Ryvyl Inc. (RVYL) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Ryvyl Third Quarter 2022 Earnings Conference Call. [Operator Instructions] The earnings press release accompanying this conference call was issued at the close of the market today. The quarterly report, which includes the company's results of operations for the 3 months ended September 30, 2022, was filed with the SEC today. On our call today are Ryvyl Chairman, Ben Errez; Chief Financial Officer; Drew Byelick; and Chief Operating Officer, Min Wei. I'd like to remind everyone that statements made on today's call are and webcast, including those regarding future financial results and industry prospects are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to the company's regulatory filings for a list of associated risks. The replay of this call and webcast will be available for the next 90 days on the company's website under the Events section. At this time, I'd like to turn the call over to Ben Errez, the company's Chairman. Ben, the floor is yours.

Hello, and thank you for joining our third quarter 2022 financial results conference call. It is time of tremendous momentum, and I'm delighted to share an update during this -- our first earnings call as Ryvyl. Earlier this year in our CEO letter, we noted that 2022 would be a year of repositioning for our company as we look to put in place the infrastructure necessary to disrupt the traditional financial payment landscape. Today, I couldn't be more pleased to report to you our significant progress towards that transition and the key achievements we have accomplished during the third quarter. To begin, the core metric that we focus on the drive out is the growth of our processing volume. In the third quarter, we once again set a quarterly record processing volume of nearly $1.3 billion. Through the first 9 months of 2022, we processed nearly double the transaction volume compared to the same period in 2021, highlighting our technology's potential, scalability, and incredibly successful internal sales and marketing team, driving the adoption of our leading-edge blockchain financial solutions. To note, this also represents an approximate 30% increase from the second quarter of 2022, an indication of our remarkable growth even during a challenging macro environment. Given the remarkable growth we have seen in the past 2 years with the continued advancement of our technology and payment solutions, the forming of new partnerships, expanding geographically and the hiring of key personnel, we knew the time was right for the evolution of our brand and identity. To that end, at our recent Annual General Meeting, we received resounding shareholder approval to rename the company Ryvyl. This initiative was spearheaded by our Chief Marketing Officer, Jacqueline Reynolds, who worked tirelessly to deliver on high expectations to create a world-class brand that we believe is unparalleled in the fintech industry. This process is vital to the next phase of our expansion as Ryvyl showcases the continued development of our payment solution, remarkable stable coin and blockchain processes, and offerings to a global audience that we have already begun to pursue aggressively. You can expect the launch of our new Ryvyl website, along with the new social media platform and heavy public relations activities and with a number of other launch activities as we strive to drive awareness in the weeks ahead. Shifting gears now to the Territorial Bank of American Samoa, TBAS. You may recall that in our second quarter commentary, we discussed a significant traction made with 13% market share as the island's exclusive payment technology provider. Now at the end of the third quarter, we are excited to report that we have achieved nearly 50% market share. This is extremely significant for the island territory as they look to modernize their economy with our innovative stable coin and blockchain-based payment solutions. These cashless payment solutions reduce costs, improve settlement times, and introduced new level of security for the residents of the eye. The surge in market share over the short time since the deployment of our technology not only demonstrates the focus and diligence of our team, but also the appetite of developing economies for adopting our unique technology as a reliable and trusted solution. Our closed-loop Ryvyl ecosystem, in American Samoa, will serve as an ideal case study for our solutions and pave the way to take advantage of opportunities around the world. This leads me to another keynote achievement during the third quarter, but we expect to be a transformational growth driver for Ryvyl. October marked the launch of Kony, our USD page stable point, which is available for download on Google Play and the Apple App Store. Businesses and individuals alike can now enjoy the speed and security of blockchain payment transactions, along with the stability of the U.S. dollar from the palm of their hands and on their desktop. One of the most significant points of distinction is that Kony became one of the industry's few to ensure near real-time custodial account at the station via a lengthy review of IT, compliance, and specifically SOC2 compliance certification from Armanino, a top accounting, consulting and technology firm in the U.S. Now what does that mean? Each coin is digital token held in a wallet on the platform is matched with 1 U.S. held in a custodial account with a federally insured financial institution. The dollars back in Kony are not tied up in investments and are not converted to other cryptocurrencies. Competing stablecoins that have not utilized these safety and compliance measures have failed, leading to severe market disruptions. Speaking of this and the heightened attention to company balance sheet and cash flow in the current market environment, Ryvyl took the initiative to renegotiate and restructure the terms of our $100 million convertible note financing, which we originally entered into on November 2, 2021. Through cooperation with our noteholders, we were able to come to terms to expand the maturity by 1 year to November of 2024 while also securing a highly valuable option to pay interest in stock, therefore, reducing the cash interest expense burden and providing a significant improvement to our financials. Additionally, and again, in the context of today's market environment, I'd like to discuss our growth strategy. Historically, we have looked to grow organically and with select acquisitions to accumulate processing volumes, such as ShopSavvy, kyFinancial and key licensing assets like Transact Europe. In contrast, given the sowing cost of capital, raising funds to pursue acquisition no longer is as much of a focus. With the launch of Kony, our truly differentiated stable coin, our new brand identity, and increased global capabilities, we believe the best path to continue to quickly scale is through relationships with well-established payment companies that benefit from our advanced infrastructure and technology. In addition, we will continue to pursue select M&A strategies suitable for the current market conditions. As we continue to evolve our growth strategy, we will report more of the details of this shift. With this, I'd like to introduce Drew Byelick, our new Chief Financial Officer, whom we brought on board in the third quarter of 2022. Drew brings a tremendous depth and breadth of functional and industry experience with start-up and middle-market global software, technology, and other industries. We're truly thrilled to have his incredible experience on the team. Welcome, Drew, please take a moment to walk us through the details of our financial results.

