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spk02: begin momentarily. Please remain on the line. Thank you for your patience. Good morning and welcome to Akerna's first quarter ended March 31st, 2021 financial results conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Erica Mannion, investor relations for Akerna. Thank you. You may begin.
spk01: Thank you, and welcome to today's first quarter-ended March 31st, 2021 conference call. On the call today are Jessica Billingsley, CEO and Chairman of Akerna, and John Fowle, CFO of Akerna. Before management begins with formal remarks, I'd like to remind everyone that during this conference call, certain statements will be made that are forward-looking statements within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Words such as estimate, projected, expect, anticipate, forecast, plan, intend, believed, seeks, may, will, should, future, propose, and variations of these words or similar expressions or versions of such words or expressions are intended to identify forward-looking statements. These statements include, but are not limited to, statements regarding future growth and prospects for ACURNA and statements regarding expected future revenue recognition. These forward-looking statements are not guarantees of future performance, conditions, or results, and involve several known and unknown risks, uncertainties, assumptions, and other important factors which could cause actual results or outcomes that differ materially from those discussed, including risks related to changes in the cannabis market and risks related to the impact of the COVID-19 pandemic. These risk factors are not fully described in the current filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made. ACURNA undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Now, I would like to turn the call over to ACURNA's CEO, Jessica Billingsley. Jessica?
spk00: Good morning, everyone. Thank you for joining us today. Our first quarter was a strong start to 2021 with software revenue growth of 62% year over year and 10% sequentially. Our business as a whole grew 31% year over year with software growth offset by softness in our consulting business. Our total SaaS ARR is currently 15.7 million, a 73% increase over the same period last year. In addition to top line growth, the restructuring activities taken in 2020 continue to deliver results, with adjusted EBITDA improving 42% year-over-year and 4% sequentially in the March quarter. We are encouraged by the pace of demand in the first quarter, and we look forward to continued growth in the quarters ahead. Our focus on the multi-state, international, and emerging enterprises in the more than $20 billion global cannabis industry continues to serve us well. This quarter, we saw churn improve by 35% sequentially, while consolidation continues with many of our larger clients significantly increasing their footprints. Our average B2B deal size has also increased by 23% year-over-year. On average, MJ Platform clients' number of transactions tracked in our system has increased by 51% year-over-year. MJ Platform delivered four nines of uptime in the quarter, and our average client satisfaction rating across all products continues to exceed 8 on a scale of 1 to 10. Today, I'd like to share with you our positioning and strategy to maximize the value creation events we see on the horizon. With leading market share driven by the breadth and capabilities of our ecosystem, we believe we are well-positioned to participate in the many growth drivers ahead. Starting with our core operations, our existing clients continue to expand the usage of our software throughout their organizations. Given the enterprise-grade nature of our solutions, our clients tend to be amongst the most sophisticated and fastest growing companies in the industry who understand the ROI benefit of investing in software systems. It is not uncommon for us to see a client grow from tens of millions to hundreds of millions in revenue over the course of just a couple of years. As their businesses rapidly expand, they quickly realize the spreadsheet solutions which enabled them to reach their first million in revenue don't scale when the business becomes 100x the size. Fueled by increasing competition in the industry, these companies turn to technology, such as the Akerna ecosystem, to reduce the complexity of managing their business, often converting one or two locations at a time as they implement across the organization. For Akerna, this translates into a healthy pipeline of backlog. Larger clients often contract with us for several locations at a time, then methodically deploy location by location before returning to contract for their next cohort of locations. With 1.2 million of ARR already in backlog and understanding the existing footprint in purchasing nature of our clients, we feel confident that over time, if we do nothing else than serve the existing markets, we can grow our business by 30% plus on an annual basis. While a strong growth rate on its own, we view this to be a baseline, given the size of opportunities in front of us. When considering industry-changing developments on the horizon, such as the Safe Banking Act, greenfield market expansion with recently passed state legalization initiatives, and ultimately the passage of U.S. federal legalization, we believe the mid- to long-term opportunities for Akerna and the cannabis industry are much, much larger. Starting with the Safe Banking Act, the U.S. House of Representatives passed legislation which would allow financial institutions to conduct business with cannabis companies despite the ongoing federal-state conflict. The bill has been introduced in the U.S. Senate, where it is expected to pass with bipartisan support. For Akerna, the passage of this bill is important as through our partnership with Priority Technology, we believe it will allow our cannabis clients to accept credit card payments for cannabis transactions and eliminate the cash-only payment constructs that currently exist. Once passed, and the major credit card payment rails agree to begin processing transactions for the cannabis industry virtually overnight, we will be able to turn on credit card processing for all of our current MJ platform and MJ retail point of sale clients who opt in. For our clients, this is beneficial as it immediately integrates payment processing with our robust compliance offering to create a comprehensive point of sale solution. For Akerna, payments become an additional revenue stream as we will capture a portion of the standard roughly 3% processing fee on each transaction. To place the magnitude of this opportunity in context, if all our current retail clients currently used our payment solution, it would translate to an additional $20 million of annual