Earnings Transcript for KERNW - Q4 Fiscal Year 2021

Operator: Good morning and welcome to Akerna’s Fourth Quarter and Full Year 2021 Financial Results Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Peter Salsberg [ph], Investor Relations for Akerna. Please go ahead.

Unidentified Company Representative: Thank you and welcome to today’s fourth quarter ended December 31, 2021 conference call. On the call today are Jessica Billingsley, CEO and Chairman of Akerna; and John Fowle, 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 Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made. 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.

Jessica Billingsley: Good morning everyone. Thank you for joining us today. Today we reported our fourth quarter and full year financial results for 2021 and I'm pleased to say we posted another year of solid top line growth, achieved improvement in gross margin, and closed two important acquisitions that boost our capabilities in the enterprise market. We delivered software revenue growth of 59% for the year with total growth of 49%. We improved our adjusted EBITDA loss by 32% year-over-year and our revenue run rate is in excess of 25 million today. John will cover the specifics of our financial in his remarks shortly. We continued to develop and acquire connecting technologies to provide real value to our clients and to drive our future growth. Our growth drivers remain intact and largely unchanged since our Q3 report in which we noted the inevitable opening of new markets, continued consolidation of the industry, new regulations, and ultimately legalization of the U.S. Federal Level. Akerna has been at the forefront of preparing for these growth drivers. At the heart of every decision we make as your Executive Management Team if this question, does this provide value to the cannabis industry of tomorrow. We are committed to being the best offer solution available to serve both the cannabis industry of today and of tomorrow accounting for every level of government regulations in every point in the supply chain. We intend to expand and solidify our position as the leading enterprise solution for the cannabis industry and execute a plan to deliver economic, social, and other business value. There are three essential ways you can measure our success in creating value; the metrics we use and report, the strategic partnerships we cultivate and announce, and the way we structure our product offering to simplify the complexity of the industry. Let's start with metrics. The primary drivers of long term value in our business includes the key performance indicators; committed annual recurring revenue, BARR, growth in bookings, and growth in client transaction. I'll clarify what each of these metrics mean, why they are important, and how we are performing. Most of our revenue today is comprised of the prescription revenue. As a result, most important metric we tracked to measure our present success is our total CRR or the total amount of contracted recurring revenue for which clients have signed contracts. Our CRR was 20.9 million as of December 31, 2021 which represents a 51% increase year-over-year. Our growth in bookings and growth in transaction metrics are both leading indicators of the future value we are building in the business. Akerna’s reported bookings represents the dollar amount of new science software contracts, the value of which will be recognized over the life of the contract. We consider growth in bookings to be a near-term leading indicator of our performance. Our Q4 software bookings were 1.5 million, a record for Akerna and more than a 50% increase over prior quarters indicating increasing growth. Turning to our client transaction growth, we can see they are the industry leaders of tomorrow. Collectively, both our transaction dollar amount and transaction volume consistently grow between 25% and 50% year-over-year which has held true for every quarter since we began reporting our client transaction. These clients are scaling in two ways, expansion through acquisitions during the overall consolidation of the market and same facility growth, for example more consumers are visiting a given retailer dispensary and they're also repeating their visits more frequently. These numbers demonstrate that more of the industry is running on Akerna. We believe transaction growth is the single most important long term leading indicator of our true market share in addition to providing a future revenue stream once regulatory changes bring opportunities to monetize transaction volume through retail and wholesale payment opportunities. The next way we create long term value is through our strategic partnerships such as those with SAP, Microsoft, Oracle NetSuite and Delmont [ph] which enable us to leverage a pool of shared resources to help our clients solve their problems of today and tomorrow. To illustrate how quickly these strategic partnerships can evolve to provide additional value as the industry grows, let's look at our partnership with Hyper, an omnichannel digital payment and compliance provider for the cannabis industry. This partnership stemmed from our shared understanding that the cannabis industry of today faces a major challenge when it comes to payment. With non-compliant payment solutions such as the so called cashless ATM, taking advantage of cannabis stores across the U.S., securing this partnership with Hyper enables retailers to complete payment in a compliant manner. Compliant pin debit solutions such as Hyper are gaining mainstream popularity especially among independent operators. We expect Hyper Solution to continue to be a valuable payment solution offering for Akerna’s post federal legalization. Lastly, we continued to build a product portfolio that provides value to the industry of today while ensuring relevant and a deep and wide mouth tomorrow and post federal legalization. When architecting our ecosystem, we took care to use an approach that would not only address the needs of the small medium sized business segments but also those of the growing enterprise market. This decision allows us to grow with our clients as they scaled from our start up business solution into our larger business offering. We focus on providing the network that connects application with solution for compliance, payments, and integration. This structure enables our clients to custom select the ecosystem connected suite of products and services wait for them at this point in their growth journey. This ability to customize becomes increasingly important as companies grow in complexity. Larger companies require tailored solutions that address needs specific to their organization and workflow. The predefined one size fits all regional compliance only solution that suffice for smaller businesses just getting started can no longer be justified as these businesses scale. Instead larger companies must evaluate their technology solutions based on their return on investment gains by having [indiscernible] reporting and analytics and by knowing their compliance needs are met today in each market in which they operate as well as any to which they might wish to expand. As an example, a large multi-state operator might contract with us for our enterprise cultivation and manufacturing module, our midmarket retail solutions with e-commerce and loyalty features and their preferred back end financial solutions. For this example, let us assume they choose the most popular mainstream tax and financial planning solution Microsoft. This client can then choose from a suite of other products connected to our ecosystem to provide additional features and functionalities. Perhaps they will add payment, a learning management system, route planning, or menu advertising from our ecosystem partners. Across all our products and services we were equipped to serve operators across all verticals and in every phase of their growth cycle. Large regulatory agencies and brands looking to expand their market share. The data is proving the success of this strategy. Our enterprise business is our focus and this line of business is growing. In closing we are very excited about the many value creation opportunities ahead and the business we have built to leverage the upcoming waves of growth. Our current, near-term and long-term leading indicators all indicate good progress and positive momentum heading into 2022 and we believe we have secured and continue to secure the right strategic partnerships for the business while we have designed our systems to solve some of our client’s biggest challenges by reducing their complexity. All 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 as the path unfolds in front of us. Now I will hand our call over to John who will take us through the details of our financial results. John, please take it from here.

