Yet Another Value Podcast - Jeremy Raper discusses POSaBIT $POSAF

Episode Date: November 3, 2021

Jeremy Raper makes his record fifth podcast appearance to discuss his latest high conviction idea: POSaBIT (POSAF). POSaBIT is a microcap company trading on a very small foreign exchange, so risk is certainly elevated here and listeners should remember to do their own work / this is not investing advice. However, Jeremy believes that the company's strong growth and big moat far outweigh the various red flags and risk around it, and that the stock is significantly undervalued based on where much slower growing peers are trading.Jeremy's seeking alpha article: https://seekingalpha.com/article/4462310-posabit-systems-3x-upside-potentialChapters0:00 Intro2:00 POSaBIT overview14:30 Diving into POSaBIT's moat22:10 Why POSaBIT's take rate is sustainable28:45 If Cannabis got legalized tomorrow, what would happen to POSaBIT?33:30 Is private equity rolling up the industry a risk?37:10 Discussing valuation46:55 Breaking down the RTO / reverse merger red flag53:10 Jeremy's closing thoughts

all right hello and welcome to yet another value podcast i'm your host andrew walker and with me today i'm excited to have my friend jeremy raper on for the fifth time jeremy how's it going i'm doing well man how are you thanks for having me again hey thanks for having me i'm going to tell you what i was telling you before the podcast congratulations jeremy just had his second kid about a month ago so congratulations thanks for coming on here on the heels of that but let me start this podcast the way to do every podcast first a disclaimer to remind everyone that nothing on here is investing advice. That's going to be particularly true today. Jeremy traffics in very small, very quirky international stocks. Everyone should remember smaller, quirkier international. All of those

are synonymous with higher risk. You need to do a lot more diligence. Nothing on here is investing advice. Please consult your own financial advisor or whatever it is. And then the second way I start every podcast is with a pitch for you, my guess. But forget about that. This is your fifth appearance on the podcast. That's groundbreaking stuff. I've done about 75 podcasts and your five with them. So if that doesn't speak how much I admire you and how much I like you, I don't know what it is. So we'll skip all of that and we'll start by going into the company that I think you're coming on, your newest, most exciting idea. I think you post an article on seeking alpha. I'll be sure to link to it in the show notes. This is your best idea right now.

The company is Pose a bit and the U.S. It trades OTC under POSAF. I'll remind everyone one more time. Risky, please do your own work. With that out the way, I'll toss it over to you, Jeremy. What is Pose of it and where are we so excited about them? Sorry, sorry, I have to get this in before I talk about POS a bit. You said you've done 75 podcasts and I've been five of them. I'm not sure what's more shocking that you've done 75 pods or that I have like a, what's that, a 7% market share of your podcasts? You know, I think the last one we did was at 50 and you were four of them.

So your market chair is creeping down, man. Your stocks in the gutter, market shares creeping down. We're diversifying over here. I'm a value, dude. I'm a value guy. Okay, I'm not about the growth. I'm about the value. Just keep that in mind. But yeah, no, thanks for having me. So pause of it. Okay, so just to kind of add on to your disclaimer at the beginning, this is a smallish company in a very fast-growing regulatory

young industry, cannabis. It's listed in two locations, actually. You mentioned the OTC listing. It's former, I guess its main listing today is still on the Canadian Securities Exchange, under the listing under the ticker P-B-I-T. So if you can actually trade on that exchange, which we'll get to, that's a bit of an issue for many market participants. If you can trade on that exchange, you can do it.

It's in Canadian dollars. Most listeners will be familiar with cannabis, kind of the cannabis evolution in the sense that a lot of securities could not be listed in the US initially for regulatory reasons due to the lack of federal legislation around cannabis. And so a lot of the companies originally went to listing Canada. So that's kind of part of the reason for the background for why P-Bit is listed in Canada and only recently

listed the, well, only recently became OTC tradable in the U.S. I do expect this company will graduate to a more normal listing in the U.S. over time, and the CEO of the company, has already thrown out 2022 as a likely NASDAQ uplisting year, although that's obviously to be determined. Can I say all that? Yeah, sure. Yeah, just so, you know, as you said, I've done podcasts on cannabis. Actually, I think tomorrow Aaron Edelheight is going to come on to do another cannabis podcast,

but most cannabis companies who operate in the U.S. trade in Canada because of federal legislation stuff, but these guys aren't technically operating cannabis. They're just doing payments. We'll get to that in a second. But because of that, they think they could go to NASDAQ at some point. I'm not sure if that's entirely the reason. In other words, I'm not sure it's because we don't actually cultivate and sell cannabis, therefore we could list on NASDAQ. I think it was more a, this is a fast-growing fintech company. Nasdaq is the logical place for it. list. And there's other service providers to the cannabis industry that are listed on NASDAQ, like weed maps, for example. So, yep, to me, to me, I'm just trying to be completely

upfront. I haven't checked the actual letter of the law as to what's preventing them from being on NASDAQ. I do know the legacy history of the company why it ended up in Canada. And then there's a natural process. And then there's a, there's a natural process to get listed on a better exchange, which takes time and money, which is kind of what they're, they're starting to go through at the moment. But actually, what the company does. So let's, let's kind of talk about it. So they're a vertically integrated payments processing company providing services to the cannabis industry, specifically to cannabis retailers, called dispensaries, but essentially shops where you go and buy cannabis. It's a U.S. company.

