Quisitive Technology Solutions Inc.

Good afternoon and welcome to acquisitive first quarter 2022 earnings conference call. Joining us for today's call are acquisitive 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 securities legislation. 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 first quarter 2022 earnings release. Now, I'll 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 Q1 2022 earnings call. We are off to a strong start in fiscal 2022 with quarterly revenues up 256% year over year, resulting in a record-breaking $45 million top line. This strong financial quarter demonstrates good momentum on delivering the integrated value of the Catapult acquisition, continued organic growth in our payments business, and validation of our acquisition strategy as we focus on our one-quisitive interaction, all evidenced by results. It has only been a few short weeks since our last update, so we will keep our comments brief, but want to address both macro market as well as high-level updates in our business. First, I'd like to talk about the broader market and key indicators. As I alluded to on the last call, our team has been paying very close attention to the various macroeconomic headwinds that have affected virtually every single business in the world. The cool down and potential recession posed risk to all facets of the market, particularly on the front of inflation as money becomes more expensive and we see various commodities temporarily losing projected value. That said, as I shared on our previous call, Quisitive successfully took proactive steps towards strengthening our executive team with industry leaders and diversifying our recurring revenue streams with the intention to gain resiliency during the natural cycling of the market. As Satya Nadella, CEO of Microsoft, noted during his most recent earnings call, instead of businesses pulling back on digital transformation efforts, they're accelerating these moves with the knowledge that increasing investment in the quality of automation within a company's infrastructure results in a properly placed deflationary force against the market's current whims. Investments in IoT, data, and digital transformation are at an all-time high and are continuing to grow. To provide additional context, Satya noted that Microsoft has not heard of businesses looking to their IT budgets or digital transformations projects as the place for cuts, but on the contrary, are places where they are looking to accelerate their growth efforts. To put it short, it's a shared idea that investment in enterprise software and services is a strong deflationary force, and that's something we at Quisitive can confidently echo as well. This puts us in an ideal situation to grab further market share as companies pivot their needs to services and solutions that we offer to ultimately ramp up their digital transformation strategies. In parallel to the enterprise business effects, there has been an impact on the average consumer purchase behaviors. Nevertheless, I wanted to take a moment to dive into something CEO of Visa, Alfred Kelly, shared on his most recent earnings call. In the topic surrounding volumes and transactions within the payments market, Alfred mentioned that despite the forces of the recent supply chain constraints caused by the Omicron surge and the war in Eastern Europe, credit card transactions continued to grow. He profoundly noted that He had not seen a noticeable impact due to inflation, supply chain issues, or the war in Ukraine, and that payment volume growth relative to three years ago has been stable and strong now for four quarters in a row, paving the way for payment networks to power both more traditional and newer ways to transact and move money. Networks inside and out of Quisitive are still expanding. and the acceleration of this growth is achievable with the measures we've taken to this point in the face of the aforementioned headwinds. These market indicators are validated by our strong Q1 results, and we are experiencing similar demand as we progress through Q2. I'd like to now shift gears and dive deeper into our global cloud solutions business segment, where a combination of the organic growth and realization of acquisition-related contributions has brought about a strong set of results for Quisitive. Our internal efforts are again supported by the previously stated theme of today's market-wide shift to hybrid business, fueled by a surging demand for technical data services and application modernization services to support enterprise customers and their digital transformation needs. Quisitive has already begun to capitalize on the synergies with Catapult, including an integrated recruiting engine to fuel headcount growth, a joint security assessment offering, and initial motions to cross-sell Catapult managed service offerings focused on security and managed Microsoft Azure services to existing inquisitive customers. This is the first full quarter we've been able to completely bake in a full three months of Catapult's financial results into our own. I am proud to say that the integration process has been going well, and the partnership across the company to immerse Catapult into the one inquisitive vision is on track. To further quantify the relationship, I'm pleased to share that to this date, there's been 19 existing Catapult customers with inquisitive assessments and services completed in process or in the pipeline, and 25 inquisitive customers engaging in the upsell of Catapult security assessments and services in similar stages. Leveraging the cross-selling opportunities within the various inquisitive specialty segments has always been a key component of our growth strategy. and we intend to further capitalize on this initiative going forward. As a committed Microsoft partner focusing on expanding our capabilities and customer reach with our broad portfolio of cloud services, Quisitive has taken a direct interest in procuring the well-respected line of Microsoft Advanced Specializations. With that said, I'm pleased to reiterate that we've achieved 11 Advanced Specializations in total and recently received the fourth and final Security Solutions Specializations. To provide additional context around how we separate ourselves from the rest of the pack, there are only six other Microsoft partners out of thousands that have obtained all four of the security solution specializations. Partners who earn an advanced specialization further differentiate their organization from companies inside and out of the Microsoft ecosystem, ultimately providing additional marketing and brand equity value to Quisitive. Additionally, Microsoft