SRAX, Inc. (NASDAQ:SRAX) Q4 2021 Results Conference Call June 6, 2022 10:30 AM ET
Company Participants
Morgan-Lea Fogg – Investor Relations
Chris Miglino – Chief Executive Officer
Mike Malone – Chief Financial Officer
Conference Call Participants
Jon Hickman – Ladenburg Thalmann
Mike Crawford – B. Riley
Morgan-Lea Fogg
Hello, everyone. Welcome to the SRAX Full Year 2021 Conference Call. We appreciate you joining us today. I’m Morgan, Vice President of Community.
This is our safe harbor statement, which I will read. This presentation contains certain forward-looking statements that are based upon current expectations and involve certain risks and uncertainties within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words or expressions such as anticipate, plan, will, intend, believe or expect or variations of such words and similar expressions are intended to identify such forward-looking statements.
These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including, without limitation, statements made with respect to expectations of our ability to increase our revenues, satisfy our obligations as they become due, report profitable operations and other risks and uncertainties as set forth in our annual report on Form 10-K for the year ended December 31, 2020, or subsequent quarterly reports on Form 10-Q as filed with the Securities and Exchange Commission.
All forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, many of which are generally outside the control of SRAX and are difficult to predict. SRAX undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
I’d like to introduce Chris Miglino, the Founder and CEO of SRAX.
Chris Miglino
Thank you, Morgan, and welcome, everybody, to the Q4 2021 and full year 2022 conference call. I want to thank you for your continued support of SRAX. As many of you know, 2021 was a fantastic year for us, and we grew significantly. In all my years that I’ve had in business, I’ve not had a business that has grown as fast and has continued to grow as fast as SRAX has. It was a monumental year, and as you will see as we get into the numbers, we’re just getting started. While I appreciate our existing investors, I want to jump and wanting to jump right into the numbers.
I want to take a minute to quickly explain to those that are new to our story a little bit about what we are doing and what is driving this significant growth. Sequire is a SaaS platform that provides public companies the ability to understand who their investors are, who’s buying and selling their stock and provides a number of tools to communicate with those investors such as text messages, e-mails, surveys and a number of other tools that help them manage their warrants, short interest data, shelf availability and allows them to track specific financing transactions that they enter into.
Once they’re on the platform, we help public companies build community through a number of tools. First is our virtual events platform that allows companies, investors and banks the ability to run virtual events. We combine this with our in-person events that gather some of the most notable investors and companies together to learn and engage from each other. We also provide news on small cap companies on both our microcaps.com website and ldmicro.com, where we have an index that tracks the micro cap market. The creation of this community has taken years, and our assets are well positioned to continue to grow this community.
We can never accomplish this without our team. We have a team of around 150 people that are helping accomplish this goal on a daily basis, and we’d like to thank all of them for their participation in helping us accomplish these goals. And here are some of those major accomplishments that we achieved this year. We’re pleased to announce that our full year revenue grew 340% year-over-year. This revenue continues to grow as we saw a 27% increase in Q4 revenue over Q3 revenue, which was also up 170% year-over-year.
When we gave our revenue guidance for BIGtoken, we were still consolidated. With their $3.5 million in revenue and the revenue that SRAX achieved, we exceeded our guidance for 2021. Not only did we beat on the revenue side, but we continued on our trajectory of positive EBITDA. While we had a lot more expenses in Q4 due to BIGtoken spin-off, we still maintained positive EBITDA and had $3.8 million in positive EBITDA for the year. We now have 13 quarters of consecutive supplier revenue growth. We continue to add customers and grew the number of clients who have signed up for the platform from 284 to 307.
Starting tonight, we’re about to embark on our most successful in-person event we’ve ever thrown. LD Micro launches tonight with almost 200 companies and over 2,000 one-on-one meetings. People are ready to get back to meeting in-person and while we anticipate it to continue, we’re also live streaming the event to the investors who cannot make it to the event.
At the end of the year, we held approximately $20 million in marketable securities. One thing to note here, and I know I’ve mentioned this many times in the past, our agreements for taking stock as service include price resets and most favored nation clauses that help us revalue our positions when stocks go down. This is — as I mentioned earlier, we exceeded our revenue guidance, and I’d like to point out how we got there.
