Registration No. 333-239783
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1/AS-1
(Pre-Effective Amendment No. 1)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AKERNA CORP.
(Exact Name of Registrant as Specified in its Charter)
| Delaware | | 7374 | | 83-2242651 |
(State or other jurisdiction of incorporation or organization) | | Primary Standard Industrial Classification Code Number) | | (I.R.S. Employer Identification No.) |
1630 Welton1550 Larimer Street Floor 4#246
Denver, Colorado 80202
1-888-932-6537
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Vcorp Services, LLCCorporation Service Company
1013 Centre Road, Suite 403-B251 Little Falls Drive
Wilmington, Delaware 1980519808
(302) 636-5400
(Address, including zip code, and telephone number,
1includingincluding area code, of agent for service)
Copies to:
Jason K Brenkert, Esq. Sudeep Simkhada, Esq. Dorsey & Whitney LLP 1400 Wewatta Street, Suite 400 Denver, Colorado 80202 Telephone: (303) 352-1133 Fax Number: (303) 629-3450 | Faith L. Charles, Esq. Naveen Pogula, Esq. Thompson Hine LLP 335 Madison Avenue, 12th Floor New York, New York 10017 Telephone: (212) 344-5680 Facsimile: (212) 344-6101 |
Jason K Brenkert, Esq.
Dorsey & Whitney LLP
1400 Wewatta Street, Suite 400
Denver, Colorado 80202
Telephone: (303) 352-1133
Fax Number: (303) 629-3450
From time to timeAs soon as practicable after the effective date of this registration statementRegistration Statement.
(Approximate date of commencement of proposed sale to the public)
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: ☒☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging Growth Company | ☒ |
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 7(a)(2)(B) of Securities Act. ☐
EXPLANATORY NOTE
Akerna Corp. (“Akerna”, the “registrant”, “we” or “our”)The Registrant hereby filesamends this amendment number one to its Registration Statement on Form S-1 (333-239783) as initially filed with the Securities and Exchange Commission on July 9, 2020, to updated information regarding its executive compensation to reflect its recent fiscal year ended June 30, 2020.
The Registrant previously paid a registration fee of $3,369.77 in connection with the filing of the initial registration statement on Form S-1 (No. 333-239783) filed with the Securities and Exchange Commission on July 9, 2020, to register the 3,294,574 shares of common stock.
We hereby amend this registration statement on such date or dates as may be necessary to delay ourits effective date until we willthe Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until thisthe Registration Statement willshall become effective on such date as the Securities and Exchange Commission in accordance withacting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. Akerna Corp.We may not sell the securities until the Registration Statement filed with the Securities and Exchange Commission, of which this prospectus is a part, is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
| PRELIMINARY PROSPECTUS | SUBJECT TO COMPLETION | DATED JUNE 28, 2022 |
Subject
AKERNA CORP.
Up to Completion: Dated August 7, 202027,754,649 Units, Each Unit Consisting of One Share of Common Stock and One Warrant to Purchase One Share of Common Stock
PROSPECTUSUp to 27,754,649 Pre-funded Units, Each Pre-funded Unit Consisting of One Pre-funded Warrant to Purchase One Share of Common Stock and One Warrant to Purchase One Share of Common Stock
AKERNA CORP.Shares of Common Stock Underlying the Pre-Funded Warrants
3,294,574 SHARES OF COMMON STOCKWe are offering up to 27,754,649 units, each unit consisting of one share of common stock and one warrant to purchase one share of common stock. The offering price of the units is $ ___ per unit. The warrants included in the units have an exercise price of $ ___ per share (100% of the unit offering price), will be immediately exercisable and expire on the five year anniversary of the issuance.
Akerna Corp. (“Akerna”We are also offering to those purchasers, if any, whose purchase of units in this offering would otherwise result in such purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of common stock immediately following the consummation of this offering, the opportunity to purchase, if any such purchaser so chooses, pre-funded units in lieu of units that would otherwise result in such purchaser’s beneficial ownership exceeding 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of common stock. Each pre-funded unit consists of one pre-funded warrant to purchase one share of common stock and one warrant to purchase one share of common stock. The purchase price of each pre-funded unit will issuebe equal to the price per unit being sold to the public in this offering, minus $0.0001, and the exercise price of each pre-funded warrant included in the pre-funded units will be $0.0001 per share. The pre-funded warrants included in the pre-funded units will be immediately exercisable and may be exercised at any time until all of the pre-funded warrants are exercised in full. The warrant included in the pre-funded unit is in the same form as the warrant included in the unit.
For each pre-funded unit we sell, the number of units we are offering will be decreased on a one-for-one basis. The units and the pre-funded units will not be issued or certificated. The shares of common stock or pre-funded warrants, as the case may be, and the accompanying warrants can only be purchased together in this offering, but the securities contained in the units or pre-funded units will be immediately separable upon issuance and will be issued separately. The shares of common stock issuable from time to time an aggregate of 3,294,574 our shares of common stock, par value $0.0001, in exchange for 3,294,574 redeemable preferred shares (the “Exchangeable Shares”) of Akerna Canada Ample Exchange Inc., a company existing under the lawsupon exercise of the Province of Ontariowarrants and a wholly owned subsidiary of Akerna (“Exchangeco”). Exchangeco issued the Exchangeable Shares to shareholders of Ample Organics Inc., an Ontario corporation (“Ample”), on July 7, 2020.pre-funded warrants are also being offered by this prospectus. The shareholders of Ample received the Exchangeable Shares in connection with the arrangement by and between Ample, Exchangeco and Akerna under a plan of arrangement in accordance with Section 182 of the Business Corporations Act (Ontario). These shareholders of Exchangeco may exchange the exchangeable shares for shares of our common stock on a one-for-one basis at any time following effectiveness of the registration statement of which this Prospectus isprospectus forms a part.
We will not receive any proceeds frompart also registers the exchange of Exchangeable Shares forcommon stock purchase warrants to be issued to the underwriter and the shares of our common stock.stock issuable upon exercise thereof.
Our common stock tradesis currently listed on the Nasdaq Capital Market under the symbol “KERN”. On August 4, 2020,“KERN.”
The assumed offering price in this offering is $0.3603 per unit and is based on the fact that last reported sale price of theour common stock on the Nasdaq Capital Market on June 24, 2022 was $6.65$0.3603. However, the final public offering price per share.unit or pre-funded unit, as the case may be, in this offering will be determined between us and the underwriter in the offering, and may be at a discount to the current market price of our common stock. Therefore, the assumed public offering price of $0.3603 per unit used throughout this prospectus may not be indicative of the final offering price per unit. There is no established public trading market for the warrants or the pre-funded warrants, and we do not expect such a market to develop. In addition, we do not intend to apply for a listing of the warrants or the pre-funded warrants on any national securities exchange or other nationally recognized trading system.
We are a “smaller reporting company” and an “emerging growth company” as defined under the federal securities laws and, as such, we may continue to elect to comply with certain reduced public company reporting requirements in future reports.
Investing in our common stocksecurities involves risks.a high degree of risk. See “Risk Factors”“Risk Factors” beginning on page 6.6 of this prospectus.
These securities have not been approved or disapproved byNeither the SEC orSecurities and Exchange Commission nor any state securities commission nor has the SECapproved or any statedisapproved of these securities commission passed upon the accuracy or adequacy ofdetermined if this Prospectus.prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
PROSPECTUS DATED
| | | Per Unit(1) | | | Per Pre-
Funded Unit | | | Total(2) | |
| Public offering price | | $ | 0.3603 | | | $ | 0.3602 | | | $ | 10,000,000 | |
| Underwriting discount and commissions(3) | | $ | 0.0252 | | | $ | 0.0252 | | | $ | 699,417 | |
| Proceeds, before expenses, to us (4) | | $ | 0.3351 | | | $ | 0.3350 | | | $ | 9,300,583 | |
| (1) | Based on an assumed offering price of $0.3603 per unit. The final offering price per unit or pre-funded unit, as the case may be, will be determined by the Company and the underwriter in this offering and may be at a discount to the market price of the Company’s common stock. |
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| (2) | Assumes 27,754,649 units are issued and no pre-funded units are issued. |
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| (3) | In addition to the underwriting discount above, we have also agreed to pay the underwriter a cash fee of 7% of the aggregate gross proceeds received upon the exercise of the warrants, reimburse the underwriter for certain expenses and issue warrants to the underwriter in an amount equal to 5% of the aggregate number of shares and shares issuable upon exercise of the warrants and/or pre-funded warrants. For more information, see “Underwriting.” |
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| (4) | Because there is no minimum offering amount required as a condition to closing in this offering, the total public offering amount, underwriting discount and commissions, and proceeds to us, before expenses, are not presently determinable and may be substantially less than the total maximum offering amounts set forth above. For more information, see “Plan of Distribution.” |
The offering is being underwritten on a firm commitment basis. We have granted the underwriter a 45-day option from the date of this prospectus to purchase up to (i) 4,163,197 additional shares (in the aggregate) of our common stock and/or (ii) warrants to purchase up to 4,163,197 additional shares of our common stock and/or (iii) pre-funded warrants to purchase up to 4,163,197 additional shares of our common stock, in any combination thereof, from us solely to cover over-allotments, if any.
The underwriter expects to deliver our shares to purchasers in the offering on or about , 20202022.
A.G.P.
June , 2022
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS
The registration statement of which this prospectus forms a part that we have filed with the Securities and Exchange Commission, or SEC, includes and incorporates by reference exhibits that provide more detail of the matters discussed in this prospectus. You should read this prospectus and the related exhibits filed with the SEC, together with the additional information described under the heading “Where You Can Find More Information.”
You should rely only on the information contained in this prospectus and in any free writing prospectus prepared by or on behalf of us. We have not, and the underwriter has not, authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus or any related free writing prospectus. This prospectus is an offer to sell only the securities offered hereby but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. Our business, financial condition, results of operations and prospects may have changed since that date.
We are not offering to sell or seeking offers to purchase these securities in any jurisdiction where the offer or sale is not permitted. We have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus and any free writing prospectus related to this offering in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.
Unless otherwise indicated, any reference to Akerna, or as “we”, “us”, or “our” refers to Akerna Corp. and its consolidated subsidiaries (“Akerna” or the “Company”).
SUMMARY
The following highlights certain information contained elsewhere in this Prospectus.prospectus. It does not contain all the details concerning the exchange of exchangeable shares for shares of Company common stock,Offering, including information that may be important to you. You should carefully review this entire Prospectusprospectus including the section entitled “Risk Factors” and the consolidated historical and pro forma financial statements and accompanying notes contained herein. See “Where You Can Find More Information.”
Unless otherwise indicated, any reference to Akerna, or as “we”, “us”, or “our” refers to Akerna Corp. and its consolidated subsidiaries (“Akerna” or the “Company”).
Summary of Our Business
We areAkerna is a leading provider of enterprise 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. Our proprietarymanagement 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 platformas 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 in which interfacing withrequiring government regulatory agencies for compliance purposes is required,oversight, or where the tracking of organic materials from seed or plant to end products is desired. Ten years ago,
Executing upon our expansion strategy, we identified a need for organic material trackingacquire complementary cannabis brands to grow the scope of Akerna’s cannabis ecosystem. Since 2019, we have integrated six new brands into the Akerna product and regulatory compliance software as a service offering. Our first acquisition, Solo Sciences (“SaaS”Solo”) solutions, 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. More recently, 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 cannabisfamily 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 hemp industry. We developed products intended to assist states in monitoring licensed businesses’scalability capabilities, all while helping maintaining compliance with state regulations, and totheir governing regulations.
On the commercial side, our products help state-licensed businesses operate in compliance with such law. Weapplicable 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 regulatory software platform, Leaf Data Systems®, to government regulatory agencies, and our business software platform, MJ Platform®, to state and federally licensed businesses. Although we havehas helped monitor legalthe compliance forof more than $18$30 billion in legal cannabis. While our software facilitates the success of legal cannabis sales to date,businesses, we do not handle any cannabis relatedcannabis-related material, do not process cannabis sales transactions within the United States (“U.S.”), and our revenue generationis 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, as revenues are generated by us on a fixed-fee based subscription model.
Our core products, Leaf Data Systems and MJ Platform, are highly-versatile platforms that provide our clients with a central data management system for tracking regulated products – from seed to initial plant growth to product – throughout the complete supply chain, using a global unique identifier method. Our platforms also provide clients with integrated security, transparency and scalability capabilities. These capabilities allow our state-licensed clients to control inventory, operate efficiently in a fast-changing industry and comply with state, local, and federal (in countries such as Canada, Italy, Macedonia and Colombia) regulation at all times, and allows our government regulatory clients to effectively and cost-efficiently monitor licensees and ensure that commercial businesses are complying with their states’ regulations.clients.
We generate revenue from software sales and by providing consulting services as follows:
| ● | Government Regulatory Software Contracts – Leaf Data Systems is our SaaS product for government agencies. Leaf Data Systems is a compliance tracking system designed to give regulators visibility into the activity of licensed cannabis businesses in their jurisdictions. We have been serving three clients for Leaf Data Systems, the State of Washington, the Commonwealth of Pennsylvania and the State of Utah. |
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| ● | Commercial Software Contracts – MJ Platform is our SaaS offering for state and federally-licensed businesses. MJ Platform is an ERP (Enterprise Resource Planning) compliance system specific to the cannabis industry, including state-legal marijuana, hemp and Cannabidiol, or CBD, industry. MJ Platform is comprised of integrated modules designed to meet the regulations and inventory management needs of cannabis and hemp CBD cultivators, manufacturers, distributors and retailers, but has applications in other industries. |
| ● | Consulting Services Contracts – We provide consulting services to cannabis industry operators interested in entering the cannabis industry and in integrating our platforms into their respective operations and systems. We consult with clients on a wide range of areas to help them successfully maintain compliance with state law. We work with clients to efficiently comply with state requirements in connection with the launch and operations of their cannabis businesses. Our management team and key personnel have broad experience gained form working with numerous cannabis operations. Our consulting team has experience in most aspects of cannabis operations in most verticals (e.g., cultivation, processing, distribution, manufacturing and retail). Our service providers understand the intricacies of the varying regulations governing cannabis in each jurisdiction and, to the extent necessary, modify the professional services based on the jurisdiction.
We provide project-focused consulting services to clients that are initiating or expanding their cannabis businesses 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 in newly legal states
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We also resell a limited number of printers for printing compliance product labels and scales that are National Type Evaluation Program certified legal for trade. Revenue from these resale activities ranged from 1% to 4% of total revenue in each of the three and nine months ended March 31, 2020, and March 31, 2019, and is not expected to become a significant generator of revenue.
Our commercial softwaredrive revenue growth is driven by leveragingthrough the development of our reputationproduct line, our acquisitions and from continued expansion of the cannabis, hemp, and CBD industry. Businesses across the regulated cannabis industry growth. We believe we are well known in these industries and can leverageuse our reputation,solutions. The brand recognition and wealth of relevant experience to attract existing cultivation, manufacturing and dispensary customers, and attract new market entrants. We believe that the reputation of our existing products, and our ability to provide services in all areas of the seed-to-sale life cycle, will attract customers from competitors thatand our wealth of relevant experience attracts cultivation, manufacturing, and dispensary clients who are seeking more comprehensive servicesbusiness optimization solutions. Our software solutions are designed to be scalable, and will attract newwhile mid-market and smaller customers as they enter into existing markets and markets that become newly legalized.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 also experience revenuebelieve these larger multi-state/multi-vertical operations represent significant long-term future growth in mature, established states and countries by providing a solution to operators seeking to vertically integrate their operations and improve their operations. We provide not only a vertically integrated solution acrossopportunities as the cannabis hemp,industry continues to consolidate at a rapid rate. The sophistication of our platform accommodates the complexities of both multi-vertical and CBD supply chain, but also have themulti-state business intelligence capture, which allows operatorsneeds, making us critical partners and allowing us to run their businesses in a more informed and efficient manner. This business intelligence capture is derived from the suite of services provided by us and sets us apart from competitors.cultivate long-term, successful relationships with our clients.
Through our acquisition, investment and partnership strategies, we are expanding the features available to new and existing customers of MJ Platform and Leaf Data Systems, including the ability to track organic matter from seed-to-self (consumer), with an interactive consumer product experience. We believe that such features create further value by providing additional add-ins that should enhance utilization and the experience of our new and existing customers. For example:
| (i) | our agreement with NetSuite will provide tax planning services to our customers in Canada; |
| (ii) | our integration with Sage Intacct provides tax planning services globally; |
| (iii) | our license with ZolTrain provides our MJ Platform customers with training modules to educate them and improve their experience by pairing education with product information at the point of sale; |
| (iv) | our Leaf Data Systems track-and-trace solution specifically customized for the State of Utah to include an electronic verification system and inventory control system, implements solo*TAGTM, the world’s first cryptographically-secure, cannabis product authentication system, exclusively for governments as an alternative to radio-frequency identification, or RFID, tracking; and |
| (v) | our agreement with Isolocity enables cannabis enterprises to pursue international expansion by providing a quality management system, or QMS, framework to support local and national compliance needs and by leveraging such QMS, MJ Platform can support good manufacturing practices, or GMP, certification requirements, including the stricter European Union GMP standard required for the export of medical cannabis into Europe and Asia. |
Our principal executive offices are located at 1630 Welton1550 Larimer Street Floor 4,#246, Denver, Colorado 80202, and our telephone number is (888) 932-6537 and our Internet website address is www.akerna.com. The information on our website is not a part of, or incorporated in, this Prospectus.prospectus.
2
The Arrangement
On December 18, 2019, we entered into an arrangement agreement, as amended by the Amendment to Arrangement Agreement, dated February 28, 2020 (“Amendment to Arrangement Agreement”), Amendment No. 2 to Arrangement Agreement dated May 26, 2020 (“Amendment No. 2 to Arrangement Agreement), and Amendment No. 3 to Arrangement Agreement dated June 1, 2020 (“Amendment No. 3 to Arrangement Agreement”) (the “Arrangement Agreement”), among us, Exchangeco and Ample, pursuant to which we through Exchangeco agreed to acquire all of the issued and outstanding equity of Ample (the “Arrangement”).
On July 7, 2020, the Arrangement was consummated by way of a court-approved plan of arrangement under Ontario law (the “Plan of Arrangement”) and Ample became our indirect wholly-owned subsidiary.
Pursuant to the Arrangement Agreement and the Plan of Arrangement, on the closing date, holders of Ample common shares (the “Ample Shares”) received a number of Exchangeable Shares equal to the number of Ample Shares multiplied by the exchange ratio of 0.0524 (the “Exchange Ratio”). In the aggregate, Ample shareholders received 3,294,574 Exchangeable Shares. The Exchange Ratio was agreed to on December 18, 2019, and was not adjusted for any subsequent changes in market price of our common stock, par value $0.0001 per share (the “Akerna Shares”) or the Ample Shares prior to the closing date.
Ample’s shareholders adopted and approved the Arrangement Agreement and the Plan of Arrangement on June 26, 2020. Akerna’s shareholders approved the issuance of the Akerna Shares (including the Akerna shares issuable upon exchange of the Exchangeable Shares and shares issuable pursuant to the CVRs) in connection with the Arrangement on June 26, 2020. The Ontario Superior Court of Justice issued a final order approving the Plan of Arrangement on June 30, 2020.
The Exchangeable Shares were issued as part of the Arrangement pursuant to Section 3(a)(10) of the Securities Act, based on the final order of the Ontario Superior Court of Justice.
Exchangeable Shares
The Exchangeable Shares are exchangeable for shares of common stock, par value $0.0001 per share, of Akerna on a 1:1 basis, as determined in accordance with the Arrangement Agreement. The Exchangeable Shares are intended to be substantially economically equivalent to shares of common stock of Akerna. The rights, privileges, restrictions and conditions attaching to the Exchangeable Shares and the related special voting stock are described herein under the headings “The Exchangeable Shares” and “Description of Company Capital Stock—Special Voting Stock” respectively, and in the terms of our plan of arrangement with Ample, which is included in the Arrangement Agreement filed as an exhibit to the registration statement of which this Prospectus forms a part.
Of the 3,294,574 Exchangeable Shares that were issued to former Ample shareholders in connection with the consummation of the Arrangement, an aggregate of 658,915 Exchangeable Shares were issued as “Closing Consideration” and an aggregate of 2,635,659 Exchangeable Shares, constituting part of the “Escrowed Consideration” were issued into escrow pursuant to an escrow agreement (the “Escrow Agreement”), entered into on July 7, 2020 by and among the Company, Purchaser, John Prentice, as Shareholder Representative, and Odyssey Trust Company. Under the Escrow Agreement, subject to unresolved claims, if any, by the Company under the Arrangement Agreement in respect of fraud, the Escrowed Consideration shall be released to former Ample shareholders upon the six-, nine-, and twelve-month anniversaries of the Closing Date in accordance with the following schedule -- 988,372 shares on the six-month anniversary, 823,643 shares on the nine-month anniversary, and 823,644 shares on the twelve-month anniversary. ..
The OfferingTHE OFFERING
Common stock offered herein:Issuer | Akerna Corp. |
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3,294,574Units Offered by Us: | Up to 27,754,649 units on a “firm commitment” basis, each unit consisting of one share of common stock and one warrant to purchase one share of common stock, at a price of $____ per unit. Each warrant will have an exercise price of $____ per share (100% of the per unit offering price), will be immediately exercisable, and will have a term of exercise of five years from the original issuance date. This prospectus also relates to the offering of the shares of common stock issuable upon exercise of Akerna, par value $0.0001, in exchange for the 3,294,574 Exchangeable Shares upon exchange by the holders thereof pursuant to their termswarrants. |
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Common stockPre-Funded Units Offered by Us: | We are also offering to those purchasers, if any, whose purchase of units in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding (1): | | 14,058,707 shares of common stock immediately following the consummation of this offering, the opportunity to purchase, if such purchasers so choose, pre-funded units (each pre-funded unit consisting of one pre-funded warrant to purchase one share of common stock and one warrant to purchase one share of common stock), in lieu of units that would otherwise result in any such purchaser’s beneficial ownership exceeding 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of common stock.The purchase price of each pre-funded unit will be equal to the price per unit being sold to the public in this offering, minus $0.0001, and the exercise price of each pre-funded warrant included in the pre-funded units will be $0.0001 per share. The pre-funded warrants included in the pre-funded units will be immediately exercisable and may be exercised at any time until all of the pre-funded warrants are exercised in full. For each pre-funded unit we sell, the number of units we are offering will be decreased on a one-for-one basis. This prospectus also relates to the offering of the shares of common stock issuable upon exercise of the pre-funded warrants. |
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Common stock outstanding after the offering (1):Stock Outstanding Before this offering: | | 17,353,28136,796,522 shares of common Stockstock. |
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| Common Stock Outstanding After this offering (1): | 64,551,171 shares of common stock (or, 68,714,368 shares if the underwriter exercises its over-allotment option for shares in full), assuming the sale of all units covered by this prospectus, no sale of pre-funded units, and no exercise of any warrants issued in this offering. If the warrants are exercised in full, assuming no pre-funded warrants are sold, then there will be 92,305,820 shares outstanding (or 100,632,214 shares if the underwriter exercises its over-allotment option for shares and warrants in full). |
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Use of Proceeds: | Over-Allotment Option | We will not receive any proceedshave granted the underwriter a 45-day option from the issuancedate of this prospectus to purchase up to (i) 4,163,197 additional shares (in the aggregate) of our common stock and/or (ii) warrants to purchase up to 4,163,197 additional shares of our common stock uponand/or (iii) pre-funded warrants to purchase up to 4,163,197 additional shares of our common stock, in any combination thereof, from us solely to cover over-allotments, if any. |
| Use of Proceeds: | We intend to use the exchangenet proceeds from this offering for general corporate purposes, including servicing our ongoing debt obligations under our convertible notes, working capital, marketing, product development and capital expenditures. See “Use of Exchangeable Shares.Proceeds” in this prospectus. |
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| Dividend Policy: | We have never declared or paid any cash dividends on our shares of common stock. We do not anticipate paying any cash dividends in the foreseeable future. |
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ListingNasdaq Capital Market Trading Symbol: | Our shares of Common Stock: | | Our common Stock isstock are listed on the Nasdaq Capital Market under the symbol “KERN”. |
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Dividend policy: | | “KERN.” We currentlydo not intend to retainlist the warrants or the pre-funded warrants on any future earnings to fund the development and growth of our business. Therefore, we do not currently anticipate paying cash dividends on our common stock. |
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Risk Factors: | | An investment in our company is highly speculative and involves a significant degree of risk. See “Risk Factors” on page 6 of this Prospectus and other information included in this Prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.securities exchange or nationally recognized trading system. |
| (1) | TheUnless otherwise indicated, the number of our shares of common stock shown above to be outstanding before andimmediately after this offering as shown above is based on the 14,058,707 shares outstanding as of August 4, 2020. The number of shares of common stock outstanding after this offering assumes that all Exchangeable Shares have been exchanged for shareas of our common stock.June 24, 2022. The number of shares outstanding excludes the following as of June 24, 2022: |
| ● | 398,595 shares of common stock issuable upon vesting of outstanding beforerestricted stock units and after this offering excludes restricted stock awards; |
| ● | 5,813,804 shares of common stock issuable upon the exercise of warrants outstanding at a weighted average exercise price of $11.50 per share; |
| ● | 27,153,199shares of common stock issuable upon conversion of our outstanding convertible notes; |
| ● | 291,192 shares of common stock issuable upon conversion of exchangeable shares; and |
| ● | 3,580,126 shares of common stock reserved for future issuance under our equity incentive plan. |
SUMMARY OF RISK FACTORS
An investment in our securities involves a high degree of risk. You should carefully consider all of the risks described below, and the other risks set forth in the section of this prospectus entitled “Risk Factors” commencing on page 6, before making a decision to invest in our units. If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. Such risks include, but are not limited to:
| ● | Funds raised in this offering may not be sufficient to eliminate the substantial doubt about our ability to continue as a going concern. |
| ● | Due to this offering, the conversion price pursuant to our Senior Convertible Notes will need to be adjusted, which will result in the potential issuance of higher number of shares of our common stock pursuant to the conversion than previously anticipated, thereby resulting in significant dilution to our stockholders. |
| ● | If our common stock is delisted from Nasdaq, the liquidity and price of our common stock could decrease and our ability to obtain financing could be impaired. |
| ● | Management will have broad discretion as to the use of the net proceeds from this offering, and we may not use the proceeds effectively. |
| ● | If you purchase shares of our common stock in this offering, you will experience immediate dilution as a result of this offering and you may experience future dilution as a result of future equity offerings or other equity issuances. |
| ● | This Offering may cause the trading price of our common stock to decrease. |
| ● | A significant portion of our total outstanding shares are eligible to be sold into the market, which could cause the market price of our common stock to drop significantly, even if our business is doing well. |
| ● | There is no public market for the units, pre-funded units, or warrants being offered in this offering. |
| ● | Holders of our warrants and pre-funded warrants will have no rights as a common stockholder until they acquire our common stock. |
| ● | If we do not maintain a current and effective prospectus relating to the common stock issuable upon exercise of our outstandingthe warrants or pre-funded warrants, public holders will only be able to exercise such warrants or pre-funded warrants on a “cashless basis.” |
| ● | The pre-funded warrants are speculative in nature. |
| ● | The warrants may not have any value. |
| ● | Provisions of the warrants and 447,044pre-funded warrants offered by this prospectus could discourage an acquisition of us by a third party. |
| ● | There is substantial doubt about our ability to continue as a going concern. |
| ● | We have a history of losses, expect to continue to incur losses in the near term and may not achieve or sustain profitability in the future. |
| ● | Our long-term results of operations are difficult to predict and depend on the commercial success of our clients, the continued growth of the cannabis industry generally, and the regulatory environment within which the cannabis industry operates. |
| ● | As a company whose clients operate in the cannabis industry, we face many unique and evolving risks. |
| ● | A significant portion of our business is, and is expected to be, from government contracts, which present certain unique risks. |
| ● | Acquisitions and integration issues may expose us to risks. |
| ● | We are smaller and less diversified than many of our potential competitors. |
| ● | Our obligations to the holders of our Senior Convertible Notes are secured by a security interest in substantially all of our assets, if we default on those obligations, the Senior Convertible Note holders could foreclose on our assets. |
| ● | Warrants are exercisable for our common stock, which could increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders. |
| ● | The market price of our shares of common stock underlying restrictedis particularly volatile given our status as a relatively new public company with a generally small and thinly traded public float, which could lead to wide fluctuations in our share price. You may be unable to sell your shares of common stock units that are issued and outstanding but remain subjectat or above your purchase price, which may result in substantial losses to vesting conditions.you. |
Selected Financial DataSUMMARY FINANCIAL DATA
The selectedfollowing tables set forth our summary historical financial information presented belowand other data as of and for the periods indicated isindicated. We have derived the summary historical financial data for the year ended December 31, 2021, the transitional six months ended December 31, 2020 and the year ended June 30, 2020 from ourthe audited financial statements containedand we have derived the summary historical financial data for the three months ended March 31, 2022 from the unaudited financial statements, each included elsewhere in this Prospectusprospectus.
The summary historical financial and other data set forth below should be read in conjunction with those financial statements.
Statement of Operations Data | | Year Ended June 30,
2019 | | | Year Ended June 30,
2018 | | | Nine Months Ended March 31, 2020 (Unaudited) | | | Nine Months Ended March 31, 2019 (Unaudited) | |
| Total revenues | | $ | 10,919,785 | | | $ | 10,476,783 | | | $ | 9,569,638 | | | $ | 7,201,191 | |
| Cost of revenues | | $ | 4,633,844 | | | $ | 4,361,963 | | | $ | 4,457,110 | | | $ | 3,550,612 | |
| Gross profit | | $ | 6,285,941 | | | $ | 6,114,820 | | | $ | 5,112,528 | | | $ | 3,650,579 | |
| Total operating expenses | | $ | 18,701,619 | | | $ | 8,577,980 | | | $ | 17,905,798 | | | $ | 10,317,984 | |
| Loss from operations | | $ | (12,415,678 | ) | | $ | (2,463,160 | ) | | $ | (12,793,270 | ) | | $ | (6,667,405 | ) |
| Net loss | | $ | (12,306,547 | ) | | $ | (2,488,309 | ) | | $ | (12,634,762 | ) | | $ | (6,580,157 | ) |
| Basic and diluted net loss per common share | | $ | (2.04 | ) | | $ | (0.51 | ) | | $ | (1.11 | ) | | $ | (1.13 | ) |
| Basic and diluted weighted average common stock outstanding | | | 6,045,382 | | | | 4,870,950 | | | | 11,299,997 | | | | 5,843,334 | |
Balance Sheet Data | | At June 30, 2019 | | | At June 30, 2018 | | | At March 31, 2020 (Unaudited) | |
| Total current assets | | $ | 24,522,671 | | | $ | 3,017,731 | | | $ | 17,896,418 | |
| Total assets | | $ | 24,522,671 | | | $ | 3,017,731 | | | $ | 41,348,584 | |
| Total current liabilities | | $ | 2,442,503 | | | $ | 1,393,902 | | | $ | 4,768,516 | |
| Accumulated deficit | | $ | (25,246,312 | ) | | $ | (12,939,765 | ) | | $ | (38,100,333 | ) |
| Total stockholders’ equity | | $ | 22,080,168 | | | $ | 1,623,829 | | | $ | 31,817,810 | |
Selected Unaudited Pro Forma Condensed Combinedthe information included under the headings “Use of Proceeds,” and “Management’s Discussion and Analysis of Financial Data
The selected unaudited pro forma condensed combined financial data presented below asCondition and Results of and for the periods indicated is derived from the unaudited pro forma condensed combined balance sheet as of March 31, 2020Operations” and the audited and unaudited pro forma condensed combinedfinancial statements of operations for the year ended June 30, 2019 and nine months ended March 31, 2020 containedrelated notes included elsewhere in this Prospectus and should be read in conjunction with such financial information and accompanying notes and are based on the historical financial statements of Akerna, solo sciences inc. (“Solo”) and Ample, after giving effect to the acquisition of Solo, the probable exercise of the Solo option, and the acquisition of Ample.prospectus.
Statement of Operations Data | | Pro forma Combined for the Year Ended
June 30, 2019 | | Pro forma Combined for the
Nine Months Ended March 31, 2020 | | | Year Ended
December 31,
2021 | | Six Months
Ended
December 31,
2020 | | Year Ended
June 30,
2020 | | Period
Ended
March 31,
2022
(unaudited) | |
| Total net revenue | | $ | 16,100,431 | | | $ | 14,013,128 | | |
| Total revenue | | | $ | 20,684,974 | | | $ | 7,824,784 | | | $ | 12,573,276 | | | $ | 6,950,841 | |
| Cost of revenue | | $ | 7,844,537 | | | $ | 6,547,044 | | | $ | 8,119,487 | | | $ | 3,141,041 | | | $ | 6,209,724 | | | $ | 2,203,671 | |
| Gross profit | | $ | 8,255,894 | | | $ | 7,466,084 | | | $ | 12,565,487 | | | $ | 4,683,743 | | | $ | 6,363,552 | | | $ | 4,747,170 | |
| Total operating expenses | | $ | 32,561,506 | | | $ | 25,091,608 | | | $ | 45,920,806 | | | $ | 20,423,420 | | | $ | 23,635,403 | | | $ | 25,383,818 | |
| Loss from operations | | $ | (24,305,612 | ) | | $ | (17,625,524 | ) | | $ | (33,355,319 | ) | | $ | (15,739,677 | ) | | $ | (17,271,851 | ) | | $ | (20,636,648 | ) |
| Net loss | | $ | (24,195,335 | ) | | $ | (17,465,502 | ) | | $ | (31,328,711 | ) | | $ | (16,219,296 | ) | | $ | (14,422,070 | ) | | $ | (21,952,893 | ) |
| Basic and diluted net loss per common share | | $ | (2.75 | ) | | $ | (1.24 | ) | | $ | (1.22 | ) | | $ | (1.01 | ) | | $ | (1.14 | ) | | $ | (0.69 | ) |
| Basic and diluted shares used in computing loss per share | | | 8,795,382 | | | | 14,049,997 | | |
| Basic and diluted weighted average common stock outstanding | | | | 25,641,950 | | | | 16,056,030 | | | | 11,860,212 | | | | 31,605,783 | |
| | | | As of December 31, | | | As of
March 31,
2022 | |
Balance Sheet Data | | Pro forma Combined as of March 31, 2020 (Unaudited) | | | 2021 | | | 2020 | | | (unaudited) | |
| Total current assets | | $ | 14,663,771 | | | $ | 18,230,064 | | | $ | 22,552,914 | | | $ | 15,267,227 | |
| Total assets | | $ | 71,090,717 | | | $ | 94,483,167 | | | $ | 77,169,072 | | | $ | 74,346,780 | |
| Total current liabilities | | $ | 10,300,006 | | | $ | 29,170,517 | | | $ | 16,051,215 | | | $ | 30,378,099 | |
| Total liabilities | | | $ | 34,533,484 | | | $ | 19,946,452 | | | $ | 33,566,484 | |
| Accumulated deficit | | $ | (38,100,333 | ) | | $ | (88,508,236 | ) | | $ | (57,179,525 | ) | | $ | (110,461,129 | ) |
| Total equity | | $ | 60,558,640 | | | $ | 59,949,683 | | | $ | 57,222,620 | | | $ | 40,780,296 | |
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this Prospectus,prospectus, before making an investment decision with regard to our securities. The statements contained in this Prospectusprospectus that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
You should carefully consider the following risk factors in evaluating our business and us. The factors listed below and in the Prospectus, represent certain important factors that we believe could cause our business results to differ. These factors are not intended to represent a complete list of the general or specific risks that may affect us. It should be recognized that other risks may be significant, presently or in the future, and the risks set forth below may affect us to a greater extent than indicated. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected.
Risks Relating to the CompanyOur Financial Condition and Operating History
There is substantial doubt about our ability to continue as a going concern.
Our financial statement footnotes include disclosure regarding the substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of the uncertainty regarding our ability to continue as a going concern. This going concern opinion could materially limit our ability to raise additional funds through the issuance of equity or debt securities or otherwise. Further reports on our financial statements may include an explanatory paragraph with respect to our ability to continue as a going concern. Our ability to continue as a going concern is uncertain and dependent upon obtaining the financing necessary to meet our financial commitments and to continue our ongoing operations as currently planned. We do not have sufficient funds to meet planned expenditures over the next twelve months, and will need to seek additional debt or equity financing to meet our planned expenditures. 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 our convertible notes. We plan to meet those requirements in part through the use of our at-the-market facility, but there are no guarantees that the facility will permit us to raise sufficient cash to meet our ongoing requirements. These factors raise substantial doubt regarding our ability to continue as a going concern. If we are unable to raise sufficient capital we may have to reduce operations which could significantly affect our results of operations. If we fail to meet the financial covenants of our debt 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. See “Risks Relating to our Convertible Debt” below.
We have a history of losses, expect to continue to incur losses in the near term and may not achieve or sustain profitability in the future.
We have incurred significant losses in each fiscal year since our inception in 2010. We have experiencedFor the quarter ended March 31, 2022, we had a net lossesloss of approximately $12.3 million and $2.5 million for$22 million. For the yearsyear ended December 31, 2021, we had a net loss of approximately $31.3 million. For the six months ended December 31, 2020 we had a net loss of approximately $16.2 million. For fiscal year ended June 30, 2019 and 2018, respectively, and2020, we had a net lossesloss of approximately $12.6 million and $6.6 million for the nine months ended March 31, 2020 and 2019, respectively,$14.4 million. These losses have been due to the substantial investments we have made by us and MJ Freeway, LLC, our wholly-owned subsidiary (“MJF”) to develop itsour monitoring and compliance platforms and related software, market these products to government regulatory agencies and commercial businesses and grow itsgrowing our infrastructure to support the increased business. We expect to continue to invest in the further development of our platforms, software, and related product offerings and to grow both our government regulatory and commercial business client base. As a result, we expect our operating expenses to increase in the future due to expected increased sales and marketing expenses, operational costs, product development costs, and general and administrative costs and, therefore, our operating losses will continue or even increase at least through the near term. In addition, because we are now a public company, we will incur significant legal, accounting, and other expenses that MJ Freeway, or MJF, did not incur as a privatenon-public company. Furthermore, to the extent that we are successful in increasing our customerclient base, we will also incur increased expenses because costs associated with generating and supporting customerclient agreements are generally incurred up front,upfront, while revenue is generally recognized ratably over the term of the agreement. You should not rely upon our recent revenue growth as indicative of future performance. We may not reach profitability in the near future or at any specific time in the future. If and when our operations do become profitable, we may not sustain profitability.
We have a relatively short operating history, which makes it difficult to evaluate our business and future prospects.
We have a relatively short operating history, which makes it difficult to evaluate our business and future prospects. Our wholly-owned subsidiary, MJF, has been in existence since 2010, and much of our revenue growth has occurred during the past three years. We have encountered, and will continue to encounter, risks and difficulties frequently experienced by growing companies in rapidly changing industries, including those related to:
| | ● | market acceptance of our current and future products and services; |
| | | |
| | ● | changing regulatory environments and costs associated with compliance; |
| | ● | |
| ● | our ability to compete with other companies offering similar products and services; |
| | | |
| | ● | our ability to effectively market our products and services and attract new clients; |
| | | |
| | ● | existing client retention rates and the ability to upsell clients; |
| | ● | the amount and timing of operating expenses, particularly sales and marketing expenses, related to the maintenance and expansion of our business, operations, and infrastructure; |
| | | |
| | ● | our ability to control costs, including operating expenses; |
| | | |
| | ● | our ability to manage organic growth and growth fueled by acquisitions; |
| | | |
| | ● | public perception and acceptance of cannabis-related products and services generally; and |
| | | |
| | ● | general economic conditions and events. |
If we do not manage these risks successfully, our business and financial performance will be adversely affected.
Our long-term results of operations are difficult to predict and depend on the commercial success of our clients, the continued growth of the cannabis industry generally, and the regulatory environment within which the cannabis industry operates.
Our offers of products and services globally to help government regulatory agencies and commercial businesses monitor regulatory compliance and operate efficiently and successfully in compliance with applicable state laws. Our long-term results will directly depend on the continued growth of the legalized cannabis industry (and public acceptance of cannabis-related products) and the ability of our current and future clients to successfully market their own products and services. If the legalized cannabis marketplace does not continue to grow because the public does not increasingly accept cannabis-related products or government regulators adopt laws, rules, or regulations that terminate or diminish the ability for commercial businesses to develop, market, and sell cannabis-related products, our business and financial performance would be materially adversely affected. Additionally, even if the cannabis marketplace continues to grow rapidly, and government regulation allows for the free-market development of this industry, products, and services competitive with those offered by us may enjoy better market acceptance.
The legalized cannabis industry may not continue to grow, and the regulatory environment may not remain favorable to participants in the industry. More generally, our products and services may not experience growing market acceptance, which would adversely impact our ability to grow revenue.
Direct and indirect consequences of the COVID-19 pandemic may have material adverse consequences.
The current COVID-19 pandemic is creating extensive disruptions to the global economy. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, we may experience adverse effects on our operations. Specifically, if our clients are forced to reduce business hours or close their businesses for an extended period of time or if their customer base experiences financial hardship, our clients may experience a sharp decline in revenue and be unable to meet their obligations to us under existing agreements or be unwilling to extend their agreements past current terms, which may adversely impact our financial results. Further, we may experience a decrease in new clients due to a lack of financial resources or a decline in new markets as businesses and financial markets deal with the impact of COVID-19. As governments are focused on relief efforts and fiscal stimulus measures, important legislation to expand or clarify certain existing or new markets for our products may be postponed or abandoned, which may adversely impact our results. Further, these conditions may impact our ability to access financial markets to obtain the necessary funding to operate our business as currently contemplated, which may adversely affect our liquidity and working capital. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this registration statement, such as those relating to our operations and financial condition. Due to the highly uncertain and dynamic nature of events relating to the COVID-19 pandemic, it is not currently possible to estimate the impact of the pandemic on our business. However, these effects could have a material impact on our operations, and we will continue to monitor the COVID-19 situation closely. Through December 31, 2021, we have experienced delays in our consulting projects and the corresponding delay in revenue recognition for such projects, which we believe could be the result of government shutdowns and other regulatory uncertainty surrounding COVID-19.
Risks Related to the Cannabis Industry
As a company whose clients operate in the cannabis industry, we face many unique and evolving risks.
We currently serve government and private clients with respect to their tracking, monitoring, and compliance needs as they operate in athe growing cannabis industry. Any risks related to the cannabis industry that may adversely affect our clients and potential clients may, in turn, adversely affect demand for our products. Specific risks faced by companies operating in the cannabis industry include, but are not limited to, the following:
Marijuana remains illegal under United States federal law
Marijuana is a Schedule-I controlled substance under the Controlled Substances Act (“CSA”), and is illegal under federal law. It remains illegal under United States federal law to grow, cultivate, sell or possess marijuana for any purpose or to assist or conspire with those who do so. Additionally, 21 U.S.C. 856 makesa.1. states that it illegalshall be unlawful to “knowingly open, lease, rent, use, or maintain any place, whether permanently or temporarily, for the purpose of manufacturing, distributing, or using any controlled substance.” Even in those states in which the use of marijuana has been authorized, its use remains a violation of federal law. BecauseSince federal law criminalizing the use of marijuana is not preempted by state laws that legalize its use, strict enforcement of federal law regarding marijuana would likely result in our clients’ inability to proceed with their operations, which would adversely affect demands for our products.
Uncertainty of federal enforcement and the need to renew temporary safeguards
On January 4, 2018, former Attorney General Sessions rescinded the previously issued memoranda (known as the Cole Memorandum) from the U.S. Department of Justice (“DOJ”) that had de-prioritized the enforcement of federal law against marijuana users and businesses that comply with state marijuana laws, adding uncertainty to the question of how the federal government will choose to enforce federal laws regarding marijuana. Former Attorney General Sessions issued a memorandum to all United States Attorneys in which the DOJ affirmatively rescinded the previous guidance as to marijuana enforcement, calling such guidance “unnecessary.” This one-page memorandum was vague in nature, stating that federal prosecutors should use established principles in setting their law enforcement priorities. Under previous administrations, the DOJ indicated that those users and suppliers of medical marijuana who complied with state laws, which required compliance with certain criteria, would not be prosecuted. On November 7, 2018, Jeff Sessions resigned from his position as Attorney General. The current Attorney General, Merrick Garland, has not indicated any change in enforcement priority for state-compliant marijuana businesses, however, substantial uncertainty regarding federal enforcement remains. Regardless, the federal government has always reserved the right to enforce federal law regarding the sale and disbursement of medical or recreational marijuana, even if state law sanctioned such sale and disbursement. Although the rescission of the Cole Memorandum does not necessarily indicate that marijuana industry prosecutions are now affirmatively a priority for the DOJ, there can be no assurance that the federal government will not enforce such laws in the future. As a result, it is now unclear if the DOJ will seek to enforce the Controlled Substances ActCSA against those users and suppliers who comply with state marijuana laws.
In 2014, Congress passed a spending bill, (the “2015 Appropriations Bill”), containing a provision (the “Appropriations Rider”), blocking federal funds and resources allocated under the 2015 Appropriations Bill from being used to “prevent such States from implementing their own State medical marijuana law.” The Appropriations Rider provided a budgetary constraint on the federal government from interfering with the ability of states to administer their medical marijuana laws, although it did not codify federal protections for medical marijuana patients and producers. Moreover, despite the Appropriations Rider, the DOJ maintains that it can still prosecute violations of the federal marijuana ban and continue cases already in the courts. However, the Ninth Circuit Court of Appeals and other courts have interpreted the language to mean that the DOL cannot prosecute medical marijuana operators complying strictly with state medical marijuana laws. Additionally, the Appropriations Rider must be re-enacted every year. The Appropriations Rider was renewed on December 20, 2019 through the signing of the fiscal year 2020 omnibus spending bill, effective through September 30, 2020, continued re-authorization of the Appropriations Rider cannot be guaranteed. Subsequently, the Appropriations Rider was extended through a series of stopgap spending bills on October 1, December 11, December 18, December 20 and December 22, 2020. On December 27, 2020 the Appropriations Rider was included in the fiscal year 2021 omnibus spending bill and will remain in effect through September 30, 2022. If the Appropriation Rider is not extended in the future, the risk of federal enforcement and override of state medical marijuana laws would increase.
Despite Attorney General Sessions’the rescission of the Cole Memorandum, the Department of the Treasury, Financial Crimes Enforcement Network, has not rescinded the “FinCEN Memo” dated February 14, 2014, which de-prioritizes enforcement of the Bank Secrecy Act against financial institutions and marijuana-related businesses thatwhich utilize them. This memo appears to be a standalone document and is presumptively still in effect. At any time, however, the Department of the Treasury, Financial Crimes Enforcement Network, could elect to rescind the FinCEN Memo. This would make it more difficult for us and our clients and potential clients to access the U.S. banking systems and conduct financial transactions, which would adversely affect our operations.
We could become subject to racketeering laws
In 2014, Congress passedWhile we do not grow, handle, process or sell cannabis or cannabis-derived products, our receipt of funds from clients that do conduct such operations in violation of federal law exposes us to risks related to federal racketeering laws. The Racketeer Influenced Corrupt Organizations Act (“RICO”) is a spending bill (“2015 Appropriations Bill”) containingfederal statute providing criminal penalties in addition to a provision (“Appropriations Rider”) blocking federal funds and resources allocated undercivil cause of action for acts performed as part of an ongoing criminal organization. Under RICO, it is unlawful for any person who has received income derived from a pattern of racketeering activity (which includes most felonious violations of the 2015 Appropriations BillCSA), to use or invest any of that income in the acquisition of any interest, or the establishment or operation of, any enterprise which is engaged in interstate commerce. RICO also authorizes private parties whose properties or businesses are harmed by such patterns of racketeering activity to initiate a civil action against the individuals involved. Although RICO suits against the cannabis industry are rare, a few cannabis businesses have been subject to a civil RICO action. Any violation of RICO could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from being used to “prevent such States from implementing their own State medical marijuana law.” The Appropriations Rider seemed to have prohibitedcivil proceedings conducted by either the federal government or private citizens or criminal charges, including but not limited to, seizure of assets, disgorgement of profits, cessation of our business activities or divestiture.
Banking regulations could limit access to banking services and expose us to risk
Our receipt of payments from interfering withclients engaged in state-legal cannabis operations could also subject us to the abilityconsequences of states to administer their medical marijuanaa variety of federal laws although it did not codify federal protections for medical marijuana patients and producers. Moreover, despiteregulations that involve money laundering, financial record keeping and proceeds of crime, including the Appropriations Rider, the Justice Department maintains that it can still prosecute violationsBank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act) and any related or similar rules, regulations or guidelines, issued, administered or enforced by the federal marijuana bangovernment. Since we fund from activities that are illegal under the CSA, banks and continue cases alreadyother financial institutions providing services to us risk violation of federal anti-money laundering statutes (18 U.S.C. §§ 1956 and 1957), the unlicensed money-remitter statute (18 U.S.C. § 1960) and the Bank Secrecy Act, among other applicable federal statutes. Banks often refuse to provide banking services to businesses involved in the courts.cannabis industry due to the present state of federal laws and regulations governing financial institutions. The inability to open bank accounts may make it difficult for us or our clients to operate and our client’s reliance on cash can result in a heightened risk of theft, which could harm their businesses and, in turn, harm our business. Additionally, some courts have denied marijuana-related businesses bankruptcy protection, thus, making it very difficult for lenders to recoup their investments, which may limit the Appropriations Rider must be re-enacted every year. While it was continuedwillingness of banks to lend to our clients and to us. The lack of banking and financial services presents unique and significant challenges to businesses in 2016, 2017the cannabis industry and 2018,we may experience similar difficulties in obtaining and remains in effect, continued re-authorizationmaintaining regular banking and financial services because of the Appropriations Rider cannotactivities of our clients.
Dividends and distributions could be guaranteed. If Congress should pass a 2019 budget rather than an extensionprevented if our receipt of payments from clients is deemed to be proceeds of crime
In the 2018 budget, it would needevent that any of our operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations were found to renewbe in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more federal statutes or any other applicable legislation. This could restrict or otherwise jeopardize our ability to declare or pay dividends or effect other distributions. Furthermore, while there are no current intentions to declare or pay dividends in the Appropriations Rider at such time, and there can be no assurance that the Appropriations Rider would be renewed at such time. Additionally,foreseeable future, in the event that a determination was made that our proceeds from operations (or any future operations) could reasonably be shown to constitute proceeds of Congress failing eithercrime, we may decide or be required to pass a 2019 budgetsuspend declaring or paying dividends without advance notice and for an extensionindefinite period of the 2018 budget in the form of a “continuing resolution,” a government shutdown would result, and the Appropriations Rider would no longer be in force. If the Appropriation Rider is no longer in effect, the risk of federal enforcement and override of state marijuana laws would increase.time.
Further legislative development beneficial to our operations is not guaranteed
Among other things, our business involves the provision of an online platform that provides monitoring and tracking of those involved in the cultivation, distribution, manufacture, storage, transportation, and/or sale of medical and adult useadult-use cannabis products in compliance with applicable state law. The success of our business depends on the continued development of the cannabis industry and the activity of commercial business and government regulatory agencies within the industry. The continued development of the cannabis industry is dependent upon continued legislative and regulatory authorization of cannabis at the state level and a continued laissez-faire approach by federal enforcement agencies. Any number of factors could slow or halt progress in this area. Further regulatory progress beneficial to the industry cannot be assured. While there may be ample public support for legislative action, numerous factors impact the legislative and regulatory process, including election results, scientific findings or general public events. Any one of these factors could slow or halt progressive legislation relating to cannabis and the current tolerance for the use of cannabis by consumers, which could adversely affect the demand for our product and operations.
The cannabis industry could face strong opposition from other industries
We believe that established businesses in other industries may have a strong economic interest in opposing the development of the cannabis industry. Cannabis may be seen by companies in other industries as an attractive alternative to their products, including recreational marijuana as an alternative to alcohol, and medical marijuana as an alternative to various commercial pharmaceuticals. Many industries that could view the emerging cannabis industry as an economic threat are well established, with vast economic and federal and state lobbying resources. It is possible that companies within these industries could use their resources to attempt to slow or reverse legislation legalizing cannabis. Any inroads these companies make in halting or impeding legislative initiatives that would be beneficial to the cannabis industry could have a detrimental impact on our clients and, in turn on our operations.
The cannabis industry could face strong opposition from other industries
We believe that established businesses in other industries may have a strong economic interest in opposing the development of the cannabis industry. Cannabis may be seen by companies in other industries as an attractive alternative to their products, including recreational marijuana as an alternative to alcohol, and medical marijuana as an alternative to various commercial pharmaceuticals. Many industries that could view the emerging cannabis industry as an economic threat are well established, with vast economic and federal and state lobbying resources. It is possible that companies within these industries could use their resources to attempt to slow or reverse legislation legalizing cannabis. Any inroads these companies make in halting or impeding legislative initiatives that would be beneficial to the cannabis industry could have a detrimental impact on our clients and, in turn on our operations.
The legality of marijuana could be reversed in one or more states
The voters or legislatures of states in which marijuana has already been legalized could potentially repeal applicable laws that permit the operation of both medical and retail marijuana businesses. These actions might force businesses, including those that are our clients, to cease operations in one or more states entirely.
Changing legislation and evolving interpretations of the law
Laws and regulations affecting the medical and adult-use marijuana industry are constantly changing, which could detrimentally affect our clients and, in turn, our operations. Local, state, and federal marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require our clients and thus us to incur substantial costs associated with modification of operations to help ensure such clients’ compliance. In addition, violations of these laws, or allegations of such violations, could disrupt our clients’ business and result in a material adverse effect on our operations. In addition, it is possible that regulations may be enacted in the future that will limit the amount of cannabis growth or related products that our commercial clients are authorized to produce. We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our operations.
Dependence on client licensing
Our business is dependent on our customersclients obtaining various licenses from various municipalities and state licensing agencies. There can be no assurance that any or all licenses necessary for our clients to operate their businesses will be obtained, retained or renewed. If a licensing body were to determine that a client of ours had violated applicable rules and regulations, there is a risk the license granted to that client could be revoked, which could adversely affect our operations. There can be no assurance that our existing clients will be able to retain their licenses going forward, or that new licenses will be granted to existing and new market entrants.
Banking regulations could limit access to banking services
Because the use of marijuana is illegal under federal law, there is a compelling argument that banks cannot lawfully accept for deposit funds from businesses involved with marijuana. Consequently, businesses involved in the cannabis industry often have trouble finding a bank willing to accept their business. The inability to open bank accounts may make it difficult for our clients to operate and their reliance on cash can result in a heightened risk of theft, which could harm their businesses and, in turn, harm our business. Additionally, some courts have denied marijuana-related businesses bankruptcy protection, thus, making it very difficult for lenders to recoup their investments, which may limit the willingness of banks to lend to our clients and to us.
Insurance risks
In the United States,U.S, many marijuana-related businesses are subject to a lack of adequate insurance coverage. In addition, many insurance companies may deny claims for any loss relating to marijuana or marijuana-related operations based on their illegality under federal law, noting that a contract for an illegal transaction is unenforceable.
Bankruptcy risks
Because cannabis is illegal under U.S. federal law, and bankruptcy is a strictly federal proceeding, many courts have denied cannabis businesses federal bankruptcy protections, thus making it very difficult for lenders to recoup their investments in the cannabis industry in the event of a bankruptcy. If we were to seek protection from creditors pursuant to applicable bankruptcy or insolvency laws, even though we are not directly engaged in manufacturing, distributing, selling or otherwise handling cannabis under state cannabis laws, there is no guarantee that U.S. federal bankruptcy protections would be available to our United States operations, which would have a material adverse effect on us, our lenders and other stakeholders. While state-level receivership options do exist in some states as an alternative to bankruptcy, the efficacy of these alternatives cannot be guaranteed.
The cannabis industry is an evolving industry and we must anticipate and respond to changes.
The cannabis industry is not yet well-developed, and many aspects of this industry’s development and evolution cannot be accurately predicted. While we have attempted to identify manyany risks specific to the cannabis industry, you should carefully consider that there are other risks that cannot be foreseen or are not described in this Prospectus,prospectus, which could materially and adversely affect our business and financial performance. We expect that the cannabis market and our business will evolve in ways that are difficult to predict. For example, it is anticipated that over time, we will reach a point in most markets where we have achieved a market penetration level in which new client acquisitions are less productive, and the continued growth of our revenue will require more focus on increasing the rate at which existing clients purchase products and services across our platforms. Our long-term success will depend on our ability to successfully adjust our strategy to meet the changing market dynamics. If we are unable to successfully adapt to changes in the cannabis industry, our operations could be adversely affected.
Risks related to Our Business
A significant portion of our business is and is expected to be, from government contracts, which present certain unique risks.
