Edited Transcript of KERN.OQ earnings conference call or presentation 13-May-20 12:30pm GMT

May 30, 2020 (Thomson StreetEvents) — Edited Transcript of Akerna Corp earnings conference call or presentation Wednesday, May 13, 2020 at 12:30:00pm GMT

Akerna Corp. – Director of IR

Akerna Corp. – Co-Founder, CEO & Director

Akerna Corp. – CFO & Secretary

Alliance Global Partners, Research Division – Head of TMT Research, MD & Senior Technology Analyst

Good morning, and welcome to Akerna’s Third Quarter Fiscal Year 2020 Financial Results Conference Call. Today’s call is being recorded. (Operator Instructions)

At this time, I would like to turn the conference over to Jason Assad with Akerna for introductions and the reading of the safe harbor statement. Please go ahead, sir.

Jason Assad, Akerna Corp. – Director of IR [2]

Thank you, and welcome to today’s Third Quarter Fiscal Year 2020 Conference Call. Representing the company today is Jessica Billingsley, CEO of Akerna; and John Fowle, CFO of Akerna. Both will be available for questions during the Q&A portion of today’s call. Before we begin our formal remarks, I’d like to remind everyone that during this conference call certain statements will be made that are forward-looking statements within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Words such as estimates, projected, expects, anticipates, forecasts, plans, intends, believes, seeks, may, will, should, future, propose and other variations of these words or similar expressions or the negative versions of such words or expressions are intended to identify forward-looking statements. 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 in the forward-looking statements. These risk factors are more fully discussed in Akerna’s filings with the Securities and Exchange Commission.

Forward-looking statements speak only as of the date 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 I’d like to turn the call over to Akerna’s CEO, Jessica Billingsley, for a more in-depth discussion of the company’s third quarter financial results. Jessica?

Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [3]

Thanks, Jason, and good morning, everyone. Thank you for joining us, and welcome to our Third Quarter Fiscal Year 2020 Earnings Call. Before we go into a discussion of our results, I would like to spend a few minutes touching on the recession-resilient nature of the cannabis industry and the clients we serve.

We’ve seen nearly every country and state with the one notable exception, Massachusetts, declare cannabis essential during these challenging times as we all work to protect ourselves and our communities. Our platform insights team has been hard at work analyzing our data and tracking cannabis, hemp and CBD industry trends during the pandemic. What we see is encouraging. Year-over-year, recreational cannabis spending is up, with a 39% increase in ticket size. As the industry evolves to meet client needs, product pickup as a fulfillment method is increasing and now accounts for 15% of total sales. I think we can agree, these are strong indicators about the future long-term health of the industry and clients we serve. And speaking to the strength of the cannabis industry, our business strategy to provide technology solutions and business intelligence to the industry is working. Clients are using our insights to drive data-driven decision-making around everything from inventory management and run rates to ordering. Beyond the cannabis industry, we recognize what an extremely challenging time this is, particularly for those on the front lines of the crisis. Our thoughts are with all of those most affected. As I say to our team at Akerna each week, we’ll get through this together.

On our second quarter call, we discussed our growing operational traction. I can tell you, we have maintained our momentum. Before the pandemic, the industry was rebalancing in response to consolidation and disruptive market valuations for operators. Even with these challenges, our industry continues to evolve and find solutions to what is a growing consumer demand. Despite this positive momentum, global market valuations for cannabis-related companies have declined over the last 12 months, leading some operators to rethink business models, look for merger synergies and explore alternative financing options. As the leading technology solution provider for the industry, we are confident in our strategic positioning and long-term competitive strategy. Our comprehensive suite of cloud based, integrated software solutions provides operators the technology to scale their operations and the business intelligence to increase profitability. We have invested in developing and maintaining an extensive collection of pre-built integrations that are designed to embed our solutions into leading business applications, including accounting, ERP, e-commerce and CRM solutions.

Maintaining pre-built integrations with a broad range of business applications provides a competitive moat. We currently have over 70 integrated products that leverage our platform infrastructure and extend the value of our ecosystem. We have strategic partnership agreements with over a dozen of the best of these integrated products.

Overall, the third quarter can be described as one in which we solidified a strong foundation for our future growth by expanding our client base among emerging enterprise cannabis companies, increasing revenue from our existing client base and continuing to expand our ecosystem by seeking new relationships and software solutions that offer exposure to potential clients, integrations with more business applications and cross-sell opportunities. As our technology solutions become further embedded in our clients’ business processes and systems, providing them with an automated solution central to their ability to transact, we are well positioned for the future. Our competitive strength and strategic focus areas will continue to drive productive, long-term client relationships.

