POSaBIT Systems Corporation (PBIT) Earnings Call Transcript & Summary

Greetings. Welcome to POSaBIT Systems Corporation Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Oscar Dahl, Chief of Staff at POSaBIT. Oscar, you may begin.

Thank you, operator. With me on this call are Ryan Hamlin, Chief Executive Officer; and Chelsea Bolander, POSaBIT's Corporate Controller. 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 subsequent 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 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 will also be citing adjusted EBITDA, adjusted revenue and adjusted gross profit in today's discussion. Adjusted revenue, adjusted gross profit and adjusted EBITDA are non-IFRS measures used by management that do not have any prescribed meaning by IFRS and may not be comparable to similar measures presented by other companies. The company defines adjusted revenue as growth revenue minus license support revenue plus actual licensing cash received as part of positives licensing deals. The company defines adjusted gross profit as adjusted revenue less company cost of goods sold. The company defines adjusted EBITDA as net income or loss generated for the period as reported before interest, taxes, depreciation and amortization and further adjusted to remove changes in fair values and expected credit losses, foreign exchange gains and/or losses and impairments. The company believes these non-IFRS measures are useful metrics to evaluate its core operating performance, and use these measures to provide shareholders and others with supplemental measures of the operating performance. The company also believes that securities analysts, investors and other interested parties frequently use these non-IFRS measures in the evaluation of companies, many of which present similar metrics when reporting their results. We caution that adjusted revenue, adjusted gross profit and adjusted EBITDA are not substitutes for gross revenue, gross profit or profit loss, respectively. Now I would like to turn the call over to Ryan Hamlin, Chief Executive Officer. Ryan, please proceed.

Thanks, Oscar, and welcome, everyone. As a reminder, all numbers that we'll be talking about today are going to be in U.S. dollars. Our Q2 results had several firsts for POSaBIT. It was the first time that we've been both adjusted EBITDA positive, finishing the quarter with nearly $100,000 in adjusted EBITDA profit. While we also finished the quarter with positive free cash flow, adding $200,000 more to our cash on hand. This is a very significant accomplishment for POSaBIT. We not only have righted the ship from the challenges over the last 12 months, but we are now growing and are cash flow positive. In Q2, we saw solid quarter-over-quarter growth across the board. Revenue was up 13%, payments revenue was up 24%, gross margin dollars were up 47%, and our overall gross margin percentage grew to a historic record of 59%, which is represented of not only the continued focus we are putting on controlling our costs, but also a nice increase in quarter-over-quarter revenue. It is important to note when looking at our year-over-year comparisons, our gross revenue decreased, but our gross margin percent increased. I bring this up so they understand why gross revenue was higher in '23 than it has been in '24. In the past, in '23 and before, we recognize both merchant fees and consumer fees in our payments revenue. In 2024, we moved to a new method of processing, which resulted in no more merchant fees just consumer fees. In prior years, we had a much larger revenue share pass-through to the merchant to offset their fees. Thus, our COGS were much higher and our gross percentage margin was much smaller. As we go forward, a much better metric to track year-over-year improvements is to look at our gross margin dollars and gross margin percent as opposed to just gross revenue. As mentioned above, we are laser-focused on growing our gross margin dollars and adjusted EBITDA profitability. We added $200,000 to our cash reserves despite paying down a host of outstanding aged accounts payable in addition to our normal Q2 payables. So while we are happy we're able to add $200,000 to our reserves, we are even more pleased that we have been able to pay down our large AP balance that has accumulated over the last 12 months during more difficult times. Our internal goal is to pay off a substantial amount of our outstanding vendor debt by the end of 2023, while still maintaining free cash flow and increasing cash on hand. To reiterate, financially, as we have exited this quarter, we are in a much stronger position for the present and the future. I would like to now briefly discuss a few material product releases we had in Q2. We officially launched our POSaBIT Pay application, our Venmo type payment app for both in-store payments and online orders. We expect continued growth with POSaBIT Pay over the remainder of '24 and into '25. In addition to the incremental revenue POSaBIT Pay we'll bring in, it is also another example of how we are adding redundant payment solutions into our overall offering for our merchants. We are now seeing about 50% adoption rate of all new debit payment merchants also signing up for POSaBIT Pay. We will continue to share more about POSaBIT Pay as we continue to rollout. In Q2, we also successfully launched the beta of our very own eCommerce and Menu platform at about a dozen of our current Point-of-Sale stores. While it is still early, the feedback to date has been very positive, and we are hearing from many of our merchants that they plan to move away from their current e-com provider to the new POSaBIT Menus. We anticipate many more merchants will adopt our Menus in Q3 and Q4 and expect about 50% of our POS base to eventually adopt our platform and move away from traditional Menu providers. Our Point-of-Sale growth remains strong. We're gaining traction outside of our home state of Washington, specifically in Oregon, New Mexico and Colorado. Our significant growth in the POS space over the last 12 months, has had a material effect on the overall percentage of POS revenue versus payments revenue. It currently represents roughly 23% of POSaBIT's total revenue. The POS monthly reoccurring cash flow is steady, predictable and forecastable revenue source. Lastly, our Point-of-Sale licensing deal continues to be a great source of cash that goes straight to the bottom line. There is still an expected $12 million in cash that will be paid to POSaBIT over the next 24 months. With that, I'll now turn the call over to Chelsea Bolander, our Corporate Controller, for a more detailed review of our financial results.

