Akerna Corp.

Good morning, and welcome to Akerna's fourth quarter and full year 2021 financial results conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Peter Seltsberg, Investor Relations for Akerna. Please go ahead.

Thank you, and welcome to today's fourth quarter-ended December 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 within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act 1995. Words such as estimate, project it, expect, anticipate, forecast, plan, intend, believe, seeks, may, will, should, future, Proposed 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 the future growth and prospects for Aperna 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 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 more fully described in Akerna's filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made. Akerna 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, without further ado, I'd like to turn the call over to Aperna's CEO, Jessica Fillingley. Jessica.

Good morning, everyone. Thank you for joining us today. Today, we reported our fourth quarter and full year financial results for 2021. And I'm pleased to say we posted another year of solid top-line growth, achieved improvement in growth margins, and closed two important acquisitions that boost our capabilities in the enterprise market. We delivered software revenue growth of 59% for the year, with total growth of 49%. We improved our adjusted EBITDA loss by 32% year over year, and our revenue run rate is in excess of 25 million today. John will cover the specifics of our financials in his remarks shortly. We continue to develop and acquire connecting technologies to provide real value to our clients and to drive our future growth. Our growth drivers remain intact and largely unchanged since our Q3 report, in which we noted the inevitable opening of new markets, continued consolidation of the industry, new regulations, and ultimately legalization at the U.S. federal level. Akrona has been at the forefront of preparing for these growth drivers. At the heart of every decision we make as your executive management team is this question. Does this provide value to the cannabis industry of tomorrow? We are committed to being the best software solution available to serve both the cannabis industry of today and of tomorrow, accounting for every level of government regulation and every point in the supply chain. We intend to expand and solidify our position as the leading enterprise solution for the cannabis industry and execute a plan to deliver economic, social, and other business value. There are three central ways you can measure our success in creating value. The metrics we use in report, the strategic partnerships we cultivate and announce, and the way we structure our product offering to simplify the complexity of the industry. Let's start with metrics. The primary drivers of long-term value in our business include these three key performance indicators. Committed annual recurring revenue, VARR, growth in bookings, and growth in client transactions. I'll clarify what each of these metrics means, why they are important, and how we are performing. Most of our revenue today is comprised of subscription revenue. As a result, The most important metric we track to measure our present success is our total CARR, or the total amount of contracted recurring revenue for which clients have signed contracts. Our CARR was $20.9 million as of December 31, 2021, which represents a 51% increase year over year. Our growth in bookings and growth in transaction metrics are both leading indicators of the future value we are building in the business. Acurnis reported bookings represents the dollar amount of new signed software contracts, the value of which will be recognized over the life of the contract. We consider growth in bookings to be a near-term leading indicator of our performance. Our Q4 software bookings were 1.5 million, a record for Acurnis, and more than a 50% increase over prior quarter indicating increasing growth. Turning to our clients' transaction growth, we can see they're the industry leaders of tomorrow. Collectively, both their transaction dollar amounts and transaction volume consistently grow between 25 and 50% year over year, which has held true for every quarter since we began reporting our clients' transaction growth. These clients are scaling in two ways. Expansion through acquisitions during the overall consolidation of the market and same facility growth. For example, more consumers are visiting a given retailer dispensary, and they're also repeating their visits more frequently. These numbers demonstrate that more of the industry is running on Akerna. We believe transaction growth is the single most important long-term leading indicator of our true market share. in addition to providing a future revenue stream once regulatory changes bring opportunities to monetize transaction volume through retail and wholesale payments opportunities. The next way we create long-term value is through our strategic partnerships, such as those with SAP, Microsoft, Oracle's NetSuite, and Domo, which enable us to leverage a pool of shared resources to help our clients solve their problems of today and tomorrow. To illustrate how quickly these strategic partnerships can evolve to provide additional value as the industry grows, let's look at our partnership with Hyper, an omnichannel digital payments and compliance provider for the cannabis industry. This partnership stemmed from our shared understanding that the cannabis industry of today faces a major challenge when it comes to payments. With non-compliant payment solutions, such as the so-called cashless ATMs, taking advantage of cannabis stores across the U.S., securing this partnership with Hyper enables retailers to complete payments in a compliant manner. Compliant pin-debit solutions, such as Hyper, are gaining mainstream popularity, especially among independent operators. We expect Hyper's solution to continue to be a valuable payment solution offering for a current post-federal legalization. Lastly, we continue to build a product portfolio that provides value to the industry of today while ensuring relevance and a deep and wide moat tomorrow and post-federal legalization. When architecting our ecosystem, we took care to use an approach that would not only address the needs of the small, medium-sized business segment, but also those of the growing enterprise market. This decision allows us to grow with our clients as they scale from our starter business solution into our larger business offering. We focus on providing the network that connects applications with solutions for compliance, payments, and integration. This structure enables our clients to custom select the ecosystem connected suite of products and services right for them at this point in their growth journey. This ability to customize becomes increasingly important as companies grow in complexity. Larger companies require tailored solutions that address needs specific to their organization and workflows. The predefined one size fits all regional compliance only solutions that suffice for smaller businesses just getting started can no longer be justified as these businesses scale. Instead, Larger companies must evaluate their technology solutions based on their return on investment gained by having superior reporting and analytics and by knowing their compliance needs are met today in each market in which they operate as well as any to which they might wish to expand. As an example, a large multi-site operator might contract with us for our enterprise cultivation and manufacturing modules our mid-market retail solution with e-commerce and loyalty features, and their preferred backend financial solution. For this example, let us assume they choose the most popular mainstream tax and financial planning solution, Microsoft. This client can then choose from a suite of other products connected to our ecosystem to provide additional features and functionality. Perhaps they will add payments, a learning management system, route planning, or menu advertising from our ecosystem partners. Across all our products and services, we are equipped to serve operators across all verticals and in every phase of their growth cycle, large regulatory agencies and brands looking to expand their market share. The data is proving the success of this strategy. Our enterprise businesses are focused and this line of business is growing. 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. Our current, near-term, and long-term leading indicators all indicate good progress and positive momentum heading into 2022. And we believe we have secured and continue to secure the right strategic partnerships for the business while we have designed our system to solve some of our clients' biggest challenges by reducing their complexity. 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.