Contracts for the Leaf Data Systems with government agencies in Pennsylvania, Washington, and WashingtonUtah represented 16%, 25% and 39% of our revenue for the year ended December 31, 2021, the six months ended December 31, 2020 and fiscal year ended June 30, 2019. In August 2019, we entered into the Utah Contract for MJF’s provision of our Leaf Data System and Trace Seed-to-sale Solution, specifically customized for the State of Utah to include an electronic verification system and inventory control system that includes customer relationship management technology. The initial term of the Utah Contract for performance of such implementation and integration is effective as of August 12, 2019. We expect the inventory control system to be fully rolled out and operational by the end of calendar year 2019 and the electronic verification system to be to be fully rolled out and operational between March and June 2020. Once the initial phases provided in the Utah Contract are complete, the DTS is expected to move into subscription services. Accordingly, we expect our revenue from state government contracts to increase.
2020, respectively. In order to obtain a government contract for the Leaf Data Systems, we are required to follow a competitive bidding process in each state where we seek a contract. Government contracts have very specific compliance requirements that often require contractors to invest material time and money to prepare a bid to ensure that our technology, processes, and staff meet these specific requirements. After expenditures of such time and money, there is no assurance that the bid will result in an award of a contract. Further, even if a contract is awarded, there are strict procedures that government agencies follow when it comes to reimbursement of the costs incurred in the course of fulfilling contracts. Accordingly, it is possible that some or all costs might not be reimbursed under a government contract as contemplated by us.
Government agencies also typically audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, its cost structure, its business systems, and compliance with applicable laws, regulations, and standards. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and administrative sanctions, including reductions of the value of contracts, contract modifications or terminations, forfeiture of profits, suspension of payments, penalties, fines, and suspension, or prohibition from doing business with the government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. Any such imposition of penalties, or the loss of such government contracts, could materially adversely affect our business, financial condition, results of operations, and growth prospects.
There also is typically a longer window of liability under government contracts than private contracts, and the government can seek claims after the contract has ended and payments under the contract have been made. The terms of government contractcontracts may also require the sharing of proprietary information, processes, software, and research andproduct development efforts with the government. Additionally, government employees are required to follow certain protocols to ensure there is no appearance of impropriety in the bidding process. As a result, bidders on government contracts must ensure that there is no appearance of favoritism, gift giving,gift-giving, bribery, or the exertion of other influences in the bidding process. Any finding of the same can result in fines to the bidder and cancellation of contracts. The applicable state government generally has the ability to terminate our contract, in whole or in part, without prior notice, for convenience or for default based on performance. If a government contract were to be terminated for convenience, we generally would be protected by provisions covering reimbursement for costs incurred on the contract and profit on those costs, but not the anticipated profit that would have been earned had the contract been completed. The state government also has the ability to stop work under a contract for a limited period of time for its convenience.
We cannot assure you that we will be successful in navigating the government contract bidding process or that we will be able to maintain our existing government contracts or obtain additional government contracts in the future.
Our operations may be adversely affected by disruptions to our information technology, (“IT”)or IT, systems, including disruptions from cybersecurity breaches of our IT infrastructure.
We rely on information technology networks and systems, including those of third-party service providers, to process, transmit, and store electronic information. In particular, we depend on our information technology infrastructure for a variety of functions, including financial reporting, data management, project development, and email communications. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, terrorist attacks, sabotage, and similar events. Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to our information technology systems to sophisticated and targeted measures known as advanced persistent threats. The ever-increasing use and evolution of technology, including cloud-based computing, createscreate opportunities for the unintentional dissemination or intentional destruction of confidential information stored in our systems or in non-encrypted portable media or storage devices. We could also experience a business interruption, information theft of confidential information, or reputational damage from industrial espionage attacks, malware, or other cyber-attacks, which may compromise our system infrastructure or lead to data leakage, either internally or at our third-party providers. Despite the implementation of network security measures and disaster recovery plans, our systems and those of third parties on which we rely may also be vulnerable to computer viruses, break-ins, and similar disruptions. If we or our vendors are unable (or are perceived as unable) to prevent such outages and breaches, our operations may be disrupted, and our business reputation could be adversely affected.
We expect that risks and exposures related to cybersecurity attacks will remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats.
Privacy regulation is an evolving area and compliance with applicable privacy regulations may increase our operating costs or adversely impact our ability to service our clients and market our products and services.
Because we store, processes, and use data, some of which contains personal information, we are subject to complex and evolving federal, state, and foreign laws and regulations (including Canadian’sCanada’s Cannabis Act and related regulations and the European Union’s general data protection regulation, (“GDPR”))or GDPR) regarding privacy, data protection, and other matters. While we believe we are currently in compliance with applicable laws and regulations, many of these laws and regulations are subject to change and uncertain interpretation, and could result in investigations, claims, changes to our business practices, increased cost of operations, and declines in user growth, retention, or engagement, any of which could seriously harm our business.
We rely on third parties for certain services made available to users of our platforms, which could limit our control over the quality of the user experience and our cost of providing services.
Some of the applications and services available through the Leaf Data System and MJ Platform are provided through relationships with third-party service providers. We do not typically have any direct control over these third-party service providers. These third-party service providers could experience service outages, data loss, privacy breaches, including cyber-attacks, and other events relating to the applications and services they provide that could diminish the utility of these services and which could harm users thereof. The MJ Platform itself does not depend on any third-party software or applications and is based entirely on open source technologies and custom programming. The MJ Platform, however, is hosted by Amazon Web Services, a third partythird-party service provider. There are readily available alternative hosting services available should we desire or need to move to a different web host. Certain ancillary services provided by us also uses the services of third partythird-party providers, for which, we believe, there are readily available alternatives on comparable economic terms. Offering integrated platforms, such as the Leaf Data System and MJ Platform which partially rely, in part, on the services of other providers lessens the control that we have over the total client experience. Should the third-party service providers we rely upon not deliver at standards we expect and desires, acceptance of our platforms could suffer, which would have an adverse effect on our business and financial performance. Further, we cannot be assured of entering into agreements with such third-party service providers on economically favorable terms.
Acquisitions and integration issues may expose us to risks.
Our business strategy includes making targeted acquisitions. Any acquisition that we make may be of a significant size, may change the scale of our business and operations, and may expose us to new geographic, political, operating, financial, and geological risks. Our success in our acquisition activities depends on our ability to identify suitable acquisition candidates, negotiate acceptable terms for any such acquisition, and integrate the acquired operations successfully with our own. Any acquisitions would be accompanied by risks. For example, there may be significant changes in our market value after we have committed to complete the transaction and have established the purchase price or exchange ratio; a potential targeted acquisition’s business and prospects may prove to be below expectations; we may have difficulty integrating and assimilating the operations and personnel of any acquired companies, realizing anticipated synergies and maximizing the financial and strategic position of the combined enterprise and maintaining uniform standards, policies, and controls across the organization; the integration of the acquired business or assets may disrupt our ongoing business and our relationships with employees, customers,clients, suppliers, and contractors; and the acquired business or assets may have unknown liabilities that may be significant. If we choose to use equity securities as consideration for such an acquisition, existing shareholders may suffer dilution. Alternatively, we may choose to finance any such acquisition with our existing resources. There can be no assurance that we would be successful in overcoming these risks or any other problems encountered in connection with such acquisitions. To grow and be successful, we need to attract and retain qualified personnel.
We recently acquired three separate operating companies: Solo, Trellis Solutions Inc., an Ontario corporation (“Trellis”) and Ample. We may not be able to successfully integrate all three of these businesses into our operations, including assimilating the operations and personnel of each of these companies. If we do not successfully integrate these businesses we may not maximize the anticipated benefits of these acquisitions and efforts to complete such integration may have an adverse impact on our results of operations by distracting management and other key personnel, increasing costs of operations or exposing us to additional liabilities.
In any future acquisitions, we may not be able to successfully integrate acquired personnel, operations, and technologies, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from future acquisitions due to a number of factors, including: (a) an inability to integrate or benefit from acquisitions in a profitable manner; (b) unanticipated costs or liabilities associated with the acquisition; (c) the incurrence of acquisition-related costs; (d) the diversion of management’s attention from other business concerns; (e) the loss of our or the acquired business’ key employees; or (f) the issuance of dilutive equity securities, the incurrence of debt, or the use of cash to fund such acquisitions.
To grow and be successful, we need to attract and retain qualified personnel.
Our growth and success will depend to a significant extent on our ability to identify, attract, hire, train, and retain qualified professional, creative, technical, and managerial personnel. Competition for experienceexperienced and qualified talent in ourthe cannabis industry can be intense. We may not be successful in identifying, attracting, hiring, training, and retaining such personnel in the future. If we are unable to hire, assimilate, and retain qualified personnel in the future, such inability could adversely affect our operations.
We are smaller and less diversified than many of our potential competitors.
While we believe we are a leading provider in the software solutions segment of the cannabis industry, there exists manyare general software design and integrated business platform companies seeking to provide online and software basedsoftware-based business solutions and operations integration to customersclients in numerous industries. The continued growth of the cannabis industry will likely attract some of these existing companies and incentivize them to produce solutions that are competitive with those offered by us. Many of these potential competitors are a part of large diversified corporate groups with a variety of other operations and expansive resources. We may not be able to successfully compete with larger enterprises devoting significant resources to compete in our target marketspace,market space, which may negatively affect operations.
Our business and stock price may suffer as a result of our limited public company operating experience and if securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our common stock in an adverse manner, the price and trading volume of our common stock could decline.
If we are unable to execute our business strategy, either as a result of our inability to manage effectively our business in a public company environment or for any other reason, our business, prospects, financial condition, and operating results may be harmed.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. We currently have limited coverage by securities and industry analysts. If no additional securities or industry analysts commence coverage of us, our stock price and trading volume would likely be negatively impacted. If any of the analysts who cover, or who may cover us in the future, change their recommendation regarding our stock in an adverse manner, or provide more favorable relative recommendations about our competitors, the price of our common stock would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
Risks related to Intellectual Property
Protecting and defending against intellectual property claims may have a material adverse effect on our business.
Our ability to compete depends, in part, upon successful protection of our intellectual property relating to our Leaf Data Systems and MJ Platform, and intellectual property acquired in business combinations, such as Solo, Trellis, Ample, Viridian and Ample.365 Cannabis. We seek to protect our proprietary and intellectual property rights through patent applications, available copyright and trademark laws, nondisclosure agreements, and licensing and distribution arrangements with reputable companies in our target markets. While patent protection for inventions related to cannabis and cannabis-related products is available, there are substantial difficulties faced in the patent process by cannabis-related businesses. Further, patent applications may be rejected for numerous other reasons beyond those related to the cannabis industry, including that the subject matter of the application is found to be non-patentable. Our previous patent applications were denied and while we are continuing to pursue such applications and believe they are with merit, there can be no assurance that patents will be issued on these applications. The failure to be awarded patents on our technology could weaken our ability to enforce our intellectual property rights. Any such enforcement, whether we have been granted patent protection or not, would be costly, and there can be no assurance that we will have the resources to undertake all necessary action to protect our intellectual property rights or that we will be successful. Any infringement of our material intellectual property rights could require us to redirect resources to actions necessary to protect the same and could distract management from our underlying business operations. AnThe infringement of our material intellectual property rights and resulting actions could adversely affect our operations.
Our success depends in part upon our ability to protect our core technology and intellectual property.
Our success depends in part upon our ability to protect our core technology and intellectual property. To establish and protect our proprietary rights, we rely on a combination of patent applications, trade secrets, including know-how, license agreements, confidentiality procedures, non-disclosure agreements with third parties, employee disclosure and invention assignment agreements, and other contractual rights.
We generally control access to and use of our proprietary technology and other confidential information through the use of internal and external controls, including contractual protections with employees, contractors, customers,clients, and partners, and our software is protected by the U.S. and international copyright laws.
Despite efforts to protect our trade secrets and proprietary rights through intellectual property rights, licenses, and confidentiality agreements, unauthorized parties may still copy or otherwise obtain and use our software and technology, as was the case when our source code was compromised in June 2017. We have taken significant actions to improve security but will be required to regularly modify our systems to combat new hacking approaches as they develop. In addition, as our international operations expand, effective intellectual property protectionsprotection may not be available or may be limited in foreign countries.
Companies in the Internet, technology, and software industries frequently enter into litigation based on allegations of infringement, misappropriation, or other violations of intellectual property or other rights. From time to time, we may face allegations that we have infringed the trademarks, copyrights, patents, trade secrets and other intellectual property rights of third parties, including competitors and non-practicing entities.
Others may assert intellectual property infringement claims against us.
Companies in the software and technology industries own large numbers of patents, copyrights, trademarks, and trade secrets, and frequently enter into litigation based on allegations of infringement, misappropriation, or other violations of intellectual property or other rights. In addition, various “non-practicing entities” that own patents and other intellectual property rights often attempt to aggressively assert their rights in order to extract value from technology companies. It is possible that others may claim from time to time that our products misappropriate or infringe the intellectual property rights of third parties. Irrespective of the validity or the successful assertion of any such claims, we could incur significant costs and diversion of resources in defending against these claims, which could adversely affect our operations. We may receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurances that favorable final outcomes will be obtained in all cases. We may decide to settle such lawsuits and disputes on terms that are unfavorable to us. As a result, we may also be required to develop alternative non-infringing technology or practices or discontinue the practices. The development of alternative non-infringing technology or practices could require significant effort and expense or may not be feasible.
Our business and stock price may suffer as a result of our limited public company operating experience and if securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our common stock in an adverse manner, the price and trading volume of our common stock could decline.
If we are unable to execute our business strategy, either as a result of our inability to manage effectively our business in a public company environment or for any other reason, our business, prospects, financial condition and operating results may be harmed.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. We currently have limited coverage by securities and industry analysts. If no additional securities or industry analysts commence coverage of us, our stock price and trading volume would likely be negatively impacted. If any of the analysts who cover, or who cover us in the future, change their recommendation regarding our stock in an adverse manner, or provide more favorable relative recommendations about our competitors, the price of our common stock would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
We may not be able to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act of 2002.
The standards required for a public company under Section 404 of the Sarbanes-Oxley Act of 2002 are significantly more stringent than those required of MJF as a privately-held company. Management may not be able to effectively and timely implement controls and procedures that adequately respond to the regulatory compliance and reporting requirements that are applicable to us. If we are not able to implement the additional requirements of Section 404 in a timely manner or with adequate compliance, we may not be able to conclude that our internal controls over financial reporting are effective, which may subject us to adverse regulatory consequences and could harm investor confidence and the market price of our common stock.
Failure to remediate material weaknesses in internal accounting controls could result in material misstatements in our financial statements.
Our management has identified material weaknesses in our internal controls over financial reporting and has concluded that due to such material weaknesses, our disclosure controls and procedures were not effective as of June 30, 2019. If not remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.
The requirements of being a public company may strain our resources and divert management’s attention.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of Nasdaq and other applicable securities rules and regulations. Compliance with these rules and regulations increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. We may need to hire more employees in the future or engage outside consultants to comply with these requirements, which will increase our costs and expenses.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguitiesRisks related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected. Our Charter Documents
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our shares of Common Stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Additionally, as an emerging growth company, we have elected to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As such, our financial statements may not be comparable to companies that comply with public company effective dates. It cannot be predicted if investors will find our Common Stock less attractive because we may rely on these exemptions. If some investors find our Common Stock less attractive as a result, there may be a less active trading market for our Common Stock and our share price may be more volatile.
Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt and limit the price investors might be willing to pay in the future for our Common Stockcommon stock and could entrench management.
Our Amended and Restated Certificate of Incorporation contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
These provisions includeprovisions:
| ● | create a staggered Board of Directors making it more difficult for stockholders to remove a majority of the Board of Directors and take control; |
| ● | grant the Board of Directors the ability to designate the terms of and issue new series of preferred shares, which can be created and issued by the Board of Directors without prior stockholder approval, with rights senior to those of the common stock; |
| ● | impose limitations on our stockholders’ ability to call special stockholders’ meetings; and |
| ● | make it more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities. |
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our Amended and Restated Certificate of Incorporation, our bylaws, and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our Board of Directors and the ability of theor initiate actions that are opposed by our then-current Board of Directors, including to designate the terms of and issue new series of preferred shares, which may make more difficult the removal of management and may discourage transactions that otherwise could involve paymentdelay or impede a merger, tender offer or proxy contest involving us. Any delay or prevention of a premium over prevailingchange in control transaction or changes in our Board of Directors could cause the market prices forprice of our securities. common stock to decline.
We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
Our corporate opportunity provisions in our Amended and Restated Certificate of Incorporation could enable management to benefit from corporate opportunities that might otherwise be available to us.
Our Amended and Restated Certificate of Incorporation provides that the doctrine of corporate opportunity, or any other analogous doctrine, shall not apply with respect to us, or any of our directors or officers in circumstances where the application of such doctrine would conflict with any fiduciary duties or contractual obligations they may otherwise have.
Our management may become aware, from time to time, of certain business opportunities (such as acquisition opportunities) and may direct such opportunities to other businesses in which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity. Further, such businesses may choose to compete with us for these opportunities, possibly causing these opportunities to not be available to us or causing them to be more expensive for us to pursue. These potential conflicts of interest could adversely impact our business or prospects if attractive business opportunities are procured by such parties for their own benefit rather than for ours.
Our amended and restated certificate of incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.
Our amended and restated certificate of incorporation requires, to the fullest extent permitted by law, that derivative actions brought in our name, actions against directors, officers, and employees for breach of fiduciary duty, actions under the Delaware general corporation law or under our amended and restated certificate of incorporation, or actions asserting a claim governed by the internal affairs doctrine may be brought only in the Court of Chancery in the State of Delaware and, if brought outside of Delaware, the stockholder bringing the suit will be deemed to have consented to service of process on such stockholder’s counsel. This choice of forum provision does not preclude or contract the scope of exclusive federal or concurrent jurisdiction for any actions brought under the Securities Act or the Exchange Act of 1934, as amended, (the “Exchange Act”).or the Exchange Act. Accordingly, our exclusive forum provision will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations.
Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation. This choice of forum provision does not exclude stockholders from suing in federal court for claims under the federal securities laws but may limit a stockholder’s ability to bring such claims in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims.
Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.
Our operations could be adversely affected by events outside of our control, such as natural disasters, wars or health epidemics.
We may be impacted by business interruptions resulting from geopolitical actions, including war and terrorism or natural disasters including earthquakes, typhoons, floods and fires. An outbreak of any of the foregoing or a fear of any of the foregoing, could adversely impact us by disrupting the operations of our customers, which could result in delayed payments, non-renewal of contracts and other adverse effects on the market for our products or by causing project development and implementation delays and disruptions (including as a result of government regulation and prevention measures). We may incur expenses or delays relating to such events outside of our control, which could have a material adverse impact on our business, operating results and financial condition.
Direct and indirect consequences of the COVID-19 pandemic may have material adverse consequences.
The current COVID-19 pandemic is creating extensive disruptions to the global economy. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, we may experience adverse effects to our operations. Specifically, if our customers are forced to reduce business hours or close their businesses for an extended period of time or if their customer base experiences financial hardship, our customers may experience a sharp decline in revenue and be unable to meet their obligations to us under existing agreements or be unwilling to extend their agreements past current terms, which may adversely impact our financial results. Further we may experience a decrease in new customers due to a lack of financial resources or a decline in new markets as businesses and financial markets deal with the impact of COVID-19. As governments are focused on relief efforts and fiscal stimulus measures, important legislation to expand or clarify certain existing or new markets for our products may be postponed or abandoned, which may adversely impact our results. Further, these conditions may impact our ability to access financial markets to obtain necessary funding to operate our business as currently contemplated, which may adversely affect our liquidity and working capital. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described under the caption “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended June 30, 2019, such as those relating to our operations and financial condition. Due to the highly uncertain and dynamic nature of events relating to the COVID-19 pandemic, it is not currently possible to estimate the impact of the pandemic on our business. However, these effects could have a material impact on our operations, and we will continue to monitor the COVID-19 situation closely.
Risks Relating to our Convertible Debt
The issuance of shares of our common stock pursuant to our convertible notesSenior Convertible Notes may result in significant dilution to our stockholders.
The conversion of our outstanding convertible notes weSenior Convertible Notes, issued on June 9, 2020October 5, 2021, could result in the issuance of a significant number of shares of our common stock. Currently the $17The original $20 million in principal amount of convertible notesSenior Convertible Notes is convertible at a price of $11.50$4.05 per share, which would result in the issuance of 1,478,2604,938,272 shares of our common stock upon the conversion of the convertible notesSenior Convertible Notes in full. Beginning on April 1, 2021, atAt the option of Akerna, assuming all equity conditions under the Senior Convertible Notes are met, the installment payments on the convertible notesSenior Convertible Notes can be converted into shares of common stock of Akerna at a price per share equal to the lower of (i) the conversion price then in effect, or (ii) the greater of (x) the floor price of $1.92$0.54 and (y) 90% of the lower of (A) the volume weightedvolume-weighted average price of the common stock as of the trading day immediately preceding the applicable date of determination and (B) the quotient of (I) the sum of the volume weightedvolume-weighted average price of the common stock for each of the two (2) trading days with the lowest volume weightedvolume-weighted average price of the common stock during the ten (10) consecutive trading day period ending on and including the trading day immediately prior to the applicable date of determination, divided by (II) two (2).two. If the equity conditions are not satisfied and the holder does not waive the equity conditions, the Senior Convertible Note’s installment payments must be made in cash.
Due to the variable nature of the adjustments of installment conversion prices and the formula that sets certain conversion prices of these securities based on a discount to the then currentthen-current market price, we could issue up to 8,854,16727,153,199 shares of common stock as of June 24, 2022, upon conversion of the convertible notesSenior Convertible Notes at the floor price, which may result in a significant dilution to our stockholders and could negatively impact the trading price of our common stock. This financing will reset the conversion price of the Senior Convertible Notes, see the risk factors under “Risks Related to this Offering” below.
Our obligations to the holders of our convertible notesSenior Convertible Notes are secured by a security interest in substantially all of our assets, if we default on those obligations, the convertible noteSenior Convertible Note holders could foreclose on our assets.
Our obligations under the convertible notes weSenior Convertible Notes, issued on June 9, 2020October 5, 2021, and the related transaction documents relating to those convertible notes are secured by a security interest in substantially all of our assets. As a result, if we default underon our obligations under such convertible notes,Senior Convertible Notes, the collateral agent on behalf of the holders of the convertible notesSenior Convertible Notes could foreclose on the security interests and liquidate some or all of our assets, which would harm our business, financial condition and results of operations and could require us to reduce or cease operations and youinvestors may lose all or part of your investment.
Events of default under the convertible notesSenior Convertible Notes include: (i) the failure of the registration statement to which this prospectus relates (under the registration rights agreement between the Company and the holders) to be filed with the SEC or the failure of the applicable registration statement to be declared effective by the SEC by deadlines set forth in the registration rights agreement; (ii) (x) the effectiveness of the applicable registration statement lapses for any reason or such registration statement is unavailable to any holder of registrable securities and Rule 144 (subject to certain conditions) is not unavailable to any holder of the conversion shares; (iii) suspension of trading of the Company’s common stock on a national securities exchange for five days; (ii)(iv) uncured conversion failure; (iii)(v) failure by usthe Company to maintain required share allocations for the conversion of the convertible notes; (iv)Senior Convertible Notes; (vi) failure by usthe Company to pay principal when due; (v)(vii) failure of the Company to remove restricted legends from shares issued to the holdersa holder upon conversion of the convertible notes; (vi)Senior Convertible Notes; (viii) the occurrence of any default under, redemption of or acceleration prior to maturity of at least an aggregate of $50,000 of indebtedness of Akerna; (vii)the Company; (ix) bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for the relief of debtors shall be instituted by or against Akernathe Company or any subsidiary and not dismissed within 45 days of initiation; (viii)(x) the commencement by Akernathe Company or any subsidiary of a voluntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law; (ix)(xi) the entry by a court of a decree, order, judgment or other similar document in respect of Akernathe Company or any subsidiary of a voluntary or involuntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law; (x)(xii) final judgment for the payment of money aggregating in excess of $50,000 are rendered against Akernathe Company or any subsidiary of the Company and not bonded or discharged within 30 days; (xi)(xiii) failure of Akernathe Company or any subsidiary to pay when due any debts in excess of $50,000 due to any third party; (xii)(xiv) breaches by Akernathe Company or any subsidiary of any representations or warranties in the securities purchase agreement pursuant to whichfor the convertible notes were purchasedSenior Convertible Notes or any document contemplated thereby; (xiii)(xv) a false or inaccurate certification by Akernathe Company that either (A) the “Equity Conditions” (as defined in the convertible notes)Senior Convertible Notes) are satisfied, (B) there has been no “Equity Conditions Failure,” (as defined in the Senior Convertible Notes) or (C) as to whether any eventEvent of defaultDefault has occurred; (xiv)(xvi) failure of Akernathe Company or any subsidiary to comply with certain of the covenants in the convertible notes; (xv)Senior Convertible Notes; (xvii) the occurrence of (A) at any time after the six month anniversary of the issuance date, of the convertible notes, any current public information failure that remains outstanding for a period of twenty (20) trading days or (B) any restatement of any financial statements of Akernathe Company filed with the SEC; (xvi)(xviii) any material adverse effect occurring; (xvii)(xix) any provision of any transaction document shall at any time for any reason cease to be valid and binding or enforceable; (xviii)(xx) any security document shall for any reason (other than pursuant to the express terms thereof or due to any failure or omission of the collateral agent) fail or cease to create a separate valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority lien; (xix)(xxi) any material damage to, or loss, theft or destruction of, any collateral, that is material to the business of Akernathe Company or any subsidiary and is not reimbursed by insurance; or (xx)(xxii) any eventEvent of defaultDefault occurs under any other convertible note.Senior Convertible Notes.
The holders of the convertible notesSenior Convertible Notes have certain additional rights upon an event of default under such convertible notes,Senior Convertible Notes, which could harm our business, financial condition, and results of operations and could require us to reduce or cease orour operations.
Under the convertible notes,Senior Convertible Notes, the holders have certain rights upon an event of default. Such rights include (i) the remaining principal amount of the convertible notesSenior Convertible Notes bearing interest at a rate of 15% per annum, (ii) during the event of default the holders of the convertible notesSenior Convertible Notes will be entitled to convert all or any portion of the convertible notesSenior Convertible Notes at an alternate conversion price equal to the lower of (i) the conversion price then in effect, and (ii) 80% of the lower of (x) the volume weighted average price of the common stock as of the trading day immediately preceding the applicable date of determination and (y) the quotient of (A) the sum of the volume weighted average price of the common stock for each of the two (2) trading days with the lowest volume weighted average price of the common stock during the ten (10) consecutive trading day period ending and including the trading day immediately prior to the applicable date of determination, divided by (B) two, (2), but not less than the floor price, and (iii) the holder having the right to demand redemption of all or a portion of the convertible notes,Senior Convertible Notes, as described below. At any time after certain notice requirements for an event of default are triggered, a holder of convertible notesSenior Convertible Notes may require us to redeem all or any portion of the convertible note by delivering written notice. The redemption price will equal the greater of (i) 115% of the outstanding principal of the convertible note to be redeemed and accrued and unpaid interest and unpaid late charges thereon, and (ii) an amount equal to the market value of the shares of the common stock underlying the convertible notes,Senior Convertible Notes, as determined in accordance with the convertible notes.Senior Convertible Notes. Upon the occurrence of certain events of default relating to the bankruptcy of Akerna, whether occurring prior to or following the maturity date, Akerna will be required to immediately redeem the convertible notes,Senior Convertible Notes, in cash, for an amount equal to 115% of the outstanding principal of the convertible notes,Senior Convertible Notes, and accrued and unpaid interest and unpaid late charges thereon, without the requirement for any notice or demand or other action by any holder or any other person or entity. We may not have sufficient funds to settle the redemption price and, as described above, this could trigger rights under the security interest granted to the holders and result in the foreclosure of their security interests and liquidation of some or all of our assets.
The exercise of any of these rights upon an event of default could substantially harm our financial condition, substantially dilute our other shareholders and force us to reduce or cease operations and youinvestors may lose all or part of yourtheir investment.
Risks Relating to ourOur Common Stock and this Offering
We may seek to raise additional funds, finance acquisitions, or develop strategic relationships by issuing securities that would dilute yourinvestors’ ownership. Depending on the terms available to us, if these activities result in significant dilution, it may negatively impact the trading price of our shares of common stock.
Any additional financing that we secure, may require the granting of rights, preferences, or privileges senior to, or pari passu with, those of our common stock. Any issuances by us of equity securities may be at or below the prevailing market price of our common stock and in any event, may have a dilutive impact on yourstockholders’ ownership interest, which could cause the market price of our common stock to decline. We may also raise additional funds through the incurrence of debt, subject to the limitations imposed by our current outstanding convertible notes,Senior Convertible Notes, or the issuance or sale of other securities or instruments senior to our shares of common stock. We cannot be certain how the repayment of our convertible notesSenior Convertible Notes will be funded and we may issue further equity or debt in order to raise funds to repay the convertiblepromissory notes, including funding that may be highly dilutive. The holders of any securities or instruments we may issue may have rights superior to the rights of our common stockholders. If we experience dilution from the issuance of additional securities and we grant superior rights to new securities over holders of our common stock, it may negatively impact the trading price of our shares of common stock and youstockholders may lose all or part of yourtheir investment.
Warrants are exercisable for our common stock, which could increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.
Currently, before this offering, there are warrants to purchase 5,813,804 shares of our common stock, and each one of those warrants is exercisable for one share of common stock at $11.50 per share. To the extent such warrants are exercised, additional shares of common stock will be issued, which will result in dilution to the then-existing holders of common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our common stock.
Certain of our warrants are accounted for as a warrant liability and are recorded at fair value upon issuance with any changes in fair value each period reported in our statement of operations, which may have an adverse effect on the market price of our securities.
We had 225,635 warrants that were issued in private placements that occurred concurrently with the initial public offering of MTech, our successor (the “private warrants”). These private warrants and the shares of Company common stock issuable upon the exercise of the private warrants are exercisable for cash or on a cashless basis, at the holder’s option, and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the private warrants are held by someone other than the initial purchasers or their permitted transferees, the private warrants will be redeemable by the Company and exercisable by such holders on the same basis as the warrants included in the units sold in the initial public offering, in which case the 225,635 private warrants could be redeemed by the Company for $2,256.35. Under generally accepted accounting principles in the United States (“GAAP”), the Company is required to evaluate contingent exercise provisions of these warrants and then their settlement provisions to determine whether they should be accounted for as a warrant liability or as equity. As a result of the provision that the private warrants, when held by someone other than the initial purchasers or their permitted transferees, will be redeemable by the Company, the requirements for accounting for these warrants as equity are not satisfied. Therefore, the Company is required to account for these private warrants as a warrant liability and record (a) that liability at fair value and (b) any subsequent changes in fair value as of the end of each period for which earnings are reported. The impact of changes in fair value on earnings may have an adverse effect on the market price of our common stock.
We may face additional risks, including regulatory, litigation, stockholder or other actions and negative impacts on our stock price, as a result of the material weakness in our internal control over financial reporting and revisions to our financial statements.
As a result of our material weaknesses in internal control over financial reporting, the change in accounting for certain warrants, and the related revisions to our prior financial statements or that may in the future be raised by the SEC, we face potential additional risks, including regulatory, litigation, stockholder or other actions and negative impacts on our stock price, which may include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the material weakness in our internal control over financial reporting and the preparation of our financial statements. As of the date of this report, we have no knowledge of any such litigation or dispute. However, we can provide no assurance that such litigation or dispute will not arise in the future. Any such litigation or dispute, whether successful or not, could have a material adverse effect on our business, results of operations and financial condition.
The market price of our shares of common stock is particularly volatile given our status as a relatively new public company with a generally small and thinly traded public float, which could lead to wide fluctuations in our share price. You may be unable to sell your shares of common stock at or above your purchase price, which may result in substantial losses to you.
The market for our shares of common stock is characterized by significant price volatility when compared to the shares of larger, more established companies that trade on a national securities exchange and have large public floats, and we expect that our share price will continue to be more volatile than the shares of such larger, more established companies for the indefinite future. The volatility in our share price is attributable to a number of factors, including the fact that our shares are thinly traded relative to larger, more established companies. The price for our shares of common stock could, for example, decline precipitously in the event that a large number of our shares of common stock are sold on the market without commensurate demand. Currently,As of March 31, 2022, there arewere public warrants of Akerna to purchase 5,813,804 shares of our common stock at $11.50 per share and $17$16.7 million in principal amount of convertible notes convertibleSenior Convertible Notes at a price of $11.50$4.05 per share.share (subject to being reset to the price at which shares of common stock are offered in this offering), which if exercised or converted and sold into the open market could cause our stock price to decline. In addition, because we may be considered a speculative or “risky” investment due to our lack of profits to date, certain investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares of common stock on the market more quickly and at greater discounts, thus resulting in a rapid downward decline in the price of our common stock. Many of these factors are beyond our control and may decrease the market price of our shares of common stock, regardless of our operating performance.
The market price of our common stock is still likely to be highly volatile and subject to wide fluctuations, and you may be unable to resell your shares of common stock at or above the price at which you acquired them.
The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including, but not limited to:
| ● | Variations in our revenues and operating expenses; |
| ● | Actual or anticipated changes in the estimates of our operating results or changes in stock market analyst recommendations regarding our common stock, other comparable companies, or our industry generally; |
| ● | Market conditions in our industry, the industries of our customersclients, and the economy as a whole; |
| ● | Actual or expected changes in our growth rates or our competitors’ growth rates; |
| ● | Developments in the financial markets and worldwide or regional economies; |
| ● | Announcements of innovations or new products or services by us or our competitors; |
| ● | Announcements by the government relating to regulations that govern our industry; |
| ● | Sales of our common stock or other securities by us or in the open market; and |
| ● | Changes in the market valuations of other comparable companies. |
The trading price of our shares of common stock might also decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, operating results, and financial condition.
We have not paid dividends in the past and do not expect to pay dividends for the foreseeable future, and any return on investment may be limited to potential future appreciation in the value of our common stock.
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends on our shares of common stock in the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including without limitation, our financial condition, operating results, cash needs, growth plans, and the terms of any credit agreements that we may be a party to at the time. To the extent we do not pay dividends, our shares of common stock may be less valuable because a return on investment will only occur if and to the extent our stock price appreciates, which may never occur. In addition, investors must rely on sales of their common stock after price appreciation as the only way to realize their investment, and if the price of our common stock does not appreciate, then there will be no return on investment. Investors seeking cash dividends should not purchase our common stock.
Risks Relating to This Offering
Funds raised in this offering may not be sufficient to eliminate the substantial doubt about our ability to continue as a going concern.
Our ability to continue as a going concern is uncertain and dependent upon obtaining the financing necessary to meet our financial commitments and to continue our ongoing operations as currently planned. Even with the funds raised in this offering, if we do not meet our management’s current projections and assumptions regarding revenues, costs and cash flows we may not have sufficient funds to meet planned expenditures over the next twelve months, we may require additional financing in the near future to meet our ongoing operational working capital requirements and continue to meet the financial covenants of our convertible notes and may need to seek additional debt or equity financing to meet our planned expenditures. If we are unable to raise sufficient capital we may have to reduce operations which could significantly affect our results of operations. If we fail to meet the financial covenants of our debt 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. See “Risks Relating to Our Financial Condition and Operating History” above.
Due to this offering, the conversion price pursuant to our Senior Convertible Notes will need to be adjusted, which will result in the potential issuance of higher number of shares of our common stock pursuant to the conversion than previously anticipated, thereby resulting in significant dilution to our stockholders.
The conversion of our outstanding Senior Convertible Notes, issued on October 5, 2021 (the “Senior Convertible Notes”), could result in the issuance of a significant number of shares of our common stock. The currently outstanding $15.5 million principal amount of Senior Convertible Notes is convertible at a price of $4.05 per share, which would result in the issuance of 3,824,691 shares of our common stock upon the conversion of the Senior Convertible Notes in full. At the option of Akerna, the installment payments on the Senior Convertible Notes can be converted into shares of common stock of Akerna at a price per share equal to the lower of (i) the conversion price then in effect, or (ii) the greater of (x) the floor price of $0.54 and (y) 90% of the lower of (A) the volume-weighted average price of the common stock as of the trading day immediately preceding the applicable date of determination and (B) the quotient of (I) the sum of the volume-weighted average price of the common stock for each of the two (2) trading days with the lowest volume-weighted average price of the common stock during the ten consecutive trading day period ending on and including the trading day immediately prior to the applicable date of determination, divided by (II) two.
Pursuant to the terms of the Convertible Notes, if on or after the issue date of the Convertible Notes the Company issues or sells shares of common stock or certain other securities exercisable or convertible into shares of common stock for a deemed issue price less than the then current conversion price of the Convertible Notes, then the conversion price of the Convertible Notes will be adjusted to the deemed issue price per share of the shares of common stock or other securities issued. Therefore, if we issue the Units under this offering at a deemed issue price of $0.3503 per share (the assumed offering price of $0.3603 per unit less $0.01 per warrant), the conversion price of the Convertible Notes will be reset to $0.3503 per share and the approximately $14.66 million principal amount of Senior Convertible Notes would be convertible into 41,849,843 shares of our common stock potentially resulting in significant dilution to our stockholders and the purchasers of securities in this offering. However, on June 28, 2022, the holders of the notes have agreed, subject to release of signatures from escrow conditioned solely upon pricing of the offering under this prospectus, to an amendment and waiver agreement pursuant to which the holder of the convertible notes would waive the application of this term of the Convertible Notes to the issuance of securities under this financing and instead will agreed to reset the conversion price to a per share price equal to 135% of the per unit price in this offering, which would be $0.47 per share based on the assumed offering price of $0.3603 and based on the approximately $14.66 million principal amount of Senior Convertible Notes would be convertible into 31,191,490 shares of our common stock. Final agreement to the waiver of the repricing term is subject to the pricing of this offering.
If our common stock is delisted from Nasdaq, the liquidity and price of our common stock could decrease and our ability to obtain financing could be impaired.
On May 24, 2022, we received a notification letter from The Nasdaq Stock Market stating that we are not in compliance with the Minimum Bid Price Requirement, which requires our listed securities to maintain a minimum bid price of $1.00 per share. The notification stated that we have a compliance period of 180 calendar days, or until November 21, 2022, to regain compliance with the Minimum Bid Price Requirement. If at any time during this 180-day compliance period the closing bid price of our common stock is at least $1.00 per share for a minimum of ten consecutive business days, then the Nasdaq Stock Market will provide us with written confirmation of compliance and the matter will be closed.
If compliance cannot be demonstrated by November 21, 2022, we may be eligible for additional time. To qualify, we will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards on the Nasdaq Capital Market (except the bid price requirement). In addition, we would be required to provide written notice of our intention to cure the minimum bid price deficiency during this second 180-day compliance period by effecting a reverse stock split, if necessary. If we are not granted an additional 180-day compliance period, then Nasdaq will provide written notification that our securities will be subject to delisting. At that time, we may appeal the determination to delist our securities to a Nasdaq hearings panel. There can be no assurance that we will regain compliance with the Minimum Bid Price Requirement or otherwise maintain compliance with the other listing requirements.
Management will have broad discretion as to the use of the net proceeds from this offering, and we may not use the proceeds effectively.
Our management will have broad discretion as to the application of the net proceeds and could use them for purposes other than those contemplated at the time of this offering. Our stockholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds. Moreover, our management may use the net proceeds for corporate purposes that may not increase our results of operations or the market value of our common stock. Our failure to apply these funds effectively could have a material adverse effect on our business, delay the development and approval of our products and cause the price of our common stock to decline.
If you purchase shares of our common stock in this offering, you will experience immediate dilution as a result of this offering.
Because the price per share being offered may be higher than net tangible book value per share of our common stock, you will experience dilution to the extent of the difference between the offering price per share of common stock you pay in this offering and the net tangible book value per share of our common stock immediately after this offering. Our net tangible book value as of March 31, 2022 was approximately $(17.9 million), or $(0.52) per share of common stock. Net tangible book value per share is equal to our total tangible assets minus total liabilities, all divided by the number of shares of common stock outstanding. See “Dilution” on page 30 of this prospectus for a more detailed illustration of the dilution you may incur if you participate in this offering. Because the sales of the shares offered hereby will be made directly into the market or in negotiated transactions, the prices at which we sell these shares will vary and these variations may be significant. Purchasers of the shares we sell, as well as our existing stockholders, will experience significant dilution if we sell shares at prices significantly below the price at which they invested.
If you purchase shares of our common stock in this offering, you may experience future dilution as a result of future equity offerings or other equity issuances.
In order to raise additional capital, we may in the future offer and issue additional shares of our common stock or other securities convertible into or exchangeable for our common stock. We cannot assure you that we will be able to sell shares or other securities in any offering at a price per share that is equal to or greater than the price per share paid by investors in previous offerings, and investors purchasing shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional shares of our common stock or other securities convertible into or exchangeable for our common stock in future transactions may be higher or lower than the price per share in previous offerings. Further, we may choose to raise additional capital due to market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. In addition, the exercise of outstanding stock options and warrants or the settlement of outstanding restricted stock units would result in further dilution of your investment.
This offering may cause the trading price of our common stock to decrease.
The price per share, together with the number of shares of common stock we propose to issue and ultimately will issue if this offering is completed, may result in an immediate decrease in the market price of our common stock. This decrease may continue after the completion of this offering.
A significant portion of our total outstanding shares are eligible to be sold into the market, which could cause the market price of our common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market, either by us or by our current stockholders, or the perception that these sales could occur, could cause a decline in the market price of our securities. Such sales, along with any other market transactions, could adversely affect the market price of our common stock.
Upon completion of this offering, based on our shares outstanding as of June 24, 2022, we will have 64,551,171 shares of common stock outstanding based on the issuance and sale of 27,754,649 units in this offering, assuming no sale of any pre-funded units. Of these shares, 2,400,118 are subject to a contractual lock-up with the underwriter for this offering for a period of 90 days following this offering. These shares can be sold, subject to any applicable volume limitations under federal securities laws, after the earlier of the expiration of, or release from, the 90-day lock-up period. The balance of our outstanding shares of common stock, including any shares of common stock included in units or issuable upon the exercise of the warrants and pre-funded warrants purchased in this offering other than shares acquired by our current stockholders who are also subject to the contractual lock-up, may be resold into the public market immediately without restriction, unless owned or purchased by our affiliates.
As of March 31, 2022, there were an aggregate of 5,813,804 shares subject to outstanding warrants, many of which shares we have registered under the Securities Act of 1933, as amended (the “Securities Act”). These shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates to the extent applicable.
As of March 31, 2022, there were 1,071,205 shares subject to outstanding options and restricted stock units that are issuable under our equity incentive plan, all of which shares we have registered under the Securities Act on a registration statement on Form S-8. These shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates, to the extent applicable.
We do not intend to pay dividends in the foreseeable future.
We have never paid cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the operation and growth of our business and currently do not plan to pay any cash dividends in the foreseeable future.
There is no public market for the units, pre-funded units, or warrants being offered in this offering.
There is no established public trading market for the units, pre-funded units, or warrants being offered in this offering, and we do not expect a market to develop. In addition, we do not intend to apply to list the units, pre-funded units, or warrants on any securities exchange or nationally recognized trading system. Without an active market, the liquidity of the units, pre-funded units, or warrants will be limited.
Holders of our warrants and pre-funded warrants will have no rights as a common stockholder until they acquire our common stock.
Until you acquire shares of our common stock upon exercise of your warrants or pre-funded warrants, you will have no rights with respect to shares of our common stock issuable upon exercise of your warrants or pre-funded warrants. Upon exercise of your warrants or pre-funded warrants, you will be entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs after the exercise date.
If we do not maintain a current and effective prospectus relating to the common stock issuable upon exercise of the warrants or pre-funded warrants, public holders will only be able to exercise such warrants or pre-funded warrants on a “cashless basis.”
If we do not maintain a current and effective prospectus relating to the shares of common stock issuable upon exercise of the warrants or the pre-funded warrants at the time that holders wish to exercise such warrants or pre-funded warrants, they will only be able to exercise them on a “cashless basis,” and under no circumstances would we be required to make any cash payments or net cash settle such warrants to the holders. As a result, the number of shares of common stock that holders will receive upon exercise of the warrants or pre-funded warrants will be fewer than it would have been had such holders exercised their warrants or pre-funded warrants for cash. Under the terms of the warrants and pre-funded warrants, we have agreed to use our best efforts to maintain a current and effective prospectus relating to the shares of common stock issuable upon exercise of such warrants and pre-funded warrants until the expiration of such warrants and pre-funded warrants. However, we cannot assure you that we will be able to do so. If we are unable to do so, the potential “upside” of the holder’s investment in our company may be reduced.
The pre-funded warrants are speculative in nature.
The pre-funded warrants offered hereby do not confer any rights of common stock ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of common stock at a fixed price. Specifically, commencing on the date of issuance, holders of the pre-funded warrants may acquire the common stock issuable upon exercise of such warrants at an exercise price of $0.0001 per share of common stock. Moreover, following this offering, the market value of the pre-funded warrants is uncertain and there can be no assurance that the market value of the pre-funded warrants will equal or exceed their public offering price. There can be no assurance that the market price of the common stock will ever equal or exceed the exercise price of the pre-funded warrants, and consequently, whether it will ever be profitable for holders of the pre-funded warrants to exercise the pre-funded warrants.
The warrants may not have any value.
Each warrant has an exercise price per share of $______ (100% of the unit offering price), are immediately exercisable after their issuance and will expire 5 years from the initial issuance date. In the event our common stock price does not exceed the exercise price of the warrants during the period when the warrants are exercisable, the warrants may not have any value.
Provisions of the warrants and pre-funded warrants offered by this prospectus could discourage an acquisition of us by a third party.
Certain provisions of the warrants and pre-funded warrants offered by this prospectus could make it more difficult or expensive for a third party to acquire us. The warrants and pre-funded warrants prohibit us from engaging in certain transactions constituting “fundamental transactions” unless, among other things, the surviving entity assumes our obligations under the warrants and pre-funded warrants. Further, the warrants and pre-funded warrants provide that, in the event of certain transactions constituting “fundamental transactions,” with some exception, holders of such warrants and pre-funded warrants will have the right, at their option, to require us to repurchase such warrants and pre-funded warrants at a price described therein. These and other provisions of the warrants and pre-funded warrants offered by this prospectus could prevent or deter a third party from acquiring us even where the acquisition could be beneficial to you.
Proposed legislation in the U.S. Congress, including changes in U.S. tax law, may adversely impact the Company and the value of the units, pre-funded units, shares of common stock, pre-funded warrants, and warrants.
Changes to U.S. tax laws (which changes may have retroactive application) could adversely affect the Company or holders of the units, pre-funded units, shares of common stock, pre-funded warrants or warrants. In recent years, many changes to U.S. federal income tax laws have been proposed and made, and additional changes to U.S. federal income tax laws are likely to continue to occur in the future.
The U.S. Congress is currently considering numerous items of legislation which may be enacted prospectively or with retroactive effect, which legislation could adversely impact the Company’s financial performance and the value of the units, pre-funded units, shares of common stock, pre-funded warrants and warrants. In particular, new proposed legislation known as the “Build Back Better Act” is under consideration within both houses of U.S. Congress. The proposed legislation includes, without limitation, new corporate minimum income taxes. If enacted, most of the proposals would be effective for 2022 or later years. The proposed legislation remains subject to change, and its impact on the Company and investors who purchase the units, pre-funded units, shares of common stock, pre-funded warrants or warrants is uncertain.
General Risk Factors
We may not be able to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act of 2002.
The standards required for a public company under Section 404 of the Sarbanes-Oxley Act of 2002 are significantly more stringent than those required of MJF as a privately held company. Management may not be able to effectively and timely implement controls and procedures that adequately respond to the regulatory compliance and reporting requirements that are applicable to us. If we are not able to implement the additional requirements of Section 404 in a timely manner or with adequate compliance, we may not be able to conclude that our internal controls over financial reporting are effective, which may subject us to adverse regulatory consequences and could harm investor confidence and the market price of our common stock.
Failure to remediate material weaknesses in internal controls over financial reporting could result in material misstatements in our financial statements.
Our management has identified material weaknesses in our internal controls over financial reporting and has concluded that due to such material weaknesses, our internal controls over financial reporting (including disclosure controls and procedures) were not effective as of December 31, 2021. If not remediated, our failure to establish and maintain effective disclosure controls and procedures over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.
The requirements of being a public company may strain our resources and divert management’s attention.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of NASDAQ, and other applicable securities rules and regulations. Compliance with these rules and regulations increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. We may need to hire more employees in the future or engage outside consultants to comply with these requirements, which will increase our costs and expenses.
In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our shares of common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Additionally, as an emerging growth company, we have elected to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As such, our financial statements may not be comparable to companies that comply with public company effective dates. It cannot be predicted if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our share price may be more volatile.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
Under Section 382 and related provisions of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We may, in the future, as a result of subsequent shifts in our stock ownership, experience, an “ownership change.” Thus, our ability to utilize carryforwards of our net operating losses and other tax attributes to reduce future tax liabilities may be substantially restricted. At this time, we have not completed a study to assess whether an ownership change under Section 382 of the Internal Revenue Code has occurred at any time in the past or may occur in the foreseeable future, due to the costs and complexities associated with completing such a study. Therefore, we may not be able to take full advantage of these carryforwards for federal or state tax purposes.
Our operations could be adversely affected by events outside of our control, such as natural disasters, wars, or health epidemics.
We may be impacted by business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods, and fires. An outbreak of any of the foregoing or fear of any of the foregoing could adversely impact us by disrupting the operations of our clients, which could result in delayed payments, non-renewal of contracts, and other adverse effects on the market for our products or by causing product development and implementation delays and disruptions (including as a result of government regulation and prevention measures). We may incur expenses or delays relating to such events outside of our control, which could have a material adverse impact on our business, operating results, and financial condition.
FORWARD-LOOKING STATEMENTS
This Prospectusprospectus and the exhibits attached 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, are forward-looking statements.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 Prospectusprospectus 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 continue as a going-concern; |
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| ● | 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; |
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| | ● | our ability to attract new clients on a cost-effective basis and the extent to which existing clients renew and upgrade their subscriptions; |
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| ● | the timing of our introduction of new solutions or updates to existing solutions; |
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| ● | our ability to successfully diversify our solutions by developing or introducing new solutions or acquiring and integrating additional businesses, products, services, or content; |
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| ● | our ability to respond to changes within the cannabis industry; |
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| ● | 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; |
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| ● | our ability to manage unique risks and uncertainties related to government contracts; |
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| ● | our ability to manage and protect our information technology systems; |
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| ● | our ability to maintain and expand our strategic relationships with third parties; |
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| ● | our ability to deliver our solutions to clients without disruption or delay; |
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| ● | our exposure to liability from errors, delays, fraud, or system failures, which may not be covered by insurance; |
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| ● | our ability to expand our international reach; |
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| ● | our ability to retain or recruit officers, key employees, and directors; |
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| ● | our ability to raise additional capital or obtain financing in the future; |
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| ● | our ability to successfully integrate acquired businesses with Akerna’s business within anticipated timelines and at their expected costs; |
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| ● | 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 ability to attract new customers on a cost-effective basis and the extent to which existing customers renew and upgrade their subscriptions; |
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| | ● | the timing of our introduction of new solutions or updates to existing solutions; |
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| ● | our ability to successfully diversify our solutions by developing or introducing new solutions or acquiring and integrating additional businesses, products, services, or content; |
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| ● | our ability to maintain and expand our strategic relationships with third parties; |
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| ● | our ability to deliver our solutions to customers without disruption or delay; |
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| ● | our exposure to liability from errors, delays, fraud, or system failures, which may not be covered by insurance; |
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| ● | our ability to expand our international reach; |
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| ● | our ability to retain or recruit officers, key employees and directors; |
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| ● | our ability to raise additional capital in the future; |
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| ● | our ability to successfully coordinate Akerna’s business with acquired businesses within anticipated timelines and at their expected costs; |
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| ● | 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; |
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| | ● | our response to competitive risks; |
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| | ● | the market reactionour ability to negative publicity regarding cannabis;protect our intellectual property; |
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| | ● | the market reaction to negative publicity regarding cannabis; |
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| ● | our ability to manage the requirements of being a public company; |
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| ● | our ability to service our convertible debt; |
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| ● | our accounting treatment of certain of our private warrants; |
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| ● | 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 |
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| | ● | other factors discussed in other sections of this Prospectus,prospectus, including the sections titled “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” and “Risk Factors.“Risk Factors.” |
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 subsequently 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 Prospectusprospectus by the foregoing cautionary statements.
RECENT DEVELOPMENTS
RECENT DEVELOPMENTSOn June 28, 2022, the Company and the holders of its Senior Convertible Notes agreed, subject to release of signatures from escrow conditioned solely on pricing of the offering under this prospectus, to an amendment and waiver agreement pursuant to which the Company and the holders would amend the Securities Purchase Agreement under which the holders purchased the Senior Convertible Notes to add covenants of the Company such that (a) the Company will be subject to a daily cash test beginning on July 1, 2022 of having an available cash balance of at least $7 million, which amount shall be reduced by $1 million on each of the dates at which the aggregate principal due upon the Convertible Notes is equal to or less than $14 million and $11 million, subject in all cases to a minimum of $5 million, and (b) the Company will establish and maintain bank accounts for each holder and deposit in such accounts an aggregate amount of $7 million with such amount to be released from the accounts only upon the written consent of such holder, provided that $1 million will automatically release from the accounts upon the occurrence of each of the dates at which the aggregate principal due upon the Convertible Notes is equal to or less than $14 million and $11 million, so long as no Equity Condition Failure then exists. Further the holders of the Convertible Notes would waive provisions of the Senior Convertible Notes such that (i) no amortization payments are due and payable by the Company for any payments previously required to be made by the Company from July 1, 2022 through January 1, 2023, (ii) the holders of the Convertible Notes will not accelerate any previously deferred installment amounts under the Convertible Notes until January 1, 2023 and (iii) the terms of the Convertible Notes which would provide for reset of the conversion price of the Convertible Notes as a result of the issuance of securities under this prospectus and instead agree to a reset of the conversion price equal to a per share price of 135% of the per unit offering price in this offering.
Solo AcquisitionOn May 27, 2022, the Company announced its implementation of certain expense reduction measures, approved by the Company’s board of directors on May 24, 2022, including a reduction of the Company’s workforce by 59 full-time employees, or approximately 33% of the Company. The corporate restructuring follows the Company’s recent decision to address liquidity concerns in part by focusing its initiatives on its enterprise business and new market expansion of the SMB business.
As a result of the corporate restructuring, the company anticipates reporting $690,000 in total costs in its second quarter of 2022 to implement the reduction in force, including the following cost elements: $630,000 in severance and associated payroll taxes; $40,000 in legal costs; and $20,000 in employee insurance benefits. Of the total cost, $440,000 in salaries, payroll taxes and benefits costs would have been reported in its second quarter if the reduction in force had not been implemented. The corporate restructuring is expected to be substantially completed by the end of the second quarter of 2022. The estimates of costs that the Company expects to incur and the timing thereof are subject to a number of assumptions and actual results may differ. The Company may also incur other charges or cash expenditures not currently contemplated in connection with the corporate restructuring. This estimate may change due to future changes in the Company’s stock price. If the Company subsequently determines that it will incur additional material restructuring costs or charges or there are material differences from the ranges provided, the Company will file an amendment to this Current Report on Form 8-K (this “Current Report”) to disclose any such material costs, charges or differences.
On May 27, 2022, in relation the Company’s corporate restructuring, the Company’s executive leadership team agreed to 25% reduction in salary. As a result, the salaries of Jessica Billingsley, Chief Executive Officer, David McCullough, Chief Technology Officer, and Raymond Thompson, Special Advisor to the Chief Executive Officer, have been reduced by 25%.
On May 27, 2022, the Company filed an amendment to its Amended and Restated Certificate of Incorporation to amend Article 4 thereof to increase the number of authorized shares of common stock, par value $0.001, from 75,000,000 shares to 150,000,000 shares.
On May 25, 2022, the stockholders of the Company approved an amendment to the Company’s Amended and Restated 2019 Long Term Incentive Plan (the “Incentive Plan”) to increase the number of shares available under the Incentive Plan by 2,934,962 shares of common stock of the Company.
On May 24, 2022, the Company received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of the Company’s common stock, par value $0.0001 per share (“Common Stock”), for the last 30 consecutive business days, the Company is not currently in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Notice”).
The Notice has no immediate effect on the continued listing status of the Company’s Common Stock on The Nasdaq Capital Market, and, therefore, the Company’s listing remains fully effective.
The Company is provided a compliance period of 180 calendar days from the date of the Notice, or until November 25, 2019,21, 2022, to regain compliance with the minimum closing bid requirement, pursuant to Nasdaq Listing Rule 5810(c)(3)(A). If at any time before November 21, 2022, the closing bid price of the Company’s Common Stock closes at or above $1.00 per share for a minimum of 10 consecutive business days, subject to Nasdaq’s discretion to extend this period pursuant to Nasdaq Listing Rule 5810(c)(3)(G) to 20 consecutive business days, Nasdaq will provide written notification that the Company has achieved compliance with the minimum bid price requirement, and the matter would be resolved. If the Company does not regain compliance during the compliance period ending November 21, 2022, then Nasdaq may grant the Company a second 180 calendar day period to regain compliance, provided the Company meets the continued listing requirement for market value of publicly-held shares and all other initial listing standards for The Nasdaq Capital Market, other than the minimum closing bid price requirement, and notifies Nasdaq of its intent to cure the deficiency.