As our numbers were BIGtoken, SRAX and the SRAX GAAP numbers will combine to make the $31.981 million. So, when you look at the SRAX financials, you’re going to see that we have $28.5 million that is excluding $3.4 million that BIGtoken had. So we gave a guidance of $31.5 million, and we actually exceeded that. Now that we’re deconsolidated on the numbers, you’re only going to see the $28.5 million.
So I just wanted to be clear about that so you didn’t think that we didn’t hit those numbers. We did hit them, but it’s just deconsolidating $3.5 million out of the P&L. We’ve had a great last few quarters of bookings, and just the last two quarters, we booked over $30 million in business, and I think we’ll book around $12.5 million in Q2. If you look at this chart, it seems to indicate that growth is coming in three-month cycles.
Since these agreements are 12-month arrangements, we have great insights into our revenue, and we’re confident we’ll get to $47 million to $50 million this year. We also had our best one week of bookings in Q2. So, the market turmoil has not derailed our growth. We continue to hold a positive EBITDA, even though we’re growing the team and our infrastructure. We anticipate that Q1 will be a record EBITDA quarter for SRAX. In Q4, we had $865,000 in positive EBITDA.
By getting into Q1, we anticipate to even exceed the $1.4 million that we had a few quarters ago. We continue to see that we’re pacing around 25 to 30 new customers per quarter. We hope to see this increase as we have hired up on our sales team, and they’re bringing in a lot of companies into the pipeline.
This is a look at our share structure. We have around 31.2 million shares outstanding fully diluted. This includes warrants and all of our employee options that are out there. When it comes to the warrants, we have around 3.6 million warrants that expire in October of this year. If they did get exercise, I would bring in around $7 million worth of extra cash into the Company.
One thing to note here is that since we didn’t file this report on time, the warrants that were to be exercised in March ended up going cashless, and instead of 1.6 million shares being added to the cap table, only 194,000 shares were added to the cap table. So a significant dilution was avoided due to that, if there is any icing on the cake for filing late.
So now, I’d like to turn the call over to Mike for his financial review. Mike?
Mike Malone
Thank you, Chris. As we previously mentioned, with the deconsolidation of BIGtoken, we’re now able to present our operating results exclusively of the Sequire business. And jumping into the fourth quarter, we’re looking at revenues exceeding the prior quarter and the prior year by 27% and 170%, respectively.
And as Chris mentioned, this growth is as a result of the continuing bookings that we’ve had in the Sequire business over the past year. Total operating expenses have increased as well. On a quarter-over-quarter basis, they’re up 28%, and on a year-over-year basis are up 9%. Again, this is reflective of the continued investment in growth in the cost structure of the business to support the revenue growth.
Now moving to the full year. We see revenues increasing year-over-year 341%, and again, this is exclusive of the BIGtoken operations. This is solely Sequire and the LD Micro Conference revenues as well as some miscellaneous other revenues. On the cost side of things, expenses are up almost 2x or 97%, but again, roughly 1/3 of the increase that we’ve seen in revenues. And again, this is mostly supporting the increased operations of the business on an overall basis.
And when we move into the GAAP P&L, I think it’s important that we focus — spend a little time and understand the large noncash items that we have in the GAAP income statement. What you’ll see are two large charges, both noncash and represent the deconsolidation of BIGtoken. With the deconsolidation of BIGtoken, what we do is, we consolidate all of the revenues and expenses of that business and represent them in one line item on the P&L called discontinued operations.
And what you’ll see in terms of the entire consolidated BIGtoken business for the full year 2021, it incurred a net loss of $14.4 million. And then the second charge that we have noncash related to the deconsolidation of BIGtoken is to dispose of the carrying value and the assets and liabilities as well as the prior equity components of that business, and that results in a loss on deconsolidation of approximately $9.4 million. So those two charges, both noncash as it relates to SRAX, represent $24 million and our one-time charge, we will no longer see the effects of the deconsolidation on a go-forward basis.
Now moving to moving into the business of Sequire exclusively going forward. I think it’s important, at least for this period, to understand the major movements from our net loss or GAAP net loss to what we represent and what we feel is an appropriate measure of the business, which is adjusted EBITDA.
And so I wanted to point out, as I previously mentioned, we’ve had significant charges as it relates to the BIGtoken deconsolidation, but there are some other noncash charges that we need to add back to get to what we believe is the appropriate measurement for our business, which is adjusted EBITDA.
