Gryphon Digital Mining Inc (GRYP) 2022 Q2 法說會逐字稿

Good morning, and welcome to Akerna's second-quarter 2022 financial results conference call. As a reminder, today's call is being recorded.

At this time, I'd like to turn the call over to Peter Seltzberg, Investor Relations for Akerna. Please go ahead, Peter.

Thank you, and welcome to today's second quarter ended June 30, 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 Securities Litigation Reform Act of 1995.

Words such as estimates, projected, expects, anticipates, forecasts, 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 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 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 in Akerna's filings with the SEC. 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.

Now, without further ado, I'd like to turn the call over to Akerna's CEO, Jessica Billingsley. Jessica, go ahead, please.

Good morning, everyone. Thank you for joining us.

Today, we will be covering three key areas of the business: the key highlights of the quarter, the progress on our balance sheet cleanup and strategic alternatives, and the sector at large. Then, I'll turn it over to Dean for a detailed financial review, followed by a Q&A session.

Yesterday, we reported our Q2 2022 results. While our team turned in a solid year-over-year comparison from the top line to the bottom line, inflation and other macroeconomic forces did have some impacts on bookings and sales, which we'll elaborate on shortly. All things considered, I'm optimistic we will continue to execute on our strategy as we head into the back half of the year.

Highlighting the quarter, the software revenue growth of 33% year over year and over 50% for the first half or six months of the year. Our current annual run rate closing out the first half of the year is approximately $25 million, putting us on track for growth of approximately 31% at the top line this year.

We had gross margins of nearly 70% in the quarter, which is towards the upper range of our target model. These margins reflect our focus on enterprise business, which is a key part of our long-term growth strategy.

As we noted in our press release, we got off to a fast start in 2022, but we did see decreased client spending beginning at the end of Q1. Importantly, we announced and implemented a restructuring this quarter intended to reduce expenses and accelerate our path to profitability. The cost-saving measures, including staff reductions, reduced facility costs, and other considerations, will save us approximately $1 million per quarter. And we'll start to realize those savings in the third quarter of this year.

We are also pleased to report that the costs of the restructuring initiatives, while non-recurring at $0.5 million, were significantly below what we had originally anticipated. Those costs have been fully recognized in the Q2 financials, and Dean will cover the specifics in his remarks.

On today's call, as on our call last quarter, I'd like to re-emphasize our key performance metrics: committed annual recurring revenue or CARR, growth in bookings, and growth in client transactions. I'll clarify each of these measures, explain why they're important, and how we are 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 $18.9 million as of June 30, which represents a 9% increase year over year. I want to acknowledge that while this represents a nice year-over-year growth, it also does represent a 6% decrease sequentially, which warrants some explanation.

First, let me clarify that this decrease does not represent a spike in lost clients. The primary reason for this reduction in CARR is that there are clients who have reduced and renegotiated their contracts with us. 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.

Importantly, by partnering with our clients to adjust to this climate, we provide value to them both now and in the long term, ultimately positioning us to expand with them as they expand and continue to serve this growing industry in the future.

To underscore this important point, while it is routine in times of economic challenge for businesses to reduce cost, 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 bookings, 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 bookings to be a near-term leading indicator of our performance.

Our Q2 software bookings were approximately $0.6 million, which was softer than our last two record-setting quarters. We expect to see bookings pick up in the back half of the year and of course, we'll also start to recognize some of the revenue from the prior quarters with longer lead times.

Turning to our third metric, client transaction growth, which we believe is the single most important long-term indicator of our true market share. We are pleased to report our transaction growth continued in the second quarter of this year with more of the industry running on Akerna, as we posted 9% growth in volume and 8% growth in amount.

This transaction growth provides a future revenue catalyst as regulatory changes bring opportunities to monetize transaction volume, including through retail and wholesale payment opportunities. Macroeconomic climate and domestic political challenges certainly create headwinds for the industry, but ultimately, we are still charting on course for collective industry growth.

