Good day, everyone, and welcome to the Payment Data Systems’ Third Quarter 2017 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please do note that today’s event is being recorded. I would now like to turn the conference over to Preston Graham of Investor Relations. Please go ahead.

Thank you, and welcome to Payment Data Systems’ third quarter 2017 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 section. On the call today are Louis Hoch, President and CEO; Vaden Landers, Executive Vice President and Chief Revenue Officer; Houston Frost, Senior Vice President of Prepaid Services; and Tom Jewell, Senior Vice President and Chief Financial Officer. Management will provide prepared remarks and then we will open the call to your questions. Before we begin, I would like to remind you 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 asset, the realization of the anticipated opportunities from the Singular acquisition, management of the Company’s growth, the loss of key resellers, the relationship 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 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 statement is 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.

Thank you, Preston, and welcome, everyone. The Company’s revenue growth plan is now yielding results, and we’re pleased to report a strong third quarter. Revenues increased 17% year-over-year; credit card processing transaction volumes were up 33% over the third quarter of 2016; and the associated dollars processed increased 77% as compared to the third quarter of 2016. Both these operating metrics for transactions and dollars processed achieved all-time records for the company. We expect that trend to continue in the fourth quarter of 2017 and throughout all of 2018. While electronic check transactions were down 18% and return check transactions processed were down 16% compared to the same time period in 2016, the electronic check transaction volumes during Q3 were up 3% as compared to the second quarter of 2017, and the return check transactions processed in Q3 were up 16% over the second quarter of 2017. In addition to growing our existing business through the introduction of new services and newly acquired customers, we closed the Singular Payments acquisition in September. We added talented leadership, sales and a robust customer base that we now perform credit card processing for. Vaden Landers, former CEO of Singular Payments, has assumed the role of Executive Vice President and Chief Revenue Officer. We’re fortunate to welcome as a senior leader in our company. Also in the third quarter, we announced the availability of same day ACH debits. This offering facilitates a faster service that extends to all U.S. bank accounts and enables businesses and consumers to send and receive payments on the same banking day through the ACH Network. This service demonstrates our commitment to being an innovator in the ACH processing services. With our well-established electronic check and credit card processing service, and our growing prepaid card and PINless debit businesses, we…

Thank you, Louis. I’m going to provide today a brief overview of our financial results before we turn the call over for questions. Payment Data Systems is in solid financial condition, with $2.2 million in cash and cash equivalents, positive cash flows from operations for the year, no debt and the recent acquisition of Singular Payments. For the first nine months of 2017, we generated net cash from operations of 33,000. Going into the third quarter, we reported revenues of $3.6 million, up 17% from the third quarter last year. For the full year – for the nine months, revenues were $9 million, down 2.6% compared to $9.2 million for the nine months ended September 30, 2016. For the nine months, the decrease in year-to-date revenues was primarily due to decreased ACH transactions and returned transactions processed, offset by one month of robust credit card revenues as mentioned previously. Gross margin dollars in the third quarter were $825,000 or 23% of revenues compared to $965,000 or 31.5% of revenues in the third quarter of last year. Gross margin dollars for the nine months ended September 30, 2017, were $2.5 million or 27.5% of revenues compared to $2.9 million or 31.5% of revenues in the corresponding prior year period. The decline in gross margin dollars was also due to the lower ACH and return profit dollars, offset by higher credit card gross margin dollars. For the third quarter, our operating loss was $892,000 compared to an operating loss of $575,000 in the third quarter of last year. Operating losses for the nine months ended September 30 were $1.8 million compared to an operating loss of $1.1 million for the same nine months ended September 30, 2016. On an adjusted EBITDA basis, for the quarter, we had negative $347,000 compared to a…

Thank you, sir. We’ll now begin the question-and-answer session. [Operator Instructions] And our first question of today will be Laura Engel with Stonegate Capital. Please go ahead.

