OTC Markets Group Inc.

Good day, and thank you for standing by. Welcome to the OTC Markets Group fourth quarter and full year 2021 earnings conference call and webcast. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star 0. I would like to hand the conference over to speaker today, Dan Zinn, General Counsel. Please go ahead.

Thank you, Operator. Good morning, and welcome to the OTC Markets Group fourth quarter and year-end 2021 earnings conference call. With me today are Cromwell Colson, our President and Chief Executive Officer, and Antonia Georgieva, our Chief Financial Officer. Today's call will be accompanied by a slide presentation. Our earnings press release and the presentation are each available on our website. Certain statements during this call and in our presentation may relate to future events or expectations and, as such, may constitute forward-looking statements. Actual results may differ materially from these forward-looking statements. Information concerning risks and uncertainties that may impact our actual results is contained in the risk factor section of our 2021 annual report, which was published yesterday and is available on our website. For more information, please refer to the Safe Harbor Statement on slide three of the earnings presentation. With that, I'd like to turn the call over to Cromwell Coulson.

Thank you, Dan. Good morning, everyone. Thank you for joining us today. I wanted to start by acknowledging the tragic events taking place in Ukraine. We stand in solidarity with the brave Ukrainian people and hope for a peaceful resolution that preserves their citizens' freedom and independence. 2021 was a year of both volatility and change. Throughout it all, I remain extremely proud of our colleagues' commitment to upholding our mission to create better informed and more efficient financial markets. Our team's collaboration and execution across all levels is extraordinary. I am honored to work with this dedicated group who kept our markets open and operating. We delivered outstanding results for our clients and shareholders in 2021 and discovered new ways to live our values of being open, transparent, and connected. Our results for the full year 2021 reflect the success we reported throughout the first three quarters. We saw increased demand for our products and services across all business lines. Client demand and higher regulatory standards, along with strong execution and a focus on leveraging technology to scale quickly and meet our clients' needs, led to record financial results. Gross revenues surpassed $100 million for the first time in our history, increasing 45%. Net income grew 67% compared to 2020. And as a result, our earnings per share and operating profit margin also experienced significant expansion. Antonia will cover our financial results in more detail in a few moments. Our cornerstone project last year was the implementation of the SEC's amendments to Rule 15C2-11. This initiative brought our entire organization together, with each department playing a key role in achieving a shared objective. It required us to remain connected to our clients, regulators, and other stakeholders, helping to foster industry-wide communication and transparency. As a regulated market operator and a qualified interdealer quotation system under Rule 211, we have an opportunity to enhance our products and services to make it less burdensome for companies to go public and to be public. With data-driven markets, we can improve information for investors while supporting industry-wide compliance initiatives. we intend to build on our enhanced regulatory role to create new opportunities for our clients to be more successful. In our OTC Link business, trading volumes leveled off in the fourth quarter from the highs earlier in the year. We continue to enhance the efficiency of our systems and add features to improve the value of our three ATSs for our subscribers. For example, OTC Link ATS's role as a qualified IDQS allows our subscribers to rely on our publicly available determinations regarding Rule 211 compliance, easing their regulatory burdens, increasing the number of securities available to trade, and supporting a more transparent public market. Security and uptime of our core SCI regulated trading systems remains a top priority. And throughout 2021, we delivered consistent, reliable service to our broker-dealer community. Our corporate services business grew at an unprecedented rate during 2021, adding more than 100 companies on the OTCQX market and more than 200 on OTCQB. Each market finished with its highest ever year-end count of companies and securities. The ongoing growth and development of each of these markets exemplifies the value of our data-driven market standards and technology platform. We understand that a company's decision to join OTCQX or OTCQB involves an active choice to meet our market standards, and we value the relationships we have built with over 1,500 companies on these markets. Led by our disclosure and news service, our suite of corporate services for distributing investor information, compliance, and governance credentials also experienced its highest growth year in 2021. doubling the number of corporate clients year over year. The Rule 211 compliance date proved a significant influx of DNS users as companies worked to ensure they could disseminate current public information in compliance with the rule for the first time. And other long-term subscribers strengthened their engagement to ensure they could retain public quotes. Our market data licensing business completed its own record year with a strong fourth quarter. User growth throughout the year highlighted broader global and domestic interest in our markets and the data we provide. We remain focused on growing our global subscriber base and providing enhanced compliance data, including data focused on Rule 211 compliance, to a wider group of industry participants. 2021 was a transformational year for OTC Markets Group in becoming a better regulated market operator. It was just a decade ago that our trading platform registered with the SEC as an alternative trading system. Rule 211 has modernized the SEC disclosure requirements for publicly traded companies and recognized our role as a qualified IDQS with enhanced FINRA SRO oversight of our trading operations and issuer qualifications process. is within that regulatory framework, we can now bring greater benefits of being public to a wider spectrum of companies. We enter 2022 with four strategic initiatives structured around continuing to serve our clients and shareholders. First, drive sustainable revenue growth across each of our business lines that increases long-term per share earnings power. Second, commercialize our enhanced regulatory status under Rule 211 to create new opportunities for public companies and broker-dealers. Third, advocate for additional regulatory recognition of our market to increase the value of being public. Fourth, pursue corporate development efforts to grow and diversify our product suite and client base. In closing, I am pleased to announce that on March 7th, our Board of Directors declared a quarterly dividend of 18 cents per share, payable later this month. This dividend reflects our ongoing commitment to providing superior shareholder returns. With that, I will turn the call over to Antonia.

