Usio, Inc.
Q1 2022 Earnings Call Transcript

Published: 12 May 2022

[Operator:]

Good morning, and welcome to the Usio earnings conference call for the first quarter ended March 31, 2022. [Operator Instructions]. Participants of this call are advised that the audio of this conference is being broadcast live over the Internet and is also being recorded for playback purposes. A replay will be available shortly after the end of the call through May 26, 2022. And now, I would like to turn the conference over to Joe Hassett, Investor Relations. Please go ahead.

[Joseph Hassett:]

Thanks, Tom, and thank you, everyone, for participating in today's call. Welcome to Usio's First Quarter Fiscal 2022 Financial Results Conference Call. The earnings release, which Usio issued yesterday after market close, is available on the company's Investor Relations website at usio.com/investors, under News. On this call today are Louis Hoch, President and CEO; Tom Jewell, Senior Vice President and Chief Financial Officer; Greg Carter, Executive Vice President of Payment Acceptance, Houston Frost, Senior Vice President of Prepaid Services. Management will provide prepared remarks, and then we will open the call to your questions. Before we begin, please remember that comments on today's call include forward-looking statements. Forward-looking statements can be identified by the use of such words as estimate, anticipate, expect, believe, intend, may, will, should, seek, approximate or plan or the negative of these words and other similar words and phrases. Forward-looking statements, by their nature, involve estimates, projections, goals, forecasts and assumptions and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements, including risks related to the COVID-19 pandemic and its effect on the economy; the realization and the opportunities from the IMS acquisition; management of the company's growth; the loss of key resellers; the relationships with the automated clearinghouse network, bank sponsors, third-party card processing providers and merchants; the volatility of stock price; the loss of key personnel; growing competition in the electronic commerce market; the security of the company's software, hardware and information; compliance with federal -- complex federal, state and local laws and regulations; and other risks detailed in the company's filings with the SEC. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as prediction of future events. Usio expressly disclaims any obligations or undertaking to update or revise any forward-looking statements made today to reflect any changes in Usio's expectations with regard thereto or any other changes in the events, conditions or circumstances on which any such statement is based, except as required by law. Please refer to the company's SEC filings on its Investor Relations website for additional information. And with that, I would now like to turn the call over to Louis. Louis?

[Louis Hoch:]

Thank you, Joe, and welcome, everyone. I'm pleased to report that it was another record quarter for Usio. For the quarter, revenues were a record $18.1 million, a 35% increase from a year ago. All of our growth this quarter was organic. While adjusted EBITDA was marginally negative for the quarter, we generated positive adjusted cash flow for the fourth consecutive quarter and ended the quarter with $7.6 million in cash, virtually no debt as we continue to strengthen our balance sheet. Once again, we experienced outstanding growth across all of our business segments

[Houston Frost:]