Thanks, Jessica.

This morning, I'll provide an overview of our financial results and key business metrics for the fourth quarter and full year ended December 31st, 2021. As a reminder, these results are discussed in further detail in our Form 10-K, 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-K 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 acquisitions continue to drive our revenue growth as we reported another quarterly record of 6.6 million in total revenue up 61 percent from prior year revenue and up 29 from prior quarter revenue drilling into the highest growth area for occurna Software revenue increased to 6.2 million, up 80% from prior year software revenue and up 36% from prior quarter software revenue. Growth in the quarter was primarily a function of strong performance from our October acquisition of 365 Cannabis, which along with Viridian Sciences, another 21 acquisition, forms our enterprise business unit. We continue to invest in our technology platform and we added further capabilities and functionality to deliver more value to the customers. We are prepared for what we anticipate will be another year of consolidation among the top players and continued growth in the industry. We continue to experience improvements in customer retention and growing volumes through our platform. Churn has improved by 24% compared to prior year, while consolidation continues with many of our larger clients significantly increasing their footprint. Our average B2B deal size has also increased by 15% year over year. B2B transactions tracked in our system increased by 23% year-over-year, and transaction volume was up 48% year-over-year, while retail order spend was up 42% against the same period in 2020. Now I'll review the financial results for the year. As a reminder, some of the below metrics are non-GAAP. A reconciliation of GAAP to non-GAAP financials is included in our earnings press release and posted on our investor relations website. We encourage you to review the reconciliation there, as well as our financial statements for the year ended December 31st, 21, contained in our Form 10-K to be filed with the SEC shortly. Total revenue increased to approximately $21 million, up 49% compared to prior year revenue of approximately $14 million, driven largely by accelerating software growth. Software revenue of $19 million was up 59% for the year and represented 92% of total revenue compared to $12 million and 86% of total revenue last year. The bulk of the growth was from the acquisition of 365 Cannabis and Viridian Sciences, as well as growth in revenue from our data and partnership initiatives. We currently have approximately $900,000 of ARR backlog pending go-live. Consulting revenue was down 13% for the year to approximately $1.5 million from $1.7 million last year. Consulting revenue was 7% and 13% of total revenue for 2021 and 2020, respectively. Due to the nature of consulting revenue, our dependence on emerging market activity, as well as the ongoing pandemic as a driver of demand, the percentage of consulting revenue over total revenue has varied from period to period depending on whether state legislation has expanded to allow new market entrants or growth of existing market participants. Progress on new state initiatives continues to be mixed. Some states have deferred the licensing process, while others have transitioned from application style to a lottery system of licensed awards. We are the clear leader in the space and are positioned well to capitalize as states issue their licenses and as some emerging states return to more aggressive licensing programs. Gross profit increased to $12.7 million for the year ended December 31, 2021, from $7.6 million for the prior year, an increase of $5.1 million, or 66%. Gross margin increased to 61% for the year ended December 31, 2021, from 55% for the year ended December 31, 2020. This improvement in gross margin was primarily due to operating synergies realized from our acquired assets, our ongoing initiatives to drive operating efficiencies, and acquiring additional B2B customers which have higher gross margins. We continue to focus on increasing our subscription gross margin over time through ongoing investments in automation. Moving to operating expenses, total operating expenses increased 34% to $45.9 million compared to $34.3 million prior year. This was a result of a number of non-cash, non-recurring items that I will discuss shortly. Total non-GAAP operating expenses increased 7% to $20.6 million compared to $19.3 million last year. We note that our current year operating expenses include the addition of the 2021 acquisitions of Viridian Sciences and 365 Cannabis. Our non-GAAP operating expenses as a percentage of revenue improved 28% year-over-year as we continue to build scale and drive operating efficiencies across the business. Non-GAAP product development expense increased $900,000 to $5.4 million, or 19%, primarily