Payment Data Systems, Inc. (PYDS) Q1 2019 Earnings Conference Call May 15, 2019 5:00 PM ET Company Participants Joe Hassett – Investor Relations Louis Hoch – President and Chief Executive Officer Tom Jewell – Senior Vice President and Chief Financial Officer Vaden Landers – Executive Vice President and Chief Revenue Officer Conference Call Participants Gary Prestopino – Barrington Research Brian Kinstlinger – Alliance Global Partners Michael Diana – Maxim Group Operator Good day, and welcome to the Payment ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________. Commission File Number:000-30152 PAYMENT DATA SYSTEMS, INC. (Exact name of registrant as specified in its charter) (State or other jurisdiction ...

Investor NACHA CERTIFIED / VALIDATED I VA BAN | --- | --- | --- | --- | --- | --- | |--------------|-------|-------|-------|------------|-------| | | | | | | | | | | | | | | | Presentation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | CREDIT CAP | | | | | | | | | | | | | | | | | | | | (0) | | | | --- | --- | --- | --- | |-------------------------------------------------------------------------- ...

Payment Data Systems, Inc. (PYDS) Q4 2018 Results Conference Call March 27, 2019 5:00 PM ET Company Participants Joe Hassett - Investor Relations Louis Hoch - President and CEO Vaden Landers - EVP and Chief Revenue Officer Tom Jewell - SVP and CFO Conference Call Participants William Gibson - ROTH Capital Partners Brian Kinstlinger - Alliance Global Partners Michael Diana - Maxim Group Operator Good day, everyone, and welcome to the Payment Data Systems Full Year and Fourth Quarter 2018 Earnings Results Con ...

PART I [Business](index=4&type=section&id=Item%201.%20Business.) The company provides integrated payment processing services and targets software developers with its "PayFac-in-a-Box" platform - The company provides a comprehensive suite of payment services, including ACH, credit/debit card processing, and prepaid card program management through its subsidiaries FiCentive and Singular Payments[15](index=15&type=chunk) - The acquisition of Singular Payments in September 2017 added a significant customer portfolio and an experienced sales force, strengthening the company's credit card processing segment[17](index=17&type=chunk) - A core growth strategy is the **"PayFac-in-a-Box" platform**, designed to offer a simple integration for software and app developers to monetize payments within their applications[20](index=20&type=chunk) - The company's merchant customer base grew from 1,817 to **1,958** in 2018, with no single customer accounting for more than **10% of revenues**[51](index=51&type=chunk)[52](index=52&type=chunk) - The business is subject to significant government regulation, including the Dodd-Frank Act, the CARD Act, and anti-money laundering (AML) laws[60](index=60&type=chunk)[61](index=61&type=chunk)[66](index=66&type=chunk) [Risk Factors](index=13&type=section&id=Item%201A.%20Risk%20Factors.) The company faces business, industry, and stock-related risks, including financial losses, regulatory burdens, and key personnel dependence - The company has a history of net losses, reporting a **loss of $3.8 million in 2018** and an accumulated deficit of **$57.0 million** as of December 31, 2018, and may require additional financing[77](index=77&type=chunk)[86](index=86&type=chunk) - Business operations are **highly dependent on relationships with bank sponsors** like Fifth Third Bank and Wells Fargo for network access[83](index=83&type=chunk)[84](index=84&type=chunk) - The company is subject to extensive regulations from the CARD Act, Dodd-Frank Act, and CFPB, with non-compliance risking fines and suspension[91](index=91&type=chunk)[92](index=92&type=chunk)[97](index=97&type=chunk) - **Security breaches** involving cardholder data could expose the company to significant liability, litigation, fines, and reputational damage[102](index=102&type=chunk)[103](index=103&type=chunk) - The company's common stock is subject to the SEC's **"penny stock" rules**, which can make trading more difficult and limit liquidity for investors[132](index=132&type=chunk) - The company depends significantly on key executives, and their departure could adversely affect the business[105](index=105&type=chunk)[109](index=109&type=chunk) [Properties](index=22&type=section&id=Item%202.%20Properties.) The company leases office spaces in San Antonio, TX, and Nashville, TN, which are considered adequate for current needs Leased Office Properties | Location | Purpose | Lease Expiration | Annual Rent Range | | :--- | :--- | :--- | :--- | | San Antonio, TX | Headquarters & Operations | July 31, 2024 | $117,000 - $232,000 | | Nashville, TN | Singular Payments Sales | April 30, 2023 | $109,000 - $122,000 | [Legal Proceedings](index=22&type=section&id=Item%203.