Ryvyl - Q1 2023

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, and welcome to the RYVYL fist quarter earnings conference call. During today's presentation, all parties will be in listen-only mode. Following management remarks, the conference will be open to 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 and operations for the three months ended March 31st, 2023, was filed with the SEC today. On our call today are RYVYL Chairman, Ben Errez, Interim Chief Financial Officer, Mary Lay Hoiit, and Chief Operating Officer, Min Wei. 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 the next 90 days on the company's website 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.

Ben Errez (Chairman and Co-founder)

Thank you for joining us today. Further to the success of using AI in our previous call, this call is entirely edited and produced using this exciting technology. Our fiscal first quarter 2023 was not without its challenges. Uncertainty surrounding the banking sector, coupled with expectation for increased regulation of digital payments and general macroeconomic concerns were common themes. RYVYL's financial performance has never been better as we deliver top-line revenue of $11.3 million, the most in our company's history for a quarter, and growth of nearly 170% year-over-year. As I stated during our recent fourth quarter conference call, we have concentrated our efforts on improving our bottom line, improving our processing efficiency, improving the workforce, and improving technology. All of these things work in concert, consequently, we're seeing our operating margins increase.

While proud of our Q1 top-line growth, much of our time, energy, and expenses for the quarter were related to completing the restatement of our financials, which we successfully completed. While Min will break down our various processing volume channel performance in a few minutes, with a high level, we processed $565 million during the quarter. Removing non-income producing volumes proved to be material in causing an increase in operating margins and corporate efficiencies. Now to review some of our major strategic initiatives that are underway, the first of which is our plans to spin off Coinme, our stablecoin technology. Subsequent to the end of Q1, we announced the initiation of this process as part of a broad value creation strategy. We have made great strides with our payment processing business.

We believe now that we have identified the best path forward to create value for our shareholders through the spin-off of Coinme as a public company towards establishing it as the premier stablecoin in the market as a necessary step in that objective. We engaged Kingswood Capital Partners as our placement agent and advisor in connection with the spin-off and related public offering, which we expect to be in the range of $40 million with a Nasdaq uplist. Furthermore, we also acquired a public shell company to transfer Coinme assets to in order to facilitate the transaction. Strategic acquisitions and partnerships will also play a role in Coinme's growth. To that end, we are evaluating multiple opportunities. We'll provide more updates on this front as they come about. Ultimately, as a standalone entity, we expect the growth trajectory of Coinme to unlock significant shareholder value.

RYVYL and its shareholders will benefit from the spin-off as we continue to plan to issue a board-approved special dividend upon completion of the spin-off. Turning now to our Banking-as-a-Service. We continue to gain momentum on this initiative in early 2023 with growing demand for the service. After signing six global financial institutions that are projected to process more than $100 million per month in transaction when fully ramped up, we also recently announced a strategic partnership with Intercash, a Europe-based global payment solutions provider. Through the collaboration, business customers can now offer co-branded debit and prepaid cards to untapped consumer markets, leveraging RYVYL's new Banking-as-a-Service platform as the infrastructure. White label cards can be issued as virtual or physical, allowing businesses enhanced flexibility.

Intercash, which currently has over 1 million cards issued, has already initiated the first phase of the process by moving more than 50,000 cards to the RYVYL card program and plans to continue with the migration in phases based on card issuance. RYVYL's Banking-as-a-Service solution offers API integrations and foreign exchange capabilities in more than 40 different currencies with local settlements. The service authorizes transactions 24 hours per day on business days and enables payouts by way of approved methods such as real-time payment or direct deposits. In addition, the service allows for the ability to readily trace transactions and reduce fraud, all while maintaining strict compliance requirements. By the end of the year, we expect to have a full global payments platform covering over 100 local currencies and local settlements.

