $375,000 that would have been due to him for 2012 under the employment agreement effective February 27, 2007. On July 2, 2012, we executed a fourth amendment to our employment agreement with Mr. Long. Under the terms of the amended employment agreement, while Mr. Long had already agreed to a lower salary for 2012, he agreed to formally reduce his annual base salary for 2012 to $255,000 from $375,000. No deferred compensation is owed to Mr. Long for 2012. Total base salary earned by Mr. Long for 2012 was $217,699, which represented a salary of $190,000/year for the first half of 2012, and a salary of $255,000/year for the second half of 2012. In 2013, Mr. Long elected to receive a base salary of $255,000 per annum in lieu of the base salary of $375,000 that would have been due to him for 2013 under the employment agreement effective February 27, 2007. No deferred compensation is owed to Mr. Long for 2013. Mr. Long's 2013 bonus compensation consisted of a one-time cash bonus of $20,000 paid on October 17, 2013. All bonus compensation was granted pursuant to the terms of our employment agreement with Mr. Long, as amended.

We entered into an employment agreement with Louis A. Hoch effective February 27, 2007. Under the agreement, Mr. Hoch agreed to serve as our Vice Chairman of the Board, President and Chief Operating Officer. The agreement provides for base annual salaries of $175,000 for 2007, $275,000 for 2008 and $350,000 for each year thereafter, unless increased by us. In addition, Mr. Hoch will receive an annual bonus of $216,000 during the term of the agreement to be paid in cash or stock at our sole discretion. Upon execution of the agreement, Mr. Hoch received a cash payment of $15,000, 500,000 shares of common stock from our Employee Plan, and 2,500,000 shares of restricted common stock that vest annually in increments of 500,000 shares beginning on February 28, 2009. On November 12, 2009, we executed an amendment to our employment agreement with Mr. Hoch. Under the terms of the amended employment agreement, Mr. Hoch agreed to reduce his annual base salary for 2009 to $175,000 from $350,000. On April 12, 2010, we executed a second amendment to our employment agreement with Mr. Hoch. Under the terms of the amended employment agreement, Mr. Hoch agreed to reduce his annual base salary for 2010 to $24,000 from $350,000, and to change the annual bonus limit from 100% of current salary to 100% of the highest salary received in any year of the agreement. On January 14, 2011, we executed a third amendment to our employment agreement with Mr. Hoch.

Under the terms of the amended employment agreement, Mr. Hoch agreed to reduce his annual base salary for 2011 to $24,000 from $350,000. In 2012, Mr. Hoch elected to receive a base salary of $175,000 per annum in lieu of the base salary of $350,000 that would have been due to him for 2012 under the employment agreement effective February 27, 2007. On July 2, 2012, we executed a fourth amendment to our employment agreement with Mr. Hoch. Under the terms of the amended employment agreement, while Mr. Hoch had already agreed to a lower salary for 2012, he agreed to formally reduce his annual base salary for 2012 to $235,000, from $350,000. No deferred compensation is owed to Mr. Hoch for 2012. Total base salary earned by Mr. Hoch for 2012 was $199,692, which represented a salary of $175,000/year for the first half of 2012, and a salary of $235,000/year for the second half of 2012. In 2013, Mr. Hoch elected to receive a base salary of $235,000 per annum in lieu of the base salary of $350,000 that would have been due to him for 2013 under the employment agreement effective February 27, 2007. No deferred compensation is owed to Mr. Hoch for 2013. Mr. Hoch received no bonus compensation in 2013.

We entered into an employment agreement with Houston Frost, Ph.D. effective December 23, 2014. Under the agreement, Mr. Frost agreed to serve as the Company's Senior Vice President Corporate Development and Prepaid Products through December 31, 2016. We agreed to pay Mr. Frost an annual base salary of $130,000 and a bonus not to exceed 50% of the highest salary received in any year of the agreement and approved and calculated by our executive compensation committee and/or Chief Executive Officer. In addition, Mr. Frost will receive 4,000,000 shares of our common stock to be vested 1,800,000 shares in equal increments of 50,000 shares a month with the first 50,000 shares to vest January 31, 2015 and the last 50,000 to vest December 31, 2017. The remaining 2,200,000 shares will vest all on January 31, 2025. The stock will be issued on a restricted, non-registered basis. Mr. Frost will also be entitled to receive stock grants and future stock options as authorized by our executive compensation committee and/or our Chief Executive Officer.



We entered into an employment agreement with Habib Yunus, effective March 3, 2015. We agreed to pay Mr. Yunus an annual base salary of $150,000. Mr. Yunus also receives a one-time signing bonus of $30,000 as well as 4,000,000 shares of our common stock which will vest on March 2, 2025. In addition, Mr. Yunus will be entitled to receive stock grants or stock options authorized by our executive compensation committee and/or President or Chief Executive Officer. Mr. Yunus also may be entitled to receive a bonus not to exceed 50% of the highest salary received in any year of his employment agreement, calculated by our executive compensation committee and/or President or Chief Executive Officer. We can terminate the employment agreement for cause, such as breach or fraud by the employee, or without cause, subject to payment by us of a deferred compensation. We will also pay a deferred compensation if Mr. Yunus terminates the employment agreement upon our default, after a change of control, such as a merger, acquisition or substantial change in our Board of Directors, or for good cause. The deferred compensation shall be the amount which is calculated as the base salary payments Mr. Yunus would have received had his employment continued for the remaining term of the employment agreement (including yearly increases calculated at the maximum increase for the prior two years), plus all of the benefits remaining under the employment agreement and a pro-rata portion of the bonus compensation for that year.

We do not have an employment agreement with Larry Morrison.

## OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table shows grants of unexercised stock options and unvested stock by grant date outstanding on December 31, 2014, the last day of our fiscal year, to each of the named executive officers included in the Summary Compensation Table.

Outstanding Equity Awards at Fiscal Year-End Table for the Fiscal Year Ended December 31, 2014

<table><tr><td rowspan="2">Name</td><td colspan="3">Option awards (1)</td><td colspan="3">Stock awards</td></tr><tr><td>Number of securities underlying unexercised options (#) exercisable</td><td>Number of securities underlying unexercised options (#) unexercisable</td><td>Option exercise price (S)</td><td>Option expiration date</td><td>Number of shares or units of stock that have not vested (#)(2)</td><td>Market value of shares or units of stock that have not vested ($)(3)</td></tr><tr><td>Michael R. Long</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>12/29/2005</td><td>381,833</td><td>-</td><td>0.082</td><td>12/29/2015</td><td>1,355,972</td><td>237,295</td></tr><tr><td>12/27/2006</td><td>-</td><td>-</td><td>-</td><td>-</td><td>2,500,611</td><td>437,607</td></tr><tr><td>2/27/2007</td><td>-</td><td>-</td><td>-</td><td>-</td><td>2,500,000</td><td>437,500</td></tr><tr><td>1/09/2008</td><td>-</td><td>-</td><td>-</td><td>-</td><td>7,750,000</td><td>1,356,250</td></tr><tr><td>10/04/2012</td><td>-</td><td>-</td><td>-</td><td>-</td><td>1,000,000</td><td>175,000</td></tr><tr><td>12/29/2014</td><td></td><td></td><td></td><td></td><td>8,000,000</td><td>1,400,000</td></tr><tr><td>Louis A. Hoch</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>12/29/2005</td><td>586,147</td><td>-</td><td>0.082</td><td>12/29/2015</td><td>2,081,536</td><td>364,269</td></tr><tr><td>12/27/2006</td><td>-</td><td>-</td><td>-</td><td>-</td><td>4,083,333</td><td>714,583</td></tr><tr><td>2/27/2007</td><td>-</td><td>-</td><td>-</td><td>-</td><td>2,500,000</td><td>437,500</td></tr><tr><td>1/09/2008</td><td>-</td><td>-</td><td>-</td><td>-</td><td>7,750,000</td><td>1,356,250</td></tr><tr><td>10/04/2012</td><td>-</td><td>-</td><td>-</td><td>-</td><td>1,000,000</td><td>175,000</td></tr><tr><td>12/29/2014</td><td></td><td></td><td></td><td></td><td>8,000,000</td><td>1,400,000</td></tr><tr><td>Larry Morrison</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>12/29/2005</td><td>26,975</td><td>-</td><td>0.082</td><td>12/29/2015</td><td>95,156</td><td>16,652</td></tr><tr><td>12/27/2006</td><td>-</td><td>-</td><td>-</td><td>-</td><td>1,000,000</td><td>175,000</td></tr><tr><td>1/09/2008</td><td>-</td><td>-</td><td>-</td><td>-</td><td>700,000</td><td>122,500</td></tr><tr><td>10/04/2012</td><td>-</td><td>-</td><td>-</td><td>-</td><td>450,000</td><td>78,750</td></tr><tr><td>12/29/2014</td><td></td><td></td><td></td><td></td><td>3,000,000</td><td>525,000</td></tr><tr><td>Kenneth Keller</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>12/29/2005</td><td>102,492</td><td>-</td><td>0.082</td><td>12/29/2015</td><td>363,971</td><td>63,695</td></tr><tr><td>12/27/2006</td><td>-</td><td>-</td><td>-</td><td>-</td><td>538,333</td><td>94,208</td></tr><tr><td>1/09/2008</td><td>-</td><td>-</td><td>-</td><td>-</td><td>1,550,000</td><td>271,250</td></tr><tr><td>10/04/2012</td><td>-</td><td>-</td><td>-</td><td>-</td><td>500,000</td><td>87,500</td></tr><tr><td>12/29/2014</td><td></td><td></td><td></td><td></td><td>3,000,000</td><td>525,000</td></tr><tr><td>Houston Frost (4)</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>12/23/2014</td><td>-</td><td>-</td><td>-</td><td>-</td><td>4,000,000</td><td>680,000</td></tr></table>

(1) We did not issue any equity incentive plan awards during the years ended December 31, 2014 and 2013.

(2) Unvested common stock granted on December 29, 2005 vests on December 29, 2015, unvested common stock granted on December 27, 2006 vests on December 27, 2016 and unvested common stock granted on January 9, 2008 vests on January 9, 2018. Unvested common stock granted on February 27, 2007 vests annually over five years in increments of 500,000 shares beginning on February 28, 2009. Mr. Long and Mr. Hoch each chose to defer vesting of the increment of 500,000 shares that was granted to each of them on February 27, 2007 and was scheduled to vest on February 28, 2009, 2010, 2011, 2012, 2013 and 2014. Unvested common stock granted on October 4, 2012 vests on October 4, 2022.

(3) Calculated using the OTC Bulletin Board, or OTCBB, closing price of $0.175 per share of our common stock on December 31, 2014.

(4) Mr. Frost was hired on December 23, 2014.



## Narrative to Outstanding Equity Awards at Fiscal Year-End Table

## Retirement Benefits

We do not have any qualified or non-qualified defined benefit plans. We do have a tax-qualified defined contribution plan pursuant to Section 401(k) of the Internal Revenue Code. All of our eligible full and part-time employees who meet certain age requirements may participate in this 401(k) plan. Participants may contribute between 1% and 15% of their pre-tax compensation. The 401(k) plan allows for us to make discretionary and matching contributions. In 2014, the Company matched 100% of employee contributions up to 3% and 50% of the employee contribution over 3% with a maximum employee contribution of 5%. The Company made matching contributions of $30,858 and $0 in 2014 and 2013, respectively.

## Non-qualified Deferred Compensation

We do not have any non-qualified defined contribution plans or other deferred compensation plans.

## Potential Payments Upon Termination or Change of Control

The employment agreements we entered into with Mr. Long, Mr. Hoch, Mr. Frost and Mr. Yunus, respectively, provide for potential payments upon termination or a change of control. Mr. Long’s and Mr. Hoch’s employment agreements contain similar terms and provide that upon termination of the executive’s employment with us due to death or disability, involuntary termination without cause, termination for good reason or default by us, termination due to non-renewal of the agreement, or a change of control, the executive is entitled to deferred compensation. The amount of deferred compensation shall consist of the amount which is calculated as the greater of the base salary payments that the executive would have received had his employment continued for the remaining term of the agreement (including yearly increases, if any, calculated at the maximum increase for the prior two years), or an amount equal to 2.95 times the higher annual compensation earned by him in the past two years. In addition to this compensation, the executive shall be entitled to all of the benefits otherwise provided in the agreement during that period of time which is the greater of the remaining term of the agreement, or one year, and an amount equal to the pro rata portion of his bonus compensation for the year in which his employment is terminated. In addition, all stock options and restricted stock granted to the executive shall become fully vested upon his termination for any of the aforementioned reasons. Also, in consideration of the executive’s obligations for a period of two years after the termination of his employment under a non-competition clause set forth in the employment agreement, he shall be paid an amount equal to 2 times the base salary paid to him in the year prior to the expiration of the agreement.

Mr. Frost’s and Mr. Yunus’ employment agreements contain similar terms and provide that upon termination of the executive’s employment with us due to termination by us without cause, termination by the executive upon our default or after a change of control or for good reasons, the executive is entitled to deferred compensation. The amount of deferred compensation consists of the amount which is calculated as the base salary payments that the executive would have received had his employment continued for the remaining term of this Agreement (including yearly increases calculated at the maximum increase for the prior two years). In addition to this base deferred compensation, the executive shall be entitled to all of the benefits otherwise provided in the agreement during that period of time which is the remaining term of this agreement, and an amount equal to the pro rata portion of the bonus compensation for the year in which his employment is terminated determined on the basis of the number of days elapsed in such year prior to such termination. In addition, all stock options and restricted stock granted to the executive shall become fully vested upon a change of control or termination for any of the aforementioned reasons.

## DIRECTOR COMPENSATION

The following table sets forth information concerning the compensation provided to each person who served as a non-employee member of our Board of Directors during the fiscal year ended December 31, 2014. Directors who are also employees are included in the Summary Executive Compensation Table above.

Director Compensation Table for the Fiscal Year Ended December 31, 2014

<table><tr><td>Name</td><td>Fees earned or paid in cash</td><td>Stock awards</td><td>Option awards</td><td>Non-equity incentive plan compensation</td><td>Non-qualified deferred compensation earnings</td><td>All other compensation</td><td>Total</td></tr><tr><td>Peter G. Kirby (1)</td><td>0</td><td>85,000</td><td>0</td><td>0</td><td>0</td><td>0</td><td>85,000</td></tr></table>

(1) Dr. Kirby is our sole non-employee director. He did not receive cash compensation for serving on our Board for the fiscal year ended December 31, 2014. We have previously granted stock awards to Dr. Kirby as compensation for his prior service on our Board. We have calculated that Dr. Kirby earned $85,000 for the fiscal year ended December 31, 2014, which represents the fair value of his accrued stock awards recognized for financial statement reporting purposes only and is not compensation earned by the director. The fair value of each restricted stock award is amortized to expense on a straight-line basis over the vesting period of the restricted stock award for the fiscal year ended December 31, 2014. At December 31, 2014, Dr. Kirby had outstanding 500,000 shares of common stock with a grant date fair value of $27,500 granted on January 9, 2008 that vest on January 9, 2018 and 400,000 shares of common stock with a grant date fair value of $36,000 granted on December 27, 2006 that vest on December 27, 2016. The aggregate grant date fair value of the stock award was calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. See Note 11 of the Notes to our Financial Statements contained elsewhere in this Form 10-K for a discussion of all assumptions made by us in determining the values of our stock awards.

At December 31, 2014, Dr. Kirby had outstanding options to purchase 325,000 shares of our common stock.



## Narrative to Director Compensation Table

We do not have a formal agreement with our independent director, Dr. Peter G. Kirby, to compensate him for his service on our Board of Directors. Mr. Long and Mr. Hoch receive no compensation for serving on our Board of Directors due to their status as officers of our Company.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following tables set forth, to our knowledge, certain information concerning the beneficial ownership of our common stock as of December 31, 2014 by (i) each stockholder known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock, (ii) our directors, (iii) each of the named executive officers included in the Summary Compensation Table, and (iv) all of our directors and executive officers as a group.

We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws.

In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to stock options and warrants held by that person that are currently exercisable or exercisable within 60 days after December 31, 2014. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.

Stockholder Known by Us to Own 5% or More of Our Common Stock

<table><tr><td>Name and address of beneficial owner</td><td>Amount and Nature of Beneficial Ownership</td><td>Percent of Shares Beneficially Owned (1)</td></tr><tr><td>Robert Evans (2)</td><td>14,020,000</td><td>(2)</td></tr><tr><td>P.O. Box 56,</td><td></td><td></td></tr><tr><td>Williamsville, IL 62693</td><td></td><td></td></tr></table>

(1) We had a total of 184,176,582 shares of common stock issued and 179,181,338 shares of common stock outstanding on December 31, 2014.

(2) We relied on the Form 4 filed by Robert Evans with the SEC on June 9, 2011 for this information.

Security ownership of our Directors and Officers

<table><tr><td rowspan="2">Name and address of beneficial owner (1)</td><td rowspan="2">Nature of beneficial ownership</td><td colspan="3">Amount of Beneficial Ownership</td><td rowspan="2">Percent of Shares Beneficially Owned (2)</td></tr><tr><td>Shares Owned</td><td>Shares - Rights to Acquire (3)</td><td>Total</td></tr><tr><td>Michael Long (4)</td><td>Chief Executive Officer, Chief Financial Officer, and Chairman of the Board</td><td>39,759,169</td><td>381,833</td><td>40,141,002</td><td>22.4%</td></tr><tr><td>Louis Hoch (5)</td><td>President, Chief Operating Officer, and Vice Chairman of the Board</td><td>39,221,553</td><td>586,147</td><td>39,807,700</td><td>22.1%</td></tr><tr><td>Kenneth Keller (6)</td><td>Senior Vice President, Chief Technology Officer</td><td>6,132,490</td><td>204,402</td><td>6,336,912</td><td>3.5%</td></tr><tr><td>Larry Morrison (7)</td><td>Senior Vice President, Sales and Marketing</td><td>5,410,695</td><td>26,795</td><td>5,437,490</td><td>3.0%</td></tr><tr><td>Houston Frost (8)</td><td>Senior Vice President</td><td>4,000,000</td><td>-</td><td>-</td><td>2.2%</td></tr><tr><td>Peter Kirby (9)</td><td>Director</td><td>1,700,500</td><td>325,000</td><td>2,025,500</td><td>1.1%</td></tr><tr><td>All directors and executive officers as a group (6 persons)</td><td></td><td>96,224,407</td><td>1,524,177</td><td>97,748,584</td><td>54.1%</td></tr></table>

(1) Unless otherwise stated, the address of each beneficial owners listed on the table is c/o Payment Data Systems, Inc., 12500 San Pedro, Suite 120, San Antonio, Texas 78216.

(2) We had a total of 184,176,582 shares of common stock issued and 179,181,338 shares of common stock outstanding on December 31, 2014.

(3) Represents shares subject to outstanding stock options and warrants currently exercisable or exercisable, or currently vested or that will vest, within 60 days of December 31, 2014.

(4) Includes 381,833 shares that Mr. Long has the right to acquire upon the exercise of stock options.

(5) Includes 586,147 shares that Mr. Hoch has the right to acquire upon the exercise of stock options.

(6) Includes 204,402 shares that Mr. Keller has the right to acquire upon the exercise of stock options.

(7) Includes 26,795 shares that Mr. Morrison has the right to acquire upon the exercise of stock options.

(8) We granted to Mr. Frost 4,000,000 unregistered shares on December 23, 2014. 1,800,000 of the shares vest in increments of 50,000 shares per month from January 31, 2015 to December 31, 2017. The remaining 2,200,000 shares vest on January 31, 2025.

(9) Includes 325,000 shares that Dr. Kirby has the right to acquire upon the exercise of stock options.

As of December 31, 2014, there are no arrangements among our beneficial owners known to management which may result in a change in control of our Company.



## TRANSACTIONS WITH RELATED PERSONS

## Michael R. Long and Louis A. Hoch

As previously disclosed, in 2002, we recognized a loss on margin loans we guaranteed for Michael R. Long, then Chairman of the Board of Directors and Chief Executive Officer, and our current Chief Executive Officer and, at the time of the transaction, our Chief Financial Officer; and Louis A. Hoch, our President and Chief Operating Officer, in the amounts of $535,302 and $449,371, respectively. In February 2007, we signed employment agreements with Mr. Long and Mr. Hoch that required each to repay his respective obligation to us in four equal annual payments of cash or stock or any combination thereof. In December 2007, we accepted common stock and stock options valued at $133,826 and $112,343 from Mr. Long and Mr. Hoch, respectively, in satisfaction of their annual payments for 2007 as provided for under their respective employment agreements.

In December 2008, Mr. Long and Mr. Hoch did not pay to us the second annual installment pursuant to their respective employment agreements. They each withheld payment of the installment due because we had deferred payment of their salary increases for 2008 called for under their respective employment agreements. At December 31, 2008, we owed Mr. Long and Mr. Hoch deferred salaries of $110,000 and $100,000, respectively, and Mr. Long and Mr. Hoch owed to us $133,825 and $112,343, respectively, for the second installment of their loan repayments. The total amount owed to us for the second installment was $246,168 and is classified as “Related Party Receivable” on our balance sheet at December 31, 2008. On March 30, 2009, we accepted 680,715 shares of our common stock valued at $23,825 and 352,658 shares of our common stock valued at $12,343 from Mr. Long and Mr. Hoch, respectively, in partial satisfaction of their annual payments due to us for 2008 as provided for under their employment agreements. The partial payments of $23,825 and $12,343 made to us by Mr. Long and Mr. Hoch, respectively, equaled the difference between the amount each owed to us for the second installment of their loan repayments and the amount we owed to each executive as deferred salary. The common stock accepted from Mr. Long and Mr. Hoch was valued at $0.035 per share, which was the closing price of the common stock on March 30, 2009. The common stock accepted from Mr. Long and Mr. Hoch was recorded as treasury stock with a total cost of $36,168.

On November 12, 2009, we executed amendments to its employment agreements with Mr. Long and Mr. Hoch. Under the terms of their respective amended employment agreements, Mr. Long and Mr. Hoch agreed to reduce their annual base salaries for 2009 to $190,000 and $175,000, respectively, from $375,000 and $350,000, respectively.

In December 2009, Mr. Long and Mr. Hoch did not pay to us the third annual installment pursuant to their respective employment agreements. They each withheld payment of the installment due because we had partially deferred payment of their salary for 2009 called for under their respective employment agreements. At December 31, 2009, we owed Mr. Long and Mr. Hoch deferred salaries for 2009 of $162,385 and $141,808, respectively, and Mr. Long and Mr. Hoch owed us to $133,825 and $112,343, respectively, for the third installment of their loan repayments. The total amount owed to us for the unpaid installments was $456,168 and was classified as “Related Party Receivable” on our balance sheet at December 31, 2009.

On April 12, 2010, we executed a second amendment to its employment agreements with Mr. Long and Mr. Hoch. Under the terms of the second amendment to their respective amended employment agreements, Mr. Long and Mr. Hoch agreed to reduce their annual base salaries for 2010 to $24,000 each from $375,000 and $350,000, respectively, and to change their annual bonus limit from 100% of current salary to 100% of the highest salary received in any year of the agreement.

In December 2010, Mr. Long and Mr. Hoch did not pay to us the fourth and final annual installment pursuant to their respective employment agreements. They each withheld payment of the installment due because we continued to be unable to pay the deferred salaries that were called for under their respective employment agreements. At December 31, 2010, we owed Mr. Long and Mr. Hoch deferred salaries of $147,368 and $126,915, respectively, in regards to their 2009 deferred salary balances. As of December 31, 2010, Mr. Long and Mr. Hoch owed us to $133,825 and $112,343, respectively, for the fourth and final installment of their loan repayments. The total amount owed to us for the unpaid installments was classified as “Related Party Receivable” on our balance sheet and was $702,337 and $703,060 as at December 31, 2011 and 2010, respectively.

On January 14, 2011, we executed a third amendment to its employment agreements with Mr. Long and Mr. Hoch. Under the terms of the third amendment to their respective employment agreements, Mr. Long and Mr. Hoch agreed to reduce their annual base salaries for 2011 to $24,000 and $24,000, respectively, from $375,000 and $350,000, respectively.

At December 31, 2011, we owed Mr. Long and Mr. Hoch a total of $23,473 and $3,300, respectively, in regards to their 2010 deferred salary balances, which were included in accrued expenses on our balance sheet. We paid the obligations in the first quarter of 2012 and thus, our balance sheet at December 31, 2012 did not reflect any such amounts owed at December 31, 2012.

On July 2, 2012, we executed a fourth amendment to its employment agreements with Mr. Long and Mr. Hoch. Under the terms of the fourth amendment to their respective employment agreements, Mr. Long and Mr. Hoch agreed to amend their annual base salaries for 2012 to $255,000 and $235,000, respectively, from $375,000 and $350,000, respectively.

As of December 31, 2012, Mr. Long owed us to $377,651 and Mr. Hoch owed to us $324,686. The total amount for the unpaid installments of $702,337 is classified as “Related Party Receivable” on our balance sheet at December 31, 2012.



On March 11, 2013, in accordance with our employment agreements with Mr. Long and Mr. Hoch, we accepted shares of our common stock owned by Mr. Long and Mr. Hoch as satisfaction in full for the remaining amounts owed to us as annual payments due to the loss on margin loans guaranteed by us for Mr. Long and Mr. Hoch.

On March 11, 2013, we also agreed to purchase additional shares of our common stock owned by Mr. Long and Mr. Hoch, valued at $156,852 and $144,403, respectively. Such bonuses were intended to compensate the executives for their service. As a result, we incurred a one-time reduction in cash of $301,255.

Accordingly, on March 11, 2013, we accepted an aggregate of 2,969,459 shares of our common stock valued at $534,503, and an aggregate of 2,606,051 shares of our common stock valued at $469,089 from Mr. Long and Mr. Hoch, respectively, as satisfaction in full of their aggregated outstanding amounts of $702,337 owed to us and aggregated compensation of $301,255 paid to Mr. Long and Mr. Hoch in lieu of cash bonuses. The common stock accepted from Mr. Long and Mr. Hoch was valued at $0.18 per share, which was the closing price of the common stock on March 1, 2013. The common stock accepted from Mr. Long and Mr. Hoch was recorded as treasury stock and we no longer carry a “Related Party Receivable” on our balance sheet.

Accordingly, following the completion of these transactions, we have no remaining receivables or payables related to Mr. Long, Mr. Hoch or any other officer of our Company.

By virtue of Mr. Long and Mr. Hoch’s officer positions with us, they are each considered a related party of our Company under federal securities law. Our Board of Directors has acknowledged that our entry into these agreements with Mr. Long and Mr. Hoch is a related party transaction and has approved such transactions.

## Herb Authier

During the years ended December 31, 2014 and 2013, we paid Herb Authier a total of $35,400 and $35,400 in cash, respectively, for services related to network engineering and administration that he provided to us. Mr. Authier is the father-in-law of Louis Hoch, our President and Chief Operating Officer.

## Nikole Hoch

During the years ended December 31, 2014, we purchased $6,227 of corporate imprinted sportswear and caps from Angry Pug Sportswear. Nikole Hoch, the spouse of our President and Chief Operating Officer Louis Hoch, is the owner of Angry Pug Sportswear.

## DIRECTOR INDEPENDENCE

During the fiscal year ended December 31, 2014, Messrs. Michael R. Long, Louis A. Hoch, and Peter G. Kirby served on our Board of Directors. The Board has determined Dr. Kirby was our sole independent board member as determined as defined by Rule 5605(a)(2) of the NASDAQ Listing Rules.

## ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

## Fees Paid to the Independent Accountants

The aggregate fees billed to us for professional accounting services, including the audit of our annual consolidated financial statements by our independent registered public accounting firm for the fiscal years ended December 31, 2014 and 2013, are set forth in the table below.

<table><tr><td></td><td>2014</td><td>2013</td></tr><tr><td>Audit fees</td><td>$ 55,000</td><td>$ 55,000</td></tr><tr><td>Tax fees</td><td>3,500</td><td>6,070</td></tr><tr><td>Total fees</td><td>$ 58,500</td><td>$ 61,070</td></tr></table>

For purposes of the preceding table, the professional fees are classified as follows:

Audit Fees. This column includes fees for professional services billed for the audit of the consolidated financial statements included in our annual report on Form 10-K filing, the review of consolidated financial statements included in our quarterly reports on Form 10-Q filings, comfort letters, consents and assistance with and review of documents filed with the SEC. The fees include amounts billed to us during each respective calendar year.

Tax Fees. This column includes fees for professional services rendered by our independent registered public accounting firm for tax compliance, tax planning and tax advice. Tax compliance involves preparation of original and amended tax returns. Tax planning and tax advice encompass a diverse range of subjects, including assistance with tax audits and appeals, tax advice related to dispositions, and requests for rulings or technical advice from taxing authorities. The fees include amounts billed to us during each respective calendar year.

## Audit Committee's Pre-Approval Policies and Procedures

We may not engage our independent registered public accounting firm to render any audit or non-audit service unless our Audit Committee approves the service in advance. 100% of the services performed by our independent registered public accounting firm described above were approved in advance by our Audit Committee.



## PART IV

## ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

## (a)(1) Consolidated Financial Statements.

The following documents are filed in Part II, Item 8 of this annual report on Form 10-K:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2014 and 2013

Consolidated Statements of Operations for the years ended December 31, 2014 and 2013

Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2014 and 2013

Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013

Notes to Consolidated Financial Statements

## (a)(2) Financial Statement Schedules.

All financial statement schedules have been omitted as they are not required, not applicable, or the required information is otherwise included.

## (a)(3) Exhibits.

<table><tr><td>Exhibit No.</td><td>Description</td></tr><tr><td>3.1</td><td>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).</td></tr><tr><td>3.2</td><td>Amended and Restated By-laws (included as exhibit 3.2 to the Form 10-KSB filed March 31, 2006, and incorporated herein by reference).</td></tr><tr><td>3.3</td><td>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).</td></tr><tr><td>4.1</td><td>Amended 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).</td></tr><tr><td>4.2</td><td>Amended 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).</td></tr><tr><td>4.3</td><td>Employee 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).</td></tr><tr><td>10.1</td><td>Lease Agreement between the Company and Frost National Bank, Trustee for a Designated Trust, dated August 22, 2003 (included as exhibit 10.3 to the Form 10-Q filed November 14, 2003, and incorporated herein by reference).</td></tr><tr><td>10.2</td><td>Employment Agreement between the Company and Michael R. Long, dated February 27, 2007 (included as exhibit 10.1 to the Form 8-K filed March 2, 2007, and incorporated herein by reference).</td></tr><tr><td>10.3</td><td>Employment Agreement between the Company and Louis A. Hoch, dated February 27, 2007 (included as exhibit 10.2 to the Form 8-K filed March 2, 2007, and incorporated herein by reference).</td></tr><tr><td>10.4</td><td>Affiliate Office Agreement between the Company and Network 1 Financial, Inc. (included as exhibit 10.11 to the Form SB-2 filed April 28, 2004, and incorporated herein by reference).</td></tr><tr><td>10.5</td><td>Stock 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).</td></tr><tr><td>10.6</td><td>Stock 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).</td></tr><tr><td>10.7</td><td>First Amendment to Employment Agreement between the Company and Michael R. Long, dated November 12, 2009 (included as exhibit 10.15 to the Form 10-Q filed November 16, 2009, and incorporated herein by reference).</td></tr><tr><td>10.8</td><td>First Amendment to Employment Agreement 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).</td></tr><tr><td>10.9</td><td>Second Amendment to Employment Agreement between the Company and Michael R. Long, dated April 12, 2010 (included as exhibit 10.16 to the Form 10-K filed April 15, 2010, and incorporated herein by reference).</td></tr><tr><td>10.10</td><td>Second Amendment to Employment Agreement between the Company and Louis A. Hoch, dated April 12, 2010 (included as exhibit 10.17 to the Form 10-K filed April 15, 2010, and incorporated herein by reference).</td></tr><tr><td>10.11</td><td>Bank Sponsorship Agreement between the Company and University National Bank, dated August 29, 2011 (included as exhibit 10.18 to the Form 10-K filed April 3, 2012, and incorporated herein by reference).</td></tr></table>



10.12 Third Amendment to Employment Agreement between the Company and Michael R. Long, dated January 14, 2011 (included as exhibit 10.19 to the Form 10-K filed April 3, 2012, and incorporated herein by reference).

10.13 Third Amendment to Employment Agreement between the Company and Louis A. Hoch, dated January 14, 2011 (included as exhibit 10.20 to the Form 10-K filed April 3, 2012, and incorporated herein by reference).

10.14 Fourth Amendment to Employment Agreement 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).

10.15 Fourth Amendment to Employment Agreement 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).

10.16 Confidential 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).

10.17 First Amendment to Lease Agreement dated August 22, 2003 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).

10.18 Second Amendment to Lease Agreement dated August 22, 2003 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).

10.19 Third Amendment to Lease Agreement dated August 22, 2003 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).

10.2 Asset Purchase Agreement, dated December 22, 2014, by and between Akimbo Financial, Inc. and Payment Data Systems, Inc. (included as exhibit 10.1 to the Form 8-K filed December 23, 2014, and incorporated herein by reference).

10.21 Transition Agreement, dated December 22, 2014, by and between Akimbo Financial, Inc. and Payment Data Systems, Inc. (included as exhibit 10.2 to the Form 8-K filed December 23, 2014, and incorporated herein by reference).

10.22 Employment Agreement, 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, 2014, and incorporated herein by reference).

10.23 Employment Agreement, 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).

10.24 Fourth Amendment to Lease Agreement, dated August 22, 2003, by and between Payment Data Systems, Inc. and Domicilio OC, LLC as successor-in-interest to Frost National Bank, dated February 12, 2015 (filed herewith).

10.25 Lease Agreement, dated February 12, 2015, by and between FiCentive, Inc. and Domicilio OC, LLC (filed herewith).

10.26 Bank Sponsorship Agreement between the Company and Metropolitan Commercial Bank, dated December 11, 2014 (filed herewith).

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).

21.1 Subsidiaries of the Company (filed herewith).

23.1 Consent of Akin Doherty Klein & Feuge, P.C. (filed herewith).

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 Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

101.INS* XBRL Instance Document (filed herewith).

101.SCH* XBRL Taxonomy Extension Schema Document (filed herewith).

101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).

101.DEF* XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).

101.LAB* XBRL Taxonomy Extension Label Linkbase Document (filed herewith).

101.PRE* XBRL Taxonomy Presentation Linkbase Document (filed herewith).

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.



## SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 30, 2015

Date: March 30, 2015

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date: March 30, 2015

Date: March 30, 2015

Date: March 30, 2015

Date: March 30, 2015

Date: March 30, 2015

49

Payment Data Systems, Inc.

By: /s/ Michael R. Long
Michael R. Long
Chairman of the Board and Chief Executive
(Principal Executive Officer)
/s/ Habib Yunus
Habib Yunus
Chief Financial Officer
(Principal Financial and Accounting Officer)

By: /s/ Michael R. Long
Michael R. Long
Chairman of the Board and Chief Executive
(Principal Executive Officer)

By: /s/ Habib Yunus
Habib Yunus
Chief Financial Officer
(Principal Financial and Accounting Officer)

By: /s/ Louis A. Hoch
Louis A. Hoch
President, Chief Operating Officer, and Director

By: /s/ Peter G. Kirby
Peter G. Kirby
Director

By: Habib Yunus
Habib Yunus
Chief Financial Officer
(Principal Financial and Accounting Officer)



# FOURTH AMENDMENT TO STANDARD OFFICE LEASE

This Fourth Amendment to Standard Office Lease (the "Amendment") is entered into between DOMICELIO OC, LLC, a Texas limited liability company ("Landlord"), as successor-in-interest to Frost National Bank, and PAYMENT DATA SYSTEMS, INC., a Nevada corporation ("Tenant"), dated effective as of February 2. 2015 (the "Effective Date").

## RECITALS

A. WHEREAS, Landlord and Tenant entered into that certain Lease Agreement dated August 22, 2003, as amended by that certain First Amendment to Lease Agreement dated February 6, 2006, that certain Second Amendment to Lease Agreement dated October 7, 2009 and by that certain Third Amendment to Lease Agreement dated October 12, 2012 (collectively, the "Lease") for Suites 120 and 525, consisting of 4,507 rentable square feet (the "Premises"), within the office building known as One Countryside Place, located at 12500 San Pedro Avenue, San Antonio, Texas 78216 (the "Building"); and

B. Landlord and Tenant wish to extend and amend certain other terms and conditions contained in the Lease.

## AGREEMENT

NOW, THEREFORE, pursuant to the foregoing, and in consideration of the mutual covenants and agreements contained in the Lease, the Lease is amended as set out below:

1. Defined Terms. All capitalized terms used herein have the same meanings as defined in the Lease, unless otherwise defined in this Amendment.

2. Landlord. The Landlord established in Exhibit A (Basic Terms) of the Lease is deleted and replaced with "DOMICILIO OC, LLC."

3. Notification Address (Landlord). Landlord's Notification Address established in Exhibit A (Basic Terms) of the Lease is deleted and replaced with the following:

Domicilio OC, LLC

Attn: Cushman & Wakefield, Property Manager
12500 San Pedro, Suite 327

San Antonio, TX 78216

4. Term. Landlord and Tenant hereby agree to extend the Term of the Lease for one (1) period of thirty eight (38) months (said thirty-eight month period hereinafter referred to as the "Extension Term"). The Extension Term shall commence on March 1, 2015 and end April 30, 2018. Tenant acknowledges and agrees that, except for the improvements to be constructed by Landlord pursuant to the work letter attached hereto as Schedule 1 (the "Work Letter"), Tenant accepts the Premises in their "AS-IS" condition. TENANT ACKNOWLEDGES THAT NEITHER LANDLORD NOR LANDLORD'S AGENTS HAVE MADE ANY REPRESENTATION OR WARRANTY AS TO THE CONDITION OF THE PREMISES OR



THE BUILDING OR THEIR SUITABILITY FOR TENANT'S PURPOSES. LANDLORD EXPRESSLY DISCLAIMS, AND TENANT EXPRESSLY WAIVES, ALL IMPLIED OR EXPRESS WARRANTIES OF EVERY KIND, INCLUDING WITHOUT LIMITATION, WITH RESPECT TO THE HABITABILITY, FITNESS, OR SUITABILITY OF THE PREMISES FOR A PARTICULAR PURPOSE. Tenant has made its own investigations and conducted its own due diligence with respect to the Premises, and is on this relying solely on these investigations and due diligence in entering into this Amendment and the transactions contemplated herein, and is not relying on any representations or warranties of the Landlord or of Landlord's agents. Tenant represents and warrants to Landlord that: (a) its sole intended use of the Premises is for general office and data center use, which has no special requirements, including without limitation special security requirements; (b) it shall not use the Premises for any other purpose; and (c) prior to executing this Amendment, it has made such investigations as it deems appropriate with respect to the suitability of the Premises for its intended use and has determined that the Premises are suitable for such intended use.

## 5. Base Rental. The Base Rental for the Premises shall be as follows, beginning

March 1, 2015 (the "Commencement Date"). Landlord and Tenant agree that as originally provided in the Third Amendment to Lease Agreement, the Base Rental and any additional rent and all other charges scheduled to be paid from March 1, 2015 through and including June 30, 2016, shall be waived and replaced with the Base Rental of this Fourth Amendment.:

<table><tr><td colspan="4">Base Rental for the Premises</td></tr><tr><td>Months</td><td>Rate</td><td>Annual Amount*</td><td>Monthly Installment</td></tr><tr><td>March 1, 2015 through March 31, 2016</td><td>$21.00/RSF/year</td><td>$ 94,647.00</td><td>$ 7,887.25</td></tr><tr><td>April 1, 2016 through March 31, 2017</td><td>$21.50/RSF/year</td><td>$ 96,900.50</td><td>$ 8,075.04</td></tr><tr><td>April 1, 2017 through April 30, 2018</td><td>$22.00/RSF/year</td><td>$ 99,154.00</td><td>$ 8,262.83</td></tr></table>

## * Based on a 12-month period

6. Expense Stop. Effective as of March 1, 2015, notwithstanding anything contained in the Lease to the contrary, for the purposes of calculating Tenant's Proportionate Share of Excess Operating Expenses, the Tenant's Base Year shall be calendar year 2015, and its Expense Stop, as defined in the Lease, shall be the Operating Expenses for the calendar year 2015.

7. Leasehold Improvements. Provided that there shall not then be existing a default by Tenant under the provisions of the Lease beyond any applicable notice or cure period, Landlord agrees to furnish and install improvements within the Premises in accordance with the Work Letter attached to this Amendment as Schedule 1 and made a part hereof.

8. Brokerage. Tenant warrants that, as of the Commencement Date of the Fourth Amendment to Lease, Tenant had no dealings with any broker or agent other than E Smith

Realty Partners Dallas, LLC in connection with the negotiation or execution of the Lease and shall indemnify Landlord against any claim from any broker or agent with the Lease. Tenant further warrants that, as of the Effective Date of this Amendment, Tenant has had no dealings with any broker or agent other than E Smith Realty Partners Dallas, LLC ("Tenant's Broke?") in connection with the negotiation or execution of the Amendment and shall indemnify Landlord against any claim from any broker or agent other than Tenant's Broker in connection with the Amendment. Landlord is responsible for paying all leasing commissions due Tenant's Broker in connection with this Amendment, pursuant to the terms and provisions of a separate commission agreement executed by and between Landlord and Tenant's Broker on or before the date of this Amendment.

9. Miscellaneous. With the exception of those tens specifically revised in this Amendment, the Lease remains in full force and effect, and to the best of Tenant's knowledge, Landlord is not in default under any of the terms and conditions of the Lease. As of the date of this Agreement, to the best of Landlord's knowledge there are no defaults by Tenant and no event has occurred or situation exists which would, with the passage of time, constitute a default by Tenant under the Lease. If there is any conflict between the terms and provisions of this Amendment and the terms and provisions of the Lease, the terms and provisions of this Amendment shall supersede and control



10. Signage. Provided that Tenant is not in default of its Lease beyond any applicable notice and cure periods, Tenant shall continue to utilize its existing location on the exterior monument sign at no cost to Tenant throughout the lease term in accordance with the terms and conditions of the Lease. Landlord will use reasonable efforts, in Landlord's sole discretion, trim the existing landscaping to allow for the visibility of such sign.

11. Landlord acknowledges and approves the existence of Tenant's supporting equipment within the Premises and located outside of the Premises, including but not limited to, the existing generator (including diesel tank and pad), antennas, grounding equipment, conduits, fiber entrances, and HVAC conditioners.

12. Reserved Parking. Tenant's two (2) reserved parking spaces as provided in the First Amendment shall remain during the Lease Tenn.

13. Counterparts/PDF Signatures. This Amendment may be executed in any number of counterparts, each counterpart shall be deemed an original, and all of the counterparts shall constitute one agreement. To facilitate execution of this Amendment, the parties may execute and exchange PDF counterparts of the signature pages, and PDF counterparts shall serve as originals.

14. Exhibits. The following exhibits are attached to this Amendment, and these exhibits shall be considered a part of the Lease for all material purposes.

SCHEDULE I WORK LETTER

FOURTH AMENDMENT TO STANDARD OFFICE LEASE Page 3

IN WITNESS WHEREOF, the parties have executed this Amendment on the dates set forth by their respective signatures to be effective as of the Effective Date.

[SIGNATURES ON NEXT PAGE]



## SIGNATURE PAGE

TO

## FIRST AMENDMENT TO LEASE AGREEMENT

LANDLORD:

DOMICILIO OC, LLC, a Texas limited liability company

By:

Name:

Title:

## TENANT:

[Missing Graphic Reference]

PAYMENT DATA SYSTEMS, INC., a Nevada corporation
By:
Name: Louis A. Hoch
Title: President and COO



## SCHEDULE 1

## WORK LETTER

1. LANDLORD'S WORK. Landlord shall have the responsibility of carrying out all Premises Alterations shown in the specification attached as Schedule A-1 to this Work Letter ("Landlord's Work").

