Reklaim Ltd

XTSX:MYID

Earnings Call Transcript 2023-Q3

[Neil Sweeney, executive]

Okay, everybody. 4:30, we're going to give it about 1 or 2 minutes here and then we're going to kick this off. You should be in an [indiscernible] here within probably 20 minutes or so. If there are any questions, feel free to put them in the chat, and we will answer them either in line or at the end of the presentation. Ira, you can -- you're unmuted, I'm assuming, you can see you can let me...

[Ira Levy, executive]

[indiscernible] It's all good.

[Neil Sweeney, executive]

Okay. If I break up where there's some technical difficulty, please speak up and kind of just let me know.

[Ira Levy, executive]

Well, I do.

[Neil Sweeney, executive]

Okay, everybody. Let me just make sure, I'm recording here. Okay, here we go.

Okay, everybody. Thanks so much for joining this quick Q3 wrap on the quarter. Overall, I think it was a positive quarter, but I'm interested in hearing what other people think as well. So we'll take you through the financials. We'll do a little bit specifically on what's been happening around the product and at the end, we'll open it up for any questions that you might have. So just for those of you that might be new to the story or are coming to the story for the first time, Reklaim, which was created 4-plus years ago, was really created to try to give consumers some visibility and optionality around the data profile that they have.

The philosophy of this business is quite simple. Every consumer on the planet has a data profile, nobody has access to that profile, and that profile was powering every business in the world. How can Reklaim democratize that data for these individual consumers and provide them with that transparency and compensation that they deserve. So that's the plan. I think what we've been seeing in the market is that there's been a consistent trend towards more and more towards consumer inclusion. We'll see that in this presentation where we talk about the emergence or the acceleration of privacy and some of the changes that are happening specifically in the market. Okay. So just quickly on the capital structure. Just as a housekeeping note, all of this information is available at [e-mail], including a copy of this recording.

So if you want to get more information or you want to come back to it, you can definitely find it there. 111 million shares outstanding. There are some warrants average strike price at $0.10. About $160,000, [indiscernible] in cash, share prices moved over the last quarter, a market cap of approximately CAD 9.4 million, CAD 9.5 million, 35% on [indiscernible]. So quickly, Q3 at a glance, thanks to Ira and Joel for putting some of these numbers together for us. So the revenue here was up 52% from Q3 2022 to $924,000, operating expenses down 8% to $734,000, gross margin, 80%, which is up 17% from Q3 2022. I think if you actually take a look at the rolling 4 quarters, you can see that there's some pretty consistent growth of revenue here between Q4 last year and where we are today. One thing if you actually take our Q3 and you -- if you take 2023 and you map it to 2022, you would see that Q1 and Q2 were incrementally higher in 2022.

There was a seasonal dip in Q3, followed by a seasonal uptick in Q4. That's exactly what's happening again here, and we expect to kind of follow along in 2023. So revenue of $2.7 million is up 64% from the same period last year. We just talked about the seasonal quarterly decline of 11%. That matches almost exactly to what we saw exactly last year as well. Platform revenue and platform revenue is those platforms that actually host the Reklaim data to power advertising and decision-making for brands and agencies. It makes up 74% of total revenue. It grew by 91% compared to Q3 in '22. Expect that number, that's where we really focused all of our time and energy. Identity revenue, which makes up 26% of total revenue, it decreased by 13%. Expect that trend to happen as well as we continue to focus more specifically on platform revenue. Some of you might ask why? Simplistically, identity revenue is not as sticky. The sales cycle is longer, and we are able to churn at a faster rate by focusing on platform revenue.

And so that's what we're doing. Again, when you take a look at the year-over-year comparison, $606,000 last year versus $924,000 this year, which is a 52% growth. Cost of services has been down, $529,000 in Q4 of '22 is now at $187,000. I think what we said in the last quarter is this -- we've got this pretty much streamlined here. So I expect this to bump along kind of where it is. We've driven a ton of efficiency sort of specifically out of what we've been doing here. And if you look at the year-over-year comparison, again, it's $505,000 in Q3 2022, down to $187,000, a 63% reduction in cost of sales. Gross margin steady Q2 to Q3 at 80%, year-over-year comparison, we've gone from 17% to over 80%. The law of large numbers will suggest that we're not going to kind of grow this to 95% gross margin, but we do think we can continue to maintain this particular margin for quite some time. So quite a healthy margin.

