POSaBIT Systems Corporation (PBIT) Earnings Call Transcript & Summary

Greetings. Welcome to the POSaBIT Systems Corporation Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Chris Baker. You may begin.

Thank you, operator. 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 and 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 subsequent filing reports as well as in other reports that the company files from time to time [Indiscernible]. Any forward-looking statements included in this call are made only at the date of this call. We do not undertake any obligation 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.

Thanks, Chris, and welcome, everyone. As a reminder, as always, the numbers I'm going to be talking about today are in U.S. dollars. Well, 2023 was quite the year, change, volatility and sustainability. I think those are the consistent themes I want everyone to take away from this call. The industry itself had an extremely rough year in 2023, almost all cannabis businesses struggle, both public and privately held companies. Thankfully, over the past 9.5 years since our inception, POSaBIT team has been battle-tested and survived many ups and downs in the past and even thrived in the face of adversity. In fact, I am proud that we achieved a combined 23% year-over-year revenue growth in our core payments and point-of-sale business. This is excluding a onetime licensing fee booked in 2022, which we'll talk about here shortly. We are also coming off another successful 420, the biggest day of the cannabis year. While some of our POS competitors had outages that impacted thousands of dispensaries, we once again were able to serve our customer base with stable outage-free and user-friendly sets of products and services. Now before we get into the numbers, I want to give a quick comment on our 2022 revenue restatement that I'm sure you read about in our press release this morning. This was due to how we accounted for revenue associated with the large point-of-sale licensing deal we completed back in 2022. If you recall, and I think I talked to you on the calls many times about this, we signed a deal to license our point-of-sale software source code to a large technology player in the cannabis industry. This deal represented over $20 million in revenue and cash to POSaBIT over a 4-year period. In fact, each month, we are sent a deposit of approximately $400,000 that goes straight to the bottom line, in essence, providing us with a consistent stream of non-diluted capital for the next several years. So why the restatement? Well, as part of the audit process, it was determined that the discount rate associated with the 2022 software license agreement should be increased to 12% versus 2.8%, which was the rate that was used. Following IFRS rules, the change in discount rate will reduce the revenue recognized in 2022 by approximately $3 million. The change in discount rate will shift some future recognized revenue from license to interest income, but I want to stress this does not affect the overall cash economics or the timing of cash receipts from this great licensing deal. I'll dive into the financial results for the full year of 2023. Revenue was $43.6 million. This includes an increase in year-over-year payments revenue of 20% or $40 million this year versus $33.4 million in 2022 and an increase in point-of-sale revenue by 51% or $2 million this year versus $1.3 million last year. Overall revenue, excluding the large onetime licensing revenue that we recognized in Q4 of 2022 was, as I said, up 23% year-over-year. Gross profit was $9.2 million for 2023 versus $8.2 million in 2022, again, excluding the licensing deal that we recognized in Q4 of '22. While the level of growth was not what we anticipated, we are pleased given the massive disruption with payments in the cannabis industry over the course of the last year. I'm very happy with how we responded. In fact, this forced us to increase our overall redundancy of payment offerings to help ensure we don't have a repeat of 2023. In fact, as I speak today, POSaBIT now offers 5 different payment options for dispensaries. Not only that, but we recently introduced POSaBIT One, an all-in-one device that can run up to 3 different payment options on the same terminal. I want to talk about our POS a little bit as well. We all know that payments is the majority of our revenue, but our anchor product is our point of sale, and it had another fantastic year of growth. From Q4 of 2022 to Q4 of '23, the number of active POSaBIT point-of-sale merchants