Triterras, Inc. (OTC:TRIRF) Q4 2022 Earnings Conference Call June 28, 2022 8:15 AM ET
Company Participants
Alvin Tan – Chief Financial Officer
James Groh – Executive Vice President, Investor Relations
Perry Mangers – Vice President of Financial Reporting
Sri Vasireddy – Chief Technology Officer
Srinivas Koneru – Founder, Executive Chairman & Chief Executive Officer
Conference Call Participants
Operator
Good morning. Welcome to Triterras’ Conference Call to discuss the results of fiscal year ended February 28, 2022. My name is Catherine and I’ll be your operator for today’s call. Joining us for today’s presentation are the company’s Chairman and Chief Executive Officer; Srinivas Koneru, Chief Financial Officer, Alvin Tan, Chief Technology Officer, Sri Vasireddy, Executive Vice President, Jim Groh; and Vice President of Financial Reporting, Perry Mangers.
Following their remarks, we will address questions that have been submitted to the company. Now I would like to turn the call over to Jim Groh. Sir, please proceed.
James Groh
Thank you, operator, and thank you all for joining us on the conference call today.
Before we start, I would like to read the following in regard to our forward-looking statements disclaimers and note to investor disclaimers. Please note that certain information discussed on the call today will include forward-looking statements about future events and Triterras’ future business strategy and financial and operating performance. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict and may cause the actual results to differ materially from those stated or implied by those statements. Certain of these risks and assumptions are discussed in Triterras’ SEC filings. These forward-looking statements reflect management’s beliefs, estimates and predictions as of the date of this live broadcast, June 28, 2022, and Triterras undertakes no obligations to revise or update any forward-looking statements to reflect events or circumstances after the date of this call, except as required by law.
Joining me on the call today are our Chairman and CEO, Srinivas Koneru; our Chief Financial Officer, Alvin Tan; our Chief Technology Officer, Sri Vasireddy; and our Vice President of Financial Reporting, Perry Mangers. For today’s call, I am first going to provide a high-level overview of Triterras, our business model and recent achievements and challenges then our CFO, Alvin Tan, will provide some introductory comments, then our Vice President of Financial Reporting, Perry Mangers will review the company’s financial results, which we announced today. Afterwards, Srinivas will then provide an update on the market and our growth strategy; and three, will wrap up by sharing some of the technology innovation occurring at Triterras. I will then return to the call to make some concluding remarks, and we will then address questions that were sent ahead of this call for the instructions provided in the conference call announcement we issued on May 27, 2022.
Like our last call, we think it would be helpful to quickly remind everyone of who we are at Triterras. We are a global FinTech innovator of inclusive financial solutions for the world’s micro, small and medium enterprises or MSMEs. We operate the Kratos platform one of the world’s largest digital financing platforms, which directly connects MSMEs with lenders online to source capital across commodity trading, supply chain, logistics and e-commerce. We leverage advanced blockchain technology to transform trade and trade finance by digitizing the fundamentally paper-based systems exemplified in today’s trade and trade finance transactions. This digitization drives efficiencies, lowers costs reduces transaction cycle times and delivers what we believe to be a monumental improvement in the sustainability aspects of our industry.
It is also important to keep in mind that in our opinion, Triterras’ business model of bringing new trade finance lending to underserved or underbanked market segments effects a world positive social impact. Additional trade finance lending is a critical economic accelerator in emerging market economies. According to the International Finance Corporation, every $1 million loaned to small and medium enterprises in developing countries is associated with the creation of an average of 6.3 direct jobs over 2 years.
Over the last 6 months, we have been quite busy. Since appointing our current auditor, WWC, P.C. on December 31, 2021, we have vastly improved the efficiency of the auditing process. This has allowed us to file an annual report for the fiscal year ended February 28, 2021, on March 7, 2022, report our 6-month results for the interim period ended August 31, 2021, and file an annual report for fiscal year ended February 28, 2022, today, in line with the time line we communicated on our April 25 conference call.