revenue with nearly zero cost to us. Beyond doubling the size of our revenue at roughly 100% gross margin, payment processing will also provide an opportunity to capture value in the sales volume growth of our clients. Looking beyond the passage of the Safe Banking Act, the next growth catalyst for our business will come from new state initiatives. With seven states passing ballot measures or legislative bills to legalize cannabis in the last six months, the greenfield opportunity for first consulting and then software sales is large. New states provide us an opportunity to sell our software products at both the government and business levels. Leveraging our B2G LEAF data systems offering, we typically engage early with states as they begin to formulate their regulatory framework. More states are interested in a closed-loop model like Pennsylvania's or Utah's, where in addition to contracting for a state regulatory oversight system, such as our LEAF data systems offering, the state also requires all licensees within the state to use one standardized business management software, our MJ platform. In Utah, we are also able to further bundle our solo tag offering, providing a cost-effective, anti-counterfeit solution for tracking and tracing. Lastly, even in states where our LEAF data systems offering is not used, we still have a large opportunity to win share among new licensees with our MJ platform as our primary competitors on government solutions do not have a business-to-business solution. In addition, Given our existing clients tend to already view large, multi-region enterprises, there is an increased potential they will look to enter new markets as they emerge and deploy offerings from the Akerna ecosystem as they bring new locations online. We're already in discussions with a number of new states, and we're excited about the opportunities they represent. With that said, it is important to remember that the decision-making process with government agencies takes time, And as RFPs are slowly issued, it likely won't be until early 2022 that we would see any initial lease data systems wins translate into revenue, followed by B2B wins once licenses are issued. Of course, within existing medical markets, which are looking to expand into recreational as well, the B2B licensee opportunities have the ability to materialize more quickly if there's often a regulatory framework already in place. Lastly, As we look out from a timeline perspective, the largest growth catalyst for our business will be U.S. federal legalization. With the forthcoming Senate Comprehensive Cannabis Bill, which is intended to end federal prohibition on cannabis, there is increasing momentum to pass legislation by as early as next year. Passing of such legislation would be an inflection point moment for both the industry and Akerna, and it's one for which we have been preparing ourselves for several years. From a platform and ecosystem standpoint, we recognized early on that even after federal legalization, compliance and regulation requirements will still vary state by state and change frequently, creating a complex regulatory system much like the tax code in the U.S. today. By re-architecting our platform and abstracting the compliance layer, we created a solution which could rapidly integrate new compliance requirements, without having to rewrite code for each product offering, thereby enabling us to scale quickly as the industry grew. Competing solutions in the market have not developed this capability, and thus we believe they will have difficulty in scaling to meet the challenge. Similarly, through our integrations with industry-leading financial and tax planning management tools such as Sage, Oracle, NetSuite, and SAP, we have created both an enterprise-grade ERP system as well as a holistic suite of tools to meet the needs of our clients. Additionally, through the recent acquisition of Viridian and their SAP Business One integration, we have expanded the breadth of our offerings to bring clients onto an ERP platform earlier in their life cycle. The integration of these capabilities is key as it provides our clients with a suite of applications to manage the entirety of their business while creating strong channel partnerships with Blue Chip Enterprise software vendors. We have also leveraged our integration capabilities to build additional enterprise functionality, such as data analytics and predictive intelligence by partnering with Domo. With MJ Analytics, our clients can leverage the large data sets captured for regulatory requirements to make informed decisions about their own operations, thereby improving business outcomes, including sales growth and profitability. The value of these capabilities continues to be recognized by the market, with ARR contribution more than doubling in the past quarter. Lastly, using the Canadian federal legalization framework as a model, we believe once U.S. federal legalization has passed, there is a large opportunity to gain traditional medical pharmacy clients as well. For a true medical pharmacy model, the pharmaceutical industry has heightened and standardized requirements to prove provenance. Today, no one in the U.S. cannabis market has yet developed this capability. However, through our acquisition of Ample Organics and our client, Shoppers Drug Mart, which represents roughly 30% of the Canadian traditional medical pharmacy market, Akerna gained pharmacy-specific capabilities, such as a payment portal, which exchanges patient information in a HIPAA and PIPA-compliant manner and insurance adjudication. Both sets of functionalities already integrate with our cannabis compliance offering and we believe will provide us with a meaningful first mover advantage specifically with U.S. traditional medical pharmacies as they look to enter the market upon federal legalization. As we prepare for this catalyst opportunity in the U.S., we have nominated Barry Fishman, a veteran in the cannabis and pharmaceutical space to our board. In closing, We are very excited about the many value creation opportunities ahead and the business we have built to leverage the upcoming waves of growth. With the leadership position we have in our core business and capabilities we have integrated to take advantage of new opportunities, such as payments, new state initiatives, and ultimately U.S. federal legalization, we strongly believe we are quickly approaching an inflection point in growth, both in the cannabis industry and a current role within it. All our hard work and achievements to date have positioned us very well for this moment, and we look forward to driving long-term shareholder value as the path unfolds in front of us. Now, I will hand the call over to John, who will take us through the details of our financial results. John, please take it from here.