is making a major investment in security, and we are well aligned to be a go-to partner in this space. Quizit is offering in the security space, Spyglass, is a holistic solution that includes assessment, roadmapping, security alerts, remediation, and coaching. It is a cross-platform expert security support that enhances customers' existing security investments, as well as identifies overlapping security solutions to provide opportunities for customers to actually decrease their costs while improving security. The cybersecurity market has reached an inflection point. Our nation is facing a shortage of skilled labor with nearly one in three security jobs vacant in the United States. This, unfortunately, has pushed the time for detection of breaches in closed networks to an alarming 287 days, a trend that Quiztive intends to help reverse. Microsoft continues to sharpen its knife on the Azure front, as Azure machine learning has grown in consumer and business usage at a rate of 86% year over year. The usage and optimization of Azure is incredibly important to our organization, as both our cloud and payment segments utilize that technology as the backbone of our platform and software as a service offerings. The headways made on the Microsoft AI front greatly assist our team in continuing to deliver top of the line services through data analytics and native cloud applications, all the while acting as a foundational platform for our payments innovation initiatives. On that note, our global payment solution segment continues to grow, highlighted by the ongoing efforts of our merchant services group, formerly known as Bank Card USA. From a volume perspective, we had a phenomenal quarter. the best March on record, as average daily volume exceeded $11 million. One thing that I did want to share is that there's variability in the way of forecasted volume-related numbers month to month due to the seasonality of both the quantity of days in any given month and the quantity of transactions that occur during different spending periods. Nevertheless, reaching an all-time high for the month of March is a milestone worth commenting on, is an encouraging example of the reference at the beginning of my remarks to the growing volume trends noted by Visa's CEO. We have onboarded over 500 new merchants over the past seven months, and the contributed increase in volume from those merchants is nearly 23 million per month. The payments industry from a broad view has not shown significant downtrends since the waves of macroeconomic factors began impacting the U.S. economy, which helps us remain focused and cautiously optimistic that our efforts in the market will continue to increasingly bear fruit. On brand with payments volumes, Ledger Pay is progressing well, as we have received MasterCard certification and are in the later stages of active testing for Visa certification. We are also preparing for our pilot customers and expect the first to be onboarded shortly after we finalize our Visa certification. We intend to accelerate our go-to-market strategy once the pilot phase is completed, which is currently expected in Q3 of this year. This includes multi-channel marketing and sales to ISOs and ISVs and direct sales to merchants. With the support of the Microsoft Sales Channel, Quizzo's sales teams will begin promoting its payment solutions to potential customers as well as targeted large U.S. merchants that would benefit from our innovative payments intelligence solution. In parallel to this Q3 go-to-market activity, we will also begin the migration of the existing merchant services customers to the Legit Play platform as shared during our last call. This will all be followed by an expansion into the Canadian mark as announced earlier this year. We are also actively in discussion with prospective customers to conduct payments intelligence proof of concepts consistent with the timelines that we had previously shared. We continue to receive positive feedback on our technology and validation of the unique data insights our solution will provide to merchants to engage their consumers. We believe that this will be increasingly important as consumer purchase behavior changes imposed by market conditions will require merchants to be more precise in understanding their customer and be able to personalize the experiences and activate engagement. Next, we will briefly discuss M&A activities for the company. The strong growth we've displayed on our organic efforts were fueled by the meticulous and calculated acquisitions over the past years, and we view today's market as still viable for these opportunities. We continue to have ongoing conversations with some very high-quality companies and are actively monitoring valuations in the private sector, given the current public market changes to multiples. Though I have nothing material to share on this call, I want to reiterate that we are proactively tweaking our mindset given the shift in macro multiples versus the historic highs of valuations we saw over the previous two years. We feel this is a prudent measure and reflects our focus on fiduciary responsibility and capitalizing on our inorganic growth strategy. On a closing note, I'll touch on the quality of our partnership with Microsoft. As they have announced the elimination of their legacy programs for gold and silver competencies creating a much more sophisticated model with the previously mentioned advanced specializations program. As a result, they're reducing their total portfolio of strategic partners, going fewer and deeper in the process. I'm proud to share that we are on that boat of existing partners and plan to dive deeper in our efforts with Microsoft. A recent happening I want to briefly touch on was the invitation we received from Microsoft to travel across the U.S. and engage with their field sales organizations across their industry teams in a co-sell partnership effort. The idea was to engage with their field sales org across the industry teams to identify key accounts in which the portfolio services Quisitive offers could be leveraged to drive customized introductions and offerings as we move into Microsoft's new fiscal year beginning July 1. Looking at our first half of 2022, we remain laser-focused on the integration and launch of our ledger payments platform, along with the continued unlocking of Catapult's full range of value. All in all, I am extremely pleased and encouraged with our execution of our plan. Thank you all for joining us in this exciting growth journey as shareholders acquisitive. I'll turn it over now to our CFO, Scott Merriweather, to discuss our Q1 2022 financial results. Scott?