Now let me briefly comment on our financial results. I’m pleased to report for the third quarter year-over-year revenues increased 32%. Our consulting revenue increased 219%, a strong leading indicator of future platform growth. Software revenue increased 16% year-over-year. Continued strong bookings were offset by revenue recognition delays due to suspended revenue related to COVID-19 and delays in advance of licensing and go-lives. We continue gaining share in the industry and the strategic platform investments are driving an improved margin profile. The majority of onetime costs associated with completed acquisitions are behind us. We will continue to focus on our infrastructure and achieving efficiencies of scale. John Fowle, our CFO, will take us through the details of our financial performance shortly.

As evidenced by our growing hemp and CBD clients, more industries can benefit from how cannabis technology delivers on supply chain transparency and accountability. In fact, in the third quarter we signed a traditional agricultural client. While we recognize the opportunity in traditional agriculture is significant, we will continue to focus on the cannabis, hemp and CBD markets, which are in a phase of rapid growth. We will explore opportunities to serve traditional agricultural clients as they arise.

Over the next few years, the cannabis market opportunity for our software products alone has the potential to grow to over $1 billion. While we are still a small fraction of this overall market opportunity, we are the market leader and the only scaled tech provider to this space.

Akerna’s primary competition remains spreadsheets, but we believe consolidation among cannabis operators will lead to rapid scaling, requiring accelerated adoption of technology and the use of data-driven decisions that spreadsheets simply cannot support. With this in mind, our strategy continues to position us to capture a growing share of the enterprise market in the cannabis industry. To be ready for this paradigm shift, our overall value creation strategy involves not only our focus on aggressive organic growth, but also our previously stated intent to seek highly complementary acquisition opportunities.

In the quarter, we’ve executed on that initiative. Having announced the acquisition of Trellis, our third acquisition, let me take a few minutes to review our inorganic growth strategy and provide some details on the integration status of solo sciences, Trellis and Ample Organics. Our inorganic growth strategy is built around solidification of our position as the essential technology infrastructure for the cannabis supply chain. We target technologies that extend our software ecosystem, give us broader reach across the supply chain and deliver more value to our clients, thereby increasing client wallet share and retention. Our open architecture technology platform provides for seamless and synergistic technology integration. Meeting the evolving needs of cannabis operators drives our partnership, integration and inorganic growth strategy.

We think about acquisition targets is generally falling into one of three channels: TAM-expanding technology, product tuck-in or competitors. In each case, we pursue accretive valuations and leverage our infrastructure to create additional value. The acquisitions we have announced in our first 10 months since becoming a public company are good examples of each channel. Solo sciences’ authentication and anti-counterfeit technology and brand consumer interaction platform extends Akerna’s total addressable market by extending our reach throughout the supply chain.

Additionally, we have gained an inexpensive, highly profitable government tagging solutions. Trellis is a product tuck-in acquisition, generating immediate contribution of positive cash flow from operations by leveraging Akerna’s infrastructure. We can offer Trellis as a compliance solution in additional markets, enabling expansion outside its home market of California and accessing growth that was not possible without integration into Akerna’s compliance [bus]. We can also sell other ecosystem connected services to Trellis clients, such as advanced business intelligence and reporting access. We have the added benefit now of a lightweight downmarket solution that becomes a feeder for our larger, more robust MJ Platform solution.

Ample Organics is the leading seed-to-sale software platform in Canada, with a majority market share in the largest legal market in the world. By bringing the companies together, Akerna’s leading market position covers all North America, giving us a commanding footprint, operating leverage and opening many additional cross-selling opportunities with our complementary software solutions. We are executing on the integration plans for each of these acquisitions. I am pleased to share both solo sciences and Trellis are fully integrated, and we are more than halfway through our 100-day integration plan with Ample Organics, which is on track to close.

From our perspective, there has never been a better time to be in our position, as many smaller players in the space are finding limited access to capital, driving opportunities for us to pick and choose complementary assets at prices far below what it would take to build internally. We can be opportunistic in each of these categories. Importantly, our transactions were structured in a manner whereby we’re not simply buying out our targeted acquisitions. To the contrary, we are buying them in. Like all of us here at Akerna, our acquisition targets are now shareholders with a vested interest in our collective future success. Part of that success depends on cultural fit.

Let me highlight our executive team’s focus on culture during the integration process. Culture is essential to effective integrations. Our emphasis on placing clients first and value-creating initiatives has been invaluable to building team morale, support and excitement about our business. By tying culture to value creation, culture has become a useful tool for achieving our post-merger integration objectives.

