BLBX - NASDAQ

Good day, and welcome to the Blackboxstocks Third Quarter 2022 Earnings Conference Call. All participants will be in listen only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. At this time, I would like to turn the conference over to Stephanie Prince of PCG Advisory. Please, go ahead.

Thank you, Allison, and welcome to everyone joining us today. On the call with me are Blackboxstocks' CEO, Gust Kepler; and Bob Winspear, CFO. The company would like to remind everyone that various remarks about future expectations, claims and prospects made on today's call constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Blackboxstocks cautions that these forward-looking statements are subject to risks and uncertainties that may cause their actual results to differ materially from those indicated, including risks described in the company's filings with the SEC. Any forward-looking statements made on this conference call speak only as of today's date, Tuesday, November 15, 2022. Blackboxstocks does not intend to update any of these forward-looking statements to reflect events or circumstances that occur after today. A replay of today's conference call will be available through the Investor Relations section of the company's website at Blackboxstocks.com. With that, I'd like to turn the call over to CEO, Gust Kepler. Gust?

Thank you, Stephanie. I want to thank everyone for joining us today. To get started, as we're all painfully aware, the macro environment continues to be difficult. It’s created headwinds for our company and our core product. The stock market is our market, and it has been a difficult and unpredictable market. Stocks declined 24% in the first nine months of this year. Inflation continues to be a factor that affects our consumers and the GDP is sluggish and higher interest rates continue to put pressure on growth, at least short-term growth. And all of these trends have created significant headwinds for the market and for our core product. Speaking more specifically, approximately 80% of our member base trades options. More importantly, most of our members are directional options traders. Current market volatility has made it difficult for this type of option trader to be consistently profitable and that has been very difficult for our user base as of late. To address these market conditions, we've done several things. So let's get out of the gloom and doom of the market and talk about some of the positive things that we've done to counter the current difficulties and headwinds. In March, we did a spring breakout sale. Spring breakout sale introduced a significantly discounted product offering that we've never done before. And we were able to obtain a large number of new users. We repeated this in a Labor Day sale. This also had a very positive effect on our user base, augmenting the user base that we had and some that we've lost. They've attracted new members, but we continue to have a very loyal member base who vote with their wallets and stay with Blackbox, because we are the best tool out there for traders in this particular sector. The downside in these heavily discounted programs is that it negatively impacts our short-term revenue, which Bob will discuss further when he has his turn on this call. And again, now that I've got the gloom and doom out of the way, let's talk about the exciting things that lie ahead for Blackbox. We've been very proactive. We did not wait for a market downturn to begin to diversify and create new products. We have a very talented technology team, and we're very forward thinking. So we've created a lot of new features for our core product and we've created new features for our Pro product that we'll be introducing next year. These new features for our Pro product also transcend into our current retail product. Blackbox Pro specifically, which is our platform that is targeting the professional trader base that means institutional investors, RIA’s, broker-dealers, et cetera, is a very, very useful tool for people that have to trade. We're trying to broaden our market outside the retail investor to the professional trader that must have the very best tools and an edge in the market like we give them. We already have firms that are using our product in variations of our product and pilot programs. And I can say that they're very useful to these firms, because on the rare occasions, there is some technology glitch, we get a call from them. So we know they use our product daily. We are also augmenting our education program. We recently hired one of our team traders from our community, Jason Swan [ph], the head of our education initiative. Jason does live webinars three times a week for our Blackbox members. And we're putting together a more comprehensive education initiatives to better prepare people when they subscribe to our software so they can use it effectively. We're also adding some other significant new features to our product offerings. We're adding futures. We're adding new charting programs, and additional proprietary alerts. We're constantly upgrading our system, and a lot of what we do is based on user suggestion. Our member base is very valuable. We have very talented and successful traders, and many of the suggestions they make or the observations they make about our platform are things that we incorporate. So we're almost like an open source product in ways, because we allow our users to improve our product through suggestion and we implement those suggestions. We also are introducing Stock Nanny, which we've talked about on previous calls. Stock Nanny is a completely different product. It's not designed for traders. It's to address the broader self-directed investor market. This is very important, because the day-trader market is a small one. And although, we have plenty of room for growth in that market, the self-directed investor market is $100 million plus in the United States alone. And to be specific, Stock Nanny is a product that allows you to import your portfolio from your broker-dealer accounts and received proprietary alerts throughout the trading day when you're on the go to your mobile device via push alert. These are some unique proprietary features that are not currently offered by brokers or online brokers. We have also load or put on hold our crypto initiative for now, because the crypto market is in disarray as everyone knows, and we're not abandoning it in any way, shape or form. We believe that crypto is here to stay, and it's an important part of our product offering long term. But for now, we believe Stock Nanny and Black Box Pro take precedence over the crypto platform. So we'll be delaying that. We hope to get it out in 2023, but it's not on the top of our priority list as of now. We're continuing to augment our marketing initiatives, and we have planned to build on the success of some of the promotions that we've done currently. And we're also in the process of launching our Black Friday Cyber Monday sale, which has been a very, very effective sale for us for three years in a row now. We had a record December last year. And although, the market is a significantly different market this year, the stock market specifically, we still believe that, this will be a very successful promotion this year. We're already getting a lot of inquiries as to whether we'll be doing it, we're about to make a big announcement about the new product promotion for Black Friday, Cyber Monday. In addition to the product upgrades, the promotions, the new marketing initiatives, we continue to believe in our business model, our product, our team, especially the team traders that are in the community every day that make Black Box, the successful platform that it is for our users. For this reason, we have our buyback – stock buyback program still in place. We bought an additional 116,700 shares this quarter, bringing our total shares repurchased to 728,000 or price of just over $1 million. Total authorized program is $2.5 million and our current pricing in the market, definitely makes us still a buyer for our stock. We feel it's very undervalued. So, although, the headwinds have created less than exciting revenue growth trajectory for us this year. Some significant takeaways for our shareholders are we have maintained a stable and loyal user base. We've continued to upgrade and improve our products, and we have pivoted into new markets or we plan to launch products into new markets and pivoted early in the development stages of these new products, which are Black Box Pro and Stock Nanny. So over this last year, as we've been continuing to invest in our company, our technology, we've developed some amazing products. Our community is strong. We are a very trusted brand. We've been around over seven years live in the market, and we are extremely and we are extremely excited about 2023 to launch our new products and also continue to improve our core product and grow our sales. And with that, I will turn it over to Bob Winspear to go over some of the key accounting components that will further provide further detail on my narrative.

