Hello, and welcome to the Usio third quarter 2023 earnings conference call. Please note today's event is being recorded. And now I turn the conference over to your host today, Paul Manley. Please go ahead, sir.

Thank you, operator, and thank you, everyone, for joining our call today. Welcome to Usio's third quarter fiscal 2023 conference call. The earnings release, which we issued today after the market closed, is available on our website at usio.com under the Investor Relations tab. On this call today are Louis Hoch, our Chairman and CEO; Tom Jewell, Senior Vice President and Chief Financial Officer; Greg Carter, Executive Vice President of Payment and Acceptance; and Houston Frost, Senior Vice President of Card Issuing. Let me remind our listeners that certain statements made during the call today constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities and Litigation Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties are described in our earnings press release and in our filings with the SEC. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update these forward-looking statements. During today's call, we will refer to non-GAAP financial measures such as adjusted EBITDA. Our earnings release includes a reconciliation of adjusted EBITDA to GAAP operating income. Management will provide prepared remarks, then we'll have a question-and-answer session. So let me start off with some highlights from this afternoon's release. I'm pleased to report another quarter of strong growth with revenue up 25%, our 13th consecutive quarter of revenue growth. We also are reiterating our guidance of 18% to 20% revenue growth for the year. In our release, we announced a number of exciting developments across our entire organization. This includes an investment in output solutions that should increase capacity by 50%, our largest ever quarter of prepaid card load volumes, our strongest ever card pipeline and the expectation that ACH volumes will start to grow again in the fourth quarter. In addition, we continue to be in excellent financial condition with strong cash flow this quarter, in part supported by record interest income, which we expect will add over $1 million to our cash position over the second half of this year. In total, this has enabled us to add nearly $2 million of cash to our balance sheet over the first nine months of the year. So at a time when many companies are forecasting slowdowns in their business, Usio continues to charge ahead. Now, I will turn the call over to Louis.

