Q1 2021 Akerna Corp Earnings Call
Thank you for joining US today. This program will begin momentarily. Please remain on the line. Thank you for your patience.
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Good morning, and welcome to occur in this first quarter ended March 31, 2021 financial results Conference call. Today's call is being recorded at this time I would like to turn the conference over to Erica Mannion Investor Relations for kind of thank you you may begin.
Thank you and welcome to today's first quarter ended March 31, 2021 conference call on the call today are Jessica Billingsley, CEO and chairman of the Corona and John <unk> CFO of the kind of.
Before management begins with formal remarks, I'd like to remind everyone that during this conference call certain statements will be made that are forward looking statements within the meaning of the safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995.
Words, such as estimates projected expect anticipate forecast plan intend believes seeks may well.
Should future propose and variations of these words of similar expressions of versions of such words or expressions are intended to identify forward looking statements. These statements include but are not limited to statements regarding future growth and the prospects for of Corona and statements regarding expected future revenue recognition.
These forward looking statements are not guarantees of future performance condition or results and involve several known and unknown risks uncertainties assumptions and other important factors, which could cause actual results or outcomes to differ materially from those discussed including rest of related to changes in the cannabis Mark.
And risks related to the impact of the COVID-19 pandemic.
These risk factors are more fully described in the current filings with the Securities and Exchange Commission forward looking statements speak only as of the day they are made.
Our current of undertakes no obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise except as required by law.
Now I would like to turn the call over to a kind of C O Jessica Billingsley Jessica.
Good morning, everyone. Thank you for joining us today.
Our first quarter was the strong start to 2021 with software revenue growth of 62% year over year and 10% sequentially.
Our business as a whole grew 31 per cent year over year was soft for growth offset by softness in our consulting business.
Total SaaS Air Art is currently $15 7 million of 73 per cent increase over the same period last year.
In addition to top line growth the restructuring activities taken in 2020 continue to deliver results with adjusted EBITDA of improving 42 per cent year over year and 4% sequentially in the March quarter.
We are encouraged by the pace of demand in the first quarter and we look forward to continued growth in the quarters ahead.
Our focus on the Multistate international and emerging enterprises in the more than $20 billion global cannabis industry continues to serve us well.
This quarter, we saw churn improved by 35 per cent sequentially well consolidation continues with many of our larger clients significantly increasing their footprints are average BW deal size has also increased by 23 per cent year over year.
On average MJ platform clients number of transactions tracked in our system has increased by 51% year over year MJ platform delivered for nines of uptime in the quarter and our average client satisfaction rating across all products continues to exceed eight on the scale of one to 10.
Today I'd like to share with you of our positioning and strategy to maximize the value creation of events you see on the horizon.
With leading market share driven by the breadth and capabilities of our ecosystem.
We believe you're well positioned to participate in the many growth drivers of hat.
Starting with our core operations are existing client cash.
Can you to expand the usage of our software throughout their organizations.
The enterprise grade nature of our solutions, our clients tend to be amongst the most sophisticated and fastest growing companies in the industry, who understands the our wide benefit of investing in software system.
It is not uncommon for us to see of client grow for tens of millions of hundreds of millions in revenue over the course of just a couple of years.
As their businesses rapidly expand.
They quickly realized the spreadsheet solutions, which enable them to reach their first million in revenue don't scale when the business becomes 100 of exercise.
Fueled by increasing competition in the industry. These companies turn to technology, such as the of current ecosystem should reduce the complexity of managing their business often converting one or two locations at a time as the implement across the organization.
For our current and this translates into a healthy pipeline of backlog larger.
The larger clients often contract with us for several locations at a time, then methodically deploy location by location before returning to contracts for the next cohort of locations.
With 1.2 million of the a or are already in backlog and understanding the existing footprint and purchasing nature of our clients, we feel confident but over time, if we do nothing else then serve the existing market. We can grow our business by 30 per cent Boston on annual basis.
