Ryvyl - Q4 2022

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, and welcome to the RYVYL Fourth Quarter and Full Year 2022 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following management remarks, the conference will be open to questions. The earnings press release accompanying to this conference call was issued at the close of the market today. The annual report, which includes the company's results of operations for the 12 months ended December 31st, 2022, was filed with the SEC today. On our call today are RYVYL Chairman, Ben Errez, Interim Chief Financial Officer, Mary Lay Hoitt, 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. Thank you, Ben. The floor is yours.

Ben Errez (Chairman)

Thank you for joining our Fourth Quarter and Full Year 2022 Financial Results Conference Call. In an ongoing effort to simplify the reporting process and make it more efficient and cost-effective, we are utilizing AI to edit and produce portions of this call. We hope you see the value in doing so as we do. If it is successful, we will increase the use of these tools in future calls. Against failing crypto exchanges, volatility, and more recently bank failures, RYVYL continues to make meaningful strides toward achieving its long-term objective of becoming a disruptive force in the digital payments market. Our fiscal year 2022 was highlighted by continued top-line growth, leading to record revenue of just short of $33 million on a total processing volume of $3.6 billion. A new company record and growth of 83% from 2021 processing volume.

As a reminder, we only recently launched our Gen 3 Technology just two short years ago. Achieving such growth in a relatively brief period while remaining compliant is truly remarkable, especially in light of a slowdown in global growth from persistently elevated inflation. RYVYL continues to prove the growing adoption of innovative payment solutions, as Min will attest to during the breakdown of our segment results. The levers that drove RYVYL's growth in 2022 are our merchant acquiring a business and geographic expansion following the completion of our acquisition of Transact Europe. We expect these two areas to continue to pave the way for future growth for our processing business for years to come. Meanwhile, we continue to rigorously focus on additional growth drivers that we expect to drive long-term sustainable value for our shareholders.

The first of which is our stablecoin technology, branded as Coyni, which we officially launched in October 2022. Given recent disruptions in the crypto and stablecoin markets, along with the more recent bank failures, increased regulation is undoubtedly on the way. We believe Coyni will be a beneficiary of that as it presents an ideal solution. Coyni is properly pegged to fiat currency, both in coverage and compliance reporting. Coyni's equivalency to fiat and likely to eventually be even better than fiat as it has the potential of being adjusted or hedged by commodity. To ignite Coyni's growth trajectory, we will use a multifaceted approach. First, we'll leverage our existing growing global processing volume to increase the adoption of Coyni. Second, we believe a spin-off of Coyni as a separate publicly traded entity has several benefits that I previously discussed and will best position its growth.

This has long been part of our growth and value creation strategy. While market conditions hindered this initiative last year, recent sector turmoil have reopened the doors of opportunity for us. We have identified and expect to acquire the vehicle to spin off Coyni's technology, branding, and revenue into a publicly traded company in the coming weeks. We have also identified the investment banking team for the proposed transaction. We are in the process of evaluating mergers with possible partners. Upon completion of the spin-off, we plan to reward shareholders with a special dividend for their long-standing support. Another important growth driver for us is our relationship with the Territorial Bank of American Samoa. In Q4, we experienced continued progress toward the adoption of our payment solutions through this partnership. I am pleased to report we now process the island's majority of electronic payments just three quarters after deployment.

This is a successful demonstration of our capabilities to create a closed loop ecosystem and modernize payments infrastructure. It has helped generate interest from a variety of potential customers, including other islands, businesses, and governments around the world. We continue to explore collaboration opportunities with the bank. We were very pleased to recently report we are seeing traction with our Banking-as-a-Service solution, with six global financial institutions signing up and adding an estimated $100 million in monthly transaction volume over time. In the aftermath of major bank failures, RYVYL was chosen by these firms due to our innovative infrastructure as a robust, compliant, and superior Banking-as-a-Service solution. We believe this is just the tip of the iceberg for our Banking-as-a-Service solution and expect to see continued growth in this segment play an important role in our evolution.

The company is experiencing a strong and growing pipeline, domestic and international acquiring business, market share capture in Samoa, and recent breakthrough wins with our Banking-as-a-Service solution. This, coupled with plans to spin off of Coyni to unlock its potential, we are well-positioned to significantly expand our presence in the digital payments market. Deliver strong results for our shareholders. With that, I'd like to introduce our interim Chief Financial Officer, Mary Lay Hoitt, to walk us through the details of our financial results and the impacts of our restatement.

