Akerna Corp.
Q2 2020 Earnings Call Transcript

Published: 13 Feb 2020

[Operator:]

Good afternoon, and welcome to Akerna’s Second 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 second quarter fiscal year 2020 conference call. Representing the company today are, Jessica Billingsley, CEO of Akerna; and John Fowle, Akerna’s CFO, who will be available for questions during the Q&A session 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 second quarter financial results. Jessica?

[Jessica Billingsley:]

Thanks, Jason. Good afternoon, everyone. Thank you for joining us and welcome to our second quarter fiscal year 2020 earnings call. On our first quarter call, we discussed our growing operational traction. I can tell you, we have maintained our momentum. And in Q2, we continued our success. Our business has seen a strong acceleration over the past two quarters with 33% revenue growth. Based on our analysis, we continue to gain share in the industry.The Quarter was marked by the subsequent integration of a multitude of new platform technology enhancements, strategic partnership and client engagement that we discussed on our Q1 call, including the announcement of our acquisition of Ample Organics, the completion of our deal with solo sciences and our initiative with PAX Labs to leverage our aggregate market business intelligence through our infrastructure as a service tool, which we launched in July 2019. These key strategic initiatives and client engagement, position us for continued strong growth through the balance of the fiscal year 2020.Much like Q1, I would categorize our movement in Q2 in two strategic focus areas. First, increasing our market share among emerging enterprise cannabis businesses, which are the multi-state, multi-country businesses that will dominate this potential $20 billion industry. And second, continuing to build and enhance our leading first to any market technology solution with enhancements in the areas of tracking organic matter across the entire supply chain, from seed-to-sale and now, seed-to-shelf or consumer with an interactive consumer product experience. This gives us a significant market opportunity to address the large $1.2 trillion consumer anti-counterfeiting market and to command competitive advantage in the market against point solution providers.As a growth and innovation company, we continue to build and enhance our leading first to any market technology solution with enhancements responses to the needs of our clients today and well into the future. You've heard me say on numerous occasions, the cannabis economy runs on Akerna the seed-to-sale tracking technology, which we invented 10 years ago, continues to set the standards for technology and supply chain transparency and accountability to consumers and governments demanding more and more. Given our strong leadership position and growing installed base, we can partner and integrate our offerings with other top tier service providers. Take for example, our recent integration of NetSuite and Sage.The integration of these enterprise class tax planning solutions is important because they enable our ability to increase our distribution footprint and accelerate our sales growth while providing end-to-end solutions for our clients. We are now offering seed-to-sale tracking in cannabis, hemp and CBD the compliance tracking required by most states and government and integrated enterprise class tax planning solutions, including global financial statements and tax reporting. Again, we are first to market with this integrated solution. And we believe this will significantly increase our win rates and drive our accelerated growth plan, especially among emerging enterprise cannabis businesses.As a result of our strategic partnership with NetSuite our integration is available additionally in Canada. Our Sage integration is available globally. 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 the rapid industry growth. Our sales teams are excited and our pipeline of deals is growing rapidly. As you know, with our infrastructure as a service approach, including our underlying sophisticated enterprise micro service architecture, compliance bus and aggregate aggregated business intelligence reporting and predictive analytics, Akerna is in a class of its own in the cannabis, hemp and CBD space when it comes to offering this integrated solution.We are confident this will significantly increase our win rates and help to drive our significant growth plan. For a decade, we have refined a technology that pinpoints every aspect of every gram of cannabis tracks in our system, the plot of land on which it was grown, soil nutrients, water and light intake, additional ingredients from manufactured products, when it was shipped, and in what batch and finally, where and when the product was sold and consumed. Businesses are increasingly turning to Akerna for a solution that is unique to our company. Technology that automates and track the entire supply chain, in turn, enabling them to stay compliant and ensure a safe consumer experience.Businesses and governments want to deliver information about a product source ingredients. For businesses this information provides a competitive advantage in the drive to meet growing client demand for transparency and consumer goods. For governments 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 that the technology exists to trace the source as a complete chain of custody for a product that is made someone else. We just experienced another romaine lettuce there.Our technology could put an end to that uncertainty. Our tracking technology is game changing in this regard. It stands beyond cannabis. It has applications for agriculture and other consumer goods. Our second strategic focus is increasing share among the enterprise cannabis businesses across any industry. We know businesses spend 37% of their total technology budget on enterprise and IT solution. As we stated today, that represents 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 well over a billion.While we are still a fraction of this overall market opportunity. We are the market leader and expect to have very strong organic growth over the next few years as the market continues to grow and consolidate and the trend towards investing in our solutions accelerate. The unique nature of the cannabis industry necessitates tailored solutions to meet the regulatory requirements and the supply chain demands of cannabis, which is