AtlasClear Holdings, Inc. (ATCH) Earnings Call Transcript

Good morning, and welcome to the AtlasClear Holdings Fiscal 2026 Year-End Results Conference Call. [Operator Instructions]. This call is being recorded. Joining us today are John Schaible, Executive Chairman; Craig Ridenour, President Sandip Patel, Chief Financial Officer and General Counsel; and Jeff Ramson of PCG Advisory, who will deliver the safe harbor statement and moderate the question-and-answer session. I'll now turn the call over to Jeff Ramson.

Thank you, operator, and good morning, everyone. Before we begin, I'd like to remind everyone that today's discussion may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. For more information, please refer to Atlas Clear's annual report on Form 10-K for the fiscal year ended June 30, 2026, and the company's other filings with the SEC. Except as required by law, Atlas Clear undertakes no obligation to update any forward-looking statements based on new information or future events. Management may also refer to certain non-GAAP or supplemental measures during today's call, including total revenues plus interest income. Reconciliations to the most directly comparable GAAP measures are included in the company's earnings press release and the Form 10-K. With that, I'll turn the call over to John Schaible, Executive Chairman.

Thank you, Jeff, and good morning, everyone. -- fiscal 2026 was a breakout year for Atlas Clear. Revenues increased 85% to $20.1 million. And together with interest income, the business generated $21.9 million. Approximately 54% of total revenue came from sources other than commissions led by the rapid expansion of our stock Locate business. Importantly, we achieved that growth without using an at-the-market program or any equity line during the year. We ended fiscal 2026 with $15.4 million in cash, more than twice the amount at the beginning of the year and stockholders' equity improved to $21.1 million from the deficit of $6.8 million. Atlas Clearing also increased its net capital to $14.4 million. These results show the platform we have been building is beginning to deliver meaningful scale. We also reported positive GAAP net income for the second consecutive year with approximately $2 million in fiscal 2026. As Sandip will explain, the GAAP results included a substantial noncash fair value gain related to warrant earnout and other derivative liabilities, most notably an $11.1 million gain associated with the earnout liability. At the operating level, we reported a loss of $9.8 million compared with $4.9 million last year. as sharply higher activity drove increased variable compensation, data processing, clearing and stock locate costs, we were investing to grow. The year also included $3.6 million of noncash stock-based compensation. We believe it's important to give investors a clear view of both the reported results and the operating investments supporting the company's growth. We also signed 6 new corresponding broker dealers whose contributions are not yet reflected in our results, and Craig will walk through their progress in more detail. In addition, we are evaluating further strategic opportunities, including ARC Financial, the holding company of Dawson James and the previously announced institutional digital asset transaction. Both remain subject to nonbinding letters of intent, due diligence, board approvals, definitive agreements and other closing conditions. With that, I will turn the call over to Craig Ridenour to discuss our operating highlights. Craig?

Thank you, John. Fiscal 2026 was a year of strong execution at Atlas Clearing. -- particularly in the expansion of our stock Locate business and our correspondent clearing pipeline. Stock locate revenue grew to $6.8 million from approximately $300,000 a year earlier. It has also changed the composition of our business. Approximately 54% of total revenues now comes from sources other than commissions, up from 45% in fiscal 2025, which makes our results less dependent on trading volume in any single period. On the correspondent side, we signed 5 new broker-dealers during fiscal 2026 and recently signed to 6. They are in various stages of onboarding and conversion. They contributed no meaningful revenue in fiscal 2026. Revenue from our existing correspondent grew approximately 67% to $1.4 million, which illustrates how our relationship can build once it's fully live. As the new firms come online, we expect the additional customer assets and trading activity to support growth across stock loan, securities lending and interest income. We built the team and infrastructure ahead of that growth, which is part of why expenses rose this year. We expect to support much of the next phase using the platform and team already in place with only incremental additional expense. That is where operating leverage comes from. Looking further ahead, settlement infrastructure is changing. Banks are now testing tokenized deposits and shared ledger settlement, mostly on the cash side of a transaction. The security side where clearing firms operate is the next step and a focused clearing firm can adopt new workflows more quickly than large incumbents within the same regulatory standards. That is how we view the digital asset opportunity we are evaluating. Regarding Commercial Bancorp of Wyoming, as discussed in our Form 10-K, the parties withdrew the pending regulatory applications and expect to refile them at an appropriate time. We remain committed to the transaction and continue to view the combination of the bank and Atlas clearing as an important part of our strategy to build an integrated trading, clearing, settlement and banking platform. I will now turn the call over to Sandip Patel to review our financial results.

