Earnings Transcript for VERB - Q3 Fiscal Year 2022

Operator: Good afternoon, and welcome to the Third Quarter 2022 Financial Results Conference Call for Verb Technology Company, Inc. At this time, all participants are in a listen-only mode. Pease be advised, the call is being recorded at the company's request. On our call today are Rory J. Cutaia, CEO, and Salman Khan, CFO. Before we begin, I'd like to remind everyone that statements made during this conference call will include forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, which involves risks and uncertainties that can cause actual results to differ materially. Forward-looking statements speak only as of the date they are made, except as required by law as the underlying facts and circumstances may change. Verb Technology Company disclaims any obligation to update these forward-looking statements as well as those contained in the company's current and subsequent filings with the SEC. I would now like to turn the call over to Rory J. Cutaia, CEO. Rory, please go ahead.

Rory Cutaia: Thank you, moderator, and thanks to everyone for joining us today for our Q3 2022 financial results and business update conference call. So last year at this time, we were all looking forward with a certain sense of optimism that we might finally be emerging from the devastating effects of the pandemic on our lives and certainly on many businesses. Then began 2022, and with it the beginning of an economic meltdown that by many accounts has yet to find a bottom. I’m honestly not sure it’s possible to overstate the challenges small public companies like us faced this year and continue to face. One need not be an economist to recognize that as the year progressed, the economy rapidly worsened, inflation drove a series of Fed rate increases, and with no near-term end in sight, the capital markets closed, share prices dropped, market caps were crushed, and business plans, operating budgets, and execution strategies needed to be revamped and revised quickly. It was during this environment that we launched several new SaaS products, and an entirely new and very promising line of business you know as MARKET.live. So today I’d like to discuss our financial results during this period. But first, I’d like to address head on what I believe to be the most important questions our shareholders have had and continue to have about our business, and particularly those that likely have had the greatest impact on our share price. In no particular order as I believe they are all equally important to our shareholders, the top three questions are

Salman Khan: Thank you, Rory, and good afternoon, everyone. I’d like to review our financial performance as reported in our Form 10-Q filed today, November 14, for the third quarter ended September 30, 2022. I may reiterate or provide more color around some of the data points Rory shared with you. The following compares the Company’s results of operations for the third quarter of 2022 with the third quarter of 2021. SaaS recurring subscription revenue, a component of Total digital revenue, was approximately $1.9 million, a modest increase, which as Rory said, virtually flat over the same period last year. Non-SaaS digital revenue was $0.2 million, versus $0.5 million for the same period last year, which was a record quarter for non-SaaS digital revenue. Total digital revenue was $2 million, versus $2.4 million for the same period last year primarily due to the record non-SaaS digital revenue we experienced in that quarter as I just discussed. SaaS recurring subscription revenue as a percentage of total revenue was 85%, compared with 64% for the same period last year, and up from 82% for last quarter. Total Digital Revenue as a percentage of total revenue was 92%, compared with 81% for the same period last year, up from 90% in the second quarter of 2022. Total revenue was $2.2 million, versus $2.9 million for the same period last year, primarily due to the decrease in the low margin non-digital revenue business we continue to exit. Cost of revenue across all products was $0.7 million, an improvement of 32% over the same period last year, and an improvement of 12% over Q2 2022, reflecting planned cost reductions and a continuing shift towards the Company’s digital business, and away from the lower margin non-digital business. Given the cost reductions Rory referenced earlier in his comments, we expect to report further improvements in our SaaS cost of revenue for Q4 and beyond. Gross margin across all products was 66%, an improvement over the 63% for the same period last year, and over the 65% for Q2 2022. Research and development expenses were $1.4 million, as compared to $3.5 million for the same period last year, reflecting an improvement of 61% due to planned cost reductions, and continued improvement of 30% over last quarter for our SaaS business, offset by new expenditures attributable solely to MARKET. General and administrative expenses were $7 million as compared to $6.1 million for the same period last year, reflecting a modest 6% increase over Q2 of 2022, attributable for the most to one-time expenses incurred in connection with Shopfest and the launch of MARKET.live. Modified EBITDA improved by $1.7 million, or 25%, when compared with the same period last year. Modified EBITDA is a non-GAAP measure and I refer you to our press release distributed today for more information and greater specificity around our Modified EBITDA analysis. Now, let me share the financial results for the nine months ended September 30, 2022 in comparison with the same period in 2021. SaaS recurring subscription revenue was $5.8 million, an increase of 19% over the same period last year. Total digital revenue was $6.3 million, an increase of 6% from the same period last year. Total revenue was $7.3 million, a decrease of 7% over the same period last year, attributable in large part to our decision to exit the low margin non-digital business discussed previously. Cost of revenue was $2.5 million, an improvement of 26% over the same period last year, reflecting the impact of planned cost reductions and a shift towards the Company’s digital business and away from the lower margin non-digital business. Research and development expenses were $4.3 million, as compared to $9.6 million for the same period last year, reflecting an improvement of 55% attributable to the planned cost reductions previously discussed. General and administrative expenses were $20.6 million, which actually represents an improvement of $1.1 million, offset for the most part by the one-time costs incurred in connection with Shopfest and the launch of MARKET as discussed previously. Modified EBITDA improved by $4.9 million, or 24%, when compared with the same period last year. Once again, Modified EBITDA is a non-GAAP measure and I refer you to our press release distributed today for more information and greater specificity around our Modified EBITDA analysis. Cash totaled $0.9 million as of September 30, 2022, essentially the same as December 31, 2021. However, the Company added approximately $9.0 million of gross proceeds in cash through a registered direct offering with institutional investors, which resulted in gross proceeds of $4 million on October 25, 2022, and through an unsecured, non-convertible, 9% fixed interest rate promissory note, which resulted in gross proceeds of $5 million on November 7, 2022. I refer you to our Form 10-Q, filed today for complete details around these financings. I’d now like to turn the call back over to the Operator for Q&A.

Operator: Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question will come from Brian Kinstlinger of Alliance Global. Please go ahead.

Brian Kinstlinger: Hi guys. Good evening and thanks for all the details. With the cost cutting you've discussed, is there any impact on your ability to run MARKET festivals? And what's the schedule for such events? And lastly, with the lower marketing budget you described, how does it impact the MARKET, if it's not running MARKET festivals?

Rory Cutaia: It will not impact at all running the MARKET festivals. And as I think I alluded to in my comments a few moments ago, we already have 250 livestream events that have been confirmed and scheduled for the balance of this year through the holiday season. And we don't anticipate any impact on our ability to do that and continue to do that.

Brian Kinstlinger: So you don't see impact, which is okay. I'm just curious, there's no impact to the cost cuts impact of -- in any way, shape or form for that MARKET business is how you see it. Is that right?

Rory Cutaia: I don't anticipate a major impact. Now I will say this, we did cut back our marketing budget. And some of that budget had previously been allocated to bringing in vendors on to MARKET.live. We've launched now the creative program where we believe we'll probably get the most new vendors and hopefully, they'll be bringing in a lot of the shoppers and buyers from their respective followings. The cut in our marketing budget won't have any impact on that at all. But I will say in the spirit of complete transparency, as I've mentioned previously, this is a numbers game. And if we had greater money to expand on marketing, to bring in more vendors and to bring in more shoppers, we would anticipate greater performance. No question about that. But I think at the current levels, I think it would be just fine.

Brian Kinstlinger: Okay. And I realize you said you've only been at this about 100 days. So it's super early. First, I thought the brands were going to do a lot of the marketing themselves and that you, but I'm wondering, and I realize you're building the ecosystem have been demonstrating your KPIs, so more vendors come. When should investors expect this is going to start to scale in terms of revenue? I realize today, it's pretty small, $0.5 million -- $1 million a quarter. And what are the leading indicators that we would see that we expect that to be around the corner.

Salman Khan: I think as we get into the second quarter of next year, which is actually not that far off. One of the indicators that we'll be sharing is the GMV, the gross merchandise value sold on the platform, of which a percentage goes directly to our revenue and actually our bottom line there, since our costs are relatively low. So that's when I think we'll begin to see some of the kinds of information that in addition to, obviously, what I've already shared that investors would be interested in.

Brian Kinstlinger: Okay. And then switching gears to the SaaS business. First, can you just discuss client churn, not necessarily the type where a customer loses sales reps, but instead, the business relationship maybe decides not to use your technology. And then, if you can maybe give an enterprise customer count, if it's relevant in your SaaS business maybe versus a year ago?

Salman Khan: So with respect to churn, there's two ways I think you might look at that. The first is the churn within our customers' own business among their sales reps, and in the direct sales industry, that churn is pretty meaningful. It's probably somewhat greater than most sales-based organizations. And that does impact us, as I mentioned just a little bit ago. And that's with regard to those specific contracts that we have, where we are being paid, not just a base rate from the enterprise itself, but also a percentage of the number of reps on the platform. So, as they lose reps and don't replenish them, that does have an impact on us, and we've seen that happen. As I mentioned a little bit ago, what we've done to address it is recently implemented flat rate pricing, so that -- and that's based upon the average monthly spend that we get -- that our customers make with us, so that it was easy for them to adopt. And that seems to have gone over really well because as I said, they are able to have a more reliable sense of what their SaaS business is going to cost them. And for us, as I said, it's -- it takes the volatility out of it. So, as they may be down for a few months with fewer reps, it doesn't impact us because we're going to stay at that flat rate number. So as we add new customers each month, we'll be adding on top of a pretty good firm base. And I think that removing that volatility is going to make a really big difference for us. Now talking about the other element of churn, which is how many customers do we lose in any particular period of time. I will tell you that our churn rate historically is less than 8%. So where our retention rates are like 92% and above, which is I think, pretty good. I hope that answers your question.

Brian Kinstlinger: Yes, it does. The last question I have is, again, back to the cost cutting, which I think is -- should be well-received. How do we think though that impacts customer acquisition on the SaaS business?

Rory Cutaia: Our pipeline is pretty strong. It's not going to impact anything that we're seeing at least out over the next several months. And look, we'd like to be able to spend a ton more on marketing because we see a direct correlation to the amount that we spend and adds on lead generation. But look, we have to live in the real world. The reality is, the markets are bad. The economy is bad. Access to capital is incredibly restricted and restrained. We have to cut back on everything and give ourselves the runway so that we're not back in the capital markets again. So to say that it's going to have zero impact, it would be disingenuous. And -- but I believe that it's not something material that anyone is going to notice here in the near-term.

Brian Kinstlinger: Great. Thank you.

Rory Cutaia: Sure. Thank you, Brian.

Operator: Your next question comes from Ed Woo of Ascendiant Capital. Please go ahead.

Ed Woo: Yes. As you add more and more sports team, congratulations on that. Are the economics to you guys getting better with each new team?

Rory Cutaia: I think we've now hit that breakpoint where initially, what we were doing is trading services for these teams to allow them to adopt and use the platform and confirm for themselves that it indeed creates enormous value for them. So now we're past that. I think we've got five or six of these teams on now. And with the most recent one, where we now have entree into Major League Baseball and our application is now approved for use by all of those teams. Now I think we turn up the economics on that. So I'm really, really excited about that because for those of you who really don't know how this process works with Major League Baseball, they really have a very tight control on the kinds of things in terms of advertising and marketing that the sports teams are permitted to do. So cracking that and now being approved, I've got great expectations for it.

Ed Woo: Great. And what about international opportunities for international sports team are you guys going to be pursuing that at scale?

Rory Cutaia: We have been in discussions with sports teams throughout Europe. And it's slow. The sales cycle on that is slow. We've actually had some of our sales reps spend a bit of time in Europe meeting with teams directly. So it looks promising, trying to negotiate the best terms, and when we've got something to announce around that, you can count on us sharing that news.

Ed Woo: Great. Thanks for answering my question and I wish you guys good luck.

Rory Cutaia: Thank you very much, Ed.

Operator: [Operator Instructions] Your next question will come from Martin Saltzman of AFM Investments. Please go ahead.

Martin Saltzman: Hey, guys and congratulations on all the great developments you guys are doing. Sympathetic, Rory, to the comments you made about the economy because as we were on your call, Amazon just announced that they're laying off 10,000 people. So that does scare you a bit, especially going into the holidays. Here's a couple of thoughts I had in questions, and I have a lot of people that follow me, and I've had a lot of e-mails and people will call me and ask me questions. One question was how better can you get market out there as a household word. And -- how can we get it out there faster? One of my clients brought this up. He says, "Oh, I see Verb on Facebook. He says, and they have a minimal amount of likes. He says, but if people were to comment the algorithms would change and more and more people would probably take note of it. How do we get that going? And are you in agreement with that?

Rory Cutaia: Well, I think it's hard to disagree with anything that you say, Martin, quite honestly. But with respect to how the algorithms work, I don't purport to be an expert on that. But I believe what you stated is correct. And we do that every day. We have a team and they analyze that, and they analyze the -- how the algorithms are constantly changing and how to get around that to create the greatest level of exposure. But I think to answer the first part of your question, some of it directly, I think that it's inevitable that MARKET.live becomes a household name. As I look forward, I really don't see any reason that, that would have happened. Live streaming and live stream shopping in particular, just over the past six months has become really top of mind in so many different places and so many different news outlets at a far greater rate than I honestly would have expected at this point in time. I mean it was only a few weeks ago, where good more than America of all places, each of the whole segment, telling their viewers that they should seek out livestream shopping platforms for the holiday shopping -- so it's happening. And as people begin to look for livestream shopping platforms, there's really not that many of them out there. Yes, there's a zillion online e-commerce platforms and sites, what there really aren't that many live stream shopping platform. And certainly, at least in my opinion, none have come close to the kind of value proposition that MARKET represents, not only for shoppers but also for sellers. So again, I think it's inevitable that we get there. And I'm going to do everything I can to accelerate that.

Martin Saltzman: I appreciate that. And I like your enthusiasm with that. Now I've been getting calls said nauseam, and I don't know why people want to concentrate on it so much. But I am getting people asking me on the SaaS side of your business, back when maybe the first quarter, you might have talked about Google and how they might integrate just like how Microsoft Outlook did. Can you comment at all on that?

Rory Cutaia: Yes. When we developed the integration with Microsoft Outlook, we're pretty optimistic about it. And based upon that level of optimism and a lot of the development work that we've already done, which is still usable for Gmail. We have put plans in motion in fact, had already begun a fair amount of development work for the integration into Gmail. But as we move forward, we realized that the adoption rates that we thought we would get were not really as great in terms of materializing as we thought they could be. And we realized in order to make that happen, we're going to need to spend quite a bit more money in marketing and promotion. Now, it was a great application. And I think it had great implications. But this is around the time that we were getting ready to really pull the trigger and accelerate our development on market and get it out into commercial use. And to be perfectly honest, we have limited resources. We want to not get into the capital markets and just keep taking money. We want to be very judicious about what we're going to spend money on. And I needed to make a choice. Should I spend more money in promoting and marketing outlook and then presumably Gmail after that? Or, should I cut back on that and focus on what I believe, and certainly what our Board and the rest of our team here believes, that market would be a far greater value proposition, far greater value creation opportunity than both Outlook and Google. So we have to cut back on that and focus accordingly. I hope that answers your question.

Martin Saltzman: Yeah. No, it does. And I respect that. Look, Google is a sexy name, you start saying you're embedded with Google. It does mean a lot, but obviously, you're spending the money, the way you feel it needs to be spent. I have to ask two more things. One here has to do with influencers and creators, okay? And I guess what I'm trying to figure out is, creators are the people who make these products and they have their followings. Are there any influencers that are your courting or that are trying and looking to court you? I mean, have they heard about market?

Rory Cutaia: Of course. Absolutely. And you'll see those beginning this month. So -- and then, as they are getting ready to launch and do their shows, we'll be promoting that. Of course, we are relying pretty extensively on the influencers and creators themselves promoting it. After all, we're choosing them among all those that come in and want to be honest, we're choosing them based upon the size of they're following and their commitment, by the way, which is part of the agreement that they enter into with us. Their commitment that they're going to promote it, a certain number of times a week, to their following, and that's really kind of the big deal. And I think that's something that I think Brian Kinstlinger from AGP sort of alluded to in some of his questions before. Yeah, we are counting very, very heavily on the creators and the influencers and certainly, the retailers to promote this. And thereby, reduce the need for our own marketing budget to promote the growth of market. I think that's a really good point. I'm glad you gave me an opportunity to stress that.

Martin Saltzman: No. Thank you. And this is one that sort of is a newer thing. You have here on your bullet points on your release about this Advisory Group, Alantra and I just started thinking myself, assist you in evaluating strategic opportunities. So I just had a thought, and you could tell me if I'm off base or you can't answer it, what have you. Are you at all thinking about partnerships throughout the world, for instance, okay? Let's say, you partner with somebody to market, market in Europe or Africa, or the Middle East. In other words, just develop strategic partnerships, because maybe it's too hard to do it all yourself, conquer the world yourself. Maybe there's a way to do it, partnerships.

Rory Cutaia: Martin, I'm not sure that I could answer that without running a sale of the rules here. And in any event, it would be premature. So I'm sorry, I can't really provide more information than that. But I would tell you that, we have historically received all kinds of inbound inquiries for partnerships and other kinds of strategic relationships. And some of them, right out of the gate, don't make any sense and they're easy to just dismiss and others require further thought analysis, consultation with the Board and sometimes outside experts. And more recently, there have been -- there's been reason to take some of these things much more seriously. And so doing, bring in people that are experts, far beyond my own expertise and that of our board members or even as an enhancement to our respective expertise in these areas. And so we held what is called a beauty contest, where you have a number of different bankers, come to you and present their services. And we did that. And presentations were made to the Board and the Board selected Alantra, and we've engaged them and they are at work. I can't unfortunately share anything more than that right now, but you know that as soon as I can, I absolutely will.

Martin Saltzman: I understand. And, yes, certainly, you don't want to compromise you or anybody else. I don't think I have any other questions for today. I noticed on your market site your platform, you have the seller list back up there, which is, I think, very important for people to see who is a vendor. I appreciate that. So thank you for doing that and I wish you all the best in the holiday shopping season.

Rory Cutaia: Thank you, Martin. I do want to just respond to that last point you made about the sales thing, because we took that off because we had made some updates to the site and then you're able to go to a different area of the navigation bar and see all of that information. So it wasn't that you couldn't see it. It's just -- I think, we put it where it belongs on other kinds of e-commerce sites, typical. However, we did get a fair amount of feedback about that. And I want to credit our team here that, what you people say and the kinds of comments or criticism that come in, matters to us. We pay attention to it. And we went and put it back, because it seemed to make people more comfortable and happy and we do that. And that's really what we're about here. But thank you again for the good wishes and same to you and yours. And I think that -- do we have any more, no?

Operator: No, sir. There are no other questions.

Rory Cutaia: Okay. I wish everyone well through the holiday season. Obviously, we're all experiencing some difficulties through this crazy, crazy world. And -- but I feel pretty optimistic that we're all going to come through it just fine and all of our expectations, certainly in all hard work and your patience will be rewarded. I really appreciate everyone hanging in there with us. Thank you.

Operator: Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank you all for participating and ask you to please disconnect your lines.