And so of the $34.3 million total net loss, approximately $24 million of that is related to the BIGtoken deconsolidation, slightly offset by the non-controlling interest in that discontinued operation. And so, we find ourselves with a full year adjusted EBITDA of $3.8 million for approximately a $6 million year-over-year increase from a negative $2 million in the prior year.
Now moving into the Sequire Security portfolio. As Chris previously mentioned, we have some additional features within the contracts in which we obtain the securities from our customers. Mainly if the Company, the issuer that we’ve received, the securities firm does a dilutive financing, we get reset subject to us still holding those shares.
And at the end of the year, we had receivables of approximately $2.1 million of fair market value of securities, but for GAAP accounting rules, we do not get to reflect those shares in our asset balance.
We also had $1.2 million of shares that are due under new revenue contracts. We report these on the balance sheet. If we move to our balance sheet, we report these on the balance sheet as a contract asset. You’re going to see that as a new line item on the balance sheet, reflecting the value of the securities that we have yet to receive.
And then finally, moving back to the balance sheet. With the deconsolidation of the BIGtoken business, historically, we’re going to represent the assets and liabilities of BIGtoken in the respective categories of the balance sheet as discontinued operations. So you get a true sense of what the balance sheet is as well as the income statement for the Sequire business historically and on a go-forward basis.
And with that, I’d like to turn the call back to Morgan.
Question-and-Answer Session
A – Morgan-Lea Fogg
Thank you, Chris. Thank you, Mike. We’ll now move to the Q&A portion of this call. We have Jon Hickman with Ladenburg Thalmann. Jon, if you would like to unmute.
Jon Hickman
Okay. Can you hear me okay?
Morgan-Lea Fogg
We can. Thank you.
Jon Hickman
Okay. I have a couple of questions. So maybe this question is for Mike, but were there — what were the — in the operating expense line, is — could you take a number out of that that was related to the deconsolidation of BIGtoken and would not be like there would be expenses that wouldn’t be repeated in Q1 or Q2?
Mike Malone
Yes, John. We had approximately, I’d say, just shy of $0.5 million legal accounting and other kind of overhead charges associated with the facilitating that process between BIGtoken and upright pull on our side. Yes, so I would say, a good number would be $500,000 probably be a good number.
Jon Hickman
But do you have expenses like that in Q1 as you resolve all this accounting stuff?
Mike Malone
Well, I think that we probably did have a bump certainly in accounting and charges we do pretty much every year. We book a significant increase from prior quarters in audit and legal fees, but I don’t think it’s going to be materially out of line with what we had in the prior year, especially in the prior year 2021.
Remember, we had a significant amount of expenses due to the first part of the BIGtoken spin-off when it moved into the — we did the reverse merger. So on a comparable basis, I don’t think you’re going to see much of a difference there, but specifically related to the transaction, we had — that’s probably the best way to think about it.
Chris Miglino
And then, I think it’s worth noting and pointing out the $10 million finance charge that was at the beginning of the year as well for the — that won’t exist into the next year, right, Mike?
Mike Malone
Yes. So, we did — that’s right, Chris. So at the beginning of the year, we had a — being in 2021, we had a charge that we took to the P&L that reflect what you’d call a warrant inducement charge. We had dropped the exercise price and some warrants outstanding in exchange for shortening the duration on a replacement warrant.
So, what you do is, you take the difference between the fair market value of the warrant that the holder had and the fair market value of the new warrant when you drop it from 750 to 250. It is quite a large P&L hit, but again, it’s all noncash, and we get the wipes warrants out much sooner.
Chris Miglino
And a lot of people forgot about that because it happened so long ago, but those warrants are now gone and already in the system.
Jon Hickman
Okay. And then, Chris, could you walk through — you now own preferred shares and BIGtoken and what’s your position there exactly? And when can you start to liquidate that, if you want — if you chose to?
Chris Miglino
Yes. So the preferred shares we have now, we have both — we have common, which represent around 4.99% of the Company, and we have the preferred. The preferred, obviously, we have a blocker. So, we can never go above the 4.99%. So we’d have to sell the 4.99% first or a fraction thereof before we can convert out of any more of the anymore of the preferred. So what — we took a really conservative approach here with this so that if we would have taken it as a mark-to-market, it would have been a positive $194 million P&L to the upside.