Thank you, Louis, and thank you, everyone, for joining our call this morning. The prepaid business had another great quarter, with revenues up 212% to $2.8 million, driven by a 270% increase in card transactions processed, 134% increase in load volume and 139% increase in purchased dollars processed. Total dollars loaded on prepaid cards in the quarter exceeded $69 million, an all-time quarterly record and a sequential increase from last quarter's $65 million. I'll also note that revenue growth has now grown sequentially for 5 consecutive quarters. Growth continues to be driven by our position as the leader in supporting various fund disbursement needs of governmental, municipal, charitable and related entities. To date, we have been the prepaid program manager on approximately 200 of these types of programs, which we believe could be over 300 by the end of the year. Much of our opportunity is arriving from the continued development of new use cases and applications for the many programs run by governments and nonprofits. As discussed previously, we participate in Mastercard's City Possible program, which is a new model for urban innovation in which a global network of cities, businesses, academics and communities work together to make the world cities more inclusive and sustainable. It's a new model of public-private partnerships that unites the private sector to work with cities to co-create initiatives that bring cities, companies, community -- and communities together to identify common challenges and co-develop solutions that advance inclusive and sustainable urban development. Many of these new initiatives require an effective means to disburse funds to residents, and Usio has been able to provide an efficient and transparent solution to this common challenge for these various programs, particularly with our ability to deliver cars electronically and provide detailed data on the use of funds. We are also continuing to move forward with Mastercard Civic Assist platform, which is developed on the Oracle Cloud to provide seamless integration between our funds' disbursement capabilities and the various systems used by governments and nonprofits to administer programs such as scholarships, unemployment, food subsidies, guaranteed income pilot programs and potentially, pension and health care payments. Our money disbursement integration will offer entities a number of disbursement forms, including ACH, card, virtual card and check. As we see the original code, relief and subsequent vaccine incentive programs mostly winding down, they have been more than replaced with a multitude of new government programs and several in the pipeline. For instance, we are running several dozen guaranteed income programs in places like Chicago, Phoenix and Washington, D.C., just to name a few of the major cities that are utilizing our technology. In contrast to the low dollar but many user model of the expiring programs, near these guaranteed income programs are for 2, 3 years or longer and involve fewer participants, but far larger disbursements. In general, since our revenue is based on dollars disbursed, these are much easier programs to administer that generate equal, if not greater revenues. As just one example of the unique programs that have implemented our technology is one for previously incarcerated women that are being provided funds with to reacclimate with the society, and those funds are disbursed on a virtual card. We believe there are practically limitless applications of our technology, and we are just scratching the surface. As Louis mentioned, there is great excitement around the introduction of the Voyager Digital debit card program. While this program is just getting started, Voyager has been rolling out cards to employees since early April, and over the past few weeks have been rolling it out to a limited beta list for further validation. It is our understanding that beginning in June, assuming no hang-ups, they will begin to accelerate the rollout to the larger group of customers that signed up to be on their wait list. We are gearing up for this program. In the first quarter, as Louis mentioned, we produced about $650,000 for the physical cards for our digital fulfillment and expanded -- and we've also expanded our customer service centers. We've also significantly -- we've expanded our customer service centers over the past 5 months. While this was accelerated to handle the sizable New York City vaccine incentive program, it has also prepared us to handle the anticipated Voyager volume and continued growth with the prepaid business in general. The Voyager card order, which was passed through at cost as well as increased telecom expenses related to customer service, dramatically reduced our gross profit this quarter. However, higher margin fees on card creation will be generated as the Voyager cards are ordered and fulfilled, and we will also begin to collect revenue from inactivity fees from the NYC vaccine incentive cards beginning in September. So we're dealing with some bit of a mismatch between the time we are incurring expenses and generating revenue on some programs. As such, we do expect margins to expand significantly over the next few quarters. We are also working to grow our for-profit customer base. Inmar, a leader in the ad tech space attracts several million rebate checks each year, is currently in an implementation. We expect the growth to accelerate as they migrate the portfolio from a competitor and onto our platform. I am very pleased with the progress we have achieved over the past several years, and I'm equally excited about our opportunities for the future. I'm confident 2022 will be another great year of growth in the prepaid business. And with that, I'll go ahead and conclude my remarks and turn the call over to Greg Carter, Executive Vice President of Payment Acceptance.

[Gregory Carter:]

