Peak Fintech Group Inc. (OTCPK:PKKFF) Q2 2021 Earnings Conference Call August 30, 2021 2:00 PM ET
Mark Schwalenberg - MZ Group
Barry Ellison - Director of Marketing and Communications
Johnson Joseph - CEO
Jean Landreville - CFO
Hello, everyone, and welcome to the Q2 Results that we are going to cover here at -- in this session today. My name is Barry Ellison, I’m the Director of Marketing and Communications at Peak. And to present the results for the second quarter, we have our CEO, Johnson Joseph; and we also have our CFO, Jean Landreville, who will be presenting the results.
In terms of the format, it was -- it's very similar to our last session. If you do – if you had a chance to attend it, you'll see on your screen, we do have a chat window, and you also have the question-and-answers window. We please ask that you put your questions within the Q&A section and not the chat. It just makes it easier for us to follow the questions. You can post a question at any point in time. We will be having a Q&A session once Johnson and Jean are finished presenting. So just like -- again, similar to the last session that we had, we'll have the Q&A and go through as many questions as we can.
We expected this probably should last about around 30 minutes, this call. And it’s obviously – it is being recorded, and we're all -- we are going to make that available after this presentation. We'll also have transcripts available as well with the session. And all the attendees are muted throughout the session, as we are presenting and answering questions. And we will also – well, we'd like to thank you for attending the session and we have a record number of people registered and attending today. So, it's very nice to see that.
And with that, I believe I just -- I'll turn this over to Johnson.
Okay. Thanks, Barry. Hello, everyone. Before I get started with the Q2 results, just wanted to address some concerns that were brought to my attention related to NASDAQ listing. This is a session to discuss the second quarter results. So, we're not planning on providing any specific information with the NASDAQ listing. But I just wanted to let everybody know that everything is okay. I know that I mentioned that we would be on NASDAQ. I think we would get the approval before the end of the month of August. It's not the end of the month of August yet. So, we still have a day.
Listen, in all seriousness, nothing to be concerned about. The second quarter results needed to be incorporated by reference, included by reference and what is called a Form 40-F that we need to file with the Securities and Exchange Commission in the U.S. So, as you know, we only filed that in the second quarter results last week, last Thursday evening. So, we're in a position right now to complete the 40-F, which we'll be submitting probably in the next couple of days if everything goes according to plan. And hopefully, there is an announcement related to NASDAQ made before the end of this week.
Just so you know, we are in the process right now of, I guess, printing T-shirts, preparing all kinds of paraphernalia to celebrate our entry on NASDAQ. So, again, hoping that you'll be able to celebrate with us before the end of this week. And if you would like to have a T-shirt, then just send an email to Barry.
Okay. That being said, let's get started with the second quarter results. I'm now going to go into the specifics of the results. I'll let Jean talk about some of the numbers at the end of my presentation. But what I wanted to do here today is basically just give you a quick overview of what fueled the growth in the second quarter. Obviously, from Q1 to Q2, we more than doubled our revenue. We were a little bit -- we showed a little bit of profit for the first time, which is nice, which was, I’ve to be honest, was a little bit unexpected. But we expect profitability to continue obviously going forward.
Now, in terms of the second quarter results, there wasn't really anything, one single thing that could explain the growth, but it was just everything that we've been doing for the past few months that are starting to pay dividends now. Now the distributor and retailer financing programs that we put together, we started those at the end of '20 -- at the end of 2020. They're really, really starting to pick up right now.
Specifically, we did a lot of business with distributors and retailers on JD.com for all kinds of products, mostly, the packaged goods products from the distributor that has the rights to COFCO products, right? For those who are not familiar, COFCO is China Oil and Foodstuffs Corporation, and they are one of the largest food processing companies in all of Asia. They essentially feed China. Well, some people like to say that they feed China, right? So, they produce rice, oil and all kinds of edible products over there.
So, one of our distributors has been very, very active on JD.com selling COFCO products, and that was a huge boost to us in the second quarter. Also, there's 618, obviously, we talked a little bit about that. This was our first year of participating in 618. Very, very successful. That allowed us to attract also a lot of new clients to the business.
Now, in terms of the Business Hub itself, I recently looked at the information on our website, and obviously the information needs to be updated. The Hub has been grown. I believe that the information that's on there right now talks about 30,000 something small businesses that are part of the Hub. But the real number right now as I'm speaking to you is closer to 70 -- 70,000. So we've more than doubled the number of businesses that are part of the Hub. So that explains part of the growth as well.