On May 23, 2022, we entered into an amending agreement (the “Amendment”) to the Amended and Restated Stock Purchase Agreement, dated as of October 1, 2021 (the “Original Agreement”), by and among the Company, The Nav People, Inc., a stock purchase agreement with substantially allDelaware corporation d/b/a “365 Cannabis”) (the “365 Cannabis”) and Matthew Dredge, Ian Humphries, Jeff Kiehn, David Walker and Quartermain Investment Holdings Ltd. (collectively, the “Sellers”).
Pursuant to the Amendment, Section 2.04(a) of the shareholdersOriginal Agreement was amended to provide that the Sellers could elect to have the potential earn-out payment described therein paid in cash or in shares of Solo, Ashesh C. Shah, Lokesh Chughthe Company or in any combination thereof. The Original Agreement previously had provided that the Company could elect whether to pay the earn-out payment in cash or in shares of the Company. 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 25%. Further, Section 2.04(b) of the Original Agreement was amendment to reflect the administrative handling of the earn-out payment to the Sellers in cash or shares of the Company.
Pursuant to the Amendment, Section 2.06 of the Original Agreement was amended to require that $100,000 the Second Post-Closing Payment (as defined in the Original Agreement) will be made at the end of June 2022 on the same day on which the Buyer’s end-of-month payroll is run and Palle Pedersen,on each an adult individual (collectively,of the “Solo Shareholder Representatives”)next four months thereafter, in each such month on the same day on which the Buyer’s end-of-month payroll is run.
On May 16, 2022, the Company and Solo, pursuant to which weRay Thompson, the Company’s then-President and Chief Operating Officer, agreed to acquire all right, titlea transition, effective immediately, by which Mr. Thompson moved from his role as President and interest in 80.40%Chief Operating Officer to Special Advisor to the Chief Executive Officer. In this new role, Mr. Thompson will continue to assist the Chief Executive Officer with certain of the issued and outstanding capital stock of Solo (calculated on a fully diluted basis), free and clear of all liens.
On January 15, 2020, we closed on the stock purchase agreement and acquired 80.40%day-to-day operations of the outstanding capital stockCompany and advise the Company on various aspects of Solo. The initial consideration amount was 1,950,000 sharescorporate strategy. In relation to the Company’s enterprise business, Jeff Kiehn, the Company’s current President of our common stock, less 570,000 sharesAkerna Enterprise will report to the Chief Executive Officer. Additionally, the Company intends for the functions of our common stockstrategic communications, compliance, technology, and human resources to be held in escrowreport directly to the Company’s Chief Executive Officer.
On May 11, 2022, the Company and and John Fowle the Company’s Chief Financial Officer and Secretary agreed to a mutual separation effective as follows: (a) 375,000 areof May 17, 2022. Mr. Fowle is leaving to be held and sold to cover costspursue other opportunities.
On May 11, 2022, the Board of Directors of the Solo shareholders under a related intellectual property purchase agreement, to be completed within 12 monthsCompany appointed Larry Dean Ditto, Jr. as Interim Chief Financial Officer (“Interim CFO”) of the closing date, with any remaining shares toCompany effective May 17, 2022.
USE OF PROCEEDS
We estimate that our net proceeds from this offering will be released toapproximately $9.07 million (or approximately $10.47million if the Solo shareholders; and (b) 195,000 shares to be held to cover any indemnity payment to certain Akerna parties underunderwriter exercises the indemnity provisions in the agreement.
On July 31, 2020, we closed on ourover-allotment option to acquire shares and warrants in full), assuming a public offering of 27,754,649 units at a price of $0.3603 per unit, which is the remaining minority stake in Solo in exchange for 800,000 Akerna shares.
As part of the closing of the option to acquire the remaining minority stake in Solo, the Solo Shareholder Representatives also agreed to amend the stock purchase agreement to eliminate the fees we had agreed to pay to the legacy Solo shareholders equal to the lesser of (i) $0.01 per solo*TAGTM and solo*CODETM sold or (ii) 7% of net revenue. The Shareholder Representatives also waived any accrued but unpaid fees up to and including July 31, 2020
Ashesh C. Shah, one of the shareholder representatives of the Solo shareholders in the transaction, is a former director of Akerna. Mr. Shah resigned as a director of Akerna on November 24, 2019, prior to the approval of the transactions in the Solo purchase agreement by the board of Akerna on November 25, 2019.
Trellis Acquisition
On April 8, 2020, we entered into a stock exchange agreement among each of the parties set forth in Exhibit E of the agreement, Pranav Sood, an individual, and Trellis, pursuant to which we purchased and took assignment and delivery of 100% of the issued and outstanding capital stock of Trellis. The considerationlast reported sale price for the Trellis shares was 349,650 shares of our common stock with an aggregate contract value of $2,000,000 at $5.72 per share, which is subject to certain adjustments not later than 90 days post-closing. The acquisition closed on April 10, 2020, the acquisition date fair value of the shares of stock issued was $2,531,466, or $7.24 per share, the closing price on the date of acquisition.
Ample Acquisition
On December 18, 2019, we entered into the Arrangement Agreement, pursuant to which we through Exchangeco agreed to the Arrangement to acquire all of the issued and outstanding equity of Ample.
On July 7, 2020, the Arrangement was consummated by way of the court-approved Plan of Arrangement under Ontario law and Ample became our indirect wholly-owned subsidiary.
Pursuant to the Arrangement Agreement and the Plan of Arrangement, on the closing date, holders of Ample Shares received a number of Exchangeable Shares equal to the number of Ample Shares multiplied by the Exchange Ratio of 0.0524. In the aggregate, Ample shareholders received 3,294,574 Exchangeable Shares. The Exchange Ratio was agreed to on December 18, 2019, and was not adjusted for any subsequent changes in market price of our common stock or the Ample Shares prior to the closing date. The Exchangeable Shares are exchangeable for shares of our common stock on a 1:1 basis,June 24, 2022, as determined in accordance withreported by the Arrangement Agreement.
Of the 3,294,574 Exchangeable Shares that were issued to former Ample shareholders in connection with the consummationNasdaq Capital Market, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and assuming none of the Arrangement, an aggregate of 658,915 Exchangeable Shares werewarrants issued as “Closing Consideration”in this offering are exercised.
We intend to use the net proceeds from this offering for general corporate purposes, including servicing our ongoing debt obligations under our convertible notes, working capital, marketing, product development and an aggregate of 2,635,659 Exchangeable Shares, constituting partcapital expenditures. As of the “Escrowed Consideration” were issued into escrow pursuantdate of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to an escrow agreement (the “Escrow Agreement”), entered intobe received upon the completion of this offering or the amounts that we will actually spend on July 7, 2020 bythe uses set forth above. The amounts and amongtiming of our actual use of proceeds will vary depending on numerous factors, including the Company, Purchaser, John Prentice, as Shareholder Representative, and Odyssey Trust Company. Under the Escrow Agreement, subject to unresolved claims by the Companyfactors described under the Arrangement Agreementheading “Risk Factors” and elsewhere in respect of fraud,this prospectus. As a result, management will retain broad discretion over the Escrowed Consideration shall be released to former Ample shareholders upon the six-, nine-, and twelve-month anniversariesallocation of the Closing Date in accordance with the following schedule -- 988,372 sharesnet proceeds from this offering, and investors will be relying on the six-month anniversary, 823,643 shares onjudgment of our management regarding the nine-month anniversary, and 823,644 shares onapplication of the twelve-month anniversary.net proceeds.
In additionDILUTION
If you invest in the securities being offered by this prospectus, your interest will be diluted immediately to the Exchangeable Shares, each Ample shareholder, immediately prior to the time at which the Arrangement became effective received one Contingent Value Right (each a “CVR” and collectively the “CVRs”). Each CVR entitles the holder to receive a portion of Deferred Consideration (as defined in the Arrangement Agreement) that the initial holder of such CVR is entitled to receive in its capacity as an Ample shareholder, with an aggregate of up to CAD$10,000,000 additional Exchangeable Shares issuable to the holdersextent of the CVRs subject to downward adjustment pursuant todifference between the Arrangement Agreement. Pursuant topublic offering price per unit and the Rights Indenture entered into on July 7, 2020 by and among Akerna, Exchangeco, John Prentice as Shareholder Representative and Odyssey Trust Company, holders of CVRs shall be entitled to additional Exchangeable Shares if certain revenue targets are achieved by Ample during the twelve month period following effectiveness of the Arrangement.
On July 7, 2020, we, entered into (i) an Exchangeable Share Support Agreement together with Exchangeco, Akerna Canada Holdings Inc., a corporation existing under the laws of the Province of Ontario, and John Prentice, as Shareholder Representative, and (ii) a Voting and Exchange Trust Agreement (the “Voting and Exchange Trust Agreement”) with Exchangeco, Akerna Canada Holdings Inc. and Odyssey Trust Company (the “Trustee”) solely for the purpose of ensuring that each Exchangeable Share is substantially the economic and voting equivalent of aadjusted, net tangible book value per share of our common stock immediately after this offering.
The net tangible book value of Akerna, and, following the registration of the shares ofour common stock issuable upon exchangeas of the Exchangeable Shares and the CVRs with the Securities and Exchange Commission (the “Commission”), ensuring that each Exchangeable Share is exchangeableMarch 31, 2022 was approximately $(17.9) million, or approximately $(0.52) per share based on a one-for-one basis for a share of common stock of Akerna, subject to certain limitations set forth therein. Together, the Voting and Exchange Trust Agreement and the Support Agreement set forth the terms governing the Exchangeable Shares. Through the Voting and Exchange Trust Agreement and the issuance by Akerna to the Trustee of a special voting share, each holder of Exchangeable Shares effectively has the ability to cast votes along with holders ofapproximately 34.2 million shares of our common stock.
Debt Financing
On June 8, 2020, we entered into a securities purchase agreement with two institutional investors to sell a new series of senior secured convertible notes of Akerna, instock issued and outstanding. Net tangible book value per share represents the aggregate principal amount of $17,000,000 having an aggregate original issue discount of 12%,our total tangible assets, excluding goodwill and ranking senior to all of our outstanding and future indebtedness. On June 9, 2020, we issuedintangible assets, less total liabilities, divided by the convertible notes and entered into a security and pledge agreement related thereto. See the description of the convertible notes below under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Convertible Note Transaction”.
USE OF PROCEEDS
We will not receive any proceeds from the issuancetotal number of shares of our common stock outstanding.
After giving further effect to the assumed sale of 27,754,649 units at an assumed public offering price of $0.3603 per unit (the closing sale price per share of our common stock on the exchangeNasdaq Capital Market on June 24, 2022) and assuming no sale of Exchangeable Shares.pre-funded warrants in this offering and no exercise of the warrants being offered in this offering and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us of $230,000, our as adjusted pro forma net tangible book value per share as of March 31, 2022, would have been approximately $(8.83) million, or approximately $(0.14) per share based on approximately 62 million shares issued and outstanding on an as adjusted basis. This represents an immediate increase in net tangible book value per share of $0.38 to existing stockholders and an immediate dilution of approximately $0.49 per share to new investors purchasing units in this offering (based on an assumed offering price of $0.3503 per share equal to the assumed offering price of $0.3603 per unit less $0.01 per warrant).
PLAN OF DISTRIBUTIONDilution per share to new investors is determined by subtracting the pro forma, as adjusted, net tangible book value per share after this offering from the public offering price per share and related warrant paid by new investors.
The following table illustrates this dilution on a per share basis:
| Assumed public offering price per share | | $ | 0.3503 | |
| Historical net tangible book value per share as of March 31, 2022 | | $ | (0.52 | ) |
| Increase in net tangible book value per share attributable to this offering | | $ | 0.38 | |
| As adjusted net tangible book value per share after giving effect to this offering | | $ | (0.14 | ) |
| Dilution in net tangible book value per share to new investors | | $ | 0.49 | |
The number of shares of common stock used in the table above is based on approximately 34.2 million shares of common stock outstanding as of March 31, 2022 and approximately 62 million shares on an as adjusted basis after giving effect to the issuance of approximately 27.8 million shares of common stock offered underby this Prospectus willprospectus. Except as otherwise indicated herein, all information in this prospectus assumes (i) no sale of pre-funded warrants, which, if sold, would reduce the number of shares of common stock that we are offering on a one-for-one basis, and (ii) no exercise of the underwriter’s over-allotment option, (iii) no exercise of the underwriter’s warrants to be issued in exchange for Exchangeable Shares. No broker, dealer or underwriter has been engaged in connection with solicitingthis offering.
The number of shares of common stock outstanding excludes:
| ● | 634,519 shares of common stock issuable upon vesting of outstanding restricted stock units and restricted stock awards; |
| ● | 5,813,804 shares of common stock issuable upon the exercise of warrants outstanding at a weighted average exercise price of $11.50 per share; |
| ● | 12,370,370 shares of common stock issuable upon conversion of our outstanding convertible notes; |
| ● | 306,852 shares of common stock issuable upon conversion of exchangeable shares; and |
| ● | 461,776 shares of common stock reserved for future issuance under our equity incentive plan. |
To the exchange and no commissionextent that outstanding options or other compensationwarrants are exercised, you will be paidexperience further dilution. In addition, we may choose to any personraise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in connection with the solicitation of the exchange. Exchangeco issued the Exchangeable Sharesfurther dilution to shareholders of Ample, on July 7, 2020. The shareholders of Ample received the Exchangeable Shares in connection with the arrangement by and between Ample, Exchangeco and Akerna under a plan of arrangement in accordance with Section 182 of the Business Corporations Act (Ontario). The Ontario Superior Court of Justice issued a final order approving the plan of arrangement on June 30, 2020. The Exchangeable Shares were issued pursuant to Section 3(a)(10) of the Securities Act, based on the final order of the Ontario Superior Court of Justice.our stockholders.
DIVIDEND POLICY
We do not intend to pay dividends for the foreseeable future. In addition, our ability to pay dividends is restricted by agreements governing Akerna’s and its subsidiaries’ debt, including the Company’s senior secured convertible notes. See “Risk Factors”“Risk Factors” above.
DESCRIPTION OF COMPANY CAPITAL STOCKSECURITIES
OurAs of June 24, 2022, our authorized share capital consists of 75,000,000150,000,000 shares of Common Stock, $0.0001 par value per share, of which 14,058,70736,796,522 shares of common stock are issued and outstanding, as of August 4, 2020, 5,000,000 shares of preferred stock, $0.0001 par value per share, of which none are issued and outstanding and one share of special voting preferred stock is issued and outstanding with a voting equivalent of which one share is outstanding.291,192 shares of common stock. We are a Delaware corporation and our affairs are governed by our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws. The following are summaries of material provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws insofar as they relate to the material terms of our common stock. Complete copies of our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws are filed as exhibits to our public filings.
Common Stock
All outstanding shares of common stock are of the same class and have equal rights and attributes. The holders of common stock are entitled to one vote per share on all matters submitted to a vote of our stockholders. Subject to the prior rights of all classes or series of stock at the time outstanding having prior rights as to dividends or other distributions, all stockholders are entitled to share equally in dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available. Subject to the prior rights of creditors of Akerna and the holders of all classes or series of stock at the time outstanding having prior rights as to distributions upon liquidation, dissolution or winding up of Akerna, in the event of liquidation, the holders of common stock are entitled to share ratably in all assets remaining after payment of all liabilities. The stockholders do not have cumulative, preemptive rights, or subscription rights.
Preferred Stock
The board of directors is authorized, subject to any limitations prescribed by law, without further vote or action by the stockholders, to issue from time to time shares of Preferred Stock in one or more series. Each such series of Preferred Stock shall have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as shall be determined by the board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights. Issuance of Preferred Stock by our board of directors may result in such shares having dividend and/or liquidation preferences senior to the rights of the holders of our common stock and could dilute the voting rights of the holders of our common stock.
Prior to the issuance of shares of each series of Preferred Stock, the board of directors is required by the Delaware General Corporation Law, and our certificate of incorporation to adopt resolutions and file a certificate of designation with the Secretary of State of the State of Delaware. The certificate of designation fixes for each class or series the designations, powers, preferences, rights, qualifications, limitations and restrictions, including, but not limited to, some or all of the following:
| ● | the number of shares constituting that series and the distinctive designation of that series, which number may be increased or decreased (but not below the number of shares then outstanding) from time to time by action of the board of directors; |
| | |
| ● | the dividend rate and the manner and frequency of payment of dividends on the shares of that series, whether dividends will be cumulative, and, if so, from which date; |
| ● | whether that series will have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights; |
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| ● | whether that series will have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the board of directors may determine; |
| | |
| ● | whether or not the shares of that series will be redeemable, and, if so, the terms and conditions of such redemption; |
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| ● | whether that series will have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; |
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| ● | whether or not the shares of the series will have priority over or be on a parity with or be junior to the shares of any other series or class in any respect; |
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| ● | the rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the relative rights or priority, if any, of payment of shares of that series; and |
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| ● | any other relative rights, preferences and limitations of that series. |
Once designated by our board of directors, each series of Preferred Stock may have specific financial and other terms that will be described in a prospectus. The description of the Preferred Stock that is set forth in any prospectus is not complete without reference to the documents that govern the Preferred Stock. These include our certificate of incorporation and any certificates of designation that our board of directors may adopt.
All shares of Preferred Stock offered hereby will, when issued, be fully paid and nonassessable, including shares of Preferred Stock issued upon the exercise of Preferred Stock Warrants or subscription rights, if any.
Although our board of directors has no intention at the present time of doing so, it could authorize the issuance of a series of Preferred Stock that could, depending on the terms of such series, impede the completion of a merger, tender offer or other takeover attempt.
Special Voting Share
The special voting share has a par value of $0.0001 per share. The special voting share entitles the holder thereof to an aggregate number of votes equal to the number of the Exchangeable Shares issued and outstanding from time to time and that are not owned by us or our subsidiaries. Except as otherwise provided herein or by law, the holder of the special voting share and the holders of our common stock will vote together as a single class on all matters submitted to a vote of Akerna’s shareholders. With respect to all meetings of shareholders of Akerna at which holders of Akerna shares are entitled to vote, each registered holder of Exchangeable Shares shall be entitled to instruct the trustee holding the special voting share to cast and exercise, in the manner instructed, that number of votes equal to the “Equivalent Vote Amount” for each Exchangeable Share owned of record by such holder of Exchangeable Shares at the close of business on the record date established by Akerna or by applicable law for such meeting, in respect of each matter, question, proposal or proposition to be voted on at such meeting. At such time as the special voting share has no votes attached to it, the special voting share shall be automatically cancelled.
Exchangeable Shares
The Exchangeable Shares of Exchangeco are intended to be substantially economically equivalent to shares of our common stock. The rights, privileges, restrictions and conditions attaching to the Exchangeable Shares of Exchangeco include the following:
| | ● | any holder of Exchangeable Shares of Exchangeco is entitled at any time following effectiveness of the registration statement, of which this Prospectus is a part to require Exchangeco to redeem any or all of the Exchangeable Shares registered in his/her name in exchange for one share of our common stock for each Exchangeable Share presented and surrendered; |
| | ● | in the event Akerna declares a dividend on its common stock, the holders of Exchangeable Shares of Exchangeco are entitled to receive from Exchangeco the same dividend, or an economically equivalent dividend, on their Exchangeable Shares; |
| | ● | the holders of the Exchangeable Shares of Exchangeco are not entitled to receive notice of or to attend any meeting of the shareholders of Exchangeco or to vote at any such meeting, except as required by law or as specifically provided in the Exchangeable Share conditions; and |
| | ● | |
| ● | the holders of Exchangeable Shares of Exchangeco are entitled to instruct the Trustee to vote the special voting stock as described above. |
Of the 3,294,574 Exchangeable Shares that were issued to former Ample shareholders in connection with the consummation of the Arrangement, an aggregate of 658,915 Exchangeable Shares were issued as “Closing Consideration” and an aggregate of 2,635,659 Exchangeable Shares, constituting part of the “Escrowed Consideration” were issued into escrow pursuant to an escrow agreement (the “Escrow Agreement”), entered into on July 7, 2020 by and among the Company, Purchaser,Exchangeco, John Prentice, as Shareholder Representative, and Odyssey Trust Company. Under the Escrow Agreement, subject to unresolved claims by the Company under the Arrangement Agreement in respect of fraud, the Escrowed Consideration shall be released to former Ample shareholders upon the six-, nine-, and twelve-month anniversaries of the Closing Date in accordance with the following schedule -- 988,372 shares on the six-month anniversary, 823,643 shares on the nine-month anniversary, and 823,644 shares on the twelve-month anniversary. As of the date hereof, 3,003,382 shares of common stock of Akerna have been issued on conversion of Exchangeable Shares.
CVRsRegistration Rights
We have granted registration rights under the Securities Act to certain holders of our common stock in relation to our acquisitions of Ample and 365 Cannabis and in relation to our issuance of the Senior Convertible Notes. In additionrelation to Ample, we agreed to file and maintain, until no Exchangeable Shares remain outstanding, a registration statement regarding the exchange of the Exchangeable Shares into shares of our common stock pursuant to their terms. In relation thereto, we filed a registration statement on Form S-1 on July 9, 2020 (333-239783) which was brought effective on August 14, 2020, as amended on January 8, 2021 and as amended on Form S-3 on May 24, 2021. In relation to the acquisition transaction of 365 Cannabis, we have agreed to register the shares of common stock issuable upon initial closing of the transaction and upon settlement of the earn-out provision, if any. In relation to our issuance of the Senior Convertible Notes, we have agreed to file the registration statement of which this prospectus forms a part. We are also obligated to maintain such registration statement until the earlier of (i) the date as of which all of the holders may sell all of the conversion shares required to be covered by such registration statement without restriction pursuant to Rule 144 (including, without limitation, volume restrictions) and without the need for current public information required by Rule 144(c)(1) (or Rule 144(i)(2), if applicable), (ii) the date on which the holders shall have sold all of the registrable securities covered by such registration statement or (iii) the later of (x) ninety (90) calendar days after the date no Senior Convertible Notes remain outstanding and (y) the first anniversary of the maturity date of the Senior Convertible Notes. We may also be required in the future to file amendments to these registration statements to maintain effectiveness.
Pre-Funded Warrants
The following summary of certain terms and provisions of pre-funded warrants that are being offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the pre-funded warrant, the form of which is filed as an exhibit to the registration statement of which this prospectus forms a part. Prospective investors should carefully review the terms and provisions of the form of pre-funded warrant for a complete description of the terms and conditions of the pre-funded warrants.
Duration and Exercise Price. Each pre-funded warrant offered hereby will have an initial exercise price per share equal to $0.0001. The pre-funded warrants will be immediately exercisable and may be exercised at any time until the pre-funded warrants are exercised in full. The exercise price and number of shares of common stock issuable upon exercise is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock and the exercise price. The pre-funded warrants will be issued separately from the accompanying warrants, and may be transferred separately immediately thereafter.
Exercisability. The pre-funded warrants will be exercisable, at the option of each Ample shareholder,holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of our common stock purchased upon such exercise (except in the case of a cashless exercise as discussed below). A holder (together with its affiliates) may not exercise any portion of the pre-funded warrant to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, except that upon at least 61 days’ prior notice from the holder to us, the holder may increase the amount of ownership of outstanding stock after exercising the holder’s pre-funded warrants up to 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the pre-funded warrants. Purchasers of pre-funded warrants in this offering may also elect prior to the timeissuance of the pre-funded warrants to have the initial exercise limitation set at which9.99% of our outstanding common stock. No fractional shares of common stock will be issued in connection with the Arrangement became effective received one CVR. Each CVR entitlesexercise of a pre-funded warrant. In lieu of fractional shares, we will either pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price or round up to the next whole share.
Cashless Exercise. If, at the time a holder exercises its pre-funded warrants, a registration statement registering the issuance of the shares of common stock underlying the pre-funded warrants under the Securities Act is not then effective or available and an exemption from registration under the Securities Act is not available for the issuance of such shares, then in lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of common stock determined according to a portion of Deferred Consideration (as definedformula set forth in the Arrangement Agreement) thatpre-funded warrants.
Transferability. Subject to applicable laws, a pre-funded warrant may be transferred at the initialoption of the holder upon surrender of the pre-funded warrant to us together with the appropriate instruments of transfer.
Exchange Listing. We do not intend to list the pre-funded warrants on the Nasdaq Capital Market or any other national securities exchange or nationally recognized trading system. The common stock issuable upon exercise of the pre-funded warrants is currently listed on the Nasdaq Capital Market.
Right as a Shareholder. Except as otherwise provided in the pre-funded warrants or by virtue of such CVR is entitled to receive in its capacity as an Ample shareholder, with an aggregateholder’s ownership of up to CAD$10,000,000 additional Exchangeable Shares issuable toshares of our common stock, the holders of the CVRs subject to downward adjustment pursuant topre-funded warrants do not have the Arrangement Agreement. Pursuant to the Rights Indenture entered into on July 7, 2020 by and among Akerna, Exchangeco, John Prentice as Shareholder Representative and Odyssey Trust Company,rights or privileges of holders of CVRs shallour common stock, including any voting rights, until they exercise their pre-funded warrants.
Fundamental Transaction. In the event of a fundamental transaction, as described in the pre-funded warrants and generally including any reorganization, recapitalization or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding common stock, the holders of the pre-funded warrants will be entitled to additional Exchangeable Shares if certain revenue targets are achieved by Ample during the twelve month period following effectivenessreceive upon exercise of the Arrangement.pre-funded warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the pre-funded warrants immediately prior to such fundamental transaction.
Warrants
The following summary of certain terms and provisions of warrants that are being offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the warrant, the form of which is filed as an exhibit to the registration statement of which this prospectus forms a part. Prospective investors should carefully review the terms and provisions of the form of warrant for a complete description of the terms and conditions of the warrants.
Duration and Exercise Price. The warrants will have an exercise price of $___ (100% of the unit offering price). The exercise price is subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our common stock and also upon any distributions of assets, including cash, stock or other property to our stockholders. The warrants are exercisable immediately, and at any time up to the date that is five years after their original issuance.
Exercisability. The warrants will be exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice and, at any time a registration statement registering the issuance of the shares of common stock underlying the warrants under the Securities Act is effective and available for the issuance of such shares, or an exemption from registration under the Securities Act is available for the issuance of such shares, by payment in full in immediately available funds for the number of shares of common stock purchased upon such exercise. A holder will not have the right to exercise any portion of the warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% (or, upon election of the holder, 9.99%) of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the warrants. However, any holder may increase or decrease such percentage, provided that any increase will not be effective until the 61st day after such election.
Cashless Exercise. If a registration statement registering the issuance of the shares of common stock underlying the warrants under the Securities Act is not effective or available and an exemption from registration under the Securities Act is not available for the issuance of such shares, the holder may elect to exercise the warrant only through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of common stock determined according to the formula set forth in the warrant. No fractional shares of common stock will be issued in connection with the exercise of a warrant. In lieu of fractional shares, we will pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price. Notwithstanding anything to the contrary, in the event we do not have or maintain an effective registration statement, there are no circumstances that would require us to make any cash payments or net cash settle the warrants to the holders.
Transferability. Subject to applicable laws, the warrants may be offered for sale, sold, transferred or assigned without our consent.
Exchange Listing. There is no established trading market for the warrants and we do not expect a market to develop. In addition, we do not intend to apply for the listing of the warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the warrants will be limited.
Rights as a Shareholder. Except as otherwise provided in the warrants or by virtue of such holder’s ownership of shares of our common stock, the holder of a warrant does not have the rights or privileges of a holder of our common stock, including any voting rights, until the holder exercises the warrant.
Fundamental Transactions. If a fundamental transaction occurs, then the successor entity will succeed to, and be substituted for us, and may exercise every right and power that we may exercise and will assume all of our obligations under the warrants with the same effect as if such successor entity had been named in the warrant itself. If holders of our common stock are given a choice as to the securities, cash or property to be received in a fundamental transaction, then the holder shall be given the same choice as to the consideration it receives upon any exercise of the warrant following such fundamental transaction.
Equitable Treatment Adjustment. In the event we permit or provide for a downward adjustment to the conversion price of any portion of the Senior Convertible Notes, issued on October 5, 2021, other than a downward adjustment that simultaneously impacts the exercise price of the warrant, then the exercise price of the warrant shall be adjusted by the same percentage as the percentage downward adjustment of the conversion price of the Senior Convertible Notes. In addition, in the event we issue any debt following the date of the issuance of the warrant having a conversion price less than the exercise price, the proceeds of which are used to, in whole or in part, repay amounts owed under the Senior Convertible Notes, then upon the issuance of such debt, the exercise price of the warrant shall immediately be adjusted downward to be equal to such lower conversion price.
Election of Directors
Our Class I Directors heldhold office until the 20192025 annual meeting of stockholders and were reelectedare eligible for reelection at such meeting. Our Class II Directors holdheld office until the 20202023 annual meeting of stockholders and are eligible for reelection at such meeting. Our Class III Directors hold office until the 20212024 annual meeting of stockholders and are eligible for reelection at such meeting. Directors are elected by a plurality of the votes cast at the annual meeting by the holders of Common Stockcommon stock present in person or represented by proxy and entitled to vote at such meeting. There is no cumulative voting for directors.
22Anti-Takeover Provisions
Our Amended and Restated Certificate of Incorporation contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
These provisions:
| ● | create a staggered Board of Directors making it more difficult for stockholders to remove a majority of the Board of Directors and take control; |
| ● | grant the Board of Directors the ability to designate the terms of and issue new series of preferred shares, which can be created and issued by the Board of Directors without prior stockholder approval, with rights senior to those of the common stock; |
| ● | impose limitations on our stockholders’ ability to call special stockholder meetings; |
| ● | make it more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities. |
DESCRIPTION OF THE BUSINESS
Business Overview
We areAkerna is a leading provider of enterprise 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. Our proprietarymanagement 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 platformas 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 in which interfacing withrequiring government regulatory agencies for compliance purposes is required,oversight, or where the tracking of organic materials from seed or plant to end products is desired. Ten years ago,
Executing upon our expansion strategy, we identified a need for organic material trackingacquire complementary cannabis brands to grow the scope of Akerna’s cannabis ecosystem. Since 2019, we have integrated six new brands into the Akerna product and regulatory compliance software as a service offering. Our first acquisition, Solo Sciences (“SaaS”Solo”) solutions, 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. More recently, 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 cannabisfamily 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 hemp industry. We developed products intended to assist states in monitoring licensed businesses’scalability capabilities, all while helping maintaining compliance with state regulations, and totheir governing regulations.
On the commercial side, our products help state-licensed businesses operate in compliance with such law. Weapplicable 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 regulatory software platform, Leaf Data Systems®, to government regulatory agencies, and our business software platform, MJ Platform®, to state and federally licensed businesses. Although we havehas helped monitor legalthe compliance forof more than $18$30 billion in legal cannabis. While our software facilitates the success of legal cannabis sales to date,businesses, we do not handle any cannabis relatedcannabis-related material, do not process cannabis sales transactions within the United States (“U.S.”), and our revenue generationis 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, as revenues are generated by us on a fixed-fee based subscription model.clients.
We drive revenue growth through the development of our product line, our acquisitions and from continued expansion of the cannabis, hemp, and 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 coreplatforms 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:
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 MJ Platform, 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 highly-versatile platformscurated 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 providemanages 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 a central data management system for tracking regulated products – from seedthe 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 initial plant growthcreate 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 product – throughout the complete supply chain, using a global unique identifier method. Our platforms also provide clients with integrated security, transparency and scalability capabilities. These capabilities allow our state-licensed clients to control inventory, operate efficiently in athis fast-changing industry and comply with state, local, and federal (in countries such as Canada, Italy, Macedonia, and Colombia) regulation at all times,. Akerna and allows our government regulatory clientsfamily of companies is well-positioned to effectivelyprovide compliance solutions for the expanding national and cost-efficiently monitor licensees and ensure that commercial businesses are complying with their states’ regulations.
We generate revenue from software sales and by providing consulting services as follows:
| ● | Government Regulatory Software Contracts – Leaf Data Systems is our SaaS product for government agencies. Leaf Data Systems is a compliance tracking system designed to give regulators visibility into the activity of licensed cannabis businesses in their jurisdictions. We have been serving three clients for Leaf Data Systems, the State of Washington, the Commonwealth of Pennsylvania and the State of Utah. |
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| ● | Commercial Software Contracts – MJ Platform is our SaaS offering for state and federally-licensed businesses. MJ Platform is an ERP (Enterprise Resource Planning) compliance system specific to the cannabis industry, including state-legal marijuana, hemp and Cannabidiol, or CBD, industry. MJ Platform is comprised of integrated modules designed to meet the regulations and inventory management needs of cannabis and hemp CBD cultivators, manufacturers, distributors and retailers, but has applications in other industries. |
| ● | Consulting Services Contracts – We provide consulting services to cannabis industry operators interested in entering the cannabis industry and in integrating our platforms into their respective operations and systems. We consult with clients on a wide range of areas to help them successfully maintain compliance with state law. We work with clients to efficiently comply with state requirements in connection with the launch and operations of their cannabis businesses. Our management team and key personnel have broad experience gained form working with numerous cannabis operations. Our consulting team has experience in most aspects of cannabis operations in most verticals (e.g., cultivation, processing, distribution, manufacturing and retail). Our service providers understand the intricacies of the varying regulations governing cannabis in each jurisdiction and, to the extent necessary, modify the professional services based on the jurisdiction.
We provide project-focused consulting services to clients that are initiating or expanding their cannabis businesses 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 in newly legal states
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We also resell a limited number of printers for printing compliance product labels and scales that are National Type Evaluation Program certifiedinternational legal for trade. Revenue from these resale activities ranged from 1% to 4% of total revenue in each of the three and nine months ended March 31, 2020, and March 31, 2019, and is not expected to become a significant generator of revenue.cannabis market.
Our commercial software revenue growth is driven by leveraging our reputation and continued cannabis, hemp and CBD industry growth. We believe we are well known in these industries and can leverage our reputation, brand recognition, and wealth of relevant experience to attract existing cultivation, manufacturing and dispensary customers, and attract new market entrants. We believe that the reputation of our existing products and our ability to provide services in all areas of the seed-to-sale life cycle will attract customers from competitors that are seeking more comprehensive services and will attract new customers as they enter into existing markets and markets that become newly legalized. We also experience revenue growth in mature, established states and countries by providing a solution to operators seeking to vertically integrate their operations and improve their operations. We provide not only a vertically integrated solution across the cannabis, hemp, and CBD supply chain, but also have the business intelligence capture, which allows operators to run their businesses in a more informed and efficient manner. This business intelligence capture is derived from the suite of services provided by us and sets us apart from competitors.Industry & Competition
Through our acquisition, investment and partnership strategies, we are expanding the features available to new and existing customers of MJ Platform and Leaf Data Systems, including the ability to track organic matter from seed-to-self (consumer), with an interactive consumer product experience. We believe that such features create further value by providing additional add-ins that should enhance utilization and the experience of our new and existing customers. For example:
| (i) | our agreement with NetSuite will provide tax planning services to our customers in Canada; |
| (ii) | our integration with Sage Intacct provides tax planning services globally; |
| (iii) | our license with ZolTrain provides our MJ Platform customers with training modules to educate them and improve their experience by pairing education with product information at the point of sale; |
| (iv) | our Leaf Data Systems track-and-trace solution specifically customized for the State of Utah to include an electronic verification system and inventory control system, implements solo*TAGTM, the world’s first cryptographically-secure, cannabis product authentication system, exclusively for governments as an alternative to radio-frequency identification, or RFID, tracking; and |
| (v) | our agreement with Isolocity enables cannabis enterprises to pursue international expansion by providing a quality management system, or QMS, framework to support local and national compliance needs and by leveraging such QMS, MJ Platform can support good manufacturing practices, or GMP, certification requirements, including the stricter European Union GMP standard required for the export of medical cannabis into Europe and Asia. |
Cannabis Industry
General
We believe the growing cannabis industry in numerous U.S. states and other countries outside of the U.S. represents an ideala significant market opportunity for our technology, as both states and countrieslegally licensed operating companies need to ensure legalthey operate within applicable laws and carefully track inventory. With democratic leadership and the new legislation passed during the 2020 election improving the outlook of the industry and a congress that is committed to push forward cannabis policy, the industry’s growth potential has large near-term upside. Since state governments require supply chain transparency to ensure compliance and the maintenance of the seed-to-sale life cycle within their jurisdictions. Furthermore, legally licensed operating companies need to ensure they operate within applicable state law and carefully track inventory.jurisdictions, each new regulated jurisdiction offers an expanded market opportunity for Akerna.
Although in its early stages, theThe regulated cannabis industry (medicinal and adult-use) is experiencing rapid growth. According to Arcview Market Research and BDS Analytics’ latest “State of LegalBDSA’s 2021 Essential Cannabis Markets” report, totalInsights, December 2021 Vol 4, Issue 10, legal spending on medical and adult-use cannabis sales in the U.S. reached an estimated $12.2passed $25 billion in 2019,2021, growth of 40% over 2020’s $18 billion. BDSA’s Cannabis Market Forecast update from September 2021 noted sales are forecasted to rise to $46 billion in 2026, a CAGR of 14% from 2021. Global cannabis sales reached nearly $29 billion in 2021, an increase of 34%45% over 2018’s total2020 sales of $9.1$20 billion. U.S. legal spending is forecast to reach $31.1BDSA forecasts global cannabis sales will grow from $29 billion in 2024, rising at2021 to $61 billion in 2026, a compound annual growth rate (CAGR) of nearly 23% from $9.1 billion in 2018. more than 16%.
The worldwide legal cannabis industry generated an estimated $14.9 billion in 2019, up 45.7% from 2018, which saw just 17%COVID-19 pandemic has had a positive effect on the growth to $10.2 billion. The report also notes that with pending international legislative decisions on Mexico’s adult-use market and Germany’s medical market, total legal sales outsideacceptance of the U.S. and Canada could rise from $517 million in 2018 to $5.4 billion in 2024 atcannabis industry. Fitting into a 47.7% CAGR.
Executing upon the expansion strategy detailed by CEO Jessica Billingsley in 2019, Akernanon-cyclical, vice product category has acquired competitive brands Ample Organics and Trellis. These additionsworked to the Akerna familyindustry’s advantage overall based on the 2020 sales data. Although many cannabis companies felt extremely adverse circumstances, and some were even forced to close or sell their businesses, this has accelerated a predictable M&A marketplace in which licenses are being acquired for a fraction of brands add two well-known seed-to-sale software optionswhat they cost only 1 year ago. The largest Multi-State Operators (MSOs) are growing and financing faster than ever before. For example, Curaleaf, one of the largest MSOs, opened their 100th retail location in February 2021. As a result of the current M&A marketplace, the landscape is beginning to position itself in a similar way that the alcohol industry has, with reputable experience and significantmajor companies controlling a vast majority of market share. Ample Organics,Akerna is positioned as an enterprise-level offering to address the needs of these large MSOs that continue to grow through consolidation. The addition of the MJ Analytics seed-to-sale reporting engine, built on the architecture of leading Health Canada approved software for Canadian Licensed Producers (LPs), has over 50% market share in the most advanced international market in the world. Trellis also brings a sophisticated solution for Cultivators, Manufacturers and Distributors, trusted by some of California’s largest brands.business intelligence platform, Domo, further positions Akerna as an enterprise-level solution.
Further to our current addressable market, the regulatory changes in the 2018 Farm Bill in the U.S. have created an opportunity for hemp-based CBD in general retail and pharmaceutical channels. Additionally, multiple countries across the world have legalized hemp for growth and export including Canada, China, Italy, Australia, and South Korea. In the U.S., hemp-derived CBD is available broadly across retailers (not solely licensed cannabis dispensaries), including online, drug and convenience stores, natural product, beauty, grocery, and pet stores. According to Grand View Research, Industrial Hemp Market Analysis, theThe global cannabidiol market size was valued at $4.6USD 2.8 billion in 20182020 and is expected to growexpand at a compound annual growth rate (CAGR) of 22.2%21.2% from 20192021 to 2025. Additionally, the global industrial hemp market size (including seeds, shivs and fibers) was estimated at $4.71 billion in 2019 and is expected to register a revenue based CAGR of 15.8%.2028.
The unfortunate events of the 2019 vape scare in the United StatesU.S. prompted regulatory changes and additional requirements, including anti-counterfeiting tags and codes. With a major investment and partnership with solo* sciences,Solo, Akerna has provided a solution to address the issue for both regulators and operators. The combined supply chain transparency solution was chosen by the State of Utah, requiring all medical dispensary products to be validated. MarketsandMarketsMarkets and Markets projects that the anti-counterfeit packaging market size will grow from USD 105.9$105.9 billion in 2018 to USD 182.2$182.2 billion by 2023, at a CAGR of 11.5%.The. The anti-counterfeit packaging market is projected to witness a high growth due to the increasing focus of manufacturers on brand protection to reduce counterfeiting. By leveraging this investment, we strengthen our current addressable market with an essential compliance tool.
The cannabis industry is a fast-growing, increasingly complex, and rapidly changing landscape. Arcview Market Research and BDS Analytics note that the range of regulatory schemes is wide, and fines for non-compliance are steep. Proper, safe, and profitable operation of a cannabis business requires a full understanding of applicable laws, the ability to track plants and products to ensure compliance with these laws, and the ability to operate at scale in a competitive environment.
We use our years of experience, proprietary databases, and resources to identify trends and predict changes inCompetitive Landscape
The competitive set within the cannabis industry in ordertechnology and consulting space has traditionally been comprised of several smaller and specialized companies with limited access to evolvecapital. As part of our products and better assistgrowth strategy, we may seek to acquire assets or companies that are synergistic with 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.business. We have two data products: The MJ Platform Business Intelligence (“BI”);built a scalable infrastructure to support both rapid organic growth and Akerna Acumen Business Insights, which both leveragetargeted acquisitions. By providing the extensive data captured in each of MJ Platform’s cultivation, E&I, distribution and retail modules. BI gives MJ Platform clients access to aggregate data across their organization to keep track of emerging legal and commercial trends, allowing for informed actionable insights at various levels within the organization, including room, location, state, brand and administration. MJ Platform allows users to align their operational data from three vantage points: in real-time; past trends; and predictive future. This proprietary database assists user in making important decisions in real-time with respect to product monitoring, tracking, planning and pricing.
Seed-to-sale
Accurate tracking of any organic products requires the ability to identify an item that changes over time. A seed grows into a plant, and a plant is refined into multiple different products, some of whichfull seed-to-sale solution, we believe we are sold to consumers, and others of which are destroyed or allowed to expire. The following is a general description of the seed-to-sale process:
Cultivation. The process of growing begins at the cultivation facility, where all living plants are tracked throughout their growth phases. The plants progress from propagation material (seeds or tissue cultures), to the vegetative stage (immature plants), then to the flowering stage (mature plants).
Harvest. Upon harvest, weights are gathered which represent the weight of the flower and other material (e.g., stems and roots). Weights decrease as product is processed through drying, trimming and elimination of waste.
Quality Assurance (“QA”) Laboratory Testing. Certain jurisdictions require cannabis or hemp CBD materialwell-positioned to be tested. Samples of flower and other material are sent to a testing laboratory where the required testing can be performed. While product samples are undergoing lab testing, the remaining packages of the associated inventory remain quarantined until passing test results have been entered by the testing laboratory.
Packaging. Once harvested material has had the appropriate QA testing performed, harvest packages may be transferred to extraction and infusion (“E&I”) facilities to undergo extraction and infusion processes. E&I facilities process the usable plant material for sale, or extract the organic compounds from the plant, which can then be packaged for sale directly as concentrated extract, such as cannabis concentrate, or processed into infused products (such as topical products, edible products, and tinctures). In some jurisdictions, it is required that samples be sent to a testing laboratory again at this point for final testing prior to being transported to retail facilities to be distributed to consumers.
Our Platform Capabilities
Our platforms and related technology offer wide ranging capabilities. We integrate these capabilities into our software offerings to provide platforms that allow government regulators to engage in accurate and real-time compliance monitoring, and which provide licensed businesses with a true enterprise solution for managing their inventory and compliance. Key capabilities of the Leaf Data Systems and MJ Platform include:
| ● | Seed-to-Sale Tracking – This allows tracking of products from cultivation, through harvest and processing and manufacturing, to monitoring of the final sale to the patient or customer. Our traceability technology captures everything that happens 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 point of sale processing, and never take, own, or handle any product or cash transaction, our platform does record all sales as part of state and jurisdictional compliance monitoring processes. |
| ● | Single System Integration – This 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. Our platforms can also be integrated with systems of numerous third-party suppliers. |
| ● | Remote Usage and Connectivity – This allows access through any Internet connection from anywhere and on any device. |
Leaf Data Systems
General
Leaf Data Systems provides regulatory authorities with visibility into the operations of licensed medical and recreational cannabis businesses. Licensed cannabis facilities within a state can track plant and product movement and waste across their organization, which is processed into reporting tailored to the government agencies that regulate and enforce the rules of the industry. This gives regulators a tool for transparency and accountability across the cannabis supply chain to ensure public and product safety as well as to monitor sales and inventory within the industry. Leaf Data Systems is customized to the regulations of the state in which it is contracted and tailored to capture the relevant data points desired by regulatory officials.
Government regulators desire visibility at critical junctures within the seed-to-sale chain of custody in order to ensure public safety, monitor sales data for the purposes of taxation, and perform physical inspectionsan acquirer of cannabis industry facilities. Leaf Data Systems allows for specific data points captured during these workflows to be compiled into the state and regional view retrievable by regulatory officials. These data points include:
| ● | Licensed facilities locations; |
| ● | Individual employees at licensed facilities;
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| ● | Specific physical locations at licensed facilities, such as where plants are grown, or products exist; |
| ● | Plants tracked as they move through their life cycle with location, phase, and origin data captured; |
| ● | Harvest details collectedtechnology solutions throughout the harvest process; |
| ● | Product and type attributes associated with physical inventory; |
| ● | Packages of physical inventory on hand at a licensed facility and all associated actions performed with inventory, such as inventory adjustments, transfers and destruction; and |
| ● | Wholesale and retail transactions. |
Leaf Data Systems leverages the use of unique identifiers that are assigned to each batch, plant and inventory item to connect the life cycle phases together and provide the foundation for the chain of custody. State officials are able to review all seed-to-sale information captured for all licensees through reporting of real-time data. The system allows regulators the ability to set alerts based on specific data points and their relative expected values to identify anomalies that might indicate diversion.
Leaf Data Systems provides regulators with three methods for data capture from licensees:
| ● | Application Programming Interface (“API”) – Licensees that utilize business management software provided by a third-party vendor to manage their plants, inventory and sales (including the MJ Platform) can integrate their existing system with Leaf Data Systems via an API. An API is a set of requirements that governs how one software application communicates with another. Our API details for Leaf Data Systems are available for any software company to utilize for their clients’ benefit. |
| ● | File Upload – If API integration is not a possibility, licensees can utilize the data upload feature using comma-separated values (“CSV”) files. A CSV file is a common format for data exchange that is widely supported and is useful for transferring tabular data between programs that operate on incompatible formats. Leaf Data Systems provides a template as a guideline for proper formatting of CSV files for any data to be uploaded. |
| ● | User Interface – Licensees who choose not to utilize API integration capabilities or data upload tools have the option of manually entering each line item of data to be captured. Leaf Data Systems’ data collection forms allow field by field detail entry for each piece of information that must be recorded. |
Leaf Data Systems allows government regulatory clients to track product of licensees from seed to plant, view manifest data on demand in order to verify the transport details for a licensee transporting cannabis products or materials, and ensure proper taxation and payment of fees by licensees.
Government Contract Bidding Process
When seeking cannabis compliance monitoring and regulatory governance systems, states publish requests for proposal (“RFP”) to which companies, such as us, can respond. We monitor government contract opportunities by reviewing all available state registries for notifications of RFP and similar proposal invitations. We have relationships with industry lobbyists, industry coalitions, regulatory agencies and industry businesses, enabling us to learn of all government contract opportunities. We believe our industry expertise, adaptable platform technology and ability to timely provide a quality commercial off-the-shelf (COTS) solution at a competitive price provides us with the ability to win the bidding process and secure state regulatory customers.
Based on an RFP, we conduct internal road-mapping to determine if there is value in responding to the proposal. If we decide to proceed, we will formulate a detailed response, including granular responses to solicitation requirements; identifying and detailing the benefits of the Leaf Data System for the state’s needs and formulating a pricing regime that the state will find attractive. Typically, we will propose three pricing models, all of which consider the extent of customization required and the number of expected licensees operating across the platform:
| ● | The state pays for the entire project – In this model, the state pays all costs associated with implementation, licensee tags (e.g., solo*TAG™, radio frequency identification, or RFID, tags, barcode tags, etc.), ongoing support, and maintenance for the duration of the contract. |
| ● | The costs for the project are split between the state and the licensees – In this model, the state pays for implementation and ongoing support and maintenance, while the licensees might pay for cost of tags. |
| ● | The licensees pay for the entire project – In this model, the licensees bear the entire cost of the project in the form of monthly fees or license tag fees. |
Currently 24 out of a total of 33 states, as well as the District of Columbia and Puerto Rico, are using some form of cannabis compliance tracking, which is becoming a standard for states that legalize medicinal or recreational cannabis. We believe that states’ demand for these platforms will continue to increase as further state-level cannabis legislation is introduced, and the existing legalized states further expand their compliance initiatives.
We have been awarded contracts in Washington, Pennsylvania, and Utah.
We have exclusivity in the Pennsylvania market due to our government contract, which requires operators in the state to use not only our track and trace system Leaf Data Systems but also our seed-to-sale tracking ERP product MJ Platform.
Agreement with State of Washington
We have supplied Washington State with Leaf Data Systems since 2017. The platform has been integrated with the Washington State Liquor and Cannabis Board and is used to monitor, control, and report on activities of authorized producers, processors and dispensaries. This project involved the conversion of three years of cannabis tracking data from the state’s prior tracking system, coordinating the cutover of all licensed businesses in the state to the Leaf Data Systems, and the integration of APIs from numerous third parties.
In July 2017, we and the Washington State Liquor and Cannabis Board (“WSLCB”) entered into a services contract for our provision of the Leaf Data System. The contract provided for us to undertake the work necessary to implement and integrate the Leaf Data system with WSLCB, with a subscription for maintenance and other services by us thereafter. The initial term of the contract for performance of such implementation and integration commenced on July 10, 2017. WSLCB has accepted and approved the implementation of the Leaf Data System, and the term of the state’s subscription for software maintenance and support was initially for one year, with up to five consecutive one-year renewals, at the sole option of Washington State. As of the date hereof, we are providing maintenance and support for the Leaf Date System, the current term expires on December 31, 2020. The subscription fee payable by WSLCB includes all costs associated with hosting, licensing, and support for each year of subscription services. WSLCB pays the respective annual costs in advance. Suspension or termination of this contract by WSLCB can occur in whole or any part at any time for certain prescribed reasons, including our breach of the contract, for the convenience of Washington State or the failure of Washington State to allocate funds in its budget for the Contract.
Agreement with State of Pennsylvania
We have supplied Pennsylvania with Leaf Data Systems since 2017. The platform has been integrated with the Pennsylvania Department of Health and is used to monitor, control, and report on activities of authorized growers/processors, dispensaries, laboratories, clinical registrants, and academic clinical research centers. The Leaf Data System, as configured for Pennsylvania, permits growers and processors to begin cultivating, growing, and processing activities as soon as possible. This platform also integrates a third-party SaaS registry from Oracle for patients, caregivers, practitioners and medical providers with our seed-to-sale system to track patient dispensary activity in the state.
In January 2017, the Pennsylvania Department of Health (“PADOH”), together with Pennsylvania’s Office of Information Technology Bureau of IT Procurement accepted our bid to provide a hosted SaaS medical marijuana seed-to-sale tracking system and awarded us a service contract. We, as the prime contractor for this contract, provides all services and meets the requirements requested by PADOH, except the production of the Medical Marijuana Patient and Caregiver identification cards, which is provided by the Pennsylvania Department of Transportation. These specific services are provided through our Leaf Data Systems product, which monitors, controls and reports on activities of authorized growers/processors, dispensaries, laboratories, clinical registrants and academic clinical research centers. Additionally, the services provided to the Commonwealth by us includes implementation of a hosted, SaaS registry for patients, caregivers, practitioners and medical providers, which is integrated with Leaf Data Systems as necessary to track patient dispensary activity. The term of the purchase order which was issued under the contract commenced on April 18, 2017, with an initial term of five years and the option for three (3) consecutive one-year renewals at the Commonwealth of Pennsylvania’s (the “Commonwealth”) discretion. The Commonwealth may exercise the renewal(s) in single or multiple year increments, at any time during the purchase order. Termination of the contract will occur at contract closeout and all data collected and stored in our systems will be transferred to PADOH without cost within 30 calendar days in a format agreed upon by the Commonwealth. Termination by the Commonwealth can occur in whole or any part at any time for certain prescribed reasons, including our failure to provide services as and when required, our failure to dedicate sufficient resources, including personnel, equipment and material, to the completion of prescribed services and unsatisfactory performance in the judgment of the Commonwealth. In addition, the Commonwealth can terminate the contract without cause for convenience upon 30 days’ notice if it determines that termination is in the best interest of the Commonwealth.
Agreement with State of Utah
In August 2019, we entered into a State of Utah Contract (the “Utah Contract”) with the Department of Technology Services (“DTS”), for MJF’s provision of the Leaf Data System. The Utah Contract provides for provision of our Leaf Data System and Trace Seed-to-Sale Solution, specifically customized for the State of Utah to include an electronic verification system and inventory control system that includes customer relationship management technology. The systems will utilize solo sciences’ solo*TAG™, the world’s first cryptographically-secure, cannabis product authentication system, exclusively for governments, as an alternative to RFID tracking.
The Utah Contract also provides for us to undertake the work necessary to implement and integrate the Leaf Data system with DTS, with a subscription for maintenance and other services by us thereafter. The purpose of such implementation and integration is for a “Seed-to-Sale” inventory control system and electronic verification system to facilitate the electronic monitoring of the state’s medical cannabis industry; and supporting functionality to register, approve, provide system credentials and administer patients, caregivers, practitioners and medical providers. The initial term of the Utah Contract for performance of such implementation and integration is effective as of August 12, 2019, and terminates on August 1, 2024, with an initial term of five (5) years and the option for three (3) consecutive one-year renewals at the State of Utah’s discretion.
The inventory control system and electronic verification system are fully rolled out and operational. The DTS has moved into subscription services. Suspension or termination of the Utah Contract by DTS can occur in whole or any part at any time for certain prescribed reasons, including our breach of the contract, for the convenience by either party or the failure of State of Utah to allocate funds in its budget for the Utah Contract.
MJ Platform
We provide state-licensed dispensaries, cultivators, manufacturers, and distributors with a data-driven seed-to-sale tracking platform, MJ Platform, which provides clients with an enterprise resource planning solution for managing their inventory and regulatory compliance. We believe that the product can scale to serve businesses of varying size, whether a small boutique shop, a large multi-state company or a multi-country business, and is available in English, Spanish and French. MJ Platform is used by customers to compliantly track inventory through all phases of the seed-to-sale cycle – from cultivation to extraction and infusion to distribution and retail sales. Data points are collected at every stage of the product lifecycle and about multiple aspects of the plant’s growing environment, manufacturing processes and ingredients, as well as retail pricing and purchase data.
Every stage of the product lifecycle has costs attached to it, including building, labor, nutrients, lighting, water, and other, sometimes hidden, expenses. For enterprises at scale, managing costs becomes an increasingly important part of sustainability. MJ Platform allows users to track costs with specificity – by the day, by the hour, by the method, by the employee, by the product line, and by the square foot of facility space.
We service licensed cannabis operators in all verticals of the industry, including cultivation, manufacturing, distribution and retail dispensaries. We believe our ability to service Multi-State Operators (“MSOs”), Licensed Producers (“LPs”) with multiple verticals, as well as individual operators in the cultivation and manufacturing verticals differentiates us from other cannabis industry software providers that typically do not provide solutions for these types of businesses. We have significant client presence for our commercial software solutions in cannabis markets such as Arizona, California, Michigan, Pennsylvania, Colorado, Utah, Illinois, Oklahoma and Puerto Rico, as well as Canada.
We have exclusivity in the Pennsylvania and Utah markets due to our government contracts, which require operators in the states to use not only our track and trace system Leaf Data Systems but also our seed-to-sale tracking ERP product MJ Platform.
Cultivation
The cultivation module in MJ Platform allows licensed cultivators to quickly get ground-level details about plant strain creation and plant growth location, together with enterprise-level costing and yield projection modeling.
