Usio, Inc.

Good morning, and welcome to the UCO Earnings Conference call for the first quarter, ended March 31, 2022. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your questions, press star, then 2. Participants of this call are advised that the audio of this conference is being broadcast live over the Internet and is also being recorded for playback purposes. A replay will be available shortly after the end of the call through May 26, 2022. And now I would like to turn the conference over to Joe Hassett, Investor Relations. Please go ahead.

Thanks, Tom, and thank you, everyone, for participating in today's call. Welcome to UCO's first quarter fiscal 2022 financial results conference call. The earnings release, which UCO issued yesterday after market closed, is available on the company's investor relations website at uco.com backslash investors on the news. On this call today are Louis Hope, President and CEO, Tom Jewell, Senior Vice President and Chief Financial Officer, Greg Carter, Executive Vice President of Payment Acceptance, Houston Frost, Senior Vice President of Prepaid Services. Management will provide prepared remarks, and then we'll 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 other 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 that differ materially from those expressed in the forward-looking statements, including risks related to the COVID-19 pandemic and its effect on the economy, the realization and the opportunities from the IMS 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 volatility of stock price, the loss of key personnel, growing competition in the electronic commerce market, the security of the company's software, hardware, and information, compliance with complex federal, state, and local laws and regulations, and other risks detailed in the company's filings with the SEC. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as prediction of future events. UCO expressly disclaims any obligations or undertakings to update or revise any forward-looking statements made today to reflect any changes in UCO's expectations with regard thereto or any other changes in the 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 the Investor Relations website for additional information. And with that, I would now like to turn the call over to Louis. Louis?