Thank you, Cromwell, and thank you all for joining the call today. We are pleased to report on a remarkable year of growth seamless implementation of critical regulatory changes, and continued reliable service for our clients. I want to start by thanking our entire OTC Markets team for their continued commitment to supporting our clients and subscribers. I will now review our results for the fourth quarter and year ended December 31, 2021. Any reference made to prior period comparatives refers to the fourth quarter or the year ended December 31, 2020. OTC Markets Group delivered strong results across all our businesses. Turning to page 10 for our fourth quarter 2021 results. We generated $26.2 million in gross revenues, up 32%, with all three of our business lines delivering quarter-over-quarter growth. In our OTC Link business, revenues were up 10%, primarily as a result of higher trading volumes on OTC Link ECN and additional subscribers connecting to the ECN throughout the year. The surge in trading volumes that we experienced in early 2021 moderated over the course of the year. the average daily transactions executed on OTC Link ECN declined from an all-time high of over 70,000 transactions per day in the first quarter, on average, to approximately 37,000 transactions per day in the fourth quarter of 2021, which still exceeded the approximately 20,000 trades per day in the fourth quarter of 2020. As a result, OTC Link ECN So a 16% increase in revenues in the fourth quarter with the impact of higher trading volume somewhat offset by shifts in the mix of securities traded by our subscribers. Transaction-based expenses comprised of rebates paid to subscribers providing liquidity on OTC Link ECN also increased 16%. Trading volumes remain at more normalized levels in early 2022. OTC Link ECN ended the fourth quarter with 93 subscribers, a net increase of 20 compared to the prior year end. Revenues from our market data licensing business were up 19%, primarily driven by growth in users. Revenues from professional users were up 16% from the prior year quarter, driven by a 13% increase in pro-user counts. Revenues from nonprofessional users increased 36%, reflecting a likewise quarter-over-quarter increase in the ending number of users. Internal system license revenues also contributed to the growth in market data licensing revenues. Historically, and in the normal course of business, we have seen significant fluctuations in the number of nonprofessional users, in response to volatility in the markets and as a result of varying levels of retail trading interest. As trading volumes moderate, we may experience a decline in the number of users in the coming months. Trading volumes are highly unpredictable and could decline further, adversely impacting our OTC link and market data licensing revenues. Furthermore, changes in our broker-dealer subscriber's trading behavior could also impact the transaction-based revenues and transaction-based expenses that OTC Link generates. Turning to our corporate services business, revenues in the quarter grew by 61%, with strong growth in our premium OTCQX and OTCQB offerings, as well as our DNS product. As a result of the amendments to Rule 211, during 2021, a significant number of companies subscribed to our DNS product or joined our markets and drove the growth in revenues quarter over quarter. Our corporate services offerings allow users to meet their disclosure requirements on the federal and state securities laws. Contributing to the growth were also price increases for our OTCQX and OTCQB market tiers that became effective January 1, 2021. Revenues from our OTCQX markets increased 44%. In the fourth