POSaBIT Systems Corporation (PBIT) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the POSaBIT Systems Corporation Second Quarter 2022 Earnings Call. All participants have been placed on a listen-only mode and the floor will be open for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, James Carbonara. Sir, the floor is yours.

Thank you, operator. And once again, welcome, everybody, to POSaBIT's Q2 earnings call. With me on this call are Ryan Hamlin, Chief Executive Officer; and Matthew Fowler, Chief Financial Officer. I would like to begin the call by reading the safe harbor statement. This statement is made pursuant to the safe harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. All statements made on this call, with the exception of historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the company believes that expectations and assumptions reflected in these forward-looking statements are reasonable, it makes no assurances that such expectations will prove to have been correct. Actual results may differ materially from those expressed or implied in the forward-looking statements due to various risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those expressed or implied in the forward-looking statements, please see risk factors detailed in the company's annual report and subsequently filed reports as well as in other reports that the company files from time to time with SEDAR. Any forward-looking statements included in this call are made only as of the date of this call. We do not undertake any obligations to update or supplement any forward-looking statements to reflect subsequent knowledge, events or circumstances. The company may also be citing adjusted EBITDA in today's discussion. Adjusted EBITDA is a non-IFRS measure used by management that does not have any prescribed meaning by IFRS and that may not be comparable to similar measures presented by other companies. The company defines adjusted EBITDA as net income or loss generated for the period as reported before interest, taxes, depreciation and amortization. It's further adjusted to remove changes in fair value and expected credit losses, foreign exchange gains and/or losses and impairments. The company believes this is a useful metric to evaluate its core operating performance. Now I would like to turn the call over to Ryan Hamlin, Chief Executive Officer. Ryan, please proceed.

