Akerna Q3 2021 Earnings Call Transcript

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November 9, 2021

There are 7 speakers on the call.

Operator

Good morning, and welcome to Aperna's Third Quarter 2021 Earnings 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 O'Kerner. Please proceed.

Speaker 1

Thank you, And welcome to today's Q3 ended September 30, 2021 conference call. On the call today are Jessica Billingsley, CEO and Chairman of Acurna and John Pfau, CFO of Acurna. Before management begins with formal remarks, I'd like to remind everyone 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 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 recognition. These forward looking statements are not guarantees of future performance, conditions or results and involves several known and unknown risks, uncertainties, assumptions and other important factors, which could cause actual results or outcomes These risk factors are more fully described in Acrona's filings with the Securities and Exchange Commission.

Speaker 1

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.

Speaker 2

Good morning, everyone. Thank you for joining us today. Our 3rd quarter results continued their momentum for 2021, The software revenue growth of 37% year over year. Our business as a whole grew 38% year over year And 5% sequentially with a mix of both organic and inorganic software revenue. Our total SaaS ARR is currently $16,500,000 a 25% increase over the same period last year.

Speaker 2

In addition to top line growth, our focus on cost containment and accretive acquisitions continues deliver results with adjusted EBITDA improving 49% year over year and 6% sequentially. Looking ahead to the growth drivers of our business, there are a series of opportunities ahead for Akerna from new markets and product line expansion to new regulations and ultimately to legalization at the federal level. On today's call and in light of the strategic acquisitions we have made this year, I'd like to spend some time discussing our business strategy and the product portfolio and ecosystem we are creating. At the heart of our strategy is our ecosystem, which incorporates both our compliance engine as well as our open API infrastructure, which enables the seamless exchange of information between application. In our view, having a robust compliance With the greatest breadth and depth of capabilities is crucial to being an enterprise software provider in the cannabis industry as regulatory requirements or a foundational part of virtually every operational process.

Speaker 2

Of course, having a leading compliance engine is only one piece in the overall solution Microsoft 365 and NetSuite, which need to integrate directly across the software stack to pass information back and forth. This is where the importance of our ecosystem and our over 80 integrations come into play. Through our standalone gateway, With which both our applications and those of our ecosystem partners integrate, we have significantly reduced the complexity of maintaining compliance within the fragmented ever changing market framework. Given this architectural approach and our long standing presence in the market, the net result Is the ability for us to build a robust software portfolio with the most comprehensive compliance and regulatory capabilities in the industry, able to serve both the business and compliance requirements of the entire cannabis supply chain in more medical and recreational markets in North America and beyond than anyone else. To help illustrate how the platform works together, let's take an example of a vertically integrated MSO Who owns cultivation, manufacturing and retail locations?

Speaker 2

At each facility, which is a distinct step in their supply chain process, There are separate workflows and associated software applications with which employees regularly interact. This is often where challenges are introduced, namely how to capture the data from those separate processes and leverage it across the organization for compliance, Financial and data driven analytic purposes. MSOs often have three choices to solve this problem. First, they can develop their own applications and workflows, which often leads to manual intensive processes like the use of spreadsheets, Lacks sophistication and features and introduces significant liability risk by taking on the responsibility for compliance changes and updates. It is in this group where the majority of the industry sits today, essentially creating Good enough solutions to keep the organization running, while management attention is focused on building and growing the business footprint.

Speaker 2

The second solution is to use a competing product, which generally comes with pre built applications for generic workflows and limited integration with applications and data beyond the core environment. While sometimes easier to And developing from scratch, these products often use a one size fits all approach. They're limited in the ability to upgrade with new features and do not integrate with resource planning applications like SAP and Microsoft 365. In addition, as MSOs grow and look to penetrate new states, if those products do not yet serve the compliance MSOs are then required to deploy separate systems, thereby increasing the complexity of their overall environment. The third option is Acurna, which offers MSOs a broad ecosystem of integrations to leverage the best in class applications of their choosing for each of their facilities, while at the same time offering the ability to integrate data captured across the organization and leverage decades of best practices in supply chain and manufacturing through industry leading applications.

