Banxa Holdings Inc. (OTCPK:BNXAF) 2023 & Q1 2024 Earnings Conference Call January 16, 2024 3:00 PM ET
Company Participants
Holger Arians – Chairman and Chief Executive Officer
Sean Moynihan – Chief Operating Officer and Interim Chief Financial Officer
Zafer Qureshi – Executive Director, Head of Corporate Affairs
Josh D’Ambrosio – Chief Commercial Officer
Holger Arians
Hello, and welcome, everyone, to Banxa’s webinar today. My name is Holger Arians. I’m Chairman and CEO of Banxa. Thank you everyone for joining from all around the world, I believe. I see a number of familiar names. Thank you for taking the time and the interest in our presentation today.
Today, we’re going to present you the financial year ’23 results and Q1 FY ’24 results. Then, Zafer, if you can go to the next slide just to share who’s presenting today. Besides me, I have Zafer Qureshi, who’s Executive Director, Head of Corporate Affairs at Banxa. We have Josh D’Ambrosio, our Chief Commercial Officer; and Sean Moynihan, our COO and Interim CFO.
The agenda today, I’m going to start with a short business update. We just had our last webinar in November where presented the FY ’22 results after the delayed audit. Today, Sean is going to walk you through our audited ’23 results and the unaudited Q1 results of FY ’22 — ’24, excuse me. And then, Zafer is going to touch on the path to profitability, which we’ve been spoken to earlier. And then, we’ll start with the question-and-answer session. If you have any questions during the webinar, please just hold them until the end, put them into the chat window, the question window, and we’ll make sure that we have enough time to answer all of these.
Okay. So, just want to start with a quick business update. Banxa is the leading on and off ramp in the world. What that means is we’re integrated with major crypto platforms like MetaMask or Trust Wallet or OKX crypto exchange and hundreds of others where their users, their hundreds of million users can basically just convert their fiat currency to cryptocurrency. For everyone who wants to do something in crypto or digital assets, that journey usually starts with fiat currency. So, think about your Australian, Canadian dollars, that you want to convert to Bitcoin, for example, Banxa is doing that inside all these platforms. We can do that because we have all the licenses and the payments. We have all the fraud controls, and the technology, most importantly, to source these coins, send them directly into your wallet.
But that’s what Banxa does, and we’ve been doing this very successfully. The business is now 10 years old. We’ve transacted over $3 billion in that time. We have over 1 million customers and 5 million orders processed. In fact, we’re processing one new order every 18 seconds, and that’s still in a market which is only slowly warming up.
I mentioned the partners that we have. Again, compared to the last bull cycle where we had less than 100 partners, we now have 300 partners. So, we’re really everywhere. There are only a few big ones missing that we don’t have yet, but we’re obviously working on those. But you can see that Banxa has made great progress on that front, and there was always the goal for us to be pretty much everywhere. Banxa is now very well-known entity in the space, and all these major crypto platforms around the world are relying on our infrastructure.
We continue to acquire licenses to be able to do what we’re doing, the crypto money transmitter licenses in the U.S., for example, and other places in the world. So that is a very strong point of Banxa. And then, we’re obviously trying to offer as many payments as possible so that people have a good way into this industry and out as well because we’re doing off ramping obviously as well where you can convert your crypto back to fiat.
Next slide, please, Zafer. I guess, on the corporate side, we’ve removed the Management Cease Trade Order that was in place for two months’ time while we were completing the audit. We have changed auditors after what happened with the FY ’22 audit. We have now new auditors that needed to get their head around the business, but also really didn’t leave any stones unturned. So that was a very thorough review, but it has taken more time because it was the first one, and Banxa was still sort of processing the learnings from the FY ’22 audit, where regulation has changed and suddenly our processes had to be updated as well.
So, we’re in a much better shape right now, have learned a lot, have implemented a lot. And part of that is also that we have now appointed Patrick Maguire as our official CFO. Sean Moynihan, our COO, has taken the role in the meantime and has done an incredible job of just jumping in with without much background, taking over from the previous CFO who left a little bit unexpected. And we were very happy that Sean took this over and really uncovered many, many things that should have been done much earlier.
So, we’re very happy with the outcome and the stability we have created for the future. So, this chapter is closed. We’re excited about the shape [with broad] (ph) Banxa in on the financial systems and processes front and the structure, obviously, with our people.
