Quisitive Technology Solutions Inc.

Good afternoon and welcome to Quisitive's fourth quarter and full year 2021 earnings conference call. Joining us today for today's call are Quisitive's Chief Executive Officer Mike Reinhart and Chief Financial Officer Scott Merriweather. Following their remarks, we will open the call for your questions. Before we begin today, I'd like to remind everyone that during the conference call, management will be making statements that contain forward-looking statements within the meaning of applicable Canadian security legislations. Please refer to the company's forward-looking information disclaimer statement, which can be found on the notice for this call, our website, and the fourth quarter and full year 2021 earnings release. Now, I would like to turn the call over to Mike Reinhart. Sir, please proceed.

Thank you, Operator, and good afternoon, everyone. We appreciate you taking the time to join our Q4 and full year 2021 earnings call. This past year marked another period of extensive growth for Quisitive. as we've continued to make substantial progress on all fronts of our business. Highlighted by three accretive acquisitions, the significant advancement of our payment solutions business, and the bolstering of our executive team, I am pleased to share that the milestones necessary to promote further transformational growth have been met. To review 2021 in short, we saw a strong mix of both organic and inorganic growth. culminating in previously discussed acquisitions of Microsoft's healthcare cloud solutions expert, Macec Global, the payment provider independent sales organization, BankCard USA, and subsequently the highly touted Microsoft-focused digital solution and services provider, Catapult Systems. Each of these strategic acquisitions have benefited Quisitive from day one and have provided us with the capabilities to scale our operations and fuel organic growth going forward. Additionally, we made significant advancements on our payment solution side. We achieved Microsoft co-sell ready status, received bank sponsorship as a payment processor, and achieved LedgerPay payment platform PCI certification. We also further demonstrated the prominence of our Microsoft partnership by winning numerous awards, including the Microsoft Healthcare Partner of the Year and selection into the Microsoft Business Applications Inner Circle. Despite the headwinds posed by the global pandemic and recent geopolitical issues, we had a strong 2021 and exceeded our revenue forecast. More importantly, one key point that I wanted to note is we recognized a 19% organic growth rate in our cloud solutions business, including cross-selling of services and synergies with the basic acquisition during the year. Thanks to the continued operational excellence of our team and the growing demand we're experiencing within IT services, we've been able to accomplish this impressive progress. Though we are proud of what we are able to accomplish last year, we recognize that there's still a lot of work to be done to unveil the potential of Quisitive. As I reflect on our accomplishments, I wanted to highlight the fact that we've done an admirable job in setting up our organization for continued growth in 2022 and beyond. Not only have we accomplished what we said we would, especially within our payments business, but also made some incredible hires recently with the onboarding of Jana Schmidt, as our President of Global Payment Solutions, and Scott Merriweather as our CFO, which will certainly fuel our growth trajectory. Jan and Scott are both well-respected executives with robust backgrounds and relevant experiences, and they'll be playing important roles going forward in preparing Quizitive for future success. First, let's talk about our payment solutions business. I'd like to take a moment and recognize the journey we've been through in getting our payments business to where it is today. Following the public announcement of LedgerPay's solution in early 2020, we've moved full steam ahead. Over the past 18 months, we have developed a LedgerPay-centric risk management program, achieved Microsoft CoSell-ready status, signed the United States Bank sponsorship with the Bancorp, received patent approval for AgeChecker, obtained PCI compliance for the LedgerPay platform, and obtained an ISO customer, Patron. Fast forward to 2022, and we successfully closed the Canadian bank sponsorship with People's Trust Company and have now also completed MasterCard certification, which enables us to begin onboarding pilot merchants to LedgerPay. It is important to remind everyone how rare it is for a payment processing endpoint with the card networks to become certified. In our workings with Visa, MasterCard, and American Express, they have all stated it has been many years since a new processor has been approved and implemented by the networks. I am truly proud of our team's ability to receive the MasterCard certification, and we are actively progressing with Visa, American Express, and Discover for certification. We had originally planned to do gateway services through the initial card network, expecting there would be a significant delay to get all of the card networks certified independently. The progress we have been making with Visa and American Express in parallel to MasterCard has shifted our focus to activating the direct connections with each rather than do any work to ready a gateway, which would only delay the time to get the direct connections completed. We do not want to risk losing the focus of Visa and MasterCard since they have dedicated teams working with us right now. Although we faced hurdles that were out of our control, such as global supply chain constraints, we've done our best in executing each short-term milestone to get us to where we are now. Today, we stand