Tenet Fintech Group Inc. (PKKFF) Q2 2022 Earnings Call Transcript

Aug. 29, 2022 8:33 PM ETTenet Fintech Group Inc. (PKKFF)
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Tenet Fintech Group Inc. (OTCPK:PKKFF) Q2 2022 Earnings Conference Call August 29, 2022 4:00 PM ET

Company Participants

Branka Petrovic - IR and Communications

Johnson Joseph - President and CEO

Jean Landreville - CFO

Mark Schwalenberg - Director, MZ Group

Conference Call Participants

Branka Petrovic

Good afternoon, everyone, and welcome to Tenet Fintech Second Quarter Earnings Call for 2022, hosted by CHF Capital Markets. I'm Branka Petrovic, the new Manager, Investor Relations at Tenet Fintech Group here at Tenet's new office in Toronto. Today we will hear from Tenet CEO Johnson Joseph and CFO, Jean Landreville. Thanks to all the great questions from shareholders the presentation will be followed by the Q&A that will be curated by Mark Schwalenberg from MZ Group.

Some statements or comments made on this call may be forward-looking statements which may include but are not limited to financial projections or other statements of the company's plans, objectives, expectations or intentions. Everyone will be muted today except for the presenters. Now we can hear from Johnson. Welcome Johnson.

Johnson Joseph

Thank you, Branka. Welcome, everybody, and thank you for attending this presentation of our second quarter 2022 financial results. As we usually do, I'm going to start with a brief overview of what took place from an operational standpoint during the quarter. And then our CFO, Jean Landreville, will walk you through some of the important financial figures for the quarter.

Now, I'll start with China, now that we have technically operations in both China and Canada. Even though we're not generating revenue in Canada yet, but that's [ph] come out, tell you a little bit more about that in a few minutes. Now China, the second quarter was a little bit difficult, because of the impact of the COVID-19 restrictions. But we did manage to make some progress as we always do. So the business continues to grow in China, even though we only had a quarter to operate fully.

The supply chain financing business, which incorporates consumer goods financings, food services and so on and so forth continues to go really, really well and is now becoming the basis -- the base of our operations in China. So even though we only had a quarter -- again, excuse me, about a month of operations, the 618 Shopping Festival was very successful for us once again, contributed to about one-third of our revenue during the quarter. So it shows that there's still a tremendous amount of demand for our core products and services in China. And we will continue to invest in those initiatives to continue to grow the business in China.

Now growing in China means not just growing geographically, but it also means growing in terms of different verticals that we wanted to service. And as you're probably aware, if you've been following the company, we had postponed certain investments in the insurance space last year, and we picked up those investments considerably in the second quarter of 2022. Now that resulted in an important increase in terms of the revenue that was generated from the insurance sector for us.

We're also looking at clean energy. We expect clean energy to be very, very important for us going forward in China. So we also made some investments during the quarter in our i3060 platform. Again, although that has not started to generate revenue for us yet, we anticipate that platform is going to be key in helping us really make our mark in the clean energy space. There are a lot of opportunities out there.

We're working with some very big names in the sector, state-owned companies. They like our platform, they like the approach that we take in terms of creating this hub, where different participants can take place and where we automate transaction. So the i3060 platform fits into that whole vision that we have. It really allows for clean energy projects to be done, assessed and conducted very, very efficiently.

So again, we've caught the attention of some big players. We're going to continue to invest in that sector. And we expect big things in the clean energy space going forward, not just in China but a lot of the -- well, a lot of the participants or entities that we're dealing with in China also operate outside of China, for instance, in Europe. And some of them even have a presence in North America. So the clean energy space is kind of like seen as a special project within the Tenet Group. But it's something that we believe will be very, very big for us in the near and long term. So we're going to continue to invest in that sector.

Now when it comes to the Canadian operations that was the most important focus for us in the second quarter. We've hired a lot of people. As I've mentioned repeatedly, about this time last year, we were about, I think, three or four employees, depending on the exact date operating out of our Montreal office here. As we speak today, we -- just last week, we inaugurated our new Toronto office.

So we have, I don't know what the exact numbers are today, but as we continue to hire more and more people, but we are around 60, maybe a little bit even more than 60 people in two offices right now, between our Toronto and Montreal offices.

