Akerna Corp.

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.

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?

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.