Mary Lay Hoitt (Interim CFO)

Thank you for the introduction, Ben Errez. I'm excited to be part of the team. Before I dive into the Q4 and 2022 financial results, as disclosed in our filings, we amended and restated our audited consolidated financial statements and related disclosures for the year ended December 31, 2021. Presented in this Form 10-K, along with our unaudited consolidated financial statements and related disclosures for the quarters ended March 31, 2021, June 30, 2021, September 30, 2021, March 31, 2022, June 30, 2022, and September 30, 2022. The following adjustments impacted revenue, net loss, total assets and shareholders equity. A full description of the adjustments and accompanying tables are available in our 10-K filing. The company recorded adjustments to reverse the recognition of certain commissions related to transactions processed under the Sky Financial portfolio.

The company has recorded adjustments to properly reflect certain transactions as the repurchase of the company's stock. The company determined that for one of its gateway banks, it had not accrued the appropriate fee % and has recorded adjustments to each of the periods being restated to record additional fees in the statement of operations and to reduce the net receivable due from the gateway bank. The company made adjustments to charge off certain receivables due from gateway banks. The company recorded adjustments to increase its merchant liability balances for each of the periods presented to properly reflect all liabilities incurred as of the end of each respective period being restated. The company made certain adjustments to properly account for this convertible debt in each of the three quarters of 2022, including adjustments to the debt balance, interest expense, loss on extinguishment of debt, and accumulated accretion.

In addition, the company recorded adjustments to make certain reclassifications on its balance sheet to record the loss of extinguishment of debt and to record fee income from merchants related to assessed fines and penalties. Turning to the company's fourth quarter and full year 2020 financial results. 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-K filing, which will be available on the company's website under SEC Filings. Fourth quarter results. Fourth quarter net revenue increased by $4.0 million or 56% to $11.1 million from $7.1 million in the year prior.

The increase was primarily due to an increase in processing volume due to the number of factors, including growth of our customer and merchant base as a result of expanded sales and marketing efforts. The expansion and growth of our advanced blockchain ledger-based payment solutions product offering, combined with an expanding ISO and partnership network. Our expansion into the Banking-as-a-Service and FX business using our acquired capabilities in the EU market, our business growth in American Samoa and our strategic acquisition strategy. Operating expenses increased by $5.3 million-$24.7 million for the three months ended December 31, 2022, from $19.5 million in the same quarter of the prior year. The increase was primarily due to an increase in depreciation and amortization expense, including an impairment charge of $14 million related to the acquisition of Sky Financial portfolio.

With the impairment charge, the company has written off the book value of the acquired intangible assets of $18.1 million due to the uncertainty of gaining access to the acquired merchant accounts and ISO list. The company recorded a net loss in the fourth quarter of 2022 of $16.4 million or $0.41 per basic and diluted share, compared to a net loss of $15.9 million or $0.16 per basic and diluted share in the same quarter a year ago. The increase in net loss was primarily due to an increase in depreciation and amortization, interest and other expenses related to the $100 million senior convertible note issued in November 2021.

For the full 2022 results, net revenue increased by $6.6 million or 25% to $32.9 million in 2022 from $26.3 million in 2021. This increase was primarily due to an increase in processing volume from $1.9 billion in 2021 to $3.58 billion in 2022. The increase in processing volume was due to a number of factors, including growth of our customer and merchant base as a result of expanded sales and marketing efforts. The expansion and growth of our advanced blockchain ledger-based payment solutions product offering combined with an expanding ISO and partnership network. Our expansion into Banking-as-a-Service and FX business using our acquired capabilities in the EU market. Our business growth in South America, Samoa, and our strategic acquisition strategy.

Net revenue in North America segments was $28.6 million, while international revenue was $4.3 million. This compares to $26.3 million, all of which were North America revenue in 2021. Operating expenses increased by $8.8 million or 19% to $54.2 million in 2022, from $45.4 million in 2021. The increase was primarily due to goodwill and intangible impairment charges of $18.1 million related primarily to the Sky Financial portfolio. Increase in payroll and payroll taxes due to increased headcount and professional fees, though offset by a decrease in general and administration expenses. Decreases in stock compensation for services by $11.8 million to reward key vendors for services rendered and to conserve cash.

There was a decrease in stock-based compensation to employees by $3.5 million, partially offset by increase in stock grant expense. Increase in research and development expenses by $2.4 million due to expenditure on the Coyni platform development and version 1 pilot that led to a successful version two systems go live in the second half of the year. Increase in marketing expenses by $1.2 million to establish our new master brand RYVYL and develop our new corporate website. Now, turning to non-operating expenses. There were several unusual items in the non-operating expense category. Including expenses related to amortization of debt discount, the company incurred interest expense of $8.2 million in 2022, primarily related to the increase in average outstanding debt due to the issuance of the $100 million convertible note in November 2021.