Thank you, Joe, and welcome, everyone. I'm pleased to report that it was another record quarter for UCF. For the quarter, revenues were a record 18.1 million, a 35 increase from a year ago. All of our growth this quarter was organic. While adjusted EBITDA was marginally negative for the quarter, we generated positive adjusted cash flow for the fourth consecutive quarter and ended the quarter with $7.6 million in cash, virtually no debt, as we continue to strengthen our balance sheet. Once again, we experienced outstanding growth across all of our business segments. ACH, card processing, prepaid card issuing, output solutions. As a result, total dollars processed in the first quarter were $2.2 billion, up 18% compared to the same period last year, while total transactions were $10.5 million. Our strategy of being a diverse fintechs payment processor by delivering our services to a variety of end markets with a mixture of electronic payment channels, allows for continued growth when economic conditions aren't optimal. This was clearly demonstrated in the first quarter where we generated growth above our guidance despite experiencing weakness in one of our growth verticals, cryptocurrency. However, because of the strength in our other markets, we easily absorbed this weakness and still generated 35 percent organic revenue growth. Consequently, we are reiterating our guidance and expect strong 18 to 20% revenue growth in 2022, while also anticipating continued positive adjusted operating cash flows. And we're also reiterating our expectation of positive adjusted EBITDA for this year. With adjusted EBITDA significantly improving in subsequent quarters from the first quarter, when we made significant investments in the business to accommodate future growth. Also, the Board of Directors has authorized a repurchase of up to $4 million of the company's common stock from time to time on open market block transactions or in privately negotiated transactions. More information on the stock repurchase program will be published soon. In particular, The following items temporarily depressed margins and increased expenses in the first quarter. We incurred approximately $650,000 to produce plastic cards that we anticipate issuing in future quarters under the Voyager Digital Debit Card Program. While there's no margin on the sales of these blank cards, Voyager's instructions to inventory these blank cards is a strong sign that they expect to be issuing these cards to their customers in the very near future. As previously communicated on our last call, we've been investing in our call center operations to be ready for the influx of customer interactions that we expect will occur. And as such, we incurred significant upfront expenses to expand and strengthen our customer service organization, both to manage the increased growth and to be prepared to meet the demands of our Voyager Digital Debit Card Program, where we will be servicing customers as well as issuing the cards and processing the transactions. Thus, we will be receiving three separate revenue streams under this program. A large prepayment program concluded in the first quarter. this program in which we shared a larger than normal proportion of the breakage and spoilage on the unused card balances with the program sponsor. This tends to depress margins on those revenues. Margin on spoilage and breakage with many other prepaid program sponsors have been negotiated at significantly better margins, and we expect to start to see large increased contribution from these expiring contracts during the second half of the year. Finally, there was about $200,000 of non-recurring expense in the quarter, which Tom will go through in a minute. Consequently, while guidance is conditioned on enthusiastic fintech lending and cryptocurrency industries, as well as no appreciable deterioration in the economic conditions, we feel very strongly that we will be able to achieve our objectives this year. In fact, we consider the prevailing sentiment about these near-term economic outlet is favorable for some of our business lines that tend to outperform in these types of economies. Now, let me offer some high-level comments by business line. ACH and complimentary services revenue was 3.8 million, up 25%, as transaction volume was up 21%. Return checks process were up 32 percent, and electronic check dollars were up 16 percent. Growth in the quarter was impacted somewhat by the weakness in the cryptocurrency market. Since the second quarter of last year was by far the peak in cryptocurrency-related volume, we anticipate the second quarter this year will lag the results we experienced last year. However, we are optimistic for a rebound in ACH over the second half of the year, not just based upon a recovery in cryptocurrency market, but the lending and other verticals that we serve, where we have historically benefited from periods of inflation and slow economic growth. In addition, ACH continues to board new customers. So we are confident that we will see strong growth and healthy contribution margins in this business line through the course of this year. In card, PayFact continues to drive significant growth. PayFact transaction volume was up 67% in the first quarter, which drove another strong increase in card revenue, which is all the more impressive when considering this growth is from the highest revenue base of any of our business lines. Total dollars process were up 21% and transactions process were up 48%. Total dollars process exceeded $325 million in the quarter, which puts us well in front of last year's pace of finishing with over $1 billion in volume process. Both volume and transactions were all-time quarterly records for the company. After doubling last year, prepaid is off to even a better start, with revenues nearly tripling. More importantly, total dollars loaded on prepaid cards in the quarter, which is a leading indicator of future revenues, exceeded $69 million in all-time quarterly records. As I mentioned earlier, prepaid recognized $650,000 of revenue from the first Voyager digital prepaid plastic pre-order for cards, and similarly recognize significant spoilage and breakage revenue on a completed program, although below normal margins. We're getting excited about the launch of the Voyager debit card program, which is already being strategically introduced to a selective group as an effective launch of this program. The rollout is expected to start to accelerate soon and then throughout the remainder of the year. Voyager is hopeful to have great adoption among their 3.5 million users. At the same time, many of our original COVID relief programs are coming to a close. As some of the early COVID vaccination incentive programs, which have current balances exceeding $20 million, which is subject to revenue from spoilage. Having implemented over 200 prepaid programs, we expect to see a steady stream of expiring cards, at which point we will realize any breakage or spoilage associated with these programs. The first significant tranche of these expirations should occur in the third quarter and continuing somewhat steadily from that point forward. as mentioned earlier, with much more favorable economics. Houston Frost will talk about this and other new prepaid programs in just a minute. Finally, Output Solutions had another strong quarter with revenues up 25% as they began their second year as part of the UCO family. One of the biggest changes that has helped Output Solutions has been the addition of a dedicated sales organization. which didn't exist prior to our acquisition. This has yielded the addition of new customers while simultaneously many of our utility and other customers continue to grow. In the first quarter, we set a record for transactions or pieces processed at over 2.9 million. We expect to see output solutions continue to make a valuable contribution to our revenue and profits. While overall gross margins in the quarter were temporary slowed as previously mentioned, we view those expenses as growth investments that strengthen our overall infrastructure and provide us with a solid foundation that can be leveraged as revenues increase. Beginning in the second quarter, we expect to see margins increase and overhead to remain relatively flat. We feel that these investments We're both wise and affordable given our very low customer acquisition costs that create tremendous leverage in our model. Each additional dollar of revenue is incrementally more profitable as we have very few direct costs associated with the additional dollars processed. Thus, with a more robust infrastructure in place, we can significantly grow the business without much increased expense. And we generated positive adjusted cash flow of $500,000 in the quarter, further strengthening our financial position while we were undertaking these investments. In summary, I consider the first quarter a great start to a year that I think could be transformational for UCF. Electronic payments or FinTech is extremely exciting space where innovation is being rewarded. And we have plans to introduce exciting new products and solutions in virtually all of our operations this year. We have made the decision in the first quarter to absorb the cost and prepare the organization to capitalize on numerous growth opportunities that are imminent. Now we are prepared to leverage that investment for future growth. With the resources in place, we can now focus on continuing the outstanding top-line growth that we have generated each quarter for almost two years. And with that, using our improved scale to drive an increase in the bottom line to create value for our shareholders. I would like now to turn over the call to Houston Frost, our Senior Vice President of Prepaid Services.