In summary, we are pleased with what we achieved to date in the short time since becoming a public company. We are strategically positioned to capitalize on the market during this period of correction, consolidation and realignment. Our growth is providing scale and operating leverage. We continue to expand our portfolio of integrated technologies. Our partnership and inorganic growth strategy is expanding our software ecosystem. And as a NASDAQ-listed public company, we have unique access to capital and the opportunity to use our public currency in accretive acquisitions. Our continued operational progress helps solidify our position as a leader in cannabis ERP and government cannabis compliance, and we intend to extend that leadership position.

With that, I will now turn the call over to our CFO, John Fowle, for a detailed review of our third quarter 2020 financial results. John?

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John Michael Fowle, Akerna Corp. – CFO & Secretary [4]

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Thanks, Jessica. Today, I will provide an overview of our financial results and key business metrics for the quarter ended March 31, 2020. As a reminder, these results are discussed in further detail in our Form 10-Q which will be filed this week with the SEC. We encourage you to review the filing.

As Jessica noted, we made significant progress in the quarter towards solidifying the foundation for our future growth. Key investments and strategic shifts throughout the business have delivered results that I would like to highlight. This past quarter, we evolved our sales and marketing teams to better align with our market and serve our clients. We recorded approximately $1 million of new AR bookings in the quarter. This includes near record-level bookings in March despite the COVID-19 pandemic. We also have a strong pipeline heading into our fiscal year fourth quarter. This continued momentum demonstrates the strength of our industry.

Strategic platform investments and changes in third-party technology applications have helped increase our margin profile to 54%, up from 50% in the same quarter of 2019. And at the end of March, we executed a small restructuring of our organization, which we expect to reduce operating expenses $2 million to $3 million annually. The reorganization results in Akerna being a leaner, more focused organization with the human capital and financial resources to execute our organic and inorganic growth strategy.

Turning to our financial results. Total revenue increased to $3.1 million for the period ended March 31, 2020, from $2.3 million for the period ended March 31, 2019, an increase of $700,000 or 32%. The increase in total revenue was achieved across each of our product lines, driven by growth from our commercial software business, MJ Platform, in addition to our consulting business and our government regulatory software business, Leaf Data Systems.

Software revenue increased to $2.3 million for the period ended March 31, 2020, from $2 million for the period ended March 31, 2019, an increase of $300,000 or 16%. The increase in software revenue was primarily driven by growth in revenue from MJ Platform of over $100,000 or 11%. The increase in subscription revenue was primarily caused by volume-driven increases from new business, which includes new client upgrades and additional subscriptions from existing clients. We continue to invest in a variety of client programs and initiatives, which, along with increasing adoption, have helped keep our attrition rate consistent compared to prior periods. Consistent attrition rates play a role in our ability to maintain growth in our subscription revenues.

Revenues from Leaf Data Systems increased by $200,000 or 18%, primarily a result of our contract with the state of Utah, which commenced in August 2019. Consulting revenue, which includes revenue generated from professional services delivered to clients to help them maintain compliance with state law, initiate new business or expand existing business operations, increased to approximately $700,000 for the period ended March 31, 2020, an increase of 219% compared to approximately $200,000 in the period ended March 31, 2019. The result was driven by a higher volume of consulting activities and engagement as we continue to experience strong demand for our consulting services in emerging states. Consulting services are highly correlated to state legalizations and other regulatory expansion activity. As a result, individual period-over-period comparisons may experience variability depending on the timing of recent legislative changes. Consulting revenue is a strong leading indicator of future platform growth.

Our cost of revenue for the period ended March 31, 2020, was $1.4 million, an increase of $300,000 or 22% as compared to the cost of revenue for the period ended March 31, 2019, of $1.2 million. The increase compared to the prior year’s quarter was primarily a result of the costs incurred to service the new contract with the state of Utah. Software hosting costs have increased due primarily to higher transaction volume. We will continue to invest in our platform infrastructure to drive scale and reduce ongoing costs.

Gross profit increased to approximately $1.6 million for the quarter ended March 31, 2020, an increase of approximately $500,000 or 42% compared to the quarter ended March 31, 2019. Gross profit margin increased to 54% for the quarter ended March 31, 2020, an increase of 4 percentage points compared to the quarter ended March 31, 2019. The increase was primarily a result of increased software revenue and a minimal marginal cost to service that revenue and infrastructure investments to reduce ongoing costs.

