SRAX Inc (SRAX) 2020 Q3 法說會逐字稿

Welcome to the SRAX Q3 conference call. We appreciate you joining the call today. There's still a few people getting into the call. So we'll go ahead and slowly start here. We're excited for the quarter. We think we had a really good and exciting quarter. We're going to go ahead and do the presentation. And then afterwards, we're going to answer some Q&A. (Operator Instructions)

So I'm going to go ahead and share -- start the presentation.

So SRAX is a -- to give you a little bit of an overview of the third quarter and -- so you have the Q3 2020 conference call. We're going to give you a little bit of an overview of what happened this quarter. We had a really good year-over-year call. We had 161% year-over-year growth within the company and most of that is attributed to the growth of our Sequire platform and the recurring revenue nature of our Sequire platform. We also had a quarter-over-quarter growth of approximately 124%, which we're really proud of that. We're continuing to see growth of the Sequire platform quarter-over-quarter.

We completed the acquisition of LD Micro this quarter and that's been going fantastic, and we'll talk to you a little bit about that. We completed the sale of the remaining position that we had inside of SRAXmd. So inside of SRAXmd, we owned a piece of an LLC that was an owner of part of the SRAXmd asset, and we sold that for $8 million. And -- so that was not sitting on our balance sheet previously, so that's $8 million that was not recognized on the balance sheet. So we're excited about that.

We also had 7 quarters of consecutive Sequire revenue growth, which is fantastic, 7 quarters of growth over time, and there's no stopping of that into the future. We're continuing to see that grow.

The -- we increased the number of Sequire clients. From the last time we did our conference call, we had 91 customers and now we have 125. So we've grown significantly since the last quarter conference call. So growing from 91 to 125, and we're just hitting our stride now. We're really starting to sign companies up significantly, and we think the pace of this acceleration is continuing to grow as we add more and more services into the platform.

We moved BIGtoken into its own public company by signing a share exchange agreement with FPVD, and we anticipate that, that company will be trading in its own public entity at the beginning of December. The Q3 bookings for Sequire were $6.7 million, which is the largest bookings that we've ever had in an individual quarter, which is fantastic. We're currently holding approximately $10 million in publicly traded marketable securities. So our balance sheet has been completely revitalized between the $8 million that we've taken in for the SRAXmd transaction and the $10 million in marketable securities that we currently are holding. If you look at the balance sheet today that we put out today, you'll notice there's only approximately $4-point-something million on the balance sheet. But since then, we have close to $10 million in marketable securities.

We're -- we have good insight into our revenue for Q4. We anticipate that Q4 will be approximately $4 million at this point. We think that this is -- this has exceeded our analyst expectations both for this quarter and for the next quarter.

So for a lot of you that are new to the SRAX story, I want to give you a little bit of an update on what Sequire is and why we're seeing such momentum on the growth of the company. Sequire is a -- we like to call it an operating system for publicly traded companies. So it's a tool that allows you to track your investors, buying/selling trends of those investors, and provides a variety of tools that are important for public issuers to understand everything about their business. And we built this out of the -- out of necessity for ourselves and then realized that there was a massive miss in the market.

So I'll give you some overview of the things that we're doing inside of Sequire, so you can understand some of the things that we have now, and then some of the things that we're building in the future. So we have 125 clients who've joined this Sequire platform. This quarter, we increased the sales team of the Sequire platform, and we're adding more infrastructure on the sales side. We launched what's called an Advanced Search feature inside the platform that allows for our issuers to search all companies that are -- all of the other companies that are out there, that are public, so they can see who's investing in their companies. They can see on an institutional basis, so all of the institutional data that's available out in the marketplace, and then also providing what is a CRM to reach out to those people.

We launched a reseller portal for our reseller partners. So we have a big initiative around helping the IR companies and helping them get trained up on the Sequire platform, and then allowing those IR companies to become experts at leveraging the platform and using it to help their customers understand what's going on within their company and manage everything in their company. And we've created a portal for those resellers. And that's an important piece.

We have the LD Micro Conference. So we have an LD Micro conference that has -- we also bought the LD Micro Conference that's out there. So as you can see that with the LD Micro initiative, we have put the conference out, and we'll be continuing to launch the conference.

Here are some of the Sequire features that we have. One of the most important is tracking of the shareholders. Who are the shareholders that are participating in any particular company? Who are they? What price are they buying the stock at? And when are they buying and selling those shares? So this is a very important piece to our customers to understand exactly what's happening inside the company.

