RTB Digital, Inc. Q1 FY2021 Earnings Call

Good afternoon, ladies and gentlemen and welcome to the GreenBox POS First Quarter 2021 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following management remarks, the comments will be open 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 ending March 31, 2021, was filed with the SEC today. On our call today is GreenBox POS's Chairman, Ben Errez and Chief Financial Officer, Ben Chung. I'd like to remind everyone that statements made on today's call and webcasts, including those regarding future financial results and industry prospects are forward-looking statements which may be subject to a number of risks and uncertainties that could cause actual results to vary 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 30 days on the company's webcast under the Events section. Thank you. At this time, I'd like to turn the call over to Ben Errez, 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 GreenBox POS first quarter 2021 financial results conference call. You will notice that both speakers for the company today are named Ben, so during the Q&A session, please advise which of us the question is intended for. Quick notes before we start, minutes ago, we issued a press release advising of a shares buyback plan that the company will deploy. The company's board of directors approved the program for open market purchases from time-to-time as the company stock continues to be unfairly valued. I invite you all to read it. The first quarter of 2021 was the most successful quarter in GreenBox history on multiple fronts. Aside from the rapid growth in processing volume, which is at the heart of our business, we achieved many additional operating highlights while making meaningful strides to improve management governance, shareholder communications, and awareness in the capital market. I'm extremely proud of our team for their tireless efforts to drive forward our business, positioning us for success in pursuit of creating long-term sustainable value for our shareholders. Now I'd like to walk through some of the key operational highlights and fundamental developments. First and foremost, we delivered on our promise to deploy our Generation 3 Advanced Large-Scale Technology in January. The deployment dramatically improved our efficiency in onboarding merchant portfolios, reducing the timeframe to complete this from days or weeks to minutes. The immediate impact is evident with the $315 million in processing volumes from the quarter, representing a growth of 140% from $131 million during the fourth quarter of 2020. Another important development stemming from the deployment of Gen 3 Technology is our white label bank offering. In early January, the Office of the Comptroller of Currency published a letter clarifying national banks and Federal Savings associations' authority to participate in the independent nodes verification network and use Stablecoin to conduct payment activities and other bank-permissible actions. In recognition of this opportunity, we announced a simple Blockchain connection API for transaction validation and facilitation for Stablecoin transactions. We're currently in talks with several interested banks and expect an additional revenue stream to begin during the second half of 2021. In demonstrating our work towards building key partnerships and improving our payment solution offering, we joined Visa's Fintech Fast Track program designed to expedite the process of integrating with Visa to more easily leverage the rich capabilities and security of VisaNet. Through the Visa Fast Track Program, we can issue co-branded Visa cards and enable direct push-to-card payment for our merchant clients, which significantly enhances our overall payment solution offering. As part of our growth strategy, we'll look to make strategic acquisitions from time-to-time to increase our processing volume, enhance our technological capabilities and expand into new verticals. In January, such an opportunity presented itself and we announced the planned acquisition of ChargeSavvy, a specialty retail payment solution company. We expect the acquisition to add significantly to our annual processing volumes, improve our anti-fraud capabilities and, with their biometric technology, open up new verticals for us in the retail space. Final terms have been agreed upon, and we expect to close the acquisition shortly. One of the most important developments of the first quarter was the announcement of our smart-contract Token technology. As previously discussed, we recognize the inherent flaws in the existing Cryptocurrency and Stablecoin architecture, including volatility and lack of flexibility in design. Given that our Blockchain customer's ledgering is already available, as well as complete end-to-end banking solutions, the next logical step in the bigger picture for us was a smart-contract Token technology. We have made good progress towards deploying our Token strategy. In Q1, we announced an agreement with Signature Bank as the banking solution for our smart-contract Token infrastructure needs. As the first FDIC insured bank to launch a Blockchain-based digital payment platform, Signature Bank is experienced in digital assets, payment infrastructure, and has the technological expertise to host the GreenBox Token. Their Signet network, the first digital payment solution to be approved for use by the New York State Department of Financial Services, allows for an uninterrupted settlement and payment environment and currently holds hundreds of digital asset-based partners. Another advantage of selecting Signature Bank as our banking solution is their ability to handle the anticipated rapid growth of the GreenBox Token transactional volume. We're very excited to have them as our custodial partners. We're also making good progress on other necessary elements to deploy our Token. We recently began onboarding with our auditors and are evaluating several options for the revolver seed capital requirements. We expect to be able to announce more on these areas shortly and, as previously discussed, to deploy our smart-contract Token during the second quarter. GreenBox recently took action to improve our management team and board of directors. Earlier in the quarter, we hired Vanessa Luna as our Chief Operating Officer. Vanessa has already made a meaningful impact on the company and is responsible for the new company branding, as well as Corporate and Investor Relations website redesign. We announced the hiring of Ben Chung, who is on the call with me today, as our new Chief Financial Officer. Ben will bring improvements to the financial controls, accounting, and auditing for GreenBox as we look to continue to grow. Finally, we added two new independent board members and expanded our board to seven directors. Carl Williams was appointed to the board recently and brings vast experience in the payments and card processing industry, particularly in international and multi-currency transactions, which will be very important to GreenBox as we further expand our ecosystem globally. Also joining the board is Dennis James, who brings a strong background in banking to the company and will be vital in guiding us through mergers and acquisitions, corporate governance, internal controls, as well as regulatory compliance reporting. We remain committed to building a culture of strong management and strong corporate governance practices. Our recent actions reflect that ongoing commitment. On the capital markets front, we raised $50.1 million in a public offering and received approval to list on the Nasdaq Capital Market on February 17. This considerably raised our exposure on the National level while allowing for a larger universe of capital market participants to invest in the stock and learn about our company and technology. We hosted two investor calls during the quarter and attended three investor conferences, demonstrating our commitment to communication with the investment community. We'll continue to look for ways to improve shareholder relations and increase awareness of GreenBox for stakeholders. I'd now like to turn the call over to our Chief Financial Officer, Ben Chung, to walk through some of the key financial highlights from the first quarter of 2021.

