Akerna Corp.

Good morning and welcome to Akerna's third quarter 2022 financial results conference call. As a reminder, today's call is being recorded. All participants are in a listen-only mode. A question and answer session will follow the formal presentation. And at any time, you may press star 1 on your telephone keypad to join the question and answer queue. To remove yourself from the queue, you may press star 2. At this time, I would like to turn the call over to Peter Selzberg, Investor Relations for Akerna. Please go ahead, Peter.

Thank you, and welcome to today's third quarter-ended September 30th, 2022 conference call. On the call today are Jessica Billingsley, CEO and Chairman of Akerna, and Dean Ditto, 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 Security Litigation Reform Act of 1995, Words such as estimates, projected, expect, anticipates, forecast, plans, intends, believes, 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 the future growth and prospects for Akerna and statements regarding expected future revenue recognitions. 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 would cause actual results or outcomes to 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 than occurred as violence with the SEC and forward-looking statements speak only as of the day 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. Lastly, as a reminder, these results are discussed in further detail on our Form 10-Q. 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 of today due to, among other things, the completion of final review procedures, the occurrence of subsequent events with the discovery of additional information. We encourage you to review the filings in detail. And now, without further ado, I'd like to turn the call over to the current CEO, Jessica Billingsley. Jessica, go ahead.