John Fowle: Thanks Jessica. This morning I'll provide an overview of our financial results and key business metrics for the fourth quarter and full year ended December 31, 2021. As a reminder, these results are discussed in further detail in our Form 10-K which will be filed shortly with the SAP. Financial results reported today are preliminary. Final financial results and other disclosures will be reported in our quarterly report on Form 10-K 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. Acquisitions continue to drive our revenue growth as we reported another quarterly record of 6.6 million in total revenue up 61% from the prior year revenue and up 29% from prior quarter revenue. Drilling into the highest growth area for Akerna, software revenue increased to 6.2 million up 80% from prior year software revenue and up 36% from prior quarter software revenue. Growth in the quarter was primarily a function of strong performance from our October acquisition of 365 Cannabis which along with Viridian Sciences another 2021 acquisition forms our enterprise business unit. We continue to invest in our technology platform and we added further capabilities and functionality to deliver more value to the customer. 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 24% compared to prior year while consolidation continues with many of our larger clients significantly increasing our footprint. Our average B2B deal size has also increased by 15% year-over-year. B2B transactions track in our system increased by 23% year-over-year and transaction volume was up 48% year-over-year while retail order spend was up 42% against the same period in 2020. Now I will review the financial results for the year. As a reminder some of the metrics are non-GAAP. A reconciliation of GAAP to non-GAAP financial 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 year ended December 31, 2021 contained in our Form 10-K to be filed with the SEC shortly. Total revenue increased to approximately 21 million up 49% compared to prior year revenue of approximately 14 million driven largely by accelerating software growth. Software revenue of 19 million was up 59% for the year and represented 92% of total revenue compared to 12 million and 86% of total revenue last year. The bulk of the growth was from the acquisition of 365 Cannabis and Viridian Sciences as well as growth in revenue from our data and partnership initiative. We currently have approximately 900,000 ARR backlog pending go live. Consulting revenue was down 13% for the year to approximately 1.5 million from 1.7 million last year. Consulting revenue was 7% and 13% of total revenue for 2021 and 2020 respectively. Due to the nature of consulting revenue, our dependence on emerging market activity as well as the ongoing academic as a driver of demand, the percentage of consulting revenue over total revenue has varied from period to period depending on whether state legislation has expanded to allow new market 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 then some emerging states return to more aggressive licensing programs. The gross profit increased to 12.7 million for the year ended December 31, 2021 from 7.6 million for the prior year, an increase to 5.1 million or 66%. Gross margin increased to 61% for the year end of December 31, 2021 from 55% for the year ended December 31, 2020. This improvement in gross margin was primarily due to operating synergies realized from our acquired assets, our ongoing initiatives to drive operating efficiencies, and acquiring additional B2B customers which have higher gross margins. We will continue to focus on increasing our subscription gross margin over time through ongoing investments in automation. Moving to operating expenses, total operating expenses increased 34% to 45.9 million compared to 34.3 million prior year. This was a result of a number of non-cash non-recurring items that I will discuss shortly. Total non-GAAP operating expenses increased 7% to 20.6 million compared to 19.3 million last year. We noted that our current year operating expenses include the addition of the 2021 acquisitions of Viridian Sciences and 365 Cannabis. Our non-GAAP operating expenses as a percentage of revenue improved 28% year-over-year as we continued to build scale and drive operating efficiencies across the business. Non-GAAP product development expense increased 900,000 to 5.4 million or 19% primarily due to the acquisitions mentioned previously. Labor cost increased 1.5 million or 44% year-over-year. This was offset by declines in contractor expenses of 700,000 and software and technology expenses of 300,000. We continue to drive efficiencies and product development through better optimization of non-labor costs. Non-GAAP sales and marketing expense increase 900,000 