Thank you, Ben E. This is my first earnings call with everyone at the company. As a new CFO, I'm excited to be here and to be part of the company's exciting growth and technology. As you all may know, the company raised a substantial amount of capital through our offering in February of this quarter, which brought us a net capital raise of approximately $46 million. This new capital will help us tremendously for working capital to hire talented people but more importantly, expedite our enhancements and continuous development of our new Token Technology that Ben had alluded to, including onboarding processes with our customers, which we expect to roll out shortly in Q2 2021. Before I go through our quarterly results, I’d like to point out that we're a calendar year-end company. Therefore our first quarter of 2021 is for the three months ended March 31, 2021. I'm now going to go through our quarter-end results. I'm excited to report that our first quarter had a very strong start with net revenue of $4.7 million, compared to $0.2 million in the prior year's same quarter, which is an increase of $4.5 million, primarily due to strong processing volume of approximately $315 million in the current quarter compared to a very small volume in the prior same-year quarter. Our net revenue margin based on our processing volume of $315 million was approximately 1.5%. Our gross margin was 66% in the current quarter, compared to a negative gross profit margin in the same quarter of the prior year, primarily due to higher net revenue in the current quarter compared to the same quarter of the prior year. We expect to hold a gross margin of between 60% and 70% throughout the year. Our margin will be primarily driven by our negotiated commission structure with our ISOs, which are our independent sales organizations, and gateway fees. I'd now like to discuss operating expenses. More importantly, I would like to point out that our operating expenses are not directly correlated with our net revenue, primarily because of the scalability of our revenue with a small number of employees due to our technology and the businesses we're in. Furthermore, when I talk about operating expenses, I'd like to categorize 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 our outside services. Our normal operating expense was $2.3 million in the current quarter, compared to $1.2 million in the same quarter of the prior year, which was an increase of $1.1 million, primarily due to an increase in research and development related to our Token Technology of approximately $0.7 million, along with an increase in professional fees of $240,000 due to an increase in compliance costs and an increase in payroll of $160,000 due to an increase in headcount. We will continue to see an increase in this category throughout the year. 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 will not recur on a go-forward basis. I'll now like to go through our other expense categories. Our other expense category primarily includes interest expense related to the debt discount for convertible debt, which was fully converted during the first quarter of 2021. The other interest expense of $360,000 was for shares issued in lieu of interest for convertible debt during the first quarter of 2021. Our overall net loss under U.S. GAAP reporting was $13.3 million for the current quarter, of which approximately $13.8 million was a non-cash adjustment, with approximately $13.0 million not expected to recur on a go-forward basis, which relates to stock compensation expenses for services, debt discount interest, and interest expense related to convertible debt. Our cash flow from operating expenses was negative at $11.3 million in the current quarter, compared to $0.3 million of positive cash flows in the same quarter in the prior year. The negative operating cash flows in the current quarter were primarily due to timing of settlement of gateways and our merchants. We had a cash balance of $35.8 million at the end of the 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 E for our outlook. Ben?