The following summarizes MJ Platform’s functionality, utility, and monitoring capabilities through the cultivation stages:
| ● | Creating plants. Cultivators use MJ Platform to identify strains of plants based on various phenotypes and to monitor and track genetics from a particular Mother Plant, thus allowing the Mother Plant and its progeny to be tracked genetically and by strain/phenotype performance over generations. |
| ● | Growing plants. MJ Platform allows cultivators to view and track high-level details about the plants they have in the propagation, vegetation, and flowering stages, with the added ability to dive into an individual plant or group of plants. Cultivators can quickly move large batches of plants through the plant life cycle (vegetation/flowering stages) or individual plants can be moved if those plants need more or less time in a particular stage while keeping track of all inventory and monitoring regulatory compliance. |
| ● | Harvesting plants. When plants have finished the flowering stage and are ready to be harvested, those plants can be reviewed through the platform as a group or individually. At this time, the overall harvest weight is entered, with corresponding waste weights. Both harvested and waste material are inventoried and tracked, allowing the business and the governing body, such as the state regulatory agency, to know where all such material is at any given time. Additionally, the harvest can be graded for quality, which allows for an evaluation of the genetics of the plant strain and the growing conditions within the cultivation facility. |
| ● | Packaging harvest. After the harvest has gone through its various drying and curing stages, it will be ready to be either sold wholesale by the commercial business for extraction purposes or sent to a retail facility. At this point, “harvest lots” are created based on the variation of cannabis flower that the cultivation facility deals with (e.g., bulk flower, trim, prepacks, etc.) and each lot is inventoried, tracked and monitored. |
| ● | Testing product. Test results can be added for products in order to track cannabinoid potency, terpenes, microbials, residual solvents, heavy metals, mycotoxins, pesticides, and foreign materials. This information can then be used for business or customer facing labeling. All test results become part of the data record and is monitorable. |
| ● | Distributing to extraction or retail facilities. When product is ready to be distributed to an extraction facility (to run extractions and produce concentrates) or a retail facility (to be sold to patients or consumers), it can be sent out on a transfer, at which point the inventory will be removed from the system and the MJ Platform has done its job of helping the customer ensure compliance. Most U.S. States require a transport manifest be created and filed at this time as well, which MJ Platform does. If this cultivation facility and the facility to which the product is being transferred are under the same parent company, a corresponding purchase order will be created at that receiving facility, easily allowing that facility to receive the inventory. |
Extraction and Infusion (E&I)
The following summarizes MJ Platform’s functionality, utility, and monitoring capabilities through the extraction and infusion stages:
| ● | Receiving inventory. When licensed extraction facilities are sent organic materials, such as raw cannabis plants, from other facilities in order to run extractions or processing on that material, the MJ Platform allows the extraction facility to easily receive that inventory into their system through a purchase order. The extraction facility is able to locate the vendor sending them product via the “vendor network” integrated into the MJ Platform, at which point the products they typically receive from the vendor will automatically be displayed. This allows the E&I facility to carefully track the products being sent by each vendor. Any payments made during the transfer are recorded in the MJ Platform and become part of the monitorable data. |
| ● | Extracting and processing. Monitoring and accounting data for each of the varying pieces of equipment used in cannabis processing jobs can be added to MJ Platform. As equipment is used to transform cannabis material into cannabis oil, live resin, and other products, that processing time is deducted from that equipment’s overall life expectancy, allowing for true product costing capabilities. MJ Platform allows the user to select monitoring of particular starting material to be extracted and processed and the platform will present only the relevant information. Additionally, the platform can monitor individual employee tasking, job completion timelines and process efficiency. |
| ● | Viewing multiple processing jobs. Larger E&I facilities have more equipment and therefore will have various processes running in various machines at the same time. MJ Platform allows for an E&I facility manager to view and modify details about all of the active processes running in each machine at any point in time. |
| ● | Inventory listing. E&I facilities have inventory in various stages of processing at any point in time. Cannabis flower may be in the process of being extracted into oil, distilled to achieve high levels of purity, or packaged into a final product. Therefore, it becomes necessary for an E&I facility manager to see in which stage all of this inventory resides at various times and to be able to accurately and immediately track such inventory. The E&I inventory listing within MJ Platform has these inventory stages set up into buckets, which include pre-run, curing infusion concentrate and finished product. This inventory bucketing structure takes the guess work out of knowing where various products are in the extraction and processing phases, ensuring efficient state compliance and the meeting of product “finishing” timelines. |
| ● | Completing processing jobs. When the processing job has completed, the output product(s) are selected and the new quantity of the output product are captured and become part of the compliance and monitorable data log. Quality ratings can also be assigned at this time to capture product color, clarity, aroma, consistency. |
| ● | Assembling a final product. Once the varying extraction and processing jobs have been run and the output material is in its final form, the final product (such as cartridges, concentrates, oil capsules) can then be assembled for the final patient or consumer. Within MJ Platform, assemblies are monitored based on the facility’s operating procedures. For example, if cartridges are to be filled and packaged, the pre-built platform assembly would contain the appropriate amount of cannabis oil, an empty cartridge, MCT Oil for dilution, and a box to house the cartridge. All of these components are monitored in MJ Platform with their corresponding costs and inventory levels, with the location of each components identifiable and monitored. As employees assemble these cartridges, they will know what components are needed (and monitor the adequacy of inventory levels) and pull from existing inventory (or reorder inventory as necessary). The pre-built assemblies also allow for the comparison of expected cost/completion times relative to actual cost/completion times. |
| ● | Testing product. In MJ Platform, product testing can be monitored and recorded at any stage of inventory (pre-run, curing, infusion concentrate and finished product). Certain states require tests to be completed at each stage of the cannabis product for consumer sales. For example, if an E&I facility is producing cartridges, it may be necessary to test the oil in the curing stage, the infusion concentrate stage, and the final finished product stage. MJ Platform is easily adaptable for these requirements and provides for traceability and compliance monitoring from one stage to another. |
| ● | Distributing to retail locations. Once the E&I facility has finished taking in cannabis flower and outputting product, the E&I facility wholesales that product to retail facilities to be sold to patients and consumers. These transactions are recorded by MJ Platform and are monitorable by state governments and other governing bodies. |
Retail
The following summarizes MJ Platform’s functionality, utility, and monitoring capabilities through the retail stages:
| ● | Receiving inventory. The process for receiving inventory at the licensed retail facility is the same as at the E&I and cultivation facilities. The licensed vendor sending the product can be easily located via the retail facility’s vendor network, at which point the products that are typically received from this vendor will automatically be displayed on the MJ Platform and tracking of same continues. Any payments made during this transfer are recorded and become part of the monitorable data. |
| ● | Creating customer records. Licensed retail facilities use MJ Platform to create a record of each customer and capture relevant customer information, including medical history, purchase history, and overall spending. MJ Platform provides retail facilities with the ability to capture demographic information (e.g., phone, email, address, driver’s license and medical ID) and special grouping information (e.g., veteran, senior and repeat customer), which can be used by commercial business to determine any product pricing adjustments, and allows compliance with all customer record keeping requirements. |
| ● | Tracking sales to customers/patients. Whether a retail facility handles in-store orders, phone orders or third-party online orders, MJ Platform records all sales finalized at or through the retail facility, including amounts of product sold, prices, inventory identification, and the employees handling and delivering product. |
| ● | Adding products to an order. As orders are placed, MJ Platform records all package labeling, retail location and patient or customer information to the monitorable data for the commercial business. MJ Platform also assists clients in the provision of accurate labeling based on information input by the client. Depending on an inventory manager’s need for inventory restriction, packages can be moved within the system to various sales and storage locations to allow them to be visible to (or hidden from) the retail employees completing the sale in order to ensure compliance. In fact, the software can prevent the retail employee from compliantly recording an inventory sale that is not in the virtual sales location to which they’ve been assigned. |
| ● | Enforcing purchase limits. Certain jurisdictions have restrictions on the amount of cannabis or cannabis derivatives that can be purchased during a given time period. MJ Platform allows for retail managers to set limits for their facility while providing the flexibility to override the limits for certain patient-based medical need. If product sale would put an end patient or customer over the applicable purchase limit, MJ Platform provides a warning message to the retail employee and the product is prevented from being compliantly recorded as a sale. Additionally, retail employees see a running total of the amount of cannabis material currently allocated to a patient or customer, allowing for tailored product choices based on the patient or customer’s remaining purchasable amount. If this retail facility’s parent company has multiple retail locations, all of these locations can be linked together to prevent “looping,” ensuring patients or customers aren’t purchasing their full limit at one location then purchasing additional product at another location. |
| ● | Paying for orders. MJ Platform does not sell or handle cannabis products and does not process any payments for same but can integrate with the client facilities’ payment processors to record all transactions to further enhance state compliance data sets. Currently, there are no U.S. clients who have any integration to payment processing through MJ Platform and only Canadian clients have the ability to integrate to payment processors to receive data back to record a sale. In the U.S., MJ Platform simply records that a sale was made for compliance purposes. |
| ● | Printing customer labels and receipts. MJ Platform allows for easy printing of labels that can be attached to the products or handed to the customer. Certain jurisdictions require such materials to be given to the customer for law enforcement purposes. Labels can be easily customized within MJ Platform to suit the needs of changing laws. Certain jurisdictions may require “mandated statements” on patient labels which apply to the whole order or may apply only to certain product categories. Instead of hardcoding these statements, MJ Platform empowers retail personnel to remain in compliance by allowing them to build out their own global label statements, category statements, subcategory statements to allow them to quickly pivot based on new rules or regulations. |
Business Intelligence
We have two data products: The MJ Platform Business Intelligence (“BI”); and Akerna Acumen Big Data, which both leverage the extensive data captured in each of MJ Platform’s cultivation, E&I, distribution and retail modules.
BI gives MJ Platform clients access to aggregate data across their organization to keep track of emerging legal and commercial trends, allowing for informed actionable insights at various levels within the organization, including room, location, state, brand and administration. MJ Platform allows users to align their operational data from three vantage points: in real-time, past trends, and predictive future. This proprietary database assists user in making important decisions in real-time with respect to product monitoring, tracking, planning and pricing.
BI is monetized through the provision of Data Analytics subscriptions to clients. We typically grants a limited, non-exclusive, non-sub-licensable license to use our industry data for internal management, reporting and business optimization purposes. The information typically supplied to clients is aggregated and anonymized information regarding products, which may or may not be those of the client, sold through sales generated through our online service platforms.
During the cultivation phase, the platform allows for yield and cycle management forecasting. The platform leverages plant growth cycle and expected harvest yield data from the propagation, vegetation and flowering stages to forecast when there will be on-hand inventory for various products, allowing for ramp up in cultivation staffing and marketing/pre-selling of the inventory.
During the E&I phase, the platform allows the licensed facility to monitor product efficiency and product quality. It provides the facility manager with insight into the efficiency and quality of extraction, processing, and assembly jobs by employee, and enables the manager to determine with employees are achieving the highest yielded product output, and which are achieving product output with the highest quality ratings.
During the retail phase, the platform allows licensed retail locations to run consumer and patient analytics by tracking sales data relative to purchaser information, such as age, gender, zip code, discounts and coupons redeemed, and date of product sale. The platform helps compliantly monitor and track retail locations retention efforts with existing patients or customers by tracking and reporting on the client’s targeted marketing and advertising efforts. The platform also allows retail location managers to view details about product sales by type, strain, vendor and consumer type, allowing for reorder and pricing of products based on data. The tracking of this data also allows retail locations to evaluate gross profit trends. The platform also provides high-level sales data about daily, weekly and monthly sales, sales by payment type, sales by retail employee, sales by product and strain type, sales by consumer segment, and other metrics.
We believe we have cultivated a substantial legal cannabis dataset with over $18 billion in sales tracked and 10 years of data across 20+ states and multiple countries. With the contractual ability to aggregate and anonymize this data, we have launched the Akerna Acumen product to provide banks, investors, researchers, cannabis businesses and non-cannabis businesses with cannabis market intelligence and valuable market comparison data. The data is available in various formats and is available with updates as frequently as daily.
Partner Integrations
MJ Platform is built on a microservices architecture. This structure has a number of benefits, including the ability to segregate certain pieces of the service in order to allow for those pieces to be easily accessed by third-party services. For example, we recently entered into a partnership with solo sciences and Isolocity to bring increased supply chain visibility and compliance to clients. The Isolocity partnership enables cannabis enterprises to pursue international expansion by providing a QMS framework to support local and national compliance needs. By leveraging Isolocity’s QMS, MJ Platform supports GMP certification requirements, including the stricter EU-GMP standard required for the export of medical cannabis into Europe and Asia.
The solo sciences partnership expands our reach across the cannabis supply chain visibility and transparency to the consumer to point-of-purchase and post-purchase feedback. The partnership also includes a proprietary tracking technology, solo*TAG™, that provides a more cost-effective and secure alternative to RFID. The technology is exclusively only available from solo and Leaf Data Systems.
As a result of MJ Platform being fully built along Representational State Transfer (“REST”) APIs, we are able to add valuable functionality through integration and strategic partners. The partnerships allow us to offer far more value to clients at a lower development cost to the company and serves as a source of accretive referral revenue to MJ Platform.
Consulting
Our experienced services team assists our government regulatory and business clients in integrating our platforms into their respective operations and systems.
Entering the cannabis industry is a significant undertaking. We work with clients to efficiently comply with state requirements in connection with the launch and operations of their cannabis businesses. Our management and key personnel bring deep cannabis industry experience to us. Our management team and key personnel have broad experience gained form working with numerous cannabis operations. Our consulting team has experience in every aspect of cannabis operations in every vertical (e.g., cultivation, processing and retail). Our team members have previously managed projects, including cultivation facilities exceeding 100,000 square feet, retail operations with locations in multiple states and online businesses serving an entire country.
We provide project-focused consulting services to clients that are initiating or expanding their cannabis businesses or are interested in data consulting engagements regarding the legal cannabis industry. We typically provides 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 in newly opened states.
We consult with clients on a wide range of areas to help them successfully operate in the cannabis industry in compliance with state law, including:
| ● | reviewing plant and product procedures to ensure compliance and safety, as well as create greater safeguards against diversion (for example, the redirection of medicinal marijuana to a recreational user sales); |
| ● | providing role-based, recorded training customized for clients’ businesses and personnel with an emphasis on the applicable state regulatory scheme; |
| ● | writing license applications and compliance programs. |
Ample
Ample is a technology provider for cannabis businesses with a focus on providing solutions to Canadian LPs and other cannabis producers outside of Canada operating in accordance with applicable laws, to ensure cannabis cultivation operations remain compliant with the applicable regulatory landscape. Ample’s seed-to-sale platform allows cultivators to track and report every stage of their cannabis growing operations, production, and sales processes by implementing unique workflows and methods to ensure that traceability identifiers are attached to various entities at every stage of production and sale. Furthermore, the Ample technology provides insight and control for regulators by generating mandatory compliance reports on inventory, patients, physicians, and any other details required within a specific regulatory jurisdiction.
Ample currently has 74 full-time employees and provides services to over 120 LPs and 5 other licensed cannabis producers in Colombia, Jamaica, New Zealand, and Australia. Ample was a Deloitte FAST50 Company to Watch in 2018, placed 9th on the Deloitte FAST50 in 2019, and was ranked the 19th Top Growing Company in Canada by the Globe and Mail in 2019. Additionally, Ample is Service Organization Control (SOC) Type 2 certified.
In December 2018, Ample acquired Last Call Analytics (“LCA”), a retail analytics platform designed for the beverage alcohol industry, with a focus on allowing its customers to use data to empower retail operations and generate revenue growth. The platform ingests sales and product data from a wide variety of sources, normalizes and homogenizes the dataset, and displays the resultant analysis in a proprietary application. With the underlying technologies built by LCA, Ample has created AmpleData, a retail analytics platform for the cannabis industry that applies the same proven solution to data streams ingested from various points within the regulated supply chain.
The Ample Organics suite of products also includes:
| ● | AmpleCentral — a government reporting and tracking solution that uses proprietary tags to identify cannabis plants, biomass, and products as they move through the possession of various license holders within the supply chain, and ultimately, to patients or consumers. The software serves as the system of record within a jurisdiction, through which, every licensee must report their compliance information. |
| ● | AmpleExchange — a software product designed to conduct the wholesale exchange of cannabis, accessories, and cannabis derivative products through a defined procurement process between producers, distributors, and retailers. |
| ● | AmplePayments — an exclusive payment processing offering that, through partnerships with leading payment providers and financial institutions, provides credit card processing, electronic funds transfers, and PayPal merchant integration within the Ample Organics E-Commerce platform used by LPs across Canada. |
| ● | AmpleCare — an API-first middleware solution that allows for the submission of both patient registration documents and medical documents in a secure electronic format to LPs using the Ample Organics seed-to-sale platform. This product enables clinics and healthcare practitioners to prescribe and register their patients directly from their clinic management or electronic medical record software in minutes instead of days. |
| ● | AmpleLearn — a dynamic education and training platform designed to educate and onboard personnel working within a licensed cannabis company. Additionally, the platform and course content have been adopted by post-secondary institutions in Canada to be used when training students for a career in the cannabis industry. |
Solo
Solo is a technology provider for legal cannabis businesses with a focus on providing a cannabis tracking technology that provides seed-to-sale-to-self data throughout a product’s lifecycle and empowers consumers with the ability to confirm the quality and authenticity of a product they have purchased.
Solo uses proprietary technology to place a unique encrypted arrangement of patterns (“a digital signature”) onto individual packaging labels. The Solo technology is significantly lower cost and more secure than traditional tagging technologies like radio-frequency identification. The technology includes a free consumer mobile application, granting end-users and regulatory agencies the ability to track products in the supply chain, verify their authenticity and learn more detailed information about the product such as its origins and ingredients.
The Solo technology platform also enables brands to connect directly with consumers. Through it, product creators can provide end users with push notifications, targeted news, product insights, loyalty points, etc. Brands embrace the platform as it enables them to increase their revenues and create a more tailored marketing experience. Customers benefit from product incentives while gaining trust in the products they are buying and consuming.
Solo currently has eight full-time employees and three consultants. In 2019, Solo was selected for the CNBC Upstart 100, a list of the world’s 100 most promising startups. Competing companies came from a diverse group of global nominees representing nearly every sector like enterprise software, finance, insurance, health care, and retail. Co-founder and Head of Partnerships, Katie Flannery, was also awarded the Silver Executive of the Year Award in the 2019 Stevie Awards for Female Business Services. The Stevie Awards, presented by American Business Awards organization, serve as an indicator of the increasing numbers of women shaping the business world as entrepreneurs and leaders.
Solo has developed several key partnerships including 14th Round (a leading cannabis packaging innovator 14th Round and the number one vaporizer and packaging supplier in North America), the Global Alliance for Cannabis Commerce (a trade organization representing a major cross-section of the global cannabis industry), and the Utah Department of Health and Department of Agriculture (Solo won a joint contract with Akerna and will be a key tagging and technology component in a closed-loop system used by all Utah cannabis licensees as the state’s primary tracking system at the retail, wholesale, cultivation and manufacturing levels.)
The current Solo product offering includes the following:
| ● | solo*CODE: Proprietary coding technology that places a unique encrypted arrangement of patterns onto the label on every individual product package — rather than every batch or SKU. This low-cost process allows end-users and regulatory agencies the ability to easily scan a product with a free mobile app, verify its authenticity, pull up data about the item, and confirm that it is not a potentially dangerous counterfeit or fake product from an illicit source. |
| ● | solo*TAG: A seed-to-sale tracking technology that uses a proprietary cryptologically secure coding system to follow the life cycle of an individual cannabis plant from the time it is planted, through its growth cycle to harvesting, manufacturing, and shipping. |
| ● | solo*APP: The solo sciences mobile application that allows product buyers and regulatory agencies to scan a solo*CODE, pull up information regarding the item in front of them, provide feedback regarding their consumer experience, and also get push notifications, targeted news, product insights, loyalty points, etc. |
| ● | solo*ID: A detailed consumer assessment that collects a myriad of demographic data, personal preferences, and physiological details in order to produce a custom profile for a person. This ID allows Solo to suggest products that a consumer may enjoy or dislike. As an individual provides feedback from their product experiences the Solo machine learning platform continuously updates the users solo*ID and makes it more accurate. |
Strategy
We intend to pursue additional growth through organic initiatives, including increased marketing personnel and resources, acquisitions, and strategic relationships. Key elements of our strategy include:
| ● | expanding into new states and countries acquiring new commercial and government clients with a seed-to-sale solution that meets in-market compliance requirements; |
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| ● | capitalizing on the rapidly growing hemp CBD market with marketing investment and additional feature development; |
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| ● | acquiring additional data services clients and expanding data features and data points collected across the supply chain; |
| ● | expanding services offerings among existing customers |
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| ● | exploiting the network effect that results from our strong position in the compliance technology and inventory management market for the cannabis supply chain; |
| ● | enhancing our systems infrastructure and data security systems; |
| ● | establishing strategic partnerships to provide greater value to clients through increased data collection |
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| ● | expanding our products to other organic material industries in the United States and aboard; leveraging our first-to-market position and utilizing our long-standing relationships with thousands of growers, cultivators, dispensaries and government agencies, to continue to develop and sell our platforms and related products and services; and |
| ● | making strategic acquisitions to enhance product and service offerings and marketing breadth. |
Government Regulation
We do not grow, handle, process or sell cannabis or cannabis-derived products, nor do we ever possess any such material or process any transactions related to the sale of same. We only provide a technology platform for our clients to ensure their compliance with state law, and to monitor and control their inventory in compliance with state regulatory environments. We do not receive any commissions from sale by our clients and our revenue generation is not based on the sales of cannabis product by our clients, but rather we generate revenues through a fixed-fee based subscription revenue model. We are not directly subject to state or federal government drug regulation and our products are only intended to be used to ensure compliance with applicable state laws, under which our clients operate. Our clients are subject to state and federal law as it relates to cannabis growth, processing and sale. 33 U.S. states have legalized cannabis in some form. Cannabis, however, is still deemed illegal under federal law. The federal government regulates drugs through the Controlled Substances Act (CSA) (21 U.S.C. § 811), which does not recognize the difference between medical and recreational use of cannabis.
We believe the existing and emerging state and federal regulatory landscape creates opportunities for our platforms. We are awarded contracts with our government regulatory clients for our products and services through the process of competitive bidding. This process begins when we first learn, formally or otherwise, of a potential contract from a prospective government customer and concludes after all negotiations are completed upon award. When preparing our response to a prospective customer for a potential contract, we evaluate the contract requirements and determine and outline the services and products that we can provide to fulfill the contract at a competitive price.
Our government contracts and sub-contracts are subject to the procurement rules and regulations of the individual states. Many of the contract terms are dictated by these rules and regulations. During and after the fulfillment of a government contract, we may be audited in respect of the direct and allocated indirect costs attributed thereto. These audits may result in adjustments to our contract costs. Additionally, we may be subject to government inquiries and investigations because of our participation in government procurement. Any inquiry or investigation can result in fines or limitations on our ability to continue to bid for government contracts and fulfill existing contracts.
The applicable state government generally has the ability to terminate our contract, in whole or in part, without prior notice, for convenience or for default based on performance. If a government contract were to be terminated for convenience, we generally would be protected by provisions covering reimbursement for costs incurred on the contract and profit on those costs, but not the anticipated profit that would have been earned had the contract been completed. The state government also has the ability to stop work under a contract for a limited period of time for our convenience. In the event of a stop work order, we generally would be protected by provisions covering reimbursement for costs incurred on the contract to date and for costs associated with the temporary stoppage of work on the contract.
In order to obtain a government contract for the Leaf Data Systems, we are required to follow a competitive bidding process in each state where we seek a contract. Any government contract awarded to us could require us:
| ● | to expend material time and money ahead of receipt of revenues thereunder; |
| ● | to be become subject to potential audits and reviews by government agencies; and |
| ● | to reserve for potential liabilities under such contracts for periods longer than under private, commercial contracts. |
Privacy & Customer Data
Regulation related to the provision of services over the Internet is evolving, as federal, state and foreign governments continue to adopt new, or modify existing, laws and regulations addressing data privacy and the collection, processing, storage, transfer and use of data. In some cases, data privacy laws and regulations, such as the European Union’s (“EU”) General Data Protection Regulation (“GDPR”) that took effect in May 2018, impose new obligations directly on us as both a data controller and a data processor, as well as on many of our customers. In addition, domestic data privacy laws, such as the California Consumer Privacy Act (“CCPA”), which will take effect in January 2020, continue to evolve and could expose us to further regulatory burdens. Further, laws such as the EU’s proposed e-Privacy Regulation are increasingly aimed at the use of personal information for marketing purposes, and the tracking of individuals’ online activities.
Although we monitor the regulatory environment and have invested in addressing these developments, such as GDPR and CCPA readiness, these laws may require us to make additional changes to our services to enable us or our customers to meet the new legal requirements, and may also increase our potential liability exposure through higher potential penalties for non-compliance. These new or proposed laws and regulations are subject to differing interpretations and may be inconsistent among jurisdictions. These and other requirements could reduce demand for our services, require us to take on more onerous obligations in our contracts, restrict our ability to store, transfer and process data or, in some cases, impact our ability or our customers’ ability to offer our services in certain locations, to deploy our solutions, to reach current and prospective customers, or to derive insights from customer data globally. The costs of compliance with, and other burdens imposed by, privacy laws, regulations and standards may limit the use and adoption of our services, reduce overall demand for our services, make it more difficult to meet expectations from or commitments to customers, lead to significant fines, penalties or liabilities for noncompliance, impact our reputation, or slow the pace at which we close sales transactions, any of which could harm our business.
Furthermore, the uncertain and shifting regulatory environment and trust climate may cause concerns regarding data privacy and may cause our customers or our customers’ customers to resist providing the data necessary to allow our customers to use our services effectively. Even the perception that the privacy of personal information is not satisfactorily protected or does not meet regulatory requirements could inhibit sales of our products or services and could limit adoption of our cloud-based solutions.
Competition
chain. We compete with numerous technology and consulting companies in the cannabis industry that offer services that are similar to some of our services including, but not limited to, Acumatica, BDS Analytics, BioTrackTHC, Canna Advisors, Cannabis 365, Cova Cannabis, Denver Relief,Dutchie, Flowhub, Greenbits, Guardian, Headset, Medicine Man,Jane, Metrc, New Frontier Data, Nextec, 3C, Treez, and TILT Holdings. We also directly compete with Kind Financial, a company offering substantively similar services to us and that has partnered with Microsoft to deliver such services in the United States.
We face competition in each of the revenue segments in which we operate. We believe, however, that we possess relative strengths in each segment that provide us with competitive advantages, including:
| | ● | the range of services offered by us; |
| | ● | our management personnel and their industry knowledge and experience; and |
| | ● | our proprietary databases, which are only available to users of our platforms and consulting services. |
Range of Services
We believe that we possess a unique viewpoint into the industry because we offer solutions to, and workswork with, both commercial businesses and government regulatory agencies towards the common goal of ensuring regulatory compliance and real-time monitoring of inventory and sales. We offer a complete range of both software and services to meet these needs for both state governments and commercial businesses. While we do not face competition from firms focusing on specific subsets of our markets, there are a very limited number of competitors providing products or services that compete with our complete range of products and services. We compete with software companies offering a product to businesses only in a certain geographic region or of a certain business type. We also compete with consulting firms serving a specific phase of the cannabis plant lifecycle.life cycle.
Industry Knowledge and Experience
Our management personnel have extensive technical and business operations knowledge and experience within the cannabis industry,and technology industries, which has been developed through numerous years of service in key roles with a broad range of both cannabis and technology companies, both in terms of product and service type and size. We leverage this knowledge and experience to guide our product and service development and delivery. Our management team possesses significant compliance expertise, allowing us to continually monitor changes in legislation and regulation within the markets we and our customersclients operate. We face competition from companies whothat have teams with technical expertise or cannabis industry experience, but there are a limited number of competitors who have both and thatwho understand the interplay between software and technicaltechnology development and the application of the same to the evolving cannabis compliance landscape.
Proprietary Databases
TenTwelve years of operations hashave provided us with a statistically significant dataset of cannabis transaction information that we believe cannot be readily duplicated by new entrants into the marketplace. This growing database includes proprietary sales, market trends, customer preferences, pricing, and regulatory data. We use this dataset to predict trends more accurately predict trends in the marketplace and makesmake this dataset available to users of our platforms, providing greater utility to customersclients in this regard than can be provided by competing platforms.
Size Compared to Direct CompetitorsProducts and Solutions
Based on numerous privateSoftware
SMB Market:
Akerna’s suite of small and public sources,medium business (“SMB” or “Non-Enterprise”) products including state tax rollsMJ Platform, Ample Organics, and comparativeTrellis provide SaaS offerings for legal cannabis, hemp and CBD businesses. We provide government-licensed cultivators, manufacturers, distributors, and retail dispensaries with a data-driven seed-to-sale tracking platform that provides clients with an enterprise resource planning solution for managing their inventory and regulatory compliance. Akerna’s products and ecosystem of connections are used by clients to compliantly track inventory through all phases of the seed-to-sale cycle - from cultivation to extraction and infusion to packaging, distribution and retail sales. Data points are collected at every stage of the product life cycle and about multiple aspects of the plant’s growing environment, manufacturing processes, and ingredients, as well as retail pricing and purchase data. In Canada, the first G7 country with a federally legal market, we have a pharmacy portal and insurance adjudication.
We service licensed operators in all verticals of the industry, websites,including cultivation, manufacturing, distribution, and retail dispensaries. We have significant client presence for our commercial software solutions in mature cannabis markets such as https://www.owler.com/company/mjfreeway, we contend that we are the largest competitorArizona, California, Michigan, Pennsylvania, Colorado, Utah, Illinois, Oklahoma, and Puerto Rico, as well as Canada.
We have exclusivity in the software-basedPennsylvania and Utah markets due to our government contracts, which require operators in the states to use MJ Platform.
Solo Sciences - Anti-counterfeiting Technology
Solo is a technology provider for legal cannabis businesses with a focus on providing a cannabis tracking technology that provides seed-to-sale-to-self data throughout a product’s life cycle and empowers consumers with the ability to confirm the quality and authenticity of a product they have purchased.
Solo uses proprietary technology to place a unique encrypted arrangement of patterns, the solo*TAGTM or solo*CODETM, onto individual packaging labels. Solo technology is significantly lower cost and more secure than traditional tagging technologies like radio-frequency identification. The technology includes a free consumer mobile application, granting end-users and regulatory agencies the ability to track products in the supply chain, verify their authenticity, and learn more detailed information about the product such as its origins and ingredients.
The Solo technology platform also enables brands to connect directly with consumers. Through it, product creators can provide end-users with push notifications, targeted news, product insights, loyalty points, etc. Brands embrace the platform as it enables them to increase their revenues and create a more tailored marketing experience. Clients benefit from product incentives while gaining trust in the products they are buying and consuming.
Solo has developed several key partnerships including the Utah Department of Health and Department of Agriculture, through Akerna’s Leaf Data Systems contract including solo*TAGTM,, a key tagging and technology component in a closed-loop system used by all Utah cannabis licensees as the state’s primary tracking system at the retail, wholesale, cultivation, and manufacturing levels.
Enterprise Market:
Akerna’s Enterprise product suite provides a comprehensive vertically integrated cannabis ERP and business management software system with a choice of being built on the Microsoft Dynamics 365 Business Central platform or the SAP Business One platform. Our enterprise products were built by cannabis experts with cannabis-specific functionality built into the core of the solution and are designed to meet present and future needs of growing businesses. The software solutions allow business clients to manage their entire operations from cultivation to retail and incorporates Cultivation, Production, Global Compliance, QC, Finance, Dispensing & Retail, CRM, Warehousing, Distribution, Multi-Facility, Multi-Company, Multi-Entity, Language, Currency and more with a client base comprised of leading U.S.-based MSOs and single-state operators, and Canadian LPs, in addition to global cannabis clients outside North America. Our enterprise offerings leverage shared Akerna infrastructure for access to Akerna’s broad ecosystem of offerings and to facilitate compliance with our up-to-date regulatory integrations, unparalleled state and country reporting knowledge, and dedicated team of compliance experts.
Government Market:
Leaf Data Systems - Government Regulatory Software
Leaf Data Systems is our SaaS product for government agencies. Leaf Data Systems provides regulatory authorities with visibility into the operations of licensed medical and recreational cannabis businesses. Government regulators desire visibility at critical junctures within the seed-to-sale chain of custody in order to ensure public safety, monitor sales data for the purposes of taxation, and perform physical inspections of cannabis industry facilities. Leaf Data Systems allows for specific data points captured during these workflows to be compiled into the state and regional view retrievable by regulatory officials.
Licensed cannabis facilities within a state can track plant and product movement and waste across their organization, which is processed into reporting tailored to the government agencies that regulate and enforce the rules of the industry. This gives regulators a tool for transparency and accountability across the cannabis supply chain to ensure public and product safety as well as to monitor sales and inventory monitoring industrywithin the industry. Leaf Data Systems is customized to the regulations of the state in which it is contracted and tailored to capture the relevant data points desired by regulatory officials.
As of the date of this report, Leaf Data Systems serves two state clients, the Commonwealth of Pennsylvania and the State of Utah. The State of Utah mandates the use of our proprietary solo*TAGTM the world’s first cryptographically-secure, cannabis product authentication system, exclusively for governments as an alternative to radio-frequency identification tracking. This customized system includes an electronic verification and inventory control system to track plants and products throughout the compliance supply chain.
Business Intelligence and Data Analytics Products
We have four data products: MJ Analytics (“MJA”); and Akerna Acumen Big Data, which both leverage the extensive data captured in each of MJ Platform’s cultivation, E&I, distribution, and retail modules; AmpleData, which leverages data obtained through Canadian regulated retail channels; and Last Call Analytics, which provides retail sales analytics for alcohol brands.
MJ Analytics
MJA gives MJ Platform clients access to aggregate data across their organization to keep track of emerging legal and commercial trends, allowing for informed actionable insights at various levels within the organization, including room, location, state, brand, and administration. MJ Platform allows users to align their operational data from three vantage points: in real-time, past trends, and predictive future. This proprietary database assists the user in making important decisions in real-time with respect to product monitoring, tracking, planning, and pricing.
Built in partnership with Domo and Snowflake, MJA is monetized through the provision of Data Analytics subscriptions to clients. We typically grant a limited, non-exclusive, non-sublicensable license to use our industry data for internal management, reporting, and business optimization purposes. The information typically supplied to clients is aggregated and anonymized information regarding products, which may or may not be those of the client, sold through sales generated through our online service platforms.
Akerna Acumen Business Intelligence
We have cultivated a substantial legal cannabis dataset with over $30 billion in sales tracked and twelve years of data across 30+ states and multiple countries. With the contractual ability to aggregate and anonymize this data, we have launched the Akerna Acumen product to provide banks, investors, researchers, cannabis businesses, and non-cannabis businesses with cannabis market intelligence and valuable market comparison data. The data is available in various formats and is available with updates as frequently as daily.
Last Call Analytics & Ample Data
Ample’s wholly owned subsidiary, Last Call Analytics (“LCA”), is a retail analytics platform designed for the beverage alcohol industry, with a focus on allowing our clients to use data to empower retail operations and generate revenue growth. The platform ingests sales and product data from a wide variety of sources, normalizes and homogenizes the dataset, and displays the resultant analysis in a proprietary application.
With the underlying technologies built by LCA, Ample has created AmpleData, a retail analytics platform for the cannabis industry. The comparativeindustry that applies the same proven solution to data available indicates that we are atstreams ingested from various points within the top of the industry in terms of annual revenuesregulated supply chain. Ample Data is designed to provide key insights for Canadian cannabis license holders, cannabis agencies and number of employees. Additionally, we have one of the longest operating histories in the industry amongst these competitors, and holds the largest global footprint amongst these competitors, having served cannabis operators in 29 U.S. states, the District of Columbia and Puerto Rico and 14 countries globally dating backgovernment regulators.
Cannabis Business Consulting
We provide project-focused consulting services to 2010.
The industry in which we participate is highly fragmented, with many small and thinly-capitalized competitors. As part of our growth strategy, we may seek to acquire assets or companiesclients that are synergistic withinitiating or expanding their cannabis businesses or are interested in data consulting engagements regarding the legal cannabis industry. We typically provide our business. We have built a scalable infrastructureconsulting services to support both rapid organic growthclients in emerging markets that are seeking consultation on newly introduced licensing regimes and targeted acquisitions. By providing the full seed-to-sale solution, we believe we are well-positioned to be an acquirer of cannabis technology solutions throughout the supply chain.
Company Information
The Business Combination
On October 10, 2018 (as amended on April 17, 2019), we (f/k/a MTech Acquisition Holdings Inc.) entered into a definitive merger agreement (the “Merger Agreement”) with MTech Acquisition Corp. (“MTech”), MJF, MTech Purchaser Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Akerna (“Purchaser Merger Sub”), MTech Company Merger Sub LLC, a Colorado limited liability company and a wholly-owned subsidiary of Akerna (“Company Merger Sub”), MTech Sponsor LLC (“MTech Sponsor”), a Florida limited liability company, in the capacity as the representative for our equity holders (other than the Sellers) thereunder, and MJF and Jessica Billingsley (as successor to Harold Handelsman), in the capacity as the representative for the Sellers thereunder. The Merger Agreement provided for two mergers: (i) the merger of Purchaser Merger Sub with and into MTech, with MTech continuing as the surviving entity (the “Purchaser Merger”); and (ii) the merger of Company Merger Sub with and into MJF, with MJF continuing as the surviving entity (the “Company Merger” and togetherassistance with the Purchaser Merger, the “Business Combination”).
The merger consideration was paidregulatory compliant build-out of operations in shares of our common stock (the “Consideration Shares”) at a price per share equal to $10.16 per share. In total, 6,520,099 Consideration Shares were issued pursuant to the Merger Agreement. All of the Consideration Shares are subject to the terms of the Lock-Up Agreement (as defined below). In addition, 652,010 of the Consideration Shares (the “Escrow Shares”) are held in an escrow account (the “Escrow Account”) to cover any adjustments to the Merger Consideration (as defined in the Merger Agreement) or claims for indemnification pursuant to the Merger Agreement until ninety (90) days after we file our 2019 Annual Report with the U.S. Securities and Exchange Commission, with the exception of Escrow Shares held to satisfy then pending claims that shall remain in the Escrow Account until the claims are resolved. In addition, 215,063 of the Consideration Shares are subject to restricted stock agreements with varying vesting terms that reflect the vesting conditions application to equity interests of the applicable MJF equity holders at the time of the Business Combination.newly opened states.
In connection with the Merger Agreement, all recipients of the Consideration Shares executed a lock-up agreement (the “Lock-up Agreement”). Pursuant to the Lock-up Agreement, each holder agreed not to engage in any transfer or other transaction with respect to the Consideration Shares for a period of time. With respect to 50% of the Consideration Shares, each holder agreed not to engage in a transfer or other transaction until the earlier of (1) one year from the closing of the Business Combination and (2) the date on which we close a subsequent corporate transaction with an unaffiliated third party that results in all of our shareholders having the right to exchange their shares for cash, securities or other property. With respect to the remaining 50% of the Consideration Shares, each holder agreed not to engage in a transfer or other transaction until the earlier of (1) one year from the closing the Business Combination, (2) the date on which we close a subsequent corporate transaction with an unaffiliated third party that results in all of our shareholders having the right to exchange their shares for cash, securities or other property and (3) the date on which the closing share price of our common stock equals or exceeds $12.50 per share for any twenty trading days with any thirty trading day period. The third condition in the immediately preceding sentence was met and as such, there is no longer a lock-up with respect to 50% of the Consideration Shares.
On June 17, 2019, MTech heldEntering the cannabis industry is a Special Meeting, at which the MTech stockholders considered and approved, among other matters, the Merger Agreement. On June 17, 2019, the parties consummated the Business Combination.
At the Special Meeting, holders of 4,452,042 shares of MTech’s common stock sold in its initial public offering (the “Public Shares”), or 99 stockholders of MTech, exercised their rightsignificant undertaking. We work with clients to redeem those shares for cash at a price of $10.23841733 per share, for an aggregate of $45,581,864 (which represented 77.98% of the funds held in the trust account of MTech on the date of the Special Meeting). Upon closing of the Business Combination, MTech’s units ceased trading, and our common stock and warrants began trading on The Nasdaq Stock Market under the symbols “KERN” and “KERNW,” respectively, we changed our name from MTech Acquisition Holdings Inc. to “Akerna Corp.”, and MJF became our wholly-owned subsidiary. Immediately after giving effect to the Business Combination (including as a result of the redemptions described above and the transfer of the 100,120 Transferred Sponsor Shares (as defined below) pursuant to the Sponsor Stock Transfer Agreement (as defined below)) and the issuance of an additional 901,074 shares of common stock for an aggregate purchase price of approximately $9.2 million in the Private Placement (as defined below) consummatedefficiently comply with state requirements in connection with the Business Combination, there were 10,400,381 shareslaunch and operations of their cannabis businesses. Our management and key personnel bring deep cannabis industry experience to us. Our management team and key personnel have broad experience gained from working with numerous cannabis businesses, with operational experience across every vertical (e.g., cultivation, processing, and retail). Our team members have previously managed projects, including cultivation facilities exceeding 100,000 square feet, retail operations with locations in multiple states, and online businesses serving an entire country.
Competitive Advantage
Partner API. We host an open API ecosystem and are continually developing and maintaining an extensive collection of integrations that are designed to connect our solutions to over 80 partners, provide full-service solutions at all points in the cannabis business life cycle, including compliance, hardware, banking, accounting, online ordering, payment solutions, CRM and loyalty, delivery, and business analytics. We believe these integrations provide a competitive advantage as they reduce implementation time, effort, and cost while providing a holistic cannabis solution; We have certified API integration with tier one ERP software providers supplying sophisticated accounting solutions that collect and store business transactions to satisfy external reporting requirements. Additionally, we leverage revenue sharing agreements and referral programs with our strategic partners to further grow our business and our revenue.
Technology. As the inventors of Seed-To-Sale technology, our proprietary platform is an AWS cloud-based software solution. We offer specialized cannabis workflows specific to the needs of the industry. We serve all verticals of the cannabis supply chain (cultivation, manufacturing, distribution, retail and delivery). We are one of the few true, single-platform Seed-To-Sale solutions in the cannabis space, and the sophistication of our common stocktechnology allows us to uniquely scale across legal markets. Our platform has processed over $30 billion in legal cannabis sales, with speed, reliability, and warrantssecurity capabilities designed to purchase 5,993,750 sharesserve the needs of even the largest of enterprise customers. Compliance with state regulations is built into our platform infrastructure, assisting clients in their efforts to operate within the regulation parameters of their individual markets. The business insights provided by the data collection throughout the supply chain enables businesses to optimize their operations and make crucial data-driven decisions for their business. These insights are easily analyzed and made actionable by our MJ Analytics module, built in partnership with Domo, a leading BI platform.
Learning Management System. Through our license with ZolTrain, we are able to provide our Akerna clients with training modules to educate and on-board their staff and improve the patient /consumer experience by pairing education with product information both in person and through digital channels. The Zoltrain platform allows cannabis employees to self-direct their own learning and certification through an Akerna specific curriculum, and their employers are able to monitor and track their progress, assisting clients in ensuring that their staff is fully trained and knowledgeable about the software they are required to use within their job functions. This is one of the only LMS platforms specifically designed both for the industry and for our software. It provides detailed notes, takeaways, scored exams and certificates of completion, ensuring staff knows their Seed-To-Sale software inside and out. Zoltrain modules are dynamic, and can be easily updated to accommodate new content or education on new product offerings. The AmpleLearn platform is a similar onboarding and education tool developed for Ample Organics clients to assist with building their proficiency using the software in Canada. Similar to Zoltrain, AmpleLearn is built on industry tested content within a dynamic learning environment. There are assessments, progress reports and certifications that are all available to both the employee and their supervisor. The AmpleLearn product is maintained by the internal team at Ample Organics, ensuring that the content is always up-to-date with the most recent software upgrades and functionality.
Strategy
We intend to leverage our scale and capital markets access to pursue additional growth through organic initiatives and to pursue our ecosystem strategy which leverages integrations, partnerships, and inorganic growth. We believe having a scaled ecosystem gives us more opportunities to leverage our footprint and increase wallet share by providing more value to our clients through having what we believe is the most robust cannabis technology suite available. We intend to pursue additional growth through organic initiatives, including increased marketing personnel and resources, acquisitions, and strategic relationships.
| ● | Graduate our SMB clients to Enterprise. Consolidation, limited license markets, and natural industry maturation are leading many companies in our SMB portfolio to look at enterprise technology to scale their business. These market forces are an opportunity for us to convert more of our client base to our Enterprise solutions as they grow and expand into other states. We have mobilized ongoing marketing and sales campaigns to identify and actively engage these opportunities to convert to Enterprise. |
| ● | Broaden our base of clients. With increasing cannabis legislation, rapid industry consolidation, and opportunities in other supply-chain driven industries, Akerna will continue to focus on expanding our leadership and market share in the mid-market, while optimizing our offerings for the multi-state/multi-vertical enterprise segment. We will continue to invest in our sales and marketing efforts and intend to expand into new markets to grow our client base. |
| ● | Grow revenue from our existing clients. With increased product line offerings, such as MJ Analytics, as well as our growing API partner network, we are able to offer continued opportunities for our customers to optimize and streamline their operations. By leveraging our existing client base and provide them with an array of tools and solutions, we are able to increase the revenue opportunity without the burden of new client acquisition costs. |
| ● | Expand and deepen our partner ecosystem. We have an extensive network of API integrated cannabis application providers and other referral sources providing us with new avenues of qualified leads and new client opportunities. By continuing to grow and optimize these partner agreements and relationships, we have increased exposure to larger client pools, and revenue sharing agreements. |
Customers
Businesses across the cannabis and hemp industries and of all sizes, ranging from small, single location/ single vertical businesses to multi-state enterprise operations, use the Akerna family of solutions. The cannabis industry is still very much in its infancy compared to more established markets, and as it matures, we are seeing a shift in the typical business model. In the beginning, most operators only managed a single location, or a single vertical operation, and therefore many of our common stock issuedlonger-standing clients fall into the small to mid-market size business. Over the past few years, and outstanding. Assignificantly expedited by the COVID-19 pandemic, we are witnessing large-scale, rapid consolidation within the industry. Many of the closing dateoriginal small licensees are being purchased and assumed into larger, multi-state, enterprise level organizations. Our software solutions are designed to be scalable, and as we see this shift in the market, we are focused on extending our customer reach to address the needs of the Business Combination,emerging enterprise level operator. We believe these larger multi-state/multi-vertical operations represent significant long-term future growth opportunities as the former securityholderscannabis industry continues to consolidate. As more states legalize, these operators are identifying future growth opportunities into these expanded legal markets and need a software solution that can grow with them.
Sales and Marketing
We sell our solutions primarily on a subscription basis with module-based and user-seat pricing, allowing businesses to customize their solution based on their specific business model or vertical. With our integrations to major accounting solutions and cannabis service providers, we are able to customize solutions for all sizes and types of MJF beneficially owned approximately 62.7%businesses. To gain market share and expand beyond the small to mid- size market, Akerna invests in specialized go-to-market strategies for sales and marketing unique to each state and customer segment.
Our omnichannel marketing program, which includes paid and unpaid digital advertising, event marketing, account-based marketing, content marketing, prospect database nurturing, and other digital marketing activities, is designed to capture inbound marketing leads. We also leverage our expertise and industry intelligence to identify and engage directly with our prospective customers, especially at the enterprise level. Additionally, we have a broad ecosystem of partners across the cannabis industry and have selectively implemented referral and revenue sharing opportunities with the key players.
We reach each market segment, from emerging small business to enterprise, through channels and tactics that match their expectations for content, outreach, timeliness, and service level. This can require high touch service for some enterprise customers, with more a traditional purchase path for the smallest companies. We hire and train both sales and marketing professionals specialized for the market and the customer segment.
For growth in the regulatory and consulting side, we stay current on emerging legal markets, both nationally and globally to actively conduct outreach and education programs to engage with state regulators and business owners. This strategy strongly supports the growth of our outstanding shares of our common stock, the former securityholders of MTech beneficially owned approximately 27.7% of our outstanding shares of our common stock,consulting client bases, as we provide license application assistance in new markets, and the Investors (as defined below) beneficially owned approximately 9.6% of our outstanding shares of our common stock. Upon the closingrequire in-depth understanding of the Business Combination,regulatory guidelines to be able to successfully win licenses for our managementcustomers. We leverage our expertise to provide thought-leadership and principal stockholders beneficially owned approximately 59.70% of our outstanding shares of our common stock.
As noted above, the per share redemption price of $10.23841733 for holders of Public Shares electing redemption was paid out of MTech’s trust account, which had a balance immediately prior to closing of the Business Combination of approximately $58.9 million. MTech’s trust account was also reduced by approximately $4.4 millionindustry guidance in order to satisfy obligationsgain recognition as a leader in the space.
Government Regulation
Cannabis and Cannabis-derived Products
We do not grow, handle, process, or sell cannabis or cannabis-derived products, nor do we ever possess any such material or process any transactions related to vendorsthe sale of the same. We only provide a technology platform for our clients to assist them with their compliance with state law and to monitor and control their inventory in compliance with state regulatory environments. We do not receive any commissions from sale by our clients and our revenue generation is not based on the sales of cannabis products by our clients, but rather we generate revenues through a fixed-fee based subscription and professional services performedrevenue model. We are not directly subject to state or federal government drug regulation and our products are only intended to be used to assist with compliance with applicable state laws, under which our clients operate.
Our clients are subject to state and federal law as it relates to cannabis growth, processing, and sale. 37 U.S. states have legalized cannabis in connectionsome form. The federal government regulates drugs through the Controlled Substances Act (CSA) (21 U.S.C. § 811), which does not recognize the difference between medical and recreational use of cannabis. State laws regulating cannabis are in direct conflict with the Business Combination.CSA, which prohibits cannabis use and possession. Although certain states and territories authorize medical or recreational cannabis cultivation, manufacturing, production, distribution, and sales by licensed or registered entities, under federal law, the cultivation, manufacture, distribution, possession, use, and transfer of cannabis and any related drug paraphernalia, unless specifically exempt, is illegal and any such acts are criminal acts under the CSA.
While the U.S. Department of Justice has used prosecutorial discretion to not prioritize enforcement actions against state-legal cannabis businesses that are compliant with state, county, municipal and other local laws and regulations and which do not trigger any other federal enforcement priorities, the Department of Justice reserves the right to enforce federal law and there can be no assurance that the federal government will not enforce the CSA and related federal laws in the future. Any shift in enforcement priority at the Department of Justice or with the individual U.S. Attorneys with jurisdiction over our clients, could have a drastic and adverse impact upon our clients and our business.
While we do not grow, handle, process or sell cannabis or cannabis-derived products, our receipt of funds from clients that do conduct such operations in violation of federal law exposes us to risks related to federal racketeering laws. The Racketeer Influenced Corrupt Organizations Act (“RICO”) is a federal statute providing criminal penalties in addition to a civil cause of action for acts performed as part of an ongoing criminal organization. Under RICO, it is unlawful for any person who has received income derived from a pattern of racketeering activity (which includes most felonious violations of the CSA), to use or invest any of that income in the acquisition of any interest, or the establishment or operation of, any enterprise which is engaged in interstate commerce. RICO also authorizes private parties whose properties or businesses are harmed by such patterns of racketeering activity to initiate a civil action against the individuals involved. Although RICO suits against the cannabis industry are rare, a few cannabis businesses have been subject to a civil RICO action.
Our receipt of payments from clients engaged in state-legal cannabis operations could also subject us to the consequences of a variety of federal laws and regulations that involve money laundering, financial record keeping and proceeds of crime, including the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act) and any related or similar rules, regulations or guidelines, issued, administered or enforced by the federal government. Because the funds from activities that are illegal under the CSA, banks and other financial institutions providing services to us risk violation of federal anti-money laundering statutes (18 U.S.C. §§ 1956 and 1957), the unlicensed money-remitter statute (18 U.S.C. § 1960) and the Bank Secrecy Act, among other applicable federal statutes. Banks often refuse to provide banking services to businesses involved in the cannabis industry due to the present state of federal laws and regulations governing financial institutions. The lack of banking and financial services presents unique and significant challenges to businesses in the cannabis industry and we may experience similar difficulties in obtaining and maintaining regular banking and financial services because of the activities of our clients.
Any violations of federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens or criminal charges, including but not limited to, seizure of assets, disgorgement of profits, cessation of business activities or divestiture. In the event that any of our operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize our ability to declare or pay dividends or effect other distributions. Furthermore, while there are no current intentions to declare or pay dividends in the foreseeable future, in the event that a determination was made that our proceeds from operations (or any future operations) could reasonably be shown to constitute proceeds of crime, we may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
Privacy & Customer Data
Regulation related to the provision of services over the Internet is evolving, as federal, state, and foreign governments continue to adopt new, or modify existing, laws and regulations addressing data privacy and the collection, processing, storage, transfer, and use of data. In some cases, data privacy laws and regulations, such as the European Union’s (“EU”) General Data Protection Regulation (“GDPR”) that took effect in May 2018, impose new obligations directly on us as both a data controller and a data processor, as well as on many of our clients. In addition, MTech obtained approximately $9.2 milliondomestic data privacy laws, such as the California Consumer Privacy Act (“CCPA”), which took effect in proceedsJanuary 2020, continue to evolve and could expose us to further regulatory burdens. Further, laws such as the EU’s proposed e-Privacy Regulation are increasingly aimed at the use of personal information for marketing purposes and the tracking of individuals’ online activities.
Although we monitor the regulatory environment and have invested in addressing these developments, such as GDPR and CCPA readiness, these laws may require us to make additional changes to our services to enable us or our clients to meet the new legal requirements, and may also increase our potential liability exposure through higher potential penalties for non-compliance. These new or proposed laws and regulations are subject to differing interpretations and may be inconsistent among jurisdictions. These and other requirements could reduce demand for our services, require us to take on more onerous obligations in our contracts, restrict our ability to store, transfer, and process data or, in some cases, impact our ability or our clients’ ability to offer our services in certain locations, to deploy our solutions, to reach current and prospective customers, or to derive insights from customer data globally. The costs of compliance with, and other burdens imposed by, privacy laws, regulations, and standards may limit the Private Placement (as defined below)use and adoption of our services, reduce overall demand for our services, make it more difficult to meet expectations from or commitments to clients, lead to significant fines, penalties or liabilities for non-compliance, impact our reputation, or slow the pace at which we close sales transactions, any of which could harm our business.
Furthermore, the uncertain and shifting regulatory environment and trust climate may cause concerns regarding data privacy and may cause our clients or our clients’ customers to resist providing the data necessary to allow our clients to use our services effectively. Even the perception that the privacy of personal information is not satisfactorily protected or does not meet regulatory requirements could inhibit sales of our products or services and could limit the adoption of our cloud-based solutions.
Patents and Trademarks
We primarily rely upon a combination of confidentiality procedures, contractual provisions, copyright, trademark, patent, and trade secret laws, and other similar measures to protect our proprietary information and intellectual property.
We hold 2 patents in the U.S., immediately priorthrough Solo, related to its Solo*ID proprietary technology. One patent has an issue date of December 1, 2009 and is set to expire on December 1, 2029. The other patent has an issue date of May 31, 2011 and is set to expire on July 11, 2025. We also have 2 patent applications that are currently pending action by the closingU.S. Patent Office. One was filed on April 22, 2011 by MJF and the other was filed on January 22, 2022 related to Solo blockchain technology.
We and our wholly-owned subsidiaries hold 19 trademarks in the U.S., principally related to Akerna, MJ Freeway, Leaf Data Systems, our Daily Dose mailer, Solo*ID and our logos and designs, 7 in Canada, principally related to Ample, AmpleCentral, AmpleData, AmpleExchange and Ample’s logos and designs and 1 in Colombia, 1 in Jamaica and 1 on EUIPO related to Ample’s logo and designs.
Employees
As of December 31, 2021, we had 204 full time employees. Of these employees, 157 were based in the U.S. and 47 were based in Canada. Our workforce is highly educated, with most of our employees working in engineering, technical, or professional roles. None of our employees are a member of a union or a party to any collective bargaining agreement. We believe our employee relations are good. On May 27, 2022, the Company announced its implementation of certain expense reduction measures, approved by the Company’s board of directors on May 24, 2022, including a reduction of the Business Combination. We received proceeds ofCompany’s workforce by 59 full-time employees, or approximately $18 million upon the consummation33% of the Business Combination and the Private Placement, net of the payments to redeeming MTech stockholders of approximately $45.6 million, third party vendors of approximately $4.4 million, and additional capital raised in the Private Placement of $9.2 million.
Upon the closing of the Business Combination, the outstanding Common Units, Preferred Units, and Profit Interest Units of MJF were exchangedCompany. See “Recent Developments” above for shares of our common stock at an exchange ratio of one Unit of MJF to 0.26716 shares of Akerna common stock (the “Exchange Ratio). Except as otherwise noted, all common share amounts and per share amounts have been adjusted to reflect this Exchange Ratio, which was effected upon the Merger.more information.
The Business Combination has been accounted for as a reverse merger in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The owners and management of MJF have actual or effective voting and operating control of the combined company. In the Business Combination, MTech is the accounting acquiree and MJF is the accounting acquirer. A reverse recapitalization is equivalent to the issuance of stock by the private operating company for the net monetary assets of the accounting acquiree accompanied by a recapitalization with accounting similar to that resulting from a reverse acquisition, except that no goodwill or intangible assets are recorded.
The accompanying financial statements and related notes reflect the historical results of MJF prior to the merger and of the combined company following the Mergers, and do not include the historical results of MTech prior to the completion of the Mergers.