We believe Banking-as-a-Service is the future of global banking, and we're excited to be an enabling service provider in a space that is rapidly emerging and reaching new customers every day. While we continue to see increased adoption of our solutions in American Samoa through our partnership with TBAS, which Min will provide an update on shortly. As a reminder, this is great demonstration of our capabilities to create a closed loop ecosystem.

Min Wei (COO)

Modernized payments infrastructure. Our success on the island has helped generate interest from a variety of potential customers, including other islands, businesses, and governments around the world that we continue to explore collaboration opportunities with. We see great potential stemming from the TBAS partnership, not only because we treated that as a digital transformation for Banking-as-a-Service, but because the Coinme platform can provide the foundation for us to convert payment services, expanding a massive universe of opportunity for us. To sum up, we're very encouraged to deliver record Q1 top-line results, yet we remain focused on executing towards the larger opportunity ahead of us in the lucrative digital payments landscape. We are thrilled with the expansion and higher margin acquiring processing volume, both internationally and domestically. We enjoy the momentum in our Banking-as-a-Service solution and the initiation of Coinme spin-off strategy.

We remain confident we are on the path to create significant long-term value for our shareholders. Now to discuss the details of our financial results, I'd like to turn the call over to our Interim Chief Financial Officer, Mary Lay Hoitt. Mary, the floor is yours.

Mary Lay Hoitt (Interim CFO)

Thank you, Ben. As a note, I'll be referring to adjusted EBITDA and other non-GAAP measures. For the calculation of adjusted EBITDA and other non-GAAP measures, please refer to our 10-Q filing, which will be available on the company website under SEC Filings. Turning to the company's first quarter 2023 financial results. Our gross revenue increased by $7.1 million, or 169% to $11.3 million for the three months ended March 31, 2023 from $4.2 million for the three months ended March 31, 2022. The change in net revenue reflected the following. Increases in processing volume in the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Increase in revenues from our acquired businesses, including ChargeSavvy, RYVYL EU, and American Samoa.

Gross profit in the first quarter of 2023 was $5.1 million or 45.3% of total revenue, compared to gross profit of $1.4 million or 33.3% of total revenue in the same quarter a year ago. The increase in gross profit was primarily due to increases in processing volume and processing volume margins in the three months ended March 31, 2023. Operating expenses had increased by $0.3 million, or 3.4% to $8.8 million for the three months ended March 31, 2023 from $8.5 million for the three months ended March 31, 2022. The increase was due primarily to higher payroll and payroll tax expenses and external professional expenses for legal and accounting services for the financial restatement and 2022 annual reporting.

In addition, we encountered legal proceedings for the three months ended March 31st, 2023, offset by decreases in general and administrative, advertising and marketing, and stock-based compensation expenses. Other expense decreased by $18 million or 80.0% to $4.3 million for the three months ended March 31st, 2023, from $22.3 million for the three months ended March 31st, 2022. Changes in the fair value of derivative liability amounted to a charge of $7.7 million for the three months ended March 31st, 2022, and a credit of $168,000 in the three months ended March 31st, 2023. Interest expense decreased by $5 million, primarily related to the $100 million convertible note issued in November 2021.

Additionally, we incurred a charge of $4.1 million in the three months ended March 31, 2022, related to a loss on a partial extinguishment and conversion of debt. The company recorded a net loss in the first quarter of 2023 of $8 million, or $0.15 per basic and diluted share, compared to a net loss of $29.3 million or $0.72 per basic and diluted share in the same quarter a year ago. The decrease in net loss was due to increased revenue, gross profit and decreased other expenses, mostly related interest expense and changes in derivative liability in the three months ended March 31, 2022. We ended the quarter with cash equivalents and restricted cash of $57.1 million as of March 31, 2023.

I'll now turn the call over to Min Wei, our Chief Operating Officer, to provide a review of business operations and our outlook.

