Brand Engagement Network, Inc. (BNAI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Brand Engagement Network First Quarter 2024 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Brand Engagement Network, Investor Relations, Ryan Flanagan. Please go ahead.

Thank you. Hi, everyone, and thanks for joining our Q1 earnings conference call. Joining me on the call today are Michael Zacharski, our CEO; and Bill Williams, our CFO. By now, everyone should have access to our earnings announcement. This announcement is also on our Investor Relations website. During this call, we'll make forward-looking statements, including statements about our business outlook, strategies and long-term goals. These comments are based on our plans, predictions and expectations as of today, which may change over time. Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors outlined in our filings with the SEC, including our Form 10-K and upcoming Form 10-Q. Forward-looking statements represent management's current estimates, and the company assumes no obligation to update any forward-looking statements in the future. Also, during this call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for our GAAP results. And finally, this call in its entirety is being webcast from our Investor Relations website at www.investors beninc.ai, and an audio replay will be available on our website in a few hours. With that, I'd like to turn the call over to Michael. Michael?

Thank you all for joining us today on what is BEN's first quarterly earnings call as a public company. We're thrilled to be listed on the NASDAQ under the ticker of BNAI and to have the opportunity to talk about key business highlights, our strategic vision and financial results from the first quarter of 2024. Before discussing our results and exciting developments across the business, I'd like to take a few minutes and provide some commentary on our financial positioning following the completion of our business combination just 8 weeks ago. BEN is currently funded by a combination of minority capital from the proceeds of the business combination and the commitment from our automotive vertical strategic partner, exclusive reseller and investor AFG companies. We are incredibly excited about our joint work in the automotive space and our shared vision of conversational and multimodal AI solutions that we believe will transform the dealership experience both for the customer, CX, the dealership staff, productivity, and dealership principles, performance. You will hear more about these key metrics CX, productivity and performance as we talk about organic growth of our core business. Throughout and exiting the SPAC process, BEN did not, unlike many companies seeking to de-SPAC, enter into any forward purchase agreements or other structured financings in connection with closing, with the result being a simplified balance sheet with improved visibility into our shares outstanding and potential dilution to our stockholders. Moving forward, we believe this will allow us to explore and enter into more traditional financing without the negative effects and complexities associated with SPAC financial structures. I'd also like to note that our SPAC sponsor principles, Chris Gartner and Thomas Morgan Jr., are continuing with the company as Chairman and Director, respectively. In addition to benefiting from their deep financial experience and counsel from an operating standpoint, we view their commitment as validation of our mission, our product and our strategic direction. With that as a backdrop, we are excited to announce that with the assistance of our banking partners, we are currently assessing avenues for additional liquidity and growth capital. Bill will discuss in greater detail momentarily. But as we continue to work on improving our liquidity and capital position, we are also closely managing our internal costs to ensure our business is built for growth and scale and to last for the long term. Although many of the investors and analysts dialed in today are familiar with our story, since this is our first call as a public company, I wanted to allocate some extra time to talk through who we are and what we do. Years in the making, BEN is a B2B2C business to business to consumer, conversational AI company, focused on delivering personalized customer engagement. Deployed through human like avatars or as pure voice configurations, we provide a full stack and turnkey offering to businesses looking to improve their CX, productivity and performance metrics. Beyond simply providing digital assistance, we believe that AI solutions for businesses must deliver and complete tasks. While there are several voice companies wrapping themselves in generative AI cloak, our teams have been working with these technologies since 2018. Our approach utilizes small footprint language models that are contained on our servers, a walled garden approach, combined with mixed technologies for data retrieval so we can provide accurate answers to consumers. We intentionally do not use a large language model for this part of the task. This approach delivers precise answers without hallucination and is based on technology that is not easily emulated. Our platform is built around a powerful existing IP portfolio complemented by our successful 2023 acquisition and integration of DM Labs, spun out from renowned researchers at Korea University. Each instance of our technology is for an individual customer ensuring data remains solely within that instance of the platform and provides the business differentiation in tune with its brand, values and processes. It is truly their, their being our customer AI solution. It's theirAI. Put simply, we make it easier and more affordable for companies to adopt and quickly deploy best-in-class conversational AI without compromising data privacy and data leakage. We are vertically focused on scaling in the automotive, health care and financial services markets, leveraging strategic partnerships to accelerate market penetration through an easy-to-understand solution set and pricing model. Our solution set includes multiple offering tiers. Our community cloud, which is built on shared infrastructure and allows for simple configuration, a private cloud offering that features a proprietary cloud and allows for greater complexity and concurrency and a Citadel version that is fully ring-fenced, highly specialized and purpose-built