The Private Placement
In connection with the Business Combination, from June 5, 2019, through June 10, 2019, MTech entered into subscription agreements (each, a “Subscription Agreement”) with certain investors, whereby the investors named therein (the “Investors”) committed to purchase an aggregate of 901,074 shares of common stock of MTech for an aggregate purchase price of approximately $9.2 million (the “Private Placement”). Upon the closing of the Business Combination, such shares issued by MTech in the Private Placement (“Private Placement Shares”) were automatically converted into shares of our common stock on a one-for-one basis.
Pursuant to the Subscription Agreements, each Investor was granted an option (the “Private Placement Option”) for a period of sixty (60) days starting after the closing of the Business Combination to purchase, subject to certain conditions, additional shares of our common stock (“Option Shares”) at a price of $10.21 per share, up to a number of Option Shares equal to the number of Private Placement Shares purchased and held and not redeemed by such Investor under the Subscription Agreement. The Private Placement Option has expired and no Investor exercised such option.Company Information
In connection with the execution of the Subscription Agreements, MTech Sponsor and MTech entered into an Agreement to Transfer Sponsor Shares (each, a “Sponsor Stock Transfer Agreement”) with each Investor, pursuant to which MTech Sponsor agreed to transfer to each Investor at the closing of the Private Placement one share of Class B common stock of MTech for each nine Private Placement Shares purchased by such Investor for an aggregate of 100,120 shares of common stock (such shares, the “Transferred Sponsor Shares”). Each Investor agreed to accept its portion of the Transferred Sponsor Shares subject escrow and other restrictions under the Letter Agreement, dated as of January 29, 2018, by and among MTech and EarlyBirdCapital, Inc.
Emerging Growth Company
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act since(the “JOBS Act”) because we went public in the U.S. in January 2018.2018 and meet the criteria outlined in the JOBS Act. We will remain an emerging growth company foruntil up to the last day of the fiscal year following the fifth anniversary of our initial public offering, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenue exceeds $1.07 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. Pursuant to Section 107 ofAs allowed by the JOBS Act, we have elected to utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Actto non-public companies for complying with new or revised accounting standards.
Employees
We have 136 employees as of June 30, 2020. None of our employees are a member of a union or a party to any collective bargaining agreement. We consider our relationship with our employees to be good.
DESCRIPTION OF PROPERTY
We currently maintain offices at 1630 Welton Street, Floor 4,Our corporate headquarters are located in Denver, Colorado, 80202, whichalthough we do not lease or own any real property associated with our corporate headquarters as our workforce is primarily remote. We have one facility that we lease in Las Vegas, Nevada which serves as office space for an aggregate of approximately $41,900 per month. The lease expires on January 31, 2022.our Las Vegas based employees. We believe that our existing facilities are adequate for our current offices areneeds and that suitable additional or alternative space would be available to us to lease on commercially reasonable terms if and adequate to operate our business at this time.when we need it.
LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings, and no such proceedings are known to be contemplated.
No director, officerFrom time to time, we may become involved in other legal proceedings or affiliate of Akerna and no owner of record or beneficial owner of more than 5%be subject to claims arising in the ordinary course of our securities or any associatebusiness. Regardless of the outcome of any such director, officerexisting or security holder is a partyfuture litigation, litigation can have an adverse to Akerna or has a material interest adverse to Akerna in reference to pending litigation.impact on us because of defense and settlement costs, diversion of management resources, and other factors.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
Our common stock is listed on the Nasdaq Capital Market under the trading symbol “KERN”. As of August 4, 2020,June 24, 2022, we had 14,058,70736,796,522 shares of common stock issued and outstanding and approximately 160240 registered shareholders. Because many of our shares of common stock are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders.
Purchases of Equity Securities by the Company and Affiliates
None.
2019 Long Term Incentive Plan Summary
The purpose of the Incentive Plan is to enable Akerna to offer its employees, officers, directors and consultants whose past, present and/or potential future contributions to Akerna have been, are, or will be important to its success, an opportunity to acquire a proprietary interest in Akerna. The various types of incentive awards that may be provided under the Incentive Plan are intended to enable Akerna to respond to changes in compensation practices, tax laws, accounting regulations and the size and diversity of its business.
Plan Administration
The Incentive Plan is administered by the compensation committee of the Akerna Board (the “Compensation Committee”) or by the full Akerna Board, which may determine, among other things, (1) the persons who are to receive awards, (2) the type or types of awards to be granted to such persons, (3) the number of shares of common stock to be covered by, or with respect to what payments, rights, or other matters are to be calculated in connection with the awards, (4) the terms and conditions of any awards, (5) whether, to what extent, and under what circumstances awards may be settled or exercised in cash, shares of common stock, other securities, other awards or other property, or cancelled, forfeited, or suspended and the method or methods by which awards may be settled, exercised, cancelled, forfeited, or suspended, (6) whether, to what extent, and under what circumstances the delivery of cash, shares of common stock, other securities, other awards or other property and other amounts payable with respect to an award, and (7) make any other determination and take any other action that the Compensation Committee deems necessary or desirable for the administration of the Incentive Plan.
Stock Options
Stock options granted under the Incentive Plan may be of two types: (i) Incentive Stock Options (as defined in the Incentive Plan) and (ii) Non-qualified Stock Options (as defined in the Incentive Plan). Any stock option granted under the Incentive Plan shall contain such terms, as the Compensation Committee may from time to time approve.
The term of each stock option shall be fixed by the Compensation Committee; provided, however, that no stock option may be exercisable after the expiration of ten years from the date of grant; provided, further, that no Incentive Stock Option granted to a person who, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of voting stock of Akerna (“10% Shareholder”) may be exercisable after the expiration of five years from the date of grant.
The exercise price per share purchasable under a stock option shall be determined by the Compensation Committee at the time of grant; provided, however, that the exercise price of a stock option may not be less than 100% of the fair market value on the date of grant; provided, further, that the exercise price of an Incentive Stock Option granted to a 10% Shareholder may not be less than 110% of the fair market value on the date of grant.
Stock Appreciation Rights
The Compensation Committee may grant Stock Appreciation Rights in tandem with a stock option or alone and unrelated to a stock option. The Compensation Committee may grant stock appreciation rights to participants who have been or are being granted stock options under the Incentive Plan as a means of allowing such participants to exercise their stock options without the need to pay the exercise price in cash. In the case of a Non-qualified Stock Option, a stock appreciation right may be granted either at or after the time of the grant of such Non-qualified Stock Option. In the case of an Incentive Stock Option, a stock appreciation right may be granted only at the time of the grant of such Incentive Stock Option. Stock appreciation rights shall be exercisable as shall be determined by the Compensation Committee. All or a portion of a stock appreciation right granted in tandem with a stock option shall terminate and shall no longer be exercisable upon the termination or after the exercise of the applicable portion of the related stock option.
Restricted Stock and Restricted Stock Units
Shares of restricted stock may be awarded either alone or in addition to other awards granted under the Incentive Plan. The Compensation Committee shall determine the eligible persons to whom, and the time or times at which, grants of restricted stock will be awarded, the number of shares to be awarded, the price (if any) to be paid by the holder, any restriction period, the vesting schedule and rights to acceleration thereof, and all other terms and conditions of the awards. In addition, the Compensation Committee may award restricted stock units, which may be subject to vesting and forfeiture conditions during the applicable restriction period, as set forth in an agreement.
Restricted stock constitutes issued and outstanding shares of common stock for all corporate purposes. The holder will have the right to vote such restricted stock and to exercise all other rights, powers and privileges of a holder of common stock with respect to such restricted stock, subject to certain limited exceptions. Upon the expiration of the restriction period with respect to each award of restricted stock and the satisfaction of any other applicable restrictions, terms and conditions, all or part of such restricted stock shall become vested in accordance with the terms of the agreement. Any restricted stock that do not vest shall be forfeited to Akerna and the holder shall not thereafter have any rights with respect to such restricted stock.
The Compensation Committee may provide that settlement of restricted stock units will occur upon or as soon as reasonably practicable after the restricted stock units vest or will instead be deferred, on a mandatory basis or at the holder’s election, in a manner intended to comply with tax laws. A Holder will have no rights of a holder of common stock with respect to shares subject to any restricted stock unit unless and until the shares are delivered in settlement of the restricted stock unit. If the Committee provides, a grant of restricted stock units may provide a holder with the right to receive dividend equivalents.
Other Stock-Based Awards
Other Stock-Based Awards may be awarded, subject to limitations under applicable law, that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares of common stock, as deemed by the Compensation Committee to be consistent with the purposes of the Incentive Plan, including, without limitation, purchase rights, shares of common stock awarded that are not subject to any restrictions or conditions, convertible or exchangeable debentures, or other rights convertible into shares of common stock and awards valued by reference to the value of securities of or the performance of specified subsidiaries.
Change of Control Provisions
The Incentive Plan provides that in the event of a change of control event, (1) all of the then outstanding options and stock appreciation rights granted pursuant to the Incentive Plan will immediately vest and become immediately exercisable as of a time prior to the change in control and (2) any performance goal restrictions related to an award will be deemed achieved at 100% of target levels and all other conditions met as of a time prior to the change in control. In the event of the sale of all of Akerna’s assets or a change of control event, then the Compensation Committee may (1) accelerate the vesting of any and all Stock Options and other awards granted and outstanding under the Incentive Plan; (2) require a holder of outstanding options to relinquish such award to Akerna upon the tender by Akerna to holder of cash, stock or other property, or any combination thereof pursuant to the terms of the Incentive Plan and (3) terminate all incomplete performance periods in respect of awards in effect on the date the acquisition occurs, determine the extent to which performance goals have been met based upon such information then available as it deems relevant and cause to be paid to the holder all or the applicable portion of the award based upon the Compensation Committee’s determination of the degree of attainment of performance goals, or on such other basis determined by the Compensation Committee.
The Akerna Board may at any time, and from time to time, amend alter, suspend or discontinue any of the provisions of the Incentive Plan, but no amendment, alteration, suspension or discontinuance shall be made that would impair the rights of a holder under any agreement theretofore entered into hereunder, without the holder’s consent, except as set forth in this Incentive Plan or the agreement. Notwithstanding anything to the contrary herein, no amendment to the provisions of the Incentive Plan shall be effective unless approved by the stockholders of Akerna to the extent stockholder approval is necessary to satisfy any provision of the Ethics Code or other applicable law or the listing requirements of any national securities exchange on which Akerna’s securities are listed.
Equity Compensation Plans
The following summarytable provides information is presented as of June 30, 2020December 31, 2021, with respect to the shares of our common stock that may be issued under our existing equity compensation plans:
| | | Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights or
vesting
of restricted
stock units
(column - a) | | | Weighted-
average exercise
price of
outstanding
options,
warrants and
rights or
vesting
of restricted
stock units
(column - b) | | | Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in column (a))
(column - c) | |
| 2019 - Equity compensation plan approved by security holders | | | 683,767 | (1) | | $ | - | | | | 459,539 | |
| Total | | | 683,767 | (1) | | $ | - | | | | 459,539 | |
| | | Number of
securities to be
issued upon
exercise of
outstanding options,
warrants,
and rights
(a) | | | Weighted-average
exercise price of
outstanding
options,
warrants, and
rights
(b) | | | Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
(c) | |
| Equity compensation plans approved by security holders(1) | | | 519,357 | (1) | | $ | 0 | | | | 1,177,425 | |
| Equity compensation plans not approved by security holders | | | Not Applicable | | | | Not Applicable | | | | Not Applicable | |
| TOTAL | | | 519,357 | (1) | | $ | 0 | | | | 1,177,425 | |
| (1) | (1) | See “2019 Long Term Incentive Plan Summary” above. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this Prospectus.prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth under “Risk Factors” and “Note“Note Regarding Forward-Looking Statements” above.
Akerna is the leading provider of enterprise software solutions within the cannabis industry. By providing an integrated ecosystem of applications and services that enables compliance, regulation, consumer safety and taxation, Akerna is building the technology backbone of the cannabis industry. Our solutions provide clients with integrated security, transparency, and scalability capabilities, all while maintaining compliance with their governing regulations.
We intend to leverage our scale and capital markets access to pursue additional growth through organic initiatives and to pursue our ecosystem strategy which leverages integrations, partnerships, and inorganic growth. We believe having a scaled ecosystem gives us more opportunities to leverage our footprint and increase wallet share by providing more value to our clients through having what we believe is the most robust cannabis technology suite available. We intend to pursue additional growth through organic initiatives, including increased marketing personnel and resources, acquisitions, and strategic relationships. We will continue scaling our platform for continued growth, adding new features and functionality, supporting new products and content types, and improving the user experience.
We offer our software solutions to our customers as a subscription-based service. Subscription fees are based upon the chosen package which includes differentiated platform capabilities, support and user accounts. As customers recognize the value of our platform, we increasingly engage with them to facilitate broad adoption across other parts of their business.
We believe having a scaled ecosystem gives us more opportunities to leverage our footprint and increase wallet share by providing more value to our clients through having what we believe is the most robust cannabis technology suite available. In order to accelerate customer growth, we intend to pursue additional initiatives, including increased marketing personnel and resources, acquisitions, and strategic relationships. We believe we are underpenetrated in the overall market and have significant opportunity to expand our customer base over time.
We have invested in professional services, customer support and customer success functions to support our sales force by helping customers successfully deploy our platform. We actively engage with our customers to assess whether they are satisfied and fully realizing the benefits of our platform. While these efforts often require a substantial commitment and upfront costs, we believe our investment in product, customer support, customer success and professional services will create opportunities to expand our customer relationships over time.
We plan to continue to make investments in areas of our business to continue to expand our platform functionality to enhance current offerings and build new features.
On April 1, 2021 and October 1, 2021, we completed our acquisitions of Viridian and 365 Cannabis which is reflected in the consolidated financial statements for the fiscal year ended December 31, 2021. The impact of the acquisition is discussed in our results of operations below.
Key Business Metrics
In addition to our results determined in accordance with U.S. Generally Accepted Accounting Principles, or GAAP, we believe earnings before interest, taxes, depreciation and amortization, or EBITDA, and Adjusted EBITDA are useful in evaluating our operating performance. We use EBITDA and Adjusted EBITDA, to evaluate our ongoing operations and for internal planning and forecasting purposes. Please see the heading Non-GAAP Financial Measures for additional discussion and a reconciliation of GAAP net loss to these non-GAAP measures.
Impact of COVID-19
In December 2019, COVID-19 was first reported. After ongoing assessment of the rapid spread, number of cases and countries affected, on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. The COVID-19 pandemic has created significant global economic uncertainty, impacted the business of our clients, impacted our consulting business and our results of operations and could further impact our results of operations, and our cash flows in the future.
The COVID-19 pandemic impacted our clients’ business and the industry. Nearly every state and country where medical and adult use cannabis was legal declared access essential, which we believe is a significant shift in sentiment. Our clients also have experienced increased consumer demand throughout the year, including during the pandemic. We believe COVID-19 has accelerated consolidation in the cannabis industry. At the peak of the crisis, cannabis companies lost on average 75% to 90% of their value, however, industry sales in 2021 increased 40% over 2020. As we move towards economic recovery from the pandemic, more state governments are looking to cannabis legalization to generate tax revenue and create jobs. During the November 2020 election, a total of 7 initiatives in 5 states passed with overwhelming majority support, showing increased bi-partisan support. These initiatives bring the total number of states with legal, medical markets to 36 and adult-use markets to 17, plus Washington, DC. Various additional states have pending legislation aimed at expanding or adding legalization to their markets. In terms of job creation, over 107,059 jobs were added to the cannabis workforce in 2021, raising the total number of full-time equivalent jobs in the industry to 428,059.
The ultimate extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration of the outbreak, the severity of the disease, responsive actions taken by public health officials, the impacts on our clients and our sales cycles, our ability to generate new business, the impacts on our clients, employee and industry events, and the effects on our vendors, all of which are uncertain and currently cannot be predicted. As a result, the extent to which the COVID-19 pandemic will continue to impact our financial condition or results of operations is uncertain. Due to our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods. If the COVID-19 pandemic has a substantial impact on our employees’, partners’ or clients’ productivity, our results of operations and overall financial performance may be harmed.
See the section entitled “Risk Factors” for further discussion of the impact and possible future impacts of the COVID-19 pandemic on our business.
Strategic Acquisitions
We have pursued and expect to continue to pursue acquisitions that align with our strategic objectives to build relevant content, technology, and expertise to best serve our current and future customers. Accordingly, the comparability of periods covered by our consolidated financial statements are, and in the future may be, affected by the impact of these acquisitions.
Components of Results of Operations
Revenue
We generate revenue from two primary sources: (1) software and (2) consulting services. Revenue from software comprised approximately 92%, 86% and 79% of our revenue for the year ended December 31, 2021, six months ended December 31, 2020, and year ended June 30, 2020, respectively. Revenue from consulting services comprised approximately 7%, 12% and 19% of our revenue for the year ended December 31, 2021, six months ended December 31, 2020, and year ended June 30, 2020, respectively. 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, 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 derivedgenerated from subscriptions and services related to the use of our commercial software platforms, MJ Platform, Ample, Trellis, Viridian, and 365 Cannabis, our SaaS enterprise resource planning tool offering for state-licensed businesses, andgovernment regulatory platform, Leaf Data Systems, our track-and-trace product for government agencies. MJ Platformand the sale of business intelligence, data analytics and other software related services. Software contracts are generally quarterly or annual contracts paid monthly, quarterly, or annually in advance of service and cancellable upon 30 or 90 days’ notice, although we do have somemany multi-year MJ Platformcommercial software contracts. We defer recognition of revenue from these payments until services have been provided, generally ratably over the noncancelable term of the agreement. Leaf Data Systems contracts are generally multi-year contracts payable in annualannually or quarterly installments. A percentage retainer or holdback fees (generally ranging from 10% to 30%) are common until all initial deliverables are complete. MJ Platformin 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.
Consulting Services. Consulting services revenue growth is drivengenerated by numerous factors. In new emerging states, we provideproviding solutions for aspiring 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 services are provided to post operational licensees to consult during the setup and buildout phases as they open and begin operating their businesses. We also provide business optimization services for established businesses that can benefit from consulting to increase efficiencies as they expand and grow. Our consulting revenue is derived throughout the life cycle of a customer relationship.
We contract our consulting services through Statements of Work (“SOW”) for businesses or entrepreneurs interested in developing operations in the cannabis, hemp and CBD industries. SOW issued andprojects completed during the pre-application phase generally solidify us as the contractorsoftware 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 over time as more states emerge with legalization reforms.
Other Revenue. Our other revenue is derived primarily from point-of-sale hardware and other non-recurring revenue.
Cost of Revenue and Operating Expenses
Cost of Revenue
Our cost of revenue is derived from direct costs derivedassociated 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 from government contract subcontractor expenses in addition to hosting and infrastructure costs associatedand subcontractor expenses incurred in connection with operating MJ Platform and Leaf Data Systems. We recordcertain government contracts. Consulting cost of revenue based onrelates 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 and indirect costs including support services and materials to the cost of revenue. Consulting cost of revenue is primarily determined as a result of our employees’ salaries and other related compensation expenses.
Product and Development Expenses
Our product and development expenses include salaries and benefits, nearshore contractor expenses, technology expenses, and other overhead. Theseoverhead 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 have grown over time,qualifying for capitalization, are expensed as incurred. Capitalized software development costs consist primarily of employee-related costs. We devote substantial resources to enhancing and we expect these expenses to continue to increase withmaintaining our growth.technology infrastructure, developing new and enhancing existing solutions, conducting quality assurance testing, and improving our core technology.
Selling, GeneralSales and AdministrativeMarketing Expenses
Our selling, general and administrative expenses include salaries and benefits, salesSales and marketing expenses, public relations and investor relations fees, outage expenses, professional fees, and other overhead. These expenses have grown over time, and we expect these expenses to continue to increase with our growth.
Marketing and sales expenses are our largest cost and consistexpense is primarily of salaries and related expenses, including commissions, for our sales, marketing, and marketing staff; including commissions, as well asclient service staff. We also categorize payments to partners and marketing programs.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 customers,clients, and sponsoring additional marketing events. The timing of these marketing events will affect our marketing costs in a particular quarter.
Critical Accounting Policies and Estimates
We disclose our significant accounting policies in Note 2 — Summarydefer the portion of Significant Accounting Policies in our Audited Consolidated Financial Statementssales commissions that is partconsidered a cost of this Prospectus. Sinceobtaining a new contract with a customer in accordance with the daterevenue recognition standard and amortize these deferred costs over the period of benefit, currently one year. We expense the remaining sales commissions as incurred. The rates at which sales commissions are earned varies depending on a variety of factors, including the nature of the Audited Consolidated Financial Statementssale (new, renewal, or add-on service offering), there have been no material changes to our significant accounting policies.the type of service or solution sold, and the sales channel.
General and Administrative Expenses
Our general and administrative expenses include salaries and benefits and other costs of departments serving administrative functions, such as executives, finance and accounting, human resources, public relations and investor relations. In addition, general and administrative expense includes non-personnel costs, such as professional fees and other supporting corporate expenses not allocated to cost of revenue, product and development or sales and marketing.
Total Other (Income) Expense, Net
Total other (income) expense, net consists of interest income on cash and cash equivalents, interest expense on our debt, quarterly remeasurement of the fair value of our convertible notes and derivative liability, foreign currency gains and losses, and other nonoperating gains and losses.
Results of Operations for the YearThree Months Ended June 30, 2019March 31, 2022 Compared with the Yearto Three Months Ended June 30, 2018March 31, 2021
The following table sets forth information comparinghighlights the componentsvarious sources of net lossrevenues and expenses for the yearsthree months ended June 30, 2019 and 2018:
| | | Years ended
June 30, | |
| | | 2019 | | | 2018 | |
| Revenues: | | | | | | |
| Software | | $ | 8,256,492 | | | $ | 8,082,424 | |
| Consulting | | | 2,403,797 | | | | 2,281,836 | |
| Other | | | 259,496 | | | | 112,523 | |
| Total Revenue | | | 10,919,785 | | | | 10,476,783 | |
| | | | | | | | | |
| Cost of revenues | | | 4,633,844 | | | | 4,361,963 | |
| Gross Profit | | | 6,285,941 | | | | 6,114,820 | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
| Product development: | | | 5,565,097 | | | | 2,645,093 | |
| Selling, general and administrative | | | 13,136,522 | | | | 5,932,887 | |
| Total operating expenses | | | 18,701,619 | | | | 8,577,980 | |
| Other income (expenses) | | | 109,131 | | | | (25,149 | ) |
| Net loss | | $ | (12,306,547 | ) | | $ | (2,488,309 | ) |
Total Revenue
Total revenue increased to approximately $10.9 million for the fiscal year ended June 30, 2019 from approximately $10.5 for the fiscal year ended June 30, 2018, an increase of approximately $0.4 million, or 4%. The increase in total revenueMarch 31, 2022 as compared to the fiscal yearthree months ended June 30, 2018 was driven primarily by growth achieved across our commercial software business, MJ Platform, in addition to our consulting business. These increases were partially offset by a decrease in revenue from our government regulatory software business, Leaf Data Systems.March 31, 2021:
| | | Three Months Ended March 31, | | | Change Period over | |
| | | 2022 | | | 2021 | | | Period | |
| Revenues: | | | | | | | | | | | | |
| Software | | $ | 6,508,513 | | | $ | 3,795,153 | | | $ | 2,713,360 | | | | 71 | % |
| Consulting | | | 427,009 | | | | 172,747 | | | | 254,262 | | | | 147 | % |
| Other | | | 15,319 | | | | 46,124 | | | | (30,805 | ) | | | (67 | )% |
| Total revenue | | | 6,950,841 | | | | 4,014,024 | | | | 2,936,817 | | | | 73 | % |
| | | | | | | | | | | | | | | | | |
| Cost of revenues | | | 2,203,671 | | | | 1,454,167 | | | | 749,504 | | | | 52 | % |
| Gross profit | | | 4,747,170 | | | | 2,559,857 | | | | 2,187,313 | | | | 85 | % |
| Gross profit margin | | | 68 | % | | | 64 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Product development: | | | 2,105,361 | | | | 1,424,100 | | | | 681,261 | | | | 48 | % |
| Sales and marketing | | | 3,236,113 | | | | 1,735,915 | | | | 1,500,198 | | | | 86 | % |
| General and administrative | | | 2,570,432 | | | | 1,852,962 | | | | 717,470 | | | | 39 | % |
| Depreciation and amortization | | | 1,993,391 | | | | 1,052,883 | | | | 940,508 | | | | 89 | % |
| Impairment of long-lived assets | | | 15,478,521 | | | | - | | | | 15,478,521 | | | | nm | |
| Total operating expenses | | | 25,383,818 | | | | 6,065,860 | | | | 19,317,958 | | | | 318 | % |
| | | | | | | | | | | | | | | | | |
| Loss from operations | | $ | (20,636,648 | ) | | $ | (3,506,003 | ) | | $ | (17,130,645 | ) | | | 489 | % |
nm - percentage change not meaningful
Revenue
Software Revenue
Our totalTotal software revenue increased to approximately $8.3$6.5 million for the fiscal yearthree months ended June 30, 2019March 31, 2022 from $8.1$3.8 million for the fiscal yearthree months ended June 30, 2018,March 31, 2021, for an increase of approximately$2.7 million, or 71%. Software revenue related to our enterprise offerings, Viridian and 365 Cannabis, for the three months ended March 31, 2022 were $3.0 million, compared to $0 for the three months ended March 31, 2021 and software revenue related to our non-enterprise offerings, which include MJ Platform, Ample, Trellis, Solo, and Leaf Data Systems, were $3.2 million for the three months ended March 31, 2022 compared to $3.4 million for the three months ended March 31, 2021. There was also a slight decrease in partnership and data revenue which was $0.2 million or 2%. Total softwarefor the three months ended March 31, 2022 compared to $0.4 million during the same period in the prior year. Software revenue accounted for 76%94% and 77%95% of total revenue for the yearsthree months ended June 30, 2019March 31, 2022 and 2018,2021, respectively. TheAs indicated above, increase in software revenue overduring the fiscal yearthree months ended March 31, 2022 as compared to the three months ended March 31, 2021 was primarily driven by growth in the number of commercial software subscriptionsattributable to MJ Platform (thus increasing recurring SaaS revenue).
Our software revenuesrevenue generated from government customers under Leaf Data Systems totaled approximately $4.3 million and $4.5 million during the years ended June 30, 2019 and 2018, respectively. Leaf Data Systems revenue decreased for the fiscal year ended June 30, 2019 primarily as a result of a smaller volume of change orders and initial license fees in the current year period. Change orders represent out-of-scope functionality modifications requested by the client. Revenues earned from these change orders are recognized upon successful implementation and delivery of the requested modifications. As a result, revenues from these clients when compared year over year may be impacted by the timing of the agreement relative to the number of requested change orders in one or either period.our enterprise offerings.
Consulting Revenue
Our consultingConsulting revenue includes revenue generated from consulting professional services delivered to prospective and current cannabis, hemp and CBD businesses and business operators. Our consulting revenue was approximately $2.4$0.4 million for the fiscal yearthree months ended June 30, 2019March 31, 2022 compared to $0.2 million for the three months ended March 31, 2021, an increase of $0.2 million, or 147%. Consulting revenue was 6% and 4% of total revenue for the three months ended March 31, 2022 and 2021, respectively. Due to the nature of consulting revenue, our dependence on emerging market activity and the ongoing pandemic as a driver of demand, the percentage of consulting revenue over total revenue has varied from period to period depending on whether state legislation has expanded to allow new market entrants or growth of existing market participant operations.
Other Revenue
Other revenue includes retail/resale revenue, which is generated from point-of-sale hardware. Other revenue was less than $0.1 million for the three months ended March 31, 2022 and 2021, respectively.
Cost of Revenue
Our cost of revenue was $2.2 million for the fiscal yearthree months ended June 30, 2018,March 31, 2022 compared to $1.5 million for the three months ended March 31, 2021, an increase of approximately $0.1$0.7 million, or 5%,52%. Total cost of revenue increased primarily as a result of an increase in hosting expenses of $0.3 million and fees for SAP and Microsoft licenses in the amount of $0.5 million related to our acquisitions of Viridian and 365 Cannabis.
Gross Profit
Gross profit was $4.7 million for the three months ended March 31, 2022 compared to $2.6 million for the three months ended March 31, 2021, an increase of $2.2 million or 86%. Gross profit margin also increased from 64% for the three months ended March 31, 2021 to 68% for the three months ended March 31, 2022. This improvement in gross margin was primarily due to operating synergies realized from our acquired assets, our ongoing initiatives to drive operating effectiveness, and acquiring additional business-to-business customers, that have a higher volumegross margin.
Operating Expenses
Product Development
Product development expense was $2.1 million for the three months ended March 31, 2022, compared to $1.4 million for the three months ended March 31, 2021, an increase of $0.7 million, or 48%. Product development expense increased primarily due the Viridian and 365 Cannabis acquisitions, which resulted in a $0.6 million increase in salary-related and contractor expenses for the three months ended March 31, 2022 compared to the same period in the prior year.
Sales and Marketing
Sales and marketing expense was $3.2 million for the three months ended March 31, 2022, compared to $1.7 million for the three months ended March 31, 2021, an increase of $1.5 million, or 86%. The increase in sales and marketing expense is primarily related to the acquisitions of Viridian and 365 Cannabis which resulted in an increase of $1.6 million in salary-related and contractor expenses for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
General and Administrative
General and administrative expense was $2.6 million for the three months ended March 31, 2022, compared to $1.9 million for the three months ended March 31, 2021, an increase of 0.7 million, or 39%. The increase in general and administrative expense is primarily related to the termination of our Las Vegas office space during the three months ended March 31, 2022, which resulted in a restructuring charge of $0.5 million. There was also an increase of $0.1 million in salary-related and contractor expenses as well as bad debt expense of $0.2 million for the three months ended March 31, 2022 compared to the same period in the prior year.
Depreciation and Amortization
Depreciation and amortization expense increased to $2.0 million for the three months ended March 31, 2022 from $1.1 million for the three months ended March 31, 2021, an increase of $0.9 million, or 89%. The increase in amortization expense is primarily attributable to the acquired intangible assets from our Viridian and 365 Cannabis acquisitions in the amount of $0.6 million, which both occurred after March 31, 2021, as well as an increase in capitalized software in the amount of $0.4 million.
Impairment of long-lived assets
Due to a continued decline in market conditions from December 31, 2021 to March 31, 2022, we recorded an impairment charge of $15.5 million on our non-enterprise reporting unit during the three months ended March 31, 2022, compared to no impairment charge for the three months ended March 31, 2021 (see Note 9 - Goodwill and Intangible Assets, Net to the unaudited consolidated financial statements for the period ended March 31, 2022 for further discussion on the impairments recorded).
Results of Operations for the Year Ended December 31, 2021 (audited) compared with the Year Ended December 31, 2020 (unaudited)
The following table highlights the various sources of revenues and operating expenses for the year ended December 31, 2021 as compared to the year ended December 31, 2020 (unaudited). The results for the year ended December 31, 2020 were derived by combining the audited six-month transition period ended December 31, 2020 with Akerna’s three-month period ended March 31, 2020 and three-month period ended June 30, 2020:
| | | Year Ended December 31, | | | Change | |
| | | 2021 | | | 2020
(unaudited) | | | Period over
period | |
| Revenue | | | | | | | | | | | | |
| Software | | $ | 18,998,409 | | | $ | 11,963,028 | | | $ | 7,035,381 | | | | 59 | % |
| Consulting | | | 1,510,413 | | | | 1,739,683 | | | | (229,270 | ) | | | (13 | )% |
| Other revenue | | | 176,152 | | | | 196,257 | | | | (20,105 | ) | | | (10 | )% |
| Total revenue | | | 20,684,974 | | | | 13,898,968 | | | | 6,786,006 | | | | 49 | % |
| | | | | | | | | | | | | | | | | |
| Cost of revenue | | | 8,119,487 | | | | 6,355,825 | | | | 1,763,662 | | | | 28 | % |
| Gross profit | | | 12,565,487 | | | | 7,543,143 | | | | 5,022,344 | | | | 67 | % |
| | | | | | | | | | | | | | | | | |
| Operating Expenses | | | | | | | | | | | | | | | | |
| Product development | | | 6,271,966 | | | | 5,129,814 | | | | 1,142,152 | | | | 22 | % |
| Sales and marketing | | | 9,108,173 | | | | 8,085,897 | | | | 1,022,276 | | | | 13 | % |
| General and administrative | | | 10,422,207 | | | | 11,018,356 | | | | (596,149 | ) | | | (5 | )% |
| Depreciation and amortization | | | 5,735,150 | | | | 3,223,844 | | | | 2,511,306 | | | | 78 | % |
| Impairment of long-lived assets | | | 14,383,310 | | | | 6,887,000 | | | | 7,496,310 | | | | 109 | % |
| Total operating expenses | | | 45,920,806 | | | | 34,344,911 | | | | 11,575,895 | | | | 34 | % |
| | | | | | | | | | | | | | | | | |
| Loss from operations | | $ | (33,355,319 | ) | | $ | (26,801,768 | ) | | $ | (6,553,551 | ) | | | 24 | % |
nm - percentage change not meaningful
Total Revenue
Total revenue increased to $20.7 million for the year ended December 31, 2021 from $13.9 million for the year ended December 31, 2020, an increase of $6.8 million, or 49%. The increase in total revenue was driven primarily by growth in our software business of $7.0 million, or 59% compared to the prior period. The growth in software was offset by a decline in consulting revenue of $0.2 million, or 13%, primarily a result of government shut-down related to COVID-19 as discussed below.
Software Revenue
Total software revenue increased to $19.0 million for the year ended December 31, 2021 from $12.0 million for the year ended December 31, 2020, for an increase of $7.0 million, or 59%. Software revenue related to our enterprise offering, Viridian and 365 Cannabis, during the year ended December 31, 2021, were $4.8 million compared to $0 in the prior year and software revenue related to our non-enterprise offerings, which include MJ Platform, Ample, Trellis, Solo, and Leaf Data Systems, for the year ended December 31, 2021, were $12.8 million compared to $11.6 million in the prior year. There was also in an increase in partnership and data revenue which was $1.4 million for the year ended December 31, 2021, compared to $0.4 million for the same period in the prior year. Software revenue accounted for 92% and 86% of total revenue in 2021 and 2020, respectively. As indicated above, the increase in software revenue for the year ended December 31, 2021 was primarily attributable to our acquisitions of Ample, Viridian, and 365 Cannabis.
Consulting Revenue
Consulting revenue includes revenue generated from consulting services delivered to prospective and current cannabis, hemp and CBD businesses and business operators. Our consulting revenue was $1.5 million for the year ended December 31, 2021 compared to $1.7 million for the year ended December 31, 2020, a decrease of $0.2 million, or 13%. Consulting revenue was 7% and 13% of total revenue for 2021 and 2020, respectively. Due to the nature of consulting activitiesrevenue, our dependence on emerging market activity as well as the ongoing pandemic as a driver of demand, the percentage of consulting revenue over total revenue has varied from period to period depending on whether state legislation has expanded to allow new market entrants or growth of existing market participant operations.
Other Revenue
Other revenue includes retail/resale revenue, which was generated from point-of-sale hardware. Other revenue was $0.2 million for the years ended December 31, 2021 and engagements2020 and was approximately 1% of total revenue for the years ended December 31, 2021 and 2020.
Cost of Revenue
Cost of revenue increased to $8.1 million for the year ended December 31, 2021 from $6.3 million for the year ended December 31, 2020, for an increase of $1.8 million, or 28%. Total cost of revenue increased primarily as a result of our acquisitions of Ample, Viridian, and 365 Cannabis, the specific drivers being an increase in hosting expenses by $1.6 million and fees for SAP and Microsoft licenses in the amount of $0.5 million. These increases from acquisitions were partially offset by net savings of $0.6 million in Leaf Data Systems contractor costs during the second halfyear ended December 31, 2021 compared to the year ended December 31, 2020.
Gross Profit
Gross profit increased to $12.6 million for the year ended December 31, 2021 from $7.5 million for the year ended December 31, 2020, for an increase of $5.0 million, or 67%. Gross margin increased to 61% for the year ended December 31, 2021 from 54% for the year ended December 31, 2020. This improvement in gross margin was primarily due to operating synergies realized from our acquired assets, our ongoing initiatives to drive operating effectiveness and acquiring additional B2B customers, which have a higher gross margin.
Operating Expenses
Product Development
Product development expense increased to $6.3 million for the year ended December 31, 2021 from $5.1 million for the year ended December 31, 2020, for an increase of $1.2 million, or 22%. Product development expense increased primarily due the acquisitions of Ample, Viridian, and 365 Cannabis which resulted in a $1.4 million increase in salary-related expenses and a $0.3 million increase in stock compensation expense for the year ended December 31, 2021 compared to year ended December 31, 2020. These increases were partially offset by savings on contractor expenses in the amount of $0.7 million.
Sales and Marketing
Sales and marketing expense increased to $9.1 million for the year ended December 31, 2021 from $8.1 million for the year ended December 31, 2020, for an increase of $1.0 million or 13%. The increase in sales and marketing expense is primarily related to the acquisitions of Ample, Viridian, and 365 Cannabis which resulted in an increase of $1.0 million in salary-related expenses and a $0.1 million increase in stock compensation expense for the year ended December 31, 2021 compared to year ended December 31, 2020. These increases were slightly offset by a reduction in external marketing consulting costs as we moved more of our marketing initiatives in house.
General and Administrative
General and administrative expense decreased to $10.4 million for the year ended December 31, 2021 from $11.0 million for the year ended December 31, 2020, for a decrease of $0.6 million, or 5%. This decrease was primarily related to a reduction in acquisition-related expenses of $2.9 million, as we completed two acquisitions, Viridian and 365 Cannabis, during the year ended December 31, 2021 compared to three acquisitions, Solo, Trellis, and Ample, during 2020. There was also a decrease of $0.6 million in rental expenses related to the termination of our office spaces in Denver in December 2020 and Toronto in June 2021, a decrease in financing fees of $0.9 million, and a decrease of $0.3 million in salary-related expenses as a direct result of cost-saving measures placed into service during 2020. Partially offsetting these decreases is a $1.9 million increase in restructuring charges during 2021 attributable to a lease settlement agreement for relinquishing office space in Toronto and the related write off of leasehold improvements associated with the lease termination, as well as an increase of $0.6 million for legal, audit, tax and other professional service fees as our business has continued to grow. We also had a $2.0 million change in fair value of contingent consideration during the year ended December 31, 2020 related to the 2020 acquisitions.
Depreciation and Amortization
Depreciation and amortization expense increased to $5.7 million for the year ended December 31, 2021 from $3.2 million for the year ended December 31, 2020. The increase in amortization expense is entirely related to the acquired intangible assets from our acquisitions completed in calendar year 2021 and 2020.
Impairment of long-lived assets
Due to a continued decline in market conditions and declines in the operating results of our non-enterprise reporting unit, we recorded an impairment charge of $14.4 million during the year ended December 31, 2021. During the year ended December 31, 2020, we recorded a $6.9 million impairment charges (see Note 6 - Goodwill and Intangible Assets, Net to the audited consolidated financial statements for the year ended December 31, 2021 for further discussion on the impairments recorded).
Results of Operations for the Six Months Ended December 31, 2020 (audited) compared with the Six Months Ended December 31, 2019 fiscal year.(unaudited)
The following table highlights the various sources of revenues and operating expenses for the six months ended December 31, 2020 as compared to the six months ended December 31, 2019:
| | | Six Months Ended
December 31, | | | Change | |
| | | 2020 | | | 2019
(unaudited) | | | Period over
period | |
| Revenue | | | | | | | | | | | | |
| Software | | $ | 6,766,985 | | | $ | 4,802,654 | | | $ | 1,964,331 | | | | 41 | % |
| Consulting | | | 916,099 | | | | 1,556,363 | | | | (640,264 | ) | | | (41 | )% |
| Other revenue | | | 141,700 | | | | 140,076 | | | | 1,624 | | | | 1 | % |
| Total revenue | | | 7,824,784 | | | | 6,499,093 | | | | 1,325,691 | | | | 20 | % |
| | | | | | | | | | | | | | | | | |
| Cost of revenue | | | 3,141,041 | | | | 2,994,940 | | | | 146,101 | | | | 5 | % |
| Gross profit | | | 4,683,743 | | | | 3,504,153 | | | | 1,179,590 | | | | 34 | % |
| | | | | | | | | | | | | | | | | |
| Operating Expenses | | | | | | | | | | | | | | | | |
| Product development | | | 3,166,088 | | | | 1,234,403 | | | | 1,931,685 | | | | 156 | % |
| Sales and marketing | | | 3,928,028 | | | | 3,725,012 | | | | 203,016 | | | | 5 | % |
| General and administrative | | | 4,435,067 | | | | 4,655,207 | | | | (220,140 | ) | | | (5 | )% |
| Depreciation and amortization | | | 2,007,237 | | | | 104,667 | | | | 1,902,570 | | | | nm | |
| Impairment of long-lived assets | | | 6,887,000 | | | | - | | | | 6,887,000 | | | | nm | |
| Total operating expenses | | | 20,423,420 | | | | 9,719,289 | | | | 10,704,131 | | | | nm | |
| | | | | | | | | | | | | | | | | |
| Loss from operations | | $ | (15,739,677 | ) | | $ | (6,215,136 | ) | | $ | (9,524,541 | ) | | | 153 | % |
nm - percentage change not meaningful
Total Revenue
Total revenue increased to $7.8 million for the six months ended December 31, 2020 from $6.5 million for the six months ended December 31, 2019, an increase of $1.3 million, or 20%. The increase in total revenue was driven primarily by growth in our software business of $2.0 million, or 41% compared to the prior period. The growth in software was offset by a decline in consulting revenue of $0.6 million, or 41%, primarily a result of government shut-down related to COVID-19 as discussed below.
Software Revenue
Total software revenue increased to $6.8 million for the six months ended December 31, 2020 from $4.8 million for the six months ended December 31, 2019, for an increase of $2.0 million, or 41%. Total software revenue increased $2.8 million primarily as a result of the acquisition of Ample, Trellis and Solo, offset by a decline in government revenue of $0.4 million, primarily as a result of these contracts maturing to a run-and-maintain mode, and a decline in other software revenue of $0.4 million. Total software revenue accounted for 86% and 74% of total revenue for the six months ended December 31, 2020, and 2019, respectively.
Consulting Revenue
Consulting revenue includes revenue generated from consulting services delivered to prospective and current cannabis, hemp and CBD businesses and business operators. Our consulting revenue was $0.9 million for the six months ended December 31, 2020 compared to $1.6 million for the six months ended December 31, 2019, a decrease of $0.6 million, or 41%. This decrease is mainly due to the impact of COVID-19. Consulting services are also correlated to state legalizations and other regulatory expansion activity. As a result, individual year-over-year comparisons may experience variability depending on the timing of recent legislative changes. During the COVID-19 pandemic and resulting shut-down, state legislatures have turned their focus to the pandemic and tabled work on cannabis legislation, which resulted in delays in our providing consulting services during the six months ended December 31, 2020. However, many state ballot initiatives were passed in the November 2020 election that provides for new medical or adult-use marijuana. We expect, despite the slowing of our consulting activity experienced during the pandemic, we will see increased demand for our services following the November 2020 election. As a sign consulting revenue is starting to rebound from the impacts of the COVID-19 pandemic, consulting revenue increased to $0.6 million for the three months ended December 31, 2020 from $0.3 million for the three months ended September 30, 2020, an increase of $0.3 million, or 100%.
Consulting revenue was 22%12% and 24% of total revenue for the yearssix months ended June 30,December 31, 2020 and 2019, and 2018, respectively. Due to the nature of consulting revenue and our dependence on emerging market activity as well as the ongoing pandemic as a driver of demand, the monthsquarters in which we recognize consulting revenue has varied from year to year depending on whether state legislation has expanded to allow new market entrants or growth of existing market participant operations. For example, while consulting activity appeared to have slowed earlier during this fiscal year, it increased significantly during the three months ended June 30, 2019 due to emerging opportunities in Missouri, Maryland, Utah, New Jersey, and Arkansas as these states have experienced recent state legal changes. Further, five of our clients in Ohio have recently won processing licenses.
Other Revenue
OurOther revenue includes retail/resale revenue, represents revenuewhich was generated from point of sale hardware and labels. Retail/resalepoint-of-sale hardware. Other revenue increased to approximately $0.3 million for the fiscal year ended June 30, 2019 fromwas $0.1 million for the fiscal yearsix months ended June 30, 2018, an increase of approximatelyDecember 31, 2020 and $0.1 million or 131%. Retail/resalefor the six months ended December 31, 2019. Other revenue was 2.0% and 2% of total revenue for the fiscal year ended June 30, 2019.
Cost of Revenue and Gross Margin
Our cost of revenue increased to approximately $4.6 million for the fiscal year ended June 30, 2019 from $4.4 million for the fiscal year ended June 30, 2018, an increase of approximately 6%. The increase compared to the prior fiscal year period was primarily due to an increase in hosting and infrastructure costs incurred to support our Software business. Hosting and infrastructure costs grew from approximately $1.0 million to $1.4 million, an increase of approximately $0.4 million, or 40%, as we continued to increase Amazon Web Services usage as part of both the growth of MJ Platform in addition to the ramp of the contract with WSLCB.
Additionally, we incurred higher direct labor costs associated with providing our consulting services of approximately $0.2 million. These increases in cost of revenue were partially offset by fewer third-party subcontractor costs associated with servicing our contract with the Commonwealth of Pennsylvania. Overall, our gross profit margin remained consistent at 58% for both of the years ended June 30, 2019 and June 30, 2018.
Additionally, we experienced increased costs of revenue associated with retail hardware sales of approximately $128,000.
Because the applications and services available through the Leaf Data System are provided through relationships with third-party service providers at higher costs than those from our MJ Platform contracts, the gross profit margins from the government contracts are generally lower than those from our commercial software clients. Total costs of government revenues incurred by us, which are included in cost of revenues on the statement of operations, were approximately $2.0 million and $2.7 million during the years ended June 30, 2019 and 2018, respectively. The decrease in cost of government revenues incurred by us was due to a smaller volume of ongoing support and maintenance services provided in connection with the contract with the Commonwealth of Pennsylvania.
Operating Expenses
The following table presents operating expense line items for the years ended June 30, 2019 and 2018 and the period-over-period dollar and percentage changes for those line items:
| | | Years ended
June 30, | | | | |
| | | 2019 | | | % of
revenue | | | 2018 | | | % of
revenue | | | Change
Period over Period | |
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Product development | | $ | 5,565,097 | | | | 51 | % | | $ | 2,645,093 | | | | 25 | % | | $ | 2,920,004 | | | | 110 | % |
| Selling, general and administrative | | | 13,136,522 | | | | 120 | % | | | 5,932,887 | | | | 54 | % | | | 7,203,635 | | | | 121 | % |
| Total operating expenses | | $ | 18,701,619 | | | | 171 | % | | $ | 8,577,980 | | | | 79 | % | | $ | 10,123,639 | | | | 118 | % |
Our operating expenses increased to approximately $18.7 million for the fiscal year ended June 30, 2019 from approximately $8.6 million for the fiscal year ended June 30, 2018, an increase of approximately $10.1 million, or 118%. The increased level of operating expenses for the fiscal year ended June 30, 2019 was driven by increased product development expenses of approximately $2.9 million, or 110% in addition to higher selling, general and administrative expenses of approximately $7.2 million, or 121%.
The increased level of operating expenses for the fiscal year ended June 30, 2019 was primarily driven by increases in salary expenses across Engineering, Sales and Marketing and Administrative functions as we continued to add headcount in order to support our growth. Salary expenses for Product Development functions increased by approximately $2.7 million. Salary expenses for Sales and Marketing and Administrative functions increased by approximately $3.5 million. Approximately $3.8 million of salaries in the current fiscal year were paid in the form of non-cash stock-based compensation. No non-cash stock-based compensation was paid during the fiscal year ended June 30, 2018.
Non-payroll related expenses within Selling, General and Administrative functions also increased for the fiscal year ended June 30, 2019 by approximately $3.7 million. These are primarily comprised of Sales and Marketing expenses related to our marketing initiatives including payments to partners and marketing programs. Marketing programs consist of advertising, events, 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 customers, and sponsoring additional marketing events. The timing of these marketing events will affect our marketing costs in a particular quarter. Additionally, we incurred professional fees of approximately $1.5 million in connection with the Business Combination and Private Placement discussed below. We also incurred fewer operating expenses during the fiscal year ended June 30, 2018 as a result of insurance proceeds received from our 2017 security breach. Non-payroll related expenses within Product development functions also increased by approximately $0.2 million as we enhanced our cybersecurity and enterprise software capabilities following our 2017 security breach.
Results of operations for the ninesix months ended March 31, 2020 compared to nine months ended March 31, 2019
The following table highlights the various sources of revenues and expenses for the nine months ended March 31, 2020 as compared to the nine months ended March 31, 2019:
| | | Nine months ended
March 31, | |
| | | 2020 | | | 2019 | |
| Revenues: | | | | | | |
| Software | | $ | 7,148,964 | | | $ | 6,174,102 | |
| Consulting | | | 2,248,947 | | | | 826,777 | |
| Other | | | 171,727 | | | | 200,312 | |
| Total Revenue | | | 9,569,638 | | | | 7,201,191 | |
| | | | | | | | | |
| Cost of revenues | | | 4,457,110 | | | | 3,550,612 | |
| Gross Profit | | | 5,112,528 | | | | 3,650,579 | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
| Product development: | | | 4,024,743 | | | | 2,877,869 | |
| Selling, general and administrative | | | 13,881,055 | | | | 7,440,115 | |
| Total operating expenses | | | 17,905,798 | | | | 10,317,984 | |
| Other income | | | 158,508 | | | | 87,248 | |
| Net loss | | $ | (12,634,762 | ) | | $ | (6,580,157 | ) |
Total Revenue
Total revenue increased to $9.6 million for the nine months ended March 31, 2020 from $7.2 million for the nine months ended March 31, 2019, an increase of $2.4 million, or 33%. The increase in total revenue was achieved across all our products. The increase in total revenue was driven primarily by growth achieved in MJ Platform and in our consulting services business. The revenues from our government regulatory software business, Leaf Data Systems, increased slightly with the addition of the State of Utah contract.
Software Revenue
Our total software revenue increased to $7.1 million for the nine months ended March 31, 2020 from $6.2 million for the nine months ended March 31, 2019, an increase of $1.0 million, or 16%. Software revenue accounted for 75% and 86% of total revenue for the nine months ended MarchDecember 31, 2020 and 2019, respectively. The increase in software revenue was primarily driven by 27% growth in revenue from MJ Platform. This increase in software revenue was primarily the result of volume-driven increases from new business, which includes new customers, upgrades and additional subscriptions from existing customers. We continue to invest in a variety of customer programs and initiatives, which, along with increasing adoption, have helped keep our attrition rate consistent as compared to the prior year. Consistent attrition rates play a role in our ability to maintain growth in our subscription revenues. Changes in the net price per user per month have not been a significant driver of revenue growth for the periods presented. Our software revenue during the nine months ended March 31, 2020 was not significantly impacted by COVID-19, in most jurisdictions our customers were deemed “essential businesses” and continued operations. Revenue recognition for new customers in our pipeline may be delayed if the timing of implementation and onboarding is negatively impacted in future periods. The significance of the impact of the COVID-19 outbreak on our business and the duration for which it may have an impact cannot be determined at this time.
Software revenues generated from government customers under Leaf Data Systems increased to $3.5 million for the nine months ended March 31, 2020, up from $3.4 million for the nine months ended March 31, 2019. While our revenues from Leaf Data Systems from our contracts with the State of Washington and the State of Pennsylvania declined for the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019 by $0.7 million primarily as a result of the completion of professional services and transition to the more consistent run and maintain mode, we recorded revenue of $0.8 million from our contract with the State of Utah, which commenced in August 2019.
Consulting Revenue
Our consulting revenue includes revenue generated from consulting professional services delivered to prospective and current cannabis, hemp and CBD businesses and business operators. Our consulting revenue was $2.2 million for the nine months ended March 31, 2020 compared to $0.8 million for the nine months ended March 31, 2019, for an increase of $1.4 million, or 172%. The increase in consulting services and other revenues was due primarily to the higher demand for services from an increased number of customers. We delivered approximately 30 operational license applications on behalf of Missouri-based clients during the month of August alone, and we continue to experience strong demand for our consulting services in other emerging states. Further, during the nine-month period ended March 31, 2020, we serviced a large contract with a Midwest-based client for the preparation, completion and delivery of operational license applications for a portfolio of recreational retail and cultivation facilities. Consulting services are correlated to state legalizations and other regulatory expansion activity. As a result, individual period-over-period comparisons may experience variability depending on the timing of recent legislative changes. During the COVID-19 outbreak, state legislatures have turned their focus to the pandemic, tabling work on cannabis legislation. The significance of the impact of the COVID-19 outbreak on our business and the duration for which it may have an impact cannot be determined at this time.
Consulting revenue was 24% and 11% of total revenue for the nine months ended March 31, 2020 and 2019, respectively. Due to the nature of consulting revenue and our dependence on emerging market activity as a driver of demand, the months in which we recognize consulting revenue has varied from period to period depending on whether state legislation has expanded to allow new market entrants or growth of existing market participant operations. We expect this variability to continue.
Other Revenue
Our other revenue represents revenue generated from the resale of point of sale hardware and labels. Other revenue decreased to $172,000 for the nine months ended March 31, 2020 from $200,000 for the nine months ended March 31, 2019, a decrease of $28,000, or 14%. Other revenue was 2% and 3% of total revenue for the nine months ended March 31, 2020 and March 31, 2019, respectively.
Cost of Revenue and Gross Profit
Our cost of revenue for the nine months ended March 31, 2020 was $4.5 million, an increase of $0.9 million, or 26%, as compared to cost of revenue for the nine months ended March 31, 2019 of $3.6 million. The increase compared to the prior nine-month period was primarily as a result of the costs incurred to service the new contract with the State of Utah, $0.9 million. With the reduction of professional services related to implementation and our exiting contracts’ transition to run and maintain mode, we expect these costs to decrease then level off in future periods. Direct labor costs associated with providing our consulting services increased by $0.1 million, while the increase in hosting and infrastructure costs associated with our Software business accounted for $0.2 million of total increase in cost of revenue. Infrastructure costs have increased primarily due to our investment for future growth, we expect to realize incremental per customer cost savings from this investment in the next fiscal year. The overall increase in cost of revenue was partially offset by a decrease of $0.3 million as a result of a change in third-party subcontractor costs related to our contract with the Commonwealth of Pennsylvania. We intend to continue to invest additional resources in our enterprise software group to facilitate the adoption of our services. The timing of these expenses will affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues in future periods.
Our gross profit for the nine months ended March 31, 2020 was $5.1 million, an increase of $1.5 million, or 40%, as compared to gross profit for the nine months ended March 31, 2019 of $3.7 million. Our gross profit margin for the nine months ended March 31, 2020 was 53.4%, an increase of 270 basis points as compared to gross profit margin for the nine months ended March 31, 2019 of 50.7%. The increase compared to the prior nine-month period was primarily as a result of increased consulting revenue and the minimal marginal cost to provide these services.
Because some of the applications and services available through the Leaf Data System are provided through relationships with third-party service providers, the costs are higher than those allocated from our employees’ salaries to support our MJ Platform and consulting contracts. Therefore, the gross profit margins from the government contracts are generally lower than those from our commercial software clients. Total costs of government revenues incurred by us, which are included in cost of revenues on the statement of operations, was $2.2 million and $1.6 million during the nine months ended March 31, 2020 and 2019, respectively.
Operating Expenses
The following table presents operating expense line items for the nine months ended March 31, 2020 and 2019 and the period-over-period dollar and percentage changes for those line items:
| | | Nine Months
Ended March 31, | | | Change | |
| | | 2020 | | | 2019 | | | Period over Period | |
| Operating expenses: | | | | | | | | | | | | |
| Salary expenses, excluding Solo | | $ | 3,293,326 | | | $ | 2,634,405 | | | $ | 658,921 | | | | 25 | % |
| Solo product development | | | 327,567 | | | | - | | | | 327,567 | | | | nm | |
| Other product development | | | 403,850 | | | | 243,464 | | | | 160,386 | | | | 66 | % |
| Product development | | | 4,024,743 | | | | 2,877,869 | | | | 1,146,874 | | | | 40 | % |
| Percentage of revenue | | | 42 | % | | | 40 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Sales and marketing | | | 3,790,317 | | | | 2,557,126 | | | | 1,233,191 | | | | 48 | % |
| Solo selling, general and administrative | | | 198,208 | | | | - | | | | 198,208 | | | | nm | |
| General and administrative salaries | | | 4,009,551 | | | | 2,947,042 | | | | 1,062,509 | | | | 36 | % |
| Merger related costs | | | 219,297 | | | | 667,313 | | | | (448,016 | ) | | | (67 | %) |
| Acquisition related costs | | | 1,597,283 | | | | - | | | | 1,597,283 | | | | nm | |
| Other general and administrative | | | 4,066,399 | | | | 1,268,634 | | | | 2,797,765 | | | | 221 | % |
| Selling, general and administrative | | | 13,881,055 | | | | 7,440,115 | | | | 6,440,940 | | | | 87 | % |
| Percentage of revenue | | | 145 | % | | | 103 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | $ | 17,905,798 | | | $ | 10,317,984 | | | $ | 7,587,814 | | | | 74 | % |
| Percentage of revenue | | | 187 | % | | | 143 | % | | | | | | | | |
nm – percentage change not meaningful
Our operating expenses increased to $17.9 million for the nine months ended March 31, 2020 from $10.3 million for the nine months ended March 31, 2019, an increase of $7.6 million, or 74%. The increase in operating expenses was driven by higher selling, general and administrative expenses, an increase of $6.4 million, or 87%, in addition to higher product development expenses, an increase of $1.1 million, or 40%.