to 8.6 million or 12% primarily due to the acquisitions mentioned previously. Labor costs increased 1 million or 18% year-over-year offset by small declines in other areas, as we continue to improve the sales efficiency. Non-GAAP general and administrative expenses decreased 400,000 to 6.6 million or 6%. Labor expenses decreased 300,000 or 11% as we realized cost saving initiatives. Rent expense decreased 700,000 as we exited a long-term offset lease. These decreases were offset by increases in professional fees related to legal, tax, and audit of approximately 500,000 and increases in insurance premium of approximately 150,000. Adjusted EBITDA improved 32% to negative 7.9 million compared to negative 11.7 million last year. Adjusted EBITDA as a percentage of revenue improved 54% compared to last year. The improvement in adjusted EBITDA and adjusted EBITDA as a percentage of revenue was primarily due to higher sales, better operating efficiency as we have discussed previously. We believe adjusted EBITDA when considered with the financial statements, determined in accordance with U.S. GAAP is helpful to investors in understanding and comparing our performance. On a U.S. GAAP basis our operating loss increased 24% for the year to approximately 33.4 million from 26.8 million last year. While revenue was up 6.8 million or 49% compared to prior year, the increase in operating loss was a result of a number of non-cash, non-recurring charges. The appreciation and amortization was 5.7 million, an increase of 2.5 million, primarily a result of acquisitions. We recorded impairment expense of 14.4 million during the year ended December 31, 2021, an increase of 7.5 million compared to prior year, primarily due to a continued decline in market valuation and a flattening in the operating results of our non-enterprise reporting unit compared to acquisition assumption. The recorded restructuring charges of approximately 1.9 million was related to our lease termination. These increases were offset by declines in financing and acquisition related expenses of approximately 3.6 million. Turning to key figures from our balance sheet and cash flow statement. Our cash and restricted cash was 14.4 million as of December 31, 2021, a 3.9 million decrease from 18.3 million prior year. Net cash used in operating activities was 7.9 million, an improvement of 54% compared to prior year. Capitalized software increased to 5.5 million or 43% compared to prior year as we continue to invest in our technology stack. We recorded a liability of 6.3 million of contingent consideration related to our acquisition. That can be settled in cash or shares upon the achievement of certain revenue targets. Deferred revenue increased to 3.3 million or up 320% from prior year. This was a result of the acquisitions of Viridian Sciences and 365 Cannabis. Given the profile of the enterprise client, most of the subscription revenues was received in advance of the quarter or year. Gross debt as of December 31, 2021 was 20 million. As we noted on last quarter's call in October of 2021, we announced we entered into a securities purchase agreement for a 20 million convertible debt financing with existing investors who held the company's then outstanding convertible notes. Net proceeds from that offering were approximately 14.6 million, which includes deductions for the original issue discount, the payment of approximately 3.3 million of outstanding amounts on the prior notes, and payment of expenses. We continue to be prudent with our spending levels and we have maintained a healthy cash position to manage the business. We believe cash on hand and access to the capital markets positions us well to execute on our strategy, which is a significant advantage over many of our competitors. The narrative remains largely the same here, we are the leader in a large market that is still early to adopt compliance automation technology. We've made some great addition to the platform that can accommodate clients of any size and the industry's consolidation. The unpredictable nature of the regulatory environment makes it a challenge for all participants in our sector and we continue to react and respond with products that provide the compliant automation required and increase the value we are able to deliver to clients. We continue to invest in initiatives that allow us to win across all segments of the market, including key investments that drive significant value under federal legalization. We believe we are sitting well positioned to continue building this company into the leader of tomorrow. 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: Thank you. [Operator Instructions]. Our first question comes from the line of Colin Rusch with Oppenheimer & Company. Please proceed with your question.