Thanks, Mike, and thank you to all of you who are joining us for today's call. We had a great start to the new fiscal year. As we set a new quarterly revenue high watermark for the company, as Mike previously noted, revenues for the first quarter ended in March increased 256% to $44.9 million from $12.7 million for Q1 of 21, driven both by our acquisitions and our healthy organic growth. Gross margin increased 317% to $17.9 million in the first quarter of 22, over $4.3 million in Q1 of 21. Our gross margin as a percentage of revenue increased to 40%, a slight uptick from the prior two quarters and significantly greater than the 34% we experienced in Q1 of 21. As we noted last quarter, the current gross margin rate is a more steady state for our current organization. Our comparison to the prior years aided by the fact that Q1 of 21 had weaker gross margins due to lost productivity from winter storms and the addition of some lower margin CSP business that was spread across a smaller total revenue base at that time. We will continue to focus on increasing our gross margin percentage as we integrate our acquisitions and focus on cross-selling activities. Adjusted EBITDA increased 451% to 6.4 million for Q1 of 22 from 1.2 million for Q1 of 21. Adjusted EBITDA as a percentage of revenues was 14% for Q1 of 22, similar to Q4 of 21. The EBITDA margin was 9% for Q1 of 21. This was our first full quarter with the Catapult acquisition. As we noted on last quarter's call, 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, and that throughout 22, our EBITDA margins will blend towards our historical rates. We also continue to invest in our payments division, building its scale as we near market readiness for ledger pay, which has also impacted our consolidated adjusted EBITDA margin. Q1 of 22 was the last quarter in which the MAZIC and Bancard acquisitions do not have prior year results included with Quisitive's historical results. Going forward, those acquisitions will have lapped, and period over period results will be evident within our financials, We'll now move to discussing the segment performance, the specific performance of our segments. Revenue in our global cloud solutions segment increased 176% to a new record of $33.8 million for Q1 of 22 from $12.2 million for Q1 of 21, driven by the Masek and Catapult acquisitions and reflecting organic growth. March has historically been one of the better months for our cloud businesses. There are no holidays, and typically March has more billing days than other months. This quarter followed that trend and our expectations, as March was a very strong month for our cloud solution segment. The segment suggested EBITDA improved 462% to $4.5 million for Q1 of 22 from $0.8 million for Q1 of 21. After contributing negative EBITDA in Q4 of 21, the impact of the catapult acquisition is evident in this quarter's results. We are confident in our ability to cross-sell and integrate our historical acquisitions and that Pending macroeconomic conditions remaining steady, we can continue our growth pace. Revenue for our global payment solution segment also set a quarterly record, increasing to $11.2 million for Q1 of 22 from $0.4 million for Q1 of 21. Substantially, all of the Q1 revenue is from our bank card acquisition. Within the payments industry, January and February are often the two weakest months, typically from a post-holiday slowdown and a short month of February. March tends to be a good indicator of the remainder of the year. Our Bank Card business follows some of these same trend lines. Given the mix of merchants within their portfolio, March is expected to be the strongest month of the year. In 2022, the Bank Card portfolio set a monthly charge volume record in March and produced strong results. Adjusted EBITDA for our Global Payment Solutions segment increased to $1.9 million in Q1 of 22 from $0.4 million for Q1 of 21. Bank Card contributed strong EBITDA results in the quarter, which were offset by our increased spending on the LedgerPay platform. In total, the payment solutions segment had very similar quarter-over-quarter EBITDA contributions compared to Q4 of 21. Operating costs related to ledger pay will continue to rise throughout 2022 as we reach market readiness and the launch of the platform. Accordingly, adjusted EBITDA as a percentage of revenue decreased in this segment, reflecting the increased costs related to the ledger pay platform. Moving to the balance sheet, At March 31st, we had 77.6 million of term loans outstanding and 9.5 million of cash on hand. As of March 31st, our total leverage ratio was 3.16 times, while the current constraint is 3.25 times. As a reminder, at March 31st, our leverage covenant stepped down a quarter step from 3.5 times. We have one more step down at June 30th to 3.0 times, where the leverage ratio will remain under the current credit agreement. There were no significant changes to our capital structure, debt, or equity, as this was a relatively steady state quarter. As a note to better understand our working capital position, at March 31st, we had $15.6 million of projected earn-out payments and short-term liabilities on the balance sheet, along with another $2.1 million of projected earn-out compensation within accrued liabilities. These earn-outs will be paid within fiscal year 22. However, they will be paid with a mix of cash and stock. the amounts reflected on the balance sheet will not have an equal impact to our working capital or our cash position. The current interest rate on our term loans is approximately 4.4%, and we currently convert around half of our adjusted EBITDA into free cash flow, which can either be used for acquisitions or debt repayment. We define free cash flow as adjusted EBITDA minus capital expenditures, internally capitalized software, cash interest, and cash taxes. As we look into the remainder of the year, we remain confident in our ability to deliver strong results, but remain wary of macroeconomic indicators of recession. We do not currently see indicators of a slowdown in tech spending, and we believe we will deliver continued growth. We are very pleased with our strong first quarter and believe it sets us up well for the remainder of the year. 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?