Thank you, Houston. And let me begin by echoing Louis' earlier comments that the new year is off to a great start. After a breakout 2021, our PayFac business line continues to generate strong growth. PayFac revenues were up strongly in the first quarters as volumes were up 67%. This led to an 18% quarter-over-quarter growth in total card revenue as total dollars processed in the card business, including legacy, increased 21% and transactions were up 22%. Card operations were also profitable for the fourth consecutive quarter. PayFac remains our growth engine. In the first quarter, we continued to sign several new ISV agreements. Some have already completed the integration process and are now live in processing volume. We have more ISVs in some phase of integration and implementation than we ever have, demonstrating that our value proposition is recognized. Our pipeline also remains robust, including a sizable opportunity in the health care space that would be our largest account to date. Both attrition and our penetration of the ISV customer bases remain much more favorable than industry averages. One example of how we continue to grow with our existing ISVs is a software provider in the health care industry. They implemented 2 years ago with modest initial volume. Now their volume is up 500%, primarily because of our continued penetration efforts, but also because they've mandated that all new subscribers utilize our PayFac platform. The same can be said with a more recently integrated franchise operator. They are mandating that all new franchisees adopt the Usio PayFac solution, a win-win for both Usio and the franchise operator. Using our proprietary partner scorecard, we can show ISVs how this simple strategy can substantially improve their economics as they grow the volume of electronic payments flowing through the Usio PayFac. These are great examples of how increased penetration leads to one of our top growth engines. From a growth perspective, our PayFac business is a 3-legged stool. We continue to add new ISVs. Those ISVs continue to grow their customer base, and the individual merchants continue to grow as well. This is what we call our leveraged distribution model. Last quarter, I described a couple of new products under development

[Lowell Jewell:]

Thanks, Greg, and welcome, everyone. Thanks for joining our call today and your interest in Usio. I'm going to conclude today's prepared remarks with a brief review of our first quarter financial results before opening the call to questions. As mentioned, revenues for the quarter ended March 31, 2022, were $18.1 million, up 35% compared to the $13.5 million in the same period last year. All of our growth was organic. ACH and complementary services revenue was $3.8 million, up 25% as transaction volume was up 21%, returned check transactions processed were up 32% and electronic check dollars processed were up 16%. And within the business, ACH revenues were up 17%, and our PINless debit product revenues were up 57%. Clearly, we are sustaining the momentum build-up over the past few quarters of this, our highest-margin business, although as Louis mentioned, we had a tough -- we have a tough Q2 comparison ahead of us. Revenues from our Output Solutions business line was $4.7 million, up 25% from the $3.8 million a year ago, as we are lapping full quarter contribution from Output Solutions, this was all organic growth. Total transactions and pieces processed in the quarter set an all-time quarterly record. Prepaid keeps rolling along and had another outstanding quarter with revenues up 212% to $2.8 million, driven by a 270% increase in card transactions processed, 134% increase in load volume and 139% increase in prepaid card purchased dollars processed. As mentioned earlier, total dollars loaded on prepaid cards in the quarter exceeded $69 million, an all-time quarterly record. We continue to support this growth by investing in more engineering and customer service resources to further enhance our reputation for providing innovative new technologies and a high level of customer satisfaction. As Houston mentioned, we had some items resulting in compressed gross margins in this category. Revenues in our credit card line were up 18% to $6.8 million. Growth in both volume and transactions processed continue to show steady improvement and drove card revenue growth with dollars processed up 21% and transactions processed up 48%. Gross profits in the quarter were $3.5 million, up 21%. Margins were 19.4%, down from 21.6% in Q1 2021, primarily reflecting the rapid expansion of prepaid, including prepaid card revenues at cost, causing depressed gross margins along with other revenue growth in lines of business with below corporate average margins. Looking back to Q1 in 2021, gross margins were our lowest of the year. Accordingly, we expect to see margins improve in Q2 and going forward, as Louis mentioned. As our rapid growth continues, we are investing in our infrastructure to support both current and anticipated growth. And last quarter, we indicated this would create an increase in our other selling, general and administrative expenses in 2022. This can be seen in the first quarter where there were increases in compensation costs and benefits, driven by both merit increases for existing employees as well as additions to staff, the full implementation of a new cloud technology infrastructure and incremental rents to accommodate the growth of our workforce. We also are building out our customer service centers, including preparing for the previously announced Voyager Digital debit card program, which we anticipate will see increasing volumes in the third quarter. We also -- the quarter also included nearly $200,000 of onetime expenses. Consequently, for the quarter, total other selling, general and administrative costs were $3.8 million versus $2.7 million in the prior year period, but up much more modestly from our fourth quarter run rate of $3.3 million. You can expect to see SG&A expenses at these levels over the balance of the year. Our depreciation and amortization reflects a slight decrease from fourth quarter 2021 levels. The next significant adjustment in depreciation and amortization will be a reduction of the customer list asset acquired in the Singular acquisition, which will be fully amortized at September 1, 2022. For the quarter, our operating loss was $1.6 million versus a loss of $700,000 in the year ago quarter. Adjusted EBITDA was a loss of $286,000 compared to a positive $247,000 a year ago. The company recorded a net loss of $1.6 million for the first quarter compared to a net loss of $720,000 a year ago, with earnings per share in the current period of negative $0.08 per share compared to a negative $0.04 per share for the same period last year. Usio continues to be in solid financial condition. Our cash balances over the first 3 months of the year increased $300,000 to $7.6 million at March 31, 2022 and Usio has no significant debt. We recorded positive adjusted operating cash flows in the quarter, generating $500,000 of positive adjusted operating cash flows compared to an adjusted net cash used by operating activities of $600,000 in the prior period. Adjusted operating cash flows exclude nonoperating operational charges in merchant reserve funds, prepaid card load obligations, customer deposits and operating lease assets and liabilities. Building on our strong 2021, the mutant year is off to a fast start, with top line growth of 35%. At the same time, we are investing in our infrastructure to support current as well as expected growth. As we grow, we will be able to leverage this investment in infrastructure with expanded margins. We have built a solid balance sheet as well that provides more than adequate resources to fund this growth. This is shaping up to be another exciting year at Usio. That concludes our prepared remarks for today. We would now like to open up the call for any questions.