Another important update is the announcement we made on May 16, 2022 that we signed an agreement to settle our class action lawsuit for $9 million, a portion of which will be covered by insurance without admitting any wrongdoing fault or liability. It will take several months to bring this settlement to a full conclusion, but we are hopeful that the class action will no longer require significant attention from our management or be a distraction to our shareholders. We also successfully held our Annual General Meeting on May 5, 2022, another step in complying with NASDAQ’s listing standards and improving shareholder relations.
Regarding the topic of listing our securities, we are continuing to work with OTC markets, which is in the process of reviewing our application to quote our securities in the over-the-counter markets. We view this as a bridge to ultimately relisting our shares on NASDAQ, although we cannot make any assurances regarding our success or timing of an OTC quotation or a NASDAQ relisting. We do believe that the filing of our annual report today was a critical step in the process and providing the regulators with updated information on the company and underscoring our commitment to timely meeting our public reporting obligations.
As we discussed on our last conference call, our industry has faced significant challenges over the last 2 years because of recurring waves of COVID-19 globally that have disrupted global supply chains and substantially extended business transaction cycle times and international trade. These issues have had a direct impact on the liquidity position of many SME traders. This has caused some short-term liquidity issues and coinciding reduction in trading activity levels for some traders.
For others in the trading industry, liquidity issues became a critical threat to their business, causing some to suspend operations entirely. The Kratos community of traders were certainly not immune to these impediments to their business. These challenges have also had a negative impact on the availability of trade credit insurance, which has limited the level of trade finance loans available to SME traders.
The lack of trade credit insurance would have had a direct impact on specialty trade finance funds where their very business model fund charters were reliant on widespread availability of trade credit insurance. Some estimates suggest the trade finance shortfall has multiplied from $1.7 trillion to $4.5 trillion, creating a substantial opportunity for us that we believe ultimately gets addressed as the global supply chain issues are resolved. Unfortunately, we do not have any guidance as to the timing of when these issues will be resolved, but we believe our disruptive digital platform and healthy balance sheet give us a lower cost footprint in the staying power to make it through to the other end of the business cycle.
I will now turn the call over to my colleague, Alvin Tan, who is our Chief Financial Officer, for some introductory comments on our financial statements. Alvin?
Alvin Tan
Thank you, Jim, and good morning, everyone. Before we get into detail on our financial statements, I wanted to provide you with some additional introductory comments. As is clear while following today we’ve timely filed our 2022 annual report with audited financials. We’ve worked very hard to put in place the capabilities to make sure we complete our audits, reviews and filings on a timely basis. Although it is covered in the 2022 annual report, I wanted to make a special mention of our progress in area previously identified material weaknesses in our controls on financial reporting. At the end of our fiscal year ended February 2021, we have identified 3 material weaknesses regarding our internal controls over financial reporting.
Over the past year, my team has worked very hard to mitigate and improve the quality of internal controls. As you will see in the 2022 Annual Report we filed today, we are pleased to report that we have remediated all 3 of these material weaknesses as of February 28, 2022. We view this as a major progress item. As we look to the future, we intend to establish a cadence of financial reporting that is more typical in the U.S. financial markets. We currently intend to file our 6-month results for the period ending August 2022 by the end of November 2022.
With that, I would like to turn things over to Perry Mangers our Vice President of Financial Reporting to take us through our financial results in detail. Perry?
Perry Mangers
Thanks, Alvin, and good morning all. For the 12 months ended February 28, 2022, we had trade transaction volume of $6.7 billion compared to $10 billion for the prior fiscal year. The decrease was due to challenges faced by the company from the impacts of COVID-19. The COVID-19 pandemic has had on the global supply chain and our customers generally.