Operating expenses were $7.1 million for the quarter ended March 31, 2020, compared to $3.7 million for the quarter ended March 31, 2019. The increase in operating expenses was driven by higher selling, general and administrative expenses, an increase of $2.8 million or 107%, in addition to higher product development expenses, an increase of $600,000 or 63%. Our operating expenses were impacted by a number of onetime costs or first-time costs compared to the same period in 2019. They include the following: $1.1 million of acquisition-related costs — as Jessica noted, these costs are largely behind us as we move forward with integration; $500,000 in new expenses related to solo sciences; $300,000 related to stock compensation; and $1 million related to investments in technology and other infrastructure to position ourselves for growth and the cost of operating as a public company. We will continue to focus on our infrastructure and achieving efficiencies of scale as we continue to grow.

Akerna incurred a net loss of approximately $5.3 million for the period ended March 31, 2020 compared to a net loss of approximately $2.5 million for the period ended March 31, 2019. As of March 31, 2020, we had $14.3 million of unrestricted cash. Cash on hand and access to the capital markets positions us well to execute on our strategy, which is a significant advantage over many of our key competitors. We expect continued improvements in our financial performance as we continue to scale and drive towards profitability.

This concludes our prepared remarks. We will be 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. Operator, please open the phone line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Brian Kinstlinger with Alliance Global Partners.

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Brian David Kinstlinger, Alliance Global Partners, Research Division – Head of TMT Research, MD & Senior Technology Analyst [2]

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I’m curious how COVID-19’s changed your business. Specifically, maybe you can highlight the biggest challenges that you as a company is facing. And then on the other side, how maybe it’s benefiting your company as well.

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [3]

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Sure. It’s a great question, and certainly timely. As a tech company, we are well positioned to work effectively anywhere and have been set up where we could work remotely for the past many, many years. So from a company impact, it has not had a tremendous impact on our company. We were able to pivot to work from home immediately. And of course, we’ve had a number of internal initiatives focusing on culture and really supporting our team during this time.

On the flip side, while we’ve certainly seen the cannabis industry as being recession resilient, which I find to be incredibly encouraging and promising as we move forward, as noted in our prepared remarks we have seen some delays and suspensions and delays in revenue recognition due to COVID-19. We do — we don’t — we do expect to recognize that revenue moving forward, but we have seen some delays, at least during this time.

We’ve also really been taking this opportunity, on the benefit side, to double down on our relationships with our existing clients and really focusing on working with them to help support them during this time in different ways, leveraging platform insights to help our clients make smarter business decisions and thinking about this time as a focus on relationship and that that focus on relationship will be well remembered as we move back into a more normalized mode of operation, if you will.

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Brian David Kinstlinger, Alliance Global Partners, Research Division – Head of TMT Research, MD & Senior Technology Analyst [4]

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Great. And then it was encouraging to see the bookings acceleration. A, I’m curious if that was mainly the result of PAX Labs. And then how have bookings trended? Have you been able to continue that momentum in April and early May? Or have there been more difficulties and challenges as stores maybe not opening as quickly right now?

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [5]

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So anecdotally, so first — to answer the first part of your question, those bookings were for MJ Platform and not related to the PAX Labs platform insights. (inaudible) cornerstone account that we announced previously, just continued strong demand for our B2B product, MJ Platform. And we have seen really nice continued bookings through April and May. Are they — could we have seen some impact, might they have been even higher in a non-COVID scenario? Potentially, but we’re really encouraged to see continued strong bookings during this time. And as I mentioned, we have seen some delays. But we — in certain instances seeing some pipeline opportunities push out as well, but we have not, at least anecdotally, lost any business or had any clients go out of business as a result of pandemic.

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Brian David Kinstlinger, Alliance Global Partners, Research Division – Head of TMT Research, MD & Senior Technology Analyst [6]

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Great. And then maybe an update on solo sciences and, more specifically, with COVID-19, does it require a demonstration and maybe that speaks also to the rest of your technology? And furthermore, maybe talk about your plan to tie your revenue more to cannabis sales that are growing so fast, which in the past, maybe you haven’t been as tied to.

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John Michael Fowle, Akerna Corp. – CFO & Secretary [7]

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I think I’ll take that one. Yes. I could take that one. Brian, apologies, maybe could you restate the question again, just so I can have better context.

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Brian David Kinstlinger, Alliance Global Partners, Research Division – Head of TMT Research, MD & Senior Technology Analyst [8]

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Yes. Yes. I’m curious in terms of solo sciences, I mean, I believe it’s your way to tie yourself with your customers more towards the growth in — that they’re enjoying in cannabis. So I’m curious how that’s — the early signs of that? And does that technology — is there any demonstration needed in person that maybe is not happening? Is there any demonstration at all that’s needed for solo sciences for customers? I’m just curious how that’s being impacted.