Speaker 2

In addition, By tightly integrating our retail, point of sale and e commerce applications like MJ Retail and our newly introduced Akerna Connect, We are able to provide MSOs with both the necessary consumer data to make effective business decisions and the ability to seamlessly interact with With the potential to quickly enable payments when legislation is passed. This is why we believe The infrastructure improvements we've made and the acquisitions we've closed in the last 2 years position Acurna for success. Delivering compliant access to the necessary comprehensive set of capabilities has been a focus of ours as we strengthen our channel connections existing enterprise, financial and tax planning providers and firmly solidify our strategic moat as the only true enterprise software solution and scaled technology ecosystem for the cannabis industry. This started with our own integration with SAP, NetSuite and Sage and continued with our acquisition of Viridian earlier this year As we took the strategic steps to broaden the scope of our offering to cater to the growing needs of our clients. With the recent addition of to the cannabis industry as the Microsoft Dynamics 365 offering has been gaining wide acceptance with small to midsized organizations, which is well suited for the scale of many of the MSOs in existence today.

Speaker 2

As these companies look to take the next step in their IT evolution Mid market, financial and tax planning market. We believe this is a crucial competitive advantage. Regardless of a cannabis business' preference For particular accounting and tax suite or other traditional ERP add ons such as HR and payroll, we have the widest As we discussed on prior calls, over the past few years, There has been substantial positive change in the political and social climate surrounding the cannabis industry, which has seen continued growth in revenue, new markets Both vertically and horizontally by opening locations in new states. As these businesses grow and the complexity of their operations expands, They increasingly require comprehensive enterprise software systems that can scale with them from start up to enterprise, While always maintaining multi state compliance, as our clients continue to scale their operations and the industry makes a natural progression to maturity, We believe the leadership position we've created will allow us to capitalize on the multitude of growth vectors ahead. To illustrate this point, while over 40% of public cannabis companies are current Acrona clients, the vast majority are Still in the early stages of rolling out our ecosystem.

Speaker 2

To help demonstrate the opportunity this represents, I'd like to take a moment to highlight a few examples How our client operations are growing ever more complex through consolidation. In the first example, a Stalwart in the U. S. Cannabis industry recently acquired a smaller operator in the 2nd and third largest markets in the U. S, Creating an organization with a combined 60 dispensaries and 11 cultivation and production facilities across 8 states And the operational platform for further expansion into new states.

Speaker 2

In a second example, 2 regional operators Recently combined with an existing portfolio of 27 retail locations with an additional 18 plus in the pipeline over the next 18 months. In a third example, a recent consolidation within the Canadian market allowed one of our clients to double their footprint to Retail locations with an additional 2 in the pipeline before the end of the year. In these particular examples, The companies being acquired are not existing or current clients. Some of these acquired locations are now in our implementation pipeline and the rest While far from a complete list, these examples are reflective of both the continuing growth and consolidation activities of our clients and the opportunities they represent for Akerna. With our focus on large multistate operators who are naturally becoming the consolidators in the industry, We believe we are well aligned with the highest growth segment of the market.

Speaker 2

In addition, as the complexity of these organizations grows And the value of sophisticated data driven analytics continues to increase, we believe there will be additional opportunity beyond the current level of software spend in the industry. 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 new state initiatives with both leaf data systems for governments and our enterprise software platform, we strongly believe We are quickly approaching an inflection point in growth, both in the cannabis industry and Acrona's 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'll hand the call over to John, who will take us through the details of our financial results.

Speaker 2

John, please take it from here.

