UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from / to
Commission file number
(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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Stock Market LLC (Nasdaq Capital Market) |
Warrants to purchase one share of common stock |
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Nasdaq Stock Market LLC (Nasdaq Capital Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ☐ No
As of May 9, 2022, there were
INDEX |
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PART I | FINANCIAL INFORMATION | |
Condensed Consolidated Balance Sheets (unaudited) | 1 | |
Condensed Consolidated Statements of Operations (unaudited) | 2 | |
Condensed Consolidated Statements of Comprehensive Loss (unaudited) | 3 | |
Condensed Consolidated Statements of Changes in Equity (unaudited) | 4 | |
Condensed Consolidated Statements of Cash Flows (unaudited) | 6 | |
Notes to Condensed Consolidated Financial Statements (unaudited) | 7 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 24 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 33 |
Item 4. | Controls and Procedures. | 34 |
PART II | OTHER INFORMATION | |
Item 1. | Legal Proceedings. | 36 |
Item 1A. | Risk Factors | 36 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 37 |
Item 3. | Defaults Upon Senior Securities. | 37 |
Item 4. | Mine Safety Disclosures. | 37 |
Item 5. | Other Information. | 37 |
Item 6. | Exhibits | 38 |
SIGNATURES | 39 |
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March 31, |
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December 31, |
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2022 |
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2021 |
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Assets |
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Current assets: |
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Cash |
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$ |
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Restricted cash |
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Accounts receivable, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Fixed assets, net |
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Investment, net |
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Capitalized software, net |
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Intangible assets, net | |||||||
Goodwill | |||||||
Other noncurrent assets | |||||||
Total Assets | $ | $ | |||||
Liabilities and Equity |
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Current liabilities: |
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Accounts payable, accrued expenses and other accrued liabilities |
$ |
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$ |
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Contingent consideration payable | |||||||
Current portion of deferred revenue |
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Current portion of long-term debt | |||||||
Derivative liability | |||||||
Total current liabilities |
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Long-term portion of deferred revenue |
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Long-term debt, less current portion | |||||||
Deferred tax liabilities | |||||||
Total liabilities | |||||||
Commitments and contingencies (Note 7) |
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Equity: |
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Preferred stock, par value $ |
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Special voting preferred stock, par value $ |
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Common stock, par value $ |
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Additional paid-in capital |
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Accumulated other comprehensive loss | |||||||
Accumulated deficit |
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Total equity |
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Total liabilities and equity |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements
1 |
AKERNA CORP.
(unaudited)
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For the Three Months Ended |
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March 31, |
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2022 |
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2021 |
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Revenue: |
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Software |
$ |
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$ |
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Consulting |
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Other revenue |
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Total revenue |
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Cost of revenue |
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Gross profit |
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Operating expenses: |
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Product development |
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Sales and marketing | |||||||
General and administrative |
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Depreciation and amortization | |||||||
Impairment of long-lived assets | |||||||
Total operating expenses |
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Loss from operations |
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Other (expense) income: |
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Interest (expense) income, net |
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Change in fair value of convertible notes | ( |
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Change in fair value of derivative liability | ( |
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Total other (expense) income |
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Net loss before income taxes and equity in losses of investee |
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Income tax (expense) benefit | ( |
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Equity in losses of investee | ( |
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Net loss |
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Basic and diluted weighted average common stock outstanding |
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Basic and diluted net loss per common share |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements
2 |
Three Months Ended March 31, | |||||||
2022 | 2021 | ||||||
Net loss | $ | ( |
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Other comprehensive (loss) income: | |||||||
Foreign currency translation |
( |
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Unrealized (loss) gain on convertible notes | ( |
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Comprehensive loss | $ | ( |
) | $ | ( |
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The accompanying notes are an integral part of these condensed consolidated financial statements
3 |
AKERNA CORP.
For the Three Months Ended March 31, 2022
(unaudited)
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Special Voting Preferred Stock |
Common |
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Additional |
Accumulated Other Comprehensive |
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Accumulated |
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Total |
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Share | Amount |
Shares |
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Amount |
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Capital |
Income |
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Deficit |
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Equity |
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Balance – January 1, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||
Conversion of Exchangeable Shares to common stock | ( |
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Settlement of convertible debt | |||||||||||||||||||||||
Shares withheld for withholding taxes | ( |
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Shares returned in connection with 365 Cannabis acquisition | ( |
( |
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Stock-based compensation | — | — | |||||||||||||||||||||
Restricted stock vesting | ( |
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Liabilities settled with shares | |||||||||||||||||||||||
Foreign currency translation adjustments | — | — | ( |
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Unrealized (loss) gain on convertible notes | — | — | |||||||||||||||||||||
Net loss |
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— |
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Balance – March 31, 2022 |
$ |
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$ |
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$ |
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$ |
$ |
( |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements
4 |
AKERNA CORP.
For the Three Months Ended March 31, 2021
(unaudited)
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Special Voting Preferred Stock |
Common |
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Additional |
Accumulated Other Comprehensive |
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Accumulated |
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Total |
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Share | Amount |
Shares |
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Amount |
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Capital |
Income |
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Deficit |
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Equity |
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Balance – January 1, 2021 | $ | $ | $ | $ | ( |
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Conversion of Exchangeable Shares to common stock | ( |
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Settlement of convertible debt | |||||||||||||||||||||||
Shares withheld for withholding taxes | ( |
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Stock-based compensation | — | — | |||||||||||||||||||||
Settlement of liabilities with shares | |||||||||||||||||||||||
Restricted stock vesting | ( |
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Forfeitures of restricted shares | ( |
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Foreign currency translation adjustments | — | — | ( |
( |
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Unrealized (loss) gains on convertible notes | — | — | ( |
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Net loss |
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Balance – March 31, 2021 |
$ |
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$ |
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$ |
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$ | ( |
) |
$ |
( |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements
5 |
AKERNA CORP.
