Q2 2021 Akerna Corp Earnings Call

[music].

Good morning, and welcome to our current on its second quarter ended June 30th 2021 financial results Conference call.

Today's call is being recorded.

At this time I would like to turn the call over the Erica Mannion investor of director of relations for it.

Thank you and welcome to today's second quarter ended June 32021 conference call.

On the call today are Jessica Billingsley, CEO, and chairman of the Kona 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 of certain statements will be made that are forward looking statements within the meaning of the safe Harbor provision of the United States Private Securities Litigation Reform Act of 1995.

Words, such as estimates projected expect anticipate forecast plan and 10 believes seeks may will should future propose and variations of these words or similar expressions of versions of such words or expressions are intended to identify forward looking statements.

These statements include but are not limited to the statements regarding the future growth and prospects of the coroner and statements regarding expected future revenue recognition.

These forward looking statements are not guarantees of future performance condition or results and involve certain known and unknown risks uncertainties assumptions and other important factors that could cause actual results or outcomes to differ materially from those discussed including the risks related to changes and the cannabis market and.

Risks related to the impact of the COVID-19 pandemic the.

These risk factors are more fully described in the Kurdish filings with the SEC.

Forward looking statements speak only as of the day they're made.

The current 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 will turn the call over to a current as CEO Jessica Billingsley.

Good morning, everyone. Thank you for joining us today, our second quarter results continued their momentum for 2020.1.

Software revenue growth of 56% year over year, and 17% sequentially our business as a whole grew 63% year over year and 22% sequentially with the mix of both organic and inorganic software revenue and a rebound and consulting revenue compared to prior periods our.

Our total SAS and air or is currently $17.3 million of 53 per cent increase over the same period last year.

In addition to topline growth our focus on cost containment and accretive acquisition continues to deliver results with adjusted EBITDA, improving 54 per cent year over year and 11% sequentially.

We are encouraged by the pace of demand and the second quarter and we look forward to continued growth and the quarters ahead.

I'll focus on the Multistate international and emerging enterprises in the more than $20 billion global cannabis industry continues to serve us well churn has improved by 48 per cent compared to prior year, while consolidation continues with many of our larger clients significant.

The increasing their footprints.

Our average would be the bee deal size has also increased by 27 per cent year over year adjusted for 1 time project in Q2, 2020.

<unk> to be transactions tracks on our system increased by 104% year over year.

Looking ahead to the growth drivers of our business.

And as we discussed and our last call. There are a series of opportunities ahead for our current and from new products to new markets to new regulations, and ultimately legalization of the federal level.

On todays call I'd like to provide and update on 2 broad areas named.

Namely industry trends within the current market landscape.

And the potential for new federal regulation.

Starting with the market as it stands today.

Despite the fact, [laughter] and 25 years of medical cannabis for first legalized and California. The U S industry is still very much and emerging 1 due to lack of federal per for them.

Emerging markets pose various challenges and opportunities and.

Elevated by candidates of status as of regulated substance, which in turn creates volatility and the supply chain.

And most states many smaller operators channel really compete and just 1 part of the supply chain and rely on partnerships to bring product to market ciao.

Challenges emerge when a problem with the supplier or customer cascades through the supply chain.

This can take the form of a products recall the has to be traced from the retail store back to the cultivation and true each stop and between.

The management challenges and business of disruptions that result from such an event.

Tribute to increase costs.

And with many smaller operators not capitalized to endure such of financial hit the supply chain, maybe even further disrupted and start the cycle of all over again.

Many operators have experienced the challenges of relying on others and the cannabis supply chain and have determined the best way to ensure the success of their business is to own the full vertical the operators that have taken this approach and have a significant advantage when expanding into a new legal market.

Where they can replicate their model without the risk of depending on the spirit operators.

Another benefit of consolidation lies within a critical part of operating any cannabis business.

Science.

Laws can vary significantly from 1 state for the next and even from 1 municipality to another complicating compliant operation.

To keep up with these variations cannabis businesses need to dedicate significant time and money to ensure adherence to compliance with canvas regulations for.

All of you to meet compliance is the daily risk, the operator space with potentially business and the repercussions and the most severe cases.

