Q3 2022 Akerna Corp Earnings Call
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Okay.
Good morning, and welcome to our current is third quarter 2022 financial results Conference call.
As a reminder, today's call is being recorded all participants are in a listen only mode. A question and answer session will follow the formal presentation.
And at any time, you May press star one on your telephone keypad to join the question and answer to Q2.
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At this time I'd like to turn the call over to Peter It sounds Weird Investor Relations work Hernan.
Please go ahead Peter.
Thank you and welcome to today's third quarter ended September 32022 conference call.
On the call today are Jessica Billingsley, CEO and chairman of <unk>.
D C F O have a colonel before management begins its formal remarks I'd like to remind everyone that during this conference call certain statements will be made that are forward looking within the meaning of the safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995 words, such as estimates projected expected.
Dissipates forecasts plans intends believes seeks may will should future propose.
<unk> and variations of these words or similar expressions or versions of such words or expressions are intended to identify forward. Looking statements. These statements include but are not limited to statements regarding the future growth prospects for our carve out statements regarding expected future revenue recognition.
These forward looking statements are not guarantees of future performance conditions or results.
Bob several known and unknown risks uncertainties assumptions and other important factors that could cause actual results or outcomes to differ materially from those discussed including a risk.
Latest changes in the cannabis market and risk related to the impact of the COVID-19 pandemic.
These risk factors are more fully described in our current as filings with the SEC.
Forward looking statements speak only as of the day. They are made or to 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.
Lastly, as a reminder, these results are discussed in further detail in our Form 10-Q financial results reported today are preliminary final financial results and other disclosures will be reported in our quarterly report on Form 10-Q, and may differ materially from the results and disclosures of today due to among other things completion of final review procedures.
A subsequent events for the discovery of additional information. So we encourage you to review the filings detail.
And now without further Ado I'd like to turn the call over to Curtis CEO , Jessica Billingsley Jessica go ahead.
Good morning, everyone. Thank you for joining us.
Today, we did last quarter, you'll be covering three key areas.
First the key company performance highlights for the quarter.
Second the progress on our balance sheet and capital structure initiatives.
Third developments in the cannabis sector.
I'll turn the call over to Dean for a detailed financial review followed by a Q&A session.
Earlier. This morning, we reported our Q3 2022 result.
I have to choose fairly heavy investment years in which we completed a number of strategic acquisition.
This year, we have remained focused on integrating and positioning the business to take advantage of future market development.
<unk> opportunities as.
As well as synergies and cost structure improvement.
Beginning in Q1 of this year, while other firm is eat themselves are speculating on future state macroeconomic maryanne and resisting the reality of the data we see the opportunity to make tough decisions early reducing our cost structure and reviewing our client pricing to accelerate our path to profitability.
This course of action is prudent.
Well, let's see steadily improved our cost structure and continue to track a path to profitability.
Late in the quarter, we saw our software revenue growth of 17% year over year, and nearly 40% year to date.
Our current annual run rate closing out in the first half of the year is running slightly ahead of the full year last year, we're anticipating.
Strong catalysts from 'twenty to 'twenty, three which we'll discuss in just a moment.
Gross margin for the quarter was 62%.
Last year's period and year to date, 7% compared to 62% for last year's year to date.
Well this is a clear demonstration of year over year growth.
You acknowledged that this growth has trended down sequentially, both domestically and internationally he used to have new entrants into this space.
Existing operators, we're seeing some purchase decisions being delayed.
I'll elaborate on this more in a moment when we discuss industry impacts of the recent U S election cycle, but for now what.
I'm, making clear that.
We are taking competitive measures to ensure we are solidifying our leadership position in the available market.
Cost saving measures enacted earlier this year are tracking periods for a piano.
Crouch went out each reported expense line is down from year ago levels.
This is a clear demonstration of our cost reduction efforts that production reduce facility costs and other consideration.