Good afternoon. Thanks for the good information and some of the updated guidance as well. I wanted to see if you could just give us a little more detail on the lower gross margins for the quarter. I know you said that this could be attributed to some of the credit card business being brought over with the acquisition. Can you just tell us a little bit more about the length of those contracts? And maybe how we should think about that going forward for the next few quarters?

Thanks, Laura. Good to hear from you. Yes, they are clearly longer-term agreements. As we talked a lot about what we’re doing is we’re signing up customers through software integrators. And so we’re an add-on product as a part of that. And typically, those customers have a very long life. In the analysis of the acquisition we were looking at the lifetime of the customer, and we’re very pleased with our ability to retain our customers.

Great, okay. And then also just related to the P&L, can you remind us what’s in this other expense category? It had a little bit of a jump this quarter up to about $1.2 million. What’s in that? And are there expenses in there that are nonrecurring or maybe related to the acquisition or the transition?

Yes. That’s our SG&A expense. And so we had obviously some costs associated with the acquisition. And then there were some legal expenses that were incurred during the quarter that we do not expect to reoccur in the fourth quarter to the extent that it did.

Okay, great. Well, great quarter and I appreciate you taking my questions, I’ll get back in the queue.

Thank you.

Thank you.

And our next questioner today will be George Doss with Wells Fargo. Please go ahead.

Yes, George here. I was just wondering about on the gross margin going forward, what should we expect? I think you said you were 23% this past quarter. Do you see improvement in that each quarter going forward? What are you striving for?

Yes. We expect to see improvements. We’re doing a lot of things to decrease the cost and increase the profits. I guess, as you integrate an acquisition, we look to probably see some modest increases in the fourth quarter and then into the early part of 2018.

Okay. All right. And any other acquisitions on the horizon now that you filed for, I guess, more money?

We’re definitely looking at – always looking at potential acquisitions. I mean, we filed an S3. It’s a shelf offering, if you’re familiar with it. It’s limited in what we can raise, and that’s the primary purpose of that offering. But we haven’t announced anything about potential acquisitions at this time.

Okay, thanks.

Thanks, George.

And our questioner today will be from Ron Nisser of Private Investor. Please go ahead.

Yes, Louis.

Hi, Ron.

I’ve got a few things that time juggling to try to figure out how soon profits will rise with Payment Data Systems. In 2003, the percent of part of the building and payment equation was placed on the back burner, and pay serve on the front. The stock was trading at $0.03 at that time and we’ve come a long way. You can’t develop and avoid a complete end-to-end payment network without billers. Can you tell me at this juncture how many biller names are in the trying through digital modular service at PDS headquarters?

We’re able to send bill payments electronically to almost 4,000 billers in the United States.

4,000, Okay. That’s quite a few more names or billers than you had in 1998. That being said, there’s such a tremendous demand for helping hand prepaid card solutions. I was wondering, with your background, a lot of few – only a few people know you. You’re educated at running a call center. Do you see getting more involved with donation cards or cards that could become a helping hand during the cleanup and rebuilding process after the floods and fires?

Ron, Houston Frost, who heads up our prepaid, I’ll let him answer that question because he had some success delivering cards to hurricane victims through charities. Do you want to answer that, Houston?

Hi, Ron. Yes so this is Houston Frost, SVP of prepaid products. We actually ran a campaign after the hurricanes whereby we offered sort of discounted, even free plastics for hurricane victims. And we have had several nonprofits take us up on that. It – part of that was, one, to help out the victims obviously of the hurricane. But the other was to kind of promote the use obviously of these cards for the purpose you’re referring to. So we actually sent out a couple of thousand cards over the last quarter, specifically on those use cases. We had several small orders and a couple much larger orders with foundations. And we hope to see that use case continue on our gifts and incentive programs.

Do we have a dollar amount that went out?

Over $250,000 went out.

