RTB Digital, Inc. Q2 FY2021 Earnings Call

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 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 ended June 30 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, 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 webcast under the Events section. At this time, I'd like to turn the call over to Ben Errez, the company's Chairman. Ben, the floor is yours.

Thank you, operator, and thank you all for joining us today. I'd like to welcome you to 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 portfolio, 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 and these rapidly growing and evolving markets with our Blockchain and smart-contract Stablecoin technology. I would like to walk through some of the key operational highlights and fundamental developments. We achieved another record-setting quarter, processing over $440 million in transaction volume. As a reminder, this excludes the impact of the ChargeSavvy acquisition, which was closed in July. This also speaks to the successful deployment of Gen3 in the first quarter of this year, which dramatically improved the efficiency of onboarding merchant portfolio and paved the way for large-scale processing volume 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, ChargeSavvy and Northeast Merchant Services, while announcing the third 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 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, and principal membership of China UnionPay. 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 creative, and management compensation will be based on processing volume hurdles that we believe will drive transaction volume and ultimately, the adoption of COYNI or smart contract Stablecoin. Global expansion remains a core objective of GreenBox and will be key to the adoption and growth of our payments and smart-contract Token technology. 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 an excellent opportunity to showcase the impact of adopting 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 ecosystem. Another partnership is an example of how our technology can be applied through joint development partnerships. For example, isMedia will build an NFT platform for blockchain-based visual assets trading. GreenBox will provide the payment gateways and payment settlement solutions for that platform while isMedia 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 coins. As I mentioned last week on our Stablecoin spinoff call, we are most excited about the opportunities that lie ahead with our smart contract technology. We announced the pilot launch of COYNI 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 is already being tested internally here. Ultimately, we’re excited for key growth drivers for our COYNI business to be person-to-person and B2C transaction adoption by allowing consumers and businesses to transact double payments and money transfers instantly on our secure blockchain ledger. We believe we are well positioned to achieve significant adoption quickly. All 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 spinoff publicly traded company. We are also evaluating several options to increase the funding for the revolving capital needed for the rapid scaling of our business. We will provide an update on that shortly. On the capital markets front, GreenBox stock has been added to the Russell 2000 and the microcap index in June. We announced a share buyback program that is still in effect and special dividends series based on the planned spinoff 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 Chung, 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 a 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, to expedite our enhancements and continuous development of our new Token technology, including the onboarding process with our customers, along 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 months ended June 30th, 2021. I'm now going to go through our quarter-end results. We had 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. For the six months ended June 30, 2021, net revenue 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 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 the six months ended and three months ended June 30, 2021 was approximately $800 million and $440 million, respectively. We have seen a quarter-to-quarter increase in processing volume comparing Q1 2021 and Q2 2021, an increase of $80 million processing volume from $350 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 of the 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 margins in the same quarter of the prior year, primarily due to higher net revenues and improved efficiency in the current quarter compared to the same quarter of the 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 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 the scalability of our revenues from a 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 categorize them into two categories; our normal operating expenses and non-cash operating expenses. So first, our normal operating expenses include: 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 an increase in research and development related to Token Technology, payroll related to an 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 expenses 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 at $0.0 million, compared to a loss of $0.2 million in the same quarter prior year. If our non-cash operating expenses, such as compensation expense for employees and services and depreciation are added back, we've had net income from operations of $2.0 million for the second quarter of 2021, and breakeven in the same quarter prior year, and $2.9 million for the six months ended June 30, 2021, and a loss of $1.4 million in the same period in the prior year. I would like to now 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 incomes 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 on extinguishment of convertible debt. Our other expenses for the 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 30, 2021 compared to a net loss of $0.3 million in the same period last 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 the reconciliation in our earnings press release related to the non-GAAP adjustment. Our cash flows from operating activities were negative $30.7 million for the six months ended June 30, 2021 compared to positive cash flows of $0.5 million in the same period last year. The negative operating cash flows were primarily due to the timing of settlement with gateways and merchants. We had a 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 Errez for our outlook.

Thank you, Ben. Before I remark on our outlook for 2021, I would like to remind everyone again about our strategic portfolio onboarding in order for GreenBox to maintain compliance with credit card issuers and paysec license requirements. During our accelerated portfolio onboarding, we need to onboard ultra-low and low-risk portfolios at times onto our platform prior to increasing the medium to processing volumes. This has impacted our financial results in the first half and is predominantly low-risk onboarding. This does not change our full-year revenue or 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 that would be 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 the press release, we have decided to delay the first record date of our special dividend series related to our COYNI SpinCo. The first recorded date will not be on Monday, August 16; rather, we will announce the first record date at least 10 calendar days prior to its implementation. As mentioned in our press release, among the factors that could affect the timing of the first record date is the receipt of required regulatory approval and consent. While we continue our analysis of the strategies and record date 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 operator to begin the Q&A session of this call.

