Usio, Inc. (NASDAQ:USIO) Q2 2019 Earnings Conference Call August 14, 2019 5:00 PM ET Company Participants Joe Hassett - Head of Investor Relations Louis Hoch - President, Chief Executive Officer, Chief Operating Officer Houston Frost - Senior Vice President of Prepaid Services Tom Jewell - Chief Financial Officer Vaden Landers - Chief Revenue Officer Conference Call Participants Gary Prestopino - Barrington Research Associates, Inc. Brian Kinstlinger - Alliance Global Partners Michael Diana - Maxim Group, L ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 For the quarterly period ended June 30, 2019 Nevada 98-0190072 or (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) [_] 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 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT O ...

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 ...

[PART I – FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20%E2%80%93%20FINANCIAL%20INFORMATION) This section presents the unaudited condensed consolidated financial statements, management's discussion, market risk, and controls [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20%28Unaudited%29.) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and stockholders' equity, along with detailed notes explaining the accounting policies, significant balances, and recent accounting pronouncements. The company reported a net loss of $1,072,889 for the quarter ended March 31, 2019 [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20as%20of%20March%2031%2C%202019%20and%20December%2031%2C%202018) This section provides a snapshot of the company's assets, liabilities, and equity at specific dates | Metric | March 31, 2019 | December 31, 2018 | | :-------------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $4,465,718 | $2,695,177 | | Total current assets | $52,421,903 | $60,905,668 | | Total assets | $62,028,324 | $68,215,512 | | Total current liabilities | $48,838,088 | $58,502,038 | | Total liabilities | $51,403,011 | $58,581,786 | | Total stockholders' equity | $10,625,313 | $9,633,726 | - Cash and cash equivalents increased by **$1,770,541** from December 31, 2018, to March 31, 2019[10](index=10&type=chunk) - Total assets decreased by **$6,187,188**, and total liabilities decreased by **$7,178,775** from December 31, 2018, to March 31, 2019[10](index=10&type=chunk) [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20for%20the%20Three%20Months%20ended%20March%2031%2C%202019%20and%202018) This section details the company's revenues, expenses, and net loss over specific periods | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Revenues | $6,588,032 | $5,843,665 | | Cost of services | $5,252,301 | $4,572,758 | | Gross profit | $1,335,731 | $1,270,907 | | Operating (loss) | $(1,095,964) | $(1,060,785) | | Net (loss) | $(1,072,889) | $(1,050,806) | | Basic (loss) per common share | $(0.09) | $(0.09) | | Diluted (loss) per common share | $(0.09) | $(0.09) | - Revenues increased by **12.7%** from **$5,843,665** in Q1 2018 to **$6,588,032** in Q1 2019[14](index=14&type=chunk) - Net loss slightly increased from **$(1,050,806)** in Q1 2018 to **$(1,072,889)** in Q1 2019[14](index=14&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20for%20the%20Three%20Months%20ended%20March%2031%2C%202019%20and%202018) This section outlines the cash inflows and outflows from operating, investing, and financing activities | Cash Flow Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash (used) by operating activities | $(1,196,528) | $(239,087) | | Net cash (used) by investing activities | $(152,923) | $(29,502) | | Net cash provided (used) by financing activities | $1,772,083 | $(956,134) | | Change in cash, cash equivalents and merchant reserves | $422,632 | $(1,224,723) | - Net cash used by operating activities significantly increased from **$(239,087)** in Q1 2018 to **$(1,196,528)** in Q1 2019[17](index=17&type=chunk) - Financing activities provided **$1,772,083** in Q1 2019, primarily due to a public offering, compared to cash used of **$(956,134)** in Q1 2018[17](index=17&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20Equity%20for%20the%20Three%20Months%20ended%20March%2031%2C%202019%20and%202018) This section shows changes in the company's equity components over specific periods | Equity Component | Balance at Dec 31, 2018 | Balance at Mar 31, 2019 | | :-------------------------------- | :---------------------- | :---------------------- | | Common Stock (Shares) | 17,129,680 | 17,961,132 | | Common Stock (Amount) | $185,561 | $186,392 | | Additional Paid-In Capital | $74,568,627 | $76,429,299 | | Treasury Stock | $(1,813,546) | $(1,835,368) | | Deferred Compensation | $(6,270,675) | $(6,045,880) | | Accumulated Deficit | $(57,036,241) | $(58,109,130) | | Total Stockholder's Equity | $9,633,726 | $10,625,313 | - Total stockholders' equity increased by **$991,587** from December 31, 2018, to March 31, 2019, primarily due to a public offering[18](index=18&type=chunk) - Accumulated deficit increased by **$1,072,889**, reflecting the net loss for the period[18](index=18&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section offers detailed explanations of accounting policies, significant balances, and transactions [Note 1. Basis of Presentation](index=8&type=section&id=Note%201.