for strict data security requirements and closed loop systems. With each of our offering tiers sold on a recurring revenue basis, our pricing model benefits from SaaS economics with high incremental margins. In a marketplace with so many avenues where AI can make meaningful contributions, deliberate focus is paramount. At BEN, we are focused on delivering use cases specifically for our target health care, automotive and financial services verticals, and within those verticals, the opportunities where we have identified the largest growth opportunities. In health care, we are focused on areas such as drug adherence, a $600 billion opportunity, and in automotive, we have targeted the auto dealership experience, which spans the 18,000 new car dealerships in the U.S. market and 50 million new and used cars sold every year. Similarly, contact center solutions across these verticals and in financial services are opportunities of growing and significant scale, providing utility to a large consumer base that is increasingly demanding more personalized information and attention at a time when businesses are faced with labor shortages, wage gap equity and increasingly less time. I will now move on to discussing the significant progress we made across many fronts in the first quarter. To start, I'd like to mention steps we have taken to operationalize our platform. We have optimized our AI modules for the cloud, and as a result, we are able to deploy our AI assistance to most consumer devices via the web, preserving resources on consumer devices by minimizing on-device drag. We strive to make it easy and accessible for all consumers to connect to and interact with our AI assistance on all of their devices. Second, during the National Auto Dealers Association Show or NADA in February, we revealed 5 AI assistance purpose-built for the auto vertical, designed specifically to solve pressing industry challenges in the automotive space. In partnership with channel partner and then investor AFG companies, these AI assistance leverage BENs human-like AI avatars as multimodal conversational resources tailored for unique purposes that assist customers as well as augment and enhanced professionals to provide improved customer service interactions and experiences. We were extremely pleased with the level of engagement, positive feedback and significant pipeline contribution driven by dealer interaction with our technology. Third, we are pleased to announce early customer wins and new partnerships in the health care vertical, including MedAdvisor, a global leader of pharmacy-driven patient engagement solutions that will bring BEN's AI assistant to certain pharmacies to help enhance patient outcomes. Similar to our partnership with AFG companies in the automotive vertical, which services more than 1,000 car dealerships. We believe MedAdvisor provides us a land-and-expand opportunity and a partnership to bring conversational AI into the pharmacy experience and to tap into the massive drug adherence ecosystem. We have also signed a pilot partnership with OSF HealthCare, an integrated health system caring for patients throughout Illinois and Michigan. We believe this partnership will address today's challenge where traditional chatbots have limited conversational skills and capacity as well as limited base knowledge of health care diagnoses and protocols. OSF HealthCare, which Fortune named one of the most innovative companies in 2023 possesses deep experience in industry-leading patient care. Together, OSF HealthCare and BEN will develop AI assistance that provide a more dynamic, adaptive and thorough training experience for advanced practice provider, APP, primary care fellowship participants. The partnership will also serve as an opportunity to demonstrate that conversational AI can provide an enhanced patient experience in real world health care. Finally, fast tracking our ability to operate in the health care vertical, I'm excited to announce that last week, our platform achieved HIPAA compliance. HIPAA compliance reinforces BEN's commitment to protecting patient health care information while also strengthening BEN's relationships with both health care partners and consumers and demonstrating the data security and privacy practices underpinning BEN's virtual assistance. The aforementioned partnerships in the automotive, health care and financial services sectors are only one tip of the spear in our multidimensional sales strategy. We are also actively pursuing exclusive reseller arrangements at targeted systems integrators and with trusted industry partners as well as building a direct selling motion to deepen and accelerate market penetration. Looking ahead and before turning the call over to Bill, I would like to discuss 3 areas that, we believe, have been are key pillars of future growth. First, maintaining a focus on our key verticals: automotive, health care and financial services and specific use cases only building assistance and modules that we can scale across those marketplaces. Second, accelerating market penetration by supercharging our multidimensional sales strategy with a focus on turnkey solutions, partnerships and opportunities to embed our modules, potentially making our modules and components available to the developer community as well as exploring inorganic growth opportunities. Third, continuous improvement and innovation across our portfolio of productionalized modules, enabling us to preserve our innovation gap with a differentiated offering relative to peers, all while maintaining financial discipline as we scale our business. We believe this is the road map to long-term success, and we are excited about our health care and automotive launches this year, delivering our product in the day-to-day lives of consumers. Overall, we see a tremendous opportunity to scale through increased market penetration in our target verticals and the conversion of several pilot programs into predictable reoccurring revenue streams. We have built momentum across key initiatives in the short time since our listing and with the transaction closed, our focus is squarely on accelerating our traction in the market, while maintaining a strategic and balanced approach to investments. With that, I'd like to turn things over to Bill, who will walk through our financial results for the first quarter and discuss our performance drivers and highlights. Bill, take it away.

