SRAX Inc (SRAX) 2021 Q3 法說會逐字稿

Welcome to the SRAX Q3 2021 Earnings Call.

We had another amazing quarter at SRAX. First, I'd like to start with a list of some of our major accomplishments in the quarter. In the third quarter, we continue to consolidate BIGtoken in our financials. So we'll talk about our financials, that's consolidated and Sequire on its own.

Year-over-year revenue growth was 219% consolidated and 283% Sequire on its own. Quarter-over-quarter revenue growth was 8% consolidated and 5% Sequire on its own. We achieved our Q3 guidance with $8.31 million in revenue. We're giving Q4 revenue guidance of $10.1 million, implying fiscal 2021 revenue of $31.5 million, which is at the high end of our full year revenue guidance that we gave earlier this year.

SRAX third quarter pro forma EBITDA was $1 million, excluding BIGtoken. We've had 12 quarters of consecutive Sequire revenue growth, and we increased the number of Sequire subscribers from 225 to 250. Q3 bookings were $8.9 million. We saw many of the deals we were working on in July and August get pushed to Q4 when people were on vacation at the end of the summer. But for Q4, bookings are now $12.5 million as of this call, with a projection to hit $16.5 million in bookings for the fourth quarter.

We're holding approximately $29 million in marketable securities plus the shares that we set aside for the dividend. Cash on hand is $7 million. Revenue from existing contracts for 2022 is currently at $6.5 million without any -- without taking into consideration any renewals of existing clients.

So we'll start off 2022 with a great base. While we're giving guidance for $10.1 million for Q4, this includes some revenue for BIGtoken in the quarter. This slide shows the revenue growth for Sequire on its own and the projected revenue for Sequire on its own in Q4, which will be $9.4 million.

As you can see, we continue to see revenue growth as we add more and more companies on the platform. While we saw an increase in revenue for the Q, we also hired up on the technical side, hired on the sales side, increased marketing spend and experienced a number of onetime costs associated to patents and the BIGtoken transaction. Our goal is to continue to grow the revenue and balance operating the company at positive EBITDA.

We booked $8.9 million in Q3. And while that's a great number, it is eclipsed by the current bookings in Q4 of $12.5 million where the projection to close out the quarter with $16.5 million in bookings. Even at its current level of $12.5 million, it's the most we've ever sold in 1 quarter. This puts us in a great position to start out 2022.

As of today, we're at 250 subscribers to the platform. This is a double in the number of subscribers from last year. What is to note is that we continue to see strong demand for the platform. As you can see, we increased the revenue for Sequire on its own by 286% year-over-year. And we took was a loss of $1.4 million for last year to a $1 million gain for this year.

As of the end of Q3, we had 25.6 million shares outstanding. We have a little bit of convertible debt left, which Mike will talk about later, and we have close to 10 million warrants, most of which expire in January of 2022 and the rest throughout 2022. So we should exit 2022 warrant free.

One of my favorite features of the Sequire platform is the ability to manage all of your warrants. This is a screenshot of our warrants out of the Sequire platform. Many of our warrants from deals we did years ago are expiring in 2022. The current in-the-money warrants will bring a little over $16 million in cash to the company in 2022. That does not include 4.5 million warrants that expire at the end of January 2022, with a $7.50 strike price.

If those did get exercised, they would bring in an additional $41 million in cash to the company, but this slide is just a perfect example of the type of data that we're helping our clients manage inside the Sequire platform. Another great feature on this Sequire platform is our ability to see the position of institutional funds.

Our institutional ownership has grown from 600,000 shares in the second quarter of last year to over 5.2 million at the end of the second quarter of this year. Based on projections, we think ownership of institutions has grown to 7 million for the third quarter. It should be noted that while this is the holding of the institutional files, we also have 9.8 million shares that are in the hands of insiders and long-term SRAX investors.

This brings the total number of shares in institutional like hands to over 16.8 million. This leaves approximately 9 million shares in the float. All of our success could not be achieved without our team, and I'd like to take this opportunity to thank our 153 employees for their contribution to the success we're experiencing.