I'd also like to provide an update on the strategic alternatives initiative that was announced in Q1. This initiative was driven by our need to continue to fund the business prudently and strengthen our balance sheet, so we can follow our growth plan and capitalize on a massive market opportunity that we continue to believe is on the horizon.

As we previously communicated, we hired JMP Securities to help us identify opportunities to create value for all stakeholders through strategic alternatives. We remain active in pursuing dialogues with numerous parties about partnerships, asset sales, and other ways to shore up the balance sheet to position us to reach and maintain profitability and produce a consistent and sustainable working business model that rewards our stakeholders.

As an additional measure, we have taken -- while operating with the best interests of our stakeholders in mind, we have successfully raised $10 million in a transaction underwritten by Alliance Global Partners. We intend to use the net proceeds from this offering for general corporate purposes, including servicing our ongoing debt obligations under our convertible notes, working capital, marketing, product development, and capital expenditures.

During the quarter, we saw the Cannabis Administration and Opportunity Act or CAOA to have filed in Congress by Senate Majority Leader Schumer and Senators Booker and Wyden. In new discussion and a demonstrable sign of progress for federal legalization, both Senators Schumer and Booker have now publicly stated they will support immediate steps to legalization, the first of which is state banking.

States have a reasonable likelihood of passing before the end of the year. And as we have maintained along with the rest of our peers, passage of this act represents a potential revenue inflection point opportunity for Akerna.

We believe that our long-term leading indicators all suggest good progress heading into the third quarter and balance of 2022 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, midsize enterprises, and larger cannabis enterprises.

Second, the cannabis market is projected to grow at an average rate of 27% in the coming years, and we are positioned as a central player with more of the industry running on Akerna each year.

And third, we are making the prudent and necessary decisions to ensure that we are a household name 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 and category to enjoy the growth that is projected for the years ahead.

We are excited 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 will hand the call over to Dean Ditto, who joins us today for his first investor call as our full-time CFO and who will take us through the details of our financial results.

Dean, congratulations again. We are very excited to have you on board. Please go ahead and proceed with the financial overview of the quarter.

Thanks, Jessica.

This morning, I'll provide an overview of our financial results and key business metrics for the second quarter ended June 30, 2022.

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 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 filings in detail.

Q2 was another solid quarter for Akerna with total revenue of $6.1 million, representing a 24% increase year over year. Gross profit increased to $4.2 million in the second quarter, up 42% year over year. And gross margin increased to 69.8% in the second quarter from 60.9% in the same quarter last year.

We continue to invest in our technology platform. And 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 to our platform. Churn has improved by 15% compared to prior year while consolidation continues with many of our larger clients, significantly increasing our footprint.

Our average B2B deal size has decreased by 9% year over year. B2B transactions tracked in our system increased by 8% year over year. And transaction volume was up 9% year over year, while retail order spend was down 4% against the same period in 2021.

Now I'll review the financial results for the quarter.

As a reminder, some of the 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 quarter ended June 30, 2022, contained in our Form 10-Q to be filed with the SEC.

Total revenue increased to approximately $6.1 million or an increase of 24% compared to the same quarter of the prior year. This improvement is driven largely by the addition of acquired businesses and accelerating software growth.

Software revenue of $5.9 million was up 33% year over year, representing 97% of total revenue compared to $4.5 million and 91% of total revenue from the same quarter of last year. The primary driver of the year-over-year growth was from the acquisition of 365 Cannabis as well as organic growth from our legacy platforms. We presently have approximately $400,000 of CARR in backlog.

On a comparative basis, consulting revenue declined for the quarter and, to a lesser extent, year to date. Consulting revenue as a percent of total revenue has varied from period to period, depending on whether state legislation has expanded to allow new 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 license awards. We are the clear leader in this space and are positioned well to capitalize as states issue their licenses and as emerging states return to more aggressive licensing programs.

Gross profit increased to $4.2 million in the second quarter from $3.0 million for the same quarter last year, an increase of 42% year over year. Gross margin increased to 69.8% in the second quarter from 60.9% in the same quarter last year and upped slightly from 68% in the prior quarter.