Thank you, James, and thanks, everyone, for joining us this afternoon. We'll start with an overview of our second quarter financial results. As a reminder, all numbers that we're reporting today are in U.S. dollars. We are very pleased to announce our second quarter revenue increased 66% year-over-year and 29% sequentially from Q1 to $8.2 million. The strength in our top line was driven by the addition of more than 100 new locations, a record number of dispensary point-of-sale installations and increased transaction volume within our current merchant base. As part of our Q1 earnings call, we reported that our revenue in March was the largest in corporate history. Since then, we have set a new record high in each subsequent month through July. The continued execution of our sales strategy was the key element to our strong revenue growth in the second quarter and sets us apart from our competitors. We exceeded the industry growth rate by a considerable margin, while others in the industry are reporting single-digit growth or even, in some cases, a decline in sales. The industry as a whole is starting to show signs of stabilization although the average order value has not rebounded from where it was last year. In fact, the average order value process using POSaBIT payments in Q2 was down from $78 last year to $73 or a 6.4% reduction from Q2 of last year, which is consistent within the industry. While this does affect the total gross volume of transactions processed, we are still seeing strong growth in actual number of transactions, meaning the average order value is down, but total transactions processed is up. This trend is leading us to lower forecasted transactional sales. However, this is offset again by an increase in the number of transactions, which has enabled us to continue to grow our revenue at fast pace. To be clear, even with the lower order value, transactional sales still grew significantly in Q2, growing by 25% over our first quarter. We processed $129 million in Q2 versus $103 million in Q1. Given the dip in average order value, we are lowering the midpoint of our guidance for transactional sales from $700 million down to $650 million to reflect the current economic climate in the U.S. But more importantly, we are reaffirming our guidance for revenue of $37 million to $40 million. We are also increasing the lower end of our guidance range for gross profit due to a mix shift towards more SaaS in point-of-sale revenue, which has much higher margins. I'll walk through the specific numbers in just a bit. Now switching to some great news around partnerships. This week, we announced the largest partner deal in the history of our company. We closed a strategic partnership with a large cannabis technology partner to license our point-of-sale software. It is a software license agreement that provides royalty payments to POSaBIT for each unit sold by our technology partner. I want to point out a few additional and important points about this new strategic partnership. First, we've always believed in the strength of our point-of-sale software. We consider it the best in the industry. The fact that a leading technology provider has licensed our source code validates the quality, scalability and complete feature set of our point-of-sale software. Second, this agreement represents a significant new stream of guaranteed reoccurring revenue over the next 4 years and potentially well beyond that. There is a minimum of $20 million in guaranteed revenue that will be recognized in our P&L over the next 40 years -- 4 years. As most of you know, we have doubled our revenue every year for the past 4 years, and we expect this year to be no different, moving from $21 million in 2021 to our guidance of $37 million to $40 million in 2022. Personally, I love doubling revenue every year, and I want to keep that trend going. Deals like this set us up not only for a great year this year but for many years to come. Third, software license deals that involve licensing source code are great for margins. All of the $20 million in revenue is straight profit. The company that is licensing our software will take on the full hosting support and implementation costs of running the point of sale. This is only one example of how we are working to improve our gross margin to enable us to get to adjusted EBITDA profitability. We will begin recognizing revenue from this partnership in the third quarter of this year. The first full year revenue of $4.4 million, which includes a onetime fee of $500,000 and first year royalty licensing fees of $3.9 million, was paid in advance and will be recognized in our P&L over the next 12 months. The last comment I want to make about this deal. We've been saying now for the past several years that POSaBIT is the open platform for all cannabis technology companies to integrate with. This open integration approach sets us apart in the industry, and this specific partnership is a great proof point of the value our industry places on our point of sale and payments platform. This openness is a key competitive advantage and key driver of our growth for years to come. Now turning to our merchant store growth. We are further encouraged by the speed at which our teams are standing up operations in new retail locations. You heard us speak about our target of 100 locations in 60 days. That is back in May, we had more than 100 contracted retail locations queued up to go live over the following 60 days. We met that target, and all of those locations are now fully operational with our solutions. Earlier this month, we had a significant milestone in our business. We now have more than 500 merchant agreements in place for our payments and POS solutions. We have nearly doubled our market share for POS with more than 80 locations added so far in 2022, 36 of those in the second quarter alone, which is a record for POS installation for us. As we have discussed in the past, another important element of our growth strategy is our focus on multistate operators or MSOs. Most recently, we began the deployment of our payment services for one of the most successful and largest privately held MSOs with operations in 7 states and more than 60 locations. We expect to roll to all of those locations over the coming weeks. Our newly appointed Chief Revenue Officer, Julie Solomon, is scaling our organization to increase brand awareness, achieve excellence with implementations and drive same-store sales growth from our existing base. The team has more than doubled in size since Julie joined us in June. We now have more than 20 people in our sales and customer success organization. We have added direct sales professionals with industry and MSO experience in targeted geographic regions as well as marketing and implementation specialists. While competitors in our space are downsizing, we are investing in revenue-generating resources and scaling up. The team is already signing up new business, growing the pipeline and reaching new geographic areas. Collectively, they are elevating the customer experience, driving growth and setting us up to achieve our second half 2022 objectives and enter 2023 in a strong position. We expect to see tangible proof points in the quarters to come. During the second quarter, we also entered the New Mexico market with our point-of-sale solution as the state went live with recreational sales for the first time. Our location count in New Mexico is in the low 20s with more locations under contract and expected to go live in the second half of this year. With the addition of New Mexico, we are now operational in 19 states in the U.S. and well on our way to achieving our target of adding 8 new states in 2022. We began the year in operations in 15 states. The addition of Georgia, New Mexico, Texas and West Virginia brings us to 19. The recent agreement with a large MSO includes deployment in 7 states, 3 of which are new for POSaBIT, leaving one more state remaining to achieve our target for this year. As we continue to scale, we are adding staff across our business to support our increasing volume of contracted locations and projected sales pipeline. We currently have 50 professionals and plan to add 20 more full-time resources across all departments by the end of the year. Our queue of contracted locations is close to 100, and our pipeline now exceeds 200 qualified prospects that are advancing through the sales cycle. We handedly outperformed both the year-over-year and sequential comps in the second quarter. But more importantly, recent contract signings and the opportunities in our pipeline reinforce our optimism for continued growth in 2022 and return to profitability on an adjusted EBITDA basis in 2023. With that, I'll now turn the call over to Matt Fowler. Our CFO, for a more detailed review of our financial results for the quarter ending June 30, 2022.