Thank you, Michael, and thanks, everyone, for joining us. I'll start by providing a brief recap of our Q1 results, and then I'll discuss areas of strategic focus for 2024 and our key assumptions as we pivot from pre-revenue to a SaaS-based recurring revenue model. Now starting with details of the quarter. As a pre-revenue emerging growth company, our Q1 revenue was de minimis, reflecting initial proof-of-concept deployments at pilot customers. Total operating expenses for the quarter were approximately $6.8 million, an increase of approximately $4.2 million compared to the prior year. The quarter-over-quarter increase was primarily due to approximately $3.2 million of transaction costs as a result of the merger. Additionally, we incurred $3.1 million in costs associated with the DM Labs acquisition that was completed in Q2 2023 as we began to expand and operationalize our AI platform in 2H '23. These incurred costs included a $1.5 million increase in employee-related cost, a $1 million increase in professional fees, $0.2 million increase in promotional cost, $0.2 million increase in research and development cost, $0.1 million increase in depreciation and amortization and $0.1 million in insurance cost. These costs were partially offset by a decrease in stock-based compensation of $2.1 million as we issued fully vested options and warrants in Q1 2023. The DM Labs acquisition, which included acquired IP, research and technology assets, transform BEN into a full stack AI solutions platform. With the integration work complete, our 2024 focus is on laying the foundation across several key areas, including products, infrastructure, talent, partnerships and initial customer relationships. We have initially focused on profitable growth in the auto, health care and financial services sectors with plans to expand into consumer and industrial verticals in the future. Throughout this journey, we are mindful of the need for efficiency, profitability and liquidity. Our revenue and profit model prioritizes recurring revenue and is primarily SaaS-based across our public and private cloud solutions with software licenses for our Citadel deployments. We believe we have a capital-light and efficient cost structure relative to our peers. With CapEx consisting primarily of capitalized internal development costs and no investment in hardware or appliances as kiosk costs are passed through are financed by our customers. Additionally, we employ a variable cost structure, leveraging our needs at AWS with a scaled approach. Finally, we achieved efficiency gains through combined offshore and nearshore product development centered around our South Korea-based development team that was onboarded with our 2023 DM Lab's acquisition. Now to provide some insights into our sales motion, I want to share an example of our product use case in health care. For a health care group suffering from poor patient medication adherence, which is a common challenge across the pharmaceutical industry, we have been able to identify problem areas and have defined our success by addressing them through operational and financial KPIs. By utilizing our BEN healthcare AI Avatar and LLM processing capabilities, we ensure that patients receive support and guidance about proper medication adherence, driving bottom line savings and top line growth for both pharmacies and pharma manufacturers. From a standing start, we believe we have developed a robust sales pipeline and are seeing early conversions, which we expect to ramp in the second half of 2024 and further accelerate in 2025. We have signed 3 pilot programs, which we believe will generate projected ACV of approximately $1 million. As we transform -- transition from a pre-revenue business throughout 2024, we are building a foundation of balanced financial discipline with a focus on profitable growth, but also efficiency, cost containment and meeting liquidity needs, we will increasingly emphasize and measure and report progress on bookings, pipeline, customer lifetime value, monthly and annual recurring revenues, new logos, customer acquisition cost and growth rate sustainability as key measures of our success. And of course, we'll incorporate sound financial fundamentals as measured by margins, operating expense leverage, EBITDA, free cash flow and liquidity. To summarize our financial strategy, it is focused on momentum, platform scaling and cost discipline. Our 5-year partnership with AFG in the auto vertical drives commercial traction and includes a $6.5 million annual capital commitment, representing $32.5 million over the '24 to '28 period. And as Michael mentioned, we are also in the process of a capital raise to fund both the journey and the resources to properly scale the platform. To optimize cash burn, we have implemented strict cost controls, ensuring cost discipline as we pursue logos and profitable growth. Now I'll hand it back to Michael for closing remarks.

Thanks, Bill. We are focused on bringing AI solutions that deliver tangible benefits to our B2B2C customers, driving superior customer experience, enhanced productivity and measurable performance. We have a unique and differentiated approach to AI, emphasizing safety and privacy that meets the regulatory and compliance requirements of businesses through human-like conversational avatars and voice capabilities. Looking ahead, our priorities for 2024 are accelerating market penetration and executing in our target verticals, scaling our operating platform and ensuring we have the resources necessary to supercharge our journey. I would also like to take this opportunity to thank the entire BEN team around the world for their hard work. It takes a team to win, and I believe we have assembled the best in the industry. I'm very excited about the opportunity in front of us. Thank you for your time. And with that, I'd like to open up to Q&A. Operator?

[Operator Instructions] I'm showing no questions in the queue at this time. If you have any questions that you would like to ask, please reach out to BEN team through their Investor Relations website. This concludes today's conference call. Thank you for participating. You may now disconnect.