Min Wei (COO)

Thank you, Mary. We will walk through our processing volumes for the verticals we serve and discuss our 2023 outlook. Please note that all the figures are exclusive of the Sky Financial portfolio. Our first quarter processing volume across all channels hit $565 million, which is approximately 37% higher than our processing projection of $414 million for the quarter. This is about 12% higher than our Q4 2022 volume of $506 million and an increase of about 381% from our Q1 2022 volume. Our Q1 acquiring business volume is $112 million, which is 14% higher than the Q4 $98 million volume and is 84% higher than the same period 1 year earlier.

Q1 ChargeSavvy processing of $66 million is about the same as the Q4 processing volume. While compared to the $57 million volume in Q1 2022, it is a 15% improvement. For our FX and international payments portfolio, including Transact Europe, we processed $344 million in the first quarter compared to $350 million in business volume in Q4, an increase of 9%. We will report our Banking-as-a-Service offering performance in this category going forward as we expect to see more momentum in the global markets. For an update on American Samoa, we are now servicing over 280 merchants and expect to roll out the services to about 60% of the merchant base in Q2.

In Q1, our processing volume was about $28 million and our monthly volume has exceeded $10 million per month. This remains an important case study for us to drive our payment solutions into island ecosystems around the world. To circle back to Coinme, as Ben spoke to earlier, plans are underway to spin off this technology as a publicly traded company in order to fully unlock its value. We continue to make enhancement releases to improve merchant and customer experience. With the U.S. regulation and digital banking changes and the increasing demand in the European market, we are adjusting our plan to roll out the Coinme platform to support the EU and other international markets.

More to follow in the next quarter. Now I'd like to turn to our outlook for the second quarter. With respect to the processing volume in Q2, we are targeting to achieve $580 million-$610 million. Given the strong start to the year with Q1 revenue of over $11 million and expectation for continued growth, we are comfortable with our 2023 revenue target from our existing and planned business expansion of $60 million. We expect Q2 revenue to be in the range of $12.5 million-$14 million. Q3 and Q4 revenue outlook are estimated to be $15 million-$17 million and $19 million-$21 million respectively.

For adjusted pro forma EBITDA, our Q1 figure is a negative $3 million, which reflected over $2 million of one-off expenses associated with the financial restatement work outside legal expenses and our R&D work. Our target for this year remains a positive $4 million, and our projection for Q2 is about the break-even level while the second half year delivery is expected to take us to the finish line. Overall, we expect to meet our revenue commitment of $60 million plus a positive $4 million adjusted EBITDA for the total 2023. This is to be achieved via our solid growth domestically in the US and in the international markets. In addition to the organic growth, we are on the path to increase values for our shareholders through our scheduled Coinme spin-off plan. This concludes my remarks for the quarter.

I'd like to now turn the call back over to Ben Errez, our Chairman, to begin our Q&A.

Ben Errez (Chairman and Co-founder)

Thank you, Min. Thank you all for your interest and commitment to RYVYL. We are grateful for your ongoing support. With that, I'd like to begin our Q&A session. Operator, please begin. Thank you so much.

Operator (participant)

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue.

Ben Errez (Chairman and Co-founder)

While we hold for questions to come in, we have a few questions that were submitted prior to this call, and I'll review those. First question is for Min. Can you talk about sales, hiring, strategy, and trends domestically and internationally for merchant acquiring?

Min Wei (COO)

Thank you, Ben. For our domestic and international sales, hiring strategy and plan, you know, I'm pleased to report that we continue to enjoy high, you know, growth momentum from our ISO and partner network. As a matter of fact, you know, when we're looking at the merchant services space in the U.S., you know, we have grown more than 150% in new merchant locations, as of end of Q1, you know, compared to second half of last year. Really, this is not just about hiring. We continue to grow and develop our ISO and partnership network. We have the strong momentum in the States.

Likewise, in the international markets, you know, we have, you know, built further, you know, partnership, which we announced in the Q1 of this year, you know, that we are enjoying momentum from, you know, the sales partnerships as well as PSPs in the European market. You know, as a matter of fact, we are gaining double-digit new merchant location application, you know, growth, you know, since the end of last year. Good question, though.