Thank you. And as a reminder, each analyst will be limited to a maximum of two questions. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. And our first question comes from the line of Robert Young with Canaccord. Please proceed with your question.

Hi, good evening. You gave a lot of great color around the demand environment and it sounds like you're very confident. So I guess there's some worry out there around recession and you don't seem to see any kind of indications of that. But maybe the second part of that would be just to maybe discuss your visibility like how far out do you reasonably see demand and I mean if there were signs of recession in the back end of the year or something like that like when would how far ahead would you see indications of that yeah I mean so if you think about it we're always operating in a combination of you know

Detailed views a quarter ahead and macro-level views, you know, kind of one to two quarters beyond that. Combination of, obviously, part of what helps us is recurring revenue streams as a higher mix of our business and having visibility to those kinds of things that have some consistency. On the project services side of things, demand is very high and it continues to be. You know, the visibility to that obviously will be factored by less things in our direct control and obviously those things that might be impacting customers. We certainly, you know, we operate in segments of the market that are less impacted today by some of those factors that might be leading to, you know, those that are having inventory challenges and reductions. But back to our point at the moment, you know, a lot of what's happening to these customers is the fact that they have been disrupted, whether it's through pandemic, now, you know, inflationary impact and other things happening to them. And optimization of their environments, their supply chain, their operations, they're doing hiring freezes, which for us is actually a positive indicator. When companies, and this is historic, I've been doing this for 30 years, when When there have been recessions, I've mentioned this before, professional services are more recession resistant because companies still need to advance their digital transformation initiatives in doing those things but are less likely to hire significant full-time staff to execute on that because of those uncertainties and more frequently reach out to third-party providers like us to go do that. Our visibility is, you know, like I said, on a detailed basis is at least a quarter plus out and we've got a macro level view and we'll continue to monitor that. And again, we have this close relationship with Microsoft and rely on their visibility as well. And because of the close collaboration we do on pipeline execution together with them and reviews and all the things that were going on, we get visibility to their enterprise software views pretty far out as well. And that's a leading indicator for us. If they saw big declines in theirs, we typically are impacted one or two quarters after that, just because of kind of the way that software decision making and services impact. So those are the kinds of things we'll be using as our leading indicators and help us have better visibility to that.

Okay. And then maybe just a quick clarification there. And then my second question, if I could, you said that there was acceleration in demand through Microsoft, if I read that right. but also a narrowing of the channel. So it sounds as though you're expecting to see more opportunities through the Microsoft channel through the remainder of the year. Is that the way to read those comments?

Yeah, I mean, we're seeing high demand now and do expect that in our strengthening partnership with Microsoft, we are being one of a smaller set of partners that they're looking to execute on their strategy and execution, both from a sales and then delivery execution side. So at the moment, yeah, we believe That statement is an accurate reflection of how we're interacting with Microsoft and the demand that we're seeing.

Okay, and then a clarification on the pilot customers on the payment side. I was a little bit confused. I think, did you say that you were waiting for the Visa certification before lighting up pilot customers, or are there already customers being piloted today? And then was that processing, or is that payments intelligence pilots? Maybe you can just sort of break that apart a little bit, so... to help me out there. I'll pass the line.

Yeah, because Visa is actually progressing at a much quicker rate than we had even announced last quarter, because we were talking about it happening a little further out, we're feeling like it is very near. We are in very advanced stages with them. It did make sense to do a pilot customer, just a MasterCard. We're going to go ahead and defer that and do the pilot customer with both Visa and MasterCard at the same time. And it will just be for processing on a production basis where we're doing real-time production processing. As I've tried to share before and reflected a little bit here, on the payments intelligence side, we're doing proof of concepts. Proof of concepts separate from a pilot. A pilot is typically something where you're actually doing production execution in a limited way versus a proof of concept is something you're doing in a non-production environment using data in the case of payments intelligence, taking data and doing things in an offline model to demonstrate the value of our payments intelligence platform before the customer takes the step to go ahead and activate a production pilot.