due to the acquisitions mentioned previously. Labor costs increased $1.5 million, or 44%, year-over-year. This was offset by declines in contractor expenses of $700,000 and software and technology expenses of $300,000. We continue to drive efficiencies in product development through better optimization of non-labor costs. Non-GAAP sales and marketing expense increased $900,000 to $8.6 million, or 12%, primarily due to the acquisitions mentioned previously. Labor costs increased $1 million, or 18% year over year, offset by small declines in other areas as we continue to improve the sales efficiency. Non-GAAP general and administrative expenses decreased $400,000 to $6.6 million, or 6%. Labor expenses decreased $300,000, or 11%, as we realized cost-saving initiatives. Rent expense decreased $700,000 as we exited a long-term offset lease. These decreases were offset by increases in professional fees related to legal, tax, and audit of approximately $500,000 and increases in insurance premium of approximately $150,000. Adjusted EBITDA improved 32% to negative $7.9 million compared to negative $11.7 million last year. Adjusted EBITDA as a percentage of revenue improved 54% compared to last year. The improvement in adjusted EBITDA and adjusted EBITDA as a percentage of revenue was primarily due to higher sales and better operating efficiency, as we discussed previously. We believe adjusted EBITDA, when considered with the financial statements determined in accordance with U.S. GAAP, is helpful to investors in understanding and comparing our performance. On a U.S. GAAP basis, our operating loss increased 24% for the year to approximately $33.4 million from $26.8 million last year. While revenue was up $6.8 million, or 49%, compared to prior year, the increase in operating loss was a result of a number of non-cash, non-recurring charges. Appreciation and amortization was $5.7 million, an increase of $2.5 million, primarily a result of acquisition. We recorded impairment expense of $14.4 million during the year ended December 31, 2021, an increase of $7.5 million compared to prior year, primarily due to a continued decline in market valuation and a flattening in the operating results of our non-enterprise reporting unit compared to acquisition assumptions. We recorded restructuring charges of approximately $1.9 million related to our lease termination. These increases were offset by declines in financing and acquisition-related expenses of approximately $3.6 million. Turning to key figures from our balance sheet and cash flow statement, our cash and restricted cash was $14.4 million as of December 31, 2021, a $3.9 million decrease from $18.3 million prior year. Net cash used in operating activities was $7.9 million, an improvement of 54% compared to prior year. Capitalized software increased to $5.5 million, or 43% compared to prior year, as we continued to invest in our technology stack. We recorded a liability of $6.3 million of contingent consideration related to our acquisition. That can be settled in cash or shares upon the achievement of certain revenue targets. Deferred revenue increased to $3.3 million, or up 320% from prior year. This was a result of the acquisitions of Viridian Sciences and 365 Cannabis. Given the profile of the enterprise client, most of the subscription revenue is received in advance of the quarter or year. Gross debt as of December 31, 2021, was $20 million. As we noted on last quarter's call, in October of 2021, we announced we entered into a securities purchase agreement for a $20 million convertible debt financing with existing investors who held the company's then outstanding convertible notes. Net proceeds from that offering were approximately $14.6 million, which includes deductions for the original issue discount, the payment of approximately $3.3 million of outstanding amounts on the prior notes, and payment of expenses. We continue to be prudent with our spending levels, and we have maintained a healthy cash position to manage the business. We believe 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. The narrative remains largely the same here. We are the leader in a large market that is still early to adopt compliance automation technology. We've made some great additions to the platform that can accommodate clients of any size and the industry's consolidation. The unpredictable nature of the regulatory environment makes it a challenge for all participants in our sector, and we continue to react and respond with products that provide the compliant automation required and increase the value we are able to deliver to clients. We continue to invest in initiatives that allow us to win across all segments of the market, including key investments that drive significant value under federal legalization. We believe we are sitting well positioned to continue building this company into the leader of tomorrow. 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?