Definitely saving us approximately $600000 per quarter, which are currently being realized.
On today's call.
As on our call last quarter I'd like to reemphasize, our three key performance metrics.
Committed annual recurring revenue or C. A R R.
And bookings and growth in client transaction.
I'll clarify each of these metrics explain why they are important and how we're performing.
Ben will provide an update on our strategic alternative evaluation.
Starting with metrics most of our revenue today.
Friction wrapping up.
As a result, that's important metric we track match our present fast is our total K are or what the total amount of contracted recurring revenue for which clients to sign contracts are.
Our C. A R. R was approximately $17 million as of September 30, which represents a slight increase year over year is also slightly below what we reported last quarter as.
As we shared in our last earnings report.
This decrease does not represent a spike in plant lots of churn.
Can you just hear a reduction in scanner or are with clients to produce and renegotiate their contract.
This represents the reality of a softer consumer economy, it's reaching across a number of sector.
Reality, there in light of macroeconomic factors.
With me, it's like service.
However, broadly speaking we have achieved our clients for their most mission critical need.
It's important to make clear that we're partnering with our clients to help them adjust assignment with over 13 years, Gary it's backing us you're acting as a trusted adviser and meeting the needs. They have today, providing mutual value both now and in the long term.
And it ultimately positions us to expand with them in new markets essentially open.
To underscore this important point.
While it is routine in times of economic challenge for businesses produce.
Given our demonstrated ability to maintain and evolve our client relationship.
We anticipate this represents.
So a growth opportunity for the future.
With regard to bookings.
This equates to the dollar amount of new sign software contract.
The value of which will be recognized over the life of contract.
Consider growth in booking to be a near term leading indicator of our performance.
Q3 software bookings of approximately half a million.
Which was also softer than what we had hoped to see and below what we saw in the early part of the year.
We will continue to closely track our cost structure in light of the softer, but some members and of course, we'll also start to recognize the revenue.
Whether it's with my baby.
Turning now to our third metric client transaction growth, which we believe is the most important long term indicator of our true market share.
Our transaction volume increased by 10% sequentially.
Transaction dollar amount reflected a 10% decrease.
What this illustrates is that as a result of supply and demand as well as consumer spending habits.
Illegal canvas transaction closely tracked the legal market opportunity.
This is a trend we publicize after identifying that and we're spending on labor day.
Shortly a top holiday.
Relatively flat year over year.
What this means for our clients, it's a competitive market pressure is high and differentiation is key.
Curtis product portfolio and ecosystem with strategically designed to guide our clients through this climate.
The transaction volume growth continues to provide a future revenue catalyst as regulatory changes bring opportunities to monetize transaction volume.
For retail and wholesale came in opportunity.
Macroeconomic climate and domestic political challenges certainly create headwinds for the industry, but ultimately we're still trading on course collective industry growth.
I'd like to now turn to what we're doing to strengthen our balance sheet and positioning ourselves for the future for us.
On top of the $10 million round of funding be closed at the beginning of the third quarter.
We've also been taking the necessary steps to maintain compliance with NASDAQ listing standards.
And we also issued a preferred convertible issue that was structured in a way.
It was not to dilute our share and accordingly, who completed a reverse split last week.
The details are in our filings and Dean will touch on the specifics of that during this call.
But the takeaway is that we.
We are continuing to make solid steady movement and strengthening our balance sheet.
And we remain ready to capitalize on the operating growth opportunities as they present themselves.
Whether that is through New York State markets opening.
U S federal banking actions such as the Safe Banking Act.
<unk> International visualization.
And touching on the legal and regulatory environment update.
Last month President Biden.
Working on it when he was the first getting U S. President suggests that the scheduling of cannabis you reevaluate it.
That's simple cannabis defenses at the federal level should be part.
These actions when coupled with the potential for safe banking and the students to be proposed prepare act.
Signify unprecedented momentum for cannabis legalization at the federal level.