spk04: Thanks, Jessica. Today, I'll provide an overview of our financial results and key business metrics for the first quarter ended March 31, 2021. As a reminder, these results are discussed in further detail in our Form 10-Q, which will be filed shortly with the SEC. Financial results reported today are preliminary. Final financial results and other disclosures will be reported in our quarterly report on Form 10-Q and may differ materially from the results and disclosures today due to, among other things, the completion of final review procedures, the occurrence of subsequent events, or the discovery of additional information. We encourage you to review the filing in detail. This past quarter, we continue to deliver on our core objectives of expanding software revenue, optimizing our operating infrastructure, and improving profitability. We work hard each day to deliver strong results like those produced this quarter, while simultaneously investing aggressively to build the compliance platform of the future. With software revenue of 10% sequentially, approximately $1.2 million of new AR bookings, and the average booking amount of 23% year-over-year, the growth momentum of our business continues to improve as larger multi-location and multi-state operators increasingly implement our solutions to solve their business needs. As evidenced by the continuing increase of transaction volume, which was up 67% year-over-year, and retail order value, which was up 29% year-over-year, our clients' operations are scaling rapidly. Our strong demand pipeline generated by both client growth and organization-wide implementation plans gives us confidence in our ability to continue to grow our revenue and profitability as we prepare for the upcoming industry catalyst, Jessica mentioned earlier. Turning to the financial results, for the March quarter, total revenue was roughly flat on a sequential basis at $4 million, with 10% organic growth in software revenue offset by softness in our consulting practice. Software revenue was up 10% sequentially to 3.8 million and up 62% compared to the prior year. We currently have approximately 1.2 million of ARR backlog pending go-live. Consulting revenue declined 70% sequentially to approximately 175,000 as a result of project timing. Progress on new state initiatives continues to be mixed with some states such as Arizona moving quickly, giving their existing medical framework while other states such as New York and New Jersey are moving more slowly through the process. As a result, we expect our consulting revenue to remain soft in the first half of 2021. However, with our current backlog and growing pipeline of opportunities, we believe the second half will be meaningfully stronger. Gross profit was 2.6 million for the quarter and represented a 64% gross margin compared to a gross profit of 2.7 million and a 66% gross margin in prior quarter. We continue to make progress automating activities to drive gross margin leverage. We expect our margin profile to expand above the mid 60% range in future periods as consulting revenue rebounds and as our software revenue grows, adding a higher contribution margin to our revenue mix. Moving to operating expenses, total operating expenses decreased approximately 6.7 million sequentially, mainly a result of a non-cash impairment charge taken last quarter. On a non-GAAP basis, operating expenses decreased approximately 240,000 5% sequentially as we continue to drive efficiency across the business. Non-GAAP operating expenses exclude a number of one-time, non-recurring, and non-cash expenses that include depreciation, amortization, stock comp expense, business combination expenses, impairment, and other non-recurring charges. Product development was flat sequentially. a result of ongoing cost management and continued focus on scalable infrastructure. In the quarter, we capitalized approximately $900,000 of software development as we continue to accelerate our product roadmap. We continue to invest in product development that we believe will deliver the complete compliance experience for our clients. Sales and marketing expense decreased 95,000 or 5% sequentially as we continue to realize synergies and refine our go-to-market strategy. We continue to be pleased with our sales and marketing efficiency as we continue to drive new business growth and improving client acquisition costs. General and administrative expenses decreased approximately 110,000 or 6% sequentially, primarily a result of a reduction in lease obligations. As I have shared previously, we are laser focused on operating efficiencies across the organization. In the quarter, adjusted EBITDA was negative 1.8 million compared with negative 1.9 million for the prior quarter ended December 2020, an improvement this quarter of 4% sequentially, and compared with negative $3.2 million for the prior year, a year-over-year improvement of 42%. We believe adjusted EBITDA, when considered with the financial statements determined in accordance with GAAP, is helpful to investors in understanding and comparing our performance. As of March 31, 2020, our cash balance was approximately $15.4 million. Cash on hand and access to the capital markets positions us well to execute on our strategy, which is a significant advantage over many of our