We provide an institutional database, so that our clients can understand who it is that is investing in their company and also other companies of similar size and nature. So you can see the name, the address, the phone number of the people that are investing in those companies, and what the trend looks like for your particular company?

We provide the ability for companies to send mock surveys out to their shareholders, so that there is a survey that is -- if you wanted to create a mock proxy or ask questions to your shareholders, you can do that right through the platform. We provide a tool to manage warrants, so that all of our customers can manage all the warrants that they have inside their company, and you can also manage your employee option plans as well.

And around 30% of our customers opt to hire us to run display advertising to promote their company. So as you know, our history as a company has been managing digital advertising initiatives for many different segments.

And inside our company, we are helping public issuers getting the investor audience aware of who their companies are. And these are some examples of display advertising that we've done for some of our clients. These are some display -- some more display ads. These are -- this is to give you an example of how those ads appear on a page. This is social media ads, so this is what the ads look like with inside Facebook and inside of Twitter.

So the growth has been significant around Sequire. We started the second quarter of last year with 12 clients. We're currently now at 125. The revenue for Sequire in the third quarter was $1.9 million. The bookings for the quarter were 6.634. So as you can see, the acceleration of growth is really starting to take root right now. And I could tell you that into the fourth quarter, we're seeing the same continued growth on the platform.

This quarter, we partnered up and bought LD Micro in collaboration with Chris Lahiji and his amazing team of people. We've now, I believe, fully integrated the LD Micro platform into the SRAX organization. And we have our first conference that we're going to be throwing on December 14 and December 15, 2020. We anticipate that there'll be somewhere between 300 and 350 companies at that conference. And our team has been working diligently with the team over at LD to finish up and modify and customize the virtual conference software to accommodate the -- throwing that conference. And we think that what we've built there is going to be the best conference software that anybody has seen, and we're very proud of it, and it's going to be a really, really unique format.

Not only has LD Micro -- not only is it the virtual piece that we're all used to right now as the pandemic is going on, but we anticipate that one of these days we'll be back to in-person meetings, maybe it'd take a year from now, but we anticipate one day that there will be a time frame when we'll be back in person. But even when we do get back to be in, in person, our conferences will always have a virtual element to them. So while there might be a few thousand people at an LD Micro conference listening to companies' stories, there's also going to be a -- there's also going to be a virtual element that is happening, so that you'll always be able to have a virtual presentation happening. And we think that the combination of this and our Sequire software is going to bring a lot of synergies together, and I'll talk about that in a minute.

LD Micro is not just the conference itself, but LD Micro is also a website that is -- tracks the LD Micro Index. And we are working on some amazing enhancements to this platform and some other digital assets that will be combined together with ldmicro.com and provide tools for investors, not only the companies themselves, but investors as well.

So the future of LD Micro is an elevated format. It's the same LD Micro that a lot of the community has come to love, but with more reach and resources. We'll add those virtual conferences into the element. We'll be inviting millions of shareholders to the conferences. Anybody that is a Sequire client for the main event this year is coming free to our virtual conference. Their only entry is that they need to invite all of their shareholders to come. And there is millions of shareholders within that ecosystem. So we'll be inviting millions of shareholders to the conference in December, which is very beneficial for all of our companies that are participating, because we have a huge investor community that's being created around all of those shareholders and each company is going to be able to invite all of their shareholders to come see their presentation. It's not just the people that are traditionally accessing the LD community, but we're inviting these additional investors as well. And then we're taking additional steps to enhance the index. The story -- we'll provide you some more insight on that in the next coming months.

So we got rid of the MD asset that wasn't on our balance sheet, so that was the $8 million that we got on the LD Micro asset. But -- I mean, I'm sorry, the SRAXmd asset, but we also own the BIGtoken asset, which is a tool that allows consumers to own and monetize their own data. That company has gotten to a point now where it can move on to its own public company. And we're moving it into a company called FPVD, it's the symbol, Frank, Paul, Victor, David, and we anticipate that we'll be starting to trade there at the end of Q4. The -- we have filed a definitive proxy statement with the company. The notice statements have been sent down. It will take around 20 days before we start trading there. The company will -- SRAX will end up owning around 88% of that company. The -- we've hired a management team there, a gentleman by the name of Malcolm CasSelle, has been on our Board for the last 8 years. And Malcolm has started 11 different companies and exited 11 companies successfully. And we've promoted George Stella, the Chief Revenue Officer of the company as well. And they're very well positioned. They've also created an amazing Board of people, a really great pedigree of people that have really deep backgrounds in the Internet advertising business. We've also done a raise for that company. We've -- there's a $3 million raise -- a $3 million offering that's being done that should be completed in the next 20 days. We've actually raised close to $2 million of that $3 million today.