increased by 46%, this extreme growth in a very tough market is a testament to our rich feature set and the stability of the product we have. We successfully rolled out POSaBIT 2.0, our next-generation POS software to all stores in the middle of last year. The response has been overwhelmingly positive. We have continued to hone and sharpen our training and implementation processes, allowing us to onboard stores at a much faster rate than previous years. Our customer support remains the best in the industry, which eliminates churn risk and keeps our customers happy and loyal. Lastly, here in our home state of Washington, we remain the dominant point-of-sale provider, accounting for over $1.5 billion in cannabis sales in Washington state alone. Now let's talk a little bit about our operations and frankly, how we got lean in 2023. Often disruptions with existing revenue sources create opportunities to assess where you're at, where you're going and frankly, the best path forward. Over the past 6 months, we have been hyper-focused on realigning our valuable resources to match our top revenue projects. This also gives us a chance to assess our efficiencies and, frankly, get lean. Part of this involved 2 layoffs over the last 6 months, which are always painful but also healthy and necessary at times. We have since increased our internal efficiencies, reduced our overall costs and are now tracking to being cash flow positive and profitable in Q2. Given the volatility of the industry, we have made the strategic decision to focus on profitability over urgent growth. Often, companies spend too much time focusing just on growth, which at times is necessary, but also can run the risk of getting them in a position where they no longer can survive because frankly, they aren't profitable. I know that may not be the proper way of looking at it these days, but we have seen far too many of our competitors get over their skis during the past few years and now are on the brink of having to close their doors. We do not want to get ourselves in a financial hole that we can't dig out. We want a sustainable, steady and profitable business. We believe this is the path we are on now, and we will remain on for the foreseeable future. I now want to give a quick update on our application with the TSX Venture Exchange. Again, we talked to you about this in some of the past calls. POSaBIT been working to advance the proposed listing of our common shares on the TSXV metro exchange or what people call the TSXV. The company remains focused and committed on satisfying applicable regulatory and TSXV listing requirements. The listing of the common shares on the TSXV is, of course, contingent on the satisfaction of all listing requirements, and there is no assurance that the TSXV will approve the company's listing application or for that matter, that the company will complete the listing on the TSXV. Is really all I'm going to say on that, we talk about it every call, I'm sure I'll have another update for you to our Q1 call. I do want to talk about some really exciting news of the potential rescheduling of cannabis as a Schedule 3 drug and what that will mean for POSaBIT. I'm sure you've all [Indiscernible] and read about it, but -- so I won't go into all the details. But basically, the main point is this, there's no more 280E tax exemptions, so dispensaries will deduct standard expenses just like any other retail store. There is also talk that this is going to open up banking and even put for credit card processing. At the end of the day, the credit card brands, as you know, Visa, MasterCard, they all have the final say and we'll decide if they will allow Schedule 3 drug to process credit card transactions across their systems. At this time, frankly, it's just unknown if they will or will not. So to be prepared, we have already been approved as a master [ISO] to process credit cards. This means that our merchants will not have to worry about if and when this happens. It will just turn on automatically for them when this is allowed because POSaBIT has already taken care of it. We look forward to seeing cannabis finally get rescheduled or descheduled and are excited for the massive increase in processing volume this will create for POSaBIT and the increase in additional cash due to 280E going away for merchants, which allows them to spend more on payments and software services. All right. With that in mind, I'm going to turn the call over to Matt Fowler, our CFO, for a more detailed review of our financial results. All you, Matt?