Thank you, Ryan. Total revenue was $4.3 million in the second quarter of 2024, up 13% compared to $3.8 million in the prior quarter. Adjusted revenue was $5 million in the first quarter of 2024 compared to $4.6 million in the prior quarter. We define adjusted revenue as gross revenue as reported minus license support revenue plus actual cash received in the current period asset receivable for the licensing contract. Adjusted gross margin was $3 million for the second quarter of 2024 or 59% of adjusted revenue. This compares to an adjusted gross margin of $2.3 million in the prior quarter or 50% of adjusted revenue. Adjusted EBITDA was a profit of approximately $97,000 in the second quarter of 2024 compared to an adjusted EBITDA loss of $684,000 in the prior quarter. Gross margin as reported in the current quarter was approximately $2.2 million or 51% of revenue, compared with $1.5 million or 39% of revenue in the prior quarter. The increase in gross margin percent compare to the prior quarter is primarily the result of a shift in partners used for processing at a reduced rate, coupled with increased revenue. Operating expenses were $2.8 million in the second quarter of 2024 compared to $6 million in the same period of the prior year. The primary drivers of the decrease in operating expenses for reductions in salaries and benefits, share base compensation expense and professional fees, coupled with a favorable foreign exchange rate. Administrative expenses were $2 million for the second quarter of 2024. The largest driver of administrative expenses are people costs. These were $1.7 million in the second quarter compared to $3 million in the prior year period. The decrease year-over-year is primarily driven by a reduction in head count. Net loss was $454,000 for the second quarter of 2024. This compares with a net loss of $1.5 million in the second quarter of 2023, and a net loss last quarter in Q1 2024 of $1.9 million. Cash on hand of June 30 was approximately $1.1 million. This compares to $900,000 as of March 30, 2024. Our debt balance remains low at $4.5 million of debt, consisting of an SBA loan and a 5-year term loan payable in 2028. With that, I'll turn the call back to you, Ryan for closing remarks.

Thanks, Chelsea. Our focus for the next 6 months is simple. We want to grow our cash in the bank and increase our gross margin dollars. The goal is for POSaBIT to achieve long-term sustainable profitability while executing a moderate and consistent rate of growth. As I mentioned last quarter, we are ready for rescheduling if and when it happens, but we aren't holding our breath. Just yesterday, the DEA announced it is now delayed the final public hearing to be after the election, now scheduled to December 2 of this year. Given this delay, it is now really anyone's guess on what will happen to rescheduling until we know the results of the November presidential election. However, we have had some great state wins of late. Ohio launched its recreational marijuana sales on August 6, just a few weeks ago. POSaBIT already has 3 stores live and processing in Ohio. Florida is also on the ballot in November for legalization of recreational sales. They are already legal for medical sales. This will be a big boost for the industry and for POSaBIT. We currently operate in Florida and are live in over 40 dispensaries. So if rec passes, it will be a nice lift for POSaBIT in sales in that state. Now we're going to jump to the Q&A portion of the call. In the press release, we asked for questions to be submitted ahead of time, which I'll be answering first. That's the same format we used in prior calls. We like to do that because for those that can't make the call, they get to send in questions. We make sure they get a chance to have their questions answered, but we also will be opening up the call at the end for any questions that callers may have. Operator, let's go ahead and start the Q&A.