Thank you, Louis, and thank you, everyone, for joining our call this morning. The prepaid business had another great quarter, with revenues up 212 percent to $2.8 million, driven by a 270 percent increase in card transactions processed, a 134 percent increase in load volume, and a 139 percent increase in purchase dollars processed. Total dollars loaded on prepaid cards in the quarter exceeded $69 million, an all-time quarterly record, and a sequential increase from last quarter, $65 million. I'll also note that revenue growth has now grown sequentially for five consecutive quarters. Growth continues to be driven by our position as the leader in supporting various fund disbursement needs of governmental, municipal, charitable, and related entities. To date, we have been the prepaid program manager on approximately 200 of these types of programs, which we believe could be over 300 by the end of the year. Much of our opportunity is arriving from the continued development of new use cases and applications for the many programs run by governments and nonprofits. As discussed previously, we participate in the MasterCard City Possible program, which is a new model for urban innovation in which a global network of cities, businesses, academics, and communities work together to make the world's cities more inclusive and sustainable. It's a new model of public-private partnerships that unites the private sector to work with cities to co-create initiatives that bring cities, companies, community, and communities together to identify common challenges and co-develop solutions that advance inclusive and sustainable urban development. Many of these new initiatives require an effective means to disperse funds to residents, and UCO has been able to provide an efficient and transparent solution to this common challenge for these various programs, particularly with our ability to deliver cards electronically and provide detailed data on the use of funds. We are also continuing to move forward with MasterCard Civic Assist platform, which is developed on the Oracle Cloud to provide seamless integration between our funds disbursement capabilities and the various systems used by governments and nonprofits to administer programs such as scholarships, unemployment, food subsidies, guaranteed income pilot programs, and potentially pension and healthcare payments. Our money disbursement integration will offer entities a number of disbursement forms, including ACH, card, virtual card, and check. As we see the original COVID relief and subsequent vaccine incentive programs mostly winding down, they have been more than replaced with a multitude of new government programs, and several in the pipeline. For instance, we are running several dozen guaranteed income programs in places like Chicago, Phoenix, and Washington, D.C., just to name a few of the major cities that are utilizing our technology. In contrast to the low-dollar but many-user model of the expiring programs, many of these guaranteed income programs are for two, three years or longer and involve fewer participants but far larger disbursements. In general, since our revenue is based on dollars dispersed, these are much easier programs to administer that generate equal, if not greater, revenues. As just one example of the unique programs that have implemented our technology is one for previously incarcerated women that are being provided funds to reacclimate to society, and those funds are dispersed on a virtual card. We believe there are practically limitless applications of our technology, and we are just scratching the surface. As Lewis mentioned, there is great excitement around the introduction of the Voyager digital debit card program. While this program is just getting started, Voyager has been rolling out cards to employees since early April, and over the past few weeks have been rolling it out to a limited data list for further validation. It is our understanding that beginning in June, assuming no hangups, they will begin to accelerate the rollout to the larger group of customers that signed up to be on their wait list. We are gearing up for this program. In the first quarter, as Lewis mentioned, we produced about $650,000 worth of physical cards for eventual fulfillment and expanded, and we've also expanded our customer service centers. We've also significantly, we've expanded our customer service centers over the past five months. While this was accelerated to handle the sizable New York City vaccine incentive program, it has also prepared us to handle the anticipated Voyager volume and continued growth with the prepaid business in general. The Voyager card order, which was passed through at cost, as well as increased telecom expenses related to customer service, dramatically reduced our gross profits this quarter. However, higher margin fees on card creation will be generated as the Voyager cards are ordered and fulfilled. And we will also begin to collect revenue from inactivity fees from the NYC vaccine incentive cards beginning in September. So, we're dealing with somewhat of a mismatch between the time we are incurring expenses and generating revenue on some programs. As such, we do expect margins to expand significantly over the next few quarters. We are also working to grow our for-profit customer base. Inmar, a leader in the ad tech space, attracts several million rebate checks each year as it is currently in implementation. We expect the growth to accelerate as they migrate their portfolio from a competitor and onto our platform. I'm very pleased with the progress we have achieved over the past several years, and I'm equally excited about our opportunities for the future. I'm confident 2022 will be another great year of growth in the prepaid business. And with that, I'll go ahead and conclude my remarks and turn the call over to Greg Carter, Executive Vice President of Payment Acceptance.