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John Michael Fowle, Akerna Corp. – CFO & Secretary [9]

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So let’s break that into 2 parts. I think to answer your first question, we continue to see momentum with solo sciences. This past quarter — when we acquired solo sciences, they were pre revenue. This past quarter, we booked some of our first revenue for the business. We’re continuing to see that pipeline of interest grow, in fact, both in cannabis and non-cannabis sectors. And certainly, the technology is unique and some of the insights that we get through their technology platform are highly valuable. So we are seeing the interest grow. We are seeing more and more RFPs come through our business as we get ready to really go to market, I mean, again, highlighting that this was a pre-revenue business, and we’re still in that go-to-market phase. So I think the overall reception from our community has been strong and has been great. And so we’re really happy with the work we’re doing so far. As far as in-person demonstrations, like the rest of the world, we’ve been able to work and pivot into just a remote capacity and demonstrate the technology and the value of the technology in remote settings through use of technology and so forth. So it hasn’t really impacted us significantly in that regard.

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Brian David Kinstlinger, Alliance Global Partners, Research Division – Head of TMT Research, MD & Senior Technology Analyst [10]

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Great. 2 more. The first one is on RFPs for Leaf Data Systems. I think in the past, we’ve talked about some of the states thinking about their options. Maybe they’re not happy with their operators. Maybe they’re moving forward for the first time or close. So maybe talk about are those getting delayed right now given the current environment, or are states moving forward with their plans to maybe evaluate their options?

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [11]

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That’s another great question. We are seeing some near-term delays in states focusing on RFPs and on some — certain [cannabis] initiatives. However, I am very encouraged by certainly the consumption trends that we’re seeing and how recession resilient cannabis has proven to be. And we’ve also received new inbound inquiries from new states that are looking at some of the states that have cannabis programs in place and they’re looking at that job creation and that tax revenue. And I personally believe that we will see a strong movement toward legalization and many different initiatives. Much like we saw alcohol prohibition and around the time of the Great Depression, we will see some very meaningful legislative change around cannabis as more governments look at this as a way to create jobs and generate tax revenue during a challenging economic time.

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Brian David Kinstlinger, Alliance Global Partners, Research Division – Head of TMT Research, MD & Senior Technology Analyst [12]

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Great. Lastly, can you quantify your churn? You mentioned it was pretty flat for — especially for the MJ Freeways business?

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [13]

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I missed that very first part. Can I quantify your, what?

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Brian David Kinstlinger, Alliance Global Partners, Research Division – Head of TMT Research, MD & Senior Technology Analyst [14]

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I’m just curious — churn, I think you called it attrition. I’m just curious how that — how — do you have a — can you quantify it? Is there a rough percentage on an annual basis that you can provide? Sorry.

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John Michael Fowle, Akerna Corp. – CFO & Secretary [15]

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I can take that question, Brian. As we’ve shared before, we fully intend to roll out with the — with our 10-K this coming year our non-GAAP metrics. And that will include a lot of the traditional SaaS metrics that our investors are looking to track. And so we don’t have — I don’t have that readily available today. But one thing I think is important to point out is the — we would look at churn in 2 respects, the retail and non-retail metrics, because obviously, retail has a very different profile than our non-retail clients. And so what we’re seeing today is consistent churn and a consistent attrition, if you will, in our business. Of course, any SaaS business is going to look to maintain that. So we’re seeing the consistent attrition rates across the board. I think we’re not seeing that improve or decline in any regard, but we think — or we expect, going forward, we’re going to be, of course, more focused on that as we want to improve that, and then certainly with the rollout of our 10-K look for that to include more of the non-GAAP metrics that our investors are looking to track.

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Operator [16]

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Your next question comes from the line of Scott Fortune with Roth Capital.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division – Director & Research Analyst [17]

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Real quick. To follow up on the state side of things, you announced a strategy with Metrc. Can you follow-up on that and how that helps integrate the new Leaf or Leaf Data on the state side of things with your platform?

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [18]

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Sure. Thanks. Good morning, Scott. I’m happy to take that one. So there are — we have 2 different product lines that offer — that offer some type of cannabis compliance. We have MJ Platform, which is used by the operators, the cultivators, manufacturers, distributors and retailers to maintain compliance and then to report compliance up to a government track and trace system, which might be our other product, Leaf Data System, as is the case where we have the state contracts; and in other states, it might be the product Metrc that you referenced in states where Metrc has that state contract. And the integration that we announced — and I believe that we are the only cannabis compliance operator to currently offer this deeper level of integration for our product suites, we have it available in both MJ Platform as well as Trellis — is an integration at the transfer level for Metrc. And what it really means is just it eliminates more double entries for our MJ Platform or Trellis business clients and allows them to more seamlessly integrate in states where Metrc is the state track and trace system. Does that answer your question well?

