Ryvyl (RVYL) - 2023 Q2 - Quarterly Report

Part I - Consolidated Financial Information Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for RYVYL Inc. as of June 30, 2023, and for the three and six-month periods then ended, compared with prior periods It includes the balance sheets, statements of operations, changes in stockholders' equity, statements of cash flows, and detailed notes explaining the financial data and accounting policies Condensed Consolidated Balance Sheets As of June 30, 2023, the company's total assets increased to $115.4 million from $97.7 million at year-end 2022, primarily driven by a significant rise in restricted cash Total liabilities also grew substantially to $136.8 million from $99.6 million, mainly due to increases in accounts payable and payment processing liabilities Consequently, the total stockholders' deficit widened to $(21.4) million from $(1.9) million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $13,166 | $13,961 | | Restricted cash | $50,760 | $26,873 | | Total current assets | $73,862 | $59,215 | | Total Assets | $115,425 | $97,657 | | Liabilities & Equity | | | | Total current liabilities | $66,035 | $36,735 | | Long-term debt, net | $66,940 | $61,735 | | Total liabilities | $136,808 | $99,579 | | Total stockholders' deficit | $(21,383) | $(1,922) | Condensed Consolidated Statements of Operations and Comprehensive Income For the second quarter of 2023, revenue more than doubled to $14.8 million compared to $7.0 million in Q2 2022 Despite a higher gross profit of $6.1 million, the company reported a net loss of $(12.0) million, a significant shift from a net income of $12.1 million in the prior-year period, which was primarily driven by a large gain on the fair value of derivative liability For the six-month period, revenue also grew strongly to $26.1 million, but the net loss widened to $(20.0) million from $(17.3) million Statement of Operations Summary (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 (restated) | H1 2023 | H1 2022 (restated) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $14,849 | $6,966 | $26,140 | $11,176 | | Gross Profit | $6,124 | $2,736 | $11,237 | $4,166 | | Loss from Operations | $(5,641) | $(8,866) | $(9,320) | $(15,943) | | Net Income (Loss) | $(12,005) | $12,092 | $(19,982) | $(17,335) | | Basic and Diluted EPS | $(0.23) | $0.28 | $(0.39) | $(0.56) | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2023, the company generated $23.1 million in cash from operating activities, a significant improvement from $3.1 million in the same period of 2022 Investing activities used a negligible amount of cash in 2023, compared to a $45.6 million outflow in 2022, which was primarily for acquisitions Financing activities also had minimal cash usage in 2023, versus a $9.2 million use in 2022 for debt repayments and stock repurchases Overall, cash, cash equivalents, and restricted cash increased by $23.1 million in the first half of 2023 Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2023 | 2022 (restated) | | :--- | :--- | :--- | | Net cash provided by operating activities | $23,129 | $3,095 | | Net cash used in investing activities | $(17) | $(45,559) | | Net cash used in financing activities | $(7) | $(9,232) | | Net increase (decrease) in cash | $23,105 | $(33,019) | Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures on the company's business, accounting policies, acquisitions, debt, legal contingencies, and segment performance Key highlights include the planned spin-off of its Coyni assets, details on the $100 million senior convertible note and its subsequent partial exchange for preferred stock, a summary of ongoing litigation including a class action lawsuit, and a breakdown of financial performance by its North America and International segments - The company is a financial technology firm focused on developing and monetizing blockchain-based payment solutions and applications[16] - In April 2023, the company acquired a 99.1% stake in Logicquest Technology, Inc., a shell company, with the intent to merge its Coyni, Inc. subsidiary into it and subsequently spin-off Coyni as a separate public company The company expects to raise approximately $40 million in an offering for the new entity, Coyni PubCo[62] - The company is involved in several legal proceedings, including a purported class action lawsuit alleging violations of securities laws by making false or misleading statements, and two shareholder derivative complaints alleging failures in internal controls[108] - Subsequent to the quarter end, in July 2023, the company authorized a new class of Series A Preferred Convertible Stock and exchanged approximately $6.0 million of its senior convertible note's principal and accrued interest for 6,000 shares of this new preferred stock[113][115] Segment Performance for Six Months Ended June 30 (in thousands) | Segment | Revenue 2023 | Revenue 2022 | Loss from Operations 2023 | Loss from Operations 2022 | | :--- | :--- | :--- | :--- | :--- | | North America | $19,842 | $10,144 | $(9,699) | $(15,409) | | International | $6,298 | $1,031 | $379 | $(534) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance for the three and six months ended June 30, 2023, compared to 2022 Revenue growth was strong, driven by acquisitions and increased processing volume in both North America and International segments However, the company incurred a net loss, influenced by operating expenses, interest costs, and changes in derivative liability valuation The discussion also includes a reconciliation of net loss to the non-GAAP measure of Adjusted EBITDA, which showed improvement, and an overview of the company's liquidity, highlighting sufficient cash to fund operations for at least the next year Results of Operations For Q2 2023, revenue increased 113% to $14.8 million, driven by an 86% increase in North