Okay, thanks a lot. That's very clear. Thank you for that clarification. I'll pass the line.

Thanks, Robert. And the next question comes from the line of Rob Goff with Acelon. Please proceed with your question.

Thank you very much. And congrats on a very strong quarter. As you look across the various units, can you talk to the underlying organic growth that you were seeing, be that within Catapult or Bankart or your traditional solutions?

Yeah, I'll let Scott talk to that as part of his analysis.

Yeah, it's very similar to what we announced on the last call. High teams in the cloud, Sorry, segment is what remains, and we are confident in that trend right now and are holding to that trend. And the payments business, definitely double-digit on the volume growth. That's going to – they've been growing in the upper teens and 20% range. As we begin to grow there, it's going to be harder to maintain that with just that business without ledger pay activating. I'm sorry, to hold that rate without ledger pay activating just because the baseline denominator number is going to be bigger. but still remaining a double-digit growth on the payments business.

One of the challenges, George, Rob, on that is when we do, especially some of the smaller acquisitions, but many of them, there's a process typically we have to go through around GAAP to IFRS and gross net and all those things. And when we do those pre-acquisition, they're done on a calendar and TTM-only basis, not on a quarterly. We don't go through the detail doing that for every quarter. So it gets a little tricky for us in stub period kinds of things to do that math that I could be confident I'm giving to you. So that's why we focus it more just on an annualized basis, because those quarterlies would be darts that we're throwing rather than detail analysis, which is why we haven't typically done that, just because I know that that creates confusion. So anyways, that's one of the other reasons why we don't do it on these interim quarters for stub periods.

And Scott talked to the debt covenants, stepping down to 3.25 and then stepping down again in June. Can you talk to your perspective on those covenants and the ratio I believe you gave was 3.16? Right. We were 3.16 at March 31st.

The step down is to 3.0 on June 30th. currently anticipate that we will be just fine at June 30th and passing our covenants. Obviously, we're keeping a close eye on it. And then that was always going to be our tightest quarter for the year. And we get a lot more headroom under those covenants for the back half of the year. But we currently, with our current projections, foresee no issues in the coming quarter.

Thank you. Thanks, Rob. Our next question comes from the line of Christian Segros with Aid Capital.

Please proceed with your question.

Hi, good afternoon. I wanted to ask a follow-on to Rob Young's question earlier around visa certification and any other milestones we should be looking out for on the ledger pay side of the business. So if I understand correctly, visa certification sounds like it would be happening sooner than expected. It's in the near term. And then pilots would commence. And then when we think of annexes, on Discover coming online. That'll be as pilots are ongoing. Is that sort of the way to think about the timeline and milestones of Ledger Pay here on end?

Yeah, I didn't spend much time talking about American Express and Discover. I'll touch on that. But yeah, to your point, you're accurate on Visa, that it is pending very soon. The American Express and Discover are a lighter lift. You've heard me talk before a lot about with both MasterCard and with Visa, the hardware that needs deployed, network circuits, and all those things into our data centers. With American Express, we discovered that's not necessary. They use a different mechanism. It's a VPN software connection. So, we're not dependent on some of those long lead time items like from a supply chain and network perspective and things like that. It's It will be able to advance into testing very quickly. We're just not doing it in parallel with Visa because we don't want to distract our team. And we also have some other things going on with proof of concepts and stuff like that on the payments intelligence side that we're trying to balance all that with our teams to advance each of those balls. But anyway, that will all occur. And then starting the pilot customers, we're going to focus. The first set of pilot customers will just be Visa and MasterCard. And many of them, that's the vast majority of their volume anyway, so it's not really a big deal. So we've selected customers that that's the case. As we layer in American Express and Discover, we'll start to bring those into the pilot groups, obviously. But more importantly, the big next step then would be beginning the migration of the bank card merchant services customers that we have and start that migration, as we've talked about, in Q3 to bring that across.

Okay, perfect. Thank you. That's tons of helpful context. The second question here today, I'll ask on the payment side again. So Marks was very strong, the records for the company. Just wondering how that was impacted by maybe the merchant portfolio under Bank Card. And if I remember correctly from last year, Q2 stays strong from Q1, maybe Q3 is the lighter summer month or summer quarter, sorry. And then Q4 is strong again. Is that the way to think about growth in the payment side of the business through the year?