We could not accomplish this without you, and your dedication and hard work is greatly appreciated. Now the number of employees we have will change when BIGtoken and SRAX separate into different companies, but those people will always be part of the SRAX family. This is an image of our -- of the SRAX building as well. For some of you that are new to the story and may be wondering what are we doing to make all this money, let me give you a brief overview of Sequire. At the root of Sequire is the Sequire platform, a platform that helps public companies with essential tools that they need to manage being public. We then operate both virtual and in-person investor events that bring investors together with amazing companies.

Our virtual platform is being used to operate conferences for some of the most notable investment banks in the country. Our goal with all of these platform is to help create community with a group of over 9 million identified profiles. We continue to grow our platform and are adding new features all the time. This quarter, we added a number of innovative features and we have a new one to share with you today.

The first feature we added is the ability for companies to launch their own IR website within the Sequire platform. Every company needs an IR website, and we've made it simple for our clients to do this at no additional cost, which is really the thing that should be noted here. It's built into the platform itself. I've never met a CEO that's not had a question about this short interest. We added the ability for companies to see daily borrow rates in the platform and to get daily short interest reports. Daily borrower rates are a great indication of the demand that's out there to short the stock. The higher the borrower rate, the more people that are interested in shorting the stock itself and the less supply there is available for people to short that stock.

So this will give you a true indication of whether or not the company could be entering into a short squeeze or if there is naked shorting going against the stock. Many times, CEOs will say to me, we're having a lot of naked shorting against our stock and will come into the platform, we'll see a borrower rate of 1%. Well, that's very unlikely because they can just borrow the stock at 1% and short the stock, highly unlikely that they're doing it on a naked basis. But this is a great feature that's been added into the platform.

Today, we're announcing the beta release of VIRA, the virtual IR assistant that can be used by any issuer to answer any public available data on the company. The system ingests publicly available information and then utilizes AI to put it in a format that can answer questions for a current or future investor. This chat feature can be added to any IR website and help answer the many questions that inundate IR teams. We'll have a release of this product in the morning and you could try it for yourself.

Remember, it's a beta version, and it is learning every day. For the more questions you ask it, the more it learns. Here's an example of how it works. Let's ask the system some questions. As you can see, you would chat with this feature on the website like any traditional chat bot, but the person you're talking to is built with artificial intelligence. I never get tired of answering questions about the company. Let's try a few basis questions, so you can see how it works.

What do you do? What was the revenue for last quarter? Who is on your Board? Who are your analysts? Who is the transfer agent? Who are your investors so far?

Communicating with investors is the core feature of the Sequire platform. We've added the ability to send text messages to your investor contacts. This is a unique method by which to communicate with prospects you may already be invested or may invest in the future. While we announced the release of Microcaps.com last quarter, this quarter, we're announcing that the site has hit 200,000 monthly unique visitors and has made it to the #1 position on Google under the search term Microcaps. We look forward to adding a lot more content to the site.

We gather a significant amount of data on users who are visiting the site and that helps us in targeting people in the future. We've also added a number of video interviews of all -- many of our Sequire clients and attendees to the LD Micro Conference. And this is a feature that we're going to be adding on a quarterly basis. We'll be interviewing companies and getting an update on their quarterly review so that people can come and visit that information right within Microcaps.com.

Live events are back, and we kicked this off with the LD Micro event in October with over 750 attendees, in-person, and with over 12,000 online attendees. These people were learning about 140 different public companies. The event was a big success and taught us that people are ready to get back to in-person events. So our team is in the midst of planning all of the events, both virtual and in-person for 2022. And we have a great slate of stuff that we're going to be adding this year.

I'd now like to turn the call over to Mike Malone, who will give us an overview of the financials. Mike?