Thanks, Gust, and good morning, everyone. I'm just going to go over a few of the highlighted items. And I'd just refer everyone to our 10-Q that we filed yesterday with the SEC for greater detail on the financial statements and notes and MD&A, et cetera. I would like to start with a quick review of our revenue. Revenue for the quarter was approximately $1.2 million. This was down about 17% or $253,000 as compared to the third quarter of 2021. $90,000 of that decline was attributable to a lower subscriber count, but the majority of that decline, about $163,000 was due to a lower average monthly revenue per subscriber. And this was a result of our Labor Day promotion that Gust discussed earlier, in which we offered new subscribers, their first month for just $1 a month, as opposed to a regular price of $99.99. And this is what drove that average revenue per subscriber down. We did a similar promotion as we discussed, earlier this year with our March breakout promotion for $5 for the first month. But in that time frame, we were able to spread the revenue impact of that lower revenue over the first and second quarter, because it happened right at the end of the first quarter. And so, we took it over two quarters, whereas this time, we took the entire revenue hedge in the third quarter. For the nine months ended September 30, revenues were $3.9 million as compared to $4.4 million in 2021, dropped about $534,000 or 12%. This drop was driven entirely by the lower average revenue per subscriber, as the subscriber count on average was up about 3.5% for the year-to-date, as compared to 2021. These revenues clearly impacted our gross profit and our gross profit margins as well. Gross profit margins were 60% for the quarter and nine months ended September 30, as compared to margins of 72% and 73% for 2021 bridge for the three and nine months. The largest impact on those margin percentages for the quarter and the year-to-date was a lower average revenue per subscriber. And as we said, that was driven by the promotions. We had some actual cost increases over 2021, and those relate to platform improvements, particularly in the social media chat features, as well as the moderator costs. Talking about our operating expenses. Our operating expenses were $1.924 million for the third quarter as compared to $1.501 million in the prior year. Operating expenses for the nine months was $5.777 billion, which was 57.6% or $2.085 million higher than the prior year. Looking to the specific elements of those operating expenses. We first look at SG&A and SG&A was $1.191 million for the third quarter as compared to $1.098 million in 2021 and $3.615 million for the nine-month period as compared to $2.321 million for the nine months ended 2021, reflecting a pretty consistent level of spending you see throughout 2022. A compensation, investor and public relations and other public company-related costs were the primary drivers for the third quarter as well as the year-to-date increases. Looking at research and development, R&D increased to $302,000 from $112,000 in the third quarter of last year and our year-to-date development costs were $832,000 as compared to $445,000 for the prior year. These are the largest increases in our operating expenses on a percentage basis increasing by 87% year-to-date. And that's as we expected. As Gus noted, we've made considerable investments in outputting our infrastructure, adding product features and enhancements into the development of all the new products. And earlier in the part of the year, a significant portion of our R&D expense was related to the development of our mobile app, which we released in April. Advertising expenses for the year were -- for the quarter were $417,000 for the third quarter, which was $131,000 higher than 2021. Our year-to-date advertising expenses were $1.243 million, which was 48% or $402,000 higher in 2021. We're seeing higher CPA costs over the year, particularly in the current quarter and some of the current quarter can be attributable through political ads, which take up a lot of the advertising, particularly in the digital marketing area where we spend our money. Our second quarter expenses included about $153,000 or so that we spent on a series of TV spots, which were targeted more towards brand awareness than our traditional digital marketing things. Nevertheless, the marketing and advertising expenses are going to be areas that we're going to be working to improve on with respect to getting improved CPA and better cost effectiveness. Looking at the EBITDA, obviously, you can see with the revenue and gross margin issues that we discussed as well as the higher expenses, you would expect EBITDA to come down, which it did. EBITDA was negative $1.076 million for the quarter and a similar $3.006 million for the nine months ended September 30th, and as compared to a slightly negative EBITDA in the third quarter of 2021 and a slightly positive EBITDA for the nine months in 2021. Looking at our balance sheet and some of our cash flow items, we still have a strong level of cash and marketable securities of about $5.3 million at the end of the quarter. Just after the quarter, on Monday, we replayed our -- repaid our senior secured loan, which matured on Monday, which was on our books of $890,000 at September 30th. Year-to-date, we have repurchased a total of $1.065 billion of treasury stock, as Gus had mentioned, and we don't expect to be able to utilize the full $2.5 million authorization before it expires at year end. Other capital expenditures and non-operating items were fairly minimal for the year and we don't foresee any significant changes there. We remain very excited about the balance of 2022 and looking to 2023. We're especially looking forward to launching the new products that target new market segments and increase our addressable market. I would like to say thanks for all our stockholders for continuing to support us as well as our subscribers and members and of course, the entire Blackbox team. With that, I'll open it up to questions.