While the strong growth rate on its own we view this to be of baseline given the size of opportunities in front of us when considering industry changing developments on the horizon, such as the Safe Banking Act Greenfield market expansion of with recently passed state legalization of initiatives and ultimately the passage of U S Federal legalization.
We believe the mid to long term opportunities for our current up and the cannabis industry are much much larger.
Starting the safe Banking Act the U S House of Representatives passed legislation, which would allow financial institutions to conduct business with cannabis companies. Despite the ongoing federal state conflict. The Bill has been introduced in the U S Senate, where it is expected passed with bipartisan support.
For our current of the passage of the spill as important as through our partnership with priority technology. We believe it will allow our cannabis clients to accept credit card payments for cannabis transactions and eliminate the cash only payment construct the currently exists.
Once passed and the major credit card payment rails agreed to begin processing transactions for the cannabis industry virtually overnight, we will be able to turn on credit card processing for all of our current MJ platform and the M. G retail point of sale clients, who opt in.
For our clients. This is beneficial as it immediately integrate the payment processing with our robust compliance offering to create comprehensive point of sales solution.
For our current of payments become an additional revenue stream as we were.
We'll capture a portion of the standard roughly three per cent processing fee on each transaction.
The place the magnitude of this opportunity in context, if all of our current retail clients currently used our payment solution.
It would translate to an additional $20 million of annual revenue with nearly zero cost to us.
Beyond doubling the size of our revenue at roughly a 100% gross margin payment processing will also provide an opportunity to capture value in the sales volume growth of our clients.
Looking beyond the passage of the Safe Banking Act. The next growth catalyst for our business will come from new state initiatives.
With seven states, passing ballot measures or the legislative bills to legalize cannabis in the last six months the Greenfield opportunity for first consulting and then software sales is large new states provide us an opportunity to sell our software products at both the government and business levels.
Leveraging our beat of G leaf data systems offering we typically engage early with states as they begin to formulate their regulatory framework.
Where states are interested in a closed loop model like Pennsylvania's or Utah, where in addition to contracting for a state regulatory oversight system, such as our leaf data systems offering. The state also requires all licensees within the state to use one standardized business management software our MJ platform.
In Utah, we are also able to further bundle our solo tag offering providing a cost effective anti counterfeit solution for tracking and tracing.
Lastly, even in states, where our leaf data systems offering is not us we still have a large opportunity to win share among new licensees with our MJ platform as our primary competitors are government solutions do not have of business to business solution.
In addition.
Given our existing clients tend to already be large multi region enterprises. There is an increase of potential they will look to enter new markets as they emerge and deploy offerings from the of current it ecosystem as they bring new locations on line.
We're already in discussions with the number of new States and we're excited about the opportunities day represents with that said it is important to remember that the decision making process with government agencies takes time and as Rfps are slowly issued it likely won't be until early 'twenty 'twenty two debt.
We would see any initial leaf data systems wins translate into revenue followed by B to b wins once licenses or issue.
Of course within existing medical markets, which you are looking to expand its recreational as well the b to b license the opportunities.
The ability to materialize more quickly if there's often a regulatory framework already in place.
Lastly, as we look out for the timeline perspective, the largest growth catalyst for our business will be U S federal legalization.
With the forthcoming Senate comprehensive candidate spill.
Which is intended to and it's out of what prohibition on cannabis.
Theres creasing momentum for passed legislation by as early as next year.
Passing of such legislation would be an inflection point moment for both of the industry and the coroner and it's one for which we have been preparing ourselves for several years.
From a platform an ecosystem standpoint, we recognized early on that even after a federal legalization compliance and regulation requirements will still vary state by state and change frequently creating a complex regulatory system much like the tax code in the U S today, but.
The re architected, our platform and abstracting the compliance layer, we created a solution, which can rapidly integrate new compliance requirements with.