Large cannabis operations, often employ of dedicated compliance role or outsource the regulatory work the smaller operations rarely have the resources to do so.

It is within this framework that of current is platform solves the complex needs of the industry, given our long standing leadership presence and the market, we have built and ecosystem with the most comprehensive compliance and regulatory capabilities and the industry able to serve off the.

Shell and the requirements of the entire candidates supply chain and more on medical and recreational markets in North America and beyond and anyone else. Then that result is a platform able to serve both small operators and large multistate and emerging enterprises, who are driving consolidation and the industry.

And as we've articulated on prior calls.

Given the strategic importance of compliance within the cannabis market you're focused on building out the ecosystem around our core compliance gateway to secure our leadership in the segment of the market.

The point of sale App M J retail, which has completed the data adoption and will now be broadly marketed to both existing clients and new prospects and the second half of the year proofs of concept by integrating a clean and streamlined the app.

With our robust compliance integration and business intelligence available and our ecosystem.

The current of ecosystem was developed to provide a wide range of solutions and insights to our clients and the cannabis industry at large.

Our platform allows cannabis operators to manage every detail of their business, while our business intelligence helps them make the most impactful decision for their operations.

With over 80 integration partners, we are able to provide the full range of services and enhanced cannabis businesses, including integration with large scale financial and tax management solution and inventory management online ordering digital menus and payment options just to name a few.

Demonstrating the success of our strategy to build and enterprise grade platform. The tools, we've built into our ecosystem have had and almost 100 per cent adoption rate with our largest and myself who are largely signing on for multiple year contracts with the current of offerings.

These episodes and rely on our premium offerings like Mg analytics to make operations more efficient as they continue to grow and scale their businesses.

Over the last year, the infrastructure improvements, we've made and the acquisitions, we've closed and acquisition strategy. We continue to pursue position of current out to be 1 of the largest cannabis technology winners as legalization expand to new states. There is no denying this past year has seen significant.

If it can't strides and the legalization of cannabis.

And the 2020 U S election, we saw and Montana, New Jersey, South Dakota and Arizona.

Support legalization for the recreational use of canvas.

In March of this year, New York became the latest to join that ever growing list.

And only a month later, Virginia became the first southern region state to begin the process for full legalization.

Even the historically conservative deep South has started to make steady gains with Alabama, joining the Louisiana and states from the region for legalized medical marijuana.

While the timing of each of these distinct opportunities varies based on factors such as the prior existence of the medical market and associated regulatory framework in general, we're seeing an uplift and our consulting backlog, indicating states are moving forward.

With muted consulting results and the first half of the year of some of the larger states were slow to start we are encouraged to see the strength of the planned projects and the second half.

As these projects are completed we would expect a corresponding increase and software revenue as licenses are granted and our consulting clients to begin to build out their infrastructure and these new markets.

Looking beyond our growth initiatives within the existing regulatory framework, we're encouraged to see the priority, which has been placed on the recently proposed cannabis administration and opportunity Act as many of you know on July 14th Senator Chuck Schumer, Ron Wyden, and Cory Booker unveiled their 100 and.

And 63 page Bill drafts, which upon passage with federally legalized cannabis and the United States.

This is important legislation as it addresses the crucial needs and candidates, including decriminalization, social equity taxation and regulation consumer safety concerns reform of baking laws.

And research authorized the medical use of access to veterans Interstate commerce, and economic empowerment to communities and individuals directly impacted by the war on trucks.

These are the necessary categories to address the regulation of the candidates the industry and help propel American economic recovery in the wake of the COVID-19 pandemic.

In addition to the broad beneficial implications of federal legalization for our current on this Bill also includes language directing the secretary of the Treasury to establish a federal track and trace.

System for cannabis products to prevent diversion as well as federal and state tax evasion.

Given the BTG capabilities, we have built with our leaf data systems offering and on.

Our recently announced federal software contract for the seat Vincent and liquidity.

As well as the breadth of our regulatory compliance across the current states we.

We believe there may be and additional opportunities for us to pursue software sales at a federal level.

Well the proposal of the spill has been met with great support many of those reporting on the topic have focused on the likelihood of bipartisan support.