Yes, thank you, Ben. This is a very exciting time for GreenBox, 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. Some of the numbers that Ben was discussing led to financial projections as follows. The total projected volume for the fiscal year 2021 remains at $1.65 billion. Q1 2021 processing volume actual is approximately $315 million, with projected processing volumes for the remaining nine months of the year at $1.335 billion. Expected margins from April 2021 to December 2021 are in the neighborhood of 4%. Expected revenues for the nine months are about $53.4 million. Revenues for the three months ending in March of 2021 were approximately $4.75 million, and total expected revenues for 2021 are just over $58 million. At this point, I'd like to turn it over to our operator to begin the Q&A session; please direct the questions to Ben C or Ben E as appropriate.

Thank you. [Operator Instructions] We'll take our first question from Scott Buck with H.C. Wainwright. Please go ahead.

Hi, good afternoon, guys. This question is for Ben E. So clearly, a busy start to 2021. I was hoping maybe you could give a little bit of color on how you're prioritizing strategy for the remainder of the year?

Thanks, Scott and hello again. Our priorities remain as I presented during my initial statements on this call. We'll continue to focus on our Token deployment, which we believe will be material for the company and for the industry in general. We intend to continue executing on our M&A activities in a big way, more on that soon. We plan to continue acquiring portfolios to increase our processing volume again in a big way and more on that soon. And generally speaking, we intend to keep our CapEx at the current level and continue with the execution as we have always done. Next question please.

Okay, that's helpful, sure. And this one is for Ben C. On operating expenses, besides normalizing for some of the non-cash expenses and stock comp expenses in the quarter. Anything else we need to pay attention to for the remainder of the year? Are you guys planning some increased hiring, a marketing push, anything along those lines?

No, not much in marketing, but our R&D expenses are expected to go up primarily related to the new Token Technology. More importantly, because of our compliance requirements related to these Token launches, our professional fees will also go up. If we're expecting to do $50 million in revenue, it’s going to be very minimal, about four basis points out of the net revenue, and our R&D will be about six basis points.

Okay, that's very helpful. And in the prepared remarks, you mentioned a gross margin range of 60% to 70% for the remainder of the year. What's the longer-term target to think about for the business?

Ben E, you might have...

Just say it’s for Ben E or Ben C.

Sorry, whichever Ben wants to answer.

So Ben E, I'll take it. Yes, definitely, we see this healthy margin being sustainable and even increasing over time as we launch additional technologies and increase efficiencies. But you know us by now: we do conservative adjustments and projections, and we stay behind this 60% to 66% margin moving forward.

Understood, I appreciate your time this afternoon, guys.

Thank you, Scott.

Thank you.

[Operator Instructions] We'll take our next question from Chris Sakai with Singular Research. Please go ahead.

Hi, everyone. Hi, Ben E. Just I got a question on…

Good morning, Chris.

You keep mentioning this rapid growth of the Token. Can you share any details on this growth and when you'll see it?

