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spk02: Welcome to the Positbit Systems Corporation Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Chris Baker. You may begin.
spk03: 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 21 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 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 file reports, as well as in other reports that the company files from time to time with CDAR. 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 that 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 compatible 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.
spk01: 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 struggled, both public and privately held companies. Thankfully, over the past nine and a half years since our inception, the positive 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 one-time 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've 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 Canvas industry. This deal represented over $20 million in revenue and cash deposited over a four-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. All right, we'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 one-time licensing revenue that we recognize 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, Positive Now offers five different payment options for dispensaries. Not only that, but we recently introduced Positive One, an all-in-one device that can run up to three 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 positive 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 Positive 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 six months, we have been hyper-focused on realigning our valuable resources to match our top revenue projects. This also gave us a chance to assess our efficiencies and frankly, get lean. Part of this involved two layoffs over the last six months, which are always painful, but also healthy and necessary at times. We have since increased our internal efficiency, reduced our overall costs, and are now tracking to being cashflow 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 we're 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. Positive has been working to advance the proposed listing of our common shares on the TSX-V Venture Exchange, or what people call the TSX-V. The company remains focused and committed on satisfying applicable regulatory and TSX-V listing requirements. The listing of the common shares on the TSX-V is, of course, contingent on the satisfaction of all listing requirements, and there is no assurance that the TSX-V will approve the company's listing application, or for that matter, that the company will complete the listing on the TSX-V. That's 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 when we do our Q1 call. I do want to talk about some really exciting news of the potential rescheduling of cannabis as a Schedule III drug and what that will mean for POSIBIT. I'm sure you've all Googled and read about it, 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's also talk that this is going to open up banking and even for credit card processing. At the end of the day, the credit card brands, as you know, will be Sin MasterCard. They'll have the final say and will decide if they will allow Schedule III 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 Positivit has already taken care of it. We look forward to seeing Canvas finally get rescheduled or descheduled and are excited for the massive increase in processing volume this will create for Positivit and the increase in additional cash due to 280 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.
spk00: Thank you, Ryan. Before we get into our 2023 financial performances, Please note, as part of the company's year-end audit, it was determined that the calculation error in the discount rate associated with the 2022 software license agreement should be increased from approximately 2.8% to 12%. The software license agreement has a discount rate applied if the agreement spans 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 discount rate will not affect the overall cash economic or timing of cash received from the license agreement. With that, I'll move into our performance for the 12 months ended December 31st, 2023. Transactional sales to our payments platform were $536.3 million, up 2.5% compared with $523.2 million in 2020-2022. Transactional sales is a non-accuracy 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 from our licensing agreement, total revenue was $43.69 million in 2023 compared to $35.3 million in 2022, an increase of 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 the large licensing revenue we 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 hiring that has taken place over the last 12 months in non-cash stock compensations. Administrative expenses were $13.1 million for 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 non-cash impairment of intangible assets in Goodwill tied to the hyperacquisition. This was partially offset by the non-cash change in the fair value of derivative liabilities. This compares with net income of $5.4 million, inclusive of the impact of a $4 million non-cash change in the fair value of derivative liabilities in 2022. The market-to-market of embedded derivative liabilities is tied to our convertible debt and is a non-cash accounting injury required by IFRS. It can cause significant differences in net income or loss year-over-year. Fluctuations in this live item or income statement may be more extreme during periods of increased volatility in the price of the company's stock. At the end of December 2023, all outstanding convertible debt was retained. This means that the company no longer has embedded derivatives liabilities, and you will not see the non-cash impact event on our financial performance going forward. Adjusted EBITDA was a loss of $5.7 billion. 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 on December 31st was $1.5 million. This compares to $3 million at the end of 2022. Our debt balance remains low at $4.6 million of debt consisting of an SBA loan and a five-year term loan payable in 2028. With that, I'll turn the call back to you, Ryan, for closing remarks.