Now one thing that's important to point out with the MD business -- or the BIGtoken business is that, that piece of the business was a cost center for us. It was costing us a lot of money to participate and to keep that piece of the business running. So getting rid of that piece of the business into its own public company allows Sequire to continue to grow without the burden of needing to invest directly into BIGtoken. So Sequire on its own, as you'll see as we go into this presentation, is EBITDA profitable. And we anticipate that -- going into the next quarter that it will continue to be EBITDA profitable.

The -- we've said that we're going to be doing $4 million in revenue into Q4, and we think -- that exceeds all of our analyst expectations, and we're very confident on that number. And that number gets us even that much closer to the full company being EBITDA positive.

So I'm going to go ahead and let Mike Malone start taking over and share the financial portion of the presentation.

Thank you, Chris. And to jump into the financials, as you can see, as we started to do in the second quarter, we're now breaking out the business into our 2 operating segments: Sequire and BIGtoken. And just to drive into the revenues, as you can see, total revenue for the quarter was $2.6 million compared to $1 million in the third quarter 2019, representing an increase of 161%. The mass majority of that increase, as everybody can see here, is the increase at Sequire, growing from $31,000 to approximately $2 million in the quarter. Looking at the year-to-date period, we had revenues of $4.1 million compared to $2.5 million in the prior year, representing an increase of approximately 65%.

Looking at the gross margins, they were both 66% for the third quarter and the year-to-date period. This is slightly down in the quarter, but up a full 9 percentage points for the year-to-date period.

Operating expenses were $4.2 million compared to $5.4 million in the second -- I'm sorry, in the third quarter 2019, representing a 22% decrease. And for the year-to-date period, operating expenses were $12.4 million compared to $15 million in the year-to-date period in 2019, representing an 18% decrease. The vast majority of this decrease in both the quarter and the year-to-date period is the rationalization of the expense base that we began to take in the first quarter towards the middle of the second quarter, and we're going to see that partially offset by an increase in the expense base due to the acquisition of LD Micro as we start to see that realized in our P&L beginning in the fourth quarter.

Operating loss was $2.5 million and $9.6 million in the third quarter and the year-to-date period, respectively. This compares to the operating losses of $4.7 million and $13.6 million in the third quarter and year-to-date periods in 2019, respectively.

And as Chris mentioned, we've had a substantial amount of activity on our balance sheet during the year. And at 9/30, we have approximately $2.5 million of cash. And on the balance sheet, as of 9/30, $4.8 million of marketable securities. And some of this is -- the variance here to the $10 million that Chris mentioned earlier has to do with the receipt of the securities. In some cases, we closed our deals and have the right to these securities, but we don't have them physically in our name, although we have the contract to receive them. There's a process that takes place to get that booked in our name, and that's the major driver for the difference.

At the end of the quarter -- I'm sorry, at the end of October, subsequent to the end of the quarter, we received $7 million in proceeds from the sale of the MD business. $1 million of the $8 million that we received was a deferred note. Substantially all of those proceeds from the sale of the MD business were used to redeem our outstanding convertible redemption -- convertible debentures. And after this redemption, we have approximately $9.2 million convertible debentures outstanding.

And with that, I'd like to turn the call back to Chris.

Thanks, Mike.

So now I'd like to open the questions -- or open the presentation to Q&A. We see that we have a number of Q&A questions here. And let me go ahead. And the first is from Jim McIlree. I'll go head and see if we can go ahead and answer this live here.

The first question from Jim is, the Sequire platform revenue flat Q-to-Q. Given the number of subscribers increased, why was platform revenue flat?

No. I don't think that is the case, Jim. We've had the Sequire revenue increased quarter-to-quarter. The -- as of today, we have 125 subs as of today.

What was the Q end subs?

So the -- we reported -- last time we reported that we had 91 subs, and now we're seeing 125.

On the $4 million Q4 revenue, how much is from Sequire, BIG or LD?

We're not going to break that out right now. We just know that we're -- I'll just tell you this that a majority of that $4 million is coming from the Sequire platform. So we're seeing most of that come from Sequire.

Let me go on to -- the next question is from Todd Rustman. So it says, given the decrease in the debt and increase in the balance sheet and moving out BIGToken, it's reasonable to assume that SRAX is cash flow positive plus not needing additional funds as revenue continues to ramp for Sequire?