And then next quarter, we would add another $50 million up to the upside and maybe we don’t know what will happen in the next quarter, but maybe it would be down another $50 million. So I would add this constant noise to the Sequire numbers, which is what we were trying to avoid by getting this whole thing done.
So by doing it this way, it allows us to — if and when we sell any of our BIGtoken holdings, it will go straight to our bottom line, and it — we won’t have to endure any of the stock volatility that they may experience in that stock. That would have an impact, and we don’t have to go around explaining it every quarter about why we’re up $50 million or down $50 million.
So that was the idea behind that. I think that they need to file their K and their Q before we’ll be able to sell any shares. But once they do file that, then we would be able to do that.
Jon Hickman
Okay. So could you walk through like if you got paid in stock and say, the contract value was, I don’t know, $3 million or something and you got stock and then that’s the price of that stock went — got cut by 30% in just in the market. How would you recoup — could you walk me through how you recoup that 30%?
Chris Miglino
Yes. Maybe let’s use $1 million just to make it a little bit easier for — I know you’re a big number guy, but for me, I’m making round numbers. So if we do a contract for $1 million, we don’t — the $1 million obviously doesn’t become the revenue. There’s a formula that we have that takes a discount against that $1 million to calculate what the revenue will be. So there’s already a discount that’s being applied for the revenue side, and that’s determined based on volatility of the stock, how much liquidity it has and things of the sort.
And then let’s say that we are six months in because typically, we need to hold these shares for six months under Rule 144. Then six months from now, the value of that stock is $0.5 million instead of $1 million now. So now the revenue side, we — let’s say, we booked it at $700,000 because we took a discount on it. So, now we’re down $200,000 against the $700,000 in revenue. So now that company ends up doing a financing. Whatever kind of financing it is, they do a convertible note, they do a debt deal, they do any kind of financing at all. We’re then able to reset our position. We’re able to reset the price of that stock down to that level.
So let’s say that when we did the deal with them, the stock was trading at $1, but now the stock is trading at $0.50. And they do a financing at $0.40 we get reset to $0.40. And let’s say that they end up giving out warrants in that new transaction. They reset the price to $0.40, and they also give 100% warrant coverage at $0.40. We also get that warrant at that point.
So whatever terms that the new financing gets, we’re able to apply that to our financing as well. And so that resets us down, we get more shares, but we also get new warrants as well, which we’re seeing a lot more of that now because where the market is, a lot more companies are doing transactions with warrants, which didn’t happen as much last year.
Jon Hickman
What if there’s no new transaction?
Chris Miglino
If there’s no new transaction, then you just got to wait, and that’s why we wait as long as we can to sell our stock because these rules only apply as long as we hold the stock. So, we try to hold as little as cash as possible and as much stock as possible at any given time and then sell stock as we need the cash. So Mike and his team are diligent in planning that out and figuring out what we do need to sell, and I think we’ve been selling around $4 million a quarter in other people’s stock out in the marketplace.
Jon Hickman
Okay. And then just one last question. When do you anticipate being able to file Q1?
Chris Miglino
I don’t want to give a definitive date on that yet, but we’re on it right away. And that’s obviously, this needed to happen first, and so we will — I think we need a week or so before we can give you that.
Morgan-Lea Fogg
Up next, we have Mike Crawford from B. Riley. Mike?
Mike Crawford
You mentioned $12.5 million of supplier bookings in the second quarter. Is that a target? Or is that what you have already?
Chris Miglino
That’s our target. That’s what we think we’ll do in the second quarter because remember, we had a lot of stuff that closed in those previous two quarters. So a lot of the pipeline got sucked up in the previous two quarters. So the pipeline now looks pretty significant into Q3 and — for Q3 and Q4.
Mike Crawford
Can you provide a sense of how much more you need to book in the final 3.5 weeks of the quarter to hit that target?
Chris Miglino
Around $3 million, $3.5 million, which there’s contracts out for signature to get that. So I think we’ll be pretty comfortable to get there.
Mike Crawford
And if you are to secure new Sequire commitments at this LD Micro Conference that’s occurring this week, is that — those are contracts that would not typically be signed until the third quarter?