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Colin Rush with Oppenheimer and Company. Please proceed with your question.

Thanks so much. Could you talk a little bit about the rate of organic growth in ARR and the investments that you're making and driving that on a go-forward basis?

Sure. Good morning, Colin. So I think it's important to think about the market conditions in 2021. There were little to no new markets, and we saw quite a wave of consolidation in the industry, which we had predicted. And the way that we had prepared for that wave of consolidation was was ensuring that we had enterprise offerings to move our S&P clients into as they scaled, as they consolidated. And I think importantly, as I shared in my prepared remarks, we've added more transactions running on our kernel. We've maintained our client base while adding two enterprise acquisitions at attractive valuations, which, as I just noted, we see is critical to our future growth so we can that existing client base into upsells and cross-sales and our enterprise offerings as our clients continue to scale. Now, looking ahead to growth and expansion opportunities this year in 2022, there are a number of new states with license deadlines now for this year and potential to open for meaningful software business, and we'll certainly be tracking that ability to really scale into emerging markets for organic growth as well as organic growth through consolidation of our existing clients and moving them into our enterprise offerings.

That's super helpful. Thank you. And then looking at industry consolidation, can you talk about how is that impacting your ability to go up the value curve and extract a bit more value from these clients as you see some of this consolidated into some larger players?

