Description

PBIT was previously written up by puppyeh over a year ago, I suggest reading that and the comments for background.  Since the writeup, the company has executed well and done what management has said it is going to do.  Something you don’t see all that often in the microcap space or on the CSE.  Recently, there have been a number of events that have been beneficial to PBIT that merit an updated pitch. 

For those new to the name, PBIT provides point of sale software and payment systems to marijuana dispensaries.  It makes the bulk of its revenue in payments and is investing in software capabilities.  It is a Canadian-listed microcap that trades on the CSE (OTC POSAF in the US), but is a US company that reports in USD.  The company as of last Q, had $8m of cash and 170m f/d shares out (132m plus another 38m warrants/options & RSUs/converted shares)

It is a secular growth company but one with a reasonable cap structure and seems to be managed well.  Management has grown the company to this point with only $11m of outside capital over the last 7 years.  The most recent capital came from existing shareholders at a premium to the market price.  There are some derivative liabilities from a convert and warrants the make the PNL look a little messy Q to Q, but the core business is being run well and the company is re-investing gross profits back into the business to take share and scale the business.  Despite the heavy investment through the income statement, the company is more or less EBITDA breakeven today.  If they decided to stop investing aggressively and growing the business, something I wouldn’t advise them to do, this would be a profitable company today.  2023 is expected to be another strong growth year.  I like and view PBIT as a share taking story, from cash, and a secular growth story as more and more states legalize marijuana (more doors to sell into).   

First, the business is going well.

Since 2017, PBIT has doubled or nearly doubled revenues each year.  For Q3, they broke 10m in revenue (10.3m to be exact), with each month being a record revenue month.  In the last update, it seemed they were on track for something similar in Q4.  PBIT is growing fast even as comps at dispensaries are mixed.  It now has over 500 customers and, as of last quarter’s earning call, over 200 more in the pipeline.  The 2022 guidance is for $37-40m of revenue, they booked $25m through Q3, this implies Q4 anywhere from $12m ($48m annualized) to $15m ($60m annualized), a wide range but this is a company that has provided thoughtful guidance and in many cases exceeded it.  PBIT most likely exited 2022 annualizing more than $48m of revenue (possibly $60m), with a long growth runway.  Further, I believe demand for PBIT’s services accelerated into year-end due to recent events in the cannabis payments space (which I’ll get to). 

Second, a favorable licensing deal was signed late in the summer.

The deal was a licensing deal that comes with a minimum of $20m paid to pbit over the next 4 years, with the first-year minimum payment of $3.9m upfront.  The fee is a royalty that can be bought out after 3 yrs at the greater of $30.75m or 5x the royalty payments by the licensee.  My understanding is that the licensee is a major MSO aggregator.  The revenue associated with this deal is for already developed software and essentially drops right to EBIT. 

Third, recent disruptions in the cannabis payments space are an opportunity PBIT is positioned to capitalize on.

In December, payment processors updated their software to remove cashless ATM as an option for dispensaries.  A Bloomberg article estimated that roughly $7b of transactions got processed via this option, leaving many dispensaries with a lot of processing volume searching for alternatives.  PBIT has invested in and is using a debit-to-the-penny solution.  The company is aggressively marketing and growing its pipeline with merchants that have been left in the lurch, it has also been getting inbound inquiries. 

Fourth, the current environment should create more opportunities.

In 2021, money was free, multiples were high, and investors were plowing money into spaces like this based on TAMs.  There now appears like there could be some distress.  PBIT grew fast, but not too fast, managed their capital structure and investor base well.  The company is in a very good position to acquire bolt-on assets at now reasonable prices to cross-sell or realize further economies of scale.  I expect the company to be in position to do some things that create and increase long-term value. 

CEO Ryan Hamlin answering a related question on the most recent conf call:

“The other thing I would comment on is, because there is so many companies that started in this space like we've commented before and have raised capital on unfortunately valuations they can't live into right now and have P&Ls that aren't generating the kind of cash that they need to survive. They're living on whatever cash they raise, right? Because they'll have a very difficult time to raise anymore. So these are the opportunities, like I said, a few minutes ago, these are the opportunities where companies like us can take advantage of the situation. And there is definitely roll up strategies in play. As we look at how do we continue to grow aggressively? Obviously, we have a great sales team, they continue to add a ton, but we want to be aggressive and look and see if now is the time that we either do more strategic partnerships, potentially some acquisition capabilities, but this is the time for companies like us that are strong to kind of take advantage of that.”

Some version of SAFE banking.

SAFE banking is federal legislation to legalize banking services to dispensaries.  You can’t really discuss PBIT without having a view on SAFE Banking.  My view is that we will get some form of it, some day, but who knows when.  It's possible (likely?) we get to a critical mass of states legalizing that something needs to be done.  I would expect that any legislation should benefit digital payments over cash (for record keeping and tax collection purposes).  That should create a land grab of sorts, but the company is set up to do Visa and Mastercard credit transactions the day they allow it (I’d expect some lag).  A key feature of the software is inventory management and compliance, something that may be difficult to build fast.  Even if/when competition increases as a result of SAFE banking, I'd expect the company to be a net beneficiary, as 70% of the company’s customers sales are still being done with cash, and credit/debit card penetration elsewhere is much, much higher.  The company’s mission, I believe, is to be as big as possible before something like SAFE banking passes and when something passes, perhaps sell to a strategic. 

Valuation

Today, PBIT trades for just a hair more than 2-2.4x their EV/annualized sales exiting Q4.  Multiples everywhere have contracted, as has PBIT's (from 3.4x at puppy's writeup to where we are today) but, the company's growth has led to the shares more or less holding their ground.  Today, very few companies have the growth and opportunity that PBIT has.  The company has not provided 2023 guidance yet, but given the opportunity set, and tailwinds it isn’t inconceivable for it to have a midpoint north of to $70m range and exit 2023 run-rating $80m+ in revenues with more to come going forward.  At this price, it seems like you could ride the growth of the business itself and not have to wait around for multiples to improve or for SAFE banking to pass, though both of those eventual outcomes would be welcome.  

Catalyst

Cashless ATM conversions to PBIT's debit to the penny solution

SAFE banking (one day)

More legalization