Yeah, so seasonality is multifaceted. I'll talk about Q1 in particular March, and then we kind of extrapolate out from there. But there are a few different drivers in March. First of all, it's a 31-day month that has no holiday. So in both segments of our business, That makes March a very strong month. There are other 31-day months, but there are very few that don't have a holiday when you look at it. So you get into that factor. So that's one, because typically holidays, even in the payment side, holidays are typically lighter transaction volume and things like that from a payment side. The second piece is there is some seasonality related to annual memberships as part of the portfolio. We have memberships to clubs, memberships across different types of organizations like that that are part of the portfolio, and they bill and transact on a credit card basis the annual membership, and much of that hits in March and some in April. So there's a little bit of that that is seasonal in that nature. So you get that kind of a combination in March that increases volume, which is, to Scott's comment, is the highest volume month and has been for them for several years. As we move through, Q2 is typically a solid quarter. And to your point, you know, and again, we're still trying to figure out what post-pandemic seasonality really does look like. But at the moment, we anticipate to be shaped similarly what you saw from Q2 to Q3 and Q4 last year, but increased volume based on the number of new merchants. You know, in my comments, I talked about 500 merchants over seven months, 23 million of incremental monthly volume from just those new merchants. So, you know, as additional new merchants and others, we do have some attrition and we're working to, you know, work through some of those things, but our attrition is very low. We've talked about that before that it's, you know, less than 10% on a customer basis, but That whole model is driving organic growth that has been the storyline since we acquired the bank card business and continues to be the storyline this year as well. And the team there has done a fantastic job of growing and expanding their volume and merchant base.

That's all very helpful. Thanks for taking my questions and congrats on the quarter. Thanks, Christian.

And again, as a quick reminder, if anyone has any questions, you may press star 2 to join the question and execute, in which you will be limited to a maximum of two questions. Our next question comes from the line of Stephen Bowen with Raymond James. Please proceed with your question.

Thanks, guys. Mike, can you go over again the cross-selling that's been happening between Catapult and Quiz? You mentioned a number of customer reviews. Just maybe a little bit more detail on that.

Yeah, so if you look at the portfolio services, I'll start with some of the things we've talked about. You know, Catapult has a unique set of offerings in the security space, which is a set of services that are, there's an assessment component to help organizations understand where they are in their security. There's incident response component, which is people go, oh, crap, I had somebody hack me, phish me something. Can you come in? And then there's a set of services that are about remediation, and then more importantly, managed services, which are an ongoing operational component where we're their security arm. you know, hardening their infrastructure environment around Azure and M365 and using all the Microsoft tooling that's a component of that and providing coaching and advising for their teams on how to secure their applications and all those good things. So that's all part of it, along with then a set of managed services for Azure environments and the M365 environments and stuff. So one set of cross-selling is that set of capabilities are things that either Quizitive didn't have at all or Quizitive had a lightweight version. And now we're taking and arming our sellers into our existing account base to go actively introduce and bring those. And that's where, in that case, there were about 25 accounts that we've already got either, you know, active engagements in some form that have either been completed or in process, et cetera. On the other side, Quisitive has this much broader set of services around what we call our business applications group, which includes our industry capabilities and healthcare and manufacturing, our SaaS offerings, all the things around the dynamics platform. And while there was a small component of the Catapult business that did that, it was a 10, 12-person team versus we have hundreds of people that do that. So you're seeing those kinds of things come across. as well as the programmatic motion that we have probably talked to you about in the past, about these assessment offerings, and we've got our on-ramp to Azure data, on-ramp to Azure application offerings that we go to market with Microsoft and have this very sophisticated program with, is something that Catapult did not have, that kind of motion with Microsoft. So we're taking that engine... and attacking it into their customer base and using those as activation to create new sources of revenue, new customer engagements, and things like that. So those are the elements of that cross-selling, and there's various other forms of it, but those are the key things.

Okay, and maybe just the quick follow-up on that. Forgive me if you mention this, but have those sales teams been fully integrated, or is that ongoing, like maybe just a general update on the integrations?

Yeah, so we've done a bunch of stuff. I think we touched on a little bit last call, but I'll expand on it a little bit. But yeah, we have fully integrated the organization. Terry Burmeister, who was the CEO and president of Catapult, has now taken over to lead what we call our cloud services and applications component of our global cloud solutions, which includes fully integrated sales, fully integrated marketing, fully integrated delivery, fully integrated recruiting. bringing all of those together in a way that we have realigned territories to remove channel conflict with Microsoft, with customers, all those things. So, yeah, fully integrated from that perspective. We're still advancing a few different areas. Our marketing programs are being synthesized. Effective July 1, we anticipate fully transitioning the brand over to the inquisitive brand. And, you know, all of our external marketing, communication, everything will be consolidated under one inquisitive program.

Okay. That's all for me right now. Thanks. Thank you.

Our next question comes from the line Divya Goyal with Scotiabank. Please proceed with your question.