Yes. That is definitely our projection that we are going to be able to utilize the capital that we have on the balance sheet today to get through and pay all of -- any and all debt that we have outstanding and also get Sequire to a place where it is EBITDA positive.

The next question is from Dave Lavigne. Chris, great quarter. Can you give us a sense of when you may be able to stop consolidating BIGtoken?

So when we do the deal, we're going to -- we'll have to consolidate for a little bit because, at the onset, we're going to own around 88% of the -- of BIGtoken. And the -- but the good part is they're going to have their own capital. On their side, they've been doing really well on raising capital for the business. So we will get diluted down in that business as they raise additional dollars. Hopefully, they continue to raise capital at higher and higher valuations as they go along. So there's not a definitive time frame in mind yet when we would be able to stop doing that. So hopefully, as soon as possible.

The next question is from Todd Rustman again. Would it be correct to state that SRAX is now more of a purebred SaaS-model company?

Yes, definitely, the bulk of our revenue is coming from the Sequire platform itself. The platform is all-encompassing. The agreements that we have and the platform itself is -- we don't do any services for companies that are not on the platform itself. So every customer that we have within Sequire is a customer that is on the Sequire platform. So our goal is to be 100% SaaS-based company, and that's why we've taken the initiatives to get rid of the MD asset, to get rid of or move BIGtoken into its own public company, just so that the story is a lot more clear, and there's no questions out there.

The next question, also from Todd is, with LD Micro, is it expected to bring additional revenues at good margins?

Yes. The margins within LD are fantastic, not only gross margins, but the EBITDA margins are very good on the LD business. But for us, really, the LD business is something that we're adding on to the platform itself, so that as our customers are in Sequire, we're providing them additional services. So while we'd like to see them participate in the platform to make money off of them, we're also providing it as a service to keep them involved in the LD Micro or in the Sequire platform itself. And LD Micro has such a strong name in the small-cap business that we think that, that adds a lot of value to our customers. And we're seeing that a lot of our customers really, really appreciate that initiative. There's a lot of conferences that happen out there, and a lot of people try to throw conferences, but LD has been able to do something special with that community. And we'll keep that going for our customers.

Also from Todd, are there plans to also list BIGtoken on tZERO? Any other further synergies expected with Malcolm and the new expanded Board?

So as many of you might know, Malcolm has started a number of cryptocurrency companies, one of which was the WAX token, which was his most recent transaction that he did. He raised a substantial amount of money for the WAX token. I think it was around $80 million for the WAX token. He has -- and he has a very deep understanding of the cryptocurrency ecosystem and marketplace. So he definitely is bringing that element to the table for BIGtoken. So we're proud that Malcolm is adding that. So as far as listening on tZERO itself, that's a question that Malcolm would have to answer as they get into it. But I know they've had some conversations about doing some things that are a little bit different with BIGtoken.

And then, Todd -- then we have a question, let's see. So the current -- our -- the next question is -- from Mark Caruso is, what effect will the BIGtoken have on the FPVD shareholders?

So we entered into agreement with FPVD, where we will receive 88.9% of the company. So the remaining piece is left for the existing shareholders and the existing debt holders.

And then the next question is from anonymous. Will the current SRAX shareholders receive FPVD shares?

No, you will not at this point receive FPVD shares. The SRAX itself is owning those shares. So we will be the owner of those shares. It does not mean that we won't give them out some time in the future, but at this point we are not.

So the next question is, what steps are you doing to reduce corporate operating expenses? How much will acquisition of LD Micro add to the corporate operating expenses? From Christopher Sakai.

Well, we've reduced operating expenses year-over-year and the quarter by 20-something percent. So we've been working hard at reducing operating expenses. The LD Micro integration is a net positive. They've been net-income positive for many years now. It doesn't have a massive infrastructure. Chris Lahiji and the team have done a fantastic job of keeping that business running with minimal infrastructure. And I think that the technology infrastructure that we're bringing to the table now will also cut back on their costs because in the past, they'd have to outsource to other companies to have them do the -- to do the virtual conference software and to do the webcasting software, which are all pieces that we are now going to be able to add without infrastructure cost.

The next one is, what is the contract length of subscribers you've entered into for the Sequire platform?

It's typically a year-long contract. So we're not entering into any agreements less than a year. So as you can see, we're continuing to add more customers to that platform.

Let's move on to the next one. The next one is from Mike Crawford at B. Riley. It says, can you break down Sequire revenue between media, data and subscriptions in Q3? Will you report LD Micro financial results in the Sequire segment?