quarter, we added 35 OTCQX companies compared to 34 new sales in the prior quarter. We ended the current quarter with 570 companies on the OTCQX market, up by 109 from the prior year end. OTCQB revenues increased 56%. We added 113 new companies in the fourth quarter compared to 94 added in the prior quarter, to finish 2021 with 1,150 OTCQB companies up from 902 at the end of 2020. Our DNS revenues increased 134%, driven by a 111% increase in companies subscribing to DNS and other products as compared to the prior quarter, prior year end. Turning to page 11 for our full year results. In 2021, we generated gross revenues of $102.9 million, up 45%. OTC Link revenues were up 87%, with a 228% increase in revenues from OTC Link ECN as the primary driver. Our market data licensing business delivered 20% revenue growth year-over-year for the reasons already discussed in the context of our quarterly results. Corporate services revenues increased 45%, with OTCQX revenues up 44%, and OTCQB revenues up 37% year-over-year, while DNS revenues increased 74%. During 2021, we added 212 new companies to OTCQX, double from 106 in the prior year. New subscriptions to OTCQB were 451. almost double the 229 added in 2020, in each case driven by the previously discussed factors. For the annual OTCQX subscription period beginning January 1, 2022, we achieved a 96% retention rate, up from 94% in the prior year. Turning now to expenses on page 12. On a quarter-over-quarter basis, operating expenses increased by 18%. The primary driver was a 17% increase in compensation and benefits expense, reflecting higher headcount, annual salary increases, an increase in cash and equity-based incentive compensation, and higher commission. IT infrastructure costs, professional and consulting fees, and occupancy costs also contributed to the increase. On a year-over-year basis, on page 13, operating expenses were up 20%, driven by growth in compensation costs, professional and consulting fees, and IT infrastructure expenses. Compensation comprised 65% of our total expense base in 2021. In summary, on page 14, we concluded 2021 with our 20th consecutive quarter of revenue growth of five years running. In the fourth quarter, we delivered 61% quarter-over-quarter growth in income from operations and 58% growth in net income. Our operating profit margin expanded to 42.4% compared to 35% in the prior quarter. For the full year, income from operations increased 77% while operating profit margin expanded to 38%. Net income increased by 67%. In addition to certain gap and other measures, management utilizes adjusted EBITDA, a non-gap measure, which excludes non-cash stock-based compensation expense. For the full year, our adjusted EBITDA was 43.1 million, up 64%. Cash flows from operating activities for the full year amounted to $46.5 million, up 79%, while free cash flows for the year increased 80%, reflecting a $0.4 million increase in capital investments during 2021 as compared to 2020. Turning to page 15, during 2021, we returned a total of $27 million to investors in the form of dividends and through our stock buyback program. an increase of 49% over the prior year. We remain focused on enhancing our value proposition to issuers and broker-dealer subscribers, growing our business, and delivering long-term value to our stockholders. With that, I would like to thank everyone for your time and pass it back to the operator to open the line for questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, just press the pound key. Once again, that's star one for questions, one more for questions. Our first question will come from the line of Chris McGinnis from Sedoti. You may begin.