(unaudited)
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For the Three Months Ended |
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March 31, |
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2022 |
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2021 |
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Cash flows from operating activities: |
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Net loss |
$ |
( |
$ |
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Adjustment to reconcile net loss to net cash used in operating activities: |
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Equity in losses of investment |
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Bad debt |
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( |
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Stock-based compensation expense |
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Amortization of deferred contract cost | |||||||
Non-cash interest expense | |||||||
Depreciation and amortization | |||||||
Foreign currency loss (gain) | ( |
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Impairment of long-lived assets | |||||||
Change in fair value of convertible notes
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Change in fair value of derivative liability | ( |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Prepaid expenses and other current assets |
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Accounts payable and accrued liabilities | |||||||
Deferred tax liabilities | ( |
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Deferred revenue |
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Net cash used in operating activities |
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Cash flows from investing activities: |
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Developed software additions |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Value of shares withheld related to tax withholdings |
( |
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Net cash used in financing activities |
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( |
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( |
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Effect of exchange rate changes on cash and restricted cash |
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Net change in cash and restricted cash |
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Cash and restricted cash - beginning of period |
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Cash and restricted cash - end of period |
$ |
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$ |
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Cash paid for interest | $ | $ | |||||
Cash paid for taxes | |||||||
Supplemental Disclosure of non-cash investing and financing activity: | |||||||
Settlement of convertible notes in common stock | $ | $ | |||||
Conversion of exchangeable shares to common stock | |||||||
Settlement of other liabilities in common stock | |||||||
Stock-based compensation capitalized as software development | |||||||
Vesting of restricted stock units | |||||||
Capitalized software included in accrued expenses | |||||||
Fixed asset purchases accrued or in accounts payable |
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Shares returned in connection with 365 Cannabis acquisition | |||||||
365 Cannabis working capital funds released from accrued expenses | |||||||
365 Cannabis working capital adjustment funds recorded in other current assets |
The accompanying notes are an integral part of these condensed consolidated financial statements
6 |
AKERNA CORP.
(Unaudited)
Note 1 - Description of Business
Description of Business
Akerna Corp., herein referred to as we, us, our or Akerna, through our wholly-owned subsidiaries MJ Freeway, LLC, or MJF, Trellis Solutions, Inc., or Trellis, Ample Organics, Inc, or Ample, solo sciences, inc., or Solo, Viridian Sciences Inc., or Viridian, and The NAV People, Inc. d.b.a. 365 Cannabis, or 365 Cannabis, provides enterprise software solutions that enable regulatory compliance and inventory management. Our proprietary, broad and growing suite of solutions are adaptable for industries in which interfacing with government regulatory agencies for compliance purposes is required, or where the tracking of organic materials from seed or plant to end products is desired. We develop products intended to assist states in monitoring licensed businesses’ compliance with state regulations and to help state-licensed businesses operate in compliance with such law. We provide our commercial software platform, MJ Platform®, Trellis®, Ample, Viridian and 365 Cannabis to state-licensed businesses, and our regulatory software platform, Leaf Data Systems®, to state government regulatory agencies. Through Solo, we provide an innovative, next-generation solution for state and national governments to securely track product and waste throughout the supply chain with solo*TAG™. The integration of MJ Platform® and solo*CODE™ results in technology for consumers and brands that brings a consumer-facing mark designed to highlight the authenticity and signify transparency.
Our Viridian and 365 Cannabis offerings are considered enterprise offerings and all other solutions are considered non-enterprise offerings that meet the needs of our small and medium business customers.
We consult with clients on a wide range of areas to help them successfully maintain compliance with state laws and regulations. We provide project-focused consulting services to clients who are initiating or expanding their cannabis business operations or are interested in data consulting engagements with respect to the legal cannabis industry. Our advisory engagements include service offerings focused on compliance requirement assessments, readiness and best practices, compliance monitoring systems, application processes, inspection readiness, and business plan and compliance reviews. We typically provide our consulting services to clients in emerging markets that are seeking consultation on newly introduced licensing regimes and assistance with the regulatory compliant build-out of operations.
Going Concern and Management's Liquidity Plans
In accordance with the Financial Accounting Standards Board’s (“FASB”) standard on going concern, Accounting Standard Update No. 2014-15, or ASU No. 2014-15, the Company assesses going concern uncertainty in its consolidated financial statements to determine if it has sufficient cash, cash equivalents and working capital on hand, including marketable equity securities, and any available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued, which is referred to as the “look-forward period” as defined by ASU No. 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to the Company, it will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and its ability to delay or curtail expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, the Company makes certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent The Company deems probable those implementations can be achieved and it has the proper authority to execute them within the look-forward period in accordance with ASU No. 2014-15.
The accompanying condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. However, since our inception we have incurred recurring operating losses, used cash from operations, and relied on capital raising transactions to continue ongoing operations. During the three months ended March 31, 2022 and March 31, 2021, we incurred a loss from operations of $
7 |
Management’s plan for the Company to continue as a going concern includes raising additional capital from our ATM program, subject to certain effects on the Senior Convertible Notes should we utilize the program, including resetting the conversion price of the Senior Convertible Notes should we raise more than $
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. We will require additional financing in the second quarter of 2022 to meet our ongoing operational working capital requirements and continue to meet the financial covenants of the Senior Convertible Notes. As noted above, we plan to meet those requirements in part through the use of our ATM Facility, but there are no guarantees that the ATM Facility will permit us to raise sufficient cash to meet our ongoing requirements.
8 |
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to the Quarterly Report on Form 10-Q and Article 8 of Regulation S-X for interim financial information. Accordingly, these financial statements do not include all of the information normally required by GAAP or Securities and Exchange Commission rules and regulations for complete financial statements. In management’s opinion, these condensed consolidated financial statements include all adjustments, consisting of normal recurring items, considered necessary for the fair presentation of the results of operations for the interim periods presented. The operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022.
The condensed consolidated balance sheet as of and for the period ended December 31, 2021, has been derived from our audited financial statements at that date but does not include all disclosures and financial information required by GAAP for complete financial statements. The information included in this quarterly report on Form 10-Q should be read in conjunction with our consolidated financial statements and notes thereto for the period ended December 31, 2021, which were included in our report on Form 10-K filed on March 31, 2022.