There's also the arrival of our ability to process payment, fund transfers and settle payments with the relationship that we have with Rongbang Technology, which is a subsidiary of China UnionPay. So just the rumors before that even got into place there, there are rumors circulating in China, people were inquiring, and that also attracted a lot of new clients to the Hub.
We started processing transactions, everything went well. That also made a significant contribution. Even though that came in the latter part of the second quarter, there's a lot of positive, I guess, hope for the future in terms of how quickly that aspect of our business will grow.
Now, that explains in general terms the growth for the second quarter. I think we also mentioned that we're looking at opportunities in different sectors, supply chain sectors. We announced recently something with the steel industry. We're also looking at opportunities in the insurance industry, clean energy, petroleum sector. So there are a number of things that we started to put into place at the end of the second quarter that are going to pay dividends in the third quarter and in following quarters.
So, there are actually a few minor transactions, call it, a pilot that we did. We have not put - given any information publicly about that yet with regards to what we're doing with the petroleum industry and directly with Petro China and some of their partners. I'm not at liberty to say the name of the international partner, but that will be disclosed in the coming weeks.
So we are really more and more integrating the supply chain in China, different supply chains. We're talking food, electronics, consumer goods. Now we're talking about steel products, insurance, petroleum products, energy, so more and more the Hub is growing and our name also is getting to be better known in the marketplace in China, continuing to deal with some big partners that have a lot of brand equity, that's also something that we're going to continue to do with it, and that's going to be helpful to the company.
Now, that being said, I'm going to turn it over to Jean, who is going to talk about some of the specifics related to the P&L and the balance sheet for Q2. Jean?
Thank you, Johnson, and welcome, everybody, on this call. So, I’m going to make a quick overview of the results of the second quarter of Peak, which was the first one that giving us positive net profit for the quarter, which is quite amazed on. Like Johnson said, there was a lot of transaction going on. And the good news this quarter is that we have a platform called Gold River that is set over the lending business. And it started again in the second quarter that was impaired two years ago.
So, we're able to revamp and restart this business that is set over the lending business platform and give us good revenue for the month of -- $30 million revenue for the month. You can break it between supply chain and the rest of the business ASFC, ASCS, that give $2 million in revenue and the rest is coming in the supply chain. So, we have two main subsidiary now, that is doing supply chain business.
Service -- we have service fees from them, and it was accounted for $28.6 million in the quarter, which is amazing. And the good news, the new business that -- with the new subsidiary that we put in under ASFC, with the Gold River platform generally $22 million [indiscernible].
Well, I think to know for the quarter, so $6.6 million from ASCS, the other supply chain service fee and $22 million from ASST. So the -- I think one thing to mention there is that we own 100% of ASST, and it's going to be profitable. So, it's more a percent of profit for AST for Peak. And before that ASCS, we have a company that we train with us and they own 50 -- 49% and we have 51%.
So to transfer business to ASST is good for Peak in terms of profits. So, the $38.6 million, $28.6 million from supply chain, $2 million from the other business, which is quite stable, profitable, but stable. The cost of service too soon to give service on the supply chain is $27.4 million. Please notice that the margin is still low, but increasing. So, the average is 5.5% for the quarter versus 2.5% in the quarter before. So, we're increasing and ASST is aimed to increase their margin in the future, which is very good for the business.
Obviously, there is [indiscernible] increase if you compare with last year and by double - almost by double with increase in the number of employees in China and Canada, and some salary adjustment that we put in Q4 2020. And there's the share-based expense there that I don’t want to get there in detail, but more the price, the surprise on the market is getting up. More the stock options that give to Director and Officer costs to the company, but it's not cash right, it's just expense as per IFRS and in the P&L. so that it's been part of the increase. But mainly, we have to -- we need some manpower in China and Canada.
We already on the other side, consulting fees. Last year, if you remember, we were looking to have a better view of Peak on the market. And we hired some consulting to make that happen and it happened well, but it costs money. So, we have an expense latter, mainly paid in share, but the cost is there. So, this year consulting fees $118,000 versus $527. But last year was exceptional expense, we can say.
Professional fees. Well, with all what we're doing at Peak is normal that audit fees getting higher, legal fees getting higher. We hire some people. So, we need some add-on tour that help us to get some people onboard. So that gets some professional fees. Expected to [indiscernible], so we're on that reduction and it's a positive expense of 10,000 versus last year 254.
