Creatd, Inc. (CRTD) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to Creatd's Fiscal Year 2020 Financial Results Webcast. I would like to hand the call over to Rachel David, Head of Corporate Communications and Business Development at Creatd. Thank you. Please go ahead.

Good morning, and thank you for joining us for Creatd Full Year 2020 Financial Results Webcast. I'm Rachel David, Creatd's Head of Corporate Communications and Business Development. Our fiscal year 2020 financial results and press release were released earlier this morning. This was our company's fifth 10-K filing and our first as a NASDAQ-listed company. The press release is available under the News and Events tab of Creatd's Investor Relations site. Before we begin, I'd like to cover the safe harbor regarding forward-looking statements. During this presentation, we will be making certain forward-looking statements, including projections and estimates about future events and results. These forward-looking statements are subject to risks and uncertainties and actual results may materially differ. Factors that could cause these results to differ materially are set forth in today's press release and in our annual report on Form 10-K filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. You can find further information about that on our website or in reports filed with the SEC. We will start today with opening remarks from Jeremy Frommer, Creatd Founder and CEO, followed by Chelsea Pullano, Creatd CFO, who will review our fiscal year 2020 financial results. After Chelsea's financial review, Jeremy will share some perspective on our forward outlook, followed by a Q&A session. If you would like to submit a question for consideration, you can do so from the submission box located on the webcast page. Now I would like to turn the call over to Creatd Founder and CEO, Jeremy Frommer.

Thank you, Rachel. Good morning, everyone. 2020 was an unpredictable year, well beyond normal. It will have consequences that will last for some years to come. Some of my peers have referred to it as a black swan event, characterized by extreme rarity, severe impact and that they are often obvious in hindsight. Fortunately Creatd not only met the challenges of this year but thrived through them, including uplisting to the NASDAQ this past September. Additionally, it was a positioning year for the company that now affords us broader access to the capital markets. And while expensive, was well worth it. My team and I, my Board, my friends and family represent a great deal of the stock and investment in Creatd. This positioning period now hopefully affords us far less dilutive financing opportunities in the future. From September to December 2020, in less than a 4-month period, we raised over $15 million and swung from negative $11 million to almost $8 million positive working capital for that period. We will await our CFO's presentation to give details on significant reduction in debt and a broad discussion on the year's operating expenses. But since there are a number of new investors on the call, I wanted to give a quick recap of how we got here, where we're going and who we are. My partner, Justin Maury and I met in 2014. Our original mission was relatively simple, make money on the Internet. Our initial business model involves rebooting legacy media assets such as magazine archives and adapting them for the digital space. And through a long period of experimentation, we found ourselves facing 2 core obstacles. First, how to get the content discovered online; and second, how to get rewarded for it. In early 2015, it became clear that to achieve our objective, we would need to build a proprietary platform ourselves. Off-the-shelf products simply weren't cutting it. And only by designing one from scratch, could one unlock the value of behavioral data and create a scalable, sustainable and defendable business model. Our customers would be the tens of millions of creators who generate billions of pieces of content daily. They range from blogs to videos to podcast to music and much, much more. We reason that everyone who creates online struggles with the same 2 obstacles: getting their content discovered and getting rewarded for their creativity. Our technology platform was a solution that could help overcome these obstacles for every creator online. Our company has found its new mission and we called