It's based in Seattle, Washington. It's, I think it's six or seven years old. I'm sorry, maybe 2017 is found. So it's a 45, I think, I was looking at the 2015, yeah. And then it started, it started operations for only in 2017. So it's an entirely U.S. business today, as I said. They're in 14 different states. They essentially, they take part of the role of the acquirer in a typical kind of banking card

network and part of the role of an issuing processor, but mostly you could think of them as an acquirer. That is, they provide merchant-oriented services. They manage the payment account for the merchant with regards to the financial institution, that is the issuer, the bank. They receive a fee. They do various different things, but essentially the burden of butter is they receive a fee per transaction for providing those services and therefore, like many other payment businesses

as the, hopefully the volume scales aggressively as it grows, you kind of earn this annuity type revenue stream on a growing pie of transactions. Jeremy, just, you know, a normal business, a Chick-fil-A, a McDonald's or something, who would the acquirer be for when they process? It would be a positive is only debit cards, I believe, but when a McDonald's process a credit card transaction, who would a typical acquirer be there? that would be someone like um i'm i'm i'm just i'm just blanking with uh no i haven't done retail i haven't done retail i haven't done retail but i think it would be like the square the clover that type of yeah yeah it would be a square is like the vanilla quote unquote com for this

industry outside of cannabis space so yeah it could be a square i mean there's actually a lot of them right but square is obviously moved to a dominant position in recent years so we'll go with square Yeah, I was just doing that so people could start thinking, you know, acquire can get a little jargony, so people can start thinking who it's competent to. But please continue. Yeah. So basically, I guess there's a few layers to the investment, right? So you have your overall kind of, the way to think about it is there's on a macro level, there's kind of two or three layers. The first layer is how fast is the end market growing? Right. So cannabis adoption obviously growing very quickly. You can look at your external consultants, but the market's being growing at kind of like a compound teens rate for the last few years. It's slated to be a 25 billion opportunity at the retail level this year. It's expected to grow at high teens for the foreseeable future. That's a function of continuing. legalization by state. So right now cannabis is legal in various forms, whether medical or recreational in I think 39 states. So there's the ongoing expectation that over time you'll get to 50 states, over time you'll get federal legalization of cannabis, which most people realize is the big issue in the industry, that it may be legal at the state level in various states, but you can't actually

transact across state lines. You can't bring cannabis from, say, Colorado into California. So it's essentially two different markets right now that has big banking and processing implications, as we'll discuss. So over time, you have this long tail win from from kind of retail growth and adoption. 25 billion a year now, this could foreseeably compound at 20% or more for many, many, many years. That's layer one. But layer two is actually more interesting to a company like positive, and that is the percent of the percent of transactions in cannabis is so heavily cash today that you don't just get the tailwind from some kind of the industry growth. You get this massive secondary derivative to tailwind from converting cash transactions.

to card transactions. So if you think about it, in a typical retail environment, you go to McDonald's or you go to, but even McDonald's, it's probably a lot more cash than other places, but you go to Zara, we go to H&M, you go to a department store,

90% of transactions today in the US take place by a card, or let's say non-cash transactions, the card of digital. And if you go to a cannabis, today that number is closer to 10%, maybe 15%. So an interesting anecdote that the CEO of Positiveit says,

is the day one when they go into a store, immediately digital transactions go to 30%. So they get 30% of the revenue in the store day one. That's generally the conversion from an overwhelmingly cash to a slight adoption of card. So in the stores they're in today, it generally is around 30% doing card versus cash. But obviously you would expect all else you call that consumers favor plastic. And over time, the card percentage share of transactions will, excuse me, the cash share of transactions will go down progressively, probably very quickly. and the card share will go up very quickly. And obviously, that will be a tailwind to whoever is processing card transactions,

which POSBIT is one player. So you have the overall growth of the market very high. Then you have this conversion of cash to card or cash to digital, cash to non-cash, essentially. And that is going to be very high. And then the third layer is more like the company's specific opportunity, which is POSBIT winning share from other payment processes, positive winning share from other POS providers,

because they have a POS offering as well, talk more about some of their offerings outside of pure payment processing. And so you have this kind of three-pronged approach. The core of the investment is if they don't even do that well on the third leg, which is the most difficult leg, and that is the win-new business leg, even if they simply ride the wave of those first two legs, that is, the growth of the industry and the conversion of cash to non-cash payments, from cash to digital or card payments, then this, in my view, this will be a home run, given the size of the opportunity.

in the valuation today. Perfect. Let's pause there. So, first quick question. So, you know, I'm familiar with cannabis stores. I've been to one or two in the past, but I thought they were all cash, right? So my first question, who else is processing card? It's only debit cards, not credit cards yet, but who else is processing car transactions? So to be completely clear there, and this, again, just depends on the state and it depends on the store. It is a bit of a great area, but essentially what you need to, in order to process non-cash transactions within a cannabis environment today, you need to have a relationship with state-level banks, essentially, state-level banks credit unions that are comfortable operating

in an intrastate environment, right, not within the aegis of the federal banking system. In other words, you go to a state, let's say you go to Colorado and you go to a local state Colorado bank, and they're happy to be, they're happy to have a banking relationship with Colorado-only dispensaries, and kind of like a closed network within the state, let's say. And so on that basis, you can do typical pin debit transactions. You can do digital ATM transactions, what's called point of banking, is the technical term for it. You can actually do credit card transactions via a two-step loop using cryptocurrency.

So in other words, it is possible to walk into cannabis store, use your credit card and walk out with cannabis. But what actually happens is you use your credit card to convert it into Bitcoin or ether or whatever and then that bitcoin or ether is used to buy cannabis products as a totally separate secondary transaction you don't actually have to in other words all the credit card rail see is a conversion to bitcoin then the bitcoin is used to buy the cannabis and the motion ends up with bitcoin which is then converted back into cash presumably at some point in other words and then the credit card rail see another bitcoin transaction so that's that's the kind of on-off

way to do a credit card transaction credit card transaction and again that's not very common right now. As you can imagine, it's clunky and expensive. And then the fourth option is you can link your bank account. So in other words, if you really wanted to and positive, it provides its functionality, but it's pretty expensive and it's very cumbersome. So I don't think many people do it. You can do an ACH transaction where you give your ABA number and your routing number and actually essentially do an ACH Rails transaction within the store to pay as well. However, to answer your question directly, the most common forms of payment today are what's known with point of banking or digital ATM, which used to

be common in the casino industry as well. Essentially, it's handing over your ATM, giving them the card number and then handing you back chips. So think of that, but doing it with cannabis instead. The problem is it's basically like an out-of-network charge. So in other words, basically your bank, the customer's bank, is going to look at that as an out-of-network transaction, therefore slap you with a big out-of-network fee. So if you're spending like, I don't know, 60, 70, $60, $100 average spend is up to $100 in some shops, but let's take $60,70 and you're spending a couple dollars convenience fee plus a network, out-of-network kind of, out-of-network ATM, virtual ATM fee.

