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spk02: Hello, and welcome to Spring Big Third Quarter 2023 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. I would now like to hand the conference over to Claire Volatieri. You may begin.
spk00: Thank you. Hi, everyone, and thanks for joining our Q3 earnings conference call. Joining me on the call today are Jeff Harris, our CEO, founder, and chairman, and Paul Sykes, our CFO. By now, everyone should have access to our earnings announcement. This announcement is also on our investor relations website. During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, and long-term goals. These comments are based on our plans, predictions, and expectations as of today, which may change over time. Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors outlined in our 10-K filed with the SEC on March 28, 2023. Also during this call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for our GAAP results. Please refer to our earnings release on our investor relations website for a reconciliation of GAAP to non-GAAP financial measures, as well as additional context on our key operating metrics. And finally, this call in its entirety is being webcast from our investor relations website at www.investors.springbig.com and an audio replay will be available on our website in a few hours. With that, I'd like to turn the call over to Jeff.
spk04: Thanks, Claire, and thanks to everyone for once again joining our quarterly earnings call. Q3 was a solid quarter in which, despite the very challenging end market conditions, we continued to make progress towards our stated priority for this year of reaching positive adjusted EBITDA. During today's call, Paul and I will provide you details on our third quarter results, update you on key business initiatives, and provide guidance for the balance of 2023. Let me start by addressing up front some of the end market challenges that we have experienced throughout the year and which seem to have become more acute over this last quarter. While broader macroeconomic concerns continue to weigh on marketing budgets and digital spend, the headwinds caused by lower revenue growth and the compression of margins in the cannabis industry have also increased the financial stress on many of our clients. In an environment where cash is king, this has emerged as a challenge of ensuring timely, or in some cases, any payment for our services. We have and continue to work diligently with many clients to support them through the introduction of payment plans, but inevitably, this difficult economic climate also has led to us having no choice, in some cases, but to cease servicing non-paying clients. This impacts our revenues, which reduce by 5% year-on-year in the quarter to $6.9 million. Given the prevailing economic conditions and the prior year quarter being a particularly tough comparable, we view this a solid performance and are particularly pleased that our subscription revenue continues to grow with 13% and 19% year-on-year growth in the quarter and year-to-date, respectively. Our commitment towards the stated goal of EBITDA breakeven during 23 is as strong as ever, and we have now tantalizingly close to reaching that objective. We have continued to derive greater efficiencies across the company, enabling us to reduce our operating expenses. We completed a reduction in force a few weeks ago, reducing our employee roster to 89, representing almost a halving of employees compared with the peak in June of last year. And when taken together with non-employee related expense savings, we anticipate our operating expenses in Q4 this year will be approximately 40% lower than Q4 last year. We are now operating at an expense level that should enable us to deliver positive EBITDA even in the absence of meaningful revenue growth. And given our gross margin profile in the high 70% range, as we do deliver revenue growth, we can reasonably anticipate a rapid expansion in EBITDA. Turning to our revenue growth initiatives. We continue to develop and launch innovative product offerings to enable our clients to retain and grow their customer bases. Last quarter, we reported the launch of a VIP loyalty program subscriptions by Spring Big. Subscriptions by Spring Big enables our retail clients to offer consumers in return for a monthly or annual subscription fee the opportunity to earn additional loyalty rewards, access to special promotions, and other perks as VIP subscribers. Progress has been at a pace that we expected. In Q3, we had 20 clients expand their contracts to incorporate this new offering. and four have already launched their VIP subscription programs. We have a strong pipeline of client interest and anticipate both an acceleration in clients committing to this program and, of course, those already signed up rolling out their VIP subscriber programs. We see meaningful potential from both a revenue growth and profitability standpoint for both our retail partners and Spring Big as these VIP subscription programs get launched and mature over time. Our second key initiative, which we also see as having meaningful potential and expect to launch during Q4, is our offering of a unique gift card payment option that can be used by consumers as a method of payment in store directly from their existing loyalty wallet and will also enable the consumer to uniquely combine the use of loyalty points and the prepaid gift card. And third, we continue to expand beyond the cannabis vertical with our loyalty and messaging communications platform servicing other regulated industries such as alcohol, vape, smoke, and CBD. These newer initiatives are going to take time to evolve, especially given the current macro environment, but we are confident that in time they will fuel significant growth to complement the potential we believe is present in our existing offerings. We should not overlook the continuing growth in our core. As mentioned earlier, we grow our subscription revenues by 13% year-on-year in Q3, and we added 89 new clients during the quarter. Before I hand over to Paul, who will walk through our financial results for the third quarter in detail, I do want to comment on the state of Spring Break. We are managing our business efficiently for the factors within our control and recognize the challenging current macro and industry-specific realities. We are delivering on a rich pipeline of revenue-generating initiatives, and we have a strong, high-growth, recurring subscription revenue base. SpringVic is in an excellent position. Our technology platform is operational in more than 2,900 retail locations across the United States and Canada and present in the smartphones of over 35 million marketable consumers. We now have our operating expenses optimized at a level that will enable us to generate meaningful profitability in the future. I remain as confident as ever that our strategy is sound, with feedback from our clients and partners reaffirming that we are making the right investments to capture the long-term opportunity in front of us. With that, I'd like to turn things over to Paul, who will walk through our financial results for the third quarter in greater detail and discuss our outlook.