it Vocal. We decided we would raise capital for this venture in a very unorthodox way for a technology company. Though not so much for a CEO who had spent a few decades on Wall Street in the institutional fintech space. In February of 2016, our predecessor company, Jerrick, went public on the OTCQB, trading under the ticker symbol JMDA. 9 months later, in December 2016, our company launched the first version of the Vocal platform, a user-generated storytelling platform that put creators and their interests first. We had 1,000 creators and 6 niche communities. One year later, we had grown to over 100,000 creators. It was an invaluable first year for the company in terms of insights it uncovered. We knew we could eventually be able to charge money for the services we were providing. But to do that, it was crucial to deeply study and understand what drives the Vocal creators, how they define success and how then to evolve the platform to best serve their interest so much so that the creators themselves would be incentivized to pay a monthly subscription fee to use it. By the end of 2018, Vocal had grown to nearly 400,000 creators and 34 communities. That was also the year we launched our first agency business model Vocal for Brands. The next year 2019 was a watershed year for us when Vocal freemium to premium model finally turned on its engines. Vocal+ was our first premium paid offering for creators, providing access to exclusive opportunities and increased rewards. We introduced Vocal+ to the platform in the third quarter of 2019, at around the same time, we made our first acquisition of a small digital agency to jump-start our brand marketing business. By the end of 2019, we had reached 600 paying Vocal+ subscribers but over 500,000 freemium creators. Total gross revenues for 2019 were $453,000 with creator subscriptions accounting for 7% of that. Bear in mind what I said a few moments ago, Vocal is a creator-first platform in spirit and in function. So while brand partnerships are part of the platform's revenue equation, the intention has always been to have the creator subscriptions grow to be the dominant revenue driver for the company. Gross revenues for fiscal year 2020 totaled $1.423 million of which $287,000 were attributed to paid Vocal+ creator subscriptions. This was within range of our original projections of $1.5 million gross revenues that we provided on our third quarter call. One of the primary drivers for year-over-year growth was the launch of Vocal Challenges in January of 2020. Challenges worked to further enhance the value proposition for a creator to upgrade to a paid subscription. After accounting for reward payments to Vocal+ subscribers, which they can earn through reads of their stories and winning challenges, net revenues were a little over $1.2 million. With these adjustments, net revenues for 2020 tripled year-over-year. In just the first quarter of 2021, Vocal+ subscriptions have generated approximately $325,000 in gross revenues and $265,000 in net revenues, already significantly outpacing its performance at the same time last year. The agency business grew as well, generating nearly $450,000 of gross revenues for the quarter. While the expected gross revenues for the first quarter of 2021 should be between $725,000 to $775,000 and net revenues should be $650,000 to $700,000, this represents a 75% to 85% quarter-over-quarter increase with creator subscriptions representing approximately 40% now of total revenues. Tomorrow, we begin the second quarter of 2021 with over 20,000 paying Vocal+ subscribers and a conservative estimate of $600,000 in creator subscription revenues for the quarter. We can comfortably project that Q2 will be our first $1 million plus quarter in net revenues. By the end of fiscal year 2021, we should have reached what you might call Creatd golden revenue ratio, which we define as when agency-related revenues represent approximately 1/3 of revenues, while creator subscriptions represent the remaining 2/3. Given Q1 and Q2 forecasts as well as projected further growth for Q3 and Q4, I am comfortable with my previous projections of between $5 million to $7 million in gross revenues for fiscal year 2021. I look forward to discussing future strategic plans in my closing remarks. But for now, I want to hand it over to my CFO, Chelsea Pullano, to review the results of fiscal year 2020 in more detail.

