Posabit Systems Corp

Good day, and welcome to the Positbit Systems Corporation first quarter 2024 earnings call. All participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Oscar Dahl. The floor is yours.

Thank you, Operator. With me on this call are Ryan Hamlin, Chief Executive Officer, and Chelsea Bolander, Positbit'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 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 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 to reflect subsequent knowledge, events, or circumstances. The company may 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 gross revenue minus license support revenue plus actual licensing cash received as part of its licensing deals. The company defines adjusted gross profit as adjusted revenue less company cost of goods sold The company defines adjusted EFA 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 for an exchange gains and or losses and impairments. The company believes these non-IFRS measures are useful metrics to evaluate its core operating performance and uses these measures to provide shareholders and others with supplemental measures of its 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. Welcome, everyone. As always, a reminder, all the numbers I'm going to be talking about today are in US dollars. So I know we were just on the phone a few weeks ago when we announced our 2023 year-end earnings. So a lot of the topics, frankly, haven't changed a whole lot over the last couple weeks. But where things have changed, I'll highlight it today on the call. And then after I get done and Chelsea gets done, we'll open up for some questions. I would encourage everyone who hasn't reviewed our year-end financials and the MD&A out on CDAR for 2023 to do so. A bunch of questions came in, I know, and a lot of those questions are answered in our annual 2023 filings on CDAR. So as a reminder, you can always go to CDAR and grab those. I bring up the 2023 financials because I want to address up front what I'll say to the elephant in the room, which is, holy cow, Ryan, You know, your top line revenue really went down this quarter. Why? So there are a couple of big reasons for this decline. The first of which is due to the payment challenges we had at the end of 2023 and even the beginning of 2024. So whenever Software Services has a major change like we did with our payment services that lasted about four months starting at the end of 24 and going, frankly, into early February, you naturally have a bit of a lag between the old service and migrating those customers to the new service. Usually you will churn some of your base when that happens as well. So this was a big part of the drop. The other major reason is we changed the way we bill for our payment services. In the past, we billed both the merchant and the consumer for the use of our services. Now we only charge the consumer. With the old method in 2023 and earlier, We had to offset the merchant cost by doing a rev share back to the merchant using some of the consumer fees we generated. This is why we always have low gross margin, and I think I talked about this quite a bit, in like the low 20% range. So while our top line revenue has definitely decreased, our overall adjusted gross profit dollars has remained relatively the same. I say this because gross profit is really how we operate our business and frankly how the board holds me accountable. This is why now you'll see our adjusted gross profit percent hit the upper 40s and even 50%, which we announced today, compared to what we saw last year. So keep that in mind when you see the lower revenue numbers versus the numbers you have seen in the past. I would encourage you to focus on gross profit and net income as the key success metrics for our business. The last point I'll make before We jump into the numbers of Q1. It has to do with really how we started the quarter and kind of where we are today and how we exited the quarter. We recognize that we certainly had challenges in Q4 and even at the start of Q1. But these challenges have forced us to refactor our cost structure and be lean as we navigated through the rough waters these last six months. The good news is we're now leaving those so-called rough waters and moving forward with a very fiscally responsible cost structure. And that means not only reaching profitability, but being able to put money back in the bank as a cash flow positive company. Our strength is not just our payments business. We are a complete fintech software company that is making money from licensing our software, rapidly expanding of our point of sale business, and setting ourselves up for long-term profitability and growth. All right, let's jump into the numbers for Q1. Our adjusted Q1 revenue was $4.5 million, and our adjusted gross margin was $2.3 million, or a 50% gross margin percentage. Again, the top-line revenue decline is based on what I just explained due to the pass-through via revenue sharing, which drove up our cost of goods sold in the past, but now has returned to what you would expect from a typical fintech company around 50%. Our adjusted EBITDA loss decreased significantly quarter over quarter from a loss in Q1 of 2024 of $800,000 compared with Q4 of 2023, which was a loss of nearly $2.5 million, or a 67% improvement in adjusted EBITDA quarter over quarter. As we exited March of this year, we had an annual run rate of over $21 million in adjusted revenue and over $10 million in adjusted gross profit. And on a monthly go-forward basis, we are now cash flow positive. In fact, this March run rate is nearly in line with our 2023 gross profit guide that we gave prior to the payment outages we had at the end of last year. All of this obviously wouldn't have been possible had we not made the tough cuts and cost reductions in the second half of 2023. This is now paying off for all of us. And we are not only achieving essentially the same gross profit as a year ago, but now we have less than 30% of our overall costs, allowing us to hit our profitability and cash flow goals. I want to talk a bit about our other sources of revenues. Sometimes investors just think of us as a payments company, but we're much more than that. I want our investors to fully understand our business model. Positive is three primary sources of revenue. Obviously, our payments business, our point-of-sale software, and our software licensing contract. Most of you are aware of the payments in the point of sale business, but not as familiar with our software licensing contracts, which represent a material portion of our new caps each month. Logitech has a reoccurring set of monthly payments made to us by several partners that license our software. Today, we license our point of sale software and our compliance software. I bring this up because it's a strong testament to the quality of our software and the services we provide to this industry. The fact that one of the largest cannabis technology providers in the industry partners with Positbit for its point of sale system is huge from both a revenue and cash perspective, but a testament to the quality of our products. Our licensing contracts have been a great source of cash over the last year and a half and will continue to be so for the foreseeable future. This is cash that goes straight to the bottom line. In addition to our licensed contracts for our point of sale software, Our compliance software is used by many banks that bank the cannabis industry to help them manage and operate their cannabis bank customers. This compliance software has been in operation for years and, again, is a strong statement to not only the quality of the software we write, essentially our software IP, but also gives us a nice, predictable source of reoccurring monthly revenue.