spk01: Thank you, Jeff, and thanks again to everyone for joining us. We delivered a solid result in this third quarter, with further reductions in our adjusted EBITDA loss as we continue to move along our path towards profitability. The progress was a little slower than we would have liked, But as Jeff mentioned earlier, we have experienced some cash collectability challenges that have certainly necessitated some tough decisions and impacted near term performance for the benefit of our longer term business health. I will start by providing a brief overview of our third quarter results before moving on to our guidance for the balance of the year. Our Q3 revenue came in at $6.9 million, representing a year-on-year decline of 5%. It should be noted that the prior year quarter was particularly strong comparable caused by high excess use revenue last year. Our year-to-date revenue of $21.3 million represents 7% year-on-year growth. Our Q3 subscription revenues grew 13% year-on-year to 5.8 million, representing now 84% of total revenue. Year-to-date subscription revenues have increased by 19% to 17.2 million, or 81% of total revenue. Spring Big is a SaaS technology business. with now more than 80% of our revenue being derived from primarily annual auto renewing contracts compared with 72% of revenue last year. We are seeing this percentage increase as we continue to replace excess use revenue with larger subscription contracts that are more predictable and higher quality. Given the tendency for clients to upgrade subscriptions, we continue to see declines in excess use revenue. While primarily the decline is due to clients upgrading so that their subscriptions better match their activity level, to some extent, given the prevailing economic conditions, we have also seen downwards pressure due to clients being more diligent in ensuring they manage their expense within budgeted subscription amounts. As mentioned, excess revenues were particularly high in Q3 last year. In fact, they were at an all-time peak of 1.7 million, and therefore the decline is particularly acute this quarter at 55%. The year-to-date decline in excess revenue is 30%. Brand revenue in Q3 was slightly higher sequentially at 0.2 million, and year-to-date has increased by 5%, albeit in the quarter we had a 12% year-on-year decline due to timing of brand campaigns varying. Our top line growth continues to be driven by strong customer demand, both in terms of new customer acquisition on the retail platform, as well as expansion within the installed base. In Q3, we added 89 new customers with annualized subscription revenue of $0.7 million, and a further $0.9 million in annualized subscription revenue was added through customers upgrading their subscriptions. We ended the third quarter with 1,356 discrete client platforms in use and are installed in 2,941 retail locations across the United States and Canada. Gross profit in Q3 was 5.3 million, representing a 5% year-on-year decline in line with the revenue movement and our growth profit margin for the quarter was consistent year on year at 77%. Moving on to operating expenses. We remain highly focused on improving the leverage in our business, while at the same time balancing this with our investments for sustainable growth. At the start of Q4, we reduced our employee roster, eliminating approximately 20 positions. Our current employee count is 89. Total operating expenses in Q3 were $8.0 million, or $6.9 million, excluding the one-time cost of settling a litigation claim. The $6.9 million represents a 24% year-on-year reduction and 13% sequentially. Sales, servicing, and marketing expenses were $1.9 million for the quarter, representing 27% of total revenue. Sales and marketing expenses decreased by 39% year on year due to cost rationalization towards the end of 2022 and during the current year, resulting in lower employment headcount. Technology and software development expenses were 1.9 million in the quarter, representing 28% of total revenues. These expenses also decreased by 32% year over year, with the savings being attributable to lower expenses associated with offshore contractors and a reduction in employee costs. G&A expense was 4.2 million for the quarter. representing 61% of total revenue and a 31% year-over-year increase. However, as mentioned earlier, this includes a 1.1 million non-recurring cost relating to the settlement of a litigation claim. Excluding this cost, G&A expense was 3.1 million, representing 46% of total revenue and a 2% year-on-year reduction. Our key earnings metric is adjusted EBITDA, as we believe this most closely equates to operating cash flow. Adjusted EBITDA loss in the third quarter was $0.9 million, representing an adjusted EBITDA margin of negative 13%. The adjusted EBITDA loss represents an improvement sequentially compared with the 1.1 million adjusted EBITDA loss in Q2 and is significantly lower than the 3.4 million loss reported in Q3 last year. For the first nine months of the fiscal year, our adjusted EBITDA loss is 3.4 million compared with 9.4 million during the same period last year, a 64% improvement. Free cash flow for the first nine months of the fiscal year was negative 3.3 million, comprising primarily 3.6 million cash used in operations, 4.3 million repayment of our convertible note, and 4.2 million received from the issuance of stock in our equity raise completed last May and