Thank you for your kind introduction, Ben. I'm excited to be part of the team. My portion will be limited to key results of our financials. A full breakdown is available in our 10-Q filing and in the press release that will be distributed at a later date. Here, I'll be referring to adjusted EBITDA and other non-GAAP measures. For the calculation of the adjusted EBITDA and other non-GAAP measures, please refer to the 10-Q MD&A, which will be available on the company website under the SEC filings. Our Q3 revenue grew to a new company quarterly record, increasing by $2.6 million or 32% to $10.6 million for the first 3 months ended September 30, 2022, from $8 million for the first 3 months ended September 30, 2021. Revenue for the 9 months ended September 30, 2022, increased by $3.3 billion or 17% to $22.5 million from $19.2 million for the 9 months ended September 30, 2021. The change in net revenue includes $2.9 million in penalties and fees charged to merchants in accordance with our standard service agreement for transaction fraud and minimum activity fees. Also contributing to the year-over-year growth were increases in processing volumes compared to the same 3-month period in 2021, offset by lower commissions from a processing partner. Gross profit for the 3 months ended September 30, 2022, was $6.4 million or 59.8% of total net revenue compared to the gross profit of $5.6 million or 69.9% of total net revenue in the prior year same period. Gross profit for the 9 months ended September 30, 2022, was $11.5 million or 51.2% of total net revenue compared to gross profit of $13.8 million or 72.2% of total net revenue in the same quarter a year ago. Our cost of net revenue gross margin will be primarily driven by our negotiated commission structure with ISOs, which are independent sales organizations and gateway fees. The decrease in gross profit was primarily due to higher processing fees paid to gateways and commission payments to ISOs. Now let's shift gears to our operating expenses. Once again, I would like to point out that our operating expenses are not directly correlated with our net revenue, primarily because of our scalability of our revenue from a small number of employees due to our technology and the business we are in. We distinguish our operating expenses into 2 categories: ordinary operating expenses and noncash operating expenses. Ordinary operating expenses include marketing, research and development, payroll, professional fees, and general expenses, while noncash operating expenses include stock compensation expenses for employees and for service providers as well as including depreciation and amortization. Ordinary operating expenses were $6.5 million and $3.9 million for Q3 2022 and 2021, respectively, an increase of $2.6 million. Our ordinary operating expenses were $21.9 million and $9.2 million for the 9 months ended September 30, 2022 and 2021, respectively. The increase of $12.7 million was due primarily to software development, marketing expenses related to rebranding, and payroll and payroll taxes. Noncash operating expenses for 9 months ended September 30, 2022, decreased $9.2 million from the prior year 9 months due primarily to lower employee stock compensation and stock issued for services. We ended Q3 2022 with a loss from operations of $3.1 million compared to a loss of approximately $2.8 million in the same quarter of the prior year. For the 9 months ended September 30, 2022, we culminated with a loss from operations of $18 million compared to $12.2 million in the same period of the prior year. The increase in net loss from operations is due to increased operating expenses. Other expenses of $8 million for the 9 months ended September 30, 2022, increased by $4 million over the same period prior year. Interest expense related to the $100 million convertible note issued in November of 2021, amortization of discount fees associated with the note, and the derecognition expense on conversion of the convertible debt were offset by favorable changes in the fair value of derivative liability of $14.6 million for the 9 months ended September 30, 2022, and none in the previous year same quarter. The company sustained a net loss for the 9 months ended September 30, 2022, of $26.1 million or $0.59 per basic and diluted share compared to a net loss of $19.4 million or $0.49 per basic and diluted share in the same period the prior year. The company recorded a net loss in the third quarter of 2022 of $15.2 million or $0.32 per basic and diluted share compared to a net loss of $6 million or $0.14 per basic and diluted share in the same quarter a year ago. The increase in net loss for the 9 months and Q3 ended September 30, 2022, was primarily due to increases in research and development, interest, and other expenses related to the $100 million note general and administrative, payroll and payroll taxes and professional fees as we continue to add staff and infrastructure related to our growth, offset by the favorable change in the fair value of the derivative liability. Adjusted EBITDA for the third quarter was a loss of $0.1 million, just short of breakeven. We ended the quarter with cash and cash equivalents of $37.6 million as of September 30, 2022. And in summary, our financial position remains strong, and we remain well positioned for future growth and profitability. So with that, I'll turn the call over to Min Wei, our Chief Operating Officer, to provide a review of our business operations and the outlook for the balance of 2022.