what we built with MJ Freeway 10 years ago, continuing to be first to market. We scaled that 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 spreadsheets simply cannot support. With this in mind, our strategy continues to position us to capture a growing share of the enterprise market in the cannabis industry. To be ready for this paradigm shift, part of that strategy involves our previously stated intent to seek highly complementary acquisition opportunities capable of furthering our leadership position. In the quarter, we did just that, taking advantage of two opportunities that will lead to significant combined value creation going forward.Although I mentioned the completion of our solo sciences acquisition earlier, let me take a moment to dive a little deeper into the value creation with the offering. Solo sciences is a recognized leader at patented anti-counterfeiting, tagging and consumer engagement technologies. Our investment is another step in our commitment to creating the preeminent global technology platform to address the entire supply chain, and its regulatory bodies through accountability and transparency. Solo sciences tech platform is complimentary to Akerna's software platform and is driving consumer safety for its anti-counterfeiting technology and alert functionality.Financially, the acquisition is important in three ways. First, solo TAG offers Leaf Data Systems, a tagging solution that is less expensive and more effective than existing expensive RFID solution exclusively employed by competitors for government track and trace application. The first government RFP solicitation to which we responded with this less expensive and more effective tagging solution was Utah which we won. Second, the global anti-counterfeiting market is over $1.2 trillion. And with solo, we can participate in this huge consumer total addressable market.Lastly, given the solo code is placed on packaging, now have a more direct correlation to unit sales in the cannabis industry, monetizing as the industry grows. Manufacturer, they use a solo code, proprietary graphic trust mark on their product packaging, enable consumer to scam product, barcode enabled fellow app and learn if a product is real or fake and get real time notification. We believe through accountability and transparency. We are creating a new industry standard, especially in the wake of the dating crisis. From our perspective, this technology is crucial to consumer safety. We are pleased to have close solo acquisition as announced on January 21, 2020.I also referred our December 18 announcement to acquire Ample Organics, a leading provider of seed-to-sale tracking for Canadian cannabis businesses. As this will be our largest acquisition to date, let me spend a few minutes on Ample. Our acquisition of Ample Organics solidifies our global leadership position. Ample has a strong track record of innovation, considerable growth pipeline, and over the last few years has seen strong revenue growth with 172% year-over-year growth in 2018 alone. Through this acquisition Akerna will be the dominant provider in Canada, The only G7 country with nationally legal cannabis. We expect Canada to serve as a template for future international markets, giving us a commanding position in which to leverage global growth across the now expanded ecosystem. Together, we see significant product synergies and the ability to cross sell into each other's installed bases.For example, Ample's product suite does not currently include a point of sale product and MJ Platform does. Ontario alone, announced in January, it expects to issue 1000 retail licenses this year, giving us a great opportunity to cross sell MJ Platform retail module into Canada in 2020. Ample's product suite includes e commerce, pharmacy integration and insurance adjudication, all products for which we see an excellent global opportunity to leverage across our existing installed base. We expect to be able to leverage our strong product portfolio across our combined client basis to capture all the touch points in a product's lifecycle and provide consumers with the transparency they're demanding when it comes to what they are putting in and on their body.This transaction is expected to close in the next couple months, adds to the synergies and value created by the recent transaction with solo sciences. We have now entered into transaction to acquire some of the most innovative and disruptive technology available in the cannabis tracking and anti-counterfeiting space to complement our current offering and extend our value proposition. Importantly, I'm sure you have noticed both transactions were structured in a manner whereby we are not simply buying out our targeted acquisition. To the contrary, we are buying them in like all of us here at Akerna they too are now substantial shareholders who have a very vested interest in our collective future.With the integration of both acquisitions well underway, we will continue to work diligently to provide critical data for better decision making for consumers, businesses and government delivering a central supply chain data that consumers and governments are demanding across more and more of the products they consume and regulate. Today, we remain focused on growth and innovation. As part of this focus, we are pleased to have recently welcome John Fowle as our new CFO who brings with him a successful track record of scaling high growth, fast businesses, and integrating acquisition. We initiated a rigorous search soon after we became a public company, for a CFO with John's talent and history of success, and we could not be more pleased to have him join the Akerna team.Before I turn the call over to John for his review of the quarter, let me briefly hit on a few select highlights. Total revenue increased to 3.3 million from 2.6 million, an increase of 28%. Total MJ Platform revenue increased by 29% and as of December 31, 2019, we had approximately 18.8 million of unrestricted cash. 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 booking 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 to date, we are keenly aware of the work ahead. The focus going forward is on organic growth and making smart strategic acquisitions that add shareholder value. As a sizable shareholder myself, my goals remain directly aligned with yours.With that, I will now turn the call over to our CFO, John Fowle for a detailed review of our second quarter 2020 financial results. John?