Yes, so the Token launch requires four components. It requires the technology, and that technology needs to be a certified and viable technology, independently certified and viable technology. The second element is the sponsoring bank, and the custodial bank. The third element is a national auditor, and the fourth element is seed capital. We just announced that we picked Signature Bank as the partner on this deployment, and we're very, very excited about that. We just heard that their nearest competitor, Circle with their USDC, picked the same bank and the same infrastructure. The third element is the National Auditor with which we're proceeding with onboarding efforts as quickly as we can. The fourth element being the seed capital, we committed $100 million to that requirement and intend to deploy that very soon. The Token itself at the onset is projected to have the ability to revolve up to a billion dollars per month of newly issued Tokens. That is enough of a bandwidth for us for a while. Hopefully, we'll have additional requirements moving forward. But out of the gate, we think that this is sufficient, and it's exactly the same amount of seed capital that was used to launch USDC, which is growing at about a billion dollars every 10 days now. We definitely expect significant growth utilizing this new technology. However, we have not yet projected any of that new financial performance on to our financials. So all the projections that I mentioned today are excluding the Token deployment.

Okay, great. I guess I've got a question for Ben C. Can you break down the processing volume by month and quarter one?

I have the quarter-to-date, not by month. But the range is approximately $100 million per month.

And I would take that. I also don't have the monthly breakdown, but it's just over $100 million per month.

Okay, great. And lastly, can you guys share or mention anything about the size of this stock buyback program?

Wow, you're very quick. No, so specifically, we didn't address that. We put together a plan on executing a buyback strategy. With the cascading approval required by the board of directors, every time we would engage in additional such amount, we would go back to the board and seek approval. But specifically, we did not want to mention any timeframe or amounts. This is a kind of a war, and in war, you don't let the other side count your bullets. So I would push on that answer forward.

Okay. All right. Thanks.

Thank you.

We'll take our next question from Richard Smithline with Centrecourt Asset Management. Please go ahead.

Thanks guys, and congratulations on a great quarter. And this is probably for either of you. Could you comment on the net cash used in operating activities? Is it something that we can look at and say we're going to have this kind of cash use going forward? Or is this just sort of a lot of one-time costs for whether Gen 3 or getting guys onboarded?

No, nothing like that. Our primary use of cash in operating activities is cash receiving from our gateways, which are the fees collected from merchant customers that we need to get paid so we can pay our merchants directly. If you look at our balance sheet, our gateway receivable was about $11.8 million and our payable to our merchants was around $5 million. So in this quarter that was kind of unusual as we had more receivable from our gateways and payable to our merchants. Therefore, you'll see a kind of a flip-flop of that. In Q2, we'll generate higher cash flow from operating activities. So it's purely just timing differences.

And let me add to that, Richard. I may have misunderstood your question, but I thought you meant our cash reserves. I wanted to note regarding that. Yes, our cash reserves are held pretty high, just over $35 million in cash. We're cash flow positive, so our operational expenses are covered out of operation. However, we do intend from time to time to utilize this cash strategically, as I just mentioned one such usage with the buyback. But other uses primarily on the merger and acquisition front may have uses for that capital as well. But generally speaking, we like having significant cash in the bank. This is just a corporate execution strategy and we'll continue to do that.

Okay, great. Yes, now I saw that it was you guys were profitable for the quarter, which was great on top of the growth, and was just wondering about the cash, but as Ben said, I guess it's a timing issue.

Correct.

Yes.

[Operator Instructions] We'll take our next question from James Young. Please go ahead.

Thank you for taking my call. Congratulations on the progress in the quarter. Just want to see if I could ask a question around the Token. Could you elaborate a little bit on the opportunity you're going after, kind of what the size of that opportunity is and whether you have secured a customer as of yet, and what kind of volumes you're hoping to achieve there?

So I'm assuming first of all, hi, Jamie. I assume your question is to me. This is Ben E. As I mentioned earlier, the seed capital in the neighborhood of $100 million allows for a maximum deployment of new tokens per month of about a billion dollars or a billion tokens. The utilization of the Token infrastructure is primarily on two prongs. Number one, every token in issuance is already a participant in the processing volume of the transactional infrastructure underneath it. This is the traditional Blockchain ledger ecosystem that GreenBox developed. The second, and this is specific to the utilization of the power of the Token to provide a regulated revolver line to our merchants and clients primarily usable by money service businesses. It is true that we have already secured commitments to volumes - significant volumes right from the beginning deployment of the Token in the hundreds of millions of dollars per month. But we think that this is just the start for the Token and it will actually exceed this capacity and volumes very quickly in its deployment.

