POSaBIT Systems Corporation (PBIT) Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the POSaBIT Systems Corporation Third Quarter 2026 Earnings Call. [Operator Instructions] Please note, this call is being recorded. I will now turn the call over to your host, Mr. Oscar Dahl, Chief of Staff at POSaBIT Systems Corporation. Sir, the floor is yours.

Thank you, operator. With me on this call are Ryan Hamlin, Chief Executive Officer; and Emily Eagon, Chief Financial Officer. I would like to begin the call by reading the safe harbor statement. This statement is made pursuant to the safe harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. All statements made on this call, with the exception of historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the company believes that expectations and assumptions reflected in these forward-looking statements are reasonable, it makes no assurances that such expectations will prove to have been correct. Actual results may differ materially from those expressed or implied in the forward-looking statements due to various risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those expressed or implied in the forward-looking statements, please see risk factors detailed in the company's annual report and subsequent filed reports, as well as in other reports that the company files from time to time with SEDAR. Any forward-looking statements included in this call are made only at the date of this call. We do not undertake any obligation to update or supplement any forward-looking statements to reflect subsequent knowledge, events or circumstances. The company will also be citing adjusted EBITDA, adjusted revenue and adjusted gross profit in today's discussion. Adjusted revenue, adjusted gross profit and adjusted EBITDA are non-IFRS measures used by management that do not have any prescribed meaning by IFRS and may not be comparable to similar measures presented by other companies. The company defines adjusted revenue as gross revenue minus license support revenue plus actual licensing cash received as part of POSaBIT's licensing deals. The company defines adjusted gross profit as adjusted revenue less company cost of goods sold. The company defines adjusted EBITDA as net income or loss generated for the period as reported before interest, taxes, depreciation and amortization, and further adjusted to remove changes in fair values and expected credit losses, foreign exchange gains and/or losses and impairments. The company believes these non-IFRS measures are useful metrics to evaluate its core operating performance and uses these measures to provide shareholders and other supplemental measures of its operating performance. The company also believes that securities analysts, investors and other interested parties frequently use these non-IFRS measures in the evaluation of companies, many of which present similar metrics when reporting their results. We caution that adjusted revenue, adjusted gross profit and adjusted EBITDA are not substitutes for gross revenue, gross profit or profit/loss, respectively. Now I would like to turn the call over to Ryan Hamlin, Chief Executive Officer. Ryan, please proceed.

Thanks, Oscar, and welcome, everyone. As always, all the numbers we'll be discussing today are going to be in U.S. dollars. POSaBIT delivered another quarter of strong growth in our core business, with continued progress on margins, profitability and cash generation. Our focus remains exactly where it has been: expanding our point-of-sale footprint, increasing the value of each merchant through reoccurring SaaS products, growing our margins and building a business that generates cash every month. Let me hit some of the key highlights for the quarter. Point of Sale revenue grew 39% year-over-year, which expands our reoccurring monthly and annual SaaS revenue and makes the business much more predictable. Gross profit grew to approximately $2 million, and gross margin expanded to 87%, a 6-point improvement over the prior year. Adjusted EBITDA was approximately $640,000, another quarter of positive adjusted EBITDA. We ended the quarter with approximately $2.9 million in cash, excluding a $1 million loan payment we made to Perga Capital Partners. Cash would have grown to roughly $3.9 million, an increase of more than $0.5 million during the quarter. And as I mentioned, we paid down $1 million of our loan with Perga Capital Partners ahead of schedule, while negotiating improved terms that reduced our go-forward interest expense and extended the term of the loan out to March of 2030. Our Point of Sale business continues to hold a dominant position among cannabis retailers in Washington State, and that footprint gives us a real advantage as we begin additional -- introducing additional products into the market. Our Brand Portal for producers and processors keeps gaining ground, with most of the state's top cannabis brands now live on the platform. That now lets us connect retailers, producers and processors all in real time and monetize the entire cannabis ecosystem in our home state. Before I turn it over to Emily to walk through our Q3 '26 financial results, I'd like to congratulate her on her appointment as our new Chief Financial Officer, which we announced last Tuesday. Emily has been running our finance team for the last 18 months as our VP of Finance, and we are thrilled to now have her officially as our new CFO. All you, Emily.