[John Fowle:]

Thanks, Jessica. So today I'll provide an overview of our financial results and key business metrics for the quarter ended December 31, 2019. Just as a reminder, these results are discussed in further detail in our form 10-Q that was filed today with the SEC, which we encourage you to review.Overall, a good quarter for Akerna, total revenue increased to approximately 3.3 million for the quarter ended December 31, 2019. An increase of 28% compared to the quarter ended December 31, 2018. The increase in total revenue was driven primarily by growth achieved in our enterprise software solution MJ Platform up 29% in addition to growth in our consulting business. The revenue from Leaf Data System our government regulatory software solution was relatively flat year-over-year.Software revenue increased to approximately 2.5 million for the quarter ended December 31, 2019, an increase of 10% compared to the quarter ended December 31, 2018. Software revenue was primarily driven by the year-over-year growth in our enterprise software solution MJ Platform of 29% offset by the year-over-year results from Leaf Data Systems.The increase in MJ Platform revenue was primarily a result of volume driven increases from new business, which includes new client, upgrades and additional subscriptions from existing clients. We continue to invest in a variety of client programs and initiatives, which along with increasing adoption, has helped keep our renewal rate consistent as compared to the prior year. With regards to Leaf Data Systems, we're optimistic about the year ahead as we've entered the current fiscal year with a new contract in Utah and we're actively engaged in multiple RFP opportunities.Consulting revenue, which includes revenue generated from professional services delivered to client to help them maintain compliance with state law, initiate new business or expand existing business operation increased to approximately 700,000 for the quarter ended December 31, 2019, an increase of 202% compared to the quarter ended December 31, 2018. The result was driven by a higher volume of consulting activities and engagement as we continue to experience strong demand for our services in emerging state.Further during the quarter ended December 31, 2019, we serviced a large contract with a Midwest based client for the preparation, completion and delivery of operational license application for a portfolio of retail facilities. It's important to note consulting services are correlated to state legalization and other regulatory expansion activity. As a result individual period-over-period comparison may experience variability depending on the timing of recent legislative changes.Our cost of revenue for the quarter ended December 31, 2019, was approximately 1.6 million. An increase of 300,000 or 24% compared to the quarter ended December 31, 2018. The increase compared to the prior year's period was primarily a result of the cost incurred to service the new contract with the state of Utah.Software hosting costs have increased primarily due to higher transaction volume. The overall increase in cost of revenue was partially offset by a decrease of approximately 200,000 in third party subcontractor costs. We do intend to continue our investment in additional resources in our enterprise software group to facilitate the adoption of our services.Gross Profit increased to approximately 1.7 million for the quarter ended December 31, 2019. An increase of approximately 400,000 or 33%, compared to the quarter ended December 31, 2018. Gross Profit Margin increased to 50% for the quarter ended December 31, 2019. An increase of one percentage point compared to the quarter ended December 31, 2018. The increase was primarily a result of increased software revenue and the minimum marginal costs to service that revenue.Operating expenses were 6.1 billion for the quarter ended December 31, 2019 compared to 3.7 million for the quarter ended December 31, 2018. The increase in operating expenses was driven by higher product development costs an increase of approximately 17%, in addition to higher selling general and administrative expenses, an increase of approximately 82%.Excluding non-cash stock based compensation and onetime acquisition cost SG&A would have increased by 41%. We continue our investment in sales and marketing by expanding our domestic and international sales activities, building brand awareness and product marketing activities. And we do plan to continue our investment in our enterprise software platform to improve and extend our service offering and develop new technologies.Akerna incurred a net loss of approximately 4.3 million for the quarter ended December 31, 2019, compared to a net loss of approximately 2.4 million for the quarter ended December 31, 2018. At December 31, 2019, Akerna had a strong balance sheet, including 18.8 million of unrestricted cash and 19.1 million of working capital.So this concludes our prepared remarks, and we'll be happy to take any questions you may have. Please do keep in mind that the forward looking statements disclaimer discussed at the beginning of this call applies equally to the Q&A session. Operator, please open the phone line.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.