As for the midterm election cycle in total we saw five states with recreational cannabis on their ballot.
Arkansas, Maryland, Missouri, North Dakota, and South Dakota.
Both Maryland, and Missouri passed their initial becoming the 20th and 21st aid to legalize recreational cannabis.
With the passage of these initiatives nearly half of Americans live in states for candidates juices legal anyone 21 years or older.
These are when we celebrate it.
To state the passing measures demonstrate the continued bipartisan interest the voters when it comes to Canada.
Accordingly, these initiatives represent the opening of two new recreational market.
Although timeline and license structures are largely yet to be determined we remain positioned and ready to enter these markets will stay open.
At the time of use remark.
There are many Senate and house races get finalized.
To be clear when I say this statement applies regardless of which party has the majority in the chambers of Congress.
Legalization of cannabis.
Just be seen as a bipartisan vote, because it's the fiscally responsible thing to do.
We saw this during COVID-19 and cannabis was declared an essential industry in Colorado and other states and we continue to see that in the state economy.
In the face of this macroeconomic climate, putting federal cannabis action, such as incremental action, including say thinking should be at the forefront of the minds Congress, regardless of which party has majority.
The economic benefit.
Revenue and job creation are bipartisan.
We believe that our long term leading indicators all suggest good progress heading into the fourth quarter and beyond for three key reasons.
First our core business of compliance is a must have and not a nice to have service for our clients.
We will continue offering a best in class suite of services that addresses the needs of small to medium sized businesses.
Mid size enterprises, and larger cannabis enterprise.
Second the cannabis market is projected to grow and we are positioned as a central player with more of the industry running on a chronic each year.
Third we are making the prudent and necessary decisions to ensure we are the go to solution mechanical space for many years to come by narrowing our focus to our core must have product line and ensuring we are firmly entrenched to rise industry and category <unk>.
Joy the growth is projected for the years ahead.
We remain optimistic about our future and we believe the cost cutting we've done in conjunction with the opportunities we have in front of US, we'll submit our leadership position and enable us to realize our long term financial objectives.
Now I'll hand, the call over to Dean <unk>, our CFO , who will provide a financial overview of the quarter Dean.
Thanks Jessica.
This morning, I'll provide an overview of our financial results and key business metrics for the third quarter ended September 32022.
For the three months ended September 30th be recorded $5 4 million in revenue in the third quarter, $5 3 million or 98% of which was software sale.
This improvement was driven largely by the addition of acquired businesses with accelerating software growth.
The primary driver of the year over year growth was from the acquisition of the enterprise platforms.
We presently have approximately 400000.
<unk> and backlog.
For the three months ended September 30th gross profit was $3 4 million and that was slightly ahead of $3 2 million in last year's quarter and resulted in a 62% gross margin.
Which was in line with Q3 and 2021.
For the year to date gross margin was 67%, reflecting higher performance in the first half of the year than in the current quarter.
The gross margin improvement in the year. It was due to synergies realized from our acquired enterprise assets.
Have higher margins mitigated by slower sales growth.
We also continued to implement ongoing initiatives to drive operating efficiency in an effort to hold margin stable at these levels.
Moving to operating expense.
Product development expense was $1 4 million for the three months ended September 30th.
Third a $1 6 million for the same period last year.
This represents a decrease of 0.2 million or 12% from the same three months period.
Like development expense decreased primarily due to the effects of head count reductions the restructuring.
Which lowered overall salary and benefit costs as well as stock based compensation costs.
Following the restructuring we have implemented controls over hiring and managing open head count.
Sales and marketing expense was 1.9 billion for the three months ended September 30, compared to 2.1 million for the same period last year.
Represents a decrease of 0.1 billion or 6% for the same three months period.
The decrease is due primarily to.
Due to the effects of head count reductions from the restructuring, which lowered the overall salary and benefit cost run rate and also reduced stock based compensation costs.