Thank you, Paul, and welcome, everyone. It was another quarter of strong growth. Consequently, I am pleased to reiterate our guidance for revenue to be between 18% and 20% for the year. Results once again reflect our diversified business strategy, diversified in the markets we serve and the payment channels that we offer. This quarter, results were led by a strong performance at prepaid, where revenues were up 197%. As a sign of prepaid's continued growing momentum, the third quarter was the first quarter in the company's history in which the volume loaded onto prepaid cards exceeded $100 million. For the quarter, prepaid continued to have solid growth, not just in load volumes, but in transactions processed and purchased dollars processed. While residual revenues from expiring card programs were certainly a contributor to our strong revenue growth, load volumes, transactions, and purchased dollars processed were all generated from ongoing programs. Consequently, these record amounts provide a clear indication of the strength of our prepaid business beyond any reliance on expired cards. Houston will discuss new accounts and the strong growth with the long term corporate expense and disbursement clients. But let me quickly touch on one of its most significant accomplishments. As recently announced, we won our first state-administered program. This is totally new, a very large market opportunity for us. So we believe prepaid has built a solid foundation of recurring revenue programs, a solid base from which we can grow, evidenced by the increasing load dollars. Loaded dollars on the cards is a leading indicator of future revenues, creating either revenue from spend or revenue from spoilage. Both revenue and margins were up again at output solutions this quarter as Sy Green and his team continue to utilize every ounce of available capacity. For that reason, we're investing approximately $1 million in new technology at output solutions that should increase our capacity by 50%. At the same time, this should also increase the speed of production and reduce costs. This new system will increase our flexibility, including the ability to handle mail, run data files, a key requirement for large projects where we were previously less competitive. Last quarter, we noted that we had hired two seasoned print and mail sales executives. So combining his contacts throughout the industry with expanded capacity will make us a formidable competitor for larger, more lucrative programs. Often this should lead to what we believe will be both a better top and bottom line. We continue to expand our relationship with LA County, handling their check disbursement needs both fees and fines that were overpaid. We mailed 142,000 letters and 27,000 checks for LA County in the third quarter. We also took on additional cities in the quarter handling their utility bill credit, for the quarter in total was sent out a record 900,000 checks. Developments in output continued to be representative of the transformation and integration taking place across Usio. Output recently launched with a toll road customer for disbursement bills by plate toll bills. The bills have a QR code that the recipient scans, which takes a little to a payment portal built and operated by Usio. There is strong interest among government agencies and utilities in the scan to pay options. Not only is it easier to set up, but they've created a more traditional customer portal. It also seems to drive payments early. We also continue to attract new accounts which are completely electronic with no credit or mail service. Such accounts involve the creation of e-bills that are emailed to customers and then directed to a Usio managed payment portal. This is obviously a higher margin business. Turning to the card, PayFac continues to generate strong growth, 27% for the quarter, as Greg will discuss, it's been a busy quarter of increasing penetration with existing ISVs, implementing new ISVs, and building a strong pipeline, including three significant new opportunities which we are aggressively targeting. In ACH, total revenues were up on the strength of associated services such as PIN-less debit and account inquiry. We expect this to be the last quarter in which volumes are below year-ago levels as this is the last year-ago quarter that included meaningful Voyager volumes. This in turn should help us improve overall segment revenue growth and profitability. Margins were up in the quarter due to the highly profitable ACH revenue growth as well as due to spoilage revenues from our prepaid segment. Our business will always include some spoilage from expired cards. In the immediate term, the majority has been generated on the New York City COVID incentive program, which will be winding down further in upcoming quarters. In the third quarter, we did see an increase in our selling, general, and administrative expenses. Many were one-time in nature. We expect these expenses to trend down in the fourth quarter, but probably not to the levels we experienced in the first and second quarters of the year. Having grown revenues 25% over the first three quarters of the year, costs are understandably up to support this rapid expansion. Our goal is to keep the rate of overhead expenses growth below that of revenues in order to realize the significant operating leverage our business model can deliver, and we expect to see that improve as we move forward. The net result is an increase in operating income, adjusted EBITDA, and EPS from a year ago, although each was down sequentially from the second quarter, which we called out on our last quarter conference call. Cash was a good story as we generated nearly $750,000 of cash over the last three months. Some of that was a product of over $500,000 in interest income in the third quarter. We anticipate another significant increase in interest income in the fourth quarter. In summary, prepaid is positioned for the future with its high loan zone cards. Cards are sitting on some of the potentially largest new ISPs in our history. ACH is rebounding and we are increasing our capacity and output by 50% due to strong demand. Another solid quarter with strong top-line growth, internal investments to sustain that growth, and improve operating leverage over time. Consequently, as Paul noted, we are reiterating our guidance for the year. And now I'd like to turn over the call to Houston Frost.

Thank you, Louis, and thank you to everyone participating on our call this afternoon. As Louis noted, prepaid had an exceptional quarter with strong revenue growth in our first ever quarter with over $100 million in card loads. It is important to remember that card loads are a forward-looking metric, providing a measurement of client engagement. Loaded clients will generate interchange and transaction fee revenue over the ensuing months as well as inactivity fees and breakage beginning 12 months after the loads occur. As such, our record Q3 card load results are particularly exciting for the impact that could have on 2024 revenue, considering the roll-off in activity and inactivity fees generated from vaccine incentive programs from 2021 and 2022. Perhaps more importantly, the record load volumes demonstrate the card issuing business's continued growth and strength even in the complete absence of any pandemic related card programs. Our client base is increasingly diverse. Today, 6 of our 10 largest clients are expense management or disbursement programs with private enterprises. Equally important, many of these are long-term growing clients we've been serving for years. Among them are fintech companies such as Class Wallet and MoviePass, which we've mentioned on previous calls. While our government clients are drawn to the transaction restrictions and controls, virtual cards and/or consumer choice offerings, the fintech market appreciates our ability to integrate our external authorization feature with their technology. Our ability to offer technology that appeals to both government and private sector is essential in attracting new customers as well as retaining existing clients over the long term. As these organizations grow or their programs expand, we are growing right alongside them. We also continue to onboard new clients. Most recently, we won our first state-administered program. This program actually arose from the recommendation of a very satisfied smaller government entity, Usio customer within the state. We are extremely proud that the card-issuing division continues to receive introductions like this, as it illustrates the customer satisfaction on which we pride ourselves. This steady stream of referral business also enables us to run a lean sales and marketing organization with the attendant benefits for our profitability. Our success continues to be built on operational execution, the flexibility and capabilities of our proprietary processing platform, and our relentless focus on client relationships. As we look to the future, we will continue to focus on increasing the diversity of our client base, and the card programs we support, and continue to seek out opportunities that generate recurring revenues.