Speaker 3

Thanks, Jessica. This morning, I'll provide an overview of our financial results and key business metrics for the Q3 ended September 30, 2021. As a reminder, these results are discussed in further detail in our Form 10 Q, which will be filed shortly with the SEC. Financial results reported today are preliminary. Final financial results and other disclosures will be reported in our quarterly report on Form 10 Q and may differ materially from the results and disclosures today due to, among other things, the completion of final review procedures, the occurrence of subsequent events for the discovery of additional information.

Speaker 3

We encourage you to review the filing in detail. Q3 was another solid quarter for Acurna. Total revenue was $5,100,000 a record for Acurna, up 38% year over year. Growth in the quarter was a result of increased demand from new and existing clients, combined with accelerating revenue growth in new product lines such as data and partnerships. Additionally, Q3 included $900,000 of revenue from the acquisition of Viridian Sciences completed in April of this year.

Speaker 3

Viridian Sciences, along with 365 Cannabis, which we completed October 1, were primarily acquired to This past quarter, we continued to deliver on our core objectives of investing in innovation and revenue growth opportunities, Including key investments in our compliance engine, which Jessica mentioned is at the heart of our platform, continued development on our new retail POS solution And exciting development initiatives in our consumer facing technologies, including Akerna Connect. These development initiatives are critical We continue to experience improvements in customer retention And growing volume through our platform. Churn has improved 33% compared to prior year, while consolidation continues with many of our larger clients, Significantly increasing their footprints. Our average B2B deal size has also increased by 7% year over year. B2B transactions tracked in our system increased by 29% year over year.

Speaker 3

Transaction volume was up 28% year over year. Retail orders were up 28% year over year and retail order spend was up 26% Against the same period last year, total platform users were up 22% year over year. Now I'll review the financial results for the quarter. As a reminder and unless otherwise noted, all metrics are non GAAP. A reconciliation of GAAP to non GAAP financials is included in our earnings release and posted on our Investor Relations website.

Speaker 3

We encourage you to review the reconciliations there as well as review our financial statements for the quarter ended September 30, 2021 contained in our Form 10 Q to be filed with the SEC shortly. Total revenue grew 38% year over And 5% sequentially to $5,100,000 through expanding software revenue and growth in our consulting business. Software revenue was up 37% year over year and 2% sequentially to $4,600,000 with a mix of both organic and inorganic software revenue, Government revenue was flat year over year as these contracts are in run and maintain mode. We currently have approximately $900,000 of ARR backlog pending go live. Consulting revenue increased 66% year over year and 34% sequentially to approximately 550,000.

Speaker 3

Important to note, the Q3 of 2020 Was an unusually soft quarter for consulting, a result of the global pandemic. As such, year over year comparisons may be skewed. 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 We are the clear leader in this space and are positioned well to capitalize as states issue their licenses percent sequentially to $3,200,000 This represented a gross profit margin of 62% compared to 54% in the prior year. The improvement in both gross profit and gross profit margin was a result of expanding high margin software revenue, both organic and inorganic, A return of consulting revenue and improved efficiencies in our operating infrastructure, including improving network costs and labor efficiencies.

Speaker 3

We continue to focus on increasing our subscription gross margin over time through ongoing investments in automation. Moving to operating expenses, total operating expenses decreased 5% year over year, but increased 2% sequentially to 4,700,000 The decrease year over year is a result of efficiencies realized from integrating acquired businesses, demonstrating our ability to continue to drive leverage through our income statement. The net effect of increased revenue while leveraging costs was an improvement in our adjusted EBITDA margin of 49 percentage points year over year and 6 percentage points sequentially. These are sustainable changes that will drive our operating margins higher over time as high margin revenue continues to build. Product development expense decreased 10% year over year, but increased 4% sequentially to $1,400,000 The decrease year over year is a result Integrating product and engineering teams from acquired assets, centralizing development efforts, simplifying the product roadmap and realizing cost synergies from third party providers such Product development expenses increased 4% sequentially as we continue to invest in our global cloud platform, including new products, content and features to drive long term sales growth and cost efficiency.

