Greenbox POS

Good afternoon, ladies and gentlemen, and welcome to the Greenbox POS Second Quarter 2021 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following management remarks, the conference will be opened for questions. 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 quarter ended June 30, 2021, was filed with the SEC today. On our call today is Greenbox POS's Chairman, Ben Erez, and Chief Financial Officer, Ben Chung. I'd like to remind everyone that statements made on today's call 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 replay on the company's website under the events section. At this time, I'd like to turn the call over to Ben Erez, the company's chairman. Ben, the floor is yours.

Thank you, operator, and thank you all for joining us today. I'd like to welcome you to the Greenbox POS second quarter 2021 financial results conference call. The second quarter of 2021 was a very productive and successful quarter for Greenbox. We continue to expand our core business merchant processing volume portfolios, deployed our new smart contract token technology, and made several major announcements demonstrating our progress towards continued execution of our long-term global strategy. I would like to thank the Greenbox team for their tireless efforts to move our business forward as we work to disrupt the payment landscape amidst a rapidly growing and evolving market with our blockchain and smart contract stablecoin technology. I would like to walk through some of the key operational highlights and the fundamental developments. We achieved another record-setting quarter, processing over $440 million in transaction volume. As a reminder, this excludes the impact of the charge-savvy acquisition, which was closed in July. This also speaks to successful deployment of Gen3 in the first quarter of this year, which dramatically improved the efficiency of onboarding merchant portfolios and paved the way for a large-scale processing volume seen in the first half of 2021. We also announced several strategic initiatives this quarter that should act as a roadmap for visualizing our long-term growth strategy. First, we completed two acquisitions, Charge Savvy and Northeast Merchant Services, while announcing a third, the pending acquisition of Transact Europe. ChargeSavvy brings a robust processing volume portfolio and POS technology solutions, while Northeast Merchant Services added a book of retail business, estimated to be $145 million in processing volume annually, and a much coveted bin, which will allow Greenbox to act as an acquiring bank. The bin is particularly important as it allows us greater flexibility in managing risk and bringing on large processing volumes quickly. We also entered into a binding MOU for the acquisition of Transact Europe, for which regulatory approval is pending and expected to be completed within 30 to 60 days. This strategic acquisition, if completed, is expected to provide Greenbox with the pathway for rapid expansion into the European market by leveraging Transact Europe's principal level membership of Visa, worldwide membership of MasterCard, a principal member of China Union Pay on top of that. Given Europe's large void in the payment processing space due to the departure of Wirecard, we believe that our technology paired with the right licensing assets, will position Greenbox as a key player in that region. The acquisition is also expected to be accretive, and management compensation will be based on processing volume hurdles that we believe will drive transaction volume and ultimately the adoption of COINI, or smart contract stable coins. Global expansion remains a core objective of Greenbox and will be key to the adoption and growth of our payment and smart contract token technologies. Aside from acquisitions, partnerships will also be an important component of our growth strategy. One such partnership we are pleased to form this quarter is with the Territorial Bank of American Samoa. where we expect to launch a fully customized financial solution to support the entire island of American Samoa. This is a great opportunity to showcase the impact of an adoption of our technologies in a closed-loop system. The initial proof of concept will be fully dependent on the Greenbox ecosystem, which supports merchant services, peer-to-peer payments, electronic bank transfers, ATM, blockchain ledger financial banking, card issuance, and banking-related services. The possibility for Greenbox, through a proof of concept, to ultimately be recognized as a provider for the island's financial services would be an important demonstration of our ecosystems. Another opportune partnership is an example of how our technology can be applied through joint development partnerships. As an example, IS Media will build an NFT platform for blockchain settled visual assets trading. Greenbox will provide the payment gateway and the payment settlement solutions for that platform, while IS Media will develops the NFT platform user interface and user experience. You can expect to see more of these types of partnerships that expand both the processing on our blockchain technology and also create demand for coin. As I mentioned last week on our stablecoin spin-off call, we are most excited about the opportunity that lies ahead with our smart contract technology, branded as Koine. We announced the pilot launch of Koine for early adopters during the second quarter and deposited $5 million into our token custodial signature bank. Currently, transactions are B2B as we test the technology and custodial architecture. Person-to-person deployment is set to be released shortly. and already is being tested internally here. Ultimately, we expect the key growth drivers for our Coinie business to be person-to-person and B2C transaction adoption. By allowing consumers and businesses to transact settled payments and money transfers instantly on our secure blockchain ledger, We believe we are well positioned to achieve significant adoption quickly. All of the discussed acquisitions and partnerships, in addition to the plans to continue these strategic initiatives, provide context for how we intend to build our coin platform into a separate spin-off publicly traded company. We are also evaluating several options to increase the funding of the revolver capital needed for the rapid scaling of our business. We will provide an update on that shortly. On the capital market front, Greenbox stock has been added to the Russell 2000 and the Russell Microcap Index in June. We announced a share buyback program that is still in effect. and a special dividend series based on the planned spinoff and an IPO of our coin platform towards the end of this year. We remain committed to embracing the investment community and our shareholder base by attending conferences and hosting strategic conference calls to more effectively communicate our vision. I'd like to now turn the call over to our Chief Financial Officer, Ben Chang, to walk through some of the key financial highlights from the second quarter of 2021.