Ben Errez (Chairman and Co-founder)

Thank you, Min. The second question is also to you. With back-to-back quarters of higher margins, is it reasonable to expect that to continue at approximately this level moving forward?

Min Wei (COO)

Well, definitely, right? You know, part of the management leadership's objective to continue to, you know, grow the top line and keep the cost under control. You know, I think the whole team did a fantastic job, you know, closing last year, continue on into, you know, Q1 this year. We definitely expect to continue to drive margin improvement, you know, going forward, into Q2, Q3, Q4 this year. You know, as a matter of fact, that's our path to, you know, achieve the numbers for top line and bottom line, as we mentioned earlier during the earnings call.

Ben Errez (Chairman and Co-founder)

Thank you, Min. I'm going to take the next question. Can you elaborate on the expected timeframe for Coinme spin-off? Coinme spin-off is a process. It started with the acquisition of a launch vehicle, to borrow a term from our friend Elon Musk. We have completed that. The that launch vehicle was acquired. It is live. It is quoting. It did not yet begin the actual asset spin-off, but that launch vehicle is alive. It is fully compliant. Its financials are up to date, and it is out there for all to see. We have engaged our investment banker for a potential raise for the company at an estimated $200 million valuation with the raise goal of $40 million.

We anticipate that to go through the next couple of quarters at least. In addition to that vehicle will enable the long-awaited dividends for the benefit of all of our shareholders. This remains a focus point for everybody, and we intend to accomplish that at some point this year as well. The next steps along these lines are the completion of the transfer of assets to the launch vehicle. This will happen shortly. Following that, we will file an application with the exchange for a name change, including a ticker change more appropriate for Coinme. We will complete the inclusion of additional forms of revenues into that entity and begin the process of uplisting and associated raises. As I said, the whole process is estimated to take approximately six months.

Operator, back to you.

Operator (participant)

Certainly. Once again, if you have a question on the phone, please press star then one now. The first question comes from Michael Donovan of H.C. Wainwright & Co. Please go ahead.

Michael Donovan (Equity Research Associate)

Thank you, operator. This is Michael. I'm calling on behalf of Kevin Dede, who's on the road right now. You've mentioned an increase in processing volume and processing volume margins. Can you provide more color around margins and your pipeline for getting paid?

Ben Errez (Chairman and Co-founder)

Yes. The, Min, our Chief Operating, will take this question.

Min Wei (COO)

Yeah, thank you for the question. You know, first of all, on the volume growth, right? The volume growth for processing is directly related to the number of new merchant locations, you know, we are boarding. As I mentioned earlier, it is just amazing that, you know, with our direct and indirect sales, you know, efforts, you know, we're able to increase, you know, the number of locations we're processing for merchant services, by, you know, more than 100%, you know, between 100%-150% since later part of last year. Accordingly, the volume is going up.

Now to answer your questions about the contribution margins on processing, you know, what we do is we are in the platform business, so leveraging our blockchain ledger, you know, platform, you know, as we pull more volume, you know, through the ecosystem, you know, we will expect, you know, continuous improvement in terms of, you know, contribution margin because our people cost, you know, certain costs we have running the business is not gonna scale at the same speed, you know, as our revenue. Hopefully that answers your question.

Michael Donovan (Equity Research Associate)

Thank you. Yeah, I have a follow-on question to that. In terms of margins and locations, how should we be thinking about these different locations as how they affect the margins?

Min Wei (COO)

You know, sure. You know, you know, the way we look at it, right, you know, we typically communicate about our business, you know, by category, right? Merchant services is one. Foreign exchange, international payment is one. In the case of merchant services, you know, when we look at, you know, when we look at the metrics or parametrics as a matter of fact, you know, what we have in the ecosystems, we have enough data point that, you know, generally speaking, depends on the verticals that we services. You know, we have seen per location, per month volume, you know, to range from, you know, $50,000-$100,000 per month on an average basis. As we continue to, you know, pull more merchant locations, it will scale up that way. Hopefully that addressed your question.