Speaker 3

Sales and marketing expense decreased 3% Year over year, but increased 10% sequentially to $1,900,000 The decrease year over year is a result of integrating sales and marketing functions from acquired businesses. Our sales and marketing expense as a percentage of revenue improved 30% year over year. We continue to be pleased with our sales and marketing efficiency As we continue to deliver new business growth with improving client acquisition costs. The increase of 10% sequentially was consistent with our expectations and as announced Our earnings call today is being recorded. We increased our marketing spend this quarter to enhance our marketing messaging, create brand alignment across our software portfolio and capitalized on our key development initiatives.

Speaker 3

General and administrative expenses decreased 2% year over year 10% sequentially to $1,500,000 mainly a result of timing in professional services such as legal and tax. We expect G and A expenses to remain flat as we believe we have the right operating infrastructure to deliver scalable growth. Adjusted EBITDA improved 49% year over year and 6% sequentially to negative $1,500,000 We believe adjusted EBITDA when considered with Turning to our balance sheet and cash flow statement. Our cash and cash equivalents were $9,600,000 as of September 30, a decrease of $2,200,000 from the prior quarter. This includes approximately $1,200,000 in debt repayments and $1,800,000 in proceeds from our ATM program.

Speaker 3

Subsequent to the quarter end, on October 5, we announced we entered into a securities purchase agreement for a $20,000,000 convertible debt Net proceeds from that offering were approximately $14,600,000 Our pro form a cash balance as of October 5, following the issuance of the notes and including the $4,500,000 payment Related to the closing of the company's acquisition of 365 Cannabis is approximately $20,000,000

Speaker 4

For the

Speaker 3

9 months ended September 30, 2021, Operating cash flow was negative $5,200,000 a 66% improvement year over year from negative $15,400,000 for the same period prior year. We continue to be prudent with our spending levels and we've maintained a healthy cash position to manage the business. We believe cash on hand and to the capital markets positions us well to execute on our strategy, which is a significant advantage over many of our competitors. In closing, we have an exciting opportunity to continue building a high growth company. We are the leader in a large market that Still early to adopt compliance automation technology.

Speaker 3

We're seeing a demand transformation as individual businesses become vertically integrated. Vertically integrated businesses become multistate operators and multistate operators expand into new states. These changes, At the same time, we're evolving as a company, delivering an increased supply of products and capabilities such as our compliance engine, Our enterprise software offerings and the Kurna Connect, all created to increase the value we are able to deliver to customers. We also continue to invest in initiatives that will allow us to win across all segments of the market, including key investments that drive This positions us well to drive long term revenue growth. Although we have been at this for over 10 years, it This concludes our prepared remarks.

Speaker 3

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 and A session. Now let's turn the call over to the operator questions. Operator?

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from Brian Kinstlinger Alliance Global Partners, please proceed.

Speaker 4

Hi, good morning guys. Thanks for taking my questions. Good morning. Can you talk about the landscape for consulting? What utilization is of that group and How much, if any, it's weighing on the bottom line?

Speaker 4

I guess you mentioned lotteries of new states and delays in licensing. So what does that mean for the consulting group?

Speaker 2

Good morning, Brian. Good question. So I think what's interesting about the consulting business is its Historic lumpiness. We've historically had $1,000,000 quarters and even more rarely $1,000,000 months. It has continued and we expect it's been historically, we expect it to continue to be lumpy.

Speaker 2

This shift in The awarding of licensing, which is new this year, it does limit our opportunity to consult with clients in advance of license award. Although it certainly does not impact our post license award consulting opportunity or of course our software opportunity in those states, We're the clear leader in this space and we're well positioned to capitalize as states issue their licenses and as some emerging states Return to more aggressive licensing programs, which we are seeing indications of. John, do you want to comment On our gross profit as it relates to consulting?