That's a great question too. So we had shared in our Q3 earnings remarks that we have roughly 40% of public cannabis companies are clients of ours in some way, shape, or form. And so we're really pursuing a land and expand model there. And we had shared a couple anecdotal examples of clients that are In process, they've signed with us, they haven't onboarded, or they've done a big consolidation and haven't yet signed with us for that new business, but we're the incumbent and most likely to win it. And so I think it's just as we think about how those waves of consolidation and growth are going to go for us and moving into those enterprise offerings, we're going to see the consolidation happen and And then we're going to see some type of a rollout over time into our solutions. And it's partly why we're continuing to share those transaction metrics, really to share that we demonstrate that we are owning that client base of the future. Adding the two acquisitions that we added this past year, Viridian and 365, Both have been critical in being able to have some of those expansion offerings, particularly in the financial side of things. So many times those clients will start with financials and then they will move into a full implementation across their supply chain. And when I say their supply chain, I'm talking about cultivation, manufacturing, distribution, retail.

That's super helpful. Thank you so much.

Thank you.

Thank you. Our next question comes from the line of Brian Kinslinger with Alliance Global Partners. Please proceed with your question.

Great. Thanks so much. Nice to see the pickup in bookings. Can you add some details regarding the bookings? Did it lean towards enterprise, data analytics? And what was customer churn in 2021?

Sure. So I will take the bookings, and then I know, John, I think we're sharing percentages on churn, so I'll flip to you for that. Good morning, Brian. For the bookings number, we don't actually include our aggregate data products in that number that we're reporting. We do include, of course, the MJ analytics that I think you're referring to there. The vast majority of that uptick is proving success of driving our clients into our enterprise offerings and that enterprise business. So we're really cautiously optimistic about seeing that trend in increased bookings continue as we're continuing to mine our client base into those enterprise offerings. And then, John, do you want to take... what we share in terms of churn. I know we share year over year improvement there.

Yeah, Brian, good morning. So I think in our prepared remarks, we talked about how churn improved 24% year over year. And I think that for us is continued investment in the platform, really the maturation of our customer base. I think if we talk a lot about the industry consolidation, you're seeing more of our customers you know, really understand the power of software and the value of software. And so we're happy to see that number and those retention metrics improve, certainly against 2021. You know, what also helped the number were the Viridian and Viridian Sciences and 365 Cannabis products. Keep in mind, you know, being SAP and Microsoft products, you know, very, very sticky infrastructure, very large robust software systems. So they tend to have, you know, really strong customer retention metrics, and that's actually helping to improve our own metrics, and I think we'll continue to see that trend in the future.

Great. And then on the expense side, it looks like you had some incremental losses from the acquisitions. Are there cost synergies you can achieve, and how do you see the quarterly adjusted EBITDA loss trending from the $3 million in the fourth quarter over the next few quarters?

Yeah, so I think, you know, we knew going into this quarter with the acquisition of 365, you know, this is the largest acquisition to date that we've done. And it represents, you know, almost half or at least 40% of our revenue today. We expected there to be some, you know, some costs related to driving the integration of the two businesses. So certainly here in the quarter, you know, we saw an uptick in that. But I think going forward, most importantly, as we look ahead, I think we'll we'll return to that trend of improving our adjusted EBITDA over time. We've done a great job of that the prior six or seven quarters, sequentially improving that adjusted EBITDA every quarter. Certainly this one, here in the fourth quarter, we took a step back. But I think as we look ahead to Q2, or sorry, Q1 of this year, we should see that improvement really get back to what we would consider to be more normalized for this business and then continue to invest going forward. And as Jessica mentioned, with the growth in enterprise and the way that platform sits relative to this consolidating market, I think we could see some nice revenue growth there. That'll certainly help improve our job.

Great. Last one for Jessica. In terms of LEAF data, there's been four statewide government contracts since November that have gone to competitors. So Do you plan to invest more in this solution to improve your competitive position, or is it time to deploy capital elsewhere, faster-growing opportunities like enterprise, and just milk what you have on the government side?

Good strategic question, too, there. Importantly, we do see the B2B opportunity as our best long-term growth opportunity for us, and especially B2B. as these businesses continue to scale, as the industry scales, and as we've really competitively differentiated ourselves in having the only connections to the major tax and financial solutions. And that's reflected in the lion's share of our revenue today and, of course, much of our strategic focus. As far as LEAF data goes, we do have a stable team delivering on those existing contracts. And that stable team will continue to bid new RFPs. The technology is built. There's a low incremental cost to continue to bid on these contracts. And they're a game of numbers is the truth. And we remain optimistic at our prospects of adding to this line of business this year. We believe there are a number of new RFPs that are coming up.