Thank you, Jeremy, and good morning, everyone. For the full year of 2020, net revenues, which take into account the net revenue reporting that Jeremy mentioned a few moments ago, totaled $1.2 million. This was roughly a threefold increase compared to 2019 revenues of $454,000. The platform side of our business, Vocal+ had its first full year of revenues in 2020. Since then, the Vocal+ subscriber count is outpacing our guidance. Vocal+ subscribers can opt to pay either $9.99 per month or pay the full year subscription fee of $99 upfront. As we have an increasing number of subscribers opting for the full year plan, our subscriber deferred revenue been building each quarter of 2020 from approximately $5,000 in the second quarter to $21,000 in the third quarter to $59,000 in the fourth quarter. Deferred revenues from creator subscriptions are expected to increase again to approximately $146,000 for Q1 2021. During our third quarter conference call this past November, we projected reaching 10,000 subscribers by the end of December. We actually had a figure in early December. We then projected reaching 20,000 by the end of first quarter 2021 and recently announced that we crossed that milestone several weeks ahead of schedule. Today, we are confirming our previous guidance of 100,000 Vocal+ subscribers before the end of fiscal year 2021. The agency side of our business, which includes Vocal for Brands and managed services, collectively produced triple-digit growth since last year and represents the vast majority of revenues in 2020. This growth is expected to continue in 2021, in part due to the brands that have begun to partner with us on our Vocal Challenges. Though we expect that overall agency-related revenues will represent a lower proportion of total revenues as creator subscriptions continue to expand. Our operating expenses were elevated during the year as we readied our company for the NASDAQ uplisting, while simultaneously positioning our company for accelerated growth. For the year ended December 31, 2020, operating expenses totaled $17.5 million as compared to $7.7 million for the year ended December 31, 2019. The $9.8 million increase is mainly related to nonrecurring charges, specifically a total of $1.3 million attributable to the NASDAQ uplisting, including additional advisory, legal and accounting services and financing activities during the year that included 2 underwritten offerings. In addition, operating expenses included a total of $5 million in equity grants to our employees and management team. The remainder of the increase in expenses during 2020 is attributed to a significant increase in personnel, including the addition of a Chief Operating Officer, additions to the sales team with senior level experience and long-standing brand relationships and an increase in marketing, which provided us an opportunity to reduce our creator acquisition costs to a record low, altogether totaling roughly $2 million. Going forward, without the burden of the extraordinary expenses we incurred during 2020, we calculate that our base level of quarterly operating expenses will be around $3 million, which during 2021, we anticipate could increase slightly with a measured added increase in marketing. Included in this quarterly budget is an increase in research and development which we expect to grow $500,000 during the course of the year with an eye towards features and systems to support recurring revenue. Keep in mind, what we spend in R&D, we get back a portion in the form of a tax rebate via our R&D subsidiary in Australia. Our rebate in 2020 totaled approximately $507,000. For the full year 2020, Creatd's comprehensive loss totaled $24.2 million or $5.68 per basic and diluted share. As we previously discussed, this loss included a number of noncash and nonrecurring charges. Net of these charges, our loss would have been approximately $11 million compared to the comprehensive loss for full year 2019 of $8 million. Net cash used in operating activities during 2020 totaled $7.3 million, an increase of approximately $1.4 million compared to 2019. During the full year 2020, our average monthly cash burn for operations was approximately $612,000 per month. We closed the year on a great note as we successfully secured $7.8 million in net proceeds in under 7 days during the December holiday period from the successful completion of our Series E convertible preferred offering, bringing our net equity above $5 million at year-end and leaving the company with a healthy cash position. At December 31, 2020, the company had cash and marketable securities of approximately $8 million and accounts receivable of $90,000. In total, the company's assets increased by $8.2 million year-over-year to $10.8 million at year-end. The company's total liabilities decreased year-over-year by approximately $5.6 million to $5.4 million. Subsequent to year-end, Creatd directed a portion of the net proceeds of the $7 million from the December Series E preferred capital raise to eliminate approximately $1 million of debt and a significant portion of outstanding payables. The government PPP loan totals roughly $694,000, the majority of which we anticipate will be forgiven and have begun the forgiveness process with the lender. The portion that may or may not be forgiven carries a 1% annual interest rate. In sum, with little to no debt and a healthy current cash level, our balance sheet has never been stronger. I want to underscore that currently, we are sitting with a strong cash position and look forward to achieving breakeven this year. However, there may be opportunities to accelerate growth further, which could require the need for additional cash. As we contemplate our growth opportunities, I would like to take a moment to discuss our numerous options to access capital should the need arise. We have strong relationships with our service providers, such as Stripe and Facebook, where we have credit lines when needed. Facebook, in fact, has generally raised this credit line consistently, which now stands at $1.5 million. We have filed the shelf registration statement, which once effective, will provide us with swift, efficient and less costly access to capital than a traditional underwriting. And subsequent to year-end, we have begun and continue to see the regular exercise of our warrants. We currently have over 6.1 million warrants with an average weighted strike price of $5.37, of which over 5.9 million are priced at 4.50 per share. These are primarily the warrants from our September and December financing. Subsequent to year-end 2020, Creatd has already received proceeds totaling roughly $1.3 million from the recent exercise of a total of 283,000 warrants. And we certainly anticipate more to follow as the share price continues to appreciate. Before I conclude, I would like to briefly review our cap table. The number of shares of common stock outstanding as of December 31, 2020, was approximately 8.7 million, consistent with the amount outstanding as of September 30, 2020. The company's fully diluted share count totaled 17.3 million, an increase of approximately 4.9 million shares from the third quarter due in large part to the December raise of the Series E convertible preferred stock and accompanying warrants. If all of the companies currently allocated options and warrants were to be exercised for cash, Creatd would receive approximately $36.3 million in additional capital. As of today, after accounting for the previously mentioned warrant exercises and conversion of the majority of the Series E preferred stock into common shares, Creatd has approximately 10.6 million shares outstanding. So to conclude, we have made great headway in 2020 and positioned the company for future success, which reflected our business flow and process, galvanized our business model and put the finishing optimization touches on our core tech platform, while simultaneously releasing several rich media tools to attract more creators to our rapidly growing base in the Vocal+ subscription offering. We completed 2 equity raises securing $15.5 million in gross capital proceeds, uplisted to the NASDAQ Capital Market, eliminated the vast majority of our debt, thereby leaving us for the first time with working capital to allocate to a well-conceived strategic business plan. I'd like to say thank you to everybody for joining us today, and I look forward to answering any questions later in this call. I'd now like to turn this call back over to Jeremy.