2. TENANT IMPROVEMENT. Provided there shall not be existing a default by Tenant under the provisions of the Lease, Landlord agrees to provide up to, but not in excess of Nine Thousand Fourteen and No/100 Dollars ($9,014.00) (the "Tenant Improvement Allowance"), which is calculated at $2.00 per square foot of the net rentable area of the Premises. Tenant shall have up to twelve (12) months after the Commencement Date to use the Tenant Improvement Allowance.

## 3. COSTS OF LANDLORD'S WORK.

a. Tenant Cost Proposal. Landlord shall provide Tenant with a good-faith quote for the cost of carrying out Landlord's Work, including any Tenant-supplied equipment reimbursable by Landlord (the "Tenant Cost Proposal"). Within five (5) business days after Tenant's receipt of the Tenant Cost Proposal, Tenant shall approve the Tenant Cost Proposal in writing and deliver it to Landlord; if Tenant does not provide any notice of approval or rejection of the Tenant Cost Proposal, then the Tenant Cost Proposal shall be deemed approved by Tenant. On Tenant's written or deemed approval of the Tenant Cost Proposal, Landlord shall be authorized to proceed with the construction of Landlord's Work. Landlord shall not be obligated to proceed with any of Landlord's Work (including any ordering or purchasing of materials) until (i) the Tenant Cost Proposal is approved or deemed approved by Tenant and (ii) Tenant pays the Upfront Tenant Cost as required by subparagraph (b) below.

b. Payments by Tenant for Landlord's Work. Promptly on Tenant's written or deemed approval of the Tenant Cost Proposal, Tenant shall pay to Landlord the sum equal to the cost of the Landlord's Work as set forth in the approved Tenant Cost Proposal, minus the Tenant Improvement Allowance. The balance of the actual costs of carrying out Landlord's Work including all Change Orders (as defined in this Work Letter), shall be billed periodically to Tenant as Landlord's Work proceeds, and Tenant shall pay each invoice within five (5) business days of Landlord's delivery of each bill to Tenant. All of the actual costs of carrying out Landlord's Work (in excess of the Tenant Improvement Allowance) shall be paid by Tenant in full on or before the Commencement Date. Any Tenant-supplied equipment that is approved by Landlord in advance, to be installed and is includable in the Tenant improvement Allowance shall be billed by Tenant to Landlord and Landlord shall pay such invoice within five (5) business days of submission by Tenant. Tenant may use the portion of the Tenant Improvement Allowance to install two additional EntryGuard readers (for either Suite 125 or Suite 140 (being the "Ficentive Space"); granite countertops and additional cabinets in the Existing Premises break room, and for any other improvement in the Ficentive Space. On Tenant's timely approval of any Change Order pursuant to Section 5 below, Tenant shall pay to Landlord the total cost of the Change Order at the time Tenant sends its written approval to Landlord, and the balance shall be billed periodically and paid by Tenant as provided in the preceding two sentences. The



amounts payable under this Section 3 shall constitute additional rent due pursuant to the Lease, and failure to make any of these payments when due shall constitute an Event of Default under this Lease, entitling Landlord to all of its remedies for an Event of Default under the Lease as well as all remedies otherwise available to Landlord at law or in equity.

4. LANDLORD'S WORK. Subject to the terms and conditions set forth in this Work Letter, Landlord shall commence and diligently proceed with Landlord's Work. Landlord shall perform, or cause the performance of, Landlord's Work in a good and workmanlike manner and in compliance with all laws and ordinances applicable to the Premises.

5. CHANGE ORDERS. If Tenant requests an item or condition that, in Landlord's sole discretion, shall require additional costs or shall cause a delay in the construction of Landlord's Work (a "Change Order"), then Landlord shall not be required to perform the Change Order until (i) Tenant requests the Change Order in writing; (ii) Landlord approves the Change Order; and (iii) Tenant pays Landlord the total cost of the Change Order as set forth in Section 3.B above. Tenant shall be responsible for any additional costs incurred and delays caused as a result of any Change Order, and Landlord may request an additional security deposit before implementing any approved Change Order.

6. SUBSTANTIAL COMPLETION. Landlord and Tenant shall walk through and inspect Landlord's Work just before the anticipated date of completion of Landlord's Work. If, at the time of the inspection, any materially defective or unfinished items of Landlord's Work (excluding minor details, adjustments, or any other punch-list items that would not materially interfere with Tenant's use of the Premises for normal business operations), then Landlord shall promptly cause those items, if any, to be completed or corrected, as the case may be. Tenant shall, within five (5) days after confirmation of Substantial Completion (as defined below) pursuant to the inspection, execute a certificate confining that Landlord's Work is Substantially Complete and identifying all punch-list items (the "Substantial Completion Certificate"). Landlord shall complete all punch-list items identified by Tenant within thirty (30) days after the issuance of the Substantial Completion Certificate, or a longer period of time if reasonably necessary to complete the punch-list items. "Substantial Completion" or "Substantially Completed" means that: (i) there are no materially defective or materially unfinished items in Landlord's Work that would materially interfere with Tenant's use of the Premises for normal business operations; and (ii) the Premises have been completed by Landlord substantially pursuant to the Final Plans, except for any punch-list items. Landlord's Work may include variations from the Final Plans without Tenant's prior approval if those variations are necessary to comply with any laws, ordinances, or regulations or are otherwise reasonably necessary, as determined by Landlord in its sole discretion. In the event of a dispute between Landlord and Tenant as to whether Landlord has Substantially Completed the construction of the Premises as required in this Work Letter, a certificate executed by Landlord's architect shall be deemed conclusive.

7. LANLORD'S ENTRY TO PERFORM WORK. Tenant agrees that Landlord may enter the Premises to perform Landlord's Work (including during regular business hours) and Tenant further acknowledges that the performance of Landlord's Work may interfere with Tenant's occupancy of the Premises and the operation of its business.



8. TENANT'S REMEDY. Tenant's sole and exclusive remedy against Landlord for any defects in Landlord's Work is for the repair and replacement of those defects, but Landlord shall not be responsible for any defect of any nature in Landlord's Work of which Landlord is not notified by Tenant in writing within one (1) year after Substantial Completion. LANDLORD MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, IN CONNECTION WITH LANDLORD'S WORK, EXCEPT THE WARRANTIES EXPRESSLY SET FORTH IN THIS SECTION 8, TENANT'S SOLE REMEDY FOR THE BREACH OF ANY APPLICABLE WARRANTY IS THE REMEDY SET FORTH IN THIS SECTION 8. Tenant agrees that no other remedy, including, without limitation, incidental or consequential damages for lost profits, injury to person or property, or any other incidental or consequential loss, is available to Tenant for any defects in Landlord's Work.

9. TENANT'S WORK. On Substantial Completion of Landlord's Work, Tenant shall install its equipment and fixtures (if any) in the Premises promptly and diligently in a professional and workmanlike manner.



SCHEDULE 1-A

LANDLORD'S WORK



ONE COUNTRYSIDE PLACE
OFFICE BUILDING LEASE

DATED THE 12 DAY OF FEBRUARY, 2015
BETWEEN

DOMICILIO OC, LLC,

a Texas limited liability company,

AS LANDLORD,

AND

FICENTIVE, INC.,

a Nevada corporation,

AS TENANT



# ONE COUNTRYSIDE PLACE
OFFICE BUILDING LEASE
BASIC LEASE INFORMATION

1. Date: February 12, 2015

2. Landlord: DOMICILIO OC, LLC, a Texas limited liability company

3. Tenant: FICENTIVE, INC., a Nevada corporation

4. Property: The real property legally described on Exhibit B attached to this Lease,

5. Building: commonly known as "One Countryside Place"
That certain office building that is known as 12500 San Pedro, in San Antonio, Texas 78216, located on the Property. The Building contains one hundred forty-seven thousand, nine hundred eighty-six (147,986) rentable square feet.

6. Premises: Two thousand seven hundred sixty-nine (2,769) rentable square feet located on the first (1') floor of the Building, designated as Suite No. 140, as outlined on the floor plan attached to this Lease as Exhibit A.

7. Initial Term: Thirty-eight (38) months (plus any partial month if the Commencement

8. Commencement Date: The later of (i) Substantial Completion of the Landlord Work (each as defined in Exhibit G), or (ii) March 1, 2015

9. Expiration Date: The date that is thirty-eight (38) months following Commencement Date (or that date that is thirty-eight (38) months following the last day of the month during which the Commencement Date occurs if the Commencement Date occurs on a date other than the first day of a calendar month)

10. Base Rental Rate: Months Annual Base Rental Rate
1 - 2 $21.00 per rentable square foot per year*
3 - 14 $21.00 per rentable square foot per year
15 - 26 $21.50 per rentable square foot per year
27 - 38 $22.00 per rentable square foot per year
*subject to Base Rent abatement as set forth in Exhibit H

11. Base Rent: Months Monthly Base Rent
1 - 2 $4,845.75**
3 - 14 $4,845.75
15 - 26 $4,961.13
27 - 38 $5,076.50



12. Security Deposit: $4,845.75

13. Base Year: 2015

14. Tenant's
The ratio that the rentable area of the Premises bears to the rentable area of the Building, which is agreed to be Proportionate
1.87% (2,769/147,986), as the ratio may be adjusted by Landlord pursuant to this Lease
Share:
15. Tenant $15,229.50

16. General Aggregate Liability Insurance Limit: $2,000,000.00

17. Guarantor: Payment Data Systems, Inc.

18. Landlord's Broker: Cushman & Wakefield/San Antonio Commercial Advisors

19. Tenant's Broker: E. Smith Realty Partners Dallas LLC

20. Parking Spaces: Twelve (12) unreserved parking spaces

21. Sign: Subject to Landlord's prior written approval, Landlord shall install and maintain through the Term at Tenant's sole expense, a sign with Tenant's name to be located on the bottom half panel of the monument sign currently situated on the Property at no additional cost to Tenant.

22. Normal Business Hours: Between the hours of 8:00 a.m. and 6:00 p.m., Monday through Friday, and 8:00 a.m. and 1:00 p.m. on Saturday, except for legal holidays. Tenant shall be permitted 24-hour access to the Building and Premises (with card-key for after hour Building access)

23. Exhibit List Exhibit A Floor Plan of the Premises

<table><tr><td>Exhibit B</td><td>Description of the Real Property</td></tr><tr><td>Exhibit C</td><td>Confirmation of Lease Term</td></tr><tr><td>Exhibit D</td><td>Form of Tenant Estoppel Certificate</td></tr><tr><td>Exhibit E</td><td>Rules and Regulations</td></tr><tr><td>Exhibit F</td><td>Intentionally Omitted</td></tr><tr><td>Exhibit G</td><td>Work Letter</td></tr></table>



Exhibit H Base Rent Abatement

Exhibit I Intentionally Omitted

Exhibit I Guaranty



The basic lease information above (the "Basic Lease Information") is incorporated into and made a part of the Lease, dated as of the date written above, by and between Landlord and Tenant, to which this Basic Lease Information is attached. If there is any conflict between the Basic Lease Information and the Lease, then the Lease shall control.

LANDLORD:

DOMICILIO OC, LLC,
a Texas limited liability company

By: /s/ John C. Horn

Name: John C. Horn

Title: Manager

Address:

% Cushman & Wakefield

12500 San Pedro, Suite 327

San Antonio, Texas 78216

Telephone: 210.494.9999

Fax: 210.545.4216

(TENANT'S SIGNATURES ON NEXT PAGE)



FICENTIVE,
a Nevada corporation

By:



Address:
12500 San Pedro, Suite 140 San Antonio, Texas 78216



# OFFICE BUILDING LEASE

THIS LEASE is entered into by and between Landlord and Tenant, as specified in Paragraph 2 and Paragraph 3 of the Basic Lease Information, respectively, as of the date shown in Paragraph 1 of the Basic Lease Information, which Basic Lease Information is incorporated into this Lease by reference.

1. SUMMARY OF LEASE. Landlord leases to Tenant and Tenant leases from Landlord the Premises (as defined in Paragraph 6 of the Basic Lease Information) on and subject to the terms, covenants, and conditions set forth in this Lease. Tenant covenants, as a material part of the consideration for this Lease, to keep and perform each and all of the terms, covenants, and conditions for which Tenant is responsible and that this Lease is entered into on the condition of Tenant's performance of all of these items.

2. PREMISES. Landlord and Tenant stipulate that the number of rentable square feet in the Premises and in the Building (as defined in Paragraph 5 of the Basic Lease Information), as set forth above in Paragraph 5 and Paragraph 6 of the Basic Lease Information, is conclusive and binding on them. Landlord disclaims any representation or warranty, express or implied, that the stipulated rentable square footage of the Premises or the Building is more or less than the respective actual rentable square footage of each or that the initial stipulated area measurements conform to any industry standard measurement methodology. Tenant has made its own independent investigation of the rentable square footage of the Premises and the Building and has not relied on any representation by Landlord concerning the accuracy of these measurements. If the measurable physical dimensions of the Premises or the Building are changed for any reason (e.g., by condemnation, casualty, exercise of an expansion option, or other cause), and this Lease requires or permits the measurement of the affected area, then Landlord's architect shall measure the affected area using the building standard measurement methodology that Landlord may designate on one or more occasions, and Landlord and Tenant stipulate and agree that Landlord's architect's determination of rentable square footage and any other ancillary measurements of the affected area is binding on Landlord and Tenant for all purposes under this Lease.

## 3. TERM.

a. Initial Term. Except as otherwise provided in this Lease, the term of this Lease is the Initial Term as set forth in Paragraph 7 of the Basic Lease Information, commencing on the Commencement Date, and ending as of the Expiration Date, as set forth in Paragraph 8 and Paragraph 9, respectively, of the Basic Lease Information. The Initial Term is referred to as the "Term." If for any reason the Commencement Date occurs pursuant to this Lease on a day other than the first day of a calendar month, then the period commencing on the Commencement Date and ending on the last day of the calendar month in which the Commencement Date occurs shall be an initial stub period that shall be added to the Initial Term, and Tenant shall pay all Rent (as defined in this Lease) with respect to this stub period (on a prorated basis as referenced in Section 5.a) at the same rate applicable to the first full calendar month of this Lease. Following this stub period and commencing as of the first day of the first full calendar month following the month in which the Commencement Date occurs, Tenant shall commence the payment of Rent as if the Initial Term had actually commenced on the first day of the first full calendar month following the month in which the Commencement Date occurs. The use of the stub period described above is intended to provide for ease of administration and calculation of all amounts owed under this Lease, because all rental adjustments shall be determined as of the first day of a calendar month and the Term shall end as of the last day of a calendar month (unless terminated earlier pursuant to this Lease).

b. Confirmation of Lease Term. When the Commencement Date and the Expiration Date have been ascertained, the parties shall promptly complete and execute a Confirmation of Lease Term in



the fnon of Exhibit C attached to this Lease; however, the failure of the parties to execute the Confirmation of Lease Term shall not defer the Commencement Date or otherwise invalidate this Lease.

4. ACCEPTANCE OF PREMISES. Except to the extent modified by Landlord's express assumption of construction obligations, if any, in the Work Letter, if any, attached to this Lease as Exhibit G, and Landlord's maintenance obligations under this Lease, THE PREMISES ARE BEING LEASED "AS IS," WITH TENANT ACCEPTING ALL DEFECTS, IF ANY, AND LANDLORD MAKES NO WARRANTY OF ANY IUND, EXPRESS OR IMPLIED, WITH RESPECT TO THE PREMISES (WITHOUT LIMITATION, LANDLORD MAKES NO WARRANTY AS TO THE HABITABILITY, SUITABILITY, OR FITNESS OF THE PREMISES FOR A PARTICULAR PURPOSE NOR AS TO THE ABSENCE OF ANY TOXIC OR OTHERWISE HAZARDOUS SUBSTANCES). ANY IMPLIED WARRANTIES ARE EXPRESSLY DISCLAIMED AND EXCLUDED. TENANT FURTHER ACKNOWLEDGES THAT WITHOUT THIS ACCEPTANCE, THIS LEASE WOULD NOT BE MADE AND THAT LANDLORD DOES NOT HAVE, AND SHALL NOT UNDER ANY CIRCUMSTANCES HAVE, ANY OBLIGATION WHATSOEVER TO UNDERTAKE ANY REPAIR, ALTERATION, REMEDIATION, OR OTHER WORK OF ANY KIND WITH RESPECT TO ANY PORTION OF THE PROJECT (AS DEFINED IN THIS LEASE), EXCEPT AS IS OTHERWISE EXPLICITLY CONTEMPLATED IN THIS LEASE. This Section 4 is subject to any contrary requirements under applicable law; however, in this regard, Tenant acknowledges that it has been given the opportunity to inspect the Premises and to have qualified experts inspect the Premises before the execution of this Lease. Tenant releases Landlord of all rights, express or implied, that Tenant may have against Landlord arising out of or resulting from any errors, omissions, or defects in the Property. This waiver and release of claims shall survive the termination of this Lease.

## 5. RENT.

a. Rent Payments. Tenant agrees to pay Landlord each month, as base monthly rent, the Base Rent set forth in Paragraph 11 of the Basic Lease Information. Unless otherwise set forth in Exhibit H (Base Rent Abatement), if any Exhibit H is attached to this Lease, the first monthly installment of Base Rent shall be due and payable on or before the date of execution of this Lease as stated in Paragraph 1 of the Basic Lease Information. Each subsequent monthly installment of Base Rent shall due and payable in advance on the first day of each calendar month during the Term, except that the first month's installment shall be paid on the execution of this Lease. If the Tenant commences or ends on a day other than the first day of a calendar month, then the Base Rent for the months in which this Lease commences or ends shall be prorated (and paid at the beginning of each of those months) in the proportion that the number of days this Lease is in effect during each of those months bears to the total number of days in that month, and this partial month's installment shall be paid no later than the commencement of the subject month. In addition to the Base Rent, Tenant agrees to pay as additional rent the amount of additional rent and rent adjustments and other charges required by this Lease (collectively, with the Base Rent, "Rent"). Unless otherwise established in this Lease, all Rent shall be paid to Landlord without prior demand or notice from Landlord, without any deduction or offset, and in lawful money of the United States of America, at the address of Landlord designated on the signature page of the Basic Lease Information or to any other person or at any other place as Landlord may designate in writing on one or more occasions. To defray administrative and handling expenses, Tenant shall pay an additional charge of One Hundred and No/100 Dollars ($100.00) for each returned check. Except as otherwise provided in this Lease, if the area of the Premises is adjusted, then the Base Rent shall be recalculated using the Base Rental Rate set forth in Paragraph 10 of the Basic Lease Information.

## b. Late Payment.

(1) If Tenant fails to pay any installment of Rent by the date that installment is due, then Tenant shall pay to Landlord, without prior demand or notice from Landlord, a late charge



equal to seven percent (7%) of the overdue installment of Rent. Tenant acknowledges that late payments shall cause Landlord to incur costs not contemplated by this Lease, the exact amount of which costs are extremely difficult and impracticable to calculate. The parties agree that the late charge described above represents a fair and reasonable estimate of the extra costs incurred by Landlord as a result of a late payment. In addition, all amounts payable by Tenant to Landlord under this Lease, exclusive of the late charge described above, if not paid within ten (10) days after these amounts are due, shall bear interest from the due date until paid at the rate of ten percent (10%) per annum, compounded monthly, or the maximum amount permitted by law (whichever is less) ("Interest"), without prior demand or notice from Landlord. The acceptance of the late charge or Interest described above shall not be deemed a consent by Landlord to any late payment, nor a waiver of Landlord's right to insist on timely payments at any time, nor a waiver of any remedies to which Landlord is entitled under this Lease, at law, or in equity.

(2) If Tenant twice in any calendar year fails to pay any installment of Rent within five (5) business days after that installment is due and notice by Landlord, then Landlord shall be entitled to require Tenant to pay Rent (as estimated by Landlord) quarterly, in advance, in readily available funds (e.g., in cash or by wire transfer, cashier's check, or money order).

c. Unelective Rent. If at any time during the Term, any Rent is not fully collectible by reason of any legal requirement or restriction, then Tenant shall take any other steps that Landlord may request, and that may be legally permissible, to permit Landlord to collect the maximum rents and charges that may be legally permissible during the requirement or restriction (but not in excess of the Rent reserved under this Lease). On the termination of the legal requirement or restriction during the Term, Tenant shall pay to Landlord, in addition to the Rent for the period following this termination, if legally permissible, the portion of Rent that would have been paid pursuant to this Lease but for the legal requirement or restriction, together with Interest on this Rent, less the Rent paid by Tenant to Landlord while the requirement or restriction was in effect, until paid in full.

6. ADDITIONAL RENT. In addition to the Base Rent, Tenant shall pay Tenant's Proportionate Share, as specified in Paragraph 14 of the Basic Lease Information, of the increase in Actual Operating Costs (as defined below) for each Operating Year (as defined below) over the Base Amount (as defined below). Tenant's Proportionate Share of the Building may change based on Landlord's remeasurement or adjustment of the area of the Building or the Premises. In addition, whenever additional space is added to the Premises, Tenant's Proportionate Share of the Building shall increase accordingly.

a. Definitions. The following terms have the meanings specified below.

(1) "Actual Operating Costs" shall mean the actual Operating Costs (as defined below) for any Operating Year, subject to any provisions set forth in Exhibit I (Cap on Controllable Expenses), if any Exhibit I is attached to this Lease. For any Operating Year, if the Building is not at least ninety-five percent (95%) occupied for the Operating Year (as defined below) or part of the Operating Year, or if Landlord is not supplying services to at least ninety-five percent (95%) of the total rentable area of the Building at any time during the Operating Year or part of the Operating Year, then the Operating Costs that vary with occupancy for that Operating Year shall be adjusted as if ninety-five percent (95%) of the total rentable area of the Building had been occupied for the entire Operating Year and Landlord had been supplying services to ninety-five percent (95%) of the Building for the entire Operating Year. Actual Operating Costs for the Base Year (as specified in Paragraph 13 of the Basic Lease Information) shall not include costs that are unusually high due to extraordinary circumstances such as embargoes, boycotts, unusual security expenditures, insurance surcharges, or unusually high premiums or utility rate increases due to shorter-term events or circumstances, but shall include,



without limitation, employment costs based on the minimum wage (including benefits), any expense increases arising from the unionization of any service rendered to the Premises, the Building, or the Property (collectively, the "Project"), and any costs reasonably incurred to comply with laws that are amended, become effective, or are interpreted or enforced differently after the date of this Lease (whether or not these costs are capital expenses). Further, in no event shall a component of Operating Costs for any Operating Year be less than the amount included in the Base Year for that Operating Costs component, except as provided in Exhibit I, if any Exhibit I is attached to this Lease.

(2) "Base Amount" shall mean an amount equal to Actual Operating Costs for the Base Year.

(3) "Capital Expenses" shall mean all costs of installing or replacing capital improvements, equipment, or devices installed or paid for by Landlord in, on, or for the Project, including, but not limited to, windows, walls, and floors and their coverings, ceiling tiles, and fixtures in lobbies, corridors, restrooms, and other common or public areas or facilities; lighting fixtures; irrigation systems, drainage facilities, fences, curbs, and walkways; parking facilities and roadways on the Property; directional signs, pavement signs, and other traffic control devices on the Property; the Building roof; and IF/AC (as defined below) and other systems serving the Building or the Property.

(4) "Estimated Operating Costs" shall mean Landlord's estimate of Operating Costs for the following Operating Year, adjusted as if ninety-five percent (95%) of the total rentable area of the Building shall be occupied for the entire Operating Year.

(5) "Operating Costs" shall mean all expenses, costs, and disbursements paid or incurred by Landlord for maintaining, owning, managing, operating, repairing, replacing, changing, installing, servicing, cleaning, inspecting, testing, evaluating, making available, or providing the Project or any part of the Project, and any service, facility, amenity, or personal property serving any part of the Project or otherwise used in conjunction with the Project, including, but not limited to, expenses paid or incurred for: Property Taxes (as defined below); utilities for the Project, including, but not limited to, electricity, power, gas, steam, oil or other fuel, water, sewer, plumbing, lighting, and HVAC (as defined in this Lease); telecommunications services for the Project; permits, licenses, and certificates necessary to operate, manage, and lease the Project; insurance, including, without limitation, property insurance, flood insurance, casualty insurance, business income/rental value insurance, liability insurance, and business interruption insurance, that Landlord deems appropriate to carry or is required to carry by any of Landlord's Mortgages (as defined in this Lease) under any mortgage encumbering any part of the Project or under any mortgage encumbering any of Landlord's or a property manager's personal property used in the operation of the Building (these insurance expenses include, but are not limited to, all costs connected with procuring insurance coverage and any payments made to satisfy any deductibles or self-insured retentions); supplies, tools, equipment (including the cost of operating and maintaining this equipment and charges for depreciation of this equipment), and materials used in the operation, repair, and maintenance of the Project; accounting, auditing, legal, inspection, consulting, concierge, and other services; environmental testing and air quality audits; equipment rental (or installment equipment purchase or equipment financing agreements); management operation costs (including (i) the cost of any management fee paid under a management agreement, (ii) the fair rental value of any office space provided, and (iii) the costs of office supplies, bullets or newsletters distributed to Project tenants, postage, telephone expenses, maintenance and repair of office equipment, and non-capital investment equipment); wages, salaries, and other compensation and benefits (but not including the fair value of any



parking privileges provided) for all on-site persons engaged in the management, operation, maintenance, or security of the Project, and employer's Social Security taxes, unemployment taxes, or insurance, and any other taxes that may be levied on these wages, salaries, compensation, and benefits, all allocated based on the time each person is engaged in providing any management, operation, maintenance, or security service for the Project; payments under any ground lease (other than ground rent due under the lease), easement, operating agreement, declaration, restrictive covenant, or instrument pertaining to the sharing of costs in any public or private planned development or similar arrangement; operation, repair, and maintenance of all systems and equipment and components of the systems (including replacement of components); janitorial service; alarm and security service; access control; fire prevention, warning, and control; window cleaning; waste disposal and recycling; pest control; elevator operation and maintenance; operation and maintenance of mechanical systems; cleaning of walks, parking facilities, roadways, and building walls; maintenance of window, wall, and floor coverings, ceiling tiles, and fixtures in lobbies, corridors, restrooms, and other common or public areas or facilities; repair and replacement of bulbs and ballasts used in lighting fixtures; interior and exterior landscaping maintenance and replacement of shrubs, trees, grass, sod, and other landscape items; maintenance and repair of irrigation systems, drainage facilities, fences, curbs, and walkways; maintenance and repair of parking facilities and roadways on the Property, including, but not limited to, repaving and restriping, patching, and sealing; maintenance and repair of all directional signs, pavement signs, and other traffic control devices on the Property; maintenance and repair of all freestanding signs and other common signs in common areas of the Project; snow, ice, and debris removal; roof repairs; all other maintenance and service agreements for the Project and for the equipment in the Project; all other costs of keeping the common areas of the Project in a safe, neat, and clean condition; all Capital Expenses, amortized over the lesser of (a) ten (10) years, (b) the Payback Period (if applicable), or (c) the useful life of the capital improvement, equipment, or device as reasonably determined by Landlord consistent with generally accepted accounting principles; the cost of contesting any governmental enactments that may affect Operating Costs.

Operating Costs shall not include depreciation, interest, and amortization on mortgages, or other debt costs or ground lease rent payments, if any, on the Building or the Property; legal fees in connection with leasing, tenant disputes, or enforcement of leases; real estate brokers' leasing commissions; costs incurred in marketing any part of the Project to potential tenants or buyers; the cost of any special work or service performed for any tenant (including Tenant) at that tenant's cost; costs incurred in connection with any improvements, work, renovations, or repairs for the exclusive benefit of a portion of the Property that is occupied or used exclusively by one or more other tenants or occupants, and which Tenant does not have the right to occupy or use; the cost of providing any service directly to any other tenant or occupant, if that service will not benefit Tenant; costs arising from defects in the design or construction of the Building or the Property, including, but not limited to, latent defects in the Building or the Property; penalties, fines, late fees, or similar charges incurred due to the violation by Landlord or any tenant or occupant (other than a Tenant Party) of any law, rule, regulation, or ordinance applicable to the Project; the costs of repairs of damage to the Project caused by Perils (as defined below); any costs arising from any environmental remediation of all or any part of the Project that results from the presence of a Hazardous Substance (as defined below) on the Property, including, but not limited to, the costs to contain and remove the Hazardous Substance from the Property and to repair any resulting damage, except to the extent that a Tenant Party directly caused the harm from or the release of the Hazardous Substance; and the costs of any items to the extent Landlord actually receives reimbursement from insurance proceeds (not including any deductibles paid by Landlord) or from a third party (with the insurance proceeds to be deducted from Operating Costs in the Operating Year in which received); taxes related to a period payable or assessed outside of



the Term of this Lease; Landlord's general corporate overhead and general administrative expenses; Landlord's legal, corporate and/or partnership accounting and legal costs, mortgages, debt costs or other financing charges; health/sport club dues; placement recruiting fees for employees assigned to the Building or not; employee training programs, real estate licenses and other industry certifications; costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord's interest in the Building/Project; bad debt loss or rent loss or any reserves thereof; costs incurred in connection with any disputes between Landlord and/or Landlord's management agent and their employees, tenants or occupants, and providers of goods and services to the Building/Project, unless same was caused or contributed to by Tenant; any cost relating to the marketing, solicitation, negotiation and execution of leases of space, including, without limitations, promotional and advertising expenses, commissions, find= fees, accounting, legal and other professional fees and expenses related to the negotiation and preparation of any lease, license, sublease or other such document; costs of design, plans, permits, licenses, inspection, utilities, construction and clean up of tenant improvements to the Premises or the premises of other tenants, other than janitorial services wages, salaries, fees, fringe benefits, and any other form of compensation to any executive employee of Landlord and/or Landlord's managing agent above the grade of Property Manager; any costs related to any employee's time devoted to other efforts unrelated to the maintenance and operation of the Building/Project; any amount paid by Landlord or Landlord's managing agent to a subsidiary or affiliate of Landlord or Landlord's managing agent, or to any party as a result of a non-competitive selection process, for management or other services, or for supplies or other materials, to the extent such costs excess the cost that would have been paid had the services, supplies, or materials been provided by unaffiliated parties on a competitive basis and are consistent with those incurred by similar buildings in the same area as the Building is located; costs and expenses incurred in relocating tenants in and out of the Building, including without limitation lease takeover costs incurred by Landlord in connection with the entering into of leases and costs incurred by Landlord to relocate tenants in order to consummate a specific lease or to accommodate a specific tenant's request; any parking charges for Landlord's management, engineering, maintenance, security, parking or other vendor personnel; repair of damage to the Building/Project in connection with any type of casualty, event of damage, or destruction, to the extent the forgoing is actually reimbursed by any insurance or any other third party; any cost or service sold or provided to other tenants in which Landlord is reimbursed by such tenants or by insurance or otherwise compensated; any fines, penalties, late charges, liquidated damages or interest charges, unless the same was caused by an act or omission of Tenant; reserves of any kind; any costs, fees, subscriptions or similar expenses for political, charitable, industry association, as well as the cost of any newspaper, magazine, trade or other subscriptions, except the Building's annual membership in the local Building Owners and Managers Association or similar building management association ("BOMA").

(6) "Operating Year" shall mean a calendar year commencing on January 1 and ending on December 31, beginning with the Base Year.

(7) "Payback Period" shall mean the period, as reasonably determined by Landlord, within which the anticipated savings from the use of a capital improvement, equipment, or device will equal the cost, as reasonably determined by Landlord, of that capital improvement, equipment, or device.

(8) "Property Taxes" shall mean all real and personal property taxes and assessments, including any interest and/or penalty on the assessments, imposed by (i) any present or future federal, state, county, municipal, or other governmental authority, agency, entity, department, or subdivision, (ii) any present or future quasi-governmental entity, or (iii) any present or future community improvement, municipal utility, or similar district or authority



(collectively, "Taxing Authorities") (a) on the Project (including a pro rata portion of any taxes levied on any common areas), (b) on any machinery, equipment, or other personal property used in connection with the operation, maintenance, or management of the Project, or (c) on Landlord as the owner of the Project, whether or not these taxes and assessments are directly paid by Landlord, and whether or not they are imposed by taxing districts or Taxing Authorities currently existing and taxing the Project; any assessments levied in lieu of or in addition to property taxes (except for any sales, use, or other tax on any form of Rent due under this Lease); any other costs levied or assessed by, or at the direction of, any Taxing Authority in connection with the use or occupancy of the Building or the Premises or the parking facilities serving the Project; any tax on this transaction or any document to which Tenant is a party creating or transferring an interest in the Premises; and any expenses, including the reasonable cost of attorneys or experts (including, but not limited to, consultants and appraisers), incurred by Landlord in contesting or seeking reduction by any Taxing Authority of the above-referenced taxes, assessments, levies, and other governmental impositions and charges, less any refunds obtained as a result of an application for review of those taxes, assessments, levies, and other governmental impositions and charges. Property Taxes include, but are not limited to, community improvement district taxes and fees, business license taxes and fees, and any taxes payable by Landlord pursuant to V.T.C.A., Texas Tax Code, Chapter 171, Section 171.001, et seq. (the "Texas Margin Tax"), as the statute may be amended or recodified on one or more occasions (but only to the extent the amendment or recodification does not alter the fundamental premise of the Texas Margin Tax as a tax created and imposed in lieu of ad valorem taxes or is otherwise a non-substantive amendment or recodification). Property Taxes shall not include any net income, franchise taxes imposed or measured on or by Landlord's net income from the operation of the Project (other than business license taxes and fees and the Texas Margin Tax), gift, transfer, estate, or inheritance taxes. TENANT WAIVES AND RELINQUISHES ALL PRESENT OR FUTURE RIGHTS THAT TENANT HAS OR MAY HAVE UNDER APPLICABLE LAW: (i) TO PROTEST, FOR AD VALOREM TAX PURPOSES, APPRAISED VALUES OF THE PREMISES, THE BUILDING, THE PROPERTY, OR ANY OTHER COMPONENT OF THE PROJECT; OR (ii) TO RECEIVE NOTICE OF REAPPRAISAL REGARDING THE PREMISES, THE BUILDING (INCLUDING LANDLORD'S PERSONAL PROPERTY (AS DEFINED IN THIS LEASE)), THE PROPERTY, OR ANY OTHER COMPONENT OF THE PROJECT, IRRESPECTIVE OF WHETHER LANDLORD CONSENTS TO THE REAPPRAISAL, INCLUDING, WITHOUT LIMITATION, ALL RIGHTS THAT TENANT HAS OR MAY HAVE UNDER SECTIONS 41.413 AND/OR 42.015 OF THE TEXAS TAX CODE (AS AMENDED, SUPPLEMENTED, MODIFIED, RECODIFIED, AND/OR REPLACED ON ONE OR MORE OCCASIONS).

b. Estimated Costs. On or before the Commencement Date and on or before each January 1 after the Commencement Date, or as soon after each January 1 after the Commencement Date as practical, Landlord shall provide Tenant with Landlord's Estimated Operating Costs for the upcoming Operating Year, and a corresponding calculation of additional rent, which shall be one-twelfth (1/12) of Tenant's Proportionate Share of the amount, if any, by which the Estimated Operating Costs exceed the Base Amount. This additional rent shall be added to the monthly installment of Base Rent payable by Tenant under this Lease for each month during the upcoming Operating Year.

c. Actual Operating Costs. Within one hundred fifty (150) days of the close of each Operating Year (except the Base Year) during the Term, Landlord shall deliver to Tenant a written statement setting forth the Actual Operating Costs during the preceding Operating Year. If the Actual Operating Costs for any Operating Year (except the Base Year) exceed the Estimated Operating Costs paid by Tenant to Landlord pursuant to Section 6.b, then Tenant shall pay the amount of this excess to Landlord as additional rent within thirty (30) days after receipt by Tenant of the Actual Operating Costs statement. If the statement shows the Actual Operating Costs to be less than the amount paid by Tenant



to Landlord pursuant to Section 6.b, then the amount of Tenant's overpayment shall be paid by Landlord to Tenant within thirty (30) days following the date of the statement or, at Landlord's option, credited by Landlord to the payment of Rent next due.

d. Determinations. The determination of Actual Operating Costs and Estimated Operating Costs shall be made by Landlord. Any payments pursuant to this Section 6 shall be additional rent payable by Tenant under this Lease, and in the event of nonpayment of this additional rent, Landlord shall have the same rights with respect to the nonpayment as it has with respect to any other nonpayment of Rent under this Lease. At any time during the Operating Year, Landlord shall have the right, on prior written notice to Tenant, to change the Estimated Operating Costs and/or Tenant's Proportionate Share. Tenant shall continue paying Tenant's Proportionate Share of Estimated Operating Costs for the prior Operating Year until Landlord has provided Tenant with Tenant's Proportionate Share of Estimated Operating Costs for the current Operating Year.

e. Taxes. Tenant shall reimburse Landlord for (i) all Property Taxes and (ii) any sales, use, or other tax (excluding state and federal income tax) imposed now or in the future by any Taxing Authority on any form of Rent due under this Lease as part of Operating Costs. If it is not lawful for Tenant to reimburse Landlord pursuant to the previous sentence, then the Base Rent payable to Landlord under this Lease shall be revised so as to net Landlord the same net rental after imposition of any tax mentioned in the previous sentence on Landlord as would have been payable to Landlord before the imposition of the tax.

f. End of Term. If this Lease shall terminate on a day other than the last day of an Operating Year, then the amount of any adjustment between Estimated Operating Costs and Actual Operating Costs with respect to the Operating Year in which the termination occurs shall be prorated on the basis that the number of days from the commencement of that Operating Year, to and including the termination date, bears to three hundred sixty-five (365), and any amount payable by Landlord to Tenant or Tenant to Landlord with respect to this adjustment shall be payable within thirty (30) days after delivery of the statement of Actual Operating Costs with respect to the Operating Year in which the termination occurs.

g. Audit Rights. After Landlord furnishes Tenant with its statement of Operating Costs for any Operating Year, Tenant may elect to, at Tenant's sole cost and expense, audit Landlord's Operating Costs for that Operating Year only (subject to Tenant's limited right to review two (2) prior Operating Years as specified below) by providing written notice to Landlord (the "Audit Election Notice") within forty-five (45) days of receiving the statement of Operating Costs (the "Audit Election Period"). Tenant's audit shall be subject to the following conditions: (i) there is no uncured default by Tenant under this Lease; (ii) the audit shall be prepared by an independent certified public accounting firm of recognized national or regional standing; (iii) in no event shall any audit be performed by a firm retained on a "contingency fee" or percentage basis; (iv) the audit shall commence within thirty (30) days after Landlord makes Landlord's books and records available to Tenant's auditor and shall conclude within sixty (60) days after Landlord receives the Audit Election Notice or such longer period as may be reasonably necessary, not to exceed a total of ninety (90) days after Landlord receives the Audit Election Notice; (v) the audit shall be conducted during Landlord's normal business hours at the location where Landlord maintains its books and records and shall not unreasonably interfere with the conduct of Landlord's business; (vi) Tenant and its accounting firm shall treat any audit in a confidential manner and shall each execute a commercially reasonable confidentiality agreement for Landlord's benefit prior to commencing the audit; and (vii) the accounting firm's audit report shall, at no charge to Landlord, be submitted in draft form for Landlord's review and comment before the final approved audit report is delivered to Landlord, and any reasonable comments by Landlord shall be incorporated into the final



audit report. Each party's audit rights and obligations will survive the expiration or termination of this Lease.

(I) Notwithstanding the foregoing, Tenant shall have no right to conduct an audit if

Landlord furnishes to Tenant an audit report for the Operating Year in question prepared by an independent certified public accounting firm of recognized national or regional standing for another tenant in the Building, where such report addressed the accuracy of Landlord's calculation of Operating Costs utilizing substantially the same definition of Operating Costs as set forth herein, and Tenant finds no manifest error in such report.

(2) Landlord shall, at Tenant's option, either credit any overpayment determined by the final audit report against the next Rent payment due and owing by Tenant or refund such overpayment directly to Tenant within thirty (30) days of determination. Likewise, Tenant shall pay Landlord any underpayment determined by the final audit report within thirty (30) days of determination. This Section 6.g(2) shall not be construed to limit, suspend, or abate Tenant's obligation to pay Rent when due.

(3) If Tenant's audit reflects a discrepancy in the proper treatment of Operating Costs, which discrepancy exceeds three percent (3%) of the amount charged by Landlord for the year in question (a "Discrepant Item"), Tenant shall be permitted to review, inspect, and audit up to two (2) prior years (other than the year of review or audit) of Landlord's books and records, but only as to the Discrepant Item(s). If Tenant does not give written notice of its election to audit Landlord's Operating Costs during the Audit Election Period, Landlord's Operating Costs for the applicable Operating Year(s) shall be deemed approved for all purposes, and Tenant shall have no further right to review or contest the same. The right to audit granted hereunder is personal to the initial Tenant named in this Lease and to any Transferee under a permitted Assignment (as defined and set forth in Section 19 below) and shall not be available to any subtenant under a sublease of the Premises.

## 7. SECURITY DEPOSIT. Simultaneously with the execution of this Lease, Tenant shall deposit with

Landlord the Security Deposit specified in Paragraph 12 of the Basic Lease Information. This sum shall be held by Landlord as security for the faithful performance by Tenant of all of Tenant's obligations under this Lease. If Tenant defaults with respect to any provision of this Lease, including, but not limited to, the provisions relating to the payment of Rent, then Landlord may (but is not required to) use, apply, or retain all or part of the Security Deposit for the payment of any Rent or any other sum in default, or for the payment of any other amount that Landlord may incur by reason of Tenant's default or to compensate Landlord for any other loss or damage that Landlord may suffer by reason of Tenant's default. If any portion of the Security Deposit is used or applied pursuant to the previous sentence, then Tenant shall, on demand, immediately deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Tenant's failure to do so is a material breach of this Lease. Landlord is not required to keep the Security Deposit separate from its general funds, and Tenant is not entitled to interest on the Security Deposit. The Security Deposit is not an advance deposit of Rent or a measure of Landlord's Damages (as defined in this Lease) for purposes of a default by Tenant under this Lease. If Tenant shall fully and faithfully perform all of its obligations under this Lease, then the Security Deposit or any balance of the Security Deposit shall be returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's interests under this Lease) sixty (60) days after the last to occur of: (i) expiration of the Ten to earlier termination of the Lease, (ii) payment of all Rent and other sums due under this Lease, (iii) Tenant's surrender of the Premises pursuant to this Lease, and (iv) Landlord's receipt of Tenant's forwarding address. However, even if Tenant fully and faithfully performs all of its obligations under the Lease, Landlord may retain all or a portion of the Security Deposit in an amount determined by Landlord as necessary to cover any amounts owed by Tenant for Actual Operating Costs incurred during the Term.



If Landlord transfers its interest in the Premises and the transferee assumes Landlord's obligations under this Lease, then Landlord may assign the Security Deposit to the transferee, and, after making this assignment, Landlord shall have no further liability for the return of the Security Deposit.