Principles of Consolidation
Our accompanying consolidated financial statements include the accounts of Akerna, our wholly-owned subsidiaries, and those entities in which we otherwise have a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts included in the consolidated financial statements and accompanying notes thereto. Our most significant estimates and assumptions are related to the valuation of acquisition-related assets and liabilities, capitalization of internal costs associated with software development, fair value measurements, impairment assessments, loss contingencies, valuation allowance associated with deferred tax assets, stock based compensation expenses, and useful lives of long-lived intangible assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results could differ from those estimates.
Accounts Receivable, Net
We maintain an allowance for doubtful accounts equal to the estimated uncollectible amounts based on our historical collection experience and review of the current status of trade accounts receivable. Receivables are written-off and charged against the recorded allowance when we have exhausted collection efforts without success. The allowance for doubtful accounts was $
Concentrations of Credit Risk
We grant credit in the normal course of business to customers in the United States. We periodically perform credit analysis and monitor the financial condition of our customers to reduce credit risk.
During the three months ended March 31, 2022 and 2021,
9 |
Segment Reporting
The Company operates its business as
In the following table, we disclose the combined gross balance of our fixed assets, capitalized software, and intangible assets by geographical location (in thousands):
As of March 31, 2022 |
As of December 31, 2021 |
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Long-lived assets: | ||||||
United States | $ | $ | ||||
Canada | ||||||
Total | $ | $ |
Recent Accounting Pronouncements
ASU 2016-02
The Financial Accounting Standards Board, or the FASB, has issued new guidance related to the accounting for leases. The new standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. We have adopted this new standard on January 1, 2022 and due to the immaterial impact of applying this standard to our limited assets subject to operating leases, there was no material impact to our results of operations.
ASU 2016-13
The FASB has issued guidance to introduce a new model for recognizing credit losses on financial instruments based on estimated current expected credit losses, or CECL. Under the new standard, an entity is required to estimate CECL on trade receivables at inception, based on historical information, current conditions, and reasonable and supportable forecasts. Following our change in fiscal year-end effective December 31, 2020, the new guidance is effective for us beginning on January 1, 2023. We are evaluating the impact of adoption of the new standard on our consolidated financial statements.
10 |
ASU 2020-01
The FASB has issued guidance clarifying the interactions between various standards governing investments in equity securities. The new guidance addresses accounting for the transition into and out of the equity method and measurement of certain purchased options and forward contracts to acquire investments. The standard is effective for us for annual and interim periods beginning on January 1, 2022. We have adopted this new standard on January 1, 2022 and there was no material impact to our results of operations as a result.
ASU 2020-06
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options and Derivative and Hedging - Contracts in Entity’s Own Equity, which simplifies the accounting for convertible instruments. This guidance eliminates certain models that require separate accounting for embedded conversion features, in certain cases. Additionally, among other changes, the guidance eliminates certain of the conditions for equity classification for contracts in an entity’s own equity. The guidance also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. This guidance is required to be adopted by us in the first quarter of 2023 and must be applied using either a modified or full retrospective approach. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
ASU 2021-04
On May 3, 2021, FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Issuers should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard. We have adopted this new standard on January 1, 2022 and there was no material impact to our results of operations as a result.
ASU 2021-08
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends the accounting related to contract assets and liabilities acquired in business combinations. Under current GAAP, an entity generally recognizes assets and liabilities acquired in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU 2021-08 requires that entities recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively to businesses combinations occurring on or after the effective date of the amendment. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
Note 3 – Revenue
In accordance with ASC 606, revenue is recognized when a customer obtains the benefit of promised services, in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those services. In determining the amount of revenue to be recognized, the Company performs the following steps: (i) identification of the contract with a customer; (ii) identification of the promised services in the contract and determination of whether the promised services are performance obligations, including whether they are distinct in the context of the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
Software Revenue. Our software revenue is generated from subscriptions and services related to the use of our commercial software platforms, MJ Platform®, Ample, Trellis, Viridian, 365 Cannabis, and our government regulatory platform, Leaf Data Systems, and the sale of business intelligence, data analytics and other software related services. For our SMB customers, software contracts are generally annual contracts paid monthly in advance of service and typically cancellable upon 30 days’ notice after the end of the contract period. Leaf Data Systems contracts are generally multi-year contracts payable annually or quarterly in advance of service. Commercial software and Leaf Data Systems contracts generally may only be terminated early for breach of contract as defined in the respective agreements. Our enterprise contracts are typically multi-year contracts paid monthly in advance of services and are generally cancellable with at least a month's notice before the end of the contract period. Amounts that have been invoiced are initially recorded as deferred revenue or contract liabilities. Subscription revenue is recognized on a straight-line basis over the service term of the arrangement beginning on the date that our solution is made available to the customer and ending at the expiration of the subscription term. We typically invoice customers at the beginning of the term, in multi-year, annual, quarterly, or monthly installments. When a collection of fees occurs in advance of service delivery, revenue recognition is deferred until such services commence. Revenue for implementation fees is recognized ratably over the expected term of the contract, including expected renewals.
11 |
We include service level commitments to customers warranting certain levels of uptime reliability and performance and permitting those customers to receive credits if those levels are not met. In addition, customer contracts often include: specific obligations that require us to maintain the availability of the customer’s data through the service and that customer content is secured against unauthorized access or loss, and indemnity provisions whereby we indemnify customers from third-party claims asserted against them that result from our failure to maintain the availability of their content or securing the same from unauthorized access or loss. To date, we have not incurred any material costs as a result of such commitments. Any such credits or payments made to customers under these arrangements are recorded as a reduction of revenue.
Consulting Revenue. Consulting services revenue is generated by providing solutions for operators in the pre-application of licensures and pre-operational phases of development and consists of contracts with fixed terms and fee structures based upon the volume and activity or fixed-price contracts for consulting and strategic services. These services include application and business plan preparation as they seek licenses to be granted. Consulting projects completed during the pre-application phase generally solidify us as the software vendor of choice for subsequent operational phases once the operator is granted the license. As a result, our consulting revenue is driven as new emerging states pass legislation, and as our client-operators gain licenses. Accordingly, we expect our consulting services to continue to grow as more states emerge with legalization reform. When these services are not combined with subscription revenues as a single unit of account, these revenues are recognized as services are rendered and accepted by the customer.
Other Revenue. Our other revenue is derived primarily from point-of-sale hardware and other non-recurring revenue. We recognize revenue as these products are delivered.