Thank you, Craig, and good morning, everyone. Total revenue for fiscal 2026 was $20.1 million, an increase of 85% from $10.9 million in fiscal 2025. Commission revenue increased 56% to $9.3 million from $5.9 million. Stock locate fees increased to $6.8 million from roughly $300,000. Clearing fees were $2.1 million compared to $3.2 million in fiscal 2025. This line includes both the fees we charge our clearing correspondent and customer account service fees and the prior year benefited from 2 unusually large months of service fee revenue. Importantly, revenue from our existing correspondent increased approximately 67% to $1.4 million and the 6 new correspondence we have signed did not contribute meaningfully to fiscal 2026 results. Betting fees were $1.4 million, broadly consistent with $1.5 million a year ago. Net gains on firm trading accounts increased to over $500,000 from under 7,000, and other revenue was approximately $65,000. Total expenses were $29.8 million compared with $15.8 million for fiscal 2025. compensation, payroll taxes and benefits increased 91% to $11.7 million from $6.2 million primarily because of higher variable compensation associated with revenue growth. Separately, we recorded $3.6 million in noncash stock-based compensation related to executive employment agreements entered into in September 2025 with no comparable expense in fiscal 2025. Data processing and clearing costs increased 98% to $4.2 million from $2.1 million, generally in line with the higher level of activity. We also recorded $800,000 of stock located expense and $700,000 of loan net expense, both new cost categories associated with the growth of the stock Locate business. Regulatory professional and related expenses increased 17% to $4.9 million from $4.1 million primarily reflecting professional fees related to the commercial Bancorp negotiations and additional consulting support. The resulting loss from operations was $9.8 million compared to $4.9 million in fiscal 2025. The increase primarily reflected the variable costs associated with higher business activity and the $3.6 million noncash stock-based compensation charge. These expenses supported a business that generated 85% revenue growth and rapidly expanded newer revenue lines during the year. Below the operating line, total other income was $11.5 million compared to $10.4 million a year ago. The principal items included noncash gains of $11.1 million from the change in fair value of our earn-out liability, $1.8 million related to the Winston & Strom agreement, $1.7 million from the change in fair value of warrant liabilities and $400,000 from the change in fair value of our convertible note derivative. These gains were partially offset by $5.1 million in interest expense and the $570,000 loss on settlement of the Winston and strong agreement. Income before taxes was $1.7 million, after a tax benefit of $250,000 net income was $2 million or $0.02 per basic and diluted share based on weighted average shares outstanding of approximately $125 million. This compares with net income of $5.8 million or $0.96 per share in fiscal 2025. The prior year results included a $12.4 million noncash gain from changes in the fair value of the long-term and short-term note derivatives. Turning to the balance sheet. We ended the year with cash and cash equivalents of $15.4 million more than double the $7.5 million reported a year earlier. Total assets increased to $71.2 million from $60.9 million. Stockholders' equity improved to $21.1 million from stockholders' deficit of $6.8 million, while the total liabilities declined by approximately $17.6 million. Shares outstanding were approximately $150.3 million at fiscal year-end and approximately $151.8 million as of the date specified in the Form 10-K. Cash used in operating activities was $6.2 million compared with cash provided by operating activities of $800,000 in fiscal 2025. The change reflected growth in operating assets as the business expanded as well as the noncash nature of a substantial portion of fiscal 2026 net income. Cash used in investing activities was 65,000, representing a payment related to the extension of the commercial Bancorp acquisition agreement. Cash provided by financing activities was $16.5 million compared to $1.6 million in fiscal 2025, driven primarily by the financing transactions completed during the year and partially offset by transaction costs repayment and the $1 million cash payment related to the Wincanton settlement. Finally, Atlas Clearing's $10 million revolving line of credit with BMO Harris Bank remained undrawn throughout the year, and the company was in compliance with all applicable financial covenants as of June 30, 2026. Based on the capital raise and management's operating cash flow forecast, management concluded that substantial doubt about the company's ability to continue as a going concern have been alleviated. Management also concluded that disclosure controls and internal controller of financial reporting were effective as of June 30, 2026, following the remediation of the previously reported material weakness. I will now turn the call back to John for closing remarks before we open the line for questions. John?

Thank you, Sandip. Fiscal 2026 marked a significant step forward for Acer. We increased revenue by 85%, build stock located into a meaningful and rapidly growing business strengthened both our balance sheet and Occlearing's net capital position and accomplish this without using a dilutive at-the-market program or equity line during the year. We also strengthened liquidity, alleviated the prior going concern uncertainty and remediated the previously reported material weakness in internal control over financial reporting. We enter fiscal 2027 with a larger platform. a more diversified revenue base, stronger capitalization and multiple avenues for growth. We look forward to updating you as we execute on these opportunities. Before we take questions, I want to share how we think about where Atlas Clear stands today. Again, we ended the year with $15.4 million in cash, $21.1 million in stockholders' equity and a broker-dealer with $14.4 million in net capital. Our year-end cash alone represents roughly half of our current market cap. We grew revenue by 85% and more than half of that revenue now comes from sources other than commissions. We've added 6 new correspondents and those numbers are not yet reflected in our numbers, but they are working through onboarding. If we look at publicly available market data, a group of established publicly traded brokerage and clearing firms, including Interactive Brokers, Charles Schwab, Lebel and Virtu currently trade at a medium of roughly 6x trailing revenue and roughly 4x book value. We trade Atlas clear trades at under 2x both. Granted, we're not at their scale, and we still have work to do to improve our growth and profit, but we also have faster growth and a more exciting story. We do not believe our current market value reflects the platform, the capital position or the growth opportunities we have built, and we intend to close that gap the only way we can and the way we have been, which is executing quarter after quarter. And with that, we'll open it up for questions.