competitors. We expect continued improvements in our financial performance as we continue to scale and drive towards profitability. The above referenced non-GAAP financial measures are discussed and reconciled to GAAP financial measures in our earnings press release that was issued before this call. That press release is available on the company's investor relations website, and we encourage you to review the reconciliations there, as well as review our financial statements for the quarter ended March 31st, 2021, contained in our Form 10Q, to be filed with the SEC shortly. This past quarter, we continued the strategic investment in technology and infrastructure that we believe will deliver our growth objectives. We must build for the future, and we are always looking forward to ensure that we continue to define cannabis compliance in this growing and ever-changing market. This concludes our prepared remarks. We are happy to take any questions you may have. Please keep in mind that the forward-looking statement disclaimer discussed at the beginning of this call applies equally to the Q&A session. Now let's turn the call over to the operator for questions. Operator?
spk02: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad A confirmation film will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Brian Kinglinger with Alliance Global Partners. You may proceed with your question.
spk03: Hi, good morning, guys. Thanks for taking my question. First, with so many states regulating cannabis... Hi, Jessica. With so many states, as you highlighted since November, regulating cannabis, can you talk about your positioning and even early conversations with potential licensees? I take it a lot of them are existing licensees that you have. And how many states are evaluating or have determined a closed-loop system is the way to go of those seven?
spk00: Good question. Great questions. Let me actually take the least portion of that question first, Brian. We're in a number of conversations that I mentioned in my prepared remarks, and we've either recently responded or are responding to RFPs from new states. It is worth noting, though, that due to the length of the RFP process, even if new ones were issued in the near term, it's unlikely that we would see revenue in calendar 2021. And I can also share, as far as the closed-loop model piece of that question goes, that our contacts in Pennsylvania and Utah are regularly contacted about this, particularly in Pennsylvania, which has a very robust and healthy program that appeals to industry and enforcers alike. And we do expect it to serve as a model in future states based on the states we know are having those discussions. As far as B2B licensees, existing clients, who are in discussions with us about expanding their footprint into new states. I think you see that reflected in our continued robust and growing pipeline, as we mentioned in our prepared remarks. And I can share anecdotally that we are continuing to have conversations with existing clients and formulate plans for large rollout plans across all of their locations.
spk03: Great. And then you've been holding at around $1 million of annual run rate bookings per quarter for some time, plus or minus. Do you expect that can accelerate given not only the new state regulations, which you highlighted is probably a 2022 event, and can bookings accelerate given the opportunities you have just with your existing client base in existing states?
spk00: Well, we certainly do expect to see some acceleration. There was really no new markets last year in 2020 throughout the COVID-19 year, if you will, and the impact. And we continue to just see strong month-over-month and quarter-over-quarter performance in our bookings. As the many new opportunities that are available come online, we do expect to see some acceleration in bookings as well.
spk03: I think you were trying to communicate, and correct me if I'm wrong, that you believe you can grow software revenue 30% organically with your existing client base. I think you meant an existing state, but maybe I'm mistaken. When do you think you can begin achieving those types of growth rates on software revenue organically?
spk00: John, do you want to take that one?
spk04: Yeah, I can take it. Good morning. Brian, how are you? Yeah, I think, I mean, I think if you think about, look at our first quarter, I mean, 10% organic growth in just a quarter. I mean, you could certainly extrapolate how that would, you know, play out over an entire full month period. You know, we're going to be continued, have that continued focus on driving that organic growth and looking for opportunities to sort of land and expand and You know, I think we saw a little bit of that in the first quarter as we were able to successfully, you know, expand with a number of our clients. You know, we certainly talked before about some of our data products and some of our AI and MJ analytics tools and being able to sort of upsell that as some of our clients grow. So, you know, I think overall from just if you look sort of the sequential growth from Q4 of last year to Q1 this year at 10%, organic growth, you know, we're certainly, you know, we're happy with that, and we're going to certainly continue to sort of look to achieve sort of those numbers in the quarters ahead.
