SRAX Inc (SRAX) 2020 Q2 法說會逐字稿

Good afternoon, everyone. I'd like to welcome all of you to SRAX's Second Quarter 2020 Conference Call.

With us today from management are SRAX's CEO, Christopher Miglino; and CFO, Michael Malone. Chris Miglino will give an overview of the second quarter and an update on the business. Mike Malone will review the financials, then turn the call back to Chris Miglino for closing remarks. Then we will open the call for questions. (Operator Instructions)

Before I turn the call over to management, I would like to remind you that this call may contain forward-looking statements, which could be indicated by the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project and similar expressions as they relate to SRAX. Investors are cautioned that all forward-looking statements involve risks and uncertainties that may cause actual results to differ from those anticipated by SRAX at this time. In addition, other risks are more fully described in SRAX's public filings with the U.S. SEC, which can be reviewed at www.sec.gov.

Finally, please make note that on today's call, management will refer to certain non-GAAP financial measures. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, noncash equity-based compensation and changes in the fair value of derivative and warrant liabilities and certain additional onetime charges. Please refer to SRAX's press release for a full reconciliation of its non-GAAP performance measures to the most comparable GAAP financial measures.

Now it is my pleasure to turn the call over to SRAX's CEO, Chris Miglino. Chris?

Thank you, Natalie. Thank you, everybody, for joining us today. We're presenting to you today from what will be the first version of the Sequire virtual roadshow feature. We have a lot of exciting things to discuss this quarter as we've made a lot of progress.

First, we saw a significant improvement in our Sequire sales. And this enabled us to recognize a 29% increase in revenues for the year and a 232% quarter-over-quarter for Q2 increase. At the same time, we enacted significant cost-cutting measures in the Q that resulted in a 21% reduction in expenses for the Q and a 30% reduction year-over-year.

We continue to see a strengthening of our margin as more and more of our revenue is coming from our SaaS-based Sequire platform. Our margins increased to 66%, which we're very excited about. And then we've seen an increase in our EBITDA as well. EBITDA increased approximately 35% year-over-year and 18% (sic) [16%] quarter-over-quarter.

In the second quarter, we completed a $16.1 million convertible debt financing that positioned us well to accommodate the growth we're experiencing. Most notably in the quarter is our continued growth in bookings for the year. In the second quarter, we reported that we had booked over $2.5 million and that pace did not slow. So when we gave our call for the last quarter, we reported that we did $2.5 million. In the first 6 weeks of the third quarter, we've booked over $4 million for just the Sequire platform alone and close to $5 million between Sequire and BIGtoken.

We had anticipated that we would see $3 million in bookings for the entire third quarter. So we actually exceeded that in July alone. So we're very, very excited about that. Based on that, we think that there's strong growth happening. And based on that strong growth that's happening on the bookings, we anticipate that we'll be able to make our payments on the convertible debt debenture without having to raise any additional capital with just the money that -- from the bookings that we have to date.

So we have 2 different distinct products inside the SRAX platform. We have Sequire, which we like to call an operating system for publicly traded companies. And we have BIGtoken as a platform that allows consumers to own and manage their own data.

So first, I'm going to focus a little bit about Sequire because we have seen so much growth in that side of the business. So Sequire is an operating system for publicly traded companies. It allows public companies to track their investors, who's buying and selling their stock and insights into those investors. And it gives us the ability then to market out to those shareholders.

Most notably for the quarter, we had 91 clients that have subscribed to the Sequire platform, which we're very excited about. That's a significant increase in -- over last quarter, where we had said we had 68 clients. And this week, we should pass the 100 client mark; if not this week, next.

In the quarter, we launched a few really notable advancements that we added for the ability for our clients to track institutional investors and helped our customers identify who those investors are and where they're custodian, their shares, so that they could be tracked intra-period and between filings of 13Fs and 13Gs.

We also launched a survey feature that allows for public companies to survey their shareholders and ask them questions about how they think management is doing or how they might view a particular issue that the company needed to contend with? Do they think the company should buy a company or merge? How they think the management is doing? Do -- how would they vote on a particular issue? We've passed the 1 million shareholder mark inside the platform, meaning that out of our 91 clients, we have 1 million shareholders that are represented by those 91 companies.

And a lot of those people, a lot of those shareholders, around half of them are Robinhood traders, who we've been able to identify from some of our clients that have seen significant growth on the Robinhood side. And we have 1 customer alone that saw growth from around 3,000 shareholders when we started working on it to now they have around 360,000 shareholders, of which around 250,000 of them are Robinhood traders. And we have a few different stories like that as well.