We think we can make lots of money and continue to do that. I think this is the best part, rolling 4 quarters of net income. So this is the second consecutive quarter of profit. We said this before, we expect Q2, we expected Q2 to be profitable, it was. We expected Q3 to be profitable, it was. We expect Q4 to be profitable. We hope it will be, and we expect the year to be profitable. We hope it will be as well. So if you look here on the right, it's a pretty big change, minus [ $675 ] to [ $530 ]. Everybody can do the math on that. It's a pretty -- it's a very different business in 2023 versus 2022. That's for sure. OpEx by function, generally speaking, across the board, it's down. G&A and salaries down 13%, R&D down 58%, selling down 51% and marketing down 77% year-over-year. Again, like there's only so much efficiency we can get here. But net-net, all positive. Year-to-date comparison, Q3 to Q3, $3.5 million last year versus $1.98 million this year, it's a 45% reduction.

So I think we're operating really efficiently as a business right now. The debt reduction, this is something that we've talked about in various different press releases as well as in investor calls. I think you can see that we've gone from [ 1.6 to 1.2 to 1.1 to 1 ]. I would expect this trend to continue, and we continue to sort of chip away at it. The intention is to get rid of the sort of sooner rather than later. The schedule here of $420,000 in April, $100,000 in August and $100,000 in October. Note this $100,000 in October, it wasn't reflected obviously in the Q3 financial statement because it actually took place in October and not actually in Q3. Let's just quickly jump into what's been happening specifically in the privacy market. So again, the theory here has always been that data, which has been amalgamated unbeknownst to the consumers and arbitrage without their knowledge is changing. We said that 3 to 4 years ago, it continues to happen.

We started this year specifically in the United States, really with the first state, actually changing privacy laws to force the actual inclusion of the consumer. Here we are 9 months later in 12 states have passed new privacy legislation requiring more consumer inclusion and protection with an additional 21 states having proposed this legislation. I said this in the previous quarter, the thing that I think is most important is sort of 2 things. One is not only is the privacy legislation happening, but it's the reclassification of data being called sensitive. Sensitive, meaning that you need to have explicit opt-in, not be assumed opt-in. So an assumed opt-in would be that cookie notification that you see on the websites that you accept all, explicit notification is a requirement by individual companies and brands to tell you that they are taking your data, using your data, and you have to explicitly consent to it. That is the sweet spot of Reklaim. That's what we're really good at.

And I think what we've been finding is that general market data is now being increasingly reclassified as sensitive personal information. And when that happens, those companies or brands that have historically used that data in the past have to venture into the market to find a new supplier. This is where Reklaim stands to benefit from it. So we update this every quarter. I would suggest if you are interested in seeing more and more trends specifically around the market. This quarter in the MD&A, I actually put probably at least a dozen individual links to various different articles that are being written specifically around how the privacy legislation is changing and how the OEMs, namely Google and Apple are reducing the actual signals that are actually leaking into the market. Those signals are fuel to power actually advertising with less signals. Again, individual brands and agencies have to find those individual companies who could provide those. That's where we actually think we can kind of benefit.

So just quickly on sort of consumer product road map from a consumer value point of 3 -- consumer value point of view in Q3, we introduced a couple of different things, a storefront, which gives consumers more visibility on how they can redeem their compensation. We introduced the VIP status. I think what we've been finding is when you see the general KPIs or metrics around our product, we have what's called a disappointed score or a favorability score of close to 60%. Typically, if you have a number that's over 40%, you have what is deemed to be product market fit. So to have 60% is a consumer-facing product. It is absurd. It's an exceptionally high number. So the individual consumers that are inside of this product are voting -- are up voting Reklaim, saying that we are giving them what they want. That's good because obviously, it reduces churn in the individual product and it actually facilitates more referrals into the individual products. In Q4, there's a couple of things that are happening. I mentioned this notion of reclassification of data in SPI. Cannabis is a perfect example of this.

In the United States, cannabis data was actually viewed as being general market data. It's now been reclassified as health care data. And as health care data, it requires 2 things: Explicit opt-in as well as a HIPAA flag. So a HIPAA flag is more a disclosure that you are actually you as a consumer are sharing this information. You should see this in the product within the next couple of weeks. My personal belief is that we're probably the only product in the world that is actually surfacing an actual HIPAA flag. And you'll see this manifest specifically into some of the actual verticals that we're tackling from a sales perspective. We think the big pharmaceutical companies who have a requirement to use data that have an explicit opt-in are increasingly looking at individual companies like Reklaim to actually help them [indiscernible] we'll take that. Other things that we are bringing back into the product, we are venturing a little bit back into privacy.