Thank you, Ryan. Transactional sales for payment services totaled $129 million, up 48% compared with $87.3 million in the second quarter of 2021. Transactional sales is a non-IFRS measure and one of the key drivers along with transactional volume for our business. Total revenue was $8.2 million, up 66% compared to $5 million in the second quarter of 2021. As Ryan mentioned, our growth during the second quarter rebounded following the industry-wide slowdown we experienced in the prior 2 quarters and far exceeded overall growth in the industry. New store payments and POS installations were the primary driver behind our increased revenue, specifically, merchants using our PIN Debit solution, which yields a higher amount of gross revenue on a per-transaction basis than our other solutions. The partnership with a leading cannabis technology partner became effective subsequent to the quarter. It had no impact on our second quarter results. Beginning next quarter, that partnership will have a pronounced impact on our results. Gross profit was $2 million or 24% of revenue, up 49.1% on a dollar basis compared with $1.3 million or 27% of revenue in the second quarter of 2021. Sequentially, gross profit on a dollar basis was up 28.5% compared to Q1 2022. Operating expense was $6 million compared to $1.1 million in the prior year's quarter. The primary driver of the increase in operating expense was the impact of a $2.7 million noncash change in foreign exchange. This is principally the result of the large balances on the balance sheet being converted from Canadian dollar to U.S. dollar. The other driver of the increase in operating expense was administrative expense of $2 million. This was largely made up of people expenses tied to our growing team. To a lesser extent, we also had higher professional fees of $564,000 compared to $208,000 in the prior year quarter. This was mainly driven by increased legal fees tied to our recently announced technology partnership and legal expense tied to our recently closed private placement. Additionally, we had $512,000 in noncash expense from share-based compensation compared to $140,000 in the prior year quarter. Net income was $380,000, inclusive of the positive impact of a $4.7 million noncash change in fair value of derivative liabilities. This compared with a net loss of $878,000 inclusive of negative impact of a $1 million noncash change in fair value of derivative liabilities in the second quarter of 2021. The mark-to-market of embedded derivative liabilities is tied to our convertible debt and is a noncash accounting entry required by IFRS. They can cause significant differences in net income or loss quarter-to-quarter. Fluctuations in this line item of our income statement may be more extreme during periods of increased volatility with the price of the company's stock. Adjusted EBITDA loss was $660,696 or negative 8% of revenue compared to the positive adjusted EBITDA of $207,000 or 4.2% of revenue in the second quarter of 2021. Cash on hand at the end of the second quarter was $1.7 million. This compared to $4.3 million at the end of 2021. The June 30 cash balance does not include $4.4 million received in August 2022 as part of the $20 million technology licensing agreement and the $3.5 million in net proceeds from the private placement, which was held in trust at the end of the period. When factoring both those items, our cash position is the best it has been in company history. During the quarter, cash was used primarily for working capital needs into purchase equipment, which is either sold or rented to our merchants. Our debt balance remains low with $199,000 of long-term debt comprised of an SBA loan and convertible notes. Subsequent to the quarter end, we completed a private placement with existing institutional shareholders that net us approximately $4 million in proceeds. The offering consisted of 5,861,941 units of the company at a premium to the market price pursuant to the offering. 4,500,000 units were issued to existing investors of the company who, concurred with the closing of the offering, exercised 600,063 previously issued common share purchase warrants. Participation by existing shareholders demonstrates their confidence in us and our business. Let me add one final thought. We do not have anything new to report about uplisting the company stock to Nasdaq or another market for trading securities other than to reiterate that positioning the company that investors can easily invest remains important to management and the Board. We are also monitoring other legislative developments, including SAFE Banking Plus. It is still too early to know if the latest iteration gain momentum to pass through the House and Senate in the next 12 months. Based on the history of this legislation, it is unlikely any action will be taken before the midterm elections in November, but we remain hopeful. That's it for me, Ryan. I hand it back to you for closing remarks.