For the international payment space, you know, we announced the strategic partnership with multiple financial institutes earlier this year. You know, we expect to see the monthly volume ramping up to north of $100 million, you know, incrementally north of $100 million, you know, dollars a month. You know, that's probably another way to look at it. I would say those are the key two new revenue drivers we have. If you need further details with that, happy to elaborate.

Michael Donovan (Equity Research Associate)

No, I appreciate that, Min. That's, it's very helpful. Another question, from your perspective, either you or Ben, from your perspective, how do you view the stablecoin ecosystem, both from a regulatory front and, competitive front?

Ben Errez (Chairman and Co-founder)

Thanks. That's the, that's the question of the hour, right? I did a TV interview last week where I was asked the same question. I guess the struggle remains the same. We definitely see divergence between onshore markets and what happens around the world. We see challenges to the industry and the dollar in general happening around the globe. We hope that the regulatory oversight locally and the people in the decision-making positions will step up to the plate and join the rest of the world in enabling this inevitable outcome in a safe and a controlled manner for the U.S. market.

In parallel, we plan and prepare for the possibility that this will not happen and it will happen first and better in other markets. You'll see that approach as safety first, let's call it, happening in other markets, primarily in Europe. This will be forthcoming in the business review for Coinme.

Michael Donovan (Equity Research Associate)

Thank you, Ben. One final question before I hop back in the queue. This one's around your closed loop system that you have going on in American Samoa. With the new partnership with Intercash, are you gonna be tweaking this closed loop system for Europe, or how are you thinking about this from a strategic perspective?

Ben Errez (Chairman and Co-founder)

That again falls under the jurisdiction of Min. Min, back to you.

Min Wei (COO)

Yeah. Thanks for the question. I would say in the near term, it's really not impacting each other, right? You know, it was amazing that we're able to roll the solution to, you know, close to, I would say by end of the quarter, close to, you know, 60%+ of the merchant locations on the island. You know, we continue to, you know, achieve amazing volume there. The closed loop ecosystem for the island is much hinged on our, you know, digital platform for, you know, payment processing, merchant acquiring. We do have a plan to, you know, roll out in a Coinme and to further enhance the digital experience on the island in the coming few months. We are actually working very diligently with our partner in a TBAS, the Territorial Bank of American Samoa, on that.

You know, the partnership with Intercash is more on the issuing side, right? You know, on the issuing side of the business, you know, the most imminent opportunity is in Europe as well as in the US. That's targeted on certain, you know, demographics. You know, I cannot share too much details until we get all of those penciled out, you know. We do see the potential of converting in up to, you know, $1 million, potentially $1 million+ in Europe. We also have a plan to look at how to roll it out in the mainland of the United States, you know, up to a few hundred thousand cards. It, it doesn't necessarily mingle with each other.

Surely, if we gain more momentum on the issuing side on continental Europe and also in the US, we'll continue to explore how to expand the issuing program for American Samoa as well. We are trying to, in the near term, you know, focus on the better volumes on the continental Europe and the US.

Michael Donovan (Equity Research Associate)

Okay, great. Very helpful. I appreciate, Ben. Appreciate, Min.

Ben Errez (Chairman and Co-founder)

You're welcome, and say hello to Kevin for us.

Operator (participant)

As there are no more questions from the phones, I would like to hand the call back over to Ben Errez for any closing remarks.

Ben Errez (Chairman and Co-founder)

Thanks, Charles. Thank you all for submitting these thoughtful questions and your interest in RYVYL. I hope you enjoyed this production that was entirely edited and produced by AI. This has worked very well for us, and we will continue to use this technology in future calls. Operator, back to you to close the call.

Operator (participant)

Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.