And then you're also paying on top of that, the typical processing charges. All of a sudden, the customer is having a bad experience and the merchant is not really, the merchant's not making any extra money. They're paying those fees on to the banking partners, right? So the customer is paying more for the same service. So the industry seems to be gravitating more towards typical pin debit, debit to the penny, as it's called, which again is made possible on a state-by-state basis because people like POSABIT do the heavy lifting of going to local state banks

and state credit unions underwriting the relationship with specific merchants and bringing and basically forming a relationship with totally compliant. totally above board at the state level, with willing partners. So I think that's very clear to keep, sorry, I think that's very important to make clear because I think a few of the questions in your comment thread on Twitter were asking, are you sure that these banks know they're dealing with cannabis merchants or cannabis stores? And the answer is, of course, of course. This isn't some kind of bait and switch where POSBIT is introducing businesses

and not telling their banky partners what product they're selling. That's ridiculous. Yes, they're familiar with. these entities with these dispensaries. They operate in the same neighborhoods. They operate in those states and their local banking institution. But, you know, the question is, I guess we can get to it later on. I guess the real question is what happens post-federal legalization to this kind of decent ecosystem. Let's get there when we get there because this was great. You answered my, they mentioned on their website a lot. They do blockchain. I was going to ask you about blockchain,

but you already answered that with the crypto and credit card question. So I guess let's dive into the mode a little bit because it does seem like until we get federal legalization, it seems like these guys are going to have a pretty nice mode, right? Like in order to, if I was, you know, a square, you can start up a payment transaction pretty easily. You know, obviously you need a tech guy and stuff, but it's not going to be too hard to get a bank and a bank to accept a bunch of transactions if you're just like processing clothes or something, right? Whereas for this, it seems like it's going to be really difficult. There aren't a lot of cannabis companies out there. So you're going to have to go, you know, literally.

state by state, store by store knocking on doors to sign up these cannabis companies. And then you're going to have to have enough size where you're going to go to the local community bank and say, hey, you know, work with us, process payments for these 30 customers who are probably higher risk, you know, all the KYC and stuff. So am I thinking correctly? It's probably a, now legalization is going to be an issue, but it's probably a pretty big mode in the meantime. Are there any big competitors here or anything? Yes, there are a number of competitors. But I think your framing of the situation is correct. So there's two, there's two regimes. There's the regime as it exists today where despite the fact there's a number of competitors, it's also a very, it's kind of a difficult

market to attack. So there's this two angles to that. First of all, the market is actually quite small. So I just mentioned that it's a 25 billion dollar opportunity. That's at the national level. If you consider U.S. retail value is a few trillion dollars. This is irrelevant to someone like Square. Essentially, today it's irrelevant to a square. It's irrelevant to a FISA. It's irrelevant to a to a Fidelity National, some of the other bigger payment names. So there is, look, it's obviously going to become more relevant, you know, in five years time or 10 years time and it will be attacked by bigger players. But for now, it's a very, very small market.

And that's at the national level. And you actually have to break it down state by state. So the numbers get a lot small. Excuse me, I want to take. No problem. Bless you. Just a touch of the old, just a touch of the old COVID kicking. I'm just kidding.

But no, no. So the point is that's quite important. That creates the size of the market creates a bit of a moat in itself because it's still very, very niche. And that's important in protecting the economics. The second point is you're right. The regulatory environment today is its own moat and that will change in the coming years. The question, of course, is how long does it take and what shape does that change take? So it's a very different scenario to say, you know, press a button, federal legal, safe banking at pasts, all of a sudden, you you can bank cannabis transactions, does that mean there'll be a free fall? And as you kind of alluded to no, and the reason it was still a no is because it was most definitely still be classified as what's known as a high risk industry. So in the kind of payment processing and or credit card world, a high risk industry is one where for whatever reason the underlying businesses deemed to be, well, high risk of default, high risk of non-payment of obligations and higher taint attached to let's say. So, for example, online pornography used to be, or still is classified as high risk, even though, you know, it's a legal industry. Online gambling is obviously another one. Tobacco is

classified in some like dealing tobacco online, some kind of online alcohol retail is also classified that way. So basically, the point is the economics derived from the risks undertaken by the various counterparties in the transaction, who's underwriting the transaction, who's taking the risk of processing these transactions. And that's less a function of legalization or non-legalization. Like, that's a big blanket term. That's more a function of the categorization of the industry. Is it a high-risk industry or is it just going to Zahar and buying clothes,

which is obviously a low-risk kind of activity? So when you combine that with the fact that it's still a very small market in the grand scheme of things, that creates a bit of an economic moat. Having said all that, you asked, are there any other competitors? And the answer is, of course, there are a lot of. of competitors. It is a competitive space. Just the competitors are not your fidelity nationals or your squares, right? The competitors are other smaller, mostly other small kind of niche-focused cannabis-oriented payment processing companies. Now, the biggest competitor today is a company

called Transact First, which is unlisted, privately held. I believe they just did a funding around and not entirely short the details, but I think it was well north of 10 times sales. I think it was largely a secondary sell-down. Don't quote me on that because I haven't seen the deal talks. I only heard through kind of my network. I do transcripts of the podcast now, so you're going to get quoted on it. I hate to tell you, there's going to be transcripts. Well, if you quote me, just say by Jeremy, who heard it through his network of, you know,

network of high-risk sources. You can say that. But no, to follow up quickly, Transact First is a real competitor. They are much larger than positive. bit today. The reason they're much larger is because essentially they they locked in a lot of the years. They were quite smart. A couple of years they locked in a lot of the larger MSOs to long-term contracts. So they locked in unlike POSBIT will sign companies to say one-year deals plus with option for extensions and trust the quality of their service to maintain the relationship

and keep the business. Transact first went the other way and locked in customers to three to five year committed relationships for their processing. So if you talk to a lot of the customers or a lot of the merchants, I should say, in the industry, they're not really happy with Transact First. It seems to be an opportunity for people like POSIVET to pick off, as in when some of these customers come up for renewal. Also, I personally don't believe Transact First technology is that great. I think POSBIT's offering is at least competitive, if not more competitive, particularly on some of the key newer offerings like debit to the penny, so PIN-based debit transactions, as opposed to the old method of point of banking,