Thank you very much. [Operator Instructions] And our first question comes from Chris Sakai of Singular Research. Please proceed with your question.

Hi, Ben.

Hello, Chris.

I got a question I guess on 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 successful on multiple levels, right? So not only is it positioning GreenBox to execute on a license, broadening transactional volumes in Europe but also positions us to fill the void left by the likes of Wirecard and cap 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 depends on turning out new volume on GreenBox and COYNI infrastructure, beginning from $100 million of new business per month all the way through $1 billion per month of new volumes. This essentially puts COYNI as a transactional platform that is a Stablecoin on par with USDC and positions COYNI as a direct competitor to Venmo with its ability to transfer money between individuals and between individuals and businesses alike in any amount and across any geography. I would just remind you, Chris and others on this call that Circle is doing an IPO very similar to the COYNI IPO at a $4.5 billion in enterprise value just in November of this year with a planned IPO proceeds of about $700 million. It's a very successful IPO. We would definitely like COYNI to be positioned in the same order of magnitude. Thanks for the question.

Okay. Great. To go into the ways earn-out is structured, so $100 million is a minimum amount per month.

Right.

What are the chances of making that, at least the $100 million?

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

Okay. Great. And I guess lastly, do you have any proto 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 GreenBox technology. The American Samoa GDP is approximately $600 million per year. It’s not very large but it’s large enough. Remember that COYNI also benefits from the type of transactions that do not contribute to the GDP of that system, such as transfers between individuals. So we anticipate an exposure to about $1 billion per year in volumes. However, the big deal about doing a technology solution for closed-loop systems is that it's a proof-of-concept of the GreenBox ecosystem that can provide complete financial solutions for entire governments, entire countries, and islands. 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 many other such communities that require 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 – it's a welcome change across the board. It’s sort of the perfect storm of adoption potential; I’m very much looking forward to the execution in American Samoa.

Okay, great. Well, thanks for that Ben.

Yes. Thanks, Chris. 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 an $11.25 million burn in the first quarter to $2.4 million in the second quarter. That was nice to see. Can 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 Chung take the initial tack on this, and then I will add my comments on top of that.

So we expect our cash spending, net cash spending, to actually flatten out for the next six months because our volume is increasing quarter-to-quarter and our net profits are increasing quarter-to-quarter. Our primary spending is really on hiring talented people, which we have recruited significantly, and on some of the expenditures for research and development and compliance. For the next six months, I don't think our cash is going to go down significantly. What I mean by that is I don't think it's going to drop below $20 million. Right now it's at $29.5 million. But in fact, 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 settlements with our gateways and our merchants. That explains when you look at our receivables from gateways and payables to processing centers, we have a net working capital of about $10 million 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, which would not need to be a capital raise for the core business, correct?

Core business, that’s correct. You are correct.

I would add, Jamie, that although for operations, we will not need any capital raising, we do plan on taking advantage of this particular situation and set up the results from the COYNI spin-off opportunity. We will raise additional capital, but I want to repeat my previous commitment that the company will not entertain raising equity capital at this level of the equity prices or shares as we see it, unfairly valued. We are 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 call it, unfairly valued.

Sure, and just also to clarify, our finance team owns north of 1 million shares in the company and continues to be strong advocates of the company and certainly wouldn't be sellers of our own stock when our lockup expires in the coming weeks.

We’re not even looking at that, and no insider is planning any sales. In fact, we're all accumulating. This is part of our long-term planning in particular. As you know, Freddie and I are the co-founders of GreenBox and own the majority of shares in the company, and we intend to remain majority owners. We've worked very hard over the past five years to be very tight with the way we share equity. This strategy 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 Pfizer? 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 Pfizer. I know that this has been taking longer than anticipated thus far, but that’s the nature of the beast, and we finally see the light at the end of the tunnel. We will continue and push for this integration completion. Give us three weeks, and we'll announce the large-scale processing beginning.

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

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

Thank you. [Operator Instructions] 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 Errez for closing remarks. Please, go ahead.

Thank you, Operator. I would like to thank all of you for joining our earnings 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, who would be more than happy to assist. With this, I conclude our session today. Thank you all for participating.

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.