Thank you, Houston. And let me begin by echoing Lewis's earlier comments that the new year is off to a great start. After a breakout 2021, our payback business line continues to generate strong growth. PayFact revenues were up strongly in the first quarters as volumes were up 67%. This led to an 18% quarter-over-quarter growth in total card revenue as total dollars processed in the card business, including legacy, increased 21% and transactions were up 22%. Card operations were also profitable for the fourth consecutive quarter. PayFact remains our growth engine. In the first quarter, we continued to sign several new ISV agreements. Some have already completed the integration process and are now live and processing volume. We have more ISVs in some phase of integration and implementation than we ever have, demonstrating that our value proposition is recognized. Our pipeline also remains robust, including a sizable opportunity in the healthcare space that would be our largest account today. Both attrition and our penetration of the ISV customer bases remain much more favorable than industry averages. One example of how we continue to grow with our existing ISVs is a software provider in the healthcare industry. They implemented two years ago with modest initial volume. Now their volume is up 500%, primarily because of our continued penetration efforts, but also because they've mandated that all new subscribers utilize our Payback platform. The same can be said with a more recently integrated franchise operator. They are mandating that all new franchisees adopt the UCO PayFax solution, a win-win for both UCO and the franchise operator. Using our proprietary partner scorecard, we can show ISVs how this simple strategy can substantially improve their economics as they grow the volume of electronic payments flowing through the UCO PayFax. These are great examples of how increased penetration leads to one of our top growth engines. From a growth perspective, our PayFab business is a three-legged stool. We continue to add new ISVs. Those ISVs continue to grow their customer base, and the individual merchants continue to grow as well. This is what we call our leveraged distribution model. Last quarter, I described a couple of new products under development. A funds disbursement solution we are calling Consumer Choice and point-of-sale lending, also known as Buy Now, Pay Later. Both products are now fully commercialized and are being enthusiastically received. In particular, point-of-sale lending is attracting interest from our dentists, veterinarians, and other similar merchants who can now offer their customers a flexible installment payment option to better manage an unexpectedly large bill. Additionally, consumer choice touches many different parts of our business. As consumers can elect to receive funds via ACH, card, whether physical or virtual, or a check that we print and mail from our facilities. In contrast to competitors that are simply aggregators of all these services from different vendors, we can perform all these services in-house. These are just a couple of examples of how we continue to broaden our products and solutions to respond to emerging market trends, enhance our value proposition as a one-stop shop, and increase our revenue streams. I also mentioned we have begun to attend in-person industry events. Let me illustrate why this is important. In April, I attended the American Bar Association Technology Show in Chicago. That was our first face-to-face industry event we've done since the beginning of the COVID pandemic. We identified and met with several qualified opportunities. In fact, we have already signed two no-ISVs because of attending that show, and they are already in implementation. During the pandemic, the sales cycle through other marketing and sales efforts had stretched to as much as six to eight months, where in this case, the sales cycle was two weeks. We are all excited to be hitting the road again for in-person events, and we plan to have a physical presence at close to 20 shows over the course of this year. Finally, let me note that one of our new ISVs, as well as the opportunity I previously mentioned that could be our largest to date, came to UCO because they were extremely dissatisfied with their existing PayFac relationship. Many of our competitors simply white label a generic PayFac solution from a larger processor, much like the old ISO days. Because they are not PayFac experts who don't own and control their own proprietary technology, these competitors are not flexible nor nimble enough to handle the ongoing servicing, customization, and modification requirements that are a routine element of any payback integration. Once the ISV becomes aware of this, they look for someone like UCO that develops and supports its own technology and can provide all the services they need. Automated underwriting and onboarding are one example, but one that is extremely important to boarding customers en masse and generating revenue in short order for the ISVs. We expect that many ISVs who were early to jump on the payback bandwagon will now be rethinking the strategy and be looking for someone with a better solution and who has the resources to meet their needs, which we think will open a whole new market for us. So it's been another quarter of steady, stable, and efficient execution, lather, rinse, and repeat. This has been our strategy, and it's becoming increasingly effective. Every day we are getting better across the organization. Let me conclude by recognizing the hard work of the many UCO employees in all of our business lines for their outstanding performance. UCO is growing rapidly, and without their commitment and dedication, our ability to provide service that delights our customers would not be possible. We are still in the early days of an industry that rewards innovation, service, and responsiveness. We look forward to continuing to aggressively grow the business with the white glove service for which we are becoming known. With that, I'd like to conclude my remarks and turn the call over to Tom Jewell, our Senior Vice President and Chief Financial Officer.