Good morning. Thanks for taking my questions and a nice quarter. I guess just to start, three questions. One in relation to Rule 211, you know, obviously a pretty good pickup in companies coming on board the markets. You know, how much should we expect this to continue as we start to go into 2022? And, you know, is there still more companies you think that are out there that are likely to transition to your market? Thanks.

Thanks, Chris, and thanks for the questions. So, yeah, I think it's important to understand with 211 that the DNS numbers, the disclosure and new service numbers that Antonia was going through were really driven by this September 28th compliance date last year where we had a number of companies trying to get into compliance to make sure they could have quotes. The positive thing is that obligation doesn't go away. They need to continue to use our services or become SEC registered or report through a foreign regulator in order to maintain a public quote. So if you think about it that way, there's not a cyclical nature to the rule itself and the obligation that drove these users to begin with. We saw a nice growth, obviously, on OTCQX and OTCQB as well. I think there are probably a number of factors, some of which are related to 15C211 and some of which probably aren't, that led to that. So it's a little bit less of a direct correlation. But I think understanding the impact of 211 as a point in time that then moves on and becomes kind of a permanent part of the market is a good way to think about it.

And, Chris, this is Cromwell. I would look at it as the rule change. We built the regulatory foundation for the rule for the ongoing compliance. And then over the long term is how do we build the commercial value proposition for clients who want to distribute information to investors, want to demonstrate compliance and share their credentials and their governance is Ever since NASDAQ became a national securities exchange, there's an opening to have the gateway market. And with more flexible, tailored, wider standards to give... a path for companies to go public and move up as they grow. And this is really the second phase of, as I said in my notes, a decade ago we brought our trading platform in under regulation ATS. And with FINRA, regulation ATS by registering with the SEC with FINRA oversight. This is the second part with SEC Rule 211, with additional FINRA rules, and it gives us more ability to provide value to companies that have current information and can meet the compliance requirements.

I appreciate that. And somewhat similar, I guess, on a decade look back, Just on the margin profile in the quarter, much stronger than anticipated. Can you maybe just talk about the main drivers to the improvement on the margin side and either how sustainable that is or is there more of a seasonal component that plays into that? Thank you.

Thanks, Chris, for the question. There is indeed a bit of seasonality to our margin. Quarter to quarter, you should expect generally the first quarter to be the lowest margin quarter, all things equal, due to certain charges on the compensation and benefit side related to vacation policies in New York that tend to reverse by the fourth quarter as vacation time is being used.

And Chris, this is Cromwell again. As you know, we don't chase margin. We don't have any expectations of trying to build a pricing model for clients that delivers exchange-type margins. Our goal is to continuously be able to invest in our people and our platform so that we can keep growing the value of our products and services that transfers into long-term per share earnings. Last year was a pretty incredible year. You know, we really got into a big project and operating during the time of remote and different swings of COVID. You know, we are looking to strengthen and grow into and also take, you know, robustify our processes, look where we can better digitalize the data and, you know, create a market that for the next few decades will is really using technology to make it easier to go public and more efficient for shares to be traded within regulated broker dealers.

Thank you. And then last question, you know, thinking about coming off the strength of last year, but even the last few years on the top line, you know, outside of, you know, trading, which is likely, you know, largely out of your control, Where do you see the largest opportunities for growth in 2022 and beyond when you look across the three segments? Thank you.

Chris, we're grinders. I mean, we don't really like to talk about where we see an opportunity for growth until actually a client is paying us for that service. So, you know, I think there's some tactical areas for us. There's some build-out areas. And, you know, the area of growth really, as I said, is going to come from creating the commercial value, the increased commercial value on top of the foundation of Rule 211. We have come into, we've created a marketplace by connecting with technology and transparency, both broker-dealers trading in this market first, distributing the data out so investors can see what's happening, and And then a process for companies to connect their own and digitalize their own information into the market. So price formation, efficient pricing can take place. And in the age we live in, compliance and governance credentials are just as important as your ongoing disclosure. So those tools, as we build that framework, increase our network connections, you know, widen the power of the network, I think has incredible potential. But it is none of our really successful products have been something that was easy.

I appreciate that. Thanks again for taking my questions, and good luck in Q1.

Thank you, Chris.

Once again, that's Starline questions, Starline. One more for questions.