Salary expenses for product development functions, excluding product development salaries for Solo, increased by $0.7 million, or 25%, which includes $0.1 millionCost of stock-based compensation recognized during the nine months ended March 31, 2020 that was not incurred in 2019. Product development costs also increased $0.3 million as a result of our January 2020 acquisition of the controlling interest in Solo. Other product development costs increased by $0.2 million for the nine months ended March 31, 2020, primarily related to recruiting costs. Our investments in product development were made to improve and extend our service offerings and develop new technologies. We expect that such costs will continue to increase in absolute dollars and may increase as a percentage of revenues in future periods as we continue to invest in additional employees and technology to support the development of new, and improve existing, technologies and the integration of acquired technologies.
Selling, general and administrative expenses include sales and marketing expenses, including personnel costs, related to our marketing initiatives including payments to partners and marketing programs; general and administrative functions, such as executives, finance and other supporting departments; transaction related costs; professional fees; and facilities expenses. Changes in selling, general and administrative expenses for the nine months ended March 31, 2020 as compared to 2019 were as follows:
| ● | $1.6 million increase in acquisition related costs associated primarily with our acquisitions of Solo in January 2020, Trellis in April 2020 and Ample, planned for the summer for 2020, this increase was partially offset by a $0.4 million decrease in costs incurred in connection with the Mergers in June 2019; |
| ● | $0.2 million increase due to the addition of Solo’s selling general and administrative expenses; |
| ● | $1.2 million, or 48%, increase in sales and marketing expense primarily due to higher personnel costs including $0.2 million of stock-based compensation for 2020; |
| ● | $1.1 million increase in general and administrative personnel costs, $0.5 million of this increase is attributable to stock-based compensation; and |
| ● | $2.8 million increase in other general and administrative costs, primarily as a result of our investments in technology and other infrastructure to position ourselves for future growth and the cost of operating as a public company. |
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 customers, and sponsoring additional marketing events. The timing of these marketing events will affect our marketing costs in a quarter. We expect to incur additional transaction costs leading up to our acquisition of Ample in the summer of 2020 and would incur costs related to other acquisitions that we may identify, the timing and amount of these transaction costs will be variable and dependent on the level of acquisition activity.
Results of Operations for the Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
The following table highlights the various sources of revenues and expenses for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019:
| | | Three Months Ended
March 31, | | | Change | |
| | | 2020 | | | 2019 | | | Period over Period | |
| Revenues: | | | | | | | | | | | | |
| Software | | $ | 2,346,310 | | | $ | 2,024,916 | | | $ | 321,394 | | | | 16 | % |
| Consulting | | | 692,584 | | | | 216,897 | | | | 475,687 | | | | 219 | % |
| Other | | | 31,652 | | | | 86,067 | | | | (54,415 | ) | | | -63 | % |
| Total revenue | | | 3,070,546 | | | | 2,327,880 | | | | 742,666 | | | | 32 | % |
| | | | | | | | | | | | | | | | | |
| Cost of revenues | | | 1,420,909 | | | | 1,166,482 | | | | 254,427 | | | | 22 | % |
| Gross profit | | | 1,649,637 | | | | 1,161,398 | | | | 488,239 | | | | 42 | % |
| Gross profit margin | | | 53.7 | % | | | 49.9 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Product development: | | | 1,632,353 | | | | 1,001,394 | | | | 630,959 | | | | 63 | % |
| Selling, general and administrative | | | 5,500,837 | | | | 2,663,171 | | | | 2,837,666 | | | | 107 | % |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | | 7,133,190 | | | | 3,664,565 | | | | 3,468,625 | | | | 95 | % |
| | | | | | | | | | | | | | | | | |
| Other income | | | 33,398 | | | | 13,064 | | | | 20,334 | | | | 156 | % |
| Net loss | | | (5,450,155 | ) | | | (2,490,103 | ) | | | (2,960,052 | ) | | | 119 | % |
| Net loss attributable to noncontrolling interests in consolidated subsidiaries | | | 101,175 | | | | - | | | | 101,175 | | | | nm | |
| Net loss attributable to Akerna stockholders | | $ | (5,348,980 | ) | | $ | (2,490,103 | ) | | $ | (2,858,877 | ) | | | 115 | % |
nm – percentage change not meaningful
Total Revenue
Total revenue increased to $3.1 million for the threesix months ended MarchDecember 31, 2020 from $2.3$3 million for the threesix months ended March 31, 2019, an increase of $0.7 million, or 32%. The increase in total revenue was achieved across all our products. The increase in total revenue was driven by growth achieved across our commercial software business, MJ Platform, in addition to our consulting business, and our government regulatory software business, Leaf Data Systems.
Software Revenue
Our total software revenue increased to $2.3 million for the three months ended March 31, 2020 from $2.0 million for the three months ended March 31, 2019, an increase of $0.3 million, or 16%. Total software revenue accounted for 76% and 87% of total revenue for the three months ended March 31, 2020 and 2019, respectively. The increase in software revenue was primarily driven by 11% growth in revenue from MJ Platform. This increase in software revenue was primarily the result of volume-driven increases from new business, which includes new customers, upgrades and additional subscriptions from existing customers. We continue to invest in a variety of customer programs and initiatives, which, along with increasing adoption, have helped keep our attrition rate consistent as compared to the prior year. Consistent attrition rates play a role in our ability to maintain growth in our subscription revenues. Changes in the net price per user per month have not been a significant driver of revenue growth for the periods presented. Our software revenue during the three months ended March 31, 2020 was not significantly impacted by COVID-19, in most jurisdictions our customers were deemed “essential businesses” and continued operations. Revenue recognition for new customers in our pipeline may be delayed if the timing of implementation and onboarding is negatively impacted in future periods. The significance of the impact of the COVID-19 outbreak on our business and the duration for which it may have an impact cannot be determined at this time.
Software revenues generated from government customers under Leaf Data Systems increased by $0.2 million as a result of our contract with the State of Utah, which commenced in August 2019.
Consulting Revenue
Our consulting revenue includes revenue generated from consulting professional services delivered to prospective and current cannabis, hemp and CBD businesses and business operators. Our consulting revenue was $0.7 million for the three months ended March 31, 2020 compared to $0.2 million for the three months ended MarchDecember 31, 2019, for an increase of $0.5$0.1 million, or 219%5%. The increase was drivenTotal cost of revenue increased $0.4 million as a result of the acquisition of Ample, Trellis and Solo, offset by a higher volumedecline in professional services costs of $0.3 million due to declining use of third-party consulting activities and engagements during the period as we continue to experience strong demandfirms for our consulting services in emerging states. Further, during the three-month period ended March 31, 2020, we servicedgovernment solution as a large contract withresult of these contracts maturing to a Midwest-based clientrun-and-maintain mode.
Gross Profit
Gross profit increased to $4.7 million for the preparation, completion and delivery of operational license applications for a portfolio of cultivation facilities. Consulting services are correlated to state legalizations and other regulatory expansion activity. As a result, individual period-over-period comparisons may experience variability depending on the timing of recent legislative changes. During the COVID-19 outbreak, state legislatures have turned their focus to the pandemic, tabling work on cannabis legislation. The significance of the impact of the COVID-19 outbreak on our business and the duration for which it may have an impact cannot be determined at this time.
Consulting revenue was 23% and 9% of total revenue for the threesix months ended March 31, 2020 and 2019, respectively. Due to the nature of consulting revenue and our dependence on emerging market activity as a driver of demand, the months in which we recognize consulting revenue has varied from period to period depending on whether state legislation has expanded to allow new market entrants or growth of existing market participant operations. We expect this variability to continue in future periods.
Other Revenue
Our other revenue represents revenue generated from the resale of point of sale hardware and labels. Other revenue decreased to $32,000 for the three months ended MarchDecember 31, 2020 from $86,000$3.5 million for the threesix months ended MarchDecember 31, 2019, a decrease of $54,000, or 63%. Other revenue was 1% and 4% of total revenue for the three months ended March 31, 2020 and March 31, 2019, respectively.
Cost of Revenue and Gross Margin
Our cost of revenue for the three months ended March 31, 2020 was $1.4 million, an increase of $0.3$1.2 million, or 22%, as compared34%. Gross margin increased to cost of revenue60% for the threesix months ended MarchDecember 31, 20192020 from 54% for the six months ended December 31, 2019. Total gross profit increased $2.6 million as a result of $1.2 million. The increase compared to the prior year’s quarter wasacquisition of Ample, Trellis and Solo, offset by the decline in consulting revenue of $0.6 million, a decline government revenue of $0.4 million, primarily as a result of the costs incurredthese contracts maturing to service the new contract with the Statea run-and-maintain mode and a decline in other software revenue of Utah of $0.2$0.4 million. With the completion of professional services related to implementation and our existing contracts transition to run and maintain mode, these costs are expected to decrease and level off in future periods. Software hosting costs have increased due primarily to higher transaction volumes. We intend to continue to invest additional resources in our enterprise software group to facilitate the adoption of our services. The timing of these expenses will affect our cost of revenues, both in terms of absolute dollars and as a percentage of revenues in future periods.
Our gross profit for the three months ended March 31, 2020 was $1.6 million, an increase of $0.5 million, or 42%, as compared to gross profit for the three months ended March 31, 2019 of $1.2 million. Our gross profit margin for the three months ended March 31, 2020 was 53.7%, an increase of 380 basis points as compared to gross profit margin for the three months ended March 31, 2019 of 49.9%. The increase compared to the three months ended March 31, 2019 was primarily as a result of increased consulting revenue and the minimal marginal cost to provide such services.
Because the applications and services available through the Leaf Data System are provided through relationships with third-party service providers, the costs are higher than those allocated from our employees’ salaries to support our MJ Platform and consulting contracts. Therefore, the gross profit margins from the government contracts are generally lower than those from our commercial software clients. Total costs of government revenues incurred by us, which are included in cost of revenues on the statement of operations, was $0.6 million and $0.5 million during the three months ended March 31, 2020 and 2019, respectively.
Operating Expenses
The following table presents operating expense line items for the three months ended March 31, 2020 and 2019 and the period-over-period dollar and percentage changes for those line items:
| | | Three Months Ended
March 31, | | | Change | |
| | | 2020 | | | 2019 | | | Period over Period | |
| Operating expenses: | | | | | | | | | | | | |
| Salary expenses, excluding Solo | | $ | 1,042,008 | | | $ | 981,318 | | | $ | 60,690 | | | | 6 | % |
| Solo product development | | | 327,567 | | | | — | | | | 327,567 | | | | nm | |
| Other product development | | | 262,778 | | | | 20,076 | | | | 242,702 | | | | nm | |
| Product development | | | 1,632,353 | | | | 1,001,394 | | | | 630,959 | | | | 63 | % |
| Percentage of revenue | | | 53 | % | | | 43 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Sales and marketing | | | 1,142,318 | | | | 975,007 | | | | 167,311 | | | | 17 | % |
| Solo selling, general and administrative | | | 198,208 | | | | — | | | | 198,208 | | | | nm | |
| General and administrative salaries | | | 1,735,749 | | | | 1,159,060 | | | | 576,689 | | | | 50 | % |
| Merger related costs | | | — | | | | 195,000 | | | | (195,000 | ) | | | (100 | )% |
| Acquisition related costs | | | 1,097,283 | | | | — | | | | 1,097,283 | | | | nm | |
| Other general and administrative | | | 1,327,279 | | | | 334,104 | | | | 993,175 | | | | 297 | % |
| Selling, general and administrative | | | 5,500,837 | | | | 2,663,171 | | | | 2,837,666 | | | | 107 | % |
| Percentage of revenue | | | 179 | % | | | 114 | % | | | | | | | | |
| Total operating expenses | | $ | 7,133,190 | | | $ | 3,664,565 | | | $ | 3,468,625 | | | | 95 | % |
| Percentage of revenue | | | 232 | % | | | 157 | % | | | | | | | | |
nm – percentage change not meaningful
Our operating expensesProduct Development
Product development expense increased to $7.1$3.2 million for the threesix months ended MarchDecember 31, 2020 from $1.2 million for the six months ended December 31, 2019, for an increase of $1.9 million, or 156%. The increase was due primarily to $1.3 million in employee-related costs from higher headcount and other operating cost related to acquisitions. Stock compensation expense increased $0.4 million compared to the prior period. Software costs increased $0.3 million primarily a result of additional investment in information technology security and reporting tools and software hosting costs, including data infrastructure.
Sales and Marketing
Sales and marketing expense increased to $3.9 million for the six months ended December 31, 2020 from $3.7 million for the threesix months ended MarchDecember 31, 2019, for an increase of $3.5$0.2 million or 95%5%. The increase in operating expenses was driven by higher selling, generalTotal sales and administrative expenses, an increase of $2.8 million, or 107%, in addition to higher product development expenses, an increase of $0.6 million, or 63%.
Salary expenses for product development functions, excluding product development salaries for Solo,marketing expense increased by $0.1 million, or 6%. Product development costs also increased $0.3$0.8 million as a result of our January 2020the acquisition of Ample, Trellis and Solo, offset by a decline other sales and marketing expense of $0.6 million primarily a result of decreased travel costs and a reduction in customer event spend due primarily to cancelling all in-person customer activities and events as a result of the controlling interest in Solo. Other product development costs increased by $0.2COVID-19 pandemic.
General and Administrative
General and administrative expense decreased to $4.4 million for the threesix months ended MarchDecember 31, 2020 primarily related to recruiting costs. Our investments in product development were made to improve and extend our service offerings and develop new technologies. We expect that such costs will increase in absolute dollars and may increase asfrom $4.7 million for the six months ended December 31, 2019, for a percentagedecrease of revenues in future periods as we continue to invest in additional employees and technology to support the development of new, and improve existing, technologies and the integration of acquired technologies.
Selling,$0.2 million, or 5%. Total general and administrative expenses includeexpense increased $0.6 million as a result of the acquisition of Ample, Trellis and Solo. Bad debt expense decreased $0.6 million during the six months ended December 31, 2020, as compared to the six months ended December 31, 2019, due to our improvement in the overall quality of our revenue and client portfolio, and the enhancement of our sales and marketing team which has resulted in a steady decline in the number and amount of delinquent accounts. We recorded a benefit of $1.0 million to reflect the estimated fair value of contingent consideration paid for our acquisition of Trellis and Ample. During 2020, we vacated certain leased offices in the U.S. following the dislocation of our workforce because of the COVID-19 pandemic. As a result, we recorded a restructuring charge of $0.4 million, which was recorded in general and administrative expenses. Stock compensation expenses including personnel costs,increased $0.3 million for the six months ended December 31, 2020, as compared to the six months ended December 31, 2019
Depreciation and Amortization
Depreciation and amortization expense increased to $2.0 million for the six months ended December 31, 2020 from $0.1 million for the six months ended December 31, 2019. Amortization expense increased entirely as a result of acquired intangible assets from our acquisitions completed in calendar 2020.
Impairment of long-lived assets
As a result of delays in executing on strategic initiatives related to acquisitions completed in calendar 2020 we recorded a $6.9 million impairment adjustment during the six months ended December 31, 2020. There were no similar charges during the six months ended December 31, 2019. A goodwill impairment charge of $4.2 million was recorded related to our marketing initiatives including paymentsAmple reporting unit and an intangible asset charge of $2.7 million was recorded for intangible assets acquired from our Solo transaction (see Note 6 - Goodwill and Intangible Assets, Net to partners and marketing programs; general and administrative functions, such as executives, finance and other supporting departments; transaction related costs, professional fees; and facilities expenses. Changes in selling, general and administrative expensesthe audited consolidated financial statements for the threesix months ended MarchDecember 31, 2020 compared2019 for further discussion on the impairments recorded).
Non-GAAP Financial Measures
In addition to 2019 wereour results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as follows:an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP.
Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. Other companies, including companies in our industry, may calculate similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. We attempt to compensate for these limitations by providing specific information regarding the GAAP items excluded from these non-GAAP financial measures.
Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures with their most directly comparable GAAP financial measures and not rely on any single financial measure to evaluate our business.
EBITDA and Adjusted EBITDA
We believe that EBITDA and Adjusted EBITDA, when considered with the consolidated financial statements determined in accordance with GAAP, are helpful to investors in understanding our performance and allows for comparison of our performance and credit strength to our peers. EBITDA and Adjusted EBITDA should not be considered alternatives to net loss as determined in accordance with GAAP as indicators of our performance or liquidity.
We define EBITDA as net loss before interest income and expense, changes in fair value of convertible notes, changes in fair value of derivative liabilities, provision for income taxes, and depreciation and amortization. We calculate Adjusted EBITDA as EBITDA further adjusted to exclude the effects of the following items for the reasons set forth below:
| ● | $1.1 million increase in acquisition related costs associated primarily withimpairment of long-lived assets, as this is a non-cash, non-recurring item, which effects the comparability of results of operations and liquidity; |
| | |
| ● | stock-based compensation expense, as this represents a non-cash charge and our acquisitionsmix of Solo in January 2020, Trellis in April 2020cash and Ample, planned forshare-based compensation may differ from other companies, which effects the summer for 2020, this increase was partially offset by a $0.2 million decrease in comparability of results of operations and liquidity; |
| ● | costs incurred in connection with the Mergersbusiness combinations and mergers that are required to be expensed as incurred in June 2019; |
| ● | $0.2 million increase dueaccordance with GAAP, because business combination and merger related costs are specific to the additioncomplexity and size of Solo’s selling, general and administrative expenses;the underlying transactions as well as the frequency of our acquisition activity these costs are not reflective of our ongoing operations; |
| ● | $0.2 million, or 17%, increase |
| ● | costs incurred in sales and marketing expenses primarily due to higher personnel costs; |
| ● | $0.6 million increase in general and administrative personnel costs, $0.3 million of this increase is attributable to stock-based compensation recognized in 2020; and |
| ● | $1.0 million increase in other general and administrative costs, primarilyconnection with non-recurring financing, including fees incurred as a direct result of electing the fair value option to account for our investments in technology and other infrastructuredebt instruments; |
| | |
| ● | restructuring charges, which include costs to position ourselves for future growthterminate a lease and the costrelated writeoff of leasehold improvements and furniture, as we believe these costs are not representative of operating performance; |
| | |
| ● | gain on forgiveness of PPP loan, as this is a public company.one-time forgiveness of debt that is not recurring across all periods and we believe inclusion of the gain is not representative of operating performance; |
| | |
| ● | equity in losses of investees because our share of the operations of investees is not representative of our own operating performance and may not be monetized for a number of years; |
| | |
| ● | and changes in the fair value of contingent consideration because these adjustments are not recurring across all periods and we believe these costs are not representative of operating performance. |
| | |
| ● | other non-operating expenses which includes a one-time gain on debt extinguishment and one-time loss on disposal of fixed assets, which effects the comparability of results of operations and liquidity; |
We planThe reconciliation of net loss to EBITDA and Adjusted EBITDA is as follows:
| | | Year Ended December 31, | | | Six Months Ended
December 31, | |
| | | 2021 | | | 2020 | | | 2020 | | | 2019 | |
| | | (unaudited) | | | (unaudited) | | | (unaudited) | | | (unaudited) | |
| Net Loss | | $ | (31,328,711 | ) | | $ | (26,888,791 | ) | | $ | (16,219,296 | ) | | $ | (3,757,952 | ) |
| | | | | | | | | | | | | | | | | |
| Interest expense (income) | | | 1,531,497 | | | | 161,646 | | | | 193,084 | | | | (125,239 | ) |
| Change in fair value of convertible notes | | | 1,365,904 | | | | 195,273 | | | | 961,273 | | | | - | |
| Change in fair value of derivative liability | | | (248,198 | ) | | | (376,811 | ) | | | (746,852 | ) | | | (2,332,075 | ) |
| Income tax expense (benefit) | | | (2,262,225 | ) | | | 31,185 | | | | 200 | | | | 104,667 | |
| Depreciation and amortization | | | 5,735,150 | | | | 3,223,844 | | | | 2,007,237 | | | | - | |
| EBITDA | | $ | (25,206,583 | ) | | $ | (23,653,654 | ) | | $ | (13,804,354 | ) | | $ | (6,110,599 | ) |
| | | | | | | | | | | | | | | | | |
| Impairment of long-lived assets | | | 14,383,310 | | | | 6,887,000 | | | | 6,887,000 | | | | - | |
| Stock-based compensation expense | | | 1,967,817 | | | | 1,871,069 | | | | 1,197,589 | | | | 492,650 | |
| Business combination and merger related costs | | | 449,940 | | | | 3,339,864 | | | | 1,094,503 | | | | 733,867 | |
| Non-recurring financing fees | | | 458,691 | | | | 1,316,984 | | | | 139,594 | | | | - | |
| Restructuring charges | | | 2,419,908 | | | | 490,146 | | | | 490,146 | | | | - | |
| Changes in fair value of contingent consideration | | | - | | | | (1,991,000 | ) | | | (993,000 | ) | | | - | |
| Gain on forgiveness of PPP loan | | | (2,234,730 | ) | | | - | | | | - | | | | - | |
| Equity in losses of investee | | | 7,564 | | | | 16,335 | | | | 12,643 | | | | - | |
| Other non-operating expense (income) | | | (186,177 | ) | | | 59,397 | | | | 59,271 | | | | 130 | |
| Adjusted EBITDA | | $ | (7,940,260 | ) | | $ | (11,663,859 | ) | | $ | (4,916,608 | ) | | $ | (4,883,952 | ) |
| | | Three Months Ended
March 31, | |
| | | 2022 | | | 2021 | |
| Net loss | | $ | (21,952,893 | ) | | $ | (6,457,703 | ) |
| Adjustments: | | | | | | | | |
| Interest expense (income) | | | 740 | | | | 774,380 | |
| Change in fair value of convertible notes | | | 1,433,000 | | | | 1,991,272 | |
| Change in fair value of derivative liability | | | (18,051 | ) | | | 175,996 | |
| Income tax expense | | | (99,444 | ) | | | 6,270 | |
| Depreciation and amortization | | | 1,993,391 | | | | 1,052,883 | |
| EBITDA | | $ | (18,643,257 | ) | | $ | (2,456,902 | ) |
| Impairment of long-lived assets | | | 15,478,521 | | | | - | |
| Stock-based compensation expense | | | 312,925 | | | | 503,379 | |
| Business combination and merger related costs (income) | | | (637 | ) | | | 43,991 | |
| Non-recurring financing fees | | | 27,954 | | | | 17,884 | |
| Restructuring charges | | | 564,234 | | | | 47,187 | |
| Equity in losses of investee | | | - | | | | 3,782 | |
| Adjusted EBITDA | | $ | (2,260,260 | ) | | $ | (1,840,679 | ) |
Going Concern and Management's Liquidity Plans
In accordance with the Financial Accounting Standards Board’s (“FASB”) standard on going concern, Accounting Standard Update, 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 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 year ended December 31, 2021, six months ended December 31, 2020, and year ended June 30, 2020, we incurred a loss from operations of $33.4 million, $15.7 million, and $17.3 million, respectively, and used cash in operations of $8.2 million, $8.7 million, and $14.3 million, respectively. At December 31, 2021, the Company had a working capital deficit of $10.9 million with $13.9 million in cash available to invest in marketing and sales by expanding our domestic and international selling and marketing activities, building brand awareness, attracting new customers, and sponsoring additional marketing events. The timing of these marketing events will affect our marketing costs in a quarter.fund future operations. During the three months ended March 31, 2022 and March 31, 2021, we incurred a loss from operations of $20.6 million and $3.5 million, respectively, and used cash in operations of $3.6 million and $1.4 million, respectively. As of March 31, 2022, a working capital deficit of $15.1 million with $9.7 million in cash available to fund future operations. These factors raise substantial doubt, as defined by GAAP, about the ability of the Company to continue to operate as a going concern for the twelve months following the issuance of these consolidated financial statements. These consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
On July 23, 2021, we entered into an Equity Distribution Agreement with Oppenheimer & Co. Inc. and A.G.P./Alliance Global Partners ("ATM Program"). Pursuant to the terms of the ATM Program, we may offer and sell from time to time, up to $25 million of shares of our common stock. As of December 31, 2021, we have raised gross proceeds of $1.9 million through the issuance of 556,388 shares through the ATM program. While no assurance can be provided that we will be able to raise further capital under the program, we intend to use the net proceeds from the sale of our shares of common stock, if any, for general corporate purposes, including working capital, marketing, product development, capital expenditures and merger and acquisition activities.
On October 5, 2021, we entered into a securities purchase agreement with the two institutional investors that held the Company's convertible notes issued in June of 2020 (the "2020 Notes") to sell senior secured notes in a private placement (the "Senior Convertible Notes"). The Senior Convertible Notes have an aggregate principal amount of $20 million, an aggregate original issue discount of 10%, and rank senior to all our other outstanding and future indebtedness. Approximately $3.3 million of the COVID-19 pandemic resultedproceeds from the Senior Convertible Notes were used to payoff the 2020 Notes, which were then to be cancelled. The net proceeds from the issuance of the Senior Convertible Notes was approximately $14.6 million, following the original issue discount and deductions for expenses and paydown of the 2020 Notes. These net proceeds will be used to support Akerna's ongoing growth initiatives and continued investment in current and future technology infrastructure. The Senior Convertible Notes are convertible into shares of common stock of Akerna at a conversion price of $4.05 per share. The Senior Convertible Notes mature on October 5, 2024 and are to be repaid in monthly installments beginning on January 1, 2022. The Senior Convertible Notes can be repaid in common shares or cash.
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 $5 million under the ATM program and an increase of 10% in the cancellationamount payable on the monthly installment payments if they are paid in cash and we have used the ATM program in the 12 months prior to the installment date, settling our contingent consideration and Senior Convertible Notes in common stock rather than cash as it comes due, to the extent that this is permissible, and implementing certain cost cutting strategies throughout the organization, while continuing to seek to grow our customer base and realize synergies as we continue to integrate our recent acquisitions. If the Company is unable to raise sufficient additional funds through the ATM Program and make it's convertible debt payments in stock, it will have to develop and implement a plan to extend payables, reduce expenditures (including by laying off employees and reducing or eliminating the funding of travelcertain business units and participationinitiatives of the Company), or scale back our business plan until sufficient additional capital is raised through other equity or debt offerings to support further operations and satisfaction of the debt, and the Company may be subject to additional risks, including retention of key employees. 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. If we are required to raise additional capital as discussed above and if we cannot timely raise additional funds, we may also be unable to meet the financial covenants of the Senior Convertible Notes, which could result in marketing events,an event of default under those instruments which reducedcould negatively impact the Company. See the risks detailed in our Form 10-K under “Item 1A. Risk Factors - Risks Relating to our Convertible Debt”.
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. We also assume that we will be able to pay our convertible debt in common stock rather than cash, however if at any point our stock price is below $2.00 (which it is as of the date hereof), the debt holders may request the payments in cash rather than stock. These factors raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the consolidated financial statements. If we are unable to raise sufficient capital we may have to reduce operations which could significantly 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.
Our corporate liquidity requirements primarily include payroll costs slightly relativeand corporate general and administrative expenses and our current sources of corporate liquidity include the cash on hand from our Senior Convertible Notes as well as the proceeds we anticipate from the access to 2019.our ATM Program.
Liquidity and Capital Resources
Cash Flows
Our cash and restricted cash balance were $14.8was $14.4 million and $22.4$18.3 million as of December 31, 2021 and 2020, respectively. Cash flow information are as follows:
| | | Year ended
December 31,
2021 | | | Six months
ended
December 31,
2020 | |
| Cash provided by (used in): | | | | | | |
| Operating activities | | $ | (8,167,904 | ) | | $ | (8,705,738 | ) |
| Investing activities | | | (10,485,085 | ) | | | (7,139,047 | ) |
| Financing activities | | | 14,736,252 | | | | 9,532,380 | |
| Effect of change in exchange rates on cash and restricted cash | | | 18,623 | | | | (2,783 | ) |
| Net decrease in cash and restricted cash | | $ | (3,898,114 | ) | | $ | (6,315,188 | ) |
Our cash and restricted cash balance was $10.2 million as of March 31, 2020 and June 30, 2019, respectively.2022. Cash flow information for the nine months ended March 31, 2020 and 2019 is as follows:
| | | Nine months ended
March 31, | |
| | | 2020 | | | 2019 | |
| Cash provided by (used in): | | | | | | |
| Operating activities | | $ | (11,602,077 | ) | | $ | (6,357,935 | ) |
| Investing activities | | | (202,281 | ) | | | — | |
| Financing activities | | | 4,247,065 | | | | 10,000,000 | |
| Net change in cash and restricted cash | | $ | (7,557,293 | ) | | $ | 3,642,065 | |
| | | Three Months Ended
March 31, | |
| | | 2022 | | | 2021 | |
| Cash (used in) provided by: | | | | | | |
| Operating activities | | $ | (3,585,394 | ) | | $ | (1,373,818 | ) |
| Investing activities | | | (647,022 | ) | | | (704,637 | ) |
| Financing activities | | | (5,615 | ) | | | (333,847 | ) |
| Effect of change in exchange rates on cash and restricted cash | | | (8,544 | ) | | | (1,579 | ) |
| Net decrease in cash and restricted cash | | $ | (4,246,575 | ) | | $ | (2,413,881 | ) |
Operating Activities
Our largest source of operating cash is cash collections from our customers for subscriptions to our products. Our primary uses of cash in operating activities are for employee-related expenditures, marketing expenses and third-party hosting costs. Net cash used in operating activities is impacted by our net loss adjusted for certain non-cash items, including depreciation and amortization expenses, change in fair value of convertible notes and derivative liabilities, stock-based compensation, deferred income taxes, as well as the effect of changes in operating assets and liabilities.
Net cash used in operating activities totaled $8.2 million during the year ended December 31, 2021 and $8.7 million during the six months ended December 31, 2020. For the year ended December 31, 2021, cash was consumed from operations by a net loss of $31.3 million, less non-cash items of $24.0 million and a net change in assets and liabilities of $0.8 million. For the six months ended December 31, 2020, cash was consumed from operations by a net loss of $16.2 million, less non-cash items of $9.7 million and a net change in assets and liabilities of $2.2 million.
Net cash used in operating activities increased to $11.6$3.6 million during the ninethree months ended March 31, 2020,2022, from $6.4$1.4 million during the ninethree months ended March 31, 2019,2021, an increase of $5.2$2.2 million. Cash used in operating activities duringFor the ninethree months ended March 31, 20202022, cash was primarily drivenconsumed from operations by thea net loss of $12.6$22.0 million, less non-cash items of $19.5 million and a net change in assets and liabilities of $1.1 million. For the three months ended March 31, 2021, cash was consumed from operations by a net loss of $6.5 million, less non-cash items of $4.6 million and a net change in assets and liabilities of $0.5 million.
Investing Activities
Our primary investing activities have consisted of capitalization of internal-use software necessary to deliver significant new features and functionality in our platform which provides value to our customers. As our business grows, we expect our capital expenditures to continue to increase. Other investing activities include cash outflows related to purchases of property and equipment, and from time-to-time, the cash paid for asset and business acquisitions.
Net cash used in investing activities was $0.2totaled $10.5 million during the nineyear ended December 31, 2021, as a result of net cash paid as consideration for the 365 Cannabis acquisition and amounts invested in the development of our software products. Net cash used by investing activities during the six months ended December 31, 2020 was $7.1 million as a result of amounts invested in the development of our software products and the net cash paid as consideration for the acquisition of Ample.
Net cash used in investing activities totaled $0.6 million during the three months ended March 31, 2020, due to $0.3 million used to acquire minority stake in Zol Solutions, Inc, partially offset by $0.1 million2022, as a result of cash and restrictedoutflows for the development of our software products. Net cash acquired inused by investing activities during the three months ended March 31, 2021, was $0.7 million which was also related to our acquisition of the majority stake in Solo. Please see Notes 7 and 3 to the Akerna condensed consolidated financial statements included in this Prospectus for more information about our investments in Zol Solutions, Inc. and Solo, respectively.software development.
Financing Activities
Our financing activities have consisted primarily of proceeds from issuance of our common stock, issuances of convertible debt and proceeds from the exercise of warrants.
Net cash provided by financing activities totaled $4.2$14.7 million during the nine monthsyear ended MarchDecember 31, 2020 due to receipt2021 and represents cash proceeds of $18.0 million from the issuance of convertible debt in October 2021, proceeds from warrants exercised duringour ATM program in the period.amount of $1.8 million partially offset by the value of shares withhold for tax withholdings and payments on our convertible debt in the amount of $0.5 million and $4.6 million, respectively. Net cash provided by financing activities was $9.5 million for the six months ended December 31, 2020, of which $12 million was related to the common stock offering that closed on October 30, 2020, partially offset by $1.5 million in payments on our financing obligations and $1.0 million of offering costs from issuing common stock.
Net cash used in financing activities totaled $10less than $0.1 million during the ninethree months ended March 31, 2019 as a result of proceeds raised in MJF Series C financing in August 2018. Upon2022 and $0.3 million for the consummation of the Mergers, the Series C Preferred Units issued in connection with the transaction were converted into shares of Akerna common stock
Liquidity and Capital Resources
As of March 31, 2020, we had cash of $14.3 million, excluding restricted cash. We had a working capital balance of $13.1 million as of March 31, 2019, as compared to $21.8 million as of June 30, 2019.
Since our inception, we have incurred recurring operating losses, used cash from operations, and relied on capital raising transactions to continue ongoing operations. Although we have continuing negative cash flow from operations, the cash outflow since the Mergers is partially attributable to approximately $1.8 million in costs incurred in connection with specific transactions, including the Mergers and acquisitions completed or expected to close within the next twelve months. The transaction costs we expect to occur over the next twelve months are far less than the costs incurred during the ninethree months ended March 31, 2020. In addition,2021. During both periods the cash used in financing activities was related to the value of shares withhold for tax withholdings.
ATM Program
On July 23, 2021, we are implementing a cost reduction plan duringentered into an Equity Distribution Agreement with Oppenheimer & Co. Inc. and A.G.P./Alliance Global Partners (the "ATM Program"). Pursuant to the fourth quarter 2020 thatterms of the Agreement, we expect to reduce recurring operating expenses between $2 millionmay offer and $3 million annually. We anticipate our current cash will be sufficient to meet the working capital requirements for the next twelve months. Fromsell from time to time, up to $25 million of shares of our common stock. As of December 31, 2021, we may pursue various strategic business opportunities. These opportunities may include investment in or ownershiphave raised gross proceeds of additional technology companies$1.9 million through direct investments, acquisitions, joint ventures and other arrangements. We can provide no assurance that we will successfully identify such opportunities or that, if we identify and pursue anythe issuance of these opportunities, any of them will be consummated. Consequently, we may raise additional equity or debt capital or enter into arrangements to secure necessary financing to fund556,388 shares through the completion of such strategic business opportunities, although no assurance can be provided that we will be successful in completing a future capital raise. The sale of additional equity could result in additional dilution to our existing stockholders, and financing arrangements may not be available to us, or may not be available in sufficient amounts or on acceptable terms. Our future operating performance will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. See “Risk Factors” on page 6 of this Prospectus and other information included in this Prospectus for a discussion of the risks related to our liquidity and capital structure.ATM program.
Convertible Note Transaction
Senior Secured Convertible Notes Issuance
On June 8, 2020,October 5, 2021, we entered into a Securities Purchase Agreement (the “SPA”("SPA") with the two institutional investors (each a “Holder” and collectivelythat held the “Holders”Company's convertible notes issued on June 8, 2020 (the "2020 Notes") to sell a new series of senior secured convertible notes (the “Convertible Notes”) of Akerna in a private placement (the “Private Placement”"Senior Convertible Notes") to the Holders, in the. The Senior Convertible Notes have an aggregate principal amount of $17,000,000 having$20,000,000, an aggregate original issue discount of 12%10%, and rankingrank senior to all our other outstanding and future indebtednessindebtedness. Approximately $3.3 million of Akerna and its subsidiaries.
The Convertible Notes were sold on June 9, 2020 with an original issue discount pursuant to which the Holders paid $880 per each $1,000 in principal amount of the Convertible Notes and do not bear interest except upon the occurrence of an event of default.
We will use the proceeds from the saleSenior Convertible Notes were used to payoff the 2020 Notes, which were then to be cancelled. The net proceeds from the issuance of the Senior Convertible Notes was approximately $14.6 million, following the original issue discount and deductions for general corporate purposes, but not, as covenanted in the SPA, directly or indirectly, for (i) the satisfaction of any indebtedness of Akerna or any of its subsidiaries, (ii) the redemption or repurchase of any securities of Akerna or any of its Subsidiaries, or (iii) the settlement of any outstanding litigation.
The Convertible Notes mature on June 1, 2023, are payable in installmentsexpenses and are convertible at the electionpaydown of the Holders as more fully described below.
Under the terms of the Convertible Notes, the2020 Notes. These net proceeds will be used to support Akerna's ongoing growth initiatives and continued investment in current and future technology infrastructure. The Senior Convertible Notes are convertible at any time, in whole or in part, at the option of the holders thereof, into shares of common stock at a rate equal to the amount of principal, interest (if any) and unpaid late charges (if any), divided byAkerna at a conversion price of $11.50.
$4.05 per share. The SPA contains customary representations and warranties of the Holders and Akerna regarding the purchase and offer and sale of the Notes.Senior Convertible Notes can be repaid in common shares or cash.
Maturity and Repayment Dates
The Senior Convertible Notes mature (the “on October 5, 2024, or the Maturity Date”) on June 1, 2023.
Under the terms of the Convertible Notes, the Convertible Notes are convertible at any time, in whole or in part, at the option of the holders thereof, into shares of common stock at a rate equal to the amount of principal, interest (if any) and unpaid late charges (if any), divided by a conversion price of $11.50.
Date. The principal amount is payable in monthly installments beginning on OctoberJanuary 1, 2020.2022. Unless deferred by the holder, on installment dates from OctoberJanuary 1, 2020 through, and including, January 4, 2021, $500,000 in principal amount will be payable, (y) with respect to the installment dates from, and including, February 1, 20212022 through, and including, June 1, 2021, $825,0002023, $1.1 million in principal amount will be payable and (z) withon installment date July 1, 2023, $0.2 million in principal amount will be payable. With respect to installment dates from and including, JulyAugust 1, 20212023 through and including the earliermaturity date of the repayment of the Principal and the Maturity Date, $1,000,000 in principal amountOctober 5, 2024, any deferred payments from prior installment dates will be payable. We may not prepay any portion of the principal amount nor interest, if any.
Interest
The Senior Convertible Notes are being sold with an original issue discount and do not bear interest except upon the occurrence of an Event of Default (described below), in which event the applicable rate will be 15.00%15.0% per annum.
Conversion
The Senior Convertible Notes are convertible at any time in whole or in part, at the option of the holders thereof,Note Holders, into shares of the common stock at a rate equal to the amount of principal, interest (if any) and unpaid late charges (if any), divided by a conversion price of $11.50 (the “$4.05, or the Conversion Price”).Price. The Conversion Price is subject to standard adjustments in the event of any stock split, stock dividend, stock combination, recapitalization or other similar transaction.
In connection with the occurrence of Events of Default, the holders of the Convertible NotesNote Holders will be entitled to convert all or any portion of the Senior Convertible Notes at an alternate conversion price equal to the lower of (i) the conversion price then in effect, and (ii) 80% of the lower of (x) the volume weightedvolume-weighted average price, (“VWAP”)or VWAP, of the common stock as of the Trading Daytrading day immediately preceding the applicable date of determination and (y) the quotient of (A) the sum of the VWAP of the common stock for each of the two (2) Trading Daystrading days with the lowest VWAP of the common stock during the ten (10) consecutive Trading Daytrading day period ending on and including the Trading Daytrading day immediately prior to the applicable date of determination, divided by (B) two, (2), but not less than the Floor Price.floor price of $0.54.
Conversion Limitation and Exchange Cap
The holders of the Convertible Notes will not have the right to convert any portion of the Convertible Notes, to the extent that, after giving effect to such conversion, such Holder (together with certain related parties) would beneficially own in excess of 4.99% of the shares of the common stock outstanding immediately after giving effect to such conversion. A holder may from time to time increase this limit to 9.99%, provided that any such increase will not be effective until the 61st day after delivery of a notice to us of such increase.
In addition, the Convertible Notes shall not be convertible to the extent the conversion would result in Akerna issuing more shares of common stock than permitted under the rules of the Nasdaq Stock Market until such time as we shall have obtained Akerna stockholder approval.
Under the SPA, among other things, we agreed to hold a stockholder meeting, by no later than November 30, 2020 to approve resolutions authorizing the issuance of shares of common stock under the Convertible Notes for the purposes of compliance with the stockholder approval rules of the Nasdaq Stock Market. If such approval is not received by November 30, 2020, we will be obligated to continue to seek stockholder approval by February 28, 2021 and every three months thereafter until such approval is obtained.
Events of Default
The Senior Convertible Notes are subject to certain customary events of default.default, see Item 1A. “Risk Factors - Risks Related to our Convertible Debt” for a short discussion of events of default under the Senior Convertible Notes.
Contractual Obligations
For information concerning our contingent consideration, convertible debt, and operating lease obligations, see Notes 4, 6, and 7, respectively, to our unaudited condensed consolidated financial statements for the period ended March 31, 2022, which appear below.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements and the related notes included in this prospectus are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
Critical accounting policies and estimates are those that we consider critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates.
Revenue Recognition
We generate revenue through the sale of our cloud-based software and the delivery of consulting services. Revenues are recognized when control of these services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those services. We determine revenue recognition through the following steps:
| ● | Identification of the contract, or contracts, with a customer |
| ● | Identification of the performance obligations in the contract |
| ● | Determination of the transaction price |
| | |
| ● | Allocation of the transaction price to the performance obligations in the contract |
| ● | Recognition of revenue when, or as, we satisfy a performance obligation |
We recognize subscription on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our subscription contracts range from twelve months to thirty-six months in duration, are billed in advance and are non-cancelable. We consider the access to our platform and related support services in a customer contract to be a series of distinct services which comprise a single performance obligation because they are substantially the same and have the same pattern of transfer. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether transfer of control to customers has occurred. We record contract liabilities to deferred revenue when cash payments are received or due. Deferred revenue consists of the unearned portion of customer billings.
Consulting revenue contracts have an initial set of proprietary deliverables that are provided to clients upfront, which is considered a separate performance obligation. As such, 30% of March 31, 2020, we did notthe contract value is recognized upfront when deliverables are provided, with the remaining recognized over the life of the contract as the consulting services are performed.
Capitalized Software Development Costs
We capitalize software development costs incurred to develop functionality for our commercial software platforms and government regulatory software platform, as well as certain upgrades and enhancements that are expected to result in enhanced functionality. These costs include personnel and related expenses for employees, costs of third-party contractors and other services directly associated with the development projects. We capitalize certain software development costs for new offerings as well as upgrades to our existing software platforms. We amortize these development costs over the estimated useful life of two to five years on a straight-line basis. We believe there are two key estimates within the capitalized software balance, which are the determination of the amounts to be capitalized and the determination of the useful life of the software.
We determine the amount of software development costs to be capitalized based on the amount of time spent by our developers on projects in the application stage of development. Costs associated with building or significantly enhancing our commercial software platform and our government regulatory platform are capitalized, while costs associated with planning new developments and maintaining our software platforms are expensed as incurred. There is judgment involved in estimating the time allocated to a particular project in the application stage as well as the determination of whether the project is an enhancement to the existing software or maintenance thereof. A significant change in the time spent on each project or the determination of the nature of projects involving existing software platforms could have any relationships with unconsolidated organizations or financial partnerships,a material impact on the amount capitalized and related amortization expense in subsequent periods.
We determined that a two-to-five-year life is appropriate for our capitalized software based on our best estimate of the useful life of the software after considering factors such as structured financecontinuous developments in the technology, obsolescence and anticipated life of the service offering before significant upgrades. Based on our prior experience, software will generally remain in use for a minimum of two to five years before being significantly replaced or special purpose entitiesmodified to keep up with evolving client needs. While we do not anticipate any significant changes to this two-to-five-year estimate, a change in this estimate could produce a material impact on our consolidated financial statements. For example, if we received information that indicated the useful life of all software was one year rather than two to five, our capitalized software balance would materially decrease, and our expense would materially increase.
Stock-Based Compensation
Stock-based compensation for all employee and non-employee stock-based awards, including restricted stock units and restricted stock, is measured at fair value on the date of grant and recognized over the service period. The fair value of restricted stock units and restricted stock are calculated based on the fair value of our common stock on the date of grant.
Stock-based compensation expense is recognized over the requisite service periods of awards, which is typically one to four years for restricted stock units and restricted stock. The estimated forfeiture rate applied to employee awards is based on historical forfeiture rates. The estimated number of stock-based awards that will ultimately vest requires judgment, and to the extent actual results, or updated estimates, differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period actual results are realized or estimates are revised. A higher forfeiture rate will result in an adjustment that will decrease stock-based compensation expense, whereas a lower forfeiture rate will result in an adjustment that will increase stock-based compensation expense. We do not apply a forfeiture rate assumption to value non-employee awards, given the nature of the services provided.
Business Combinations
We account for business acquisitions using the purchase method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. Goodwill represents the excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.
Significant judgment is used in determining fair values of assets acquired and liabilities assumed, as well as intangible assets and their estimated useful lives. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows attributable to the acquired intangible assets and appropriate discount rates used in computing present values. Management applied significant judgement in estimating the fair value of the acquired developed technology intangible asset, which involved significant estimates and assumptions with respect to forecasted revenue growth rates, the revenue attributable to the acquired intangible asset over its estimated economic life and the discount rate. These judgments may materially impact the estimates used in allocating the purchase price consideration to the fair value of assets acquired and liabilities assumed, as well as our current and future operating results. Actual results may vary from these estimates that may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to the fair value of assets acquired and liabilities assumed made after the end of the measurement period are recorded within our operating results.
Contingent Consideration Liabilities
ASC 805 requires that contingent consideration be estimated and recorded at fair value as of the acquisition date as part of the total consideration transferred. Contingent consideration is an obligation of the acquirer to transfer additional assets or equity interests to the selling shareholders in the future if certain future events occur or conditions are met, such as the attainment of product development milestones. Contingent consideration also includes additional future payments to selling shareholders based on achievement of components of earnings, such as “earn-out” provisions or percentage of future revenues, including royalties paid to the selling shareholders based on a percentage of revenues generated from CHI and Sera Labs over the contractual period.
The fair value of milestone-based contingent consideration was determined using a scenario analysis valuation method which incorporates our assumptions with respect to the likelihood of achievement of revenue and gross margin percentage milestones, as defined in the Sera Labs Merger Agreement, credit risk, timing of the contingent consideration payments and a risk-adjusted discount rate to estimate the present value of the expected payments, all of which require significant management judgment and assumptions. Since the contingent consideration payments are based on nonfinancial, binary events, management believes the use of the scenario analysis method is appropriate.
The fair value of all contingent consideration after the Sera Labs Merger Date is reassessed by us as changes in circumstances and conditions occur, with the subsequent change in fair value recorded in our consolidated statements of operations. Changes in key assumptions can materially affect the estimated fair value of contingent consideration liabilities and, accordingly, the resulting gain or loss that we record in our consolidated financial statements. See Note 17 to our consolidated financial statements included elsewhere in this Report.
Impairment of Goodwill and Acquired Intangible Assets
Goodwill is not amortized but rather tested for impairment at least annually, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Goodwill impairment is recognized when the carrying value of goodwill exceeds our implied fair value. Goodwill is evaluated for impairment annually on October 31, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.
Acquisition intangible assets consist primarily of technology, customer relationships and trade names. Purchased intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated useful lives following the pattern in which the economic benefits of the assets will be consumed, generally straight-line. We continually evaluate whether events and circumstances have been establishedoccurred that indicate the remaining estimated useful life of amortizable long-lived assets may warrant revision or that the remaining balance may not be recoverable. When factors indicate that acquisition intangible assets should be evaluated for possible impairment, we use an estimate of the related undiscounted future cash flows over the remaining life of the amortizable long-lived assets in measuring whether they are recoverable. if the estimated undiscounted future cash flows do not exceed the carrying value of the asset, a loss is recorded as the excess of the asset’s carrying value over its fair value.
Determining if an impairment triggering event has occurred (which may include, but is not limited to, a significant adverse change in customer demand or business climate or a significant decrease in expected cash flows) requires significant management judgement.
Senior Convertible Notes
We determined at the issuance of our Senior Convertible Notes to elect the fair value option. At issuance, the carrying value of the Senior Convertible Notes was recorded at estimated fair value calculated using probability weighted valuations of various settlement scenarios. The valuations of the various settlement outcomes were calculated using Monte Carlo simulation models and discounted cash flow models. We remeasure the Senior Convertible Notes to estimated fair value on each reporting period using valuation techniques similar to those applied at issuance. The change in the fair value resulting from changes in instrument specific credit risk is recognized as other comprehensive income with the remainder of the change recognized in current earnings. We believe key estimates used in accounting for the purposeSenior Convertible Notes are the fair value at the reporting period end as well as the determination of facilitating off-balance sheet arrangementsthe portion of the change resulting from instrument specific credit risk, including assumptions regarding the probability of various outcomes and the volatility of Akerna's common stock. A significant change in the probability weighting or other contractually narrow or limited purposes.the volatility could have a material impact to the carrying value of the Senior Convertible Notes as well as the amount of change recognized during the period in earnings.
53
Income Taxes
Income taxes are accounted for using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of other assets and liabilities. We provide for income taxes at the current and future enacted tax rates and laws applicable in each taxing jurisdiction. We use a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. We recognize interest and penalties related to income tax matters in selling, general and administrative expenses in the consolidated statement of operations.
We recognize deferred tax assets to the extent that its assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, we will make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
Going Concern Assessment
With the implementation of FASB’s standard on going concern, ASU No. 2014-15, we assess going concern uncertainty in our consolidated financial statements to determine if we have sufficient cash and cash equivalents on hand and working capital, including available loans or lines of credit, if any, to operate for a period of at least one year from the date our 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 us, we consider various scenarios, forecasts, projections, and estimates, and we make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and our ability to delay or curtail those expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, we make certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent we deem probable those implementations can be achieved and we have the proper authority to execute them within the look-forward period in accordance with ASU No. 2014-15.
Recent Accounting Pronouncements
Please refer to Note 2 - “Summary of Significant Accounting Policies” to the consolidated financial statements for our discussion about new accounting pronouncements adopted and those pending.
DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
| Name | | Age | | Position |
| Jessica Billingsley | | 4244 | | Chairman of the Board and Chief Executive Officer(3) |
| Scott Sozio | | 3942 | | Director(3)(2) |
| Matthew R. Kane | | 3941 | | Director(1) |
| Tahira Rehmatullah | | 3740 | | Director(1) |
Mark IwanowskiBarry Fishman | | 64 | | Director(3) |
John FowleLarry Dean Ditto, Jr. | | 4256 | | Interim Chief Financial Officer and Secretary |
Nina SimoskoRay Thompson | | 5152 | | Special Advisor to the Chief RevenueExecutive Officer |
Ray ThompsonDavid McCullough | | 4945 | | Chief OperatingTechnology Officer of MJF |
| (3) | (3) | Class III director. |
Jessica Billingsley has served as Chief Executive Officer and director since the consummation of our Business Combination on June 17, 2019, and Chairman of the Board since July 2019. Ms. Billingsley co-founded MJF, our wholly-owned subsidiary, in 2010 and served as President of MJF from 2010 to April 2018 and Chief Executive Officer since May 2018. An early investor in one of Colorado’s first legal medical cannabis businesses, Ms. Billingsley created the category of cannabis seed-to-sale technology after seeing the need first-hand. Prior to MJF, Ms. Billingsley was the founder and chief executive officer of Zoco, a technology services firm with clients across the United States. Ms. Billingsley has 20 years of technology and systems experience with rapidly scaling businesses, and founded her first business at the age of 22. Ms. Billingsley has served on the board of the National Cannabis Industry Association since 2012.from 2012 – 2019 and currently serves as Chair of the Board of the United States Cannabis Council. Ms. Billingsley was named one of Fortune’s 10 most promising women entrepreneurs in 2015 and named one of Inc. Magazine’s 100 Female Founders in 2018. Ms. Billingsley holds a dual degree from the University of Georgia in Computer Science and Communications. Ms. Billingsley was selected to serve on our Board based on her extensive experience with technology and systems companies, broad experience in the telecommunications industry, and her background as an entrepreneur.
Scott Sozio has served as a director since October 2018, prior to the Business Combination.consummation of our merger on June 17, 2019. From October 2018 until the consummation of the Business Combinationmerger on June 17, 2019, Mr. Sozio served as President and Secretary of Akerna. From September 2017 and until the Business Combinationmerger in June 2019, Mr. Sozio served as the chief executive officer and a director of MTech Acquisition Corp. Since July 2019, Mr. Sozio has served as Head of Corporate Development., Mr. Sozio is the co-founder of Hypur Ventures and since June 2016, has served as its managing director, where he sources, structures, negotiates and executes portfolio investments.director. Since April 2015, Mr. Sozio has served as a director of Hypur Inc., a financial technology firm focused on banking compliance. Since September 2016, Mr. Sozio has served as a director of Simplifya Holdings, LLC, a cannabis compliance technology business, both portfolio companies of Hypur Ventures. Since February 2013, Mr. Sozio has served as a partner in Van Dyke Holdings, where he is responsible for its private investment portfolio, and he led its initial deal in the cannabis industry in 2014.portfolio. Prior to joining Van Dyke Holdings, Mr. Sozio was a vice president of Bay Harbour Management L.C., a distressed-debt focused hedge fund. He joined Bay Harbour in 2004 after working in the Financial Restructuring Advisory Group at CIBC World Markets. Mr. Sozio is the former Chairman of Island One, Inc., a timeshare company based in Florida (from 2011 to 2012), and acquired by Diamond Resorts as part of Diamond’s initial public offering, and a former director of Great Destinations, Inc., a timeshare sales business based in California (from 2013 to 2016), and acquired by Interval International in 2016. Mr. Sozio holds a B.A. in Architecture from Columbia University. Mr. Sozio was selected to serve on our Board based on his extensive experience in finance and investment management and his broad experience with working with cannabis companies.
Matthew R. Kanehas served as a director since the consummation of our Business Combinationmerger on June 17, 2019. Since December 2015, Mr. Kane has served as a director or MJF. In 2002, Mr. Kane co-founded and since then has served as co-chief executive officer of Green Shades Software, Inc., a human resources, payroll and tax reporting software company.company, until 2019 where he has since served as a board member. Additionally, Mr. Kane has served as chief executive officer of Welltality, a health care technology start-up, from 2014 to 2018, where he has since 2014.served as a board member. He received his bachelor’s degree in Computer Information Systems from Jacksonville University in 2001, and hisan MBA from the Warrington College of Business at the University of Florida in 2006.2006, and a Masters in Information and Data Service at the University of California, Berkeley in 2020. He previously served for 11 years on the board of Jacksonville University from 2007 to May 2018.2018 and was reappointed in 2019. Mr. Kane was selected to serve on our Board based on his extensive experience in in the software technology applications industry.
Tahira Rehmatullah has served as a director since consummation of our Business Combinationmerger on June 17, 2019. Since October 2018, prior to the Business Combinationmerger and until consummation of the Business Combinationmerger in June 2019, Ms. Rehmatullah servesserved as Vice President and Treasurer. Since 2016, Ms. Rehmatullah has been president of T3 Ventures, a strategy and management consulting firm. From September 2017 to June 2019, Ms. Rehmatullah was the chief financial officer of MTech Acquisitions Inc. SinceFrom 2016 to 2019, Ms. Rehmatullah has also beenwas a managing director of Hypur Ventures, where she iswas responsible for portfolio company management as well as investment sourcing and execution. SinceFrom June 2017 to June 2018, Ms. Rehmatullah has served as a director of Dope Media, a cannabis media company and portfolio company of Hypur Ventures. Prior to joining Hypur Ventures, from 2014 to 2016 Ms. Rehmatullah served as the general manager of Marley Natural, a cannabis brand based on the life and legacy of Bob Marley, where she was responsible for the brand launch as well as managing its day-to-day operations. From 2014 to 2016, Ms. Rehmatullah served as an investment manager at Privateer Holdings, a private equity firm with investments in the legal cannabis industry. Prior to her activities in the cannabis industry, from 2011 to 2012, Ms. Rehmatullah was a portfolio manager at City First Enterprises or CFE, where she was responsible for underwriting, structuring and managing deals for their community development and investment portfolio. From 2007 to 2011, Ms. Rehmatullah was an associate at Perry Capital where she led research initiatives for the asset-backed securities team. Her career began in Ernst & Young’s Financial Services Advisory practice in 2005. Ms. Rehmatullah holds an M.B.A. from the Yale School of Management and was a Yale Entrepreneurial Institute Venture Creation Advisor. She holds a B.S. in Finance and minor in Life Sciences from The Ohio State University where she graduated Magna Cum Laude and was a Presidential Scholar.University. Ms. Rehmatullah was selected to serve on our Board based on her extensive experience in finance and investment management and her broad experience with working with cannabis companiescompanies.