Thanks, Chris. And now for our financial review. First, I'll go through our revenue margin and EBITDA performance for the quarter. Then I'll move into a discussion around liquidity and marketable securities, and I'll finish with an overview of the onetime special distribution we announced at the end of last quarter. Revenue for the quarter was $8.3 million on a consolidated basis, which reflects an increase of 219% and 8.3% from the prior quarter, which was in line with our expectations. Sequire continues to be our major driver of growth.

Looking at our business without BIGtoken, we finished the quarter with revenues of $7.7 million, which was up 278% year-over-year and 5% versus the prior quarter. On a consolidated basis, our margins continued to perform in line with our expectations. For the quarter, we finished with gross margins of 78%, which reflects an increase of 1,200 basis points from the prior year. The continued expansion in our margins in terms of absolute dollars, highlights the high operating leverage of our SaaS-based Sequire platform.

EBITDA. We finished the quarter with adjusted EBITDA loss of $800,000, which reflects a $1.1 million improvement from the third quarter of the prior year. Excluding BIGtoken, we finished with EBITDA of approximately $1 million reflecting an increase of $2.1 million from the third quarter of prior year. Now moving to some key balance sheet items and liquidity. As of September 30, we finished the quarter with cash and equivalents of approximately $7 million and marketable securities of approximately $18 million. Including the value of the securities at the end of the quarter that underlie the preferred shares, cash and securities totaled approximately $31 million. Additionally, our debt balance decreased another $2 million during the quarter. And as of September 30, our total outstanding indebtedness was just over $1 million.

Now moving onto our Sequire security portfolio. During the quarter, we saw a decrease in our balance of approximately $6 million from a balance at the end of the prior quarter. Subsequent to the end of the quarter and through today, we received another $11 million in marketable securities through our sales activities during the quarter.

As we previously announced, we issued $36 million in preferred shares on an as-converted 1 formed base to shareholders, debenture holders and certain warrant holders as of record on September 20, 2021. On a quarterly basis going forward, we will make distributions from the liquidation of the underlying securities. We expect our first distribution to be January 31, 2022, and quarterly thereafter until the underlying securities have been fully liquidated. And with that, I'll turn the call back to Chris.

Thanks, Mike. Before we go to Q&A, we'd like to announce a new initiative that we're embarking on. We're launching the SRAX Scholarship Fund in honor of Malcolm CasSelle, who is a Board member of SRAX and a dear friend of mine, who passed away way too early in his life, earlier this year. We're launching, in his honor, the SRAX Scholarship Fund. Malcolm loved helping smart kids who may not have had the opportunity to go to the school for their dreams or school at all due to their economic position.

He both helped them financially and personally mentored them. In keeping with his dream of helping kids, we'll be offering a number of scholarships to kids in and around our Mexicali office, who may not have had the opportunity to continue their education due to financial constraints. We look forward to keeping you appraised on our efforts in this area. I would now like to open the call to Q&A.

Thank you, Chris. Thank you, Mike. We have a few of our analysts here today, to ask some questions.

Mike Crawford, do you want to go ahead and unmute yourself and ask your question first, and then please mute yourself when you're finished.

Okay. First, do you see seasonality in supplier bookings? Or is this re-acceleration in the current quarter more a function of LD Micro, main event in early October or something else?

I think we're seeing a little bit of seasonality because it's hard to -- the decision makers on what we sell comes down to the CEO and the CFO and at the end of July and August, it gets very difficult to reach those people. So we saw this last year. We're seeing it again this year. So we are seeing a little seasonality there. But -- and you can see that being pushed into Q4 here. So I don't think we have enough years under our belt to tell you that, that's going to be a consistent theme. That's where -- that's what we saw this year.

Okay. So kind of related on the renewals front, both for the monthly subscriptions and for media data campaigns. We had about 100 companies that have been on the platform for over a year. So what are you seeing on that front?

So we're still seeing around an 85% renewal rate. And for this next quarter, Mike is going to be putting together some numbers that will reflect -- I think we have enough data at this point to start to make a projection of what we can do into next year based off of the those renewals. So I think as we end this quarter into the fourth quarter, we'll be able to get a really good look as to what Q -- or what the whole year is going to look like next year?