[Operator:]

[Operator Instructions]. And our first question comes from Barry Sine with Spartan Capital Securities.

[Barry Sine:]

Congratulations, a very strong quarter. In this market environment, I want to kind of focus on risk areas that investors might be concerned with and give you a chance to kind of respond on some of these. And there's 3 areas that I'm wondering about. First of all, I think you'd agree, the balance sheet is pretty strong. It's all $7 million cash, almost no debt. And you even added cash in a negative EBITDA quarter. Second, you've talked about the crypto business. I think you said 1Q for you was a little weak here. Obviously, crypto is going through an extreme bear market. So I'm not sure how that would affect things if that continued. And then the third risk factor I'm wondering about is potential economic weakness. And again, I know that you have things like income support programs, so you have some countercyclicality in the products that you're offering. So if you could go through those and talk about how you can deal and survive and even thrive with some of these risks the market is thinking about?

[Louis Hoch:]

Well, thank you, Barry. We're different than most of the payment processors because our strategy is to be diverse, diverse in the industries we serve and diverse in the payment channels that we offer. No industry represents more than 10% of our revenue. We do have to address cryptocurrency. We don't like when cryptocurrency trade sideways. We like volatility. And for example, last night, we saw triple the amount of volume that we normally would have seen. And 97% of that money was going into their wallets. So -- and that was fueled from volatility yesterday. And so as cryptocurrency is volatile, it generates more transactions for us. And we don't have any risk with cryptocurrency. We don't hold any. So it doesn't matter what the dollar is on a -- value is for a particular point. And again, cryptocurrency today represents less than 10% of our revenue. In times of recession, we have many segments that will generate a lot more transactions. We have a big footprint in consumer lending, short-term loans. We have the guaranteed income programs, and those typically do very well in hard times of economy. We like our balance sheet. We've continued to strengthen it every quarter. And as we talked about earlier, the Board of Directors approved a $4 million stock repurchase program. The Board wouldn't have done that unless they've had a certain amount of confidence in our balance sheet and our ability to generate cash flow for future opportunities. Hopefully, that answers your 3 areas of concern.

[Barry Sine:]

It does. So just one follow-up on that. You mentioned there's no industry more than 10% of revenue. What is your largest industry served? And what percentage of revenue would that comprise?

[Louis Hoch:]

There's a couple that are close to 10%, crypto is one, health care is another, consumer lending, especially when you include government programs in that segment. Those are important to us.

[Operator:]

The next question comes from Gary Prestopino with Barrington Research.