[Operator Instructions] Jeff, I'll turn it over to you for -- if you have any questions.

Thank you very much. Yes, we've got a few questions coming in, and some submitted earlier. So guys, the first question that we're getting relates to Dawson James and the timing. Can you add a little color to that?

I'll take that, Jeff. This is John. Thanks, everyone, for listening in. We are optimistic that Dawson James transaction will be closed very soon. I don't know if we could be in a position to say more than that, but we're right there.

Okay. Okay. The next question we have is related to Commercial Bancorp and maybe some more clarity on when you expect to refile -- or any color around that?

Jeff, this is Craig. I'll take that. Yes, this is a great question. We've actually been having conversations recently about that very task -- can't give a definitive time line, but I can tell you that 1 of the things that we had to do is we had to incorporate a more robust business plan in the sense of -- we've been very vocal. John and I have and the company has about where we're going long term and digital assets play a role in that. And so we were -- we had to answer the questions of what that looked like -- and up until the time when we signed the LOI with a digital asset company, we couldn't talk to policies, procedures, technologies, people. And so we thought it best to pull back for the moment. reformulate and expand the business plan and then resubmit and we're working towards that goal. We're in unison with Commercial Bancorp, they're on board. We're within our contracts. So we're not in the valuation there. So we're excited about the opportunity. And we also have some consultants we'll be working with that we think will help the process as well. So -- we're optimistic, we'll be refiling hopefully in the not too distant future, and we'll make sure that we keep people abreast to that. But we are excited about the opportunity, and we're looking forward to the future with Commercial Bancorp after potential approval.

Okay. Great. Great. The next question is, I saw the 8-K on the 6 borrow note extension. Can you explain the thinking there and how it fits with your overall capital plans?

Yes. So Six Boro is related to Bob Kiser, who is the CEO of Dawson James. And that's 1 of the vehicles through which the Keyser family has invested into us and Bob, of course, joined our Board, and it's been just an absolute delight working with him and trying to get to the close of the Dawson James transaction. When that note approached mature, he was kind enough to simply reset it for us rather than exercising and trying to take shares at a price point that he could, he's letting us work through that. And so he was work with us. And so we got that done in a way that's good for the shareholders.

Very good. Okay. Okay. So the next question we have here is -- congrats on getting through the year without an ATM or equity line. As a shareholder, I'm curious how you plan to fund growth from here, while keeping dilution in check. And we see that question a lot obviously. So Yes.

Yes. I'll take that, Jeff. This is Craig. We have constant conversations about the right capital path as we move forward. Obviously, we've made a number of announcements as we've been talking about just now on acquisitions, but we're very mindful obviously of dilution. Now as we grow dilution is a part of it, right? That's 1 of the benefits of having a public company and public currency. And quite frankly, we would like to get to where we've got good valuations and capital raises that are based on equity. We think we've kind of outgrown the phase of Evox and ATMs and structured products, not that we can't go use those if necessary. But we think we're at a growth point where we're looking at capital from the perspective of equity. That being said, we've got a few different opportunities, some different proposals from potential investment partners and as we flesh out the next month or 2 going into next year, we'll have some clarity on what that will look like. But keep in mind, we're all -- our entire Board has invested. We were mindful of the actual dilution, but we'll understand the word of growth phase now, and we're looking forward to finding the right path, trying to minimize the dilution, but also meeting the needs of the acquisitions that are going to help really expand the company. So -- we're all mindful of that. We think about it every day, talk about it every day and just know that we're going to look out for the best interest of the company and for our shareholders and hopefully choose the right path.

Okay. Very good. Okay. So another question that just came in. Of the 6 corresponding agreements signed, how many are fully live today and for the ones that are live, what's a typical range of annual clearing revenue per correspondent once fully ramped, including interest income on their customer balances.

I think we can say that 3 are fully integrated and incrementing business over to us. the differentials between the 6 contracts, Jeff, are pretty significant. Some of them are quite large. Some of them are very small. And the nature of their business in each particular situation is going to be different in terms of how they onboard with us. Wilson Davis historically was 1 of the premier microcap shops and low-priced security shops. And so our channel of customers coming into us, a lot of them focus on that first and that's probably a great place for them to focus. And so we're going to be holding back on any kind of revenue forecast related to the correspondence that we've signed and the additional ones that we see in our channel until we have more experience directly with what they can return. Some of the larger ones because we are still small, even though our revenue has been up 85% and things are really starting to hum. 1 or 2 of the large ones can make such a material difference. We're just not comfortable until we have the facts. So I'm sorry, I can't answer the second half of that question. First half of them are incrementing the other 3 should be done before the end of the year. With respect to being integrated and then when they bring their business on, each 1 is going to be different, that are all going to start incrementally, right? No 1 wants to move everything over unless they have to. It's got to be approved process, and we're proving that out now.