While a worthy point equally applicable to any proposed legislation given the current political environment.

It is often overlooked is the evolution of bipartisan support on cannabis related measures over the last few years.

Using our own state of Colorado as an example.

Wood recreational cannabis legislation was first introduced in 2014.

It received harsh criticism from both of the Democratic Governor Andrew Republican Senator.

After those initial objections and witnessing firsthand the economic benefits.

Derived from such legislation both became supporters with Senator Cory Gardner co sponsoring most subsequent candidates related belt.

This is not an isolated event.

Oh for 37 states, which have thus far passed some form of legislation around cannabis legalization. There is a large contingent of Republicans within those states, who have similarly seen the benefits firsthand and are beginning to step forward.

The most recent co sponsor to add his name to the Safe Banking Act is Republican Roy Blunt of Missouri.

While it is too soon to make predictions on the likelihood of the cannabis administration and opportunity Act ultimately passing.

The evolution of public and political perception on the topic of cannabis reform continues.

With the priority set in place by the current Congress, there's a strong chance that even if the current proposed bill does not move for it it will pave the way for some form of meaningful legislation such as the Safe Act were safe plus tax reform to pass and the current session.

Further increasing the opportunity in front of us.

And in fact, the U S House of Representatives of proved a package of spending legislation last month, the contained similar language and the provisions to the Safe Banking Act.

Closing.

We're very excited about the many value creation opportunities ahead, and the business, we have built to leverage the upcoming waves of growth.

With the leadership position, we have and our core business and capabilities via the integrated to take advantage of new opportunities such as you state initiatives and ultimately U S. Federal legalization and strongly believe we are quickly approaching an inflection point and growth.

Both of the candidates industry and the current his role within it.

All of our hard work and achievements to date have positioned us very well for this moment and we look for to driving long term shareholder value is the path and faults in front of us.

Now I'll 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 second quarter ended June 30 of 2020..1 as a reminder of these results are discussed in further detail and our form 10-Q, which will be filed shortly with the SEC financial results reported today are preliminary and final financial results and <unk>.

Other disclosures will be reported and 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 for the discovery of additional information. We encourage you to review the filing and detail.

Moving along to the business updates this past quarter, we continued to deliver on our core objectives of investing in innovation and revenue growth opportunities, including the acquisition of Iridium Sciences, optimizing our operating infrastructure and improving profitability with software revenue up 17% sequentially and 56.

Per cent year over year, approximately 900000 of new E. R. Our bookings and the average booking amount of 27% year over year adjusted for onetime transaction and Q2, 2020 the growth momentum of our business continues as larger multi location and multistate operators increasingly implement our solutions to solve.

Their business needs true.

Auction volume was up 57% year over year retail order value was flat year over year. However, in Q2 of 2020 retail order value was up 19% against the same period 2019 as consumers stocked up on product ahead of potential shutdowns related to Covid.

Our strong demand pipeline generated by both client growth and organization wide implementation plans gives us confidence and our ability to grow our revenue and profitability as we prepare for the upcoming industry catalysts Jessica mentioned earlier.

Now, let's review the financial results for the quarter as a reminder, and unless otherwise noted all metrics of our non-GAAP a reconciliation of GAAP to non-GAAP financials is included in our earnings release and posted on our Investor Relations website.

We encourage you to review the reconciliations there as well as review our financial statements for the quarter ended June 30 of 2021contained in our form 10-Q to be filed with the SEC shortly.

Total revenue grew 22% on a sequential basis and 63% year over year to $4.9 million through a combination of organic and inorganic growth, including strength in our consulting business, new software product lines and partnership revenue and the revenue contribution from acquired assets.

Software revenue was up 17% sequentially to $4.5 million and up 56 per cent compared to the prior year. We currently have approximately $1.2 million of our our backlog of pending go lives.

Consulting revenue more than doubled sequentially to approximately 400000 as a result of project timing and the prior period.

Progress on new state initiatives continues to be mixed however, as Jessica previously mentioned with our current backlog and growing pipeline of opportunities. We believe the second half will be meaningfully stronger than the first half.