[Gary Prestopino:]

A lot to get a handle on around here. First of all, when you look at your SG&A expenses and we're looking at what it should be going forward, back out the onetime $200,000 number. So we're looking at probably about $3.6 million, give or take, going forward per quarter?

[Louis Hoch:]

That's a reasonable number.

[Gary Prestopino:]

Okay. So let me ask you this. I heard you say that the -- you're looking at a quarter that is going to be challenged. Was that versus Q2 last year? Or sequentially, versus Q1 where you generated $18 million of revenue in this quarter?

[Louis Hoch:]

Yes. First, 2001, and it's very specific to ACH transaction volumes. So our ACH transaction volumes in Q2 of last year, were in part fueled by extreme excitement of the cryptocurrency market in that border. It was the peak of last year in that industry. And we don't have that same amount of excitement this quarter. So it's going to be a hard comp for us on our operational metrics for ACH only.

[Gary Prestopino:]

Can you give us some idea of how these ACH transactions surrounding crypto at this point have started to trend given the fact that basically, the market is definitely having some issues in terms of pricing -- prices?

[Louis Hoch:]

Yes. Well, Q1 was -- Q1 for cryptocurrency started out good. And this is just my personal theory. I think that cryptocurrency was kind of the hedge for inflation for a while. Then cryptocurrency started trading like the stock market, which made that segment a little bit tougher. I would tell you that this last week, the volatility in cryptocurrency is creating a lot of transactions for us. So again, we don't carry any crypto. So we have no risk by holding it. And we're moving money in and out of the platform. So we like volatility. So...

[Gary Prestopino:]

Okay. And then on the card side, did you say you produced 650,000 cards? Or was that a revenue number?

[Louis Hoch:]

That was a revenue number. It was like 270,000 cards or something like that.

[Gary Prestopino:]

So are we going to, as we go forward throughout the year as you ramp up this product, because I understand there's about 3 million to 3.5 million accounts. Is this going to be something that as you ramp it up, we're still going to have this margin degradation issue because of your issuing more cards or producing more cards?

[Louis Hoch:]

Actually, as we start personalizing these cards, when they get a name put on these cards, we have margin. And then those cards will start to produce transactions. So a large card plastic order like this one is just a future indicator of margins that it will -- we're going to earn revenue off those cards. So this is just the first step. Again, it's a leading indicator. It's a great leading indicator. It shows commitment by the customer. And so again, once you put a name on that card, we start making money. And so it shows you what we've been saying, is that the program is ramping, it's going to be a significant program and that we're going to earn significant revenues this year off that program.

[Gary Prestopino:]

So as we get to the back half of the year and you start issuing these cards, the assumption would be that if you're getting x transactions, x dollar amount per transaction on the ACH time side, how much would that increase if you're doing prepaid transactions with these cards that are issued? I guess what I'm trying to ask is that crypto is going to be volatile here, who knows what's going to happen? But as you start getting these cards in the market, should we see a precipitous increase in revenue from these cards that would basically or possibly dwarf what you would get on the ACH side from any kind of money movement?

[Louis Hoch:]

Well, first thing is they're complementary. The majority of our ACH transactions going in -- or is money going in to the platform. And as people start to use those cards, and the card is backed by stablecoin, USDC. So people are going to start using these cards as their checking account, and it earns 9% interest. So they're going to be moving more and more money in. And then the money will come out on usage of the card, which we run on interchange. So we think it's -- the prepaid program is also a catalyst for ACH to increase.

[Operator:]

The next question comes from Jon Hickman with Ladenburg.

[Jon Hickman:]

I want to add my congratulations on the quarter. Could I drill down a little bit on this prepaid spoilage that you're anticipating to hit in like September time frame? Did you say like $20 million? Did I get that right?

[Louis Hoch:]

There's $20 million on cards that is potentially going to spoil. Not all of that is going to spoil. It's just to give you the kind of the order of magnitude. I don't really want to throw a number out there, but it's going to be nice for us going forward.