Chris Miglino
Yes, they would be signed in the — probably in the third quarter or I mean, you’ll have some people that sign up right away. Our sales cycle is interesting. Some companies sign up immediately and on one phone call and others take a couple of months to finish up. But I would see — I think we’ll see a boost from this conference until the beginning of the month here. So the sales guys have all month to close them up. And what’s interesting about this particular conference is that it’s a lot of non-Sequire clients that are attending. So there’s a big opportunity for our sales guys to close them up.
Mike Crawford
Okay. And then you gave that cash and securities number for December 31. Around what was it at the end of Q1?
Chris Miglino
So — you want to go, Mike? Go ahead.
Mike Malone
Yes, I was going to say, so Mike, we’ve got, I would say, just shy — probably the midpoint between $0.5 million and $1 million at the end of the first quarter. And then the balance sheet is going to show roughly $30 million in marketable securities. But as Chris was saying, there’s a lot — there’s some noise in that as it relates to certainly the mark-to-market as well as what we sell.
And then the way that we book these receivables or rather these shares we have in transit, so there’s going to be a few million dollars of those that others would be in that number that we book as contract assets that we closed towards the end of the March that we had yet to receive actually in book entry form. So, it’s — probably, a good number is just shy of $1 million and then $30 million at March 31 for securities.
Chris Miglino
Well, Mike, I think it’s important to note that in the first quarter, we sold around $4 million worth of securities. So we’re able to — like I said, we hold the stock as long as we can because the longer we hold it, if those companies do dilutive financings, then we get reset. So, our goal is to kind of ride as long as we can with the stock. So, in Q1 — and correct me if I’m wrong, Mike, I think we sold around $4 million worth of security.
Mike Malone
Yes, that’s right.
Chris Miglino
And we anticipate that we’ll be able to continue to do that.
Mike Crawford
Okay. And then just — I hate to get too much in the weeds here. But yes, Mike, I did hear about the contract assets at year-end was $1.3 million, and now that’s going to be around $3 million in March for securities in transit. And I’m sorry, can you just say where we see your preferred and common BIGtoken holdings on the balance sheet? So there’s this $4.1 million designated asset, and there’s also this $4.1 million at recent year-end of a preferred stock liability, but where would…
Mike Malone
Yes. So Mike, no. So the value of our position in BIGtoken, our investment in BIGtoken is part of that securities held for sale or marketable securities balance. It is in there. And as Chris was saying, we’ve marked that extremely low for the purposes that Chris was saying. So, it’s within that balance.
Mike Crawford
Okay. So — but you can’t say what…
Mike Malone
Yes. No, it’s — we’re carrying it at roughly $30,000.
Mike Crawford
And that’s the common and the preferred.
Mike Malone
Yes.
Mike Crawford
Okay. So, essentially a market down zero. But now BIGtoken itself with BritePool published or issued an 8-K on Friday afternoon about transitioning to a Web 3.0 business model. I mean you’re on the Board, I think, still, Chris. What can we say about where BIGtoken itself may be headed this year?
Chris Miglino
Well, I think they have — they were, in the past, giving away points to consumers for their data and that proved to be a very expensive business model. Now they’re shifting to working with doing the same thing, but they’re rewarding those consumers with NFTs that they’re doing in participation with very large brands. So, it’s actually a really interesting model. It saves them the cost of the points. I think there’s a good opportunity for them.
And our accounting and our recognition of that accounting has absolutely nothing to do with the prospect that they have. I think that they have a good opportunity there. So when we do sell some of the stock and if we do sell some of it, it will instead of eating against our — the value that we have on the P&L, it will go straight to our bottom line after that 38,000 is eaten against. And then we don’t have to worry about these weird jumps in the stock or decreases in the stock value that would have a massive impact on our P&L.
Morgan-Lea Fogg
That concludes the Q&A for the SRAX Full year 2021 financials. Thank you, everybody, for joining us today.
Chris Miglino
And I’d like to — if anybody wants to watch the Sequire event, we’d love to have you join us. We have the LD Micro event that starts tomorrow. It’s all day on Tuesday and Wednesday, and then part of the day on Thursday. We have 200-plus public companies that are presenting. You can find a link at microcaps.com under the events if you’d like to watch it virtually, if you’re not going to be joining us in person. If you are joining us in person, we look forward to seeing you there. We have, like I mentioned earlier, around 2011 meetings set up. So it should be a very busy couple of days for us.
Thank you for joining us, and we appreciate the continued support.
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