So, if you remember, well, last year, at the same time, we're at the start of the pandemic and ASFC, our finance institution in China, they extended payment and we have to take provision over the -- the payment of the loans. That's why we have a higher expense last year. That's not there this year, and we change [indiscernible]. So, the auto loans will go up -- they are getting to change to auto – a real estate loans, and credit loans, which is higher risk level, so we can reduce our provision -- the provision over the expected credit loss over last year, and that -- I think that's going to continue for next quarter and several quarters.
So, the reversal of impairment loss, I explained before, this is the Gold River platform that was impaired two years ago that we restart this quarter. So, we can -- we're in position to bring back this asset, which has positive effect on the P&L for 193,000 for the quarter. And the adjusted EBITDA, we'll take that in consideration, which is non-regular item if you want. So that's a positive in the quarter. But even with -- if you don't take that in consideration, the net profit will be positive for the quarter, which is a good news. We don't need to have this impairment reversal to have a net profit for the quarter, which is a very good news.
So, at the end, $30 million revenue, net profit of 296 positive if you take out the 200,000 from reversal of impairment loss, which is a gain. We're still positive at 100,000. Last year, same period operative loss of $5 million, which is a tremendous improvement. That's what my word on the P&L [indiscernible].
Now, I want to go to the balance sheet. But we just noticed that concerning the debt, Peak doesn't have any more debenture on the market. The last 50,000 that was up there was paid, reimbursed and we continue to have warrant [indiscernible] the money on the market, we have some [indiscernible] on the market and we continue to receive on a regular basis some cash from the investor to exercise the warrants. So, we are bringing [indiscernible] for investor. That's what I have to say regarding the P&L.
We can go to the Q&A, and we're going to be pleased to answer any questions you have. Mark?
Yes. Thanks, Jean. So, we got a bunch of questions here. I'll try to keep them mostly to about the quarterly results. The first one is about revenue -- for the supply chain revenue. How much is charged by Peak and how much is passed through from other vendors? I'm not sure …
How much is charged by Peak and how much is passed through to other vendors?
From other vendors.
Not sure I -- I'm not trying to say -- okay. So, the way we provide our supply chain services is the following. So, the clients come to the Hub for financing primarily, and we bundle those financing services with other services that may be related to the orders that they place, right. So, let's say they place an order for, I don’t know, $50,000 worth of product, we don't charge a fee for them placing that order of the product. We don't charge any fee; we don't make any cut or whatever commission on the product. But that product needs to be financed, right. So, they don't have the $50,000. So, we help them finance that product, we charge a fee for that. That product needs to be sometimes shipped warehouse or whatever, we provide a bundle service where we charge also for the warehousing and for the shipping related to the product. So, we make money on the warehousing, the shipping and primarily on the financing of that product.
Now what we pass along was the warehousing in the shipping was being done by a sub -- well, not a subsidiary, but a third-party company called [indiscernible] logistics by the way also. So, the system that they use -- I’m sorry, the system that they used to place the order was [indiscernible] system. Now we've replaced that with Gold River. So now instead of going to the [indiscernible] system where they place the order, they have logistics services, they go through Gold River. So, we charge them a fee for using the Gold River platform to place the orders for logistics. They need to be able to track their inventory, keep track of it or whatever. So, we charge a bundle service fee for all those services. Now before the warehousing logistics and shipping was passed on to [indiscernible] and that was the cost of services.
Now, the vast majority of those services other than the shipping and the warehousing is done by Gold River. So that's where we're reducing the expenses related to other costs of providing the service. And its intercompany fees, whatever Gold River charges us gets cancelled out, and we only report the net revenue. And [technical difficulty]. I hope that answers the question.
Sounds good. That's a good question. So, in the MD&A, you mentioned several countries, specifically, you want to enter by -- Peak wants to enter by the end of 2023, including U.S., U.K., France and Brazil. Can you just expand a little bit on strategy? Like why are you targeting these specific countries? What you see?
Okay, sure. First of all, U.S. -- we're a Canadian based company, right. So other than China, the most important market for us going forward will be the U.S. So, what we're doing in Canada is we want to launch here first in Canada. We already have, I'm talking through Cubeler, once the transaction closes again, I'm talking as if the transaction has already closed. But once that transaction closes, and we do require Cubeler, Cubeler it has financial institutions, small businesses registered on its hub here in Canada. So, it's going to be fairly easy for us to get started with Cubeler. That's what we expect to launch Cubeler's operations and start to generate revenue with Cubeler before the end of 2020. Now, once that's done, we operate. Cubeler here in North America and Canada for a month -- a couple of months. In parallel, we're going to be working on setting things up for the U.S., really understanding the rules and regulations, we've already started to do that. And we're hoping to be in the U.S by the middle of next year, call it the second quarter of next year.