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division – Director & Research Analyst [19]

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Yes. And what I’m getting at, is that beneficial for people adding on MJ Platform with those states, because Metrc has a fair number of states from that side. Do you see it as beneficial to cultivate new operators into your platform because of that, from [that sense]?

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [20]

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Absolutely. It’s a wonderful competitive advantage and Metrc does not have a B2B product. So in states where Metrc is the state system, having that competitive advantage of having a tighter and better integration than anyone else is a very strong competitive advantage and one we were pleased to announce.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division – Director & Research Analyst [21]

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Okay. And then a follow-up. You have a nice platform surrounding data collection. As you’ve stated, we saw stockpiling, and since then a lot of the numbers have normalized higher than January and February, and so being very resilient. How is your time line or kind of a road map in terms of monetizing the data in the near future? How are you looking at that portion of new opportunities for that business?

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [22]

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So as Brian referenced a bit ago, we announced, I believe in January, a cornerstone client for our business, analytics products. We announced PAX Labs as our cornerstone client for that product. So it certainly is our intention to generate and monetize that revenue. We don’t expect to see significant revenue from that product in this fiscal year. We’re really focusing on those — our first cornerstone accounts there and ensuring that we’re meeting their needs well, but we do expect to see a significant revenue in next fiscal year from our business intelligence product.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division – Director & Research Analyst [23]

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Okay. And then probably a follow-up question for John. Kind of you implemented a reorg to reduce expenses $2 million to $3 million annually. Can you provide a little more color on the cuts across the board and kind of timing of those savings?

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John Michael Fowle, Akerna Corp. – CFO & Secretary [24]

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Sure. So maybe talk timing first. The reorg we put together took place at the end of March, and so we expect some of those — we expect those cost savings to start materializing here in the current quarter and go forward. As we thought about the reorg, we looked, of course, at opportunities to streamline, where did we have redundancies. And certainly as an emerging growth company, we’re still working through a lot of that — a lot of that growth curve. And so we just saw a lot across the business, some opportunities to just combine, reduce, condense some operations, of course certainly looking externally and focusing on duplicative vendors and third-party resources. As I highlighted in my prepared remarks, we made some changes in platform infrastructure and other sales and marketing type activities that helped improve gross margin or some of the other efficiencies we gained on the sales and marketing group. So it really wasn’t any one particular area — one particular focus area. It was just an opportunity to maybe get a little more — a little leaner, a little more focused and just tighten the belt a little bit in some key areas.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division – Director & Research Analyst [25]

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Okay. I mean, obviously, you have to wait — thank you for the color, but you’re [weighing] growth, that’s the most important thing right now as you guys drive these opportunities from an acquisition standpoint with always letting it flow to the EBITDA line today, but that will help you get to positive EBITDA on a quicker basis overall. Okay. That’s it for me. I’ll jump back to the queue.

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Operator [26]

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Your next question comes from the line of Gerald Pascarelli with Cowen.

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Gerald John Pascarelli MR, Cowen and Company, LLC, Research Division – Associate [27]

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So last time you spoke at the end of March, your analytics, obviously, from an industry perspective, pointed to pantry load, similar to the trends that we’ve been seeing in the off-premise channel within alcoholic beverages. So I guess like my high-level question is now that we’re through April, would love to get your thoughts and some color on what you’re seeing in terms of the sustainability of the load and then, in particular, which form factors within cannabis continue to outperform, if there’s been any kind of a change since the end of March. That would be helpful.

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [28]

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Sure. Thank, good question. So I’ll answer as much as I can off the top of my head. And of course, we do release Akerna’s weekly flash report, where we continue to update on things like the mix between categories. So if you’re not following those, of course, and this is for anyone on the line, please — please go to Akerna’s website and sign up to receive those. So we have seen a continued strong — just strong buying across all of our markets. We may see some impact from Nevada, which just recently allowed for curbside. And certainly, Nevada — Nevada was an outlier among and across most of our markets where there was a negative impact during COVID compared to many of our markets where we were seeing a positive impact. Nevada’s governor recently allowed for curbside as a fulfillment method, and we saw sales for — following that increase 68% with an average ticket size of $123. We’ve also seen the product mix, as you’re asking about the different categories — and this is something that we would expect to see in a challenged economic time — we have seen the products mix shift a bit more towards flower and towards some lower-cost products. And we’ve seen that maintain throughout this whole period of time. Of course, there’s been a long-term trend of concentrates increasing and gaining more share. But during this period of time, we’ve also seen an uptick in flower.

