Akerna Corp.
Q3 2020 Earnings Call Transcript

Published: 13 May 2020

[Operator:]

Good morning and welcome to Akerna’s Third 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 would 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 third quarter fiscal year 2020 conference call. Representing the company today is Jessica Billingsley, CEO of Akerna; and John Fowle, CFO of Akerna. Both 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 third quarter financial results. Jessica?

[Jessica Billingsley:]

Thanks Jason and good morning everyone. Thank you for joining us and welcome to our third quarter fiscal year 2020 earnings call.Before we go into a discussion of our results, I would like to spend a few minutes touching on the recession-resilient nature of the cannabis industry and the clients we serve.We've seen nearly every country in state within one notable exception, Massachusetts; declare cannabis essential during these challenging times as we all work to protect ourselves and our communities.Our platform insights team has been hard at work, analyzing our data and tracking cannabis, hemp and CBD industry trends during the pandemic. What we see is encouraging, year-over-year recreational cannabis spending is up with a 39% increase in ticket size. As the industry evolves to meet client needs, product pickup as a fulfillment method is increasing, and now accounts for 15% of total sales.I think we can agree these are strong indicators about the future long-term health of the industry and clients we serve. And speaking to the strength of the cannabis industry, our business strategy to provide technology solutions and business intelligence to the industry is working. Clients are using our insights to drive data-driven decision making around everything from inventory management, and run rates to ordering.Beyond the cannabis industry, we recognize what an extremely challenging time this is, particularly for those on the frontlines of the crisis. Our thoughts are with all of those most affected. As I say to our team at Akerna each week, we'll get through this together.On our second quarter call, we discussed our growing operational traction. I can tell you we have maintained our momentum. Before the pandemic, the industry was rebalancing in response to consolidation and disruptive market valuations for operators.Even with these challenges, our industry continues to evolve and find solutions to what is a growing consumer demands. Despite this positive momentum, global market valuations for cannabis-related companies have declined over the last 12 months, leading some operators to rethink business models, look for merger synergies, and explore alternative financing options.As the leading technology solution provider for the industry, we are confident in our strategic positioning and long-term competitive strategy. Our comprehensive suite of cloud-based integrated software solutions provides operators the technology to scale their operations and the business intelligence to increase profitability.We have invested in developing and maintaining an extensive collection of pre-built integrations that are designed to embed our solutions into leading business applications, including accounting, ERP, ecommerce, and CRM solutions.Maintaining pre-built integrations with a broad range of business applications provides a competitive moat. We currently have over 70 integrated products that leverage our platform infrastructure and extend the value of our ecosystem. We have strategic partnership agreements with over a dozen of the best of these integrated products.Overall, the third quarter can be described as one in which we solidified the strong foundation for our future growth by expanding our client base among emerging enterprise cannabis companies, increasing revenue from our existing client base, and continuing to expand our ecosystem by seeking new relationships and software solutions that offer exposure to potential clients, integrations with more business applications, and cross-sell opportunities.As our technology solutions become further embedded in our clients' business processes and systems, providing them with an automated solution central to their ability to transact. We are well-positioned for the future. Our competitive strengths and strategic focus areas will continue to drive productive long-term client relationships.Now, let me briefly comment on our financial results. I'm pleased to report the third quarter year-over-year revenues increased 32%; our consulting revenue increased 219%, a strong leading indicator of future platform growth.Software revenue increased 16% year-over-year. Continued strong bookings were offset by revenue recognition delays due to suspended revenue related to COVID-19 and delays in advance of licensing and go live.We continue gaining share in the industry and the strategic platform investments are driving an improved margin profile. The majority of one-time costs associated with completed acquisitions are behind us.We will continue to focus on our infrastructure and achieving efficiencies of scale. John Fowle, our CFO will take us through the details of our financial performance shortly.As evidenced by our growing hemp and CBD clients, more industries can benefit from how cannabis technology delivers on supply chain transparency and accountability.In fact, in the third quarter, we signed a traditional agricultural client. While we recognize the opportunity in traditional agriculture is significant, we will continue to focus on the cannabis hemp and CBD markets, which are in a phase of