Thank you, Ben, for that. Just as a reminder, as I mentioned on the prior earnings call, the company raised substantial amount of capital through our offering in February of this year. which brought us net capital raise of approximately $46 million. This new capital has helped us tremendously for working capital to hire talented people, but more importantly, expedite our enhancements and continuous development of our new token technology, including onboarding process with our customers, including with the rollout of our token technology. Before I go through our quarterly results, I would like to point out that we are a calendar year-end company. Therefore, our second quarter of 2021 is for the three-month end of June 30, 2021. I'm now going to go through our quarter-end results. We had a tremendous net revenue growth due to increased processing volume with our merchants, and we will continue to have growth in our processing volume throughout the year. Our six months ended June 30, 2021 was 11.1 million compared to 2.5 million in the prior same period. An increase of 8.6 million due to strong processing volume. Our second quarter of 2021 quarter had a very strong quarter with net revenue of 6.4 million compared to 2.3 million in the prior year same quarter. which is an increase of 4.1 million primarily due to strong processing volume. Our processing volume for six months ended and three months ended June 30, 2021 was approximately 800 million and 440 million respectively. We had quarter to quarter increase in processing volume comparing to Q1, 2021 and Q2 2021, an increase of $80 million processing volume from $360 million in Q1 2021 to $440 million in Q2 2021. We expect continued quarter-to-quarter growth in the processing volume throughout the rest of the year. Our gross profit was $5.1 million for the second quarter of 2021 compared to $0.9 million in the same quarter prior year, an increase of $4.2 million. For the six months ended June 30, 2021, our gross profit was $8.2 million compared to $0.9 million in the same period, an increase of $7.3 million. Our gross margin was 79% in the second quarter of 2021, compared to 40% gross margin in the same quarter of prior year, primarily due to higher net revenue and improved efficiency in the current quarter compared to the same quarter of prior year. We expect to hold gross margin of between 60 and 70% throughout the rest of the year. Our margin will be primarily driven by our negotiated commission structure with our ISOs, which are independent sales organizations and gateway fees. I would like to now discuss about operating expenses. And more importantly, 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 small number of employees due to our technology and the business we are in. Furthermore, when I talk about operating expenses, I would like to put them into two categories, our normal operating expenses and non-cash operating expenses. The first category of our normal operating expenses includes marketing, research and development, payroll, professional, and general expenses, while the second category includes stock compensation expenses for employees and for services, including depreciation. Our normal operating expense was $3.1 million and $1.1 million for the second quarter of 2021 and 2020, respectively, an increase of $2.0 million primarily due to increase in research and development related to token technology, payroll related to increase in headcount, and professional fees related to compliance. Our non-cash operating expenses primarily relate to stock compensation expense, for employees and services. Our stock compensation expense for services are non-recurring charges which we expect not to incur going forward. We ended our loss from operations for the second quarter of 2021 of $0.0 million compared to $0.2 million in the same quarter prior year. If our non-cash operating expenses such as stock compensation expense for employees and services and depreciation are added back, we had net income from operations of 2.0 million for the second quarter of 2021 and break even in the same quarter prior year, and 2.9 million for the six months end at June 30, 2021, and a loss of 1.4 million in the same period in the prior year. I would now like to go through our other expense category. Our other income or expense for the second quarter of 2021 was approximately none compared to $5.2 million of other income in the same quarter prior year. The $5.2 million of other income in the same quarter prior year was primarily due to non-cash income due to changes and gain in fair value of derivative liability and gain and extinguishment of convertible debt. Our other expense for six months ended June 30, 2021 was $4.0 million of which 0.6 million was related to interest expense, 3.0 million related to debt discount, and 0.4 million for merchant liability settlement expense compared to 1.1 million of other income in the six months ended June 30, 2020. Our overall net loss was 0.0 million for the second quarter of 2021 compared to 4.9 million of net income in the same quarter prior year. Our overall net loss was 13.4 million for the six months ended June 30th, 2021 compared to 0.3 million of net loss in the same period prior year. Our adjusted EBITDA, a non-GAAP measure for the second quarter of 2021 was $2.0 million compared to a loss of $0.2 million in the same quarter prior year and $0.5 million in Q1 2021. You can find reconciliation in our earnings press release related to the non-GAAP adjustment. Our cash flows from operating expense was negative of $13.7 million for the six months ended June 30, 2021, compared to a positive cash flows of $0.5 million in the same period prior year. The negative operating cash flows was primarily due to timing of settlement of gateways and merchants. We had cash balance of $29.8 million at the end of the current quarter. Overall, we believe our financial position is strong, and we remain well positioned for future growth and profitability. I'll now turn the call back to Ben Erez for our outlook.