digital ATMs, which was the dominant solution, still is the dominant solution today, but is being de-emphasized over time for reasons that I mentioned, the out-of-network fee charged to the customer, the clunkiness of the transaction. So transact first is what I would call the legacy strong player in this specific cannabis payment processing niche. POSBIT is definitely a challenger. So you think about it this way. There's over 8,000 dispensaries in the United States. Possibly is in 300 plus, going at 200% at the revenue line, but growing the dispensary level number, you know, over 50%, and they're entering new states all the time. So, yeah, I mean, they're definitely not, it's not, it's not a situation where you have one player with

huge market share and a long tail. It's a completely fragmented market, very fragmented. Even transact first market share is not, I mean, I don't have the exact stats in front of me, but it's not like they have a dominant market share and everyone else has no hope. It's a very, as you would, as you would expect, right, because they're not really one market. You have to think about in terms of 35 to 40 different markets, state markets, where various operators have with different resources have made the decision to invest in, you know, as you said, KYC completely compliant solutions and banking relationships. And POSA bit's done that in a few states, but definitely not all of the states.

And Transact's done that in more states and has had a couple of better, longer term relationships with what ended up being larger entities, but they're not, you know, kind of, they're not like a draft kings or anything like that. Let me jump in here. So in a second, we're going to talk valuation, but you covered a lot there, and I just want to go through a couple of things you covered. So the first, you know, if people can remember five or ten minutes ago when you were talking about industries with taint, I thought you had a great thing in your seeking alpha piece

where you were talking about, hey, here's how much positive charges per transaction. And, you know, when I think of a normal credit card transaction, you know, it's like if I go to the bodega across the street or something, it's going to be, I think they charge 30 cents per swipe plus 2% of the transaction or something, right? But industries with higher taint are going to charge higher charge back. So you just had a great thing and you're seeking out a piece of here's how much the average industry with taint is charged by the credit card issue. And here's how much positive it is charging. And I think that will help frame this a little bit more. Sure. I hate to be unprepared. I don't actually have the seeking alpha article in front of me.

But it's on the net so people can pull it up. But the gist of it is essentially the, as you said, the high risk average take rate today is well north of 5%, right? All in, let's say all in the blended take rate is well north of 5%. Meaning, yeah, meaning the economic cost to the economic cost to the ecosystem from processing this transaction, let's say it's $100 is north of $5. Versus today's POSBIT's top take rate. In other words, so all in charge they get the most is I think 5.2% for, for one of their services.

I think it's for debit, debit, pin debit transactions, meaning it's not wildly out of line. It's not wildly out of line with legal, federal legal high risk industries today. So my point is, if you believe, and this is a belief, not a fact, but if you believe that cannabis regulation or at least the payments ecosystem in cannabis follows the playbook of other high risk industries, such as pornography or online gambling or online betting, or things like this, then you're never going to have a situation where the take rates are, you know, 30 basis points, 50 basis points. It's always going to be some kind of huge multiple of that. And if it's in line with these other industries, there's no reason it shouldn't be

close to 5%. Having said, yeah, go on, go on. Oh, I was just going to say in your article, I just thought that was such a great point because, you know, when you first hit this document, we'll talk about some of the other red flags, one of the things my mental model was, oh, well, yeah, they're generating great revenue right now, But when it gets legalized, first the big players are going to come in. And then, you know, these guys are charging 5%. The big players are going to way undercut them. So they're going to be churning and they're going to have to reprice all their contracts.

And I think you've done a great job of addressing why if legalization came, which is a big if, I'm actually kind of taking the, I think it's going to take longer for federal to legalize than we would kind of hope. But even if it came, I think you've addressed the big risk. It's not going to all switch to square in one day. And they're not going to have to go from 5% charges to two, percent charges and, you know, see their revenue get cut cut in half or something overnight. But were you going to say one other thing on this? Well, I think, I think, maybe I was, but I think

what you raised is more interesting. And that is when, when, it's really important to talk about the pace of federal legalization, right? This is a key investment risk and a key kind of determinant the outcome of the investment. So when Biden got elected, kind of back up a little, why are all U.S. cannabis stocks in the toilet? They've been a massive underperformer. Your buddy, Aaron, I'm sure we'll talk about it tomorrow. But essentially, there was this belief that when Biden was elected, it would be a free fall. We would move to federal legalization very quickly. And obviously, with all the consequences for guys like positive payment processing, now what's turned out to happen is all of a sudden, not only is federal legalization kind of still on the backburner,

but even the safe banking act has not passed. It got stuck in the Senate. Who knows if it makes progress. But now it seems as if the market is coming around to dispute that federal legalization is at least 18 months away, maybe longer. And that could continue to get pushed. I've spoken with a lot of people who think it's not going to happen during a Biden administration. To be fair, he's probably a one-term president. So I'm not saying that's all that long. But when a company is growing 200% a year, you only really need one or two more years to make

numbers work, especially at this valuation. That's point one. Point two is, and I guess it's the point you raised, the day Safe Banking Act passes, the day that could be well before actual federal legalization of marijuana. of it. Let's say, you know, federal legalization happens completely shortly thereafter. Amazon is not rushing into sell cannabis, okay? There's still going to be highly restricted. Think of it like alcohol or tobacco or anything. The actual point of sale opportunity is still going to be regulated at state level. You're not going to be, you know, it's not as if there's

going to be a free-for-all where cannabis is available everywhere and Visa and MasterCard are rushing to do cannabis transactions and all your typical payment processes that service, that service traditional industries like Square is just diving straight headfirst in and undercutting everyone. It's interesting you mentioned Square actually because I believe they actually entered the CBD market. And even though they have all this huge scale from their, you know, their step function, higher volume business and they're, you know, very fast-growing traditional transactions business to normal industries, they're still charging from what I heard, they're still charging kind of four to five percent take rates on the CBD business that they actually tried to pursue.

