Joe Hassett - Investor Relations Louis Hoch - President and Chief Executive Officer Vaden Landers - Executive Vice President and Chief Revenue Officer Tom Jewell - Senior Vice President and Chief Financial Officer Houston Frost - Senior Vice President, Prepaid Services.

Brian Kinstlinger - Alliance Global Partners.

Good afternoon, everyone and welcome to the Payment Data Systems' Earnings Conference Call for the Second Quarter Ended June 30, 2018. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions [Operator Instructions].

Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A replay of the call will be available approximately one hour after the end of the call through August 28, 2018. I would now like to turn the conference over to Joe Hassett.

Please go ahead..

Thank you, William, and welcome to Payment Data Systems' second quarter 2018 financial results conference call. The earnings release, which Payment Data issued earlier this afternoon is available on the Company's Investor Relations website at paymentdata.com/invest under the news.

On the call today are Louis Hoch, President and CEO; Vaden Landers, EVP and Chief Revenue Officer; Tom Jewell, Senior Vice President and Chief Financial Officer; and Houston Frost, Senior Vice President of Prepaid Services. Management will provide prepared remarks and we will then open the call to your questions.

Before we begin, please remember that comments on today's call include forward-looking statements. Forward-looking statements can be identified by the use of such words as estimate, anticipate, expect, believe, intend, may, will, should, seek, approximate, or plan, or the negative of these words and phrases or similar words and phrases.

Forward-looking statements by their nature involve estimates, projections, goals, forecasts, and assumptions and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements, including risks related to the integration of the recently acquired Singular assets, the realization of the anticipated opportunities from the Singular acquisition, management of the Company's growth, the loss of key resellers, the relationships with the Automated Clearinghouse network, bank sponsors, third-party card processing providers and merchants, the loss of key personnel, growing competition in the electronics commerce market, the security of the Company's software, hardware and information and compliance with complex federal, state and local laws and regulations.

These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events.

Payment Data expressly disclaims any obligation or undertaking to update or revise any forward-looking statements made today to reflect any change in Payment Data's expectations with regard thereto or any other changes in events, conditions, or circumstances on which any such statements are based, except as required by law.

Please refer to the Company's SEC filings on its Investor Relations website for additional information. With that, I would now like to turn the call over to Louis.

Louis?.

Thank you, and welcome, everyone. Payment Data Systems had a record second quarter, where we reported record transaction processing volumes and record revenues.

The results demonstrate the success of our strong product offerings and the effect of our aggressive sales and marketing efforts across our ACH, card processing and prepaid card business lines. Revenue in the second quarter was up 146% with organic growth of 14%. The balance of our growth was attributed to the Singular acquisition.

At $6.3 million, revenues were an all-time quarterly record and we are on pace for quarterly record revenue for the balance of the year. Total dollars processed during the second quarter exceeded $821 million, also a Payment Data Systems quarterly record for the previous three years.

Our ACH transaction volumes and the associated revenues increased sequentially for the fourth consecutive quarter. More importantly, we have now recovered from the setback brought by the unexpected acquisition of one of our largest customers.

Volumes now exceed levels that we experienced prior to the loss of the large customer, and we are positioned to build upon that growth.

This quarter, we reported year-over-year growth in both electronic check volumes and returned check transactions processed, with electronic check transactions growing 17% over the same period in 2017 and returned check processing growing 30% over the same time period in 2017.

The market is finding our addition of new sponsoring banks and our NACHA certification as an attractive combination rarely found in the market and the kind of services and security and the variety that meets their increasingly complex and challenging requirements.

To capitalize on the growing momentum, we expanded beyond our traditional markets into the lucrative legal, accounting software, franchise and non-profit sectors. Behind this established momentum, we expect to see continued organic growth in our ACH business, which is also our most profitable business line.

In our card business, revenues were up significantly in the quarter as transaction processing volumes were up 415% and the associated dollars processed were up 291% as compared to the same time period in 2017. Both the Singular and the Payment Data legacy card business continue to generate organic growth as we add new ISV channel partners.

Our prepaid card business continues to grow. We added two new resellers recently that will distribute our gift and incentive cards and are already starting to generate results. Longer term, we see prepaid not only as a fantastic growth opportunity, but as a tremendous complement to our other businesses.