Okay. And then just last 1 for me. With the implied $700,000 revenue for BIGtoken in the fourth quarter, is that for the whole quarter? Or is there anything for BritePool in this?

No. The BritePool transaction hasn't closed yet. We think it will either close sometime this week or next week. So there's no number for BritePool in there yet. That's just all BIGtoken.

That's the BIGtoken revenue will only extend until it closes and then be effectively 0 after that because you're in a minority position.

Mike, yes, that's correct. And then to touch upon the implied $700,000 that is for the period until we close.

Jon Hickman, do you like to unmute and go next?

Could you review for us the whole BIGtoken, BritePool and then your exit out of that. What's the timing again? And how is that going to look afterwards from a line item porting view?

So we -- from a timing perspective, we're hoping to have the transaction closed out this week. What happens to our position, as we move into a preferred position of nonvoting preferred that just converts straight into common with no teeth or anything in it. So that puts us in a position where we would move what is going to be around almost a 40% ownership of the company into a preferred position that could -- that can't ever convert more than 4.99% at any given time. So that -- in that scenario, we then no longer need to consolidate and we'll hold that on an equity method on our books.

So your ownership goes from 40% down to 5%.

No. We'll still own -- we'll own 40%, but it will go into a preferred that can never convert into more than 5% at any given time. So if we were to start selling that position, we would need to convert 4.99% and then sell those shares and then convert again until we were through approximately, I think it's 36%.

And what that does is it takes us -- kind of impacts our affiliate status and our need to file what we're doing and how we're selling. So if we can remove ourselves from being an affiliate, we no longer need to file when we're taking action in the marketplace.

So -- So as like come the first quarter of next year, you won't have those revenues and you won't have those expenses in your P&L?

Correct. Mike, do you want to talk about that a little bit?

Yes, that's correct. That's correct, Jon. When we deconsolidate, if we are just assuming that we close the transaction in the coming week, we're making a -- we'll report -- we'll start to report the BIGtoken operations in our fourth quarter K as discontinued operations, but we'll still show that on our P&L for the period. And then thereafter, our position will just be in that preferred position, and we'll mark that to market.

Really? That's how you'll do it? So you won't be there, P&L will be your -- no, you marked the preferred to market on your balance sheet, but on what the line item on your P&L will be a percentage of their like net income or not.

No. Well, we're still working on some of the details there. So I think what you're referring to is if we fall below consolidation, we still might be considered to be able to have significant influence on the business and thereby have to report our position in the equity method.

But what Chris was describing is we're going to move into a preferred where we would fall below the ability to significantly influence BIGtoken. So we would just have our position in a normal holding similar to how we have marketable securities on our books.

Okay. Okay. Okay. And then you said that you expect to make your first dividend distribution this quarter. You said that?

It will be 30 days after the close of the quarter. So at the end of the quarter, we set aside those securities and just began liquidating them at the beginning of this quarter. And at the end of every quarter, we'll -- or shortly there after about 30 days, we'll make a distribution based upon what we've sold.

Okay. So that would be late January or early February of next year.

That's right.

Next, we have Jim McKellar.

I just want to follow up on the prior question. So when you move BIGtoken to your balance sheet, you're going to mark that to market. So won't you have a substantial gains to report on that gain flow through the income statement next quarter. Is that right?

Yes, that's correct. And we've got -- as Chris mentioned, it can be in a preferred. So there's going to be some valuation work that we need to do on that. It might not exactly be the value of the underlying common shares, but in concept, you're correct.

Understood. Also, I think you were asked about renewal rates. I just want to make sure I understand what you're putting in the numerator and denominator. So a renewal would be what, additional media buying or additional subscription? Or what are you defining as a renewal?

We're doing both, Jim. So we're -- we've actually broken it down as a platform service. So we're taking both into consideration because we said -- when we're selling this, we sell it as a combined service, we don't sell them separately. So we're -- 85% of those people are renewing their services.