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Gerald John Pascarelli MR, Cowen and Company, LLC, Research Division – Associate [29]

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That’s very helpful color. My next question, look, you guys have obviously been very active on the M&A front. And can you just speak to, I guess, your overall capital allocation strategy and how that potentially changes, at least over the near term, in light of the COVID-19 pandemic?

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [30]

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Sure. John, can you take that one?

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John Michael Fowle, Akerna Corp. – CFO & Secretary [31]

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Yes. I’ll take that one. Great question. So of course, at the high level, we’re always going to be — we’re always going to look at our capital structure and look for ways to optimize that and whether that — as you know, it’s always a — where do you deploy your capital in the most — in a manner that’s going to deliver the best ROI. And that — is that through inorganic means? Is it through development means? Is it through expanding Leaf Data? Is it our B2B platform? So it’s a great question. I mean certainly in these times we’re very mindful of our capital, our access to capital, the strength of our balance sheet today. And so we’re very mindful about decisions we make. And again, as we prepare — as we’ve made comments to you in our prepared remarks or we stated previously, we do have access to a unique currency for M&A. And so that continues to be an option for us. And certainly, as we do transactions or we pursue transactions, making sure from a valuation perspective, they are accretive to our current shareholder base, which historically and yet so far they are, and they’ve been very well financially structured to our favor. But yes, capital allocation and how we allocate the different resources we have is something we’re very mindful of.

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Operator [32]

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(Operator Instructions) Your next question comes from the line of Alan Brochstein with NCV media.

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Alan Brochstein, New Cannabis Ventures – Founding Partner [33]

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I appreciate you including me. I wanted to quickly confirm — you have said originally there were 3 potential transactions, and obviously you’ve announced the third. I just wanted to verify if the Trellis was indeed the third acquisition?

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [34]

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So we had previously disclosed 3 LOIs and we have now announced 3 transactions. So I think I’m answering your question.

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Alan Brochstein, New Cannabis Ventures – Founding Partner [35]

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So there’s not…

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [36]

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(inaudible).

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Alan Brochstein, New Cannabis Ventures – Founding Partner [37]

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It was all 3. You closed 3 for 3. It wasn’t — Trellis was not new to the mix?

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [38]

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We closed 3 for 3.

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Alan Brochstein, New Cannabis Ventures – Founding Partner [39]

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Okay. And then my next question, and I know this year is tough, so I’m not necessarily looking for guidance, but given that you’re relatively new recently but your business has been around for a long time, can you give us a little color on seasonality? Companies like yours often will have a very strong fourth quarter, which you’re in right now relative to the other 3 quarters. Is that — is there seasonality in your numbers, Jessica?

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [40]

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So I’ll take that briefly, and then I’ll pivot to John to share to the seasonality historically. It is a good question and interesting, especially given the cannabis market and then I’ll throw it to you, John, to just speak generally to what we expect to see moving forward. Vis-a-vis seasonality, Alan, I think that shows your deep experience in cannabis. We do see certainly [actual] time periods that have historically been really great time periods for bookings. That doesn’t necessarily translate into revenue recognition in that quarter, but I can anecdotally share that both in the spring is often a very busy time for us from a bookings perspective, as is — and this would be very normal for any software business — we often have a very strong, as you mentioned, fourth quarter — calendar quarter or coming in towards the end of the calendar year as many businesses would look to change a system on January 1 and start a new system for the year. So just sharing a little bit of historic color there around seasonality. We don’t see a tremendous impact from that, because as I said, those are bookings, not necessarily revenue recognition, and we do have a really nice profile of strong bookings month-over-month without a ton of variability between month-to-month. But anecdotally, those are some times that we see to be just a bit busier from bookings. John, do you want to speak to any expectations moving forward in the future?

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John Michael Fowle, Akerna Corp. – CFO & Secretary [41]

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Yes. I’ll touch on that briefly, I think expanding on some of those comments. I think when I see the business, I don’t think of it as much about seasonality as I think impact to our financial results are more driven by legislative changes. Just in the brief time I’ve been here, to see new states come on board and open up their states to some form of legalization, that’s when we really see the impact of that. So I don’t — like Jessica said, I don’t see too much of a financial impact with regards to seasonality, I tie it more back to legislative changes. And certainly, as we shared — and as we go with Leaf Data Systems, that can have an impact to our numbers as well, just due to timing and some of the nature of our products and services. As far as our expectations, we reported a good bookings number. And like we shared, we’re going to focus on churn and attrition and driving that. And so I don’t think seasonality has really that much effect on our business going forward. We look at it more holistically throughout the year.