## 8. USES; ENVIRONMENTAL LAWS AND HAZARDOUS SUBSTANCES.

a. Uses. Tenant agrees that it shall continuously during the Term use the Premises for general office purposes, and for no other business or purpose. With regard to the Premises and to any Premises Alterations (as defined in this Lease) made by or on behalf of Tenant, Tenant, at its sole cost and expense, shall promptly comply with, and except for Landlord Work, shall bear the risk of complying with, all federal, state, county, and municipal laws, statutes, ordinances, and governmental rules, regulations, and requirements now in force or that may be in force in the future, including, without limitation, the Americans with Disabilities Act, 42 U.S.C. § 12101 et seq. (as amended, supplemented, modified, recodified, and/or replaced on one or more occasions, and including any related governmental rules, regulations, standards, and guidelines, the "ADA") and the Texas Architectural Barriers Act (Texas Gov. Code §§ 469.001—.208) (as amended, supplemented, modified, recodified, and/or replaced on one or more occasions, and including any related governmental rules, regulations, standards, and guidelines, "Chapter 469") (collectively, the "Disabilities Acts"). Tenant shall forward to Landlord within five (5) days of Tenant's receipt copies of any notices received from any governmental authorities with respect to Tenant's compliance or noncompliance with the Disabilities Acts. Neither Tenant nor any shareholder, member, manager, partner, Affiliate (as defined below), subsidiary, director, officer, employee, agent, representative, licensee, contractor, invitee, or visitor of Tenant or of any assignee or subtenant of Tenant, or anyone else on the Property with the express or implied consent of Tenant or of any assignee or subtenant of Tenant (each a "Tenant Party") shall use or permit the Premises to be used in any manner or do any act that would increase the existing rate of insurance on the Building or cause the cancellation of any insurance policy covering the Building, and no Tenant Party shall permit to be kept, used, or sold, in or about the Premises, any article that may be prohibited by the standard form of fire insurance policy, unless Tenant obtains an endorsement to the policy allowing the act or article. As used in this Lease, the term "Affiliate" means any person or entity that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the party in question. If, because of a Tenant Party's act, the rate of insurance on the Building or its contents increases, then the act is an Event of Default (as defined in this Lease), Tenant shall pay to Landlord the amount of the rate increase on demand, and acceptance of this payment shall not waive any of Landlord's other rights. During the Term, no Tenant Party shall (i) commit or allow to be committed any waste on the Premises, or any public or private nuisance in or around the Building or on the Property; (ii) allow any sale by auction on the Premises; (iii) place any loads on the floor, walls, or ceiling of the Premises that endanger the Building; (iv) use any apparatus, machinery, or device in or about the Premises that shall cause any substantial noise or vibration or in any manner damage the Building; (v) disturb or unreasonably interfere with other tenants of the Building or with Landlord's management of the Building; (vi) place any harmful liquids in the drainage system or in the soils surrounding the Building; (vii) use all or any portion of the Premises for: (a) an outbound "call center," or any other outbound telemarketing use, (b) offices of any agency or bureau of the United States or of any state or political subdivision of the United States or any state, (c) offices or agencies of any foreign government or of any political subdivision of any foreign government, (d) offices of any health care professionals or service organization, (e) schools or other training facilities that are not ancillary to corporate, executive, or professional office use, (f) retail or restaurant uses, or (g) communications firms such as radio and/or television stations. If any Tenant Party's office machines or equipment disturbs the quiet enjoyment of any other tenant in the Building, then Tenant shall provide adequate insulation, or take any other action that may be necessary to eliminate the disturbance, all at Tenant's sole cost and expense. Whether a Tenant Party's use of any part of the Project is prohibited by the previous two sentences is to be reasonably determined by Landlord.



## b. Environmental Laws and Hazardous Substances.

(1) No Tenant Party shall generate, use, manufacture, keep, store, refine, release, discharge, or dispose of any substance or material that is described as a toxic or hazardous substance, waste, or material or a pollutant or contaminant by any federal, state, county, or municipal law, ordinance, rule, regulation, standard, or guideline in force now or in the future (as amended, supplemented, modified, recodified, and/or replaced on one or more occasions) in any way relating to or regulating human health or safety or industrial hygiene or environmental conditions or pollution or contamination, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), 42 U.S.C. 9601, et seq. and the Solid Waste Disposal Act, 42 U.S.C. § 6901, et seq. ("Environmental Laws"), including, without limitation, PCBs, petroleum products, asbestos, and asbestos-containing materials, crude oil, natural gas liquids, liquefied natural gas, or synthetic gas usable as fuel, and "source," "special nuclear," and "byproduct" material as defined in the Atomic Energy Act of 1985, 42 U.S.C. § 3011 et seq. (collectively, "Hazardous Substances"), on, under, or near the Premises or the Building, except that a Tenant Party may use Hazardous Substances on the Premises that are incidental to general office use, such as photocopier toner, cleaning fluids, and solvents, provided that the quantities of these substances do not pose a threat to public health or to the environment or would necessitate a "response action," as that term is defined in CERCLA, and so long as Tenant strictly complies or causes compliance with all applicable Environmental Laws concerning the use, storage, production, transportation and disposal of these Hazardous Substances.

(2) Tenant shall (i) obtain and maintain in full force and effect all Environmental Permits (as defined below) that may be required on one or more occasions under any Environmental Laws applicable to Tenant or the Premises and (ii) be and remain in compliance with all terms and conditions of all of those Environmental Permits and with all other Environmental Laws. "Environmental Permits" means, collectively, any and all permits, consents, licenses, approvals, and registrations of any nature at any time required pursuant to, or in order to comply with, any Environmental Law.

(3) On the expiration or earlier termination of this Lease, Tenant, at Tenant's sole cost and expense, shall remove (i) all Hazardous Substances from the Premises (except to the extent placed on the Premises by Landlord), and (ii) any and all Hazardous Substances released in, on, under, or about the Property by any Tenant Party.

(4) Tenant shall give Landlord immediate written notice of any release or threatened release of, or any claim or action related to any release or threatened release of, any Hazardous Substance in, on, under, or about the Project. If the release was caused, in whole or in part, by any Tenant Party, then the notice shall include a description of measures proposed to be taken by Tenant to contain and/or remediate the release of the Hazardous Substance and any resultant damage to or impact on property, persons, and/or the environment ("environment" includes, without limitation, air, soil, surface water, and groundwater). On Landlord's approval and at Tenant's sole cost and expense, Tenant shall promptly take all steps necessary to clean up and remediate any release of any Hazardous Substance caused, in whole or in part, by any Tenant Party, comply with all applicable Environmental Laws, and otherwise report and/or coordinate with Landlord and all appropriate governmental agencies.

(5) Tenant agrees to indemnify and defend Landlord against and hold Landlord harmless from any and all losses, costs, liabilities, claims, and damages (including actual, direct, incidental, consequential, punitive, and exemplary damages, interest, and attorneys' fees, court



costs, alternative dispute resolution expenses, and other legal fees and expenses) (collectively, "Damages"), including, without limitation, cleanup costs, response costs, remediation costs, causes of action, claims for relief, professional fees, penalties, fines, assessments, and charges incurred in connection with or arising from the generation, use, manufacture, storage, disposal, or release of any Hazardous Substance by any Tenant Party, or any person claiming through or under any Tenant Party, on or about the Property throughout the Term. Landlord agrees to indemnify and defend Tenant against and hold Tenant harmless from any and all Damages, incurred in connection with or arising from the generation, use, manufacture, storage, disposal, or release of any Hazardous Substance by any Landlord Party, or any person claiming through or under any Landlord Party, on or about the Property throughout the Term.

(6) Landlord may, on reasonable notice to Tenant, be granted access to and enter the Premises no more than once annually to perform or cause to have performed an environmental inspection, site assessment, or audit. The environmental inspector or auditor may be chosen by Landlord, in its sole discretion, and the inspection or audit shall be performed at Landlord's sole expense. To the extent that the report prepared on that inspection, assessment, or audit (i) indicates the presence of Hazardous Substances in violation of Environmental Laws or (ii) provides recommendations or suggestions to prohibit the release, discharge, escape, or emission of any Hazardous Substances at, on, under, or within the Premises, or to comply with any Environmental Laws, Tenant shall promptly, at Tenant's sole expense, comply with the recommendations or suggestions, including, but not limited to, performing any additional investigative or subsurface investigations or remediation as recommended by the inspector or auditor. However, if, at any time, Landlord has actual notice or reasonable cause to believe that any Tenant Party has violated any Environmental Law, then Landlord shall be entitled to perform an environmental inspection, assessment, or audit at any time, and without being subject to the annual limitation, and Tenant must reimburse Landlord for the cost or fees incurred for the inspection, assessment, or audit as additional rent.

(7) Promptly on receipt of Landlord's request, Tenant, at Tenant's sole expense, shall submit to Landlord true and correct copies of any reports filed by Tenant with any governmental or quasi-governmental authority regarding the generation, placement, storage, use, treatment, or disposal of Hazardous Substances on or about the Premises.

## 9. MAINTENANCE AND REPAIRS.

a. Landlord's Obligations. Landlord shall maintain and keep in good repair the foundations, exterior walls, structural portions of the roof, and other structural portions of the Building, and shall maintain the electrical, plumbing, and heating, air conditioning, and ventilation ("11VAC") equipment in the Building, except any portions of this equipment that may be specially installed for Tenant or otherwise altered by Tenant in connection with Tenant's Premises Alterations, if any, or otherwise, or that exclusively serve the Premises; and except that all damage or injury to the Premises, the Building, or the equipment and improvements in the Premises and the Building, caused by any act, neglect, misuse, or omission of any duty by any Tenant Party shall be paid for by Tenant. Landlord shall not be liable for any failure to make any required repairs or to perform any required maintenance unless this failure shall persist for an unreasonable time (taking into account the nature and urgency of the repair or maintenance) after written notice of the need for the repairs or maintenance is given by Tenant to Landlord. Landlord shall not be responsible for any interruption, inconvenience, or annoyance to Tenant or Tenant's business caused by any repairs, restoration, or maintenance required to be made by Landlord under this Agreement, and Tenant shall not reduce or withhold any portion of any Rent payment without a prior final judicial determination of Tenant's right to do so. Tenant waives and releases its right to make repairs at Landlord's expense under any law, statute, or ordinance in effect now or in the future. Landlord



has no obligation to make any improvements, Alterations (as defined in this Lease), repairs, or maintenance to the Premises before or during the Term except as specifically set forth in the Lease, and in no event shall Landlord have any obligation under this Lease to make any repairs, maintenance, or replacements to the interior portion of the Premises, including, without limitation, carpeting, window coverings, wall coverings, windows, or painting of any of Tenant's property or Premises Alterations (as defined in this Lease).

b. Tenant's Obligations. Except to the extent specified in Section 9.a above, Tenant shall, at its expense, maintain, repair, and replace all portions of the Premises and the equipment or fixtures relating to the Premises, including, but not limited to, (i) all doors and plate glass in the Premises, (ii) all electrical, plumbing, and supplemental IVAC systems exclusively serving the Premises, and (iii) all furniture, fittings, installations, fixtures, equipment, cables, and any other personal property (collectively, "Personal Property") and Premises Alterations (as defined in this Lease) belonging to Tenant or placed in the Premises by, for, or on behalf of Tenant, at all times in good condition and repair. All maintenance, repairs, and replacements by Tenant shall be made promptly, in a good and workmanlike manner, pursuant to the laws of the State of Texas, all health, fire, police, and other ordinances, regulations, and directives of governmental agencies having jurisdiction over matters related to maintenance, repairs, and replacements, and the equipment manufacturers' suggested service programs, with materials and work of a quality at least equal to the original materials and work and with contractors approved in writing by Landlord. If Tenant fails to perform its obligations, then Landlord may enter the Premises and do so on Tenant's behalf, and Tenant shall reimburse Landlord on demand for any costs and expenses incurred by Landlord in performing Tenant's obligations. Tenant shall repair or replace, subject to Landlord's direction and supervision, any damage to the Premises or the Building, or the equipment or improvements in the Premises or the Building, by any act, neglect, or misuse by any Tenant Party; further, Tenant shall replace at Tenant's sole expense any glass that may be broken in the Premises, and elsewhere in the Building, if done through any act, neglect, or misuse by any Tenant Party, with glass of the same size, specifications, and quality, and, if required, with signs. If Tenant fails to make these repairs or replacements within fifteen (15) days after the occurrence of the cause of the damage, then Landlord may make the repairs or replacements at Tenant's cost, along with an additional administrative charge in an amount equal to ten percent (10%) of the costs of the repair or maintenance, within thirty (30) days after receipt of an invoice.

## 10. ALTERATIONS.

a. Landlord's Consent. Tenant shall not make any alterations, additions, improvements, or betterments, make changes to locks on doors, or add, disturb, or in any way change any plumbing or wiring ("Alterations") in or to the Premises (including Tenant's Work (as defined in the Work Letter, if any, attached as Exhibit G), if any, "Premises Alterations") without obtaining the prior written consent of Landlord, which consent Landlord may withhold in its sole discretion, and the Alterations must not affect the Building's structure, safety, systems, or aesthetics or cause the release of Hazardous Substances. On any request by Tenant to make any Premises Alterations in excess of $5,000 in each instance, Landlord reserves the right to require Tenant to submit to Landlord plans and specifications for the Alterations for Landlord's approval pursuant to any reasonable requirements that Landlord may impose.

b. Performance of Work. All Premises Alterations shall be made at Tenant's sole expense and by contractors or mechanics approved in writing by Landlord, shall be made at the times and in the manner as Landlord may designate on one or more occasions, and shall become the property of Landlord without any obligation that Landlord pay for them. Tenant shall not employ, or permit the employment of, any contractor or laborer, or permit any materials to be delivered to or used in the Building, if, in Landlord's sole judgment, that employment, delivery, or use shall interfere or cause any conflict or



disharmony with other contractors or laborers engaged in the construction, maintenance, or operation of the Building by Landlord, Tenant, or others, or the use and enjoyment of the Building by other tenants or occupants. In the event of this interference, conflict, or disharmony, on Landlord's request, Tenant shall cause all contractors or laborers causing the interference, conflict, or dishainony to leave the Building immediately. All work with respect to any Premises Alterations shall be performed in a good and workmanlike manner and shall be of a quality equal to or exceeding the then-existing construction standards for the Building, and the floors and ceilings must be finished in a manner customary for general office use and other uses common to first-class office buildings in the vicinity. No interior improvements installed in the Premises may be removed unless those improvements are promptly replaced with interior improvements of the same or better quality. Premises Alterations shall be diligently prosecuted to completion to the end that the Premises shall be at all times a complete unit except during the period necessarily required for Premises Alterations work. All Premises Alterations shall be made strictly pursuant to all laws, regulations, and ordinances relating to Premises Alterations, including, but not limited to, Chapter 469. Tenant agrees to indemnify and defend Landlord and hold Landlord harmless against any loss, claim, liability, or damage resulting from Premises Alterations work or the performance of Premises Alterations work (including by Tenant, its contractors, and subcontractors, and including, without limitation, any loss, claim, liability, damage, fine, or penalty resulting from or related to violation of Chapter 469), and Tenant shall, if requested by Landlord, furnish a bond or other security satisfactory to Landlord against any loss, claim, liability, or damage resulting from Premises Alterations work or the performance of Premises Alterations work. If Chapter 469 requires that plans and/or specifications be submitted to the Texas Department of Licensing and Regulation or any other governing authority (collectively, "TDLR") for review and approval, then Tenant shall (i) submit the plans and/or specifications to TDLR and provide to Landlord proof of this submission before applications for any building permits are submitted or construction has commenced and (ii) promptly on completion of any Premises Alterations work, if any, request an inspection pursuant to Chapter 469 and provide Landlord with a certificate that the Premises are in compliance with Chapter 469. Tenant's obligations under the preceding two sentences shall survive the expiration or earlier termination of this Lease. Landlord reserves the right to require any contractor or mechanic working in the Premises to provide lien waivers and liability insurance covering Premises Alterations and to require Tenant to secure, at Tenant's sole cost and expense, completion and lien indemnity bonds satisfactory to Landlord, and/or to require any other instruments that may be reasonably requested by Landlord. Tenant shall give Landlord ten (10) days' written notice before the commencement of any Premises Alterations and shall allow Landlord to enter the Premises and post appropriate notices to avoid liability to contractors or material suppliers for payment for any Premises Alterations. All Premises Alterations (including, without limitation, all improvements to the Premises made pursuant to Section 30 below) shall remain in and be surrendered with the Premises as a part of the Premises at the termination of this Lease, without disturbance, molestation, or injury, except that Landlord may require, upon any notice to Tenant at least sixty (60) days prior to the then Lease expiration, any Premises Alterations to be removed on termination of this Lease. If Landlord requires this removal, then all expenses to restore the affected part of the Premises to normal building standards shall be borne by Tenant, and Tenant shall repair all damage caused by the removal, reasonable wear and tear excepted.

## c. Landlord's Expenses: Administrative Fee. Tenant shall pay to Landlord, as additional

rent, any out-of-pocket costs incurred by Landlord to outside contractors and consultants if warranted by the Premises Alterations in connection with the review, approval, and supervision of Premises Alterations, if any, and for any quantifiable additional Building services provided to Tenant or to the Premises in connection with any Premises Alterations that are beyond the normal services provided to occupants of the Building. Tenant shall also pay to Landlord an administrative fee equal to ten percent (10%) capped at $500 per Premises Alterations of the cost of the work to compensate Landlord for the administrative costs incurred in the review, approval, and supervision of Premises Alterations other than Landlord's Work and Tenant's Work, if any (as defined in the Work Letter, if any, attached as Exhibit G).



Under no circumstances shall Landlord be liable to Tenant for any damage, loss, cost, or expense incurred by Tenant on account of Tenant's plans and specifications, Tenant's contractors or subcontractors, or Tenant's design of any work, construction of any work, or delay in completion of any work.

## 11. TENANT'S PROPERTY.

a. Removal On Expiration of Lease. All articles of Personal Property and all business and trade fixtures, machinery and equipment, cables, furniture, and movable partitions owned by Tenant or installed by Tenant at its expense in the Premises shall be and remain the property of Tenant and may be removed by Tenant at any time during the Tenn, subject to the other requirements of this Lease. Further, Tenant shall remove all of this property from the Premises on the expiration of the Term or earlier termination of this Lease, as required by Section 33 below.

b. Personal Property and Premises Alterations Taxes. Tenant shall be liable for and shall pay, at least ten (10) days before delinquency, all taxes directly or indirectly imposed or assessed on any Personal Property placed by Tenant in or about the Premises. If any taxes on Tenant's Personal Property are levied against Landlord or Landlord's property (including, but not limited to, any part of the Project) or if the assessed value of the Premises or Landlord's obligations are increased by a value placed on the Personal Property of Tenant, and if Landlord pays the taxes or obligations based on Tenant's Personal Property, which Landlord has the right to do regardless of the taxes' or obligations' validity, then Tenant shall, within five (5) days after Tenant receives written demand from Landlord, repay to Landlord the taxes or obligations levied against Landlord or Landlord's property pursuant to the previous sentence, or the portion of the taxes or obligations resulting from the increase in the assessment pursuant to the previous sentence. Additionally, if any Premises Alterations, whether installed and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part of the real property, are assessed for real property tax purposes at a valuation higher than the valuation at which improvements conforming to Landlord's building standard in other spaces in the Building are assessed, then the taxes levied against Landlord or the real property by reason of the excess assessed valuation shall be deemed to be taxes levied against Personal Property of Tenant, and payment of these taxes shall be governed by the provisions of this Section 11.b.

12. ENTRY BY LANDLORD. After reasonable notice at least 24 hours in advance (except in emergencies, where no notice is required), Landlord and Landlord Parties shall at any and all times have the right to enter the Premises to inspect, test, and examine the Premises, to supply journalistic service and any other service to be provided by Landlord to Tenant under this Lease, to show the Premises to mortgages, prospective mortgages, prospective purchasers, or prospective tenants (but only in the last 6 months of the then expiration of the Lease), to post notices, to alter, improve, or repair the Premises or any other portion of the Building, or for any other reasonable purpose. Landlord may, in order to carry out these activities, take all materials and supplies into the Premises that may be required for the purpose of performing the activities, and may erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed. Landlord shall at all times have and retain keys, control cards, or other means of access to all doors in the Premises, excluding Tenant's vaults and safes. Landlord has the right to use any and all means that Landlord may deem proper to open any doors in the Premises in an emergency in order to obtain entry to the Premises. Any entry to the Premises obtained by Landlord pursuant to this Section 12 shall not be deemed to be a forcible or unlawful entry into the Premises, or an eviction of Tenant from the Premises or any portion of the Premises, and Tenant waives any claim for Damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss in, on, or about the Premises. Tenant shall not be due any abatement of Rent as a result of any entry to the Premises pursuant to this Section 12.

## 13. LIENS AND INSOLVENCY.



a. Liens. Tenant shall keep the Lease and Project free from any liens or encumbrances of any kind or nature arising out of any work performed, materials ordered, or obligations incurred by or on behalf of Tenant. If any lien, encumbrance, or charge is filed against this Lease or all or any part of the Project, then Tenant shall cause the lien, encumbrance, or charge to be discharged by payment within ten (10) days after the date filed. If Tenant fails to cause the lien, encumbrance, or charge to be discharged within the permitted time, then Landlord may, at Landlord's sole discretion, either (i) cause it to be discharged and may make any payment if Landlord, in Landlord's sole judgment, considers it necessary, desirable, or proper to do so or (ii) declare Tenant's failure to discharge to be an Event of Default (as defined in this Lease). If Landlord makes any payment under option (i), then all amounts paid by Landlord are payable by Tenant to Landlord on demand, with Interest.

b. Tenant's Insolvency. If Tenant becomes insolvent or makes an assignment for the benefit of creditors, or if legal proceedings are instituted seeking to have Tenant adjudicated bankrupt, reorganized, or rearranged under the bankruptcy laws of the United States, then Landlord may, at its option, declare an Event of Default, in which case Landlord shall have the option to terminate the Lease, and Landlord may accept Rent from the appointed trustee, assignee, or receiver without waiving or forfeiting Landlord's right of termination. Further, unless and until Landlord elects to terminate the Lease, Tenant and its successor shall have the following obligations and be subject to the following conditions, in addition to any other obligations or conditions imposed upon Tenant or its successor: (1) the requirement to cure any monetary defaults and reimburse Landlord for any pecuniary loss within not more than thirty (30) days of the assumption and/or assignment; (2) the requirement to deposit with Landlord an additional sum equal to three (3) months' Base Rent to be held as security; (3) the requirement that the Premises be used in keeping with Section 8 of this Lease; (4) the condition that the reorganized debtor or assignee of such debtor in possession or Tenant's trustee demonstrate in writing that it has the financial ability to comply with Tenant's obligations under this Lease and meets all other reasonable criteria of Landlord as did Tenant upon execution of this Lease; (5) the condition of obtaining prior written consent of each of Landlord's Mortgages, if any; and (6) the requirement that no physical changes of any kind may be made to the Premises unless in compliance with the applicable provisions of this Lease.

14. DAMAGE TO TENANT'S PROPERTY. Neither Landlord nor its agents shall be liable under this Lease for (i) any damage to any property entrusted to any Landlord Party (as defined in this Lease); (ii) loss or damage to any property by theft or otherwise; (Hi) any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, or water or rain that may leak from any part of the Building or from the pipes, appliances, or plumbing work in the Building or from the roof, street, or subsurface or from any other place, dampness, or any other cause whatsoever; or (iv) any damage or loss to the business or occupation of Tenant arising from the acts or neglect of other tenants or occupants of, or invitees to, the Building. Tenant shall give prompt written notice to Landlord in case of fire or accident in the Premises or in the Building or of defects in the Premises' or Building's fixtures or equipment.

## 15. EMINENT DOMAIN.

a. Complete Taking. If the whole of the Property, the Building, or the Premises or so much of the Property, the Building, or the Premises are taken by condemnation or in any other manner (including, but not limited to, private purchase in lieu of condemnation) for any public or quasi-public use or purpose so that a reasonable amount of reconstruction shall not result in the Premises being reasonably suitable for Tenant's continued occupancy, then this Lease and the Term and estate granted by the Lease shall terminate as of the date that possession of the Property, the Building, or the Premises are taken (the "Date of the Taking"), and the Base Rent and other sums payable under the Lease shall be prorated and adjusted as of that termination date.



b. Partial Taking. If only a part of the Property, the Building, or the Premises is taken, and the remaining part of the Property, the Building, and the Premises, after reconstruction, if any, is reasonably suited for Tenant's continued occupancy, then this Lease shall be unaffected by the taking, except that Landlord may, at its option, terminate this Lease by giving Tenant notice to that effect within sixty (60) days after the Date of the Taking. If Landlord elects to terminate the Lease, then the Lease shall terminate on the date that the written notice from Landlord to Tenant is given, and the Base Rent and other sums payable under the Lease shall be prorated and adjusted as of that termination date. In the event of a partial taking after which this Lease continues in force as to any part of the Premises, the Base Rent and other sums payable under the Lease shall be adjusted according to the rentable area remaining.

c. Award. Landlord is entitled to receive the entire award or payment in connection with any taking without deduction from the award or payment for any estate vested in Tenant by this Lease, and Tenant shall receive no part of the award or payment, including any award for the "leasehold bonus value" of this Lease. Tenant expressly assigns to Landlord all of its right, title, and interest in and to every award or payment in connection with any taking.

d. Waiver. Except as otherwise provided in this Lease, Tenant waives and releases any right to terminate this Lease under any law, statute, or ordinance in effect now or in the future relative to eminent domain, condemnation, or takings.

16. TENANT'S INSURANCE. Tenant shall, during the entire Term of this Lease and any other period of occupancy, at its sole cost and expense, keep in full force and effect the following insurance:

a. Property Insurance. Special form property insurance (extended coverage) on ISO form CP 10 30 (or an equivalent business owner's policy) insuring against the perils of fire, vandalism, malicious mischief, cause of loss — special form, sprinkler leakage, and earthquake sprinkler leakage, and with earthquake coverage, mold coverage, and terrorism coverage, with no exclusions except the standard printed exclusions. Tenant shall also obtain flood insurance on a form equivalent to the National Flood Insurance Program's General Property Form (the "NFIP Form"). Each of these insurance policies shall be for one hundred percent (100%) of the replacement cost, without deduction for depreciation, of (i) all Personal Property owned, leased, held, or possessed by Tenant or any contractor of Tenant and located in the Building; (ii) all Premises Alterations, regardless of who paid for them in connection with work on those Alterations; and (iii) all materials, equipment, supplies, and temporary structures on or within one hundred (100) feet of the Premises used for making any Premises Alterations; however, if the full replacement cost exceeds the NFIP Form's maximum coverage limit, then the flood insurance policy shall be for the NFIP Form's maximum coverage limit rather than the replacement cost. If there is a dispute as to the amount that comprises full replacement cost, the decision of, as applicable, Landlord, any beneficiary of a mortgage or deed of trust encumbering all or any part of the Project (each "Landlord's Mortgage"), or any manager of the Project, or any of their respective shareholders, members, managers, partners, Affiliates, subsidiaries, directors, officers, employees, agents, representatives, licensees, contractors, and/or any respective successors or assigns of the foregoing (the "Landlord Parties") shall be conclusive. Each policy shall have the following unmodified endorsements: (i) the Landlord Parties shown as "insured as their interests may appear" and (ii) ordinance or law coverage.

b. Liability Insurance. Commercial general liability insurance on form ISO CG 00 01 04 13 (or, if Tenant has more than one location covered by a policy having a general aggregate limit, ISO fom amendment Aggregate Limits of Insurance Per Location CG 25 04) insuring Tenant against any liability arising out of the lease, use, occupancy, or maintenance of the Premises and all areas appurtenant to the Premises. This insurance must include an Additional Insured — Tenant's Endorsement, and must have the General Aggregate Liability Insurance Limit specified in Paragraph 16 of the Basic Lease Information per occurrence for each of the following: (i) injury to or death of one or more persons in an occurrence and



(ii) damage to tangible property (including loss of use) in an occurrence, with an Additional Insured — Tenant's Endorsement, with the liability amount to be adjusted from year to year as reasonably required by Landlord. The policy shall insure the hazards of premises and operations, independent contractors, and contractual liability (covering, without limitation, the indemnity contained in Section 18 of this Lease) and shall (i) name the Landlord Parties as additional insureds and (ii) contain a cross-liability provision. If the use and occupancy of the Premises include any activity or matter that is or may be excluded from coverage under a commercial general liability policy (e.g., the sale, service, or consumption of alcoholic beverages), then Tenant shall obtain endorsements to the commercial general liability policy or otherwise obtain insurance to insure all liability arising from the activity or matter (including liquor liability, if applicable) in amounts as Landlord may reasonably require.

c. Workers' Compensation Insurance. Workers' Compensation insurance (not any alternative form of coverage) for at least the applicable statutory limit; and employer's liability (or equivalent coverage under commercial umbrella) with at least a One Million and No/100 Dollar ($1,000,000) limit for each accident, for bodily injury by accident, and at least a One Million and No/100 Dollar ($1,000,000) limit for the death of Tenant's employees for bodily injury by disease.

d. Business Income and Extra Expense Coverage. Business income and extra expense coverage on ISO form CP 00 30 (or an equivalent business owner's policy) for the direct or indirect loss of Tenant's income and expenses attributable to Tenant's inability to use fully or obtain access to the Premises or the Building in an amount, as approved by Landlord, that shall properly reimburse Tenant for a period of one (1) year following the loss of use or access.

e. Boiler and Machinery Insurance. If Tenant installs any boiler, pressure object, machinery, fire suppression system, supplemental HVAC equipment, or other mechanical equipment within the Building, then Tenant shall also obtain and maintain, at Tenant's expense, boiler and machinery insurance covering loss arising from the use of that equipment.

f. Builder's Risk Insurance. Before any Premises Alteration(s), including, but not limited to, any initial improvements set forth in the Work Letter, if any, attached to this Lease as Exhibit G, are undertaken, and whether these Alteration(s) are undertaken by Landlord, Tenant, or their respective contractors or subcontractors, Tenant shall obtain, and shall provide Landlord with evidence of, special form builder's risk insurance for one hundred percent (100%) of the replacement cost, without deduction for depreciation, of (i) all Premises Alterations under construction; (ii) any damage to the Building or the Property resulting from the Premises Alterations; (iii) all materials, equipment, supplies, and temporary structures on the Premises used for making the Premises Alterations; (iv) all materials, equipment, and supplies at other locations or in transit to the Premises that are intended to be used for making the Premises Alterations; and (v) any loss of rentals in the Building due to the Premises Alterations, for a period of twelve (12) months. The builder's risk insurance shall be effective from the beginning of the performance of the Premises Alteration(s) through the completion of the peformance of the Premises Alteration(s).

g. Other Insurance. Any other form or forms of insurance as Landlord or any of Landlord's Mortgages may reasonably require on one or more occasions, and any other insurance in the form and amounts that a prudent tenant would obtain, and for insurance risks against which a prudent tenant would protect itself.

All of the insurance policies required by this Section 16, and any other insurance policies that Tenant may be required to obtain under this Lease, shall be written in a foim satisfactory to Landlord and shall be taken out with insurance companies qualified to issue insurance in the State of Texas and holding an A.M. Best's Rating of "A+" and a Financial Size Rating of "X" or better, as set forth in the most current issue



of Best's Key Rating Guide. Each policy shall provide that it is primary insurance, and not excess over or contributory with any other insurance in force for or on behalf of any Landlord Party, with all policies of Landlord Parties being excess, secondary, and noncontributing. Further, none of these policies shall contain any endorsement or provision that states the limits of the policy shall not stack, pyramid, or be in addition to any other limits provided, nor shall any of these policies have any cross-suits exclusion or any similar exclusion that excludes coverage for claims brought by an additional insured under the policy against another insured under the policy. Additionally, none of these policies shall have a deductible or self-insured retention in excess of Ten Thousand and No/100 Dollars ($10,000.00). Tenant must reinstate the full aggregate limit of any policy reduced below seventy-five percent (75%) of any aggregate limit required by this Lease. Within ten (10) days after the execution of this Lease, Tenant shall deliver to Landlord copies of policies or certificates and endorsements evidencing the existence of the amounts and forms of coverage satisfactory to Landlord. No policy shall be cancelled or reduced in coverage except after thirty (30) days' prior written notice to Landlord. Tenant shall, at least thirty (30) days before the expiration of the policies, furnish Landlord with renewals or "binders" of the policies. If Tenant fails to notify Landlord of a policy's expiration, cancellation, or reduction, then Landlord may order insurance to replace or supplement the policy that is expired, cancelled, or reduced, and Landlord may charge the cost of the replacement or supplementary insurance to Tenant as additional rent. In addition to any other remedy available to Landlord pursuant to this Lease or otherwise, Landlord may, but is not obligated to, obtain any insurance that is the responsibility of Tenant under this Section 16, and Tenant shall pay to Landlord on demand the premium costs of the insurance, plus an administrative fee of fifteen percent (15%) of those costs.

Tenant acknowledges that Landlord or any of Landlord's Mortgages may reasonably require Tenant to procure and maintain insurance coverages on other forms and with other endorsements than those set forth above, and Tenant agrees to comply with Landlord and Landlord's Mortgages' requirements.

To the fullest extent permitted by law, Tenant waives and releases all Landlord Parties of and from any and all rights of recovery, claims, actions, or causes of action against any Landlord Party to the extent covered by any of the above insurance policies. Each insurance policy must be endorsed to reflect the insurer's acceptance of this waiver of subrogation. The above waiver of subrogation applies whether or not there are any deductibles or self-insured retentions and in the absence of any insurance policy.

Tenant acknowledges that Landlord makes no representation that the limits or forms of coverage of insurance specified in this Lease are adequate to cover Tenant's property, business operations, or obligations under this Lease.

17. DAMAGE OR DESTRUCTION. If the Building and/or the Premises are damaged by fire or any other peril (a "Peril"), then Tenant shall give prompt written notice to Landlord. After receipt of this notice, Landlord shall have the following rights and obligations:

## a. Repair and Restoration.

(1) If the Building and/or the Premises are damaged or destroyed by any Peril covered by collectible insurance carried by Landlord at the time of the damage or destruction (a "Covered Peril"), to the extent that, in Landlord's sole discretion, (i) the cost to repair, reconstruct, or restore the Building and/or the Premises exceeds twenty-five percent (25%) of the then-full replacement value of the Building and/or the Premises or (ii) the damage to the Building and/or the Premises is such that the Building and/or the Premises cannot reasonably be repaired, reconstructed, and restored within six (6) months from the date of the damage or destruction, then Landlord shall either: (i) use reasonable diligence to commence or cause the commencement of and complete or cause the completion of the work of restoring the Building and/or the Premises



and Landlord's Work (as defined in the Work Letter, if any, attached to this Lease as Exhibit G), if any, (except that Landlord shall not be responsible for delays beyond Landlord's control) to substantially the same condition as they were in immediately before the Covered Peril, in which event this Lease shall remain in full force and effect or (ii) within ninety (90) days after the date of the damage or destruction, elect not to repair, reconstruct, or restore the Building and/or the Premises as described in option (i), in which event this Lease shall terminate. In either event, Landlord shall give Tenant written notice of its intention within the ninety (90)-day period. If Landlord elects not to repair, reconstruct, or restore the Building and/or the Premises, then this Lease shall be deemed to have terminated as of the date of the damage or destruction by the Covered Peril.

(2) If the Building and/or the Premises are partially damaged or destroyed by any Covered Peril, to the extent that, in Landlord's sole discretion, the cost to repair, reconstruct, or restore the Building and/or the Premises is twenty-five percent (25%) or less of the then-full replacement value of the Building and/or the Premises, and if the damage to the Building and/or the Premises is such that the Building and/or the Premises reasonably may be repaired, reconstructed, or restored within a period of six (6) months from the date of the damage or destruction by the Covered Peril, then Landlord shall commence or cause the commencement of and diligently complete or cause the completion of the work of restoring the Building and/or the Premises and Landlord's Work, if any, (except that Landlord shall not be responsible for delays beyond Landlord's control) to substantially the same condition as they were in immediately before the Covered Peril, and this Lease shall continue in full force and effect.

b. Repair and Restoration Exceptions. If the Building and/or the Premises are damaged or destroyed by a Peril, then Landlord may elect to be relieved of its obligation to repair, reconstruct, and restore and may terminate this Lease within ninety (90) days after the date of damage or destruction caused by the Peril if (i) damage or destruction of the Building and/or the Premises is due to any cause not covered by collectible insurance carried by Landlord at the time of the damage or destruction; (ii) any of Landlord's Mortgages require that any portion of the insurance proceeds resulting from the Peril be applied to any deed of trust or mortgage on all or any part of the Project; (iii) Landlord does not actually receive sufficient insurance proceeds to pay for all repairs, reconstruction, and restoration of damage or destruction caused by the Peril; or (iv) the repair, reconstruction, or restoration of the damage caused by the Peril is delayed or prevented for longer than six (6) months after the occurrence of the damage or destruction due to circumstances beyond Landlord's control, including, but not limited to, acts of God, strikes, embargoes, governmental restrictions, war, terrorism, or other strife, inability to procure the necessary labor or materials, or any other cause beyond the control of Landlord. Further, Landlord shall not have any obligation to repair, reconstruct, or restore the Premises and may terminate this Lease when the damage resulting from any Peril occurs during the last twelve (12) months of the Term to such an extent that more than thirty percent (30%) of the floor area of the Premises is rendered untenantable for a period of more than sixty (60) days.

c. Termination of Lease. On any termination of this Lease under any of the provisions of this Section 17, Landlord and Tenant shall each be released without further obligation to the other from the date possession of the Premises is surrendered to Landlord, or any other date as is mutually agreed on by Landlord and Tenant, except with regard to payments or other obligations that have accrued as of that date and are then unpaid or unperformed. If this Lease is terminated under the provisions of this Section 17, then Landlord shall be entitled to the full proceeds of the insurance policies providing coverage for all Premises Alterations.

d. Base Rent Abatement. In the event of repair, reconstruction, or restoration by or through Landlord pursuant to this Section 17, the Base Rent payable under this Lease shall be abated in total if



any of the Premises are unfit for occupancy during the period of the repair, reconstruction, or restoration, but only if the damage did not result from the negligence or misconduct of any Tenant Party. Tenant is not entitled to any compensation or Damages for loss of the use of all or any part of the Premises and/or any inconvenience or annoyance occasioned by the damage, repair, reconstruction, or restoration, nor shall Tenant be entitled to any insurance proceeds, including those in excess of the amount required by Landlord for the repair, reconstruction, or restoration. Tenant shall not be released from any of its obligations under this Lease due to damage or destruction of the Building and/or the Premises except to the extent and on the conditions expressly stated in this Section 17.

e. Extent of Landlord's Repair Obligations. If Landlord is obligated to or elects to repair, reconstruct, or restore pursuant to this Section 17, then Landlord shall be obligated to repair, reconstruct, or restore only those portions of the Building and the Premises that were originally provided at Landlord's expense, and only to the extent of the insurance proceeds actually received by Landlord for the damage or destruction caused by the Peril in question. Any repair, reconstruction, or restoration of the Premises Alterations that were damaged or destroyed by the Peril, if any, shall be the obligation of Tenant, or, at Landlord's election, Landlord shall carry out the repair, reconstruction, or restoration, and Tenant shall pay all costs of the repair, reconstruction, or restoration, along with an additional administrative charge in an amount equal to fifteen percent (15%) of the costs of the repair, reconstruction, or restoration. Tenant must give Landlord satisfactory evidence of Tenant's ability to carry out the repair, reconstruction, or restoration of the Premises Alterations, if any, or to pay the costs of the repair, reconstruction, or restoration and the additional administrative charge, before Landlord shall have any obligation to begin restoring the Premises pursuant to this Section 17. Further, Landlord has no obligation to repair, reconstruct, or restore any Personal Property of any Tenant Party.

## 18. INDEMNITIES AND WAIVERS.

## a. Indemnities. Tenant shall indemnify, defend, and hold all Landlord Parties haii iless

from all Damages arising, in whole or in part, from (i) any causes in, on, or about the Premises; (ii) any Tenant Party's use of the Project or the conduct of its business or any activity, work, or thing done, permitted, or suffered by any Tenant Party in or about the Project (including, without limitation, any activity that results in an increase in the premium of any insurance policy or coverage carried by Landlord); (iii) any breach, violation, or nonperformance by any Tenant Party of any term, covenant, or provision of this Lease; (iv) any Tenant Party's actual or alleged violation of, or failure to comply with, any applicable law; (v) any injury or damage to the person, property, or business of any Tenant Party; (vi) the negligence of any Landlord Party (but not the gross negligence or willful misconduct of a Landlord Party); or (vii) any action or proceeding brought on any of the items listed in this sentence. In case any action or proceeding is brought against any Landlord Party by reason of any of the items in the previous sentence, Tenant, on written notice from Landlord, shall defend the Landlord Party at Tenant's expense by counsel approved in writing by the Landlord Party. Landlord shall indemnify, defend, and hold all Tenant Parties harmless from all Damages arising, in whole or in part, from (i) any causes in, on, or about the common areas of the Building and Project; (ii) any Landlord Party's use of the common areas of the Project or the conduct of its business or any activity, work, or thing done, permitted, or suffered by any Landlord Party in or about the common areas of the Project; (iii) any breach, violation, or nonperformance by any Landlord Party of any term, covenant, or provision of this Lease relating to the common areas of the Project; (iv) any Landlord Party's actual or alleged violation of, or failure to comply with, any applicable law; (v) or (vi) any action or proceeding brought on any of the items listed in this sentence. In case any action or proceeding is brought against any Tenant Party by reason of any of the items in the previous sentence, Landlord, on written notice from Tenant, shall defend the Tenant Party at Landlord's expense by counsel reasonably approved in writing by the Tenant Party.



b. Waivers, TENANT WAIVES ALL CLAIMS AGAINST LANDLORD PARTIES ACTUALLY OR ALLEGEDLY ARISING FROM DAMAGE TO OR LOSS OF ANY TENANT PARTY'S TANGIBLE PROPERTY. NOTWITHSTANDING ANY PROVISION IN THIS LEASE TO THE CONTRARY, AND AS A MATERIAL PART OF THE CONSIDERATION TO LANDLORD, TENANT, TO THE FULLEST EXTENT PERMITTED BY LAW AND THIS LEASE, ASSUMES ALL RISK OF, WAIVES ITS ENTIRE CLAIM OF RECOVERY FOR, AND RELEASES AND RELIEVES ALL LANDLORD PARTIES FROM RESPONSIBILITY FOR ANY CLAIMS ACTUALLY OR ALLEGEDLY ARISING FROM: (i) TENANT'S INSURABLE INJURIES (AS DEFINED BELOW); (ii) ANY INSURABLE INJURY TO ANY TENANT PARTY NOT CAUSED BY A LANDLORD PARTY; (iii) ANY BUSINESS INTERRUPTION OR TENANT'S LOSS OF USE OF THE PREMISES; OR (iv) ANY LOSS OR DAMAGE TO OR WITHIN THE PROJECT AND/OR THE PREMISES, WHETHER THE LOSS OR DAMAGE IS DUE TO THE NEGLIGENCE OF EITHER OF THE PARTIES TO THIS LEASE, ANY TENANT PARTY OR LANDLORD PARTY, OR ANY OTHER CAUSE. "Insurable Injury" means (i) any loss or damage to the real or personal property of any Landlord Party or Tenant Party located anywhere in the Building and including the Building itself, arising out of or incident to the occurrence of any of the perils that are covered by the property insurance required to be carried under this Lease or by the fire insurance policy, with extended coverage endorsement, in common use in the city in which the Premises are located; (ii) any "personal and advertising injury" as defined in the form of liability insurance Tenant is required to maintain under this Lease; or (Hi) any loss or injury to persons that is covered by Workers' Compensation and employer's liability insurance required to be carried by this Lease or by state law. To the extent that the risks waived by the parties are, in fact, covered by insurance, each party shall cause its insurance carriers to consent to waive those risks and to waive all related rights of subrogation against the other party; but no release by an insurance carrier shall be effective unless the insurance policy or policies covering the risks waived by the parties expressly permit this type of release or contain a waiver of the carrier's right to be subrogated. TENANT ACKNOWLEDGES AND AGREES THAT IT IS SOLELY RESPONSIBLE FOR PROVIDING ADEQUATE SECURITY FOR THE PREMISES, AND FOR TENANT PARTIES' USE OF THE PROJECT AND THE COMMON AREAS OF THE PROJECT. LANDLORD HAS NO RESPONSIBILITY TO PREVENT, AND SHALL NOT BE LIABLE TO ANY TENANT PARTY FOR, LOSSES DUE TO THEFT, BURGLARY, OR OTHER CRIMINAL ACTIVITY, OR FOR DAMAGES OR INJURIES TO PERSONS OR PROPERTY RESULTING FROM PERSONS GAINING ACCESS TO THE PREMISES OR THE PROJECT, AND TENANT RELEASES ALL LANDLORD PARTIES FROM ALL LIABILITIES FOR THESE LOSSES, DAMAGES, OR INJURIES, REGARDLESS OF THEIR CAUSE. IF ANY PART OF THIS LEASE CONFLICTS WITH THE PREVIOUS TWO (2) SENTENCES, THEN THE PREVIOUS TWO SENTENCES SHALL PREVAIL.

c. Scope of Indemnities and Waivers. ALL INDEMNITIES, WAIVERS, AND OBLIGATIONS TO DEFEND IN THIS LEASE: (i) SHALL BE ENFORCED TO THE FULLEST EXTENT PERMIT ED BY LAW FOR THE BENEFICIARY'S BENEFIT, REGARDLESS OF ANY EXTRAORDINARY SHIFTING OF RISK, AND EVEN IF THE CLAIM IS CAUSED BY THE ACTIVE OR PASSIVE SOLE, JOINT, CONCURRENT, OR COMPARATIVE NEGLIGENCE OR TORT OF A LANDLORD PARTY, OR LIABILITY WITHOUT FAULT OR STRICT LIABILITY IS IMPOSED ON, OR ALLEGED AGAINST, THAT LANDLORD PARTY, BUT NOT TO THE EXTENT THAT A COURT OF COMPETENT JURISDICTION'S FINAL AND UNAPPEALABLE JUDGMENT FINDS THAT THE LANDLORD PARTY'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT CAUSED THE CLAIM; (ii) ARE INDEPENDENT OF, AND SHALL NOT BE LIMITED BY, EACH OTHER OR ANY INSURANCE OBLIGATIONS IN THIS LEASE (WHETHER OR NOT COMPLIED WITH); AND (iii) SHALL SURVIVE THE EXPIRATION OR TERMINATION OF THIS LEASE UNTIL ALL CLAIMS AGAINST A LANDLORD OR TENANT PARTY ARE TIME-BARRED UNDER APPLICABLE LAW. IT IS THE EXPRESS INTENTION OF BOTH LANDLORD AND TENANT THAT EACH PARTY'S OBLIGATION TO INDEMNIFY,



DEFEND, AND HOLD HARMLESS AN INDEMNIFIED PARTY PURSUANT TO THIS SECTION 18 SHALL APPLY TO LOSS, DAMAGE, AND INJURY CAUSED BY THE NEGLIGENCE (WHEN CONTRIBUTORY) OF SUCH INDEMNIFIED PARTY (BUT NOT THE SOLE NEGLIGENCE, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PARTY). LANDLORD AND TENANT EACH EXECUTED THIS LEASE IN MATERIAL RELIANCE ON THE INCLUSION OF EACH INDEMNITY AND WAIVER IN THIS LEASE, INCLUDING ANY EXTRAORDINARY SHIFTING OF RISK.

d. Landlord's Reliance. In reliance on Tenant's indemnities and waivers in this Lease, and on Tenant's agreement to obtain and maintain in force the insurance coverages required by this Lease, Landlord shall not carry primary insurance for Tenant's Insurable Injuries. Tenant acknowledges that: (i) if Landlord had been required to carry primary insurance for the risks allocated to Tenant, then the Base Rent would have been higher; (ii) Tenant is not relying on Landlord or Landlord's insurance, but is instead relying on: (a) Tenant's insurance policies and any additional insurance Tenant may elect to carry for claims covered by Tenant's insurance, (b) Tenant's own funds for any deductibles, self-insured retentions, or losses exceeding Tenant's insurance coverages, and (c) third parties (other than Landlord Parties) for any claims or liabilities arising from acts or omissions of those third parties. Tenant's failure to take out or maintain any insurance policy or coverage required under this Lease or to self-insure (if permitted by Landlord) shall be a defense to any claim asserted by any Tenant Party against Landlord by reason of any loss sustained by that Tenant Party that would have been covered by the required policy.