Now, when it comes to other markets, the U.K and France, we've already had interest shown for the concept in the U.K already and in Brazil. France is just I mean, Quebec, here we speak French. So, France is another important market. Since we're already bilingual here, the platform is already bilingual. In Canada, it's going to be English and French, it's not going to be that difficult for us to get into the French market as well. So that's the reason why we targeted those specific markets.
It makes a lot of sense. Thanks. In regards to -- back to revenue, in terms of UnionPay, we mentioned $300 million of transactions in June. Like what does that trickle down to in terms of Peak revenue fees?
Listen, when you deal with some of these big partners, they don't necessarily want you disclosing and that's why we're like, we're being very careful when we're talking about dealing with JD.com, the UnionPay, or whatever, they have other clients as well. So, they negotiate certain rates with us and they don't necessarily want that information to be in the public domain. And also, that's why we stopped putting that information specifically in our news releases, how much we earn with each transaction. But just as a general rule, figure between whatever transactions we do with UnionPay figure between 1% and, call it, 2.5%. So, it's within that range.
Okay. Very good. Another question here. This one on stock options. Someone noted that it appears that we're regularly issuing about a million shares and options per quarter. And can we comment on do we expect that to continue?
I'll turn it over to Jean in a minute because I'm not sure about issuing stock options. We don't have anything specific where we say, like this quarter we're going to issue X number of stock options. We usually issue the stock options based on performance, special circumstances, that kind of stuff, but I couldn't tell you -- Jean, like how many we issued last quarter or what we plan on doing in the future?
Well, we just issue with -- mainly in the Peak history we're issuing to -- stock option to Director and Officer once a year, like the issue in June, every June -- May, June or July of every year we issue stock option. And [indiscernible] in last year we issue stock option with some [indiscernible] in October. And under that, if we hire new employees, key employees, we're going to issue some stock option with really minimal. So, in the history of Peak, it's really on annual stock option that we issue -- and the same time that we're doing the annual meeting. So, there's no other pattern than this one.
Got you. Okay. I got some people asking or noting in the MD&A section that about regards to the U.S financing. And if we can provide any kind of context in regards to size that working with Benchmark?
That's a good question. We're talking about a base shelf prospectus right with Benchmark. So perhaps just a quick note on what the base shelf prospectus is, for those who are not familiar. A base shelf is where it is a prospectus offering. You file it, but you set a maximum amount, and you have 25 months, which is a little over 2 years to raise up to that amount, right. So initially, we talked doing a specific amount with Benchmark similar to what we just did with Research Capital here in Canada. And we were talking about the US$30 million. But there appears to be quite a bit of interest for the stock from Benchmark and their clients or other potential investment banking firms that would be interested as well. So that's why we've changed our strategy, and we're thinking about filing a base shelf prospectus. Now what that amount is that we will be raising over the next 2 years with this base shelf prospectus, we have not determined that yet. We're still in discussions with Benchmark and the other investment bankers that are part of this the syndication to determine what the amount will be. So by filing the -- what's interesting is that by filing the base shelf prospectus is that you don't have to keep filing a new prospectus each time you need capital.
One thing I want to mention, though, is I don't know if the question -- the reason for the question is because of concerns of dilution, or whatever we get that like, I mean, we realize like I mean, we're a penny stock company. I still say that we're a penny stock company, and people are concerned about dilution. But really, we have an opportunity here to really step up and get to be known internationally as a FinTech company, a Business Hub, that has an impact on business, on -- in the markets where we operate. So that's going to need -- that's going to require some capital. So obviously, like when the company's market cap has been grown -- has grown tremendously over the last year, it's going to continue to grow and anything that we do in terms of financing will be accretive, right. So, we will bring value to our shareholders. We're not raising capital, basically just raise capital. And I don't know like pay high salaries or whatever stuff like that. We're planning on growing the business. And anything that we do will bring value to our shareholders. So regardless of what the amount ends up being, it will be to the benefit of the shareholders, that I can say.
Excellent. Excellent. Thanks, Jonathan. Can you talk a little bit about retention rate of SMEs in China on the Hub and reoccurring loans? Just go into that a little bit -- [indiscernible] of quarter.