In fact, we find it interesting that our competitor, Stripe, recently announced the formation of a new prepaid operation.

This announcement, in many respects, validates our long-term strategy and suggests that a competitor, over whom we have triumphed many times, believe that they can - that prepaid card processing is important to their future growth.

Based upon the strength of our first half, we believe that Payment Data Systems will record record revenues this year, exceeding $24 million. To continue this momentum into 2019, we're actively investing in our technology and products in order to propel our growth.

We are fortunate that our balance sheet supports our growth plans and we're committed to achieving quarterly cash breakeven point as quickly as possible while simultaneously heavily investing in our prepaid and PayFac businesses.

As a result, we are finding a welcome response in the market, which provides encouraging backdrop for further market penetration. With that, I'd like to conclude my opening remarks and turn the call over to Tom Jewell, our Senior Vice President and Chief Financial Officer, to discuss our financial results in more detail.

Tom?.

Thank you, Louis. Good afternoon, everyone, and thanks for joining our call today. We're going to provide a brief review of our financial results before turning the call over to Vaden. As Louis mentioned, we continue to have a strong balance sheet with cash of $2.7 million, no debt and a clean capital structure as of the end of the quarter.

And as Louis mentioned, through a number of strategic actions and our continually improving financial performance, we are committed to achieving our quarterly breakeven cash flow objective as quickly as possible. And on to the second quarter.

We reported record quarterly revenues of $6.3 million, up 146% from $2.6 million for the second quarter last year. As Louis mentioned, our organic revenue growth from our legacy card, ACH and prepaid business was up 14%, coupled with continued growth related to our Singular Payments acquisition.

As far as gross profits, our profits for the quarter were $1.3 million, up 90% from $0.7 million a year ago. While Singular is generating strong incremental gross margin dollars, they report lower margins because they record pass-through expenses as both revenues and costs.

As a result, when you look at gross margins, our margins were 20% in the quarter, down from 27% a year ago. Our second quarter operating loss was $1 million as compared to an operating loss of $0.5 million in the second quarter of last year. As you look at our results, keep in mind a few factors.

We are incurring non-cash amortization expenses from our recent Akimbo and Singular Payments acquisitions. As with most growth-oriented organizations, we reward our employees through stock compensation, which is also a non-cash charge that is contributing to this year's increased operating expenses.

And as discussed previously, with our commitment to growth, our cost structure reflects higher spending, one, to develop our sales pipeline; two, to launch our PayFac initiative; and three, to invest in our prepaid platform as a growth engine, as Louis mentioned, and a great complement to our other products.

Looking at the business from an adjusted EBITDA perspective, our adjusted EBITDA was a loss of $0.3 million in the quarter compared to a loss of $0.1 million in the second quarter of last year. If you look at the adjusted EBITDA as a percentage of revenue, our loss was a negative 4.4% of sales for the quarter.

For the first six months of 2018, our net cash used in operations was $0.9 million. And as I mentioned in my opening remarks and Louis discussed, we are focused on bringing our cash from operations to the breakeven point.

Bottom line, for the quarter, net loss of $1 million or $0.09 per share, compared to a net loss of $0.5 million or $0.06 per share for the second quarter of last year. Quickly recapping our year-to-date results, revenues were up 126% to $12.1 million with organic growth of about 5%. Our gross profits were up 58% to $2.6 million.

Gross margins year-to-date are 21% compared to 31% in the same period last year. The operating loss for the first six months was $2.1 million, compared to $0.9 million last year and attributable to the increased operating cost as we work to scale the business, develop the prepaid platform and enhance the Singular sales pipeline.

On adjusted EBITDA basis for the six months was a loss of $0.5 million, compared to flat adjusted EBITDA for the same period in 2017. Year-to-date, the adjusted EBITDA margin as a percentage of revenue was negative 4.2%. Year-to-date, our net loss was $2.1 million or $0.17 per share, compared to a loss of $0.8 million or $0.10 per share last year.

Now I'd like to turn the call over to Vaden to discuss our revenue and growth initiatives..

Thanks, Tom, and good afternoon, everyone. It was a great quarter across the board for Payment Data Systems.