[Brian Kinstlinger:]

Hi, guys, thanks for taking my questions.

[Jessica Billingsley:]

Hey, Brian.

[Brian Kinstlinger:]

I was wondering – hi, Jessica, can you quantify the MJ Platforms installed base at the end of '19 maybe compared to '18. And then maybe just to give us a sense of their installed base general percentages of retail operators versus manufacturers versus cultivators?

[Jessica Billingsley:]

Great question, so it depends on how you count installed base. So by volume, we've seen a significant increase of volume transacting through our system at being tracked and monitored, compliantly through our system over 2019 over 2018 and only continuing to increase on a monthly basis. By a per client count, although our revenue and our bookings have increased, we've actually seen our client count increase by a lower percentage as we've seen consolidation. So we've seen some large clients of ours actually combined, either with other clients of ours or generally our clients tend to be the more enterprise operators in their purchasing other assets and adding them to their portfolios. And then, of course, that's additional modules and platform access fees and revenue for us. So we're seeing all of those factors weigh in and I think maybe the best metric or way to look at that is to think about are we continuing to see more and more growth through the system as well as growth by revenue and locations. And we're continuing to see that by a significant percentage year-over-year.And speaking to your question on the percentage by verticals, rough percentage, so if we look at the market as a whole, and it's been a little bit of time since we did this analysis, but the market as a whole has roughly a distribution of a little bit more than a third of the number of operators are retail. And then there is a smaller number of cultivators somewhere in a third region and then just since I think it's somewhere close to 20%, of what we call extraction and infusion or manufacturers or processors depending on their regulatory framework. And then of course, we also have a couple markets where there is a unique license type for distribution. So between all of that we've done that analysis to see what is our distribution among the verticals. And ours has over a very long period of time, multiple years, tracked almost identically to the distribution across the whole industry. So if the whole industry has more than 30%, retail, that's about what we see an MJ Platform as well, at 20% ish manufacturing, instruction infusion, and so on. Does that make sense?

[Brian Kinstlinger:]

Yeah. And do you have a rough number of an installed base and how many customers have your software?

[Jessica Billingsley:]

We do, the number that we share publicly is hundreds of unique customers of which a customer could have 100 locations.

[Brian Kinstlinger:]

Right, right, of course. And then I wanted to delve into PAX Labs, the icon track. I'm curious, how long did you – how long were you testing that enhanced platform before they moved into a formal contract? And then can you quantify in terms of number of brands you're talking to or in various stages of selling this solution?

[Jessica Billingsley:]

But that as well, so we've been working with PAX for some time and working on a proof of concept, of course, that many months in advance of actually issuing our public release on it and really ensuring that that we have the solution right for them. So I think we noted either in our remarks or in our filing that we launched the solution in July of 2019. And we currently have dozens of similar companies in the pipeline for this particular solution.

[Brian Kinstlinger:]

When you say similar, you're talking, you're going out to the top brands first. Is that right?

[Jessica Billingsley:]

Absolutely.

[Brian Kinstlinger:]

Right, right, okay and then I'm wondering if you can also quantify the number of government contracts that you believe are coming for rebid and what those states are saying about solo TAG, obviously, there's press out there about Missouri in the supply chain being unhappy about heavy cost of the RFID tags, which you alluded to in your presentation. So I'm curious, even if it's not formally expected, do you expect the handful of states are going to go through a rebidding process this year?