Thanks, Greg, and welcome, everyone. Thanks for joining our call today and your interest in UCO. I'm going to conclude today's prepared remarks with a brief review of our first quarter financial results before opening the call to questions. As mentioned, revenues for the quarter ended March 31, 2022, or $18.1 million, up 35% compared to the $13.5 million in the same period last year. All of our growth was organic. ACH and complimentary services revenue was $3.8 million, up 25%. Its transaction volume was up 21%. Return check transactions process were up 32%. And electronic check dollars process were up 16%. And within the business, ACH revenues were up 17%. and our pinless debit product revenues were up 57%. Clearly, we are sustaining the momentum built up over the past few quarters of this, our highest margin business, although, as Louis mentioned, we have a tough Q2 comparison ahead of us. Revenues from our output solutions business line was $4.7 million, up 25% from the $3.8 million a year ago. As we are lapping full quarter contribution from output solutions, this was all organic growth. Total transactions and PCS process in the quarter set an all-time quarterly record. Prepaid keeps rolling along and had another outstanding quarter with revenues up 212% to $2.8 million, driven by a 270% increase in card transactions process, 134% increase in load volume, and 139% increase in prepaid card purchase dollars process. As mentioned earlier, total dollars loaded on prepaid cards in the quarter exceeded 69 million, an all-time quarterly record. We continue to support this growth by investing in more engineering and customer service resources to further enhance our reputation for providing innovative new technologies and a high level of customer satisfaction. As Houston mentioned, we had some items resulting in compressed gross margins in this category. Revenues in our credit card line were up 18% to $6.8 million. Growth in both volume and transactions process continued to show steady improvement and drove card revenue growth with dollars processed up 21% and transactions processed up 48%. Gross profits in the quarter were $3.5 million, up 21%. Margins were 19.4% down from 21.6% in Q1 2021, primarily reflecting the rapid expansion of prepaid, including prepaid card revenues at cost, causing compressed gross margins, along with other revenue growth in lines of business with below corporate average margins. Looking back to Q1 in 2021, Gross margins were our lowest of the year. Accordingly, we expect to see margins improve in Q2 and going forward, as Louis mentioned. As our rapid growth continues, we are investing in our infrastructure to support both current and anticipated growth. And last quarter, we indicated this would create an increase in our other selling general administrative expenses in 2022. This can be seen in the first quarter, where there were increases in compensation compensation costs and benefits driven by both merit increases for existing employees as well as additions to staff, the full implementation of a new cloud technology infrastructure, and incremental rents to accommodate the growth of our workforce. We also are building out our customer service centers, including preparing for the previously announced Voyager Digital Debit Card Program, which we anticipate will see increasing volumes in the third quarter. The quarter also included nearly $200,000 of one-time expenses. Consequently, for the quarter, total other selling general and administrative costs were $3.8 million versus $2.7 million in the prior year period, but up much more modestly from our fourth quarter run rate of $3.3 million. You can expect to see SG&A expenses at these levels over the balance of the year. Our depreciation and amortization reflects a slight decrease from fourth quarter 2021 levels. The next significant adjustment in depreciation and amortization will be a reduction of the customer list asset required in the singular acquisition, which will be fully amortized at September 1, 2022. For the quarter, our operating loss was $1.6 million versus a loss of $700,000 in the year-ago quarter. Adjusted EBITDA was a loss of $286,000 compared to a positive $247,000 a year ago. The company recorded a net loss of $1.6 million for the first quarter compared to a net loss of $720,000 a year ago, with earnings per share in the current period of a negative $0.08 per share compared to a negative $0.04 per share for the same period last year. UCO continues to be in solid financial condition. Our cash balances over the first three months of the year increased $300,000 to $7.6 million at March 31, 2022, and UCO has no significant debt. We recorded positive adjusted operating cash flows in the quarter, generating $500,000 of positive adjusted operating cash flows, compared to an adjusted net cash used by operating activities of $600,000 in the prior period. Adjusted operating cash flows exclude non-operating operational charges in merchant reserve funds, prepaid card load obligations, customer deposits, and operating lease assets and liabilities. Building on our strong 2021, the new year is off to a fast start with top-of-the-line growth of 35%. At the same time, we are investing in our infrastructure to support current as well as expected growth. As we grow, we will be able to leverage this investment in infrastructure with expanded margins. We have built a solid balance sheet as well that provides more than adequate resources to fund this growth. This is shaping up to be another exciting year at UCO. That concludes our prepared remarks for today. We would now like to open up the call for any questions.

We'll now begin the question and answer session. To ask a question, press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw yourself from the question queue, press star, then two. We'll pause momentarily to assemble the roster. And our first question comes from Barry Sign with Spartan Capital Securities. Please go ahead.

Hey, good morning, gentlemen, and congratulations. A very strong quarter. In this market environment, I want to kind of focus on risk areas, you know, that investors, you know, might be concerned with and give you a chance to kind of respond on some of these. And there's three areas that I'm wondering about. First of all, you know, I think you'd agree the balance sheet is pretty strong. It's all 7 million cash, almost no debt. And you even added cash in a negative EBITDA quarter. Second, you've talked about the crypto business. I think you said 1Q for you was a little weak here. Obviously, crypto is going through an extreme bear market, so I'm not sure how that would affect things if that continued. And then the third risk factor I'm wondering about is potential economic weakness. And, again, I know that you have things like income support programs, so you have some counter-cyclicality. in the products you're offering. So if you could go through those and talk about how you can deal and survive and even thrive with some of these risks the market is thinking about.