from the exercise of stock options, and a further 0.8 million from short-term cash advances. I shall now turn to our updated guidance for the balance of the year. With regard to our outlook, I would include our usual caveat. Our clients continue to experience industry-specific headwinds coupled with a slowdown in discretionary spending by consumers given the general macro environment. In addition, we are experiencing increasing receivables challenges, which, as mentioned, impact revenue and earnings as we implement a stricter policy towards non-payment. For the full year for fiscal 2023, we expect total revenues of 28 to 28.5 million, implying 6% year-on-year growth at the midpoint. and an adjusted EBITDA loss, which for the full year, we expect to remain approximately at the current year-to-date amount of 3.4 million. In Q4, we expected our adjusted EBITDA to be approximately at breakeven, with positive adjusted EBITDA in the latter months of the quarter. And with that, I would like to open it up to Q&A. Operator, please poll for questions.
spk02: Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 11 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Scott Fortune with Roth. Your line is open.
spk04: Yeah, good afternoon, and thank you for taking the questions. Real quick, just kind of on the top line, obviously, you know, 89 new accounts. You're still growing accounts a little bit slower than you have in the past, but it seems like a lot of this pressure has come from the upgrading of these existing clients. Just kind of step us through that. Obviously, you provide a little bit of color, but more of the what are you seeing from the customers on the upgrading side of things? And then kind of just a sense of the cadence, how long do you sense that this turn will take to kind of revive or renew growth on the upgrading side and subscription side of things? Just a little more color on that would be great. Sure. Hi, Scott. So on the new business side, so Our new business velocity is pretty much where it's been the last few quarters, as we've always talked about. You know, we're usually adding between 85 to 105 customers every quarter, and that was consistent in Q3. Q3 is always a little bit softer, a little bit on the lower end of that number, just because of the vacation schedule in August. So there's not as long of what I'll call a quarterly selling season as there is usually in other quarters. In terms of upgrades, upgrades continue to be strong. We continue to move customers that have a spend cadence that has a percentage in subscription, a percentage in overage, and we move more of those to subscription. I think through Q3 we've upgraded over $5.5 million in annual contract value, and I think in Q3 we upgraded close to $900,000. We had some big upgrades in the first two quarters, so those were kind of taken off the table, so to speak, for the remainder of the year, because when we upgrade them, we upgrade them for 12 months. But we had a successful upgrade quarter as well. Now, with the upgrade, so basically what we're doing is we are moving more of our client spend to subscription spend as compared to excess. So it doesn't necessarily mean that they're going to spend a lot more money with us, although over time they will, in our belief. It does mean, though, that a larger percentage of revenue that we're seeing is locked into subscription as a contract. I hope that answers the question. Yeah, that's helpful from that standpoint. And then obviously the other pressure, and we've seen this in the industry for a little bit of a while now, but you guys really experienced it on this quarter with the client accounts. You've had clients come off your subscription a little bit. But just kind of step us through the pressure of continuing to write off other clients who are not being able to pay. What's your sense of where we're at in that challenge as we look into 3Q and into 24 here? So we've been aggressively working through that cycle. And what we're seeing is the pressure is really on the low end. to the low mid-end of our customer base. There are some outliers that are in the mid-end. We're not seeing anyone on the higher end of our customer base that is struggling with being able to fulfill their commitments financially based on the invoices that they get. I think they're pretty aware of what their invoices are going to be, and they are fulfilling those commitments without an issue. I think where we're really seeing the issue is on the lower and the mid-end. The decision that we made a few months ago is to get much more aggressive because not only is it an issue of keeping customers on the books that aren't paying their bills, so that's one issue that you have, but the other issue you have is the cycles of the people working those accounts to try to get them paid. So we've gotten much more aggressive in terms of if they're not paying by a certain date, we suspend their services. That does bring a lot of them back to the table, by the way, so it is helping us kind of reengage with customers and get them back to the table to pay what they owe so their systems can get turned on. But there are just a larger percentage of customers than we've seen in the past that just cannot afford to pay their bill, so they just can't pay it. And what's happening, if that's the case, is we are suspending their services, turning off their ability to use the