rapid growth. We will explore opportunities to serve traditional agricultural clients as they arise.Over the next few years, the cannabis market opportunity for our software products alone has the potential to grow to over $1 billion. While we are still a small fraction of this overall market opportunity, we are the market leader and the only scaled tech providers to the space.Akerna's primary competition remains spreadsheets. But we believe consolidation among cannabis operators will lead to rapid scaling, requiring accelerated adoption of technology and the use of data-driven decisions 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, our overall value creation strategy involves not only our focus on aggressive organic growth, but also our previously stated intent to seek highly complementary acquisition opportunities.In the quarter, we've executed on that initiative, having announced the acquisition of Trellis, our third acquisition. Let me take a few minutes to review our inorganic growth strategy and provide some details on the integration status of solo sciences, Trellis, and Ample Organics.Our inorganic growth strategy is built around solidification of our position as the essential technology infrastructure for the cannabis supply chain. We target technologies that extend our software ecosystem, give us a broader reach across the supply chain, and deliver more value to our clients, thereby increasing client wallet share and retention.Our open architecture technology platform provides for seamless and synergistic technology integration, meeting the evolving needs of cannabis operators, drives our partnerships, integration and inorganic growth strategy.We think about acquisition target is generally falling into one of three channels, TAM expanding technology, product tuck-in or competitor. In each case, we pursue accreted valuations and leverage our infrastructure to create additional value. The acquisitions we have announced in our first 10 months, since becoming a public company are good examples of each channel.solo sciences authentication and anti-counterfeit technology and brands consumer interaction platform extends Akerna’s total addressable market by extending our reach throughout the supply chain. Additionally, we have gained an inexpensive, highly profitable government tagging solution.Trellis is a product tuck-in acquisition, generating immediate contribution of positive cash flow from operations by leveraging Akerna’s infrastructure. We can offer Trellis as a compliance solution in additional markets, enabling expansion outside its home market of California and accessing growth that was not possible without integration into Akerna’s compliance.We can also sell other ecosystem connected services to Trellis clients, such as advanced business intelligence and reporting access. We have added benefit now of a lightweight down market solution that becomes a feeder for our larger more robust MJ Platform solution.Ample Organics is the leading seed-to-sale software platform in Canada, with a majority market share in the largest legal market in the world. By bringing the companies together, Akerna’s leading market position covers all North America, giving us commanding footprints, operating leverage, and opening many additional cross-selling opportunities with our complimentary software solution. We are executing on the integration plan for each of these acquisitions.I am pleased to share both Solo Sciences and Trellis are fully integrated. And we are more than halfway through our 100 day integration plan with Ample Organics, which is on track to close. From our perspective, there has never been a better time to be in our position, as many smaller players in the space are finding limited access to capital, driving opportunities for us to pick and choose complimentary assets at prices far below what it would take to build internally. We can be opportunistic in each of these categories.Importantly, our transactions were structured in a manner, whereby we will not simply buying out our targeted acquisition. To the contrary, we are buying them in. Like all of us here at Akerna’s, our acquisition targets are now shareholders with a vested interest in our collective future success. Part of that success depends on cultural fit.Let me highlight or executive teams focus on culture during the integration process. Culture is essential to effective integrations. Our emphasis on placing clients first and value creating initiatives has been invaluable to building team morale, support and excitement about our business. By tying culture to value creation, culture has become a useful tool for achieving our post-merger integration objectives.In summary, we are pleased with what we have achieved to date. In the short time, it's becoming a public company. We are strategically positioned to capitalize on the market during this period of correction, consolidation and realignment. Our growth is providing scale and operating leverage. We continue to expand our portfolio of integrated technologies.Our partnership, and inorganic growth strategy is expanding our software ecosystem. And as a NASDAQ listed public company, we have unique access to capital and the opportunity to use our public currency in accretive acquisitions. Our continued operational progress helps solidify our position as a leader in cannabis ERP and government cannabis compliance and we intend to extend that leadership position.With that, I will now turn the call over to our CFO, John Fowle for a detailed review of our third quarter 2020 financial results. John?