Thanks, Matt. As we end our call today, I want to provide the following guidance for full year 2022. As I mentioned already, we are lowering our guidance for transactional sales volume based on current economic commissions and the lowering of our average order value. We now expect our transactional sales volume to be between $600 million and $700 million, which compares to our previous guidance of $675 million to $730 million. Fortunately, our business is less influenced by the overall total dollars processed and more so by the number of transactions in process. As we increase installations of our PIN Debit solution, the impact to our revenue from the decline in transactional sales per order is offset by the increase in the number of transactions. Furthermore, with more than 100 additional store locations set to go live, plans to expand to new states, a dedicated team focused solely on organic growth and guaranteed revenue from a new license agreement, we are reiterating our full year guidance for revenue as well as increasing the lower end of the range for gross profit. We now expect revenue of $37 million to $40 million, which reflects year-over-year growth of 81% at the midpoint and continues our trend of doubling or nearly doubling our revenue for 5 consecutive years and gross profit of $9.5 million to $10 million, an increase from the $9 million at the low end of the previous guidance which reflects year-over-year growth of 69% at the midpoint. Also, as already mentioned, we are announcing that we plan to return to positive adjusted EBITDA in 2023. This is both the signal of our increased focus on gross margin and our confidence in strong revenue growth while optimizing our overall costs. Lastly, we continue to focus not only on 2022, but are already looking beyond 2023 and have started to put in place new revenue drivers so we can continue our strong trend of doubling our revenue every year. The new $20 million guaranteed revenue partnership is just one example of this and our commitment to our investors to maintain our high growth rates while also planning on adjusted EBITDA profitability in 2023. I will end today's call by providing a bit of evidence on how we have already planned for our growth to hit our revenue guidance I just shared with you. As you can see, we grew about $2 million in new revenue between Q1 and Q2. This was during a time when the industry as a whole was significantly down. If you look at what we need to accomplish in the second half and realize our exit run rate velocity in July was about $36 million, it allows us to see a clear path to hitting our guidance. The new revenue from the license deal should be viewed as both a bit of insurance in case the current cannabis climate takes another significant drop or it can be viewed as potential upside in our forecast. I will end by reiterating that if you look at our past several years since going public in 2019, we have a good track record of hitting our guidance. Operator, we can now open up the call for any questions.

[Operator Instructions] And first, we have Andrew Bond with Jefferies.

This is Andrew Bond on the line for Owen Bennett. Congrats on the results and recently announced agreements. So on the first question, on the recently signed software agreement, understanding there's limited disclosure around this right now and details are to come in due course, can you just talk about the pipeline or your strategy around additional licensing transactions such as this?

Yes. Good question. I talked about this, and I mentioned it earlier today about -- for the last several quarters, we've talked about our open platform. And this is something that really differentiates us than others in this technology space. I mean we believe strongly in our point-of-sale software. We believe equally strong in our payment software. And we've always been an open provider. And this, being the first large provider to adopt our POS, is just a strong statement of the support of people looking at our code, understanding that it's scalable, understanding that it has a great feature set. And we anticipate others in the industry to follow suit. So yes, this is definitely in line with our growth strategy as we go into 2023 to have more and more partners license both our payments platform but also our point-of-sale platform.

Got it. Helpful detail. And then moving to your customer base with regards to the larger multistate operators, encouraging to see that transaction, but what do you think POSaBIT needs to do? Or what is the company already implementing strategically to win more of these enterprise-type clients?

Yes. I think we look at it in 2 different ways. One, our payments business, obviously, is the best-in-class in the industry, and it scales wonderfully across multi -- MSO, multistate operators. And so that is already kind of a testament to that platform. I think when you look at our point-of-sale platform, there's others that have been in this industry a little bit longer than us. And so it's no secret that in some ways, we have to increase our feature set as it relates to large MSOs. And it's been something we've been doing now for probably the last 6 to 9 months as we started to put out more and more releases of our POS, really looking at what does it take to be a world-class operator for those MSOs. And we're starting to get now, for the first time, several multi-location operators that are using our point of sale. And I think that's just -- it's going to be -- it's going to continue to be a focus for us because we want to be able to support the largest of all of the MSOs. And I think that's just something that's on our roadmap and you'll hear more about it each quarter as we release more and more features targeted at that.

Got it. Great. And just if I could sneak in a quick housekeeping item. I wanted to make sure I was clear on what you said regarding your new MSO client. I think I heard you say that the newly signed client had more than 60 locations in the U.S. across 7 states. Was that correct?

That is correct.

Okay. Great. I'll pass it on. Congrats again on the quarter.

Okay. Next, we have [ James Baganis ], private investor.