And I guess, on the corporate front, we have continued turnaround. Zafer and I have really done a lot of heavy lifting over the last quarter, that were — there was a capital raise in a very difficult market still. We have bought out the convertible note as a next step after the capital raise, and we’ve initiated Board changes and are continuing to look at the Board composition, obviously. And then, we’re also reducing our cost of capital, the loans we’re having and just making things much more efficient.
I think what’s important is just to be patient on seeing these changes because Banxa, with all our licenses, being a listed company, being — having gone through hyper growth, it takes a long time to turn the ship around, and I really just would like to ask our shareholders, potential shareholders to have the patience. There are great things happening. We’re certainly seeing the market warming up. And we are very sure that the things are surfacing very soon, and we’ll see those — continue to see those results. And we’re very excited of what we have achieved, but also what’s in store for the next few months and the next few years as well.
I guess on the partner front, we have continued to onboard the major partners of the industry, Trust Wallet, probably the biggest wallet, together with MetaMask out there with tens of millions of users. In Coinbase, we are an aggregator called Onramper who has integrated with Banxa. So, we’re now indirectly integrated in Coinbase, but also talking with them directly as well. So, I think that just validates the quality product we’ve built, and we’ve always focused on the product.
We did have to get other things in the house in order. I think we have made great progress and continue to do so. And we’re getting a lot of good signals from the market as well. So, earlier this month, we had the spot ETF approvals in the U.S., which send a really strong signal to the market. What that helps with is just a much better user experience if people want to get into this space, much more trust and clarity on the regulatory front, which we’ve always waited for.
The next milestone or event to look forward to is very soon as well, and that’s usually a buildup in the market, the Bitcoin halving in April, that usually gets more people excited and get back into the space to trade.
So, we are quite happy that the last two years are now behind us, and that there is an exciting time ahead of us. And, hopefully, our share price will also reflect that very soon with all the work we’re doing. So, please stay tuned for what’s going to come, and trust us on the work we’ve done that you might not see yet. But there’s a lot going on, and I believe we got the message off that needed to be changed. We’ve done it. We continue working on it, and we’re happy with the progress, but we’re still a long way ahead of us. But we do have the confidence that we’ll get there.
And with that, let’s get into the numbers. Sean, I’ll hand over to you.
Sean Moynihan
Thanks, Holger, and hi, everyone. Thanks for joining.
So, yeah, excited to show you the numbers for FY ’23 and first quarter of FY ’24. Just to clarify, when we’re talking about FY ’23, we’re talking about the period of 1 July ’22 through to 30 June ’23. So, we’re working on the Australian financial year, and not calendar years. Just want to clarify that in case anyone was uncertain. And we presented an estimate for FY ’23 in the last webinar. So, now we have the final audited numbers, as Holger mentioned, that was completed the end of December. So, these are the final numbers for FY ’23, but they haven’t really changed materially to estimates we presented in the last webinar, except for perhaps the revenue item, and I’ll talk to that a little bit as well on this slide.
But just starting at the top-line, the total transaction volume, so that’s the total sales we process, otherwise acronym to TTV, is a really, really important metric for us, but won’t be the most important metric and I’ll get to that in a second. So, we did see a decrease in that and quite a significant decrease in FY ’23 and that was driven by the contraction in crypto volumes through the bear market. And many of you may already know the crypto markets go through four years cycles, two years of bull market and two years of bear, and we were in the bear market in FY ’23. And hopefully coming out of that pretty soon.
So, we did see a reduction in the TTV. But at the same time, there was an increase in the revenue. And you may be asking, how could that happen? Quite simply, it’s just how the revenue is recognized. And I talked to this a little bit in the last webinar, but realize some people may be joining it and not have seen that one. But basically we can recognize our revenue on two bases. One as an agent. And when we act as an agent, the revenue recognized is just our commission. And one as a principal, where we recognize 100% of the sales. And so, what has been happening throughout FY ’23 and it will happen more in FY ’24 is we’re acting more as a principal.