spk03: And maybe to that end, can you talk about how your analytics products being accepted in the marketplace and when you think that will become a meaningful catalyst to software revenue?
spk00: Well, Brian, I'll take that, at least the first part of that. As we shared in our prepared remarks, we have seen contribution from MGA Analytics double in this past quarter over the quarter before. And I can also share that we are seeing a large close and attach rate on new deals for that product, and we expect to see ongoing contribution from it.
spk03: Great. Last question I have on the consulting side. It sounds like new states are moving quickly right now. With the modest quarterly revenue, can I assume that you're only working with maybe one state right now? And then what does the competitive landscape look like on these consulting projects? There are a number of other companies that are bidding on these projects. Is there a lack of competition?
spk00: On the competition side, we perform extremely well versus our competitors. We're not the least expensive solution out there. There's probably a handful of competitors in any market. However, we do have the, I believe, the best win rate for applications in that space and in the industry, and our reputation is very well known. We are currently, in fact, we're actually seeing a combination of projects that were placed on hold at the beginning of the pandemic start to come back as well as new projects from recently passed state initiatives. We are working in a handful of states currently and progress on those new state initiatives continues to be mixed. Some states such as Arizona are moving quickly given their existing medical framework while other states such as New York and New Jersey are they're moving more slowly through the process. So as a result, we do expect our consulting revenue to remain soft in the first half of 2021. However, with our strong backlog and growing pipeline of opportunities, we believe the second half will be immediately stronger.
spk03: Okay. Thanks, guys.
spk00: Thank you.
spk02: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad One moment while we poll for questions. Our next question comes from the line of Martin Toner with ATV Capital. You may proceed with your question.
spk06: Good morning, everyone, and congrats on a good quarter.
spk00: Good morning, Martin.
spk06: Thank you. I'd like to ask about Baribian and ask you guys to talk about... what the synergies between the businesses will be. Are there current customers that you think it would be beneficial for both of you guys for them to graduate to the Viridian solution? Will there be any integration between the Viridian solution and some of your other ones? Are there things that you can take from different solutions to improve any of the other ones, stuff like that.
spk00: Great question. So first, I guess let me just share the core synergy that we see between our products. After working to develop their own compliance capabilities, the Verdean management team had a direct appreciation for the challenges of replicating the depth and breadth of our compliance gateway. Coupled with the integrations of our ecosystem and added functionalities such as our retail and payment solutions, we realized that integrating our platform is an opportunity to unlock significant synergies on both sides. The primary synergy we'll start with is integrating the Viridian product to our compliance gateway and ecosystem, and it should take about a quarter complete the initial integration steps with the realization of synergies through our first year. In regarding which products would yield synergies, both Akerna and Meridian have a pipeline of clients who have already indicated interest in the enhanced product offerings, in addition, of course, to the network effects of upselling to our combined existing client base. So not only do we expect to, and are we already in conversation for the Veridian product with some of our existing client base, but we also have been in discussion with Veridian clients about additional products and services that we can offer as well.
spk07: That's great. Super. Does Veridian require a lot of R&D spending?
spk00: As we mentioned previously, Viridian does contribute positive cash flow synergies, and we have enough R&D sending in there to complete the integration work to our compliance gateway, which will realize some synergies by doing compliance in one place for all of our product lines. And then we certainly have enough and appropriate budgets for ongoing product development across our product lines.
spk06: That's great. John, would you add anything to that?
spk04: No, I think that's a really good way to think about Viridian, you know, to Martin's question about integrating sort of with the broader Akerna ecosystem to drive that cohesive, you know, technology platform with our compliance gateway. So I think that was a really good way to say it.
spk07: Super. Well, that's all for me. Thank you, guys.
spk02: Thank you, Martin. Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Ms. Jessica Billingsley for closing remarks.
spk00: Thank you, Operator. We are the technology ecosystem for cannabis, serving operators, governments, and brands. Our ecosystem strategy and strategic investments are focused on locking up the tech spend and of the enterprise cannabis businesses and solving with technology the growing demand for increased supply chain transparency among consumers and government. We thank you for your interest, Makarna, and we look forward to sharing our progress with you as we move forward.
spk02: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.
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