It's like you knew that I was going to ask that you've made in your closing remarks about how to bridge guidance versus everything you talked about, so I really appreciate that. But if you can just talk more about what you're factoring into guidance. I mean you're run rating at the low end right now without layering in the recently signed deal. But then I think you said in the remarks, you took down TPV. So I guess what's being assumed for the rest of the year? If you can just give more granularity on that.

Yes. So I think if you just kind of go through the math. I mean, if you look at what we did in Q1 and Q2, it's a little over $14.5 million. So you do the math on the midpoint of our guidance that says, "Hey, we got to hit midpoint of 38.5. Let's just target midpoint." That's $24 million. So if we exited the second quarter at a run rate of 36, do simple math on that, $3 million times 6, that's $18 million that's in the bag. So with literally no additional adds as far as new merchants in the next 6 months, that gets us to $32.5 million, close to $33 million. So how do we get from that $33 million in essence, call it, $40 million because that is our high end of our midpoint. So how do we get an incremental $7 million? And that's really why I wanted to stress the importance of our pipeline. The fact that we have 100 contracted merchants, the fact that we have over 200 in the pipeline, the fact that we just landed an MSO with over 60 locations, all of which have not come online yet. Those are just proof points of that line of sight to say, okay, to get from $33 million to $40 million, that $7 million is not a hard leap to go from where we already see that's in the bag and what we have coming in the pipeline. And then that's why I kind of said when we look at this large partnership deal that we licensed for $20 million, that revenue, I look at it, like I said, I look at as, hey, that's great to have. That's kind of insurance money, I guess, if you want to think of it as far as if the conditions one way or another turn or it's even upside above what we've already guided to. So that's a little bit of the kind of the math and the thinking behind it. And it doesn't -- that doesn't really account for a lot of the same-store growth too because now that we have Julie's team and the customer success organization fully built out, they're completely gold on same-store growth. So now you're going to have some organic growth layered on top of all the new stores that we're adding as well. And we are seeing the industry stabilize. So we actually anticipate that transactional sales or that average ticket size or order value will start to go back up where we had originally baselined it last year in 78, it's gone down $5 or $6. So hopefully, that answered that, James. That's just kind of how we're thinking and seeing kind of down the road and how we get to that $40 million.

Yes. Really, really helpful and really encouraging. I mean I'd say overly conservative, but I appreciate you guys being prudent. But that's on the TPV piece, how do I think about that? Unless I misheard, that came down, didn't it, on your guidance?

On the sales -- yes, total transactional sales. So the way I think about that is -- so we have this metric because we would always -- we would say, hey, you can kind of factor in roughly 5.5% of our total transaction sales, process, there's revenue. When we saw the dip in the ticket, that means our transactional sales were going down. But what we did see is that customers that were repeat customers are coming into our stores where we would have maybe 30% of the volume of those transactions, we now are starting to see 35% to 40%. So we make revenue both on the value of the ticket, but we also make it on just the number -- how many tickets happen. So a $10 transaction versus a $7 transaction, I still make the full amount on the trend -- the individual transaction. I don't make as much on the percent of the amount. But that's why when we looked at it, we said, okay, we're getting offset. Transactional sales going down a little bit. We want to be smart on how we give guidance there. We lowered -- if you look at the midpoint, we just lowered it by $50 million from $675 million. It was $675 million to $730 million. We went to $600 million to $700 million, $700 million on the high end. So we just felt like it was prudent to lower the transactional volume, net top line net, but we feel great on the optimism. And you saw that in the difference between Q1 and Q2, I mean we grew 25% in Q1 and Q2 in transactional sales. So it's not like we're declining. In fact, we grew pretty quickly in Q1 to Q2. But as we talked about in Q1, Q1 is a tough quarter all around for the industry. And so we're just having a little bit of that hangover as we come out of that, that transactional sales number.

Right. Okay. That makes sense. I think this is more of the usual prudence and I get that. Okay, one other one. Just -- so it's great, again, the partnership is really cool to see as an asset. But you talked about the recurring revenue just from licensing the platform, will -- assuming they sell your payment solution, is that revenue presumably incremental that you'll be generating?

Yes. And that's all upside, too. So we haven't factored that into the forecast this year. Obviously, as we go into next year, we'll factor that in. So that's potential upside.

Got it. So I guess that's how you double revenue in '23 then?

Did I say that, [ James ]? I might have hinted to that.