UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from / to
Commission file number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
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Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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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. Yes
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). Yes
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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Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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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
As of August 11, 2022, there were
INDEX |
Page Number |
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| PART I | FINANCIAL INFORMATION | |
| Item 1. | 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 | 37 |
| Item 4. | Controls and Procedures | 38 |
| PART II | OTHER INFORMATION | |
| Item 1. | Legal Proceedings | 40 |
| Item 1A. | Risk Factors | 40 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 42 |
| Item 3. | Defaults Upon Senior Securities | 42 |
| Item 4. | Mine Safety Disclosures | 42 |
| Item 5. | Other Information | 42 |
| Item 6. | Exhibits | 43 |
| SIGNATURES | 44 |
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June 30, |
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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 | |||||||
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| Total assets | $ | $ | |||||
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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 | |||||||
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Current portion of deferred revenue |
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| Current portion of long-term debt | |||||||
| Derivative liability | |||||||
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Total current liabilities |
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| Long-term portion of deferred revenue |
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| Long-term debt, less current portion | |||||||
| Deferred income tax liabilities | |||||||
| Total liabilities | |||||||
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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 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 |
For the Six Months Ended |
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June 30, |
June 30, |
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2022 | 2021 |
2022 |
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2021 |
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Revenue: |
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Software |
$ | $ |
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$ |
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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 | |||||||||||||||
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General and administrative |
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| Depreciation and amortization | |||||||||||||||
| Impairment of long-lived assets | |||||||||||||||
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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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| Other expense (income), net | |||||||||||||||
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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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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements
| 2 |
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2022 |
2021 |
2022 | 2021 | |||||||||||
| Net loss | $ | ( |
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| Other comprehensive (loss) income: | ||||||||||||||
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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 Six Months Ended June 30, 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 | $ | $ | $ | $ | $ | ( |
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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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| 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 | — | — | |||||||||||||||||||||||||||||
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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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| 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 issued in connection with the ATM program | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | |||||||||||||||||||||||||||||
| Restricted stock vesting | — | ||||||||||||||||||||||||||||||
| Liabilities settled with shares | — | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | |||||||||||||||||||||||||||||
| Unrealized (loss) gain on convertible notes | — | — | |||||||||||||||||||||||||||||
| Net loss | — | — | ( |
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| Balance – June 30, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 4 |
AKERNA CORP.
For the Six Months Ended June 30, 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 |
Loss |
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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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— |
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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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$ |
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Conversion of Exchangeable Shares to common stock |
( |
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| Settlement of convertible debt | |||||||||||||||||||||||||||||||
| Shares withheld for withholding taxes | |||||||||||||||||||||||||||||||
| 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 | — | — | |||||||||||||||||||||||||||||
| Unrealized (loss) gains on convertible notes | — | — | ( |
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| Net loss | — | — | ( |
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| Balance – June 30, 2021 | $ | $ |
$ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 5 |
AKERNA CORP.
(unaudited)
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For the Six Months Ended |
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June 30, |
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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 expense |
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Stock-based compensation expense, net |
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| Loss on write off of fixed assets | |||||||
| Impairments of long-lived assets | |||||||
| Amortization of deferred contract cost | |||||||
| Non-cash interest expense | |||||||
| Depreciation and amortization | |||||||
| Foreign currency loss (gain) | ( |
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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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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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Prepaid expenses and other current assets |
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( |
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| Accounts payable, accrued expenses and other accrued liabilities | |||||||
| Deferred income 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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| Fixed asset additions |
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| Cash returned from business combination working capital settlement (Note 4) |
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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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| Principal payments of convertible notes |
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| Proceeds received from stock offering, net | |||||||
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Net cash used in financing activities |
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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 income taxes | $ | $ | |||||
| Supplemental disclosures of non-cash investing and financing activities: | |||||||
| 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 | |||||||
| Shares returned in connection with 365 Cannabis acquisition (Note 4) | |||||||
| 365 Cannabis working capital reduction to accrued expenses (Note 4) | |||||||
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, the Company or Akerna, through our wholly-owned subsidiaries MJ Freeway, LLC, or MJF, Trellis Solutions, Inc., or Trellis, Ample Organics, Inc, the Company 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 while all other solutions are considered non-enterprise offerings that meet the needs of our small and medium-sized business, or SMB, 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 (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern (“ASU 2014-15”), we assess going concern uncertainty in our consolidated financial statements to determine if we have 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 defined to as the “look-forward period” in ASU 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to us, we 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 our ability to delay or curtail expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, we make certain assumptions regarding implementing curtailments or delays in the nature and timing of programs and expenditures to the extent we deem probable that such implementations can be achieved and we have the proper authority to execute them within the look-forward period in accordance with ASU 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 losses from operations, used cash from operating activities, and relied on capital raising transactions to continue ongoing operations. During the six months ended June 30, 2022 and June 30, 2021, we incurred losses from operations of $
| 7 |
Management’s plan for the Company to continue as a going concern includes several initiatives and actions including those impacting our short and intermediate term financing, continuing costs, primarily labor and employee benefits, our working capital and the liquidity of our Common Stock. Certain of these initiatives and actions began during the quarter ended June 30, 2022 while others were initiated in July 2022.