Thank you. We will now begin the question-and-answer session [Operator Instructions] And our first question today will come from Joe Gomes of Noble Capital Markets. Please go ahead.

Hey, good morning, everyone. This is Joshua

I'll answer that. Most of the development costs are in the staffing up of our engineering team. So they've already occurred over the course of the last three quarters. So I don't expect a significant increase in cost for finishing these products. We're well on our way to completing them. So supporting them is a different story, but I don't expect a large increase in cost for support of these products, especially Stock Nanny, it's a much lower maintenance product than our current core product.

Okay. And we're still -- are they still really on track for that early 2023 release those products?

Stock Nanny is on track for the release in first quarter of 2023. And we believe the Pro will come out in the second quarter.

Okay. Great. And I guess, as for these products themselves, like how will the company just be marketing them to attract new clients. And obviously, you guys mentioned the Black Friday and Cyber Monday promotion, but there's anything else that maybe you guys are looking ahead at

Stock Nanny will be marketed digitally. We have a business development strategy for Blackbox Pro, where we are doing some R&D pilot programs with various broker-dealers and financial institutions, gathering data and info on what their use case is. And by doing so, we're making introductions and relationships, so the strategy with the Pro is a little different than our go-to-market strategies for retail investors, but there will be digital marketing associated with the Pro as well. So it's somewhat of a hybrid approach on the Pro and Stock Nanny will be in our traditional marketing vein, which is digital.