[John Fowle:]

Thanks, Jessica. Today, I will provide an overview of our financial results and key business metrics for the quarter ended March 31, 2020. As a reminder, these results are discussed in further detail in our form 10-Q, which will be filed this week with the SEC, we encourage you to review the filing.As Jessica noted, we made significant progress in the quarter towards solidifying the foundation for our future growth. Key investments and strategic shifts throughout the business have delivered results that I would like to highlight. This past quarter, we evolved our sales and marketing team to better align with our market and serve our clients.We recorded approximately $1 million of new AR bookings in the quarter. This includes near record level bookings in March despite the COVID-19 pandemic. We also have a strong pipeline heading into our fiscal year fourth quarter. This continued momentum demonstrates the strength of our industry.Strategic platform investments and changes in third-party technology applications have helped increase our margin profile to 54%, up from 50% in the same quarter of 2019. And at the end of March, we executed a small restructuring of our organization, which we expect to reduce operating expenses $2 million to $3 million annually. The reorganization results in Akerna's being a leaner, more focused organization with the human capital and financial resources to execute our organic and inorganic growth strategy.Turning to our financial results, total revenue increased to $3.1 million for the period ended March 31, 2020, from $2.3 million for the period ended March 31, 2019, an increase of $700,000 or 32%. The increase in total revenue was achieved across each of our product lines, driven by growth from our commercial software business MJ Platform in addition to our consulting business and our government regulatory software business, Leaf Data System.Software revenue increased to $2.3 million for the period ended March 31, 2020 from $2 million for the period ending March 31, 2019, an increase of 300,000 or 16%. The increase in software revenue was primarily driven by growth in revenue from MJ Platform of over $100,000 or 11%. The increase in subscription revenue was primarily caused by 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 have helped keep our attrition rate consistent compared to prior periods. Consistent attrition rates play a role in our ability to maintain growth in our subscription revenue. Revenues from Leaf Data Systems increased by $200,000 or 18%, primarily a result of our contract with the state of Utah, which commenced in August 2019.Consulting revenue, which includes revenue generated from professional services delivered to clients to help them maintain compliance with state law, initiate new business or expand existing business operations increased to approximately 700,000 for the period ended March 31, 2020, an increase of 219% compared to approximately 200,000, in the period ended March 31, 2019. The result was driven by a higher volume of consulting activities and engagement, as we continue to experience strong demand for consulting services in emerging state.Consulting services are highly correlated to state legalization and other regulatory expansion activity. As a result, individual period over period comparisons may experience variability depending on the timing of recent legislative changes. Consulting revenue is a strong leading indicator of future platform growth.Our costs of revenue for the period ended March 31, 2020 was $1.4 million, an increase of 300,000 or 22%, as compared to the cost of revenue for the period ended March 31, 2019 of $1.2 million. The increase compared to the prior year's quarter was primarily a result of the costs incurred to service the new contract with the state of Utah. Software hosting costs have increased due primarily to higher transaction volume. We will continue to invest in our platform infrastructure to drive scale and reduce ongoing costs.Gross profit increased to approximately $1.6 million for the quarter ended March 31, 2020, an increase of approximately 500,000 or 42% compared to the quarter ended March 31, 2019.Gross profit margin increased to 54% for the quarter ended March 31, 2020, an increase of four percentage points compared to the quarter ended March 31, 2019. The increase was primarily a result of increased software revenue and then minimal marginal cost of service that revenue and infrastructure investments to reduce ongoing costs.Operating expenses were $7.1 million for the quarter ended March 31, 2020, compared to $3.7 million for the quarter ended March 31, 2019. The increase in operating expenses was driven by higher selling, general and administrative expenses, an increase of $2.8 million, or 107%. In addition to higher product development expenses, an increase of 600,000 or 63%.Our operating expenses were impacted by a number of one-time costs or first time costs compared to the same period in 2019. They include the following $1.1 million of acquisition related costs. As Jessica noted, these costs are largely behind us, as we move forward with integration, $500,000 and new expenses related to sell appliances. $300,000 related to stock compensation, and $1 million related to investments in technology and other infrastructure to position ourselves for growth and the cost of operating as a public company. We will continue to focus on our infrastructure and achieving efficiencies of scale as we continue to grow.Akerna incurred a net loss of approximately $5.3 million for the period ended March 31, 2020, compared to a net loss of approximately $2.5 million for the period ended March 31, 2019. As of March 31, 2020, we had $14.3 million of unrestricted cash, cash on hand and access to the capital market positions as well to execute on our strategy, which is a significant advantage over many of our key competitors. We expect continued improvements in our financial performance, as we continue to scale and drive towards profitability.This concludes our prepared remarks. We will be happy to take any questions you may have. Please keep in mind that the forward looking statement disclaimer discussed at the beginning of this call applies equally to the Q&A session.Operator, please open the phone line.