%20Basis%20of%20Presentation) This note explains the accounting principles, revenue recognition, and recent accounting standard adoptions - The Company recognizes revenue primarily from electronic payment transaction processing and related services on a gross basis, acting as the principal obligor[21](index=21&type=chunk)[30](index=30&type=chunk) | Metric | March 31, 2019 | December 31, 2018 | | :-------------------------------- | :------------- | :---------------- | | Deferred revenues | $5,000 | $20,000 | | Allowance for estimated doubtful accounts | $50,575 | $55,212 | | Reserve for processing losses | $407,153 | $374,153 | - The Company capitalized **$140,043** in internal use software costs for the three months ended March 31, 2019, a significant increase from **$15,878** in the prior year period[27](index=27&type=chunk) - The Company adopted new accounting standards for revenue recognition (ASC 606), restricted cash (ASU 2016-18), and leases (Topic 842) effective January 1, 2018, and January 1, 2019, respectively. Lease adoption resulted in recognizing **$2,688,412** in right-of-use assets and **$2,775,259** in lease liabilities[30](index=30&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk) [Note 2. Leases](index=12&type=section&id=Note%202.%20Leases) This note details the company's operating lease commitments and related expenses | Period | Operating Leases (March 31, 2019) | | :-------------------------------- | :-------------------------------- | | 2019 (Remaining 9 months) | $226,743 | | 2020 | $336,301 | | 2021 | $336,644 | | 2022 | $344,554 | | 2023 | $350,915 | | Thereafter | $1,823,669 | | Total minimum lease payments | $3,418,826 | | Less imputed interest | $(669,333) | | Total lease liabilities | $2,749,493 | - Operating lease expense for the three months ended March 31, 2019, was **$103,522**, up from **$71,839** in the prior year[37](index=37&type=chunk) [Note 3. Note Receivable](index=12&type=section&id=Note%203.%20Note%20Receivable) This note discusses the status and collection efforts for a specific note receivable - The Company is pursuing collection of a **$145,000** principal amount from Mercury Investment Partners LLC, following a default judgment granted on December 21, 2018, related to a loan to C2Go, Inc[39](index=39&type=chunk)[40](index=40&type=chunk) - A loss reserve on the note receivable was reduced from **$72,500** to **$36,250** from December 31, 2018, through March 31, 2019, reflecting a 'more likely than not' recognition threshold due to the default judgment[40](index=40&type=chunk) [Note 4. Accrued Expenses](index=13&type=section&id=Note%204.%20Accrued%20Expenses) This note itemizes and explains changes in various accrued liabilities | Accrued Expense | March 31, 2019 | December 31, 2018 | | :-------------------------------- | :------------- | :---------------- | | Accrued commissions | $246,601 | $243,317 | | Reserve for merchant losses | $407,153 | $374,153 | | Other accrued expenses | $1,037,027 | $582,720 | | Accrued taxes | $82,852 | $80,888 | | Accrued salaries | $183,411 | $107,118 | | Total accrued expenses | $1,957,044 | $1,388,196 | - Total accrued expenses increased by **$568,848** from December 31, 2018, to March 31, 2019, primarily driven by an increase in 'Other accrued expenses'[42](index=42&type=chunk) [Note 5. Stockholders' Equity](index=13&type=section&id=Note%205.%20Stockholders%27%20Equity) This note describes transactions affecting stockholders' equity, including warrant issuances - The Company issued a warrant to University Fancards, LLC to purchase **150,000** shares of common stock, with **30,000** warrants vesting immediately and **120,000** vesting annually over 4 years[43](index=43&type=chunk)[44](index=44&type=chunk) - The fair value of the warrants was **$135,764**, amortized as a reduction of revenues, with **$8,985** recorded for the quarter ended March 31, 2019[44](index=44&type=chunk) [Note 6. Net (Loss) Per Share](index=14&type=section&id=Note%206.