## 19. ASSIGNMENT AND SUBLETTING.

q. Landlord's Consent. Without the express prior written consent of Landlord, which Landlord shall not unreasonably withhold, Tenant shall not (i) directly or indirectly, voluntarily or by operation of law, sell, assign, encumber, pledge, or otherwise transfer or hypothecate all or part of its interest in or rights with respect to the Premises or this Lease (collectively, enter an "Assignment"); (H) sublet all or any portion of the Premises (enter a "Sublease"); or (ii) grant any license, concession, or other right of occupancy of all or any portion of the Premises (each of the events listed in this sentence is a "Transfer"). Landlord's withholding of consent to a proposed Transfer shall be reasonable if (i) an Event of Default under this Lease has occurred and has not yet been cured; (ii) the business to be conducted in the Transfer Space (as defined below) by the proposed assignee, subtenant, or transferee (each a "Transferee") would be incompatible with the character of the Building (i.e., if the Transferee intended to run a clothing store in the Building, that retail use would be incompatible with the character of the Building, since the Building is an office building); (Hi) the proposed assignee's net worth as of the delivery of the Transfer Request (as defined below) is not equal to or greater than Tenant's net worth as of the Effective Date of the Lease; or (iv) the proposed subleasee is (a) an existing tenant of another space in the Building, (b) a prospective tenant that, within the six (6) months before the delivery of the Transfer Request, received a letter of intent from Landlord or a broker engaged by Landlord for a proposed lease of any space in the Building.

b. Transfer Request. Except for an Allowed Transfer, if Tenant desires to make a Transfer, then Tenant shall give a written request to Landlord of its intention to do so (the "Transfer Request"), containing (i) the name of the proposed Transferee; (ii) the nature of the proposed Transferee's business to be carried on in the Premises; (iii) the material terms of the proposed Transfer, including, without limitation, the commencement and expiration dates of the proposed Transfer and the base rent, additional rent, and rent adjustments and other charges payable under the relevant Assignment, Sublease, or other Transfer instrument (collectively, the "Transfer Rent"); (iv) the portion of the Premises proposed to be transferred (the "Transfer Space"); (v) the most recent audited financial statements or other evidence of the proposed Transferee's assets, liabilities, net cash flow, operating history, and other evidence Landlord may reasonably request to evaluate the financial capacity of the proposed Transferee to perform its



obligations; and (vi) the identity and contact information of the proposed Transferee's business affiliates and prior landlords, and any other evidence Landlord may reasonably request to evaluate the proposed Transferee's quality and reliability. Further, any Transfer Request for a Sublease must be delivered to Landlord at least forty-five (45) days prior to the proposed commencement date of the Sublease. Within thirty (30) days after Landlord's receipt of the Transfer Request, Landlord shall, by written notice to Tenant, elect, in its sole discretion, to (i) terminate this Lease as to the Transfer Space, with a proportionate reduction in Base Rent and Tenant's Proportionate Share of Operating Costs, effective on a date not earlier than thirty (30) days nor later than sixty (60) days after Landlord's notice; (ii) consent to the Transfer; or (iii) disapprove the Transfer. Landlord's failure to make this election within thirty (30) days after Landlord's receipt of the Transfer Request shall be deemed to be Landlord's disapproval of the proposed Transfer. If Landlord terminates the Lease as to the Transfer Space, then the Lease shall cease for the Transfer Space, and Tenant shall pay to Landlord all Rent relating to the Transfer Space accrued through the effective date of the termination. After the termination, Landlord may lease the Transfer Space to the prospective Transferee (or to any other person) without liability to Tenant. Tenant shall reimburse Landlord, within ten (10) days after Tenant's receipt of an invoice, for any costs that Landlord may incur in connection with any proposed Transfer, including, without limitation, Landlord's reasonable attorneys' fees, the costs of investigating the acceptability of any proposed Transferee, and a Two Hundred Fifty and No/100 Dollar ($250.00) administrative fee.

c_Permitted Transfers. If Landlord consents to any Transfer as set forth in Section 19.b,

(1) Tenant may, within thirty (30) days after Landlord's consent, enter into the Transfer, but only with the Transferee and on the same terms as set forth in the Transfer Request, and Tenant shall promptly send to Landlord a copy of the fully executed documents effectuating the Transfer;

(2) In the case of a Sublease, Tenant shall pay to Landlord monthly, together with monthly installments of Rent under this Lease, fifty percent (50%) of any sums payable to Tenant in connection with the Sublease in excess of the proportionate amount (on a rentable square footage basis) of Base Rent payable by Tenant under this Lease for the space covered by the Sublease, after deducting all sublease costs such as commissions, Landlord approvals, required improvements, architect and attorney fees and other reasonable costs;

(3) In the case of an Assignment, Tenant shall pay to Landlord, within ten (10) days of receipt, any transfer or assignment fee, purchase price, or other consideration received by Tenant in connection with the Assignment attributable to the value of this Lease, and if Tenant fails to pay that sum when due, then Landlord may contact the Transferee and require the Transferee to make all payments due under the Assignment directly to Landlord;

(4) Any Transfer shall be subject to all of the provisions of this Lease, and Landlord's consent to any Transfer shall not be construed as a consent to any terms of the Transfer that conflict with any of the provisions of this Lease except to the extent that Landlord specifically agrees in writing to be bound by the conflicting terms;

(5) No Transferee shall have the right to exercise any right or option under this Lease, if any, to lease additional space, extend the Term, or terminate this Lease;

(6) Landlord's consent to any Transfer shall not waive its rights, and it shall not stop Landlord from exercising its rights, with respect to any other actual or proposed Transfer, and Landlord's consent to any Transfer shall not relieve Tenant or any Guarantor of Tenant, if



any, as named in Paragraph 17 of the Basic Lease Information (a "Guarantor") of any liability to Landlord under this Lease or otherwise; and

(7) If, after a permitted Transfer, Tenant and the Transferee submit to Landlord a Transfer Request to enter a Sublease of the Transfer Space in which Tenant would be the sublessee, Landlord shall have the right to terminate this Lease as to the Transfer Space.

(8) Except if Landlord exercises its right to terminate this Lease as to the proportion of the Transfer Space, Tenant shall pay the costs of any demising walls or other improvements necessitated by a Transfer.

d. Continuing Liability. Tenant shall not be relieved of any obligation to be performed by Tenant under this Lease, including the obligation to obtain Landlord's consent to any other Transfer, regardless of whether Landlord consented to any Transfer. Any Transfer that fails to comply with this Section 19 shall be void and, at the option of Landlord, shall constitute an Event of Default (as defined in this Lease) by Tenant under this Lease. The acceptance of Transfer Rent or other sums by Landlord from a proposed Transferee shall not constitute Landlord's consent to a noncompliant Transfer.

## e. Assumption and Attornment by Transferees.

(1) Each Transferee under an Assignment shall assume all obligations of Tenant under this Lease and shall be and remain liable jointly and severally with Tenant for the payment of Rent, and for the performance of all other provisions of this Lease. No Assignment shall be binding on Landlord unless Landlord receives a counterpart of the Assignment and an instrument in recordable form that contains a covenant of assumption by the Transferee reasonably satisfactory in substance and form to Landlord and consistent with the requirements of this Section 19, but the failure of the Transferee to execute that instrument shall not release the Transferee from its liability as set forth above.

(2) Each Transfer by Tenant other than an Assignment shall be subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate, and each Transferee, other than Landlord, shall be subject to this Lease. By entering into a Sublease, each subtenant is deemed to have agreed that in the event of termination, re-entry, or dispossession by Landlord under this Lease, Landlord may, at its option, take over all of the right, title, and interest of Tenant, as sublandlord, under the Sublease, and the subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then executory provisions of the Sublease, except that Landlord shall not be (i) liable for any previous act or omission of Tenant under the Sublease; (ii) subject to any counterclaim, offset, or defense that the subtenant might have against Tenant; (iii) bound by any previous modification of the Sublease not approved by Landlord in writing or by any Transfer Rent, including, without limitation, additional rent or advance rent that the subtenant might have paid for more than the current month to Tenant, and all prepaid Transfer Rent shall remain due and owing to Landlord, including the amount of the advance payment; (iv) bound by any security or advance rental deposit made by the subtenant that is not delivered or paid over to Landlord and with respect to which the subtenant shall look solely to Tenant for refund or reimbursement; or (v) obligated to perform any work in the subleased space or to prepare it for occupancy, and in connection with the attonument, the subtenant shall execute and deliver to Landlord any instruments Landlord may reasonably request to evidence and confirm the attonument.

(3) Each Transferee shall be deemed, automatically on and as a condition of its accepting an Assignment or occupying or using the Premises or any part of the Premises, to have



agreed to be bound by the terms and conditions set forth in this Section 19.e. The provisions of this Section 19.e are self-operative, and no further instrument is required to give effect to these provisions.

f. Unauthorized Transfers. Any Transfer in violation of this Section 19 is void and, at the option of Landlord, shall constitute an Event of Default under this Lease. The acceptance of any Transfer Rent by Landlord from a purported Transferee shall not constitute a waiver by Landlord of the provisions of this Section 19.

g. Default. If an Event of Default (as defined in this Lease) occurs while the Premises or any part of the Premises is subject to a Transfer, then Landlord, in addition to its other remedies, may collect directly from the Transferee all Transfer Rent becoming due to Tenant and apply the Transfer Rent against the Rent. Tenant authorizes its Transferees to make payments of Transfer Rent directly to Landlord on receipt of notice from Landlord to do so following the occurrence of an Event of Default under this Lease.

h. Change in Control. Notwithstanding anything to the contrary contained in this section, the following constitutes Allowed Transfers, which do not require any notice or consent of Landlord (i) a transfer of the Lease to an entity which is the parent of Tenant, subsidiary of Tenant, affiliate of Tenant, or shall directly or indirectly control, be controlled by, or be under common control with, Tenant; (ii) any subsequent sale of ownership interest or issuance of new ownership interests, directly or indirectly, in Tenant; and (iii) a transaction in which any entity succeeds to all or substantially all of the assets of Tenant whether by merger, consolidation, sale or otherwise provided such successor entity assumes in full the obligations of Tenant under this Lease; provided, however, that (A) Tenant shall remain liable for the performance of all covenants, duties and obligations under the Lease, irrespective of any such assignment, and (B) the use of the Premises by the assignee shall conform with the uses permitted by this Lease. Tenant shall notify Landlord, in writing, of any such Allowed Transfer within fifteen (15) days after its occurrence and shall provide Landlord with all such reasonable information as Landlord may request reasonably regarding the identity and status of such assignee. As used in this Section 19, the term "Tenant" shall also mean any Guarantor that has guaranteed Tenant's obligations under this Lease or any entity that directly or indirectly owns a majority of the voting stock of or partnership, limited liability company, or other beneficial interests in Tenant, and the Transfer provisions in this Section 19 are applicable to any sales or transfers of the stock or partnership, limited liability company, or other beneficial interests of that Guarantor or majority owner.

## 20. SUBORDINATION.

a. Tenant agrees that this Lease is and shall be subordinate to any mortgage, deed of trust, or other security interest (collectively, "Prior Liens"), or ground lease, underlying lease, easement, agreement, encumbrance, or any other instrument affecting title of record (collectively with Prior Liens, "Encumbrances") that is now, or that may be in the future, placed on all or part of the Project, and all renewals, replacements, and extensions of Encumbrances. If any Prior Lien holder wishes to have this Lease prior to its Prior Lien, then, on the Prior Lien holder's notifying Tenant to that effect, this Lease shall be deemed prior to the Prior Lien. If any ground lease or underlying lease terminates for any reason or any Prior Lien is foreclosed or a conveyance in lieu of foreclosure on the Prior Lien is made for any reason, then: (i) Tenant shall attempt to and become the tenant of the successor in interest to Landlord; (ii) Tenant shall look solely to the successor in interest as the landlord under this Lease; (iii) Landlord shall be released from all of its liabilities and obligations under this Lease; and (iv) Tenant's remedies for any breach of this Lease shall be solely against the successor in interest. Within five (5) days of presentation including any nondisturbance agreement in favor of Tenant and this Lease, Tenant shall execute any documents that any Prior Lien or Encumbrance holder may require to effectuate the provisions of this



Section 20, or that may be required by Landlord or any third party to evidence the Lease's subordination. If a Prior Lien holder has given Tenant written notice of its interest in this Lease, Tenant may not exercise any remedies for default by Landlord under this Lease unless and until the Prior Lien holder has received written notice of Landlord's default and a reasonable time (not less than thirty (30) days) after the Prior Lien holder's receipt of the notice has elapsed without the default having been cured.

b. The parties to this Lease are bound by all Encumbrances that now or later may affect the Project, and Landlord is not liable to Tenant for any Damages resulting from any action taken by a holder of an interest in the Project pursuant to the rights of that holder under the interest in the Project.

c. If a Prior Lien holder has given Tenant written notice of its interest in this Lease, Tenant may not exercise any remedies for default by Landlord under this Lease unless and until the Prior Lien holder has received written notice of Landlord's default and a reasonable time (not less than thirty (30) days) after the Prior Lien holder's receipt of the notice has elapsed without the default having been cured.

21. ESTOPPEL CERTIFICATE. Tenant shall, on ten (10) business days' prior request by Landlord, execute, acknowledge, and deliver to Landlord a recordable statement in writing executed by Tenant, substantially in the form of Exhibit D, attached to this Lease (an "Estoppel Certificate"), certifying, among other things: (i) the date of this Lease; (ii) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect as modified, and setting forth these modifications); (iii) the date to which the Rent has been paid; (iv) either (a) that, to the knowledge of Tenant, no default exists under the Lease on the part of Landlord or Tenant or (b) that certain defaults allegedly exist under the Lease (in which case the Estoppel Certificate shall also specify each alleged default of which Tenant may have knowledge); (v) that there are no claims against Landlord under this Lease nor any defenses or rights of offset against collection of Rent or other charges due under this Lease; and (vi) any other matters that may be reasonably requested by Landlord. The parties agree and intend that any Estoppel Certificate executed by Tenant may be relied on by any prospective purchaser or mortgagee of the Building. Tenant's failure to execute and deliver any requested Estoppel Certificate within ten (10) business days of the request shall be deemed to be an acknowledgment by Tenant of the truth and accuracy of the requested statements to be included in the Estoppel Certificate.

## 22. SERVICES.

a. Landlord shall use reasonable efforts to: (i) maintain the public and common areas of the Project, such as lobbies, stairs, corridors, and restrooms, in good order and condition except for damage occasioned by the acts of Tenant, which shall be repaired at Tenant's sole cost and expense; (ii) furnish the Premises with electricity for lighting and operation of office machines that do not require more than one hundred ten (110) volts and whose electrical energy consumption does not exceed normal office usage, as reasonably determined by Landlord; (iii) furnish the Premises with nominal office HVAC, at temperatures and in amounts that are standard for comparable buildings in the vicinity of the Building; and (iv) provide reasonable, nonexclusive elevator service for ingress and egress to the floor on which the Premises are located, all during Normal Business Hours (as specified in Paragraph 22 of the Basic Lease Information) and all as reasonably determined by Landlord. Landlord shall also use reasonable efforts to provide lighting replacement for Landlord-furnished lighting, toilet room supplies, window washing with reasonable frequency, and customary janitorial service, as reasonably determined by Landlord.

b. Landlord is not required to furnish electrical current for equipment that requires more than one hundred ten (110) volts or other equipment whose electrical energy consumption exceeds normal office usage. If Tenant's requirements for or consumption of electricity exceeds the electricity to be provided by Landlord as described in Section 22.a, then Landlord shall, at Tenant's expense, make reasonable efforts to supply the excess electricity through the then-existing feeders and risers serving the



Building and the Premises, and Tenant shall pay to Landlord the cost of supplying the additional electricity within thirty (30) days after Landlord has delivered to Tenant an invoice for supplying the additional electricity. Landlord may determine the amount of Tenant's additional consumption and potential consumption by any verifiable method, including, without limitation, installation of a separate meter in the Premises installed, maintained, and read by Landlord, at Tenant's expense. Tenant shall not install any electrical equipment requiring special wiring or requiring voltage in excess of one hundred ten (110) volts unless approved in advance by Landlord, which approval shall not be unreasonably withheld. Tenant shall not install any electrical equipment requiring voltage in excess of the Building's capacity unless approved in advance by Landlord, which approval may be withheld in Landlord's sole discretion. The use of electricity in the Premises shall not exceed the capacity of existing feeders and risers to or wiring in the Premises. Any risers or wiring required to meet Tenant's excess electrical requirements shall, on Tenant's written request, be installed by Landlord, at Tenant's expense, if, in Landlord's judgment, the risers or willing is necessary and shall not (i) cause permanent damage to the Building or the Premises, (ii) cause or create a dangerous or hazardous condition, (iii) entail excessive or unreasonable Alterations, repairs, or expenses, or (iv) interfere with or disturb other tenants of the Building.

c. Special HVAC beyond normal office HVAC, such as for any computer centers, and after-hours HVAC shall be provided by Landlord at Tenant's expense, provided that Tenant delivers a written request to Landlord for this HVAC before 1:00 p.m. on the preceding business day. Landlord is entitled to determine, on one or more occasions, the cost of supplying special or after-hours HVAC, and Tenant must pay that cost, plus an administrative fee of fifteen percent (15%) of that cost, as Rent. Further, if Tenant uses any equipment or machinery in the Premises that affects the temperature otherwise maintained by the central HVAC system, then Landlord shall have the right, in its sole discretion, to install supplemental HVAC units in the Premises, and the cost of the installation and the HVAC units, plus an administrative fee of five percent (5%) of this cost, shall be paid by Tenant to Landlord on demand. The costs incurred by Landlord in providing special or after-hours HVAC service or supplemental HVAC units to Tenant shall include, but not be limited to, costs of electricity, water, sewage, water treatment, labor, metering, filtering, installation, operation, and maintenance reasonably allocated by Landlord to providing the service or units.

d. Before the commencement of any Premises Alterations to be carried out by, for, or on behalf of Tenant, if any, Landlord shall have the right to install separate meters for any utility services to the Premises, and these meters shall be installed, maintained, and read by Landlord, at Tenant's expense.

e. Landlord shall use reasonable commercial diligence to restore any intempeted service this Lease requires Landlord to provide, and Landlord shall use commercially reasonable diligence to minimize any service disruptions due to scheduled maintenance, repairs, inspections, and tests. However, Landlord is not liable to Tenant for any loss or damage caused by or resulting from any variation, interruption, or failure of any service due to any cause whatsoever, and no temporary interruption or failure of any service incident to the making of repairs, Alterations, or improvements due to accident or strike or conditions or events not under Landlord's control shall (i) be deemed an eviction of Tenant, (ii) relieve Tenant from any of Tenant's obligations under this Lease, or (iii) entitle Tenant to any set-off, abatement, recoupment, or other reduction in any component of Rent. As Tenant's sole and exclusive claim and remedy for the interruption of a service that this Lease requires Landlord to provide, and subject to the limitations on Landlord's liability in the previous sentence, Tenant shall be entitled to an equitable diminution of Base Rent during and to the extent that Tenant's use of or access to the Premises (and common areas of the Project essential to Tenant's use of or access to the Premises) is prevented or materially impaired, if a court of competent jurisdiction finds in a final, unappealable judgment that Landlord's gross negligence or willful misconduct caused the service interruption, and that the service interruption prevented or impaired Tenant's use of the Premises for more than five (5) consecutive



business days. TO THE FULLEST EXTENT ALLOWED BY APPLICABLE LAW, TENANT WAIVES ALL OTHER CLAIMS AGAINST LANDLORD PARTIES ARISING FROM INTERRUPTION OF ANY UTILITY SERVICE, ELECTRICAL SERVICE, OR ANY OTHER SERVICE FURNISHED BY LANDLORD.

f. If Tenant wishes to contract with any communications provider other than those currently servicing the Building, then Tenant's provider must enter into a written agreement with Landlord setting forth the terms and conditions of the access and lights to be granted to the provider. Landlord further reserves the right, in its sole and absolute discretion, to determine which telecommunications and media service providers shall have access to the Building. Landlord makes no warranty as to the quality, continuity, or availability of the telecommunications services in the Building, and Tenant waives any claim against Landlord for any Damages (including Damages for loss of business) if Tenant's telecommunications services in any way are interrupted, damaged, or rendered less effective. Unless Landlord otherwise requests or consents in writing, Tenant's telecommunications equipment must be located in the Premises and the telephone closet(s) on the floor(s) on which the Premises are located. Landlord, on reasonable prior notice to Tenant, shall be entitled to interrupt or turn off telecommunications facilities for any emergency, to repair the Building, or to install telecommunications or other equipment for the Building's other occupants or users.

g. Landlord shall be entitled to, on one or more occasions, select and change any provider of services described in this Section 22 (a "Service Provider") though Tenant will be permitted to keep any existing and prior-approved Service Provider if necessitated by its technology or business.

h. Tenant shall cooperate with Landlord and any Service Provider at all times, and Tenant shall allow any Landlord Party or any Service Provider reasonable access to the Building's electric lines, cables, feeders, risers, wiring, electrical panels, and any other equipment or machinery within, or accessed from, the Premises.

i. Landlord is not obligated to furnish any services or utilities other than as set forth in this Section 22. If Landlord elects to furnish additional services or utilities, then Tenant shall pay Landlord, on demand, the costs of the additional services or utilities, or Tenant's pro rata share of these costs, as determined by Landlord.

j. Unless expressly provided otherwise in this Lease or paid for separately by Tenant, the cost of furnishing all utilities and services to Tenant shall be included as part of Operating Costs. If Tenant fails to timely pay for any utilities or services provided by Landlord under this Lease that are not included in Operating Costs, then Landlord shall have the right, without any notice to Tenant and in addition to Landlord's other rights and remedies under this Lease, to discontinue any or all of these utilities or services.

23. SIGNS AND ADVERTISING. Landlord shall provide Tenant with Building standard signage (pursuant to the Building standard for signage that is established on one or more occasions by Landlord) on the Building directory in the lobby of the Building (the provision of this signage is included in Operating Costs) and on one-half of one of the bottom-most panel of the monument sign. Tenant shall not erect or install or otherwise utilize signs, lights, symbols, canopies, awnings, window coverings, or other advertising or decorative matter (collectively, "Signs") on the windows, walls, and exterior doors or otherwise visible from the exterior of the Premises without first (i) submitting its plans to Landlord and obtaining Landlord's written approval of the plans and (ii) obtaining any required approval of any applicable governmental authority. All Signs approved by Landlord shall be professionally designed and constructed in a first-class workmanlike manner, and installed and maintained by Tenant in a first-class manner, including the electrical hookup, if any, of the Signs, all at Tenant's sole expense. Landlord has



the right to promulgate on one or more occasions additional reasonable rules, regulations, and policies relating to the style and type of Signs that may be used by any occupant, including Tenant, in the Building, and may change or amend these rules and regulations on one or more occasions as in its discretion it deems advisable. Tenant agrees to abide by these rules, regulations, and policies. At the expiration or earlier termination of this Lease, all Signs attached to or painted by Tenant on the Premises, whether on the exterior or interior of the Premises, shall be removed by Tenant at its own expense, and Tenant shall repair any damage or injury to the Premises, and correct any unsightly condition, caused by the maintenance and removal of the Signs.

24. RULES AND REGULATIONS. Tenant agrees to observe and be bound by the Rules and Regulations applicable to the Project, a copy of which is attached to this Lease as Exhibit E (the "Rules and Regulations"). Landlord reserves the right to amend the Rules and Regulations as Landlord in its judgment may on one or more occasions deem to be necessary or desirable for the safety, care, and cleanliness of the Project and the preservation of good order in the Project, and Tenant agrees to comply with the Rules and Regulations. However, Landlord has no liability to Tenant for the noncompliance by other tenants and occupants of the Project with the Rules and Regulations. Further, Landlord will consistently apply the Rules and Regulations to all tenants in the Project but may waive any one or more of the Rules and Regulations for the benefit of any particular lessee, if such waiver does not impact Tenant's business, but no waiver by Landlord of one or more of the Rules and Regulations for the benefit of any particular lessee shall be construed as a waiver of those Rules and Regulations in favor of any other lessee, nor shall it prevent Landlord from subsequently enforcing any of those Rules and Regulations against any or all of the other lessees of the Building. To the extent the Rules and Regulations conflict with this Lease, this Lease shall control. Tenant's breach of any of the Rules and Regulations, at Landlord's option, may constitute an Event of Default (as defined in this Lease).

25. PARKING. Subject to the rules and regulations of the city in which the Premises are located, Tenant have the right to the unreserved Parking Spaces specified in Paragraph 20 of the Basic Lease Information free of any charge during the Term of the Lease, and otherwise subject to the Rules and Regulations applicable to the parking areas, including, without limitation, hours of operation and the prohibition on parking in reserved spaces, if any, assigned to persons other than Tenant. Landlord shall be entitled to impose fines of up to Twenty-Five and No/100 Dollars ($25.00) on Tenant for each violation of Landlord's parking Rules and Regulations or the unauthorized use of parking areas by any Tenant Party.

26. TIME. Time is of the essence in each and every provision regarding Tenant's performance under this Lease.

27. QUIET ENJOYMENT. So long as Tenant pays the Rent and performs the covenants and obligations contained in this Lease, Tenant shall hold and enjoy the Premises peaceably and quietly, subject to the provisions of this Lease. This covenant is in lieu of any other covenant, express or implied.

## 28. DEFAULTS AND REMEDIES.

a. Tenant Defaults. The occurrence of any one or more of the following events shall constitute a default under this Lease by Tenant (each an "Event of Default"):

(1) Tenant fails to make any payment of Rent as and when required to be made by Tenant under this Lease within fifteen (15) days after the day on which the Rent is due.

(2) Any of the following occur: (i) the making by Tenant or any Guarantor of any general assignment for the benefit of creditors; (ii) the filing by or against Tenant or any



Guarantor of a petition (a) to have Tenant adjudged bankrupt, (b) for reorganization or arrangement under any present or future law or regulation relating to bankruptcy, or (c) in any proceeding for an assignment for the benefit of creditors, unless the petition is dismissed, discharged, or denied within thirty (30) days; (iii) the appointment of a trustee, receiver, or liquidator to take possession of (a) substantially all of Tenant's assets located at the Premises, (b) substantially all of Tenant's assets, (c) Tenant's or any Guarantor's interest in this Lease, or (d) substantially all of any Guarantor's assets, where the trustee, receiver, or liquidator is not discharged within thirty (30) days of appointment; (iv) the attachment, execution, or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where the seizure is not discharged within thirty (30) days; (v) Tenant's or any Guarantor's becoming insolvent; (vi) a transfer by Tenant or any Guarantor made in fraud of creditors; or (vii) the written admission by Tenant or any Guarantor of its inability to pay its debts as they become due.

(3) Tenant, its bankruptcy trustee, or any entity authorized by court order to act on behalf of Tenant rejects this Lease under 11 U.S.C. § 365(a) or any other provision of Title 11 of the United States Code, or this Lease is deemed rejected by operation of law under 11 U.S.C. § 365(d)(4). Any rejection of this Lease described in the previous sentence shall terminate this Lease, without notice of any kind to Tenant, effective on the later of: (i) the date Tenant vacates the Premises following the rejection; (ii) the date the bankruptcy court with jurisdiction over Tenant's bankruptcy case enters an order on its docket authorizing Tenant to reject this Lease; or (iii) the date this Lease is deemed rejected under 11 U.S.C. § 365(d)(4).

(4) Any of the following occur: liquidation, termination, dissolution, or forfeiture of right to do business.

(5) At any time before the Commencement Date, a material adverse change occurs in the business, assets, liabilities, financial condition, net worth, results of operations, or business prospects of Tenant or in the ability of Tenant to perform any material obligations under this Lease, whether resulting from any single act, omission, situation, event, or undertaking, or several acts, omissions, situations, events, or undertakings.

(6) Tenant fails to take possession of and occupy the Premises within thirty (30) days of the Commencement Date.

(7) Tenant removes or prepares for removal (other than in the normal course of business) all or substantially all of Tenant's Personal Property from the Premises without Landlord's prior written consent.

(8) Any Tenant Party uses the Premises in violation of Section 8 above for more than two (2) business days after notice of the violation from Landlord.

(9) Tenant fails to procure and maintain, and to deliver to Landlord evidence of, the insurance policies and coverages as required by Section 16 above.

(10) Any Tenant Party performs any act that causes the rate of insurance on the Building or its contents to increase.

(11) Tenant fails to execute and deliver an attornment agreement as required by Section 19.e, an Estoppel Certificate as required by Section 21, or a guaranty as required by Section 43 within the required time periods.



(12) Tenant does or permits to be done anything that creates a lien on the Premises or the Project, if the lien is not removed or discharged within ten (10) days after it is filed.

(13) Any Tenant Party fails to cease any conduct on or about the Project, or Tenant fails to eliminate any condition in the Premises caused in whole or in part by a Tenant Party, that poses a danger to person or property within twelve (12) hours of receipt of written notice from Landlord requesting cessation of the conduct or elimination of the condition.

(14) The occurrence of any other event that is designated by this Lease as an "Event of Default."

(15) Any Tenant Party fails to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in Sections 28.a(1) through 28.a(14) above, where this failure continues for more than thirty (30) days after Landlord delivers written notice of the failure. If the nature of Tenant's default (other than a default specified in Section 28.a(1) through Section 28.a(14) above) is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if (i) Tenant begins the cure within thirty (30) days after Landlord delivers written notice of the default and diligently prosecutes the cure to completion, and (ii) completion of the cure occurs not later than sixty (60) days from the date on which Landlord delivers the notice of default.

(16) Tenant fails to comply with any item of this Lease more than twice during any consecutive twelve (12)-month period, which shall constitute an independent Event of Default.

b. Notice and Cure Periods. Unless otherwise established in this Lease or required by applicable law, no notices or notice periods are required for an event to constitute an Event of Default, nor is Tenant entitled to any cure periods after an Event of Default. Further, any notice or cure periods provided in this Lease are in lieu of, and not in addition to, any notice or cure periods required under applicable law, including, but not limited to, notice requirements regarding unlawful detainer actions.

c. Landlord Remedies. If an Event of Default exists, then, in addition to any other remedies available to Landlord at law or in equity, Landlord may exercise any or all of the following rights and remedies (and use by Landlord of one or more of the following remedies shall not preclude Landlord from simultaneously or later utilizing any one or more of these remedies), using lawful force if necessary or appropriate, and without notice or demand beyond any notice or demand required by this Lease or applicable law:

(1) Landlord shall have the right, on or at any time after the occurrence of the Event of Default, to terminate this Lease and Tenant's right to possession of the Premises, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, then Landlord may, without prejudice to any other remedy that it may have for possession or arrearages in Rent, and pursuant to Section 28.d below, enter on and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part t of the Premises. Tenant shall pay to Landlord on demand the amount of all Damages that Landlord may suffer or incur by reason of the termination, whether due to inability to re-let the Premises on satisfactory terms or otherwise.

(2) Landlord may terminate Tenant's right to occupy all or any part of the Premises, without terminating this Lease and with or without re-entering or repossessing the Premises. Unless Landlord delivers written notice to Tenant expressly stating that it has elected to terminate



this Lease, all actions taken by Landlord to dispossess or exclude Tenant from the Premises shall be deemed to be taken under this Section 28.c(2).

(3) Landlord shall have the right to continue this Lease in effect and to enforce all of its rights and remedies under this Lease, including the right to recover Rent as it becomes due, for so long as Landlord does not terminate Tenant's right to possession. Acts of maintenance or preservation, efforts to re-let the Premises, or the appointment of a receiver on Landlord's initiative to protect its interest under this Lease shall not constitute a termination of Tenant's right to possession.

(4) Landlord may charge Interest on any amount not paid when due from the due date through the date of its payment.

(5) At any time after any expiration or termination of this Lease or repossession of all or any part of the Premises by reason of the occurrence of an Event of Default, Landlord shall have the right to recover from Tenant, and Tenant shall pay to Landlord on demand, as and for liquidated and agreed final damages (and not as penalty or forfeiture) for Tenant's default a lump sum payment equal to: (i) the worth at the time of the recovery of all unpaid Rent due as of the date of termination, calculated using an interest factor equal to the rate specified in Section 5.b for Interest; (ii) the total Rent that, in Landlord's reasonable determination, Tenant would have been required to pay for the remainder of the Term, discounted to present value at a per annum rate equal to the "Prime Rate" as published on the date this Lease is terminated by The Wall Street Journal, Southwest Edition, in its listing of "Money Rates" plus two percent (2%), subject to any obligation Landlord may have under applicable law to mitigate damages; (iii) all of Landlord's costs and expenses (including, without limitation, Landlord's pro-rata (calculated on the remaining Lease Ten) as the numerator and the new tenant's lease term being the denominator) repossession costs, marketing expenses, brokerage commissions, legal expenses, attorneys' fees, employee expenses, repairs, costs of Alterations, and expenses of preparation for re-letting (including any cleaning or redecorating of the Premises)) incurred in connection with or related to Tenant's failure to perform its obligations under the Lease; and (iv) any other amount necessary to compensate Landlord for the detriment proximately caused by Tenant's failure to perform its obligations under the Lease. If any applicable law validly limits the amount of liquidated final damages to less than the amount agreed on in the previous sentence, then Landlord shall be entitled to the maximum amount allowable under that applicable law. If an Event of Default occurs before the expiration of the Initial Term, then Landlord shall also have the right to recover the amortized remaining amount of the Tenant Improvement Allowance (as set forth in Paragraph 15 of the Basic Lease Information), if any, and the amortized remaining free Rent granted by Landlord. The parties agree that this is a reasonable estimate of Landlord's Damages for an Event of Default given the uncertainty of future market rental, repair, and other rates and of the duration of any vacancy but not a limitation on Landlord's right to recover Rent or other Damages not caused by Tenant's nonpayment of Rent.

(6) Landlord shall have the right to take steps necessary or appropriate to have a receiver appointed for Tenant in order to take possession of the Premises and apply any Rent or other Damages collected and exercise all other rights and remedies granted to Landlord.

(7) Landlord may apply the Security Deposit in any manner permitted by this Lease, and Landlord may increase the amount of the Security Deposit.

(8) Landlord may, to the extent permitted by applicable law, withhold or suspend any service that Landlord would otherwise be required to provide, and Landlord may withhold or



suspend any payment that this Lease would otherwise require Landlord to make to any Tenant Party or any third party. Landlord shall not be liable for any claim for Damages arising from this withholding or suspension.

(9) In addition to the other remedies provided in this Lease, Landlord is entitled, to the extent permitted by law, to (i) injunctive relief, including, without limitation, eviction, in case of the violation, or attempted or threatened violation, of any of the covenants, agreements, conditions, or provisions of this Lease; (ii) a decree compelling specific performance of this Lease; (iii) Damages arising from the Event of Default, including, but not limited to, the costs of (a) collecting Rent and any other money owed by Tenant or a substitute tenant, (b) repairing any damage caused by any Tenant Party, (c) performing any obligation of Tenant under the Lease, (d) any other loss or cost incurred by Landlord as a result of, or arising from, Tenant's breach of the Lease or Landlord's exercise of its rights and remedies for any breach of the Lease by Tenant, (e) any contractual or liquidated types or measures of damages specified in this Lease, and (f) any other type or measure of damages recoverable for any particular breach under applicable law; and (iv) any other remedy allowed to Landlord at law or in equity.

d. Re-entry. If an Event of Default exists, then Landlord shall also have the right and is authorized, with or without terminating this Lease, and with or without notice, to the extent permitted by applicable law, to re-enter the Premises, change or pick the locks, access codes, or other access control devices to the Premises or the Building, and to take any self-help measures or judicial action to remove and exclude Tenant and other occupants from the Premises, without liability for any resulting Damages. Landlord also is entitled to use the measures in the preceding sentence to remove all property from the Premises, which then may be stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. If Landlord re-enters the Premises or terminates this Lease pursuant to this Section 28.d, then Tenant waives all claims for Damages that may be caused by that re-entry or termination by Landlord. Neither the re-entry or taking possession of the Premises by Landlord pursuant to this Section 28.d, nor the service by Landlord of any notice pursuant to the forcible entry and detainer statutes of the State of Texas and the surrender of the Premises pursuant to that notice, shall be construed as an election to terminate this Lease unless a written notice of Landlord's intention to terminate the Lease is given to Tenant or unless the termination of the Lease is decreed by a court of competent jurisdiction, and Tenant's obligations shall remain in effect for the remainder of the Term. To the extent of any inconsistency or conflict between this Lease and the provisions of Section 93.002 of the Texas Property Code (as amended, supplemented, modified, recodified, and/or replaced on one or more occasions, the "TPC"), it is the agreement of the parties that this Lease shall supersede Section 93.002. Landlord may take these actions without being deemed in any manner guilty of trespass, eviction, or forcible entry or detainer and without inclining any liability for damage resulting from these actions, including, without limitation, any liability arising under Chapter 93 of the TPC, and without relinquishing Landlord's right to collect Rent, or any other right given to Landlord under this Lease or by operation of law. Tenant waives any and all rights to claim Damages for Landlord's re-entry and expulsion pursuant to this Lease, including any rights granted to Tenant by Chapter 93 of the TPC.

e. Re-letting. At any time or on one or more occasions after the repossession of all or any part of the Premises pursuant to Section 28.c(I) or Section 28.d, whether or not this Lease has been terminated, Landlord may (but has no obligation to, except to the extent required by law) re-let all or any part of the Premises in the name of Tenant, Landlord, or otherwise, without notice to Tenant, for the term or terms (which may be greater or less than the period that would otherwise have constituted the balance of the Term), on the conditions (which may include concessions or free rent), at a rate (which may be a rental rate greater than or less than the Rent under this Lease), and for any uses as Landlord, in its absolute discretion, may determine, and Landlord may collect and receive any rents payable by reason of that re-letting. In any situation in which Landlord is attempting to re-let the Premises in order to mitigate



its damages resulting from an Event of Default, Landlord shall conclusively be deemed to have done so if Landlord lists the Premises with a real estate broker or agent (which may be affiliated with Landlord), places a sign in a window of the Premises (which, Tenant agrees, Landlord is authorized to do), and considers in good faith all written proposals for the Premises made by the broker or agent. In attempting to re-let or actually re-letting the Premises, Landlord may enter into a direct lease with the proposed replacement tenant, and, in entering that lease, Landlord shall not be deemed to be acting as Tenant's agent. Landlord agrees that the rentals and other collections that Landlord may actually receive from a substitute tenant of the Premises, to the extent that any of these rentals and/or other collections are attributable to any particular time period within the Term (and after reduction for all expenses incurred by Landlord in connection with that substitute tenant), shall be credited against Tenant's obligations for the same time period; however, no rent collected from a substitute tenant for any month in excess of the Rent due under the Lease for that month shall be credited or offset against unpaid Rent for any other month or any other Damages. Landlord shall not be responsible or liable for any failure to collect any rent due on re-letting. To the extent Landlord is required by law to re-let the Premises, Landlord shall not be obligated: (i) to re-let the Premises in preference to any other space in the Building; (ii) to re-let the Premises to any prospective tenant who does not meet Landlord's then current leasing guidelines; (iii) to re-let the Premises to any prospective tenant if the use proposed to be made of the Premises by that prospective tenant is not of a type and nature consistent with that of the other tenants in the Building or on the floor where the Premises are situated as of the Event of Default, or if that use would, in the good faith opinion of Landlord, impose unreasonable or excessive demands on the Property; (iv) to solicit or entertain negotiations with any prospective tenant(s) for the Premises until Landlord has obtained full and complete possession of the Premises, free of any claim by Tenant that it continues to have a right of occupancy with respect to the Premises; (v) to travel outside a radius of thirty (30) miles from either the Property or Landlord's principal office in order to meet with a prospective tenant; (vi) to pay leasing commissions in excess of then-current market rates; (vii) to pay any expenses related to a prospective tenant's existing lease at another location (e.g., lease takeover payments or moving expenses) or any other non-typical expenses; (viii) to expend money for a finish-out requested by a prospective tenant unless Landlord, in its sole discretion, believes that the excess rent Landlord shall receive and the credit of the prospective tenant support expending money for the finish-out; (ix) to cause or allow an existing tenant of the Property to move from its existing space to all or any portion of the Premises; or (x) to re-let the Premises to an Affiliate of Tenant. Further, Tenant shall not be entitled to have any proceeds from re-letting any space in the Building, other than the Premises, credited against any amounts due Landlord under this Lease. The terms of any substitute lease shall not effect a surrender of this Lease. Landlord shall have no duty to restore or repair the Premises if Tenant does not leave the Premises and any improvements in the same condition as they were in when Landlord delivered them to Tenant, reasonable wear and tear excepted. Landlord and Tenant stipulate that the re-letting provisions of this Section 28.e are objectively reasonable under the circumstances.

f. Landlord's Right to Cure. Landlord may, but is not obligated to, cure any default by Tenant after complying with the notice provisions set forth in this Lease, and whenever Landlord elects to cure a default by Tenant, all costs and expenses paid or incurred by Landlord in curing that default, including, but not limited to, collection costs and legal expenses, shall be deemed to be additional rent due on demand with Interest. In an emergency, Landlord shall have the immediate right to cure any default by Tenant before the expiration of the applicable notice and cure period if reasonably necessary to protect the Project or to prevent injury or damage to persons or property, and Tenant shall pay to Landlord all amounts expended by Landlord to cure the default within ten (10) days of written notice to Tenant of these expended amounts.

g. Remedies Cumulative; Limited Waiver. All rights, options, and remedies of Landlord contained in this Lease or provided by law or in equity shall be construed and held to be cumulative, and no one of them shall be exclusive of the other. No waiver of any default under this Lease shall be implied



from any acceptance by Landlord of any Rent or any omission by Landlord to take any action on account of a default by Tenant, and no express waiver shall affect any default other than as specified in that waiver. The consent or approval of Landlord to or of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent or approval to or of any subsequent similar acts by Tenant.

h. Survival of Tenant’s Obligations. No expiration or termination of this Lease due to an Event of Default, by operation of law or otherwise, and no repossession or re-letting of all or any part of the Premises pursuant to this Section 28, shall relieve Tenant of its obligations and liabilities under the Lease, all of which shall survive any expiration or termination of this Lease due to an Event of Default and any repossession or re-letting of all or any part of the Premises pursuant to this Section 28.

i. Interest. All amounts due from Tenant to Landlord under this Section 28 shall bear Interest until paid in full.

j. Alteration of Locks. With or without notice, and to the extent permitted by applicable law, following an Event of Default, Landlord may alter locks or other security devices at the Premises to deprive Tenant of access to the Premises, and Landlord shall not be required to provide a new key or right of access to Tenant.

k. Landlord Liability Waiver. NO LANDLORD PARTY SHALL BE LIABLE FOR ANY CLAIM BY ANY TENANT PARTY ARISING FROM ANY ACT OR OMISSION OF ANY LANDLORD PARTY IN THE EXERCISE OF ANY RIGHT OR REMEDY FOR TENANT'S DEFAULT UNDER THIS LEASE, INCLUDING, WITHOUT LIMITATION, CLAIMS ARISING FROM A LANDLORD PARTY'S OWN NEGLIGENCE OR STRICT LIABILITY (BUT NOT INCLUDING CLAIMS ARISING FROM A LANDLORD PARTY'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT).