As we mentioned in the last quarter, we launched our Stock for Ads program that allows public companies to pay for Sequire and its related services in stock. We continue to see a lot of adoption of that platform and people wanting to interact with it. And another thing that we launched in the platform is the ability to identify shareholders that are holding their shares on the OBO list or in Street Name. And we've created some intelligence that really helps the issuer identify where those people are holding those shares.

We've -- the institutional investor shareholder database thing has been a great addition to the platform. We've seen a lot of companies wanting that data, even though a lot of it tends to be a little bit dated on 13F and 13G filings. We've added it so that our customers could see it. So now that a lot of people might be new to the story, I'm going to walk you through some of the features that we have within Sequire itself and the things that are helping us with the growth of this platform.

We have -- inside the platform, we have the ability to do shareholder tracking. Inside the shareholder tracking, we can see the name of individual shareholders, the total number of shares that a company has, the number of shareholders that were added in any given period and the amount of shares that an individual owns and the price at which they acquired those shares. And then from this data, we then can extract additional information about those shareholders so we can get there, not only their name and address, but we can get their Facebook pages or LinkedIn pages or Twitter pages, their emails, their phone numbers and different ways that our issuers can communicate with those shareholders.

Inside the institutional database, we've added the ability for companies to look and see who their institutional holders are, how many shares they own over a period of time and then the ability for issuers to then go in and search for other companies and prospects against other institutions that are investing in peers. So you can see who those people are, how much they're investing in your peers and then give you phone numbers and ways that you then can communicate with them.

And then we've added in the shareholder surveys. So you can launch inside the platform the ability for companies to ask questions of their shareholders so that you then can say, do you think we should buy another company? Do you think we should merge with other companies? How do you think the management of the company is doing? And you can create all of these different surveys in the platform and send that out to your shareholders.

And then we have a section that allows companies to manage all of their warrants and options, employee options. So you can manage all of the different warrants that you have, so you could see at any given time how many warrants are out there in the marketplace. And you can see that the -- what the value of those warrants are to the company at any given time. So you can see here that this company has $21 million worth of value in the warrants, that they were all exercised today and then you can run sensitivity testing and analysis around that.

Now these are just some examples. Aside from the platform itself, we then help our customers go to market and identify different traders and investors that might be interested in advertising, I mean in buying stock for that company. So you're looking at -- these are some banners that we've created. And we are using these banners to target people that we know are investors in certain types of companies and then running ads to make them aware of these different companies that are out there.

This is an example of what that might look like on Stocktwits. So here, you can see an ad for a wrap that is showing a video of somebody getting wrapped, of a video that was on CNBC. And we took that and put it in there and are targeting not everybody on Stocktwits but just the people that we know are active and are out there buying stock. So we're sure that the media dollars that we're spending are effective and driving conversions to make -- driving people to become shareholders in the company. And we can see that in the platform. We can see the number of new shareholders that we're driving on a weekly basis for the company.

Here are some other examples of that media. This is inside of Facebook and inside of Twitter and Instagram. So you can see this is another client that we ran a bunch of media against and drove a lot of people to -- a lot of Robinhood traders.

This is the growth that we've seen over the last few quarters of Sequire. So obviously, it was a new product for us. We worked hard after we sold the MD business to build this up. We started at 12 clients, and we've grown that now to 91 clients over the last 5 or 6 quarters. And what we're noticing now is that we're starting to see a significant acceleration of that pace. We've beefed up the sales team here, and we're closing deals nonstop. In fact, we said in our press release, we've been closing around $1 million a week for around the last 6 weeks. So it's been a busy 6 weeks.

Here, you can see that we've generated around $746,000 in revenue in the second quarter. We booked $2.5 million. Booked another -- around -- this is actually a little bit higher than this now, around $4 million as of today. And so we're -- we've booked a lot of money and those are year-long contracts for Sequire clients. So we'll start to see the fruits of that labor as we go in through the rest of the year. It's exceeding what we had anticipated we would do here.

So we're seeing a lot of success, and this is why you're starting to see an increase in our margins because the margins on the SaaS platform here are pretty significant. And so we're starting to -- as those margins start to get -- as the revenues on that side start to get bigger and bigger, you're starting to see additional -- you're starting to see an increase in the margin itself. So we're excited that we'll cross around 100 companies on the platform here pretty soon. That's going to be a big, giant milestone for us.

So without -- I know this quarter has been a really big success for Sequire, and we've had a lot of growth there. But BIGtoken, at the same time, continues to increase their volume of companies, advertising on the platform and increase the number of companies that they're partnering with. So they have Lottery.com as a deal that they just did, and they also did a partnership with Redbox. We did a deal with GroupM in Singapore to begin monetizing our Asian Pacific users on the platform.