Non-cash interest expense from the amortization of debt discount was $15.1 million in 2022. We recorded a gain from derecognition on conversion of convertible debt of $16.9 million in 2022. We recorded a loss on a merchant liability settlement of $5.7 million in 2022. We ended fiscal year 2022 with a loss from operations of $38.1 million, compared to a loss of $20.8 million in 2021. The increase in net loss from operations is primarily due to increased operating expenses.

The company sustained a net loss for the 12 months ended December 31, 2022 of $49.6 million or $1.03 per basic and diluted share, compared to a net loss of $35.3 million or $0.65 per basic and diluted share in the same period of the prior year. The increase in the net loss for the 12 months was primarily due to an increase in depreciation and amortization expense related to a goodwill impairment charge, as well as interest and other expenses related to the $100 million note. We ended the year with cash equivalents and restricted cash of $40.8 million as of December 31, 2022. I will now turn over the call to Min Wei, our Chief Operating Officer, to provide a review of business operations and our outlook.

Min Wei (COO)

Thank you, Mary. As I've done in prior conference calls, I will provide a walkthrough of the material revenue contributors and before turning over to our 2023 outlook. During 2022, our processing volume hit nearly $3.6 billion, which is approximately 15% lower than our processing projection of $3.8 billion. Q4 volume across all channels is about $508 million, about 59% lower than our Q3 volume. This is primarily due to us suspending the reporting of the volume and revenue from the Sky Financial portfolio, plus the timing of volume ramp-up in the foreign exchange and international payments business in Coyni. Compared to the 12 months ended 2021, we are looking at a 83% improvement.

Should we look at the processing volume outside of the Sky Financial portfolio, our volume improved from $323 million to $1.7 billion year-over-year, or a 420% increase. Our acquiring business Q4 volume is $98 million, which is $536 million less than the Q3's $634 million due to the pause in reporting the Sky Financial related volume. ChargeSavvy is approximately 19% higher than planned, processing $67 million in Q4, and for the full year 2022 processed $250 million. The Q4-over-Q3 growth is about 5%.

For our foreign exchange and international payments business line, including Transact Europe, we reported over $315 million in business volume in Q4, of which $289 million is attributable to FX conversion and international payment transactions. This total year volume of $1 billion is 25% higher than our original budget estimate. For an update on American Samoa, we continue to gain traction and are pleased to share that our services have been rolled out to over 250 merchants, representing over half of the overall merchant target market. In Q4, our monthly volume exceeds $10 million for the first time, with a total Q4 volume at about $27 million. We're very proud of our electronic payment enablement for the businesses and customers on the island.

With respect to our ACH business, we decided to adjust our strategic approach to this offering, and we'll pivot it as part of the Banking-as-a-Service offering in early 2023. We have announced our experience in gaining great momentum in this space recently. To circle back to Coyni, since the launch of our platform on October 12, 2022, we have made a couple of enhancement releases to improve merchant and customer experience. With the recent business environment shifts in the digital asset banking space in the States, it further supports our plan to monetize Coyni platform to support the EU and other international markets. I would like to turn to our outlook for 2023. With respect to the processing volume, we are targeting to achieve $6 billion and plus. Revenue from our existing and planned business expansion is targeted at $60 million for the year.

For adjusted pro forma EBITDA, our target for the year is a positive $4 million. Overall, we expect to continue our strong growth momentum for our various processing businesses through our expanded ISO partnerships and direct sales force, pivot our Coyni platform for significant ramp up in the global markets through our scheduled spin-off plan and further improve shareholder values in 2023. I would like to now turn the call back over to Ben Errez, our Chairman, to begin our Q&A.

Ben Errez (Chairman)

Thank you, Min. to the folks listening to this call, thank you all for your interest and commitment to RYVYL. We are genuinely grateful for your ongoing support. As a personal comment, I would mention and highlight again that my portion of this call was edited and produced using AI. although it sounded like me, it wasn't me talking. I would welcome your comments about that effort. With that, I'd like to begin our Q&A session. Operator, please begin. Thank you so much.

Operator (participant)

Thank you, Ben. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from the line of Kevin Dede with H.C. Wainwright. Please proceed with your question.

Kevin Dede (Managing Director and Senior Technology Analyst)

All right. Good afternoon. Hi, Ben. Welcome, Mary. Hi.

Mary Lay Hoitt (Interim CFO)

Thank you.

Kevin Dede (Managing Director and Senior Technology Analyst)

Wow, I don't really know where to start. Maybe, Ben, you could just sort of refresh our memory on the opportunity you see in the Coyni spin. 'Cause your AI software kinda glossed over that.