Despite the reduction in transaction volume, we grew the number of users on our platform from 83 in fiscal year 28, 2021, to 172 in this current fiscal year, which we believe is positioning us to capture more of the market. Trade finance volume represented 36.6% of total volume during the current fiscal year as compared to 34.1% in the prior fiscal year as a larger percentage of users of the trade discovery’s sub-modules got financing via our trade finance sub-module.
Our average transaction fee percentage for the 12 months ended February 28, 2022, was 0.57%, which is slightly higher than the prior period of 0.55%. This increase was primarily driven by the increase in financing activity in the trade finance sub module. For the 12 months ended February 28, 2022, our revenues were $56.7 million compared to $55.5 million for the prior fiscal year. The slight increase was due to the addition of revenue from the trade marketplace sub-module, which did not exist in the prior fiscal year and contributed $18.6 million in revenue during the fiscal year ended February 28, 2022. This was partially offset by a reduction in platform fees, which decreased 31% year-over-year to $38.1 million, which was in line with the reduction in total transaction volume on our platform due to global supply chain constraints and trade finance limitations in the industry.
Cost of revenue for fiscal year ended February 28, 2022, totaled $21.2 million, which compares to $4.1 million in the prior fiscal year. The increase was primarily due to the introduction of transactions in the trade marketplace sub-module as we recorded $18.3 million in trading costs in the fiscal year ended February 28, 2022. Cost of revenue associated with operating our trade and finance sub-modules decreased by 33% to $2.9 million.
Marketing and sales costs for the fiscal year ended February 28, 2020 totaled $1.9 million, a 57% decrease from the prior fiscal year of $4.3 million. The decrease primarily relates to a reduction in consulting expenses, partly offset by an increase in marketing and promotional cost. Our general and administrative costs for the fiscal year ended February 28, 2022, totaled $31.2 million, an increase from the prior fiscal year of $16.8 million. The increase is primarily attributable to activities associated with operating as a public company and ongoing general corporate, regulatory and legal compliance requirements in addition to onetime costs for the retention of external advisers in connection with our Audit Committee independent investigation and the class action lawsuit. We estimate that we’ve incurred $10.3 million of costs in the fiscal year ended February 28, 2022 related to these onetime items.
During the fiscal year ended February 28, 2022, Triterras recorded $8.3 million in impairment charges compared to $6.9 million in the prior fiscal year. The impairment charges during the fiscal year ended February 28, 2022, relate to trade receivables, which in large part are due to the liquidity issues faced by our customers because of impacts from COVID-19 pandemic and impairment of contract costs as a result of third parties not making their customer referral targets under a prepaid subscription agreement.
Net income for the 12 months ended February 28, 2020, totaled $33.4 million or $0.44 per share compared to net income of $45.3 million or $0.74 per share for the corresponding period last year. Net income for the fiscal year ended February 28, 2022, included a $48 million noncash gain related to the change in fair value of warrant liabilities and an $8.3 million impairment charges. Net income for the fiscal year ended February 28, 2021, included $26.1 million related to a noncash gain related to the change in fair value of warrant liabilities and $6.9 million in impairment charges. We will continue to record noncash charges in the fair value of our warrants until such time as warrants are either exercised or expired, but again, I want to emphasize these are noncash items.
Adjusted EBITDA, which is a non-IFRS measure for the 12 months ended February 28, 2022, was $7.7 million compared to $32.2 million in the prior fiscal year. The decrease was primarily due to the reduction in transaction volume on our platform the increase of costs associated with becoming a public company and the onetime costs I previously discussed. An explanation regarding our use of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income are contained in our earnings release filed earlier today.
Lastly, on our balance sheet, at February 28, ’22, we had $68.8 million in cash and cash equivalents and a working capital surplus of $101.6 million, which continues to put us in a strong position to execute our business objectives.
I will now pass it over to Srinivas to discuss our market opportunities and growth strategy.
Srinivas Koneru
Thank you, Perry, and good morning, everyone. We are pleased with the results we reported for our fiscal year ended February 28, 2022, particularly in the context of the severe challenges faced by the company and the global supply chains that are broadly impacting our industry.