Thank you, Houston, and good afternoon, everyone. Card revenues were up again with year-over-year growth in our PayFac business, accelerating sequentially to 27% in the third quarter. Both dollars and transactions processed were up from a year ago with PayFac on target for three quarters of $1 billion of processing volume in what is shaping up to be a record year. While the third quarter is typically a slower time, this year, we onboarded a record number of new merchants from our existing ISV relationships, up substantially compared to any previous quarters with an average of more than 100 new onboarded merchants a month compared to 60 recently. I attribute this steady improvement to our business strategy where we keep adding new ISVs, and they, in turn, continue to penetrate their account bases. As our base of ISVs grows, this is a natural result of our disciplined processes. What is even more exciting is the number of ISVs that are mandating their users adopt our PayFac solution. One example is the new fitness exercise practice management ISV we recently implemented. This ISV is rapidly transitioning all their users from Braintree to Usio. Once adopted by their entire client base, this ISV could be one of our largest. There's been a recent industry development that is providing an additional tailwind. It's becoming much harder to become a registered PayFac. The requirements are much more stringent and many ISVs simply don't have the experience or resources to justify building the necessary infrastructure themselves. Consequently, this is making our PayFac as a service value proposition increasingly attractive to ISVs who want to monetize payments. Louis alluded to a number of large prospects in our pipeline, which we attribute to both our diligent marketing efforts but also, in part, due to these new complexities and challenges. The third quarter is always a great time for prospecting. It is the boring part of sales involving a lot of groundwork, but it sets us up to have a strong pipeline for the fourth quarter and into the new year. We attended several different conferences this quarter, especially in the lending industry. For instance, we attended LEND360, which is probably the biggest lending conference for the sub-prime and alternate lending channels. We are seeing increased activity in the tribal lending space. We've always been in that space, but we're becoming more visible, and that is yielding new agreements directly with the tribes. It's a good market that contributes to ACH both ways, both in funding and then servicing of the loans. In the third quarter, we also attended the Tribal Lending Conference in California. PIN-less debit is also doing very well. It's a less expensive alternative to credit cards and is becoming very popular with fintech lenders and loan servicers. Revenue growth in this product line has been outstanding and we intend to capitalize on the momentum being created by more widespread adoption. So the third quarter can be characterized by strong growth in onboarding new merchants driven by growth in our existing ISV relationships and the recent implementation of other ISVs that have had an immediate impact. We have a solid pipeline of new ISVs in various stages of implementation. We are doing the groundwork now to build our prospect pipeline for the future. I remain very optimistic for the balance of this year and for 2024 in general. With that, I'd like to conclude my remarks and turn the call over to Tom Jewell, our Senior Vice President and Chief Financial Officer, to discuss our financial results.