Gross profit was 3 million for the quarter and represented a 62 per cent gross margin compared to a gross profit of $2.6 million and of 64 per cent gross margin and the prior quarter.

Our gross margin percentage was slightly impacted by the viridian acquisition as we have not fully realized the cost synergies throughout the second half of the year will continue to focus on driving leverage from our infrastructure and we expect our margin profile to return to the mid to upper 60 per cent range near term as cost synergies are realized.

Hosting revenue rebound and as our software revenue growth, adding a higher contribution margin to our revenue mix.

Moving to operating expenses total operating expenses increased approximately 236000 and sequentially, mainly a result of the acquisition of viridian offset by the continued execution on cost management and operating efficiencies.

And the quarter operating expenses increased only 5% from the prior quarter, even though revenue increased by 22% demonstrating our ability to drive significant leverage out of our total cost structure.

The net effect of increased revenue, while leveraging cost was an improvement and our adjusted EBITDA margin of 27 percentage points sequentially and 72 percentage points year over year. These are sustainable changes that will drive our operating margins higher over time.

The efforts include productivity enhancements through system and process improvements and improved allocation of human capital.

Product development expense increased approximately 140000 or 12% from the prior quarter, mainly a result of the viridian acquisition and the quarter, we capitalized approximately $1.2 million of software development as we continue to accelerate our product roadmap, we continue to invest and product development that we believe will deliver the complete.

And it's experience for our clients.

Sales and marketing expense, similarly increased 80000, or 5% sequentially with incremental expenses related to the radian acquisition offset by the continuing refinement of our go to market strategy. While we continue to be pleased with our sales and marketing efficiency as we continue to deliver new business growth with improving client acquisition call.

We plan to make incremental investments and the second half of the year to enhance our marketing messaging create alignment across our portfolio of brands and capitalize on our key development initiatives.

General and administrative expenses were flat sequentially and down 9% year over year.

And the quarter adjusted EBITDA was negative $1.6 million compared with negative $1.8 million for the quarter ended March 31, 2021, and improvement this quarter of 11% and compared with negative $3.6 million for the prior year of year over year improvement of 54%.

We believe adjusted EBITDA when considered with the financial statements determined in accordance with GAAP is helpful to investors and understanding and comparing our performance.

As of June 32021 of our cash balance was approximately $11.8 million, we continue to be prudent with our spending levels and we've maintained a healthy cash position to manage the business.

Cash on hand, and access to the capital markets positions us well to execute on our strategy, which is of significant advantage over many of our competitors. We expect continued improvements and our financial performance as we continue to scale and drive towards profitability.

And clothing, the tailwind of candidates reform and consumer adoption is growing but in some cases offset by short term budget constraints largely as a result from the uncertainty presented from COVID-19.

However, we are optimistic about our product roadmap and our new software solutions coming to market. We continue to develop more platform capabilities and expand market reach we believe our strategy positions us well within our industry. We continue to have a strong balance sheet, and we're well positioned to invest and the growth we expect going forward.

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 and discussed at the beginning of this call applies equally to the Q&A session.

Now, let's turn the call over to the operator for questions.

Operator.

Thank you.

We will now be having a question and answer session.

If he would like to ask a question. Please press star 1 on your telephone keypad.

Confirmation tone will indicate that your line is and the question queue.

And we also press the star 2 if he would like to remove your question from the queue.

1 moment, please only now poll for questions.

Our first question comes from Brian <unk> with Alliance Global Partners. Please proceed with your question.

Hi, Good morning, guys. Thanks for taking my questions.

Good morning, and.

More and more.

Hi, John.

You mentioned you expected the ramp in consulting and the second half as many states are looking for regulation and some were slow to start can you help frame that well, we see quarters similar to 2019 and do you expect demand will be sustained in 2022 based on the timelines with the states plan. The Orange I know consulting has been lumpy.

A couple of quarters, good couple of quarters down and so I'm just trying to understand the sustainability also.

A great question, Thanks, Brian and we do expect a continued rebound and although I do want to note. The state's can and often do make changes to their programs that can delay of initiatives and and you know just speaking to the delay we see in some states.

The delay as they focus on perceived higher priority initiatives and continued response to COVID-19.