The gross margin recovery was primarily due to operating synergies realized from our acquired enterprise assets, which have higher margins. We also continue to implement ongoing initiatives to drive operating efficiency and effort to hold margins stable at these levels.

Moving to operating expenses, excluding long-lived asset impairments of $24.1 million, total operating expenses were relatively flat at $9.3 million compared to $9.0 million in the same quarter last year. A $2.0 million reduction in general and administrative expense was more than offset by the following cost increases: sales and marketing increased by $1.4 million; product development increased by $0.2 million; and depreciation and amortization increased by $0.7 million.

Within these cost changes are $0.8 million in non-recurring costs related to the restructuring and financing transactions in Q2. Product development expenses increased primarily due to the Viridian Sciences and the 365 Cannabis acquisitions, which resulted in a $0.3 million increase in salary-related and contractor expenses for the three months ended June 30, 2022, compared to the same period in the prior year.

The 2022 period also includes severance benefit costs associated with the restructuring, partially offset by lower recruiting and share-based compensation costs.

The increase in sales and marketing expense was primarily related to the acquisition of Viridian Sciences and 365 Cannabis, which resulted in an increase of $1.1 million in salary-related and contractor expenses for the three months ended June 30, 2022, compared to the three months ended June 30, 2021. In addition, the 2022 period included approximately $0.3 million of severance benefits for sales and marketing and associated with the restructuring.

In recent years, the company has terminated office lease locations in Toronto and Denver to reduce overhead burden of running offices. During the second quarter of 2022, we also exited our Las Vegas office space and incurred a one-time cost of $0.5 million.

In addition, bad debt expense was lower by $0.2 million during the 2022 period when compared to the 2021 period.

The second quarter also contains a non-cash impairment charge related to changes in fair value of goodwill due to declines in market capitalization, and certain intangible assets and capitalized software due to changes in operating results.

As a reminder, we measure EBITDA and adjusted EBITDA because we believe it is helpful to investors in understanding our performance and allows for comparisons of our performance and credit strength to our peers. Adjusted EBITDA excludes the effects of non-cash expenses, like impairment charges, adjustments to fair value, and stock-based compensation; and non-recurring items, such as restructuring, business combination, and financing charges.

For the second quarter, adjusted EBITDA was a loss of $2.1 million compared to a loss of $1.6 million in the same period from the prior year. Both periods contained non-cash and non-recurring charges. Importantly, adjusted EBITDA was $2.3 million from the first quarter of this year, reflecting sequential improvement of 9% despite the restructuring charges in Q2.

Turning to key figures from our balance sheet and cash flow statement, our cash and restricted cash was $5.1 million as of June 30, 2022. Net cash used in operating activities was $7.2 million for the quarter. Net cash used in investing activities was $1.4 million, which includes $1.7 million used to invest and capitalize software development, offset partially by the receipt of a working capital settlement with one of the prior acquisition transactions.

Adding the net proceeds of our equity issuance that funded just after the end of the quarter, our cash balance was $14.1 million on July 5, 2022.

As of June 30, 2022, our convertible debt was $13.4 million. We reduced the outstanding principal by $2.1 million during the quarter with $1.5 million paid in cash and $0.6 million settled in shares.

I'd like to take a moment, as required, to address the going concern disclosure incorporated into our 10-K filed in March of this year.

While we are pleased with the operating results this past quarter, especially our enterprise business unit, we recognize the continued downward pressure on working capital. The ability of the company to continue as a going concern is dependent on our ability to secure other sources of financing to reduce debt and to attain profitable operation.

Our corporate liquidity requirements primarily include payroll costs, technology and infrastructure costs, corporate overhead expense, and debt service costs. Our current sources of liquidity include cash on hand as well as proceeds we anticipate from the access to our ATM program.

We have proposed a reverse stock split to our shareholders who will vote on the proposal later this month. The Board is addressing the working capital deficiency and considering all options available to the company in the best interest of our shareholders.

As we move forward, we are the leader in a large market that is still early to adopt compliance automation technology. We've made great additions to the platform that can accommodate clients of any size as the industry continues its consolidation.