Having to rewrite code for each product offering.
Thereby enabling us to scale quickly as the industry growth.
<unk> solutions in the market have not developed this capability and thus we believe they will have difficulty in scaling to meet the challenge.
Similarly through our integrations with industry, leading financial and tax planning management tools, such as stage Oracle's net suite in the S. E. T. We have created both in enterprise grade ERP system as well as a holistic suite of tools to meet the needs of our clients. Additionally.
Additionally, through the recent acquisition of Meridian and the S. E. T business one integration, we have expanded the breadth of our offering to bring clients onto our ERP platform earlier in their lifecycle. The integration of these capabilities is key as it provides our clients with the suite of applications to manage the entirety of.
Their business, while creating strong channel partnerships with the Blue Chip enterprise software vendors.
We have also leveraged our integration capabilities to build additional enterprise functionality, such as data analytics and predictive intelligence by partnering with them all.
With the M J analytics, our clients can leverage the large datasets captured for regulatory requirements to make informed decisions about their own operations, thereby improving business outcomes, including sales growth and profitability.
The value of these capabilities continues to be recognized by the market with a our contribution more than doubling in the past quarter.
Lastly, using the Canadian federal legalization framework as a model.
We believe once U S. Federal legalization of past there is a large opportunity to gain traditional medical pharmacy clients as well for a true medical pharmacy model. The pharmaceutical industry has heightened and standardized requirements to Providence today, No. One did the U S. Cannabis market has yet developed this capability.
<unk>.
However, through our acquisition of ample organics and our client shoppers drug Mart, which represents roughly 30% of the Canadian traditional medical pharmacy market.
Current I gained pharmacy specific capabilities, such as the payment portal, which exchanges patient information and of HIPAA and Pip of compliant manner and insurance adjudication.
Both sets of functionalities already integrate with our cannabis compliance offering and we believe will provide us with the meaningful first mover advantage, specifically with the U S traditional medical pharmacies.
As they look to enter the market upon federal legalization.
As we prepare for the catalyst opportunity in the U S. We have nominated Barry Fishman of veteran in the cannabis and pharmaceutical space to our board.
In closing we are very excited about the many value creation opportunities ahead in the business, we have built to leverage the upcoming waves of growth with.
With the leadership position, we have in our core business.
And the capabilities, we have integrated to take advantage of new opportunities such as payments.
The state initiatives and ultimately U S federal legalization.
Strongly believe we are quickly approaching an inflection point in growth both in the cannabis industry and the current its role within it.
All of our hard work and achievements to date have positioned us very well for this moment and we look forward to driving long term shareholder value is the path of unfolds in front of us now.
Now I will hand, the call over to John who will take us through the details of our financial results.
John Please take it from here.
Thanks, Jessica today, I'll provide an overview of our financial results and key business metrics for the first quarter ended March 31, 2021. As a reminder, these results are discussed in further detail in our form 10-Q, which will be filed shortly with the SEC financial results reported today are preliminary and final financial results and other disclosure.
Those will be reported in our quarterly report on form 10-Q, and may differ materially from the results and disclosures today due to among other things. The completion of final review procedures. The occurrence of subsequent events or the discovery of additional information. We encourage you to review the filing in detail.
This past quarter, we continued to deliver on our core objectives of expanding software revenue optimizing our operating infrastructure and improving profitability. We work hard each day to deliver strong results like those produced this quarter, while simultaneously investing aggressively to build the compliance platform of the future.
With software revenue of 10% sequentially, approximately 1.2 million of new a our bookings and the average booking amount of 23% year over year the growth momentum of our business continues to improve as larger multi location and multistate operators increasingly implement our solutions to solve.
Their business needs.
Evidenced by the continuing increase of transaction volume, which was up 67 per cent year over year, and retail order value, which was up 29% year over year, our clients operations are scaling rapidly our.