Colin Rusch: Hi, thanks so much. Could you talk a little bit about the rate of organic growth and ARR and investments that you're making in driving that on go forward basis?

Jessica Billingsley: Sure. Good morning, Colin. So I think it's important to think about the market conditions in 2021. There were little to no new markets and we saw quite a wave of consolidation in the industry which we had predicted. And the way that we had prepared for that wave of consolidation was ensuring that we had enterprise offerings to move our SMB clients into, as they scaled as they consolidated. And I think importantly, as I shared in my prepared remarks, we've added more transactions running on Akerna. We've maintained our client base while adding two enterprise acquisitions at attractive valuations, which as I just noted we see is critical to our future growth. So we can mine that existing client base into up sells and cross sales and our enterprise offerings as our clients continue to scale. Now, looking ahead to growth and expansion opportunities this year in 2022, there are a number of new states with licensed deadlines now for this year and potential to open for meaningful software business. And we'll certainly be tracking that ability to really scale into emerging markets for organic growth, as well as organic growth through consolidation of our existing clients and moving them into our enterprise offerings.

Colin Rusch: That's super helpful, thank you. And then, looking at industry consolidation, can you talk about your -- how is that impacting your ability to go up the value curve and extract a bit more value from these clients as you see some of this consolidate into some larger players?

Jessica Billingsley: That's a great question, too. So we had shared in our Q3 earnings remarks, that we have roughly 40% of public cannabis companies are clients of ours in some way, shape or form. And so we're really pursuing a land and expand model there, and we had shared a couple of anecdotal examples of clients that are in process, they've signed with us, they haven't onboarded, or they've done a big consolidation and haven't yet signed with us for that new business, but we're the incumbent and most likely to win it. And so I think it's just, as we think about how those waves of consolidation and growth are going to go for us and moving into those enterprise offerings, we're going to see the consolidation happen and then we're going to see some type of a rollout over time into our solutions. And it's partly why we are continuing to share those transaction metrics really to share that we demonstrate that we are owning that client base of the future. Adding the two acquisitions that we added this past year Viridian and 365, both have been critical in being able to have some of those expansion offerings, particularly in the financial side of things. So many times those clients will start with financials and then they will move into a full implementation across their supply chain. And when I say their supply chain, I'm talking about cultivation, manufacturing, distribution, retail.