[Jon Hickman:]

Okay. And then my next question is, the investments you made in your call center to handle the future customer volumes, how long do you expect that to last before you have to do it again?

[Louis Hoch:]

Well, the first thing is that you need to understand about the call centers, the call center right now is expense to us. As we go forward, it's actually going to create revenue. So there'll be an offset. And right now, we took more lease space. We obviously did furniture and computers and we established an offshore overflow call center as well, enhanced our telecom infrastructure and we're ready now. So we know...

[Jon Hickman:]

But what kind of volume will that support? You said something about 300 program.

[Houston Frost:]

So what I can let you know is we really started to ramp up customer service in the start -- beginning in December of last year. And this is related to the New York City's vaccine incentive program. So to give you an idea around that, we had nearly 1 million cards go out in 4 to 5 months, the last 4 or 5 months of 2021 with a large percentage, maybe even as high as 50% of those going out in the month of December and January. So the call center is ramped now to be able to handle large card orders going out any given month and can support programs up to, call it, 1 million cards. What I will also though state is that there's a little bit of a difference between a program like New York's vaccine incentive program and then a longer-term customer like a Voyager cardholder. So I don't know if that gives you a little bit more of an idea for where our call centers ramped up, too. But those are numbers I think we can share as we were able to handle almost 0.5 million cards going out in 1 month, to give you an idea. We did have some strain on the call center. So I want to mention 2 other things just related to this real quick. One is hold times are long. That resulted in larger telecom expenses, which was in cost of goods. So that was one of the items that really depressed margins for us was in the first quarter, we were still fielding a ton of calls, especially in January, have a lot of long hold times, which increased the telecom expenses. The other thing is we did incur expenses in the SG&A for the increased customer service rep headcount as well as the customer service that we have off-site. And again, part of that is getting ready for continued growth, but the other part of that was servicing a card program where we're going to end up seeing about 70% of the revenue from that card program, maybe even more than that, on the back end in the form of this breakage and an activity piece that's going to really get started in August. So our customer service center affected both cost of goods sold as well as SG&A and on a program where the revenue comes in at a later time. That was sort of the mismatch of timing we talked about. On the Voyager program moving forward, the revenue will be coming in much closer to the time that we are incurring that because Voyager gets charged directly for customer service minutes as opposed to that we're generating revenue to cover that expense from other means. So hopefully, that answers both the size of the customer service volume for you and a little bit more on the impact it had in first quarter SG&A and cost of goods.

[Operator:]

The next question comes from Michael Diana with Maxim Group.

[Michael Diana:]

So most of my questions have been answered, but I have one for Greg. So with ISVs and PayFac using such heavy usage of ISVs for distribution, you've had your leveraged distribution model there for a long time now. But in my view, Greg, since you've taken over, the execution has just been much, much better. Could you just walk us through some of the processes that you've implemented to improve your penetration through these ISVs?

[Gregory Carter:]

Sure. Really, it's all about talking with the ISV partner and getting aligned with their strategy, their marketing and their conversion strategy. As I said, when we initially convert an ISV, those existing subscribers or their merchants don't necessarily come over with that initial integration. Some do, but the majority don't. But we've taken the time and put our internal resources to sit with their marketing and sales teams to put together specific callback campaigns, webinars, other informative means to let those merchants know that once you use the payment system, then you do have a fully integrated software approach for your practice management application. So in the example of a physician's office, rather than importing that data from some other payment system, that's now embedded with that operating software. So when they close the month, it's much, much easier. So really just getting to that value proposition. Secondarily, showing the ISV, how much incremental essentially no cost revenue that they could earn or receive by just using Usio's PayFac is also a compelling reason. The instance that I referenced in this talk today was this ISV in the health care space is growing almost 500% is really the classic textbook example of what we're trying to do with all of our ISVs. If they'll put the time and attention, which we are happy to assist with, they will see not only economic gains but I think a happier subscriber base. So it's really just, in my opinion, focusing on the basics and executing day in and day out, just putting more time and attention to those partner relationships.