And the determination when we’re a principal is essentially we’re selling our own inventory. We’re selling coins that are in our own wallet, which we have the keys to. And we’ve been moving to doing that more because: one, it’s more efficient in terms of settling to customers, the fees are lower if we settle from our own wallet versus a third-party wallet; and two, the security aspect as well. And I’m sure everyone’s pretty familiar with FTX and what happened to people holding funds in FTX and still not being able to access those funds. So, it’s sort of twofold. And so, you’ll see this revenue item go up over time. And it can be a little bit disproportionate to the movements in the TTV.
Because of that, what we really focus on and we think are the two core metrics, which are the ones in green here, is the gross profit. So, once we’ve netted out all the cost of sales, what’s our gross profit and the net take rate. And we’ve been focusing really on trying to grow these metrics. Now in FY ’23, we weren’t able to grow the gross profit, unfortunately. But you can see that the decrease in it is only 17%, whereas the decrease in the total sales is 54%. And the reason for that is, in the next line, you see the net take rate, that’s gone up 80%. So, we’ve been focusing really, really hard on being more efficient, focusing on reducing our cost of goods sold. And we’re seeing great results there.
And we’re sort of getting to the point now where we will definitely still see improvements and we saw some improvement in Q1, but it’s probably getting to the point where the improvements are going to start to become incremental. We’re not going to see these huge uplifts in the net take rate. But what’s really important is that we’ve got it to this point now, because as Holger mentioned, we’re expecting the market to really pick up and we want to be the most efficient we can be during that time.
We saw a little bit of a decrease in our operating expenditure. So, we have been doing some restructuring and that went down by 21%. We saw a reduction in our operating income — sorry, an increase in our operating income and reduction in our operating loss, largely due to the operating expenditure being a little bit more efficient. And you see that through into the net loss and the adjusted EBITDA.
Cash went down a little bit and that was really funding the product development so we could enter new segments such as the wallet segment has been a real core area of focus for us and customizing our product to better suit that segment and it has worked really well, which we’ll see in the next slide.
So, now if we compare Q1 of FY ’24, so 1 July ’23 to 30 September ’23 to the corresponding period, the financial year before, we’ve had a massive uplift in TTV, a massive uplift in revenue, but not all that’s due to the increase in TTV. Like I said, we’ve been moving more to doing transactions on a principal basis. So, we will naturally see that number go up a lot. But really importantly, we’ve seen a really big increase in the gross profit. And again, the net take rate has helped, but it’s been a twofold increase in the TTV and increasing the net take rate.
A marginal reduction in our operating expenditure. So, we’re always working on how can we be more efficient there? And we want to always try to drive that down quarter-on-quarter. But at the same time, it may go up if we see opportunities in the market to grab more revenue.
The operating loss went down, because the gross profit has gone up. But I should also mention, in the prior financial year, in FY ’23, we did have $3.2 million of other income, which you’ll see in the P&L. And that was from a sale of a non-core business asset. So, in FY ’23 that did reduce our net income and our net loss. But you’ll see here that when we do the quarter-on-quarter comparison, and that sale of that asset happened in Q1 FY ’23. So that’s why the net loss is lower relative to Q1 FY ’24, because in Q1 FY ’24, we didn’t have the sale of that asset. And the adjusted EBITDA was lower in FY ’23, because it was really boosted by the sale of that asset.
Again, cash is down a little bit. But that’s been really investing in the sales particularly the wallet segment, which has driven the TTV and GP growth. So, it has had a really great return on investment.
And that’s everything, yeah. Again, put your questions in the Q&A if you have any.
Zafer Qureshi
Great. Thank you, Sean. So on to, I guess, how are we tracking forward? Since I joined as an Executive Director, our big initiative has been to get to profitability and get there as quickly as we can. In this market, it’s very critical that we operate within our means and [Technical Difficulty] are cash flow positive, because companies that are burning cash quite a lot [Technical Difficulty] and we want to ensure that we’re self-sustainable and moving forward in a very healthy financial position.
So, I’m really excited to share with you guys that all the effort that we’ve been putting in and optimizing our costs, getting more efficient over the last three to four months, we’re starting to see the fruits of all that effort. And in January of essentially this month, we are on track to be cash flow positive. So, super excited about that.