platform, and sending them to collections to get paid. because on the one hand, we don't want to take the cycles on our side from an accounting standpoint to manage that process. And number two, we want to make sure that we're not counting on revenue that we're suspect is going to get paid. So we're getting more aggressive. I do think we're getting through a lot of them over the last few months. So I think I wouldn't say we're in the eighth inning, but we're definitely not in the second inning. We're probably somewhere in the fifth or sixth inning of this process. of basically cleaning out customers that quite frankly are just not healthy customers. They're not paying their bills, they're not healthy. So we're probably in the fifth or sixth inning of cleaning out the unhealthy customers and we're adding in new customers and all of the new customers that we're adding in to avoid this issue in the future, we are putting them on a prepaid system. So therefore we don't have to worry about going to collect from them. we are actually going to make sure that they're prepaying for their services so before they get to use the platform or before they get to send out messages, they've paid. And if, in fact, they run out of message credits from their subscription and they need to buy more during the month to fulfill whatever marketing needs that they have, they'll have to buy those credits up front. So as we clean out kind of like these accounts that just weren't paying their bills and we add in all these new accounts, This issue will greatly be diminished because we're moving all of these types of customers to prepaid accounts.
spk01: Scott, we may get a little bit of pressure on revenue, but we'll certainly see some pickup in the bad debt expense we've been experiencing. So we'll have a lot higher quality of revenue.
spk04: Yeah, unfortunately, you know, it's an industry epidemic, unfortunately. You guys can't control that. But that you can from there is great. And then one last question for me. You provide a little bit of color on the adoption of subscriptions by Spring Break and that loyalty, VIP loyalty base. What's going to really drive that ramp? And then how should we start looking at that kind of cadence or the opportunity from a revenue standpoint going into 2024? Just kind of put a little more color of the opportunity there as we go forward yeah sure so and from subscription standpoint the key for us is focusing on our customer base that have larger consumer bases so we have a we have two additional programs that are launching uh one is launching next week one is launching the week after that just have much larger consumer bases because this is this is a play on larger consumer basis because some percentage of that consumer base is going to join the VIP program, a retailer's VIP program. So we've had over 20 clients sign contracts. We have four programs that are actually active right now. It is taking a little while for retailers to kind of think through and build out what their VIP program is going to look like. And then in addition to that, they need to make sure that they have the time to train their retail staff because this actually gets sold in-store for the most part. I mean, there is some additional marketing that happens in social media and on the website of a retailer's e-commerce site. But from the majority of these subscriptions, consumer subscriptions are going to be sold in stores. So what we are realizing, it does take a little bit longer from once a client signs the contract till they have all their ducks in a row to launch. But we've been focusing on getting our larger retailers. So We haven't necessarily focused on our largest MSOs yet because we want a little bit more time to prove out what we're seeing from subscriptions, but we are definitely moving up market in terms of the prospects that we're calling on, the clients that are signing contracts, and the programs that are launching. The two programs that are launching in the next couple weeks have consumer databases that are much larger than the ones that we have in place. And we have more on the docket that are coming through in the next couple months. So again, we believe that You know, in 2024, we're going to see substantial revenue growth in subscriptions. We've been pretty conservative in our projections as we thought about them for next year. But we believe that there's really substantial opportunity there as we start getting larger clients interested in running these programs. Got it. Thank you for the detail. I will jump back in the queue.
spk02: Thank you. Please stand by for our next question. Our next question comes from the line of Casey Ryan with West Park Capital. Your line is open.
spk03: Thank you. Good afternoon, everybody. So I'm wondering if you can give a little clarity or color about with some of the customer weaknesses, is it geographic enough to call out, or do you say it's just national and sort of consistent across states? I mean, we are impacted, right, by certain states, you know, maybe contributing more to the market currently. And sort of what do we make of, you know, newer states that are seeing sort of good activity? Do you also see that? Like, yeah, we're seeing good activity in states that have come online and doing well, Missouri, Maryland, that kind of thing. But, yeah, I'm curious if you could add a geographic layer to the commentary.