[Operator:]

The next question is a follow-up from Gary Prestopino of Barrington Research.

[Gary Prestopino:]

Houston, I'm just trying to understand this whole thing with the call center. My understanding, and it's probably wrong here, is that the call center investment was really for Voyager. But it seems to me that it's for all of the business overall, given the growth that you've had ex Voyager and what you anticipate for Voyager, is that correct?

[Houston Frost:]

Yes. The growth in the call centers to support prepaid card accounts in general. And so yes, we really are kind of saying 2 things at once here. We grew the call center to deal with increased -- the increased loads at card orders that you saw largely related to New York, but then also a few other cities' vaccine incentive programs from last year. So that was what really kicked it off, and it was December when we significantly began scaling that up. So it was -- it -- we began scaling up the call center faster than we anticipated, and it was directly because of the growth that we were seeing in disbursement cards. But what we're also saying is that by doing that earlier, we are now prepared also for increased volume, whether it comes from the Voyager program or other programs.

[Louis Hoch:]

Yes, Gary. And it's important to understand, and Houston kind of touched on this, is that the disbursement programs, we don't get paid for customer service. The way we recoup those costs is through spoilage, which occurs much later. On the Voyager program and similar programs that are reoccurring like the government guaranteed income programs. Those cards get used like a checking account, and those cards will generate more calls. The disbursement programs generate calls in bunches, right? So a big group of -- a big chunk of cards go out, then we get a spike and then it goes away. But the Voyager program and similar programs, we get paid per minute, and those are more consistent type of volumes going forward.

[Houston Frost:]

I mean in general, I know the volatility and prepaid's gross margins, it isn't -- may have given hope to sort of understand where those are going to end up leveling out. But that volatility really shows that we keep signing and executing bigger and bigger deals because it's these one-off card orders, substantial expenses and customer service that will have a -- on 1 quarter have a negative effect on gross margin. And then we see gross margins snap back up because we're then, for example, collecting breakage revenue in another quarter. As we continue to grow, these kind of costs and expense mismatches are really going to even out. But any time we start to see them not even out is because we're signing larger and larger deals that are having these kind of outsized impact on our cost of goods sold. So in a sense, while it's annoying to try and analyze it, it's a good sign for the continued growth of the business.

[Gary Prestopino:]

Well, Louis answered the question that I had. I wanted to make sure your Voyager is going to pay on a usage basis. But on these disbursement programs, you capture all of the spoilage? Is there any split from the government entities?

[Houston Frost:]

No. We shared some...

[Gary Prestopino:]

I'm sorry?

[Houston Frost:]

We do share some spoilage. So going back, it depends on the type of program, but we almost -- I mean, it really -- in the larger government programs, we are sharing spoilage and the various rates.

[Gary Prestopino:]

Okay. So these cards do have an expiration date and there's -- spoilage, it only starts to be recognized once the card has expired? There's no estimate of spoilage as the card program goes on?

[Houston Frost:]

When you say that there's no revenue brought forward or estimated and recognize this revenue until we collect the revenue. I don't know if that's exactly what you mean. But to that answer, no, we're not estimating and recognizing any revenue. It's only recognized when it's feed off the card. Not -- I also -- and we're getting into a little bit of details here, but New York City is not a fixed expiration date. There's various types of card programs. Some of them have fixed expiration date, some of them assess inactivity fees. And those models are just dependent and very variable, and depends on how we settle the program and the negotiations with the entities disbursing the funds.

[Gary Prestopino:]

So I mean I'm just trying to understand, if they don't have an expiration data on some of these cards, then how do you accurately determine what the spoilage is going to be?

[Houston Frost:]

There's two models. There's an inactivity fee model, and there's a fixed expiration model. Yes. So I mean you can still understand an inactivity fee model. If it's a $20 card or $100 card, it's pretty easy to multiply months, times and activity fee, simple multiplication.

[Operator:]

This will conclude our question-and-answer session, which also concludes today's conference call. Thank you all very much for attending today's presentation, and you may now disconnect.