Just double clicking into it to how we’ve been able to do that. The cost optimization efforts, since when you compare us to Q1, we really tried to hammer down on — trying to become as lean as we can and reduced our costs overall by 22% quarter-over-quarter. And some of the efforts that have gone into that, the key areas, so essentially restructuring our debt, buying out the secured convertible note, lowering our costs of liquid facilities, right-sizing our payroll, enhancing a lot of the controls and reducing unnecessary third-party processing costs. And then generally just in terms of our overall financial operations as well, ensuring that we have the funds in the right jurisdictions, the right bank accounts for how the TTV is being processed in all these different areas. So that’s been super critical in getting us to this point.
And then, as kind of Sean has mentioned, over the last 12 months, there’s been massive effort in trying to make sure that our net take rate, we’re essentially processing our transactions as efficiently as we can. And that’s been a combination of product enhancements and generally ensuring that we’re having the liquidity available where it needs to be, minimizing FX rates and things like that. So, greater focus on the key markets and the key partners, ensuring that we’re using the right — providing the right payment method to the customers through our partners and ensuring that we have the adequate banking relationships in all the different jurisdictions that we operate in. That just ensures lower banking costs and just overall processing costs.
So, just as we kind of look forward to 2024, really optimistic that the market is going to be on an upswing. And we wanted to really ensure that we’re in a position to capitalize on that. But if it doesn’t pan out, based on our expectations or the timing isn’t right, that we don’t have a need to or we’re not continuing to burn cash and we can essentially operate within our means. So super excited about 2024, and all the work that we’ve put in, there’s lots of return that we’re still yet to see from all our efforts, but I’m really confident that 2024 will be a big year for Banxa and obviously all our shareholders.
Question-and-Answer Session
A – Holger Arians
Thank you, guys. Appreciate your contribution here. Let’s go to the question. There are only three questions. If there are any other questions, please add them to the Q&A section here.
We’ll start with the first one. Gentlemen, an update on the company’s biometric suit, please?
So, for those of you who don’t know, we’ve been — we’ve received a legal claim out of the state of Illinois in the U.S. We’ve seen many other crypto companies receiving the same claim from the same claimant. We’ve identified a number of errors with this claim and we formally responded. But other than that there is no real update and we’ll just have to wait and see what the next steps are, but we are not very concerned about this.
Zafer, you might be in best place to take the next one. What are concrete steps Banxa is going to take in 2024 to increase stock price, shareholder value?
Zafer Qureshi
Yeah, definitely. So, generally, I think the key thing is that if we create a good strong foundation for the business financially, be in a very strong position, the share price naturally will reflect that. But when it comes to the share price, there’s several factors that drive that, some that are in our control, others that are driven by generally the market. So, I think we’re doing all the right things to move the levers that are in our control, making sure that financially, first big thing is that we’re operating in a cash flow path moving forward, positive cash flow.
And then beyond that, I think the other thing really is to now tell our story to all the investors out there, really get out there in front of the right investors and ensure that we get back on the radar. Because obviously, with the CTO, we essentially fell off the radar of many investors. But now as the crypto market is picking back up, there’s interest starting to come back into the sector. It’s important to basically get back on the radar. And we’re going to be doing that over the next couple of quarters. So, super excited about that.
Holger Arians
Thank you, Zafer. The next question is, what’s the progress with U.S. expansion? There was a lot of news initially and now there is radio silence. What is happening with Banxa and U.S. operations?
Josh, you probably in best place to answer this one.
Josh D’Ambrosio
Yeah, look, the U.S. launch is something we’re very, very excited about. We talk about quite a bit. Obviously, myself being on the commercial side, I see immense opportunity and demand in that space. In terms of timing, so that’s something we’re actually just working through at the moment. And we’re hoping to come up with our formal plan on when that should exactly land. In the meantime, just worth noting, we do continue to serve the U.S. market at great — at large extent via our third-party provider and looking to unlock further opportunities when we eventually do go live with our own infrastructure.
Holger Arians
Yeah. And I think today we have 34 of the money transmitter licenses. So, we’re still waiting for a few more there. But yeah, definitely, we’re going to be activated this year and we’re very excited about it, but there’s a lot of heavy lifting to get that done.
Okay. And then, the next question is, “Hi, guys. I didn’t understand the Q1 FY ’24 revenue jump from $13 million to $85 million.”
That is a really good question, because — perhaps, Sean, you can explain again how this revenue recognition is working there.