Mark D. IwanowskiBarry Fishman has served as director since the consummation of the Business Combination on June 17, 2019. Since May 2019, Mr. Iwanowski has served as a director since he was elected to the Board at the 2021 Annual Meeting of MJF. Mr. Iwanowski is the founderStockholders on June 7, 2021. Over the past two decades, Barry has been the Chief Executive Officer of Global Visions-Silicon Valley, Inc., a global consulting group focused on venture, mergers and acquisitions, and turnarounds, and has served as its president and chief executive officer since August 2011. Mr. Iwanowski advises and invests in a variety of early stagefour life science companies and is an experienced veteran in the international technology sector. Recent projects including overseeing the selection, mentoring and seed funding of approximately 20 start-up companies in the Republic of Georgia. Mr. Iwanowski also serves(two listed on the Virgin Galactic advisory board, which recently made it first successful commercial flight into space.Toronto Stock Exchange), including VIVO Cannabis from 2017-2020, Merus Labs International from 2014-2017, Teva Canada from 2003-2012 and Taro Canada from 2000-2003. From 1979-1982, Mr. IwanowskiFishman was a managing director with Trident Capital from April 2005 to November 2011. During this time,Senior Associate at Deloitte. Mr. IwanowskiFishman has also served as chairmana director of Neohapsis (KSR INC)five public and three not-for-profit organizations. In 2015, Barry was inaugurated into the Canadian Healthcare Marketing Hall of Fame for his contributions to healthcare and exemplary service to the community. Mr. Fishman is a cyber-security firm that was then acquired by CiscoCertified Public Accountant. Mr. Fishman holds a Bachelor degree in Communications from 2006 to 2010. From 2002 to 2005,McGill University. Mr. Iwanowski was senior vice president - Global IT and chief information officer for Oracle Corporation (NYSE: ORCL). Prior to Oracle, Mr. Iwanowski co-managed an outsourcing business at Science Applications International Corp (NASDAQ: SAIC) and served as its chief operating officer - Telecom and IT Outsourcing Business Unit from 1997 to 2002. Mr. Iwanowski served as a principal at Quantum Magnetics, an airport explosive detection system company, as a general manager and vice president from 1995 to 1997. Mr. Iwanowski also held executive positions with Raytheon (NASDAQ:RTN) as the vice president of Business Development from 1993 to 1995, and was a principal at Applied Remote Technology, an underwater robotics company that was acquired by Raytheon (NASDAQ:RTN), serving as its executive vice president - business development from 1991 to 1993. Mr. Iwanowski played professional football from 1978 to 1980 with the New York Jets, Oakland Raiders and Kansas City Chiefs. Mr. Iwanowski received an MBA from National University in 1989, an MS in Engineering from California Institute of Technology in 1979, and a BS in Engineering from the University of Pennsylvania in 1977. Mr. IwanowskiFishman was selected to serve on our Board based on his extensive public company experience in business operationas both a Chief Executive Officer and public companies.a director and based on his being a Certified Public Accountant who can provide better guidance on accounting issues and review on the Company’s audit committee.
John FowleLarry Dean Ditto, Jr. has servedwas appointed as Chief Financial Officer since December 17, 2019. From May 2019 through December 2019, Mr. Fowle served asInterim Chief Financial Officer of Rev360, an optometry softwareAkerna effective May 17, 2022, and business services company. During that time,he has served as accounting and financial consultant for Akerna since April 21, 2022. Mr. Fowle oversawDitto is the Chief Financial Officer (“CFO”) of Mydecine Innovations Group, Inc (“Mydecine”), where he has served as CFO since December 2020 and will continue to serve as CFO concurrent to his service as the Company’s Interim CFO. Prior to his service at Mydecine, Mr. Ditto served Sigue Corporation from June 2019 through December 2020. He was the company’s financial operationsCFO and, risk management functions; andfollowing his CFO tenure, also supported the company’s strategic divestiture of the software business unit. From July 2015 through December 2019, Mr. Fowlecompany as a Financial Consultant. He served as the Vice President Corporate Controller and Officer of Welltok, Inc., an emerging-growth, data-driven, enterprise SaaS company that delivers the healthcare industry’s leading consumer activation platform. From May 2013 through July 2015, Mr. Fowle served as Corporate Controller of Clarient Diagnostic Services,OSI Systems, Inc., a NeoGenomics Company, a specialty molecular biology laboratory focused on cancer diagnostics, testing from April 2018 through June 2019 and research. Prior to that,the CFO of DLH Davinci LLC (Dental Lab Holdings) from January 2016 through April 2018. Mr. Fowle held a variety of increasingly responsible senior financial management positions in GE Healthcare, Panasonic Avionics and Freedom Communications. Mr. FowleDitto holds a Bachelor of Science degreeArts in Business AdministrationEconomics and Management from the University of Southern California,Albion College and holds a Master of Business Administration from the UniversityKelley School of California, Irvine, and is a Certified Public Accountant.
Nina Simosko has served as Chief Revenue Officer since September 23, 2019. From Feb 2015 through 2018, Ms. Simosko served as president, chief executive officer, and chief product officer of NTT Innovation Institute Inc. (NTT i3), a Silicon Valley-based innovation center for NTT Group, one of the world’s largest information and communications technology companies. From Feb 2013 through July 2015, Ms. Simosko was responsibleBusiness at Nike, Inc. for leading the creation and execution of the Nike technology strategy, planning and operations world-wide. Additionally, from February 2013 through February 2015, Ms. Simosko served on the advisory board of Appcelerator. From August 2012 through August 2014, Ms. Simosko served on the advisory board of Taulia, Inc. and from October 2012 through October 2014 served on the advisory board of K2Partnering Solutions. From June 2004 through May 2012, Ms. Simosko was the senior vice president of the Global Premier Customer Network of the SAP America, Inc. (“SAP”). At SAP, she led both the PCN Center of Excellence and SAP’s Global Executive Advisory Board. During her tenure, she was a part of SAP’s Global Ecosystem & Partner Group which was charged with continuing to build and enable an open ecosystem of software, service and technology partners together with SAP’s communities of innovation. Additionally, she served as the global chief operating officer for the worldwide Customer Education organization, responsible for driving more than half a billion euros in global education software and services revenue, as well as the senior vice president of the SAP’s Education Sales. From July 2008 through June 2011, Ms. Simosko served as a director of Reading Partners. From May 2000 through June 2004, Ms. Simosko served as the executive director of Siebel University and Worldwide Maintenance Renewal Sales, where she was responsible for $100M in annual revenues. From April 1998 through April 2000, Ms. Simosko served as the senior sales and marketing director of Oracle Corporation’s, Oracle Education (Americas Division), where she managed a P&L for a $13M annual budget. Ms. Simosko currently serves on the advisory board of: since January 2018, Silicon Valley in Your Pocket; since January 2015, AppOrchid; since September 2014, Reflection; since May, DeepSense.ai; and since June, 2019 Scanta, Inc. Ms. Simosko holds a Bachelor of Arts degree from Montclair State University where she graduated cum laude.Indiana University.
Ray Thompson haswas appointed Special Advisor to the Chief Executive Officer in May 2022, and he served as President and Chief Operating Officer of MJF sinceAkerna from January 2022 to May 2022 and Chief Operating Officer from November 2018.2018 to January 2022. From November 2016 to January 2018, Mr. Thompson worked as the head of customer and sales Operations for Gloo, a people development SaaS company. During that time, Mr. Thompson reported to the executive team to develop and execute on market strategies, product offerings, financial projections, and talent management. From October 2008 to October 2016, Mr. Thompson served as corporate senior vice president of VisionLink, a multiagency humanitarian software platform, managing across all aspects of the business providing enterprise SaaS solutions to federal and state governments and international humanitarian organizations. From 1996 to 2008, Mr. Thompson has served in various executive sales and marketing roles across multiple technologies companies. Mr. Thompson holds a Masters in Business Administration from the University of Denver.
David McCullough has served as Chief Technology Officer of Akerna since July 1, 2020. Mr. McCullough has been with Akerna and MJF since 2015, previously serving as Akerna’s executive vice president of product & engineering. Before joining MJF, Mr. McCullough was the Chief Technology Officer of StudentPublishing.com, during that time, he actively managed the technical aspects of Student Publishing’s sale to and system integration with lulu.com. Mr. McCullough has over 16 years of software engineering experience, including extensive government systems experience. Mr. McCullough has previously served as a professor at New Mexico State University where he taught courses in data communications and networking. Mr. McCullough holds a master’s degree in Computer Science. MCSE, CCNP, A+. N+.
Board Qualifications
Our Board has not formally established any specific, minimum qualifications that must be met by each of its officers or directors or specific qualities or skills that are necessary for one or more of its officers or members of the board of directorsBoard to possess. However, we expect to generally evaluate the following qualities: educational background, diversity of professional experience, including whether the person is a current or was a former chief executive officer or chief financial officer of a public company or the head of a division of a prominent organization, knowledge of our business, integrity, professional reputation, independence, wisdom, and ability to represent the best interests of our stockholders.
Our officers and board of directorsthe Board will be composed of a diverse group of leaders in their respective fields. Many of these officers or directors have senior leadership experience at various companies. In these positions, they have also gained experience in core management skills, such as strategic and financial planning, public company financial reporting, compliance, risk management, and leadership development. Many of our officers and directors also have experience serving on boards of directors and/or board committees of other public companies and private companies, and have an understanding of corporate governance practices and trends, which provides an understanding of different business processes, challenges, and strategies. Further, these officers and directors also have other experience that makes them valuable, such as managing and investing assets or facilitating the consummation of business investments and combinations.
We, along with our officers and directors, believe that the above-mentioned attributes, along with the leadership skills and other experiences of our officers and board members described above, provide us with a diverse range of perspectives and judgment necessary to facilitate our goals of shareholder value appreciation through organic and acquisition growth.
Number and Terms of Office of Officers and Directors
Our board of directors areBoard is divided into three classes: Class I; Class II; and Class III. The directors in Class I have a term expiring at this Annual Meeting and again at the 20222025 annual meeting of stockholders, the directors in Class II have a term expiring at the 20202023 annual meeting of stockholders, and the directors in Class III have a term expiring at the 20212024 annual meeting of stockholders. The Class I directors are Matthew R. Kane and Tahira Rehmatullah, there are currently nothe Class II directors,director is Scott Sozio, and the Class III directors are Jessica Billingsley Scott Sozio, and Mark Iwanowski.Barry Fishman.
Our officers are appointed by the Board and serve at the discretion of the Board, rather than for specific terms of office. Our Board is authorized to appoint persons to the offices set forth in our Amended and Restated Bylaws as it deems appropriate.
Arrangements between Officers and Directors
To our knowledge, there is no arrangement or understanding between any of our officers and any other person, including Directors, pursuant to which the officer was selected to serve as an officer.
Family Relationships
None of our Directors are related by blood, marriage, or adoption to any other Director, executive officer, or other key employees.
Other Directorships
None of the Directors of Akerna are currently also directors of issuers with a class of securities registered under Section 12 of the Exchange Act (or which otherwise are required to file periodic reports under the Exchange Act). In the past five years, Mr. Fishman has served as a director to Merus Labs International Inc., Aurora Cannabis Inc., Field Trip Health Ltd., and VIVO Cannabis Inc.; and Ms. Rehmatullah served as a director for Good Works Acquisition Corp. from August 2020 to August 2021.
Legal Proceedings
Other than as noted below, weWe are not aware of any of our directors or officers being involved in any legal proceedings in the past ten years relating to any matters in bankruptcy, insolvency, criminal proceedings (other than traffic and other minor offenses) or being subject to any of the items set forth under Item 401(f) of Regulation S-K.
Director Independence
The Board evaluates the independence of each nominee for election as a director of our Company in accordance with the Listing Rules (the “Nasdaq Listing Rules”) of the Nasdaq Stock Market LLC (“Nasdaq”). Pursuant to these rules, a majority of our Board must be “independent directors” within the meaning of the Nasdaq Listing Rules, and all directors who sit on our Audit Committee, Nominating Committee and Compensation Committee must also be independent directors.
The Nasdaq definition of “independence” includes a series of objective tests, such as the director or director nominee is not, and was not during the last three years, an employee of the Company and has not received certain payments from, or engaged in various types of business dealings with, the Company. In addition, as further required by the Nasdaq Listing Rules, the Board has made a subjective determination as to each independent director that no relationships exist which, in the opinion of the Board, would interfere with such individual’s exercise of independent judgment in carrying out his or her responsibilities as a director. In making these determinations, the Board reviewed and discussed information provided by the directors with regard to each director’s business and personal activities as they may relate to Company and its management.
As a result, the Board has affirmatively determined that each of Matthew R. Kane, Tahira Rehmatullah, Mark Iwanowski, and Ashesh ShahBarry Fishman are independent in accordance with the Nasdaq listing rules.Nadsaq Listing Rules. The Board has also affirmatively determined that all members of our Audit Committee, Nominating Committee and Compensation Committee are independent directors.
EXECUTIVE COMPENSATION
Summary Compensation Table
On October 10, 2018 (as amended on April 17, 2019), Akerna entered into a definitive merger agreement (the “Merger Agreement”) with MTech Acquisition Corp. (“MTech”), MJ Freeway, LLC (“MJF”), MTech Purchaser Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Akerna (“Purchaser Merger Sub”), MTech Company Merger Sub LLC, a Colorado limited liability company and a wholly-owned subsidiary of Akerna (“Company Merger Sub”), MTech Sponsor LLC (“MTech Sponsor”), a Florida limited liability company, in the capacity as the representativeOur named executive officers for the equity holders of Akerna (other than the Sellers) thereunder, and MJF andfiscal year ended December 31, 2021 are Jessica Billingsley, (as successor to Harold Handelsman), in the capacity as the representative for the Sellers thereunder. The Merger Agreement provided for two mergers: (1) the merger of Purchaser Merger Sub withour Chief Executive Officer, John Fowle, our former Chief Financial Officer, Ray Thompson, our former President and into MTech, with MTech continuing as the surviving entity (the “Purchaser Merger”);Chief Operating Officer, David McCullough, our Chief Technology Officer and (2) the merger of Company Merger Sub with and into MJF, with MJF continuing as the surviving entity (the “Company Merger” and together with the Purchaser Merger, the “Business Combination”).Nina Simosko, our former Chief Commercial Officer.
Prior to the Business Combination, none of MTech Holdings’ executive officers or directors received any cash (or non-cash) compensation for services rendered to Akerna.
The following table sets forth all information concerning the compensation earned, for the fiscal yearsyear ended December 31, 2021, six-month transition period ended December 31, 2020, and for the fiscal year ended June 30, 2020 and 2019 for services rendered to us by persons who served as our named executive officers at the end of 2019. Individuals we refer to as our “named executive officers” include our chief executive officer and our most highly compensated executive officers whose salary and bonus for services rendered in all capacities exceeded $100,000 during the fiscal year ended June 30, 2019.December 31, 2021.
| Name and Principal Position | | Year | | | Salary
($) | | | Bonus
($) | | | Stock Awards
($) | | | All Other Compensation ($) | | | Total
($) | |
| (a) | | (b) | | | (c) | | | (d) | | | (e) | | | (i) | | | (j) | |
| Jessica Billingsley | | | 2020 | | | | 250,000 | | | | — | (1) | | | 70,365 | (2) | | | 21,780 | (3) | | | 342,145 | |
| Chief Executive Officer | | | 2019 | | | | 8,904 | (4) | | | 309,659 | (5) | | | — | | | | — | | | | 318,563 | |
| Nina Simosko(6) | | | 2020 | | | | 154,545 | | | | — | | | | 999,996 | (7) | | | — | | | | 1,154,541 | |
| Chief Revenue Officer | | | | | | | | | | | | | | | | | | | | | | | | |
| John Fowle(8) | | | 2020 | | | | 106,250 | | | | — | | | | 799,997 | (9) | | | — | | | | 906,247 | |
| Chief Financial Officer | | | | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | | Year | | | Salary
($) | | | Bonus
($) | | | Stock
Awards
($) | | | All Other
Compensation
($) | | | Total
($) | |
| (a) | | (b) | | | (c) | | | (d) | | �� | (e) | | | (i) | | | (j) | |
| Jessica Billingsley | | | 2021 | | | | 262,500 | | | | 201,866 | (22) | | | 108,200 | (1) | | | 11,774 | (2) | | | 584,340 | |
| Chief Executive Officer | | | 2020 TP | | | | 125,000 | | | | 81,625 | (3) | | | 125,450 | (4) | | | 740 | (5) | | | 332,815 | |
| | | | 2020 | | | | 250,000 | | | | 54,750 | (6) | | | 153,474 | (7) | | | 21,780 | (8) | | | 480,004 | |
| Nina Simosko(9) | | | 2021 | | | | 200,000 | | | | — | | | | 83,200 | (10) | | | — | | | | 283,200 | |
| Former Chief | | | 2020 TP | | | | 100,000 | | | | — | | | | 94,200 | (11) | | | — | | | | 194,200 | |
| Commercial Officer | | | 2020 | | | | 154,545 | | | | — | | | | 999,996 | (12) | | | — | | | | 1,154,541 | |
| John Fowle(13) | | | 2021 | | | | 200,000 | | | | — | | | | 83,200 | (14) | | | — | | | | 283,200 | |
| Former Chief | | | 2020 TP | | | | 100,000 | | | | — | | | | 94,200 | (15) | | | — | | | | 194,200 | |
| Financial Officer | | | 2020 | | | | 106,250 | | | | — | | | | 799,997 | (16) | | | — | | | | 906,247 | |
| Ray Thompson | | | 2021 | | | | 200,000 | | | | — | | | | 83,200 | (17) | | | — | | | | 283,200 | |
| Former Chief Operating Officer | | | 2020 TP | | | | 100,000 | | | | — | | | | 94,200 | (18) | | | — | | | | 194,200 | |
| David McCullough | | | 2021 | | | | 200,000 | | | | 60,075 | (19) | | | 83,200 | (20) | | | — | | | | 343,275 | |
| Chief Technology Officer | | | 2020 TP | | | | 100,000 | | | | — | | | | 94,200 | (21) | | | — | | | | 194,200 | |
| (1) | During the year ended 2021, Ms. Billingsley was awarded 20,000 restricted stock units with a grant date fair value of $83,200. These awards vest 25% annually on December 1 with the final vesting occurring on December 1, 2024. As compensation for the 2021 fiscal year, Ms. Billingsley was also awarded a discretionary bonus of 22,322 restricted shares with a grant date fair value of $25,000. These shares fully vested on April 12, 2022. |
| (2) | In addition to cash and stock awards, Ms. Billingsley may redeem loyalty awards generated by corporate purchases made on certain credit cards for her personal use. During the year ended 2021, Ms. Billingsley redeemed $11,774 in loyalty awards for her personal use. |
| (3) | Pursuant to Ms. Billingsley’s employment agreement with Akerna, she is eligible for a bonus that is determined by the Board on the basis of fulfillment of the objective performance criteria established in its discretion. For the transition period 2020, the transition period bonus was determined based Akerna’s relative performance against budgeted targets, as further described below. The Board evaluated the achievement of these targets and Ms. Billingsley’s transition period 2020 bonus amount was $81,625. |
| (4) | During the transition period 2020, Ms. Billingsley was awarded 20,000 restricted stock units with a grant date fair value of $94,200. These awards vest 25% annually on July 1 with the final vesting occurring on July 1, 2024. As compensation for the 2020 transition period, Ms. Billingsley was also awarded a discretionary bonus of 7,548 restricted shares with a grant date fair value of $31,250. These shares fully vested on April 26, 2021. |
| (5) | In addition to cash and stock awards, Ms. Billingsley may redeem loyalty awards generated by corporate purchases made on certain credit cards for her personal use. During the transition period 2020, Ms. Billingsley redeemed $740 in loyalty awards for her personal use. |
| (6) | Pursuant to Ms. Billingsley’s employment agreement with Akerna, she is eligible for an annual bonus that is determined by the board of directorsBoard on the basis of fulfillment of the objective performance criteria established in its discretion. For the 2020 fiscal year, the annual bonus will bewas determined based Akerna’s relative performance against budgeted targets, as further described below. The board of directors has not yetBoard evaluated the achievement of these targets as suchand Ms. Billingsley’s 2020 annual bonus amount has not been determined.was $54,750. |
| (2)(7) | During 2020, Ms. Billingsley was awarded 10,000 restricted stock units with a grant date fair value of $57,900. These awards vest 25% annually on July 1 with the final vesting occurring on July 1, 2023. Ms. Billingsley was awarded share-based compensation that was conditioned upon the price of a share of Akerna common stockour Common Stock achieving a specified total return as of June 30, 2020. This award had a grant date fair value of $12,465. The total return target was not achieved, as such no shares will be issued pursuant to this award. Ms. Billingsley was also awarded a share based annual bonus award of 19,694 shares of Common Stock. This award had a grant date fair value of $83,109. |
| (3)(8) | In addition to cash and stock awards, Ms. Billingsley may redeem loyalty awards generated by corporate purchases made on certain credit cards for her personal use. During 2020, Ms. Billingsley redeemed $21,780 in loyalty awards for her personal use. |
| (4)(9) | Ms. Billingsley became Chief Executive Officer of Akerna on June 17, 2019. Ms. Billingsley will be paid an annual salary of $250,000, pursuant to an employment agreement with Akerna, and was paid $8,904, as a pro rata portion of her salary for year ended June 30, 2019. |
| (5) | Within ten days consummation of the Merger Agreement, Akerna paid Ms. Billingsley a single lump sum of $95,000. Additionally, as a result of reaching a certain target, Ms. Billingsley’s received a bonus of $214,659. |
| (6) | Ms. Simosko became Chief Revenue Officer of Akerna on September 23, 2019.2019, her title was subsequently changed to Chief Commercial Officer without any change in duties or compensation. Ms. Simosko ceased to be the Chief Commercial Officer on January 31, 2022. |
| (7)(10) | During the year ended 2021, Ms. Simosko was awarded 20,000 restricted stock units with a grant date fair value of $83,200. These awards vest 25% annually on December 1 with the final vesting occurring on December 1, 2024. |
| (11) | During the transition period 2020, Ms. Simosko was awarded 20,000 restricted stock units with a grant date fair value of $94,200. These awards vest 25% annually on July 1 with the final vesting occurring on July 1, 2024. |
| (12) | During 2020, Ms. Simosko was awarded 125,156 restricted stock units with a grant date fair value of $999,996, these awards vest 25% annually on the grant date anniversary in each of the subsequent four years. |
| (8)(13) | Mr. Fowle became Chief Financial Officer of Akerna on December 17, 2019. Mr. Fowle ceased to be the Chief Financial Officer on May 17, 2022. |
| (9)(14) | During the year ended 2021, Mr. Fowle was awarded 20,000 restricted stock units with a grant date fair value of $83,200. These awards vest 25% annually on December 1 with the final vesting occurring on December 1, 2024. |
| (15) | During the transition period 2020, Mr. Fowle was awarded 20,000 restricted stock units with a grant date fair value of $94,200. These awards vest 25% annually on July 1 with the final vesting occurring on July 1, 2024. |
| (16) | During 2020, Mr. Fowle was awarded 72,727 restricted stock units with a grant date fair value of $799,997, these awards vest 25% annually on the grant date anniversary in each of the subsequent four years. |
| (17) | During the year ended 2021, Mr. Thompson was awarded 20,000 restricted stock units with a grant date fair value of $83,200. These awards vest 25% annually on December 1 with the final vesting occurring on December 1, 2024. |
| (18) | During the transition period 2020, Mr. Thompson was awarded 20,000 restricted stock units with a grant date fair value of $94,200. These awards vest 25% annually on July 1 with the final vesting occurring on July 1, 2024. |
| (19) | During the year ended 2021, Mr. McCullough was awarded a discretionary cash bonus of $60,075. |
| (20) | During the year ended 2021, Mr. McCullough was awarded 20,000 restricted stock units with a grant date fair value of $83,200. These awards vest 25% annually on December 1 with the final vesting occurring on December 1, 2024. |
| (21) | During the transition period 2020, Mr. McCullough was awarded 20,000 restricted stock units with a grant date fair value of $94,200. These awards vest 25% annually on July 1 with the final vesting occurring on July 1, 2024. |
| (22) | Pursuant to Ms. Billingsley’s employment agreement with Akerna, she is eligible for a bonus that is determined by the Board on the basis of fulfillment of the objective performance criteria established in its discretion. For the year ended 2021, the bonus was determined based Akerna’s relative performance against budgeted targets, as further described below. The Board evaluated the achievement of these targets and Ms. Billingsley’s 2021 fiscal year bonus amount was $201,866. |
Employment Agreements
Jessica Billingsley
In connection with the consummation of the Business Combination,mergers on June 17, 2019, Ms. Billingsley and Akerna entered into an employment agreement, dated June 17, 2019 (the “Billingsley“Billingsley Employment Agreement”Agreement”). Under the terms of the Billingsley Employment Agreement, Ms. Billingsley serves at the Chief Executive Officer of Akerna at will, and must devote substantially all of her working time, skill and attention to her position and to the business and interests of Akerna (except for customary exclusions).
Akerna pays Ms. Billingsley an annual base salary in the amount of $250,000. The base salary is subject to (1) review at least annually by the board of directors of AkernaBoard for increase, but not decrease, and (2) automatic increase by an amount equal to $50,000 from its then current level on the date upon which Akerna’s aggregate, gross consolidated trailing twelve month (TTM) revenue equals the product of (x) two multiplied by (y) Akerna’s aggregate, gross consolidated trailing twelve month (TTM)TTM revenue as of the Closing. Effective October 1, 2021, Ms. Billingsley’s annual base salary was increased to $300,000. Within ten days of the consummation of the Merger Agreement, Akerna paid Ms. Billingsley a completion award in a single lump sum of $95,000.
Ms. Billingsley will be eligible for an annual bonus (the “Annual Bonus”) with respect to each fiscal year ending during her employment. Her target annual cash bonus shall be in the amount of one hundred percent (100%) of her base salary (the “Target Bonus”) with the opportunity to earn greater than the Target Bonus upon achievement of above target performance. The amount of the Annual Bonus shall be determined by the board of directors of AkernaBoard on the basis of fulfillment of the objective performance criteria established in its reasonable discretion. The performance criteria for any particular fiscal year shall be set no later than ninety days after the commencement of the relevant fiscal year. For the 2021 fiscal year, the Annual Bonus shall be determined based upon four (4) budget components (B2B Software Revenue, B2G Software Revenue, Services Revenue and Adjusted EBITDA) and NPS Scores With regards to the budget components, each scales linearly between achieving 75% to 100%, and greater than 100% with respect to the B2B Software Revenue, B2G Software Revenue, and Adjusted EBITDA target budget components respectively, of the applicable fiscal year’s budget for each such component (with 50% of the Target Bonus payable upon achievement of 75% of budget, 100% of the Target Bonus payable upon achievement of budget (and, with respect to the B2B Software Revenue, B2G Software Revenue, and Adjusted EBITDA budget components, with 200% of each weighted portion of the Target Bonus payable upon achievement of 125% of the corresponding component of budget, with linear interpolation between points. Accelerator to be paid at the discretion of the Board of Directors in cash, stock, or both. For the transition period 2020 and 2019the 2020 fiscal years,year, the Annual Bonus was determined based upon the following four (4) budget components, each of which scales linearly between achieving 75% to 100%, and greater than 100% with respect to the Platform Recurring Revenue (as defined in Billingsley Employment Agreement) and Government Recurring Revenue (as defined in Billingsley Employment Agreement) budget components respectively, of the applicable fiscal year’s budget for each such component (with 50% of the Target Bonus payable upon achievement of 75% of budget, 100% of the Target Bonus payable upon achievement of budget (and, with respect to the Platform Recurring Revenue and Government Recurring Revenue budget components, with 200% of each weighted portion of the Target Bonus payable upon achievement of 125% of the corresponding component of budget, with linear interpolation between points)). During the fiscal year ended June 30, 2019,2020, due to achieving a targettargets Ms. Billingsley received a bonus of $214,659. The board$54,750 and she received a discretionary share bonus of directors has not yet concluded regarding the achievement$90,000 worth of the target performance forCompany’s shares of Common Stock based on the fiscal year10-day volume weighted average price as of the date of the award, which resulted in the issuance of 19,694 shares of Common Stock with a grant date fair value of $83,109. During the transition period ended June 30, 2020.December 31, 2020, due to achieving targets Ms. Billingsley received a bonus of $81,625.
Ms. Billingsley is entitled to participate in annual equity awards and employee benefits. She is indemnified by Akerna to for any and all expenses (including advancement and payment of attorneys’ fees) and losses arising out of or relating to any of her actual or alleged acts, omissions, negligence or active or passive wrongdoing, including, the advancement of expenses she incurs. The foregoing indemnification is in addition to the indemnification provided to her by Akerna pursuant to her Indemnification Agreement.
In the event of Ms. Billingsley’s termination for cause or without good reason, Akerna will be obligated to pay any accrued but unpaid base salary and any annual bonus earned and awarded for the fiscal year prior to that in which the termination occurs. In the event of Ms. Billingsley’s termination without cause or with good reason, Akerna will be obligated to pay any accrued but unpaid base salary, any annual bonus earned and awarded for the fiscal year prior to that in which the termination occurs, a cash severance payment equal to her base salary, pro-rated annual bonus for the fiscal year in which the termination occurs through the date of termination, and twelve months of health benefits.
The Billingsley Employment Agreement also contains noncompetition and non-solicitation provisions that apply through her employment and for a term of one year thereafter, and which are in addition to the noncompetition and non-solicitation provisions prescribed under a certain Non-Competition Agreement between Ms. Billingsley and Akerna. The Billingsley Employment Agreement also contains a non-disparagement provision that apply through her employment and for a term of two years thereafter.
John Fowle
On December 17, 2019, Mr. Fowle entered into a letter agreement with Akerna. Mr. Fowle servesserved as the Chief Financial Officer of Akerna at will. Akerna payspaid Mr. Fowle an annual base salary of $200,000.$200,000 in 2021. At the Board’s discretion, Mr. Fowle may be eligible for a bonus. Under the Company’s 2022 executive compensation structure, Mr. Fowle received a base salary of $250,000 and Mr. Fowle’s performance target annual cash bonus was to be 25% of his base salary. Mr. Fowle received a grant of approximately $800,000 of restricted stock units, which will vest as to 25% on the first anniversary of the grant date, as to the next 25% on the second anniversary of the grant date, as to the next 25% on the third anniversary of the grant date and as to the remaining 25% on the fourth anniversary of the grant date. Mr. Fowle iswas entitled to participate in employee benefits. Upon a change of control transaction, Mr. Fowle’s unvested restricted stock units or any other equity interests that he may be granted, will immediately vest. If Mr. Fowle’s employment is terminated by Akerna without cause or by him with good reason, he is entitled to his base salary through the date of termination.
Akerna entered into an Employee Covenant Agreement with Mr. Fowle, which obligates Mr. Fowle from disclosing any confidential information, including without limitation, trade secrets. The agreement also prohibits Mr. Fowle during the term of his employment and for a period of two years after his employment from soliciting any customer, client, employee, supplier or vendor of Akerna, and rendering any services or giving advice to any competitor or affiliate of a competitor. The agreement also requires Mr. Fowle to return all Akerna property and disclose all work product to Akerna.
On May 11, 2022, Akerna and Mr. Fowle agreed to a mutual separation effective as of May 17, 2022.
Larry Dean Ditto, Jr.
Prior to Mr. Ditto’s appointment as Interim CFO, the Company and Mr. Ditto entered into a consultant agreement dated April 21, 2022 (the “Consulting Agreement”). Pursuant to the Consulting Agreement, Mr. Ditto has agreed to perform certain financial and accounting related services. The Company will pay Mr. Ditto a monthly fee of $12,000 for performance of services up to 80 hours per calendar month. If Mr. Ditto performs more than 240 hours of service per calendar quarter, Mr. Ditto will be paid $150 per hour for additional services performed exceeding 240 hours per calendar quarter, subject to the Company’s approval of such additional services. In the event that Mr. Ditto becomes a full-time employee during the term of the Consulting Agreement, the Company will grant Mr. Ditto restricted stock units that are valued at $25,000 and will immediately vest upon the grant. Unless terminated by either party in accordance with the Consulting Agreement, the Consulting Agreement will terminate after 12 months. The term of the Consulting Agreement can be extended by mutual agreement between the Company and Mr. Ditto. Mr. Ditto is also eligible for a one-time $18,000 bonus if an acquisition of the Company occurs, subject to certain terms and conditions. Mr. Ditto’s compensation as described above under the Consulting Agreement has not changed as a result of his appointment as Interim CFO.
Ray Thompson
On October 19, 2018, Mr. Thompson entered into a letter agreement with Akerna’s wholly owned subsidiary MJ Freeway LLC. Mr. Thompson served as the President and Chief Operating Officer of Akerna at will. Akerna paid Mr. Thompson an annual base salary of $200,000 in 2021. As part of his appointment as the Company’s President under the Company’s 2022 executive compensation structure, Mr. Thompson received an annual base salary of $275,000 and Mr. Thompson’s performance target annual cash bonus shall be 25% of his base salary. At the Board’s discretion, Mr. Thompson may be eligible for a bonus. Upon a change of control transaction, Mr. Thompson’s unvested restricted stock units or any other equity interests that he may be granted, will immediately vest. If Mr. Thompson’s employment is terminated by Akerna without cause or by him with good reason, he is entitled to his base salary through the date of termination.
Akerna entered into an Employee Covenant Agreement with Mr. Thompson, which obligates Mr. Thompson from disclosing any confidential information, including without limitation, trade secrets. The agreement also prohibits Mr. Thompson during the term of his employment and for a period of two years after his employment from soliciting any customer, client, employee, supplier or vendor of Akerna, and rendering any services or giving advice to any competitor or affiliate of a competitor. The agreement also requires Mr. Thompson to return all Akerna property and disclose all work product to Akerna.
On May 16, 2022, Akerna and Mr. Thompson agreed to a transition, effective immediately, by which Mr. Thompson will move from his current role as President and Chief Operating Officer to Special Advisor to the Chief Executive Officer. In that role, Mr. Thompson will continue to assist the Chief Executive Officer with certain of the day-to-day operations of the Company and advise the Company on various aspects of corporate strategy.
David McCullough
Mr. McCullough does not have a formal letter agreement with Akerna in relation to his employment as the Chief Technology Officer. Akerna paid Mr. McCullough an annual base salary of $200,000 for 2021. Under the Company’s 2022 executive compensation structure, Mr. McCullough will receive a base salary of $250,000 and Mr. McCullough’s performance target annual cash bonus shall be 25% of his base salary. At the Board’s discretion, Mr. McCullough may be eligible for a bonus. Upon a change of control transaction, Mr. McCullough’s unvested restricted stock units or any other equity interests that he may be granted, will immediately vest. If Mr. McCullough’s employment is terminated by Akerna without cause or by him with good reason, he is entitled to his base salary through the date of termination.
Akerna entered into an Employee Covenant Agreement with Mr. McCullough, which obligates Mr. McCullough from disclosing any confidential information, including without limitation, trade secrets. The agreement also prohibits Mr. McCullough during the term of his employment and for a period of two years after his employment from soliciting any customer, client, employee, supplier or vendor of Akerna, and rendering any services or giving advice to any competitor or affiliate of a competitor. The agreement also requires Mr. McCullough to return all Akerna property and disclose all work product to Akerna.
Nina Simosko
On September 23, 2019, Ms. Simosko entered into a letter agreement with Akerna. Ms. Simosko serves as the Chief Revenue Officer of Akerna at will. Akerna pays Ms. Simosko an annual base salary of $200,000. At the Board’s discretion, Ms. Simosko may be eligible for a bonus. Ms. Simosko will receivereceived an approximate grant of $1,000,000 of restricted stock units, which will vest as to 25% on the first anniversary of the grant date, as to the next 25% on the second anniversary of the grant date, as to the next 25% on the third anniversary of the grant date and as to the remaining 25% on the fourth anniversary of the grant date. Upon a change of control transaction, Ms. Simosko’s unvested restricted stock units or any other equity interests that she may be granted, will immediately vest. If Ms. Simosko’s employment is terminated by Akerna without cause or by her with good reason, she is entitled to her base salary through the date of termination and the immediate vesting of 33% of the restricted stock units that are unvested on the date of termination. Ms. Simosko is entitled to reimbursement of reasonable expense incurred with her relocation to Denver, Colorado, in amount not to exceed $5,000. Ms. Simosko is entitled to participate in employee benefits.
Akerna entered into an Employee Covenant Agreement with Ms. Simosko, which obligates Ms. Simosko from disclosing any confidential information, including without limitation, trade secrets. The agreement also prohibits Ms. Simosko during the term of her employment and for a period of two years after her employment from soliciting any customer, client, employee, supplier or vendor of Akerna, and rendering any services or giving advice to any competitor or affiliate of a competitor. The agreement also requires Ms. Simosko to return all Akerna property and disclose all work product to Akerna.
Ms. Simosko ceased to be the Chief Commercial Officer on January 31, 2022.
Outstanding Equity Awards at Fiscal Year-End
A summary of the number and the value of the outstanding equity awards at June 30, 2020as of December 31, 2021 held by the named executive officers is set out in the table below.
| | | Stock Awards(1) | |
| Name | | Number of Shares or Units of
Stock That
Have Not
Vested (#) | | | Market Value of Shares or Units of Stock That Have Not Vested ($) | | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested(#) | | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | |
| (a) | | (g) | | | (h) | | | (i) | | | (j) | |
| Jessica Billingsley | | | — | | | | — | | | | 10,000 | (2) | | | 88,000 | |
| Chief Executive Officer | | | — | | | | — | | | | 13,884 | (3) | | | 122,185 | |
| | | | | | | | | | | | | | | | | |
| Nina Simosko | | | — | | | | — | | | | 125,156 | (4) | | | 1,101,373 | |
| Chief Revenue Officer | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| John Fowle | | | — | | | | — | | | | 72,727 | (5) | | | 639,998 | |
| Chief Financial Officer | | | | | | | | | | | | | | | | |
| Stock Awards(1) |
| Name | | Number
of Shares
or Units
of Stock
That
Have Not
Vested (#) | | | Market
Value of
Shares or
Units of
Stock
That
Have
Not
Vested ($) | | | Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units
or Other
Rights
That
Have Not
Vested(#) | | | Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested ($) | |
| Jessica Billingsley | | | - | | | | - | | | | 5,000 | (2) | | | 8,750 | |
| Chief Executive Officer | | | - | | | | - | | | | 15,000 | (3) | | | 26,250 | |
| | | | - | | | | - | | | | 15,000 | (4) | | | 26,250 | |
| | | | - | | | | - | | | | 22,322 | (12) | | | 25,000 | |
| Nina Simosko | | | - | | | | - | | | | 62,578 | (5) | | | 109,512 | |
| Former Chief Commercial | | | - | | | | - | | | | 15,000 | (3) | | | 26,250 | |
| Officer | | | - | | | | - | | | | 15,000 | (4) | | | 26,250 | |
| John Fowle | | | - | | | | - | | | | 36,363 | (6) | | | 63,635 | |
| Former Chief Financial Officer | | | - | | | | - | | | | 15,000 | (3) | | | 26,250 | |
| | | | - | | | | - | | | | 15,000 | (4) | | | 26,250 | |
| Ray Thompson | | | 13,358 | (7) | | | 23,377 | | | | 5,000 | (2) | | | 8,750 | |
| Former Chief Operating Officer | | | - | | | | - | | | | 13,358 | (8) | | | 23,377 | |
| | | | - | | | | - | | | | 12,500 | (9) | | | 21,875 | |
| | | | - | | | | - | | | | 15,000 | (3) | | | 26,250 | |
| | | | - | | | | - | | | | 15,000 | (4) | | | 26,250 | |
| David McCullough | | | 6,679 | (10) | | | 11,688 | | | | 4,000 | (11) | | | 7,000 | |
| Chief Technology Officer | | | - | | | | - | | | | 15,000 | (3) | | | 26,250 | |
| | | | - | | | | - | | | | 15,000 | (4) | | | 26,250 | |
(1) | (1) | Each RSU represents a contingent right to receive one share of common stockCommon Stock of the Company. |
(2) | (2) | Represents 10,0005,000 RSUs, which vest as follows: 2,500 units shall vest on July 1, 2020, 2,500 units shall vest on July 1, 2021, 2,500 units shall vest on July 1, 2022, and 2,500 units shall vest on July 1, 2023 .2023. |
(3) | (3) | Represents an estimate of shares to be awarded at the discretion of the board of directors for fiscal year 2020 performance. The estimate assumes the total amount allotted will be awarded and the number of shares has been calculated using the volume weighted average price for a share of Akerna common stock for the last 10 trading days in fiscal year 2020, actual shares to be awarded could differ from the number disclosed. Does not include 28,329 RSUs granted during 2020, the vesting of which was contingent upon Akerna achieving a specified total shareholder return, measured at the end of the fiscal year. This target was not achieved and as such the RSUs will not vest. |
(4) | Represents 125,15615,000 RSUs, which vest as follows; 31,289follows: 5,000 units shall vest on October 7, 2020, 31,289July 1, 2022, 5,000 units shall vest on October 7, 2021,July 1, 2023, and 5,000 units shall vest on July 1, 2024. |
| (4) | Represents 15,000 RSUs, which vest as follows: 5,000 units shall vest on December 1, 2022, 5,000 units shall vest on December 1, 2023, and 5,000 units shall vest on December 1, 2024. |
| (5) | Represents 62,578 RSUs, which vest as follows; 31,289 units shall of October 7, 2022, and 31,289 units shall on October 7, 2023; however, there is immediate vesting in the event of a Change in Control (as defined in the award) and there is immediate vesting of 33% of the restricted stock units that are unvested on the date that she is terminated without cause or by her with good reason..reason. |
(5) | (6) | Represents 72,72736,363 RSUs, which vest as follows; 18,181 shares shall vest on December 17, 2020, 18,182 shares shall vest on December 17, 2021, 18,182 shares shall vest on December 17, 2022 and 18,182 shares shall vest on December 17, 2023. |
| (7) | Represents 13,358 shares of restricted stock, which vest as follows: 6,679 units shall vest on January 1, 2022, and 6,679 units shall vest on January 1, 2023. |
| (8) | Represents 13,358 RSUs, which vest as follows: 6,679 units shall vest on January 1, 2022, and 6,679 units shall vest on January 1, 2023. |
| (9) | Represents 12,500 RSUs, which vest as follows: 6,250 units shall vest on January 1, 2022, and 6,250 units shall vest on January 1, 2023. |
| (10) | Represents 6,679 shares of restricted stock, which vest as follows: 6,679 units shall vest on January 1, 2022. |
| (11) | Represents 4,000 RSUs, which vest as follows: 2,000 units shall vest on July 1, 2022, and 2,000 units shall vest on July 1, 2023. |
| (12) | Represents 22,322 restricted shares, which vest on April 12, 2022. |
Options
There were no options granted in the fiscal year ended June 30, 2020.December 31, 2021.
Pension Benefits
None of our employees participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by us. Our Compensation Committee may elect to adopt qualified or non-qualified benefit plans in the future if it determines that doing so is in our company’s best interest.
Non-qualified Deferred Compensation
None of our employees participate in or have account balances in non-qualified defined contribution plans or other non-qualified deferred compensation plans maintained by us. Our Compensation Committee may elect to provide our officers and other employees with non-qualified defined contribution or other non-qualified compensation benefits in the future if it determines that doing so is in our company’s best interest.
Director Compensation
The following table sets forth the compensation granted to our directors who are not also executive officers during the fiscal year ended June 30, 2020.December 31, 2021. Compensation to directors that are also executive officers is detailed above and is not included on this table.
| Name | | Fees
earned or paid in cash
($) | | | Stock
awards
($) | | | Option
award(1)
($) | | | Non-equity
incentive plan
compensation
($) | | | Nonqualified
deferred
compensation
earnings
($) | | | All other
compensation
($) | | | Total
($) | |
| (a) | | (b) | | | (c) | | | (d) | | | (e) | | | (f) | | | (g) | | | (h) | |
| Matthew Kane | | | 20,250 | | | | 15,196 | | | | — | | | | — | | | | — | | | | — | | | | 35,446 | |
| Mark Iwanowski | | | 20,575 | | | | 15,936 | | | | — | | | | — | | | | — | | | | — | | | | 36,511 | |
| Tahira Rehmatullah | | | 21,750 | | | | 16,325 | | | | — | | | | — | | | | — | | | | — | | | | 38,075 | |
| Name | | Fees
earned or
paid in cash
($) | | | Stock
awards
($) | | | Option
award
($) | | | Non-equity
incentive
plan
compensation
($) | | | Nonqualified
deferred
compensation
earnings
($) | | | All other
compensation
($) | | | Total
($) | |
| Barry Fishman(1) | | | 12,310 | | | | 12,310 | | | | - | | | | - | | | | - | | | | - | | | | 24,620 | |
| Matthew Kane | | | 21,750 | | | | 21,750 | | | | - | | | | - | | | | - | | | | - | | | | 43,500 | |
| Mark Iwanowski(2) | | | 9,440 | | | | 9,440 | | | | - | | | | - | | | | - | | | | - | | | | 18,880 | |
| Tahira Remhatullah | | | 21,750 | | | | 21,750 | | | | - | | | | - | | | | - | | | | - | | | | 43,500 | |
| Scott Sozio(3) | | | 250,000 | | | | 136,937 | | | | - | | | | - | | | | - | | | | - | | | | 386,937 | |
| (1) | Mr. Fishman joined the Board on June 7, 2021. |
| (2) | Mr. Iwanowski left the Board on June 7, 2021. |
| (3) | Mr. Sozio receives compensation pursuant to his role as Head of Corporate Development and is not compensated independently as a director. |
Narrative Disclosure to Director Compensation Table
Compensation granted to our directors who are not also executive officers inor employees during the fiscal year 2020ended December 31, 2021 included an annual fee of $30,000 and additional fees for service on committees of the board of directors,$43,500 paid in a mix of50% in cash and stock awards.50% in stock. Amounts earned in cash are paid quarterly. Stock awards were granted on October 7, 2019 and January 28, 2020 and vest 25% atquarterly over the end of each fiscal quarter. Directors did not receive meeting fees in 2020.year.
Compensation Policies and Practices and Risk Management
The Compensation Committee has reviewed the design and operation of Akerna’s compensation policies and practices for all employees, including executives, as they relate to risk management practices and risk-taking incentives. The Compensation Committee believes that Akerna’s compensation policies and practices do not encourage unnecessary or excessive risk taking and that any risks arising from Akerna’s compensation policies and practices for its employees are not reasonably likely to have a material adverse effect on Akerna.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee has ever been an officer or employee of Akerna. None of Akerna’s executive officers serve, or have served during the last fiscal year, as a member of the board of directors, compensation committee, or other board committee performing equivalent functions of any other entity that has one or more executive officers serving as one of Akerna’s directors or on the Compensation Committee.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth information concerning beneficial ownership of Akerna’s capital stock outstanding as of the date of this Prospectus,prospectus, by: (1) each stockholder known to be the beneficial owner of more than five percent of any class of Akerna’s voting stock then outstanding; (2) each of Akerna’s directors and nominees to serve as director; (3) each of Akerna’s named executive officers; and (4) Akerna’s current directors and executive officers as a group.
As of August 4, 2020,June 24, 2022 there were 14,058,70736,796,522 shares of common stockCommon Stock issued and outstanding. Each share entitles the holder thereof to one vote.
The information regarding beneficial ownership of shares of common stockCommon Stock has been presented in accordance with the rules of the SEC. Under these rules, a person may be deemed to beneficially own any shares of capital stock as to which such person, directly or indirectly, has or shares voting power or investment power, and as to which such person has the right to acquire voting or investment power within 60 days through the exercise of any stock option or other right. The percentage of beneficial ownership as to any person as of a particular date is calculated by dividing (1) (i) the number of shares beneficially owned by such person plus (ii) the number of shares as to which such person has the right to acquire voting or investment power within 60 days by (2) the total number of shares outstanding as of such date, plus any shares that such person has the right to acquire from Akerna within 60 days. Including those shares in the tables does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares that power with that person’s spouse) with respect to all shares of capital stock listed as owned by that person or entity.
| | | Beneficial Ownership | |
| Name and Address of Beneficial Owner(1) | | Number of Akerna
Shares of Common Stock | | | Percentage(2) | |
| DIRECTORS AND OFFICERS | | | | | | |
| Jessica Billingsley(3) | | | 1,158,302 | | | | 8.2 | % |
| Matthew Kane(4) | | | 263,254 | | | | 1.9 | % |
| Scott Sozio(5) | | | 236,375 | | | | 1.7 | % |
| Tahira Rehmatullah(6) | | | 51,307 | | | | * | |
| Mark Iwanowski | | | 3,988 | | | | * | |
| David McCullough(7) | | | 50,089 | | | | * | |
| Ray Thompson(8) | | | 35,895 | | | | * | |
| Nina Simosko(9) | | | — | | | | * | |
| John Fowle(10) | | | — | | | | * | |
| All directors and officers as a group (nine persons) | | | 1,799,210 | | | | 12.8 | % |
| | | | | | | | | |
| 5% STOCKHOLDERS | | | | | | | | |
| Jessica Billingsley Living Trust(3) | | | 1,158,302 | | | | 8.2 | % |
| Amy A. Poinsett Revocable Living Trust(11) | | | 1,325,802 | | | | 9.4 | % |
| Ashesh Shah(12) | | | 1,218,005 | | | | 8.7 | % |
| John X. Prentice(13) | | | 1,000,657 | | | | 6.6 | % |
| M&J Special Investments LLC(14) | | | 917,253 | | | | 6.5 | % |
| Osmington, Inc(15) | | | 801,291 | | | | 5.4 | |
| | | Beneficial Ownership | |
| Name and Address of Beneficial Owner(1) | | Number of
Akerna
Shares of
Common
Stock | | | Percentage(2) | |
| DIRECTORS AND OFFICERS | | | | | | |
| Jessica Billingsley(3) | | | 1,190,661 | | | | 3 | % |
| Matthew Kane(4) | | | 613,307 | | | | 2 | % |
| Scott Sozio(5) | | | 290,654 | | | | 1 | % |
| Tahira Rehmatullah(6) | | | 56,912 | | | | * | |
| Mark Iwanowski(7) | | | 6,261 | | | | * | |
| David McCullough(8) | | | 64,306 | | | | * | |
| Ray Thompson(9) | | | 63,410 | | | | * | |
| Nina Simosko | | | 77,756 | | | | * | |
| John Fowle(10) | | | 34,205 | | | | * | |
| Barry Fishman(11) | | | 2,646 | | | | * | |
| Larry Dean Ditto, Jr. | | | 0 | | | | - | |
| All directors and officers as a group (eleven persons) | | | 2,400,118 | | | | 7 | % |
| (1) | (1) | Unless otherwise noted, the business address of each of the persons and entities listed above is 1630 Welton1550 Larimer Street #246 Denver, Colorado 80202. |
| (2) | The percentage is based on 14,058,70736,796,522 shares of common stockCommon Stock issued and outstanding as of August 4, 2020.June 24, 2022. |
| (3) | Represents 1,155,8021,078,290 shares held by Jessica Billingsley Living Trust and 2,500 vested restricted stock units112,371 shares held directly by Ms. Billingsley. Ms. Billingsley, the trustee of the Jessica Billingsley Living Trust, has sole and dispositive power over the shares held by the Jessica Billingsley Living Trust. Does not reflect 7,50027,500 restricted stock units issued pursuant to Akerna’s Incentive Plan, which vest as follows: 2,500 units shallRSUs, which vest on July 1, 2021,as follows: 2,500 units shall vest on July 1, 2022, and 2,5002023, 10,000 RSUs, which vest as follows: 5,000 units shall vest on July 1, 2023.2023, and 5,000 units shall vest on July 1, 2024, and 15,000 RSUs, which vest as follows: 5,000 units shall vest on December 1, 2022, 5,000 units shall vest on December 1, 2023, and 5,000 units shall vest on December 1, 2024. |
(4) | |
| (4) | Includes 263,254261,340 shares held by Seam Capital, LLC. Mr. Kane is a manager of Seam Capital, LLC, and as such, Mr. Kane has sole and dispositive power of the shares held by Seam Capital, LLC. Also, includes 351,967 shares of Common Stock held directly by Mr. Kane. |
| (5) | Represents 204,065290,654 shares and warrants to acquire 32,310 common shares held by Mr. Sozio. |
(6) | Represents 46,180 shares and warrants to acquire 5,127 common shares held by Ms. Rehmatullah. |
(7) | Does not reflect 6,000 restricted stock units issued pursuant to Akerna’s Incentive Plan, which vest as follows; 2,000 units shall vest on July 1, 2021, 2,000 units shall vest on July 1, 2022, and 2,000 units shall on July 1, 2023. |
(8) | Of the 35,895 shares issued to Mr. Thompson: 20,037 are subject to the terms of a restricted stock agreement and vest as follows: 6,679 shares shall vest on January 1, 2021, 6,679 shares shall vest on January 1, 2022 and 6,679 shares shall vest on January 1, 2023. Does not include 30,03758,582 restricted stock units issued pursuant to Akerna’s Incentive Plan, which vest as follows: 6,679 units shall vest on January 1, 2021, 2,50025,542 units shall vest on July 1, 2021, 6,6792023 and 25,542 units shall vest on JanuaryJuly 1, 2024, and 7,500 RSUs, which vest as follows: 2,500 units shall vest on December 1, 2022, 2,500 units shall vest on July 1, 2022, 6,679 units shall vest on JanuaryDecember 1, 2023, and 2,500 units shall vest on JulyDecember 1, 2023.2024. |
(9)(6) | Represents 56,912 shares of Common Stock. |
| (7) | Represents 6,261 shares of Common Stock. |
| (8) | Reflects 64,306 shares of Common Stock. Does not reflect 125,15627,000 restricted stock units issued pursuant to Akerna’s Incentive Plan, which vest as follows; 31,289follows: 2,000 RSUs, which vest as follows: 2,000 units shall vest on October 7, 2020, 31,289July 1, 2023, 10,000 RSUs, which vest as follows: 5,000 units shall vest on October 7, 2021, 31,289July 1, 2023, and 5,000 units shall of October 7, 2022,vest on July 1, 2024, and 31,28915,000 RSUs, which vest as follows: 5,000 units shall vest on October 7, 2023; however, there is immediate vesting in the eventDecember 1, 2022, 5,000 units shall vest on December 1, 2023, and 5,000 units shall vest on December 1, 2024. |
| (9) | Reflects 63,410 shares of a Change in Control (as defined in the award) and there is immediate vesting of 33% of the restricted stock units that are unvested on the date that Ms. Simosko is terminated without cause or by Ms. Simosko with good reason. |
(10) | Common Stock. Does not reflect 72,72739,792 restricted stock units issued pursuant to Akerna’s Incentive Plan, which vest as follows; 18,181 sharesfollows: 2,500 RSUs, which vest as follows: 2,500 units shall vest on July 1, 2023, 6,679 RSUs, which vest as follows: 6,679 units shall vest on January 1, 2023. 6,250 RSUs, which vest as follows: 6,250 units shall vest on January 1, 2023, 10,000 RSUs, which vest as follows: 5,000 units shall vest on July 1, 2023, and 5,000 units shall vest on July 1, 2024, and 15,000 RSUs, which vest as follows: 5,000 units shall vest on December 17, 2020, 18,182 shares1, 2022, 5,000 units shall vest on December 17, 2021, 18,182 shares1, 2023, and 5,000 units shall vest on December 17, 2022 and 18,182 shares shall vest on December 17, 2023.1, 2024. |
(11)(10) | Based solely on the Form 4 filed jointly by Amy A. Poinsett Revocable Living Trust and Amy Poinsett on May 27, 2020. Amy Poinsett, the trustee of Amy A. Poinsett Revocable Living Trust, has sole and dispositive power over the shares held by the Amy A. Poinsett Revocable Living Trust. |
(12) | Represents 676,186 shares held by ACS Pedersen LLC (d/b/a The London Fund SPV 10, LLC) and 97,639 shares held by Heath Hill Syndicate SPV 2, LLC. Of these shares, 76,294 are subject to the terms of an escrow agreement. Ashesh C. Shah and Palle Pedersen are the managing members of ACS Pedersen LLC and as such, Messrs. Shah and Pedersen have shared voting and dispositive power over the shares held by ACS Pedersen LLC. |
(13) | Represents 998,037 Exchangeable Shares issued by Akerna’s wholly owned subsidiary, Akerna Canada Ample Exchange, Inc. The Exchangeable Shares may be exchanged on a one-for-one basis into34,205 shares of Akerna common stock. These shares are subject to the terms of an escrow agreement. Also, includes options to acquire 2,620Common Stock. |
| (11) | Represents 2,646 shares of Akerna common stock issued pursuant to Akerna’s Incentive Plan. |
(14) | Based solely on the Schedule 13G/A filed jointly by M&J Special Investments LLC, Nicholas J. Pritzker, and Joseph I. Perkovich on February 14, 2020. Each of Nicholas J. Pritzker and Joseph I. Perkovich, the managers of M&J Special Investments LLC, has shared voting and dispositive power over the shares held by M&J Special Investments LLC. The address of M&J Special Investments LLC is c/o Tao Capital Partners LLC, 1 Letterman Drive, Suite C4-420, San Francisco, CA 94129. |
(15) | Represents 767,284 Exchangeable Shares issued by Akerna’s wholly owned subsidiary, Akerna Canada Ample Exchange, Inc., held by Osmington, Inc and 34,007 Exchangeable Shares held by Osmington Capital Corporation. The Exchangeable Shares may be exchanged on a one-for-one basis into shares of Akerna common stock. These shares are subject to the terms of an escrow agreement. Of these shares, 330,719 are subject to the terms of an escrow agreement.Common Stock. |
Change in Control
We are not aware of any arrangement that might result in a change in control in the future. We have no knowledge of any arrangements, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in Akerna’s control.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Employment of Scott Sozio
In July 2019, we hired Mr. Scott Sozio, at will, to serve as our Head of Corporate Development. As restructured in August 2020, Mr. Sozio receives an annual base salary of $150,000, which is to be credited against certain variable bonusa one-time grant of $600,000 in restricted stock units (92,166 restricted stock units) issued in August 2020 vesting over 4 years, as discussed below, and deal related compensation to be paid in a combination of cash and equity pursuant to the Incentive Plan once every twelve-month period. The terms of such bonus payment include the payment of 1%0.5% of the transaction value of acquisition transactions completed by Akerna, payable one-half as cash compensation and one-half in restricted stock units of Akerna.Akerna at the option of the Board.