So the growth of the business comes first by growing the manpower, the personnel. So we went from again, three to four employees, this time last year in Canada to over 60, I would say right now. So that contributed to a lot of expenses. We also were very active during the quarter in terms of business development initiatives in Canada, trying to reach out to the small and medium-sized business community here in Canada, talking to potential partners. That's also going very well. But obviously that comes with expenses.

So all of this contributed to the net loss that we showed for the quarter. But these are investments, right? These are things that we need to do if we're going to be growing the business outside of China, which we're very excited about.

So we anticipate that the platform will be launched before the end of – well, the platform will be launched for sure before the end of this year. And we anticipate that we will begin to generate revenue outside of China and Canada before the end of 2022.

So that's about it. Very, very exciting things to look forward to between now and the end of the year. Obviously, we mentioned the event that we're going to be holding in November to inaugurate our new Montreal office. That will coincide with the launch of the application here in Canada. And the way the application is being developed, once it's launched in Canada, we anticipate that within just a matter of a few months, we should be able to expand to the U.S. and potentially in Europe shortly thereafter.

So again, we're looking forward to reaching these important milestones. For now the business is continuing to grow. And China will -- again if there are any concerns, I want to make sure I mentioned this -- if there are any concerns about the fact that we only had one month of operations in China and how that was going to impact our guidance for the remainder of 2022, I'd like to say that what occurred during the second quarter was expected. So there should not an impact on our guidance for the balance of 2022.

Now with that being said, I'm just going to hand it over to Jean, who's going to go over some of the specifics of what -- of the financial results for the second quarter. Jean?

Jean Landreville

Thank you, Johnson, and welcome, everybody. So like it was mentioned in the MD&A and by Johnson second quarter was quite difficult in terms of revenue. Regarding the Chinese, almost locked down for two months. So we have one month operation over three. So usually, we have revenue growth in the say two figures, but not this quarter. So we finished with CAD32.4 million revenue compared to CAD30.6 million last quarter of last year -- second quarter of last year sorry, or CAD1.7 million more.

Good news is the business in insurance business, UK and ASSI were CAD700,000 more revenue than last year because of the acquisition that we made in the last quarter of 2021, so supply chain, CAD1.7 million, which we expect will get higher than that but with the shutdown for two months, the supply chain services revenue was lower than expected. So there's CAD1.7 million more, but we're expecting more than that in the second quarter. So that explained the smaller volumes for last year, where we end up. It's going to be a lot better for Q3 and Q4.

Cost of services falling because also the slowdown in earnings and the activity in China in first two months of the quarter was so that same pack [ph] also did increase or there was a slight margin increase over last year 1.7%. Normally, we're aiming more before, between 3% and 8% increase quarter-to-quarter in the cost of service, but didn't happen in the second quarter, for the reason as explained for the first two months of the quarter.

On the salary side, an increase in salary expense, mainly because of the number of employee from quarter 2021 to the last quarter of 2022. So to be precise, there's 93 more employees from one year to the other. So Q2, 2021 we were 42 employees total China and Canada. And now we're at 135. Mainly in Canada, the increase that Johnson mentioned were at the end -- 50 at the end of June but now we are 60 or 10 people more in the last 1.5 month. So that's explain the majority of the salary increase, including the CAD170,000 of share-based remuneration, which is a non-cash item. I'm going to come back to this non-cash item at the end.

Consulting fees increased by CAD250,000 over last quarter of 2021. Mainly for consulting that we received for expansion of our shareholder base outside in Canada to the major TSX Market and other markets we're looking outside of Canada. We had a question, are going to explain more in detail the CAD1 million in the outside service. So for the first time we highlight this line items in the financial because it was important in the quarter.

So there's three main components. The first one in Canada, the development of the Cubeler platform. We need to achieve our goal to launch the software before the end of the year to hire some outside firm to make sure that we're going to be able to do it. So there's a cost of it. That's not internal salary, but it's important for the business to do it. So we get more outside services, -- outside service in the quarter. And it's going to be also in Q3 and Q4 of this year.

Now we're going to make an analysis and this is a general comment on all these expense related to the platform, if we can capitalize or not. So it's going to -- we're going to make a deep detail analysis of these expense in Q3 and Q4 to make to make sure that under the policy of the company that we can capitalize, yes or no, if it's support or R&D that is not generating any further revenue, we cannot capitalize, but I suspect that there will be some money under that, some expense that was presented as expense conservatively and Q2 that will be capitalized in Q2, Q4.