Thank you, Ryan. Before we get into our 2023 financial performance, please note as part of the company's year-end audit, it was termed through integration are the discount rate associated with the 2022 software license agreement should be increased to approximately by 2.8% to 12%. The software license agreement has a discount reapplied as the immune expands multiple years. The change in discount rate will reduce the revenue recognized in 2022 by approximately $3 million and will shift more revenue from licensing to interest income going forward. However, it's important to note the change in the discount rate will not affect the overall cash economics or determine the cash received from the license [Indiscernible]. With that, I'll move into our performance for the 12 months ended December 31, 2023. Transactional sales to our payments platform were $536.3 million, up 2.5% compared with $523.2 million in 2022, transaction sale is a non-IFRS measure and one of the key drivers for our business. Total revenue was $43.6 million in 2023, down 7% compared to $46.8 million in 2022. Excluding revenue generated for our license agreement, total revenue was $43.6 million from 2023 compared to $35.3 million in 2022, an increase from approximately 23% year-over-year. Gross margin was $9.2 million or 21% of revenue compared with $19.6 million or 42% of revenue in 2022. The decrease in gross margin percent year-over-year is primarily the result of a large licensing revenue recognized in 2022 versus 2023. Operating expenses were $18.8 million in 2023 compared to $17.4 million in 2022. The primary driver of the increase in operating expense was higher EBIT has taken place over the last 12 months in noncash stock compensation. Administrative expenses were $13.1 million for the 2023. The largest driver of administrative expenses are people costs. These were $10.9 million in 2023 compared to $7.5 million in the prior year. The increase year-over-year is primarily driven by hiring. Net loss was $13.8 million in 2023, inclusive of an approximately $7 million noncash impairment of intangible assets and goodwill prior to the hyper acquisition. This was partially offset by the noncash change in the fair value derivative liabilities. This compares with net income of $5.4 million, inclusive of the impact of a $4 million noncash change in the fair value of derivative liabilities in 2022. The market to market embedded derivative liabilities is tied to our convertible debt and is a noncash accounting entry required by IFRS, taking cause significant differences in net income or loss year-over-year. Fluctuations in the [Indiscernible] items or income statement may be more extreme than periods of increased volatility in the price of the company's stock. At the end of December 2023, all outstanding convertible debt was repaid. This means that the company no longer has embedded derivative liabilities, and you will not see the noncash impact event on our financial performance going forward. Adjusted EBITDA was a loss of $5.7 million in 2023 compared to an adjusted EBITDA income of $7.5 million in 2022, again, primarily driven by the licensing revenue recognized in 2022. Cash on hand at December 31 was $1.5 million. This compares to $3.9 million at the end of 2022. Our debt balance remains low at $4.6 million of debt, consisting with SBA loans in a 5-year term loan payable in 2028. With that, I'll turn the call back to you, Ryan, for closing remarks.

Thanks, Matt. Before we jump into our Q&A portion of the call, you all may have read this morning in the press release that we are making a change at the CFO position. I want to start by personally thanking Matt for being our CFO over the last 3 years. Matt's done a great job in helping advance positive to his next phase of growth. And I know personally, he's moving up some very cool new challenges. So thank you, Matt, and I will miss you next to me as we do these lovely calls every quarter. Going forward, I will be joined on this call by Stephen Gledhill, who is coming back to POSaBIT as our new CFO. Even was with us as our CFO when we first went public on the CSC back in 2019. in a sense, stayed on as an adviser even after Matt joined 3 years ago. I know given his knowledge of POSaBIT already and his skill set that we are in good hands moving forward with Stephen as our new CFO.

Now let's jump into our Q&A portion of the call. Given this is our annual earnings call, it's been a few months, in fact, I think it was November since we last had a chance to talk to our shareholders. In our press release announcing this call, we ask for questions to be submitted ahead of time to our investors@posabit.com, e-mail Alice. We've gathered those questions, thank you for all those sent in and I'm now going to address the talk requests. We felt like this was the best way to gather everyone's feedback and still have enough time to answer the majority of the questions. So if for some reason, when I'm done, your particular question wasn't answered, please just follow up with an e-mail to investors@posabit.com, and then we'll get back to you either in an e-mail or we can set up a call. All right. So let's jump into the questions. The first question, surprisingly is about our restatement of our 2022 earnings. I think Matt and I both did a pretty good job kind of walking this through, but the question was, please summarize why past had to restate and what specific impact to revenue gross margin was in the 2022 restatement. So as we said, our new auditors this year discovered that it was -- the discount rate used last year was not ideal as a 2.8%, and it should have been a discount rate of 12% to better reflect the credit characteristics of the licensee. So as a result of those changes, it did make an impact to our total revenue and our total