Speaker 3

Yes. I mean, interesting. Good morning, Brian. Our gross Profit margin on consulting is actually still quite very strong. It's much higher than, I would say, traditional professional services and other business models.

Speaker 3

Consulting for us, although we talk about sort of the shift in maybe the application style Lottery system, it still for us continues to be a very strong margin profile. And I think we've maintained the right structure And the organization to capitalize on movements within the states when they occur.

Speaker 4

Great. And then in the last three quarters, bookings have declined sequentially just by a small amount, But still nevertheless you're declining. Is that based on what you're talking about, the lot of reasons and delays? Is the win rate changed at all in any meaningful way? Just maybe talk about when also you might think that might reaccelerate given the landscape?

Speaker 2

Overall, our software business remains healthy with 2 main growth drivers. 1st, From new states prospects which contribute new greenfield opportunities for software revenue? And secondly, as we mentioned To some extent, in our prepared remarks, from our existing clients, who, as we articulated, continue to grow their respective footprints, In addition to signing on for multiple year contracts with our premium tools like MJ Analytics. So I think We've overall been really steady in that bookings and of course, we're looking to do what we can to increase that over a period of time, Acknowledging that some of that does depend on greenfield as well as expansion.

Speaker 4

Okay, great. Last question I have, You guys have communicated that 365 Cannabis generates about $8,200,000 of revenue At a trailing 12 months and about 5.2 of that was recurring SaaS. How do we think about How much of that non recurring revenue continues on over the next 12 months? I guess I'm trying to understand the contribution to your business post acquisition, which I assume is somewhere between $5,200,000 $8,200,000 Can you help us think about the contribution?

Speaker 2

John, you want to take that one?

Speaker 3

I will take that one. Yes, Brian. So as we think the Software subscription and the professional services, not just 365, but also our Viridian business are very closely aligned. As we get now and move more into enterprise software, the implementation periods, the Support needed to bring these new products live is much more significant. And then certainly the support that we Provide once installed and after go live is pretty significant.

Speaker 3

So you tend to see a fairly high correlation between the two. It's often we just think about them separately because of the nature and timing of our operational deliverables there. But I think it's fair to think that the 2 will sort of Mirror each other as we grow that software business and we're very excited about some of those growth opportunities, we should see that professional services sort of align In that nature, obviously, some will start to slow down, but as new customers come on, It should replace that. So I think sort of that contribution distribution should remain sort of similar.

Speaker 4

Great. Thanks so much, guys.

Speaker 2

Thank you.

Operator

Our next question comes from Max Michaels with Lake Street Capital Markets. Please proceed.

Speaker 5

Hey, guys. Good morning. My first question is about 365 Cannabis. I just kind of want to jump back into like the contribution of it into Q4. So what do we expect that to

Speaker 3

So we reported when we acquired 360 You could think of it as about an $8,000,000 a year business. So just do the math, a quick $2,000,000 a quarter, again, as we touched on a second ago, that's a function Of both subscription and professional services, their margin profile, I think, is similar to ours, if not just a slight tick and improvement, we're going to continue to watch that very closely as we move to integrate these two businesses. So we'll be mindful of sort of that margin profile. I think the 1st year, these are 365 is a pretty sizable And there's a lot of infrastructure we'll be integrating. So the next year will be a really critical time for us to focus on driving some of those operating synergies So we can really realize the value of the acquisition really over the next 9 to 12 months.

Speaker 5

All right. Thank you. And then I know last quarter you guys had mentioned that you guys expected gross margin to be around the mid-60s range, coming in around 62 This quarter, should we expect this kind of stabilization around the 61%, 62% going forward in Q4 and then fiscal year 2022?