The unprecedented nature of the capital markets and regulatory environment makes it a challenge for all participants in our sector. We will continue to develop and implement plans to address these headwinds while working diligently to build upon Akerna's leadership position for continued success.

I would also like to take a minute to update you as to what we're trying to do with the balance sheet.

As you know, we hired JMP Securities to help us identify opportunities to create value through strategic alternatives. And we remain active in pursuing dialogues with numerous parties about partnerships, asset sales, and other ways to shore up the balance sheet to position us to reach and maintain profitability and produce a consistent and sustainable working business model that rewards our shareholders.

We are very excited about our future. And we are confident that the cost cutting we've done, the opportunities we have in front of us, and our positioning as a leader in the compliance software space for cannabis should enable us to reach our long-term financial objectives.

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?

(Operator Instructions) Brian Kinstlinger, Alliance Global.

Great. Thanks so much for taking my questions, guys. In late 2020 and early 2021, there were a number of states that legalized adult use or medical cannabis. Which of these states have you been most and least successful with in your seed-to-sale tracking?

Hi, Brian. Good morning. Jessica here. I'll take first crack at that answer.

I think it's more a question of how are the markets proceeding with opening? So in some of those states, what we've seen are just the existing medical operators being licensed to operate, and we haven't seen a ton of expansion potential or new business. And in other states, we've seen new licenses issued and really, the preparation for expansion market opportunities. So it's a bit of a mixed bag.

I will say that in general, we have not seen a ton of new market expansion from that slug of new states to date, although there are some that are still -- I guess, I just would say, kind of still on the horizon. And mainly -- maybe point out New York, New Jersey as markets that we really expected to see -- come into play quite a bit earlier this year.

But we are still -- they're in a licensing process, issuing licenses, preparing to really open that market and expand. And we do expect to see some outcome from that in the back half of the year.

Great. And then just on the bookings, is that a net booking as you talked about some customers pulling back on some of the modules -- I take -- or services? So did you actually book more business gross, and then you offset that with anything that was reversed or is -- or do I have that incorrect?

No, that's a great question. We do take the bookings for anyone who's renegotiated so that we're -- as we look at our bookings' numbers added together as a net, that we are -- we would take that as a debooking rather -- depending on the time frame, as they haven't yet started their onboarding -- rather than as a -- the way we just -- we look at it internally rather than as churn.

So some of that number is a debooking, although I do want to say the team was signaling towards the end of Q1 that Q2 was going to be a lighter quarter, and it certainly was. And the team has signaled that, hey, we think this has been from kind of the end of Q1. Hey, it looks like Q2 is going to be light. We still feel really optimistic about the back half of the year. And I would say that that's something that is still holding true.

Yeah. I was going to ask, essentially, the second -- do you think the whole second half of the year in terms of bookings will keep up that kind of trend, given everyone, including your industry, is dealing with a weaker economy? And then where do you see the greatest opportunity for near-term bookings and revenue growth? Is it by state? Is it by module? Where do you see that opportunity?

We continue to see a huge opportunity in organic growth just from our existing client base into our more enterprise solutions. And certainly, that demand has continued. And demand has continued -- that's where we're really seeing -- well, and I should temper that. Because we're also seeing a real uptick in interest in our MJ Platform retail offering in particular.

So I would say that the two most -- the two biggest opportunities are some real demand for our MJ Platform with our MJ retail app. We're starting to really see that accelerate -- and then, also, both non-existing customers, right -- so someone who may be using something else and is ready to upgrade to enterprise -- and certainly, also from our existing small and midsize client base -- folks who are ready to upgrade into some enterprise systems, and they're really looking at that in a really careful way.

As I mentioned in my prepared remarks and as you noted, that there is a real focus and a concern on spending right now among our client base. And people implement software because there's an ROI to it. And that can be done prudently and module by module, where they start with the back-end financials and then start to implement each of the modules for moving into some more enterprise systems. And we're really seeing quite a lot of interest in that as well as -- as I mentioned, a good surge in interest in our retail offerings.