Cost of Revenue. Cost of revenue consists primarily of costs related to providing subscription and other services to our customers, including employee compensation and related expenses for data center operations, customer support and professional services personnel, payments to outside technology service providers, security services, and other tools.
Deferred Revenue. Deferred revenue consists of payments received in advance of revenue recognition from subscription, implementation and consulting services. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, contract duration, and invoice frequency. Deferred revenue that will be recognized during the succeeding twelve-month period is recorded as deferred revenue, which is a current liability on the accompanying consolidated balance sheets.
Disaggregation of Revenue
The Company derives the majority of its revenue from subscription fees paid for access to and usage of its SaaS solutions for a specified period of time, typically one to three years. In addition to subscription fees, contracts with customers may include implementation fees for launch assistance and training. Fixed subscription and implementation fees are billed in advance of the subscription term and are due in accordance with contract terms, which generally provide for payment within 30 days. The Company's contracts typically have a one to three year term. The Company's contractual arrangements include performance, termination and cancellation provisions, but do not provide for refunds. Customers do not have the contractual right to take possession of the Company's software at any time.
Sales taxes collected from customers and remitted to government authorities are excluded from revenue.
12 |
The following table summarizes our revenue disaggregation of enterprise offerings and non-enterprise offerings for the following periods (in thousands):
For the Three Months Ended |
||||||
2022 |
2021 |
|||||
Enterprise |
$ |
|
|
$ |
|
|
Non-enterprise |
|
|
|
|||
|
$ |
|
|
$ |
|
For the Three Months Ended |
||||||
2022 |
2021 |
|||||
United States |
$ |
|
|
$ |
|
|
Canada |
|
|
|
|||
|
$ |
|
|
$ |
|
Customers may elect to purchase a subscription to multiple modules, multiple modules with multiple service levels, or, for certain of the Company's solutions. We evaluate such contracts to determine whether the services to be provided are distinct and accordingly should be accounted for as separate performance obligations. If we determine that a contract has multiple performance obligations, the transaction price, which is the total price of the contract, is allocated to each performance obligation based on a relative standalone selling price method. We estimate standalone selling price based on observable prices in past transactions for which the product offering subject to the performance obligation has been sold separately. As the performance obligations are satisfied, revenue is recognized as discussed above in the product descriptions.
13 |
Transaction Price Allocated to Future Performance Obligation
ASC 606 provides certain practical expedients that limit the required disclosure of the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied. As many of the contracts the Company has entered into with customers are for a twelve-month subscription term, a significant portion of performance obligations that have not yet been satisfied as of March 31, 2022 are part of a contract that has an original expected duration of one year or less. For contracts with an original expected duration of greater than one year, for which the practical expedient does not apply, the aggregate transaction price allocated to the unsatisfied performance obligations was $
Deferred Revenue
Deferred revenue represents the unearned portion of subscription and implementation fees. Deferred revenue is recorded when cash payments are received in advance of performance. Deferred amounts are generally recognized within one to three years. Deferred revenue is included in the accompanying consolidated balance sheets under Total current liabilities, net of any long-term portion that is included in Other long-term liabilities.
The following table summarizes deferred revenue activity for the three months ended March 31, 2022 (in thousands):
|
As of |
|
Net additions |
|
Revenue recognized |
|
As of |
|||
Deferred revenue |
$ |
|
|
|
|
( |
$ |
|
Of the $
Costs to Obtain Contracts
In accordance with ASC 606, we capitalize sales commissions that are directly related to obtaining customer contracts and that would not have been incurred if the contract had not been obtained. These costs are included in the accompanying consolidated balance sheets and are classified as Prepaid expenses and other current assets. Deferred contract costs are amortized to sales and marketing expense over the expected period of benefit, which we have determined to be one to three years based on the estimated customer relationship period.
The following table summarizes deferred contract cost activity for the three months ended March 31, 2022 (in thousand):
|
As of |
|
Additions |
|
Amortized costs (1) |
|
As of |
|||
Deferred contract costs |
$ |
|
|
|
( |
$ |
(1)
14 |
Note 4 – Significant Transactions
2021 Transactions
Viridian Sciences
On April 1, 2021, we completed the acquisition of Viridian Sciences Inc. (“Viridian”), a cannabis business management software provider that is built on SAP Business One. We acquired Viridian in exchange for
365 Cannabis
On October 1, 2021, we acquired all the issued and outstanding shares of 365 Cannabis. Under the terms of the Agreement, the aggregate consideration for the 365 Cannabis shares consisted of an initial purchase price of (1) $
We reached a working capital settlement agreement during the three months ended March 31, 2022 in the amount of $1.5 million. As a result of this post-close adjustment, the 365 Cannabis purchase price was reduced by $
|
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Preliminary |
|
|
Shares issued |
|
$ |
|
|
Cash | ||||
Contingent consideration | ||||
Total preliminary fair value of consideration transferred | $ |
The opening balance sheet presented below reflects our updated purchase price allocation, summarizing the preliminary fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
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|
Preliminary |
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|
Cash | $ | |||
Accounts receivable |
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|
Prepaid expenses and other current asset | ||||
Fixed Assets | ||||
Non-compete agreement | ||||
Acquired technology |
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Customer relationships | ||||
Acquired trade name | ||||
Goodwill | ||||
Accounts payable and accrued expenses |
|
|
( |
) |
Deferred tax liabilities | ( |
) | ||
Deferred revenue |
|
|
( |
) |
Net assets acquired |
|
$ |
|
|
15 |
The excess of purchase consideration over the fair value of assets acquired and liabilities assumed was recorded as goodwill, which is primarily attributed to the assembled workforce and expanded market opportunities, for which there is no basis for U.S. income tax purposes. The fair values assigned to identifiable assets acquired and liabilities assumed are based on management’s estimates and assumptions. We expect to finalize the valuation as soon as practicable, but no later than one year from the acquisition date.
Pro Forma Financial Information
The following unaudited pro forma consolidated operating results give effect to the Viridian and 365 Cannabis acquisitions, as if they had been completed as of January 1, 2020 (in thousands):
Three Months Ended March 31, |
|||
2021 | |||
Revenue | $ | ||
Net loss | $ | ( |
The pro forma financial information for the period presented above has been calculated after adjusting the results of Viridian and 365 Cannabis to reflect the business combination accounting effects resulting from this acquisition, including the amortization expense from acquired intangible assets as though the acquisition occurred as of the beginning of the periods indicated above as well as direct acquisition costs. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the years indicated above.