Thank you, Ryan, and thank you to the Board and the team. I'm glad to be in this seat. Ryan covered the headlines, so I'm going to intentionally spend a little more time and detail on what sits underneath them, the quality of our revenue, where margin and costs are heading and how the end of the monthly period of our licensing agreement flows through adjusted EBITDA and cash. Unless otherwise stated, comparisons are the 3 months ended September 30, 2026, against the same quarter of 2025. Reported revenue was $2.3 million, down 2% year-on-year, but up 3% over Q2. The total is flat, but the mix is not. Revenue tied to the licensing agreement fell $200,000 due to the contract moving from a per-month royalty to a per-terminal royalty. Excluding the licensing agreement, revenue from the business we run every day grew 8% year-over-year and 14% over Q2. As Ryan mentioned, the Point of Sale is now our largest revenue stream, at $1.1 million or 48% of total revenues. What matters more is what's inside it. Recurring POS revenue, so excluding onetime hardware, was $967,000, up about 60%. And remember, recurring revenue is where the margin is. Referral revenue from our payment partners was slightly over $1 million, up 14% over Q2. From this time last year, net of the processing costs we still carried in Q3 2025, so on a like-for-like basis, payment contribution grew about 7%. Gross margin was 87%, up from 81%. Two things drove that. Processing costs under our old payment model accounted for $232,000 in Q3 last year and are now essentially 0, and recurring software keeps growing as a share of the mix. Margin was down by 4% from Q2 for a specific reason. License support revenue carried no cost. So as it steps down, the blended margin settles towards the margin of our core business. Operating expenses, excluding foreign exchange, were $2.1 million, flat with Q2 and up 4% year-over-year. The increase is mostly people costs. Salaries and benefits were up 7% as we invest in our team who build our products, including the AI work Ryan will talk about next. Share-based compensation fell to $30,000 from $78,000. With core revenue up and being sequentially flat on costs, we're really starting to see operating leverage in the core business. Foreign exchange was a small gain this quarter against a larger $358,000 loss a year ago. That swing, together with margin, brought the operating loss down to $123,000 from $511,000 this time last year, a 76% improvement. Net loss was $118,000 compared with $596,000. One item to call out, the amendment to our credit facility produced a onetime noncash net gain of $136,000 under IFRS. Excluding it, net loss would have been about $254,000. That's still less than half of last year's. Adjusted EBITDA was $639,000 compared with just over $1 million in Q2, a decrease of $442,000. Licensing cash alone fell by more than that. We collected $864,000 under the agreement in Q3 versus $1.5 million in Q2 because the licensing monthly royalty period ended in August. That's a $674,000 reduction. The rest of the business made up about $232,000 of that gap, $58,000 from our new royalty and roughly $174,000 from core revenue growing on a flat cost base. So the decline in adjusted EBITDA is a contract timing story. The operating business improved quarter-over-quarter. Going forward, the licensing contribution becomes the per-device royalty, which is smaller and usage-based. That means adjusted EBITDA will lean much more on the core business. It's why core revenue growth and its stable costs are the 2 measures we are managing most closely. Ryan touched on cash also, but to reiterate, we began the quarter with $3.3 million in cash. Operations generated $564,000, and we used $1 million for the principal repayment, and we ended at $2.9 million. Year-to-date operating cash flow was $2.1 million compared with $305,000 a year ago. From a quick year-to-date perspective, revenue is at $6.7 million. Gross profit grew 14% to $6 million. Gross margin is at 90% versus 67% last year, and net loss narrowed by 1/3 to $274,000. To sum it up, the licensing agreement did what it was designed to do, and it now continues as a smaller ongoing royalty. Underneath it, recurring revenue is growing. Margins are structurally higher than a year ago. Costs are stable, and we used the cash to produce -- to reduce and reprice our debt. What a great quarter. Once again, I have to thank the entire POSaBIT team for the execution and commitment that continue to make these results possible. With that, I'll hand it back to Ryan to wrap up the call.

Thanks, Emily. As you can see, we're continuing to execute on the fundamentals of the business, growing our core, expanding margins, generating cash and strengthening the balance sheet. That combination puts POSaBIT in a strong position for the rest of this year and beyond. I want to close by commenting on a few large product announcements we made in Q3. Hopefully, you were all able to read the press releases when those came out. The one that I'm most excited about is our new POSaBIT MCP server or AI connector, which we shipped this quarter. For those not that familiar with MCP, it's the Model Context Protocol. It's an open standard that lets AI assistants like Claude or ChatGPT connect securely to a data source. Many people call them AI connectors as well. Our MCP server lets a retailer or brand point their AI assistant at their own POSaBIT data and ask plain language questions. For example, what were my top products last month across all my stores and what were my top 10 products sold? And get an answer within seconds with no report to pull. And because it's read-only, their data stays fully protected. This is now available to all our brands and merchants on the POSaBIT platform. Alongside the MCP server, we also shipped a full refresh of our back-end portal built using our internal AI capabilities, making it easier for retailers to manage their point of sale every day. These launches reflect how we're embedding AI across the board at POSaBIT, both in the products we build for our customers and also how we run our company. In fact, all employees at POSaBIT use AI daily to increase efficiency and speed to market. With that said, as always, thank you for being a POSaBIT shareholder. We appreciate your continued support and we remain focused on growing the business, improving profitability and, of course, creating long-term shareholder value. Thanks for your time today. We're going to move into the question-answer period. We received a couple questions online prior to the call. So I'm going to let Oscar go ahead and ask those.

Ryan, first question. Last quarter, a question was asked about insiders buying stock since it is so cheap. Can you give us an update on that?

Yes, good question. I mean, quickly, we had our annual strategy meeting this last week with our Board, everyone flew into town. And one of the things I talked about with the Board during a break was how much -- how many shares have we all bought. And we did the quick math, and insiders had acquired a little over 2 million shares so far this year alone. So I think that in itself is a very strong signal of confidence that obviously the Board has in the company and its long-term value. One of the things people need to know is we, as the Board, we buy in the OTC, not on the CSE, not on the Canadian exchange. So sometimes people ask like, where can I get the insider information? All of our purchases are made on the OTC, and that's where you'd find those.