Thank you. Good afternoon, gentlemen. Wonderful quarter. So I know, Scott, you mentioned debt fees. Can you repeat that a little bit? And can you provide some more color on leverage and companies' current capital standing and its capital allocation priorities as you go forward?

Yeah, sure. So currently right now, $77.6 million at March 31st was our outstanding balance on the term loans. The balance sheet has some debt issuance costs and that kind of thing, but when you add it in, it nets lower. But from a gross perspective of what's actually added, it's $77.6 million. We do have quarterly paydowns of about $2 million on those term loans, and those will be continuing and ongoing. Leverage was 3.16 against that 3.25 covenant. The covenant steps down to three at June 30th, and we currently project full compliance for the remainder of the year. And clearly, as our acquisitions and our growth continue, We get a little bit more headroom in the back end of the year under those covenants. We always knew June 30th would be the tightest, but like we want to reiterate, there's no concerns there on our side. And from a capital allocation perspective, it's a lot of the same of what we said. We're going to continue to invest in LedgerPay. The current payments company, a bank card, and then some of our cloud side is continuing to fund some continued investment on that side as we begin to get LedgerPay activated and built from a platform perspective. But then as we go through the year and the platform is ready for launch, we will continue to allocate capital both from a capital expenditure perspective from software development, but also from an operational perspective of building out sales and marketing teams and operational support teams as we begin to launch and drive revenue growth on the back end of 2022. You'll see more of that contributing in 2023 than 2022. But we will be continuing to invest throughout 22 to ready that platform and to make the impact that we want to make with it.

One of the other things that, you know, was kind of, I think, embedded in there when we talked about earnouts, you know, CRG, we just completed their final year of earnouts. So, you know, while we have those payments that are about to be made, all the free cash flow from EBITDA contributions from that business now going to free cash flow, as Scott started to reference, and create additional funding available. This is the final year of the Memlo earn out as well. So, you know, as we progress through this year into next, you know, we'll start to free those up, which also then create additional available free cash flows for investments and or potential acquisitions in the future.

Thank you. That's good color. But correct me if I'm wrong, but bank card earnouts are coming up soon as well then, right?

Correct. Yes. We noted earlier that in total, there's about 17.7 million of earnouts on the balance sheet right now that are due throughout fiscal year 22. But again, not all of those are due in pure cash. They'll be paid in a mix of cash and stock. And so we From a capital allocation perspective, we're comfortable in our current standing and our projections through the rest of the year.

And you're not looking to increase your deadline or raise any additional capital at this time?

Not at the moment. As Mike alluded to earlier, we will always be on the lookout for the right M&A opportunities. We're going to let the market settle down a little bit from both a multiples perspective and just The capital markets, the equity markets right now, we all know are struggling a little bit. So we're keeping a close eye on market conditions and we continue to work on M&A targets. And we won't be afraid to act when the time is right. But at the current moment, I would say the time probably isn't perfect or right. But if it's the right acquisition, we'll still find a way to pull it off.

That's awesome. So just one more question on the company's spyglass or the cybersecurity platform. Mike, I know you mentioned, talked about it briefly. Could you provide a little bit more color on how is that going and how is Quisitive sort of cross-selling Spyglass and how is Catapult benefiting from Quisitive's platform there?

Yeah, so the platform is a combination of methodology, methodology IP, and then some very talented cyber and security resources, which are, you know, a key component of what we bring to the customers. It goes back to a set of what I kind of described as a set of things that we do to assess a current state with a customer, remediate. Some of that remediation is proactive. Some of that remediation can be reactive based on a customer having an event, which happens way too often. It's a great entree for us into a customer when they've had that. And then it's a set of things that we do for road mapping to really secure and, as I described, harden customers. their environment on many fronts, not only the Microsoft tooling and platform leveraging it, but when you start to think about application development, and it's actually a big, big area in the future, and you'll see us continue to expand our role in this around application security and how applications in a native cloud environment participate in a way that is not trying to be... Because too much of what you see with infrastructure being is trying to prevent access and those kinds of things. And one of the real challenges is making sure the applications, as they're deployed, and this gets into the whole DevOps model and infrastructure to code and all the kinds of things that go with that universe, is making sure that you're deploying applications secure by design, not just at the edge. And a lot of what you see is being done. So all that's the applications, all the capabilities. That was a really strong foundation of what we acquired in Catapult, which is twofold. One is really an important area at this time. Second is it's all recurring revenues on an annual contract, recurring revenue stream kind of a basis. And the way we sell that is going into customers and, again, often starting with an assessment. And, again, often going back to some of the things we uniquely do with Microsoft, Microsoft typically will pay us to go do that assessment because they know what's going to happen is we're going to uncover vulnerabilities Those vulnerabilities, we're going to help customers figure out how to solve. And in many cases, it's acquiring additional services from Microsoft's cloud offerings that help harden the environment. Or in other cases, it's a preventative thing. Microsoft may have already convinced them to buy it and have it, but they're not accurately applying it. We see this quite often where people have bought some of the security offerings from Microsoft but have done 10%. of the integration or application of what is capable of. And what we do is really help them think about how to holistically embed that. So those services, we got, you know, pre-sales expertise on the business. Our sales teams have been educated and trained on the offering. We're going to market through this joint marketing engine that we've built, leveraging all the collateral pieces, taking that to market together through many different channels, using our Microsoft joint account planning and selling processes. I actually just met with one of the senior security team members on the retail side, and we're talking to them about this offering as a key way for them to go in and have different discussions with their customers. And, oh, by the way, along the way, we're helping them understand how ledger pay is a component of of that value proposition in terms of how we think about using and applying that to data that we unlock from LedgerPay as well. So hopefully that gives you a little bit of context about that offering and how we're applying it.

