What changed in this filing

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Item 1. Legal Proceedings

2024-05-15 compared with 2023-11-08 · 47 added, 20 removed, 4 unchanged (94% of the section changed)

Legal Proceedings.

On September 1, 2021, KDHM, LLC sued PDS Acquisition Corp, now known as Usio Output Solutions, Inc., in the 73rd District Court of Bexar County, Texas claiming a breach of the asset purchase agreement executed by the parties on December 14, 2020.

The lawsuit alleges that due to a mistake, accident, or inadvertence, certain customer deposits in the amount of $317,000 were improperly transferred to us.

We believe that plaintiff's claims in the lawsuit have no merit and contradict the express terms of the asset purchase agreement.

As a result of this post-sale dispute, we discovered that KDHM, LLC and its principals made certain misrepresentations and breached the terms of the asset purchase agreement. 

On September 28, 2021, we filed an answer generally denying the plaintiff’s allegations. On October 5, 2021, we filed a counterclaim and third-party petition. Therein, we allege that neither KDHM nor its principals disclosed that KDHM was not accounting for the customer deposits in accordance with GAAP. KDHM and third-party defendants, its principals Henry Minten and Thomas Dowe, affirmatively represented and warranted in section 3.1(e) of the asset purchase agreement that “[t]he Annual Financial Statements and the Interim Financial Statements have been prepared from the books and records of Seller in accordance with GAAP applied on a consistent basis.” 

We also discovered that KDHM by and through its principals failed to disclose that $305,000 in additional customer deposits existed and that these deposits were not conveyed to us as required by the asset purchase agreement.

KDHM, Minten and Dowe provided us with fraudulent and misleading profit and loss statements that did not disclose these additional customer deposits. KDHM and the defendants do not dispute that these additional customer deposits exist and that they were purchased by Usio. However, despite a written representation that these funds would be returned, KDHM and its principals have held these funds hostage. Section 2.1(b)(x) of the asset purchase agreement provides that the purchased assets include “All of Seller’s deposits from its customer, including without limitation, those customer deposits listed on Schedule 2.1(b)(xi) of the Disclosure Schedules.” Finally, we discovered that KDHM did not provide us with all customer lists, which are identified as purchased assets under the agreement.

In our counterclaims and third-party petition, we assert causes of action for fraud, breach of contract and conversion. 

BEN KAUDER, NINA PIOLETTI, & TRIPLE PAY PLAY, INC.

In 2017, Usio acquired Singular Payments, Inc.

(“Singular”), another payment processing company with offices in Nashville, Tennessee and St.

Augustine, Florida.

Ben Kauder and Nina Pioletti were executives of Singular and, after the acquisition, Usio hired them as executive-level employees.

Usio hired Kauder to serve as Senior Vice President of Integrated Payments, and Pioletti was hired to serve as Director of Sales.

As a condition of employment, Kauder and Pioletti agreed to be bound by certain Usio policies, including as related to preserving the confidentiality of Usio’s proprietary information.

As Usio executives, Kauder and Pioletti were afforded access to and contributed to the development of Usio’s trade secrets and other proprietary information not generally known by the public at large, including but not limited to financial information, marketing plans, cost and operational/strategic plans, and sales presentations.

In May 2021, Kauder resigned from Usio followed by Pioletti in July of 2022.

Thereafter, Kauder and Pioletti formed Triple Pay Play, another payment processing company which competes with the same services as Usio.

Upon information and belief, Kauder and Pioletti were working to form Triple Pay Play while employed by Usio, during Usio business hours, and while using Usio resources and Usio property.

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

On July 6, 2023, Ben Kauder, Nina Pioletti and Triple Pay Play filed a Motion to Dismiss for Lack of Jurisdiction.

The motion was granted.

Subsequently, in February of 2024, Usio refiled its case in Tennessee, where Kauder, Nina, and Triple Pay Play reside.

Currently, this case is pending in the Chancery Court of Maury County, Tennessee and is in the early-stage discovery.

GREENWICH BUSINESS CAPITAL, LLC

On or about September 25, 2019, Usio and Greenwich Business Capital LLC (“GBC”), entered into an Agreement for payment processing services (the “Agreement”).

Pursuant to the terms of the Agreement, Usio effectively terminated the Agreement with GBC on October 31, 2023, by providing Greenwich with a 30-days written notice as required by the Agreement.

On November 13, 2023, GBC filed lawsuit against Usio, alleging violations of the National Automated Clearing House Association (NACHA) rules.

In early March of 2024, Usio filed a Motion to Dismiss for improper venue and failure to state a claim.

The motion is set to be heard in May of 2024 in the State of Rhode Island Kent, SC.

Superior Court.

On September 1, 2021, KDHM, LLC, an entity owned by the former owners of IMS, sued PDS Acquisition Corp, now known as Usio Output Solutions, Inc., in the 73rd District Court of Bexar County, Texas claiming a breach of the asset purchase agreement executed by the parties on December 14, 2020.