%20Net%20%28Loss%29%20Per%20Share) This note presents the calculation of basic and diluted net loss per common share | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) available to common shareholders | $(1,072,889) | $(1,050,806) | | Weighted average shares outstanding (Basic & Diluted) | 12,621,857 | 12,026,622 | | Basic (loss) per common share | $(0.09) | $(0.09) | | Diluted (loss) per common share | $(0.09) | $(0.09) | - Anti-dilutive awards and options totaled **3,874,935** shares at March 31, 2019, and **3,877,750** shares at March 31, 2018[46](index=46&type=chunk) [Note 7. Income Taxes](index=15&type=section&id=Note%207.%20Income%20Taxes) This note provides information on deferred tax assets, valuation allowances, and net operating loss carryforwards - The Company recognized a deferred tax asset of approximately **$1.4 million** and a valuation allowance of approximately **$8.9 million**[49](index=49&type=chunk) - As of December 31, 2018, the Company had approximately **$45.3 million** in net operating loss carryforwards, expiring starting in 2022[50](index=50&type=chunk) [Note 8. Related Party Transactions](index=15&type=section&id=Note%208.%20Related%20Party%20Transactions) This note outlines transactions with entities and individuals affiliated with company management - The Company engaged in transactions with entities owned by its President and CEO, Louis Hoch, and Board member Miguel Chapa, including purchases from Angry Pug Sportswear and revenues from Lush Rooftop and BLVD Bar and Lounge[52](index=52&type=chunk)[53](index=53&type=chunk)[54](index=54&type=chunk) - The Company repurchased **11,860** shares of common stock from CFO Tom Jewell for **$1.84** per share on January 6, 2019, to cover taxes[55](index=55&type=chunk) [Note 9. Legal Proceedings](index=16&type=section&id=Note%209.%20Legal%20Proceedings) This note updates on significant legal actions, including a default judgment on a note receivable - The Company obtained a default judgment against Mercury Investment Partners LLC on December 21, 2018, for an unpaid **$145,000** principal from a C2Go loan, and is taking steps to domesticate the judgment for collection[57](index=57&type=chunk)[58](index=58&type=chunk) - A loss reserve for the note receivable was reduced to **$36,250** as of March 31, 2019, reflecting increased likelihood of recovery post-judgment[58](index=58&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=17&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) This section provides management's perspective on the Company's financial condition and results of operations for the quarter ended March 31, 2019. It highlights revenue growth driven by ACH and prepaid portfolios, increased operating expenses due to growth initiatives, and a net loss. The Company also discusses its liquidity, capital resources, and future growth strategies [Overview](index=17&type=section&id=Overview) This section describes the company's electronic payment processing services and key operational metrics - The Company provides integrated electronic payment processing services, including ACH, credit, PINless debit, and prepaid card services, and operates Akimbo prepaid card platforms[63](index=63&type=chunk) | Metric | Q1 2019 | Q1 2018 | Change (YoY) | | :-------------------------------- | :------ | :------ | :----------- | | Credit card transactions processed | -4% | N/A | Decrease | | Credit card dollars processed | +7% | N/A | Increase | | ACH (eCheck) transaction volumes | +20% | N/A | Increase | | Returned check transactions processed | +16% | N/A | Increase | | Total dollars processed | $856M | $783M | +9.3% | | Net loss | $(1,072,889) | $(1,050,806) | +2.1% | - The Company anticipates continued revenue increases in ACH and returned check revenues, and expects incremental revenues from PayFac integrated payments and prepaid growth initiatives in Q2 2019[66](index=66&type=chunk) [Critical Accounting Policies](index=18&type=section&id=Critical%20Accounting%20Policies) This section highlights the significant accounting policies and estimates used in financial statement preparation - Management's discussion relies on interim condensed consolidated financial statements prepared in accordance with U.S. GAAP, requiring estimates and judgments for assets, liabilities, revenues, and expenses[69](index=69&type=chunk) - Key accounting policies, including revenue recognition, deferred revenues, merchant reserves, and recently adopted pronouncements, are detailed in Note 1 to the financial statements[69](index=69&type=chunk)[70](index=70&type=chunk) [Results of Operations](index=18&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance, including revenue, cost of services, and net loss [Revenues](index=18&type=section&id=Revenues) This section discusses the drivers and changes in the company's revenue streams - Revenues for Q1 2019 increased by **12.7%** to **$6.6 million**, up from **$5.8 million** in Q1 