Sean Moynihan
Yeah, definitely. And it’s a good question, and it does look like a bit of anomaly, but it really just comes down to the accounting recognition of revenue. And as I described before, there’s two types. So, there’s the — we acting as an agent, so selling someone else’s inventory, or we acting as a principal and selling our own inventory. And this is similar to other online platforms. So, Amazon would have the same considerations if they’re selling their own stock, they would be recognizing that revenue as principal. And if they’re selling someone else’s, it’d be on an agency basis.
So, if I just run through an example, it might be the easiest way to explain it. If someone buys, a customer buys $100 of Bitcoin from us, if we send them that Bitcoin from our own wallet, so we’ve got Bitcoin sitting in a wallet, which we control, which we have inventory risk on, and we have the keys to, that would be acting as a principal. And we recognize that full $100 as revenue. Now, if we settled that transaction from a third-party’s wallet, we’d be selling their inventory. And we’d only recognize our commission, which we went through before the net take rates around about 2.8%. So, we’d only recognize $2.80 as revenue.
So, what’s been really happening is we’ve been having more transactions where we’re acting as a principal. We’ve been settling more customer transactions from wallets which we control. And we’re selling more transactions using our own inventory versus selling somebody else’s. And as I mentioned before, the reasons for that are twofold. One, it’s cheaper for us to do it. So that’s what helps improve our net take rate. And two, it’s more secure, because we’re the key holder. So, there can’t be that insolvency event like an FTX. So, we’re trying to do more through our own wallets to provide — to secure up our funds.
So hopefully that explains it. I know it’s a little bit confusing. It’s a relatively new thing in accounting still, and the standards are still being clarified, but does create a bit of confusion. So hopefully that helps explain it.
Zafer Qureshi
Yeah. And just one more thing to add on that. Generally, our revenue is going to be volatile just because of the mix between agency and principal. The typical standard metric to actually be — the better metric to be tracking, which we’re going to be shifting more of our focus on in terms of our reporting is the gross profit and the net take rate, which is generally kind of the standard metrics within the payment space.
Holger Arians
Yeah. Thank you. And another one, how will the change in gross profit in upcoming quarters affect operating costs? Will increased profit have a significant impact on costs? Or will costs remain stable and profit go to the bottom-line?
Perhaps, Sean, you can take this one.
Sean Moynihan
Yeah, another good question. So, most of our volume-based costs sit in our cost of goods sold, which is sitting above the gross profit item. So, we should have already netted out those costs when we get to the gross profit line item. Now, there’s a couple exceptions to that. There’s a couple software subscriptions, but they’re relatively small, like there’s less than $100,000 and I wouldn’t expect they grow to be more than $100,000 in a month. That would increase as our volume increases.
Probably the main item sitting below the line — below the gross profit line that goes into our net outcome is interest costs. So, if the volume scales quickly, we’d need to source more liquidity to service that volume, because the delay in fee at settlement times over the weekend. So, we would expect the interest costs probably be the main item to go up, but it’d be disproportionately less in its increase in the increasing gross profit. So, yeah, we’re now at that point where as the volumes — TTV volumes go up and the gross profit goes up, the majority of that’s going to be going to bottom-line.
Holger Arians
Yeah, thank you, Sean. It’s scalable. There are obviously a few operational costs that need to keep up. But overall, this business is highly scalable. We’ve seen that in the last bull market where we didn’t have all these efficiencies and now this is definitely going to reflect in the bottom-line. So, we’re very excited about the market warming up as well with all the work we’ve done internally.
Sean, there’s another question for you. Is there a way to only use our wallet instead of using third-party wallet partners to increase TTV?
Sean Moynihan
Yeah. Look, we can use our own wallets. Now that won’t increase TTV, it will reduce our costs and make our funds more secure. It just requires building some infrastructure and there’s a cost to building that. So, sometimes it’s better to use third-party solutions, particularly for coins or blockchains, which haven’t got a lot of adoption. So, there’s really not the payback for us in building that infrastructure for these coins and chains. So, we will outsource to third parties in that instance. But yes, we want to get to the point where the vast majority are processing through our own wallets. But yeah, that itself won’t have an increase in TTV. It should help the GP and bottom-line.