And can you characterize the dollar amount that they're renewing at? So for instance, if the first time their customer, they buy -- make up a number, $10,000 worth of services. The next time around they buy the same amount, a lesser amount, a greater amount?

I don't think we have those exact statistics available right now, but we can get that for you and have it available for the next call as well.

Okay. Can you give us a projection of how many supplier customers you expect to have at the end of the year?

Well, we gave our goal of being at 1,000 within 3 years, and that was a little less than a year ago. So we're looking to be at 1,000 within 3 years. So if we could do the same, if we could double again like we did this last year, and then double again, that will get us there.

I guess I was trying to reconcile the additional bookings that -- or the increased bookings that you're seeing in Q4 relative to Q3 and trying to put that into a subscriber number as well. Does that increased bookings imply greater than Q3 number of incremental subscribers?

Not necessarily because a lot of services are additional services beyond the number of subscribers and it's also coming from existing subscribers as well. So while those bookings are coming in, it could be from a lot of people that have already become subscribers in the past and are re-upping on other services.

So we're seeing kind of a snowball effect of that because you have a lot of -- you have new deals that are happening, but yet you have a lot of new people that are adding additional services on top of what they already have. And we'll have that number ready for you for the next call.

Understood. Okay. I see what you're getting at. And then my last -- yes, go ahead.

No, I was just going to add to that, just to say that we still -- we're still early in the renewal cycle. We've had a significant number of renewals coming up in the fourth quarter. So we'll feel better about the estimates that we throw out there when we get through that cycle.

Right. Right. Okay. And then my last one is, can you just characterize the Sequire customer base, broadly speaking. So I'm trying to get a feel for that, let's say, the average or median market cap, the listed versus unlisted, healthcare versus tech. Anything along those lines just to get a better feel for what those customer base looks like?

Well, we started our journey down this road with the small cap market, right? That's really where we were focused. But now we're starting to move upstream. And we're signing up a lot larger companies and a lot of the features that we've added into the platform in the last 6 months are kind of table stakes for the larger cap companies. So it's helping us win a lot of that business out there. So I'd say that we're probably around low 60-40 now on the smaller cap side that's gone up -- the smaller companies have gone up a little bit more.

And I think that has a lot to do with LD Micro and the amount of business that we're closing from the companies at LD Micro. It's really driving a lot of success in having that relationship with the companies. As far as industry, I don't have that broken down for you, but we have a -- our data analysts actually working on all of that information, and we'll try to break that out for you on the next call.

Chris and Mike, we have a few questions left over that were written in, so I'll get started on those. The first one is, with all the cash you have on hand, will you look to do any acquisitions?

We're highly focused on just building on our own and just continuing to increase the size of our tech team to build the ideas that we have. That's not to say that if we saw something interesting that we wouldn't consider it, but really we're with nose to the grindstone on doing what we need to do to continue to grow and build our own tech on the platform. And we have plenty of stuff that's planned out for this year, that is -- that are all really big initiatives. And so focusing on acquisitions, I think, would be just a distraction for us. So it's not something we're looking for. If it was presented to us, then we could think about it.

The next one is, do you offer a free option for new IPOs?

No. To date, we haven't done that. Some of our competitors offer free services, and I don't know if they're counting that in their numbers or not. But as far as new people are signing up, we do not offer a free sign-up option. Because we have hard data costs associated with the platform. We're not just scraping 13F and 13G data. So it's a little bit different, but it may be something that we could potentially consider in the future.

Great. And then the next one is, what revenue do you think you'll do in 2022?

Well, like I said earlier, when I think one of the analysts kind of was asking towards that, but we haven't given that number out yet. But I'd say, we go into '22 somewhere between the $25 million and $30 million range already locked up. And if nobody sold anything for 2022, we start off there. And so I think we can definitely do north of what we've done this year for sure.

Awesome. I think that's all we have.

All right, everybody, thank you very much. Really appreciate the time, and I appreciate you attending the -- our earnings call. And if you are an investor, we appreciate your support and look forward to the next earnings call with you. Thank you very much.