Ben Errez (Chairman)

Well, hopefully the real-life version of me can improve it somewhat. Yes, we definitely see a great opportunity in the spin-off for Coyni. There are both on the negative testing side and on the positive testing side, advantages for doing so. First, we wanted to remove the derivative version of the cryptocurrency from the main business. We believe in the technology and the stablecoin opportunity and in blockchain in general, and we think that the combination of the two entities will be far greater than the sum of the parts. To that effect, we have identified the launch vehicle for Coyni and have acquired it.

We have identified several merging partner into this opportunity. We will discuss that separately in days to come. We have identified the investment banking team, and we will do a joint release on that very shortly. All of these will establish a launch opportunity that is not only commercial for the Coyni launch itself, but also a big advantage on the strategic direction for the company for creating shareholder value. We're thinking a very generous opportunity for a dividend for existing shareholders of RYVYL.

We can do that, even though we plan on staying above the 80% ownership of the spin-off company, because we were able to identify the right launch vehicle and acquire the majority of it, in fact, north of 99% of it. Again, we will discuss that separately in days to come. I hope that helps.

Kevin Dede (Managing Director and Senior Technology Analyst)

It helps a lot, Ben. I think one of the details I was looking for was your interpretation of customer feedback. I think one of the questions lingering for me is just whether or not your customers perceive a difficulty in working with RYVYL with such close affiliation to Coyni and whether or not they wanted to see some separation.

Ben Errez (Chairman)

Yeah. Very astute question, and thank you for it. It is true. We see that actually manifested on both sides of the border. Some of our clients, especially international clients, prefer working directly with Coyni because of the speed and availability of funds and the instant settlement and other properties that were made available due to this technology. On the other side of it, we see certain banks and other strategic partners really worried about these derivative reputational risks. You know, we see that from auditors, and we see that from other strategic partners. To that effect, we saw the best direction for the company in this separation, and we think it'll be directly positive on both sides of the border.

Kevin Dede (Managing Director and Senior Technology Analyst)

That, that helps even more. can we sort of peel the onion back a little bit on Banking-

Ben Errez (Chairman)

Sure.

Kevin Dede (Managing Director and Senior Technology Analyst)

-as a Service, Ben? I think what I'd like to understand better is how you're gonna package and market that and what services in particular you're gonna promote and how that marketing effort is aligned with the other services that RYVYL offers.

Ben Errez (Chairman)

Okay. to that, let me invite my brother from another mother to the conversation, Fredi Nisan, CEO, and co-founder. Fredi, go ahead.

Fredi Nisan (CEO and Co-founder)

Thank you very much. That's a great. Banking-as-a-Service is a product that have a huge need today in the market, especially in Europe. We see a lot of different providers, different banks and different services that have different challenges in today market, and they looking for different solutions. Coyni infrastructure and technology, utilize blockchain become something that they looking for and need to be compliant and with the changing of the landscape of financial today. We are going to package that services from card issuing, IBAN and bank account issuing to FX and cryptocurrency to offer different on and off-ramp capabilities utilizing our technology. We have a huge demand for that, as we mentioned in our last PR.

We in Europe especially because a lot of the providers are shutting down for different issues like regulation and compliance. The way we design Coyni, we believe that that solution can be something that they can rely on and grow their business, including our business from those results. We're really excited about Coyni and about the opportunities in the business Banking-as-a-Service. Of course, one more thing that I would like to add is the ability to process credit card, and that's related to the acquiring side of the business. Coyni will leverage that as well in offering different payment structures for the on-ramp capabilities. Yes, we are excited about it and our partners as well.

Kevin Dede (Managing Director and Senior Technology Analyst)

last question for me before I turn the floor over. It, it seems that processing volume missed your target a little bit. I guess this is sort of the elephant in the room. I was hoping you could speak to that and maybe give us an indication. I think the beginning of 2022, there was little seasonal weakness. I'm wondering if you're seeing that so far, given, you know, we're halfway through April already. maybe you could touch on what happened in December and processing volume in the December quarter and how you see it now?

Ben Errez (Chairman)

Okay. For that, I will direct the conversation to Min Wei, our Chief Operating. Min, go ahead.

Min Wei (COO)

Ben, hey, Kevin. As we mentioned here during the earnings call, starting Q4, we stopped reporting the volume processed from the Sky Financial's portfolio. You know, outside of the Sky Financial's portfolio, we really have gained a huge momentum, right? If we look at the annual volume for processing, you know, without looking at Sky Financial portfolio, we went from $320 million, you know, to $1.7 billion. From 2021 to 2022. That momentum continues. When we look at our merchant base, you know, we have grown by about, I would say for the North America acquiring, we have grown by more than, you know, 10%, 15% already in Q1 of 2023. Right. In addition to that, we also are looking at acquiring volume in the European market.

