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.