Great. Thank you. Sure thing.

Thank you. Our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets. Please proceed with your question.

Yeah, I wanted to talk about the upcoming, or I guess the quarter that we're pretty close to buttoning up here. Given the success that you had with the new business bookings in Q4 and starting from that Q4 revenue, I'm not looking for a specific number for Q1, but do we expect to be up sequentially Q1 versus Q4 on the revenue?

I think it's important to note, and I'll let John maybe answer specifics there. Good morning, Eric. It's important to note that most of those bookings, as we just mentioned, are in the enterprise portion of our business, and that generally does have a little bit longer implementation cycle. We'll be continuing to report bookings. Of course, our deferred revenue is reported in our filings. And then we'll look to see some incremental progress, but I'm expecting that we'll see the bulk of the trend in adding this increase in bookings come just a little bit later in the year as most of them are enterprise. John, do you want to add to that?

Yeah, no, I would agree. That was, that was great. You know, enterprise, they're significantly larger contracts, significantly longer term contracts, but the go live and the implementation process is a lot longer. And so I think, I think the success we had in Q4 will probably start to see some of that trickle in, in Q2 of this year.

Yeah. Got it. Okay. And then on the expense side, obviously, you typically would drive some efficiencies from, you know, at that higher scale. But I also know, you know, 365 cannabis is something that's not necessarily standalone, but you don't get as much synergies from that as, say, you know, buying another platform that we're... operating on, let's say, a prior enterprise platform like kind of a Viridian Sciences 2.0. But as far as the operating expenses go, I'm looking at the non-GAAP expenses in Q4 at around $6.8 million. Do we see any synergies there for the coming quarter? Anything that we should call out as far as maybe – one-time or seasonal expenses that we should layer in to Q1 versus that $6.8 million non-GAAP number in Q4?

Yeah, I think it's really tough to do quarterly comparisons here, as you mentioned, Eric, with the size and scale that 365 is at acquisition. Like you said, when you bring in smaller acquisitions like we did, for instance, in 2020 with Trello solutions, that was a really small tuck-in acquisition where cost synergies were almost realized from day one. We've talked a lot about the enterprise business, both on our Microsoft and SAP platforms sort of being the future growth areas. These are substantial businesses that require a lot of integration with. You know, I think, so it's difficult in the fourth quarter to compare because you're sort of comparing, you're not really comparing apples to apples. Sort of on a normalized basis, our expenses were up just a few hundred thousand in the fourth quarter. And that was really just primarily a result of, you know, some marketing spend in the Q4 period for, you know, our annual industry conference. You know, aside from that, I would say expenses were sort of flat on a non, you know, sort of acquired basis. basis. But I think going forward, we're going to realize cost synergies, maybe a little bit in labor, but certainly early on in more of the hosting and infrastructure costs. That's a big expense for software companies that we tend to share right now. We've got a huge initiative here in the first quarter to drive that. I think we're starting to see some of that materialize already, and we'll continue to focus on that throughout Q1 and Q2 of this But, you know, overall, as we've shared every, you know, every one of our calls, we are very prudent, you know, with our spending. We're making sure we're, you know, very, very closely monitoring how we're spending. And as we reported in our prepared remarks, you know, our percentage, our operating expenses, the percentage of revenue are up or improved 28% year over year. And so we're really focused on driving that scale to the organization. I think we'll see that really pick up here in Q1 and Q2. Okay.

And then lastly, while it is satisfying to see the unit and sales transactions numbers rise, that's not translating into top line for top line improvement for Akerna. What should we be looking forward to see that kind of organic growth rate? What are the big drivers for you guys in 2022 that you're trying to accomplish aside from any inorganic activities?

