Earnings Transcript for KERNW - Q2 Fiscal Year 2022

Operator: Good morning and welcome to Akerna’s second quarter 2022 financial results conference call. As a reminder, today’s call is being recorded. At this time, I would like to turn the call over to Peter Seltzberg, Investor Relations for Akerna. Please go ahead, Peter.

Peter Seltzberg: Thank you and welcome to today’s second quarter ended June 30, 2022 conference call. On the call today are Jessica Billingsley, CEO and Chairman of Akerna, and Dean Ditto, CFO of Akerna. 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 within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Words such as estimates, projected, expects, anticipates, forecasts, plans, intends, believes, seeks, may, will, should, future, propose, 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 and prospects for Akerna and statements regarding expected future revenue recognition. These forward-looking statements are not guarantees of future performance, conditions, 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 risks related to changes in the cannabis market and risks related to the impact of the COVID-19 pandemic. These risk factors are more fully described in Akerna's filings with the SEC. Forward-looking statements speak only as of the day they are made, and Akerna 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 without further ado, I would like to turn the call over to Akerna's CEO, Jessica Billingsley. Jessica, go ahead please.

Jessica Billingsley: Good morning everyone. Thank you for joining us. Today we will be covering three key areas of the business

Dean Ditto: Thanks Jessica. This morning, I’ll provide an overview of our financial results and key business metrics for the second quarter ended June 30, 2022. As a reminder, these results are discussed in further detail on 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 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 filings in more detail. Q2 was another solid quarter for Akerna with total revenue of $6.1 million, representing a 24% increase year-over-year. Gross profit increased to $4.2 million in the second quarter, up 42% year-over-year, and gross margin increased to 69.8% in the second quarter from 60.9% in the same quarter last year. We continue to invest in our technology platform and we are prepared for what we anticipate will be another year of consolidation among the top players and continued growth in the industry. We continue to experience improvements in customer retention and growing volumes to our platform. Churn has improved by 15% compared to prior year while consolidation continues with many of our larger clients, significantly increasing our footprint. Our average B2B deal size has decreased by 9% year-over-year. B2B transactions tracked in our system increased by 8% year-over-year and transaction volume was up 9% year-over-year, while retail order spend was down 4% against the same period in 2021. Now I’ll review the financial results for the quarter. As a reminder, some of the metrics are non-GAAP. A reconciliation of GAAP to non-GAAP financials is included in our earnings press release and posted on our Investor Relations website. We encourage you to review the reconciliation there as well as our financial statements for the quarter ended June 30, 2022 contained in our Form 10-Q [indiscernible] approximately $6.1 million, or an increase of 24% compared to the same quarter of the prior year. This improvement is driven largely the addition of acquired businesses and accelerating software growth. Software revenue of $5.9 million was up 33% year-over-year, representing 97% of total revenue compared to $4.5 million and 91% of total revenue from the same quarter of last year. The primary driver of the year-over-year growth was from the acquisition of 365 Cannabis, as well as organic growth from our legacy platforms. We presently have approximately $400,000 of CARR in backlog. On a comparative basis, consulting revenue declined for the quarter and, to a lesser extent, year to date. Consulting revenue as a percent of total revenue has varied from period to period depending on whether state legislation has expanded to allow new entrants or growth of existing market participants. Progress on new state initiatives continues to be mixed. Some states have deferred the licensing process while others have transitioned from application style to a lottery system of license awards. We are the clear leader in this space and are positioned well to capitalize as states issue their licenses and as emerging states return to more aggressive licensing programs. Gross profit increased to $4.2 million in the second quarter from $3.0 million for the same quarter last year, an increase of 42% year-over-year. Gross margin increased to 69.8% in the second quarter from 60.9% in the same quarter last year, and up slightly from 68% in the prior quarter. The gross margin recovery was primarily due to operating synergies realized from our acquired enterprise assets, which have higher margins. We also continued to implement ongoing initiatives to drive operating efficiency in effort to hold margins stable at these levels. Moving to operating expenses, excluding long lived asset impairments of $24.1 million, total operating expenses were relatively flat at $9.3 million compared to $9.0 million in the same quarter last year. A $2.0 million reduction in general and administrative expense was more than offset by the following cost increases

Operator: [Operator instructions] Our first question comes from Ryan Kintslinger from Alliance Global. Please go ahead, Ryan.