Colin Rusch: That's super helpful. Thank you so much.

Jessica Billingsley: Thank you.

Operator: Thank you. Our next question comes from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.

Brian Kinstlinger: Great. Thanks so much. Nice to see the pickup in bookings. Can you add some details regarding the bookings, did it lean towards enterprise data analytics, and what was customer churn in 2021?

Jessica Billingsley: Sure. So, I will take the bookings and then I know John, I think we're sharing percentages on churn. Well, I'll flip to you for that. Good morning, Brian. For the bookings number, we don't actually include our aggregate data product in that number that we're reporting. We do include, of course the MJ Analytics that I think you're referring to there. The vast majority of that uptick is proving success of driving our clients into our enterprise offerings and that enterprise business. So, we're really cautiously optimistic about seeing that trend in increased bookings continue as we're continuing to mine our client base into those enterprise offerings. And then John, do you want to take what we share in terms of churn, I know we share year-over-year improvement there.

John Fowle: Yeah Brian, good morning. So I think in our prepared remarks we talked about how churn improved 24% year-over-year. And I think that, for us is continued investment the platform, really the maturation of our customer base. I think as we talk a lot about the industry consolidation, you're seeing more of our customers really understand the power of software and the value of software and so are happy to see that number and those retention metrics improve, certainly against 2021. What also helped the number were the Viridian Sciences and 365 Cannabis products, keep in mind, being SAP and Microsoft products very, very sticky infrastructure, very large, robust software systems. So they tend to have really strong customer retention metrics and that's actually helping to improve our own metrics and I think we'll continue to see that trend in the future.

Brian Kinstlinger: Great. And then on the expense side, it looks like you had some incremental losses from the acquisitions. Are there cost synergies you can achieve and how do you see the quarterly adjusted EBITDA loss trending from the $3 million in the fourth quarter over the next few quarters?

John Fowle: Yeah, so I think, we knew going into this quarter with the acquisition of 365, this is the largest acquisition to date that we've done and it represents almost half or at least 40% of our revenue today. We expected there to be some costs related to driving the integration of the two businesses. So certainly here in the quarter we saw an uptick in that. But I think going forward, most importantly as we look ahead, I think we'll return to that trend of improving our adjusted EBITDA for time. We've done a great job of that the prior six or seven quarters sequentially improving that adjusted EBITDA every quarter. Certainly this one, here in the fourth quarter, we took a step back. But I think as we look ahead to Q2 or sorry, Q1 of this year, we should see that improvement really get back to what we would consider to be more normalized for this business and then continue to invest going forward. And as Jessica mentioned with the growth in enterprise, and the way that platform sits relative to this consolidating market, I think we could see some nice revenue growth there that'll certainly help improve our adjusted EBITDA.

Brian Kinstlinger: Great. Last one for Jessica, in terms of lease data, there's been four statewide government contracts of origins, November that have gone to competitors. So do you plan to invest more in this solution to improve your competitive position or is it time to deploy capital elsewhere, faster growing opportunities like enterprise and just milk what you have on the government side?

Jessica Billingsley: Good strategic question there. So importantly, we do see the B2B opportunity as our best long term growth opportunity for us. And especially, as these businesses continue to scale, as the industry scales, and as we've really competitively differentiated ourselves in having the only connections to major tax and financial solutions. And that's reflected in the lion share of our revenue today and of course, much of our strategic focus. We -- as far as lease data goes, we do have a stable team delivering on those existing contracts and that stable team will continue to bid new RFPs. And the technology is built, there's a low incremental cost to continue to bid on these contracts and they are a game of numbers is the truth. And we remain optimistic at our prospects of adding to this line of business this year as we believe there are a number of new RFPs that are coming up.