So it's not as if they went in there and under and the reason is simple. It's because, and by the way, CBD is legal, right? It's not cannabis, but the point is maybe, see, I need to check the letter of the law, but maybe CVD is classified as a high risk industry. It may well be. And if that's the case, then the economics of the payment processor are still going to be dependent upon giving up portions of that take rate to other partners at high risk levels, which means theoretically the take rate, I mean, obviously someone could come in and just use

it as massive loss leader, right? But why would you come in and use it as a massive loss leader when the revenue pool is still de minimis in the grand scheme? As I said, $30 billion revenue even in a year is at the national level, right, is the drop in the bucket for U.S. retail. So it doesn't still, the point is the day after or even in the immediate aftermath of federal legalization, it's unclear to me exactly what is going to change very rapidly. You're still going to have a highly regulated industry. It's still largely going to be dominated by the states. The status quo will largely be maintained, although you will be able to transact across state borders, and you obviously will be able to bank the industry properly. That's a huge benefit. I just don't think because you're able to bank properly, that means one, take rates get compressed, and two, all of a sudden you see all these big boys just jump in to a still small market. And this goes back to actually my next question, it transitions pretty nicely. So you said even if federal gets legalized tomorrow, like the cool thing about these merchant acquires, right? Because husband also POSB,

is the start, right? It runs your point of sale. And your point of sale is a very sticky product. Like, these are, this is one of the reasons why a point of sale companies get value so highly. Once somebody chooses to go with you for point of sale, it's not like somebody chooses Jeremy's product. And then the next day, I come over and I say, oh, Jeremy's charging you 2.4%. I'll charge you 2.3% and they jump for joy and switch over to me, right? Like, you have to literally rip out your entire systems, retrain your whole staffs. Like, it's a super sticky thing. So even if federal got legalized tomorrow and everybody was like square technology is great, all this, it would take, you have to get door to door, you have to plan

these big transitions. It takes a long time. So that transition. So another thing I wanted to ask, you mentioned when we were talking about transact first versus them, that POSBIT has one year contracts with their customers. Do you know what the churn for their customers after the one year contracts are up is? To be frank, I don't, but I would assume it's, well, I would assume it seems like it's very low if and only because they seem to be growing very rapidly in adding new customers so meaning in absolute terms they had you know far fewer customers last year than they have this year meaning if they were churning a meaningful portion of their business they'd have to almost replicate the whole business again overnight if you see what

I'm saying so the fact they're in 300 plus dispensaries today and they're in 250 year ago 28 months ago if they were actually churning say 10% of their business every year, then obviously those numbers would be much likely to be growing so rapidly. They'd have to retain the business. If you ask them anecdotally, they say they keep most all their business. But they don't lock their customers into these long-term relationships, specifically because that was a huge pain point mentioned by other customers who have either considered the transact-first ecosystem or left the transact-first ecosystem. Now, to be clear, I want to be totally upfront, probably the biggest knock, or at least the risk that I could

see other than federal legalization for this company is the fact that it's obviously still subscale and a majority of their customers are still what I would call mom and pops or small customers. So they do have a couple of MSOs, multi-state operators. So they just entered New Mexico with a multi-state operator and they've disclosed two customers that own more than 20 stores. So they're pretty big, pretty big organizations. But one real risk, and this is a real risk that they need to demonstrate they can kind of get beyond is what happens if the market consolidates and all of a sudden you have you have six or seven big national cannabis players at some point and you're not banking them or you're not processing the

transactions for any one of those because you happen to back all the losers let's say quote unquote um that's a real issue for them in the future the reason I'm less worried about it is for two reasons firstly the cannabis industry today is growing 15 to 20 percent and positive it's growing 200 percent they've doubled the size of the business every year every since they launched. They're guided to grow well north of 100% for the foreseeable future, and they said the business is to accelerating, and it grew at 230% last quarter. So they seem to be doing something right. They're very much of us in the overall industry, and by definition, that means winning customers, whether that's greenfield, whether that's brownfield, they do seem to be

doing something right in a competitive space. And the second point is, if you think about it, Right. Like all these, all these, all these multi-state operators who be locked into these Transact First relationships, these are going to anniversary, right? So as these anniversary and as the market, as they encounter more people like POSID and including POSBit who could offer a full suite of products that I don't believe Transact First can compete on in some of these other products that we'll talk about. I do expect there'll be some switching. And the third point is you have to remember, this company is still a very young company. It was listed on microcap backward Canadian exchange with a hideously high cost of equity capital as recently as nine months ago, even six months

ago. And therefore, they couldn't really hire a sales force. I mean, it's a small company. It was a very small company, right? Even today, they're doing, what, 20 million revenue this year? And that's, you know, that's up well over 100%. So it's a very small company. They didn't have the resources to hire the salespeople. So one of the things they're doing now that their cost of capital started to come down a little bit is they're investing in growing. So I think that yes, they need to do a better job of proving they can win bigger clients. But I think part of that will come when they actually have the people to pick up the phone, to make the calls, to do the actual, to do the sales work and to sell the product, which they've been a little bit hamstrung until now. Jeremy, I am so mad

because I thought my big, you know, all the research, I thought my big question was going to be, hey, federal legalization might not be the issue with Square. It might be that all the mom and pops get bought out and the mom get bought out by you know there's a big private equity roll up and you know my old friends over at private equity buy up all the mom and pops roll them all up and they they don't go with positive bit they go with squares offering and that ends up kicking positive bit off i thought i was going to get you with that but yeah you thought it through the only other thing i would say go ahead go ahead no i was like to say i mean look it's it's how i think about it but it's definitely a key risk i mean i think you're right like the the real risk is this industry

consolidates faster than the end market growth. In other words, their ability to acquire new customers is fast, but not as fast as these massive multistate operators can consolidate most of the transactional volume in the industry. And all of a sudden, it's kind of like a game of musical chairs and for every reason, positive it is not nimble enough, doesn't have enough capital, or is, and cannot move fast enough to get a seat at the table. That is eminently a possibility. In that situation, or again, it's important to glide path, right? Before, we get to that end point, I think it's far more likely they get acquired for the book of business. But it's a possibility. And that's definitely one of the risks within the investment.