Our market opportunity remains — our market opportunity remains robust as MSMEs remain a massively under-served segment that we believe is addressed quite well through our Kratos solution. Our most important business objectives remain expanding the network of borrowers and lenders on our platform to drive a scalable solution that is low cost, intuitive, and user-friendly. As outlined in today’s annual report filing, the company is focused on driving growth in 3 distinct revenue streams. First and foremost, — there are platform fees, which has been the company’s historical source of revenues. We charge fee to users who facilitate their transaction management through Kratos, and we charge fees relating to the financing that is provided on the platform.
As many of you are aware, we have expanded the product scope of the Kratos platform beyond commodities to semifinished and finished goods, and we have also expanded the financing structures to include supply chain financing and micro lending in the e-commerce space. All of these — the stage for expansion of our platform key revenues.
The second revenue stream comes from financing fees. We are driving transaction volumes by using our own balance sheet for some trade finance loans. We expect to earn robust earnings on our deployed capital, which results in revenues from financing fees. In addition, we are demonstrating to potential new lenders, the attraction of trade finance lending as a compelling business opportunity. We believe that this demonstration will help to attract new lenders to the Kratos platform.
The third revenue stream is our trade marketplace revenues, where revenues represent the cost of goods purchased plus a margin. We view the trade marketplace as an innovative and elegant solution to effectively increase trade finance lending into some particularly challenging lending environment in emerging markets. Some emerging market countries have complicated and cumbersome regulations and licensing requirements that make entry by new offshore lenders very difficult.
Also sometimes the civil remedies afforded by the local legal systems subject to be less than adequate by lenders in North America and Europe. Our trade marketplace solution addresses these issues by establishing the lender as an intermediary principal in the buy-sell relationship, the lender pays the seller for the goods at one point in time and collects from the buyer at a later point in time. The transaction becomes a commercial transaction as opposed to a loan to the seller. Also, the parties involved can select a legal jurisdiction with strong civil enforcement like Singapore or the UAE.
The trade marketplace relies heavily on the Kratos platform capabilities for execution and risk management. The legal structuring of the transaction is quite comprehensive, but we believe it minimizes any potential transaction risk to the lenders. Also, credit risks are associated with the buyer in the transaction so the trade marketplace will focus on buyers with strong credit profile. Although Triterras is pioneering the transactions in trade marketplace as a principle in demonstration of proof of concept, we believe that new third-party lenders will participate in these opportunities in the future. Jim Groh is going to speak later as to how we plan to track our progress in these 3 and 3 revenue streams.
Lastly, I would like to briefly speak to our efforts in the area of ESG, that is environmental, social and governance. The company’s multidimensional ESG strategy spans across all levels of the organization. Our efforts in this area are of critical importance. Our ESG initiatives are a product of a working group led by our Senior Vice President, Amoy Chambers.
Our view is that environmental sustainability is in the DNA of Triterras. Our focus to bring widespread digitization to archaic paper-based system is already yielding results. We recently conducted an internal study, which estimates that the Kratos platform has eliminated over 300,000 documents by digitization. You will be hearing significantly more from us on ESG in the coming communications, but I urge you all to review our newly filed annual report for more information on the commitment to ESG.
In concluding, I would like to reflect on the future. While we cannot control the timing of an improvement in the global supply chain, we can continue to innovate on our Kratos platform and build out our senior level leadership of experienced institutional finance executives for business development efforts and lender recruitment. We are continuing to emphasize growth in new markets and expanding our revenue streams. By expanding the breadth of our service offering and diversifying our regional and product offerings, we expect to have a broader-based exposure to the global supply chain to benefit from eventual rebound.
I would like to reiterate from our last conference call that Triterras is, at its core, a fintech company. It is our view that the trade finance industry has significant structural under investment and is generally an antiquated industry ripe for technological disruption. We believe that ever improving state-of-the-art technology will be fundamental to our success.