[Jessica Billingsley:]

So we absolutely expect a handful of states and thank you for bringing that up related to Leaf. Certainly, we always see a bit more lumpiness in our leaf revenue just due to the cycles of state bidding. There are a few RFPs out there to which we responded that we have not heard back from. So certainly high pipe for us there, if you will to use a sales term and we are actively in discussions with a number of states who have existing state contracts, of which a small handful five ish or one or two less depending on what they decide to do in their renewal cycle that we do expect will look for a rebid sometime in the next calendar year.

[Brian Kinstlinger:]

Great, I'll ask one more and then I'll get back in the queue. The bookings and the annualized basis is about $400,000. Just taking the number you gave 10 to 12 and that's similar to last quarter. I think excluding Ample Organics, I think you've discussed MJ Platforms you thought would grow significantly I believe in the March quarter and then even more in the June quarter. Is it still reasonable to assume that March quarter will be much stronger than December, given the bookings were similar in this last quarter, we didn't see quite a pop in MJ Platforms sequentially?

[Jessica Billingsley:]

Well, it's – so wonderful thing about fast right as you continue to add booking absence, any issues with the booking. So for instance, a booking could actually have a lead time for us, in that we've booked an account and taking a deposit, but they count on board until they receive a license. We have some rules of engagement around that, for instance, we won't take a booking, if it's less for 90 days to go live and we have a number of rules that govern that for us so that we don't end up in a situation where we're taking bookings that don't turn into revenue. However, sometimes that can make it show a little bit of lag time between reflection that we certainly expect to see continued growth. John, would you add anything to that from the SAS lens and the recurring revenue growth lens?

[John Fowle:]

No, I would agree. I mean, I think the pipeline for us continues to grow – our both active backlog and qualified leads that we pursue continue to grow. But to some extent, we're hampered a little bit on some of the go live by our customers. And certainly, it's a focus for us as we go to the back half of the year. How do we start monetizing those bookings and creating initiatives to get those booking kind of transition into active subscriptions and active revenue as fast as possible? So I think we're optimistic about our backlog. And certainly the direction we're going from the sales ops and it is an aggressive initiative we're undertaking to kind of shrink that go live period so we can accelerate some of that revenue.

[Brian Kinstlinger:]

So just to be clear as the only publishing analyst, so I'm – only my number is consensus right now that investors can look at, do you foresee March being much stronger than December in terms of software revenue? Or will it be a modest in – more of a modest increase given the bookings and the time is taking to get them live?

[Jessica Billingsley:]

I would say a continuous recurring revenue bill that would be my answer. John, would you add anything to that point?

[John Fowle:]

Yeah, I would agree. I wouldn't necessarily expect something overly aggressive in the third or fourth quarter compared to what we see today. But moderate build from where we are today, I think, is a reasonable expectation.

[Brian Kinstlinger:]

Okay. Thanks, guys.

[Jessica Billingsley:]

Thank you.

[Operator:]

Our next question comes from the line of Jacob Silverman with Alliance Global Partners. Please proceed with your question.

[Jacob Silverman:]

Hi, yeah. Thanks. Can you talk about the opportunity outside of North America and your competitive position?

[Jessica Billingsley:]

Hi, Jacob. Thank you for that. So certainly with our announcement of our acquisition of Ample Organics, which we expect to close in a couple months, we are looking both at Canada as well as the rest of the world. So certainly with leading market share in Canada by a great stretch and the ability to cross sell our products into both Ample's and MJ Platforms customer bases that's very exciting. And then Canada is the only G7 country to have federally legal cannabis has already been shown and in my opinion is already being rolled out as the template and a lot of other countries internationally. So really gives us a great platform, a great launching pad, if you will, for further international expansion and of course we continue to plant flags in the ground and in new countries and to have inquiries on almost a weekly basis, but certainly a monthly basis from new countries either interested in our government tracking solutions, especially with solos and solos less expensive tagging solution that is proving really interesting and really exciting to a number of foreign governments. It's only been in discussion. There are, of course applications to leverage that not just for tracking and compliance but also for tax tracking and collection in a very cost effective and secure way. And then, of course, after some type of a governments or legalization initiative rolls out, there's ample opportunity for our b2b product platforms with Ample Organics and MJ Platform as well.