Speaker 3

I think last quarter when we talked about what we expected in terms of a margin profile, It was still sort of under that assumption that consulting would be a little more robust than it's turned out to be. Like we talked Before the shift sort of in the consulting business, I think has been a small drag just not having that top Our overall expense profile and sort of that infrastructure we have in place to support the business is very well solidified. So for us, all of our new revenue is very high marginal profit in the 90% range. So focus on driving that top line revenue and we think we Get back to the mid to upper 60s certainly by middle of next year.

Speaker 5

All right. Thank you. And then just my last one was just a clarification. So you guys said that your Pro form a cash was $20,000,000 at the end of the quarter. Is there do you guys have a pro form a debt number that I might have missed?

Speaker 3

That's a good question. I guess you could, on a pro form a basis, probably think of it as $20,000,000 I suppose. Probably just, yes, dollars 20,000,000 I guess on the balance sheet.

Speaker 5

Okay. Thank you. I'll jump back in queue. Nice quarter, guys.

Speaker 3

Sure. Thanks so much.

Speaker 2

Thank you.

Operator

Our next question comes from Scott Buck with H. C. Wainwright. Please proceed.

Speaker 6

Hi, good morning guys. I was wondering if you could give me a little bit of color on kind of where you stand in the integration of 365 C5 Cannabis, and as you've started to go through that process, anything that surprised you to the positive or the negative?

Speaker 2

Sure thing. We're really happy with the integration progress with Cannabis 365 What 365 Cannabis? Well, we're still early in the integration, as it's only been a little over a month since we closed. The results thus far are aligned with our initial expectations, including feedback that we gather via internal surveys that show that we're trending very positively.

Speaker 6

Okay. Thank you, Jessica. That's helpful. And then how should I think about the M and A pipeline going forward? Having just completed that deal, are you guys taking a breather from M and A?

Speaker 6

Are you continuing to remain active in the market?

Speaker 2

We continue to have a strong pipeline of potential technology in each of our 3 Target categories, namely TAM Expanding Technology, product tuck in and market share. As a result, we can afford to be very opportunistic Focus on shift our focus just a bit in the types of deals. Financial and tax planning strategy we were pursuing with our ecosystem and being able to offer more than now to our clients their pick of all of the mainstream tax and financial solutions coupled with our infrastructure.

Speaker 6

Okay, great. I appreciate the time.

Speaker 2

Sure thing. Thank you.

Operator

We have a follow-up question from Brian Kinstlinger with Alliance Global. Please proceed.

Speaker 4

Yes. Hi, great. Thanks. Clearly, lots of companies in consulting as well as Software integration, you talked about the challenges of labor right now. So while you're Being very careful about adding expenses, is the labor shortage in any way create any challenges for Ocrona at this time?

Speaker 2

That's a great question. And certainly, I can share that we certainly did experience Some labor challenge we experienced, I would say, very, very early in The phase of what is now being called the great resignation, so really very early in this year and mostly among some of our The layer of individual contributors, that and I think maybe by virtue, just of our profile and The interest in the cannabis industry and some of the exciting new initiatives on which we've been working, I think we We're largely on the other side of it today. We've got a few open positions, But managed to be really competitive and I think desirable as an employer due to the opportunity and growth prospects That exists both in cannabis, but also in some of the really interesting pack we're pursuing that is that's appealing. And so I would see today Still today, our largest challenge remains on the regulatory front, but we are certainly seeing increasing political tailwinds, And we remain as excited as ever about the potential for federal action. And then I guess I would add secondarily and somewhat related Is the overall maturity of the industry?

Speaker 2

As we previously articulated in our prepared remarks, consolidation in the industry is It's creating an inflection point for the adoption of our platform.

Speaker 4

Great. Thanks so much.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the call back to Jessica Billingsley for closing remarks.

Speaker 2

Thank you, operator. We are the technology ecosystem for cannabis, serving operators, Government 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 both consumers and governments. We thank you for your interest in Acarna, and we look forward to sharing our progress with you as we move forward.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.

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Akerna Q3 2021
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