You know, that has really improved from about, you know, $7 million-$8 million a month, you know, to double digit, you know, most recently already. Really the impact going back to Q4 is because we decided to, you know, stop reporting the volume from Sky Financial portfolio. Other than that, our organic growth is very strong.

Kevin Dede (Managing Director and Senior Technology Analyst)

Okay, Ben,

Ben Errez (Chairman)

To add to that, in a couple of words. Sorry for interrupting. You see that as a common theme for what is happening with the company over the past months. We do have this concentrated effort in improving our bottom line, improving our processing efficiency, improving the workforce, improving technology. All of these things work in concert. The one interesting manifestation for that is what you see in today's call, where while the volume reported is decreasing, operating margins are increasing, and the overall performance is actually higher. This is very, very important to notice. We're not done by any means, and we will continue to improve on all of these fronts, but I wanted to make sure that this is on the table and everybody notices that.

Kevin Dede (Managing Director and Senior Technology Analyst)

Yes. Thanks, Ben. Sorry, just for a quick follow-up. The Min mentioned 10%-15% up already. That's year-over-year, I'm going to assume. I'd just like to understand why we're omitting Sky Financial portfolio now. What happened there? I apologize for not, you know, not understanding that.

Min Wei (COO)

Yeah. No, no problem, Kevin. This is a fair, very fair question. It's important that we provide that clarity. As part of the Sky Financial acquisition we announced in 2022, you know, the company expect to receive, you know, assets to customer merchant base, and, you know, business IPs. As of end of December 2022, we have not yet received the assets of those items, which is part of the seller's obligation to us. For prudent in concert with auditors and technical accounting consideration, we have decided not to, you know, recognize the volume and re-revenue associated with that. That's in accordance with U.S. GAAP.

Kevin Dede (Managing Director and Senior Technology Analyst)

Okay. Now do you expect that to change at some point going forward when the auditors are more comfortable with where those assets stand?

Ben Errez (Chairman)

We're not at this point in a position to put targets, new targets on that, but we'll report new information on that as it becomes available. However, we, as Min just stated, we think it's prudent of us to disregard that contribution until we can prove it.

Kevin Dede (Managing Director and Senior Technology Analyst)

Okay. Ben, the $6 billion target for this year and the $60 million is.

Ben Errez (Chairman)

Is without, yes.

Kevin Dede (Managing Director and Senior Technology Analyst)

Does not include the Sky Financial transaction volume, but includes their revenue.

Ben Errez (Chairman)

No, we did not include any number, any performance number, volume or revenue, from the Sky Financial. I should also say that this does not include any performance that we scheduled for Coyni, as it will be reported separately as a separate entity.

Kevin Dede (Managing Director and Senior Technology Analyst)

Very good. Thank you, gentlemen. Apologies for drawing the questions on. I'll happily turn the floor over.

Ben Errez (Chairman)

Thanks, Kevin. Appreciate it.

Operator (participant)

I'd like to now turn the call back over to Ben Errez to answer any questions submitted prior to today's call. Thank you, Ben.

Ben Errez (Chairman)

Thank you. Kevin actually addressed a lot of these issues already. I think the one question that actually was not answered is this, and this was submitted before the call. Has growth in American Samoa opened opportunities into other countries and islands? I think Min is probably in the best position to answer that. I would just say that we do see approach from other countries, South America and South Pacific, for collaboration in on our technology and ledger infrastructure. We will report on some of that in a separate opportunity. But Min may have a further light to shed on this. Min?

Min Wei (COO)

Yeah. Thank you, Ben. Yes, absolutely. We see great potentials in, on American Samoa Island, not only because we treated that as the digital transformation for banking services, and the Coyni platform provides a great foundation for us to allow us to, you know, convert the, you know, payment services there. We already have interest from, you know, local organizations to, you know, utilize Coyni for certain, you know, institutional programs, you know, governmental service programs. You know, we expect that once those materialize, you know, we'll be able to, you know, determine the monetization strategy. You know, with all of that in the plan, we definitely foresee, you know, similar services can be, you know, applied, implemented in the mainland of the United States as well as other countries and islands.

Ben Errez (Chairman)

Okay. With that, I thank you all for submitting these thoughtful questions and interest in RYVYL. Operators, we are back to you.

Operator (participant)

Thank you for joining us today. You may now disconnect your lines. Have a great rest of the day.

Ben Errez (Chairman)

Thank you.