With that, I will pass it over to our Chief Technology Officer, Sri Vasireddy, who will discuss our efforts in technology development. Sri?
Sri Vasireddy
Thank you, Srinivas. I would like to share with you the Triterras technology strategy, as I recently did with our Board of Directors. Our technology team is dedicated to providing valuable solutions that enhance the Kratos platform experience and mitigate the business process risk of its trade, trade finance and supply chain participants, all while expediting trade and trade flows.
We categorize our efforts in terms of 4 areas. The first is enhancing platform security and scalability. We have accomplished much in this area with our shift to Amazon Web Services managed private blockchain and some recently completed projects on implementing a security operations center or SOC. I am sure many of you saw our recent announcement of our collaboration with Unqork to move to low-code/no-code framework and continuous compliance automation.
Our second focus area is partnership and integration. The successful results of this work will be the complete integration of Kratos 1.0 and Invoice Bazaar into a universal platform, we term Kratos 2.0.
The third area of technology focus is customer-centric innovation. We have a number of initiatives in this area, including improving accessibility for customers via mobile, automated document processing, improving the lender experience with automated credit risk calculation. And last, but certainly not the least, our technology teams are focused on promoting sustainability.
Our efforts are focused on improving the platform to provide a comprehensive suite of sustainable product offerings. Our expected outcomes from our technology strategy are clear. We are striving for a secure and stable platform that benefits from higher quality, lower cost, higher velocity and delivery. Our comprehensive platform will service the full gamut of our clients’ needs, leading to increased adoption and increased revenues.
Now, I will turn it over to Jim for closing remarks.
James Groh
Thank you, Sri. In wrapping up today’s call, I would like to point out one additional item we think will be of interest to our various stakeholders. In our 2022 annual report filing, we published a set of metrics that we believe will inform the markets in terms of our progress in our business and its related revenue streams. These metrics track the 3 distinct revenue streams that our CEO, Srinivas described earlier.
We separate these revenue streams into 3 broad categories: platform fees, income from financing charges and trade marketplace revenues, and each of these have separate metrics or KPIs that is key performance indicators. For platform fees, we track total transaction volumes, the financing ratio that is how much of our total transaction volume was also financed through the platform. Average transaction fee, which reflects our take rates for the period and number of users on the platform.
For the financing fees, we track the amount of financing deployed by Triterras and the average interest rate per annum generated by those funds. Lastly, the new trade marketplace revenues, we track the gross transaction volume. There is significant disclosure of these metrics in the annual report.
This concludes our prepared remarks, and we are now ready to address the questions that were submitted prior to the commitments of this conference call.
Question-and-Answer Session
A – James Groh
I know that many of you are aware that we held a business update call on April 25, 2022, and we answered a great number of questions about the business. Since that call was only 60 days ago, we have a limited number of questions to respond to in today’s call. As we did in the previous call, I will pose the question and a member of the leadership team will respond. Our first question is, number one, how many traders are there on the platform? Srinivas, would you field that one, please?
Srinivas Koneru
As we explained in our conference call today, we have expanded the scope of our activities beyond commodity traders to a much wider user base. We now trust the total number of users on the platform as opposed to the number of commodity traders. As of the end of February 2022, we had 172 users as compared to 83 users at the end of February 2021.
James Groh
The second question, have there been any significant defaults to lenders on the platform. Alvin, please?
Alvin Tan
Our platform does not track the repayments, but we are not aware that any issues have been raised by the lenders with us on defaults.
James Groh
Thank you, Alvin. Third question, has the NASDAQ relisting application been submitted? I’m going to field the answer to that one. It has not been, but our plans are to do so shortly. On May 5th, we held our Shareholder AGM, which is a requirement for our relisting applications. We also felt it was important to demonstrate to the market our ability to submit our audited financials and Annual Report on time, which we did today. Also, we took demonstrable actions in improving our internal controls as we reported in our annual report filing today.