[Operator:]

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions]Your first question comes from line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.

[Brian Kinstlinger:]

Hi, guys, thanks for taking my questions. Good morning.

[Jessica Billingsley:]

Good morning, Brian.

[Brian Kinstlinger:]

Hi, Jessica. I'm curious how COVID-19 change your business. Specifically, maybe you can highlight the biggest challenges that you as a company is facing. And then on the other side, how maybe it's benefiting your company as well?

[Jessica Billingsley:]

Sure. It's a great question, and certainly timely. As a tech company, we are well positioned to work effectively anywhere. And then step for, we could work remotely for the past many, many years. So from a company impact, it has not had a tremendous impact on our company, we were able to pivot to work from home immediately. And of course, we've had a number of internal initiatives focusing on culture and really supporting our team during this time.On the flip side, while we've certainly seen the cannabis industry as being recession resilient, which I find to be incredibly encouraging and promising as we move forward. As noted in our prepared remarks, we have seen some delays and suspensions, and delays in revenue recognition due to COVID-19. We do -- we don't expect to recognize that revenue moving forward.But we have seen some delays at least during this time. We've also really been taking this opportunity on the benefit side to double down on our relationships with our existing clients, and really focusing on working with them to help support them during this time in different ways leveraging platform insights to help our clients make smarter business decisions.And thinking about this time as a focus on relationship and that -- that focus on relationship will be well remembered as we as we move back into a more normalized mode of operation as well.

[Brian Kinstlinger:]

Great. And then it was encouraging to see the bookings accelerate. I am curious, if that was mainly the result of PAX Labs. And then how are our bookings trended? Have you been able to continue that momentum in April and early May? Or as have there been more difficulties and challenges as stores maybe not opening as quickly right now?

[Jessica Billingsley:]

So anecdotally, at first, to get to the first part of your question, those bookings were for MJ platforms and not related to the PAX Labs, apart from insights. Cornerstone accounts that we announced previously, and just continued strong demand for our B2B product MJ platform. And we have seen really nice continued bookings through April and May or they could have seen some impact might have been even higher in a non-COVID scenario, potentially, that we're really encouraged to see continued strong bookings during this time.And all as I mentioned, we have seen some delays. But we had an uncertain as we've seen some pipeline opportunities push out as well, we have not, at least anecdotally lost any business or had any clients go out of business results of pandemic.

[Brian Kinstlinger:]

Great. And then maybe an update on solo sciences and more specifically with COVID-19, is it require a demonstration? And maybe that's speaks also to the rest of your technology. And furthermore, maybe talk about your plan to tie your revenue more to cannabis sales are growing so fast, which in the past, maybe you haven't been as tied to?

[Jessica Billingsley:]

John, do you want to --?

[John Fowle:]

Yes. I could take that one. Brian, apologies, maybe, could you restate the question again, just so I can have a better context?

[Brian Kinstlinger:]

Yes. Yes, I'm curious in terms of solo sciences, I mean, I believe it's your way to tie yourself with your customer's more towards the growth in that they're enjoying and cannabis.So I'm curious, how that's the early signs of that. And does that technology, is there any demonstration needed in person that maybe it's not happening? Is there any demonstration at all that's needed for solo sciences, for customers, I'm just curious how that's being impacted?

[John Fowle:]

So let's break that into the two -- into two parts. I think to answer your first question. We continue to see momentum with solo sciences this past quarter. We -- you know, when we acquired solo sciences, they were pre revenue this past quarter, we booked some of our first revenue for the business. We're continuing to see that pipeline of interest grow.In fact, both in cannabis and non-cannabis sectors and certainly the technology is unique and some of the insights that we get to their technology platform are highly valuable. So we are seeing the interest grow. We are seeing more and more RFPs come to our business as we get ready to really go to market. I mean, again, highlighting that this was a pre-revenue business, and we're still in that go to market phase. So I think, the overall reception from our community has been strong. And it has been great.And so we're really happy with the work we're doing so far, as far as in person demonstration, you know, like the rest of the world, we've been able to work and pivot into just a remote capacity and demonstrate the technology and the value of the technology and in remote settings, so use of technology and so forth. So it hasn't really impacted us significantly in that regard.