spk04: Yeah, sure. So I think in terms of the customers that we believe are struggling and struggling financially and struggling to be able to meet their financial commitments, Yeah, I wouldn't say it's completely concentrated in a few states, but you are definitely seeing states like California, states like Colorado that have retailers that seem to be struggling more. You are not necessarily seeing the same struggles in the Northeast and on the east side and the eastern half of the Mississippi. You're seeing more of it on the west, and you're seeing it more from the more mature markets that have been around for a while where there are just a lot of stores and there are struggles in those geographical markets. But I would say California is a market that we're seeing it. I would say Colorado is another market that we're seeing it. To a lesser extent we're seeing Oregon and to a lesser extent than that we're seeing Washington. But I would say it's primarily focused on states that have been around for longer that have a larger group of retailers that are competing with each other on the West Coast. So on that, we're seeing that in terms of states that seem to be doing well. New Mexico seems to be doing very well. We're seeing a nice pickup in activity there. We're seeing a nice pickup of activity in Missouri. So some of the newer states that are coming online, stores seem to be well-funded, and we seem to be doing well both from a customer acquisition standpoint, but a customer retention standpoint as well.
spk03: Thanks. That's very helpful. Would you be able to sort of frame the non-cannabis opportunity? Because I think it sounds exciting and it's something we've been excited about, but not wanting to overstate what its potential is, I guess. How should we think about it as sort of a Yeah, sure.
spk04: So, you know, so if you think about the four kind of verticals that we're focusing on kind of like as a next step into non-cannabis are liquor, smoke, vape, CBD. There's probably, when you think about those four, there's probably north of 100,000 retail locations in the U.S. and Canada that are theoretically The TAM, if you think about location-based TAM, that would be a location-based TAM that would be available. We have now finished the integration with our second point of sale in the non-Canada space. The name of the point of sale is called Lightspeed. It's a very well-known point of sale, and they have thousands of customers in those four verticals. So we are going to start co-marketing with them. We're going to do kind of like a light co-marketing between now and the end of the year, and then you know, we're going to be doing heavy co-marketing with them. So we are expecting our non-cannabis location count to grow pretty significantly, probably, you know, as you think about it, we're going to do heavy marketing in Q1, starting in Q2. I don't know exactly. We don't get to have an exact count of how many of locations Lightspeed has in these four markets, but we know it's in the thousands, and we know that there's a real need for those verticals to get support from a company like Springbrick. So we're excited about that. And we're continuing to look at other point of sales that we can integrate with that have good presence in this market. So again, just the size of those markets are so much larger. But then on the other hand, the cadence of communication for those markets are not necessarily as frequent as cannabis retailers. We're not necessarily expecting, we're probably expecting about 75 to 80% of the revenue that we would usually see as compared to a cannabis location. But over time, we believe that there is as much, there's potential to have as many non-cannabis stores on our platform as there are cannabis stores.
spk03: Got it, that's really helpful. And just one more on that sort of adjacent space. does it matter how many PLSs we're with or just that we're with enough to sort of get a sizable piece of this hundred thousand store? Yeah.
spk04: So it doesn't necessarily matter. I mean the, the more the merrier because the, um, what I mean by that is that our platform works best when we're integrated with the point of sale. So therefore the retailer can manage their spring big loyalty program from within the point of sale. So, uh, with both, uh, Corona, which is a con-based point of sale that we integrated with earlier in the year that we have a number of non-cannabis clients with and with Lightspeed. The loyalty program in particular can be managed by the retail staff of that retailer from within the point of sale. So there's a two-way communication that's happening between our platform and the point of sale, so it makes it easy for them. So yes, we really try to focus on creating a unique integration a unique 360 degree integration with point of sales because we understand that it makes it a much tighter and More seamless opportunity for the retailer which will keep them around much longer so we're focused on on developing relationships with point of sales that we believe can we could add value to them and they could add value to us and And by doing so by having that integration market to their customers in a way that we believe is going to be a really positive and experience for the retailer.
spk03: Yeah. Okay. That's terrific. And just to clarify to make sure I heard it correctly, you were saying sort of Q2 of 24 would be a time where maybe we'd start seeing customer counts kind of rise in that segment, I think, is what you're saying, giving time to co-market. Okay. Correct. Okay. Good. Thank you very much. That's it for me. Thank you.
spk02: Thank you. Ladies and gentlemen, at this time, I would now like to turn the call back over to Jeff for closing remarks.
spk04: Thank you all very much for joining. We appreciate you spending the time with us. And please, if there are any questions, follow up with us afterwards. Have a great night. Bye-bye.
spk02: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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