So breach notifications, you'll see these manifest specifically in the product. We're not changing the UX, but rather when you log in, if that e-mail has been hacked somewhere online, we will notify you, and we will take you through an automated flow via a chatbot as to whether or not you want to update that or change that. Expect more information to -- expect more of product development, specifically around that. Lastly, we actually did this specifically in kind of Q3 is that the UX change or the changes specifically around the product to improve the user experience is now complete. And last but not least, we've automated the individual crypto redemptions for individuals that want to be paid in crypto and they're no longer having to wait. We think that's also going to manifest really well.

So just one other quick slide before we actually take some questions. People ask me what about [indiscernible]? what about security? What about AI. My point of AI is we've been doing AI since we started. So I appreciate that it's very buzzy right now, and everybody wants to talk about ChatGPT, but you'll see here in the middle image that AI is throughout this entire product. So we do bug detection in the app using the company called [indiscernible] co-detection of unperfected passwords. We use via GitHub, cost monitoring and anomaly detection by Amazon, smart clustering in sizing by Amazon, fraud detection, bot detection, we use large language models for writing really all of our consumer-facing information as well and all of our frontline support is by automated chatbots, which is actually AI.

The other thing, too, which we believe is that -- we do believe that blockchain is part of the future really of data. And so for us, what we've been building is incrementally building more and more products that actually support this. I think the crypto redemption is a good example of that. What we look at in the market is there's a huge disparity between those companies that are in the blockchain world and those companies that are in the traditional data world. We see Reklaim as the company that can bridge those 2 individual worlds. So expect increasingly more behind the scenes work on that. And then last but not least, security is top of mind, obviously, for us. Why? Because with data, everyone is a target. Data breaches are now daily appearance with individuals.

And so we've been increasingly building more and more security and DataBridge technology specifically to our product. We do see this idea of providing that information and reconciliation to consumers if and when their data has been breached and what to do with that data once it's been breached as an opportunity to expand the individual products. So I would also look for more of that in the future. So with that in mind, I was a quick spin through the financials. Happy to take any questions that people might have. And if there are no questions, I'm happy to let everybody jump.

[Unknown Analyst]

I guess I can ask a question. What's the seasonality from Q4 to Q1? Like just looking at that bar chart, will we see a big drop from Q4 then? Or...

[Neil Sweeney, executive]

You'll see -- so typically, the most -- the highest quarter is Q4. There's usually always seasonality in Q1, although last year, our Q1 was higher than our Q4. So if you look at our Q1 this year, it was actually higher than our Q4 last year, which if you have a higher Q1 than you have Q4, it bodes well for the entire year. So Q1 and Q3 tend to have a little bit more seasonality than Q2 and Q4, but Q4 by far and away is the -- is by far and away like the biggest quarter.

[Unknown Analyst]

And then what was the recurring revenue percentage again?

[Neil Sweeney, executive]

Yes. So 90% recurring revenue, 80% margin. Those are -- and I think our overall recurring revenue has been pretty consistent between that kind of 85% and 90-plus percent throughout the year.

[Unknown Analyst]

So we can just take 90% of your revenue line and you'll do at least that next quarter and going forward. Is that fair?

[Neil Sweeney, executive]

It's a fair assessment. Yes.

[Unknown Analyst]

And how long would this be? Like are they contracts for many years or...

[Neil Sweeney, executive]

No, it's not a SaaS-based model, so it doesn't really work that way. So most with a lot of these individual brands and agencies, they reallocated budgets kind of every quarter. But I think that the challenge for these individual brands is sort of getting on those individual plans first and foremost. Once you're on the plan and you actually perform very rarely, unless you blow it up, are you actually removed. So I think it's a good testament to us that we're a pretty small company. We've got over 100 individual clients. That's 100 of the Fortune 500, and you can go down the list. It's UPS, it's DoorDash, it's Amgen, it's Bayer. I mean these are all clients that we actually work with. And so for us, the goal is not only to get more clients, but to return to clients that we have and then have those individual clients spend increasingly more and more money. So right now, we're only getting a very small share of this exceptionally large data market. So there's a lot of opportunity here for us to continue to grow share. That's for sure.

[Unknown Analyst]

Neil, building off of that, how do you see the business scaling over the next couple of years?

[Neil Sweeney, executive]

I mean I think we start every year with the idea that we kind of want to grow 100%. I think that's sort of what we're always looking at. We're trying to find the balance of -- we don't really have an appetite to burn cash. And I think, to be honest, in this market, burning cash isn't going to get us anymore. I think capital is expensive. So for us, it's how fast can we grow this business based on the cash flow that we have. So I think next year is an interesting piece, and again, I'll direct you -- everybody here to the MD&A. I said to somebody earlier this morning is that we expect demand in the market to be up in 2024. And all the research is saying that 65% of Fortune 500 brands are planning on increasing their budgets in 2024. So what does that mean? Well, in relation, these same individuals that ran that same research last year, at this time, only 30% were saying that.