The other thing, and I might not be thinking about this correctly, but the other thing is, like, your big risk is a private equity style roll-up where, you know, a private equity company just comes in, buys out all the mom and pops and puts them on one standard operating procedure, right? Like, very much like a McDonald's would, right? McDonald's owns all, doesn't own all the restaurants, they franchise them. They're all in the same systems, though. But if you think about it, like cannabis retailers, like it might just be like liquor stores where there's not really chains of liquor stores, right? Most of them are mom and pops and their own locally. I think a lot of people think cannabis might be different because right now the major guys are required to be completely vertically integrated where for the most part, they want to own not, they want to grow and they want to own the retail front.

That's not how it works in alcohol. That's not how it works in a lot of industries. it might end up that the major guys end up operating huge farms. And then there's just lots of mom and pop shops selling locally, much like liquor. And if that's how it plays out, that plays right into positive stands. You're saying yes and no. What do you think? I mean, I would love if it played out like that.

I really would. Aaron, you can ask Aaron about it tomorrow, seeing as you're talking about us with him later. I think honestly being completely realistic, I think it's, I think it would more turn towards consolidation. But I'm pretty comfortable with that outcome. As I said, ultimately, you have to back the management. You have to back them to execute and win bigger clients. And they already have a number of multi-state operators. And as I said, now that they have a proper sales force so we're getting to that point, I think they can go after bigger clients. And I think that'll happen. So, yeah, I mean, it would be great if Mullen Pops stayed around and carried the flag

for a small business in the United States by the cannabis industry. In reality, I think big box cork tends to win and they just have to prove they can compete and they're on the way to doing that and i don't think the valuation accounts for any of that any of any of that by any stretch so i think i think that's something always to keep in the back of keeping the foreground as we as we consider the investment and to make sure we we grade them on that uh in the coming kind of 12 to 24 months you know maybe we need to launch a liquor store roll up maybe that that's uh what we need to do because if if they're going to win in cannabis retail that we could do the liquor roll But let's talk valuation here.

Sure. You know, POSBIT, you mentioned hyper growth company right now. What you've got, people can refer to the seeking out of article. Again, it's going to be in the notes to see you've got some nice charts and stuff. But let's just talk a simple valuation. What are you paying for POSBIT right now? Sure. So I think the stock is like $1.85.

So I always look at the Canadian line just out of habit because I think that's the main listing. The volume is probably a little bit higher in the U.S. line. but I'm talking about in the Canadian dollar stock price, but everything else will be US dollar. So I adjust you with the FX. So at $1.85, I think it's about a $200, $215,000,000, enterprise value. It's basically net cash neutral.

I mean, they have like maybe $5,6 million in cash. And there's a lot of warrants, excuse me. We're back, we're back. There's a lot of warrants outstanding. So, you know, as those warrants get converted, they get some cash in the door. But basically an oil in EV. they're struck very low. I mean, a lot of the warrants are struck at, you know, 30 cents, 40 cents kind of thing.

So they're all in the money. And those kind of get habitually converted, which is why there's been some volume in the stock, I think. Early investors kind of cashing out, whatever. So, yeah, the EV today is about $200 million, maybe $215 million. And I think they're going to do north of $50 million revenue next year at a mid-30s gross margin. We can talk about the profitability build, if you like. This year, I think they're going to do close to $22 million. So it's about nine times revenue this year, but four times next year.

I think they're going to grow again 130% at the top line next year. So, yeah, if you think about it, as I said, this company's kind of doubled its business every year of its existence and it's going to grow this year top line at 190%. Next year, I still think it's going to grow at 130%. And, you know, it's trading it four times revenue. So it's, and sorry, sorry, that's point one. Point two is the revenue pool is very small still, meaning where hyper, hyper early in a company's S-scur, which normally means you get a higher multiple, right? You get a higher absolute multiple because you have a very large tan here, right?

So theoretically, investors would be willing to pay a higher multiple of a lower absolute number, given the underlying growth rate is so hyper. But actually, we're paying a far, far, far below sector median multiple for hyper growth. You said far below, go ahead. No, I was just going to say, I do think there are real earnings here, right? So I use a revenue just because I'm a value guy, right? As you know, everyone knows I'm not a hypergrowth guy. Maybe I do the on GARP investment. This is a GARP investment to me.

But I'm not just about buying a revenue multiples, but the point is it's very, it's very easy to see how this could become a very high earning real business quickly if they wanted to be, right? So payment processing, obviously a huge operating leverage industry, more volume goes through the same infrastructure, the same fixed investment drops mostly to the bottom line. In POSA bit specific case, company has guided to 30 to 32% gross margins this year, but there's a very clear guide path, glide path to getting those margins to mid-40s. And this, look, this isn't probably going to happen next year, but could easily happen. If they wanted to flick the switch

and get there in the next two years, they probably could just depends on how much they want to invest. But basically, their top line take rate, as we discussed earlier, is a bit north of 5%. I have that coming down a bit for various reasons, but essentially it's north of 5%. But of that 5%, they give up a lot of the economics to partners right now. So, for example, they give up a lot of the economics they share with the issuing bank in return for doing things like KYC, underwriting the merchants, helping them with the back and infrastructure. Then they also give a lot of that economics out to other partners.

They outsource some of the services, which they were forced to do because they were so small. And also because, you know, as a small niche cannabis payment processing organization with, you know, as recently as 2019, then they had a few million dollars in revenue, right? It wasn't clear that banks would want to deal with them. So they had to bring in larger players to help build those relationships. But obviously, as you grow, you can bring some of that in-house. And obviously, the take rate that the, that your partners will take, in other words, the banking partners will take is very clarified. will drop as volumes grow. So actually the CEO has said this on a number of calls publicly recently. He basically said as soon as the gross transactional sales number gets about 500 million, you get a margin kicker back, a rebate, in other words. And as soon as we get above a billion, you get another margin kicker. And he actually quantified this by saying,

look, as soon as we get above a billion runway gross transactional sales, you could add as much as double digits to our margin profile. And that was when the margin was 30 to 32%. So that's basically how you get to low 40s. Then you bring some of that partner business back in else that gets you to mid-40s. So, in other words, I'm not baking any of that in. None of that, that's all gravy. But I still think it should be a mid-30s margin business next year, right? And just doing very low incrementsals after that.