In addition, we incurred lower trade show and promotional expenses in the 'twenty to 'twenty two period.
These decreases were partially offset by an increase in contractor.
General and administrative expense was $1 8 million for the three months ended September 30, compared to $2 1 million.
For the same period last year.
This represents a decrease of <unk> 3 million or 12% from the same three month period.
The decrease was primarily due to lower financing and acquisition related costs as well as lower stock based compensation and franchise tax cost in the 'twenty to 'twenty two period.
These decreases were partially offset by higher bad debt expense.
Board of director compensation costs, and proxy related expenses associated with the shareholder meeting.
There are a few adjustments in the year to date numbers.
To call out as well as part of the financial performance conversation.
The first two items are not as expensive.
And the last item is a nonrecurring charge.
Contingent consideration adjustment.
In connection with our acquisition of 365 candidates in October 2021.
There is a contingent consideration foreign common terms and earn out will be paid in cash or common stock or any combination thereof.
Upon the completion of the assessment period associated with the revenue targets.
The fair value of the contingent consideration was reduced to $3 3 million as of September 32022.
Impairment charges.
Earlier in the year the company performed impairment analysis on the tangible assets and goodwill and found it necessary to book impairment charges in order to report. These long lived assets at fair value and in accordance with GAAP.
Restructuring of Jessica.
To remind also in May 2022, we implemented a corporate restructuring initiative.
The restructuring as approved by our board of directors, which resulted in a reduction of the company's workforce by 59 employees or approximately 33% of the company.
As a reminder, we measure EBITDA and adjusted EBITDA, because we believe it is helpful to investors in understanding our performance.
It allows for comparisons of our performance and credit strength to our peers.
Adjusted EBITDA excludes the effects of non cash expenses like impairment charges adjustments to fair value and stock based compensation.
Nonrecurring items, such as restructuring business combination and financing charges.
Looking at adjusted EBITDA for the three months ended September 32022, we reported a loss of approximately 1.4 million.
Narrowing our loss slightly from a year ago and down more significantly from $2 3 million in the June quarter.
We continue to experience customer churn due to a number of reasons, including customers going out of business or otherwise exiting the cannabis segment.
Churn has increased by 15% compared to the same quarter of the prior year, our average fee to be deal size has decreased by 16% year over year, indicating customers are closely monitoring their purchases.
As Jessica noted during her earlier remark.
This trend is something we anticipated and addressed in a proactive way.
We remain confident that as tailwind has returned to the cannabis sector. We remain best positioned to capitalize on opportunities as our core software is a must have and not a nice to have.
Turning to key figures from our balance sheet and cash flow statement, our cash and restricted cash was approximately $9 5 million as of September 32022.
Net cash used in operating activities was $3 2 million for the quarter.
Net cash used in investing activities was one 6 million, which primarily consists of investing in capitalized software development.
We raised $9 2 million from a unit offering that closed in July .
As of September 30th 2020 to our convertible debt was valued at $14 5 million.
Due to the amendment to the debt agreement, which effectively moved the amortization of the debt out in time for January 2023, we did not reduce the principal balance of the debt during the quarter.
I'd like to take a moment as required to address the going concern disclosure corporate it into our 10-K filed in March of this year.
We are pleased with the operating result, this past quarter, we recognize the continued downward pressure on working capital.
The ability of the company to continue as a going concern is dependent on our ability to secure other sources of financing to reduce debt and maintain profitable operation.
Our corporate liquidity requirements primarily include payroll costs.
Knowledge and infrastructure costs, corporate overhead expense and debt service costs.
Our current source of liquidity include cash on hand, as well as proceeds we anticipate from the access to our ATM program.
We recently completed a reverse stock split that was approved by our shareholders.
We continue to explore strategic options available to the business.
Management is working in a focused manner to produce a consistent and sustainable working business model that is designed to generate returns for our shareholders and reward them for their commitment to and investment in the corner.