[Jacob Silverman:]

Great, thanks. And then what percentage of revenue today is outside of Canada and the US and when do you expect international begin ramping?

[Jessica Billingsley:]

So the last time I looked at it, we were still less than 20% outside the US, John, is that correct?

[John Fowle:]

Yeah, I think you would have taken outside US and Canada, correct. Yes.

[Jacob Silverman:]

Did I hear correctly?

[John Fowle:]

Yeah. Yeah, that's great. Yeah, I think again, like last time, I had a look at it. Again, I don't always look at it as between domestic and international. It's definitely below 10%, but for us, it's certainly a market of focused opportunity for us as we look to expand overseas.

[Jacob Silverman:]

Okay, great. Thanks, guys.

[Jessica Billingsley:]

Thank you.

[Operator:]

Our next question comes from the line of Mike Regan with MJBizDaily. Please proceed with your question.

[Mike Regan:]

Hey, Jessica and John, thanks a lot. Hi, just a quick question. You mentioned the solo tag; you're generating interest because it's cheaper than RFID for governments to implement on Leaf Data. Is there any way to just sort of mentally quantify how much cheaper the solo tag is than typical RFID?

[Jessica Billingsley:]

Sure, absolutely, so a typical RFID is somewhere around $0.50 and the – and, by the way, hi, Mike nice to talk to you again. Typical RFID tag is that around $0.50 and the solo tag is 25% to 30% of that, so at targeting closest to the $0.10 to $0.15 range.

[Mike Regan:]

Okay. And they just said on solo, there was certain no solo revenue in the December quarter since they closed more in January or is there any impact from solo, I guess?

[Jessica Billingsley:]

Not in December that's correct.

[Mike Regan:]

I guess we should start to see that flow through going forward.

[Jessica Billingsley:]

Yes, we'll see that solo has a lot of momentum in the market and we expect them to be accretive to our organic growth targets in 2020. And we do expect them to be cash flow positive within two years, as we stated in a prior call.

[Mike Regan:]

Okay, and then on the PAX opportunity, you mentioned that started in July. So I guess was there a sort of any revenue in the September or December quarter from PAX or not because I was still sort of in like a test phase?

[Jessica Billingsley:]

So there is some revenue included for that in both Q1 and Q2 of our financial year, of course, we're really working with PAX on a proof of concept and are really excited about our robust pipeline of additional brands that are interested in leveraging our business insights.

[Mike Regan:]

Got it, okay. Okay, that's it for me. Thanks a lot.

[Jessica Billingsley:]

Great, thank you, Mike.

[Operator:]

[Operator Instructions] Our next question is a follow up question from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.

[Jessica Billingsley:]

Hi, Brian.

[Operator:]

Brian, your line is live. Do you have us on mute?

[Brian Kinstlinger:]

I do. Have you on mute. Sorry. Thank you. Just one more question on Ontario. You mentioned licenses that they're planning to issue 1,000 I think and I think in previous conversations you mentioned as part of that application they need – they generally need to put down a software provider that they intend to use proceed to sale tracking. Can you give us a sense, if the rates you provided in the press release are tracking similarly to those 1,000 or so they're expected to launch in Ontario? And then as a follow up to that when do you see that impacting your business? Are we two quarters away? Are we four quarters away?

[Jessica Billingsley:]

So, great question, Brian. Couple thoughts on that, there's – there are the Health Canada licenses for licensed producers that really have an extensive application process where the software provider has to be listed on the application and then Health Canada's on a very regular by the clock basis doling out somewhere between half a dozen and a dozen licenses on a monthly basis. And that certainly continues to be a massive pipeline for Ample Organics on the licensed producer side in Canada. The 100 – sorry, the 1,000 retail licenses, those would be issued by the province of Ontario through a faster and I don't want to use the word less rigorous, but maybe less onerous would be the right way to put it, a less onerous issuance process. And we certainly expect to have the opportunity with Ample's installed base in Canada among licensed producers and cannabis operators within the existing industry. We're excited to have our point of sale of product that exists in MJ Platform our retail module to silence that client base. I imagine that we'll be looking for revenue. And John probably give me a hand slap here for saying anything but probably mostly pipeline over the next quarter and starting to see some impact from that in the quarters thereafter. Would you add anything to that John?