Thank you, Chelsea. In the interest of time, I will quickly mention a few of our more important strategic initiatives for 2021. First, reach 100,000 paying Vocal+ creators by the end of the year. Two, increase agency business primarily through accretive acquisition of small agencies generating between $2 million and $5 million in revenues with talented key people and an opportunity for significant cost cutting. Three, we currently have 4 investments in development under our corporate venture division Creatd partners. We expect that number to reach 10 by the end of fiscal year 2021. Four, we expect to continue developing our partnerships with third-party marketing platforms such as Google and Facebook, with whom we have an enterprise-level relationship and, in some cases, such as Facebook, access to a credit line. And finally, five, while there are a number of technology platforms, acquisitions we have looked at in the past, this year, fiscal year 2021 will be more about reaching our goal of $6 million in gross revenues from internal and pre-established business lines. And I would expect 2022 to be a more acquisitive year in the SaaS space.

Before I let the operator begin the Q&A session, I wanted to respond to the flood of questions we have received regarding NFTs, crypto and blockchain in our IR channel. I thought it helpful to read some of these communications verbatim. The first one reads, "as an investor, I was wondering if you would be introducing NFT news soon." Another one reads, please properly prepare for how you intend to address the NFT issue on your webcast call. Don't fall in the same trap that another CEO fell into. He was asked about NFTs and basically said, "Oh, yes, they're really interesting. We're taking a cautious approach, but should be developing an NFT strategy soon." The inquiry continued, but it felt more like a demand, as you said, "That's not good. Creatd as access to unique IP and you provide services to content creators. You'll need to embrace NFTs, transition your unique IP into NFT blockchain and make NFTs part of the services you offer to creators. He went on, if you fail to properly address NFTs on your webcast, then you will do great detriment to your investors and stock price. Wishing you the best of luck and success." And then there was my favorite short suite with little room to maneuver and a glaring need for some insight. Hi, my name is Mike, are you in NFT or crypto play? So there is no ambiguity in the market. I either believe we are an NFT or crypto play or crypto company or NFT company, period. We are institutionally curious about all things tech, including blockchain. We have a fiduciary responsibility to understand any tech that impacts the creative community that we serve, and determine if it is a benefit or a detriment to our mission. In 2018, Stripe, one of the largest payment processors said, "Empirically, there are fewer and fewer use cases for which accepting or paying with Bitcoin makes sense. They went on to say, therefore, starting today, we are winding down support for Bitcoin payments." At the same time in 2018, we were at the start of a due diligence process for integrating Stripe's crypto framework into our product and thankfully did not continue. The transactional fees resulting from crypto conversions made it difficult to gain transaction traction. Let alone, if we had integrated it, we would literally have to undo it afterwards. When it comes to these kind of systemic changes, our second-to-market mover advantage demands patients and research. The day we had initially planned to release the feature, transaction fees for Bitcoin rose to $37, irrespective of the amount of crypto being converted and to this day remains high for content and digital micro transaction-oriented platforms to economically scale crypto features. The transaction fees are just costly prohibitive. That said, much has changed since then. And part of our strategy at Creatd is, as I said, to amplify the second-mover advantage. If we believe there was demand for crypto or token payments in our ecosystem and from our creative community and if it was economical and accretive to the value of the company, we would efficiently execute on a plan to monetize the opportunity. And we continue to watch closely as companies like PayPal push into the cryptocurrency market. In regards to whether we are an NFT play, the same logic applies, currently at a price between $50 to $500 to mint an NFT, there was a big obstacle to get over if you want to scale the concept into a digital library let alone determine if there was any demand from the marketplace. Then there is the very important sustainability concern around the carbon emission outputs to run the systems that do the minting. And finally, most importantly, before we made any significant move into the NFT space, we would have to be sure that we would never damage the reputation of our platform and the trust of our creators, their audiences and the brands we work with and all that they have put in us. I try hard not to be the CEO who promotes something and does not have a plan for executing on it. I don't "set up a division to explore NFTs" or "have plans to partner with an NFT company." I don't do that without a deep exploration of facts and opportunities of a new business line, the bandwidth for which just simply does not exist. What is fact is that within one of our business divisions, there is a very special collection of original art documents, illustrations, collectibles and photographs. In particular, in excess of 100,000 original 35-millimeter slides, photographs and negatives, most notably by Bob Guccione, once the CEO of General Media owner of Penthouse magazine; Viva; Omni and the health and wellness magazine, Longevity. Creatd has the right to utilize the images from this specific collection for sale, print, download or other reproduction in any form whatsoever. This collection has a carrying value of $0 on our balance sheet as a result of an impairment charge taken many years back. We have not had the company's licensing rights valued as a digital library, but the physical assets in the collection alone have been independently appraised at between $5 million to $7 million, let alone the value of mining the other intellectual property opportunities. And we have leveraged the transmedia IP on a number of occasions, including the film Filthy Gorgeous directed by renowned documentary filmmaker Barry Averich, which premiered at the Toronto Film Festival in 2013. The book No One's Pet, written by notable film critic, Glenn Kenny. The film Till Human Voice Wake Us, directed by celebrity photographer and staring Lindsay Lohan. In fact, the Vocal communities Longevity and Viva are examples of the print to digital trends media and intellectual property opportunities we have leveraged from the collection and onto the Vocal platform. In 2013, Vice Media devoted an entire magazine issue to the collection. We are continuously expanding our IP library and collection. And in the past, the collection was used to secure an asset-backed loan in excess of $4.5 million, which is no longer on the balance sheet. At this point, though, the only actual plan regarding NFTs and learning more about the blockchain opportunity in this format is to choose a select few images from the collection and potentially the Lindsay Lohan short film, mint them, introduce them into an NFT marketplace. And if and when there is any further developments at the company regarding the monetization of these assets, blockchain, crypto and the NFT space, we will disseminate the news in a professional and disciplined fashion. Now I'd like to hand over the call to the operator for the Q&A session.