Holger Arians
Hey, here’s another one. We’ve seen Bitcoin, Ethereum, USDT and USDC volume increase 50% to 80% in the October to December quarter versus July to September. Are you seeing similar increases in TTV?
Okay. So, I think that’s the market increasing, versus is our TTV also increasing? Perhaps Josh, you can take that one.
Josh D’Ambrosio
It’s been really obviously quite good seeing that the market pick up in the last quarter or two, particularly in that Q2. We certainly saw the broader market increase as you’ve outlined there. In terms of our specific TTV, we have seen increases. We’ve seen increases in number of new users. In terms of, is it comparable? It’s probably not quite to the extent that we’ve seen the growth in the overall crypto trading volume. And that’s probably for a number of reasons. One is it’s the type of users that are getting back into this space. We’ve seen a number of coming in at the institutional level. And then number two, a lot of the way we’ve been building in the non-custodial space, we’re expecting to pick up further as that next wave of adoption comes through into retail. And so, we’re probably projecting the greater growth to come through 2024 in that space. But nevertheless, we have seen some growth across Q2 compared to Q1.
Holger Arians
Thank you, Josh. There are no more open questions at the moment. If there’s anything after the webinar, please reach out to Zafer or myself. We really want to communicate much more proactively. We would like to hear from you.
And again, we hope that you see the work that has been done at Banxa, especially over the last couple of months, how we are really trying to turn the ship around for hopefully a better market in the next two years. But even if the market is still a little bit slower, Banxa is getting in a really strong position. And we believe that we’re building critical infrastructure for a space which is, I always call it, a generational event. It’s as big or bigger than the internet.
And what we are doing is building these critical payment and compliance infrastructure. And I think we’ve proven with all the integrations that we have and the users and the partners that we can really deliver. But we also have to work within the constraints we have. We’re a public company in a very new space. We have many, many licenses, so we can’t always move that quickly. But there’s been a lot of great work done and we expect to — for this to continue and for all our shareholders to see the fruits of that.
So with that, please, was there another question? Let’s quickly answer this one as the last one. Will U.S. expansion make a significant impact on TTV considering the U.S. market is already being served through a third-party partner? Is there a set date for the expansion?
Josh, I’ll throw this one to you, and then we’ll wind the lines for today.
Josh D’Ambrosio
Yeah sure. So, for the U.S. expansion, as outlined, we do already serve that market and that provides us broadly access to provide our products there. The opportunity for us is really as this, and we believe this industry does scale to quite a large extent over the coming years. It really offers us the ability to reduce costs in that market. The way we currently operate is we do get aggregated with a number of other providers. And so, by providing those reduced costs, we do expect to see higher top of funnel growth from new users and return users, which would therefore drive a lot more TTV.
The other key areas which are really important for us is it’s the opportunity to add new revenue streams. And so, there’s a few different areas that that can get driven from. It can be from new coins and chains and other sort of features that we can’t offer in the U.S. market, which we do offer globally. And there is quite a significant demand from a number of partners asking us to provide these products in the U.S., which we are currently unable to do so. And then, the second area is a number of new products that we’re working on in the background to see how we can unlock those through that U.S. expansion.
And then, probably the third part worth noting is the U.S. regulatory environments, obviously, always evolving. What we sort of foresee over the years to come is that hopefully we do get that greater clarity. But more and more, it’s going to be important to be sitting [indiscernible] own licensing for any company operating at scale in this space. As if you are not and you do rely on that third party, you’re going to be coming up against some really intense competition from those that do have the local infrastructure, as they can often will be able to offer much more seamless products. So, we think it’s just from a revenue projection point of view, really important and equally on the TTV revenue growth, as well as the cost reduction in that kind of growing market.
And then, sorry, again, in terms of that date, that’s exactly what we’re trying to work on in the background, probably over the next coming weeks. When do we formally want to sort of set that go live, at least internally, and then be communicating that to the greater market.
Holger Arians
Awesome. Thank you, Josh. And thank you, everyone at Banxa for presenting today. Thank you to our shareholders for dialing in. Again, reach out for any questions to Zafer or myself. I’m very happy to answer any of your questions or address concerns. Again, overall, we’re really excited about the change we’ve brought and what’s ahead of us, and hopefully also a market that is looking much better this year than last year.
Thank you everyone. Goodbye.