Thanks, Greg, and welcome, everyone. Thanks again for joining our call today and for your interest in Usio. Let me quickly provide some highlights around this quarter's results before opening the call to questions. Revenues for the quarter were up 25% to $20.5 million, driven by growth in all of our segments, especially prepaid. I also note that ACH revenues were up year over year in the quarter after being down in the first half of the year. Output Solutions was also up nearly double digits once again, while credit card revenues were up 5%, as our PayFac business continues to grow at a faster rate than the wind-down of our legacy traditional payment processing. Gross profits were $4.1 million and margins were up 170 basis points from the year-ago quarter. Gross margin improvement reflects a higher contribution from breakage and spoilage and better margins at Output Solutions. Gross profits and gross margins were down compared to the second quarter, principally due to a sequential decrease in prepaid profits and gross margins as our share of the New York City COVID incentive breakage and spoilage stepped down. As our share of New York City breakage and spoilage profits are sequentially reduced, we expect prepaid profits and margins to contract further in the fourth quarter. Our long-term strategy remains to manage strong growth in gross profit dollars, although potentially at lower margins. Selling, general, and administrative costs were up from a year ago, reflecting increases in marketing and professional fees. Since some of the increase in the quarter was from nonrecurring expenses, we expect fourth quarter SG&A to trend lower. As Louis stated, over the long term, we expect to improve the operating leverage in our model by keeping the rate of overhead growth below that of revenues. We reported an adjusted EBITDA loss of just under $100,000, which was a $400,000 improvement from the year-ago quarter, although down from the last three quarters. For the quarter, we reported a net loss of $700,000 or $0.04 per share, which was a big improvement over the net loss of $1.8 million or $0.09 per share a year ago, but again, down sequentially. Non-GAAP adjusted operating cash flows as defined in our SEC filings was $2.4 million for the first nine months of the year. Our cash position at the quarter end was $7.4 million or approximately $1.7 million higher than at the beginning of the year. A contributing factor was the over $500,000 of interest income in the quarter, and we expect another quarter of strong interest income in the fourth quarter. Transitioning to year-to-date results, for the first nine months of the year, revenues were up 25%. Gross margin has expanded 290 basis points, and SG&A was up just 7%. From a profitability perspective, adjusted EBITDA was $2.1 million compared to a loss of $1.4 million in the first nine months of last year. Again, this reflects my previous comment about the significant improvement in profitability this year compared to last year. As Louis noted, we expect to meet our revenue guidance for the year but expect to see a slight slowdown in revenue growth in gross profits in the fourth quarter due to declining breakage and other items. With that, I will turn the call back to the operator to conduct our question-and-answer session.

The first question comes from Scott Buck with H.C. Wainwright.

Hi, good afternoon, guys. Thanks for taking my questions. I was hoping to get a little bit more color on the new state Pro Card program. I guess what I'm trying to figure out is whether or not there's an opportunity for this program to be renewed 12 months from now or if this is more of a one-and-done type deal?

Well, the program that we're supporting has got a fixed amount of funds. What I will say is that as of the end of Q3, it was less than a third deployed. So it's going to be deployed over time, but it is a fixed amount of funds. That being said, we obviously continue to have additional opportunities from other state programs like this. So does that help with your question?

Yeah. And they have told us that they're going to put out $95 million on the cards.

Okay. That's helpful. Louis, can you explain how the flow of funds works? I assume it relates to the high interest income this quarter, but do they provide all the money at once, and then you load it gradually onto the cards? How does that work?

Anytime we sell the credit out at our company, our customer base has to send us good funds before we initiate that credit. So the cards are no different. To date, they sent us $80 million of the $95 million, and about $35 million has been loaded on the cards. The rest of it is sitting in a bank account.

Okay, perfect. That's great. And then I wanted to ask you about Output Solutions and the new capacity you're bringing on. When does that become available? And as a follow-up to that, have you guys lost business or turned away business due to the capacity constraints you're under currently?

We are investing in a new machine that will increase our capacity by 50%. Output Solutions has an amazing pipeline of business from internal sales and from cross-selling across their divisions. And we know that there's business out there that we can capture. Right now, we're running two shifts or 16 hours a day. We could be filling up another shift if we could find people that work light, but that's kind of impossible. So we believe there's a lot of business for us to capture, and we are able to get a bank loan, a very favorable one, to purchase that equipment.

Okay, great. That's all I had, guys. I appreciate the time. Thank you.

Thanks.

The next question comes from Jon Hickman with Ladenburg.

I have a couple of questions. The new machine, is it smaller than your other one? Is that why it's only 50% and not double?

No, it's this big, Jon, but it's not a new printer. It's a different way to fold, insert, and cut paper that will remove some other folding in our existing machines. It also takes less labor to operate. So we'll see some savings there, but it just increases the speed of the overall process from the beginning of receiving a data file to the point where it actually gets put in the Postal Service.