Well, thanks, Barry. Thanks for calling in. You know, we're different than most of the payment processors because our strategy is to be diverse, diverse in the industries we serve and diverse in the payment channels that we offer. No industry represents, you know, more than 10% of our revenue. We do have to address cryptocurrency. You know, we don't like when cryptocurrency trades sideways. We like volatility. And, you know, for example, last night we saw triple the amount of volume that we normally have been seeing. And 97% of that money was going into their wallets. And that was fueled from volatility yesterday. And so, you know, as cryptocurrency is volatile, it generates more transactions for us. And, you know, we don't have any risk with cryptocurrency. We don't hold any. So it doesn't matter what the dollar is or what the value is for a particular coin. And again, cryptocurrency today represents less than 10% of our revenue. In times of recession, we have many segments that will generate a lot more transactions. We have a big footprint in consumer lending, short-term loans. We have the guaranteed income programs, and those typically do very well in hard times of economy. We like our balance sheet. We've continued to strengthen it every quarter. And, you know, as we talked about earlier, the board of directors approved $4 million stock repurchase program. The board wouldn't have done that unless they've had a certain amount of confidence in our balance sheet and our ability to generate cash flow for future opportunities. Hopefully that answers your three areas of concerns.

It does. Just one follow-up on that. You mentioned there's no industry more than 10% of revenue. What is your largest industry served, and what percentage of revenue would that comprise?

You know, it depends. There's a couple that are close to 10%. Crypto is one. Healthcare is another. Consumer lending, especially when you include government programs in that segment. Those are important to us.

Okay, thank you.

The next question comes from Gary Prestopino with Barrington Research. Please go ahead.

Yeah, good morning, everyone. A lot to get a handle on around here. First of all, when you look at your SG&A expenses and we're looking at what it should be going forward, back out the one-time $200,000 number, so we're looking at probably about $3.6 million. give or take, going forward per quarter?

Mr. That's a reasonable number. The President Okay.

So, let me ask you this. I heard you say that the, you're looking at a quarter that is going to be challenged. Was that versus Q2 last year or sequentially versus Q1 where you generated $18 million of revenue in this quarter?

It's verse 2001, and it's very specific to ACH transaction volumes. So our ACH transaction volumes in Q2 of last year were in part fueled by, you know, extreme excitement of the cryptocurrency market in that quarter. It was the peak of last year in that industry. And You know, we don't have that same amount of excitement, you know, this quarter. So it's going to be a hard comp for us on our operational metrics. Right. For ACH only.

Can you give us some idea of how these ACH transactions surrounding crypto at this point have started to trend given the fact that, you know, basically the market is, you know, definitely having some issues in terms of pricing, prices?

Yeah, well, Q1 was, you know, Q1 for cryptocurrency started out good. And that's just my personal theory. I think that cryptocurrency was kind of a hedge for inflation for a while, then cryptocurrency started trading like the stock market, which made that segment a little bit tougher. I can tell you that, you know, this last week, the volatility in cryptocurrency is creating a lot of transactions for us. So, you know, again, we don't carry any crypto, so we have no risk by holding it. And we're just moving money in and out of the platform. So we like volatility. Okay.

And then on the card side, did you say you produced 650,000 cards or was that a revenue number?

That was a revenue number. It was like 270,000 cards or something like that.

So are we going to, as we go forward throughout the year, as you ramp up this product because I understand there's about three to three and a half million accounts. Is this going to be something that as you ramp it up, we're still going to have this margin degradation issue because of your issuing more cards or producing more cards?

Actually, as we start personalizing these cards, when they get a name put on these cards, we have margin. And then those cards will start to produce transactions. So a large card plastic order like this one is just a future indicator of margins. That it will, you know, we're going to earn revenue off those cards. So this is just the first step. Again, it's a leading indicator. It's a great leading indicator. It shows commitment by the customer. And You know, so, again, you know, once you put a name on that card, we start making money. And so it's, you know, it shows you what we've been saying, is that the program is ramping. It's going to be a significant program, and that we're going to earn significant revenues this year off that program.