[John Fowle:]

No, thank you for doing it, like I need to put that away to characterize the opportunity, I think that's the right way to characterize the opportunity. It's certainly not tomorrow, but it's significant upside and in the near quarters ahead for sure.

[Brian Kinstlinger:]

Great, that's all I have. Thanks so much.

[Jessica Billingsley:]

Great. Thanks, Brian.

[Operator:]

Our next question comes from the line of Scott Fortune with ROTH Capital Partners. Please proceed with your question.

[Scott Fortune:]

Good afternoon. Curious you guys break down the state and kind of grow from that standpoint. And then can you talk about potential upside as they move from a medical to potential recreational space as far as your business is concerned from that standpoint?

[Jessica Billingsley:]

Sure. So hi, Scott, I'm happy to take that one. We certainly – we look at states and we quantify the state opportunities based on the model of legalization. How many licenses does the regulation expect to issue? What is the population of the state? And a couple other metrics that we apply that have allowed us over 10 years to develop a very predictive model and what we found is that today, because there is always a rolling thunder now of new states moving forward with legal programs, we have we've also seen international markets moving forward as well. And so, actually our upside from states is much more predictable and much more of a rolling thunder than it was say, six or seven years ago where a new state or new state program would very much be a huge spike in growth that we would need to prepare for ahead of time. For us now and it's just continued expansion and growth that is available to us as the market continues to expand by our metrics and by volume of sales that we measure on a month-by-month basis.And to that point you had a second piece to your question on the correlation between medical and recreational and it's, it's very interesting because when we see adult use past in a state that previously had medical, initially we see medical at flat now or plateau, as the recreational or adult use program is coming online. But after six months, there is a positive correlation of continued growth between the medical and adult use market in legal states. So we certainly hypothesize or posit that there are cannabis consumers who first become introduced to cannabis through adult use and then convert to medical patients over time as well. So we definitely see a positive growth correlation after six months.

[Scott Fortune:]

I appreciate that. As a real quicker follow up on kind of the hemp side of the business, what percent of that business is part of the business and the opportunity there as you look out going forward for you guys.

[Jessica Billingsley:]

I love so much that you asked this question. So hemp and CBD is a rapidly growing I opportunity for us. When I talk about the total market opportunity for cannabis in terms of cannabis and that's regulated more than 3% THC cannabis. Just cannabis today, the market opportunity for just enterprise and IT solutions is more than $500 million. If you look at hemp and CBD that already takes that opportunity to 5, 10x, if you will. And we are – we have a very robust pipeline of hemp and CBD businesses as well as a growing segment of those businesses being added to our client base. And really for us this is a bridge into traditional Ag tech and all the other plant growing businesses with which we can serve with our solution.

[Scott Fortune:]

Okay, thanks for the color.

[Jessica Billingsley:]

Great, thank you.

[Operator:]

Our next question comes from the line of Michael Ducote a private investor. Please proceed with your question.

[Unidentified Analyst:]

Hello, thank you for taking my call.

[Jessica Billingsley:]

Absolutely.

[Unidentified Analyst:]

I'm interested calling – congratulations on the increase in revenue. I'm specifically interested in the expenses for this quarter and how much to increase the selling, general and administrative. Can you give some details on those increases? And how that might contribute to profit later on?

[John Fowle:]

Hey, Michael, great question. I appreciate that. So maybe just a few things to comment, first of all, when we talk about comparison this time last year, the company was in the process of its public listing. And so, oftentimes the case companies may hold back on some strategic investments while the focus is executing on that strategic capital initiative. And so when we look at comparison year-over-year there's no doubt it certainly kind of is a large number. So kind of think about it in that context is where the company was this time last year to kind of where it is today is it's certainly different.I think second of all there's a couple of things to also consider from kind of moving from a private company to a public company. So not only where maybe strategic investments in the business sort of flowed to execute on that, excuse me, but also the Association of being a public company. So for instance, we disclosed in our notes that we had a significant amount of non-cash expense related to stock option. So because we were going through, just some context, because we were going to the capital markets process, our ability to issue options to our employees, which as we know, is a key driver of retention for employees of companies at our stage. We were unable to do that. And so once we were lifted and some of the restrictions were lifted, we were able to move forward and issue option to our employees. So that added to a significant kind of non-cash expense through our P&L, which again, for companies that are stage in our size is very typical.Second of all Jessica and our public statement before has made it very clear that part of growing an enterprise software business is through strategic M&A and so part of that does involve kind of these onetime deal costs. So in the quarter, we had significant onetime deal costs related to our solo and our Ample acquisition. And again, those are part of the growth story for companies at our stage. So I think the comparables quarter-to-quarter are slightly, maybe off because we're not necessarily comparing it to apple-to-apples. I think on a go forward basis, we'll definitely start to see some of those costs normalize and you'll see – you won't the significant increases quarter-to-quarter and we'll see kind of operating expense as a percentage of our total combined revenue get much more favorable in the quarters ahead.