The most significant components of our plan include the following:
If we are unable to secure other potential financing alternatives or fail to execute any other strategic options to raise sufficient additional funds through the first half of 2023, including through the ATM Program, we will have to develop and implement more aggressive plans to address our liquidity needs and our ability to satisfy the scheduled maturity of our obligations under the Senior Convertible Notes. Such plans could include extending payables, further reductions of expenditures (including the termination of additional employees) and reducing or eliminating investments in and the funding of certain of our business units and initiatives, or otherwise substantially scale back our business plan until sufficient additional capital is raised through other equity or debt offerings. Such offerings may include the issuance of shares of common stock, warrants to purchase common stock, preferred stock, convertible debt or other instruments that may dilute our current stockholders. Accordingly, we may be subject to additional risks, including retention of key employees and limitations on the extension of credit by our vendors and other service providers. If we are required to raise additional capital as discussed above and if we cannot timely raise additional funds, we may be unable to meet the financial covenants of the Senior Convertible Notes, which could result in an event of default under those instruments which could adversely impact the Company. See the risks detailed in our Form 10-K under “Item 1A. Risk Factors – Risks Relating to our Convertible Debt”.
Our ability to continue as a going concern is dependent upon our ability to successfully execute the plans described above and attain profitable operations. Despite the comprehensive scope of our plans, the inherent risks associated with their successful execution are not sufficient to fully overcome substantial doubt about our ability to continue as a going concern for one year from the date of issuance of the consolidated financial statements. Accordingly, if we are unable to raise sufficient capital we may have to reduce operations which could significantly and adversely affect our results of operations. If we fail to meet the financial covenants of the Senior Convertible Notes and cannot obtain a waiver from such provisions or otherwise come to an agreement with the holders of our debt, such holders may declare a default on the debt which could subject our assets to seizure and sale, negatively impacting our business.
The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary if the Company is unable to continue as a going concern.
| 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 and six months ended June 30, 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 June 30, 2022.
Principles of Consolidation
Our accompanying consolidated financial statements include the accounts of Akerna and our wholly-owned subsidiaries. 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.
Subsequent Events
Management has evaluated all of our activities through the issuance date of our condensed consolidated financial statements and has concluded that, with the exception of the issuance of common stock and warrants in an offering that closed on July 5, 2022, as disclosed in Note 4, no subsequent events have occurred that would require recognition in our condensed consolidated financial statements or disclosure in the notes thereto.
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 and Canada. We periodically perform credit analysis and monitor the financial condition of our customers to reduce credit risk.
During the six months ended June 30, 2022 and 2021,
| 9 |
Segment Reporting
We operate our 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 June 30, 2022 |
As of December 31, 2021 |
||||||
| Long-lived assets: | |||||||
| United States | $ | $ | |||||
| Canada | |||||||
| Total | $ | $ | |||||
Adoption of Recent Accounting Pronouncements
The FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”) which, together with related amendments to GAAP, represents ASC Topic 842, Leases (“ASC 842”). ASC 842 superseded all prior GAAP with respect to leases. ASC 842 established a right-of-use model which 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 are to be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. We adopted ASC 842 effective 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 balance sheets and statements of operations.
The FASB issued ASU No. 2020-01, Clarifying the Interaction between Topic 321, Topic 323, and Topic 815 (“ASU 2020-01”) which provides guidance clarifying interactions between various standards governing investments in equity securities. The 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. We adopted ASU 2020-01 effective January 1, 2022 and there was no material impact to our balance sheets and statements of operations.
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The FASB issued ASU No. 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, (“ASU 2021-04”) which provides clarification and reduces diversity in practice with respect to 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. We adopted ASU 2021-04 effective January 1, 2022 and there was no material impact to our balance sheets and statements of operations.