2018, primarily driven by growth in ACH and prepaid portfolios[72](index=72&type=chunk) [Cost of Services](index=18&type=section&id=Cost%20of%20Services) This section explains the factors contributing to changes in the cost of services - Cost of services increased by **14.9%** to **$5.3 million** in Q1 2019 from **$4.6 million** in Q1 2018, mainly due to increased transaction volume and higher referral fees[74](index=74&type=chunk) [Gross Profit](index=18&type=section&id=Gross%20Profit) This section details the company's gross profit and the factors influencing its change - Gross profit increased by **5.1%** to **$1,335,731** in Q1 2019 from **$1,270,907** in Q1 2018, primarily due to growth in the highly profitable ACH business[75](index=75&type=chunk) [Stock-based Compensation](index=18&type=section&id=Stock-based%20Compensation) This section reports on the trends and amounts of stock-based compensation expenses - Stock-based compensation expenses decreased from **$0.4 million** in Q1 2018 to **$0.3 million** in Q1 2019, due to the net decrease in amortization as grants are fully amortized[76](index=76&type=chunk) [Other Selling, General and Administrative Expenses](index=19&type=section&id=Other%20Selling%2C%20General%20and%20Administrative%20Expenses) This section explains the changes in the company's SG&A expenses - Other selling, general and administrative expenses increased by **10.9%** to **$1.7 million** in Q1 2019 from **$1.5 million** in Q1 2018, mainly due to investments in Prepaid and PayFac growth initiatives[77](index=77&type=chunk) [Depreciation and Amortization](index=19&type=section&id=Depreciation%20and%20Amortization) This section presents the depreciation and amortization expenses for the period - Depreciation and amortization totaled **$486,548** in Q1 2019, a slight increase from **$458,663** in Q1 2018[78](index=78&type=chunk) [Other Income (Expense)](index=19&type=section&id=Other%20Income%20%28Expense%29) This section details non-operating income and expenses - Other income increased to **$23,075** in Q1 2019 from **$9,979** in Q1 2018[79](index=79&type=chunk) [Net Loss](index=19&type=section&id=Net%20Loss) This section reports the company's overall net loss for the period - The Company reported a net loss of **$1,072,889** for Q1 2019, compared to a net loss of **$1,050,806** for Q1 2018[80](index=80&type=chunk) [Liquidity and Capital Resources](index=19&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's cash position, capital structure, and funding activities [Cash Flows](index=19&type=section&id=Cash%20Flows) This section analyzes cash generated or used by operating, investing, and financing activities - Cash and cash equivalents increased to **$4.5 million** at March 31, 2019, from **$2.7 million** at December 31, 2018[81](index=81&type=chunk) - Net proceeds from a public offering in February 2019 amounted to **$1.8 million**, used for general corporate purposes and working capital[82](index=82&type=chunk) - Net cash used by operating activities (including merchant reserve funds) was **$1.2 million** in Q1 2019, compared to **$0.2 million** in Q1 2018[84](index=84&type=chunk) - Net cash generated from financing activities was **$1.8 million** in Q1 2019, a significant improvement from **$1.0 million** cash used in Q1 2018, primarily due to the public offering[86](index=86&type=chunk) [Off-Balance Sheet Arrangements](index=20&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms the absence of material off-balance sheet financial commitments - The Company currently has no off-balance sheet arrangements that have or are reasonably likely to have a material effect on its financial condition or results of operations[87](index=87&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=20&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk.) As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk - The Company, as a smaller reporting company, is exempt from providing quantitative and qualitative disclosures about market risk[88](index=88&type=chunk) [Item 4. Controls and Procedures](index=20&type=section&id=Item%204.%20Controls%20and%20Procedures.) Management, including the CEO and CFO, evaluated the effectiveness of the Company's disclosure controls and procedures, concluding they were effective as of March 31, 2019. No material changes in internal control over financial reporting occurred during the quarter [Evaluation of Disclosure Controls and Procedures](index=20&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section reports on the effectiveness of disclosure controls - The Chief Executive and Chief Financial Officers concluded that the Company's disclosure controls and procedures were effective as of March 31, 2019[89](index=89&type=chunk) [Changes in Internal Control over Financial Reporting](index=20&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This section confirms no material changes in internal controls - There were no material changes in the Company's internal control over financial reporting during the quarter ended March 31, 2019[90](index=90&type=chunk) [PART II – OTHER INFORMATION](index=20&type=section&id=PART%20II%20%E2%80%93%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity sales, and exhibits [Item 1. Legal Proceedings](index=20&type=section&id=Item%201.