In other words, incremental's meaning incremental EBIT on incremental revenue. If my incremental margins are only kind of like 15, 20%, when normally in the payments industry, they're above 50% for mature business. So that's, again, this is just kind of back at the envelope to kind of conceptualizing. it even then, I think I'm paying 30 times EBITDA next year for a company growing 100 to 150%. And, you know, 30 times EBTA is not the cheapest multiple. As you said, it's growing 100 times revenue. And just to give people an idea, look, Visa and MasterCard aren't perfect comps in any way, shape,

or form, right? But they're the first names that come to mind when you think payments. Those trade at 25 times even off, right? So 30 times EBITDA is that crazy, particularly for something hyper growth. You know, if I thought, I don't even know what. multiple square trades out, but something like Fissor, which I think owns Clover, and there's been some activists there saying Clover's worth more than the whole market cap, I think that trades at like 15 times even up, I remember correctly. And that's not a hypergrowth business by any way, shape,

or form. So just to give people an idea. I want to come back. Actually, we covered that. You mentioned nine times revenue. I mean, that's not crazy expensive for a company if you believe that they can grow 150% next year. And then, you know, after that, they're not. not going to grow 150% forever, but there are a lot of tailwinds here. There's no reason this can't be a 30, 40% grower for a pretty long time, I would say. Totally, totally. Yeah, I mean, I totally agree. If people want to refer back to my article, we have a couple of my daughter just ran into the room.

No problem. Do you need this pause for a second? Or does she want to say hello? No, no, it's fine. It's fine. I'll try to keep her off the screen, actually, for, for, for, for, privacy purposes. But if people want to refer back to my article, they can look. I try to do this analysis where I look at the valuation of other payment stocks. And to be fair, most of them are

much bigger than positive it. So it's take that with a grain of salt. But basically the 10 or 15 most direct comps payment comps, sorry, my daughter just pulled my phone. Take 10 or 15 of the most direct payment comps and kind of run a regression between valuation and organic growth. So obviously there's a hyper-growth business in a growth industry, so it's dominated by growth investors. And what growth investors normally look for is what they really solve for when they value these companies is growth versus valuation. So there's a very high correlation between a multiple accorded. So the EV bit multiple accorded to the company and its organic growth rate, like 90% R squared. So basically correlation on this one. And if you run that regression and you look at

positive it, this stock should be trading already over three times where it currently trades, given even if you assume growth normalizes to say 50% for the next few years, which, again, very simplistic, very kind of, what's the way to put it, unsophisticated, kind of quick valuation math, but just to kind of give you a sense of the potential relative valuation of this versus other similar kind of hypergrowth or even some of those things are growing teens, right? Other kind of assets within this space, there's a big implied discount here. And maybe now's the right time to talk about why there's this massive implied discount, even though the stock's done well recently. Go ahead. Yeah, so I think there's a few things.

So the first and by far the most obvious one, I actually don't think it's the cannabis part piece of it. I think the cannabis piece of it is real, but I don't think that's the main reason, because there's a lot of other cannabis-related businesses actually trading in the US at very high valuations. and private company cannabis businesses are trading at far, far bigger premiums than huge premiums to wear positive trades today. So for example, not even payments businesses, like other software providers to the cannabis industry, a company called Dutchie, just did a private funding round where they raised a lot of money, I think is $300 million at a $3.75 billion valuation.

Now, they're not a cannabis retailer, so it's a different model. there are picks and shovel software provider to the cannabis industry. They don't do payments. They do other things. They do a bit of POS. So it's analogous. I mean, it's not identical, but it's analogous in that they do provide services to the cannabis industry.

So picks and shovel software. And they traded it. I mean, last revenue number I saw from them was under $50 million. So, I mean, this thing's trading at some astronomical valuation. And it's a private company. I don't have all the details, but any kind of hyper-growth fintech asset in the private markets you can pick, you know, you won't find one trading below 10, 15 times forward sales. So that's kind of like a quick, quick check.

So the question is, why does positive trade at a discount? And I have a feeling it relates very much to the last red flag. I wanted to talk to you about they came public by an RTO or reverse, I call it a reverse merger. I guess RTO, reverse takeover or something. but that's, you know, any investor who's spent a lot of time in the public markets knows an RTO is an immediate about the biggest red flag you can get. So do you want to discuss that? Because I think that's where you were driving for the valuation multiple. Absolutely. Absolutely. So the, as in a lot of other previous rate for capital investments,

I guess, kind of to touch on the topic we might come to. But let me pause for one second. One of the rate for capital investments is a Polish trash company that may or may not allegedly have ties to the mob. So Jeremy is willing to go look at things with some hair on them. I had to throw that out there. Yeah, that's an interesting. We can talk about that in a second. But yeah, so there's invariably what I look for

is a bit of legacy hair or, yeah, I mean, kind of there has to be, there has to be a force for the value, right? Like, where are you going to derive your value? there has to be some kind of taint on on on the kind of specifics of the company or his idiosyncratic situation otherwise there wouldn't be any value for for someone like need to to kind of pick over right so in this situation you're right it's the legacy listing was a huge mistake like if you talk to the CEO today he said he will admit he maybe he basically says it in his presentations but they shouldn't have done it they got bad advice the reason they got bad advice was well they the reason

they took the bad advice, I guess, was probably a mistake, but they really wanted access to capital. They thought even if they did an RTO, reverse takeover and ended up on an exchange, I think they were sold something that ended up, they weren't. They thought being listed meant being listed. They didn't realize that being listed in a certain geography or exchange is really not being listed role. And that's what it ended up being. So they ended up listing on it. Honestly, I'd never even heard of this exchange before this, I found this company. I had never heard of the Canadian Securities Exchange. This isn't the Venture Exchange. venture exchange is the junior exchange in Canada, which in itself is not an idealistic.

But this is not that. This is like, imagine if you go to the outhouse at the end of the town, right, in, I don't know, Yuma, Arizona, an old cowboy town, and you go to the crappiest little saloon at the end. And then you keep walking and you go past there to the kind of the ram buck shackle, ram shackle hut at the very end of that street, kind of, if anyone knows what I'm talking about, I'd be surprised. But this is the version of that from the financial exchange. point of view. I don't, have never looked at any other company listed on this exchange.