Sure.

And our next question comes from Mark Wilson as an investor. You may begin.

Good morning.

Good morning, Mike.

Hi, Mark. It's Mark. Thank you all for the hard work and also to all the company associates for the hard work through the year, adding value. and efficiency to our company. I had a question. Can you please discuss the reason for the increase in the authorized shares of the company from $14 million to $17 million?

Sure. Hi, Mark. This is Dan, and thanks for the question. Thanks for joining the call. It was really just for operational considerations. We account, obviously, for the shares we have outstanding and then those that are reserved for issuance under our equity incentive plan. And when that number starts to reach the authorized amount, and really this is the first time in our history that's happened, we wanted to make sure we had appropriate headroom to offer that kind of plan going forward and just make sure we can operate our corporate business. Three million gives us certainly that kind of operational headroom without it being, I think, a concern about long-term dilution or anything of that nature.

Okay, the listed number of shares outstanding is 11.8 million, and then the prior number of authorized shares was 14 million. Is that correct?

That's correct. There's also some issues because when we buy back shares, we can't reissue some of them. This is Cromwell. So the ones that go into, Dan, I think, Go into Treasury. In Treasury, they're hard to reissue. But I think it's really important for investors to look at dilution. And if you look at our dilution over time, and especially dilution compared to growth rate, is it something we think about? And because it's important that we, over the long term, create more earnings power per share, because that's what you should measure per Us, not quarter to quarter, not year to year, but every five to ten years, say, did this management team increase the per share earnings?

Okay. I see. Yes. No, I think you guys have done a terrific job limiting the number of shares. And I commend you for that, looking over history. It just seemed to me that – An increase from 14 to 17 was a significant number of shares. I wonder if something was on the docket.

I mean, I'm a significant shareholder. My goal is not to do anything that's dilutive in a harmful way. But we would, you know, is, and I have a lot of skin in the game, if this company fails, I'm selling my primary home. Okay.

Thank you very much. Thank you again for all the hard work and the great management of the company. Take care.

Thank you.

Our next question comes from Larry Goldstein from OTC. You may begin.

Good morning. You've never heard from me or have not heard from me in years. You just gave the best answer I ever heard an executive of a public company give. I applaud you.

Um, thank you, Larry. And when you're not emailing me, this is Cromwell. Uh, you know, I, you know, I, I, I feel we're probably not doing a good enough job to get you, uh, engaged enough.

Thank you. Um, do you make any concerted effort to get, uh, listed on other exchanges in the U.S. or the world to list with you?

Well, I think that our sales team, who's constantly reaching out to companies around the world and in the United States and on exchanges where we think they don't have a great value to be listed, is there constantly trying to sell. And they did a fantastic job last year of a lot of education. So, you know, the hard part is, you know, is that companies don't care till they care. And when they do care, it's usually because the investor pushes them. And a lot of times companies, you know, as you know well, because you invested in many of the companies that went dark they use different excuses than the reality. And we can call them as much as we want, and they're trying to cut off information flows to reduce the value of shares held by minority investors. And that's something which is a bit of a weakness in the SEC's oversight is they spend a lot of time looking for management teams selling overvalued shares, but they don't spend much time chasing down management teams who are trying to limit information, create an information asymmetry, and buy out minority shareholders at a discount.

I was thinking of something a little different than those who are you know, denying shareholders information. For example, I can think of some small companies that are listed on NASDAQ, and I've said to them, why don't you list on OTC instead? Why pay the higher fees? What do you get for it? And frankly, I really don't know whoever said, I want to buy or sell X. Oh, what exchange is it on? I can't imagine that anybody really cares except those who think the New York Stock Exchange is prestigious. But without addressing that, why a small company in particular or any company would trade on NASDAQ when they can trade with you is something I don't understand. And I wonder if you make any concerted effort to solicit them on the basis of they save dollars.