1. Tenant Remedies. Landlord shall not be in breach of this Lease if Landlord begins promptly and pursues with reasonable connumerial diligence the cure of its failure to meet any material obligation under this Lease within thirty (30) days after Landlord receives written notice from Tenant specifying Landlord's failure. Except as otherwise expressly provided in this Lease, Tenant shall have no right to terminate or rescind this Lease or to abate, set off, or withhold any payment of Rent for any reason, including, but not limited to, Landlord's breach of this Lease, and Tenant acknowledges that any covenant made by Landlord in this Lease is independent of Tenant's covenant to pay Rent. Except as otherwise expressly provided in this Lease, Tenant irrevocably waives all rights at law or in equity to terminate or rescind this Lease for Landlord's breach, and Tenant agrees that its sole and exclusive remedy for any breach shall be a suit for damages limited to Tenant's direct, out-of-pocket losses. IN NO EVENT SHALL LANDLORD BE LIABLE OR RESPONSIBLE FOR ANY CONSEQUENTIAL, INCIDENTAL, OR SPECIAL DAMAGES. Before exercising any remedy for Landlord's breach, Tenant shall give each of Landlord's Mortgages written notice specifying Landlord's breach and at least thirty (30) days to cure that breach. Tenant acknowledges and agrees that the remedy provided by this Section 28.1 is exclusive, and Tenant irrevocably and unconditionally waives any and all other remedies, at law or in equity, including, without limitation, any action seeking specific performance, injunctive, or other equitable relief, and any action that would or could create a lien on all or any portion of the Project.

29. RIGHT TO PERFORM. If Tenant shall fail to pay any sum of money other than the Base Rent, or shall fail to perform any other act on its part to be performed under this Lease, and this failure continues for ten (10) days after notice of the failure from Landlord, then Landlord may, but shall not be obligated to, and without waiving or releasing Tenant from any obligations of Tenant, make any payment or perform any other act on Tenant's part to be made or performed as provided in this Lease. Tenant shall



reimburse Landlord for all costs incurred in connection with that payment or performance immediately on demand.

## 30. IMPROVEMENTS.

a. Tenant Improvement Allowance. Landlord shall provide Tenant an allowance for Tenant improvements to the Premises in an amount not to exceed the Tenant Improvement Allowance, if any. If no Tenant Improvement Allowance amount is indicated in Paragraph 15 of the Basic Lease Information, then Tenant is not entitled to any allowance for Tenant improvements to the Premises. Tenant will be permitted up to twelve (12) months after Lease Commencement to utilize the Tenant Improvement Allowance. In no event shall Tenant be entitled to any credit or benefit for any unused portion of the Tenant Improvement Allowance over the amount expended for the actual cost of the work performed and materials provided, architectural fees, engineering fees, mechanical costs, structural costs, computer cabling and wiring, security, electrical costs, construction management fees (not to exceed five percent (5%) of the total cost), permit fees, and out-of-pocket expenses.

b. Initial Improvements. The construction of the initial improvements, if any, to the Premises, and the potential effect of this construction on the Commencement Date and the Expiration Date, are governed by the terms of the Work Letter, if any, attached to this Lease as Exhibit G.

31. NOTICES. All notices to the parties under this Lease shall be sent in writing to the addresses of the parties designated on the signature pages of the Basic Lease Information or any addresses that may be designated by either party in writing. These notices shall be (i) sent by certified mail, return receipt requested, in which case notice shall be deemed delivered three (3) business days after timely deposit, postage prepaid, in the U.S. Mail; (ii) sent by a nationally recognized overnight courier, in which case notice shall be deemed delivered one (1) business day after timely deposit with the courier; or (iii) personally delivered, in which case notice shall be deemed delivered on receipt.

32. ATTORNEYS' FEES. If either party places the enforcement of this Lease or any part of this Lease, or the collection of any Rent, or recovery of the possession of the Premises, in the hands of an attorney, or files suit on the enforcement of this Lease or any part of this Lease, or the collection of any Rent, or recovery of the possession of the Premises, then the non-prevailing (or defaulting) party shall pay the other party's reasonable attorneys' fees and court costs, including, without limitation, paralegal fees and any attorneys' fees and court costs in connection with any appeals and any bankruptcy or insolvency proceedings involving Tenant or this Lease. If any Landlord Party is named as a defendant in any suit brought against any Tenant Party in connection with or arising out of any Tenant Party's occupancy or use of the Premises or the Project, then Tenant shall pay to Landlord its costs and expenses incurred in that suit, including Landlord's reasonable attorneys' fees. Any attorneys' fees and other expenses incurred by either party in enforcing a judgment in its favor under this Lease are recoverable separately from and in addition to any other amount included in that judgment, and the attorneys' fees obligation is intended to be severable from the other provisions of this Lease and to survive and not be merged into any judgment under this Lease. As used in this Lease, "prevailing party" shall include, without limitation, a party that is awarded monetary relief or declaratory, injunctive, or other nonmonetary relief

## 33. SURRENDER OF PREMISES.

a. On the expiration or earlier termination of this Lease, Tenant shall immediately (i) quit and surrender the Premises to Landlord; (ii) remove from the Premises all of Tenant's Personal Property and repair any damage caused by that removal; (Hi) remove all cable and communications wires (collectively, "Cables," as that term is defined in the 2002 National Electric Code, Section 800.52) that Tenant installed or caused to be installed in horizontal and vertical spaces in the Premises, in any plenum



areas above the Building's ceiling, under any raised floor in the Building, and in any other riser and communication areas in the Building; (iv) restore the Premises to their permitted use condition, exclusive of ordinary wear and tear; (v) clean the Premises, including, but not limited to, all walls, floors, and carpeting in the Premises; (vi) remove or cause to be removed all debris and rubbish from the Premises; (vii) remove any and all Hazardous Substances from the Premises (except for any Hazardous Substances existing on the Premises before the date of this Lease); (viii) execute any requested bills of sale for Premises Alterations permitted by Landlord to remain in the Premises, free of any and all liens and encumbrances; (ix) surrender any keys, electronic ID cards, and other access control devices to Landlord at the place then fixed for the payment of Rent; and (x) perform all other obligations required of Tenant under the terms of this Lease (e.g., removal of Premises Alterations if required by Landlord, as provided in Section 10.b above). If Tenant fails to remove any of its Personal Property on the expiration or earlier termination of this Lease, then all remaining Personal Property located in the Premises shall conclusively be deemed abandoned, and Landlord may, at its option, remove that Personal Property in any manner that Landlord shall choose, and store the Personal Property, without liability to Tenant for loss of the Personal Property. Tenant agrees to pay Landlord on demand any and all expenses incurred in this removal and storage of abandoned Personal Property, including, without limitation, court costs and attorneys' fees and storage charges for any length of time that the Personal Property is in Landlord's possession. If Tenant does not both (i) claim and take delivery of any of Tenant's Personal Property that remains in the Premises or in storage within ten (10) days after the expiration or earlier termination of this Lease and (ii) pay Landlord all amounts due under this Lease and all costs of removal and storage of that Personal Property, then Landlord may, at its option, without notice, sell the Personal Property at private sale and without legal process, for any price that Landlord may obtain, and apply the proceeds of the sale to any amounts due under this Lease from Tenant to Landlord and to the expenses incident to the removal and sale of the Personal Property.

b. Tenant shall indemnify Landlord for any loss or liability resulting from any delay by Tenant in surrendering the Premises to Landlord as provided in this Section 33.

c. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation of this Lease, shall not work a merger, and shall, at the option of Landlord, operate as an assignment to Landlord of any subleases or subtenancies, and Landlord, in its sole discretion, may terminate any subleases or subtenancies.

34. HOLDING OVER. If Tenant holds over after the expiration or earlier termination of the Tenn without the express prior written consent of Landlord, then Tenant shall become a tenant at sufferance only, at a rental rate equal to the greater of (i) one hundred fifty percent (150%) of then-current market rents for the Premises as determined by Landlord in its sole discretion, or (ii) one hundred fifty percent (150%) of the Rent in effect on the date of the expiration or earlier termination (subject to adjustment as provided in Sections 5 and 6 and prorated on a daily basis), and otherwise subject to the terms, covenants, and conditions of this Lease, so far as applicable. Acceptance by Landlord of Rent after the expiration or earlier termination shall not result in a renewal of this Lease and shall not waive Landlord's right to bring an unlawful detainer action against Tenant or otherwise remove Tenant from the Premises. If Tenant fails to surrender the Premises on the expiration of this Lease despite demand to do so by Landlord, then Tenant shall indemnify, defend, and hold Landlord harmless from all loss or liability, including, without limitation, any claim made by any succeeding tenant founded on or resulting from Tenant's failure to surrender. If (i) Landlord delivers written notice to Tenant that Landlord has entered into a lease of, or is in active negotiations of a letter of intent to lease, all or any portion of the Premises; (ii) Tenant fails to vacate the Premises after expiration or earlier termination of the Lease within thirty (30) days after Landlord delivers written notice to Tenant of the lease or negotiations of a letter of intent to lease; and (iii) Tenant's holdover beyond that thirty (30)-day period prevents, delays, or hinders Landlord's timely preparation or delivery of the Premises, or any portion of the Premises, for occupancy by another tenant,



then Tenant shall be liable for all of Landlord's Damages, if any, resulting from any holdover or occupancy after the expiration of this thirty (30)-day period, AND TENANT SHALL INDEMNIFY AND DEFEND THE LANDLORD PARTIES AGAINST ANY AND ALL CLAIMS ARISING FROM TENANT'S FAILURE TO TIMELY VACATE THE PREMISES, and any limitation on, or exculpation from, any liability or Damages elsewhere in this Lease shall not apply to Tenant's duties to indemnify and defend Landlord under this Section 34.

35. NON-WAIVER. Landlord shall not be deemed to have waived (i) any right of Landlord or (ii) Tenant's breach of any obligation under this Lease, unless Landlord delivers a signed writing, addressed to Tenant, explicitly relinquishing that right or breach. Any waiver by Landlord of any right, or of Tenant's breach, on one or more occasions shall not be deemed a waiver on any other occasion. Further, no custom or practice arising during the administration of this Lease shall waive or diminish Landlord's right to insist on strict performance of Tenant's obligations under this Lease. Neither the acceptance of Rent nor any other act or omission of Landlord at any time or times after the happening of any event authorizing the cancellation or forfeiture of this Lease shall operate as a waiver of any past or future violation, breach, or failure to keep or perform any covenant, agreement, term, or condition of this Lease, or deprive Landlord of its right to cancel or forfeit this Lease, on the notice required by this Agreement or by any applicable law, at any time that cause for cancellation or forfeiture may exist, or be construed so as to at any future time stop Landlord from promptly exercising any other option, right, or remedy that it may have under any term or provision of this Lease or at law or in equity.

36. NOTICE TO MORTGAGEE. In the event of any default on the part of Landlord, Tenant shall give notice by registered or certified mail to each Landlord's Mortgagee whose address has been furnished to Tenant, and shall offer each Landlord's Mortgagee a reasonable opportunity to cure the default, including time to obtain possession of all or any part of the Project by power of sale or a judicial foreclosure, if necessary to effect a cure.

37. MORTGAGEE PROTECTION. If any Landlord's Mortgagee succeeds to the interest of Landlord under this Lease, then Landlord's Mortgagee shall not be: (i) liable for any act or omission of any prior lessor (including Landlord); (ii) bound by any Rent that Tenant might have paid for more than the current month to any prior lessor (including Landlord), and all Rent shall remain due and owing, including the amount of any Rent paid in advance to any prior lessor; (iii) bound by any security or advance rental deposit made by Tenant that is not delivered or paid over to Landlord's Mortgagee and with respect to which Tenant shall look solely to Landlord for refund or reimbursement; (iv) bound by any termination, amendment, or modification of this Lease made without Landlord's Mortgagee's consent and written approval, except for those terminations, amendments, and modifications permitted to be made by Landlord without Landlord's Mortgagee's consent pursuant to the loan documents between Landlord and Landlord's Mortgagee; (v) subject to the defenses that Tenant might have against any prior lessor (including Landlord); and (vi) subject to the offsets that Tenant might have against any prior lessor (including Landlord) except for those offset rights that (a) are expressly provided in this Lease, (b) relate to periods of time following the acquisition of all or any part of the Project by Landlord's Mortgagee, and (c) of which Tenant has provided written notice to Landlord's Mortgagee and with respect to which Tenant has provided Landlord's Mortgagee a reasonable opportunity to cure the event giving rise to the offset rights. Landlord's Mortgagee shall have no liability or responsibility under or pursuant to this Lease or otherwise after it ceases to own an interest in the Project. Nothing in this Lease shall be construed to require Landlord's Mortgagee to see to the application of the proceeds of any loan, and Tenant's agreements set forth in this Lease shall not be impaired on account of any modification of the documents evidencing or securing any loan.

38. INTENTIONALLY DELETED.



39. CHANGES TO THE PROJECT. Landlord reserves the right at any time to, in its sole discretion and without any liability or responsibility to Tenant so long as such items do not materially and adversely affect Tenant's business or operations in the Premises, make changes, Alterations, reductions, and additions to the Project, including, without limitation: (i) the construction of other buildings or improvements in the Project; (ii) the construction of additional stories on any building; (iii) changing the location of entrances and exits, passageways, doors and doorways, corridors, elevators, stairs, toilets, or other parts of common areas of the Project; (iv) running pipes, conduits, and ducts through the Premises; and (v) carrying on any work, repairs, Alterations, or improvements in, on, or about the Project, and, in doing so, temporarily closing or obstructing doors, entryways, public space, and corridors in, on, or about the Project. Landlord has no obligation to inform Tenant of any improvements or activities that may be contemplated in the Project.

40. RIGHTS RESERVED TO LANDLORD. In addition to any other rights Landlord has under this Lease, at law, or in equity, Landlord shall, in its sole discretion, have the following rights, exercisable without notice and without liability to Tenant for damage or injury to property, person, or business (Tenant waives and releases all claims for any damage related to Landlord's exercise of the following rights) and without effecting an eviction or disturbance of Tenant's use or possession of the Premises or giving rise to any claim for setoffs or abatement of Rent: (i) the right to sell, mortgage, assign, or transfer all or any part of the Project or of this Lease; (ii) the right to change the name or street address of the Building or the suite number of the Premises; (iii) the right to install and maintain signs on the exterior and interior of the Building or elsewhere on the Property; (iv) the right to take any reasonable measures for the safety and protection of all or any part of the Project, or any of its occupants; (v) the right to designate sign painting and lettering, towels, coffee cart service, vending machines, or toilet supplies to be used or consumed in the Building; (vi) the right to have access to all mail chutes or boxes according to the rules of the United States Postal Service; (vii) the right to require all persons entering or leaving the Building during any hours as Landlord may on one or more occasions determine in its sole discretion to identify themselves to security personnel by registration or otherwise, and to establish their right to enter or leave the Building, and to exclude or expel any peddler, solicitor, or beggar at any time from the Project; (viii) the right to interrupt or temporarily suspend Project services and facilities; (ix) the right to close the Building at any time outside Normal Business Hours, or at any other times as Landlord may determine in its sole discretion, subject, however, to Tenant's right to admittance under the Rules and Regulations that are prescribed on one or more occasions by Landlord in its sole discretion; (x) the right to grant anyone the exclusive right to conduct any business or render any service in the Building, but this exclusive right shall not operate to exclude Tenant from the uses permitted under Section 8 of this Lease; and (xi) the right to lease space in the Building for restaurant uses.

41. TRANSFER OF LANDLORD'S INTEREST. In the event of any transfer or transfers of Landlord's interest in the Project, other than a transfer for security purposes only, Tenant agrees that Landlord shall be automatically relieved of any and all obligations and liabilities on the part of Landlord accruing from and after the effective date of the transfer, and Tenant agrees to atmo to the transferee and look solely to the transferee to perform any obligations and liabilities of Landlord accruing on or after the effective date of the transfer.

## 42. INTENTIONALLY DELETED.

43. GUARANTY. If Paragraph 17 of the Basic Lease Information names a Guarantor, then, as additional consideration for Landlord to enter into this Lease, Tenant shall cause the Guarantor to execute the Guaranty attached to this Lease as Exhibit J, and Tenant shall deliver the Guaranty to Landlord contemporaneously with Tenant's execution of this Lease. Tenant's failure to deliver the Guaranty as required in the preceding sentence is an automatic Event of Default under this Lease, with no notice being necessary to Tenant, and shall entitle Landlord to exercise any and all rights and remedies available to it.



under this Lease, as well as at law or in equity. Additionally, if Tenant fails to deliver the Guaranty, then Landlord (i) shall not be required to perform any of Landlord's Work (as defined in the Work Letter, if any, attached to this Lease as Exhibit G), if any; (ii) shall not be required to make any reimbursements or allowances in connection with any Premises Alterations; (iii) shall not be required to pay any brokerage commissions to Tenant's Broker (as named in Paragraph 19 of the Basic Lease Information), if any (and Tenant shall indemnify Landlord against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any broker or agent, if the broker or agent is claiming that liability by, through, or under Tenant); and (iv) may terminate this Lease by providing Tenant five (5) days' advance written notice of termination. If this Section 43 conflicts with any other provisions of this Lease, then this Section 43 shall prevail.

## 44. GENERAL PROVISIONS.

a. Entire Agreement. This Lease contains all of the agreements of the parties, and there are no verbal or other agreements that modify or affect this Lease. This Lease supersedes any and all prior agreements made or executed by or on behalf of the parties regarding the Premises. In addition, no agreement shall be effective to modify or terminate this Lease in whole or in part unless the agreement is in writing and duly signed by the party against whom enforcement of the modification or termination is sought.

b. Terms and Headings. The words "Landlord" and "Tenant" include the plural as well as the singular, and words used in any gender include all genders. The term "person" in this Lease means any person, corporation, partnership, or other entity. The titles to sections of this Lease are not a part of this Lease and have no effect on the construction or interpretation of any part of the Lease. Unless otherwise specified in this Lease, references to a "month" in this Lease during the Term shall mean and refer to a full calendar month, beginning on the first day of the calendar month and ending on the last day of the calendar month, and all prorations to be performed under this Lease shall be based on the actual number of days in the relevant calendar month.

c. Successors and Assigns. Except as expressly stated to the contrary in this Lease, all of the covenants, agreements, terms, and conditions contained in this Lease shall inure to and be binding on Landlord and Tenant and their respective heirs, successors in interest, legal representatives, and assigns.

d. No Brokers. Tenant represents and warrants to Landlord that it has not engaged any broker, finder or other person, except for Tenant's Broker, who would be entitled to any commission or fees in respect of the negotiation, execution, or delivery of this Lease and shall indemnify, defend, and hold harmless Landlord against any loss, cost, liability, or expense incurred by Landlord as a result of any claim asserted by any other broker, finder, or other person claiming to be entitled to any commission or fees in respect of the negotiation execution, or delivery of this Lease, except for Tenant's Broker or Landlord's Broker (as named in Paragraph 18 of the Basic Lease Information), if any, on the basis of any arrangements or agreements made or alleged to have been made by or on behalf of Tenant. Landlord is responsible for paying all leasing commissions due Landlord's Broker and Tenant's broker in connection with this Lease.

e. Accord and Satisfaction. No payment by Tenant or receipt by Landlord of a lesser amount than any installment or payment of Rent due shall be deemed to be other than on account of the amount due, and no endorsement or statement on any check or payment of Rent shall be deemed an accord and satisfaction.

f. Liability of Landlord. The Landlord Parties' total obligations and liability to any Tenant Party under this Lease are limited solely to the lesser of (i) the proceeds of any sale, exchange, or transfer



of Landlord's interest in the Building (subject to existing liens) or (ii) the equity interest Landlord would have in the Building if the Building were encumbered by third-party debt in an amount equal to eighty percent (80%) of the value of the Building (as the Building's value is determined by Landlord); but in no event shall this liability amount include any sales or insurance proceeds received by any Landlord Party in connection with the Project. Further, no Landlord Party, nor any officer, director, shareholder, or partner of or in any Landlord Party, shall have or incur any personal liability whatsoever with respect to this Lease. Additionally, Tenant waives its statutory lien under Section 91.004 of the TPC. No Landlord Party shall be liable under any circumstances for injury or damage to, or interference with, Tenant's business, including, but not limited to, loss of profits, loss of rents or other revenues, loss of business opportunity, loss of goodwill, or loss of use, in each case, however occurring.

g. Remedies for Withheld Consent. Wherever in this Lease Landlord's consent or approval is required, if Landlord refuses to grant consent or approval, then Tenant shall not make, and Tenant waives, any claim for money Damages (including any claim by way of setoff, counterclaim, or defense) based on Tenant's claim or assertion that Landlord unreasonably withheld, delayed, or conditioned its consent or approval. Tenant's sole remedy is an action or proceeding to enforce the relevant provision by specific performance, injunction, or declaratory judgment, and Tenant waives any claim for attorneys' fees or any other Damages relating to that action or proceeding unless Landlord refuses to comply with a court order or judgment requiring it to grant its consent or approval. Further, Landlord shall have no obligation whatsoever to grant consent or approval if the relevant provision entitles Landlord to use its discretion.

h. Severability. Any provision of this Lease that shall prove to be invalid, void, or illegal shall in no way affect, impair, or invalidate any other provision of the Lease, and the remaining provisions of the Lease shall nevertheless remain in full force and effect.

i. Force Majeure. Except as may be otherwise specifically provided in this Lease, time periods for Landlord's or Tenant's performance under any provisions of this Lease not involving the payment of money shall be extended for periods of time during which the nonperforming party's performance is prevented due to circumstances beyond the party's control, including, without limitation, strikes, embargoes, governmental regulations, acts of God, war, terrorism, or other strife.

j. No Air Rights. No rights to any view or to light or air over any property, whether belonging to Landlord or any other person, are granted to Tenant by this Lease. If at any time any windows of the Premises are temporarily darkened or the view, light, or air from the windows is obstructed by reason of any repairs, improvements, maintenance, or cleaning in or about any part of the Project, then the darkening or obstruction shall be without liability to any Landlord Party and without any reduction or diminution of Tenant's obligations under this Lease.

k. Identification of Tenant. If more than one person or entity executes this Lease as Tenant,

then:

(1) Each of these persons or entities is jointly and severally liable for the performance of all of the terms, covenants, and conditions of this Lease; and

(2) The term "Tenant" shall mean each of them jointly and severally. The act or notice from, or notice or refund to, or the signature of any one or more of them, with respect to the tenancy of this Lease, is binding on each and all of the persons or entities executing this Lease as Tenant.



1. Examination of Lease. Landlord has delivered a copy of this Lease to Tenant for Tenant's review only, and submission of this Lease for examination or signature by Tenant does not constitute an offer to Tenant or a reservation of or option to lease the Premises. On execution and delivery of this Lease by Tenant, this Lease shall be binding on Tenant as an irrevocable offer to Landlord. If Landlord does not execute and deliver this Lease to Tenant within fifteen (15) days from the date of execution and delivery by Tenant, then Tenant may elect not to go forward with this Lease by delivering written notice to Landlord before the date Landlord executes and delivers this Lease to Tenant (in which event Landlord shall have three (3) business days after Tenant's delivery of the notice to execute and deliver this Lease). This Lease is not effective as a lease or otherwise until it is fully executed and delivered by both Landlord and Tenant.

m. Modification for Lender. If, in connection with Landlord's obtaining construction, interim, or permanent financing for any part of the Building, the lender requests reasonable modifications to this Lease as a condition to that financing, then Tenant shall not unreasonably withhold, delay, or defer its consent to the modifications, provided that the modifications do not increase the Base Rent or materially adversely affect the leasehold interest created by this Lease or Tenant's rights under this Lease.

n. Lease as Sublease. If this Lease is a sublease, then Tenant accepts this Lease subject to all of the terms and conditions of the underlying lease under which Landlord holds the Building as lessee. Tenant covenants that it will do no act or omission that would constitute a violation by Landlord of its obligations under the underlying lease, but Landlord acknowledges that Tenant's agreement in this Section 44.n is premised on Landlord's assurances that the terms of this Lease do not violate the underlying lease.

0. Financial Statements. If for any reason, Tenant's parent corporation is no longer publicly traded or Tenant or Tenant's parent corporation no longer provides its financial statements to the public at large, then, on one or more occasions, Tenant agrees to provide to Landlord, within fifteen (15) days of written request, Tenant's current financial statements (including any notes on them), dated no earlier than three (3) months before Landlord's request, certified as accurate by Tenant or, if available, Tenant's audited financial statements (and notes on them) prepared by an independent certified public accountant with copies of the auditor's statement. If any guaranty is executed in connection with this Lease, then Tenant also agrees to deliver to Landlord, within fifteen (15) days of written request, current financial statements of the Guarantor in a form consistent with the above criteria. Landlord agrees that the financial statements located on sec.gov for the parent company of Tenant are in the proper format and Landlord agrees to pull any information it needs from the public filings located at the website sec.gov. Landlord also understands and agrees that the financial statements of Tenant are consolidated with the parent company of FiCente and, as such, no specific financial statements for Tenant exist or can be provided.

p. Real Property Records. This Lease is subject to all matters of record in the real property records of the county in which the Premises is located. By executing this Lease, Tenant consents to all plats and replats, if any, of the Property.

q. Recording. Neither Landlord nor Tenant shall record this Lease or a short form memorandum of this Lease without the prior written consent of the other.

r. Applicable Laws. The laws of the State of Texas shall govern the validity, performance, and enforcement of this Lease, and this Lease and the obligations of the parties to the Lease are performable in the county in which the Premises are located.



§. Compliance with Regulations. Landlord and Tenant acknowledge that there are in effect federal, state, county, and municipal laws, orders, rules, directives, and regulations, as well as Encumbrances, covenants, conditions, and restrictions filed in the real property records of the county in which the Premises are located (collectively, "Regulations"), and that additional Regulations may be enacted or go into effect in the future that relate to or affect the Premises or the Project. Subject to the express rights granted to Tenant under the terms of this Lease, Tenant agrees that it will not cause or permit to be caused any act or practice, by negligence, omission, or otherwise, that would violate any Regulations within the Premises. In addition, no Tenant Party shall have any claim against Landlord based on any changes Landlord may make to the Project or the Premises pursuant to any Regulations or any charges that may be imposed upon any Tenant Party pursuant to any Regulations. Specifically, and without limiting Tenant's obligations under the previous two sentences, Tenant, at its sole cost, shall (i) comply with all requirements of the Disabilities Acts applicable to the Premises; (ii) be solely responsible for any reasonable accommodations within, or Alterations to, the Premises required to accommodate any Tenant Party under the Disabilities Acts; and (iii) be solely responsible for any reasonable accommodations or Alterations to the Project required to accommodate a Tenant Party under the Disabilities Acts if Landlord would not otherwise be required to make the additional accommodation or Alteration under generally applicable provisions of the Disabilities Acts. Landlord shall only be responsible for (i) making "readily achievable" (as defined in the ADA) changes to common areas of the Project and (ii) modifying policies, practices, and procedures applicable to all tenants to the extent required under Title III of the ADA. No term of this Lease authorizes, or should be construed as authorizing, Landlord or Tenant to violate the Disabilities Acts. If this Section 44.s conflicts with any other provisions of this Lease, then this Section 44.s shall prevail.

Consent to Jurisdiction. Except as expressly provided to the contrary in this Lease, all disputes arising, directly or indirectly, out of or relating to this Lease, and all actions to enforce this Lease, shall be dealt with and adjudicated in the local or federal courts of the state, commonwealth, or jurisdiction in which Rent is due pursuant to Section 5.a, and for that purpose Tenant expressly and irrevocably submits itself to the jurisdiction of those courts. So far as is permitted under applicable law, this consent to personal jurisdiction is self-operative, and no further instrument or action, other than service of process in one of the manners specified in this Lease, or as otherwise permitted by law, shall be necessary in order to confer jurisdiction on it in any of the local or federal courts of the state, commonwealth, or jurisdiction in which Rent is due. Any judgment against Tenant in any action or proceeding relating to this Lease shall be conclusive and, to the extent permitted by applicable law, may be enforced in any other jurisdiction within or outside the United States of America by suit on the judgment, a certified or exemplified copy of which shall be conclusive evidence of the fact and of the amount of its indebtedness.

u. Survival of Obligations. All provisions of this Lease that require the payment of money or the delivery of property after the termination of this Lease or require Tenant to indemnify, defend, or hold Landlord harmless shall survive the termination of this Lease.

v. Exhibits. The exhibits listed in Paragraph 23 of the Basic Lease Information are attached to this Lease and by this reference made a part of the Lease.

w. Determination of Charges. Landlord and Tenant agree that each provision of this Lease for determining charges and amounts payable by Tenant (including, but not limited to, provisions regarding Operating Costs and Property Taxes) is commercially reasonable and, as to each charge or amount, constitutes a statement of the amount of the charge or a method by which the charge is to be computed for purposes of TPC Section 93.012. ACCORDINGLY, TENANT VOLUNTARILY AND KNOWINGLY WAIVES ALL RIGHTS AND BENEFITS, IF ANY, AVAILABLE TO TENANT UNDER SECTION 93.012 OF THE TPC AS TFlAT SECTION NOW EXISTS OR AS IT MAY BE AMENDED,



x. Application of Payments. Unless otherwise established in this Lease, Landlord has the right to apply payments received from Tenant pursuant to this Lease, regardless of Tenant's designation of those payments, to satisfy any obligations of Tenant under this Lease, in any order and amounts as Landlord, in its sole discretion, may elect.

y. Authority. Each individual executing this Lease represents that it has all requisite power and authority to execute and deliver this Lease on behalf of the entity for which it is signing, and by his or her signature shall bind that party to the terms of this Lease. If Tenant is a corporation (including any form of professional association), limited liability company, partnership (general or limited), or other form of organization other than a natural person, then Tenant and each person executing this Lease on behalf of Tenant covenants, warrants, and represents that: (i) Tenant, pursuant to Tenant's organizational documents, has duly authorized that person to execute and deliver this Lease; (ii) this Lease is binding on Tenant according to its terms; (iii) Tenant is duly organized and legally existing in the state of its organization, and is qualified to do business in the State of Texas; (iv) on request, Tenant shall provide Landlord with true and correct certified copies of Tenant's organizational documents (including any amendments) and any authorizations for Tenant to enter into the Lease; and (v) Tenant's execution and delivery of this Lease shall not breach, or cause a default under, any mortgage, deed of trust, lease, loan, credit agreement, partnership agreement, or other contract. Unless Tenant is a natural person, two (2) authorized officers must sign on behalf of Tenant, and this Lease must be executed by the president or vice-president and the secretary or assistant secretary of Tenant, unless the bylaws or a resolution of the board of directors shall otherwise provide, in which case the bylaws or a certified copy of the resolution of Tenant, as the case maybe, must be furnished to Landlord.

z. Execution in Counterparts. This Lease may be executed in any number of counterparts and by different parties to the Lease in separate counterparts, each of which when executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. In proving this Lease, a party need not produce every counterpart.

aa. No Joint Venture. Landlord and Tenant shall be deemed and construed as independent contractors with respect to one another for all purposes relating to this Lease, and nothing contained in this Lease is intended to constitute, nor shall it be deemed or construed as constituting, the creation of any partnership, joint venture, or principal/agent relationship between Landlord and Tenant arising out of the existence or exercise by Landlord or Tenant of their respective rights under this Lease.

bb. No Estate. This Lease shall create the relationship of landlord and tenant only between Landlord and Tenant, and no estate shall pass out of Landlord. Tenant has only a usufruct, not subject to levy and sale, and not assignable in whole or in part by Tenant except as provided in this Lease.

cc. Confidentiality. Tenant shall hold the terms of this Lease in strict confidence for Landlord's benefit, and shall not directly or indirectly, without Landlord's prior written consent, disclose those terms to any person other than to (i) Tenant's directors, officers, employees, and partners, and (ii) those brokers, consultants, lenders, or other third parties working with Tenant in connection with this Lease and who need to know the terms of the Lease for the purpose of consummating this transaction and who agree in writing to the terms of this Section 44.cc. This confidentiality obligation shall not be applicable to disclosure of information required by applicable law. Tenant shall be liable for any disclosures made in violation of this Section 44.cc by Tenant or by any entity or individual to whom the terms and conditions of this Lease were disclosed or made available by Tenant. Tenant acknowledges and stipulates that Landlord may suffer irreparable harm in the event of a breach of this Section 44.cc, for



which Landlord has no adequate remedy at law. Therefore, in addition to all other remedies available pursuant to this Lease or at law, Landlord has the right to obtain immediate injunctive or other equitable relief on a breach of this Section 44.cc by Tenant, without the necessity of giving any notice of that default or opportunity to cure the default. The consent by Landlord to any disclosure shall not be deemed to be a waiver on the part of Landlord of any prohibition against any future disclosure.

dd.Certification. Tenant certifies that: (i) it is not, and is not acting, directly or indirectly, for or on behalf of any person, group, entity, or nation named by any Executive Order or by the U.S. Treasury Department as a terrorist, a "Specially Designated National and Blocked Person," or any other harmed or blocked person, entity, nation, or transaction pursuant to any law, order, rule, or regulation that is enforced or administered by the Office of Foreign Assets Control, or pursuant to any other statute or executive order (including the September 24, 2001 Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism) or other governmental action (each a "Prohibited Party"); (ii) it is not engaged in this transaction directly or indirectly on behalf of, or instigating or facilitating this transaction directly or indirectly on behalf of, any Prohibited Party; and (iii) it shall not transfer this Lease to, contract with, or otherwise engage in any dealings or transactions or otherwise be associated with any Prohibited Party. Tenant shall indemnify, defend, and hold harmless Landlord from and against any and all Damages actually incurred, arising out of, or related to any breach of the certification in this Section 44.dd.

cc.Acceptance of Keys. The acceptance of keys to the Premises by Landlord, any Landlord

Party, or any other person on Landlord's behalf shall not be deemed or constitute an early termination of this Lease unless an early termination is evidenced in writing and signed by Landlord.

ff.Waiver of Jury Trial, LANDLORD AND TENANT WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY LANDLORD OR TENANT AGAINST THE OTHER OR ANY MAILER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD TO TENANT, THE USE OR OCCUPANCY OF THE PREMISES BY ANY TENANT PARTY, ANY CLAIM OF INJURY OR DAMAGE, AND ANY EMERGENCY OR OTHER STATUTORY REMEDY. IF LANDLORD COMMENCES ANY SUMMARY OR OTHER PROCEEDING FOR NONPAYMENT OF RENT OR THE RECOVERY OF POSSESSION OF THE PREMISES, THEN TENANT SHALL NOT INTERPOSE ANY COUNTERCLAIM OF WHATEVER NATURE OR DESCRIPTION IN THE PROCEEDING, UNLESS THE FAILURE TO RAISE THE COUNTERCLAIM WOULD CONSTITUTE A WAIVER OF THE COUNTERCLAIM. EACH PARTY ACKNOWLEDGES THAT IT HAS RECEIVED, OR HAS HAD THE OPPORTUNITY TO RECEIVE, THE ADVICE OF COMPETENT COUNSEL WITH REGARD TO THIS SECTION 44.ff.

gg•Water or Mold Notification. To the extent any Tenant Party discovers any water leakage, water damage, or mold in or about the Premises, Tenant shall promptly notify Landlord of the leakage, damage, or mold in writing.

hh.Disclaimer of Representations and Warranties. Tenant represents and warrants to

Landlord that: (i) no Landlord Party made, and no Tenant Party relied on, any representation, warranty, or promise, express or implied, with respect to this Lease or the Project, except for those specifically expressed in this Lease and (ii) Tenant acquired no rights, easements, or licenses (by implication or otherwise), except for those specifically expressed in this Lease.

ii.Waiver of Rights. TO THE EXTENT ALLOWED BY APPLICABLE LAW, TENANT WAIVES FOR ITSELF, AND ALL THOSE CLAIMING UNDER IT, ANY RIGHTS THAT IT MAY HAVE UNDER ANY PRESENT OR FUTURE CONSTITUTION, STATUTE, OR RULE OF LAW: (i)



TO REDEEM THE PREMISES AFTER TERMINATION OF TENANT'S RIGHT OF OCCUPANCY BY ORDER OR JUDGMENT OF ANY COURT OR BY ANY LEGAL PROCESS OR WRIT; (ii) THAT EXEMPTPS PERSONAL PROPERTY FROM LIABILITY FOR DEBT OR FOR DISTRESS FOR RENT; (iii) THAT ENTITLES TENANT TO NOTICE OR HEARING BEFORE LANDLORD OBTAINS ANY PREJUDGMENT REMEDY; OR (iv) THAT ENTITLES TENANT TO RECEIVE ANY PRIOR NOTICE TO QUIT AS A CONDITION PRECEDENT TO LANDLORD'S FILING OF A COMPLAINT AND SUMMONS FOR IMMEDIATE POSSESSION OR OCCUPANCY OF THE PREMISES.

ji.Waiver of Texas Deceptive Trade Practices Act, TENANT SPECIFICALLY ACKNOWLEDGES AND AGREES THAT IT HAS KNOWLEDGE AND EXPERIENCE IN

FINANCIAL AND BUSINESS MA!1ERS THAT ENABLE IT TO EVALUATE THE MERITS AND

RISKS OF ITS TRANSACTION WITH LANDLORD, AND THAT IT IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION WITH LANDLORD. TENANT WAIVES ALL ITS RIGHTS UNDER THE TEXAS DECEPTIVE TRADE PRACTICES—CONSUMER PROTECTION ACT, SECTION 17.41, ET SEQ. OF THE TEXAS BUSINESS AND COMMERCE CODE (AS AMENDED, SUPPLEMENTED, MODIFIED, RECODIFIED, AND/OR REPLACED ON ONE OR MORE OCCASIONS, THE "DTPA"), A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF TENANT'S OWN SELECTION, TENANT VOLUNTARILY CONSENTS TO THIS WAIVER. TENANT REPRESENTS AND WARRANTIES THAT ITS ATTORNEY WAS NOT, DIRECTLY OR INDIRECTLY, IDENTIFIED, SUGGESTED, OR SELECTED BY ANY LANDLORD PARTY.

(SIGNATURES ON NEXT PAGE(S))



The parties to this Lease have executed the Lease as of the date specified in Paragraph I of the Basic Lease Information.

LANDLORD: DOMICILIO OC, LLC,

a Texas limited liability company

By: /s/ John C. Horn

Name: John C. Horn

Title: Manager

Date: February 12, 2015

FebTENANT:

FICENTIVE, INC.,

a Nevada corporation

By:/s/ Louis A. Hoch

Name: Louis A. Hoch

Title: President and CEO

Date: February 12, 2015



## EXHIBIT A

## FLOOR PLAN OF THE PREMISES



THIS PLAN IS FOR REFERENCE PURPOSES ONLY



## DESCRIPTION OF THE REAL PROPERTY

ALL OF LOT 9 OF COUNTRYSIDE COMMERCIAL SUBDIVISION, PLAT OF WHICH IS RECORDED IN VOLUME 9400, PAGE 24 OF THE BEXAR COUNTY DEED AND PLAT RECORDS: CONTAINING ALL OF LOT 12 OF COUNTRYSIDE COMMERCIAL SUBDIVISION UNIT 7, PLAT OF WHICH IS RECORDED IN VOLUME 9521, PAGE 189 OF THE BEXAR COUNTY DEED AND PLAT RECORDS.



## EXHIBIT C

## CONFIRMATION OF LEASE TERM

This Confirmation is made as of ___, 20, between ___

a ___("Landlord"), and ___a ___("Tenant").

Landlord and Tenant have entered into that certain Office Building Lease (the "Lease") dated ___ 20 ___, in which Landlord leased to Tenant and Tenant leased from Landlord certain

premises consisting of approximately ___ rentable square feet, situated on the ___ floor of the office building located at ___, Texas

Pursuant to Section 3 of the Lease, Landlord and Tenant confirm the Commencement Date and Expiration Date of the Term of the Lease as follows: ___ is the Commencement Date.

days following the Commencement Date is the Expiration Date.

## LANDLORD:

## TENANT:

<table><tr><td>a</td><td>a</td></tr><tr><td>By:</td><td>By:</td></tr><tr><td>Name:</td><td>Name:</td></tr><tr><td>Title:</td><td>Title:</td></tr><tr><td>Date:</td><td>, 20</td></tr><tr><td>Date:</td><td>, 20</td></tr><tr><td>By:</td><td></td></tr><tr><td>Name:</td><td>Title:</td></tr></table>

C-1



# EXHIBIT D
FORM OF TENANT ESTOPPEL CERTIFICATE
TENANT ESTOPPEL CERTIFICATE

Tenant:

Premises Address: ___, Texas ___ (the "Property")

Suite: ___ Area: ___ Sq. Ft. (Rentable)

Date of Lease. ___

Date(s) of Lease Amendment(s): ___

Commencement Date

Expiration Date: ___ days following the Commencement Date

Current Base Monthly Rent: $ ___

Base Monthly Rent Increases: ___

Date of Last Rent Payment: ___

Amount of Last Rent Payment: $ ___

Operating Costs: $ ___

Percentage Share of Operating Costs and Property Taxes: ___

Current Monthly Payment of Operating Costs and Property Taxes: $ ___

Security Deposit: ___

Guarantor: ___

The undersigned, as Tenant under the Lease of the above-referenced premises (the "Premises") executed

by ("Landlord"), as Landlord, and Tenant on the above-referenced date,

represents, ___ certificates, ___ and ___ covenants ___ to ("Buyer"),

("Lender"), and their assignees, as follows:

1. LEASE. The copy of the Lease, including all addenda and amendments to the Lease, attached as Exhibit A, is a true and correct copy of the Lease that is in full force and effect and that has not been further amended, supplemented, or changed by letter agreement or otherwise.