contract assets, and so we needed to adjust those. So specifically, revenue and gross margin hit down by approximately $3 million. And then the discount rate will shift as we go forward, as we mentioned, some of our future revenue from license to interest income other statements. But again, I know we've said this, it doesn't affect our overall cash economics of the deal or any sort of timing of the cash coming in to the license agreement. I think after that, we've kind of talked about that for about 3 times now. So if you have more questions, please do reach out, but hopefully that answers the restatement question. All right, next question. Given the disruptions you had in payment processing last year, do you expect similar disruption this year? And if so, what are you doing to prepare for it? Well, great question. Obviously, we -- on our leadership team, often ask ourselves this question to make sure we're prepared. And I think what we all have learned, and I know I've learned over the last 9 years is you can never say never. So what we have to do is just give our best chance at sustained stability. And -- in order to do that, we implemented 5 different payment methods, like I mentioned. And so we believe that the redundancy of these backup methods is really the name of the game. That's how rescheduling and safe banking happened. So I guess to answer the question, will another disruption happen? Honestly, it's really unknown. But I do know we have put ourselves in the best position to be successful and to continue processing payments by putting in these redundant systems. All right. Next question. We all have read about how hard cannabis has been hit over the last 24 months in the market and in general, what do you think is your competition? And who will be left standing at the end of 2024. Yes, great question and I guess I'll answer it a couple of ways. I know that if you've been paying attention to the public companies that have already posted Q1 earnings, things are starting to look better. So I think that's a positive. I think the overall momentum of the potential of rescheduling is also a big part of this and why I think people are feeling generally bullish. But the industry has to do a bit of a reboot and it has to take a hard look at where the efficiencies are and in many cases, makes some tough calls like frankly like we had to do. I know that many of our competitors are struggling right now, especially those that are reliant upon selling a single [Indiscernible] like a point of sale as their main source of income. Dispensaries that I talk to, everybody's tightened their belts and so what that means is they're pushing all of us to drop prices and so the problem is with that model, no one wins because it's just a race to the bottom. The good news is that companies like us that have a real business and haven't relied on kind of that endless supply of investor funds are in a better position to not only survive but take over as the leaders in the space. So I know that if you look at the competition, many of those large privately held companies, they have these historic large valuations, which, frankly, now makes it pretty much impossible for them to raise some new money. So thankfully, that's not the position that we're in here at POSaBIT. All right. The next question. Do you anticipate any changes specific to rescheduling or state banking happened before the presidential election in November? This sounds a pretty easy one. I'll be brief. Yes, I do expect movement, but will it be done by November? I think it's probably highly unlikely. I think there's some really great momentum going right now but if you read the articles and you just look at the time line, there's specific dates in place where they have to have public hearings and those hearings have certain times associated to them. So it's really tight to get this done prior to the election, but I don't think it's unreasonable to think that it still gets done this year at some point, which obviously is great for us as we move forward. Next question. What will revenue gross margin look like going forward in 2024? As we stated, we're not getting into our guidance or our revenue run rate right now. That's going to be something we're going to try to address in our Q1 call, here coming up in a matter of weeks. But what I can tell you is, as we've added more of these payment methods, we've really had to change the way that these deals are structured in the basic economics of how we account for the revenue. And what that means is our overall revenue top line number is going to be lower than what has been in the past, but our overall gross margin is going to be significantly more. And obviously, gross margin is what drives our business and we pay the bills and so you're going to see our gross margins somewhere in the upper 40s versus right now, if you look at our financials, this last year, we were like 21%. So I'll also mention that the cost saving measures that we did over the last 6 months, some of the layoffs and OpEx cuts saves us about $400,000 a month, which again, aligns with our goal of cash flow breakeven in Q2. But again, more on that in Q1 call. All right. A couple more questions here. In November, you hosted an update call with investors about the recent disruption of debit. You mentioned that you had planned to be back up to 100% by the end of the year. Did that happen? And what was the time line of event? I'm actually glad somebody asked that. In fact, I got that question from a couple of you. So I think this is a good context for everyone to have. After that call, we're certainly on our way back to 100% by the end of the year, and we were tracking. However, we got hit by another challenge from one of our alternative debit solutions, which forced us to then migrate merchants