So as we get to the back half of the year and you start issuing these cards, again, The assumption would be that, you know, if you're getting X transactions, X dollar amount per transaction on the ACH time side, how much would that increase if you're doing prepaid transactions with these cards that are issued? You know, I guess what I'm trying to ask is that, you know, crypto is going to be volatile here. Who knows what's going to happen? But as you start getting these cards in the market, should we see a precipitous increase in revenue from these cards that would basically or possibly dwarf what you would get on the ACH side from any kind of money movement?

Well, first thing is they're complementary. The majority of our ACH transactions is money going in to the platform. And as people start to use those cards, and the card is backed by Stablecoin, USDC. So, you know, people are going to start using these cards as their checking account. And, you know, it earns 9% interest. So they're going to be moving more and more money in. And then the money will come out on usage of the card, which we earn interchange. Okay. We think the prepaid program is also a catalyst for ACH to increase.

Okay, thank you.

The next question comes from John Hickman with Lattenburg. Please go ahead.

Hey, I want to add my congratulations on the quarter. Could I drill down a little bit on this prepaid spoilage that you're anticipating to hit in, like, September timeframe? Did you say, like, $20 million? Did I get that right?

There's $20 million on cards that is potentially going to spoil. Not all of that is going to spoil. It's just to give you kind of the order of magnitude. You know, we don't really want to throw a number out there, but it's going to be nice for us going forward.

Okay, and then my next question is the investments you made in your call center to handle the future customer volumes, how long do you expect that to last before you have to do it again?

Well, the first thing is that you need to understand about the call centers. The call center right now is the expense to us. As we go forward, it's actually going to create revenue. So there will be an offset. And, you know, right now, you know, we took more lease space. We obviously did furniture and computers, and we established an offshore overflow call center as well. We've enhanced our telecom infrastructure, and we're ready now.

But what kind of volume will that support? You said something about 300 programs.

So what I can let you know is, you know, we really started to ramp up customer service in December, beginning in December of last year. And this is related to, you know, the New York City's vaccine incentive program. So, you know, to give you an idea around that, we had nearly a million cards go out in four to five months, the last four or five months of, you know, 2020 21 with a large percentage, maybe even as high as 50% of those going out in the months of December and January. So the call center is ramped now to be able to handle large card orders going out any given month and can support, you know, programs, you know, up to call it a million cards. What I will also, though, state is that there's a little bit of a difference between a program like New York's vaccine incentive program and then a longer-term customer like a Voyager cardholder. So I don't know if that gives you a little bit more of an idea for, you know, where our call center is ramped up to, but, you know, those are numbers I think we can share as you You know, we were able to handle almost half a million cards going out in one month, to give you an idea. We did have some strain on the call center. So I want to mention two other things just related to this real quick. You know, one is hold times were long. That resulted in larger telecom expenses, which was in cost of goods. So, you know, that was one of the items that really depressed margins for us. was in the first quarter, you know, we were still fielding a ton of calls, especially in January, had a lot of long hold times, which increased, you know, the telecom expenses. The other thing is we did incur, you know, expenses in the SG&A for the increased customer service rep, headcount, as well as the customer service that we have off-site. And, you know, again, part of that is getting ready for continued growth, but the other part of that was servicing a CART program where we're going to end up seeing about 70% of the revenue from that CART program, maybe even more than that, on the back end in the form of these, in the form of this breakage and inactivity fees that's going to really get started in August. So, you know, our customer service center affected both cost of goods sold and as well as SG&A, and on a program where the revenue comes in at a later time. That was sort of a mismatch of timing we talked about. On the Voyager program moving forward, the revenue will be coming in much closer to the time that we're incurring that because Voyager gets charged directly for customer service minutes as opposed to that we're generating revenue to cover that expense from other means. So hopefully that answers both the size of the customer service volume for you and a little bit more on the impact it had in first quarter SG&A and cost of goods.

Okay. Thanks. Appreciate it. Thanks, John.

The next question comes from Michael Diana with Maxim Group. Please go ahead.

Thank you. So, most of my questions have been answered, but I have one for Greg. So, with ISVs, you know, and payback, using such heavy usage of ISVs for distribution, you've had your leveraged distribution model there for a long time now. But in my view, Greg, since you've taken over, the execution has just been much, much better. Could you just walk us through some of the processes that you've implemented to improve your penetration through these ISCs?