[Operator Instructions] And while we poll for questions, I will hand the call back to Ryan Hamlin for some pre-submitted questions.

Thanks, operator. And Oscar, I think you're going to ask me to the pre-canned questions, go for it.

So that will be the investors. Can you speak a little bit about the results of the share consolidation that was described as part of the Annual Shareholder Meeting and in the Information Circular?

Yes, I had this question. Most of you and, hopefully, all of you voted on your proxy. But we had something on the ballot, which would allow us to do basically a reverse stock split. And the reason being is that a lot of investors look at stocks like ours right now that's pretty low, unfortunately, as a kind of a penny stock. And so to create more visibility and more investor eyeballs on our stock, we may choose to do a reverse split and increase the price. Another reason that we might do this is if we're looking to uplift to a bigger exchange, like the TSX or even as maybe a potential merger that if makes business sense to do a reverse split. So I will say nothing is planned to do any of that today. But we wanted to vote on it so that it is an available tool for us in the next 12 months if we need to do that. And because it does require shareholder approval, we wanted to have as part of the [indiscernible].

All right. Next question. Why does the company feel it's not important to be updating the market and investors outside of just earnings calls?

Well, we definitely think it's important. We're not being intentionally quiet. We have been pretty hesitant though, and I think if you have been watching our finances and our stock over the last 12 months, you understand that, that was probably the best use of time for us is to focus in on our business, execute and get our position back to where, frankly, it is today, where we had the ability today to announce positive cash flow and adjusted EBITDA profitability. So yes, you will hear a little bit more from us as we have more product releases. But to be honest, our last 12 months has just been a lot of focus on just getting back on track to where we know the company needs to be.

Has the Board considered a stock buyback? And why have insiders not bought more stock when the prices are low?

Yes. We're definitely not considering a stock buyback. I think that is done typically by companies that have fair amount of reserves of cash. And right now, as we just talked through, we had $1.1 million, yes, we are putting cash in the bank, which is fantastic, but to use those very valuable resources to do a buy back just doesn't make financial and business sense right now. However, the other question, I think, was about insiders, and one of the things I want to make sure I educate investors about is that blackout periods for insiders, it's not just around earnings. It's also around any sort of big material events that we may be aware of as an insider. So it's not as simple as though we can buy stock right after earnings. If we are working on big deals, which we have in the past, we've made acquisitions and mergers then that's another sign where we just frankly can't be purchasing because we have that insider information. I would also remind our investors that insiders own about 40% of the company already. So believe me, we are very invested in the future of the company. And by no means is it any sort of a sign of anything by ownership if we're not picking up additional shares, It's -- we're fully in with our 40% for sure.

Your investor presentation on the website is quite old. When can we expect an updated version?

Yes. Pretty simple answer. Kind of embarrassed that is so old and we do apologize. It's going to be updated. There's, in fact, a couple of us already working on the draft, reviewing it, and you should see a new version of our investor deck up on the website in the next 7 days.

Right. The cannabis market and POSaBIT stock have been hit hard over the last 12 months. What can you say to investors to instill confidence in the company for the next year? And why is the stock price so low?

Yes. We talked about this last call, stock price has been low. No one knows that. I wish I knew the answer. The industry has been hit hard. I would say the entire market has, but cannabis, especially given kind of the back-and-forth rescheduling and SAFE banking. I think that hasn't helped investor confidence. I will say we are seeing more money coming into this sector now finally. I think states like Ohio that legalized and are taking off and having great success and all indications look like Florida is going to pass the rec. Those are all good signs. More money pouring into this space and thus, hopefully creating more investor excitement for what the future holds for this industry. As for as POSaBIT, it's pretty straightforward. It's what I said earlier. We're really focusing in on execution on growing our gross margin dollars and staying profitable and putting more cash in the bank. I mean, it's we believe, and we've always said this, if we execute and we did those things, then naturally, the good things should happen to the company and to the stock and -- that's just where we're at today, and we're excited for the next 12 months. We're in a much healthier position, and we have great products that we just put into the market with our Menus and POSaBIT Pay. So excited for what the next 12 months looks like for us.

All right. Operator, we'll send it back to you for any one of those questions on the line.

[Operator Instructions] We did have a question come from the phone lines coming from James Baglanis. James is a private investor.