Special Voting Preferred Stock and Exchangeable Shares
In connection with the Ample acquisition, which was completed on July 7, 2020, we entered into agreements with our wholly-owned subsidiary and the Ample shareholder representative that resulted in the issuance of a single share of our special voting preferred stock, for the purpose of ensuring that each Exchangeable Share is substantially the economic and voting equivalent of a share of Akerna common stock, and, following the registration of the Akerna shares issuable upon exchange of the Exchangeable Shares under the Securities Act of 1933, ensuring that each Exchangeable Share is exchangeable on a one-for-one basis for a share of Akerna common stock, subject to certain limitations. As a result of these agreements and the issuance of the special voting preferred stock, each holder of Exchangeable Shares effectively has the ability to cast votes along with holders of Akerna common stock. Additionally, these agreements grant exchange rights to the holders of exchangeable shares upon the event of our liquidation, dissolution or winding up.
The special voting preferred stock has a par value of $
During the three months ended March 31, 2022, several Ample shareholders exchanged a total of
16 |
Note 5 - Balance Sheet Disclosures
Prepaid expenses and other current assets consisted of the following:
As of |
As of |
|||||
March 31, |
December 31, |
|||||
2022 |
2021 |
|||||
Software and technology | $ |
|
$ | |||
Professional services, dues and subscriptions | |
|
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Insurance | |
|
||||
Deferred contract costs | |
|
||||
Unbilled receivables | |
|
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Other | |
|
||||
Total prepaid expenses and other current assets | $ | |
$ | |
Accounts payable, accrued expenses, and other accrued liabilities consisted of the following:
As of |
As of |
|||||
March 31, |
December 31, |
|||||
2022 | 2021 | |||||
Accounts payable | $ | $ | ||||
Professional fees | ||||||
Sales taxes | ||||||
Compensation | ||||||
Contractors | ||||||
Settlements and legal | ||||||
Other | ||||||
Total accounts payable, accrued expenses, and other accrued liabilities | $ | $ |
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Note 6- Fair Value
Fair Value Option Election – Convertible Notes
We issued convertible notes with a principal amount of $
For the 2020 Note and 2021 Notes, which are measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values for the three months ended March 31, 2022 and three months ended March 31, 2021:
Three Months Ended March 31, |
|||||||
2022 | 2021 | ||||||
Fair value balance at beginning of period |
$ | $ | |||||
Payments on Convertible Notes | ( |
) | ( |
) | |||
Change in fair value reported in the statements of operations | |||||||
Change in fair value reported in other comprehensive loss |
( |
) | |||||
Fair value balance at end of period |
$ | $ |
The estimated fair value of the Convertible Notes as of March 31, 2022 and December 31, 2021, was computed using a Monte Carlo simulation, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined by GAAP. The unobservable inputs utilized for measuring the fair value of the Convertible Notes reflect our assumptions about the assumptions that market participants would use in valuing the Convertible Notes as of the issuance date and subsequent reporting period.
We estimated the fair value by using the following key inputs to the Monte Carlo Simulation Model:
Fair Value Assumptions - Convertible Notes |
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||||
Face value principal payable |
|
$ |
|
|
|
$ |
|
|
||
Original conversion price |
|
$ |
|
|
|
$ |
|
|
||
Value of Common Stock |
|
$ |
|
|
|
$ |
|
|
||
Expected term (years) |
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|
|
|
|
|
|
|
||
Volatility |
|
|
|
% |
|
|
|
% |
||
Market yield |
|
|
% |
|
|
|
% |
|||
Risk free rate |
|
|
|
% |
|
|
|
% |
||
Issue date | ||||||||||
Maturity date |
18 |
Fair Value Measurement – Warrants
In connection with MTech Acquisition Corp.'s ("MTech") initial public offering, MTech sold
Upon completion of the mergers between MTech and MJF on June 17, 2019, as contemplated by the Merger Agreement dated October 10, 2018, as amended ("Mergers"), the MTech Public Warrants and the MTech Private Warrants were converted, respectively, at an exchange ratio of one-for-one to a warrant to purchase
For the Private Warrants classified as derivative liabilities, which are measured at fair value categorized within Level 3 of the fair value hierarchy, the following is a reconciliation of the fair values for the three months ended March 31, 2022 and March 31, 2021:
Three Months Ended March 31, | |||||||
2022 | 2021 | ||||||
Fair value balance at beginning of period |
$ |
|
$ | ||||
Change in fair value reported in the statements of operations |
|
( |
) | ||||
Fair value balance at end of period |
$ |
|
$ |
We utilized a binomial lattice model, which incorporates significant inputs, specifically the expected volatility, that are not observable in the market, and thus represents a Level 3 measurement as defined in GAAP. The unobservable inputs utilized for measuring the fair value of the Private Warrants reflect our estimates regarding the assumptions that market participants would use in valuing the Warrants as of the end of the reporting periods.
We record the fair value of the Private Warrants in the consolidated balance sheets under the caption “derivative liability” and recognize changes to the liability against earnings or loss each reporting period. Upon exercise of the Private Warrants, holders will receive a delivery of Akerna shares on a net or gross share basis per the terms of the Private Warrants and any exercise will reclassify the Private Warrants, at the time of exercise, to shareholder’s equity to reflect the equity transaction. There are no periodic settlements prior to the holder exercising the Private Warrants. There were no transfers in or out of Level 3 from other levels for the fair value hierarchy.