at the precipice of commercialization, and we are uniquely equipped to bring this product to market. Our team has been working hard at aligning our strategic initiatives to achieve commercialization of LedgerPay, along with the ongoing management of Bank Card USA and the build-out of the growing Merchant Services Group. The Merchant Services Group, powered by Bank Card, continues to see strong growth, and for the full year 2021, had payment volume of $3.8 billion as compared to the full year 2020 payment volume of $3 billion. Total merchants is now nearly 7,300, and pro forma revenue grew over 20% for calendar year 2021. As we have discussed, our merchant services business is a strong asset independent of the ledger pay synergies creating value for our shareholders. Having achieved the MasterCard certification, we are now preparing to onboard pilot customers to LedgerPay throughout Q2. Once the pilot phase is completed, we will begin migrating bank card customers to the platform and expect to continue that process over the next several quarters. We're also expecting to accelerate our go-to-market strategy once the pilot phase is completed, which we forecast will occur beginning in third quarter of this year. This strategy will include multi-channel marketing and sales to independent sales organizations, or ISOs, and independent software vendors, or ISVs, as well as direct sales to merchants. Further, we will begin joint marketing and sales activities with Microsoft, aligning our payment solutions with their industry teams for retail and financial services. These efforts will combine the LedgerPay payment solution along with our cloud data and analytics offerings to help drive momentum in these industries, and arm both the Quizzitive and Microsoft sales team to engage these customers. Recently, we attended the ETA Transact Payments Industry Conference in Las Vegas. We had the opportunity to meet in person with executives from MasterCard, Visa, American Express, and Discover to discuss our platform and ways that we can partner together in the future. They all expressed their excitement for our unique cloud and data offering in payments and their commitment to our shared success. As one of the executives stated in an email to me after the conference, quote, I'm excited to have our company be part of the journey with Quisitive. I love your approach to payments and data and look forward to a deeper partnership together. I also met with several investment banking groups, M&A advisors, and acquisition targets in the payments industry. all expressed strong interest in our unique model and approach, and the conference allowed us to broaden our network in the U.S. and share our story as we embark on commercial launch of LedgerPay. Our payment solution segment is truly born out of the success we garnered from the cloud solutions capabilities. It is because of our cloud solutions business we've established the technical expertise and the robust relationship with Microsoft needed to develop the first cloud-based payment processor using Microsoft Azure. As the payments business grows, we will expand the scope of our customer base and increase the customer lifetime value and engagements by pairing payment solutions with complimentary cloud services. The payments business will enable cross-sell opportunities and data-rich services through cloud and Microsoft technologies and practices. We expect to continue leveraging the synergies from the two businesses under the acquisitive umbrella. Next, I want to move on and share some updates regarding our cloud solutions business. As I mentioned at the outset of the call, we were able to achieve a strong 19% organic growth rate within our IT services business. Thanks to the continued growing demand and, of course, our team's ability to consistently execute. The addition of the basic solutions to our global business application group allowed us to expand services for D365 ERP, customer engagement, and our SaaS offerings in healthcare and manufacturing. The acquisitive platform for commercialization combined with the solutions and services from the basic business created strong organic growth for our cloud solutions business. In calendar year 2022, we expect to see the synergistic benefits from our Catapult acquisition, including their security and Azure managed services beginning in Q1 and throughout the year as we further integrate the business. Thus far in Q4, We have only recognized a fraction of the synergies from a financial standpoint, given the timing of the acquisition and subsequent accounting treatments. But anecdotally, what I can share is that we've continued to see immense progress in the integration, and I'm very pleased with the rate at which we are progressing. As I iterated on the last call, Catapult strengthens our executive team with veteran industry leaders, diversifies our recurring revenue streams, provides incremental cross-sell and up-sell opportunities with their client base and vice versa, and brings a similar culture and philosophy that we embody here at Quisitive. The synergies are numerous, and to ensure that we capture these strategic joint opportunities, we have a dedicated task force that is leading this integration, in addition to actively onboarding their team members into our ecosystem. I also want to stress that the onboarding of Catapult will be quite evident on our financial statements for this calendar year, as their robust recurring revenues will be reflected in our quarterly filings. Consistent with our philosophy of integrating the business under one inquisitive to serve our customers, we recently made changes to our organization structure to better align our model to enable our strategy and strategic objectives. Our cloud solutions business is now fully integrated across all of our cloud solutions