Fourth Quarter 2015 Financial Highlights

• Revenues were $3.7 million
• Gross margins were $1.4 million, or 37.8% of revenues
• Operating income was $136,991
• Adjusted EBITDA1 was $670,625, or 18.3% of revenues
• Net income was $164,842, or $0.01 per diluted share

1See Reconciliation of GAAP Operating Income to Adjusted EBITDA in the accompanying financial tables

Year Ended December 31, 2015 Financial Highlights

• Revenues were $14.4 million; up 7.4% from $13.4 million in 2014
• Gross margins were $5.0 million, or 34.5% of revenues; up 18.8% from $4.2 million, or 31.2% of revenues in 2014
• Operating income was $946,877, compared to $2.3 million a year ago
• Adjusted EBITDA2 was $2.9 million, or 20.1% of revenues; up 12.1% from $2.6 million, or 19.2% of revenues in 2014
• Net income was $1.0 million, or $0.08 per diluted share, compared to $3.8 million, or $0.41 per diluted share in 2014
• Cash flow from operations was $2.1 million; up 4.2% from $2.0 million in 2014

2See Reconciliation of GAAP Operating Income to Adjusted EBITDA in the accompanying financial tables

2015 Full Year Operating Highlights

• Total dollars processed for 2015 set a new record, exceeding $3.3 billion, an 18% increase from 2014.
• Total transactions processed for 2015 also reached a new high at more than 14.3 million, a 10% increase from 2014.

Management Commentary

“I am proud to report that our focus on innovation and delivery of world-class payments processing technology for our customers drove record revenues and results across all key operating metrics in 2015, and for the first time we exceeded the $3 billion mark for total dollars processed in a year,” said Michael Long, Chairman and CEO, Payment Data Systems, Inc.

“This is truly an exciting time to be in the payments space. The rapid growth of e-commerce, online mobile payments and new alternative payment methods is driving significant change in the payments market, with electronic payments now exceeding 85% of all non-cash payments,” added Long. “As never before, merchants need to manage the complexity to thrive and are looking at payments and payment innovators much more strategically than in the past. We serve unmet needs in a fast growing market that demands secure, adaptive, and convenient payments and prepaid products – and because of the customization and innovation we provide in meeting these needs, we have created a loyal base of customers.”

Payment Data Systems, Inc. President and Chief Operating Officer Louis Hoch said, “2015 marked a year of significant accomplishments that position Payment Data Systems for long-term growth. Our strategies for long-term value creation are two-fold. We plan to drive organic growth by continuing to expand our payment processing business with new customer verticals through resellers and integrators and by increasing prepaid product sales by leveraging our powerful Akimbo user interface. On the acquisition front, we will selectively evaluate strategic acquisitions that enhance or bring additional products and services to our current model, with the goals of increasing customer satisfaction, generating additional opportunities to cross-sell, and creating opportunities to engage new clients. We will also evaluate portfolio acquisitions at accretive multiples.”

Hoch added, “During the fourth quarter, our revenues were down slightly due primarily to lower ACH volumes. In addition, in October, we introduced our new eCheck verification service that significantly reduced return check rates for our customers. The eCheck service improves quality for merchants and we expect it to continue to provide an attractive revenue stream. Although each eCheck verification transaction generates lower gross revenue than a returned check fee, an eCheck transaction has a higher gross margin and is more profitable than returned check fees. As a result, our gross margins remain intact even though our total revenues are unfavorably impacted by this mix shift.

“Based on a strong customer pipeline, we expect to resume revenue growth in the second half of 2016. We are excited about the growth prospects ahead for 2016 and beyond, and we look forward to reporting on our progress on our growth strategies in future quarterly calls.”

“Our 2015 results reflect continued investment in technology, product development, sales, customer service, and compliance while remaining profitable,” said Habib Yunus, CFO, Payment Data Systems, Inc. “Our revenues, gross margins and Adjusted EBITDA margins each grew versus last year but net income was impacted by higher SG&A, and one-time expenses related to the Akimbo acquisition and NASDAQ uplisting.”

“Our balance sheet is strong, with $4.1 million of cash. We remain debt free and generated positive cash flow from operations of $2.1 million in 2015. This positions us well to pursue future growth opportunities,” said Yunus.

Financial Results

Three Months Ended December 31, 2015

Revenues of $3.7 million decreased 2.7% compared to $3.8 million for the fourth quarter of 2014, as record credit card processing volumes were offset by a decline in ACH volumes and returned check processing fees.

Gross margins of $1.4 million, or 37.8% of revenues, compared to $1.4 million, or 38.0% of revenues, in the corresponding prior-year period.

Operating income was $136,991, compared to $931,390 in the fourth quarter of 2014, reflecting higher selling, general and administrative expenses, including higher non-cash compensation expense, to support the Company’s growth, and higher amortization expense related to the amortization of assets purchased from Akimbo.

Adjusted EBITDA (Earnings before interest, taxes, depreciation and amortization adjusted for non-recurring and non-cash items) was $670,625 compared to $1.0 million in the corresponding prior-year period. Please see a reconciliation of Adjusted EBITDA to operating income in the accompanying financial tables.

Net income was $164,842, or $0.01 per diluted share, compared to $2.5 million, or $0.27 per diluted share in the fourth quarter of 2014, primarily reflecting higher expenses in the fourth quarter of 2015 and the release of a deferred tax allowance in the fourth quarter a year ago.

Year Ended December 31, 2015

Revenues of $14.4 million increased 7.4% from $13.4 million in 2014, driven primarily by increased ACH and credit card transaction volumes.

Gross margins increased 18.8% to $5.0 million, or 34.5% of revenue, from $4.2 million, or 31.2% of revenue a year ago.

Operating income was $946,877, compared to $2.3 million a year ago, reflecting higher selling, general and administrative expenses, including higher non-cash stock compensation expense, to support the Company’s growth, one-time expenses related to the Akimbo acquisition and listing on NASDAQ, and higher amortization expense related to the amortization of assets purchased from Akimbo.

Adjusted EBITDA (Earnings before interest, taxes, depreciation and amortization adjusted for non-recurring and non-cash items) of $2.9 million increased 12.1% from $2.6 million in 2014. Please see a reconciliation of Adjusted EBITDA to operating income in the accompanying financial tables.

Net income was $1.0 million, or $0.08 per diluted share, compared to $3.8 million, or $0.41 per diluted share a year ago.

Balance Sheet

At December 31, 2015, the Company had $4.1 million of cash and cash equivalents.