So it's not a printer; it's a supplemental improvement. Okay. Thanks. Then can you elaborate on the one-time expenses? How much were one-time expenses in the quarter?

About $250,000.

Okay. Thanks. That's it from me.

Thanks, John.

The next question comes from Michael Diana with Maxim Group.

Ok, thank you. Greg, I think you referred to some of the ISVs not being large enough to be, I think you used the word registered PayFacs. If I got the word wrong, you can tell me right quick, what is that all about? I am not familiar with them.

A registered PayFac is with the card brands themselves. So it's a level of diligence and capabilities that you have to display before you become a registered PayFac, and what we offer is PayFac as a service. So our ISVs don't have to go through that diligence review or that process to become registered with the card brands themselves.

Okay. So that's a competitive advantage, basically.

Absolutely. Speed to market could be as much as 2 to 2.5 years faster by using Usio rather than trying to embark upon that yourself as the ISV.

Right. Okay. And you also mentioned the fitness studios. Can you give us any more color on maybe where that is and being rolled out? Or are there end customers actually using it?

Well, absolutely. They have an excess of 300 merchants or facilities online now. The owner of that ISV is a practice management software for that industry, and they are going to require everyone to be using the payment component by the end of this year. The good news is when they went live, a large part of their merchants went live with the processing capabilities of Usio. So we'll see some additional uptick this month and end of December, beginning of January, then all existing fitness studios and all net new will be using the payments solution powered by Usio.

Okay, great. Then I think you mentioned tribal lending. How do you interface with that? Who exactly are you providing services to there, a middleman or something, right?

There are really two parts to that. Traditionally, tribes operate as sovereign nations or entities that utilize loan servicers as intermediaries for processing or issuing loans. Recently, however, several tribes have started handling that servicing process themselves. This means we can now work directly with the tribe rather than going through a third-party service provider. Hopefully, that makes sense.

Yeah. Okay. Great. All right. That's it for me. Thank you very much.

Thank you.

The next question comes from Gary Prestopino with Barrington Research.

Hey, good afternoon, everyone. A couple of questions. First of all, Greg, you said the PayFac growth was up 27%. Is that processing volume or revenues?

Revenue.

Okay. I always ask this question, but your card revenues increased by only 4.8% in the quarter. There is a significant difference with PayFac. What percentage of the card revenues comes from PayFac? The legacy portfolio must still be trading, which is likely preventing us from achieving stronger revenue growth in your segment.

You're exactly correct. We added an additional $45 million in processing volume through the first nine months on the PayFac platform, and the legacy singular portfolio is trading faster than it has historically. So we're making up for that. We've got to sell or process twice as much just to show that growth curve.

How much of the portfolio singular is left, then?

There's a significant amount. We have two legacy portfolios, one from PDFs and singular, which together comprise about 60% of our card business. However, the increase we observed, a $1.1 million increase over the first nine months, is entirely from PayFac.

Okay. So this is still going to be something that is going to continue to impact the growth in card for quite some time?

At the macro level, that's correct. I mean, card in general, we're not selling into those portfolios any longer. We're doing our best to manage the attrition. So obviously, the sales efforts are on new ISVs exclusively.

Have you given any efforts? You just thinking about selling those portfolios and then you just have a pure PayFac comparison there?

No, we don't want to sell the portfolios. The majority of those portfolio customers are integrated with us, which makes it a hard portfolio to sell. And those portfolios are still generating quite a bit of revenue for us.

Okay. I was noting what you said; did I understand correctly that we might see a decrease in gross margin or a decline in gross profit in Q4? I didn't quite catch that because you mentioned that prepaid spoilage is decreasing.

It's definitely going to depend on what the mix is from product lines. But we will know that we're going to be paying New York the majority of the spoilage in the fourth quarter and first quarter and second quarter of next year. So we're anticipating that the quarter should look very similar to this quarter.

Okay. So similar quarter, and a step down in SG&A, right?

Yes. We will have as many one-time things as we have this quarter.