Thank you, Drew. As I have done in prior conference calls, I would like to take this time to walk us through the material revenue contributors and provide an update first before turning to our outlook for the remainder of the year. Q3 volume across all channels is about $1.3 billion, about 35% ahead of our processing target for the time period. On a year-to-date basis, our processing volume hit nearly $3.1 billion, which is approximately 38% higher than our processing projection. Well compared to the volume for the same 9 months of 2021, we are looking at a 98% improvement. Our acquiring business Q3 volume, including the Sky financial portfolio is $685 million, which exceeded our expectations by about 12%. ShopSavvy is also approximately 14% higher than planned, processing $64 million in Q3. When compared to the same period in 2021, this quarter's volume is 42% more favorable. In our ACH business, we saw a 47% increase over Q2, with volume at $25 million in Q3. We are currently in the process of moving our service to a new processing channel to increase processing capacity. As a result, we are behind the targeted monthly volume of $50 million. When the new platform is ready in Q4, we expect processing to pick up steam. For our FX and international payments business line, including Transit Europe, we reported over $500 million in business volume, of which $480 million is attributable to FX conversion and international payments transactions. This volume is 53% higher than our original budget estimates for the quarter. Now let's update on American Samoa. We are incredibly pleased to share that our services have been rolled out to over 240 merchants, representing approximately 50% of the overall merchant target market. This Phase I goal was achieved ahead of our schedule. And in Q3, we were able to process nearly $17 million for the businesses and residents on the item. This is an amazing accomplishment as we literally launched from a 0 baseline at the beginning of Q2. Getting back to Kony, our development, marketing, and operations teams work days, nights, and weekends to launch the platform on time and as promised before the end of Q3. Since the initial launch, we rolled out the platform on both the iOS and Android apps on October 12. As part of the Kony technology, we additionally designed the system to have foreign exchange and international payments capabilities, which we plan to be fully integrated into Kony as an FX module. While the module is not fully integrated, the starting volume of $480 million in the quarter gave us confidence about its potential in the international payments business. In addition, we are scheduled to enable Kony with a second banking partner in Q4, which will allow us to accelerate the onboarding of domestic volume on the Kony. We ask that you stay tuned for more to follow on this development next quarter. With a strong performance thus far, I'd like to share our current estimates for the remaining year. For processing volume, we closed the first 3 quarters at $3.1 billion and expect to process $1.1 billion to $1.3 billion in Q4, projecting a total 2022 volume around $4.2 billion to $4.4 billion. This is in line with our total year target of $46 billion. Revenue from processing in Q3 is $10.6 million, including regular processing revenue of $7.8 million and a onetime fees of $2.9 million from legacy accounts. We expect to see a solid Q4 and project a total year revenue at $32 million to $35 million. For adjusted pro forma EBITDA, our Q3 adjusted EBITDA is minus $0.1 million, which is just a tick below the breakeven target for the quarter. We're very proud to have accomplished this major improvement from last quarter's negative $4.9 million. Our updated Q4 projection for adjusted EBITDA is around 0 to a positive $3 million. Overall, we hit the vast majority of our operating and processing goals in Q3, launched the Kony platform as scheduled, and remain truly optimistic about our near-term growth trajectory. With this, I would like to now turn the call back over to Ben Errez, our Chairman, to begin our Q&A.