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Alan Brochstein, New Cannabis Ventures – Founding Partner [42]

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Great. And then my last question, and I apologize if this is explained somewhere in your materials or your filings, but I don’t see a geographical breakdown in your business. I’m also — when I see third-party reports, your market share is certainly not — it’s a very fragmented industry, that’s what I was trying to say. Can you address both those issues in terms of what you think your overall market share is? I’m sorry, I’m talking about MJ Platform, what the overall market share might be? And I’m guessing that you guys are real heavy in Colorado, but if you could maybe address other geographies.

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [43]

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Sure. I’m happy to speak to that one. And it’s a great question. And I think I have seen some of the same reports you have, which are generally self survey reported and generally focused only on the retail portion of the business. So often, those members are not taking into account the full supply chain, which, of course, we serve. And so when we look at our market share, we look at — in some states, it’s published, the number of licenses, in some countries and markets; and in others, it’s not published, and we have to do some extrapolation to determine what the available number of licenses as in a given market. So we look at that, then we determine how many of those are actually operational. And then we look at our numbers to see what our market share is. I can tell you that what we see in our numbers is leading market share. And certainly with our acquisition of Ample Organics, leading — which has majority market share in Canada, North American, a commanding footprint in North America when you look across the whole supply chain. And the other thing that I would just mention on that is that in — we also look at — we tend to serve the more enterprise tiers of business. And so we also will look at not only what is our capture of the number of licenses, but we will also internally look at what is our capture of the volume of a given market. And generally, we are — we do have some states where we’re a little stronger than others. And of course, in both Pennsylvania and Utah, where per our Leaf Data Systems contract the state mandates the use of MJ Platform, of course we have 100% market share. And in other states, we generally track internally the number of licenses. For instance, California is a state with a lot of licenses. We’re going to have a high number of licenses in California compared to some other states that have limited numbers of licenses.

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Alan Brochstein, New Cannabis Ventures – Founding Partner [44]

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Can you weigh in on Colorado, specifically how much of Colorado might be your business, ballpark?

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [45]

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We don’t have that published. But I can share that among the enterprise tier of operators, we have really great market share in Colorado and including a couple of cornerstone clients and clients that have been with us for a very long time. We have clients dating back to the very earliest days of the industry, back when we first started in 2010.

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Alan Brochstein, New Cannabis Ventures – Founding Partner [46]

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Okay. And that leads to me the last part of the same question. So when I talk to people about your company, I say, for a lot of investors, it’s difficult to pick the winners, although maybe it’s getting easier when it comes to the large MSOs. And are you able to disclose like your opportunity ahead or where you are now with — I don’t know how you would define it, but let’s say, you were to look at the New Cannabis Ventures ranking and look at the top end that shows by revenue, can you kind of describe if it’s fully penetrated or half penetrated? Kind of where do you see yourself in terms of the large enterprises, outside of Colorado (inaudible)?

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [47]

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Okay. Sure. Very good question. So we — as we look at the largest set of MSOs, of them and of the MSOs that we have signed, there are few in which we have fully rolled out and installed across all locations, although of course some have. Others are very much still in that process, and we are partners. We’ve announced our integration with Sage for accounting and tax planning. We also have an integration with NetSuite and a strategic partnership with NetSuite. And certainly, those integrations are MSO cornerstone accounts. For those integrations, we expect to see that is a compelling competitive differentiator, and we expect to see that drive significant revenue in next fiscal year that’s focused on completing those integrations and really ensuring that no one tries to reinvent the wheel when we already solve for all pieces of the business, including global currency conversions, advanced tax planning and financials.

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Alan Brochstein, New Cannabis Ventures – Founding Partner [48]

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Great. Hey, I really appreciate the color and wish you the best as you wrap up this year.

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [49]

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Wonderful. Thank you so much. Of course, there’s always room to grow, and we’re laser-focused on execution. Thanks so much.

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Operator [50]

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

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Jessica Billingsley, Akerna Corp. – Co-Founder, CEO & Director [51]

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Thank you, operator. We continue to do what we say we’re going to do. We create trust between product creators and product consumers. Our acquisitions and strategic investments are focused on locking up the tech spend of the enterprise cannabis businesses and solving with technology the growing demand for increased supply chain transparency among consumers and governments. You can depend on us to continue to execute. We believe our greatest opportunities lay just ahead. Thank you for your continued support. We look forward to sharing our continuing progress with you in the future.

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Operator [52]

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This concludes Akerna’s conference call. Thank you, and have a great day.

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