Okay, so just a follow-up on that, Ben. Thank you for that piece of data. So, the margin on that should be from the get-go in the 4% to 5% range. Is that correct?

The operational margins on the Token are complex things to forecast. But I would say that it should be higher than the ecosystem itself. The 4% to 5% range is not out of the question. On top of just the issuance of income that relates to issuance on the Token, as I said, the Token itself is participating in the transactional volume of the processing ecosystem, right, the Blockchain ledger ecosystem, and carries the same contributions to operating margins as any other dollars that enter this system. On top of that, there are certain additional technologies that are available by utilizing the Token. For example, instantly executing into a Visa card or into your Apple Pay, or Google Wallet, or all of these interesting things that have value which will carry their own fee structure alongside with that. So in general, the total picture will reflect higher financial performance for the company using the tokens than using dollars.

Got it. That's helpful and just one last question for me. On the higher risk business for you and your traditional Blockchain of business. I believe, two of the main verticals for the company are online gaming and CBD. In the CBD space, our due diligence has suggested that Fiserv has somewhere around a $30 billion book in CBD and that they were working with Elavon. They have moved to work with GreenBox, and at the moment, they're not working with anyone but GreenBox. So it seems like that would be possibly a big opportunity when you talk about the ramp in the processing volume in the second half of the year as you onboard more high-risk. Is that correct?

Yes, this is correct. I specifically did not add any projections to the technologies that are not yet deployed. We're still integrating with Fiserv on several portfolios. But you're correct about the particular verticals which are of exceptional interest and profitability to both prices and the company. You're right on that.

[Operator Instructions]. We'll take our next question from Blair Friedensohn with Kingswood Capital Markets, please go ahead.

Hi, Ben E.

Hello, Blair.

Congrats on an awesome first quarter. I was just wondering if you could share a little bit more color on kind of ramp-up in processing volumes for the next three quarters and how we should map out the fee percentage growth over those quarters. It looks like we're at a 1.5% for this first quarter. And it's kind of a follow-up to the previous question. So as we go and acquire the higher-risk merchants, how should we envision that ramp-up to achieve those revenue targets that you put out?

Thanks for that question, Blair. First of all, we like to give growth guidance in terms of overall processing volume because it's an easy proxy for the company. As this volume grows, the company makes more money. How much money is specifically your question? The company generates more revenue on both the top and bottom lines when it processes higher-risk volumes. However, there is a limit to how much risk the portfolio can carry and still stay safe under operational rules and regulators. When we increase processing volumes, we always increase first using low risk and then add higher risk. As a result, you see the operating margins being low in this case in the first quarter. This process is done every time a new technology cycle is deployed. We deployed Gen 3 in January, so this cycle began in January, a little bit before in Q4, in anticipation of Gen 3. You would see financial performance as Ben C went through in Q1. But then you would see much improved operating margins towards the end of the year. The risk balance for the portfolio allows for a blended revenue map that represents a higher figure. While we say just look at the pricing volumes and go from there, do anticipate that in an annual view, these margins will stabilize at a much higher figure, maybe as much as three times that of Q1 in an annual perspective. This aligns with the numbers I projected at the end of my presentation.

Okay. That is very helpful. And then just one quick follow-up. Should - is there anything on the M&A front in the pipeline that we should be on the lookout for over the next couple of quarters? Or is that someone put on hold as you ramp up internally?

Quite the opposite. Not only are we not putting any M&A activities on hold, we're actually accelerating M&A activities. We’re not at liberty to discuss that today, as some of these are in the midst of processing. But do expect a substantial amount of acquisition activities or transactions in the next nine months, definitely.

Okay, thank you for the clarity. Thank you for your time this evening. That's all for me.

Thank you.

Ladies and gentlemen, at this time this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Ben Errez for his closing remarks.

Okay, thank you very much, operator. I'd like to thank all of you for joining our earnings conference call today. We look forward to continuing to update you on our ongoing progress and growth. If we were unable to answer any of your questions, please reach out to our Investor Relations firm MZ Group, who will be more than happy to assist further. Thank you all.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may now disconnect.