[Brian Kinstlinger:]

Great. Two more, the first one is on RFPs for Leaf Data Systems. I think in the past, we've talked about some of the state's thinking about their options. Maybe they're not happy with their operators. Maybe they're moving forward for the first time or close. So maybe talk about are those getting delayed right now, given the current environment or our state's moving forward with their plans to maybe evaluate their options?

[Jessica Billingsley:]

That's a great question. We are seeing some near-term delays in states focusing on RFPs and uncertain service initiatives. However, I am very encouraged by certainly the consumption trends that we're seeing, and how recession resilient cannabis is proven to be.And we've also received new inbound inquiries from new states that are looking at some of the states that have cannabis programs in place and they're looking at that job creation and that tax revenue.And I personally believe that, we will see a strong movement toward legalization and many different initiatives, much like we saw alcohol prohibition and around the time of the Great Recession, we will see some very meaningful legislative change around cannabis as more governments look at this as a way to create jobs and generate tax revenue during a challenging economic time.

[Brian Kinstlinger:]

Great. Thanks. Lastly, can you quantify your churn you mentioned it was pretty flat especially for the MJ Freeway business. Thanks so much for all your questions.

[Jessica Billingsley:]

I missed that very first part. Can you quantify all right.

[Brian Kinstlinger:]

Yes. Just curious churn, I think you call it attrition. I'm just curious how that -- how -- do you have a -- can you quantify it? Is there a rough percentage on an annual basis that you can provide? Sorry.

[John Fowle:]

I take that question, Brian. As we've shared before, we fully intend to roll out with the -- with our 10-K this coming this coming year, our non GAAP metrics. And that will include a lot of the traditional SAS metrics that our investors are looking to track. And so we don't have that -- I don't have that readily available today. But one thing I think is important to point out is the -- we would look at turn in two respects, the retail and non-retail -- non-retail metrics, because obviously, retail has a very different profile than our non-retail clients.And so what we're seeing today is consistent churn and consistent attrition, if you will, in our business. Of course, any SAS business is going to look to maintain that. So we're seeing the consistent attrition rates across the Board. I think we're not seeing that improve or decline in any regard. But we think or we expect going forward, we're going to be, of course, more focused on that as we want to improve that, and then certainly with the rollout of our 10-K look for that to include more of the non-GAAP metrics that our investors are looking to track.

[Brian Kinstlinger:]

Great. Thanks so much.

[Operator:]

Your next question comes from line of Scott Fortune with ROTH Capital. Please proceed with your question.

[Scott Fortune:]

Good morning, and thank you for the time in the call. Real quick to follow-up on the state side of things, you’ve announced a strategy with metric can you follow-up on that and how that helps to integrate in the new Leaf or Leaf Data on the state side of things with your platform?

[Jessica Billingsley:]

Sure. Thanks. Good morning. Scott, I'm happy to take that one. So there are -- we've two different product lines that offer Leaf Data -- that offers some type of cannabis compliance. We have MJ platform, which is used by the operators, the cultivators, manufacturers, distributors and retailers to maintain compliance and then to report compliance up to a government track and trace system, which might be our other products Leaf Data Systems, as is the case where we have the state contracts. And in other states, it might be the product metrics that you referenced in states where metric has that state contract.And the integration that we announced, and I believe that we are the only cannabis compliance operator to currently offer this deeper level of integration for our product suites, we have it available at both MJ platform as well as Trellis is a integration at the transfer level for metric and what it really means is just it eliminates more double entry for our MJ platform or Trellis business clients and allows them to more seamlessly integrate in states where metric is the state track and trace system. Does that answer your question well?

[Scott Fortune:]

Yes. And what I'm getting at is that's beneficial for people adding on MJ platform with those states, because metric has a fair number of states from that side. You see as a beneficial to cultivate new operators into your platform because of the [Indiscernible].