We estimated the fair value by using the following key inputs:
Fair Value Assumptions - Private Warrants |
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
Number of Private Warrants |
|
|
|
|
|
|
|
|
Original conversion price |
|
$ |
|
|
|
$ |
|
|
Value of Common Stock |
|
$ |
|
|
|
$ |
|
|
Expected term (years) |
|
|
|
|
|
|
|
|
Volatility |
|
|
|
% |
|
|
|
% |
Risk free rate |
|
|
|
% |
|
|
|
% |
19 |
Note 7 - Commitments and Contingencies
Litigation
On December 4, 2020, TechMagic USA LLC filed suit against our wholly-owned subsidiary, Solo, in Massachusetts Superior Court, Department Business Litigation, seeking recovery of up to approximately $
On April 2, 2021, TreCom Systems Group, Inc. (“TreCom”) filed suit against Akerna and our wholly-owned subsidiary, MJ Freeway, LLC, in federal District Court for the Eastern District of Pennsylvania, seeking recovery of up to approximately $
On May 21, 2021, our wholly-owned subsidiary, Solo, filed suit against two of Solo’s former directors, Ashesh Shah and Palle Pedersen. Solo seeks recovery for Mr. Shah’s intentional interference with contractual relations, and the defendants’ breaches of various fiduciary duties owed to Solo. Defendant Shah engaged in improper communications with Solo’s customers with the intent that those customers cease their contractual relations with Solo. The defendants also entered into an improper contract with a contractual counter party that the defendants had a conflict of interest with. The defendants have filed a motion to dismiss, which the court found unpersuasive and denied. Defendants have not asserted any counterclaims, and we therefore have not recognized a loss contingency.
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred. As of March 31, 2022, and through the date these consolidated financial statements were issued, there were no other legal proceedings requiring recognition or disclosure in the consolidated financial statements.
Operating Leases
During the three months ended March 31, 2022, we began negotiations to terminate the 365 Cannabis office lease in Las Vegas, Nevada. We booked a liability and lease termination expense of $
Note 8 - Loss Per Share
During the three months ended March 31, 2022 and 2021, we used the two-class method to compute net loss per share because we issued securities other than common stock that is economically equivalent to a common share in that the class of stock has the right to participate in dividends should a dividend be declared payable to holders of Akerna common stock. These participating securities were the Exchangeable Shares issued by our wholly owned subsidiary in exchange for interest in Ample. The two-class method requires earnings for the period to be allocated between common stock and participating securities based on their respective rights to receive distributed and undistributed earnings. Under the two-class method, for periods with net income, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current period earnings that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the period's earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the Exchangeable Shares have no obligation to fund losses.
Diluted net loss per common share is calculated under the two-class method by giving effect to all potentially dilutive common stock, including warrants, restricted stock awards, restricted stock units, and shares of common stock issuable upon conversion of our Convertible Notes. We analyzed the potential dilutive effect of any outstanding convertible securities under the "if-converted" method, in which it is assumed that the outstanding Exchangeable Shares and Convertible Notes are converted to shares of common stock at the beginning of the period or date of issuance, if later. We report the more dilutive of the approaches (two-class or "if-converted") as the diluted net loss per share during the period. The dilutive effect of unvested restricted stock awards and restricted stock units is reflected in diluted loss per share by application of the treasury stock method and is excluded when the effect would be anti-dilutive.
The weighted-average number of shares outstanding used in the computation of diluted earnings per share does not include the effect of potential outstanding common shares that would have been anti-dilutive for the period.
The table below details potentially outstanding shares on a fully diluted basis that were not included in the calculation of diluted earnings per share:
As of March 31, | ||||||
|
2022 |
2021 |
|
|||
Shares issuable upon exchange of Exchangeable Shares | ||||||
Shares of common stock issuable upon conversion of Convertible Notes | ||||||
Warrants |
|
|
|
|||
Unvested restricted stock units |
|
|
|
|||
Unvested restricted stock awards |
|
|
|
|||
Total |
|
|
|
Note 9 - Goodwill and Intangible Assets, net
22 |
Note 10- Income Taxes
The Company's effective tax rate was
23 |
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements for the three months ended March 31, 2022, and the related notes thereto, which have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP").
Akerna Corp., herein referred to as “we”, “us”, “our” or “Akerna”, through our wholly-owned subsidiaries MJ Freeway, LLC, Trellis Solutions, Inc., Ample Organics, Inc., solo sciences, inc., Viridian Sciences Inc., and The NAV People, Inc. d.b.a. 365 Cannabis.
Forward-Looking Statements
This Quarterly Report on Form 10-Q including all exhibits hereto contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding future events or our future results of operations, financial condition, business, strategies, financial needs, and the plans and objectives of management. In some cases, forward-looking statements can be identified because they contain words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “likely,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. Forward-looking statements are based on information available to our management as of the date of this Quarterly Report and our management’s good faith belief as of such date with respect to future events and are subject to a number of risks, uncertainties, and assumptions that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements, in particular the substantial risks and uncertainties related to the ongoing COVID-19 pandemic. Important factors that could cause such differences include, but are not limited to:
|
● |
our ability to sustain our revenue growth rate, to achieve or maintain profitability, and to effectively manage our anticipated growth; |
|
● |
our dependence on the commercial success of our clients, the continued growth of the cannabis industry and the regulatory environment in which the cannabis industry operates |
|
● |
our ability to attract new clients on a cost-effective basis and the extent to which existing clients renew and upgrade their subscriptions; |
|
● |
the timing of our introduction of new solutions or updates to existing solutions; |
|
● |
our ability to successfully diversify our solutions by developing or introducing new solutions or acquiring and integrating additional businesses, products, services, or content; |
|
● |
our ability to respond to changes within the cannabis industry; |
|
● |
the effects of adverse changes in, or the enforcement of, federal laws regarding our clients’ cannabis operations or our receipt of proceeds from such operations; |
|
● |
our ability to manage unique risks and uncertainties related to government contracts; |
|
● |
our ability to manage and protect our information technology systems; |
● | our ability to maintain and expand our strategic relationships with third parties; | |
● | our ability to deliver our solutions to clients without disruption or delay; | |
● | our exposure to liability from errors, delays, fraud, or system failures, which may not be covered by insurance; | |
● |
our ability to expand our international reach; | |
|
● |
our ability to retain or recruit officers, key employees, and directors; |
|
● |
our ability to raise additional capital or obtain financing in the future; |
|
● |
our ability to successfully integrate acquired businesses with Akerna’s business within anticipated timelines and at their expected costs; |
|
● |
our ability to complete planned acquisitions on time or at all due to failure to obtain stockholder approval or governmental or regulatory clearances, or the failure to satisfy other conditions to completion, or the failure of completion for any other reason; |
|
● |
our response to adverse developments in the general market, business, economic, labor, regulatory, and political conditions, including worldwide demand for cannabis and the spot price and long-term contract price of cannabis; |
|
● |
our response to competitive risks; |
● | our ability to protect our intellectual property; | |
● | the market reaction to negative publicity regarding cannabis; | |
● | our ability to manage the requirements of being a public company; | |
● | our ability to service our convertible debt; | |
● |
our accounting treatment of certain of our private warrants; |
|
● | our ability to effectively manage any disruptions to our business and/or any negative impact to our financial performance caused by the economic and social effects of the COVID-19 pandemic and measures taken in response; and |
|
|
● |
other factors discussed in other sections of this Quarterly Report on Form 10-Q, including the sections of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under Part II, Item 1A. “Risk Factors” and in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission, or the SEC, on March 31, 2022, under Part I, Item 1A, “Risk Factors.” |
24 |
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated, or expected. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We disclaim any obligation to revise subsequently any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. We qualify all the forward-looking statements contained in this Quarterly Report by the foregoing cautionary statements.