America and a 270% increase in International revenue For H1 2023, revenue grew 134% to $26.1 million Gross profit margins improved in both periods Operating expenses remained relatively flat year-over-year, with increases in G&A and professional fees offset by decreases in stock compensation and depreciation The net loss in Q2 2023 was primarily due to other expenses, including a negative change in the fair value of derivative liability, compared to a large gain in Q2 2022 Q2 2023 vs Q2 2022 Performance (in thousands) | Metric | Q2 2023 | Q2 2022 (restated) | Change % | | :--- | :--- | :--- | :--- | | Revenue | $14,849 | $6,966 | 113.2% | | Gross Profit | $6,124 | $2,736 | 123.8% | | Total Operating Expenses | $11,765 | $11,602 | 1.4% | | Net (Loss) / Income | $(12,005) | $12,092 | -199.3% | - The increase in revenue for Q2 and H1 2023 was primarily attributable to significant growth in processing volume from acquired businesses, including RYVYL EU and American Samoa[132][140] - Higher general and administrative expenses in 2023 were mainly due to non-recurring legal settlements, related legal fees, a provision for credit losses on legacy accounts, and accounting fees for the restatement of prior period financial statements[136][143] Adjusted EBITDA (Non-GAAP) The company uses Adjusted EBITDA, a non-GAAP measure, to evaluate core operating performance For Q2 2023, the Adjusted EBITDA loss improved to $(0.9) million from a loss of $(3.1) million in Q2 2022 For the first six months of 2023, the Adjusted EBITDA loss was $(3.9) million, a significant improvement from a loss of $(12.6) million in the prior-year period The calculation adjusts net loss for interest, taxes, depreciation, amortization, stock compensation, and other non-recurring or special items Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $(12,005) | $12,092 | $(19,982) | $(17,335) | | Adjustments | $11,111 | $(15,226) | $16,110 | $4,721 | | Adjusted EBITDA | $(894) | $(3,134) | $(3,872) | $(12,614) | Liquidity and Capital Resources The company's primary liquidity source has been capital raises, as cash flow from operations has not historically covered cash requirements Despite a net operating loss, management believes the current cash balance is sufficient to fund operations for at least one year A key event impacting capital structure was the July 2023 agreement to exchange $22.7 million of its senior convertible note for newly authorized Series A Preferred Stock, with an initial exchange of approximately $6.0 million completed on July 31, 2023 - Management believes that the current cash balance is sufficient to fund operations for at least one year from the filing date of this report[158] - In July 2023, the company entered into an agreement to exchange an aggregate of $22.7 million of outstanding principal and interest under its senior convertible note for 15,000 shares of new Series A Preferred Convertible Stock[159][160] Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2023 | 2022 (restated) | | :--- | :--- | :--- | | Cash provided by operating activities | $23,129 | $3,095 | | Cash used in investing activities | $(17) | $(45,559) | | Cash used in financing activities | $(7) | $(9,232) | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is classified as a smaller reporting company and is therefore not required to provide the information for this item - As a smaller reporting company, RYVYL Inc. is not required to provide quantitative and qualitative disclosures about market risk[175] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were not effective as of June 30, 2023 This conclusion is based on the existence of one or more material weaknesses in internal control over financial reporting, including issues related to accounting for complex transactions and inadequate segregation of duties The company has outlined remediation plans, which include hiring additional senior accounting staff, engaging third-party experts, and implementing new procedures and internal controls - Management concluded that the company's disclosure controls and procedures were not effective as of the end of the period covered by this report[176] - A material weakness was identified related to the segregation of duties within certain accounting processes, which is attributed to the company's size and smaller department teams[179] - Remediation efforts are underway, including hiring a new Interim CFO and Corporate Controller, redistributing job responsibilities, and implementing more rigorous review processes The company expects to complete remediation in 2023[181][183] Part II - Other Information Item 1. Legal Proceedings This section refers to Note 13 in the Notes to Unaudited Condensed Consolidated Financial Statements for information regarding the company's legal proceedings - Information regarding legal proceedings is incorporated by reference from Note 13 of the financial statements[186] Other Items (Items 2, 3, 4, 5) For the period, the company reported no unregistered sales of equity securities, no defaults upon senior securities, and no other material information required to be disclosed The section on mine safety disclosures was not applicable - Item 2: No unregistered sales of equity securities and use of proceeds were reported[187] - Item 3: No defaults upon senior securities were reported[188] - Item 4: Mine Safety Disclosures are not applicable[189] - Item 5: No other information was reported[190] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, agreements related to the recent debt-for-equity exchange, and certifications by the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act - The exhibits include the Exchange Agreement and Leak-Out Agreement related to the Series A Preferred Stock transaction, as well as officer certifications required under Sections 302 and 906 of the Sarbanes-Oxley Act[191]