I doubt many other investors have. It really is a total backwater, financial services backwater, and they should never have been on this exchange, especially with this exciting story to tell. On the other hand, I would never have the opportunity to own the stock if it was listed already on the venture exchange even, or let alone a US exchange. And you can see that and you know that's a factor because as soon as they listed on OTC, the stock started going up, right? And We're talking OTC in the US. We're not talking a proper market over the counter in a proper geography. The stock is already gone from, I don't know where it was, $1.20, $30 or something to $1.80 now,

in Canadian dollar terms, right? So it's already gone up a fair bit just purely from that. So part of the historical issues here around listing are a real issue. And this is something we've monetized before with Bragg, with GAN, was a great, example of this. Again, at much, much kind of less, less crappy levels than this particular exchange. But this is a well-trodden concept in the RAPA Playbook and one I've hoped to continue monetizing over and over. And that is finding companies that don't deserve to be in these backwaters with real businesses, real prospects, trading at rationally high discounts, and then

riding the kind of closing of that gap, that listing arbitrage as they kind of, you know, just basically just get up to speed and list on proper exchanges over time. Obviously underwriting the fundamentals along the way, but that's the, that's kind of a key how to list here. And it's one that I, A, you know, I historically undertraded because when GAM was coming out, you and I were talking a lot and I was like, there's a lot of red flags here. And you're like, bro, just keep it simple. It's growing past and it's going to a major exchange.

And you were right, though, you know, interestingly with GAN, it basically round tripped, right? Because they came out. It was a hot stock. Yeah. which has been very interesting. But I'm with you, you know, the RTO, it is, it is just such a red, it is just so hard to get over that RTO, though, right?

Like an RTO on the backwater, backwater exchanges. And I get like, bankers can be very compelling and they can do, it's, they can really convince you like, hey, just get on there. Everybody's going to love you. You're growing quickly. It's going to be fine. You can raise capital and you go do it. And then you're like, oh, gosh, it's an irreversible decision.

But it's just a big, right, let me, let me try to. give you at least some context. So Ryan Hamlin, the CEO of the company, his background, he's a software engineer, essentially. He ran a large security software suite at Microsoft with 1,500 reports for a long time. So he's not prototypically a finance guy, right? He's a software guy. So if I was to try to understand the decision to do the RTO, and, you know, Ryan's super smart, he's doing a great job, but I would have to say there was a learning curve with being executive, even for a very small company. There's a big learning curve with being a CEO and also capital allocation with being a manager of capital and lowering that cost of capital. And they just

didn't have the right perspective on that. I'm sure they got bad advice. And they didn't get, they didn't, unfortunately, they didn't have the right connections when they were a very early stage venture company to guide them towards the right process to the right sources of capital, let's say. And so they made that decision. They have to live with that decision. But that is why we have the opportunity today in my view. And to be clear, Ryan, I believe Ryan Sloan's in excess of 10% of the company. I need to double check.

But from what I understand, management still owns a big chunk of the equity. Perfect. Well, hey, Jeremy, I know we wanted to go through the rest of the eclectic Jeremy Raper capital playbook. But unfortunately, it is 930-yard time and I haven't had dinner yet. So it's starting to get out there. But is there anything else on POSBIT you want to say before we wrap up? I think we actually did a really nice job of covering a bunch of different angles here. Sure, sure.

The only thing we didn't cover, which I think is quite important and is worth mentioning, is this is not just a pure payments processor. In other words, they are trying to build a vertically integrated operator. So if you look at their P&L today or the revenue breakdown, you'll see they already do POS. So they do have a hardware offering. They do have a POS offering. They do have this somewhat innovative solution in that they have handheld

POS capability, which Transact First doesn't have. So the guy is selling you the weed, the cannabis, what's called a bud tender can walk around the store with his little handheld POS and take your payments within the store floor. You're kind of like an Apple, Apple store kind of for anyone listening, anyone listening who's interested, go look at their website. I looked at their website and watched some videos. It looks like, when you see the POS, it looks exactly like a company running the square stuff and the hand the handheld technology it looks really cool like it is up to speed you would think a real serious tech company built this stuff from the video i'm sure the video is a little bit spruce up but it looks really good yeah no i think i think they're doing a good job and i guess

the point is they're they're trying to build an ecosystem where it's not purely about the payments to a point about you know someone bigger coming along and cutting them out or rolling up all the payments for one entity. They want to entrench themselves within the merchant's ecosystem, right? So POS is part of that. Customer loyalty. They've got some customer loyalty

partnership. Exactly. And they're expanding their offering. So they're trying to do B2B services for the merchant as well. Outside of the pure customer-facing portion of the business, they're going to,

apparently the next thing to tackle is B-to-B payments and B-to-B services. They also do other, you know, more mundane things like, you know, back-end reporting, integration, you know, onboarding and installer systems for the software, introductions to local banks for a lot of these guys. You know, it sounds like it's pretty plain vanilla stuff,

but a lot of these, as you mentioned, smaller shops in this industry, they don't have banking relationships or they don't have good banking relationships. So they do a lot of that. And that's actually a revenue generator as well because they can get kickbacks from the bank for those introductions. My point is they're trying to build out their offering from pure payments. and processing to these other value-added services and to become vertically integrated and they're

well on the way to doing that. And I think that will hopefully, that will hopefully future-proof the business to an extent and allow them to stay more in, in, in entrenched with their customers. That's the only thing I would mention that we, that we didn't cover. Perfect. Well, Jeremy, I mean, this is such an interesting one. Typical paper capital stuff, hypergrowth company, backwater exchange. But I think you've done great work here. You know, all the questions I had just addressing them. Everyone should, of course, follow Jeremy's stuff. Rapercapital.com is absolutely fantastic. I'll link to his Twitter in the show notes. I'll link to the seeking out article he put on up here. So go read that if you want to learn a

little bit more about the company. But Jeremy, this has been fantastic, man. Thanks so much for coming on. And I'm really looking forward to having you on for the sixth appearance. Thanks, man. We'll have to do the recap of all the stuff that happened, that worked or didn't work. And when you've had your dinner, we can do that another time. We will. We will we'll have to do it soon. Thanks again, man. We'll talk soon. Thanks, man. Cheers.