2. COMPLETION OF PnEtsiisEs/No DISPUTES. Tenant has accepted possession of all of the Premises, and all conditions to be satisfied by Landlord under the Lease have been satisfied pursuant to the Lease, including, but not limited to, completion of construction of any required improvements to the Premises except those listed below.

3. No DEFAULTS/CLAIMS. All conditions of the Lease to be performed by Landlord necessary to the enforceability of the Lease have been satisfied, and Landlord is not in default under the Lease, except for the following existing alleged defaults by Landlord:



In addition, Tenant has not delivered any notice to Landlord regarding an alleged default by Landlord under the Lease, except for the notices delivered on the following dates and with respect to the following alleged defaults:

Further, except as listed above, Tenant has no disputes, claims, counterclaims, defenses, or setoffs against Landlord or liens against all or part of the Property, or of any buildings, landscaping, parking structures, or other facilities and improvements on the Property (collectively, the "Project") arising from the Lease.

Tenant is not entitled to any concessions, rebates, allowances, or Rent ("Rent" means base monthly rent, additional rent and rent adjustments, and other charges required by the Lease) for any period after this certification, nor is Landlord obligated to construct or install any additional improvements in the Premises except those listed below.

4. No ADVANCE PAYMENTS; SECURITY DEPOSIT. No Rent payable under the Lease has been paid in advance by Tenant except the current month's Rent. Landlord has no obligation to segregate the security deposit (if any) or to pay interest on the security deposit (if any).

5. No PURCHASE OR TERMINATION RIGHTS. Tenant has no option and no right of first refusal to purchase all or any part of the Project or any interest in the Project and no right to cancel or terminate the Lease.

6. No EXTENSION RIGHTS. Tenant has no option or right to extend the term of the Lease, except those listed below.

7. No SUBLEASE/ASSIGNMENT. Tenant has not entered in any sublease, assignment, or other

agreement transferring any of its interest in the Lease or the Project, except those listed below.

8. No NOTICE. Tenant has not received notice of any assignment, hypothecation, mortgage, or

pledge of Landlord's interest in the Lease or the Rent or other amounts payable under the Lease, nor any violation of any federal, state, county, or municipal laws, regulations, or orders related to the use or condition of any part of the Project, except those listed below.



9. HAZARDOUS SUBSTANCES. No Hazardous Substance has been used, treated, stored, or disposed

of on the Property by Tenant. Tenant does not have any permits or identification numbers issued by the United States Environmental Protection Agency or by any state, county, or municipal agencies with respect to its operations on the Property, except those listed below.

"Hazardous Substance" means any substance or material that is described as a toxic or hazardous substance, waste, or material or a pollutant or contaminant by any federal, state, county, or municipal law, ordinance, rule, or regulation in force now or in the future, as amended on one or more occasions, in any way relating to or regulating human health or safety or industrial hygiene or environmental conditions or pollution or contamination, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. § 9601, et seq. and the Solid Waste Disposal Act, 42 U.S.C. § 6901, et seq. (as these laws may be amended, supplemented, modified, recodified, and/or replaced on one or more occasions, and including any governmental rules, regulations, standards, and guidelines relating to these laws), including, without limitation, PCBs, petroleum products, asbestos, and asbestos containing materials, crude oil, natural gas liquids, liquefied natural gas, or synthetic gas usable as fuel, and "source," "special nuclear," and "byproduct" material as defined in the Atomic Energy Act of 1985, 42 U.S.C. § 3011 et seq.

## 10. No MODIFICATION OF LEASE. From the date of this Certificate through, no

modification or amendment to the Lease, forgiveness of payment of Rent due under the Lease, grant of extension or option, or prepayment of Rent more than one (1) month in advance may be made except with the written consent of Buyer.

11. RELIANCE; BUYER'S RIGHTS. Tenant recognizes and acknowledges it is making these representations to Buyer with the intent that Buyer or its assignees shall rely on Tenant's representations in connection with Buyer's acquisition of the Project. All Rent payments under the Lease shall continue to be paid to Landlord pursuant to the Lease until Tenant is notified otherwise in writing. As of the effective date of the purchase of the Project by Buyer, Tenant shall recognize Buyer as landlord under the Lease. Tenant further acknowledges and agrees that Buyer and its successors and assigns (including any entity holding a deed of trust at any time after the date of this Certificate) have the right to rely on the information contained in this Certificate.

12. BINDING. The provisions of this Certificate shall be binding on and inure to the benefit of the successors, assigns, personal representatives, and heirs of Tenant and Buyer.



13. DUE EXECUTION AND AUTHORIZATION. The undersigned, and the persons executing this Certificate on behalf of the undersigned, are duly authorized to execute this Certificate on behalf of Tenant and to bind Tenant to the Certificate.

TENANT:

a

By: ___

Name: ___

Title ___

Date: ___ ,20

By: ___

Name: ___ Title: ___

Date: ___ , 20



## EXHIBIT E

## RULES AND REGULATIONS

1. The sidewalk and public portions of the Project shall not be obstructed, nor shall refuse, furniture, boxes, or other items be placed in the Project, by any Tenant Party, nor shall they be used for any purpose other than ingress and egress to and from the Premises, or for going from one part of the Project to another part of the Project.

2. No curtains, blinds, shades, louvered openings, or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises, without the prior written consent of Landlord, which consent may be arbitrarily withheld by Landlord. No aerial or antenna shall be erected on the roof or exterior walls of the Premises or on the Building without the prior written consent of Landlord, which consent may be arbitrarily withheld.

3. The plumbing fixtures shall not be used for any purpose other than those for which they were constructed, and no sweepings, rubbish, rags, or other substances shall be thrown in them. Further, Tenant shall not install any garbage disposal in any sink in the Premises.

4. No Tenant Party shall do, nor permit anything to be done, in or about the Building, or bring or keep anything in or about the Building, that shall in any way increase the rate of fire or other insurance on the Building, or on property kept in the Building, or otherwise increase the possibility of fire or other casualty.

5. No bicycles, motorcycles, motorized vehicles, or animals of any kind (except animals assisting disabled persons) shall be brought into the Premises or the Building.

6. Subject to the exception in the following sentence, no cooking shall be done or permitted in the Premises by any Tenant Party. Conventional coffeemakers, microwave ovens, and vending machines may be installed exclusively for the use of Tenant Parties. No Tenant Party shall cause or permit any unusual or objectionable odors to be produced on or permeate from the Premises.

7. No Tenant Party shall make or permit to be made any unseemly or disturbing noises or disturb or interfere with occupants of the Building or neighboring premises or their invitees, customers, guests, and employees.

8. No Tenant Party shall at any time bring or keep on the Premises any inflannable, combustible, or explosive substance or any chemical substance, other than reasonable amounts of chemicals, such as photocopier toner, cleaning fluids, and solvents required in the normal operation of Tenant's business, all of which shall only be used in strict compliance with all applicable Environmental Laws.

9. Landlord shall have a valid passkey to all spaces within the Premises at all times during the Tenn. No additional locks or bolts of any kind shall be placed on any of the doors or windows by any Tenant Party, nor shall any changes be made in existing locks or the mechanism of the locks, without the prior written consent of Landlord and unless and until a duplicate key is delivered to Landlord. No Tenant Party shall make duplicates of the keys for the Premises without the prior consent of Landlord. Tenant must, on the termination of its tenancy, return to Landlord all keys to stores, offices, and toilet rooms.



10. All deliveries must be made via the service entrance and service elevator, when provided, during Normal Business Hours. Landlord's written

approval must be obtained for any delivery during hours other than Normal Business Hours.

11. All deliveries, removals, or the carrying in or out of any safes, freights, furniture, or bulky matter of any description may be accomplished only pursuant to Landlord's approved procedures and then only in and through approved areas, during approved hours. If any items shall exceed the designed floor load capacity of the Premises, then Tenant may not install those items unless Tenant installs structural reinforcement, at Tenant's expense, as directed by Landlord.

12. There shall not be used in any space, or in the public halls of the Building, either by a Tenant Party or by jobbers or others, in the delivery or receipt of merchandise to any Tenant Party, any hand trucks, except those equipped with rubber tires and side guards. No hand trucks shall be used in elevators other than those designated by Landlord as service elevators. All deliveries shall be confined to the service areas and through the approved service entries.

13. No Tenant Party shall create or use any advertising mentioning or exhibiting any likeness of the Building without the prior written consent of Landlord.

14. Landlord reserves the right to exclude from the Building at all times other than Normal Business Hours all persons who do not present a pass to the Building on a form or card approved by Landlord.

15. No portion of the Project shall be used for lodging, gambling, or any illegal, immoral, or improper purpose.

16. Canvassing, soliciting, and peddling within the Building or in the common areas of the Project is prohibited.

17. In order to obtain maximum effectiveness of the cooling system, Tenant shall lower and/or close Venetian or vertical blinds or drapes when the sun's rays fall directly on the exterior windows of the Premises.

18. Tenant Parties are not permitted to occupy at any one time more than the number of parking spaces in the parking areas permitted in the Lease (including parking spaces, if any, reserved exclusively for Tenant). Usage of parking spaces shall be in common with all other tenants of the Building and their employees, agents, contractors, and invitees. All parking space usage shall be subject to any reasonable rules and regulations for the safe and proper use of parking spaces that Landlord may prescribe. Landlord, in Landlord's sole and absolute discretion, may establish on one or more occasions a parking decal or pass card system, security check-in, or other reasonable mechanism to restrict parking in the parking areas. On request by Landlord, Tenant shall furnish Landlord with the license numbers and descriptions of any vehicles of Tenant or its principals, employees, agents, or contractors. Tenant acknowledges that reserved parking spaces, if any, shall only be reserved during Normal Business Hours.

19. Parking spaces may be used for the parking of passenger vehicles only. Overnight parking in parking areas is prohibited. All trucks and delivery vans shall be parked in designated areas only and not parked in spaces reserved for cars. All loading and unloading of goods shall be done only at the times, in the areas, and through the entrances designated for loading purposes by Landlord. Landlord has the right to tow or otherwise remove vehicles of Tenant Parties that are improperly parked, blocking ingress or egress lanes, or violating parking rules, at the expense of Tenant or the owner of the vehicle, or both, and without liability to Landlord.



## TENANT'S INITIALS HERE:

20. Tenant Parties shall abide by all posted roadway signs in and about the parking facilities.

21. Landlord has the power to prescribe the weight and position of heavy equipment or objects. All damage done to the Building by the improper placing of heavy items by any Tenant Party shall be repaired at the expense of Tenant.

22. No Tenant Party shall cause or permit any waste material or refuse to be dumped on or remain on any part of the Project outside the Premises, and no Tenant Party shall cause or allow any materials, supplies, equipment, finished products, semi-finished products, or articles of any nature to be stored on or remain on the Project outside the Premises.

23. Tenant shall be responsible for the removal and proper disposition of all crates, oversized trash, boxes, and other similar items other than customary trash generated by general office use.

24. Tenant Parties shall comply with any recycling programs for the Building implemented by Landlord on one or more occasions (e.g., Tenant Parties shall separate waste appropriately so that it can be efficiently processed by Landlord's particular recycling contractors). To the extent Tenant Parties fail to comply with any of Landlord's recycling programs for the Building, Tenant shall be required to pay any contamination charges related to this noncompliance.

25. Landlord is not responsible for lost or stolen Personal Property or money occurring in or on any part of the Project, regardless of how or when the loss occurs.

26. No Tenant Party shall paint or decorate any part of the Project, or mark, cut into, drive nails, hooks, or screws into, or in any way deface any part of the Project, without the prior written consent of Landlord, except that standard picture hanging shall be permitted without Landlord's prior consent.

27. No Tenant Party shall install, operate, or maintain in the Premises or in any other area of the Building any electrical equipment that does not bear the U/L (Underwriters Laboratories) seal of approval, or that would overload the electrical system or any part of the system beyond its capacity for proper, efficient, and safe operation as determined by Landlord. No Tenant Party shall furnish any HVAC to the Premises, including the use of any electronic or gas heating devices, without Landlord's prior written consent.

28. No machinery of any kind, other than ordinary office machines such as typewriters, information processing systems, copy machines, communications equipment, personal computers, printers, and calculators, shall be operated in the Premises without the prior written consent of Landlord. No space heaters or fans shall be operated in the Building.

29. The Project is deemed to be a "no smoking" area, and smoking is prohibited in or on any part of the Project.

30. Tenant shall not allow the Premises to be occupied by more than five (5) persons per one thousand (1,000) square feet of rentable area.

31. Tenant shall take all steps necessary to prevent (i) inadequate ventilation, (ii) emission of chemical contaminants from indoor or outdoor sources, and (iii) emission of biological contaminants. Tenant shall not allow any unsafe levels of chemical or biological contaminants (including volatile organic compounds) in the Premises and shall take all steps necessary to prevent the release of contaminants from adhesives (e.g., upholstery, wallpaper, carpet, machinery, supplies, and cleaning agents).



32. If Tenant asserts that the air quality in the Premises is unsatisfactory or if Tenant requests any air quality testing within the Premises, then Landlord may elect to cause its consultant to test the air quality within the Premises and to issue a report regarding that air quality. If the report from any air quality testing indicates that the air quality within the Premises is comparable to the air quality of other Class A office buildings in the market area of the Building, or if the report from the testing indicates that the air quality does not meet that standard as a result of the activities caused or permitted by Tenant in the Premises, then Tenant shall reimburse Landlord for all costs of the applicable tests and report. Additionally, if Tenant causes or permits any activity that adversely affects the air quality in the Premises, in the common area of the Building, or in any premises within the Building, then Tenant shall be responsible for all costs of remedying the adverse effect on the air quality.

33. Tenant shall cooperate with Landlord's employees in keeping the Premises neat and clean and in the performance of janitorial service to the Premises

34. No Tenant Party shall locate equipment, cabinets, or furniture adjacent to mechanical or electrical access panels or over air conditioning outlets so as to prevent Landlord's personnel and employees from servicing those units. All costs of moving equipment, cabinets, or furniture for Landlord's access to mechanical or electrical access panels or air conditioning outlets shall be at Tenant's sole expense.

35. Corridor doors in the Premises and the Building, when not in use, shall be kept closed.

36. Landlord may, during periods of civil unrest, close and lock the Building's exterior doors for the safety of the Building and its occupants. This decision shall be solely the option of Landlord, and Landlord shall not be liable for any omission or commission in implementing this procedure.

37. Landlord may evacuate the Building in the event of an emergency or catastrophe.

38. Tenant Parties shall cooperate fully with any life-safety plans of the Building established and administered by Landlord, including, without limitation by participating in exit drills, fire inspections, and life-safety orientations.

39. Whenever these Rules and Regulations directly conflict with any of the rights or obligations of any Tenant Party under the Lease, the Lease shall govern. These Rules and Regulations may be reasonably modified by Landlord on one or more occasions. Landlord may waive any of the Rules and Regulations in writing, but the waiver shall apply only to Tenant Parties and to the extent set forth in the written waiver.



# TENANT'S INITIALS HERE: EXHIBIT F

# INTENTIONALLY OMITTED

F-1

EXHIBIT G

WORK LETTER

# LANDLORD TO PERFORM WORK

# BASIC WORK LETTER INFORMATION

1. LANDLORD WORK. Landlord shall have the responsibility of carrying out all Premises Alterations shown in the specification attached as Exhibit G-1 to this Work Letter (the "Landlord's Work").

2. INTENTIONALLY OMITTED.

3. COSTS OF LANDLORD'S WORK.

a. Tenant Cost Proposal. Landlord shall provide Tenant with a good-faith quote for the cost of carrying out Landlord's Work, including the cost of any Tenant-supplied equipment that may need to be installed (the "Tenant Cost Proposal"). Within five (5) business days after Tenant's receipt of the Tenant Cost Proposal, Tenant shall approve the Tenant Cost Proposal in writing and deliver it to Landlord; if Tenant does not provide any notice of approval or rejection of the Tenant Cost Proposal, then the Tenant Cost Proposal shall be deemed approved by Tenant. Tenant shall not unreasonably withhold its approval of the Tenant Cost Proposal, but will be permitted to provide its needed changes to the Tenant Cost Proposal. On Tenant's written or deemed approval of the Tenant Cost Proposal, Landlord shall be authorized to proceed with the construction of Landlord's Work Plans. Landlord shall not be obligated to proceed with any of Landlord's Work (including any ordering or purchasing of materials) until (i) the Tenant Cost Proposal is approved or deemed approved by Tenant and (ii) Tenant pays the Upfront Tenant Cost as required by subparagraph (b) below.

b. Payments by Tenant for Landlord's Work. Promptly on Tenant's written or deemed approval of the Tenant Cost Proposal, Tenant shall pay to Landlord the sum equal to the cost of the Landlord's Work as set forth in the approved Tenant Cost Proposal, minus the Tenant Improvement Allowance as defined in Paragraph 15 of the Basic Lease Information. The balance of the actual costs of carrying out Landlord's Work including all Change Orders (as defined in this Work Letter), shall be billed periodically to Tenant as Landlord's Work proceeds, and Tenant shall pay each invoice within five (5) business days of Landlord's delivery of each bill to Tenant. All of the actual costs of carrying out Landlord's Work (in excess of the Tenant Improvement Allowance) shall be paid by Tenant in MI on or before the Commencement Date. On Tenant's timely approval of any Change Order pursuant to Section 5 below, Tenant shall pay to Landlord the total cost of the Change Order at the time Tenant sends its written approval to Landlord, and the balance shall be billed periodically and paid by Tenant as provided in the preceding two sentences. The amounts payable under this Section 3 shall constitute additional rent due pursuant to the Lease, and failure to make any of these payments when due shall constitute an Event of Default under this Lease, entitling Landlord to all of its remedies for an Event of Default under the Lease as well as all remedies otherwise available to Landlord at law or in equity.

4. LANDLORD'S WORK. Subject to the terms and conditions set forth in this Work Letter, Landlord shall commence and diligently proceed with Landlord's Work. Landlord shall perform, or cause the performance of, Landlord's Work in a good and workmanlike manner and in compliance with all laws and ordinances applicable to the Premises.



5. CHANGE ORDERS. If Tenant requests an item or condition that, in Landlord's sole discretion, shall require additional costs or shall cause a delay in the construction of Landlord's Work (a "Change Order"), then Landlord shall not be required to perform the Change Order until (i) Tenant requests the Change Order in writing; (H) Landlord approves the Change Order; and (iii) Tenant pays Landlord the total cost of the Change Order as set forth in Section 3.b above. Tenant shall be responsible for any additional costs incurred and delays caused as a result of any Change Order and shall deposit the amount of projected additional cost with Landlord in advance.

6. SUBSTANTIAL COMPLETION. Landlord and Tenant shall walk through and inspect Landlord's Work just before the anticipated date of completion of Landlord's Work and issuance of certificate of occupancy, if required. If, at the time of the inspection, any materially defective or unfinished items of Landlord's Work (excluding minor details, adjustments, or any other punch-list items that would not materially interfere with Tenant's use of the Premises for normal business operations), then Landlord shall promptly cause those items, if any, to be completed or corrected, as the case may be. Tenant shall, within five (5) days after confirmation of Substantial Completion (as defined below) pursuant to the inspection, execute a certificate confirming that Landlord's Work is Substantially Complete and identifying all punch-list items (the "Substantial Completion Certificate"). Landlord shall complete all punch-list items identified by Tenant within thirty (30) days after the issuance of the Substantial Completion Certificate, or a longer period of time if reasonably necessary to complete the punch-list items. "Substantial Completion" or "Substantially Completed" means that: (i) there are no materially defective or materially unfinished items in Landlord's Work that would materially interfere with Tenant's use of the Premises for normal business operations; and (ii) the Premises have been completed by Landlord substantially pursuant to the Final Plans, except for any punch-list items. Landlord's Work may include variations from the Final Plans without Tenant's prior approval if those variations are necessary to comply with any laws, ordinances, or regulations or are otherwise reasonably necessary, as determined by Landlord in its sole discretion. In the event of a dispute between Landlord and Tenant as to whether Landlord has Substantially Completed the construction of the Premises as required in this Work Letter, a certificate executed by Landlord's architect shall be deemed conclusive.

7. TENANT'S ENTRY. Landlord grants Tenant a license to enter the Premises before the completion of Landlord's Work for the limited purpose of inspecting the Premises and developing a punch list of items to be adjusted or completed. Tenant shall not exercise this right in a manner that interferes with Landlord's Work, and Landlord shall have the immediate right to terminate Tenant's license if any entry by Tenant interferes with Landlord's Work. This license shall be for the period beginning on the date of the Lease and ending on the earlier of (i) the date of Substantial Completion of Landlord's Work or (ii) the date of termination of the Lease. All of the terms, covenants, and conditions set forth in the Lease shall apply to this license, except for requirements to pay Rent or other sums. Tenant agrees to indemnify and hold Landlord harmless against any loss or damage resulting from Tenant's exercise of its rights under this license.

8. TENANT'S REMEDY. Tenant's sole and exclusive remedy against Landlord for any defects in Landlord's Work is for the repair and replacement of those defects, but Landlord shall not be responsible for any defect of any nature in Landlord's Work of which Landlord is not notified by Tenant in writing within one (1) year after Substantial Completion. LANDLORD MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, IN CONNECTION WITH LANDLORD'S WORK, EXCEPT THE WARRANTIES EXPRESSLY SET FORTH IN THIS SECTION 8, TENANT'S SOLE REMEDY FOR THE BREACH OF ANY APPLICABLE WARRANTY IS THE REMEDY SET FORTH IN THIS SECTION 8. Tenant agrees that no other remedy, including, without limitation, incidental or consequential damages for lost profits, injury to



person or property, or any other incidental or consequential loss, is available to Tenant for any defects in Landlord's Work.

9. TENANT'S WORK. Tenant represents and warrants to Landlord that, on Substantial Completion of Landlord's Work, Tenant shall (i) perform Tenant's Work, if any, in compliance with the provisions of the Tenant Work Letter attached to this Work Letter as Exhibit 0-2, if any, and (ii) install its equipment and fixtures in the Premises promptly and diligently in a professional and workmanlike manner.




This exhibit is for reference purposes only, no warranties or representation as to accuracy is intended.

A. New Building standard paint throughout the Premises (one color)

B. Patch to match the existing carpet and professionally clean the existing carpet throughout the Premises
C. Replace damaged ceiling tiles as needed

D. Provide secure closet in Storage area (across from break room) as noted hereinabove
E. Wall demo and construction as noted hereinabove

F. Install two optical readers (same as was installed by Landlord a few months ago for Payment Data Systems; no controller needed)



## EXHIBIT 11

## BASE RENT ABATEMENT

The Base Rent shall be conditionally abated for the first two (2) months of the Term. All other sums due under the Lease shall be payable as provided in the Lease. The abatement of Base Rent provided for in this Exhibit H is conditioned on Tenant's full and timely performance of all its obligations under the Lease. If at any time during the abatement period a default by Tenant occurs, then the abatement of Base Rent provided for in this Exhibit H shall cease, and Tenant shall commence the payment of Base Rent as if the date of execution of the Lease were, solely for the pupose of calculating the Base Rent payable for any partial month, the date of the default.

If there is any conflict between this Exhibit H and the Lease, then this Exhibit H shall control.



INTENTIONALLY OMITTED

I-1



## EXHIBIT J

## GUARANTY

In order to induce DOMICILIO OC, LLC, a Texas limited liability company ("Landlord"), to execute the Office Building Lease with FICENTIVE, INC., a Nevada corporation ("Tenant"), dated

February, 2015, (the "Lease") in which Landlord shall lease to Tenant and Tenant shall lease from

Landlord certain premises consisting of approximately 2,769 rentable square feet, situated on the first (1') floor of the office building located at 12500 San Pedro, San Antonio, Texas 78216, the undersigned (whether one or more than one) (collectively, "Guarantor") has guaranteed, and by this instrument does hereby guarantee, for Ten and 00/100 Dollars ($10.00) and other good and valuable consideration, the payment and performance of all liabilities, obligations, and duties (including, but not limited to, payment of rent) imposed on Tenant under the terms of the Lease, as if Guarantor has executed the Lease as Tenant.

Guarantor waives notice of acceptance of this Guaranty and all other notices in connection with this Guaranty or in connection with the liabilities, obligations, and duties guaranteed by this Guaranty, including notices of default by Tenant under the Lease, and waives diligence, presentment, and suit on the part of Landlord in the enforcement of any liability, obligation, or duty guaranteed by this Guaranty.

Guarantor further agrees that Landlord shall not be first required to enforce against Tenant or any other person any liability, obligation, or duty guaranteed by this Guaranty before seeking enforcement of this Guaranty against Guarantor. Suit may be brought and maintained against Guarantor by Landlord to enforce any liability, obligation, or duty guaranteed by the Guaranty without joinder of Tenant or any other person. The liability of Guarantor shall not be affected by any indulgence, compromise, settlement, or variation of terms that may be extended to Tenant by Landlord or agreed to by Landlord and Tenant, and shall not be impaired, modified, changed, released, or let in any manner whatsoever by any impairment, modification, change, release, or limitation of the liability of Tenant or its estate in bankruptcy, or of any remedy for the enforcement of any impairment, modification, change, release, or limitation of the liability of Tenant or its estate, resulting from the operation of any present or future provision of the federal Bankruptcy Code, or any similar law or statute of the United States or any state of the United States. Landlord and Tenant, without notice to or consent by Guarantor, may at any time or times enter into any extensions, renewals, amendments, assignments, subleases, or other covenants with respect to the Lease that they may deem appropriate, and Guarantor shall not be released as a result of those extensions, renewals, amendments, assignments, subleases, or other covenants, but shall continue to be fully liable for the payment and performance of all liabilities, obligations, and duties of Tenant under the Lease as extended, renewed, amended, assigned, or otherwise modified.

It is understood that other agreements similar to this Guaranty may, at Landlord's sole option and discretion, be executed by other persons with respect to the Lease. This Guaranty shall be cumulative of any of those agreements, and the liabilities and obligations of Guarantor under this Guaranty shall in no event be affected or diminished by reason of those other agreements. Moreover, if Landlord obtains the signature of more than one guarantor on this Guaranty or obtains additional guarantee agreements, or both, then Guarantor agrees that Landlord, in Landlord's sole discretion, may (i) bring suit against all guarantors of the Lease jointly and severally or against any one or more of them, (ii) compromise or settle with any one or more of the guarantors for the consideration that Landlord may deem proper, and (iii) release one or more of the guarantors from liability. Guarantor further agrees that none of those three actions shall impair the rights of Landlord to enforce the Lease against any remaining guarantor or guarantors, including Guarantor, it being acknowledged and agreed that each of the undersigned is primarily, jointly, and severally liable for all obligations of Guarantor hereunder.



To the extent allowed by law, this Guaranty shall be effective as a waiver of, and Guarantor waives, all rights to which Guarantor may otherwise have been entitled under any suretyship laws or similar laws in effect now or in the future, including, but not limited to, Chapter 43 of the Texas Civil Practice & Remedies Code, Rule 31 of the Texas Rules of Civil Procedure, and Section 17.001 of the Texas Civil Practice & Remedies Code. To the extent allowed by law, Guarantor additionally waives the benefit of any statute of limitations affecting Guarantor's liability under this Guaranty.

If a party executing this Guaranty is a corporation, then that Guarantor's officer personally represents and warrants that the board of directors of that corporation, in a duly held meeting, has determined that this Guaranty may reasonably be expected to benefit the corporation.

Guarantor agrees that if Landlord shall employ an attorney to present, enforce, or defend any of Landlord's rights or remedies hereunder, then Guarantor shall pay all reasonable attorneys' fees incurred by Landlord in connection with that employment.

This Guaranty shall be binding on Guarantor and the successors, heirs, executors, and administrators of Guarantor, and shall inure to the benefit of Landlord and Landlord's heirs, executors, administrators, successors, and assigns. This Guaranty may be attached as an exhibit to the Lease without affecting the Guaranty's validity or enforceability, This Guaranty may be executed in multiple counterparts, each of which shall be an original instrument and that, taken together, constitute one and the same agreement.

(SIGNATURE ON NEXT PAGE)



EXECUTED this day of February, 2015, to be effective the same day as the effective date of the Lease.

GUARANTOR:

PAYMENT DATA SYSTEMS, INC.,

a Nevada corporation

By: /s/ Louis A. Hoch

Name and Title: Louis A. Hoch, President and COO
Title:

Address:

12500 San Pedro, Suite 120

San Antonio, TX 78216

STATE OF TEXAS

COUNTY OF Bexar

This instrument was acknowledged before me on this 12th day of February, 2015, by

Louis A. Hoch, the President of Payment Data Systems, Inc.



ANGIE ESPINOZA

Notary Public

STATE OF TEXAS

My Comm. Exp. 10-14-18

Notary Public Signature

My Commission Expires: October 14, 2018



# PREPAID CARD ISSUER & PROGRAM MANAGEMENT AGREEMENT

This Prepaid Card Issuer & Program Management Agreement (the “Agreement”) dated as of December 11, 2014 (the “Effective Date”) is entered into by and between FiCentive, Inc., a Nevada Corporation, whose address is 12500 San Pedro, Suite 120, San Antonio, Texas 78216 (“Program Manager”) and Metropolitan Commercial Bank, whose address is 99 Park Ave., New York, NY 10016 (“Issuer” and/or “Bank”). Each may be referred to herein as a “Party” or collectively as “Parties”.

Whereas, Bank is a principal member of one or more Systems and is in the business of issuing Cards and establishing Settlement Accounts for the settlement of Card transactions; and

Whereas, Bank wishes to market and promote certain Cards to the public, as of means of gaining new Bank customers, increasing Bank deposits and increasing Bank fee revenues; and

Whereas, Program Manager is in the business of marketing prepaid, stored value or payment cards and implementing programs to consumers and corporations that include the distribution and usage such cards and can provide services, either directly or through subcontractors, to support Card Programs; and

Whereas, Bank desires to retain Program Manager to market, offer and support Card Programs approved by Bank, using Cards issued by Bank; and

Whereas, Program Manager desires to market Programs with Cards issued by Bank and to provide support services for such Programs on behalf of Bank, bearing the Mark of one or more Systems, to consumers subject to the terms and conditions hereof;

Now, therefore, in consideration of the mutual covenants and conditions hereinafter set forth, the Parties hereto, intending to be legally bound, agree as follows:

## ARTICLE I – DEFINITIONS

## SECTION 1.1

## Definitions

Except as otherwise specifically indicated, the following terms shall have the following meanings in this Agreement (such meanings to be equally applicable to both the singular and plural forms of the terms defined):

“ACH” means the Automated Clearinghouse network, governed by the rules of NACHA - The Electronic Payments Association (“NACHA”). Program Manager and Bank agree to follow all rules and regulations of NACHA.

“Applicable Law” means any federal, state, or local law, rule, regulation, ordinance or requirement related to this Agreement, the Program and the Program services.

“Bank” shall have the meaning set forth on page 1 of this Agreement.

“BIN” means bank identification number and is a number assigned to Bank by a System for the purposes of identifying and routing Transactions.

“Business Day” means the active banking days as designated by the Federal Reserve Bank of New York, New York excluding Saturday, Sunday and specified holidays.

“Card” means any stored value, prepaid, payment or account access device or number issued by Bank under authority from one or more electronic payment networks. For purposes of this Agreement, a Card does not include any credit card or product that accesses credit.

“Cardholder” means (i) a person who is issued a Card, and/or (ii) is authorized to use the Card to make a Transaction.

“Cardholder Agreement” means the agreement between Bank and a Cardholder governing the terms and conditions applicable to the use of a Card.

“Cardholder Funds” means all funds received by Bank for loading or reloading to a Card including, without limitation, all funds held in a Cardholder Funds Account.

“Cardholder Funds Account” means a pooled custodial Deposit Account, as more fully described in Section 3.7(d)(i) herein.

“CIP Criteria” shall have the meaning set forth in Section 3.3(c).

“Customer” means the business or entity that generally is initially solicited by Program Manager for participation in the Program and, upon acceptance, participates in the Program as a Program Affiliate of Program Manager pursuant to the requirements of Schedule B hereto. Program Manager will be responsible for the funding source and related Card load Program Affiliates for the Cards issued pursuant to the Program.

“Customer Service Center” means Program Manager’s, or Program Affiliate’s customer service centers, which provide Cardholder assistance and service to both the Customer and all Cardholders, pursuant to this Agreement and the Cardholder Agreement.

“Deposit Accounts” Program Manager or Bank-controlled general ledger or demand deposit accounts established at Bank’s direction at Bank and/or Bank-approved FDIC insured financial institution accounts held by contract with or at the direction of Bank as needed by the Program and only for the purpose of facilitating the Program, including, without limitation, those Deposit Accounts described in Section 3.7(a) herein. Throughout this Agreement, the reference to an “Account” or “Accounts” shall be deemed to reference the singular or plural accounts actually established by Bank for the Program.



“Effective Date” shall have the meaning set forth on page 1 of this Agreement.

“Fee and Interchange Account” means a Deposit Account established with Bank as more fully described in Section 3.7(a) herein.

“Governmental Requirements” means collectively all statutes, codes, ordinances, laws, regulations that may apply to Cards, and all related rules, orders and decrees of all governmental authorities (including without limitation federal, state and local governments, governmental agencies and quasi-governmental agencies).

“Graphic Standards” means all standards, policies, and other requirements adopted by a System or Bank from time to time with respect to use of their Marks.

“Issuer” shall have the meaning set forth on page 1 of this Agreement.

“Legal Requirements” means collectively all Applicable Law, Governmental Requirements, the Rules and any rules, orders and regulations issued by the Regulatory Authorities.

“Mark” means the service marks and trademarks of a System or Bank, including but not limited to, the names and other distinctive marks or logos, which identify a System or Bank.

“Minimum Monthly Transaction Fees” shall have the meaning set forth in Section 3.2.

“Net Revenues” shall have the meaning set forth in Section 3.7(g).

“PCI” means Payment Card Industry.

“Processing Services” means those services which are necessary to issue and service a Card and for the processing and Settlement of a Transaction in accordance with this Agreement, Governmental Requirements, Rules, and any Regulatory Authority.

“Processor” means the Bank approved and registered business, also known as Third Party Processor (“TPP”), that Program Manager retains to perform Processing Services under this Agreement, as set forth in Schedule B. Program Manager shall obtain Bank’s approval for any TPP and retains all responsibility and liability to Bank for actions of the Processor pursuant to the terms and conditions of this Agreement, including the liability and indemnification provisions herein. Processor shall be deemed a Program Affiliate of Program Manager pursuant to this Agreement.

“Program” means a system of services approved by Bank and operated in accordance with the “Program Guidelines” incorporated herein by reference, under which a specific list of Cardholders subject to a Cardholder Agreement utilizes a Card to submit Transactions into a System utilizing a Settlement Account to access Cardholder Funds. This Agreement contemplates that Program Manager may be permitted by Bank to offer multiple Programs hereunder, each subject to the terms hereof and the prior written approval of Bank.

“Program Affiliates” means the Customers, clients, employers, co-branders, retailers, sales and marketing agents, Cardholder Funds load agents, TPP, third party service providers, and any other parties that the Program Manager contracts with for the purpose of marketing, selling, promoting, producing, processing or otherwise facilitating the Program and the management and distribution of the Card and/or Card Product.

“Program Manager” means the entity, which for purposes of this Agreement is identified on page 1 of this Agreement, that is responsible for day-to-day management of the Program and Cardholder services, including actions by Program Affiliates and their employees, officers, agents, TPP or service providers on behalf of Program Manager including, but not limited to, this Agreement, the Processing Services and all policies, procedures, marketing collateral and related Program functions incorporated into this Agreement, as specified in Section 2.1 hereof.

“Program Materials” means all materials and methods of marketing used by Program Manager in connection with the Program(s) governed by this Agreement including, without limitation, web sites, advertisements, brochures, telephone scripts, applications, Cardholder Agreements, and similar materials which are used to communicate information to Customers or Cardholders in any medium.

“Program Outline” means the document submitted by Program Manager to Bank outlining a Program concept for inclusion as an approved Program.

“Program Revenue” means all income and other Cardholder fees and revenues generated or accrued by a Cardholder’s use of a Card or participation in a Program, including without limitation, all funds held in a Program Manager Revenue Account.

“Program Manager Revenue Account” means a Deposit Account established to receive Program Revenue due to Program Manager from Cardholder fees and interchange Settlement and other sources, as further described in Section 3.7(a)(iv) herein.

“Regulatory Authority” means, as the context requires and as they may have jurisdiction over one or more Parties to this Agreement: any System; any state agency that regulates financial institutions, including Money Services Businesses (MSBs); the Federal Deposit Insurance Corporation; the New York State Department of Financial Services; the Board of Governors of the Federal Reserve System; the Federal Trade Commission; the Securities and Exchange Commission; the Internal Revenue Service; the Consumer Finance Protection Bureau (CFPB); and any other federal or state agency having jurisdiction over or responsibility for protecting the interests of the Bank, Program Manager, Cardholders or Processors, as applicable.

“Reserve Account” means a Deposit Account as directed by Bank, as further described in Section 3.7(a)(ii) herein.



“Rules” means the by-laws and operating rules of any System, NACHA or the published policies and procedures of Bank, including without limitation, Bank’s anti-money laundering compliance program, as promulgated by Bank’s Board of Directors in good faith to ensure the continued safety and soundness of Bank.

“Settlement” means the movement and reconciliation of funds between Bank and System members in accordance with the Rules.

“System” means any electronic payment network for transmitting items and Settlement thereof of which Bank is a member, as set forth on Schedule B.

“Transaction” means using a Card to do any of the following: (i) to make a purchase; (ii) to obtain a credit for a previous purchase; (iii) to obtain cash from a terminal or automated teller machine (“ATM”); (iv) to make a bill payment or other payment to a third party; (v) to transfer value to another card or account; (vi) to load the initial funds to a Card account; (vii) to add further funds or to “reload” a Card account, as more fully described in Section 3.7; or (viii) to withdraw funds from a Card account.

“Transaction Fees” shall have the meaning set forth in Section 3.2(b).

“Transit” means the Cardholder Funds received by Bank or an entity approved by Bank, which Bank has agreed may transmit funds for the Program in the normal course of business.

## ARTICLE II – GENERAL DESCRIPTION OF PROGRAMS

## SECTION 2.1

## Purpose

Bank hereby appoints Program Manager as Bank’s authorized agent, delegate and representative to (i) market, offer and sell Cards, and other related products as agreed in writing by the Parties from time to time, that meet Bank requirements; (ii) develop, market and offer Programs that utilize Cards; and (iii) perform such services hereunder to support the Cards and Programs including loading of funds to cards and all functions necessary to provide processing and settlement for prepaid cards, solely in accordance with the terms of this Agreement.

## ARTICLE III - DUTIES OF PROGRAM MANAGER

## SECTION 3.1

## Management

Program Manager agrees as follows:

(a) Program Manager agrees that the scope of this Agreement shall be limited to the Bank’s formally accepted and approved Program(s) registered by Bank with the System(s) on behalf of Program Manager and listed on the attached Schedule A, as amended from time to time. Any Program documents specified in a Program Outline provided by Program Manager shall be approved in writing by Bank and incorporated herein pursuant to the terms and conditions of this Agreement and include the additional documents and correspondence submitted and registered comprising the Program(s) which by its submission in any form to Bank by Program Manager shall be inclusive of and a part of Schedule A. Additional services may be added to the Program(s) by Bank approved documents submitted by Program Manager and accepted in writing by Bank. Program Manager may directly provide or receive any additional services outside the scope of this Agreement from any third party if: (i) its receipt of such service does not conflict, interfere with, and/or limit Bank’s ability, reputation, risk, or right to provide the services provided for in this Agreement; (ii) it specifically meets and conforms to all Rules and Regulations; and (iii) it meets all requirements within the terms and conditions of this Agreement. Program Manager shall be responsible for all costs and services from any third party entity contracted by or providing service to Program Manager for the Program(s) pursuant to this Agreement. A Program Outline is only finalized by signatures of both Parties.

(b) Program Manager has reviewed and agrees to abide by Bank’s underwriting guidelines for Cardholders and Program Affiliates attached hereto as Schedule B. Program Manager agrees to abide by these underwriting guidelines at all times and acknowledges that in the event a Program Affiliate requires Bank’s approval, as described in Schedule B, information regarding such Program Affiliate shall be disclosed in advance and written approval will be sought from Bank for such Program Affiliate prior to engaging in any services with Program Affiliate. Program Manager agrees that all documents required pursuant to Schedule B shall be maintained by Program Manager in accordance with all confidentiality and review provisions herein.

(c) Any Customer Service Center providing services by a Program Affiliate to Cardholders must be certified and approved by Bank pursuant to Schedule B.

(d) Any Program Affiliate retained by Program Manager in connection with any of the Programs shall be in accordance with the Guidelines set forth in Schedule B.

## SECTION 3.2

## Marketing

(a) Program Manager, at its sole expense, may from time to time develop Programs and promote and market Cards, Programs and other products to prospective customers, in accordance with this Agreement. Any products or services related to the operation and servicing of the Cards issued pursuant to the Program shall be subject to the approval of the Bank. Program Manager shall have the right to offer other products or services to Cardholders, provided that any marketing materials referencing any such other products or services shall be subject to the approval of the Bank, such approval not to be unreasonably withheld, conditioned or delayed. All Card products related to the operation and servicing of the Cards and Programs, together with any promotions, marketing materials, Card design, and use of Marks related thereto, are subject to prior approval by Bank and System prior to use, such approval not to be unreasonably withheld, conditioned or delayed; provided, however, that Bank shall use commercially reasonable efforts to determine the suitability of any Card products and Programs, together with any promotions, marketing materials, Card design, and use of Marks related thereto within three (3) business days of receipt of such request in writing and the materials. Bank shall be identified on all marketing material for Cards and Programs contemplated in this Agreement. Program Manager shall ensure all Card products and Program materials incorporating the Marks comply with all Graphic Standards provided by Bank. Subject to the terms and conditions of this Agreement, Bank acknowledges and agrees that (i) Program Manager shall have the right to offer other products and other cards and accounts to Cardholders from time to time and (ii) marketing materials related to the Program may include references to other products offered by or through Program Manager provided that there is a clear disclaimer in any such marketing materials that the Bank does not provide or endorse any such other products, subject to review and approval by Bank of such disclaimers within three (3) business days of receipt of such request in writing and the materials. However, non-receipt of any approval due hereunder within the above-indicated time frames shall not constitute an approval.



(b) Program Manager commits that its marketing efforts will generate sufficient volume to result in minimum monthly transaction fees to Bank (the "Transaction Fee"), along with any additional fees and terms set forth in the attached Schedule C Term Sheet. Program Manager acknowledges that Bank has relied on such representation in determining whether to develop the Program. Based on these representations, beginning ninety days after on the first day of the month immediately following the funding of the first commercially active Cardholder account occurs (i.e., not a test account), Bank will deduct from monthly Program Revenues the minimum monthly Transaction Fees set forth in the attached Schedule C Term Sheet (the "Minimum Monthly Transaction Fees") to determine Net Revenues. Program Manager agrees to pay any negative Net Revenue balance on a monthly basis.

(c) Program Manager will ensure that neither its employees nor its agents will solicit the marketing of Card products outside of the United States, which is strictly prohibited.

## SECTION 3.3

## Approval of Cardholders

Program Manager shall:

(a) Program Manager shall be responsible for accepting and processing applications to become a Cardholder in accordance with the Rules and Applicable Law and based on Bank-approved criteria, terms, and conditions used by Program Manager, including Program Manager's and Bank's Anti-Money Laundering Compliance Program that shall at all times comply with the Rules and Applicable Law.