And for all of us who were around last year, this is around the time last year that people were cutting Q4 budgets and cutting Q1 budgets because they weren't sure where the economy is going. So the fact that next year, 65% of people are planning on increasing their budgets, plus you have an election year and I know it's convenient to say it's an election year. So everybody is going to make lots of money. I mean, we have a plan to participate on the election money. I think those all bode well for next year. The one thing that really kind of works in our favor is the 2 big OEMs, namely Google and Apple, they have consistently been cutting signals from the market. And what that means is the amount of data that is leaking out of those devices is getting reduced. Why does that matter? And who cares? Well, it is that data, which people need in order to actually use to advertise.

So if those signals go away, meaning the supply goes down and demand goes up, then you have disparity between a supply and demand curve, which means all of those individual clients who are trying to spend that money can no longer use those traditional players or companies that they have before. They've got to get into the market and find a new player. I think that's really kind of where our opportunity is. And companies like Google who've been threatening to remove the cookie from the ecosystem. January, they're removing 5% of cookies and by July, 100% of cookies will be gone. Not to bore everybody with the details, but that is an enormous change, considering that the cookie powers pretty much every targeted advertisement on the Internet today. So if you remove the signal that is responsible for targeting the majority of advertising on the Internet, where all those advertisers are going to go. I think, again, this is the opportunity we've been preparing for.

So from a scale perspective, there's lots of opportunity here. So for us, it's really about how can we allocate our capital, hire efficiently, get into partnerships and grow the business. But our starting point is always, we're trying to grow at least 100% a year, and we're working on some things that potentially can make us take a bigger step forward. So hopefully, that helps. If not, I'm happy to elaborate some more.

[Unknown Analyst]

That helps. So you're plus or minus $4 million run rate this year as we see. So I would look for $8 million to $10 million next year.

[Neil Sweeney, executive]

I think so. I mean I -- honestly, I'd love to grow it like as fast as possible, and that's what we're trying to do. So I think what we're not willing to do is we're not willing to grow for the sake of growing. I just don't think that that's going to work in this market. If we had a top line that was $6 million, but we were burning $3 million on the bottom line, I don't think there's any floor underneath the stock. So for now, it's been -- let's put up a profitable quarter in Q2. Let's do the same in Q3 and Q4. Let's see where we land at the end of the year if we have a profitable year. And then let's figure out how we can get this thing up into the right going into 2024. So I feel like I've been in this bear market for small caps for like forever. So I've kind of tried it the other way. It didn't really work. So now I'm sort of sticking to my knitting here and just I tend to believe that capitalists have an uncanny ability to find value.

And if I continue to build value in this business by growing profitability and top line and maintaining 90% recurring revenue and 80% margin, that more and more people will come on out of the -- off the fence and into the stock, and we'll start moving. But trust me when I tell you, like we want to grow this thing as fast as possible, but not at the point where we're burning cash and then having to dilute everybody on this call. That's -- nobody -- I don't think anybody wants that. If you do, you can raise your hand for sure. But I think -- I don't think anybody wants that.

[Unknown Analyst]

Okay. And is it about headcount to grow at this stage? Is it -- again, salespeople where -- what do you need?

[Neil Sweeney, executive]

Yes, I think it's a bit of head count for sure. I mean there's a finite amount that we can actually grow with the headcount that we have. I'm always reluctant really in any of my businesses to kind of just throw bodies at the organization. I think what we demonstrated this year is we've gotten really efficient. So when you get efficient, it makes for a strong case where then you can then add additional bodies. If you're not efficient and you're putting bodies on the bottom line, now you're just adding cost to an inefficient structure. I think if you ask me 6, 8 months ago, were we in a position to be adding those additional bodies when we were trying to drive the efficiencies in the business? No. Are we at that point now where we are trying to add more bodies? Yes. So I think partially, it's -- we will add more people primarily to the sales line.

So I think it's a combination of, sure, adding more of those bodies, but it's also trying to think through here like what are the bigger deals, what are the bigger opportunities? Where should we be focusing in kind of our time and energy. I do think over the last couple of quarters, we definitely have sort of found where we differentiate in the market. And I think where we differentiate in the market is on those verticals that require additional compliance or additional opt-in, we're very strong. Others would say companies that specialize in automotive data might be stronger than us in that vertical, but there are very few that are stronger than us in that -- those verticals that require it.