spk01: 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 three years. Matt's done a great job in helping Advance Positive to its next phase of growth, and I know personally he's moving on to 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. Thanks, Matt. Going forward, I will be joined on this call by Stephen Glendale, who is coming back to Positivate as our new CFO. Stephen was with us as our CFO when we first went public on the CSE back in 2019, and has since stayed on as an advisor even after Matt joined three years ago. I know given his knowledge of Positivate 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 has 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 asked for questions to be submitted ahead of time to our investors at positive.com email alias. We gathered those questions, thank you for all those that sent in, and I'm now going to address the top 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. If for some reason when I'm done, your particular question wasn't answered, please just follow up with an email to investors at positive.com, and then we'll get back to you in an email or we can set up a call. All right, so let's jump into the question. The first question, surprisingly, is about our restatement of our 2022 earnings. I think Matt and I both... did a pretty good job at kind of walking this through, but the question was, please summarize why POSIDENT had to restate and what specific impact the revenue gross margin was in the 22-02 restatement. So, as we said, our new auditors this year discovered that the discount rate used last year was not ideal with 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 went down by approximately $3 million. And then this discount rate will shift as we go forward, as we mentioned, some of our future revenue from license to interest income on our statements. But again, I know we've said this, it doesn't affect our overall cash. uh economics of the deal or any sort of timing of the cash coming into the license agreement so i think after that we've uh kind of talked about that for about three times now so if you have more questions please do reach out but hopefully that answers the restatement question all right the next question given the disruptions you had in payment processing last year do you expect similar disruptions this year and if so what are you doing to prepare for well great question um obviously we uh on our leadership team often ask ourselves this question and make sure we're prepared. And I think what we all have learned and I know I've learned over the last nine years is you can never say never. So, you know, what we have to do is just give our best chance at sustained stability. And in order to do that, we implemented five different payment methods, like I mentioned. And so we believe that the redundancy of these backup methods is really the name of the game until rescheduling and safe banking happens. I guess to answer the question, will another disruption happen? You know, 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? Yeah, great question and I guess I'll answer it a couple 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, make some tough calls, 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 product like a point of sale as their main source of income. Dispensaries that I talk to, everybody's tight in 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 that endless supply of investor funds are in a better position to not only survive, but take over as the leaders in the space. I know that if you look at the competition, many of those large privately held companies, they had these historic large valuations, which frankly now makes it pretty much impossible for them to raise some new money. Thankfully, that's not the position that we're in here at Positive. All right. Next question. Do you anticipate any changes specific to rescheduling or state banking happen before the presidential election in November? This one's 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 timeline, 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 revenue run rates 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 what pays the bills. And so, you know, you're going to see our gross margin somewhere in the upper 40s versus right now, if you look at our financials this last year, we were like 21%. I'll also mention that the cost-saving measures that we did over the last six 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. Let's see here. In November, you hosted an update call with investors about the recent disruption of debits. You mentioned that you had plans to be back up to 100% by the end of the year. Did that happen, and what was the timeline of events? I'm actually glad somebody asked that. In fact, I got that question from a couple of you. So I think this is good context for everyone to have. After that call, we were 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. Thankfully, in November, we had already started to look for other payment providers. In 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. 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 or 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 positive in this industry. When rescheduling happens, it removes a lot of these roadblocks and all these frustrations that we've had over the last several years. Um, usually it's at this point where the, uh, when I answer this question and investor will stop me and say, okay, yeah, right. But doesn't, 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 three 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 said big guys, like the square, the toast, et cetera. They're probably not going to entertain this until cannabis is fully legal in the U.S., not just a Schedule III 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's 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, when we go into our Q1. All right, 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, do you anticipate needing 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 the press release, we've already secured 600K on a secure 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 a million dollars. So we're in the process, 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 Positbit 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, you know, 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, yeah, 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 400K 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 the best news is we have lower costs. 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, what, whatever we are now, a $20 million valuation, but yet we just announced over double that in revenue of $43 million. We announced we're 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 it 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 our head down continue to execute and you know 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 uh for staying on the line um Let me know how you enjoyed this Q&A session. Again, we tried to get all of the questions, as many as we could, answered. Again, if I missed any and you feel like you want to get an answer, email me or email investors.positive.com, and we'll get back to you. Obviously, all of our financials are in DNA. The press releases are all out on CDAR, so I'd 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.
spk02: This does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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