AtlasClear Holdings (ATCH) Q1 2024 earnings call transcript

Thank you everyone for joining us for AtlasClear’s first earnings call as a public company. The transition to a public company was an important milestone for AtlasClear and we are able to celebrate this momentous occasion by ringing the New York Stock Exchange bell on March 6. We have achieved this through a lot of hard work and dedication, and I would like to take this time to thank all of our employees for this incredible accomplishment. The team and I are excited to share our first quarter results, as well as provide you with an overview of our business and future growth strategies.

With that, I’ll begin my remarks with our first quarter highlights. In the first quarter, we successfully closed the DSPAC transaction and began trading on the New York Stock Exchange Amex on February 12. At the operational level of Wilson-Davis & Co., our first quarter was profitable and we anticipate increasing that profit moving forward. We expanded the scale of our income generating activities with increased margins lending, increased stock loan business and announced a new line of investment banking business. Now, before I talk about some recent business developments, since it’s the first time we are discussing our quarterly results in a conference call format, I wanted to spend some time discussing AtlasClear’s market opportunity and value proposition. At AtlasClear, our goal is to build a cutting edge, technology-enabled financial services firm that will create a more efficient platform for trading, clearing, settlement and banking, with evolving and innovative financial products that focus on financial services firms.

We believe we are positioned to provide a ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www.viavid.com modern, mission critical suite of solutions to our clients, enabling them to reduce their transaction costs and compete more effectively in their businesses. Our target client base for our prime banking and prime brokerage services includes financial services firms generally with annual revenues up to $1 billion, including brokerage firms, hedge funds, pension plans and family offices that are not adequately served by today’s larger correspondent clearing firms and banks. The larger clearing firms have raised their minimums to a point where it is difficult for this segment of the market to meet the requirements for access to their clearing offerings.

Smaller financial services firms are thus forced to find alternative solutions to continue its service to their client bases. The practice of obtaining these services through intermediaries results in additional fees and a loss of transparency and control for such financial services firms. Through the acquisition of Wilson-Davis, a corresponding clearing firm and our proposed acquisition of Commercial Bancorp, a Federal Reserve member, we will have acquired capabilities to provide specialized clearing and banking services to financial services firms with an emphasis on domestic and international markets currently underserviced by larger vendors. Once properly integrated, anticipated synergies between Commercial Bancorp - post successful regulatory approval – and Wilson-Davis are expected to allow for lower cost of capital, higher net interest margin, expanded product development and greater credit extension for our current and future client base.

Now, I want to discuss the market opportunity. We estimate total revenue of the execution, clearing and prime services in the industry to exceed $150 billion annually. Today, AtlasClear has the capabilities that would answer unmet needs compared to competitors. We believe our technology platform and specialized clearing and banking services will be mission critical to our clients, given the complexities of investing infrastructure, the complications around collateral and capital requirements, and the complicated regulatory landscape. We expect to benefit as new fintech firms launch and existing firms scale, potentially outpacing legacy financial firms in their own categories. We believe consumer expectations for a one-stop shop for their investing, banking, spending, insurance and borrowing needs is driving the convergence of financial services.

As a result, financial companies that traditionally operated as a single-product specialist – for example, savings focused platforms or lending focused platforms – are now seeking to integrate trading and investing capabilities into their broader offering. Now, I’d like to go over our four growth strategies in detail. Growth strategy number one: Growing our base of clients organically. Our technology platforms combined with the rapidly accelerating demand for cost efficiencies are expected to drive growth in our prospective client base. For new market entrants, we believe the efficiencies of our prospective turnkey solutions and speed at which we expect to be able to bring a client’s offering to market will position us to win new clients. Growth strategy number two: Growing our clients’ revenue.

We believe we will succeed when our clients succeed. The more assets, services or transactions the customers direct through our prospective platform, the more revenue we and our clients would be able to generate. Through innovation, we also expect to enhance our product offerings and add more products, capabilities and functionality for our clients, which in turn should allow such clients to drive growth into their business. Additionally, we see an opportunity for us to develop new financial products to provide to our clients and their customer bases, thereby increasing their revenues. ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call.

This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www.viavid.com Growth strategy number three: Pursuing potential international expansion opportunities. While we expect our operations will be initially U.S. focused, we see opportunity to grow our business and total addressable market by expanding into international markets. As we assess international opportunities, we believe our core competencies and operational excellence positions us well to win in new markets, many of which are experiencing secular tailwinds similar to what we are seeing in the U.S. For example, growth of mobile and digital solutions. Initially, we plan to focus on serving international clients seeking access to U.S. markets. Growth strategy number four: Identifying and executing strategic acquisitions. We expect to selectively pursue acquisitions that we believe will create value for our shareholders.