And most notably, we signed a deal with Procter & Gamble Fabric Care, which inside the P&G world is the biggest spender of media dollars inside P&G. And if you've been following our story for a little bit in the last 4 years or so, we had done around $30 million worth of media buying for Procter & Gamble. So bringing them into the BIGtoken platform is a significant advancement for the BIGtoken platform. This deal took around 1.5 years to get done, and we finally got it done. So really excited about that.

They've had around $570,000 of revenue year-to-date. We have a lot of repeat business coming in here. So you got repeat business from Kraft, Tyson, Diageo. Additional repeat business from others, like we had the -- we have the Girl Scouts of America. We worked at Publicis to create a consumer COVID research study across all the Publicis agencies to educate their brands about how they should deal with the COVID crisis and how willing consumers were to make changes to their spending habits during the COVID crisis, which actually ended up being really valuable for them.

We launched what we call Lightning Insights, which is a way for brands to get very quick research results from the platform. And typically, brands would go into a research study and say, look, we want 1,000 people or 2,000 people answer this. We can get that in an afternoon from these people.

So we've also launched something called BIG Seasons, which is our most ambitious exercise in BIGtoken for the quarter. BIGtoken adds additional gamification to data value. And it creates a predictable payment cycle for consumers because we're paying consumers once a quarter. And at least, this defines that those consumers are getting paid one time per quarter. And it gamifies the entire process, and it's been very successful. And actually, since implementing this, we've seen a significant increase in the number of people engaging with the platform.

Before I go into the financials and turn it over to Mike, I'm going to -- hold on one second here. I just wanted to bring out the fact that although we've talked about it a number of times that we are -- we still own 31% of our MD business. So MD is still something that is a significant part of our business. We own 31% of it. And as of the end of this quarter, our preferred position in that business is equal to around $11.6 million. So it's $11.6 million that we would be paid in a preferred position if that business was sold.

We think the business is doing well. We have some confidentiality around it, so I can't talk about what their numbers are. But we think the business is doing good. And if they don't sell it, if they sold it at the -- or sold it at the end of 2020, we should see approximately, at a minimum, a $12.1 million return on that business.

So all in all, we think it was a pretty good quarter for us, and we think we're well positioned to continue to benefit from both BIGtoken and from the growth of Sequire. So I'll now turn the call over to Mike to review some of the financials.

Thank you, Chris. And as Chris mentioned earlier, we now operate the businesses as 2 separate operating companies, Sequire and BIGtoken. And beginning with this quarter, we now include segment information revenue and profit margin within the footnotes and the MD&A section of the 10-Q that we filed this past Friday.

And jumping into the quarterly results. Total revenue for the fourth quarter was $1.165 million compared to $904,000 in the second quarter of 2019, reflecting an increase of 29%.

For the first 6 months, we finished with $1.516 million, which is roughly 1% over the prior year. Gross margins were 66% for both the second quarter and the first half, and this compares to 54% and 50% for the respective periods in the prior year.

Operating expenses were $4 million compared to $5.1 million in the second quarter of 2019. And for the first half of 2020, operating expenses were $8.1 million compared to $9.6 million. The primary driver of the decrease in operating expenses is driven by the reduction in staffing and cost rationalization activities that we began earlier this year.

Operating loss for the quarter was $3.2 million and $7.1 million in the first half, respectively. This compares to operating losses of $4.6 million and $8.9 million for the second quarter and the first half of 2019, respectively.

And now turning to our balance sheet. During the quarter, we raised approximately $14 million in gross proceeds through the sale of convertible debentures for $13 million, and then we received $1 million of proceeds from a PPP loan, for which we expect to receive full forgiveness in the coming months. As a result of the Stock for Ads program, we now have approximately $1.7 million in marketable securities on our balance sheet as of 6/30. And the business that we have closed through today's date subsequent to 6/30, we now have approximately $5.5 million in current value of marketable securities.

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

Thanks, Mike. So at this point, I'd like to turn the call over to some questions and see if anybody has questions. (Operator Instructions)

It looks like we have a question from Mike Crawford at B. Riley.

Chris, can you hear me?

We can, yes.

Excellent. Good. So I wanted to ask about Sequire. When companies are prospecting versus peers, what data are these companies accessing to do this prospecting?

So they're looking at what other funds are invested in that company. So you can look at both to the filers that have filed against that company and also the companies that have -- the funds that have made investments into that company. So you can say, okay, who's invested directly into this business or who has filed that they've made an investment in this company during the quarter?

So it's looking at like 13F data? Or is this more NOBO data from Broadridge that's linking directly into the platform?

It does all of those things. So it pulls in 13F, 13G. It looks as if the company did an overnight direct deal. It looks if they did -- it looks to find out if they did any convertible debt deals. And it looks at who those funds were that made those investments so that you can see the number of shares that those companies may have had or have the opportunity to get. And then if they did get them, where did they go, what custodians got them, so that then we can then start to track them intra-periods. If you just finished an overnight direct deal, and then in that overnight direct deal, you issued out 2 million shares to a fund and you then are -- then we can start to track where those shares went and the changes on a day-to-day or week-to-week basis of those shares.