Same thing in China. There was a fair amount of money invest in the clean energy platform, i3060. Right now we don't have any view on the revenue for now. It's coming in the next quarter to have the view. So it's not -- we need to make sure that we can capitalize if we have revenue that's coming from these platforms. So right now it's an expanse. It's I know it's CAD1 million that show up in the financial of the quarter. But this is a conservative approach, and we're going to see if we can capitalize.

I suspect that all the clean energy expense which is CAD300,000 to CAD400,000 since the beginning of the year that we invest in a platform that was not capitalized, could be capitalized in the third and the four quarter I hope that explain why we have this outside sources in the quarter. For the rest was professional fee, public relation, office supplies and software. The difference is mainly because of the growth of the business and we have more employees. So we have some expense that is coming with it.

Insurance, as you know, we have the NASDAQ that we're not anymore, but was there last year. So we have to take D&O insurance to cover our Directors and Officer last year, and we -- the price was a sharp price for this kind of insurance regarding the environment in the States and in Canada. Finance, so what I would like to point out here is the CAD300,000 to CAD299,000, CAD300,000 entries is mainly non-cash item, isn't the acquisition of the contingent liability that we have with Heartbeat acquisition of 2021. So it's really the difference from the actualization of the payment. And we will do and share [ph] for the acquisition of Heartbeat. So our transition that when we get closer to the end of the deal that there's acquisition of the acquisition rate that we're doing.

So the finance cost CAD300,000 is hard cash item. So it's an expense that is an accounting expense. But it's not a cash-out for the company. Same thing for the amortization of a tangible asset, which is from the acquisition last year of Cubeler and Heartbeat. So this obviously is not a cash item. This is a non cash item. So it's an expense. Amortization is an expense, but not a non-cash item.

So with all these the total expense for the quarter, CAD77.5 million compared to CAD29.6 million, increase of CAD7.8 million over last year, mainly salary and outsourced services on the cash side. On the non-cash item there's CAD2 million of non-cash item, which is the amortization, really of the platform that we acquired, share-based payment and a financial cost of CAD200,000. So those increase in salary for sure for cash, that we expense, but there's non-cash item in there for CAD2 million. I just want to point out that the CAD7 8 million difference is not cash out of the company.

So that was my two cents of the explanation of variation of the quarter. I will have -- I think we have some Q&A that Mark will handle from now. Thanks for your attention.

Question-and-Answer Session

A - Mark Schwalenberg

Thanks, Jean. So we need Johnson back up here, too. Okay, we got it. Okay. Sort of top of mind, I think on a lot of investors' consciousness just the capital market strategy. So to start off high level, Johnson, I'm going to hit you with this. Can you discuss as much as you can about the prospectus filing, tied in with the TSS -- TSX uplist? We mentioned some of that in the MD&A. But anything you can share a few certain timelines or deadlines for the prospectus. So anything you can update on that front?

Johnson Joseph

Sure. We're really at the stage where we're kind of like dotting the i's and crossing the t's. Or is it crossing t's dotting the i's, whatever it is, for the prospectus right now. We had delays due to the changes that we made, the recent changes that we made to our Board of Directors. But now that that's done, we're really in the final stages of both the uplisting application and the prospectus filing. So I would say that these things will happen within, I would say, within the next week and a half or days here. There's a chance that we could file the prospectus before the end this week. But it really depends on the lawyers, on how quickly we get to dotting the i's and crossing the t's.

Mark Schwalenberg

Perfect, thanks. And quick follow up on that. You mentioned the new Board members. Could you just elaborate? We put out a press release about it. But can you elaborate a little bit on just what the new members bring and how they'll help essentially facilitate growth in China and also launching the North American markets and integrate the hub model over time?

Johnson Joseph

Yeah, absolutely. As we said in that news release, again, Mark and Charles did a fantastic job as Board members. So I really want to thank them once again for their services. We got to the point where the company was going to need, I guess, a little bit more in terms of international experience and capital markets experience.

This is expected to be a global hub. Yes, we started in China, but we have visions to be in the U.S., Europe, South America, pretty much all over the world. And we needed to find Board members that had those skillsets, those connections, both from a business standpoint and from a capital market standpoint to be able to assist to assist the company to better do that. And we feel that we have found two extraordinary candidates in Carol Penhale and Dylan Tinker to help us do that.