To the folks listening on today's call, thank you for your interest and commitment to Ryvyl. We are genuinely grateful for your ongoing support. With that, I'd like to begin our Q&A session. In addition to Drew, Min and myself, other members of our executive leadership team, including our CEO, Fredi Nisan; and CMO, Jacqueline Reynolds, are on hand to answer questions. Operator, please begin. Thank you so much.

[Operator Instructions] Our first question is Howard Halpern with Taglich Brothers.

Congratulations guys on achieving a lot during the quarter. Based on Q3 results that we see out there, have we really reached in this year an inflection point in the gross margin trajectory, and that we'll start seeing it creep into the low 60s from where you are in the third quarter?

I will direct this question to Min. This is part of the projections for Q4 and next year. Min, go ahead.

Howard, thank you for the quick question. I would say, yes, indeed, for our Q3 we bought about $1.3 billion of volume. We actually opened to even hit beyond the 60 basis points, as you referenced. As a result of that, we're able to get to pretty much a breakeven adjusted EBITDA number for the quarter, right? So we expect to see further improved gross margin contribution coming up.

And that's from a reduction in expenses related to ISOs and gateways and you're able to do it more or less more on your own?

Well, it's a combination of a few things. It's comprised of further improved gross margin because we're able to process more and continue to drive gross margin out of the high-risk acquiring space of the business. But obviously, on the cost control side, we continue to monitor closely as we launch the Kony platform, we are rightsizing the continuing on the product development efforts as well as other costs for operations.

Okay. And now in terms of Kony, I don't know if you've officially disclosed how much funding have you put in to at least your initial bank? And are you looking for partners to put money in escrow for the second partner?

I will take that question, Howard. So Kony moving forward is focused on a B2B vertical. And as such, it is in self-funding. Therefore, we would not be seeking additional funding for it at this time.

Okay. That sounds really good. And in terms of how you've gained momentum with American Samoa, what have you been receiving or what kind of feedback have you been receiving from the merchants? I don't know whether you'd receive it from the customers, but what is the reception so far that you are receiving from your operations there?

I will direct that question again to Min.

That is a great question, Howard. As mentioned on the call earlier, we achieved basically 50% of the targeted merchant base. On the island, the experience of has been fantastic. The volume of the payment processing business on the island has grown from basically 0 to close to $8 million on a monthly basis just within a number of months. We've been collecting feedback from the merchants, including restaurants, like McDonalds [indiscernible] collecting feedback directly through our banking partner, Territorian Bank of American Samoa. It's what we see so far, our partners expect to receive further volume coming up in the next quarter or 2. So all it's going well.

Okay. And I guess since you're sort of almost like kind of halfway into the American Samoa, are there others now that are developing in the pipeline that might occur next year? Or are you waiting to develop that pipeline until American Samoa is fully deployed?

Thanks again for a thoughtful question, Howard. This is Ben. Yes, we do see a potential and already inquiries by other similar systems. Closed-loop systems are all over the world. We have been approached by several to duplicate the success in technology platforms for American Samoa. We will discuss those in due course. They are not yet at the point where we would disclose any of that. But definitely, we have several opportunities on the table.

Okay. And then one technical financial question. I see with the change, I guess, in the convertible debt and interest expense, debt discount dropping significantly in this quarter. I haven't looked at the Q yet, but could we see that basically diminishing towards 0 from the $437,000 that we recorded in the third quarter?

I will direct that question to our Chief Financial Officer, Drew.