We'll report the LD Micro financials inside the next quarter because that's when they'll have substantial revenues. In this quarter, their conference that they did in September was before our acquisition. So even though they did the LD 500, the numbers there didn't come into play until after the segment was over and so -- or until after the Q is in play already, so we didn't take those revenues, but we'll have them in Q4. So we'll break them out in Q4.

As far as breaking down the Sequire revenues between media, data and subscriptions, I'll go ahead and let Mike take that question. Mike?

Sure. Yes. Mike, in footnote 2 within the 10-Q that we filed this morning, there's a segment analysis that breaks it down in the Q. I'm sorry, it's actually footnote number -- let me just tell you, I think it's footnote #4. You can see the distribution between the shareholder and investor, media services, the platform subscription and then the BIGtoken, and then there's a line for conferences. As Chris mentioned, we didn't pick up in our financials any of the activity for the third quarter that LD Micro had as we closed that acquisition on the 16th, and there was no revenue from the 16th through the 30th.

Okay. The next question that we have, it says, what's the status of the special dividend that was declared several years ago?

The -- we had -- as many of you know and many of you have -- many of you have, this sitting in your brokerage account, there is a special dividend that was out there. So we're continuing to work with the lawyers on getting that extended and do some kind of dividend around that. Obviously, most of that was done around BIGtoken, and it was to provide a fraction of the revenue of the BIGtoken shareholders. So we're working with the lawyers to see what we can do with that, but anticipation that something will happen there.

The next question is from anonymous attendee is, what are your expectations of what SaaS revenue multiples' effect will be on the stock?

SaaS revenue multiples obviously are much higher than other multiples, and we think that will have a positive impact in long term on the stock itself.

The next one is from Dave Lavigne. How do you plan to liquidate the shares that you own? In other words, will you largely sell shares as they become available for sale? Or would there be an element of trying to hold some because you have better expectations for the potential appreciation of those shares, if that makes sense?

In some -- we've been able to be in the market and sell shares over the last few months, and we haven't done so. So we just think that there's certain opportune times to be able to do that. And obviously, we're very cautious about how we do that with our clients. So we want to make sure that we're getting the best price for those shares without having a negative impact on our partners. So we're very conscious about how we're going about doing that.

The next one is -- yes, it's the same question around the SRAX rights. And then we have a question from that is, can we provide any clarity on the FPVD share transfer agreement?

So we filed that transfer agreement, that's publicly available for you to see. We've filed an 8-K around that. So you can actually see what the deal that we did. So I would direct you towards that document itself.

And then you're saying, are you reading it right that $850,000 convertible debt will be converted via dilution?

The debt in the agreement -- we are taking the company debt-free, so it is the company's obligation to be delivered to us debt-free.

What are our expectations of cash burn in Q4 considering the separation of BIGtoken?

So obviously, with an increase of revenue of another $1 million -- more than $1 million from the current quarter -- close to $2.7 million up to $4 million, you're going to have a lot more cash there, that's going to reduce the burn down. And then we'll only have 2 months of BIGtoken burn in SRAX itself. So you'll have 1 month less of SRAX burn. So with that said, we haven't defined that number for the market yet, but we anticipate it will be way less than where we are today. So take another $1 million on the top side, reduce 1/3 of that cost that you see inside the document now for BIGtoken, and then apply some of the operating income -- or the operating corporate expenses over to BIGtoken because there's probably around somewhere between $500,000 and $600,000 a quarter of the corporate overhead that gets shifted over to BIGtoken.

So the next question is, what holds the future for SRAX after BIGtoken?

Well, Sequire is the future of SRAX after BIGtoken. And that is really what we're highly focused on. Our goal is to grow this to 1,000 companies. And we think that if we can accomplish that, we'll be well on our way to providing a very, very valuable tool for our customers. The -- it's -- we have a lot of things that are coming in Sequire that are very unique and are things that public companies need. And I'm really excited about the future of what Sequire is going to offer to companies. We have literally a year's long pipeline of developments that we're bringing into the Sequire platform itself, some really, really exciting and interesting things that public issuers need. And I think we're serving a place in the market today that is not being served by anyone else.

So that's the end of the Q&A. We don't have any more questions. So I'll give you one more second, if anybody does have another question to go ahead and enter it in there.

All right. Thank you. Again, we're always open to further conversations. So if you have any -- if you have any questions or anything, please reach out to us, let us know, and we'd be happy to have a conversation with you about what we're doing.

All right. Thank you very much. I appreciate it.