Our strong demand pipeline generated by both client growth and the organization wide implementation plan gives us confidence in our ability to continue to grow our revenue and profitability as we prepare for the upcoming industry catalyst Jessica mentioned earlier.
Turning to the financial results for the March quarter total revenue was roughly flat on a sequential basis at $4 million with 10% organic growth in software revenue offset by softness in our consulting practice software revenue was up 10% sequentially to $3 8 million and up 62 per cent compared to the prior year. We currently have.
Approximately $1 2 million of our our backlog pending go lives.
<unk> revenue declined 70% sequentially to approximately 175000 as a result of the project timing Prague.
Progress on new state initiatives continues to be mixed with some states such as Arizona moving quickly, giving their existing medical framework, while other states such as New York and New Jersey are moving more slowly through the process.
As a result, we expect our consulting revenue to remain soft in the first half of 'twenty 'twenty. One however, with our current backlog and growing pipeline of opportunities. We believe the second half will be meaningfully stronger.
Gross profit was $2 6 million for the quarter and represented a 64% gross margin compared to a gross profit of $2 7 million and the 66% gross margin in the prior quarter.
We continue to make progress of automating activities to drive gross margin leverage we expect our margin profile to expand above the mid 60 per cent range in future periods as consulting revenue rebound and as our software revenue growth, adding a higher contribution margin to our revenue mix.
Moving to operating expenses total operating expenses decreased approximately $6 7 million sequentially, mainly as a result of a noncash impairment charge taken last quarter on a non-GAAP basis operating expenses decreased approximately 240000 for 5% sequentially as we continue to drive efficiency across the business.
Non-GAAP operating expenses exclude a number of one time nonrecurring and noncash expenses that include depreciation amortization stock comp expense business combination expenses impairment and other nonrecurring charges.
Product development was flat sequentially. The result of ongoing cost management and continued focus on scalable infrastructure in the quarter, we capitalized approximately $900000 of software development as we continue to accelerate our product roadmap. We continue to invest in product development that we believe will deliver the complete compliance experience for her.
Clients.
Sales and marketing expense decreased 95000, or 5% sequentially as we continue to realize synergies and refine our go to market strategy. We continue to be pleased with our sales and marketing efficiency as we continue to drive new business growth and improving client acquisition costs.
General and administrative expenses decreased approximately 110000 or 6% sequentially, primarily a result of a reduction in lease obligations as I've shared previously we are laser focused on operating efficiencies across the organization.
In the quarter adjusted EBITDA was negative $1 8 million compared with negative $1 9 million for the prior quarter ended December 2020, and improvement this quarter of 4% sequentially and compared with negative $3 2 million for the prior year of year over year improvement of 42%. We believe adjusted EBITDA when considered with the financial statements deter.
For them and in accordance with GAAP is helpful to investors in understanding and comparing our performance.
As of March 31, 2020, our cash balance was approximately 15 point for million cash on hand in access of the capital markets positions us well to execute on our strategy, which is the significant advantage over many of our competitors. We expect continued improvements in our financial performance as we continue to scale and drive towards profitability.
The above referenced non-GAAP financial measures are discussed and reconciled to GAAP financial measures in our earnings press release that was issued before this call.
That press release is available on the company's Investor Relations website, and we encourage you to review the reconciliations there as well as review our financial statements for the quarter ended March 31, 2021 contained in our form 10-Q to be filed with the SEC shortly.
This past quarter, we continued the strategic investment in technology and infrastructure that we believe will deliver our growth objectives, we must build for the future and we are always looking forward to ensure that we continue to define cannabis compliance in this growing and ever changing market.
This concludes our prepared remarks, we are happy to take any questions. You may have please keep in mind that the forward looking statement disclaimer discussed at the beginning of this call applies equally to the Q&A session now lets turn the call over to the operator for questions operator.
At this time, we'll be conducting a question and answer session. If you would like to ask the question. Please press star one on your telephone keypad. It confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like channel of your question from the queue for participants using speaker equipment it may be necessary.