(b) Approval of applications for Cardholders shall be contingent upon the applicant also meeting Bank’s underwriting criteria as specified in Schedule B to this Agreement. Program Manager shall be responsible directly or through its agent for Office of Foreign Assets Control (“OFAC”) verification and compliance with all related Rules and Regulations. Such OFAC verification shall be conducted at intervals no less than the time frames set forth in Schedule B for all Cardholders.

(c) Program Manager, within five (5) Business Days after requested by Bank and in Program Manager’s proprietary format, will provide reports to Bank indicating compliance or non-compliance with the established criteria as set forth in Sections 3(a) and (b) and Schedule B (collectively, the “CIP Criteria”); Bank reserves the absolute right to immediately cease any or all Card issuance under the Program for identified violations of this Section 3.3, and to suspend all Card issuance pending validation of correction regarding the violation of this Section 3.3. Any material breach of or material failure by Program Manager to comply with this Section 3.3 shall be considered a material default as defined within the cure provisions and termination for cause provisions of this Agreement.

## SECTION 3.4

## Printing of Cards and Cardholder Agreements

Bank shall, in consultation with Program Manager, at all times review and approve the terms and conditions, including any applicable fees, charged with respect to all Cards issued hereunder. Bank shall be the contracting party under all Cardholder Agreements and shall enter into a Cardholder Agreement with each Cardholder introduced to Bank by Program Manager. The relationship with each Cardholder shall be owned jointly by Bank and Program Manager. All Cards and Cardholder Agreements shall identify Bank as the Issuer of the Cards and shall include Program Manager's "[Card Name] Card" trademark and/or graphics. All Cards shall include such other names, Marks, and disclosures as may be required to conform to Governmental Requirements, Regulatory Authority, and Rules.

The terms and conditions contained in the Cardholder Agreements shall be determined by Bank in consultation with Program Manager and may be amended by Bank, from time to time, in consultation with Program Manager. Program Manager, at its sole expense, shall be responsible for printing and distributing the Cardholder Agreement and any amendments thereto to Cardholders as reasonably directed by Bank in consultation with Program Manager. In addition, Program Manager shall ensure the secure shipping and storing of Cards in compliance with applicable Systems Rules.

## SECTION 3.5

## Access to Program Documents and Information

Bank shall have access to all information and documents it reasonably requests with regard to any activity contemplated by this Agreement in Program Manager’s proprietary format(s).

## SECTION 3.6

## Processing Services

Program Manager, at its sole expense, shall provide for Processing Services. Any processor retained by Program Manager to provide Processing Services must be approved in advance by Bank, and such approval not to be unreasonably withheld, conditioned or delayed. Bank agrees that FiCentive, Inc. is an approved processor, along with the additional approved processors listed on Schedule B and further agrees to register FiCentive, Inc. with the System as a processor with the designation of TPP and or TPS.

## SECTION 3.7

## Account Obligations and Reserve Account

(a) Program Manager shall cooperate with Bank to open such Deposit Accounts pursuant to Bank policies and procedures as are necessary for the Bank to provide the services outlined in this Agreement. The Deposit Accounts will be reconciled by Bank as set forth in this Agreement. The Bank shall not charge Program Manager any fees for the Deposit Accounts. Bank will allow for a balanced ACH formatted file to move amounts between bank owned Deposit Accounts. Unless otherwise identified in Schedule F the Deposit Accounts to be opened are:



i. Cardholder Funds Account, a pooled account to hold Cardholder Funds to fund Transactions pursuant to this Program, which shall be established as a custodial account for the active balances held by Cardholders on their Cards, which shall be reconciled daily and shall receive all loads or funding to the Cards, regardless of the source of the load;

ii. Reserve Account, a noninterest bearing account to hold funds to cover losses, and/or fund shortages within the Program as described in this Agreement, as well as daily Settlement of adjustments to or from the Card accounts including, but not limited to, the payment by the Systems of credits from chargebacks;

iii. Fee and Interchange Account, which shall be established to receive on a daily basis Program Revenue due to Program Manager from Cardholder fees and net interchange Settlement and other sources, (net interchange being interchange revenue net of interchange expenses), which shall be disbursed as set forth in subsections 3.7 (a) (iv) and 3.7(j) herein; and

iv. Program Manager Revenue Account, which shall be funded weekly on Monday for each preceding week (or if such Monday is not a Business day, the next Business day) with the balance from the Fee and Interchange Account(s) and the remainder at the end of month net of Bank fees, pass throughs and other expenses described in Schedule C and in accordance with Section 3.7(j) for such month. The Program Manager Revenue Account shall be owned and controlled by Program Manager.

v. Settlement Account, to facilitate net Settlement with the System for System initiated transactions

vi. Operating Account, to facilitate Program Manager’s card load activity (non-System)

(b) The Cardholder Funds Account will be funded daily and will occur as follows: (i) funding initiated by or at the direction of a cardholder, (ii) through third party licensed money transmitters, ACH or other electronic means, (iii) to a third party funds processor, (iv) to Bank. Funding will be in an amount equal to the active dollar amount loaded by or on behalf of Cardholders and available to Cardholders for spending, and such funds shall be held in the Cardholder Funds Account. Program Manager will be responsible for supervising and managing all such daily funds flow process as depicted in Schedule F.

(c) On each Business Day during the term of this Agreement, the applicable System will debit or credit the Settlement Account for the net funds required for Settlement with the System for Transactions, offset by: (i) funds received from the System for merchandise returned by Cardholders; (ii) network initiated loads; and (iii) any other credits received from the System that are due to Cardholders on such Business Day. In the event Bank off-sets from the Reserve Account, Program Manager shall deposit, within two (2) Business Days, funds equal to the amount of off-set to return the Reserve Account to the pre-off-set balance.

(d) On each Business Day during the term of this Agreement, the Cardholder Funds Account shall be credited for the following: (i) funds received by approved Program load formats; (ii) currency for deposit to the Cardholder Funds Account(s); and (iii) any other credits due to Cardholders. Program Manager will be responsible for overseeing and managing all such credits.

(e) Program Manager represents and warrants that the Cardholder Funds Account will be at all times appropriately funded by deposits or funds in transit in an amount that is no less than 100% of the total amount of currency represented as active and available to Cardholders of the current day's balances of Cardholder Funds. Program Manager will be responsible for overseeing and managing such funding. Program Manager shall be responsible for any failure of the Cardholder Funds Account to be fully funded not caused by Bank or its agents or third party contractors. In the event of any such failure, Program Manager shall, within one (1) business day after receiving notice of such failure, fully fund any shortfall in the Cardholder Funds Account.

(f) Bank shall establish, and Program Manager shall fund, a “Reserve Account” for deficits in the Program including, but not limited to, potential over limits, negative balances, fraud, disputes or System charges, controlled by Bank and held on behalf of Program Manager, as an account based upon the Bank’s due diligence and compliance risk review. Such account shall be funded prior to the inception of any services with the amount as determined below. Program Manager agrees that Program Manager’s failure to timely pay any material amounts due to Bank hereunder and the failure to establish or maintain sufficient funds in a Reserve Account constitutes a failure to perform in a material respect Program Manager’s obligations to Bank and triggers Bank’s right to terminate under Section 10.2, subject to a reduced cure period of no more than ten (10) Business Days. In no case shall the Reserve Account be funded with less than:

Fifty thousand dollars ($50,000) or 1% of the daily average balances of Cardholder Funds outstanding during the immediately preceding calendar quarter, whichever is greater,

Plus

the average daily “funds in transit” volume based on prior three months. For purposes of this Agreement, “Funds in Transit” shall include funds committed to Cardholders including funds loaded at retail locations that have not yet been received by the Bank but will not include funds received by ACH and will not include FICentive initiated loads that have been prefunded from the “Opening Account” defined in Section 3.7(a)(vi). Notwithstanding the foregoing, funds from ACH transactions will not be made available to consumers until the transaction posting date.

(g) The Reserve Account shall be funded in accordance with Subsection 3.7(f) above; and if not funded according to Subsection 3.7(f) above, Bank reserves the right to delay indefinitely the launch of the corresponding Program for Program Manager. In addition, the Bank may, in its sole discretion, either terminate the Agreement pursuant to Section 3.7(f) or may elect to immediately suspend the issuance of any new Cards to Cardholders in the event of a default by Program Manager in funding of the Reserve Account. If Program Manager does not pay any sums due under this Agreement within the time period designated in the notice and as required by this Agreement, and if Bank does not immediately exercise its right to terminate this Agreement, Bank may charge and Program Manager will pay, a late fee of one and one-half percent (1.5%) per month on the balance outstanding or the highest amount allowed by law, whichever is lower.



(h) Program Manager shall require the Processor, on a daily basis and in Program Manager’s proprietary format, to provide to Bank written or electronic reports in a manner reasonably acceptable to Bank showing the total of funds and/or credits due from Program Manager to Cardholders, the previous day’s balance of Card Accounts and Cardholder Funds, including, but not limited to, those reports described on Schedule E, a list of all posted transactions for the prior day, a list of all cardholders including CIP information and status of the account, and a summary of total credits to and debits from cards (including fees) grouped by transaction type.

(i) Such written or electronic reports shall also contain any other information reasonably requested by Bank for services relating to the Agreement or as may be required to conform to the Rules and Legal Requirements.

(j) Subject to receiving appropriate reporting from Program Manager and Processor, Bank shall provide a monthly electronic statement, no later than the  $ 10^{th} \)  Business Day of each month showing the following information for the preceding calendar month: (i) total Program(s) Revenues for the Program(s) during the immediately prior month (the “Invoice Period”); (ii) all Interchange received by the Bank during the Invoice Period; (iii) Transaction Fees deducted by Bank as set forth in Schedule C attached hereto for Transactions occurring during the Invoice Period, or the Monthly Minimum Transaction Fees, whichever is higher; (iv) any outstanding expenses assessed or passed through by Bank to Program Manager for the Invoice Period, as set forth in Schedule C attached hereto and (v) the remaining amount of Net Revenues held by Bank for the Invoice Period. As compensation for services provided pursuant to this Agreement, Bank shall deposit said Net Revenues to Program Manager’s Revenue Account no later than the Business Day following Program Manager’s receipt of the statement each Invoice Period. If Net Revenues in any given Invoice Period are negative, Bank will withdraw said Net Revenues from the Program Manager’s Revenue Account or Reserve Account on the 10th Business Day following Program Manager’s receipt of the statement for such Invoice Period. Program Manager will be solely responsible for paying any other costs of the Cards and Programs from either (a) the up-front purchase fees, and/or (b) the Net Revenues, including but not limited to, processor’s fees, marketing costs, operational costs, Card losses, etc.

(k) If this Agreement is Terminated (as defined below) for any reason, the Reserve Account shall be maintained for a period of ninety (180) days from the date of the last Transaction under this Agreement, provided, however that the amount to be maintained in the Reserve Account from and after the date of Termination (as defined below) shall be the amount calculated in accordance with Subsection 3.7(f) without regard to any stated minimum dollar amount set forth in Subsection 3.7(f). Following this ninety (180) day period, the Reserve Account will be terminated and the balance in the Reserve Account, if any, shall be paid to Program Manager within ten (10) Business Days. For purposes of this Subsection 3.7(k), “Terminated” or “Termination” means that (i) a written notice of termination has been delivered be either Party to the other Party pursuant to this Agreement, (ii) no new Cards are being issued pursuant to the Program, (iii) no loads into Card accounts are being accepted pursuant to this Agreement, and (iv) Program Manager and Bank are winding-down the Program.

(l) Program Manager will not at any time during the term of this Agreement, or until all amounts due under this Agreement have been paid in full, grant or pledge any security interest in or lien in the Reserve Account to any person or entity without the prior written consent of Bank, which consent shall not be unreasonably withheld, conditioned or delayed.

## SECTION 3.8

## Error Resolution

Program Manager agrees to resolve, in accordance with the applicable Rules and Applicable Law, all alleged errors or unauthorized Transactions with respect to any Transactions performed or attempted to be performed in accordance with or under this Agreement. In particular, Program Manager agrees, upon written notification by Bank, any Customer or any Cardholder of a complaint or allegation, to obtain any and all documentation or data required to resolve the matter and reasonably investigate the allegations, advise Bank of the results of the investigation in writing and provide an audit trail of information pertinent to the matter, all within any timeframes required by the Rules of any applicable System and Applicable Law, but in no event later than such time as may be required by Applicable Law or the Rules of any applicable System after Bank, any Customer or any Cardholder has provided Program Manager with written notice of the complaint or allegations.

## SECTION 3.9

## ACH Services

Program Manager is solely responsible for all ACH “origination” services required for the functioning of the Program. Program Manager acknowledges that ACH origination services of Bank require a separate and independent agreement with Bank. In the event Bank performs services as Originating Depository Financial Institution (“ODFI”), such services require a separate and independent agreement with Bank and such services shall be performed based upon the separate terms, conditions and service pricing for such services.

Bank will act as Receiving Depository Financial Institution (“RDFI”) for receipt of all Cardholder Funds. Bank’s duties and obligations related to ACH services of Program and for Program Manager are limited solely to ACH rules and regulations which are defined within the operating rules of NACHA. Bank will provide Program Manager all daily originations received by Bank by 8 am CST each banking day and in a NACHA formatted file via secure FTP. Program Manager agrees to provide Bank all ACH returns by 2 pm CST via secure FTP each banking day. Bank will process any Program Manager initiated ACH returns on the same day that they are received by the Bank from Program Manager. Notwithstanding the foregoing, Bank will make a good faith effort to meet the indicated time frames, but failure to do so will not constitute an event of default under this Agreement.

Program Manager agrees to perform, and to direct all Program Affiliates to perform all services relative to Bank RDFI functions in accordance with all Legal Requirements.

Program Manager shall be financially responsible for all Cardholder Funds in Transit with approved Program Affiliates, and Program Manager’s contracts with Program Affiliate load networks shall reflect appropriate controls and indemnification regarding such activity. Notwithstanding anything to the contrary in this Agreement, Bank shall not be responsible under any circumstance other than its negligent or intentional acts or omissions for misdirected Cardholder Funds through any load network of the Program and all such load networks or related services shall be Program Affiliates. Examples of Bank-approved entities for the purpose of transmitting Cardholder Funds under this Agreement are approved correspondent banks, the Federal Reserve, or approved Program Manager load networks (examples include, but are not limited to, Western Union, Green Dot, InGo Money, Money Gram, MasterCard Repower, Ready Link, Precash) to be delivered electronically for the benefit of Cardholder Card accounts.



# ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF PROGRAM MANAGER AND BANK

## SECTION 4.1

## Representations and Warranties of Program Manager

Program Manager represents and warrants to Bank as follows:

(a) Program Manager has the full right, power and authority to execute and deliver this Agreement and to perform all its obligations under this Agreement and other agreements which must be executed to effect the services contemplated herein.

(b) No consent or approval of any third party is required for the valid execution, delivery and performance of this Agreement by Program Manager.

(c) Except as otherwise disclosed, neither Program Manager nor, to the knowledge of the Program Manager, any principal of Program Manager has been subject to the following:

(i) Criminal conviction (except minor traffic offenses and other petty offenses);

(ii) Any unpaid Federal or state tax lien;

(iii) Administrative or enforcement proceedings commenced by the Securities and Exchange Commission, any state securities regulatory authority, Federal Trade Commission, federal or state bank regulator, or any other state or federal regulatory agency; or

(iv) Restraining order, decree, injunction, or judgment in any proceeding or lawsuit, alleging fraud or deceptive practice on the part of Program Manager or any principal thereof.

For purposes of this subparagraph, the word “principal” shall include any person directly or indirectly owning ten percent (10%) or more of Program Manager, any officer or director of the Program Manager or any person actively participating in the control of Program Manager’s business. The Bank hereby reserves the right to order litigation reports on such principals as part of its due diligence process.

(d) There is not pending or threatened against Program Manager, any litigation or proceeding, judicial, tax or administrative, the outcome of which might materially adversely effect the continuing operations of Program Manager or their ability to perform its obligations under the Agreement. Attached to this Agreement is a list and brief description of all such pending lawsuits in which Program Manager is a party (see Schedule D).

(e) Program Manager has delivered to Bank complete and correct copies of its balance sheets and related statements of income and cash flow. Program Manager's financial statements, subject to any limitation stated therein, which have been or which hereafter will be furnished to Bank, will fairly represent the financial condition of the Program Manager.

(f) Program Manager agrees that, at Bank’s sole discretion and cost (except as otherwise provided in Section 8.2 herein), Bank, its authorized representatives, or agents and any government entity with regulatory or supervisory authority over Bank (collectively the “Auditing Party”), on a confidential basis shall have the right to inspect, audit, and examine all of Program Manager’s facilities, records and personnel relating to the Program at any time during normal business hours upon prior written reasonable notice. The Auditing Party shall have the right to make abstracts from Program Manager’s books, accounts, data, reports, papers, and computer records directly pertaining to the subject matter of this Agreement, and Program Manager shall make all such facilities, records, personnel, books, accounts, data, reports, papers, and computer records available to the Auditing Party for the purpose of conducting such inspections and audits.

(g) Program Manager is in compliance with all applicable federal, state and local laws, regulations, rules and administrative orders which are applicable to Program Manager, the Program and the Cards.

(h) Program Manager has obtained and is in compliance with all licenses, permits, memberships, consents and authorizations required to perform all its obligations under this Agreement and other agreements which must be executed to effect the services contemplated herein. Program Manager will not facilitate the processing of loan payments on behalf of lenders in any of their Programs with Bank exclusively with card.

(i) Program Manager is validly existing and in good standing under the laws of the state of its formation and is authorized to conduct business as contemplated in this Agreement in each state in which the nature of the Program Manager’s activities hereunder makes such authorization necessary.

(j) Program Manager shall abide by the requirements of 41 CFR 60-300.5(a). This regulation prohibits discrimination against qualified protected veterans, and requires affirmative action by covered prime contractors and subcontractors to employ and advance in employment qualified protected veterans.

(k) Program Manager shall abide by the requirements of 41 CFR 60-741.5(a). This regulation prohibits discrimination against qualified individuals on the basis of disability, and requires affirmative action by covered prime contractors and subcontractors to employ and advance in employment qualified individuals with disabilities.



## SECTION 4.2 Representations and Warranties of Bank

Bank represents and warrants to Program Manager as follows:

(a) Bank has the full right, power and authority to execute and deliver this Agreement and to perform all its obligations under this Agreement and other agreements which must be executed to effect the services contemplated herein.

(b) No consent or approval of any third party is required for the valid execution, delivery and performance of this Agreement by Bank.

(c) There is not pending or threatened against Bank, any litigation or proceeding, judicial, tax or administrative, the outcome of which might materially adversely effect the continuing operations of Bank.

(e) Bank is in compliance with all applicable federal, state and local laws, regulations, rules and administrative orders which are applicable to Bank, the Program and the Cards.

(h) Bank has obtained or will obtain and is or will be in compliance with all licenses, permits, memberships, consents and authorizations required to perform all its obligations under this Agreement and other agreements which must be executed to effect the services contemplated herein.

(i) Bank is a New York State chartered bank, duly chartered by the New York State Department of Financial Services.

## ARTICLE V - COVENANTS OF PROGRAM MANAGER

## SECTION 5.1

## Covenants

Program Manager covenants and agrees with Bank as follows:

(a) Program Manager is performing, and will at all times use commercially reasonable efforts to continue to perform its obligations under this Agreement and to ensure any Program Affiliates will, and are and shall at all times be, in compliance with all Legal Requirements that relate to Program Manager’s business, the Program Manager’s Programs, this Agreement, or the matters and transactions contemplated herein.

(b) Program Manager will provide on an ongoing basis via sec.gov, at least once each calendar year, updated balance sheets and related statements of income and cash flow, as well as year-end or fiscal year financial statements and tax returns prepared by an outside accountant and presented on a compiled basis, within 120 days of either fiscal or calendar year end, as applicable.

(c) Program Manager in Program Manager’s proprietary format will provide to Bank a list of all material written consumer complaints received by Program Manager, relating to the Card or its use, no later than monthly. Such report shall include the name and address of the complaining Cardholder, a brief summary of the Cardholder’s complaint, and when resolved a brief summary of how the complaint was resolved.

(d) Any litigation or court proceedings filed against Program Manager, relating to the Card or its use, or the outcome of which might materially adversely effect the continuing operations of Program Manager, will be immediately reported to Bank. Such report shall include a copy of the court papers or proceedings, together with a summary of the Program Manager’s position with respect to the matter, the name and address of Program Manager’s counsel handling the matter, and the likelihood of settlement of such matter.

(e) Program Manager is in possession of and will maintain a copy of the applicable System Rules, which may be amended by System from time to time.

(f) Program Manager will obtain or will at all times maintain appropriate licenses required with respect to any Marks, copyrights and patents used by Program Manager effecting any and all aspects of Program Manager’s performance of this Agreement.

(g) Program Manager will implement the BSA/AML/OFAC policies and procedures approved by Bank to approve Cardholders, to report Transactions to the Bank as required by the Bank, and to monitor Transactions for suspicious activity and to notify Bank of the same. Bank acknowledges that prior to the date of execution of this Agreement Program Manager has submitted and Bank has approved such policies and procedures. Program Manager shall provide to Bank a summary report of findings from Program Manager's fraud monitoring, including but not limited to, reports of transactions identified as potentially suspicious or fraudulent, within 3 Business Days of written request and in Program Manager's proprietary format.

(h) Program Manager shall implement policies and procedures reasonably approved by Bank with respect to (i) employee training and (ii) customer service levels to be provided to Cardholders and potential Cardholders, including but not limited to the handling or escalation of consumer complaints.



# ARTICLE VI - DUTIES OF BANK

## SECTION 6.1 Memberships in System

Bank, as a principal member of the System, shall support the sponsorship and registration of Program Manager as a marketing agent or service provider of Bank with each System, as applicable.

## SECTION 6.2 Assessment, Development and Approval of Programs

Bank shall work closely with Program Manager to develop Programs that meet Bank’s strategic objectives and customer goals. Any Programs proposed by Program Manager shall be reviewed and assessed by Bank, and shall be approved or declined in Bank’s sole discretion.

## SECTION 6.3

## Issuer of Cards and approval of Cardholders

Bank shall be the Issuer of all Cards hereunder. To do so, Bank shall sponsor a BIN for the Cards and will maintain a Program whereby it issues Cards marketed and promoted by Program Manager pursuant to this Agreement. In addition, with respect to Card Programs that establish an ongoing relationship with the Cardholder, Bank shall be responsible to ensure that each such Cardholder meets Bank’s Customer Identification Program as required by applicable law, including regular reports and periodic sample audits of the process.

## SECTION 6.4

## Settlement

Bank shall provide for Settlement for all Cards issued by Bank. To facilitate Settlement, Bank has established or will establish one or more Settlement Accounts as provided in Section 3.7(a), with such accounts owned by either Bank or Program Manager as provided in Section 3.7(a). Bank shall hold all Cardholder Funds in a Deposit Account owned and controlled solely by Bank. No Bank fees or charges to Program Manager will be imposed with respect to all Settlement Accounts and Deposit Accounts opened in connection with this Agreement.

## SECTION 6.5

## Program Monitoring

(a) At all times, Bank shall be responsible for monitoring Program Manager’s performance of services hereunder and the results of the various Programs developed and implemented jointly with Program Manager. Bank shall review reports and financials from the Programs, and shall meet regularly with Program Manager, on at least a semi-annual basis, to discuss the results of the Programs (including any problems, losses or complaints, and any changes or modifications that may be necessary to ensure the viability of the Programs).

(b) Program Manager acknowledges it is subject to examination under the Bank Service Company Act and assessment of Program Manager’s ability to perform its contractual obligations pursuant to this Agreement and acknowledges the statutory authority of all relevant regulatory entities to regulate, examine, and take an enforcement action against the Program Manager with respect to the activities performed by Program Manager as an agent or representative of Bank.

## SECTION 6.6

## Escheatment.

Program Manager shall be responsible for the handling of any Cardholder Funds that constitute unclaimed, abandoned or similar property under Legal Requirements based upon the Cardholder records maintained by Program Manager. Program Manager shall provide such reports and notices that may be reasonably requested from Bank from time to time.



# ARTICLE VII – COMPLIANCE WITH LAW; DISASTER RECOVERY

## SECTION 7.1

## Legal Compliance

Each Party will comply with all applicable federal and state statutes, rules, laws and regulations, including all rules, orders and decrees of the New York State Department of Financial Services and the Federal Reserve Bank of New York, as applicable,, and Rules that relate to the Parties' performance of its duties and obligations pursuant to this Agreement. Without limiting the foregoing, the Parties acknowledge and agree that (i) the Bank will delegate as provided hereunder its anti-money laundering compliance and OFAC compliance obligations to the extend allowed under applicable law, including, without limitation, the Bank Secrecy Act, to Program Manager, and (ii) Program Manager shall develop, implement and maintain an anti-money laundering and OFAC compliance program compliant with applicable law and approved by the Bank, which addresses such obligations. Program Manager shall ensure that each of its and its agents impacted employees shall receive at least annual compliance training on all applicable regulatory, Systems and Program requirements and procedures, to be acknowledged by each, beginning within 90 days of the effective date of this Agreement.

## SECTION 7.2

## Disaster Recovery

Each Party shall have a viable and tested contingency plan (“Disaster Recovery Plan”) in effect and hereby warrants that any third party performing any of its duties hereunder that has access to Cardholder data has represented to such Party that it has a viable and tested contingency plan in effect. Each Party’s Disaster Recovery Plan shall provide for short-term recovery of data for processing, reasonable security, confidentiality of customer data and reasonable period for full recovery in relation to the volume and importance of the application to such Party’s operations and duties under this Agreement. Program Manager shall deliver a copy of such Disaster Recovery Plan to Bank upon Bank’s request, which plan shall be subject to review and approval by Bank. Each Party shall test its Disaster Recovery Plan by conducting at least one test annually, and Program Manager agrees to provide Bank a copy of its written test report within a reasonable time after completion of each test. Upon Bank’s request, Bank shall have the right in its reasonable discretion to participate by conference call in Program Manager’s annual testing of its Disaster Recovery Plan if reasonably deemed necessary or appropriate by Bank. On an annual basis, Program Manager shall provide Bank an executive summary of Program Manager’s Disaster Recovery Plan and a new copy of the Disaster Recovery Plan, in Program Manager’s proprietary format each dated as of the year that it is provided to Bank, and shall provide Bank a new executive summary of its Disaster Recovery Plan and a new copy of the Disaster Recovery Plan promptly after any time during the Term of this Agreement that Program Manager amends such plan. Bank acknowledges it has already been provided with Program Manager’s current disaster recovery plan and has approved it accordingly.

## ARTICLE VIII – COMPENSATION AND EXPENSES

## SECTION 8.1

## Expenses of Bank

Bank shall be solely responsible for the following expenses:

(a) Membership fees related to Bank’s own membership in any System utilized by a Program.

(b) Bank shall pay its own costs and overhead generated from its review, assessment and development of Programs, and from its supervision and oversight of Program Manager and the Program results.

(c) Bank shall be obligated to compensate Program Manager for its services as set forth in Section 8.3 hereof.

(d) All fees, fines and penalties assessed by any Regulatory Authority or System due Bank’s negligent or willful actions, inactions, or omissions

## SECTION 8.2

## Expenses of Program Manager

Program Manager shall be solely responsible for the following:

(a) Advertising and other expenses associated with the marketing of Cards to potential Cardholders.

(b) All fees, fines and penalties assessed by any Regulatory Authority or System (other than Bank) due to Program Manager’s negligent or willful actions, inactions, or omissions.

(c) All expenses associated with and losses resulting from over limit processing, Cardholder fraud, value load fraud and under floor limit processing shall be paid on a daily basis from the Reimbursement Account or Operating Account.

(d) A fee not to exceed $15,000.00 annually and on one occurrence per annum, payable to Bank to reimburse, actual and reasonable out-of-pocket expenses incurred for such inspections and audits conducted as described in Section 4.1(f) above (but specifically excluding the costs of any salary or wages payable to any employee of Bank or third party contracted by Bank).

(e) Any fees charged by a System in relation to Program Manager’s registration, as applicable, as a marketing agent or service provider of Bank.

(f) All fees charged by a System for any purpose related to the Programs.

(g) All expenses of the third party processor associated with establishing and maintaining any accounts with, or receiving services from, any financial institution providing Settlement and all expenses in providing Bank with account balances.

(h) All reasonable expenses associated with completing a due diligence review for any third party vendor or contractor relationship contemplated in this Agreement

(i) All costs associated with upgrade by processor not to exceed $25,000, that will provide functionality by which transaction limits can be set to reject items that exceed Bank-approved total spend per Program transactional limits. Program Manager will work with processor to ensure that such capability is installed, tested and functioning by no later than June 30, 2015 unless costs exceed $25,000.



## SECTION 8.3 Compensation Payable to Program Manager

Program Manager shall be entitled to the compensation as defined in Schedule C.

## SECTION 8.4

## Right of Set-Off

If at any time Bank determines that Program Manager has breached any of the terms, conditions, obligations, covenants, representations or warranties under this Agreement, and Program Manager is indebted to Bank, Bank may, without prior notice, exercise a right of set-off against the Reserve Accounts and the Program Manager Revenue Account (which accounts Program Manager represents do not include any trust funds or funds owned by third parties) and exercise all other rights and remedies provided in this Agreement or the Uniform Commercial Code or the New York Uniform Commercial Code as applicable. Program Manager hereby agrees that Bank shall have the right to enforce its rights as provided herein. Program Manager agrees that any and all costs incurred by Bank in enforcing this Agreement, including reasonable attorneys' fees, shall constitute additional indebtedness owed by Program Manager to Bank pursuant to this Agreement. Program Manager agrees to execute such documentation including, but not limited to, security agreements, UCC-1 Financing Statements, assignments and notices of assignment, as may be reasonably requested in writing by Bank to effectuate and perfect its security interests granted pursuant to this Section 8.4.

## ARTICLE IX - LIMITATION OF LIABILITY

## SECTION 9.1

## No Special Damages

Neither Party shall be liable to the other, whether in contract, tort, equity or otherwise, for any indirect, incidental, consequential, special, punitive or exemplary damages arising from or relating to this Agreement. Notwithstanding the foregoing, the limitations set forth in this Section shall not apply to or in any way limit a claim that (i) is subject to the third party indemnity obligations under this Agreement, (ii) arises out of a breach of confidentiality or a breach of information security, (iii) with respect to Bank, arises out of gross negligence, willful misconduct or fraud, or (iv) with respect to Program Manager, arises out of gross negligence, willful misconduct or fraud.

## SECTION 9.2

## Disclaimers of Warranties

Each Party specifically disclaims all warranties of any kind, express, implied, statutory or otherwise, arising out of or related to this Agreement, including without limitation, any warranty of marketability, fitness for a particular purpose or non-infringement, each of which is hereby excluded by agreement of the Parties.

## SECTION 9.3

## Liabilities of Program Manager for System, Regulatory and other Claims

(a) Program Manager shall be liable to Bank for any and all liabilities and every loss, cost, expense, claim, demand, and cause of action (including, without limitation, the cost of investigating the claim, the cost of litigation and reasonable attorneys' fees, whether or not legal proceedings are instituted and whether paid or incurred, as the case may be) by or on behalf of any Cardholder, Regulatory Authority, System, or other third party as a result of any of Program Manager's Programs or the Program Manager's failure to fully comply with the Legal Requirements, excluding in each case any such costs arising from Bank's failure to fully comply with the Legal Requirements.

(b) Bank shall be liable to Program Manager for any and all liabilities and every loss, cost, expense, claim, demand, and cause of action (including, without limitation, the cost of investigating the claim, the cost of litigation and reasonable attorneys' fees, whether or not legal proceedings are instituted and whether paid or incurred, as the case may be) by or on behalf of any Cardholder, Regulatory Authority, System, or other third party as a result of Bank's failure to fully comply with the Legal Requirements, excluding in each case any such costs arising from Program Manager's failure to fully comply with the Legal Requirements.



# ARTICLE X – TERM OF PROGRAMS AND AGREEMENT

## SECTION 10.1

## Term

The term of this Agreement shall commence on the Effective Date and continue for four (4) years (the “Initial Term”) unless terminated earlier as provided below. After the Initial Term, this Agreement shall automatically extend for additional periods of two (2) years each (a “Renewal Term”) unless either Party terminates this Agreement for any reason by providing written notice of non-renewal to the other at least 90 days prior to the commencement of the next Renewal Term. The Initial Term and any Renewal Term(s) are collectively referred to herein as the “Term”.

## SECTION 10.2

## Event of Material Failure and Termination of Agreement

(a) Either Bank or Program Manager shall have the right to terminate this Agreement upon the occurrence of one or more of the following events:

(i) Failure by the other Party to observe or perform, in any material respect, that Party’s material obligations to the other Party hereunder, so long as the failure is not due to the actions or failure to act of the terminating Party, but only if the failure continues for a period of (A) thirty (30) days after the non-performing Party receives written notice from the other Party specifying the failure in the case of a failure not involving the payment of money, or (B) ten (10) days after the non-performing Party receives written notice from the other Party specifying the failure in the case of a failure to pay any amount then due hereunder; provided, however, that either Party, in its sole discretion, may terminate this Agreement without such a cure period if a substantially similar material failure has previously occurred on two (2) occasions within the prior twelve (12) months;

(ii) In the event any financial statement, representation, warranty, statement or certificate furnished to it by the other Party in connection with or arising out of this Agreement is adverse to the terminating Party and is untrue, misleading or omits material information, as of the date made or delivered.

(iii) A Party (A) voluntarily or involuntary (and such involuntary petition or proceeding is not dismissed within sixty (60) days) commences (or is the subject of, as the case may be) any proceeding or filing of any petition seeking relief under Title 11 of the United States Code or any other Federal, state or foreign bankruptcy, insolvency, liquidation or similar law, (B) applies for or consents to the appointment of a receiver, trustee, custodian, sequestrator or similar official for such Party or for a substantial part of its property or assets, (C) makes a general assignment for the benefit of creditors, (D) commences the winding up or liquidation of its business or affairs, or (E) takes corporate action for the purpose of effecting any of the foregoing.

(iv) Upon any change to or enactment of or change in interpretation or enforcement of any law or regulation which would have a material adverse effect upon such Party’s ability to perform its obligations or such Party’s costs/revenues with respect to the Program.

(v) Violation by either Party of any material federal or applicable state law relating to the performance of this Agreement.

(vi) Upon direction from any Regulatory Authority or System to cease or materially limit performance of the rights or obligations under this Agreement or the inability to obtain any required regulatory approvals.

(b) Either Bank or Program Manager shall have the right to terminate this Agreement without penalty upon any material change to or enactment of or material change in interpretation or enforcement of any Legal Requirements, interpretative guidance or policy statements which would have a material adverse effect upon such Party’s ability to perform its obligations or such Party’s costs/revenues with respect to the Program, provided, however, that the Parties, upon written request from the non-terminating Party, will first meet in good faith for a period of thirty (30) days to negotiate changes to this Agreement and/or administration of the Program(s) that would resolve the concerns of the terminating Party.

(c) In addition to any other remedies available to Bank under this Agreement, Program Manager agrees that should any material failure occur or should the Bank, in its reasonable discretion, or any regulator or System, determine that any card Program may be subject to any event creating undue risk of intellectual property breach, privacy or security breach, fraud, illegal activity or money laundering, Bank may, with notice, (i) change processing or payment terms; or (ii) suspend entirely the card Programs including any aspect or function of the card Programs, pursuant to the terms of this Agreement until the Bank, regulator and/or System has had a reasonable opportunity to investigate or resolve such event or activity.

(d) Notwithstanding the foregoing, Bank shall be entitled at any time, upon at least 270 days prior written notice to Program Manager, to terminate Bank’s issuance of any Card or to terminate Bank’s participation in any Program. Such termination will not effect or impact any other Cards or Programs implemented hereunder. In the event the Bank exercises its right to terminate any Cards or Programs under this subsection 10.2(c), the Bank will assist the Program Manager to ensure a smooth transition for Program Manager with any affected Cardholders as set forth in Section 10.3 below and, notwithstanding the foregoing, if Program Manager is actively pursuing and is in discussions with another party to take over terminated Programs, such transition assistance will continue for up to one year from the date of said notice or until such transition is completed, whichever is sooner, but no longer than one year.

(e) Notwithstanding the foregoing, if any case or proceeding is commenced against Bank or Program Manager for a violation of applicable laws by Bank which is not cured within 30 days of receipt of written notice of such action and the violation and which is so material so as to significantly impair a party’s ability to perform its obligations hereunder, then Program Manager may terminate this Agreement without being subject to Liquidated Damages pursuant to section 10.3(d) and or 10.3(c). All other outstanding payment pursuant to this Agreement will be due and payable to Bank. In the event that changes required by federal law or regulations causes the Program Manager card Program to no longer be financially or operationally viable, as reasonably determined by Program Manager, then Program Manager has the right to terminate this agreement upon 30 days written notice without being subject to Payment for Early Termination Liquidated Damages under section 10.3.



## SECTION 10.3

(a) In the event: (i) any Cards or any Programs are terminated by Bank without cause pursuant to Subsection 10.2(d); (ii) this Agreement is terminated by Program Manager due to a material default by the Bank; or (iii) this Agreement is terminated by Bank pursuant to 10.2(a)(vi), then, upon Program Manager's request, the Bank will take commercially reasonable steps to permit the relevant BINs to be transferred to another issuing financial institution. In addition, if this Agreement or any Cards or any Programs are terminated pursuant to Subsection 10.2(c) within four (4) years of the Effective Date, the Bank will be responsible to reimburse Program Manager for the costs and expenses incurred by Program Manager for the transfer of the Program BIN to the new bank.

(b) In the event that: (i) the Bank elects to terminate any Card or any Program; or (ii) this Agreement is terminated for any reason, the Parties will cooperate to provide a smooth and orderly wind-down of the Program or Programs involved.

(c) Termination or expiration of this Agreement shall not preclude either Party from pursuing other remedies available to it, including injunctive relief, nor shall such termination or expiration relieve either Party’s obligation to pay all fees or charges that have accrued under this Agreement, including Minimum Monthly Transaction Fees but only to the extent that Transaction Fees are less than the Minimum Monthly Transaction Fees during any period following termination, for the remainder of the then-current term, which shall be due and payable upon the early termination of this Agreement for any reason other than an uncured material breach by Bank or a termination by Bank under Subsection 10.2(d).

(d) Liquidated Damages. The Parties agree that the pricing under this Agreement was determined by mutual agreement based upon certain assumed volumes of processing activity and the length of the Term of this Agreement. The Parties further agree that it would be difficult or impossible to ascertain Bank’s actual damages for an early termination of this Agreement by Program Manager for its convenience or by Bank due to Program Manager’s breach. Accordingly the Parties agree that, in the event of an early termination of this Agreement by Program Manager for its convenience or by Bank due to Program Manager’s material breach, the Bank is entitled to the following due to the termination of the Agreement prior to the end of its then-current term: the aggregate of: (i) all fees earned but not paid prior to the date of termination; (ii) any direct costs incurred as a result of the termination, deconversion and/or changeover; and (iii) the number of months (and partial months) then remaining in the Term multiplied by the higher of (a) the agreed-upon Minimum Transaction Fees or (b) two (2) times the average total monthly fees over the previous 12 months for all services being provided to Program Manager on the date of notice of termination. Each Party acknowledges and agrees, after taking into account the terms of this Agreement and all relevant circumstances at the date hereof, that the liquidated damages payable under this Section represent a reasonable and genuine pre-estimate of the damages which would be suffered by Bank in the event of early termination of this Agreement and do not constitute a penalty.

(e) In no event will any Parties make any public statement or customer communication regarding the termination or wind-down of this Agreement, or any Cards or Programs without the express prior written approval of both Bank and Program Manager, which approval shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Program Manager agrees that Bank may communicate the termination or expiration of this Agreement with any Party that Program Manager has contracted with to provide any Processing Services, marketing, or other service with regard to the Program. Bank understands and agrees that this Agreement is deemed by the SEC to be a significant agreement and notice of any termination of the Agreement would be required under SEC regulations.

## ARTICLE XI – CONFIDENTIALITY

## SECTION 11.1

## Confidential Information

The term “Confidential Information” shall mean this Agreement and all proprietary information, data, trade secrets, business information and other information of any kind whatsoever which (a) a Party (“Discloser”) discloses, in writing, orally or visually, to the other Party (“Recipient”) or to which Recipient obtains access in connection with the negotiation and performance of this Agreement, and which (b) relates to (i) the Discloser, (ii) in the case of Program Manager, Bank and its customers and or associates, or (iii) consumers who have made confidential or proprietary information available to Program Manager and/or Bank. The definition of Confidential Information shall include Customer Information as described below.

## SECTION 11.2

## Compliance with the Gramm-Leach-Bliley Act/PCI Standards

The purpose of this Section is to ensure that this Agreement and the activities conducted hereunder conform to the applicable provisions of the Gramm-Leach-Bliley Act (the "Act") and applicable industry security standards. Program Manager acknowledges and agrees that "Non Public Personal Information" and "Personally Identifiable Financial Information" (as defined in Sections 573.3(n) and (o) respectively of the Office of the Comptroller of the Currency Regulations on Privacy of Consumer Information published at 12 CFR Chapter V) about Bank's customers and Cardholders shall be considered as confidential and proprietary information of Bank, and shall not be disclosed to or shared with any third party without prior written consent of Bank or the Cardholder. Program Manager agrees to implement and maintain appropriate measures designed to meet the objectives of the guidelines establishing standards for safeguarding Non Public Personal Information and Personally Identifiable Financial Information as adopted from time to time by the applicable Regulatory Authority. Except as provided in, and subject to the limitations stated herein, Program Manager will not compile, use, sell or otherwise distribute any lists of Bank's customers/Cardholders nor use the names, account numbers or any other Non Public Personal Information and Personally Identifiable Financial Information about customers or Cardholders to compile, use, sell or distribute lists or data for use by Program Manager, its subsidiaries or affiliates, or by any third parties. Program Manager will instruct its employees, agents and contractors (including the processor) as to the confidentiality of the Non Public Personal Information and Personally Identifiable Financial Information and will not disclose any such Non Public Personal Information or Personally Identifiable Financial Information to any third party or entity. Program Manager also agrees that any dissemination of the aforementioned confidential Non Public Information or Personally Identifiable Financial Information within its own business entity and to agents and contractors shall be restricted to "a need to know basis" for the purpose of performance hereunder. Program Manager shall protect any Non Public Personal Information and Personally Identifiable Financial Information from disclosure with no less than the same degree of care afforded by Program Manager to its own Confidential Information. The foregoing restrictions on disclosure of Non Public Personal Information and Personally Identifiable Financial Information shall apply for so long as is required under applicable statutes and regulations. All Program Manager obligations and undertakings relating to Non Public Personal Information and Personally Identifiable Financial Information shall survive the termination of this Agreement for whatever reason. Non Public Personal Information and Personally Identifiable Financial Information may be collectively referred to herein as "Customer Information".

Program Manager agrees and represents to Bank that it (or its processor) will implement a security program including measures designed to meet the objectives of the Interagency Guidelines Establishing Standards for Safeguarding Customer Information (the "Security Guidelines"), including its obligation to validate compliance with applicable Systems Cardholder Information Security Program ("CISP") and Payment Card Industry Data Security Standards (PCI DSS"). Bank has the right to make reasonable requests to inspect, during normal business hours and upon 30 days advance written notice, Program Manager's Program, associated audit reports, summaries of test results or equivalent measures taken by Program Manager or the processor to ensure that its security measures meet the objectives of the Security Guidelines in accordance with the Rules and this Agreement.



In carrying out the above-described obligations to secure and protect the respective Confidential Information, Program Manager agrees that it will protect Confidential Information and will require any of its service providers or subcontractors to protect and safeguard the Confidential Information to the same degree required of Program Manager.

Program Manager agrees that in the event there is a breach of security resulting in unauthorized disclosure of the Confidential Information, Program Manager will promptly notify Bank of such breach, the nature of such breach, and the corrective action taken to respond to the breach and, upon 3 Business Days prior written request, will provide access to Bank to investigate such breach. The Parties agree that the payment of losses and fines (including, without limitation, any fines assessed by any System) incurred as a result of confidentiality or data breach and the cost of identity theft protection services (if required by law) for affected Cardholders are direct damages.