Brian Kinstlinger: Great. Thank you.

Jessica Billingsley: Sure thing.

Operator: Thank you. Our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets. Please proceed with your question.

Eric Martinuzzi: Yeah. I wanted to talk about the upcoming or I guess clearly the court of it we're pretty close to buttoning up here. Given the success that you had with the new business bookings in Q4 and starting from that Q4 revenue, I'm not looking for a specific number for Q1, but do we expect to be up sequentially Q1 versus Q4 on the revenue?

Jessica Billingsley: I think it's important to note and I'll let John maybe answer specifics there. Good morning, Eric. It is important to note that most of those bookings as we just mentioned are in the enterprise portion of our business. And that generally does have a little bit longer implementation cycle. We'll be continuing to report bookings. Of course, our deferred revenue is reported in our filings and then we'll look to see some incremental progress, but I'm expecting that we'll see the bulk of the trend in adding this increase in bookings come just a little bit later in the year, as most of them are enterprise. John, do you want to add to that?

John Fowle: Yeah, no, I would agree, that was great. Enterprise, there are significantly larger contracts, significantly longer term contracts, but the go live and the implementation process is a lot longer. And so I think, the success we had in Q4 will probably start to see some of that trickle in, in Q2 of this year.

Eric Martinuzzi: Yeah. Got it. Okay. And then on the expense side, obviously, we're -- you typically would drive some efficiencies from -- at that higher scale, but I also know 365 Cannabis is something that's not necessarily standalone, but you don't get as much synergies from that as say, buying another platform that we're operating on let's say, a prior enterprise platform like kind of a Viridian Sciences 2.0. But as far as the operating expenses go, I'm looking at the non-GAAP expenses in Q4 of around 6.8 million. Do we see any synergies there for the coming quarter, anything that we should call out as far as maybe, one time or seasonal expenses that we should layer in to Q1 versus that 6.8 million non-GAAP number in Q4?

John Fowle: Yeah. I think it's really tough to do quarterly comparisons here. As you mentioned, Eric, with the size and scale that 365 is at acquisition, when you -- like you said, when you bring in smaller acquisitions like we did, for instance, in 2020 with Trellis Solutions, that was a really small tuck in acquisition where cost synergies were almost realized from day one. We've talked a lot about the enterprise, the enterprise business, both on our Microsoft and SAP platforms sort of being the future growth areas. These are substantial businesses that require a lot of integration with. I think with -- so it's difficult in the fourth quarter to compare because you're sort of comparing, you're not really comparing apples to apples. Sort of on a normalized basis, our expenses were up just a few hundred thousand in the fourth quarter and that was really just primarily a result of some marketing spend in the Q4 period for our annual industry conference. Aside from that, I would say expenses were sort of flat on a non, sort of acquired basis. But I think going forward, we're going to realize cost synergies, maybe a little bit in labor but certainly early on in more of the hosting and infrastructure cost, that's a big expense for software companies that we tend to share right now. We've got a huge initiative here in the first quarter to drive that. I think we're starting to see some of that materialize already, and we'll continue to focus on that throughout Q1 and Q2 of this year. But, overall as we've shared in every one of our calls is we are very prudent with our spending, we're making sure we're very, very closely monitoring how we're spending. And as we reported in our prepared remarks, our percentage, our operating expense as a percentage of revenue are up or improved 28% year-over-year. And so we're really focused on driving that scale through the organization. I think we'll see that really pick up here in Q1 and Q2.

Eric Martinuzzi: Okay. And then lastly, while it is satisfying to see the unit and sales transactions numbers rise, that's not translating into top line for -- top line improvement for Akerna. What should we be looking for to see that kind of organic growth rate, what are the big drivers for you guys in 2022 that you're trying to accomplish aside from any inorganic activities?

Jessica Billingsley: I think it's maybe important to talk about some of the new emerging markets. Of course, we feel very good about our ability and our positioning, our strategic positioning to continue to win this consolidating enterprise business to incrementally add and of course, to upsell, cross sell minor existing client base. However, there are also a number of new markets that at least licensed deadlines and some license issuing that we are tracking and watching very carefully because of course, new emerging markets are going to create even more opportunities for us in 2022. New Jersey began accepting applications for dispensaries last week. Alabama is going to accept applications September 1st. So probably not a ton in this year, but nice to see that deadline. New Mexico, has open licenses right now. They'll begin for operations some time in Q2. We've got Mississippi, which is now moving forward, South Dakota, New York's applications are open, there's, some movement in Michigan, Arizona, Connecticut. So, actually quite lot that we'll be tracking. Of course we won't expect to see every single one of those markets open for software opportunity. But certainly a couple of those big markets will be meaningful for Akerna. And then just to note that, for the upcoming 2022 U.S. midterm elections, there's another handful of states that are all working towards adult use cannabis initiatives on their ballots, and then a couple states, working toward medical cannabis. All of that is big momentum for us, because our biggest growth drivers are new market expansion, consolidation in the industry, and then of course, U.S. Federal movement.

Eric Martinuzzi: Got it. Thanks for taking my questions.

Jessica Billingsley: Thank you.

Operator: Thank you. [Operator Instructions]. Our next question comes from the line of Scott Buck with H.C. Wainwright. Please proceed with your question.

Scott Buck: Hi, good morning guys. I'm curious. I hope I didn't miss it, John and Jessica, did you mention what 365 revenue was for the quarter?

Jessica Billingsley: John, did we break that out.

John Fowle: Yeah, we did break that out separately but you could sort of assume they're probably in that 2 plus, $2 million run rate today. We've actually filed audited financials for them as part of the acquisition process so that'll give you a sense of sort of what their trends have been historically, and then sort of what they did here up and through the acquisition.

Scott Buck: Okay. That's helpful. I appreciate that, John. And then the sequential decline in gross margin is that due to mix from the addition of 365 and is that something that we should see kind of walk higher here over the next three or four quarters?

John Fowle: I would say so. One thing that is important to note is the enterprise business unit, our SAP and Microsoft product offerings are incredibly robust and their sort of margin profile when they get into the mid to upper 60s and low 70s is probably at a higher revenue volume than would be for our legacy business. And so yeah, that business sort of took a -- had a little bit of an impact here in the fourth quarter. But as they start to grow their business, as they get their scale up and running, I would expect them to be back into the upper 60s, mid to upper 60s here in short order. But again, just the size and scale of that sort of business and that product offering, their scale, where they really start to hit their scale is going to be a higher revenue tick. And so we're certainly pushing in that direction and certainly with -- as Jessica shared with all of the consolidation in the industry and the demand for more robust enterprise level solution, we think we can execute on that pretty, pretty rapidly.

Scott Buck: Okay, thanks. That's very good color. And then last one for me, just on sales and marketing, obviously a pretty meaningful sequential uptick. How should we think about that line moving forward, is this kind of the new run rate and if so, I am curious how those dollars are being spent?

John Fowle: So really great question, Scott, follow up to kind of the first comment. The business model of enterprise -- while we're providing sort of the same products and services and cannabis compliance software, the majority of their expenses fall, I would say into the, what we would think of as account management and customer support and, and so forth. And so the majority of the growth in sales and marketing expense in the period was really just specific to our enterprise product offerings. So a way to think about it going forward is that, that uptick quarter-to-quarter is a reflection of 365. And that's probably sort of our normalized state going forward. There was no new initiatives or outside marketing spender conferences. It is sort of just where that sort of business unit and some of those labor costs sit within the framework of the income statement.

Scott Buck: Alright, that's perfect. I appreciate the time guys. Thank you very much.

Jessica Billingsley: Thank you.

Operator: Thank you, ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Ms. Billingsley for any final comments.

Jessica Billingsley: Thank 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 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: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.