For you to pick up your handset before pressing the star keys, one moment, while we poll for questions.
The first question comes from the line of Brian King's Linger with Alliance Global Partners. You May proceed with your question.
Hi, Good morning, guys. Thanks for taking my questions.
First with so many of them waiting for regulated cannabis hi, Jessica with so many states as you highlighted since November.
The leading cannabis can you talk about your positioning and even early conversations with potential licensees I've taken a lot of them are.
The existing licensees that you have.
And how many states are evaluating will have determined the closed loop system is the way to go up those seven.
Yeah.
Great question. So let me actually take the the lease portion of that question first Brian I. We're in we're in a number of conversations as I mentioned in my prepared remarks, and we've either recently responded or are responding to rfps for new states. It is worth, noting though that due to the length of.
The RFP process, even if new ones were issued in the near term, it's unlikely that we would see revenue in calendar 2021.
And I can also share as far as the Close-lipped model piece of that question goes that our contacts in Pennsylvania, and Utah are regularly contacted about this particularly in Pennsylvania, which has a very robust and healthy program and that appeals to industry and enforcers of like and if we do expect it to serve as a model in future states.
Based on the states, we now are having those discussions.
As far as B to B licensees that existing clients, who are in discussions with us about expanding their footprint into new states.
Thank you you see that reflected in our continued robust and growing pipeline as we mentioned in our prepared remarks, and I can share anecdotally that we are continuing to have conversations with existing clients and formulate plans for a large rollout plans across all of their located.
<unk>.
Right and then you've been holding at around $1 million of annual run rate bookings per quarter for some time plus or minus.
Do you expect that can accelerate given not only the new state regulations, which.
You highlight there's probably of 'twenty 'twenty two event.
And can bookings accelerate given the opportunities you have just with your existing client base in existing states.
Oh.
Yeah.
Well, we certainly do expect to see some acceleration there was really no new markets last year and in 2020 throughout a the the COVID-19 year, if you will and the impact and we continue to just the strong month over month and quarter over quarter performance.
In our bookings.
As the many new opportunities that are available to come on line, we do expect to see some acceleration in bookings as well.
Great.
I think you were trying to communicate and correct me if I'm wrong that you believe you can grow software revenue of 30% organically, which of your existing client base.
Many of the just gone strength, but maybe I'm mistaken when do you think you can begin achieving those types of growth rates on software revenue organically.
John do you want to take that one.
Yeah, I can take a good morning, Brian how are you.
Yeah, I think I mean, I think if you'd think about look at our first quarter I mean, 10% organic growth in just a quarter. I mean, you can certainly extrapolate how that would play out over an entire 12 month period.
We're gonna be continued have that continued focus on driving organic growth and looking for opportunities to sort of land and expand and you know I think we saw a little bit of that in the first quarter as we were able to successfully expand with the number of our clients. As you know, we certainly have talked before about some of our data products.
<unk> and some of our AI and and MJ analytics tools and being able to sort of upsell that as some of our clients grow so.
I think overall for Matt just if you look sort of the sequential growth from Q4 of last year to Q1 this year at 10%.
Organic growth, we're certainly we're happy with that and we're going to certainly continue to sort of.
I'd look to achieve sort of those numbers in the quarters ahead.
And maybe to that end can you talk about.
How you're in all of its clogs being accepted in the marketplace and when do you think that will become a meaningful catalyst to software revenue.
Oh, Brian I'll take that at least the the first part of that.
As we shared in our prepared remarks, we have seen a contribution from M. J analytics, a double I in this past quarter over the the quarter before so we're and I can also share that we are seeing of March close and attach rate on new deals for that product and we expect to see.
Ongoing contribution from it.
Yeah.
Great last question I have when the <unk>.
Salt inside it.
It sounds like few states are moving quickly right now with the modest quarterly revenue.