Thank you, Ben. Before I remark on 2020 Outlook, I would like to remind everyone again about our strategic portfolio onboarding. In order for Greenbox to maintain compliance with credit card issuers and PASIC license requirements during our accelerated portfolio onboarding, we need to onboard ultra-low and low-risk portfolio at times onto our platform prior to increasing the medium to high risk processing volumes. This has impacted our financial results in the first half and our predominantly low risk onboarding. This does not change our full year revenue or our net income outlook. To provide an updated 2021 outlook, given our first half growth trajectory and acquisitions that we have closed, we expect 2021 processing volume of $1.85 billion, slightly higher than previously projected, leading to gross revenues of $58 million and adjusted EBITDA of at least $20 million. This does not include the impact from our stablecoin launch or any of the acquisitions mentioned today. As we announced earlier this afternoon in a press release, we have decided to delay the first record date of our special dividend series related to our Coinish spin code. The first recorded date will not be on Monday, August 16th. Rather, we will announce the first record date at least 10 calendar days prior to its implementation. As mentioned in our press release forward-looking statements, Among the factors that could affect the timing of the first record date is the receipt of the required regulatory approval and consent. While we continue our analysis of the strategies and record dates related to the special dividend series, we also continue to make progress on the regulatory approval and special dividend series. This is a very exciting time for Greenbox POS, and I look forward to continuing to diligently execute on our strategy in the months ahead as we seek to create sustainable long-term value for our shareholders. With that, I'll turn over to the operators to begin the Q&A session of this call. Operator?

Thank you very much. We do welcome questions or comments. To register, please press 1-4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered or you would like to withdraw a registration, please press 1-3. Again, to register questions, please press 1-4 on your telephone. One moment please for the first question. And our first question comes from Chris Sakai of Singular Research. Please proceed with your question.

Hi, Ben. I've got a question, I guess, with the acquisition of Transact Europe. Do you have any idea or could you share any sort of color on how much processing volume this might bring in the future?

Yes, so Transact Europe is an acquisition that is a successful one on multiple levels. So not only is it positioning Greenbox to execute on a licensed broadband transactional volumes in Europe, but also positions it to fill in the void of the likes of Wirecard and encapsulate all of these volumes that are desperately looking for a home in Europe because of the demise of Wirecard. So, as such, the acquisition of Transact Europe was structured so that the majority of the upside to the operators depends on earnouts towards the processing of new volumes on Greenbox and Koine infrastructure, beginning from $100 million of new business per month all the way through $1 billion per month of new volumes. This essentially puts Koine as a transactional platform that is a stablecoin-based at the same order of magnitude as Circle and USDC, its primary competitor, and also positions Coinie as a direct competitor to Venmo in its ability to transfer money between individuals and between individuals and businesses alike in any amount and across any geography. And I will just remind you, Chris, and others on this call that Circo is doing an IPO very similar to the Koine IPO at a $4.5 billion in enterprise value just in November of this year with a plan

uh ipo proceeds of just about 700 million very successful ipo uh we would definitely like uh coiny to be positioned uh in the same order of magnitude okay great just um to go into the i guess the the way the earn out is structured so 100 million is is the minimum uh amount per month what are the chances of of of them making that, at least 100 million?

The chances are very good. We already have an onboarding backlog awaiting the completion of that transaction in excess of that hurdle. I don't want to get into specific numbers, but it's greater than this first hurdle of 100 million of new business per month.

Okay. Okay, great. And then I guess lastly, do you have any sort of timeline on when you start to receive processing volume from American Samoa?

Yes, American Samoa is in the final phases of integration and installation of a green box technology. You know, the American Samoa GDP is approximately 600 million per year. It's not very large, but it's large enough. But remember that COINI also benefits from the type of transactions that do not contribute to the GDP of that system, such as the transfer between individuals. So we anticipate an exposure to about a billion dollars per year in volumes. However, the big deal about doing a technology solution for a closed-loop system is that it's a proof of concept of the Greenbox ecosystem. to provide complete solutions for entire governments, entire countries, islands. So this is where we see the primary win in this collaboration. And this collaboration will increase within American Samoa and will be announced in a separate conversation.