[Jessica Billingsley:]

Absolutely. It's a wonderful competitive advantage and metric does not have B2B product. So in states where metric is the state system, having that competitive advantage of having a tighter and better integration than anyone else is a very strong competitive advantage and one we were pleased to announce.

[Scott Fortune:]

Okay, thanks. And then a follow-up in you have a nice platform around data collection, as you've stated, we saw stockpiling and since then a lot of the numbers have normalized higher than January and February, and so being very resilient. How is there a timeline or kind of roadmap in terms of monetizing the data in the near future? How are you looking at that option of new opportunities for that business?

[Jessica Billingsley:]

First, slide reference a bit ago, we announced, I believe in January, a cornerstone client for our business analytics product. We announced Pax Labs as our cornerstone client for that product. So it certainly is our intention to generate and monitor that revenue. We don't expect to see significant revenue from that product in this fiscal year. We're really focusing on those our first cornerstone accounts there and ensuring that we're meeting their needs as well, but we do expect to see a significant revenue in next fiscal year from our business intelligence product.

[Scott Fortune:]

Okay. And then probably a follow-up question for John, kind of you implemented a reorg to reduce the expenses $2 million to $3 million annually? Can you provide a little more color on the cuts across the Board and kind of timing of those savings?

[John Fowle:]

Sure. So maybe talk timing first. The reorg we put together took place at the end of March. And so we expect some of those -- we expect those cost savings to start materializing here in the current quarter and go forward.As we thought about the reorg, we looked, of course it's opportunities to streamline, where did we have redundancy and certainly as an emerging growth company, we're still working through a lot of that growth curve. And so we just saw a lot across the business. Some opportunities to just combine reduce, condense some operations, of course, certainly looking externally and focusing on duplicative vendors and third-party resources, as I highlighted in my prepared remarks.We made some changes in platform infrastructure and other sales and marketing type activities that helped improve gross margin or some of the other efficiencies we gained on the sales and marketing group.So it really wasn't any one particular area, one particular focus area, it was just an opportunity to maybe get a little more, a little leaner, a little more focused and just tighten the belt a little bit in some key areas.

[Scott Fortune:]

Okay.

[John Fowle:]

And I mean, you -- obviously, you have to wait -- thank you for the cover, you’re weighing growth that's the most important thing right now, as you guys drive these opportunities from an acquisition standpoint with always letting it flow to the EBITDA line today, but that will help you get to positive EBITDA quicker basis overall.

[Scott Fortune:]

Okay. That's it for me. I'll jump back in the queue.

[John Fowle:]

Okay. Thank you.

[Jessica Billingsley:]

Thank you.

[Operator:]

The next question comes from line of Gerald Pascarelli with Cowen. Please proceed with your question.

[Gerald Pascarelli:]

Hi, good morning. Thanks very much for taking the questions.

[Jessica Billingsley:]

Good morning, Gerald.

[Gerald Pascarelli:]

So -- good morning, Jessica. So last time you spoke at the end of March your analytics, obviously, from an industry perspective, pointed to pantry load similar to the trends that we've been seeing in the off-premise channel within alcoholic beverages. So I guess like my high level questions now that we're through April, would love to get your thoughts and some color on what you're seeing in terms of the sustainability of the load? And then in particular which form factors within cannabis continue to outperform if there's been any kind of a change since the end of March? That will be helpful. Thank you.

[Jessica Billingsley:]

Sure. Thanks. Good question. So I'll answer as much as I can off the top of my head and of course, we do release Akerna’s weekly tax report where we continue to update on things like the mix between categories. So, if you're not following those, of course, and such -- anyone on the line, please to our Akerna’s website and sign up to receive those.So we have seen a continued strong, just strong buying across all of our markets. We may see some impact from Nevada, which just recently allow for curbside and certainly Nevada's -- Nevada was an outlier among and across most of our markets where there was a negative impact through during COVID compared to many of our markets where we were seeing a positive impact. Nevada's governor recently allowed for curbside as a fulfillment method and we saw sales for following now they increased at 68% with an average ticket size of $123.We've also seen the product mix, as you're asking about the different categories and this is something that we would expect to see in a challenge economic time. We have seen the product mix shift a bit more towards flower and towards lower cost net products. And we've seen that maintain throughout this whole period of time. Of course, there's been a long-term trend of concentrate in increasing and gaining more share, but during this period of time, we've also seen an uptick in flower.