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, let's turn the call over to the operator for questions operator.
Operator.
And at this time, we will be conducting our question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line isn't a question Hugh you.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star he's.
Our first question comes from the line of Brian .
Excuse linger with Alliance Global Partners. Please proceed with your question.
Hey, great. Thanks, guys for taking my questions.
If the economy, leading customers to scale back on some services I'm curious at a high level, what's the strategy to drive bookings and growth. For example are there pockets of strength or areas of focus and if we look at your half million dollars in bookings in the quarter, what types of contracts, where these and any other E.
<unk> can help us understand where you are winning business.
Hi, Brian Jessica someone's taking money.
Just answering that question is where are we seeing some good growth opportunity and some addition.
We're certainly seeing some very strong markets.
Continue to grow and for us to continue to expand in some of our strongest markets.
So since you to note would be at Pennsylvania, and Puerto Rico.
We're also starting to see just a little bit of emerging market activity Oh, No. New York continues to be very slow I am giving you hard as you have seen a little bit of movement in New Jersey and also we're starting to see some.
Expansion in the.
Southern Utah, and Mississippi is claimed to start to issue some licenses, Alabama is in in licensing.
Licensing application days now.
Has the timeline to resolution announced his application next year.
We're very bullish on both the southern United States, and Latin America as markets in general.
Of course, we think there are some existing markets or just strong continue to be strong.
So great. That's helpful and then if I think about it.
A lot of those states like New Jersey, Mississippi, Alabama, where Youre seeing movement are you starting to see licensing applications start.
Talk about how you're positioned.
The customers that are.
Applying already.
Contracted to you you if they get license are these existing customers that you have at the other states just talk about how you're positioned going these days.
Oh sure. So it makes the boats we certainly in some of these states that are in the application we have our existing clients that have already put us on the application.
With that as well.
Most applications and in those states have some type of protection for what is the electronic tracking system that you plan to you.
Certainly have a number of existing clients, who have noted a fair.
We have seen existing consulting clients with whom we're working in the more.
And faced with more competitive licensing, Alabama being notable there and it and then of course there are there other states, where we have existing.
Existing.
Our client set.
I, maybe haven't specifically noted asset leave me absolutely isn't it.
Great one more question I'm curious if the service level of declines you discussed.
In the near term you think will continue to more than offset bookings by selling them out.
If so is there anything you can do from a pricing standpoint to retain the customers that are remaining in Canada. I know you talked about some customers are leaving because they're leaving the exit or exiting the market, but what about those that are staying in the market just pulling back on service level agreements.
So I.
I don't have a crystal ball, it's a great question I would like to think that we are nearing the tail end of that.
However, I.
I don't think that anyone can call that for sure I do think that we are.
Are you starting to see.
Yes.
We've seen a lot of shake out this year. He is a great way to put it.
And I wouldn't expect to continue to see that at the same rate overtime I think a lot of our clients are.
We're feeling the pinch and looking and saying hey, where can we contract.
And then there's a little bit of a hey, we're just going to hunker down and through the second half the time and of course and as I noted in my prepared remarks, what's great about that is our core products are a must have and a nice to have and in working with these clients and being a really good partner true through this period of time.
We're in a really great position for our land and expand and to grow with them as they continue to grow because of course, there's still a tremendous amount of growth opportunity over the next few years in Canada.
Great. Thank you.
Okay.
And as a reminder, if anyone has any questions you can make her star one on your telephone keypad to join the question and execute and again for leaving the queue you May Press star two.
And it shows that we have reached the end of our question and answer session. I will now turn the call back over to Jessica Billingsley for closing remarks.
Thank you operator.
We are the technology ecosystem for Canada.
And we appreciate you spending time with US this morning, and following our progress.
And thank you for your interest in a corner and we look forward to sharing our progress with you asking us for it.
And this concludes today's conference and you may disconnect your lines at this time.
Thank you for your participation.
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