Business Overview
Akerna is a leading provider of software solutions within the cannabis industry. Cannabis businesses face significant complexity due to the stringent regulations and restrictions that shift based on regional, state, and national governing bodies. As the first to market more than ten years ago, Akerna’s family of software platforms help to enable regulatory compliance and inventory management across the entire supply chain. When the legal cannabis market started to grow, we identified a need for organic material tracking and regulatory compliance software as a service (SaaS) solution customized specifically for the unique needs of the industry. By providing an integrated ecosystem of applications and services that help our clients enable compliance, regulation, consumer safety and taxation, Akerna is building the technology backbone of the cannabis industry. While designed specifically for the unique needs of the cannabis market, our solutions are adaptable for other industries requiring government regulatory oversight, or where the tracking of organic materials from seed or plant to end products is desired.
Executing upon our expansion strategy, we acquire complementary software brands that service the cannabis industry to grow the scope of Akerna’s cannabis ecosystem. Since 2019, we have integrated six new brands into the Akerna product and service offering. Our first acquisition, Solo Sciences ("Solo"), was initiated in the fall of 2019, with the full acquisition completed in July 2020. We added Trellis Solutions ("Trellis") to our portfolio on April 10, 2020 and finalized the acquisition of Ample Organics ("Ample") and Last Call Analytics ("Last Call") on July 7, 2020. On April 1, 2021 we completed our acquisition of Viridian Sciences Inc. ("Viridian"), a cannabis business management software system built on SAP Business One, followed by the acquisition of The NAV People, Inc. d.b.a 365 Cannabis ("365 Cannabis"), a cannabis business management software system built on Microsoft Business Central, on October 1, 2021. Through our growing family of companies, Akerna provides highly versatile platforms that equip our clients with a central data management system for tracking regulated products. Our solutions also provide clients with integrated security, transparency, and scalability capabilities, all while helping maintaining compliance with their governing regulations.
On the commercial side, our products help state-licensed businesses operate in compliance with applicable regional laws. Our integrated ecosystem provides integrations with third-party vendors and add-ons that enhance the capabilities of our commercial software platforms. On the regulatory side, we provide track and trace solutions that allow state governments to monitor compliance of licensed cannabis businesses. To date, our software has helped monitor the compliance of more than $30 billion in legal cannabis. While our software facilitates the success of legal cannabis businesses, we do not handle any cannabis-related material, do not process cannabis sales transactions within the United States ("U.S."), and our revenue is generated from a fixed-fee based subscription and professional services model and is not related to the type or amount of sales made by our clients.
We drive revenue growth through the development of our product line, our acquisitions and from continued expansion of our software and consulting offerings within the cannabis, hemp, and cannabidiol ("CBD") industry. Businesses across the regulated cannabis industry use our solutions. The brand recognition of our existing products, our ability to provide services in all areas of the seed-to-sale life cycle, and our wealth of relevant experience attracts cultivation, manufacturing, and dispensary clients who are seeking comprehensive business optimization solutions. Our software solutions are designed to be scalable, and while mid-market and smaller customers have historically been our primary target segment, we are focused on extending our customer reach to address the needs of the emerging enterprise level operator. We believe these larger multi-state/multi-vertical operations represent significant long-term future growth opportunities as the cannabis industry continues to consolidate at a rapid rate. The sophistication of our platform accommodates the complexities of both multi-vertical and multi-state business needs, making us critical partners and allowing us to cultivate long-term, successful relationships with our clients.
Our platforms provide licensed businesses with a true enterprise solution for managing their inventory and compliance and allow government regulators to engage in accurate and real-time compliance monitoring. Key capabilities of our technology infrastructure include:
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Seed-to-Sale Tracking allows the tracking of products from cultivation, through harvest and processing and manufacturing, to the monitoring of the final sale to the patient or consumer. Our traceability technology captures every step in an individual plant’s life, providing visibility into the supply chain from any measurement of finished product dispensed to a patient or customer, back to the plant it came from, and all activity, transportation, and transactions that happen in between. While we do not provide payment processing, and never take, own, or handle any product or cash transaction, our platform records all sales as part of state and jurisdictional compliance Track-and-Trace processes. The data gathered throughout all of these processes is captured, and provides the insights and information needed to run an efficient and streamlined cannabis business. Seed-to-Sale software operates in a complementary relationship with state-mandated Track-and-Trace systems, replicating the reporting functionality and eliminating the need for operators to duplicate their compliance data into two disparate systems. Track-and-Trace systems are designed solely for government regulators to maintain compliance and do not have the sophistication or functionality to provide cannabis business owners with the insights and tools for effective business management. Our seed-to-sale platforms integrate with the state Track-and-Trace compliance system, reporting in the mandated data along the supply chain while also providing business owners with the capabilities to make informed business decisions based on the fully overview of their operations.
Track-and-Trace is the compliance reporting system used by regulatory bodies in most states. In order to adhere to their state-specific compliance regulations, cannabis operators are required to enter specific data points along the supply chain into the state-mandated track-and-trace system. By doing so, regulators can track the movement of cannabis inventory through the full supply chain, even when it moves between facilities or operators. The aggregated view that Track-and-Trace software seeks to ensure that the end product being sold has been grown, harvested, processed, transferred and sold compliantly, and provides assurance of safety to consumers.