I think it's maybe important to talk about some of the new emerging markets. Of course, we feel very good about our ability and our positioning, our strategic positioning to continue to win this consolidating enterprise business, to incrementally add, and, of course, to upsell, cross-sell, mine our existing client base. However, there are also a number of new markets that that at least license deadlines and some license issuing that we are tracking and watching very carefully because, of course, new emerging markets are going to create even more opportunities for us in 22. New Jersey began accepting applications for dispensaries last week. Alabama is going to accept applications September 1st, so probably not a ton in this year, but it's nice to see that deadline. New Mexico has open licenses right now. They'll begin for operations sometime in Q2. We've got Mississippi, which is now moving forward. South Dakota, New York's applications are open. There's some movement in Michigan, Arizona, Connecticut. So actually quite a lot that we'll be tracking. Of course, we won't expect to see every single one of those markets open for for software opportunity, but certainly a couple of those big markets will be meaningful for Akerna. And then just to note that for the upcoming 22 U.S. midterm elections, there's another handful of states that are all working toward adult use cannabis initiatives on their ballots, and then a couple states working toward medical cannabis. All of that is big momentum for us, because our biggest growth drivers are new market expansion, consolidation in the industry, and then, of course, U.S. federal movement.

Got it. Thanks for taking my questions.

Thank you.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Scott Buck with HC Wainwright. Please proceed with your question.

Good morning, guys. I'm curious. I hope I didn't miss it, John and Jessica.

Did you mention what 365 revenue was for the quarter?

John, did we break that out?

Yeah, we didn't break that out separately, but you could sort of assume – they're probably in that $2 million run rate. Today, you know, we've actually filed audited financials for them as part of the acquisition process. So that'll give you a sense of sort of what their trends have been historically and then sort of what they did here up and through the acquisition.

Okay, that's helpful. I appreciate that, John. And then the sequential decline in gross margin, is that due to mix from the addition of 365? And is that something that we should see kind of walk higher here over the next three or four quarters?

I would say so. One thing that is important to note is the enterprise business unit, our SAP and Microsoft product offerings are incredibly robust. And their sort of margin profile when they get into the mid to upper 60s and low 70s is probably at a higher revenue volume than would be for our legacy business. And so Yeah, that business sort of had a little bit of an impact here in the fourth quarter. But as they start to grow their business, as they get their scale up and running, I would expect them to be back into the upper 60s, you know, mid to upper 60s here in short order. But again, just the size and scale of that sort of business and that product offering, you know, their scale, where they really start to hit their scale is going to be a higher revenue tick. And so we're certainly, you know, pushing that direction. And certainly with As Jessica shared with all of the consolidation in the industry and the demand for more robust enterprise-level solution, we think we can execute on that pretty rapidly.

Okay, thanks. That's a very good color. And then the last one for me, just on sales and marketing, obviously a pretty meaningful sequential uptick. How should we think about that line moving forward? Is this kind of the new run rate? And if so, curious how those dollars are being spent.

So really great question. Scott, follow up to kind of the first comment. The business model of enterprise, you know, while we're providing sort of the same products and services and cannabis, you know, compliance software, the majority of their expenses fall, I would say, into what we would think of as account management and customer support and so forth. And so the majority of the growth in sales and marketing expense in the period was really just specific to our enterprise product offerings. So a way to think about it going forward is that that uptick quarter to quarter is a reflection of 365, and that's probably sort of our normalized state going forward. There was no new initiatives or outside market expender conferences. It's sort of just where that sort of business unit and some of those labor costs fit within the framework of the income statements.

All right, that's perfect. I appreciate the time, guys. Thank you very much.

Thank you.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Ms. Billingsley for any final comments.

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 of the enterprise cannabis businesses and solving with technology the growing demand for increased supply chain transparency among consumers and governments. We thank you for your interest in Akerna, and we look forward to sharing our progress with you as we move forward. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.