The lawsuit alleges that due to a mistake, accident, or inadvertence, certain customer deposits in the amount of $317,000 were improperly transferred to us.

We believe that plaintiff's claims in the lawsuit have no merit and contradict the express terms of the asset purchase agreement.

As a result of this post-sale dispute, we discovered that KDHM, LLC and its principals made certain misrepresentations and breached the terms of the asset purchase agreement.

On September 28, 2021, we filed an answer generally denying the plaintiff’s allegations.

On October 5, 2021, we filed a counterclaim and third-party petition.

Therein, we allege that neither KDHM nor its principals disclosed that KDHM was not accounting for the customer deposits in accordance with GAAP.

KDHM and third-party defendants, its principals Henry Minten and Thomas Dowe, affirmatively represented and warranted in section 3.1(e) of the asset purchase agreement that “[t]he Annual Financial Statements and the Interim Financial Statements have been prepared from the books and records of Seller in accordance with GAAP applied on a consistent basis.”

We also discovered that KDHM by and through its principals failed to disclose that $305,000 in additional customer deposits existed and that these deposits were not conveyed to us as required by the asset purchase agreement.

KDHM, Minten and Dowe provided us with fraudulent and misleading profit and loss statements that did not disclose these additional customer deposits.

KDHM and the defendants do not dispute that these additional customer deposits existed and that they were purchased by Usio.

However, despite a written representation that these funds would be returned, KDHM and its principals have held these funds hostage.

Section 2.1(b)(x) of the asset purchase agreement provides that the purchased assets include “All of Seller’s deposits from its customer, including without limitation, those customer deposits listed on Schedule 2.1(b)(xi) of the Disclosure Schedules.” Finally, we discovered that KDHM did not provide us with all customer lists, which are identified as purchased assets under the agreement.

In our counterclaims and third-party petition, we assert causes of action for fraud, breach of contract and conversion.

On August 18, 2023, the judge granted a summary motion entitling KDHM to deposits for customer accounts that were printed and mailed prior to the acquisition, and Usio Output Solutions, Inc.

was entitled to deposits for accounts that were not yet printed and printed but not yet mailed prior to the acquisition.

Usio has requested a reconsideration of the motion, as it does not consider that deposits are only owed to KDHM if they were earned and offset against accounts receivable.

Usio Output Solutions, Inc. is scheduled for depositions beginning November 13, 2023.

We consider the risk of loss as remote related to this lawsuit.

Lifetime Home Warranty, LLC

On or about December 1, 2022, Usio and Lifetime Home Warranty, LLC ("Defendant") entered into an Automated Clearing House and Remotely Created Check Service Agreement (the “Agreement”).

Pursuant to the terms of the Agreement, Usio agreed to and did provide to Defendant certain automated remotely created check and other payment processing services. Usio initiated certain payment transactions as directed by Defendant, and in exchange, Defendant agreed to pay Usio for its services.

Additionally, to the extent that there were any “chargebacks”

or “returns,” Defendant contractually agreed to pay Usio and/or cover the amount of these items. Chargebacks and returns are essential rejections or disputes by the Defendant’s end consumer user of the charges Usio was directed to process by Defendant. Pursuant to the Agreement and the Operating Rules and Guidelines as defined in the Agreement, Defendant’s return rate was not to exceed 0.50% of the total transaction volume. By the end of 2022, Defendant’s returns were so large that Usio terminated its Agreement with the Defendant based on the amounts owed to Usio and the risks associated with conducting further business with the Defendant. Pursuant to the Agreement, Usio invoiced Defendant on a monthly basis for all fees, chargeback and returns. Usio attempted to debit Defendant’s Settlement Account for the amount due and owing, but Defendant’s account contained insufficient funds to cover of the excessive chargebacks and returns. 

Subsequent attempts to collect the amounts due and owing to Usio failed, necessitating the filing of a lawsuit in the 224th District Court of Bexar County, Texas on April 10, 2023.

As of September, 2023 the amount owed to Usio, exclusive of interest or attorneys’

fees, totals $213,780. The Defendant has been served, and a motion for default judgment has been filed.

In addition to the proceedings described above, we may be involved in legal matters arising in the ordinary course of business from time to time.

Usio has requested a reconsideration of the motion, as it does not consider that deposits are only owed to KDHM if they were earned and offset against accounts receivable.

On March 4, 2024, the court held a hearing on KDHM’s Supplemental Rule 166(G) Motion and the court granted the motion in favor of KDHM.

However, Usio believes the court erred in granting the motion and filed a motion for reconsideration on March 19, 2024.

On March 28, 2024, the court heard Usio’s Motion for Reconsideration of Order Granting Plaintiff’s Supplemental Rule 166(g).

On May 2, 2024, the court denied Usio’s motion.

We are currently in the process of appealing the decision.

OTHER PROCEEDINGS

Aside from these proceedings, the Company 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.

RISK FACTORS.

There have been no material changes from risk factors previously disclosed in the 2023 Annual Report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Legal Proceedings