%20Legal%20Proceedings.) This section details the ongoing legal proceedings related to a defaulted loan to C2Go, Inc., which was subsequently to be purchased by Mercury Investment Partners LLC. The Company has secured a default judgment against Mercury Investment Partners and is actively pursuing collection - The Company filed suit against Mercury Investment Partners in Bexar County District Court and was granted a default judgment on December 21, 2018, for an unpaid **$145,000** principal[91](index=91&type=chunk)[92](index=92&type=chunk) - Legal counsel is preparing documents to domesticate the Texas judgment to facilitate collection, and the loss reserve on the note receivable was reduced to **$36,250**[91](index=91&type=chunk)[93](index=93&type=chunk) [Item 1A. Risk Factors](index=21&type=section&id=Item%201A.%20Risk%20Factors.) The Company states that there have been no material changes to the risk factors previously disclosed in its annual report on Form 10-K for the fiscal year ended December 31, 2018 - No material changes have occurred in the risk factors since the filing of the annual report on Form 10-K for the fiscal year ended December 31, 2018[95](index=95&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=22&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds.) This section reports that the Company did not issue any unregistered equity securities during the quarter. It also details the Company's stock repurchase program, including repurchases from officers and directors to cover tax obligations [Recent Sales of Unregistered Securities](index=22&type=section&id=Recent%20Sales%20of%20Unregistered%20Securities) This section confirms no unregistered equity securities were issued during the quarter - The Company did not issue any unregistered equity securities during the quarter ended March 31, 2019[97](index=97&type=chunk) [Purchases of Equity Securities by the Issuer and Affiliated Purchasers](index=22&type=section&id=Purchases%20of%20Equity%20Securities%20by%20the%20Issuer%20and%20Affiliated%20Purchasers) This section details the company's stock repurchase program and related transactions - The Board of Directors authorized a stock repurchase program, with **$1,450,462** remaining available at March 31, 2019[98](index=98&type=chunk) | Period | Total number of shares purchased | Average price paid per share | | :-------------------------------- | :------------------------------- | :--------------------------- | | January 1 - January 31, 2019 | 11,860 | $1.84 | - On January 6, 2019, the Company repurchased **11,860** shares from CFO Tom Jewell at **$1.84** per share to cover taxes[98](index=98&type=chunk) [Item 3. Defaults Upon Senior Securities](index=22&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities.) The Company reported no defaults upon senior securities during the period - There were no defaults upon senior securities[100](index=100&type=chunk) [Item 4. Mine Safety Disclosures](index=22&type=section&id=Item%204.%20Mine%20Safety%20Disclosures%20%28Not%20applicable%29.) This item is not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[101](index=101&type=chunk) [Item 5. Other Information](index=22&type=section&id=Item%205.%20Other%20Information.) The Company reported no other information required under this item - No other information is reported under this item[102](index=102&type=chunk) [Item 6. Exhibits](index=23&type=section&id=Item%206.%20Exhibits.) This section lists all exhibits filed as part of the Form 10-Q, including articles of incorporation, employment agreements, bank sponsorship agreements, and certifications - The report includes various exhibits such as Amended and Restated Articles of Incorporation, Employment Agreements, Bank Sponsorship Agreements, and Certifications[103](index=103&type=chunk)[105](index=105&type=chunk)[108](index=108&type=chunk) [SIGNATURES](index=29&type=section&id=SIGNATURES) This section lists the executive officers who certified the accuracy of the financial report - The report is signed by Louis A. Hoch, Chief Executive Officer, and Tom Jewell, Chief Financial Officer, on May 15, 2019[113](index=113&type=chunk)

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)