Mark Schwalenberg

Okay, great. We'll pivot to a question about the Heartbeat Insurance revenue. So maybe for Jean. So we talked about expected revenue in Q4 last year. That was deferred. And had a shareholder, curious about whether that was captured as part of the CAD32 million in revenue for Q2, or any clarity on how that's progressing?

Johnson Joseph

Well, Jean, like I mean, if you want I can answer that. We just started really like I mean, catching up with the deferred investments. So yes, some of the revenue that was generated in Q2 came from the efforts that we put forth in to the Heartbeat platform, but certainly more is expected from that platform. So by no means have we reached the peak of what we expect Heartbeat to contribute to our top and bottom lines. So it's just a start. But yes, we did start to see some returns, but we expect a lot more from the platform going forward.

Mark Schwalenberg

Okay, that's good. Regarding the Canadian operation buildout, so could you just talk a little bit about the pre-registry campaign? What kind of traction you've seen from that, if possible, like any KPIs that you're tracking, like number of registrants or registered users or anything that we're looking at, particularly that you can comment on?

Johnson Joseph

Well, our Director of Marketing at Cubeler forbids me from discussing the number of pre-registrations that we have in the campaign right now. So I'm not going to say anything about that. I don't want to steal his thunder. But we're very pleased with the reception that we've had from small businesses with the pre-registration campaign. We really -- the pre-registration campaign itself can be described as a -- I guess, as a soft campaign right now, because the Cubeler website is being redone right now, there's going to be a whole new brand.

Sorry Luke, I have to say this. So there's going to be a brand new Cubeler website, logo and everything else. That's when the pre-registration campaign is really going to kick in. So right now, what the marketing team are doing is really kind of like testing certain things on social media.

So we haven't totally opened the floodgates yet for the pre-registration. But what we're seeing so far is very, very encouraging. And we will disclose numbers, if Luke allows me to do so. And we will disclose numbers, as we get closer to the November launch of the platform. But no, it's very encouraging. What we're measuring in terms of KPIs, it's definitely for now the number of registrants on the platform.

Everything that we're looking to do, whether it's monetizing the data, or generating advertising revenue, everything is predicated on the adoption of the concept of the business hub by small and medium-sized business owners and executives. So long as they buy into the idea and they accept the trade-off of giving us access to their data in exchange for all of the services that we provide them, then that's the most important thing for us.

Now in terms of how we monetize the data, those things will be communicated in due time. But right now the most important metric for us is the number of small businesses that are going to be registered on the platform. Everything else will fall into place after that.

Mark Schwalenberg

Got it. Okay, no, that's awesome. Also, in regards to the Canadian operation and the associated expenses that are going along with it, what's sort of the outlook for those in terms of how they're going to continue through the end of the year and heavy into next year? Or what can you comment on or clarify about that?

Johnson Joseph

Sure. We don't expect the Canadian operations to be profitable for -- certainly not this year, or maybe even 2023. We're going to have to spend money to grow the business. It's not just Canada, but the U.S. as well. We're planning on opening offices in the U.S. before the end of 2023. So business development initiatives, marketing and so on and so forth. So there's going to be some considerable expenses going forth for the, call it, the North American operations. But obviously, we expect those expenses or investments to pay dividends in the midterm and longer term for the company.

Obviously, like I mean, this is a different model than what we're operating right now in China. But it is a model that we believe will be far more profitable than the model in China. And elements of this model will also be introduced to what we're doing in China, which will make what we're doing in China more profitable as well.

So to answer that question, yes, there's going to be significant expenses, but just like any grown company, it's normal, you have to invest before you -- for the business to grow before you become profitable.

Mark Schwalenberg

Okay, thanks. How are you feeling about the competitive landscape in the North American markets? It's been brought to our attention, there's some other companies that are building out small and micro business hubs. Obviously, not the footprint in China that Tenet does, but how are you looking at that and thinking about that, and just monitoring the industry as a whole?

Johnson Joseph

Yeah, like, I mean, we've seen different companies try to do different things. Loan brokers, companies that specialize in small business loans and so on, and so forth. But when talking to prospective partners, really the offering that we have, for a small or medium sized business owner, or executive is unparalleled. Like I mean, there are businesses out there that have certain elements of what we're doing. But the way we offer services, the way everything is packaged, really is not seen right now in the industry.