acquisitions. The cloud services and applications component of Global Cloud Solutions, CSA for short, We'll report to Terry Burmeister, who is the president of Catapult. This CSA business includes all of our services and solutions related to Azure security, infrastructure, data, and modern application development, as well as the Microsoft 365 solution platform. This team combines the legacy Quisitive, Menlo, and Catapult businesses, as well as our India and South America teams under one business area within Global Cloud Solutions. Terry and her team will be instrumental in executing our strategy and growing this business perquisitive. Our business applications component of Global Cloud Solutions, GBA for short, will report to Lane Sorgen, who is a former regional vice president at Microsoft. The GBA business includes all of our services and solutions related to the Microsoft Dynamics 365 ERP and customer engagement platforms, as well as our industry SaaS offerings for healthcare, manufacturing, and public sector. This team combines the legacy CRG, MASIC, and the D365 components from the Menlo and Catapult businesses, as well as our offshore partners in the UK and Pakistan under one business area within global cloud solution segment. Lane and his team will drive growth across North America and in Europe as we expand in this area of the business. The purpose of these changes is to establish the leadership and organization structure to focus each of the business areas to drive growth and create scale. Our public reporting will continue to be the two segments of global cloud solutions and global payment solutions, so these changes do not have any effect on how our financials will be reported. It does, however, provide the proper focus and accountability to help realize our organic growth objectives and also enables me to focus less on operations, and more on the strategic areas of the business, including payments acceleration in partnership with Jana, as well as our strategic partnerships and M&A to create scale. As the world economy transitions to a digital-first ecosystem, we've seen marked increase in demand for our IT services. Quizative's concerted effort to offer best-in-class cloud solution services through our unique partnership with Microsoft and utilizing the Microsoft 3Cloud platform has paid off with strong growth prospects. Companies are making investments for digital transformation to revamp their workflow and are turning to us in an increasing fashion. With our reformed and enhanced cloud solutions division, we intend to further augment our footprint and capture as much market share as possible. Next, I'll touch on our M&A work. Consistent with our stated strategy over the past several years, we continue to invest in the future of our business by fueling our growth with inorganic measures. M&A will continue to play a prominent role in the acquisitive story as we dedicate resources to acquiring companies that provide accretive value for our shareholders via acquisition. We've laid a strong and focused M&A path that will continue forward in the coming years and are also grateful for the continued inbound requests from potential acquisition targets that come across our desk. That said, I wanted to reiterate, for the next few months, our team remains primarily dedicated. towards the activation of ledger pay and the integration of the Catapult acquisition. Though we don't want to neglect our M&A initiative, getting ledger pay up and running and realizing the synergies of Catapult are priority one. Both the IT services and payments industry markets remain very active on the M&A front. We continue to have strong pipeline of targets, but also recognize that the strategic and financial buyers in both areas remain very active. While public valuations have come down, the private market has stayed consistent, driven by the significant money looking for quality growth assets in these two industries. This was confirmed during our discussions at the previously mentioned Transact Payments Conference. On brand with the operational progress and growth we've been able to achieve, we continue to grow our workforce by hiring high-quality employees to the Quisitive family. Moreover, due to the strong work culture we've been able to develop over the years, Inquisitive has been unaffected by the media's increasing mention great resignation. The point of pride we hold is our retention rate of employees across the business has remained industry leading. We've made proactive investments in onboarding and ongoing employee experience to ensure every employee, whether hired organically or integrated via acquisition, is equipped with the necessary resources and training to successfully accomplish their responsibilities. We look to continue our trend of success on that front going forward. The retention of employees is a critical component of growth, as the labor shortage creates challenges in hiring the skills necessary at a global level. The focus on retention reduces the number of hires necessary to enable growth, which is key to our business. Looking ahead, we expect to continue to grow our cloud business at a rate of 15% to 20% organically and 20% growth in our merchant services business enabled through bank cards. Our first quarter saw strong momentum and continued growth in both of our business segments, and I look forward to sharing further details with all on our next call. Looking at our first half of 2022, we remain laser-focused on the integration and launch of our LedgerPay payments platform, along with the continued unlocking of Catapult's full range of value. Thank you all for joining us in this exciting growth journey as shareholders of Quisitive. I'll turn it over now to our CFO, Scott Merriweather, to discuss our Q4 and full year 2021 financial results. Scott?