I assume that you're only working with maybe one state right now and then what is the competitive landscape look like on the Consol consulting.
Consulting projects, where there were a number of other companies.
That are bidding on these projects is there a lack of competition.
On the competition side of it we perform extremely well versus our competitors, where we're not the least expensive solution out there. There's there's probably a handful of competitors in any market.
However, we do have the I believe the the best win rate for applications in a in that space and in the industry and our reputation is very well known and we are.
We're currently in fact, we're actually seeing a combination of projects that were placed on hold at the beginning of the pandemic started to come back as well as new projects from recently passed state of initiatives and we are working in a handful of states currently in progress on those new state of initiatives continues to be mixed at some states such as Arizona arms.
Moving quickly given their existing medical framework, while other states such as New York, and New Jersey, they're moving more slowly through the process. So as a result, the we do expect our consulting revenue to remain soft in the first half of 2021.
However, with our strong backlog and growing pipeline of opportunities and we believe the second half will be meaningfully stronger.
Okay. Thanks, guys.
Thank you.
As a reminder, if you would like to ask the question. Please press star one on your telephone keypad.
One moment, while we poll for questions.
Our next question comes from the line of Martin Toner with a T V capital you May proceed with your question.
Hi, good morning, everyone and congrats on the on a good quarter.
Good morning, Martin Thank you.
Boy I'd.
I'd like to ask the meridian and the and to talk about.
What the synergies between the businesses will be are there or their current our current customers that you think it would be beneficial for both of you guys for them to graduate to.
The the meridian solution.
There would be any integration between.
The viridian solution in some of your other ones.
Are there things that you can take from different solutions to improve any of the other one.
The stuff like that.
Hi, Greg Great question. So first I guess, let me just share the the the the core synergy that we see between our.
Between our products and after.
Working to develop their own compliance capabilities, the Verde and management team kind of direct depreciation for the challenges of replicating the depth and breadth of our compliance gateway and coupled with the integrations of our ecosystem and added functionality such as our retail and payment solutions.
We realized the integrating our platform as an opportunity to unlock significant synergies on both sides.
The primary synergy we'll start with is integrating the viridian product to our compliance gateway and ecosystem and it should take about a quarter to complete the initial integration steps with the realization of synergies through our first year for it.
It is in regarding which products are what would be a.
With the old synergies at both our current and Meridian have a pipeline of client too.
I have already indicated interest in the enhanced product offerings and in addition of course to the network effects of Upselling to our combined our existing client base. So not only do we expect U S and are we already in conversations for the iridium product with some of our existing client base, but we also.
<unk> had been in discussion with verily and clients about additional products and services that we can offer as well.
Oh, that's great Super.
Where do you require a lot of R&D spending.
As we mentioned previously viridian does contribute a positive cash flow synergies and we have enough our R&D spending.
The in there to complete the integration works for our complaints gateway, which will realize the synergies by doing compliance in one place for all of our product lines and then we certainly have a enough and appropriate budget for ongoing product development across our product lines.
That's great. Okay, I'm with you out of anything to that.
No I think that's a really good way to think about Meridian, you know to Martin's question about integrating sort of with the broader occurred ecosystem to drive the cohesive.
The technology.
The technology platform was our compliance gateways. So I think that was really a good way to say it.
Yeah.
Super well that's all for me. Thank you guys.
Thank you Martin.
Ladies and gentlemen, we have reached the end of today's question answer session I would like to turn this call back over to MS. Jessica Billingsley for closing remarks.
Thank you operator.
We are the technology ecosystem for cannabis serving operators governments and brands our ecosystem strategy and strategic investments are focused on locking up the tech spend of the enterprise canvas businesses and solving with technology, the growing demand for increased supply chain transparency among consumers.
In governance.
We thank you for your interest in the corner and we look forward to sharing our progress with you as we move forward.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation of enjoy the rest of your day.
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