Okay. Great. And then -- and I guess is really comfortable with just with the cash position you're in now, or are you guys looking really into anything like raising any additional funds?

We believe that we have a strong cash position and a lot of the expenditures have been in the development of these new products, and we have not released them yet. So we have not realized any revenue from them. So we expect our cash position to improve as our revenues grow with the new product launches.

Okay. Great. Thank you. And then…

To answer your question, we don't have any -- I'm sorry, we don't have any current plans for additional capital raise.

Okay. Great. Thank you. And then, I guess, last one, if I may. I know, just given the current market conditions there are, and are you guys really seeing good retention in just current clients. Are you guys really able to quantify this really at all.

We have seen a larger churn rate when the markets get choppy or volatile, as I described, most of our -- in my earlier narrative -- most of our traders are directional options traders and it's been a difficult market for them to navigate. Our more experienced traders, not only stay with us, but a lot of them upgrade to annual memberships, and that's part of our strategy when we did this Black Friday/Cyber Monday promotion. So to be 100% transparent, the market does affect our member base, but we have maintained a stable member base, and we expect to grow our member base with these new products that are not entirely reliant on day traders that make a living trading every day. The new products are focused on either professional traders that have to have tools, because they don't have the luxury of deciding they're going to sit out the market for a quarter or a year until it comes back. They have to trade. So they need the advantage that our products provide. Stock manning is a different type of product as well, because most people that are investors a lot of times find value in market decrease and come in and buy what they consider undervalued stocks. They still need to monitor their positions. And by -- the stock manning product is a portfolio monitoring rather than a day trading tool. So we believe it will be very valuable to portfolio holders or self-directed investors, which again, I'll repeat, is a much larger demographic than the day trader market that we currently serve.

Okay. Great. Yes. Thank you for answering my questions and good job on the quarter, guys.

Thank you.

Thank you.

[Operator Instructions] And our next question today will come from Ed Woo of Ascendiant Capital. Please go ahead.

Yes. Thank you for answering my question. You said that, this market is not good for the directional option traders, but obviously, it's very good for short -- people who are short to market. Have you been putting more focus on products that will make money during down markets and get that out to your customer base?

Our marketing message to new subscribers or potential new members is that, you can make money betting against the market. But to be more specific, directional options traders find it difficult, premiums on options are much higher when volatility is high. So it's harder to be profitable. So while there is benefit to people that know how to bet against the market or short the market, be it stock traders or options traders, it's still a difficult market for the majority of our user base, which is 80% directional options traders.

Great. And then, talk about international opportunities. Are you able to focus on getting more international customers, or is that also still very challenging?

We haven't seen a rise or decline in international users. We're currently in approximately 32 countries. We're not seeing a large concentration of new users in a particular region. The US stock market tends to be the leading market in the world and the international members that we currently have are affected in the same way that our domestic members are affected. So to answer your question, we don't see -- we haven't seen a large rise in any particular sector in the international markets. But we are -- we do have future plans to add additional exchanges, and we are adding features to our platform which will provide a new avenue for traders outside of just the options and stock trading that we currently offer.

For the futures, are that commodities and currencies?

We are -- we have a specific set that we'll be announcing like top 16, I believe, that we're going to introduce first, so we may add more as we go. I don't have specifics on all of the features that we'll be adding at this point.

Great Well, thanks for answering my questions. I wish you guys good luck. Thank you.

Thanks, Ed.

Thanks, Ed.

And ladies and gentlemen, at this time, we will conclude our question-and-answer session. I'd like to turn the conference back over to Gust Kepler, CEO, for any closing remarks.

Thank you. Again, we'd like to thank all of our shareholders for their support and the confidence they've had in us as we navigate this unusual market. And I also want to thank our team traders who are in the market every day, guiding our users, helping them in difficult market situations and ultimately, helping a lot of new members become very profitable even in these somewhat challenging conditions. So our team traders, our developers and our corporate team, I want to thank everybody at Blackbox for making Blackbox a leader in its category for another year, and we are looking forward to a very exciting and prosperous 2023 with our core product and our new products.