Yeah, that's very helpful. Thank you. Thanks, Divya.

And our next question comes from the line of Gabriel Lang with Beacon Securities. Please proceed with your question.

Good afternoon. Thanks for taking my questions. Just wanted to ask about operating expenses and how we should be thinking about the progression of operating expenses over the course of calendar 22, given the current growth plans and the concurrent impact on EBITDA margins, I guess, relative to the EBITDA margins just reported this quarter. How should we think about that over the course of the year?

Yeah, our goal is to You know, the goal we've told the entire market is that we're going to be trying to expand our EBITDA margins in time, especially I think if you look at it from the two different segments, from the cloud perspective, I think you're going to see EBITDA margins begin to slowly uptick there. We do have, like the entire world knows right now, there's the cost of headcount is going up. You know, we do have the ability to pass that on through rates and time, and so we do expect as we continue to leverage the integration of Catapult and Quizzit together, that there will be some operational efficiencies there, and that also as we get more recurring revenue streams within the cloud side of the business, that our goal to get north of that 14% it's currently at is an achievable goal, but I think it holding in that 14% range is an expectation that you can plan on and that we are planning on. Obviously, our goal is to expand that, Within the payment side, you're going to see those begin to shift down, frankly, over time. I think on a blended perspective, we'll hold it as a company around where it currently is, but we will continue to invest more and more in headcount on the payment side, which will increase our OpEx. The goal there will be a little bit more EBIT in neutral, but it will make EBIT a margins decrease, if that makes sense, just because the goal will be to expand revenue But as we expand revenue, we'll also be investing in that business to build the platform it needs to be so we can be expanding revenue in EBITDA at a higher rate in future years. But as we're launching now and we're launching off what I would call a smaller base and smaller numbers, you'll see an outsized impact. So on the margin piece, and I would look at payments more in a holistic EBITDA perspective on a baseline EBITDA instead of a percentage EBITDA and just know that the ledger based out of the house, we're not expecting to contribute significantly to bottom line EBITDA through this fiscal year, because we'll need to be investing more as the year goes on.

Gotcha. I appreciate that feedback. And secondly, just on the, in terms of cash flows, do you have a projection of what the calendar 20 to earn us will be in terms of the cash in share of splits? That's the first part. And the second part was I did notice that receivables was a bit of a drain on working capital this quarter. Just curious if that's sort of taking care of itself in the current quarter.

Yeah, the receivables, there's nothing we need to disclose to be worried about in the receivables perspective. That's just some normal timing and mixed things. So no concerns there. That's just a mixed issue. And then from an overall split on the earnouts, those are still in discussions and we don't have a number to give to the market on that. So, but.

Yeah. So like even, you know, remember we just, we haven't even closed the period yet on the first year for bank card, which is the big one, for example. So there's still scoring and things that we won't have yet for probably another month or more to even evaluate to where they actually achieved on those earnouts. So that's, You know, part of the reason we don't know exactly the threshold and some of those things, even on the basic one, we have a preliminary. But because Bank Card, if you remember, was a May 7th, we won't have the financials for that period of May until end of June, which will be our first view to kind of look at full year and all those kinds of things. The earn-out payment on that one's not due until late August, early September.

Gotcha. Thanks for all the feedback, and congrats on the progress. Thanks, Gabriel.

And at this time, this concludes this company's question and answer session. If your question was not taken, you may contact the Inquisitive Investor Relations team at quis at gatewayir.com. I'd now like to turn the call back over to Mr. Ryan Hart for his closing remarks.

Thank you, and thanks, everyone, for joining us today. I especially want to thank our employees, partners, investors, and customers for their support. We appreciate your continued interest in Quisitive and look forward to updating you on our next call. Operator?

Thank you for joining us today for Quisitive's first quarter 2022 earnings conference call. You may now disconnect.