[Unidentified Analyst:]

Okay, thank you for your explanation. Really appreciate it.

[John Fowle:]

Sure.

[Operator:]

Our next question comes from the line of Kenneth Isham, a private investor. Please proceed with your question.

[Unidentified Analyst:]

Hello, can you hear me?

[Jessica Billingsley:]

Yes, yes, hi, Ken, nice to meet you.

[John Fowle:]

We got you.

[Unidentified Analyst:]

Hi, nice to meet you too. I'm just wondering of your miss today. Your stock is tanking right now 690 and I'm a trader, mostly not an investor. But I researched your company. I thought I knew what I was doing trying to gain these earnings calls. I want to just give me an idea of what is the one main reason you surprised the analyst this time with a miss.

[John Fowle:]

Yeah and this is John and I'm happy to take your call. That's a great question. Kenneth. I think as a leadership team and as a board and certainly the investor community we want everyone to realize as we do that this is a long term play for us, right. We are truly seeing that this as an opportunity to reshape an industry as Jessica said, and you've heard before, it's not just cannabis that extends to hemp, CBD and potentially other applications outside this industry. So we don't – we think of this as a long term, we're not focused necessarily on making decisions to hit a quarterly number, revenue, profit or cash. We are clearly and squarely focused on delivering long term value where do we want to – what are the decisions we're making today that can put us in a position to be where we need to be five years from now. And that's really where the value is going to come from. Not necessarily hitting our quarterly guidance. I think it gets people to know – I'm sorry, go ahead.

[Unidentified Analyst:]

So what trick the analyst? Was it because he bought a few things this quarter?

[John Fowle:]

That's a great question. And I don't specifically know kind of how they roll up some of their guidance. I mean, we generally, as a company don't give guidance, we like to speak to broadly participating in a market as it is the world's fastest growing market at this point, by multiple measurement points. And so we still see that we've got good growth and MJ Platforms, great growth in our consulting business, which you may see as a leading indicator to future software revenue. So for us, we're very optimistic, very positive about the leading indicators of our business that are leading to future growth kind of regardless of where we might have been expected to land in a particular quarter, but overall we feel confident that our growth and the continuing add of market share and increasing wallet size amongst our existing customers is really supporting that we're making the right decision both in the market and in a technology perspective to service the industry.

[Unidentified Analyst:]

So you think it's just a general enthusiasm that kind of misguided the analysts?

[John Fowle:]

Okay, Jessica do you want to –

[Jessica Billingsley:]

I would love to note – yeah, I just love to know that we're certainly continuing to put up excellent double digit growth and where it is certainly faster growth than many others in our industry and competitors. And maybe it's not as fast as some expected, but we're very pleased with our progress and our continued growth and we intend to continue growing and executing. And I would just say, we look for us to continue to execute on what we said we're going to do.

[Unidentified Analyst:]

Sounds good, I guess I'm an investor now.

[Jessica Billingsley:]

Well, thank you. And we're certainly are happy to take your questions anytime, please contact us with IR and we're happy to have a longer conversation as well.

[Unidentified Analyst:]

Thank you.

[Jessica Billingsley:]

Thank you.There are no further questions in the queue. I'd like to hand the call back to Jessica Billingsley for closing remarks.

[Jessica Billingsley:]

Thank you, operator. 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 to growing demand for increased supply chain transparency among consumers and governments. You can depend on us to continue to execute. We believe our greatest opportunities lie just ahead. Thank you for your continued support. We look forward to sharing our continuing progress with you in the future.

[Operator:]

Ladies and gentlemen, this does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.