Okay. Then just one final question from me, also regarding Sequire. So historically, the company has done -- has proven to be digital marketing experts. And now you have this base of 100 companies that probably could use digital marketing services to help further their business not just maybe gain insight into their investor base or gain new investors. So to what extent do you see that will comprise a component of the Sequire ancillary services going forward and maybe for SRAX overall?

Yes. That's where we're seeing a significant part of the growth is. Not only from the companies wanting to use us to help them identify shareholders and markets to shareholders but those same public companies wanting us to help them market their services, whether that be B2B or B2C, and using our expertise of analyzing data to be able to better market to those consumers or to those businesses.

So yes, we're seeing a big uptick in that side of the business. And it's the direct correlation between the relationship with the company and understanding their cap structure that is enabling us to have that conversations with the CEOs, CFOs, Chief Marketing Officers of those companies.

Let's see if anybody else has a question. (Operator Instructions) I have a question here from [Steve Salo].

Chris?

Yes.

Got to be away from my computer. Sorry about that. I was just wondering what the plan was up until the (inaudible)?

[Steve] got to -- we can't hear you when you walk away from your computer. I think the question was a question around how we're doing on BIGtoken and what the -- potentially what's happening with the BIGtoken investment.

So -- well, BIGtoken has obviously been a big part of the business. And privacy couldn't be more an issue than it is right now. I mean we've had more issues around privacy come up in the business than before -- ever before. So we're finding that it's definitely something that is of importance to the market, where we think there's a big opportunity for BIGtoken to do something on its own and really be -- potentially do some kind of strategic positioning and that we're exploring a bunch of things with BIGtoken right now. And I think that will -- everybody will learn about some decisions we make about that in the next 1.5 months to 2 months.

So somebody in the chat had asked a question. And they're asking what's the status of the SRAX rights expiring on 12/31/2020 and the MD payouts for the $10 million?

So the MD payout was -- that was an earnout that they had from -- that we were supposed to get around a year ago if they hit certain numbers, which they didn't hit those numbers. They still owe us a -- we still have our preferred position in that company. So we still are owed the money if they sell the business. So we anticipate that, that will happen sometime here in the future. And we hope that they benefit from the COVID, a company here where that business is focused around helping pharmaceutical companies reach doctors without salespeople and to use very good data targeting to reach those people. So I am -- we think that business is well positioned and could really make a lot of money here in the future.

But -- and as far as the rights go, that would be attributed to the strategic thing that I just mentioned a little bit ago. So sometime in the 1.5 months to 2 months from now, I think that you'll have a much clearer understanding of what's happening there.

Let's see. I got -- somebody is saying, what's the value of having 1 million investors in the platform -- in the Sequire platform itself?

Well, the value of being in the Sequire platform -- having that many users in the Sequire platform is that we can learn a lot about who investors are and how much -- what type of stocks they're investing in and what kind of people are investing in what kind of companies. And that targeting and that data that is gleaned from all of that enables us really to be a lot more successful in targeting additional new investors. And that's really been our -- that's been our expertise for the last 10 years.

And so I just think that the more data we have in there, the more we learn from it. And we have a bunch of machine learning that we've set up against that data that just feeds us back amazing targeting capabilities that really work. I mean we see -- when we start targeting the right investors for the right type of company, you're really starting to see when it's just not a platform. And when you have a KPI that is saying, look, if I spend money on marketing, can I drive additional shareholders into the platform, and you could see that happen week-to-week, that's very valuable.

And that's why we're -- that's why we're having success and seeing more companies continue. It's not new companies that are spending with us, but we're starting to see a lot of additional companies -- existing customers really spend more in the same platform.

(Operator Instructions) All right. Well, thank you very much for joining us today. I appreciate you taking the time to join the call and hear a little bit about us, what we're doing -- I have one more question here. Let's see who this is from -- not seeing it.

So thank you very much for joining us today. And if there's any questions that you guys have that we didn't answer here, please get in touch and we'd be happy to set up a call with you and let you know -- try to answer any questions that we didn't answer here today, but we appreciate.

We think we're in a good spot. We think the company is well positioned. We've worked hard to get here. Like we said in our press release, we really feel like we're at a tipping point with the business and that we're seeing ourselves kind of getting to a point where Sequire is really well, well positioned to continue to take off or just that we're just at the beginning with the 100 companies. We think that there's thousands and thousands of companies that could be on this platform.

So thank you very much for joining us today, and we appreciate your time to be here.