once again. So thankfully, in November, we had already started to look for other payment providers. During December, we immediately began moving those merchants over to another solution. What I will say is, fortunately, our merchants are patient with us and they understand the complexity of payments in cannabis so they gave us a little bit of grace for us to migrate them over. In fact, we had about several of them up in January, but it really wasn't until like February and March when we really started to roll again. I share all this because I think it's good for all of our investors here to understand that this is a very complicated industry and why things like rescheduling are so important to POSaBIT in this industry. When the rescheduling happens, it removes a lot of these roadblocks and all these frustrations that we've had over the last several years. Usually, it's at this point where the -- when I answered the question an investor will stop and say, okay, yes, Ryan, but doesn't that just mean then more competition? And I mean, honestly, the answer is maybe or not really. I mean what you need to understand is that even as a Schedule 2 drug, it's still going to be considered high risk by processors and it's going to be highly regulated. So most of the big guys, when I say big guys, like the Square, the Toast, et cetera, we're probably not going to entertain this until cannabis is fully legal in the U.S., not just a Schedule 3 drug. So in some ways, I guess, we're going to get the best of both worlds. We will have a significant increase in processing volume, but there is only going to be a handful of major payment players. So there you go. I mean, that's really kind of the history of what we've gone through since we last spoke. Of course, we'll say this again, we'll be talking about this more, I know and we go into our Q1. Just a couple more questions here, and then we'll be wrapping it up. Given the current cash situation and where you are at today in Q1, you anticipate do you to raise additional capital? Also explain the expected timing of the income tax recovery mentioned in the press release. So yes, we did talk about a secured loan based on a tax recovery. So good question. If you read in the press release, we've already secured $600,000 on a secured loan that we can draw from if we need to. This is secured based on an overpayment that was made with our Washington state taxes over the last couple of years. That number is a little bit north of $1 million. So we're in the process of obviously working with the state to get that refund. We definitely want that money back. There is no timing -- exact timing of this yet, but we are optimistic that we will see this sometime in 2024. So the answer of, will we need more funding? We don't expect to have any outside funding other than what we've already secured with this loan. I will mention the secured loan that each of our Board members, myself included, are participating in that loan, which I think is a strong statement of how we believe and support the future of our company. All right. Last question. Ryan, what do you say to investors who have been with POSaBIT for a while now? We've seen the stock go as high as $2 and as low as a few pennies. Is there stability coming? What is the growth plan for 2024? This is my favorite question that I get. Well, not really. It's my question I get all the time when I go to my family events, or work events. This is -- when you start a company and you get your friends and family to invest, this tends to be the question you get asked quite a bit. But yes, I feel the same way. I mean, I'd love to summarize it, I guess like this. I would say, last year in 2023, we had to make some tough decisions. And like I mentioned, we got lean and mean in our costs, and we reduced our OpEx by $400,000 a month, which is great. By doing this, we've now put ourselves in the best position for long-term sustained growth and profitability. I know that our business is healthy and growing and best is we have lower cost. So stock price is baffling to me. And I know every CEO says this, but it's hard for me to imagine a company that has roughly whatever we are now, a $20 million valuation. But yes, we just announced over double that in revenue of $43 million. We announced our cash flow positive in Q2 this year, and we already have this great stream of licensing revenue for the next several years of about another $13 million in cash that's going to come in. So truly remains a mystery to me, but I do not think -- I think some of this is just cannabis investors and the frustration over the last several years of up and down and frankly, the economy as a whole just doesn't have a whole lot of extra cash to invest. So all we can do and I keep telling my team is keep our head down, continue to execute and eventually, we believe that will get recognized by our investors over time. So I'm excited as we wrap up this call, I'm really excited for 2024. I think we've put ourselves in a great position of success. And again, hopefully, that will be reflected in our stock price, but that's for our investors to decide. So -- all right. Well, I'm going to wrap it up. Thanks for staying on the line. Let me know how you enjoy this Q&A session. Again, we tried to get all of the questions as many as we could have answered. Again, if I missed any, you feel like you want to get an answer, e-mail me and -- or e-mail investors@posabit.com and we'll get back to you. Obviously, all of our financials, our ND&A, the press release are all out on SEDAR, so I encourage you to download any materials you need for any detailed questions you might have. So with that, have a great rest of your day. And operator, I think we can end the call.

This does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation.