Akerna Corp.
Q1 2020 Earnings Call Transcript

Published: 14 Nov 2019

[Operator:]

Good afternoon, and welcome to Akerna’s First Quarter Fiscal Year 2020 Financial Results Conference Call. Today's call is being recorded. All lines have been placed on mute. [Operator Instructions]At this time, I will like to turn the conference over to Jason Assad with Akerna for introduction and the reading of the Safe Harbor statement. Please go ahead, sir.

[Jason Assad:]

Thank you, and welcome to today’s Q1 fiscal year 2020 conference call. Representing the company today are, Jessica Billingsley, CEO of Akerna; and Ruth Ann Kraemer, Akerna’s CFO, who will be available for questions during the Q&A portion of today's call.Before we begin our formal remarks, I’d like to remind everyone that during this conference call, certain statements will be made that are forward-looking statements 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 the negative versions of such words or expressions are intended to identify forward-looking statements.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 in the forward-looking statements. These risk factors are more fully discussed in Akerna’s filings with the Securities and Exchange Commission.Forward looking statements speak only as of the day they are made. Akerna undertakes no obligations to update or revise any forward looking statements, whether as a result of new information, future events or otherwise, except as required by law.Now, I'd like to turn the call over to Akerna’s CEO, Jessica Billingsley for more in-depth discussion of company’s Q1 financial results and future strategy. Jessica?

[Jessica Billingsley:]

Thanks, Jason. Good afternoon, everyone. Thank you for joining us and welcome to our Q1 fiscal year 2020 earnings conference call. A month and a half ago, we shared our fiscal year 2018 results, and celebrated a landmark year for Akerna. Today, I can tell you, we haven't lost our momentum. In Q1, we continued our success, showing double-digit year-over-year revenue growth. The quarter was marked by a multitude of new platform technology enhancements, strategic partnership and customer engagement that position us for accelerated growth through the balance of fiscal year 2020.I would categorize our business in Q1 fiscal 2020 and two strategic focus areas. First, increasing our share on an emerging enterprise cannabis businesses, which was a multi-state, multi-country businesses that will dominate this potential $20 billion industry and second, building a first to any market technology solution that tracks organic matter, across the entire supply chain from seed to sale and now from seed to consumer, with an interactive consumer product experience.I’d like to say, the cannabis economy runs on Akerna. The seed to sale tracking technology, which we invented 10 years ago, continues to set the standard for technology and supply chain transparency and accountability that consumers and government are demanding more and more, as indicated by some of our key accomplishments in the current fiscal quarter. Like our recent agreement, with two leading enterprise resource planning providers. Through these agreements, we are integrating their tool into MJ Platform, our seed-to-sale cannabis combined platform.With these new partnerships, we can now offer our customers seed-to-sale tracking in cannabis. The compliance tracking required by more states and governments and integrated enterprise resource planning solutions including enterprise class to global accounting and tax reporting.It’s the first time world-class accounting and tax reporting traditional software and seed-to-sale cannabis ERP compliance software has been integrated to help enterprise businesses more efficiently and compliantly address rapid industry growth.For nearly 10 years, we have refined a technology that pinpoints every aspect of every gram of cannabis trapped in our system. The plot of land that is grown on soil nutrients, water and light intake, additional ingredients for manufactured product, when it was shipped out and in what batch and finally, where and when the product was sold and to whom.Businesses and government want to deliver information about a product, source and ingredients. For businesses, this information provides a competitive advantage and would drive to be growing consumer demand for more information. For government with this information, they can assure the public that products are from regulated sources, and meet safety standards. From our perspective, more industries can benefit from how cannabis technology has delivered on supply chain transparency and accountability.After all, in today's data rich world, should not take weeks to identify a contamination source, when the technology exists to trace the stores and complete chain of cost base for a product that has made someone else. Our tracking technology is game changing. In this regard, it spans beyond cannabis and has applications for agriculture and other consumer goods.Our second strategic focus is increasing share among the enterprise campus business. Across any industry, we know businesses spent 37% of their total technology budget on enterprise and IT solution. As we stated, today that represents a more than $500 million market opportunity for Akerna in the cannabis industry alone.Over the next few years, the market opportunity has the potential to grow to over $1 billion. The unique nature of the cannabis industry necessitates tailored solution to meet the regulatory requirements and the supply chain demands of cannabis, which is what we built as MJ Freeway 10 years ago.Continuing see first to market, we scaled back solution to meet the needs of cannabis enterprise businesses. While anecdotally, Akerna's primary competition remains spreadsheets. We believe consolidation among cannabis operators will lead to rapid scaling requiring accelerated adoption of technology and the use of data-driven decision. That spreadsheet cannot work.With this in mind, our strategy continues to position us to capture a growing share of the enterprise market in the cannabis industry. As a technology leader, Akerna will be there innovating to meet the needs of technology and compliance. We intend to remain ahead of the curve, not only to match the incredible growth of the industry, but also to capture more of the available, as yet and captured market. We will continue to work diligently to provide critical data for better decision making, for consumers, businesses and government, delivering essential supply chain data that consumers and government are demanding across more and more of the products they consume and regulate. Accompanying our organic growth, we will continue executing on our targeted acquisition strategy to acquire complementary businesses to build a larger scale and to enhance our considerable growth prospects.Before I turn the call over to Ruth Ann, let me hit on a few other highlights for the quarter ended September 30, 2019, as compared to the quarter ended September 30, 2018. Total revenue increased to $3.2 million from $2.3 million, an increase of 39%. Total MJ Platform revenue increased by 36%. Additionally, MJ Platform revenue from recurring sources grew by 40% over the same period continuing to demonstrate high fast-growth.Our gross profit margin increased to 56% from 54% in the quarter ended September 30, 2018. As of June 30, 2019, we approximately $22.4 million of cash net of restricted balances on our balance sheet.In summary, we are very pleased with what we have achieved to date and we firmly believe our largest opportunities lie ahead. Our continued operational progress helped solidify our position as a leader in cannabis, ERP and government cannabis compliance, and we intend to extend that leadership. We continue to see increased MJ Platform bookings and recurring software revenue, reflecting the growing demand for our technology offering, not only in this emerging, high growth sector, but potentially also in other industries.While we have accomplished a great deal today, we are keenly aware of the work ahead. We look forward to it, because we know our efforts will continue to result in solutions that keep us planted in a leadership position resulting in more first. As a sizable shareholder myself, my goal remain directly aligned with your.While on that topic, I want you to know that none of us here at Akerna are content with our current stock price. We believe our company undervalued. We are and will continue to work diligently towards remedy, the disparity between our results of operation and the market value of our security. Rest assured the primary goal of our entire management team and the Board of Directors is creating value for us all.With that, I will now turn the call over to our CFO, Ruth Ann Kraemer for a review of our financial results for the quarter ended September 30, 2019.

[Ruth Ann Kraemer:]

Thanks, Jessica. Today, I will provide an overview of our financial results and key business metrics for the quarter ended September 30, 2019. These results are discussed in further detail and our Form 10-Q, which was filed today with the SEC, which we encourage you to review.Total revenue increased to approximately $3.2 million for the three months ended September 30, 2019 from approximately $2.3 million for the three months ended September 30, 2018, an increase of approximately $900,000 or 39%. The increase in total revenue was driven primarily by growth achieved in our commercial software business, MJ Platform.In addition to our consulting business, the revenues from our government regulatory software business, Leaf Data Systems had a slight increase as well. Software revenue for the quarter ended September 30th, 2019 increased 23% to $2.3 million compared to $1.9 million for the quarter ended September 30, 2018. Again, this increased primarily reflect continued demand for our commercial software product, MJ Platform. We are optimistic about the year ahead as we entered the current fiscal year with a new Leaf Data System contract in Utah.Service revenue, which includes revenue generated from consulting activities, increased 125% to $800,000 for the quarter ended September 30th, 2019 compared to $400,000 in the quarter ended September 30th, 2018. The result was driven by a higher volume of consulting engagements during the current quarter. We delivered approximately 30 operational license applications on behalf of Missouri-based clients during August 2019 alone and we continue to experience strong demand for our consulting services.Further, we signed and had begun servicing an $894,000 contract with an Illinois-based client for the preparation, completion, and delivery of operational license applications for a portfolio of recreational retail facility.The Illinois Department of Financial and Professional Regulation announced the applications will be accepted by the department starting on December 10th, 2019 and must be submitted by January the second 2nd, 2020.It's important to note consulting services are correlated to state legalization and the allowance of new market entrance or growth of existing markets participant operation. Accordingly, service revenues can vary as a result of this.Our cost of revenue for the quarter ended September 30th, 2019, was approximately $1.4 million, an increase of approximately $300,000 or 31% as compared to cost of revenue for the quarter ended September 30th, 2018 of approximately $1.1 million.The increase compared to the prior period was primarily due to higher direct labor cost of approximately $100,000 associated with providing our consulting service and higher hosting and infrastructure costs that's approximately $100,000 incurred to support our software business.Hosting and infrastructure costs grew from approximately $400,000 to $500,000 increase of approximately $100,000 or 26%, as we continue to increase Amazon Web Services usage as part of the growth of MJ platform.In addition, the cost of revenue from the contract with the State of Utah was approximately $300,000. The total cost of revenue, however, was offset by lower cost of revenue from our government contract with the State of Pennsylvania.Overall, our gross profit grew to 56% for the quarter ended September 30th, 2019, compared to 54% for the quarter ended September 30th, 2018. Operating expenses were $4.7 million for the quarter ended September 30th, 2019 compared to $2.9 million the quarter ended September 30th, 2018. The increased level of operating expenses was driven by increased product development expenses of approximately $300,000 or 41% in addition to higher selling, general, and administrative expenses of approximately 1.4 million or 67%.Akerna incurred a net loss of approximately $2.8 million for the quarter ended September 30th, 2019 compared to a net loss of approximately $1.7 million in the previous fiscal year. At September 30th, 2019, Akerna had unrestricted cash of approximately $22.4 million.This concludes our prepared remarks and we'll be happy to take 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. Operator, please open the line.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Brian Kinstlinger with Alliance Global Partners. Please proceed.

[Brian Kinstlinger:]

Great. Thanks for taking my questions. First, I wanted to talk a little bit about Utah. I think if I read correctly, there's eight applicants chosen to grow Medical Marijuana and 14 applicants are expected to be chosen to run dispensaries, is that the number you're seeing the first six to nine months of the install base?And then, that's -- I just wanted you first to confirm that. And then, how do you expect those numbers are going to grow over the course of the first year or the second year of Utah putting those new laws into place?

[Jessica Billingsley:]

Ruth Ann, chime in if you have an update on the specific numbers that have been authorized by the State. All right. Jessica speaking here. Thanks for the question, Brian. My understanding is that those are just the first initial licenses that will be granted and then Utah will continue to grant more licenses over this year.They certainly have more, and I don't want to be held to this number because I'm remembering it and I don't have it in front of me, that I believe that they've authorized at least 100 licenses per their written regulation or per their bill. So there's something in there and I think it's just around the initial wave of which ones they're starting with, and then they'll continue to issue more licenses as we progress.

[Brian Kinstlinger:]

Great, great. And then, I guess, as you look at your install base. How many of your users, if I call them that, are taking more than one module, right? The base module, they pay one price for, but how many of them are taking two or three or just multiple modules?

[Jessica Billingsley:]

That's a great question. Well, so we don't publish that metric. But I can tell you that their first certification revenue is viewed as important here. And we have an emphasis, both in our – with our account executives that are selling to new customers, as well as with our customer success team, which focuses on existing customers and up-sells to ensure that that we're really providing the most value in a solution to our clients. And that generally means, providing more than one module or piece of functionality.

[Brian Kinstlinger:]

Now in those cases, do customers typically start with more than one module at the get go? Or do they take the base module and then over time generally realize they need more functionality that you're offering?

[Jessica Billingsley:]

Probably, because our customers tend to be more of the mid market to enterprise customer base, most of our customers do sign-up for more than one module out of the gate.

[Brian Kinstlinger:]

Great. Lastly, I'm curious, if you can update on any of the other statewide opportunities that have been discussed. I think, maybe, Florida discussed and maybe Oklahoma. And then particularly, I'm curious, how they're reacting to, what I think is, your differentiated tracking app in solo. I'd love to hear, if there's been any feedback on how they're viewing that?

[Jessica Billingsley:]

Well, thanks for that one as well. So Florida has not reissued their -- that they call it an ITN and rather than an RFP, they have not reissued that yet. Of course, our internal government relations folks are in conversations with almost every legal U.S. state, whether they have a current system or haven't decided what systems we want to use yet, and we certainly are responding to any new RFPs that are issued and unless it falls broadly outside of our core competencies. So, we certainly did respond to Oklahoma's RFP. They're still in the decision making process.Anecdotally, I can tell you that the reception from regulators with whom we're engaging regarding our lower cost tags that are also cryptic graphically secure and really give us a competitive differentiator over -- with a modern tagging technology over existing RFID technology, I can tell you anecdotally that that's being very well received by regulators.

[Brian Kinstlinger:]

Great. Thanks so much Jessica.

[Jessica Billingsley:]

Thank you, Brian.

[Operator:]

[Operator Instructions] Our next question is from Greg Miller with the National Institute for Cannabis Investors. Please proceed.

[Greg Miller:]

Hi. Thanks for taking my questions. I had another -- I don't want to follow-up on that government thing because, maybe I wasn't able to find it in your documents, but is there like a schedule of who has RFPs out there and who we expect to have RFPs put out in the future to get a sense for, sort of, what the velocity of sales might be on that side? And then, I've got a question on the client side after that.

[Jessica Billingsley:]

That's a good question, Greg. If somebody develops that service, we would love to pay for it. So we don't have to keep costs, keep on task of getting in touch with the states and understanding what their schedule may be.So, the answer is that we -- that is a manual boots on the ground process for us with our government relations in discussion with the states and sometimes that as I'm sure you can understand and appreciate, sometimes the states will tell us that their timeline is one thing and then sometimes their timeline in practice is a little bit different.So, we certainly do have -- there are some services, to which you can subscribe to be notified when an RFP actually drops. So, at that point of course the RFP is baked and we certainly do make every effort to respond to every RFP that is within our wheelhouse. But our discussions start long before the RFP is actually issue and really maintaining good relationships with all markets. And what I can tell you is that, we are engaged in discussions with many regulators in many markets currently.

[Greg Miller:]

Okay. But no like monster contracts out there like, oh my god, the California contracts coming up and that's the big guy.

[Jessica Billingsley:]

Well, at any given point in time, we certainly have a couple -- we have discussions that are large contracts and could be in that same universe.

[Greg Miller:]

Okay, terrific. Now on the private client side, you've talked a little bit about an emphasis on working with the larger MSO, the international guys, the multistate people or folks like that. Can you give a sense of what the business looks like now and where you hope to take it in terms of the split between, I don't know -- companies with more than five dispensaries or more than 10 dispensaries or some sort of sense of the scale of what we're looking at for the business?

[Jessica Billingsley:]

That's a good question, Greg. So we currently have the -- and again, this is without me looking at exact numbers. But I think it's fair to say that the majority of our clients are businesses with more than one vertical or more than one location. We certainly do have some clients that are smaller clients. And what we find is that our software is really tailored to businesses who either are focusing on a unique brand and are so really interested in all of the data points that we track and the ROI that that can provide or businesses that are truly operating at scale. And I think if you look at it through that lens and through the lens which we presented, which is really the value proposition of what we provide in our software to our clients.

[Greg Miller:]

Okay. That's just super helpful. Thank you very much.

[Jessica Billingsley:]

Okay. Thank you.

[Operator:]

Our next question is from Dan Des [ph] Lauriers with Craig-Hallum Capital Group. Please proceed.

[Eric Des Lauriers:]

Thank you. It's Eric Des Lauriers. Thank you for taking my questions. I was wondering if you could give us a sense of the evolving competitive landscape on the B2B or ERP side of things. And then any anecdotal feedback from clients and prospective clients? And then perhaps, if you're seeing any impact from the current capital environment in terms of willingness to spend on ERP systems? Thanks.

[Jessica Billingsley:]

Great questions, Eric. Let me see if I can take those one at a time. The first is update on the competitive landscape. And what we are seeing is more and more of our clients and of our prospects as the market is maturing. They're interested in ensuring that they are position for the future.And so partnering with our product MJ Platform, which is integrated and we've signed partnerships with traditional accounting and tax reporting system that provides and that underlying functionality, really puts us in a position where our clients and our prospective clients, if they want to have some of that underlying world-class global accounting and tax reporting functionality. They can have all of the benefits of our cannabis specific supply chain tracking and reporting on top of that.And so what we're actually seeing is an increased competitive advantage with some of the decisions that we made to pursue these partnerships over a year ago.Certainly, in the B2B market itself, competitively we're not seeing a huge increase or decrease I would say and now there's no brand new big competitor with which to make you aware.Of course, we are still executing on our M&A strategy and we are very interested in some companies out there that have-- that might not only be accretive to existing investors through a financial lens, but have technology that is accretive to our offerings as well. So, we're really looking at both those things. And then you had -- restate your -- say your second question for me one more time.

[Eric Des Lauriers:]

Yeah. No problem.

[Jessica Billingsley:]

Yes. How does that--

[Eric Des Lauriers:]

Yeah. Well, that was great color on the first one. And then just following up, if you're seeing any impact from the current capital environment in terms of willingness to spend on ERP systems?