We are capitalizing on the vast new opportunities our innovative technology is creating in a market that is hungry for new fintech solutions able to accelerate and simplify the acceptance of electronic forms of payment and facilitate an easier movement of money between consumers and businesses.

As Louis outlined, the ACH business has fought its way back and will shortly [indiscernible] not seen in years. Thanks to the validation accorded by our NACHA-certified Third-Party Senders certification and the relationships with our multiple sponsor bank partners, we have a breadth of capabilities few in the market can match.

So we are being aggressive. New relationships are being established in markets where we see tremendous growth potential, such as law firms, accounting software, franchise groups and nonprofits.

With the momentum we have behind this business and the opportunities in our strong pipeline, we expect to see continued organic growth in the sector throughout the remainder of 2018 and beyond.

In card operations, our legacy businesses are doing well, because we own and control our technology, we have been able to be very nimble in the way that we address and meet the needs of our clients, which has helped us increase market penetration.

Over the last several months, we have been adding new app and software developers onto the platform, primarily in our three targeted industries, health care, utilities and property management.

However, we've also been actively engaged with software vendors in other verticals, such as accounting, transportation and fundraising, as our PayFac-in-a-box solution offers a versatile platform that can support electronic payments across industries.

As mentioned last quarter, virtually simultaneous with the launch of our PayFac platform, we finalized strategic marketing agreements with two new channel partners that will expand our reach into both health care and utilities.

The number of ISVs who have now completed the integration to our PayFac-in-a-box platform has grown to 22, including several who have just gone live in the last few weeks. This represents a significant growth opportunity as we move to the batch boarding phase of implementation.

Our ability to reduce the inherent friction of the mission-critical contracting and onboarding process gives us a competitive advantage in the integrated payment ecosystem.

As our processes in the platform itself continue through the hardening process, our leveraged distribution model is taking shape and beginning to generate positive forward momentum. Volume from users boarded thus far is starting to build and, as mentioned previously, should start to become more apparent in our results in the second half of this year.

While there is currently nothing to report today, our acquisition activity remains robust as the industry continues to go through a period of consolidation. We intend to be buyers and are opportunistically exploring transactions that will provide for further product differentiation, expanded distribution and are accretive in terms of cash flow.

Our prepaid business is also making great strides. We are building on this momentum by continuing to invest in our industry-leading technology, which we are confident is the key to future growth. Prepaid represents both a stand-alone growth opportunity as well as an excellent complement to our other products and services. Things are heating up.

So we are optimistic momentum will soon accelerate. At this time, we'd like to open up the call to questions. Just as a reminder, in addition Tom, Louis and myself, we also have Houston Frost, our Senior Vice President of Corporate and Prepaid Development, on the line to assist in answering your questions.

Operator?.

Thank you. [Operator Instructions] And our first questioner today will be Brian Kinstlinger with Alliance Global Partners. Please go ahead with your question..

Hi, good evening, guys. Vaden, you just talked about the PayFac-in-a-box platform.

Can you discuss end-user adoption, how - what the customers are saying about it, how quickly they're adopting it? And then given that can save customers money, how quickly do you think the sales cycle will be once you start to have a handful of batch customers in place?.

Thanks for the question, Brian. Thanks for joining. As you and I have talked, the platform is very appealing not only to end-user clients but to the software providers that we come alongside and help bring them into the revenue stream on the payments life cycle.

And so what that's done is it allowed us to create strong strategic relationships on the front end of these merchant opportunities, and it gives us access to these merchant opportunities more in a one-to-many selling environment as opposed to the traditional one-to-one selling environment that many of our competitors employ today.

What we found, in response to the back half of your question, is that the integration process has been able - we've been able to shrink that process dramatically down from about five months to about five days on average. Some take longer, some less time.

But for the most part, through the API libraries that we created around the PayFac-in-a-box platform, we've been able to create an environment through which these software developers can quickly and easily integrate to and then begin to work with our sales and marketing teams on activating those downstream customers.

The first step in that process is they have to provide us with a batch file that we use to create merchant IDs for the hundreds or thousands of downstream software customers that use that platform to run their back office.