Okay. And then on with this state program that you signed up, is that a guaranteed income program or is that an unemployment program or what exactly is that, Houston? Can you please elaborate?

The State of California disaster relief is funded partly from federal funds from the USDA with the State of California administering it. And they told us that there's $95 million that will go out with cards. We've only loaded about $35 million today. So that program will continue until the money's all exhausted, and I know in the state of California, they'll probably add more money to it to serve.

So that would deal with things like fires, earthquakes that they have out there? That money would be released at that position?

From the floods that occurred. The disaster has already happened.

So many disasters out there. Okay, so this dealt with the floods last year, right?

Yeah. Because we won this business because of our success with LA County.

The next question comes from Steve Riney with Integrity Wealth Advisors.

Hey guys. Great work in the quarter and the year so far. Just a quick follow-up on the last gentleman's question about the next quarter. Louis, I think you said that it's going to be very similar to this one with the exception that those one-time charges might be in there. So is that am I understanding that correct?

Yes. And interest income will be up dramatically.

So on an adjusted EBITDA basis, we'll have a profit because of this; we only had $100,000 adjusted EBITDA loss in the quarter. And so if the expenses are down and the interest is up, that should be a really good look for us, am I reading that correctly?

I'm not going to provide guidance there, but I can tell you where you're going.

It's just simple math, I guess. So I just wanted to make sure I heard it right. The other thing is congratulations on the state; whether it's one-time or not, it's a good new market. You mentioned it was a new market. Can you talk about any other new markets that you're getting in and you're looking at getting in any expansion of what you're going to be able to do, especially after the investment into the capacity?

With the outputs’ new machinery, we're going to be able to have some technology implemented that will allow us to take on larger print jobs that require each item envelope to be monitored. We do some of that today, but we can't due to the high volumes, and we're soon to be able to do it at high volumes. And we know that there's cross-selling business out there that we haven't got because we haven't tried to close it because we didn't have the capacity. We are hitting the ball out of the park with our check production with the hidden new niche with bankruptcy distributions. Last year we printed like a million checks all year for Spectrum, Verizon, AIG, and DirecTV; and this year, I think we're going to do over 3 million checks. And for us to print 900,000 checks last quarter. I mean, again, the niche that we're starting to develop with bankruptcy distributions does have some legs.

That is impressive, great job. Before I turn it over to Paul, could you provide an update on MoviePass?

You know, I can't give you specific metrics, but we're continuing to see our card activity there. We do know that they're kind of in the middle of another financing round, I believe. And so we'll probably see additional marketing efforts and promotional efforts by MoviePass.

Yeah, I can't really share much more beyond that. Okay, could you share if you're generally pleased with the way things are progressing with them?

If that weren't the win level sale, other French transaction volumes continue to go up. And you know the...

I know that your profit percentages are much better with MoviePass than with some of the alternatives. So I guess the other question that I would have, Paul, for you is, as you look, obviously, we're in a terrible, our small-cap microcap bear market. You guys are trading for well less than one-time sales. You're generating cash. What are you hearing what letter? What are investors telling you as to what they're looking for, what they're waiting for in order to get more aggressive with your stock and with your company?

Well, we talk to funds all the time, and we're going to conferences. We do non-deal roadshows. We're definitely committed to educating these funds. They almost all love the story. And the other ones that fit don't just have the capacity to understand technology and they have been limited. But, you know, it's the investment decisions are with the funds and they all have different reasons why they haven't pulled the trigger and increased their position. We have seen some very positive activity with a few funds that we've been working with, and hopefully our best town story on a regular basis will increase that activity.

And I would just add, Steve, that a few of the funds, they just want to see us execute for a couple more quarters and get into 2024. So like Louis said, we're planting a lot of seeds right now. We're meeting a lot of balls with school. So I'm excited about the pipeline of people that we're meeting with that can pull the trigger.

Okay, fantastic. Keep up the good work. We'll be in touch soon, and have a good afternoon.

Thank you, Steve.

Thank you. And this concludes our question-and-answer session as well as the call itself. Thank you so much for attending today's presentation, and you may now disconnect your lines.