[Gerald Pascarelli:]

That's very helpful color. Thank you for that. My next question, you guys have obviously been very active on the M&A front. And can you just speak to, I guess your overall capital allocation strategy? And how that potentially changes, at least over the near-term in light of the COVID-19 pandemic? Thanks.

[Jessica Billingsley:]

Sure, John. Can you take that one?

[John Fowle:]

Yes, I'll take that one. Great question. So of course, at the high level, we're always going to be, we're always going to look at our capital, our capital structure and look for ways to optimize that and whether that, it's always, where do you deploy your capital in the most -- in a manner that's going to deliver the best ROI. And is that through inorganic means, is it through development means, is it through expanding, the data is it, our b2b platforms? So, it's a great question. And then certainly in these times, we're very mindful of our capital or access to capital, the strength of our balance sheet today and so we're very mindful about decisions we make. And again, as we prepare, as we've made comments to you on our prepared remarks or restated previously, we do have access to a unique currency for M&A and so that continues to be an option for us and certainly as we do transactions or we pursue transactions making sure from an from a valuation perspective, they are creative to our current shareholder base, which historically and yet so far they are and they've been very well financial structured to our favor. But yes, capital allocation and how we allocate the different resources we've is something we're very mindful of.

[Gerald Pascarelli:]

Super helpful. That's it for now. I'll be back into the queue. Thanks very much.

[Jessica Billingsley:]

Assad?

[Operator:]

[Operator Instructions] Your next question comes from line of Alan Brochstein with NCV Media. Please proceed with your question.

[Alan Brochstein:]

Hey, good to be on the call. I appreciate. I wanted to…

[Jessica Billingsley:]

Good morning, Alan.

[Alan Brochstein:]

You've said originally there was three potential transactions and obviously, you've announced that there I just want to verify, if Trellis was indeed the third acquisition?

[Jessica Billingsley:]

So we had previously disclosed three LOI’s and we have now announced three transactions. So I think I'm answering your question.

[Alan Brochstein:]

It was all three. Did you close three-for-three, it wasn't -- Trellis wasn’t moved to the mix.

[Jessica Billingsley:]

We close three-for-three.

[Alan Brochstein:]

Okay. And then my next question and I know this year is tough, so not necessarily looking for guidance, but given that you're relatively new recently, but your business has been around for a long time. Can you give us a little color on seasonality? Companies like yours often will have a very strong fourth quarter, which you're in right now, relative to the other three quarters. Is that -- is there seasonality in numbers, Jessica?

[Jessica Billingsley:]

So, I'll take that briefly. And then I'll head it to John to share to the seasonality historically, it is a good question and interesting, especially given the cannabis market. And then I'll throw it to you John, to just keep generally to what we expect to see moving forward. B2B seasonality Alan, I think that shows your deep experience in cannabis. We do see certainly at full time periods that have historically been really great time period for booking, that doesn't necessarily translate into revenue recognition in that quarter. But I can anecdotally share that fit both in the springs is often a very busy time for us from a bookings perspective.As is -- and this would be very normal for any software business, we often have a very strong as you mentioned fourth quarter, calendar quarter or coming in toward the end of the calendar year, as many businesses would look to change a system on January 1st and start a new system for the year.So just sharing a little bit of historic color there around seasonality, we don't see a tremendous impact from that because I said those are those are bookings are necessarily revenue recognition and we do have a really nice profile of strong bookings month-over-month without a ton of variability between those two months. But anecdotally, those are some times that we seem to be just a bit this year from booking. John, do you want to speak to any expectations moving forward?

[John Fowle:]

Yes, I'll touch on that briefly. I think expanding on some of those comments, I think when I see the business, I don't think of it as much about seasonality as I think. I think, impact to our financial results are more driven by legislative changes. Just in the brief time, I've been here to see new states come onboard and open-up their -- open-up their state to some form of legalization. That's when we really see the impact of that.So I don't like Jessica said, I don't see too much of a financial impact with regards to seasonality. I tie it more back to legislative changes and certainly as we share as we go with lead data systems that can have an impact to our numbers as well, just due to timing and some of the nature of our products and services.As far as our expectations, we reported a good booking number and like we shared, we're going to focus on churn and attrition and driving out. And so I don't think seasonality has really that much effect on our business going forward. We look at it more holistically throughout the year.