Now once we have created that batch file and upload it and create those MIDs, the process of then beginning to activate those customers on the system starts in earnest. Then that's where we are really sort of focusing our energy and our time today is on these customers. I mentioned 22 that have completed the integration.

We are beginning the process of activating them on the system. We have activated close to - or not activated but boarded a little over 600 merchants in the last few weeks and have turned on about 250 of those that have just begun to start processing.

So we're in the very, very early stages of really perfecting the processes and understanding what the timetables are going to be in each space of not only integration but activating the customers and seeing how that translates into real volume on the system.

And I expect that in the next quarter and in really the fourth quarter, we'll be able to give you much more detail in terms of how those opportunities are translating to meaningful volume..

And when you said - did you say 250 customers or 250 batches? What was it, 250?.

250 of the 600-plus customers that have - that were batch-boarded have actually activated and are now processing….

And so I think last you and I talked, getting them to activate can be a challenge. Sometimes and other times, it can't be.

What's the sales team doing to kind of push that process?.

The activation isn't as hard. Frankly, it's getting from integration to batch file to getting the merchant IDs generated. That's where we really are spending a lot of time figuring out what's the most efficient way to get from completing integration to getting large-scale batches of customers onto the system.

And we're just continuing to work through how that process is going to work. We batch-boarded 100 property management group onto the system and did that seamlessly. We batch-boarded another couple of hundred taxicab drivers onto the system as well, and that went seamlessly.

And so the process for us really is the most important and critical piece is - once the integration is complete, is getting the software provider to make it a priority to hand over the customer list. And that's where we'll really are going to get better with each one of these that we do.

And as I mentioned before, having now 22 completed the integration, everyone here internally, I can assure you, is laser focused on getting that done..

Well, I guess it'd be good for investors to understand the value proposition to the software partners, why they would want to give you those customers and then what's the value proposition to the end customer? I think that would be helpful for investors to understand..

I'm sorry, Brian.

Did you say to the end customer?.

Well, to the end customer, the taxicab company maybe.

And then what's the - so what's the value to them? But what's also the value to the software partner that's going to sell - essentially sell your product as well?.

Yes. Well, as it relates to the software company, the value to them is in the ability to basically do away with the multiple integrations they have with different gateway providers where there's no real strategic partnership or no plan for how to get their customers to adopt the processing solution.

So we come alongside them and we develop a plan to make that happen sooner rather than later. I mean, it's obviously in all of our collective interest to get that done.

The real benefit to them is that they're able to bring a value, an additional value add through their platform to their downstream customer and, in so doing, cut themselves into the revenue stream associated with payments through a rev share with Payment Data Systems. So that's the value proposition for the software provider.

The value proposition for the downstream user, the cabdriver, as you've said, and the practices that use these practice management systems we're integrated to is that as opposed to having to use some stand-alone piece of equipment or point-of-sale device and manually update payments into their system and reconcile the two at the end of the day in a very, again, manual fashion, by doing this integration and integrating an EMV-capable device directly into the software, they can now process all of their payments, whether it be card, check, cash, ACH, what have you.

They can process all those payments seamlessly inside the framework or their software through integrating to our platform. And they can do it - a lot of times, they can do it cheaper, but we always say that we like to talk to potential clients where price is the last topic of conversation and not the first.

And by leveraging a software platform and creating the value around that, that's typically where we end up..

And this sounds like recurring revenue, if I'm not mistaken.

So talk about the fourth quarter, can you give us some sort of expectation of what would be success to you in terms of dollar contribution to revenue, a range?.

Well, if you think about sort of how we book revenue, the percentage that we charge to downstream merchants ends up translating the topline revenue for the company. And we're charging out there in the average - somewhere in the neighborhood of 2.65% on average to the software customers that are using the technology.

So if you can try to think about for every $1 million of sales volume for those software clients that we've boarded onto the system, we can generate $26,500 or so of topline revenue.

So I don't know that I want to offer up any guidance in terms of exactly how much volume we expect to pile onto the system in the third and fourth quarter, but I can tell you that from the visibility that I have into the pipeline and these 22 that have already integrated and what I'm expecting even in this week in the way of batch files, I expect it to be substantial..

And finally, as it relates to this line of question, who's offering the strongest competition in a similar product?.