## SECTION 11.3

## Disclosure to Employees and Agents.

Each of the Parties, as Recipient, hereby agrees on behalf of itself and its employees, officers, affiliates, agents, representatives, contractors and subcontractors that Confidential Information will not be disclosed or made available to any person for any reason whatsoever, other than on a “need to know basis” and then only to: (a) its employees and officers; (b) subcontractors and other third-parties specifically permitted under this Agreement, provided that all such persons are subject to a confidentiality agreement which shall be no less restrictive than the provisions of this Section; (c) independent contractors, agents, and consultants hired or engaged by Recipient, provided that all such persons are subject to a confidentiality agreement which shall be no less restrictive than the provisions of this Section; and (d) as required by law or as otherwise permitted by this Agreement, either during the term of this Agreement or after the termination of this Agreement. Prior to any disclosure of Confidential Information as required by law or regulation, the Recipient shall (i) notify the Discloser of any, actual or threatened legal compulsion of disclosure, and any actual legal obligation of disclosure immediately upon becoming so obligated, and (ii) cooperate with the Discloser's reasonable, lawful efforts to resist, limit or delay disclosure. Nothing in this Section shall require any notice or other action by Bank in connection with requests or demands for Confidential Information from bank examiners or for compliance purposes.

## SECTION 11.4

## Non-Solicitation of Employees

The Parties agree that they shall neither seek to employ nor employ any employee of the other Party nor otherwise interfere with the contractual relationship of any employee, agent or contractor of the other Party for a period commencing on the Effective Date of this Agreement and ending on the later to occur of: (i) three (3) years following the Effective Date of this Agreement; or (ii) two (2) years following the date of actual termination (for any reason) of this Agreement. The foregoing restrictions shall not apply to any person solicited solely by means of a general solicitation.

## SECTION 11.5

## Return of Materials

Upon the termination or expiration of this Agreement, or at any time upon the request of a Party, the other Party shall return (or destroy if so directed by the other Party) all Confidential Information, including Customer Information, in the possession of such Party or in the possession of any representative, contractor or third party otherwise required by this Agreement or Applicable Law. If destroyed, such destruction of Confidential Information shall be designated by a certificate executed by an officer of the Party which was responsible for such destruction in conformity with applicable Systems standards.

## SECTION 11.6

## Exceptions

With the exception of the obligations related to Customer Information, the obligations of confidentiality in this Section shall not apply to any information which a Party rightfully has in its possession when disclosed to it by the other Party, information which a Party independently develops, information which is or becomes known to the public other than by breach of this Section or information rightfully received by a Party from a third party without the obligation of confidentiality.

## SECTION 11.7

## Media Releases

All media releases, public announcements and public disclosures by either Party, or their representatives, employees or agents, relating to this Agreement or the name or logo of Bank or Program Manager, any Bank or Program Affiliate or supplier, including, without limitation, promotional or marketing material, but not including any disclosure required by legal, accounting or regulatory requirements beyond the reasonable control of the releasing Party, shall be coordinated with and approved by the other Party in writing prior to the release thereof. Bank understands and agrees that this Agreement is deemed by the SEC to be a significant agreement and will be filed and available for public viewing, with the SEC as such.



## SECTION 12.1

## Indemnification

(a) Program Manager covenants and agrees to indemnify and hold harmless and defend Bank, its parent, subsidiaries or affiliates, and their respective officers, directors, employees and permitted assigns, as such, against any losses, costs or expenses, including but not limited to reasonable attorneys' fees, arising from any third party legal action, claim, demand or proceedings brought against any of them as a result of: (i) any misrepresentation, breach of representation or warranty or failure to fulfill a covenant of this Agreement on the part of Program Manager; (ii) any act or omission of Program Manager or its contractors, providers or representatives which violates any Legal Requirement; (iii) any claim or action against the Bank related to any violation of any state or local law, rule regulation, or ordinance; (iv) any claim or action by any state regulatory agency, subdivision, or attorney general relating to any of Program Manager's Programs; or (v) any claim relating to obligations owed to or by Program Manager or any third party retained by it. Provided, however, that Section 12.1(a) (i)-(v) shall not apply if such claim arises out of (i) an act of fraud, embezzlement or criminal activity by Bank or its contractors, providers or representatives, (ii) negligence, willful misconduct or bad faith by Bank or its contractors, providers or representatives, or (iii) the failure of Bank or its contractors, providers or representatives to comply with, or to perform its obligations under, this Agreement.

(b) Bank covenants and agrees to indemnify and hold harmless Program Manager and its parent, subsidiaries or affiliates, and their respective officers, directors, employees, and permitted assigns, as such, against any losses, costs or expenses including, but not limited to, reasonable attorneys' fees, arising from any third party legal action, claim, demand, or proceedings brought against any of them as a result of: (i) any misrepresentation, breach of representation or warranty or failure to fulfill a covenant of this Agreement on the part of Bank; (ii) any act or omission of Bank or its contractors, providers or representatives which violates any federal statutes, rules, laws or regulations, any rules, orders or decrees of any applicable Regulatory Authority, or Rules; or (iii) any claim relating to obligations owed to or by Bank or any third party retained by it (except to the extent that Program Manager has agreed to fulfill such obligation under this Agreement). Provided, however, that Section 12.1(b)(i)-(iii) shall not apply if such claim arises out of (i) an act of fraud, embezzlement or criminal activity by Program Manager or its contractors, providers or representatives, (ii) negligence, willful misconduct or bad faith by Program Manager or its contractors, providers or representatives, or (iii) the failure of Program Manager or its contractors, providers or representatives to comply with, or to perform its obligations under, this Agreement.

(c) If any claim or demand is asserted against any Party or Parties (individually or collectively, the “Indemnified Party”) by any person who is not a party to this Agreement in respect of which the Indemnified Party may be entitled to indemnification under the provisions of subsections (a) or (b) above, written notice of such claim or demand shall promptly be given to any Party or Parties (individually or collectively, the “Indemnifying Party”) from whom indemnification may be sought. The Indemnifying Party shall have the right, by notifying the Indemnified Party within ten (10) days of its receipt of the notice of the claim or demand, to assume the entire control (subject to the right of the Indemnified Party to participate at the Indemnified Party’s expense and with counsel of the Indemnified Party’s choice) of the defense, including, at the Indemnifying Party’s expense, employment of counsel subject to the approval of Indemnified Party, which approval shall not be unreasonably withheld. Indemnifying Party shall not compromise or settle the matter without the consent of Indemnified Party, which consent shall not be unreasonably withheld. If the Indemnifying Party gives notice to any Indemnified Party that the Indemnifying Party will assume control of the defense of the matter the Indemnifying Party will be deemed to have waived all defenses to the claims for indemnification by the Indemnified Party with respect to that matter. Any direct damages to the assets or business of the Indemnified Party caused by a failure of the Indemnifying Party to defend, compromise or settle a claim or demand in a reasonable and expeditious manner, after the Indemnifying Party has given notice that it will assume control of the defense, shall be included in the damages for which the Indemnifying Party shall be obligated to indemnify the Indemnified Party.

## SECTION 12.2

## Disclosure

(a) Each Party shall promptly notify the other of any action, suit, proceeding, facts and circumstances, and the threat of reasonable prospect of same, which might give rise to any indemnification hereunder or which might materially and adversely effect either Party’s ability to perform this Agreement.

(b) Each Party represents and warrants to the other that it has no knowledge of any pending or threatened suit, action, arbitration or other proceedings of a legal, administrative or regulatory nature, or any governmental investigation, against it or any of its affiliates or any officer, director, or employee which has not been previously disclosed in writing and which would materially and adversely effect its financial condition, or its ability to perform this Agreement.

## SECTION 12.3

## Use of Marks

(a) Bank hereby grants to Program Manager during the Term, a non-exclusive, royalty-free, non-assignable license, in the United States, to use Bank’s Marks (and the copyrights that exist in such Marks, if any) as the Bank authorizes in connection with the Program in accordance with the Graphic Specifications, including on the Cards, on Cardholder Agreements, and in other communications to Cardholders and prospective Cardholders. Bank’s Marks shall be used only in the forms and format expressly approved by Bank, which approval shall not be unreasonably withheld, condition or delayed. Except as provided herein, it is expressly agreed that neither Program Manager nor any Cardholder is acquiring any right, title or interest (other than the foregoing license rights) in Bank’s Marks, which shall remain the property and/or rights of Bank. Program Manager agrees that it shall not challenge the title or any rights of Bank in and to Bank’s Marks.

(b) Program Manager hereby grants to Bank during the Term, and any wind-down or Transition Period, a non-exclusive, non-assignable license, in the United States, to use Program Manager’s Marks (and the copyrights that exist in such Marks, if any) as Program Manager authorizes in connection with the Program, including on the Cards, on Cardholder Agreements, and in other communications to Cardholders and prospective Cardholders. Program Manager’s Marks shall be used only in the forms and format expressly approved by Program Manager, which approval shall not be unreasonably withheld, conditioned or delayed. Except as provided herein, it is expressly agreed that neither Bank nor any Cardholder is acquiring any right, title or interest (other than the foregoing license rights) in Program Manager’s Marks, which shall remain the property and/or rights of Program Manager. Bank agrees that it shall not challenge the title or any rights of Program Manager in and to Program Manager’s Marks.

## SECTION 12.4

## Insurance

Program Manager shall procure, pay for and maintain the minimum insurance coverage set forth below for the entire term of the Agreement. All insurance coverage is subject to the approval of the Bank and shall be issued by a fiscally sound insurance carrier which maintains an A.M. Best rating of A- VII or better. The General Liability policy shall name Bank as additional insured on the General Liability policy:



(i) Workers’ Compensation insurance providing coverage pursuant to statutory requirements.

(ii) Commercial General Liability insurance with Completed Product and Operations covering bodily injury, property damage, and including contractual liability coverage with a combined limit of $1,000,000 per occurrence and $2,000,000 general aggregate. The Commercial General Liability insurance policy shall name Bank as additional insured but solely as it relates to insurable losses and expenses that result from Program Manager’s activities in the servicing of the Program. Such policy shall contain a waiver of subrogation in favor of Bank.

(iii) Commercial Umbrella Liability insurance with per occurrence and aggregate limits of $3,000,000 with the liability insurance required under clauses (i) and (ii) above scheduled as underlying.

(iv) Commercial Crime insurance covering Employee Theft and Computer Fraud with limits of $100,000 per loss for loss or damage arising out of fraudulent or dishonest acts committed by the employees of Program Manager, acting alone or in collusion with others, including the property and funds of others in their possession, care, custody, or control.

(v) Technology Errors and Omissions Liability insurance in the amount of $1,000,000 per claim and aggregate.

Program Manager must furnish Bank with certificates of insurance as evidence of the above insurance requirements prior to commencement of operations under the Agreement. Such certificates shall verify that Bank is named as additional insured and the waiver of subrogation in favor of Bank under the Commercial General Liability policy as required herein, and that in the event of a cancellation or material change in coverage, Bank would be given thirty (30) days prior written notice. In the event Program Manager receives notice of cancellation for any of the required policies, Program Manager shall use commercially reasonable efforts to provide at least thirty (30) days prior notice of such event to Bank, unless the required coverage is immediately replaced by similar coverage in scope and limits. Failure of Program Manager to provide or of Bank to request a certificate of insurance shall not waive Program Manager’s obligation under this Agreement to maintain the insurance required herein. In the event Program Manager fails to maintain the insurance set forth herein Bank shall have the right to terminate this Agreement immediately upon written notice.

## SECTION 12.5

## Third Party Services

Program Manager shall obtain Bank’s prior written approval, which Bank may grant or deny in its sole discretion, before retaining any third party to perform any services to be provided by Program Manager pursuant to this Agreement, and will assist Bank in obtaining such due diligence materials from, or agreements with, any proposed third party service provider that Bank may deem reasonably necessary or that may otherwise be required by Applicable Law and as set forth on and pursuant to the requirements of Schedule B, as updated from time to time. Bank’s approval of any proposed third party service provider shall not in any way relieve Program Manager of its duties and obligations under this Agreement, nor shall such approval constitute a representation or warranty by the Bank that the services to be performed or products to be furnished by such Program Affiliate will be performed as agreed or represented.

## SECTION 12.6

## Relationship of Parties

Bank and Program Manager agree they are independent contractors to each other in performing their respective obligations hereunder. Nothing in this Agreement or in the working relationship being established and developed hereunder shall be deemed, nor shall it cause, Bank and Program Manager to be treated as partners, joint ventures, or otherwise as joint associates for profit.

## SECTION 12.7

## Regulatory Examinations and Financial Information

Program Manager agrees to submit to any examination which may be required by any Regulatory Authority or System with audit and examination authority over Bank, to the fullest extent of such Regulatory Authority or System. Program Manager shall also provide to Bank any information, which may be required by any Regulatory Authority or System in connection with their audit or review of Bank or the Program and shall reasonably cooperate with such Regulatory Authority or System in connection with any audit or review of Bank. Program Manager shall furnish Bank, at Program Manager expense, with compiled financial statements prepared by a certified public accountant via the website sec.gov. Program Manager shall also provide such other information as Bank, Regulatory Authorities, or the System may from time to time reasonably request with respect to the financial condition of Program Manager and such other information as Bank may from time to time reasonably request with respect to third parties contracted with Program Manager.

## SECTION 12.8

## Governing Law

The Parties acknowledge that Bank, as a New York State chartered bank, is regulated by the New York State Department of Financial Services and the Federal Reserve Bank of New York. This Agreement shall be governed by the internal laws, and not by the laws regarding conflicts of laws, of the State of New York. Each Party hereby submits to the jurisdiction of the courts of such state, and (subject to the Bank’s reservation of preemption rights above) waives any objection to venue with respect to actions brought in such courts and further waives the right to trial by jury.

## SECTION 12.9

## Severability

In the event that any part of this Agreement is deemed by a court, Regulatory Authority, System, or other public or private tribunal of competent jurisdiction to be invalid or unenforceable, such provision shall be deemed to have been omitted from this Agreement. The remainder of this Agreement shall remain in full force and effect, and shall be modified to any extent necessary to give such force and effect to the remaining provisions, but only to such extent.

## SECTION 12.10

## Survival

The Parties agree that the following sections will survive termination: Article IX (Limitation of Liability); Article XI (Confidentiality); Section 12.1 (Indemnification); Article XII (General Provisions).



## SECTION 12.11

## Successors and Third Parties

Except as limited by Section 12.12, this Agreement and the rights and obligations hereunder shall bind, and inure to the benefit of the Parties and their successors and permitted assigns.

## SECTION 12.12

## Assignments

The rights and obligations of Program Manager under this Agreement are personal and may not be assigned either voluntarily or by operation of law, without prior written mutual consent of the Bank and Program Manager, which consent shall not be unreasonably withheld, conditioned or delayed.

## SECTION 12.13

## Notices

notices, requests and approvals required by this Agreement shall be in writing addressed/directed to the other Party at the address by registered mail, return receipt requested, or at such other address of which the notifying Party hereafter receives notice in conformity with this section. All such notices, requests, and approvals shall be deemed given upon actual receipt thereof. All such notices, requests and approvals shall be addressed to the attention of:

Bank to:

Metropolitan Commercial Bank

99 Park Ave., New York, NY 10016

Attention: M. DeFazio, CEO

With Copy to:

Facsimile Number: 212-659-0610

M. Guarino, G.C.

Program Manager to: FiCentive, Inc.

12500 San Pedro, Suite 120

San Antonio, Texas 78216

Attn: Corporate Counsel

With a copy to:

Eric A. Pullen

Pulman, Cappuccio, Pullen & Benson

2161 N.W. Military Highway, Suite 400

San Antonio, Texas 78213

## SECTION 12.14

## Waivers

Neither Party shall be deemed to have waived any of its rights, power, or remedies hereunder except in writing signed by an authorized agent or representative of the Party to be charged. Either Party may, by an instrument in writing, waive compliance by the other Party with any term or provision of this Agreement on the part of the other Party to be performed or complied with. The waiver by either Party of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach.

## SECTION 12.15

## Entire Agreement; Amendments

This Agreement constitutes the entire Agreement between the Parties and supersedes all prior agreements, understandings, and arrangements, oral or written, between the Parties with respect to the subject matter hereof. This Agreement may not be modified or amended except by an instrument or instruments in writing signed by the Party against whom enforcement of any such modification or amendment is sought.



## SECTION 12.16

## Counterparts

This Agreement may be executed and delivered by the Parties in counterpart, including by way of electronic signature and transmission, each of which shall be deemed an original and both of which together shall constitute one and the same instrument.

## SECTION 12.17

## Disputes

(a) Duty to Notify. In the event of any dispute, controversy, or claim arising out of or relating to this Agreement or the construction, interpretation, performance, breach, termination, enforceability or validity thereof (hereinafter, a “Dispute”), the Party raising such Dispute shall notify the other promptly and no later than sixty (60) days from the date of its discovery of the Dispute. In the case of a Dispute relating to account or transaction statements or similar matter, the failure of a Party to notify the other Party of such Dispute within sixty (60) days from the date of its receipt shall result in such matter being deemed undisputed and accepted by the Party attempting to raise such Dispute.

(b) Cooperation to Resolve Disputes. The Parties shall cooperate and attempt in good faith to resolve any Dispute promptly by negotiating between persons who have authority to settle the Dispute and who are at a higher level of management than the persons with direct responsibility for administration and performance of the provisions or obligations of this Agreement that are the subject of the Dispute.

(c) Arbitration. Any Dispute which cannot otherwise be resolved as provided in paragraph (b) above shall be resolved by arbitration conducted in accordance with the commercial arbitration rules of the American Arbitration Association, and judgment upon the award rendered by the arbitral tribunal may be entered in any court having jurisdiction thereof. The arbitration tribunal shall consist of a single arbitrator mutually agreed upon by the Parties, or in the absence of such agreement within 30 days from the first referral of the Dispute to the American Arbitration Association, designated by the American Arbitration Association. The place of arbitration shall be New York City, New York, unless the Parties shall have agreed to another location within 15 days from the first referral of the Dispute to the American Arbitration Association. The arbitral award shall be final and binding. The Parties waive any right to appeal the arbitral award, to the extent a right to appeal may be lawfully waived. Each Party retains the right to seek judicial assistance: (i) to compel arbitration, (ii) to obtain interim measures of protection prior to or pending arbitration, (iii) to seek injunctive relief in the courts of any jurisdiction as may be necessary and appropriate to protect the unauthorized disclosure of its proprietary or confidential information, and (iv) to enforce any decision of the arbitrator, including the final award. In no event shall either Party be entitled to punitive, exemplary or similar damages.

(d) Confidentiality of Proceedings. The arbitration proceedings contemplated by this Section shall be as confidential and private as permitted by law. To that end, the Parties shall not disclose the existence, content or results of any proceedings conducted in accordance with this Section, and materials submitted in connection with such proceedings shall not be admissible in any other proceeding, provided, however, that this confidentiality provision shall not prevent a petition to vacate or enforce an arbitral award, and shall not bar disclosures required by any laws or regulations.

## SECTION 12.18

## Headings

The table of contents, various captions and section headings in this Agreement are included for convenience only and shall not effect the meaning or interpretation of any provision of this Agreement. References in this Agreement to any Section are to such Section of this Agreement.

## SECTION 12.19

## Drafting Presumption

Program Manager and Bank agree that they participated in the drafting of this Agreement and, in the event that any dispute arises in the interpretation or construction of this Agreement, no presumption shall arise that either one Party or the other drafted this Agreement.

## Section 12.20 Parent Guaranty

As of the Effective Date of this Agreement, Program Manager shall ensure that Payment Data Systems, Inc. signs the Parent Guaranty in the form attached as Schedule G to this Agreement, as required by the Bank.

IN WITNESS WHEREOF, this Agreement is executed by the Parties' authorized officers or representatives and shall be effective as of the date first above written.

## PROGRAM MANAGER

/s/ Louis A. Hoch:

Name: Louis A. Hoch

Title: CEO

## METRO COMMERCIAL BANK

/s/ Nick Rosenberg

Name: Nick Rosenberg

Title: Executive Vice President and CTO

By: /s/ Michael A. Guarino

Name: Michael A. Guarino



## Schedule A

## PREPAID CARD ISSUER AND PROGRAM MANAGEMENT AGREEMENT PROGRAM(s)

This card program will be a general purpose card issued to cardholders directly. The funds on the cards will be owned by the consumer. The card marketers and co-branders will be primarily entities engaged in the alternative lending, title loan, and pay day lending markets. The cardholder will be able to receive real-time funding of their loans and initiate repayments via the card although the card will not be the only funding or repayment option available to the customer and there will not be any lending feature within the card program itself. The card holder will be able to load the card from other sources as well including direct deposit, Green Dot, Ingo Money, Western Union and any other network that is supported by MasterCard re-power.

<table><tr><td>Product</td><td>Market</td><td>PM Int.</td><td>Bank Int.</td></tr><tr><td>0</td><td>Payroll SVC Card</td><td></td><td></td></tr><tr><td>0</td><td>Incentive SVC Card</td><td></td><td></td></tr><tr><td>0</td><td>FSA/HASSVC Card</td><td></td><td></td></tr><tr><td>0</td><td>General Purpose Card</td><td></td><td></td></tr><tr><td>0</td><td>Gift SVC Card</td><td></td><td></td></tr><tr><td>0</td><td>Travel SVC Card</td><td></td><td></td></tr><tr><td>0</td><td>Teen SVC Card</td><td></td><td></td></tr><tr><td>0</td><td>Other</td><td></td><td></td></tr><tr><td>Systems for Program Manager Program(s)</td><td>PM Int.</td><td>Bank Int.</td><td></td></tr><tr><td>0</td><td>MasterCard</td><td></td><td></td></tr><tr><td>0</td><td>Visa</td><td></td><td></td></tr><tr><td>0</td><td>Discover</td><td></td><td></td></tr><tr><td>0</td><td>Star</td><td></td><td></td></tr><tr><td>0</td><td>Other</td><td></td><td></td></tr></table>

Metropolitan Commercial Bank
Date: 12/19/2014
Signature: /s/ Michael A. Guarino

[NAME AND TITLE]: Michael A. Guarino, SVP

12/19/2014

Date

(FiCentive, Inc.)

By: /s/ Louis A. Hoch

Name and Title: Louis A. Hoch, CEO



# UNDERWRITING GUIDELINES
FOR CARDHOLDERS AND PROGRAM AFFILIATES

## A. Underwriting Guidelines for Cardholders

1. Cardholder information should be collected and verified for all prepaid card Programs that permit reloading of funds onto the cards:

a. The following Program types require collection and verification of Cardholder information in compliance with USA Patriot Act:

i. Payroll Cards;

ii. Government Funds Disbursement;

iii. General Purpose Reloadable;

iv. Campus/Student/Family Cards;

v. Cross-border Money Transfer;

vi. FSA/HSA Health Cards;

vii. Travel Cards.

b. The following Program types do not require collection and verification of Cardholder information, although certain functionalities of the Programs may require that such information be on file:

i. Gift Cards (Non-Reloadable)

ii. General Purpose (Non-Reloadable)

iii. Corporate Incentive/Rewards (Non-Reloadable)

2. The following Cardholder information must be collected and verified (e.g., non-expired, government-issued photo identification) for all prepaid card Programs that require it:

a. Cardholder Name

b. Cardholder physical address

c. Cardholder date of birth

d. Cardholder Social Security Number (SSN)

e. In the absence of (for non-resident aliens in the US) or in addition to an SSN, alternative forms of non-expired identification may be permitted with the permission of the Bank:

i. Passport number and country of issuance;

ii. Alien identification card number; or

iii. Number and country of issuance of any other government-issued photo ID.

3. Cardholder information should be verified through a recognized identification verification source, such as Lexis Nexis, Experian, Equifax, etc. OFAC verification must also be performed at account opening and thereafter at a minimum bi-weekly of onboarding and additional verification required after every update to the OFAC list by Treasury; at a minimum to be run bi-weekly.

a. Cardholders may have the option of providing additional identifying information in the event that a match cannot be made through any of the above sources.

b. Collection and verification of Cardholder information may be done by the Program Manager, Processor or another third party with the approval of Bank and subject to audit by Bank.

4. For Cards that do not require Cardholder identification under Section 1(b) above (e.g., non-reloadable Gift Cards or non-reloadable General Purpose Cards), the Bank may still require additional information based upon the Program and Legal Requirements, including, without limitation, the following procedures:

a. Collection of information (name, address, phone) from purchaser of Gift Card; information will require verification and OFAC check.

b. Limitations on amount that could be loaded to the card.

c. Limitations on the number of cards that can be purchased by one person in a single transaction or series of transactions.

## B. Underwriting Guidelines for Program Affiliates

The following guidelines are established to define due diligence requirements for Program Manager’s Program Affiliates (i.e., employers, co-branchers, retailers, sales and marketing agents, third party service providers, etc.) who purchase, participate in or provide services for the Prepaid Stored Value Program defined in Schedule A and elsewhere in this Agreement. Circumstances may arise which would permit variances to these procedures, based on System requirements, changes in laws or regulations, as may be required by any regulator (provided that documentation of such requirement from any regulator is provided to Program Manager, or as may be otherwise mutually agreed); however variances will be in writing, authorized by a Bank officer, and approved by the Bank’s compliance department prior to implementing a change. Bank reserves the right to review verified documentation prior to review and acceptance of any Program related to the Program Affiliate. Background checks including, without limitation, Lexis Nexis, D&B, entity status searches, etc. will be performed by the Bank at Program Manager’s expense unless alternative process is independently reviewed and approved by the Risk Committee.

1. Table 1: Description of Program Affiliates and Required Due Diligence Levels defines the role(s) that each potential affiliate plays in the Prepaid Stored Value Card Program and the corresponding level of information/due diligence required to be held on file and provided to the Bank. Upon request.



<table><tr><td colspan="4">Table 1: Description of Program Partners and Required Due Diligence Levels</td></tr><tr><td>Affiliate Type</td><td>Examples</td><td>Defined</td><td>Due Diligence to be shared with Bank</td></tr><tr><td>Indirect Marketers, Sales</td><td>· Direct mailers· Print ads· Email lists· Call center transfers· Affiliate Systems</td><td>· Marketer runs ad campaign using Program Manager&#x27;s creative materials· Transfer of Customer to Program Manager· Program Manager provides scripts, etc.· Program Manager controls/monitors ads, etc.· Marketer does not touch Cardholder data at any time.</td><td>· Level A· Creative, Marketing Materials</td></tr><tr><td>Employer</td><td>· Small to mid-sized businesses· Payroll companies· Temporary staffing agencies</td><td>· Contracts to deploy cards to employees· Allows Program Manager to market cards directly to employees· Provides Program Manager&#x27;s card product to employers who use payroll services· Does not touch Cardholder data other than employee information (i.e., does not handle PAN data)</td><td>· Level B· Marketing and employee enrollment forms· Systems, Rules and Regulations</td></tr><tr><td>Co-Branders</td><td>· Large employers· Corporate incentive partners· Cards sold in co-branner&#x27;s stores· Product tie-ins</td><td>· Client seeking brand identity with card product· May or may not participate in distribution of product· Does not touch Cardholder data (exception: retail sales through POS)</td><td>· Level B or C (latter if handles card product or cardholder data)· Marketing, creative, employee forms· PCI, if applicable</td></tr><tr><td>Direct Marketers, Sales</td><td>· Card distributors (Blackhawk, InComm)· Contract sales agents· Retail distributors· Web portals hosting Program Manager application/API interface</td><td>· Distributes cards to/from retail stores· Directly sells Program Manager&#x27;s product· Solicits cardholders and collects Cardholder information· May or may not touch Cardholder data, including PAN</td><td>· Level C· Marketing, creative materials· PCI, if applicable· Copy of state MSB license and FinCEN MSB registration per location, if applicable</td></tr><tr><td>Load Systems</td><td>· GreenDot· Western Union· PayXone· PaySpot</td><td>· Facilitates loading of cards at public/retail locations· Stores, transmits or processes Cardholder data</td><td>· Level C· Funds flow documents· Guaranty of funds or copy of contract· PCI· State MSB licenses and FinCEN registration, if applicable</td></tr><tr><td>Service Providers</td><td>· Call centers· Systems Hosts· Mobile payments</td><td>· Stores, transmits or processes Cardholder data· Interacts directly with Cardholders</td><td>· Level C· PCI· Other documentation as appropriate· Prior Bank approval required for third party call centers and mobile payment companies. Bank will require due diligence documents obtained for third party call centers and mobile payments</td></tr><tr><td>Check Cashing Pay-day Lending</td><td>· Ace Check Cashing</td><td>· Individual locations or Program Manager locations</td><td>· Level C· Copy of State MSB license and FinCEN MSB registration per location, if applicable</td></tr><tr><td>Processors</td><td>· Metavante· i2c· TSYS</td><td>· Processes Cardholder data for Transaction Settlement and authorization.</td><td>· Level C· PCI· Prior Bank approval· Copy of State MSB license and FinCEN MSB registration per location, if applicable</td></tr></table>



2. Table 2: General Due Diligence Requirements define the necessary requirements included with every application for a client/employer, agent or third party service provider prior to acceptance by Bank. The level of information/due diligence that must be completed is dependent upon the role that the client/employer, agent or third party plays in the management, marketing/sales, distribution, loading, Customer service or processing of the Program (see above Table 1 for the various indicated roles). Due diligence levels are defined in Table 2 below:

<table><tr><td colspan="2">Table 2: General Due Diligence Requirements for Program Affiliates</td></tr><tr><td>Level A</td><td>1. Application listing:  a. Legal name, address and state of incorporation/licensing of business  b. Federal tax ID  c. Name, SSN, DOB and contact information of principal owners (10%+)  d. Signature(s) of principals attesting to accuracy of information  e. List of any current or pending law suits in which business is named  2. Proof of business (copy of business license, document of corporate registration with state, etc.)  3. Any other information required by Systems, card associations or regulators.</td></tr><tr><td>Level B</td><td>Due diligence collected at Level A, plus:  1. Program Manager financial information (most current audited financials or Federal tax returns)  2. Dunn &amp; Bradstreet report on Program Manager or business credit report on Program Manager  3. Public filings, if applicable</td></tr><tr><td>Level C</td><td>Due diligence collected at Levels A and B, plus:  1. Principals&#x27; financial information (most current Federal tax returns)  2. Signed permission to conduct background investigations for all principals  3. Civil and criminal background check on principals  4. Credit check on principals</td></tr></table>



3. Restricted Affiliates: Program Affiliates that fall into any of the following categories or business type are considered an exception and must be approved by the Bank designate. Affiliate request must be submitted to Bank for any additional Bank requirements prior to using services.

i. "How to" type businesses

ii. Adoption agencies

iii. Body Building Products (HGH, Beta Alanine etc.)

iv. Buying Club/ Shopping Services

v. Collection agency

vi. Online Cosmetics

vii. Counseling services

viii. Credit restoration, protection, reporting, or identity theft programs

ix. Dating services

x. Grants – “Free Money” Assistance

xi. Finance companies

xii. Furniture Stores (Including Mattress Stores)

xiii. Internet Insurance Sales

xiv. Investor services/clubs

xv. Management Consulting

xvi. Massage parlors (Does not include Licensed Massage Therapists)

xvii. Medical billing

xviii. Memberships/Subscriptions/Negative Billing Merchants – Inbound Telemarketing Services

xix. Mortgage brokers

xx. Multi-level marketers

xxi. Marketers and Distributors of Nutriceuticals and Other Direct Response Products (Acai, Colon Cleanse, Res-V/Anti-Aging, Related Diet Products, Phenylmine, Glucosulin, Teeth Whitening, Male Enhancement, Sexual Enhancement, Green Tea etc.)

xxii. Outbound phone solicitation/telemarketing

xxiii. Pornographic solicitation or material including telephone, pictures, books, movies, t-shirts, internet adult sites, etc.

xxiv. Protection services

xxv. Real Estate Agents/Brokers

xxvi. Search Engine Optimization

xxvii. Seminar brokers

xxviii. Teeth Whitening/Laser Hair Removal Locations

xxix. Telecom

xxx. Telephone sales, solicitation, talk lines, pre-paid phone cards

xxx. Third-party processors, fulfillment houses and check-clearing services for third parties (but excluding properly licensed check cashing or money service businesses where the end user is known and has been properly identified in accordance with Section A of this Schedule B)

xxxii. Time shares

xxxiii. Travel agents

xxxiv. Vitamin sales



4. Restricted Affiliates: Program Affiliates engaged in the following businesses require approval through the Bank executive committee.

a. Airlines

b. Cruise Lines

c. Airline Carriers

d. Pharmacies (Online Only)

e. Cigar Stores and Stands (Online Only – Includes E-Cigarettes)

f. Betting, Lottery, Off Track Betting, and Gambling

g. Escort Services

h. Medicinal Marijuana Dispensaries

i. Online Alcohol Sales

j. Penny Auctions

k. Drug or sex paraphernalia related

1. Massage parlors

m. Pornographic solicitation or material including telephone, pictures, books, movies, t-shirts, internet adult sites, etc.

5. Approved Processors: Approved processors for the Programs are the following:

a. Galileo Processing

b. Visa DPS; and

c. FSV

d. FiCentive utilizing Fiserv, Inc as a gateway.

6. Other Third Party Program Affiliates: he following third parties for Program Manager are being submitted to Bank for approval to utilize to perform services, subject to the Bank’s due diligence pursuant to these Guidelines:

1) Fiserv, 2) ArrowEye, 3) Ingo Money, 4) Green Dot, 5) Perfect Plastic, 6) Lexis Nexis, 7) TransUnion, 8) Western Union via MasterCard RePower, 9) Amazon Cloud Services, 10) SATC Co-location.

7. “Systems” – Payment networks to which Bank will be a member for the purposes of this Agreement include: Visa, Mastercard, Cirrus, [Maestro, Exchange and Accel – TBD, subject to Bank’s approval and satisfactory due diligence pursuant to these Guidelines.



## Schedule C

## Program Term Sheet

The attached Term Sheet between Metropolitan Commercial Bank and the Program Manager identified in the PREPAID CARD ISSUER & PROGRAM MANAGEMENT AGREEMENT, dated December 19, 2014 (the “Agreement”) is hereby incorporated by reference in the Agreement and is subject to its terms and conditions.

SEE ATTACHED TERM SHEET DATED MARCH 5, 2014



## Schedule D

## PENDING MATERIAL LITIGATION

Listed below are all pending or threatened, any litigation or proceeding, judicial, tax or administrative against Program Manager, the outcome of which might materially adversely effect the continuing operations of Program Manager or their ability to perform under the Agreement (if none, please indicate so):

NONE



[TO BE PROVIDED BY PROGRAM MANAGER PRIOR TO LAUNCH]



## Funds flow diagram

## SCHEDULE G TO PREPAID CARD ISSUER & PROGRAM MANAGER AGREEMENT






As a primary inducement to Metropolitan Commercial Bank, whose address is 99 Park Ave., New York, NY 10016 (“Issuer” and/or “Bank”) to enter into the Prepaid Card Issuer & Program Management Agreement (the “Agreement”) effective as of the date signed below with FiCentive, Inc., whose address is 12500 San Pedro, Suite 120, San Antonio, Texas 78216 (“Program Manager”) for prepaid card programs with Bank as Issuer (the “Programs”), and any addendum or attachment to such Agreement, the undersigned as owner/ parent company of Program Manager (“Guarantor”), by signing this Guaranty (“Guaranty”), any addendum or attachment thereto signed by them or their agents, unconditionally and irrevocably guarantees Program Manager’s liability for any claims, actions, costs and/or expenses, including but not limited to attorneys’ fees, arising from only fraudulent conduct or fraudulent transactions in connection with the Programs (together, the Obligations”). If Program Manager shall at any time default in the payment, performance or observance of any of the Obligations, Guarantor will pay, keep, perform and observe same, as the case may be as long as the Guarantor is the owner or parent company of the Program Manager.

The terms of the Agreement, the Program(s), Program structure, and/or related documents may be altered, modified, changed, extended or renewed by agreement between Bank and Program Manager, or by a course of conduct, and the Agreement may be assigned by Bank or any assignee of Bank, or by Program Manager or any successor thereto, without consent or notice to or authorizations of Guarantor and this Guaranty shall thereupon and thereafter guarantee the performance of Program Manager or any such successors thereto of the Obligations under the Agreement as so changed, altered, modified, assigned, extended or renewed. Without authorization from or notice to Guarantor, Bank and Program Manager may alter, compromise or change the time or manner of payment or performance of any or all of the Obligations, may release or add any one or more guarantors, sureties or endorsers in respect of any of the Obligations, and may take and hold collateral to secure payment, performance, discharge and satisfaction of any or all of the Obligations, may foreclose upon or otherwise realize all or any part of any such collateral in any order, and may release all of or any part of any such collateral, if any, all without impairing, affecting or otherwise exonerating any of the covenants, agreements, duties or obligations of Guarantor hereunder. This Guaranty shall continue in effect even after termination or expiration of the Agreement.

Guarantor agrees that Guarantor may be joined in any action against Program Manager in connection with the Obligations under the Agreement and recovery may be had against Guarantor in any such action. Bank may enforce the obligations of Guarantor hereunder without previous notice to or demand upon either Program Manager or Guarantor and without first taking any action whatsoever against Program Manager or its successors and assigns, or pursuing any other remedy or applying any security it may hold.

Guarantor hereby expressly waives, relinquishes and releases any right, defense, protection, claim of exoneration or other claim, and any right to assert any right, defense, protection, claim of exoneration or other claim, in any action brought on this Guaranty or otherwise, whether the laws of New York or any other jurisdiction may apply.

Without limiting the generality of the foregoing, Guarantor hereby expressly waives (a) notice of the acceptance of this Guaranty by any person, (b) notice of the Obligations now existing or that my hereafter exist, (c) notice of demand for payment or performance, or notice of default or nonpayment or nonperformance, under the Agreement or otherwise in respect of any of the Obligations, and (d) all other notices to which Guarantor might otherwise be entitled in connection with this Guaranty, the Agreement or otherwise in respect of the Obligations, provided any such notice is given to the Program Manager, if required by the terms of the Agreement.

Guarantor hereby expressly waives (a) any right to require Bank, as a condition precedent to the enforcement of the Guaranty or otherwise, to exhaust any security for the payment, performance, satisfaction or discharge of the Obligations under the Agreement in any manner, or to pursue any other rights or remedies that Bank currently or hereafter may have against Guarantor, or any other Guarantors, or any other payors, endorsers or sureties of the Agreement or the Obligations, whether such rights exist in law, in equity, by contract, by statute or otherwise, it being agreed by Guarantor that this Guaranty is and constitutes an absolute, unconditional and irrevocable guarantee by Guarantor of payment and performance, and the failure of Bank to exercise any rights or remedies they have or may have against Guarantor shall in no way abrogate, impair, nullify, terminate or otherwise affect the Obligations of Guarantor under this Guaranty, and that the liability of Guarantor hereunder is and shall be direct, absolute, unconditional and irrevocable, or (b) any defense arising by reason of the termination or other cessation of any of the Obligations for any cause whatsoever other than full, effective and irrevocable payment, performance, satisfaction or discharge of any liability or obligation comprising any of the Obligations.



Guarantor hereby covenants and agrees to, and shall, indemnify, defend and hold harmless Bank, its officers, directors, partners, employees and agents, from and against any and all losses, liabilities, damages, claims, demands, obligations, actions, settlements, costs and expenses (including, without limitation, court costs and attorneys' fees) that Bank and/or its officers, directors, partners, employees and agents, may suffer, sustain, incur, pay, expend or lay out by virtue, as a result of or in respect of, in connection with or based upon or arising out of, directly or indirectly, each and every breach by Guarantor of any of the Obligations of Program Manager and/or Guarantor under the Agreement or under this Guaranty.

In the event that any action, suit, or other proceeding is brought by Bank, its officers, directors, partners, employees or agents, to enforce the Obligations of Guarantor under this Guaranty, the prevailing party shall be entitled to recover all of such party's costs and expenses (including, without limitation, court costs and reasonable attorneys' fees) incurred in each and every such action, suit or other proceeding, including any and all appeals or petitions therefrom.

Guarantor may not assign any of Guarantor’s rights, or delegate any of Guarantor’s duties or obligations, hereunder without the prior written consent of Bank, and any such assignment or delegation without such prior written consent of the Bank shall be void ab initio and of no legal force or effect whatsoever.

This Guaranty shall terminate, if at all, only upon the full, effective and irrevocable payment, performance, discharge and satisfaction of each and all of the Obligations and the full, effective and irrevocable performance by Guarantor of each and all of its covenants, agreements, duties and obligations under this Guaranty. This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Obligations is rescinded or must otherwise be returned by the Bank or any other entity upon the insolvency, bankruptcy or reorganization of the Program Manager or otherwise (and whether as a result of any demand, settlement, litigation or otherwise), all as though such payment had not been made.

Guarantor further agrees to treat all provisions of this Guaranty, as well as all provisions of and all non-public information received in connection with the Agreement, as confidential and subject to the confidentiality requirements therein, which obligations shall survive termination of this Guaranty and the Agreement.

Notwithstanding the place where the Agreement and Guaranty may be executed by any of the parties, hereto, each Guarantor expressly, irrevocably and unconditionally agrees that all terms and provisions hereof shall be construed in accordance with and governed by the laws of the state of New York, without giving effect to any applicable principles of conflicts of laws that would cause the laws of another state to otherwise govern the Agreement or the Guaranty. The parties hereby irrevocably and unconditionally consent to submit to the sole and exclusive jurisdiction of the New York courts in New York, New York, or if such courts lack jurisdiction by virtue of federal law, the federal courts in the Southern District of New York (collectively, the "New York Courts"), for any litigation arising out of or relating to this Agreement (and agree not to commence any litigation relating thereto except in such courts), waive any objection to venue of any such litigation in the New York Courts and agree not to plead or claim in any New York Court that such litigation brought therein has been brought in an inconvenient forum. The undersigned parties hereby further waive the right to a trial by jury.

## Guarantor(s):

Payment Data Systems, Inc
(Printed Full Legal Name of Guarantor)

By: /s/ Louis A. Hoch

Print Name/Title: Louis A. Hoch President and COO

Date: 12/19/2014



We consent to of our report dated March 30, 2014, with respect to the consolidated financial statements of Payment Data Systems, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2014.

We further consent to our designation as an expert in accounting and auditing.

/s/ Akin, Doherty, Klein & Feuge, P.C.

AKIN, DOHERTY, KLEIN & FEUGE, P.C.
San Antonio, Texas

March 30, 2015



# CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
SECTION 302 OF THE SARANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)

I, Michael R. Long, certify that:

1. I have reviewed this Annual Report on Form 10-K of Payment Data Systems, Inc. for the fiscal year ended December 31, 2014;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. As the registrant’s certifying officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. As the registrant’s certifying officer, I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2015

By: /s/ Michael R. Long
Michael R. Long
Chairman of the Board and Chief Executive Officer(Principal Executive Officer)



# CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
SECTION 302 OF THE SARANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)

I, Habib Yunus, certify that:

1. I have reviewed this Annual Report on Form 10-K of Payment Data Systems, Inc. for the fiscal year ended December 31, 2014;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. As the registrant’s certifying officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. As the registrant’s certifying officer, I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2015

By: /s/ Habib Yunus
Habib Yunus
Chief Financial Officer
(Principal Financial and Accounting Officer)



# CERTIFICATION PURSUANT TO
SECTION 906 OF THE SABANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of Payment Data Systems, Inc., a Nevada corporation (the "Company"), does hereby certify, to such officer's knowledge, that:

The Annual Report on Form 10-K for the year ended December 31, 2014 (the “Form 10-K”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 30, 2015

By: /s/ Michael R. Long
Michael R. Long
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)

Date: March 30, 2015

By: /s/ Habib Yunus
Habib Yunus
Chief Financial Officer
(Principal Financial and Accounting Officer)