Recent Accounting Pronouncements Pending Adoption
The FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which introduced a new model for recognizing credit losses on financial instruments based on estimated current expected credit losses, or CECL. ASU 2016-13 requires and entity to estimate CECL on trade receivables at inception, based on historical information, current conditions, and reasonable and supportable forecasts. ASU 2016-13, and subsequent amendments, is effective for us beginning on January 1, 2023. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
The FABS issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity (“ASU 2020-06”), which simplified the accounting for convertible instruments. ASU 2020-06 eliminated certain models that require separate accounting for embedded conversion features, in certain cases. Additionally, among other changes, ASU 2020-06 eliminates certain of the conditions for equity classification for contracts in an entity's own equity. ASU 2020-06 also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effects of shares settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. ASU 2020-06 is required to be adopted by us beginning on January 1, 2023 and must be applied using either a modified or full retrospective approach. We are currently evaluating the impact ASU 2020-06 will have on our consolidated financial statements.
The FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), 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
We recognize revenue 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, we perform 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 one 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.
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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. 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 and title has transferred.
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 presented as a current liability while amounts that will be recognized in periods greater than twelve months in the future are recognized as a noncurrent liability on the accompanying consolidated balance sheets.
Disaggregation of Revenue
We derive the majority of our revenue from subscription fees paid for access to and usage of our “software as a service,” or 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. Our 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 tour software at any time.
Sales taxes collected from customers and remitted to government authorities are excluded from revenue.
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The following tables summarizes our revenue disaggregation of enterprise offerings and non-enterprise offerings for the following periods (in thousands):
|
Six Months Ended June 30, |
|||||||
| 2022 |
2021 |
||||||
|
Enterprise |
$ |
|
|
$ |
|
||
|
Non-enterprise |
|
|
|
||||
|
|
$ |
|
|
$ |
|
||
|
Six Months Ended June 30, |
|||||||
| 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.
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Transaction Price Allocated to Future Performance Obligation
GAAP 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 June 30, 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 current liabilities, net of any long-term portion that is included in noncurrent liabilities.
The following table summarizes deferred revenue activity for the six months ended June 30, 2022 (in thousands):
|
|
As of |
|
Net additions |
|
Revenue recognized |
|
As of |
||||||
|
Deferred revenue |
$ |
|
|
|
|
( |
) |
$ |
|
||||
Of the $
Costs to Obtain Contracts
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 a component of 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 six months ended June 30, 2022 (in thousands):
|
|
As of |
|
Additions |
|
Amortized costs |
|
As of |
||||||
|
Deferred contract costs |
$ |
|
|
|
( |
) |
$ |
||||||
| 14 |
Note 4 – Significant Transactions
Convertible Notes Amendment
On June 30, 2022,
Unit Offering
On June 30, 2022, we entered into an underwriting agreement (the “Underwriting Agreement”) with A.G.P./Alliance Global Partners (the “Underwriter”), in connection with the Unit Offering which is comprised of an aggregate of
The Pre-Funded Warrants are immediately exercisable at a nominal exercise price of $
The Pre-Funded Warrants were sold to purchasers whose purchase of shares of Common Stock in the Offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than
Pursuant to
Pursuant to the Underwriting Agreement and upon closing of the Unit Offering, we issued to the Underwriter warrants to purchase up to
The Unit Offering closed on July 5, 2022 and we received net proceeds of approximately $
Restructuring
In May 2022, we implemented the Restructuring as approved by our board of directors. The Restructuring resulted in a reduction of the Company's workforce by 59 employees, or approximately 33 percent of the Company. We incurred costs of approximately $
| 15 |
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 stock purchase agreement (the “Stock Purchase 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 first quarter of 2022 in the amount of $
On May 23, 2022, we and the sellers of 365 Cannabis entered into an amendment (the "Amendment") to the Stock Purchase Agreement in order to provide the Sellers an election to have the potential earn-out payment, recognized as contingent consideration in the table below, paid in cash or Common Stock or in any combination thereof. Under the Amendment, if a seller elects to have any portion of the earn-out payment paid in cash such amount payable will be reduced by
The updated consideration transferred is reflected in the table below (in thousands):
|
|
|
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):
|
|
|
Preliminary |
|
|
| Cash | $ | |||
| Accounts receivable |
|
|
|
|
| Prepaid expenses and other current asset | ||||
| Fixed assets | ||||
| Non-compete agreement | ||||