I tell you, I think it's probably what we see is Stripe, and it's primarily because Stripe has done such a great job of marketing and using the Internet as a tool to communicate with software developers.

What happens a lot of times is there'll be a CTO who will give a tech guy, developer, on his staff the mandate to go and integrate payments into a software application and not knowing where to look. He'll go and Google it. And the first thing he finds is Stripe, and then he'll go and integrate to Stripe.

He'll go back in his boss' office and tell him, hey, I got it done and we're all set.

And so they don't really realize, in doing that, what the opportunity is to align themselves with a company like a Payment Data Systems that has access to all the different payment tools, the prepaid tools, the ability to evolve and develop with them as they grow their business.

I mean, you - if you are integrated to Stripe, you can't even talk to anyone on the telephone. The only way to communicate with them is through e-mail. So that's clearly not a good long-term solution for a growing software development company, and that's kind of where we come in and we find ourselves migrating business off the Stripe platform.

Now, let's say, a pretty decent percentage of the opportunities in our pipeline that we're working with today are guys who've just outgrown what Stripe offers and they're looking to migrate over to our platform..

Got it, okay. Two more questions, the first one, for anyone, the sequential volume increases in dollars and transactions, you have a few key verticals.

Where would you say the majority of the growth - what's driving most of the growth right now?.

Well, the sequential growth that we talked about is our ACH business line, and we're excited about the four consecutive quarters of growth in not only transactions processed, but returns processed. And we're very hopeful that's going to continue throughout the year.

Why that's important is because five or six quarters ago, we lost our largest ACH customer because they got acquired. So it will show you the strength of our offering and our sales team to recover from such a loss. So it's coming from the ACH side. The growth in the credit card side is coming primarily from the Singular acquisition.

But both of our legacy portfolios Payment Data and Singular, did have nice organic growth this last quarter..

Got it, okay. And then finally, in the past couple of calls, I think you guys have talked about a handful of large procurements that would really lead to sizable growth in terms of volumes and revenue.

Can you just update us on kind of the size of your pipeline and timing of some of these large deals?.

Yes, Brian, when we were talking about, in response to your last round of questions, the fact that we've implemented some cab companies and some - we actually implemented a food truck software and some different things, what you hear me talk about was these health care opportunities, where we really are focused in the utilities and the property management.

I did mention the one group that we turned on. It's about 100 locations of property managers and that is just - we've just turned that on literally in the last few days. So that's going to generate some nice topline growth for us as that volume ramps and mounts.

And then really, in the health care sector where - I would tell you 60% to 70% of our pipeline that we're working certainly on the PayFac side of the business is coming from the health care market.

And the reason why we like health care and utilities and property managers is because they are relatively isolated from attrition, meaning that doctors don't like to make changes. And the only way they're going to change us out is if they change their software system out.

So that's comforting to us and it gives us a high degree of confidence that we can continue to grow as they continue to grow because not only are we walking into a partnership with a software company that has hundreds or thousands of existing customers, they're adding hundreds of new ones a month.

So when we talk to you about the fact that we signed a software partnership and they have 1,000 downstream customers, our first objective is get those 1,000 customers on our system as quickly and efficiently as we can and then we immediately turn our attention to ensuring that there's a way leveraging our boarding application or technology to allow them to - with a new one signed up.

As they're implementing that software, they can then just click a button and turn on their payments inside the software as soon as they go live. So there's the existing piece of business that we want to bring over that's meaningful.

And then that ongoing organic growth that we get just naturally as our software partners grow begins to really get super interesting for us also..

Great. Thank you so much..

Thank you..

[Operator Instructions] Our next questioner today will be [Ron Nesser], a Private Investor. Please go ahead with your question..

I'd like to convey my thoughts to L.A. Hoch. Good afternoon, Louis..

Good afternoon, Ron..

I'm focused on Payment Data Services - Systems opportunities and capabilities - enhanced capabilities. Only a few investors know that you're an expert when it comes to operating an American-based multilingual, bill serve, pay serve call center. That being said, 877-PDS-PAYS could ring off the hook in the seeable - foreseeable future.