Ryan Kintslinger: Great, thanks so much for taking my questions, guys. In late 2020 and early ’21, there were a number of states that legalized adult use for medical cannabis. Which of these states have you been most and least successful within your seed to sale tracking?

Jessica Billingsley: Hi Brian, good morning. Jessica here. I’ll take first crack at that answer. I think it’s more a question of how are the markets proceeding with opening, so in some of those states, what we’ve seen are just the existing medical operators being licensed to operate, and we haven’t seen a ton of expansion potential or new business. In other states, we’ve seen new licenses issued and really the preparation for expansion market opportunities, so it’s a bit of a mixed bag. I will say that in general, we have not seen a ton of new market expansion from that flood of new states to date, although there are some that are still, I guess I just would say still on the horizon, and maybe point out New York, New Jersey as markets that we really expected to see come into play quite a bit earlier this year. But we are still--they’re in a licensing process, issuing licenses, preparing to really open that market and expand, and we do expect to see some outcome from that in the back half of the year.

Ryan Kintslinger: Great, and then just on the bookings, is that in net bookings you talked about some customers pulling back on some of the modules, I take, or services, so did you actually book more business gross and then you offset that with anything that was reversed, or do I have that incorrect?

Jessica Billingsley: No, that’s a great question. We do take the bookings for anyone who’s renegotiated, so that as we look at our bookings numbers added together as a net, that we are--we would take that as a de-booking rather--depending on the time frame as they haven’t yet started their on-boarding, rather than as a--just the way we look at it internally rather than as churn. Some of that number is a de-booking, although I do want to say the team was signaling towards the end of Q1 that Q2 was going to be a lighter quarter, and it certainly was. The team has signaled that, hey, this is--this was kind of the end of Q1, hey, it looks like Q2 is going to be light, we still feel really optimistic about the back half of the year, and I would say that that’s something that is still holding true.

Ryan Kintslinger: Yes, I was going to ask, do you think the whole second half of the year in terms of bookings will keep up that kind of trend, given everyone, including your industry, is dealing with a weaker economy? Then where do you see the greatest opportunity for near term bookings and revenue growth - is it by state, is it by module? Where do you see that opportunity?

Jessica Billingsley: We continue to see a huge opportunity in organic growth just from our existing client base into our more enterprise solutions, and certainly that demand has continued. Demand has continued--that’s where we’re really seeing--well, and I should temper that because we’re also seeing a real uptick in interest in our MJ platform retail offering in particular, so I would say that the two most--the two biggest opportunities are some real demand for our MJ platform with our MJ retail app, we’re starting to really see that accelerate, and then also at both non-existing customers, right, so the one who may be using something else and is ready to upgrade to enterprise, and certainly also from our existing small and midsized client base, folks who are ready to upgrade into some enterprise systems, and they’re really looking at that in a really careful way. As I mentioned in my prepared remarks and as you noted, there is a real focus and a concern on spending right now among our client base, and people implement software because there’s an ROI to it, and that can be done prudently and module by module, where they start with the back end financials and then start to implement each of the modules for moving into some more enterprise systems, and we’re really seeing quite a lot of interest in that, as well as I mentioned a good surge in interest in our retail offerings.

Ryan Kintslinger: Great. My last question is a two-part one on the cost cuts. You talked about a million dollars in quarterly expense reductions. First, is that year-over-year, or I think it’s more sequential based in the huge drop you had from last year. But my second question is when you talk about a million, I take it that doesn’t include the reduction or the lack thereof that $800,000 of financing charges, half a million dollars from the closure of the Las Vegas office, and your $0.3 million from severance, so when I add all that together, it’s more like $2.1 million, I take it sequentially. I want to make sure I have that right.