Good morning, everyone. Thank you for joining us. Today, as we did last quarter, we will be covering three key areas of the business. First, the key company performance highlights of the quarter. Second, the progress on our balance sheet and capital structure initiatives. And third, developments in the cannabis sector. Then I'll turn the call over to Dean for a detailed financial review, followed by a Q&A session. Earlier this morning, we reported our Q3 2022 results. After two fairly heavy investment years in which we completed a number of strategic acquisitions, This year, we have remained focused on integrating and positioning the business to take advantage of future market development and expansion opportunities, as well as synergies and cost structure improvements. Beginning in Q1 of this year, while other firms busied themselves with speculating on future state macroeconomic scenarios and resisting the reality of the data, we seized the opportunity to make tough decisions early, reducing our cost structure and reviewing our client pricing to accelerate our path to profitability. This course of action is proven fruitful as we've steadily improved our cost structure and continue to track a path to profitability. Highlighting the quarter, we saw software revenue growth of 17% year over year and nearly 40% the year to date. Our current annual run rate closing out the first half of the year is running slightly ahead of the full year last year. And we're anticipating seeing some strong catalysts in 2023, which we'll discuss in just a moment. Gross margin for the quarter was 62%, consistent with last year's period. And year-to-date was 67%, compared to 62% for last year's year-to-date. While this is a clear demonstration of year-over-year growth, we do acknowledge that this growth has trended down substantially. Both domestically and internationally, the pace of new entrants into this space is slowing. And with existing operators, we're seeing some purchase decisions being delayed. I'll elaborate on this more in a moment when we discuss industry impacts of the recent U.S. election cycle. But for now, what I'm making clear is this. We are taking competitive measures to ensure we are solidifying our leadership position in the available market. The cost-saving measures we enacted earlier this year are tracking through to our P&L. We're proud to announce that each reported expense line is down from year-ago levels. This is a clear demonstration our cost reduction efforts, staff reductions, reduced facility costs, and other considerations, successfully saving us approximately $600,000 per quarter, which are currently being realized. On today's call, as on our call last quarter, I'd like to re-emphasize our three key performance metrics, committed annual recurring revenue, or CARR, growth in bookings, and growth in client transactions. I'll clarify each of these metrics, explain why they're important, and how we're performing. Then we'll provide an update on our strategic alternatives evaluation. Starting with metrics, 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 approximately $17 million as of September 30th, which represents a slight increase year over year, It is also slightly below what we reported last quarter. As we shared in our last earnings report, this decrease does not represent a spike in client loss return. We continue to see a reduction in CARR with clients who have reduced and renegotiated their contract. This represents the reality of a softer consumer economy that's reaching across a number of sectors, a reality where, in light of macroeconomic factors, some clients have made select service cuts. However, broadly speaking, we have retained our clients for their most mission-critical needs. It's important to make clear that we're partnering with our clients to help them adjust to this climate. With over 13 years of experience backing us, we are acting as a trusted advisor in meeting the needs they have today, providing mutual value both now and in the long term. And it ultimately positions us to expand with them as new markets eventually open. To underscore this important point, while it is routine in times of economic challenge for businesses to reduce costs, given our demonstrated ability to maintain and evolve our client relationships, we anticipate this represents a potential growth opportunity for the future. With regard to booking, this equates to 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 booking to be a near-term leading indicator of our performance. Our Q3 software bookings were approximately half a million, which was also softer than what we had hoped to see, and below what we saw in the early part of the year. We will continue to closely track our cost structure in light of these software booking numbers, and of course, we'll also start to recognize some of the revenue from the prior quarters with longer lead times. Turning now to our third metric, client transaction growth. which we believe is the single most important long-term indicator of our true market share. Our transaction volume increased by 10% sequentially, and our transaction dollar amount reflected a 10% decrease. And what this illustrates is that as a result of supply and demand, as well as consumer spending habits, growth in legal cannabis transactions will closely track the legal market opportunities. This is a trend we publicized after identifying the consumer spending on Labor Day. Historically, a top spending holiday is relatively flat year over year. What this means for our clients is that competitive market pressure is high and differentiation is key. A Kernis product portfolio and ecosystem was strategically designed to guide our clients through this climate. The transaction volume growth continues to provide a future revenue catalyst as regulatory changes bring opportunities to monetize transaction volumes. including through retail and wholesale payment opportunities. Macroeconomic climate and domestic political challenges certainly create headwinds for the industry, but ultimately, we're still charting on course for collective industry growth. I'd like to now turn to what we're doing to strengthen our balance sheet and position ourselves for the future growth that we anticipate. On top of the $10 million round of funding we closed in the beginning of the third quarter, we've also been taking the necessary steps to maintain compliance with NASDAQ listing standards. And to that end, we also issued a preferred convertible issue that was structured in a way so as not to dilute our shares, and accordingly, we completed our reverse split last week. The details are in our filing, and Dean will touch on the specifics of that during this call. But the takeaway is this. We are continuing to make solid, steady movement in strengthening our balance sheet, and we remain ready to capitalize on operating growth opportunities as they present themselves, whether that is through new U.S. state markets opening, U.S. federal banking actions, such as the Safe Banking Act, and or international legalization. In touching on the legal and regulatory environment updates, last month, President Biden had a historic moment when he was the first sitting U.S. president to suggest that the scheduling of cannabis should be reevaluated and that simple cannabis offenses at the federal level should be pardoned. These actions, when coupled with the potential for safe banking and the soon-to-be-proposed PREPARE Act, signify unprecedented momentum for cannabis legalization at the federal level. As for this midterm election cycle, In total, we saw five states with recreational cannabis on their ballot. Arkansas, Maryland, Missouri, North Dakota, and South Dakota. Both Maryland and Missouri passed their initiative, becoming the 20th and 21st states to legalize recreational cannabis. With the passage of these initiatives, nearly half of Americans live in states where cannabis use is legal for anyone 21 years or older. These are wins to be celebrated. The two states' passing measures demonstrate the continued bipartisan interest of voters when it comes to cannabis. Importantly, these initiatives represent the opening of two new recreational markets. Although timelines and license structures are largely yet to be determined, we remain positioned and ready to enter these markets as they open. At the time of these remarks, there are many Senate and House races yet to be finalized. I want to be clear when I say that this statement applies regardless of which party has the majority in the Chamber of Congress. The federal legalization of cannabis must be seen as a bipartisan goal because it is the fiscally responsible thing to do. We saw this during COVID when cannabis was declared an essential industry in Colorado and other states, and we continue to see this in the state economy. In the face of this macroeconomic climate, Putting federal cannabis action, such as incremental action including safe banking, should be at the forefront of the minds of Congress, regardless of which party has majority. The economic benefits, increased revenue, and job creation are bipartisan. We believe that our long-term leading indicators all suggest good progress heading into the fourth quarter and beyond for three key reasons. First, our core business of compliance is a must-have and not a nice-to-have service for our clients. We will continue offering a best-in-class suite of services that addresses the needs of small to medium-sized businesses, mid-sized enterprises, and larger cannabis enterprises. Second, the cannabis market is projected to grow, and we are positioned as a central player with more of the industry running on Acronit each year. Third, we are making the prudent and necessary decisions to ensure that we are the go-to solution in the cannabis space for many years to come by narrowing our focus to our core must-have product lines and ensuring we are firmly entrenched to rise with the industry in category to enjoy the growth that is projected for the years ahead. We remain optimistic about our future, and we believe the cost-cutting we've done in conjunction with the opportunities we have in front of us will cement our leadership position and enable us to realize our long-term financial objectives. Now, I'll hand the call over to Dean Ditto, our CFO, who will provide a financial overview of the quarter. Dean?