Thanks, Mike, and thank you to all who are joining us for today's call. We had a solid quarter, setting a new revenue high-water mark for the company. Revenues from the fourth quarter ended in December increased 155% to $33.3 million from $13.1 million for Q4 2020, reflecting the pace of our acquisitions and healthy organic growth. Gross margin increased 141% to $13.1 million in Q4 2021, over $5.4 million in Q4 2020. Our gross margin as a percentage of revenue held at 39%, similar to Q3 of 21. It was a drop from our abnormal seasonal high of 41% in Q4 2020. Our professional services and consulting staff had higher utilization rates during the 2020 holidays due to the travel restrictions of the COVID-19 pandemic, resulting in a higher gross margin percentage for that quarter. The 2021 gross margin percentage for Q4 of 21 is more steady state for our current organization. As we continue to integrate and sell products, cross-selling them from our recent acquisitions, we aim to drive gross margin percentage higher. Adjusted EBITDA increased 105% to 4.5 million for Q4 2021 from 2.2 million for Q4 of 20. Adjusted EBITDA as a percentage of revenues was 14% for Q4 of 21. The EBITDA margin was 17% for Q4 of 20. The Catapult acquisition contributed revenues, but essentially no adjusted EBITDA in Q4 of 21, given the timing of when the acquisition closed, just before Thanksgiving, and the available billing dates for professional staff, which was further impacted by PTO, versus our fixed costs. Catapult historically has had lower EBITDA margin profiles than the remainder of our company, but we believe recurring revenue product sales, both of products from the Catapult portfolio and of our previously owned products into the Catapult portfolio, will offset that impact. We've also continued to invest in our payments division, building its scale as we near market readiness for the launch of the LedgerPay platform, which has also impacted our consolidated adjusted EBITDA margin. We'll now move to discussing the specific performance of our segments. Revenue in our global cloud solutions segment increased 94% to a record $23.0 million for Q4-21, from $11.9 million for Q4 2020, driven by the Masek and Catapult acquisitions and reflecting organic growth. We have seen greater cross-selling opportunities between our historical acquisitions and believe we can continue our growth base as we continue to integrate these themes in our products, as Mike noted earlier. This segment's adjusted EBITDA improved 76% to $2.6 million for Q4 2021 from $1.4 million of Q4 2020. As noted previously, the Catapult acquisition contributed no EBITDA for the fourth quarter. We had planned for greater EBITDA contributions to the quarter from Catapult, but the ultimate timing of the acquisition close resulted in little impact. Catapult's impact to adjusted EBITDA will be reflected beginning with the first quarter of 2022. Revenue for the global payment segment also set a quarterly record, increasing to $10.3 million for Q4 of 21 from $1.2 million for Q4 of 20. Substantially, all of the Q4 revenue was from our bank card acquisition. In the payments industry, Q4 typically experiences higher seasonal payment volumes. We saw this trend modestly present itself in Bancard's merchant base as Q4 payment volume had a slight uptick in Q4 to just shy of $1 billion, but there is not heavy seasonality within that portfolio of merchants. Adjusted EBITDA for our global payment solution segment increased $2.0 million from Q4 2021 from $0.8 million for Q4 2020. Adjusted EBITDA as a percentage of revenue decreased in this segment as we continue to scale up internally for the launch of our electric pay platform, as noted earlier. Moving to the balance sheet, On December 31st, we had $79.6 million of term loans outstanding and $13.5 million of cash on hand. As of December 31st, our total leverage ratio was 3.26x, while the current constraint is 3.5x. Our covenants stepped down a quarter step in each of Q1 and Q2 of 2022, at which time our total leverage ratio will be below 3x, absent any further M&A activity. During the quarter, we exercised the accordion feature of our credit agreement and borrowed an additional $15 million to complete the capital acquisition. We also completed a bought deal offering in November 21 and used $30.3 million of the net proceeds from that capital raise to also fund the acquisition. As a note to better understand our working capital position at December 31st, we had $15.6 million of projected earn-out payments for fiscal year 22, along with $1.6 million of projected earn-out compensation that's displayed within accrued liabilities. We expect to pay half of this amount in cash and the other half in equity as per the terms of the agreement, so that has an effect to the working capital view on the balance sheet. The current interest rate on our term loans is approximately 3.3%. We currently convert half of our adjusted EBITDA into free cash flow, which can either be used for acquisitions or for debt repayment. We define free cash flow as adjusted EBITDA minus capital expenditures, cash interest, and cash taxes. Looking forward, the finish to our fiscal year gives us confidence for fiscal year 2022. 2021 was a transformational year for the company, and we look to accelerate our growth as we approach the market as one integrated team. This concludes our prepared remarks. Thank you all for your time this afternoon, and we look forward to updating you on our progress going forward, and we're now ready to open the call for your questions. Operator?