Yes, as I mentioned before, I mean, the Hub has been growing. It's grown tremendously over the last year. This is not a lending hub only, so to speak, right? This is a Hub where businesses sign up to conduct business. There are a lot of advantages to being part of this Hub. So, it's not like a small business will come in and let's say they need a $50,000 loan or whatever, they sign up, they get their loan, and they leave. No, there's stickiness to the Hub. So, they come in, they interact with other members of the hub. There are other benefits, as I mentioned before. The payment processing that we do, the fact that when they make sales, they can get paid a lot quicker than if they were outside of the Hub is just one advantage. The other advantage is basically just networking with other members of the Hub. We're going to implement very, very soon the ability basically for them to actually advertise their products or services to other members of the Hub. So, there are a number of reasons why businesses have an advantage to stick around.
Now in terms of retention rate, there's been very, very little, I guess, like attrition or whatever, people leaving the Hub, or more for the most part, once they come in, they stick around. And as we continue to provide more services, we're talking about providing insurance, there are other services that we're going to be providing later on down the line. So, there's just going to be more and more reason for people to stick around. So, there's not been that much turnover, if you will, in terms of members leaving the Hub.
Awesome. Okay. [Indiscernible] overall revenue picture, can you kind of break down, if possible, the concentration from JD.com related customers that we've been processing?
Okay. That's a good question. From -- as Jean mentioned that the supply chain business that includes the distributors, retailers, the program that we implemented specifically for JD.com clients, that business generated -- if you take that aspect of the business, that generate about $22 million. So that was the biggest revenue generator. I have to say, for the last quarter because of 618 and the popularity of those programs on JD.com. Out of those -- out of that $22 million, I would say about 60% to 70% came from was related to JD.com.
Okay. Okay. And a bunch of people are curious about how you're going to get to 100,000 SMEs by the end of September? Like can you just articulate the growth strategy a little bit and how you expect that to ramp up and like, if possible, for Q4 as well?
Sure. Listen, as I mentioned before, the information that's on the website right now is a little bit misleading, because again the website is mentioning about like 30 some -- went with [indiscernible] whatever it was 30,000 small businesses somewhere along those lines. But as we speak today, we have not updated that information. But as we speak today, we have an excess of 70,000 small businesses right now that are part of the Hub. So that information needs to be updated on website.
Now as far as how do we get from 70,000 to 100,000 between now and the end of September, let's say, just onboarding a lot of the clients on ShopEx. There's a lot of clients being referred to us by Rongbang Technologies. Obviously, they have a quite a lot of clients because of the relationship with China UnionPay. So, we expect the ramp up to continue throughout the month of September. So, if it's not by the end of September, certainly at some point in October, we expect to reach 100,000 -- that milestone, 100,000 small businesses that are part of the Hub.
Okay. Any comments on what percent of sales in Q2 we are tied to on ShopEx?
To ShopEx, a very little. ShopEx, we started to onboard them. But we have not started the marketing campaign yet with ShopEx to let them do exactly the benefits of the program. So that's something that we expect will kick in either in Q4 or first quarter of next year. But we are onboarding the clients right now.
Okay. All right. Well, Jonathan, a lot of questions about NASDAQ, as you can expect. Some -- a lot of others about forward-looking, but we don't need to necessarily need to get into all of that. So, we'll wrap up Q&A at this time.
End of Q&A
That sounds great. Listen, I understand the concern about NASDAQ. Like I said, send an email to Barry. Barry, I'm sorry to do this to you, but send an email to Barry if you're interested in getting T shirts, because listen, I want to be clear about this. NASDAQ is happening. We expect to make an announcement this week. And if we can get those T shirts made, we may have some kind of whatever, like fun contests or whatever, where people can sign up to for a chance to win a T&T NASDAQ T shirt.
Okay. So, if that's it, do you want to send it back to Barry to wrap up or any more questions you want to address, Mark?
We are good, Johnson, yes.
Okay, terrific. Listen, before I turn it over to Barry, once again, I want to thank everybody for taking the time here. It's the middle of the day. Markets are still open. So very, very appreciative that you guys took time out of your busy days, or whatever you're doing, you're working to be with us today. Appreciate it and turn it over to Barry. We're looking forward to continuing to build the company. And once again, thank you for your support. Barry?
Hello. Yes. Thanks, Johnson. So those are really good questions. And I can reiterate too. Thank you for a very, very strong attendance. It's -- I think it's one of -- I think it is the highest we've had. So that's great. I mean, that's a good sign of interest. Peak is just becoming so much more of a greater interest and to all the good points. My inbox is on Fire. So, thank you for that. Yes, they just keep coming in. So, yes, I'll get on that. And like I said earlier, so this this has been recorded so it will be available later. And we'll also have written transcripts for those that actually prefer to read this session. So, with that, I'll close down the session, and we'll see you next quarter. Thank you very much.