Great. My last question is a two-part one on the cost cuts. You talked about $1 million in quarterly expense reduction. First, is that year over year or -- I think it's more sequential based in the huge drop you had from last year.

But my second question is, when you talk about $1 million, I take it that doesn't include the reduction or the lack thereof, the $800,000 of financing charges, $0.5 million from the closure of the Las Vegas office, and your $0.3 million from severance. So when I add all that together, it's more like $2.1 million, I take it, sequentially. And just -- I want to make sure I have that right.

Dean, do you want to take that one?

Yeah, sure. Hello, Brian. Yeah, so the way we've been looking at it is really on a run-rate basis. So to your point with those one-time events, we're thinking in our projections -- look more on a run rate. So really, where we've seen the cost cuts is in labor, and we've seen the labor costs stabilize, which has reduced our monthly cash burn by approximately 500 a month.

We're also taking a very close look at the services that the company consumes internally to identify additional cost reductions. And right now, our projections indicate that our burn rate will drop to neutral and potentially move into a cash flow positive situation on our operation's run rate in the 12- to 15-month range. And that's kind of how we are thinking about it.

I know with the one-time costs, you have to kind of take those out of the mix. But we're really focused on the operational run rate.

Right. That's helpful. Thank you so much.

[Ray Rasa].

Thank you for the information today. Question getting back to your marketing strategy, what resources have you devoted to acquiring new contractual relationships in terms of boots on the ground? And also, you had New York and New Jersey with recreational dispensaries going live daily. Have you been able to secure contracts in those states?

Hi, Ray. Good morning. We generally employ a hybrid boots-on-the-ground strategy. So although we have had a few folks in New York, New Jersey area and really hitting the streets, especially when there's been some events around, we have not seen a ton of new business.

And I just want to note part of what that is, is we have not -- the market has not expanded as rapidly. And I hear you saying, new every day. We have -- I think that we're seeing a lot of really, really, really, really micro-small operations start to open and some that may or may not be fully licensed, which sometimes we see in new markets.

We do have a very robust pipeline of applicants and licensees in the northeast, New York, New Jersey area. And we do feel that we're going to have some good, meaningful activity there in the back half of the year. Of course, we've had some business to date, but it has not been the wave that we had thought we might see earlier this year.

But you do approach folks like Zen Leaf, that are multi-state, multi-location operators? And how is the transactional pricing received as these dispensaries grow? Do they (technical difficulty) eroding their margins or is it more of a partnership approach to growth?

So when we look at our -- but first, great question. The way that we do -- the way we structure our pricing, we price based on functional module and then additional pieces of functionality, user base, some platform access fees, and those are all at least annual contracts.

And we certainly -- I'd have to check Salesforce to tell you if the specific operator that you mentioned is someone with whom we've had conversation. I would guess that answer is probably yes, but I can't tell you that answer without double-checking with our sales team or with our system.

And we've -- the conversation is very much a partnership approach. And I think it's what's been so appealing about our systems in general or that we grow with our clients as our clients grow. We generally do not -- and we're not very competitive at the very, very lowest end of the -- with the smallest mom-and-pop delivery or pop-up retail operators. We don't do month-to-month pricing, for instance. And there are options out there for some folks that are just month to month.

We do really take that partnership approach, look for at least an annual contract with our clients, and look -- I mentioned already, but good software provides an ROI. And software that's doing its job provides quite a bit more value than it costs.

So it may be a little bit more expensive than these very lowest and compliance-only systems, but what you get in exchange for that are very robust reporting, the comfort of knowing that our compliance is going to be best in class. And we certainly have historically done extremely well, I would say, kind of in the upper end of SMB and midsize business, which is what we see in most markets.

As they're emerging, we see a lot of really small operators open first, and then we start to see the more midsize -- upper end of SMB, midsize and enterprise, open.

Okay. So anyway, we stand by our partnership approach and the value we bring.

And at this time, there are no further questions. I would like to turn the call back to Jessica for closing remarks.

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 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. We look forward to sharing our progress with you as we move forward.

This concludes today's conference call. Thank you for attending.