Sure. Really, it's all about talking with the ISP partner and getting aligned with their their strategy, their marketing, and their conversion strategy. As I said, when we initially convert an ISV, those existing subscribers or their merchants don't necessarily come over with that initial integration. Some do, but the majority don't. But we've taken the time and put our internal resources to sit with their marketing and sales teams to put together specific callback campaigns, webinars, other informative means to let those merchants know that once you use the payment system, then you do have a fully integrated software approach for your practice management application. So an example of a physician's office, rather than importing that data from some other payment system, that's now embedded with that operating software. So when they close the month, it's much, much easier. So really just getting to that value proposition. Secondarily, showing the ISV how much incremental, essentially no-cost revenue that they could earn or receive by just using UCO as the payback is also a compelling reason. The instance that I referenced in this talk today was this ISV in the healthcare space has grown almost 500% is really the classic textbook example of what we're trying to do with all of our ISVs. If they'll put the time and attention, which we are happy to assist with, they will see not only economic gains, but I think a happier subscriber base. So it's really just, in my opinion, focusing on the basics and executing the day in and day out, just putting more time and attention to those partner relationships.

Okay, great. Thanks, Greg.

Thank you.

The next question is a follow-up from Gary Precipino of Barrington Research. Please go ahead. Hey, Houston.

I'm just trying to understand this whole thing with the call center. My understanding, and it's probably wrong here, is that the call center investment was really for Voyager, but it seems to me that it's for all of the business overall, given the growth that you've had ex-Voyager and what you anticipate for Voyager. Is that correct?

Yeah, the growth in the call center is to support prepaid card accounts in general. And so... You know, yeah, we really are kind of saying two things at once here. We grew the call center to deal with the increased loads of card orders that you saw largely related to New York's but then also a few other cities' vaccine incentive programs from last year. So that was what really kicked it off, and it was December when we significantly began scaling that up. So, it was, you know, we began scaling up the call center faster than we anticipated, and it was directly because of the growth that we were seeing in disbursement cards. But what we're also saying is that by doing that earlier, we are now prepared also for, you know, increased volume, whether it come from the Voyager program or other

Yeah, Gary, and it's important to understand, and Houston kind of touched on this, is that the disbursement programs, we don't get paid for customer service. The way we recoup those costs is through spoilage, which occurs much later. On the Voyager program and similar programs that are reoccurring, like the government guaranteed income programs, those cards get used like a checking account And, you know, those cards will generate, you know, more calls. The disbursement programs generate calls in bunches, right? So a big group of, a big chunk of cards go out, then we get a spike, and then it goes away. Okay. But the Voyager program and similar programs, we get paid per minute. and those are more consistent type of volumes going forward.

I mean, in general, you know, I know the volatility and prepaid gross margins isn't, you know, makes it difficult to sort of, you know, understand where those are going to end up leveling out. But that volatility really shows that we keep signing and executing bigger and bigger deals because it's, you know, these one-off card orders, substantial expenses in customer service. you know, that will have, you know, a quarter, you know, on one quarter have, you know, a negative effect on gross margins. And then we see gross margins snap back up because we're then, for example, collecting breakage revenue in another quarter. As we continue to grow, you know, these kind of costs and expense mismatches are really going to even out. But You know, anytime we start to see them not even out, it's because we're signing larger and larger deals that are having these kind of outsized impacts on our cost of goods sold. So, in a sense, while it's annoying to try and analyze it, it's a good sign for the continued growth of the business.

Well, yeah, and Louis answered the question that I had. I wanted to make sure your Voyager is going to pay on a usage basis, but on these disbursement programs, you – capture all of the spoilage? Is there any split that the government has?

No, we do share some spoilage. I'm sorry? No, we do share some spoilage. So, going back, it depends on the type of program. But, you know, we almost, I mean, it really, in the larger government programs, we are sharing spoilage, and they're at various rates.

Okay. So, these cards do have an expiration date. date and there's spoilage is only starts to be recognized once the card is expired there's no estimate of spoilage as the card program goes on when you say there's no revenue brought forward or estimated and and you know

recognize this revenue until we collect the revenue. I don't know if that's exactly what you mean, but to that answer, no, we're not estimating and recognizing any revenue. It's only recognized when it's feed off the card. We're getting into a little bit of details here, but New York City is not a fixed expiration date. There's various types of card programs. Some of them have fixed expiration dates. Some of them assess inactivity fees, and, you know, those models are just dependent and variable and depend on how we set up the program and the negotiations with, you know, the entities dispersing the funds.

So I'm just trying to understand, if they don't have an expiration date on some of these cards, then how do you accurately determine what the spoilage is going to be?

There's two models. There's an inactivity fee model, and there's a fixed expiration model. Okay. Yeah, so, I mean, you can still understand an inactivity fee model. If it's a $20 card or a $100 card, it's pretty easy to multiply months times inactivity fee. It's a simple multiplication. Okay. Thank you.

Thank you.

Thank you.

This will conclude our question and answer session, which also concludes today's conference call. Thank you all very much for attending today's presentation, and you may now disconnect.