[Jessica Billingsley:]

That's right. That's right. Okay. Great question, Eric. So, if you look at the data in our system shows, we look at a couple of different things. But as we look at of course, internally, we measure metrics much like any other SaaS company and we look for leading indicators of our sales this quarter or next quarter based on whether we have the right number of, what we call, sales qualified leads or SQL. And our -- if that is healthy, then we expect to continue to see healthy sales.So, I can tell you that we're actually very, very pleased with what we are seeing internally around those metrics and feel very comfortable that we're on track to meet our guidance -- previously published guidance for the year.And the second thing that we look at is we do look at our aggregate data to see in terms of the industry itself from a fundamental metrics point of view outside of the capital market, what's happening and our data shows that people are continuing to increase their spend then -- consumers and patients are continuing to increase their candidates spend.So, we certainly don't see any decrease in appetite for ERP systems and in fact that some of this market pressure is going to cause some of these businesses to really focus on their business fundamentals as differentiator. And that will actually cause them to look for ERP systems and the ROI that our system can provide.And just to think of the maybe the smallest anecdote case study would be a client that wants to understand which of their strains is most profitable and carry those type of metrics through the business. We’re actually finding more and more at the enterprise-class clients asking us those kind of question.

[Eric Des Lauriers:]

Yes, makes sense and great to hear. Good luck guys.

[Jessica Billingsley:]

Okay. Thanks so much Eric.

[Operator:]

[Operator Instructions] Our next question is from Patrick Calvin [ph] with Shay Capital [ph]. Please proceed.

[Unidentified Analyst:]

Hi, Jessica and everybody, Thank you for taking the call.

[Jessica Billingsley:]

Hi, Patrick

[Unidentified Analyst:]

I wanted to touch on what you addressed at the end of the call where there's obviously a dislocation, or lack of appreciation of the fundamentals within the company based upon the way that the market is currently valuing the overall company. And I -- and I agree, and I appreciate the way that you stated things to eloquently towards the end of your presentation there.But that said there's very little -- it’s actually in place or has been done to take advantage of this -- or capitalize on this valuation discount that's being offered in the market by the company and by insiders.And I really wanted to dig in a little bit further with you as you continue to discuss role going out and acquiring other companies in the space on an opportunistic basis. Are you finding other companies out there that are trading at less than one-time sales on an EBITDA -- on an easy to sale basis? I basically -- and I'm looking at your company as the cheapest option by far of anything that I see out there, unless you're seeing things that are trading at multiples cheaper than one-time sales, and really makes me scratch my head as to why you're not redeploying that capital into yourself in the form of a share buyback, or something of the sort?

[Jessica Billingsley:]

Sure, sure. Well, we're always evaluating the best ways to build value for shareholders. And if management and the Board were to determine a share buyback is the most prudent use of cash, we'd clearly consider it. And that said, our immediate goal is growth and capturing market share, and both of which we expect to have the potential to result in increased profitability and free cash flow that then maybe used for that purpose.And I also just mentioned, as I mentioned in my prepared remarks, none of us here are content with our stock price. And as you said, we appear to be one of the most undervalued. I can tell you that, many insiders here at Akerna have asked, if they are currently permitted to transact in our shares. As we speak, we have been advised that we are currently restricted in our ability to do so.This could obviously be due to certain blackout periods for the most public companies. But there's also the possibility that we maybe actively engaged in other currently or not publicly disclosed initiative. And, of course, as one of the larger shareholders, my goal is to build a sustainable value to you. This is clearly an equity play for me. And my goals are directly aligned with our shareholders.

[Unidentified Analyst:]

Great. Well, that's encouraging to hear. And I think emphasizing the fact that growth for the sake of growth isn't always the right option. As you went through being able to deploy capital on an opportunistic basis, where it's going to generate the best return on a long-term basis for yourself and other shareholders is really the focus, or it should be the focus, which just sounds like it is. So look forward to seeing how things continue to play out and being a supportive shareholder.

[Jessica Billingsley:]

Well, thank you so much. And I'm 100% agree. I'm right there with you.

[Operator:]

We have reached the end of our question-an-answer session. I would like to turn the conference back over to management for closing remarks.

[Jessica Billingsley:]

Thank you, Operator. In closing, we continue to do what we say we're going to do. Our acquisitions and strategic investments are focused on locking up the tech spend of the enterprise cannabis businesses and solving with technology that’s growing demand for increased supply chain transparency.You can depend on us to execute. And we believe our greatest opportunities lay just ahead. We look forward to continuing to solidify our position as a technology leader. Thank you for your continued support. And we look forward to sharing our progress with you in the future.

[Operator:]

This concludes Akerna’s conference call. Thank you and have a great day.