So as a consequence of that, the way we were trying to streamline the sales team is you should be focusing on those brands and those agencies and those clients that require that type of data because the pitch is a lot easier and not to be kind of provocative, but everybody will say to you, "Well, why should I work with you versus somebody else? And the answer is, well, you can work with somebody else, but you better make sure that they have explicit opt-in because if they don't, you're going to go to jail because it's illegal. You cannot target that. That usually gets the attention of the CMO or the person that actually is controlling the dollars. So it's pretty binary. You either have the opt-in or you don't. And most people in the data market because they've been amalgamating data unbeknownst to consumers, there's no front end. There's no consumer interface.

So if you think about all the data brokers who all have your data today who have been selling it for billions of dollars, nobody on this call could name one data broker, but every single one of them has your data today. It's very -- it's almost impossible for those individual companies to maintain compliance because they have no way to communicate to the consumer. That's our difference is that we have a portal where you don't have to take our word for it. You can go to the portal, you can see actually how we have all the controls in place. And so back to that comment around privacy legislation and SPI, we think that the explicit Opt-in bucket is getting bigger, not getting smaller.

And so if we're really good at the explicit opt-in bucket, as that -- as we continue to drive revenue in that bucket, the bucket gets bigger. I think that's a good formula for us to be really efficient and drive really good revenue. So verticals around health care, multicultural, political, even cannabis. Those are verticals that we tend to focus on more as a sales team, and we would focus less, for instance, on CPG or packaged goods. Why? Because packaged goods advertising doesn't necessarily will have that explicit opt-in requirement.

Anybody else have questions, feel free to let it.

[Unknown Analyst]

I've got a quick question. Can you just explain to me a little bit about the sales side. You mentioned Fortune 500 companies, which is fantastic. Are those your direct clients?

[Neil Sweeney, executive]

Yes, in some cases, they are, in some cases, they're represented by the agency. So as an example, we work with Bayer directly. Whereas in other cases, we work with DoorDash directly through Group M, which is their agency of record. So there's 2 different tactics. Some companies focus directly on going to the brand. Others focus directly on working with the agencies. There's pros and cons to both. I mean technically, we actually work with both. The one thing that's important to remember about the advertising agencies is that they get paid to spend the money. So they have an incentive to make sure that they spend the money, which means that the sales cycle with the agencies is a little bit more fluid and faster.

We also are well respected and viewed as a primary partner of a lot of the big holding companies, which are the agencies. So that's rare air. So we kind of doubled down on that. But in those situations where we actually have relationships directly with the client, like a Bayer or like Edgewell, we'll obviously use those to our advantage as well. So I'd say it's mostly agencies, maybe 25% direct with the individual brands themselves.

[Unknown Analyst]

And if you were going to hire sales person or headcount, they would be looking for more agencies and more direct relationships because I've never seen anything in a press release or in a filing about we've got these big companies. I mean I think that's something to sort of boast about. That's great for a little microcap company like what you guys have.

[Neil Sweeney, executive]

Well, I'm biased, I would agree. I think the things that we have done from a distribution point of view, so just take one step back. And if you look at where -- we've talked about our data being -- having ubiquitous distribution. And what that means and for some of you that have been with the story over for a long time, most of these brands and agencies use global platforms to onboard data. And so the best way to think of those platforms or those companies is they're almost like -- I've used this analogy before. They're almost like grocery stores. So if your product is not on the shelf of that particular grocery store, that brand who shops at that grocery store has no opportunity to purchase your data.

I think where we are really good is we have ubiquitous distribution amongst the largest data companies in the world, Google, Trade Desk, LiveRamp, TransUnion. These are all companies that have done evaluations on Reklaim data and are actually deciding to put it on their shelves to expose to their clients. I think that is something that is not easily done by people who haven't been in this space for a long time. And I think as a consequence of that, it gives you credibility to then onboard those companies that you're making reference to. As it relates to the seller, when we're adding sellers, again, it's pretty straightforward. It's can you make money or can you not? And where are you going to make that money and when are you going to make that money. And if you can make that money, you're in. And if you can't, you're out.

So if that person is strong at the agency level, great. If they're strong at the brand level, great. We don't discriminate against the brand versus the agency. We focus on where is the money and when can you get it in here. And that's kind of what sort of determines whether that person is getting hired on to the sales line or not. As you can probably imagine, it's not the most probably comfortable sales line into the organization but that's how we do it.

Any other questions from anybody else? Okay. Well, thanks, everybody. Appreciate it again. I know everybody has a lot of different choices to actually purchase a lot of different stocks. So we do appreciate you sticking with the story. We think it's more of the same to come. But if there's any questions you ever look for any more information, don't hesitate to reach out to me or the team, we tend to be always available. So if you want a copy of this recording, you can find it again on the Reklaim investor site. Other than that, thanks a lot. Really appreciate everybody's support.