I don't know if you remember, but years ago, you mentioned something about you were focused on California. I don't know if that was Silicon Valley or whatever, but now there's an office in Long Beach, California. My first question would be what will that office focus on? My second question is, you mentioned utilities.

And if my memory serves me correctly, you were awarded Patent 7,021,530, circa 2006, and that covers paying utilities with plastic.

I'd like you to comment on any role of that, that's you can, please?.

Well, Ron, in Long Beach, we have graphic developer there. It's the only person employed at that location. So other than working on our graphics and card packages and websites, that's about all that's going to happen in California at this time.

We do have tons of customers in California but those are - have been - they have been secured from our sales efforts in San Antonio and Nashville.

So we - as for your second question - what was you second question again?.

Well, the second question basically is the 7,021,530, which was awarded to you circa 2006, it covers paying utility bills with plastic.

Does that hold water? Do you have any plans on pushing that or getting behind that in the future?.

Well, we hold a perpetual license to that patent that we developed because we sold that patent - I don't remember when, but it was pretty much after we received the pattern. We didn't believe we had financial resources to enforce it. We sold that patent for, if my memory serves me, $750,000. But we hold a perpetual license to it for our use.

So we're definitely utilizing that license in our consumer base card programs..

Okay. Well, as long as it's still in the deck of cards, I imagine it could come to fruition in the foreseeable future. I'm kind of - I'm interested in the bank-independent card solutions that you - that cater to the non-bank because according to the CEO of PayPal, there are 2 billion people worldwide that don't have a checking or banking account.

Have you looked into advertising these bank-independent card solutions and maybe smartphone, combination solutions to help the non-bank masses network in a fast lane?.

Well, definitely. We believe that we have the best consumer base card program in the marketplace in terms of features and fees, low fees. That's akimbocard.com. And part of that customer base is unbanked consumers. So they can use that card to transact business just like they would if they had a bank account. They can do direct deposits.

They can obviously use the card anywhere. It's accepted worldwide. They can make ATM withdrawals. So part of the strategy of Akimbo card is marketing to unbanked, and we do that every day on Internet. So we do not process international card issuance, but our cards can be used internationally..

Okay. There was a time back when I talked to [Mr. Wong]. I was inquisitive about why he didn't advertise Payment Data Systems like I'd like to see it advertised. He said it's cost-prohibitive, which I can understand.

I'd also like to mention that when you have household names like MasterCard, Visa, Discover, American Express, on and on, you can't step on their toes or in front of them, but you - we'll have to use their household, recognized logos to produce and to advertise your Akimbo FiCentive cards.

Is there anything in the works on spending a little more money at this early juncture on advertising?.

If you Google Akimbo card, you're going to see ads. If you're on Facebook and you're talking about prepaid card, you're going to see ads. We believe we're appropriately budgeted for our marketing campaigns for our consumer base program..

Okay, I appreciate that. Thanks for your reply and I'll follow your stock on a day-to-day basis. Currently, it's at 4.17% after hours. And I wish everybody the best..

Thank you, Ron..

And our next question will be a follow-up from Brian Kinstlinger of Alliance Global Partners. Please go ahead..

Great, thanks. I just wanted to get some metrics. You said credit card processing - processed dollars was up 7% sequentially.

Is that - do I have the numbers right, $800 million in the first quarter separate to the - a little above $850 million?.

Credit card dollars versus last year were up 291%..

Yes, I was talking sequential with the Singular, obviously. In the first quarter, if I'm not mistaken, you bought $800 million.

And then so that - I would take 7% from there?.

No, the $800 million number includes payments to all of our channels, ACH and credit card..

Have you given or could you give dollars processed on credit cards?.

We haven't really said in the past. We'll look at if we're going to start doing that..

I see, okay. That was really, I wanted to understand that.

And then - well, the total dollars processed, how much did that increase then from that first quarter?.

I don't remember the first quarter number.

Tom, do you remember it?.

Just one second..

Obviously, we announce - what was it?.

It's about 5%..

Tom said about 5%..

5% from the $821 million that you report this quarter..

Yes..

Okay, all right. Thank you..

Thanks..

And there looks to be no further questions at this time. So this will conclude our question-and-answer session and today's conference call. Thank you for attending today's presentation and you may now disconnect your lines..