So I just wanted to start by saying -- and this is the first time we could say this in a while, just a really impressive -- just a great quarter overall. And I think just the execution since the October setbacks is just really, really impressed me. I mean, your gross profit has gone up from $1 million a quarter to, kind of, $3 million you reported and -- so I guess just as I think about kind of coming out of the recovery, getting back to kind of business as usual, how do we think about the trajectory of kind of the growth of the business going forward? Because I guess, run rate last quarter was $9 million of adjusted gross profit. Now it's $12 million. And I know you'll provide that disclosure going forward. But just how do I think about that going forward?

Yes. Well, thanks, James. I appreciate you always as an investor and also thanks for recognizing that. Yes, we've -- we really have hunkered down and focused in on the business and our costs and in growing. I mean as I look out over the next 12 months, I think we saw really nice growth between Q1 and Q2, and a lot of that was getting our payments business back in order. I won't say it's a surprise because I think our POS is a fantastic product, and we have had great success with it. But if there is kind of a surprise coming out of it, is just the amount of new Point-of-Sale subscribers that are coming on board. And the reason that's super important is that not only is that a customer that is a set of reoccurring revenue because those typically are year to multiyear deals. But it also gives us a relationship that we can then sell our payments to. And so as that shift has happened, and it's pretty drastic in the last 12 months of just the sheer number of people that were signing up. I was just looking at our stats just for the state of Washington and I think we'll process well over $1 billion in sales through our POS. And I think we now have something like 28 or 29 of the top 30 stores in Washington alone. So I think as you look out, you're going to see, yes, payment growth, but I would let our investors know that the POS growth is the thing that really has been excellent and will continue to go. And as that goes, and grows, then I would expect our payments to follow along because we're going to be pushing our payments with that business. So yes, it's a little bit of business as usual, execute like we have, but it's also excitement about the POS growth and now with our Menus coming out because our Menus, that creates a whole new source of revenue because now we're in the space where like you think of Jane and Dutchie and others that have Menus, we now get to be in that same space and get a pull from that revenue too. So I know we didn't talk a whole lot about Menus, but next quarter, you'll probably hear a lot more about it, because that truly is a source of revenue for us. Thanks, James.

Yes. And I have a couple of other follow-ups, too. As you mentioned, the 23% of revenue that's recurring revenue, I think, from the Point-of-Sale, which I think is really interesting and probably underappreciated point. But how do I think about kind of the penetration within the base of the 500-plus stores you have, I guess, first of anything that you monetize through recurring revenue? And then second of payments penetration into that base too, because just thinking about the different growth levers even before you add any additional customers?

Yes. So if you look at -- and you said it right, 23% of our revenue is from the POS. When we look at that POS base, unfortunately, I'd love to say 95% of those customers use our payments. It's about 50%. And in fact, it's just a shade below 50%, use our payments in our POS. There's 2 main reasons for that. One is in the state of Washington for some reason, the ATMs are just something that owners love. Washington in the second state that legalized ATMs were the first real source of making sure that people like cash to pay. And so we've had a more difficult time selling payments in Washington. So it's unfortunate because Washington is our strongest POS market. What we are seeing is as we venture outside of Washington and into new markets, for example, like New Mexico, our hit rate is much better. So you're getting a much better payments to POS kind of percent. So kind of the long answer to your question is, we want to watch both that percent of recurring revenue, that 23% growth, but we also want to see the percent of POS merchants using our payments grow too, because that, obviously, in the long run, is going to have a big effect on revenue, but it's also going to have a big effect when legalization eventually happens because now you have a much more secure customer relationship with the Point-of-Sale customer versus with just the payments customer.

Yes. That makes sense. And I guess it's interesting, last year 2023, your guidance was for $12 million to $14 million gross profit, you've now returned to this kind of run rate level, and I expect pretty considerable growth from here, but the stock is at $0.09 versus $0.60 to $0.70 last year. And it's just -- I don't know how to make it make sense.

Yes. I don't either, James. I do think -- I mean my hope is, I mean, I think we signaled that things were improving in Q1, and now we're coming out and we're showing those results. So the hope is that through these results, people are paying attention and they're seeing that, yes, we're turning this thing around and the stock is certainly depressed in my mind.

There were no other questions in queue at this time. And that does conclude our conference today. You may disconnect your lines at this time. Thank you for your participation.