[Alan Brochstein:]

Okay. And then the last question and I apologize if this is exposing any of the materials you would be filing, but I don't see a geographical breakdown in your business and also, when I see third party reports, your market share is certainly not, it's a very fragmented industry. That's what I was trying to say. Can you address both of those issues in terms of what you think your overall market shares and I'm sorry, I'm talking about in MJ platform, what the overall market share might be in this year? I am guessing if you guys are real heavy in Colorado, but if could maybe address other geographies?

[Jessica Billingsley:]

Sure, I'm happy to speak to that one. It's a great question. And I think, I'm seeing some interesting reports you have which are generally self-survey reported and generally focused only on a retail portion of the business. So often those numbers are not taking into account the full supply chain, which of course we serve. And so when we look at our market share, we look at, in some states published the number of licenses in some countries and markets and in others, it's not published and we have to do some extrapolation to determine what the available number of licenses is in a given market.So we looked at that and we determine how many of those are actually operational and then we look at our numbers to see what our market share is. I can tell you that what we see in our numbers is leading market share and certainly with our acquisition of Ample Organics leading which has majority market share in Canada and North American commanding footprints in North America, when you look across the whole supply chain.And the other thing that I would just mention on that, is that in -- we also look at we tend to serve the more enterprise tiers of business and so we also will look at not only what is our capture of the number of licenses, but we will also internally look at what is our capture of the volume of a given market.In generally, we do have some states where we're a little stronger than others and of course in both Pennsylvania and Utah where probably data systems contracts, the state mandates. The use of MJ platform of course, we have 100% market share and in other states, we generally track internally the number of licenses. For instance, California is a state with a lot of licenses. We're going to have a high number of licenses in California compared to some other states that have limited numbers of licensing.

[Alan Brochstein:]

I think can you weigh in on Colorado specifically, how much of Colorado might be your business ballpark?

[Jessica Billingsley:]

We don't have that published. But I can share that among the enterprise tier of operators. We have really great market share in Colorado and including a couple of Cornerstone clients and clients that have been with us for a very long time. We have clients getting back to the very earliest days at the industry and back when we first started in 2010.

[Alan Brochstein:]

Okay. And that brings to actual part of the same question. So when I talk to people about your company, I say, for a lot of investors, it's difficult to pick the winners although maybe it's getting easier when it comes to the large investors. And are you able to disclose like your opportunity ahead or where you are now with, I don't know how you would define it. Let's say you have a look at the New Cannabis Ventures ranking and look at the top-end that says by revenue. Can you kind of describe, it's fully penetrated or half penetrated kind of where do you see yourself in terms of the large enterprises outside of Colorado?

[Jessica Billingsley:]

Okay. Sure. Very good question. So as we look at the largest set of MSOs, all of them and half the MSOs that we've signed, there are a few in which we have fully rolled out and installed across all locations, although, of course some half, others are very much still in that process. And we are partners, we've announced our integration with Sage for accounting and tax planning. We also have integration with NetSuite and a strategic partnership with NetSuite.And certainly, those integrations are MSO Cornerstone accounts. For those integrations, we expect to see that as a compelling competitive differentiator and we expect to see that drive significant revenue in next fiscal year that focused on completing those integrations and really ensuring that no one tries to reinvent the wheel when we already solve for all pieces of the business, including global currency conversions, advanced tax planning and financials.

[Alan Brochstein:]

Great. I really appreciate the color and wish you the best as you wrap-up this year.

[Jessica Billingsley:]

Wonderful. Thank you so much and of course, there's always room to grow and we're laser focused on execution. Thanks so much.

[Alan Brochstein:]

All right.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Jessica Billingsley for closing comments.

[Jessica Billingsley:]

Thank you, operator. We continue to do what we say we're going to do. We create trust between product creators and product consumers. Our acquisitions and strategic investments are focused on locking up the text end of the enterprise cannabis businesses and solving with technology, the growing demand for increased supply chain transparency among consumers and government.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:]

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