Jessica Billingsley: Dean, do you want to take that one?

Dean Ditto: Yes, sure. Hello Brian. Yes, so the way we’ve been looking at it is really on a run rate basis, so to your point with those one-time events, we’re thinking in our projections more on a run rate. Really, where we’ve seen the cost cuts is in labor, and we’ve been the labor cost stabilize, which has reduced our monthly cash burn by approximately 500 a month. We’re also taking a very close look at the services that the company consumes internally to identify additional cost reductions, and right now our projections indicate that our burn rate will drop to neutral and potentially move into a cash flow positive situation on our operations run rate in the 12 to 15 month range. That’s kind of how we are thinking about it. I know with the one-time costs you have to kind of take those out of the mix, but we’re really focused on the operational run rate.

Ryan Kintslinger: Right. That’s helpful, thank you so much.

Operator: Our next question comes from Ray Rasa [ph]. Please go ahead, Ray.

Ray Rasa: Thank you for the information today. A question getting back to your marketing strategy. What resources have you devoted to acquiring new contractual relationships in terms of boots on the ground, and also, you had New York and New Jersey with recreational dispensaries going live daily, have you been able to secure contracts in those states?

Jessica Billingsley: Hi Ray, good morning. We generally employ a hybrid boots on the ground strategy, so although we have had a few folks in New York, New Jersey area really hitting the streets, especially when there’s been some events around, we have not seen a ton of new business. I just want to note part of what that is, is we have not--the market has not expanded as rapidly, and I hear you saying new every day - I think that we’re seeing a lot of really, really, really micro small operations start to open and some that may or may not be fully licensed, which sometimes we see in new markets. We do have a very robust pipeline of applicants and licensees in the northeast, New York, New Jersey area, and we do feel that we’re going to have some good, meaningful activity there in the back half of the year. Of course, we’ve had some business to date, but it’s not been the wave that we had thought we might see earlier this year.

Ray Rasa: But you do approach folks like Zen Leaf, that are multi-state, multi-location operators? How is the transactional pricing received as these dispensaries grow? Is it eroding their margins or is it more of a partnership approach to growth?

Jessica Billingsley: When we look at our--first, great question. The way that we do--the way that we structure our pricing, we price based on functional module and then additional pieces of functionality, user base, some platform access fees, and those are all at least annual contracts. We certainly--I’d have to check Salesforce to tell you if the specific operator that you mentioned is someone with whom we’ve had conversations - I would guess that answer is probably yes, but I can’t tell you that answer without double-checking with our sales team or with our system. But the conversation is very much a partnership approach, and I think what’s been so appealing about our systems in general is that we grow with our clients as our clients grow. We generally do not--and we’re not very competitive at the very, very lowest end of the--with the smallest mom and pop delivery or pop-up retail operators. We don’t do month-to-month pricing, for instance, and there are options out there for some folks that are just month to month. We do really take that partnership approach, look for at least an annual contract with our clients, and look - I mentioned already that good software provides an ROI, and software that’s doing its job provides quite a bit more value than it costs, so it may be a little bit more expensive than these very lowest and compliance-only systems, but what you get in exchange for that are very robust reporting, the comfort of knowing that our compliance is going to be best-in-class, and we certainly have historically done extremely well, I would say kind of in the upper end of SMB and midsized business, which is what we see in most markets as they’re emerging. We see a lot of really small operators open first and then we start to see the more midsized--you know, upper end of SMB, midsized and enterprise open. Okay, so anyway, we stand by our partnership approach and the value we bring.

Operator: At this time, there are no further questions. I would like to turn the call back to Jessica for closing remarks.

Jessica Billingsley: 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 enterprise cannabis businesses and solving with technology the growing demand for increased supply chain transparency among consumers and governments. We thank you for your interest in Akerna and we look forward to sharing our progress with you as we move forward.

Operator: This concludes today’s conference call. Thank you for attending.