Sorry, it's on mute. With the conversion of parts of the debt to stock, we have taken the discounts and derivatives values down and recognized an expense related to those -- the reduction in debt. The interest rate obviously is affected by the reduction in the debt. So -- but the conversion is not -- we can't predict the rate of conversion from the debtholders at this particular point in time.

Right. But the debt discount part of it, that should stay now because you've already assumed that in the debt that you've already taken most of that?

The discount was reduced by the reduction in the debt in the quarter.

Okay. That sounds great, and you guys just keep up the great work.

Thanks, Howard. Operator, who's next?

Our next question is from Kevin Dede with H.C. Wainwright.

Ben, maybe sort of too high level for this call, you can kick it if you don't want to deal with it. But could you just run through a transaction example that illustrates how Kony is self-funded?

I will direct this question to CEO, Fredi Nisan.

Howard, thank you for the question. Kevin, sorry. From Wainwright, sorry about that. So Kony in the B2B space, the way transaction are coming in is B2B, our business will fund Kony wallet with the amount we want and then request to do certain things, for example, FX, send money, invoices, everything related to business or payout vendors or other different businesses, you will find his own wallet. When it comes from a critical processing, we basically hold the money for 24 hours and then release when we get the funds. So the ecosystem is funding itself. We do have instant funding is needed and then we can access a liquidity if needed. But at this point, we don't see it happen.

The New York Fed, and I'm sure you've seen this, has recently started testing, not just a central bank digital coin but also a tokenized blockchain-backed transaction processing engine that seemed to me to be very similar to the one that you folks have developed. Can you help me understand how should their test be successful, how you'd expect -- how do you expect vendors to come to your platform versus using one that was offered by the Fed?

Kevin, thanks for this question. So this is my view. I think that development is a great thing for Kony. The feature is necessary next step for the industry in general, and we'll continue to grab legitimacy traction as a larger player enter the space and the government steps up the regulatory oversight. Kony can provide the same or superior technology as an equalizing agent, so that smaller banks can have the same capabilities as this major player. Kony's infrastructure is built to be able to integrate with the pilot or the larger banks down the track. We expect this trend to continue as this pilot program takes place.

Okay. Sort of taking a step back and looking at your objectives this year, you're basing your -- I mean, obviously, right, we're halfway through the quarter, but you're not expecting to close any acquisitions through balance of this year. Could you characterize -- I mean, I know in your prepared remarks, Ben, you spoke to the opportunity. I'm just hoping, given sort of the general reset and valuations, you could give us your perspective on how that market looks. And what type of currency you would use to pull the trigger on a new deal?

And again, thanks for this insight. So obviously, as we are all interfacing dry powder in the capital market standard debt and equity raises are less likely. This does not mean that M&A activity is halt to stop. We are still looking at several opportunities. Obviously, these opportunities will need to be in the context of both the $100 million existing notes on our books and an opportunity to reset market cap when we join forces with other accretive businesses. Although you are correct in saying that it is highly unlikely that Q4 will see a completion of such activity. We do think that the days when this will happen are nearing. And I do expect that to happen in the near future, maybe in the next couple of quarters.

Can you just give us an idea of how you see the target environment? Do you just think there are, I guess, privately held companies that have investors that are looking for an exit or maybe the management teams there realize that there's a better opportunity in scale... And...

The second is more likely. We will not be looking to provide an exit to anybody. That business -- potential business that we're discussing here will have to be something that is extremely accretive to our business model, our business lines and perhaps provide traction in a vertical that we don't have today. Also, it has to be accretive to scaling for both GreenBox and Ryvyl and this potential partner. Also, as I look into this opportunity, obviously, I'm looking at rebalancing of equity through a true-up event, meaning some metrics to value will have to be revisited down the road, maybe 12 months, maybe 24 months, such that the accretive additions to both businesses will have to be realized in the future. We anticipate the current equity market to remain stagnant as they are now for some duration, maybe 4 or 5 quarters down the road, and we will act accordingly. We would seek to do a rebalancing to us after that.

Okay. Could you offer just a high-level view on your sales and marketing approach, given where Kony is now, where you're processing business is here in the U.S., the opportunity to engage further, both with credit cards and on the Forex side and obviously, the touch on businesses you have in Europe?

Okay. I will direct that question to Min.