Single System Integration allows state-licensed clients to manage inventory, customer records, and staff in one tracking system. MJ Platform and Leaf Data Systems platforms can be fully integrated with one another to create a streamlined Seed-to-Sale/Track-and-Trace solution. Additionally, our platforms can also be integrated with systems of numerous third-party suppliers. We have certified integrations with world class accounting solutions, including Sage, SAP, Microsoft and Netsuite.
Anti-Counterfeiting Technology. Solo sciences provides next-generation anti-counterfeiting technology fused with a direct communication system between brands and consumers. The solo sciences mission is to build confidence and establish trust among consumers, while enabling retailers and distributors to close the loop with creators and producers.
Cannabis Market Insights are curated using the anonymized data aggregated through our Seed-to-Sale platform for key industry intelligence. With over $30 billion in cannabis sales tracked over the past twelve years, we have cultivated a substantial legal cannabis dataset across 30+ states and multiple countries. This data provides a detailed overview of key industry trends, giving us the ability to provide banks, investors, researchers, cannabis businesses, and non-cannabis businesses with cannabis market intelligence and comparison data.
Enterprise Resource Planning (ERP) software is a business process management software that manages and integrates a company’s financials, manufacturing, inventory, supply chain, operations, commerce, and reporting activities. ERP systems improve an operator's efficiency and effectiveness by eliminating disparate systems, consolidating business critical information in a single location, reducing double entry data, and streamlining operations. ERP software solutions built for cannabis operators combine traditional accounting, manufacturing, inventory, and supply chain management with cannabis-specific track and trace and compliance functionality.
Using our years of experience, proprietary databases, and resources to identify trends and predict changes in the cannabis industry we evolve our products and better assist our clients in operating in compliance with the applicable laws of their jurisdictions and capitalizing on commercial opportunities within the applicable regulatory framework, with accuracy, efficiency, and geographic specificity. We have worked with clients and governments across the globe to create customized solutions that fit their specific regulatory and commercially compliant needs. While the majority of our clients are in the U.S. and Canada, our solutions allow cannabis businesses to operate efficiently in this fast-changing industry and comply with state, local, and federal (in countries such as Canada, Italy, Macedonia, and Colombia). Akerna and our family of companies is well-positioned to provide compliance solutions for the expanding national and international legal cannabis market.
Financial Results of Operations
Revenue
We generate revenue from two primary sources: (1) software and (2) consulting services. Revenue from software comprised approximately 94% and 95% of our revenue for the three months ended March 31, 2022 and 2021, respectively. Revenue from consulting services comprised approximately 6% and 4% of our revenue for three months ended March 31, 2022 and 2021, respectively.
Software. Our software is solutioned for our key markets, small and medium-sized ("SMB") and enterprise customers. Our SMB customers become a natural funnel for our larger, more robust enterprise offerings built on SAP and Microsoft. In either market, software revenue is generated from subscriptions and services related to the use of our commercial software platforms, MJ Platform, Ample, Trellis, Viridian, and 365 Cannabis, our government regulatory platform, Leaf Data Systems, and the sale of business intelligence, data analytics and other software related services. Software contracts are generally quarterly, annual, or three-year long contracts paid monthly, quarterly, or annually in advance of service and cancellable upon 30 or 90 days’ notice, although we do have many multi-year commercial software contracts. Leaf Data Systems contracts are generally multi-year contracts payable annually or quarterly in advance of service. Commercial software and Leaf Data Systems contracts generally may only be terminated early for breach of contract as defined in the respective agreements. Amounts that have been invoiced are initially recorded as deferred revenue or contract liabilities. Subscription revenue is recognized on a straight-line basis over the service term of the arrangement beginning on the date that our solution is made available to the customer and ending at the expiration of the subscription term.
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Consulting. Consulting services revenue is generated by providing solutions for operators in the pre-application of licensures and pre-operational phases of development. These services include application and business plan preparation as they seek licenses to be granted. Consulting projects completed during the pre-application phase generally solidify us as the software vendor of choice for subsequent operational phases once the operator is granted the license. As a result, our consulting revenue is driven as new emerging states pass legislation, and as our client-operators gain licenses. Accordingly, we expect our consulting services to grow over time as more states emerge with legalization reforms.
Other Revenue. Our other revenue is derived primarily from point-of-sale hardware.
Cost of Revenue and Operating Expenses
Cost of Revenue
Our cost of revenue is derived from direct costs associated with operating our commercial and government regulatory software platforms and providing consulting services. The cost of revenue for our commercial and government regulatory platforms relates primarily to hosting and infrastructure costs and subcontractor expenses incurred in connection with certain government contracts. Consulting cost of revenue relates primarily to our employees’ and consultants’ salaries and other related compensation expenses. We record the cost of revenue using the direct cost method. This method requires the allocation of direct costs including support services and materials to the cost of revenue.
Product Development Expenses
Our product development expenses include salaries and benefits, nearshore contractor expenses, technology expenses, and other overhead related to the ongoing maintenance of our commercial and government regulatory software platforms and planning for new software development. Product development costs, other than software development expenses qualifying for capitalization, are expensed as incurred. Capitalized software development costs consist primarily of employee-related costs. We devote substantial resources to enhancing and maintaining our technology infrastructure, developing new and enhancing existing solutions, conducting quality assurance testing, and improving our core technology.
Sales and Marketing Expenses
Sales and marketing expense is primarily salaries and related expenses, including commissions, for our sales, marketing, and client service staff. We also categorize payments to partners and marketing programs as sales and marketing expenses. Marketing programs consist of advertising, events, such as trade shows, corporate communications, brand building, and product marketing activities. We plan to continue to invest in marketing and sales by expanding our domestic and international selling and marketing activities, building brand awareness, attracting new clients, and sponsoring additional marketing events. The timing of these marketing events will affect our marketing costs in a particular quarter.
We defer the portion of sales commissions that is considered a cost of obtaining a new contract with a customer in accordance with the revenue recognition standard and amortize these deferred costs over the period of benefit, current