%20Legal%20Proceedings.) The company is pursuing collection of a defaulted loan after obtaining a default judgment against Mercury Investment Partners - The company filed a lawsuit against Mercury Investment Partners for defaulting on a note purchase agreement related to a **$200,000 loan** to C2Go, Inc[141](index=141&type=chunk) - A Texas court granted a **default judgment** in favor of the company on December 21, 2018, and collection efforts are underway[141](index=141&type=chunk) - A loss reserve on the remaining **$145,000** principal was reduced to **$36,250** as of December 31, 2018, following the favorable judgment[142](index=142&type=chunk) [Mine Safety Disclosures](index=23&type=section&id=Item%204.%20Mine%20Safety%20Disclosures%20(Not%20applicable).) This section is not applicable to the company's operations - Not applicable[145](index=145&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=24&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities.) The company's stock trades on Nasdaq (PYDS), no dividends are paid, and a stock repurchase program is active 2018 Quarterly Stock Price Range | Quarter (2018) | High | Low | | :--- | :--- | :--- | | First Quarter | $3.39 | $1.43 | | Second Quarter | $2.09 | $1.56 | | Third Quarter | $2.05 | $1.57 | | Fourth Quarter | $1.90 | $1.38 | - As of March 18, 2019, there were **16,863,222 shares** of common stock outstanding held by 92 stockholders of record[150](index=150&type=chunk) - The company has **never declared or paid dividends** and has no plans to do so in the foreseeable future[151](index=151&type=chunk) - A stock repurchase program had **$1,472,284 available** for repurchases as of December 31, 2018[155](index=155&type=chunk) [Selected Financial Data](index=25&type=section&id=Item%206.%20Selected%20Financial%20Data.) As a smaller reporting company, this information is not required and has been omitted - The company is a smaller reporting company and has opted out of providing selected financial data[157](index=157&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) FY2018 revenue grew 72% to $25.0M, but net loss widened to $3.8M due to higher expenses from the Singular acquisition Key Financial Metrics | Metric | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $25.0M | $14.6M | +72% | | Gross Profit | $5.6M | $3.8M | +48% | | Net Loss | ($3.8M) | ($3.0M) | +27% | | Total Dollars Processed | $3.4B | $2.8B | +19% | - The increase in revenue was driven by **12% organic growth**, primarily from the ACH business, and incremental revenue from the Singular Payments acquisition[168](index=168&type=chunk) - The wider net loss was primarily due to increased operating expenses associated with the full-year impact of the Singular Payments acquisition[169](index=169&type=chunk)[172](index=172&type=chunk)[176](index=176&type=chunk) - **Cash and cash equivalents decreased to $2.7 million** at Dec 31, 2018, from $4.8 million at Dec 31, 2017[177](index=177&type=chunk)[178](index=178&type=chunk) - Subsequent to year-end, the company raised **$1.8 million in net proceeds** from a public offering on February 14, 2019[180](index=180&type=chunk)[282](index=282&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=29&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk.) As a smaller reporting company, this information is not required and has been omitted - The company is a smaller reporting company and has opted out of providing quantitative and qualitative disclosures about market risk[188](index=188&type=chunk) [Financial Statements and Supplementary Data](index=30&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data.) This section presents the audited consolidated financial statements and notes for fiscal years 2018 and 2017 [Consolidated Balance Sheets](index=32&type=section&id=Consolidated%20Balance%20Sheets) Total assets were $68.2M and stockholders' equity decreased to $9.6M as of year-end 2018 Key Balance Sheet Items | Balance Sheet Items (in millions) | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $2.7 | $4.8 | | Total current assets | $60.9 | $59.1 | | Total Assets | $68.2 | $67.4 | | **Liabilities & Equity** | | | | Total current liabilities | $58.5 | $54.3 | | Total liabilities | $58.6 | $54.3 | | Total stockholders' equity | $9.6 | $13.1 | [Consolidated Statements of Operations](index=35&type=section&id=Consolidated%20Statements%20of%20Operations) Revenues grew 72% to $25.0M in 2018, resulting in a net loss of $3.8M, or ($0.31) per share Key Income Statement Items | Income Statement Items (in millions) | 2018 | 2017 | | :--- | :--- | :--- | | Revenues | $25.02 | $14.57 | | Gross profit | $5.57 | $3.77 | | Total operating expenses | $9.34 | $6.61 | | Operating (loss) | ($3.77) | ($2.84) | | Net (Loss) | ($3.78) | ($3.01) | | Basic & Diluted EPS | ($0.31) | ($0.33) | [Consolidated Statements of Cash Flows](index=38&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash used by operating activities was $2.8M in 2018, with financing activities using $1.0M for stock buybacks Summary of Cash Flow Activities | Cash Flow Activities (in millions) | 2018 | 2017 | | :--- | :--- | :--- | | Net cash (used) by operating activities | ($2.76) | ($0.94) | | Net cash (used) by investing activities | ($0.70) | ($1.82) | | Net cash (used) provided by financing activities | ($0.98) | $2.61 | [Notes to Consolidated Financial Statements](index=41&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail ASC 606 adoption, the Singular acquisition, NOLs, and a subsequent public offering - The company adopted ASC 606 and determined it is the principal in its transactions, thus continuing to report revenues on a **gross basis**[208](index=208&type=chunk)[230](index=230&type=chunk) - The 2017 acquisition of Singular Payments had a total purchase price of **$5,000,000**, consisting of cash and common stock[234](index=234&type=chunk) - The company has approximately **$45.3 million in net operating loss carryforwards** for tax purposes, which begin to expire in 2022[262](index=262&type=chunk) - Subsequent to year-end, on February 14, 2019, the company raised approximately **$1.8 million in net proceeds** from a public offering of its common stock[282](index=282&type=chunk) [Changes In and Disagreements with Accountants on Accounting and Financial Disclosure](index=53&type=section&id=Item%209.%20Changes%20In%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure.) The company reported no changes in or disagreements with its accountants - None reported[284](index=284&type=chunk) [Controls and Procedures](index=54&type=section&id=Item%209A.%20Controls%20and%20Procedures.) Management concluded that disclosure controls and internal controls over financial reporting were effective as of year-end 2018 - Management concluded that the company's **disclosure controls and procedures were effective** as of December 31, 2018[284](index=284&type=chunk) - Management's assessment concluded that the company's **internal control over financial reporting was effective** as of December 31, 2018[285](index=285&type=chunk) [Other Information](index=54&type=section&id=Item%209B.%20Other%20Information.) No other information was reported for this item - None[287](index=287&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=55&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance.) Required information on directors, officers, and governance is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the 2019 Proxy Statement[289](index=289&type=chunk) [Executive Compensation](index=55&type=section&id=Item%2011.%20Executive%20Compensation.) Required information on executive compensation is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the 2019 Proxy Statement[294](index=294&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=55&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters.) Required information on security ownership is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the 2019 Proxy Statement[295](index=295&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=55&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence.) Required information on related transactions and director independence is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the 2019 Proxy Statement[296](index=296&type=chunk) [Principal Accounting Fees and Services](index=55&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services.) Required information on accountant fees and services is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the 2019 Proxy Statement[297](index=297&type=chunk) PART IV [Exhibits, Financial Statement Schedules](index=56&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules.) This section lists all exhibits filed with the report, with financial statements located in Item 8 - The consolidated financial statements are filed in Part II, Item 8 of the report[299](index=299&type=chunk) - All financial statement schedules were omitted because they were not applicable or the required information was included elsewhere[300](index=300&type=chunk) - Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to the **Sarbanes-Oxley Act of 2002** are filed as exhibits[304](index=304&type=chunk) [Form 10-K Summary](index=61&type=section&id=Item%2016.%20Form%2010-K%20Summary.) The company elected not to provide a Form 10-K summary - None[305](index=305&type=chunk)