Do you have any other islands or countries like this in your view?

Not yet. But we anticipate that a successful execution in American Samoa will lead to a lot of other such communities that share the need for the same type of solutions. It's extremely meaningful for the local economy. It makes it a lot more efficient. It reduces the cost to consumers. And it's a welcome change across the board. Sort of a perfect storm of adoption potential. Very much looking forward to execution in American Samoa.

Okay, great. Well, thanks for that, Ben. Yeah, thanks, Chris. I appreciate it.

And our next question comes from the line of Jamie DeYoung of Goudy Park Capital. Please proceed with your question.

Thank you. Good afternoon. Congratulations on the continued improvement in the results. If I'm not mistaken, it looks like operating cash came down from 11.25 burn in the first quarter to 2.4 in the second quarter. So that was nice to see. Do you expect that to continue in the second half of the year, or do you think cash burn will likely accelerate as you make some further investments in the business?

Thanks for the question, Jamie. I'm going to let Ben C. take the initial tack on this, and then I will add my comments on top of that.

Ben, go ahead. So we expect for the next six months to actually kind of flatten out in our net cash spending because our volume is increasing quarter to quarter. Our net profits increasing quarter to quarter. Our primarily spending is really hiring the talented people, which we have hired some significant, you know, key members. And, you know, going through some of the, you know, spendings on research and development and compliance. But for the next six months, I don't think our cash is going to go down significantly. And what I mean by that is I don't think it's going to be below 20 million. Right now it's at 29.5 million. But in fact, you know, if our volume and our acquisitions substantiate, then we might have an increase in net cash flows. The reason our cash flows went down is primarily the timing of our settlement with our gateways and our merchants. And that's why when you look at our receivable, from gateways and payable to processing centers, we have a networking capital of about $10 to $15 million, and that's where the cash kind of went.

Understood. But essentially, there's plenty of cash on the balance sheet to fund the ongoing operations of the core business that would not need to be a capital raise for for the core business, correct? Core business, that's correct. You are correct. Yeah.

I want to add to that, Jamie, that although for operations we will not need any capital raising, we do plan on taking advantage of the particular situation and set up that results from the COINI spin-off opportunity. We will raise additional capital, but towards that, I would like to repeat my previous commitment that the company will not entertain raising equity capital at this level of the equity prices. Our shares, as we see it, are unfairly valued. And we're not sellers of the shares at this level. In fact, we are buyers of it. And we intend to dramatically increase our buying should the stock remain as I called it, unfairly valued.

Sure. And just also to clarify, our fund owns north of a million shares in the company and continue to be strong advocates of the company. And not only would you not raise equity at these prices, you certainly wouldn't be sellers of your own stock when your lockup expires in the coming weeks.

Yeah, we're not even looking at that and no insider is planning any sales. In fact, we are all accumulating. This is something that for us is part of our long-term planning. In particular, As you know, Freddie and I are the co-founders of Greenbox, own the majority shares of the company, and we intend to stay majority owners. We've worked very hard over the past five years to be very tight with the way we share equity. This is a strategy that has not changed and will not change in the near future.

One last question for me is, do you have any update on the relationship with Fiserv? Has that integration been completed or is that still ongoing?

So my personal estimate is that towards the end of the month, we will be able to formally announce the launch of the joint platform. and begin large-scale processing on this platform jointly with Faisal. I know that this has been taking longer than anticipated so far, but that's the nature of the beast, and we finally see the light at the end of the tunnel. So we will continue and push for this integration completion. And as I said, give us three weeks and we'll formally announce the large-scale processing begin.

Okay, great. Well, thanks for the update and congratulations on the continued progress.

Thanks, Jamie, and I appreciate your commitment and support of the company.

Thank you. And as a final reminder to register questions, please press the one followed by the four on your telephone. And there don't appear to be any further questions in the queue. This concludes our question and answer session at this time. I would now like to turn the call back over to Mr. Ben Erez for closing remarks. Please go ahead.

Thank you, Operator. I would like to thank all of you for joining our earning conference call today. We look forward to continuing to update you on an ongoing basis on progress and growth. If we were unable to answer any of your questions, please reach out to our IR firm, MZ Group, who would be more than happy to assist. With this, I conclude our session today. Thank you all for participating. Back to you, operator.

Thank you very much. And that does conclude today's presentation. We do thank you for your participation and ask that you please disconnect your lines. Have a great rest of the day, everyone.