And so I’d like to add. I know that Jason Moore is listed as one of the insiders or one of the people helping run the company. I would think that his expertise with being Paris Hilton’s agent at one time, he could contact some celebrities and help promote these helping hand load and reloadable prepaid cards, which, I believe, would streamline the cleanup and the rebuilding process. And Houston, while I have you on the phone here, I’m not quite – I’m not familiar with your PhD in biometrics, and I was wondering how it might tie in with Near Field Communication, if any, voice, face recognition. Can you comment on your expertise?

Hi, Ron. So my PhD is actually in chemical engineering. It’s certainly – my experience as academic researcher and as an engineer helps out my day-to-day just problem-solving and other things. It’s a little bit hard to comment specifically on biometrics because unfortunately, that wasn’t a focus of mine during my academic career. In general, I’ll say my education has been a good foundation for me in my professional career.

Yes. I understand the Payment Data Systems management’s highly educated. And what I see coming down the pipe as fast as it can develop and deploy at web speed is iPhones that can be waved in front of the readers once the readers are set in place and you have this Near Field Communication that will create more recurring revenue and click fees than cards in the foreseeable future. And if you could combine smartcards with smartphones then you might have some military-grade security. Maybe I’m pushing the envelope too hard here, but the iPhone – or the Apple iPhone and iTunes, I think it could meld seamlessly with games, and there’s some click fees involved in that juncture or that pursuit. That being said, do you see in the foreseeable future that you’ll be using – or being handling and processing recurring transactions from NFC-enabled iPhones?

Well, I think on the issuing side on the prepaid cards side, card tokenization and digital cards have been at the forefront of our thinking and really our product development. We’ve made announcements of this in the past that we are really the first two market period full stop with a fully digital gift or incentive card. And in fact, we have several large clients – large companies leveraging that platform today primarily for R&D. But we see a lot of areas where those companies can use our digital card platform. So we’re able to deliver cards both instantly and digitally direct to an Android phone, an Apple phone and those cards can be immediately provisioned into the mobile wallet. And that’s really kind of in the first of its kind. We are starting to see some of the competition catch up there but we’ve been so early that I think we’re just starting to see some of the benefits from being first to market there. There’s innumerable applications for that kind of platform. And in my opinion, we’re just at the very early days of seeing cards move from a plastic form to a digital form that will be in a variety of devices, not just mobile phones but there’ll be encoded in a chip in your car, on your watch, on a keychain. So I think long-term, we fully believe plastic will go away, and it’ll be completely replaced by electronic devices and tokenized cards within the electronic devices. And we want to continue to be right at the forefront of that. It’s a long-term trend. We’re in just the first few years of it. But certainly, we want to continue to be pioneers and leaders in that. And I think some of the applications you mentioned are interesting, and there are several others. I can tell you, we’re in close contact with MasterCard’s inbound team about all sorts of new things that they have been working on and empowering. And so we’re excited to be kind of close to those guys and see what’s coming down the pipeline in terms of new devices and new products. And so I think you’re going to see a lot of exciting stuff over the next couple of years when it comes to digital cards.

Yes, sir. Inch by inch is a cinch, yard by yard is hard. Just so happens I have a couple of friends that came back from China and Taiwan and they were amazed how much ahead they are of the United States when it comes to using smartphones and voice and face recognition. Wave your iPhone in front of a card or whatever and you make your payment for your meal or go through a turnstile and registers when you got on or off a train and knows when to bill you and how to bill you correctly. And if you don’t have one of the cards in Japan, you can’t get through – to the train or can’t go through the turnstiles when you got off the train. For that, and other reasons, I focus on 21st century Payment Data solutions and, I believe you’re sitting in the catbird seat. And if you can get the right backing, it’s "Katy, bar the door!", but again, inch by inch is a cinch, yard by yard is hard. I’ll hang up on that note and wish everybody the best.

Thanks, Ron.

[Operator Instructions] And there looks to be no further questions. So this will conclude the question-and-answer session and today’s conference call. Thank you all for attending this presentation. You may now disconnect your lines.