So yes, we keep an eye on the competition, but honestly, like I mean, it all comes down to value proposition, right? Like what are you offering the client, as opposed to what a competitor's offering the client? If you look at our offering, it's hard to be free, right? I mean, we're not charging the small businesses anything at all. So compare that to the many benefits that they would have from being part of our network.

So regardless of what anybody is doing out there, we feel very, very comfortable and confident in our ability, basically, to attract small businesses to our network. And like I said before, that is the most important thing. Once we're successful doing that, then everything else will fall into place.

Mark Schwalenberg

Perfect, perfect. Thanks. Little pivot here. So I'm sure you probably saw the news about the PCA agreement with Chinese authorities. And just be curious, your thoughts on implications for Tenet in terms of the business in China, capital market access, SEC review and all that. Anything you can comment on there?

Johnson Joseph

Yeah, Mark, we actually have a party planned just for that specific event. That's how happy we are about what took place. No, in all seriousness, no, it's very good news for every company with ties into China. So we've had an open dialogue with the folks at the Securities and Exchange Commission. We're going to continue to do that. And this is certainly something that we will bring to their attention, and it can only work in our favor.

So we're very happy about that news. Again there's no timetable for an eventual return to the NASDAQ, but everything is pointing in the right direction, let's just say and we're happy with the news that came out recently.

Mark Schwalenberg

Certainly, understood on that. And I guess lastly, just we saw the news about the launch event coming up in November and it mentions who some of the participants are, who's going to be invited? Is that an open invite to all shareholders? Or how does that work?

Johnson Joseph

Open invite -- yeah the offices are expected to be bigger, but I don't know that we'd be able to accommodate every shareholder. By last count, I can't remember like -- well, we have thousands of shareholders, obviously. So it's not -- unfortunately, I would love to have everybody there and just have like this big party, but it's not feasible. Now there are certain people that we would like to have attend the event, certainly, strategic partners, members of the media.

If possible would like to invite some government officials, because we're working within the association right now, whose mandate it is to help small and medium sized businesses in the Asia Pacific region, which Canada and the U.S. are a part of, connect and do business with each other. And they have ties to the government.

So through them, we're hoping to be able to invite some government officials for them to be aware of what we're doing and how we're helping, at least businesses here in Canada, potentially expand and export their products to the Asia Pacific region. So to answer your question, yes. So certainly members of the Tenet Group are going to be present. Folks from China, we're hoping that the Golden [ph] may be able to bring back a couple of our partners in China with them to attend the event. But we're not sure if that's going to happen. But certainly Golden will be back for that event.

So members of the Tenet family, certain shareholders will definitely be invited, probably longer term shareholders, those that have been with the company for a number of years that have witnessed the evolution of the company, we'd certainly like to have some of those folks be at the event as well. And like I said, our strategic partners and members of the media. That's what -- that's who we're targeting for the event.

Mark Schwalenberg

Awesome. Can't wait. That's about all I had for Q&A, Johnson. I will turn it back to you for any closing remarks.

Johnson Joseph

Okay, thank you very much. Once again, I'd like to thank everybody for attending the second quarter 2022 financial statements shareholder meeting and very excited about the future of this company, as I'm sure you're well aware of now right now. Now things were a little bit slow in the second quarter in China, but we expect activities to pick up in China. Again, supply chain will continue to grow. We're looking at branching out, while not the sort of branching out but making a splash into the clean energy sector.

There are other sectors as well like the energy sector, well petroleum oil and gas also that should be very beneficial to the company's top and bottom lines going forward. But more importantly, we're very, very excited about expanding outside of China. So more and more emphasis will be put on the activities of the company in Canada, and eventually in the U.S., and potentially in Europe by the end of 2023 or early 2024.

So also a different business model. We're looking forward to rolling out something that's a little bit more simple for investors and shareholders to understand. So keep KPIs more news. We will -- once we find the prospectus and we get the financing close, you can expect a little bit more in terms of news flow, because we will then have the capital that we need in order to accelerate some of the things that we'd like to do.

So again, I want to thank you for your time and we're looking forward to having you continue to support the company and looking forward to continuing to deliver on everything that we've promised our shareholders. Thank you and have a good afternoon.

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