[Operator Instructions] Participating in the Q&A today, along with Jeremy Frommer and Chelsea Pullano are Laurie Weisberg, Creatd Chief Operating Officer; and Justin Maury, Creatd President and Head of Products. The first question is for Justin. Please talk about the impact of the Facebook and Apple issues on your business?

That's a good question and a very important issue today. And it's one of the things that my team and I have been monitoring for the last few months. For those of you who are not aware, Apple's iOS 14 updates impact the way in which companies like Facebook are able to receive and process conversion events from internal tools that they have, such as the Facebook Pixel. And while this doesn't really affect Android users, Apple controls over 50% of the smartphone market share in the U.S. So this is obviously a big concern for Facebook, even to the extent that they took out a couple of full-page ads in the Wall Street Journal and the New York Times, really fighting against this initiative by Apple. And I think like the reason that this is such an issue for Facebook is that at Facebook's core business model, it's really around advertising and the algorithms that power that advertising model are reliant on this data that Apple is now asking users to opt into as opposed to opt out of. But to go back to the question, how does this affect us? Transparently, it already has. And it's not affecting just us. It's an industry-wide problem. And there's increasing CPMs and conversion costs across multiple industries and sectors. Facebook has been a close marketing partner for ours over the last couple of years, but we're now more actively diversifying our marketing portfolio and customer acquisition strategies. When we look forward, I think we're still going to be marketing with Facebook throughout Q2 2021. But what we're now doing is, as I mentioned a moment ago, we're diversifying those customer acquisition campaigns to other platforms such as Google and Snapchat and Twitter, but I think it's also important to note that these platforms are also affected by this iOS update. But we believe that this omnichannel approach to create our acquisition will help us reach our targeted audience throughout the funnel. Now from an organic perspective, our core base of over 900,000 creators and over 20,000 Vocal+ subscribers acts as a strong foundation for these organic growth efforts. We're actively analyzing and improving our communications with our creators via our e-mail-driven campaigns and organic social channels, all with the goal of getting them to convert to a Vocal+ subscription. And then from the product perspective, we've been analyzing our first-party data and have identified insights into new features that will help increase the value proposition of someone operating to Vocal+. Some of these features will increase the engagement between creators and their audiences while simultaneously introducing new recurring revenue streams. Like I mentioned before, this is an issue that's affecting the entire industry, but we do feel confident that Vocal's freemium to premium model has positioned us strongly to be able to adapt and continue to scale rapidly. So in conclusion, I think that the Facebook, Apple issue has, in our opinion, temporarily increased the paid subscriber acquisition costs. Overall, what we've seen is a blended sac which includes the organic efforts that I just mentioned, that has decreased over the last few months, and we anticipate that to continue throughout Q2 2021. I'll now hand it back to the operator for the next question.

The next question is for Chelsea. You had 2 large offerings in 2020. Both deals came at once. Please help me understand how you avoided warrant derivative liability charges?

Absolutely. In 2017, we adopted what was at the time, new accounting guidance, ASU 2017-11. And this guidance determined that warrants would no longer be accounted for as derivative liabilities as a result of down round features. And all other features in our warrants that could potentially trigger derivative liabilities, things like fundamental transaction triggers are determined to be in our control to trigger, therefore, don't require us to book derivative liability. I'll hand it back to the operator for the next question.

Another question for Chelsea. Where do you stand with your NASDAQ listing for the disclosures the company put out at the end of last year and earlier this year?