So I think that's a very good point. We do solicit them. We've had a lot of success in the community bank space because they truly understand regulatory costs and burdens, both from the external advisory costs but also the internal management time. So with industries that are highly regulated, management has an understanding. In my view, listing on the New York Stock Exchange is like buying a software package from IBM. You know, nobody gets fired from buying someone from IBM, buying from IBM, but it comes with a lot of expensive consultants. It's very complicated. It's built for the largest companies. It may not fit your unique models. We're selling the building blocks of listing. And you get to choose the ones you want. And for a company, you get to build your own brand. I mean, I joined the New York Stock Exchange, and I get the New York Stock Exchange brand, which is hugely valuable, but the world has been moving forward. If we look at how the online world is moving and about how technology is, open source, cloud, AWS, companies are assembling building blocks of technology in marketing. They're not needing technology. to buy the Super Bowl ad to market to consumers if they're smart and nimble and they believe in the strength of their own brand. And that's, you know, we give companies the tools to be public and go public. And I think that's an exciting value proposition going forward.

Okay. Thank you.

Thank you, Larry.

Great.

You've got my email.

And we have another question from Pedro Fonseca from Edison. Hi.

I only have one question left at this stage, which is following now that you're qualified IDQ as in the rule 15C211, what's the outlook this year in terms of increasing the additional regulatory recognition for the markets?

So, you know, the regulatory recognitions, there's various regulators, legislative processes, and in the details, Dan can get very deep in the details, is we can't give an outlook of others we don't control. The positive side is, 211 is a rule that created a qualified inter-dealer quotation system, but there's really a partner rule of FINRA SRO oversight of ATSs that are qualified inter-dealer quotation systems, and that should give other regulatory and legislative agencies more comfort in recognizing us.

Yeah, Pedro, thanks for the question. I mean, I think it's a building block to Cromwell's point. having this QIDQS designation, which is more or less conferred on us by the SEC by virtue of this rule, provides this baseline for, one, educating additional regulators on the federal and state level, and even going to Washington and talking to the folks in the legislature about, about ways to build and recognize what we do as a market. It's difficult. We saw it when we were really diving into the state rules and talking about Blue Scott. It's tough to get somebody to be first. And once the gates open, people kind of rush through. And I think this QIDQS designation and just our regulatory standing under 211 is a similar moment where the SEC has now taken this To Cromwell's point, FINRA has a companion rule, and FINRA now looks at us in this new way, in this kind of more highlighted way with regards to our regulatory work. And so it opens the door for others to recognize what we've been doing as a market and where we can go. So I think from the point of your question in 2022, a lot of it's going to be about making sure everybody recognizes where we are now and what we do and how we can leverage that for additional consideration.

And Pedro, this goes back to NASDAQ before it became an exchange. Not every NASDAQ company got every regulatory privilege. and that's really important for the market that lives between private markets and the national securities exchanges because not every company will qualify. So you have to tailor the regulations so that the companies can demonstrate their qualifications for these individual regulatory rules. And you create a ladder for companies to climb in the capital formation process as they become more established. Now, we believe at the top level of our market, companies should be able to get all of those building blocks. And that is our goal. It is a hard goal. The better companies we have, we get a better community pushing. And an example was Virginia. Community banks in Virginia got the legislator to change blue sky law there. So we had some engaged OTCQX companies, and they changed it. And this is, you know, this is a grind. This is not something where you wake up and you say three smart things and it happens. This is a grind. You have to get a community together. You have to pull them together. And, you know, that's what our team does or tries to do.

Okay. Thank you very much.

Thank you. And I'm not showing any further questions in the queue. I'll try to call back over to the speakers.

Thank you, Operator. I want to thank each of you for joining us today. I would encourage you to read our annual report and the earnings press release. Links to both are available on the Investor Relations page of our website. We also hope you will join us for our upcoming Investor Day, scheduled for Tuesday, June April 19th at 10 a.m. Eastern. On behalf of the entire team, we wish you and your families continued health and safety, and we look forward to updating you on key initiatives that continue to shape the integrity and competitiveness of the public markets.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.