We plan to evaluate acquisition opportunities based on a number of strategic parameters including their ability to, one, enhance our product capabilities; two, broaden our client reach; three, drive further scale; four, increase our presence in new geographies; and five, generate attractive financial returns. Going forward, we have a lot to be excited about. Management is working hard to secure additional capital into the broker dealer to take advantage of clients we believe are available to us. Should we be successful in securing the capital, we will be better positioned to onboard additional introducing brokers and accelerate our growth. We have a very strong management team led by Bob McBey, an industry veteran of more than 35 years. In addition to Bob, we have exceptional team members within our broker dealer organization and a very experienced Board of Directors.

We believe our technology suite will allow us to compete in the space at efficiencies unmatched in the market. We will be rolling out part of our PacSquare code in Q2 and we believe this rollout will have immediate positive results to the bottom line by making our account opening and fully paid lending offerings faster and more robust.

Finally, we cannot overstate how excited we are to have Wilson-Davis and its unique licensing set as the core of our Company. We have a fully licensed corresponding clearing firm that will allow us over time to provide a full suite of products and potential new products to our client base. This will allow us to bring additional value and flexibility to an everchanging financial world to meet our clients’ needs.

To summarize, we believe we have built a compelling prime brokerage model that is well positioned on filling a gap in the capital markets where smaller institutions, broker dealers and asset managers have been at a disadvantage. Our successful industry track record, strategically experienced leadership team, and accretive acquisition opportunities positions us well for long-term growth. Now, I’ll turn over the call to John so he can provide a review of our financial results from the first quarter. John?

Thanks Craig. I am excited to talk to you today about the Q1 financial results. Since this is our first earnings call as a public company, I would like to briefly talk about our financial model and drivers at the operating level of our recently acquired target, Wilson Davis &. Co. Our key financial model drivers for Wilson-Davis for quarter one 2024 on a pro forma basis comparing Q1 2023 versus Q1 2024 for Wilson-Davis on a standalone non-GAAP basis include, first, commissions and related execution fees. For commissions and related execution fees, we increased from $1.3 million in the first quarter of 2023 to approximately $1.8 million in the first quarter of 2024. This was a 27.9% increase. ViaVid has made considerable efforts to provide an accurate transcription.

There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only. 1-888-562-0262 1-604-929-1352 www.viavid.com Second, stock loan revenue. Revenues from stock loan activities increased significantly quarter-over-quarter. In Q1 2023 for Wilson-Davis, stock loan revenue was negligible, but management increased this line to approximately 3% of revenue for Q1 2024. Other interest income. Interest income increased approximately 9% in 2024 quarter one over quarter one 2023. This is largely due to increases in our money market balances. As a standalone company, Wilson-Davis & Co. was profitable for $125,000 in net income and we anticipate improving that going forward. Some of our primary areas of focus for revenue growth following the acquisition of Wilson-Davis were commissions, stock loan, and other forms of interest income.

As evidenced, Q1 reflected improvement in all three of these segments and we anticipate increasing those lines of revenue moving forward. Again, on a standalone pro forma basis, we are profitable, recognizing over $125,000 in net income in quarter one, and we are in the very early stages of executing our growth plans. Now I’d like to turn to our consolidated results for the three-month period ended March 31, 2024. At the consolidated level, we recognized a net loss in Q1 of approximately $86.2 million. That loss includes expenses for changes in the fair value of the notes we used to close this acquisition of approximately $6.7 million, an additional negative writedown of approximately $68.5 million in assets on the acquisition, and over $9 million in regulatory and professional expenses.

In the simplest terms, we bit the bullet for the significant transaction related expenses in quarter one. We think it’s important that going forward these expenses will not be recurring and the Company has a large net operating loss which it can use to manage tax consequences as it expands the operating profit of its primary subsidiary Wilson-Davis.

To summarize, at the operational level we delivered a solid first quarter in 2024. Perhaps most importantly, we recognized revenue growth across three of our primary drivers with notable growth in stock loan revenue and a 27.9% increase in commissions quarter-over-quarter. We are encouraged with the momentum that we are seeing in the business, and we will remain laser-focused on filling a gap in the capital markets where smaller institutions, broker dealers and asset managers have been at a disadvantage. We believe we are well positioned for a successful 2024 and we look forward to delivering a prosperous year. I would like to thank you all for your time and now I’ll turn the call back to the Operator.