And lastly, we’ve taken a number of concrete actions to improve our profile as a candidate for relisting on NASDAQ. We are hopeful that the sum total of these actions will be viewed favorably by NASDAQ, but we cannot make any estimates on how long the process may take or assure you that the relisting will be successful.
The next question. In a previous call, mention was made of the new micro lending initiative to clients of an e-commerce platform. Any updates on this. Srinivas?
Srinivas Koneru
We are seeing good progress in this area. We expect to be announcing in the very near term an agreement with another e-commerce platform provider who serves several thousand clients with an e-commerce B2B platform. We will keep everyone informed if and when we execute the expected agreement.
James Groh
Thank you. Next question. Why is your customer base transitioned from Southeast Asia to the United Arab Emirates? Related to this, what’s the future of your business in Southeast Asia, Srinivas?
Srinivas Koneru
As many of you know, our original customer base was concentrated in Southeast Asia. Some of our customers there have gone through troubled times. Singapore and some Southeast Asian markets had very strict border controls during the COVID-19 pandemic. This led to many Asian businesses being forced to curtail their operations. Some even took a drastic step of moving their operations to another country. Given the challenges faced by the company, we had a difficult task to maintain or expand our Southeast Asian user base. We were, however, relatively successful in expanding our UAE-based business. We had strong business development team presence, which resulted in some growth success. We also did decide to consolidate our U.K. operations into the UAE.
To summarize, there were 2 forces at play. The decline in the Southeast Asia business with increased in our UAE business. I would like to add that we are working to rebuild our customer base in Southeast Asia. SEA is an important market for us given the expected recovery of the economy over time. In addition, we are looking to replicate our success in UAE and are looking at building business development teams in other geographies and expect to diversify further over the next 12 months. Jim?
James Groh
Thank you. Next question, can you describe what the company is doing to collect its outstanding trade receivables, particularly in light of the impairment of over $10 million in receivables over the past 2 years. Alvin?
Alvin Tan
Well, COVID-19 and the challenges faced by the company have resulted in longer payment cycles from our customers. Majority of the customers have continued making payments, although there have been delays. As far as the impairment of the receivables over the past 2 years is concerned, this was mainly due to the challenges faced by specific customers on the account of COVID-19. So some of these customers have undergone or is currently undergoing a liquidation process.
James Groh
Thank you, Alvin. Next question, can you tell us how the integration of the Invoice Bazaar Holdings acquisition is progressing. Srinivas?
Srinivas Koneru
We have completed the IB Holdings integration across human resources, processes, cash flows and reporting. We will be completing the integration of technology in the coming few months. James?
James Groh
Great. Does the company anticipate any M&A activity in fiscal 2023. Again, Srinivas, would you take that one, please?
Srinivas Koneru
We continue to selectively look for M&A opportunities. We believe that our industry is going through a consolidation phase and shall actively look for opportunities which give us access to newer geographies or product segments.
James Groh
Great. And the final question, can you explain the reason for the drops in revenues. Perry?
Perry Mangers
The decrease in revenue was primarily due to a $3.3 billion or 33.3% decrease in total transaction volume, which was primarily due to challenges faced by the company from the impact the COVID-19 pandemic has had on the global supply chain and our customers. However, we have seen a marginal increase in our financing ratio, which we consider as a good sign for our future.
James Groh
Thank you, Perry. At this time, we will conclude our question-and-answer session in this call. Thank you all for joining us today. We appreciate your support of our mission and confidence in our ability to achieve it. Stay safe and we look forward to speaking with you soon. I want everyone to have a great day. As a concluding remark, if your question was not answered, please contact our Investor Relations team at trit@gatewayir.com. Thank you all, and I’ll turn this over to the operator for conclusion.
Operator
Thank you for joining us for Triterras’ conference call for the fiscal year ended February 28, 2022. You may now disconnect.
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