In April 2020, Mr. Sozio was granted 1,230 restricted stock units of the Akerna under our 2019 Equity Incentive Plan in relation to the closing of our acquisition of Trellis, which vested immediately. In August of 2020, Mr. Sozio’s compensation was restructured and he was granted 92,166 restricted stock units, which vest one quarter each year beginning on July 1, 2021. In September 2020, Mr. Sozio was granted 10,000 restricted stock units as part of our annual employee grants, which vest one quarter each year beginning on July 1, 2021 and 38,527 restricted stock units in connection with the closing of our acquisition of Ample, which vested immediately. In April 2021, Mr. Sozio was granted 2,976 restricted stock units of the Akerna under our 2019 Equity Incentive Plan in relation to the closing of our acquisition of Viridian, which vested immediately. In October 2021, Mr. Sozio was granted 29,210 restricted stock units of the Akerna under our 2019 Equity Incentive Plan in relation to the closing of our acquisition of 365 Cannabis, which vested immediately. In April 2021, Mr. Sozio was granted 10,000 restricted stock units as part of our annual employee grants, which vest one quarter each year beginning on December 1, 2021.
TechMagic
During the fiscal year ended June 30, 2020, we have been invoiced through our wholly-owned subsidiary Solo by TechMagic USA LLC, a Massachusetts limited liability, in an amount of approximately $657,000. When we acquired Solo in January 2020, there was an open balance payable to TechMagic of approximately $265,000. Subsequently, during the remainder of our fiscal year ended June 30, 2020, we received invoices totaling an aggregate additional amount of approximately $392,000. After our year ended June 30, 2020, through to the date hereof, we have received invoices totaling an aggregate amount of approximately $375,000. Currently, there are outstanding invoices totaling approximately $767,000. The invoices set forth services that TechMagic USA LLC purports to have provided to Solo regarding development of mobile software applications for MJF and Solo between March and November 2020. Mr. Ashesh Shah, formerly the president of Solo and currently the beneficial holder of 6.2% of our issued and outstanding shares of Common Stock is, to our knowledge, the founder and one of the principal managers of TechMagic USA LLC. The invoices state that the services were rendered pursuant to the terms of an agreement regarding the development of mobile software products for Solo, entered into between Solo and TechMagic at a time when Mr. Shah was a principal at both entities. On December 4, 2020, TechMagic filed suit against Solo in Massachusetts Superior Court seeking recovery of up to approximately $1.07 million. Akerna provided a notice of termination of the Master Services Agreement on November 23, 2020 and the parties dispute the effective date of the termination. Solo disputes the validity of the invoices, in whole or in part, and intends to defend the suit vigorously. Mr. Ashesh Shah, formerly the president of Solo and currently the holder of less than 5% of our issued and outstanding shares of common stock is, to our knowledge, the founder and one of the principal managers of TechMagic USA LLC. As of December 31, 2021 and December 31, 2020, we recognized a loss contingency of $0.5 million and $0.6 million, respectively.
Indemnification
Akerna’s amended and restated certificate of incorporation contains provisions limiting the liability of directors, and its amended and restated bylaws provides that it will indemnify the directors and executive officers to the fullest extent permitted under Delaware law. Akerna’s amended and restated certificate of incorporation and bylaws also provides the board of directors with discretion to indemnify the other officers, employees, and agents when determined appropriate by the board of directors. In addition, Akerna entered into an indemnification agreement with each of its directors and executive officers, which requires it to indemnify them.
Related Person Transactions Policy and Procedure
Akerna’s Code of Ethics requires it to avoid, wherever possible, all related party transactions that could result in actual or potential conflicts of interests, except under guidelines approved by the Board (or the audit committee). Related-party transactions are defined as transactions in which (1) the aggregate amount involved will or may be expected to exceed $120,000 in any calendar year, (2) Akerna or any of its subsidiaries is a participant, and (3) any (a) executive officer, director or nominee for election as a director, (b) greater than 5% beneficial owner of Akerna’s shares of common stock, or (c) immediate family member, of the persons referred to in clauses (a) and (b), has or will have a direct or indirect material interest (other than solely as a result of being a director or a less than 10% beneficial owner of another entity). A conflict of interest situation can arise when a person takes actions or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest may also arise if a person, or a member of his or her family, receives improper personal benefits as a result of his or her position.
Ours audit committee, pursuant to its written charter, is responsible for reviewing and approving related-party transactions to the extent we enter into such transactions. The audit committee will consider all relevant factors when determining whether to approve a related party transaction, including whether the related party transaction is on terms no less favorable to us than terms generally available from an unaffiliated third-party under the same or similar circumstances and the extent of the related party’s interest in the transaction.
Director Independence
The Board evaluates the independence of each nominee for election as a director of our Company in accordance with the Nasdaq Listing Rules (the “Nasdaq Listing Rules”) of the Nasdaq Stock Market LLC (“Nasdaq”).Rules. Pursuant to these rules, a majority of our Board must be “independent directors” within the meaning of the Nasdaq Listing Rules, and all directors who sit on our Audit Committee, Nominating Committee and Compensation Committee must also be independent directors.
The Nasdaq definition of “independence” includes a series of objective tests, such as the director or director nominee is not, and was not during the last three years, an employee of Akerna or our subsidiaries and has not received certain payments from, or engaged in various types of business dealings with us. In addition, as further required by the Nasdaq Listing Rules, the Board has made a subjective determination as to each independent director that no relationships exist, which, in the opinion of the Board, would interfere with such individual’s exercise of independent judgment in carrying out his or her responsibilities as a director. In making these determinations, the Board reviewed and discussed information provided by the directors with regard to each director’s business and personal activities as they may relate to Company and its management.
As a result, the Board has affirmatively determined that each of Matthew R. Kane, Tahira Rehmatullah, and Mark IwanowskiBarry Fishman are independent in accordance with the Nasdaq listing rules.Nadsaq Listing Rules. The Board has also affirmatively determined that all members of our Audit Committee, Nominating Committee and Compensation Committee are independent directors.
THE SEC’S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIESCERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
Our directors and officers are indemnifiedThe following is a general discussion of certain material U.S. federal income tax considerations relating to the fullest extent permitted under Delaware law.purchase, ownership and disposition of units, consisting of shares of common stock and warrants, and pre-funded units, consisting of pre-funded warrants and warrants, the acquisition, ownership, and disposition of shares of common stock acquired as part of the units, the acquisition, ownership, and disposition of pre-funded warrants acquired as part of the pre-funded units, the exercise, disposition, or expiration of warrants acquired as part of the units or pre-funded units, the acquisition, ownership, and disposition of shares of common stock received upon exercise of the pre-funded warrants, and the acquisition, ownership, and disposition of shares of common stock received upon exercise of the warrants (the “warrant shares”), all as acquired pursuant to this prospectus. This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), existing and proposed U.S. Treasury Regulations promulgated or proposed thereunder and current administrative and judicial interpretations thereof, all as in effect as of the date of this prospectus and all of which are subject to change or to differing interpretation, possibly with retroactive effect. This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive or prospective basis. We have not sought and will not seek any rulings from the Internal Revenue Service (the “IRS”), regarding the matters discussed below. There can be no assurance that the IRS or a court will not take a contrary position.
This discussion is limited to U.S. holders and non-U.S. holders who hold units, pre-funded units, shares of common stock, pre-funded warrants, warrants, or warrant shares, as applicable, as a capital asset within the meaning of Section 1221 of the Internal Revenue Code (generally, as property held for investment). This discussion does not address all aspects of U.S. federal income taxation, such as the U.S. alternative minimum income tax and the additional tax on net investment income, nor does it address any aspect of state, local or non-U.S. taxes, or U.S. federal taxes other than income taxes, such as federal estate and gift taxes. Except as provided below, this summary does not address tax reporting requirements. This discussion does not consider any specific facts or circumstances that may apply to a holder and does not address the special tax considerations that may be applicable to particular holders, such as:
| ● | insurance companies; |
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| ● | tax-exempt organizations and governmental organizations; |
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| ● | banks or other financial institutions; |
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| ● | brokers or dealers in securities or foreign currency; |
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| ● | traders in securities who elect to apply a mark-to-market method of accounting; |
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| ● | real estate investment trusts, regulated investment companies or mutual funds; |
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| ● | pension plans; |
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| ● | controlled foreign corporations; |
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| ● | passive foreign investment companies; |
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| ● | corporations organized outside the United States, any state thereof, or the District of Columbia that are nonetheless treated as U.S. persons for U.S. federal income tax purposes; |
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| ● | persons that own (directly, indirectly or constructively) more than 5% of the total voting power or total value of our common stock; |
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| ● | corporations that accumulate earnings to avoid U.S. federal income tax; |
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| ● | persons subject to the alternative minimum tax; |
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| ● | U.S. expatriates and certain former citizens or long-term residents of the United States; |
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| ● | persons that have a “functional currency” other than the U.S. dollar; |
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| ● | persons that acquire units, pre-funded units, shares of common stock, pre-funded warrants, warrants or warrant shares as compensation for services; |
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| ● | owners that hold our stock as part of a straddle, hedge, conversion transaction, synthetic security or other integrated investment; |
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| ● | holders subject to special accounting rules; |
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| ● | S corporations (and shareholders thereof); |
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| ● | partnerships or other entities treated as partnerships for U.S. federal income tax purposes (and partners or other owners thereof); and |
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| ● | U.S. holders that are subject to taxing jurisdictions other than, or in addition to, the United States. |
If any entity taxable as a partnership for U.S. federal income tax purposes holds our units, pre-funded units, shares of common stock, pre-funded warrants, warrants or warrant shares, the U.S. federal income tax treatment of a partner in the partnership generally will depend on the status of the partner, the activities of the partnership and certain determinations made at the partner level. A partner in a partnership or other pass-through entity that holds our units, pre-funded units, shares of common stock, pre-funded warrants, warrants or warrant shares should consult its own tax advisor regarding the applicable tax consequences.
For purposes of this discussion, the term “U.S. holder” means a beneficial owner of our common stock that is, for U.S. federal income tax purposes:
| ● | an individual who is a citizen or resident of the United States; |
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| ● | a corporation created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
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| ● | an estate the income of which is subject to U.S. federal income taxation regardless of its source; or |
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| ● | a trust, if (1) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust or (2) the trust has a valid election to be treated as a U.S. person under applicable U.S. Treasury Regulations. |
A “non-U.S. holder” is a beneficial owner of our common stock that is neither a U.S. holder nor a partnership (or other entity treated as a partnership for U.S. federal income tax purposes).
THIS DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT, AND IS NOT INTENDED TO BE, LEGAL OR TAX ADVICE. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND NON-U.S. INCOME, ESTATE AND OTHER TAX CONSIDERATIONS OF ACQUIRING, HOLDING AND DISPOSING OF OUR UNITS, PRE-FUNDED UNITS, SHARES OF COMMON STOCK, PRE-FUNDED WARRANTS, WARRANTS OR WARRANT SHARES.
U.S. Federal Income Tax Consequences of the Acquisition of Units or Pre-Funded Units
For U.S. federal income tax purposes, the acquisition by a U.S. holder or a non-U.S. holder of a unit will be treated as the acquisition of one share of common stock (“Share”) and one warrant. The purchase price for each unit will be allocated between these two components in proportion to their relative fair market values at the time the unit is purchased by the U.S. holder or non-U.S. holder. This allocation of the purchase price for each unit will establish a U.S. holder’s or non-U.S. holder’s initial tax basis for U.S. federal income tax purposes in the one Share and do maintain insurance, which protectsone warrant that comprise each unit.
For this purpose, we will allocate US$0.3503 of the purchase price for the unit to the Share and US$0.01 of the purchase price for each unit to the warrant. However, the IRS will not be bound by such allocation of the purchase price for the units, and therefore, the IRS or a U.S. court may not respect the allocation set forth above. Each U.S. holder and non-U.S. holder should consult its own tax advisor regarding the allocation of the purchase price for the units.
For U.S. federal income tax purposes, the acquisition by a U.S. holder or a non-U.S. holder of a pre-funded unit will be treated as the acquisition of one pre-funded warrant and one warrant. The purchase price for each pre-funded unit will be allocated between these two components in proportion to their relative fair market values at the time the pre-funded unit is purchased by the U.S. holder or non-U.S. holder. This allocation of the purchase price for each pre-funded unit will establish a U.S. holder’s or non-U.S. holder’s initial tax basis for U.S. federal income tax purposes in the one pre-funded warrant and one warrant that comprise each pre-funded unit.
For this purpose, we will allocate US$0.3502 of the purchase price for the pre-funded unit to the pre-funded warrant and US$0.01 of the purchase price for each pre-funded unit to the warrant. However, the IRS will not be bound by such allocation of the purchase price for the pre-funded units, and therefore, the IRS or a U.S. court may not respect the allocation set forth above. Each U.S. holder and non-U.S. holder should consult its own tax advisor regarding the allocation of the purchase price for the pre-funded units.
Treatment of Pre-Funded Warrants
Although it is not entirely free from doubt, we believe that a pre-funded warrant should be treated as a separate class of our officerscommon shares for U.S. federal income tax purposes and directors against any liabilities incurreda U.S. holder or non-U.S. holder of pre-funded warrants should generally be taxed in connectionthe same manner as a holder of shares of common stock except as described below. Accordingly, no gain or loss should be recognized upon the exercise of a pre-funded warrant and, upon exercise, the holding period of a pre-funded warrant should carry over to the shares of common stock received. Similarly, the tax basis of the pre-funded warrant should carry over to the shares of common stock received upon exercise, increased by the exercise price of $0.0001 per share. However, such characterization is not binding on the IRS, and the IRS may treat the pre-funded warrants as warrants to acquire shares of common stock. If so, the amount and character of a U.S. holder’s or non-U.S. holder’s gain with their servicerespect to an investment in pre-funded warrants could change. Accordingly, each U.S. holder and non-U.S. holder should consult its own tax advisors regarding the risks associated with the acquisition of a pre-funded warrant pursuant to this prospective (including potential alternative characterizations). The balance of this discussion generally assumes that the characterization described above is respected for U.S. federal income tax purposes.
U.S. Holders
U.S. Federal Income Tax Consequences of the Exercise, Disposition or Expiration of Warrants
Exercise of Warrants
A U.S. holder should not recognize gain or loss on the exercise of a warrant and related receipt of a warrant share (unless cash is received in lieu of the issuance of a fractional warrant share). A U.S. holder’s initial tax basis in the warrant share received on the exercise of a warrant should be equal to the sum of (a) such U.S. holder’s tax basis in such warrant plus (b) the exercise price paid by such U.S. holder on the exercise of such warrant. It is unclear whether a capacity.U.S. holder's holding period for the warrant share received on the exercise of a warrant would commence on the date of exercise of the warrant or the day following the date of exercise of the warrant.
Insofar as indemnification for liabilities arising under the Securities ActIn certain limited circumstances, a U.S. holder may be permitted to undertake a cashless exercise of warrants into warrant shares. The U.S. federal income tax treatment of a cashless exercise of warrants into warrant shares is unclear, and the tax consequences of a cashless exercise could differ from the consequences upon the exercise of a warrant described in the preceding paragraph. U.S. holders should consult their own tax advisors regarding the U.S. federal income tax consequences of a cashless exercise of warrants.
Disposition of Warrants
A U.S. holder will recognize gain or loss on the sale or other taxable disposition of a warrant in an amount equal to the difference, if any, between (a) the amount of cash plus the fair market value of any property received and (b) such U.S. holder’s tax basis in the warrant sold or otherwise disposed of. Any such gain or loss generally will be a capital gain or loss, which will be long-term capital gain or loss if the warrant is held for more than one year. Deductions for capital losses are subject to complex limitations under the Internal Revenue Code.
Expiration of Warrants Without Exercise
Upon the lapse or expiration of a warrant, a U.S. holder will recognize a loss in an amount equal to such U.S. holder’s tax basis in the Common Stock Warrant. Any such loss generally will be a capital loss and will be long-term capital loss if the warrants are held for more than one year. Deductions for capital losses are subject to complex limitations under the Internal Revenue Code.
Certain Adjustments to the Warrants
Under Section 305 of the Internal Revenue Code, an adjustment to the number of warrant shares that will be issued on the exercise of the warrants, or an adjustment to the exercise price of the warrants, may be treated as a constructive distribution to a U.S. holder of the warrants if, and to the extent that, such adjustment has the effect of increasing such U.S. holder’s proportionate interest in the “earnings and profits” or our directors, officers and controlling personsassets, depending on the circumstances of such adjustment (for example, if such adjustment is to compensate for a distribution of cash or other property to the shareholders). Adjustments to the exercise price of warrants made pursuant to a bona fide reasonable adjustment formula that has the foregoing,effect of preventing dilution of the interest of the holders of the warrants should generally not be considered to result in a constructive distribution. Any such constructive distribution would be taxable whether or not there is an actual distribution of cash or other property. (See more detailed discussion of the rules applicable to distributions made by us at “Distributions on Shares of Common Stock, Pre-Funded Warrants and Warrant Shares” below).
U.S. Federal Income Tax Consequences of the Acquisition, Ownership, and Disposition of Shares of Common Stock, Pre-Funded Warrants and Warrant Shares
Distributions on Shares of Common Stock, Pre-Funded Warrants and Warrant Shares
A U.S. holder that receives a distribution, including a constructive distribution, with respect to a Share, pre-funded warrant or warrant share (as well as any constructive distribution on a warrant as described above) will be required to include the amount of such distribution in gross income as a dividend to the extent of our current and accumulated “earnings and profits”, as computed under U.S. federal income tax principles. To the extent that a distribution exceeds our current and accumulated “earnings and profits”, such distribution will be treated first as a tax-free return of capital to the extent of a U.S. holder’s tax basis in the shares of common stock, pre-funded warrants or warrant shares and thereafter as gain from the sale or exchange of such shares of common stock, pre-funded warrants or warrant shares (see “Sale or Other Taxable Disposition of Shares of Common Stock, Pre-Funded Warrants and/or Warrant Shares” below). Dividends received on shares of common stock, pre-funded warrants or warrant shares may be eligible for a dividends received deduction, subject to certain restrictions relating to, among others, the corporate U.S. holder’s taxable income, holding period and debt financing. Dividends paid by us to non-corporate U.S. holders, including individuals, generally will be eligible for the preferential tax rates applicable to long-term capital gains for dividends, provided certain holding period and other conditions are satisfied. The dividend rules are complex, and each U.S. holder should consult its own tax advisor regarding the application of such rules.
Sale or Other Taxable Disposition of Shares of Common Stock, Pre-Funded Warrants and/or Warrant Shares
Upon the sale or other taxable disposition of shares of common stock, pre-funded warrants or warrant shares, a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between (a) the amount of cash plus the fair market value of any property received and (b) such U.S. holder’s tax basis in such shares of common stock, pre-funded warrants or warrant shares sold or otherwise disposed of. Gain or loss recognized on such sale or other taxable disposition generally will be long-term capital gain or loss if, at the time of the sale or other taxable disposition, the shares of common stock, pre-funded warrants or warrant shares have been held for more than one year. Preferential tax rates may apply to long-term capital gain of a U.S. holder that is an individual, estate, or trust. There are no preferential tax rates for long-term capital gain of a U.S. holder that is a corporation. Deductions for capital losses are subject to significant limitations under the Internal Revenue Code.
Non-U.S. Holders
U.S. Federal Income Tax Consequences of the Exercise, Disposition or Expiration of Warrants
Exercise of Warrants
A non-U.S. holder generally will not recognize gain or loss on the exercise of a warrant and related receipt of a warrant share (unless cash is received in lieu of the issuance of a fractional warrant share and certain other conditions are present, as discussed below under “Gain on Sale, Exchange or Other Taxable Disposition of Shares of Common Stock, Pre-Funded Warrants, Warrants and Warrant Shares”). A non-U.S. holder’s initial tax basis in the warrant share received on the exercise of a warrant should be equal to the sum of (i) the non-U.S. holder’s tax basis in the warrant, plus (ii) the exercise price paid by the non-U.S. holder on the exercise of the warrant. It is unclear whether a non-U.S. holder's holding period for the warrant share received on the exercise of a warrant would commence on the date of exercise of the warrant or the day following the date of exercise of the warrant.
In certain limited circumstances, a non-U.S. holder may be permitted to undertake a cashless exercise of warrants into warrant shares. The U.S. federal income tax treatment of a cashless exercise of warrants into warrant shares is unclear, and the tax consequences of a cashless exercise could differ from the consequences upon the exercise of a warrant described in the preceding paragraph. Non-U.S. holders should consult their own tax advisors regarding the U.S. federal income tax consequences of a cashless exercise of warrants.
Disposition of Warrants
A non-U.S. Holder will recognize gain or loss on the sale or other taxable disposition of a warrant in an amount equal to the difference, if any, between (a) the amount of cash plus the fair market value of any property received and (b) such non-U.S. holder’s tax basis in the warrant sold or otherwise disposed of. Any such gain or loss generally will be a capital gain or loss, which will be long-term capital gain or loss if the warrant is held for more than one year. Any such gain recognized by a non-U.S. holder will be taxable for U.S. federal income tax purposes according to rules discussed under the heading “Gain on Sale, Exchange or Other Taxable Disposition of Shares of Common Stock, Pre-Funded Warrants, Warrants and Warrant Shares” below.
Expiration of Warrants without Exercise
Upon the lapse or expiration of a warrant, a non-U.S. holder will recognize loss in an amount equal to such non-U.S. holder’s tax basis in the warrant. Any such loss generally will be a capital loss and will be long-term capital loss if the warrants are held for more than one year. Deductions for capital losses are subject to complex limitations under the Internal Revenue Code.
Certain Adjustments to the Warrants
Under Section 305 of the Internal Revenue Code, an adjustment to the number of warrant shares that will be issued on the exercise of the warrants, or an adjustment to the exercise price of the warrants, may be treated as a constructive distribution to a non-U.S. holder of the warrants if, and to the extent that, such adjustment has the effect of increasing such non-U.S. holder’s proportionate interest in the “earnings and profits” or assets, of the Company, depending on the circumstances of such adjustment (for example, if such adjustment is to compensate for a distribution of cash or other property to the Company’s shareholders). Adjustments to the exercise price of a warrant made pursuant to a bona fide reasonable adjustment formula that has the effect of preventing dilution of the interest of the holders of the warrants should generally not result in a constructive distribution. See the more detailed discussion of the rules applicable to distributions made by the Company under the heading “Distributions on Shares of Common Stock, Pre-Funded Warrants and Warrant Shares” below.
U.S. Federal Income Tax Consequences of the Acquisition, Ownership, and Disposition of Shares of Common Stock, Pre-Funded Warrants and Warrant Shares
Distributions on Shares of Common Stock, Pre-Funded Warrants and Warrant Shares
If we pay distributions of cash or property with respect to our shares of common stock, pre-funded warrants or warrant shares, those distributions generally will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits, the excess will be treated as a tax-free return of the non-U.S. holder’s investment, up to such holder’s tax basis in its shares of our common stock. Any remaining excess will be treated as capital gain, subject to the tax treatment described below under the heading “— Gain on Sale, Exchange or Other Taxable Disposition of Shares of Common Stock, Pre-Funded Warrants, Warrants and Warrant Shares.” Dividends paid to a non-U.S. holder generally will be subject to withholding of U.S. federal income tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty between the United States and such holder’s country of residence. In the case of any constructive distribution, it is possible that this tax would be withheld from any amount owed to the non-U.S. holder, including, but not limited to, distributions of cash, shares of common stock or sales proceeds subsequently paid or credited to that holder. If we are unable to determine, at the time of payment of a distribution, whether the distribution will constitute a dividend, we may nonetheless choose to withhold any U.S. federal income tax on the distribution as permitted by U.S. Treasury Regulations.
Distributions that are treated as effectively connected with a trade or business conducted by a non-U.S. holder within the United States are generally not subject to the 30% (or lower rate as may be specified by an applicable tax treaty) withholding tax if the non-U.S. holder provides a properly executed IRS Form W-8ECI stating that the distributions are not subject to withholding because they are effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States. If a non-U.S. holder is engaged in a trade or business in the United States and the distribution is effectively connected with the conduct of that trade or business, the distribution will generally have the consequences described above for a U.S. holder (subject to any modification provided under an applicable income tax treaty). Any U.S. effectively connected income received by a non-U.S. holder that is treated as a corporation for U.S. federal income tax purposes may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate (or such lower rate as may be specified by an applicable income tax treaty).
A non-U.S. holder who claims the benefit of an applicable income tax treaty between the United States and such holder’s country of residence generally will be required to provide a properly executed IRS Form W-8BEN or W-8BEN-E, as applicable, and satisfy applicable certification and other requirements. A non-U.S. holder that is eligible for a reduced rate of U.S. withholding tax under an income tax treaty generally may obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim with the IRS. Non-U.S. holders should consult their own tax advisors regarding their entitlement to benefits under a relevant income tax treaty.
Gain on Sale, Exchange or Other Taxable Disposition of Shares of Common Stock, Pre-Funded Warrants, Warrants and Warrant Shares
Subject to the discussions below in “—Information Reporting and Backup Withholding” and “—Foreign Account Tax Compliance Act,” a non-U.S. holder generally will not be subject to U.S. federal income tax on gain recognized on a sale, exchange or other taxable disposition of our shares of common stock, pre-funded warrants, warrants, or warrant shares unless:
| ● | the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States and, if an applicable income tax treaty so provides, the gain is attributable to a permanent establishment maintained by the non-U.S. holder in the United States; in these cases, the non-U.S. holder will be taxed on a net income basis at the regular graduated rates and in the manner applicable to a U.S. holder, and, if the non-U.S. holder is a corporation, an additional branch profits tax at a rate of 30%, or a lower rate as may be specified by an applicable income tax treaty, may also apply; |
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| ● | the non-U.S. holder is an individual present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met, in which case the non-U.S. holder will be subject to a 30% tax (or such lower rate as may be specified by an applicable income tax treaty) on the amount by which such non-U.S. holder’s capital gains allocable to U.S. sources exceed capital losses allocable to U.S. sources during the taxable year of the disposition; or |
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| ● | the Company is or has been a “U.S. real property holding corporation” (“USRPHC”) for U.S. federal income tax purposes at any time during the shorter of the non-U.S. holder’s holding period or the 5-year period ending on the date of disposition of shares of common stock, pre-funded warrants, warrants or warrant shares; provided, with respect to the shares of common stock and warrant shares, that as long as the Company’s shares of common stock are regularly traded on an established securities market as determined under the Treasury Regulations (the “Regularly Traded Exception”), a non-U.S. holder would not be subject to taxation on the gain on the sale of shares of common stock or warrant shares under this rule unless the non-U.S. holder has owned: (i) more than 5% of the Company’s shares of common stock at any time during such 5-year or shorter period; (ii) pre-funded warrants with a fair market value on the date acquired by such holder greater than the fair market value on that date of 5% of the Company’s shares of common stock; (iii) warrants with a fair market value on the date acquired by such holder greater than the fair market value on that date of 5% of the Company’s shares of common stock; or (iv) aggregate equity securities of the Company with a fair market value on the date acquired in excess of 5% of the fair market value of the Company’s shares of common stock on such date (in any case, a “5% Shareholder”). Since the warrants are not expected to be listed on a securities market, the warrants are unlikely to qualify for the Regularly Traded Exception. Special rules apply to the pre-funded warrants. Non-U.S. holders holding pre-funded warrants should consult their own tax advisors regarding such rules. In determining whether a non-U.S. holder is a 5% Shareholder, certain attribution rules apply in determining ownership for this purpose. The Company believes that it is not currently, and it does not anticipate becoming in the future, a USRPHC for U.S. federal income tax purposes. The Company can provide no assurances that it is not currently, or will not become, a USRPHC, or if it is or becomes a USRPHC, that the shares of common stock, pre-funded warrants, warrants or warrant shares will meet the Regularly Traded Exception at the time a non-U.S. holder purchases such securities or sells, exchanges or otherwise disposes of such securities. Non-U.S. holders should consult with their own tax advisors regarding the consequences to them of investing in a USRPHC. If the Company is a USRPHC, a non-U.S. holder will be taxed as if any gain or loss were effectively connected with the conduct of a trade or business as described above in “Distributions on Shares of Common Stock, Pre-Funded Warrants and Warrant Shares” in the event that (i) such holder is a 5% Shareholder, or (ii) the Regularly Traded Exception is not satisfied during the relevant period. |
Information Reporting and Backup Withholding
Distributions on, and the payment of the proceeds of a disposition of, our shares of common stock, pre-funded warrants and warrant shares generally will be subject to information reporting if made within the United States or through certain U.S.-related financial intermediaries. Information returns are required to be filed with the IRS and copies of information returns may be made available to the tax authorities of the country in which a holder resides or is incorporated under the provisions of a specific treaty or agreement.
Backup withholding may also apply if the holder fails to provide certification of exempt status or a correct U.S. taxpayer identification number and otherwise comply with the applicable backup withholding requirements. Generally, a holder will not be subject to backup withholding if it provides a properly completed and executed IRS Form W-9 or appropriate IRS Form W-8, as applicable. Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be refunded or credited against the holder’s U.S. federal income tax liability, if any, provided certain information is timely filed with the IRS.
Foreign Account Tax Compliance Act
Sections 1471 through 1474 of the Internal Revenue Code (commonly referred to as “FATCA”) impose a separate reporting regime and potentially a 30% withholding tax on certain payments, including payments of dividends on our shares of common stock, pre-funded warrants and warrant shares. Withholding under FATCA generally applies to payments made to or through a foreign entity if such entity fails to satisfy certain disclosure and reporting rules. These rules generally require (i) in the case of a foreign financial institution, that the financial institution agree to identify and provide information in respect of financial accounts held (directly or indirectly) by U.S. persons and U.S.-owned entities, and, in certain instances, to withhold on payments to account holders that fail to provide the required information, and (ii) in the case of a non-financial foreign entity, that the entity either identify and provide information in respect of its substantial U.S. owners or certify that it has no such U.S. owners.
FATCA withholding also potentially applies to payments of gross proceeds from the sale or other disposition of our shares of common stock, pre-funded warrants and warrant shares. Proposed regulations, however, would eliminate FATCA withholding on such payments, and the U.S. Treasury Department has indicated that taxpayers may rely on this aspect of the proposed regulations until final regulations are issued.
Non-U.S. holders typically will be required to furnish certifications (generally on the applicable IRS Form W-8) or other documentation to provide the information required by FATCA or to establish compliance with or an exemption from withholding under FATCA. FATCA withholding may apply where payments are made through a non-U.S. intermediary that is not FATCA compliant, even where the non-U.S. holder satisfies the holder’s own FATCA obligations.
The United States and a number of other jurisdictions have entered into intergovernmental agreements to facilitate the implementation of FATCA. Any applicable intergovernmental agreement may alter one or more of the FATCA information reporting and withholding requirements. You are encouraged to consult with your own tax advisor regarding the possible implications of FATCA on your investment in our shares of common stock, pre-funded warrants or warrant shares, including the applicability of any intergovernmental agreements.
UNDERWRITING
A.G.P./Alliance Global Partners, or A.G.P., is acting as the sole book-running manager in connection with this offering. Subject to the terms and conditions of the underwriting agreement dated ____, 2022, A.G.P., as the underwriter, has agreed to purchase from us, and we have been advisedagreed to sell, ____ units and/or pre-funded units at the public offering price, less the underwriting discount and commissions set forth on the cover page of this prospectus.
The underwriting agreement provides that in the opinionobligation of the SECunderwriter to purchase all of the shares, warrants, and pre-funded warrants being offered to the public, other than those covered by the over-allotment option, is subject to certain conditions, and the underwriter is obligated to purchase all of the shares of common stock, warrants, and pre-funded warrants offered hereby if any of the shares, warrants, and pre-funded warrants are purchased.
Underwriting Discounts, Commissions and Expenses
We have agreed to sell the securities to the underwriter at the offering price of $____ per unit or $____ per pre-funded unit, as applicable, which represents the offering price of such indemnification is against public policy as expressed insecurities set forth on the Securities Actcover page of this prospectus, less the applicable 7% underwriting discount and is, therefore, unenforceable. Ina cash fee equal to 7% of the event that a claim for indemnification against such liabilities (other than the paymentaggregate gross proceeds received by us upon the exercise of any warrants.
The following table shows the underwriting discounts and commissions payable to the underwriter by us in connection with this offering (assuming both the exercise and non-exercise of the over-allotment option to purchase additional shares of common stock and/or warrants, or pre-funded units that we have granted to the underwriter):
| | No Exercise | | | Full Exercise | |
| Per Unit | | $ | | | | $ | | |
| Per Pre-Funded Unit | | $ | | | | $ | | |
| Total | | $ | | | | $ | | |
We have also agreed to reimburse the underwriter for legal and other expenses incurred or paid by a director, officer or controlling person of ours in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling personthem in connection with the Offering in an amount not to exceed $70,000 and to pay the underwriter a non-accountable expense allowance up to $15,000. We estimate the total offering expenses of this offering that will be payable by us, excluding the underwriting discount and commissions, will be approximately $140,000.
Underwriter Warrants
We have also agreed to issue to the underwriter warrants (the “Underwriter Warrants”) to purchase that number of shares of common stock equal to 5% of the aggregate number of the shares of common stock (including shares underlying warrants and/or pre-funded warrants, but excluding shares issued upon the exercise of the underwriter’s over-allotment option) issued in this offering, subject to any reductions necessary to comply with the rules and regulations of the Financial Industry Regulatory Authority (“FINRA”). The Underwriter Warrants shall be exercisable, in whole or in part, immediately upon the closing of this offering and expire on the five year anniversary of the date of issuance at an initial exercise price per share of $____ (100% of the unit offering price).
The Underwriter Warrants and underlying shares of common stock are being registered pursuant to the registration statement of which this prospectus is a part, and we have agreed to maintain such registration during the term of the Underwriter Warrants. Pursuant to FINRA Rule 5110(g), the Underwriter Warrants and any shares issued upon exercise of the Underwriter Warrants shall not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the date of effectiveness or commencement of sales of this offering, except the transfer of any security: (i) by operation of law or by reason of our reorganization; (ii) to any FINRA member firm participating in the offering and the officers or partners thereof, if all securities so transferred remain subject to the lock-up restriction set forth below for the remainder of the time period; (iii) if the aggregate amount of our securities held by the underwriter or related persons do not exceed 1% of the securities being registered,offered; (iv) that is beneficially owned on a pro rata basis by all equity owners of an investment fund, provided that no participating member manages or otherwise directs investments by the fund and the participating members in the aggregate do not own more than 10% of the equity in the fund; or (v) the exercise or conversion of any security, if all securities remain subject to the lock-up restriction set forth below for the remainder of the time period.
Over-Allotment Option
We have granted the underwriter an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the underwriter to purchase up to (i) 4,163,197 additional shares (in the aggregate) of our common stock and/or (ii) warrants to purchase up to 4,163,197 additional shares of our common stock and/or (iii) pre-funded warrants to purchase up to 4,163,197 additional shares of our common stock, in any combination thereof, from us solely to cover over-allotments, in each case at the public offering price that appears on the cover page of this prospectus, less the underwriting discounts and commissions.
Indemnification
We have agreed to indemnify the underwriter against liabilities under the Securities Act. We have also agreed to contribute to payments the underwriter may be required to make in respect of such liabilities.
Listing
Our common stock is listed on the Nasdaq Capital Market under the trading symbol “KERN”.
Lock-up Agreements
Our executive officers, directors and certain of our significant stockholders have agreed, subject to certain exceptions, to a 90-day “lock-up” from the date of this prospectus relating to shares of our common stock that they beneficially own, including the issuance of shares of common stock upon the exercise of currently outstanding options and options which may be issued without the prior written consent of A.G.P. This means that, for a period of 90 days following the date of this prospectus, such persons may not offer, sell, pledge or otherwise dispose of these securities without the prior written consent of A.G.P., subject to certain exceptions.
In addition, the underwriting agreement provides that we will unlessnot, for a period of 90 days following the date of this prospectus, offer, sell or distribute any of our securities, without the prior written consent of A.G.P.
Stabilization
The rules of the SEC generally prohibit the underwriter from trading in our securities on the open market during this offering. However, the underwriter is allowed to engage in some open market transactions and other activities during this offering that may cause the market price of our securities to be above or below that which would otherwise prevail in the opinionopen market. These activities may include stabilization, short sales and over-allotments, syndicate covering transactions and penalty bids in accordance with Regulation M.
| ● | Stabilizing transactions consist of bids or purchases made by the representative for the purpose of preventing or slowing a decline in the market price of our securities while this offering is in progress. |
| ● | Short sales and over-allotments occur when the representative sells more of our shares of common stock than it purchases from us in this offering. To cover the resulting short position, the representative may exercise the over-allotment option described above or may engage in syndicate covering transactions. There is no contractual limit on the size of any syndicate covering transaction. The representative will make available a prospectus in connection with any such short sales. Purchasers of shares sold short by the representative are entitled to the same remedies under the federal securities laws as any other purchaser of shares covered by the registration statement. |
| ● | Syndicate covering transactions are bids for or purchases of our securities on the open market by the representative in order to reduce a short position. |
| ● | Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the shares of Common Stock originally sold by the syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. |
Neither we nor the underwriter make any representation or prediction as to the effect that the transactions described above may have on the prices of our counselsecurities. These transactions may occur on any trading market. If any of these transactions are commenced, they may be discontinued without notice at any time.
Other Activities and Relationships
From time to time, the matterunderwriter and/or its affiliates have provided, and may in the future provide, various investment banking, financial advisory and other services to us and our affiliates for which services they have received, and may in the future receive, customary fees. In the course of its business, the underwriter and its affiliates may actively trade our securities or loans for its own account or for the accounts of customers, and, accordingly, the underwriter and its affiliates may at any time hold long or short positions in such securities or loans. Except for services provided in connection with this offering, the underwriter has not provided any investment banking or other financial services during the 180-day period preceding the date of this prospectus and we do not expect to retain the underwriter to perform any investment banking or other financial services for at least 90 days after the date of this prospectus.
Offer and Sale Restrictions Outside the United States
Other than in the United States, no action has been settledtaken by controlling precedent, submitus or the underwriter that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the Offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a courtsolicitation of appropriatean offer to buy any securities offered by this prospectus in any jurisdiction the question whetherin which such indemnification by itan offer or a solicitation is against public policy as expressedunlawful.
Electronic Distribution
This prospectus may be made available in the Securities Act and will be governedelectronic format on websites or through other online services maintained by the final adjudicationunderwriter, or by its affiliates. Other than this prospectus in electronic format, the information on the underwriter’s website and any information contained in any other website maintained by the underwriter is not part of such issue.this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the underwriter, and should not be relied upon by any purchaser of the securities offered pursuant to the registration statement of which this prospectus forms a part.
EXPERTS
The consolidated financial statements of Akerna as of June 30, 2019December 31, 2021 and 20182020, the related consolidated statements of operations, comprehensive loss, changes in equity and cash flows for the year ended December 31, 2021, for the transitional six months ended December 31, 2020, and for each of the two years in the periodyear ended June 30, 20192020 included elsewhere in this Prospectus,herein have been audited by Marcum LLP, independent registered public accounting firm, as set forth in their report thereon and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
The financial statements of SoloThe Nav People, Inc. & Subsidiary, which comprise the consolidatedbalance sheet as of December 31, 20192020, and 2018the related consolidatedstatements of operations and comprehensive loss, changes in stockholders’ deficit and cash flows for yearsthe year then ended, and the related notes to the financial statements included elsewhere in this Prospectus,herein have been audited by Marcum LLP, independent auditors, as set forth in their report thereon and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Ample as of December 31, 2019 and 2018 and for years then ended includedNo expert or counsel named in this Prospectus, have been audited by Ernst & Young LLP, independent auditors,prospectus as set forthhaving prepared or having certified any part of this prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in their report thereon, which report includes an explanatory paragraph asconnection with the registration or offering of the common stock was employed on a contingency basis or had, or is to receive, in connection with the abilityoffering, a substantial interest, direct or indirect, in the registrant or any of Ample to continueits parents or subsidiaries. Nor was any such person connected with the registrant or any of its parent or subsidiaries as a going concern as described in Note 1 to the financial statements, and are included in reliance on such report given upon such firm as experts in accounting and auditing.promoter, managing or principal underwriter, voting trustee, director, officer or employee.
LEGAL MATTERS
The validity of the securities offered herebyby this prospectus and other legal matters concerning this offering relating to United States federal law and New York law has been passed upon for us by Dorsey & Whitney LLP, Denver, Colorado. Certain legal matters in connection with this offering will be passed upon for Akernathe underwriter by Dorsey & Whitney LLP.Thompson Hine LLP, New York, New York.
WHERE YOU CAN FIND MORE INFORMATION
We are subjecthave filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the informational requirementssecurities we are offering by this prospectus. The registration statement, including the attached exhibits and schedules, contains additional relevant information about us and the securities. This prospectus does not contain all of the Exchange Actinformation set forth in the registration statement and accordingly,the exhibits and schedules thereto. For further information respecting our company and the shares offered by this prospectus, you should refer to the registration statement, including the exhibits and schedules thereto.
We file currentannual, quarterly and periodicother reports, proxy statements and other information with the SEC. We have also filed a registration statementOur Annual Report on Form S-1 in connection10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, including any amendments to those reports, and other information that we file with this offering. This Prospectus, which is partor furnish to the SEC pursuant to Section 13(a) or 15(d) of the registration statement, does not contain allExchange Act can be accessed free of charge through the Internet. These reports and other information will be available at the website of the SEC at http://www.sec.gov. We also maintain a website at www.akerna.com, at which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. However, the information contained in the registration statement. For further information with respect to us and the sharesor accessible through our website is not part of common stock offered hereby, reference is made to such registration statement, including the exhibits thereto, which may be read, without charge, and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains a site at www.sec.gov that contains current and periodic reports, proxy statements and other information filed by us with the SEC. Statements contained in this Prospectus as to the intent of any contractprospectus or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the registration statement eachof which this prospectus forms a part, and you should not rely on such statement being qualifiedinformation in all respects by such reference.making a decision to purchase our securities in this offering.
INDEX TO AKERNA’S FINANCIAL STATEMENTS
INDEX TO THE NAV PEOPLE’S FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Quarterly Financial Statements
Annual Financial Statements
AKERNA CORP.
Condensed Consolidated Balance Sheets
(unaudited)
| | | March 31,
2020 | | | June 30,
2019 | |
| Assets | | | | | | |
| Current assets | | | | | | |
| Cash | | $ | 14,309,996 | | | $ | 21,867,289 | |
| Restricted cash | | | 500,000 | | | | 500,000 | |
| Accounts receivable, net | | | 1,324,051 | | | | 1,257,274 | |
| Prepaid expenses and other current assets | | | 1,762,371 | | | | 577,674 | |
| Total current assets | | | 17,896,418 | | | | 24,202,237 | |
| | | | | | | | | |
| Intangible and other assets | | | 23,136,584 | | | | — | |
| Fixed assets, net | | | 65,582 | | | | — | |
| Investment | | | 250,000 | | | | — | |
| Total assets | | $ | 41,348,584 | | | $ | 24,202,237 | |
| | | | | | | | | |
| Liabilities and Equity | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 4,025,199 | | | $ | 1,818,116 | |
| Deferred revenue | | | 743,317 | | | | 624,387 | |
| Total current liabilities | | | 4,768,516 | | | | 2,442,503 | |
| | | | | | | | | |
| Commitments and contingencies (Note 6) | | | | | | | | |
| | | | | | | | | |
| Equity: | | | | | | | | |
| Preferred stock, par value $0.0001; 5,000,000 shares authorized, none are issued and outstanding at March 31, 2020 and June 30, 2019 | | | — | | | | — | |
| Common stock, par value $0.0001; 75,000,000 shares authorized, 12,856,302 issued and outstanding at March 31, 2020, and 10,589,746 shares issued and outstanding at June 30, 2019 | | | 1,286 | | | | 1,059 | |
| Additional paid-in capital | | | 69,916,857 | | | | 47,325,421 | |
| Accumulated deficit | | | (38,100,333 | ) | | | (25,566,746 | ) |
| Total stockholders’ equity | | | 31,817,810 | | | | 21,759,734 | |
| Noncontrolling interests in consolidated subsidiary | | | 4,762,258 | | | | — | |
| Total equity | | | 36,580,068 | | | | 21,759,734 | |
| Total liabilities and equity | | $ | 41,348,584 | | | $ | 24,202,237 | |
| | | March 31,
| | | December 31,
| |
| | | 2022 | | | 2021 | |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash | | $ | 9,687,690 | | | $ | 13,934,265 | |
| Restricted cash | | | 508,261 | | | | 508,261 | |
| Accounts receivable, net | | | 2,579,187 | | | | 1,403,774 | |
| Prepaid expenses and other current assets | | | 2,492,089 | | | | 2,383,764 | |
| Total current assets | | | 15,267,227 | | | | 18,230,064 | |
| | | | | | | | | |
| Fixed assets, net | | | 159,159 | | | | 153,151 | |
| Investment, net | | | 226,101 | | | | 226,101 | |
| Capitalized software, net | | | 8,012,387 | | | | 7,311,676 | |
| Intangible assets, net | | | 20,708,046 | | | | 21,609,794 | |
| Goodwill | | | 29,964,160 | | | | 46,942,681 | |
| Other noncurrent assets | | | 9,700 | | | | 9,700 | |
| Total Assets | | $ | 74,346,780 | | | $ | 94,483,167 | |
| | | | | | | | | |
| Liabilities and Equity | | | | | | | | |
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable, accrued expenses and other accrued liabilities | | $ | 7,463,341 | | | $ | 6,063,520 | |
| Contingent consideration payable | | | 6,300,000 | | | | 6,300,000 | |
| Current portion of deferred revenue | | | 3,369,631 | | | | 3,543,819 | |
| Current portion of long-term debt | | | 13,200,000 | | | | 13,200,000 | |
| Derivative liability | | | 45,127 | | | | 63,178 | |
| Total current liabilities | | | 30,378,099 | | | | 29,170,517 | |
| | | | | | | | | |
| Long-term portion of deferred revenue | | | 486,201 | | | | 582,676 | |
| Long-term debt, less current portion | | | 2,137,000 | | | | 4,105,000 | |
| Deferred tax liabilities | | | 565,184 | | | | 675,291 | |
| Total liabilities | | | 33,566,484 | | | | 34,533,484 | |
| | | | | | | | | |
| Commitments and contingencies (Note 7) | | | | | | | | |
| | | | | | | | | |
| Equity: | | | | | | | | |
| Preferred stock, par value $0.0001; 5,000,000 shares authorized, 1 share special voting preferred stock issued and outstanding at March 31, 2022 and December 31, 2021 | | | — | | | | — | |
| Special voting preferred stock, par value $0.0001; 1 share authorized, issued and outstanding as of March 31, 2022 and December 31, 2021, with $1 preference in liquidation; exchangeable shares, no par value, 306,852 and 309,286 shares issued and outstanding as of March 31, 2022 and December 31, 2021 respectively | | | 2,347,418 | | | | 2,366,038 | |
| Common stock, par value $0.0001; 75,000,000 shares authorized, 34,175,088 and 31,001,884 issued and outstanding at March 31, 2022 and December 31, 2021, respectively | | | 3,417 | | | | 3,100 | |
| Additional paid-in capital | | | 148,761,867 | | | | 146,027,258 | |
| Accumulated other comprehensive loss | | | 128,723 | | | | 61,523 | |
| Accumulated deficit | | | (110,461,129 | ) | | | (88,508,236 | ) |
| Total equity | | | 40,780,296 | | | | 59,949,683 | |
| Total liabilities and equity | | $ | 74,346,780 | | | $ | 94,483,167 | |
The accompanying notes are an integral part of these condensed consolidated financial statements
AKERNA CORP.
Condensed Consolidated Statements of Operations
(unaudited)
| | | For the Three Months Ended
March 31, | | | For the Nine months Ended
March 31, | |
| | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| Revenues | | | | | | | | | | | | |
| Software | | $ | 2,346,310 | | | $ | 2,024,916 | | | $ | 7,148,964 | | | $ | 6,174,102 | |
| Consulting | | | 692,584 | | | | 216,897 | | | | 2,248,947 | | | | 826,777 | |
| Other | | | 31,652 | | | | 86,067 | | | | 171,727 | | | | 200,312 | |
| Total revenues | | | 3,070,546 | | | | 2,327,880 | | | | 9,569,638 | | | | 7,201,191 | |
| Cost of revenues | | | 1,420,909 | | | | 1,166,482 | | | | 4,457,110 | | | | 3,550,612 | |
| | | | | | | | | | | | | | | | | |
| Gross profit | | | 1,649,637 | | | | 1,161,398 | | | | 5,112,528 | | | | 3,650,579 | |
| | | | | | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | | | | | |
| Product development | | | 1,632,353 | | | | 1,001,394 | | | | 4,024,743 | | | | 2,877,869 | |
| Selling, general and administrative | | | 5,500,837 | | | | 2,663,171 | | | | 13,881,055 | | | | 7,440,115 | |
| Total operating expenses | | | 7,133,190 | | | | 3,664,565 | | | | 17,905,798 | | | | 10,317,984 | |
| | | | | | | | | | | | | | | | | |
| Loss from operations | | | (5,483,553 | ) | | | (2,503,167 | ) | | | (12,793,270 | ) | | | (6,667,405 | ) |
| | | | | | | | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | | | | | | |
| Interest | | | 33,522 | | | | 20,914 | | | | 158,762 | | | | 69,265 | |
| Other | | | (124 | ) | | | (7,850 | ) | | | (254 | ) | | | 17,983 | |
| Total other income | | | 33,398 | | | | 13,064 | | | | 158,508 | | | | 87,248 | |
| | | | | | | | | | | | | | | | | |
| Net loss | | | (5,450,155 | ) | | | (2,490,103 | ) | | | (12,634,762 | ) | | | (6,580,157 | ) |
| Net loss attributable to noncontrolling interests in consolidated subsidiary | | | 101,175 | | | | — | | | | 101,175 | | | | — | |
| Net loss attributable to Akerna stockholders | | $ | (5,348,980 | ) | | $ | (2,490,103 | ) | | $ | (12,533,587 | ) | | $ | (6,580,157 | ) |
| | | | | | | | | | | | | | | | | |
| Basic and diluted weighted average common stock outstanding | | | 12,469,737 | | | | 6,022,026 | | | | 11,299,997 | | | | 5,843,334 | |
| Basic and diluted net loss per common share | | $ | (0.43 | ) | | $ | (0.41 | ) | | $ | (1.11 | ) | | $ | (1.13 | ) |
| | | For the Three Months Ended
| |
| | | March 31, | |
| | | 2022 | | | 2021 | |
| Revenue: | | | | | | |
| Software | | $ | 6,508,513 | | | $ | 3,795,153 | |
| Consulting | | | 427,009 | | | | 172,747 | |
| Other revenue | | | 15,319 | | | | 46,124 | |
| Total revenue | | | 6,950,841 | | | | 4,014,024 | |
| Cost of revenue | | | 2,203,671 | | | | 1,454,167 | |
| Gross profit | | | 4,747,170 | | | | 2,559,857 | |
| Operating expenses: | | | | | | | | |
| Product development | | | 2,105,361 | | | | 1,424,100 | |
| Sales and marketing | | | 3,236,113 | | | | 1,735,915 | |
| General and administrative | | | 2,570,432 | | | | 1,852,962 | |
| Depreciation and amortization | | | 1,993,391 | | | | 1,052,883 | |
| Impairment of long-lived assets | | | 15,478,521 | | | | — | |
| Total operating expenses | | | 25,383,818 | | | | 6,065,860 | |
| Loss from operations | | | (20,636,648 | ) | | | (3,506,003 | ) |
| Other (expense) income: | | | | | | | | |
| Interest (expense) income, net | | | (740 | ) | | | (774,380 | ) |
| Change in fair value of convertible notes | | | (1,433,000 | ) | | | (1,991,272 | ) |
| Change in fair value of derivative liability | | | 18,051 | | | | (175,996 | ) |
| Total other (expense) income | | | (1,415,689 | ) | | | (2,941,648 | ) |
| | | | | | | | | |
| Net loss before income taxes and equity in losses of investee | | | (22,052,337 | ) | | | (6,447,651 | ) |
| Income tax (expense) benefit | | | 99,444 | | | | (6,270 | ) |
| Equity in losses of investee | | | — | | | | (3,782 | ) |
| | | | | | | | | |
| Net loss | | $ | (21,952,893 | ) | | $ | (6,457,703 | ) |
| | | | | | | | | |
| Basic and diluted weighted average common stock outstanding | | | 31,605,783 | | | | 22,209,072 | |
| Basic and diluted net loss per common share | | $ | (0.69 | ) | | $ | (0.29 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements
AKERNA CORP.
Condensed Consolidated Statements of Changes in Equity Comprehensive Loss
(unaudited)
For the Nine Months Ended March 31, 2020
| | | Three Months Ended
March 31, | |
| | | 2022 | | | 2021 | |
| Net loss | | $ | (21,952,893 | ) | | $ | (6,457,703 | ) |
| Other comprehensive (loss) income: | | | | | | | | |
| Foreign currency translation | | | (33,800 | ) | | | (230 | ) |
| Unrealized (loss) gain on convertible notes | | | 101,000 | | | | (13,000 | ) |
| Comprehensive loss | | $ | (21,885,693 | ) | | $ | (6,470,933 | ) |
| | | Common | | | Additional
Paid-In | | | Accumulated | | | Total
Stockholders’ | | | Noncontrolling
Interests in
Consolidated | | | Total | |
| | | Shares | | | Amount | | | Capital | | | Deficit | | | Equity | | | Subsidiary | | | Equity | |
| Balance – July 1, 2019 | | | 10,589,746 | | | $ | 1,059 | | | $ | 47,325,421 | | | $ | (25,566,746 | ) | | $ | 21,759,734 | | | $ | — | | | $ | 21,759,734 | |
| Stock-based compensation | | | — | | | | — | | | | 161,165 | | | | — | | | | 161,165 | | | | — | | | | 161,165 | |
| Cash received in connection with exercise of warrants | | | 368,910 | | | | 37 | | | | 4,242,417 | | | | — | | | | 4,242,454 | | | | — | | | | 4,242,454 | |
| Net loss | | | — | | | | — | | | | — | | | | (2,846,071 | ) | | | (2,846,071 | ) | | | — | | | | (2,846,071 | ) |
| Balance – September 30, 2019 | | | 10,958,656 | | | | 1,096 | | | | 51,729,003 | | | | (28,412,817 | ) | | | 23,317,282 | | | | — | | | | 23,317,282 | |
| Stock-based compensation | | | — | | | | — | | | | 331,485 | | | | — | | | | 331,485 | | | | — | | | | 331,485 | |
| Forfeitures of restricted shares | | | (37,572 | ) | | | (3 | ) | | | 3 | | | | — | | | | — | | | | — | | | | — | |
| Cash received in connection with exercise of warrants | | | 401 | | | | — | | | | 4,611 | | | | — | | | | 4,611 | | | | — | | | | 4,611 | |
| Net loss | | | — | | | | — | | | | — | | | | (4,338,536 | ) | | | (4,338,536 | ) | | | — | | | | (4,338,536 | ) |
| Balance – December 31, 2019 | | | 10,921,485 | | | | 1,093 | | | | 52,065,102 | | | | (32,751,353 | ) | | | 19,314,842 | | | | — | | | | 19,314,842 | |
| Common shares issued in exchange for interest in consolidated subsidiary | | | 1,950,000 | | | | 195 | | | | 17,549,805 | | | | — | | | | 17,550,000 | | | | — | | | | 17,550,000 | |
| Noncontrolling interests in acquired subsidiary | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,863,433 | | | | 4,863,433 | |
| Stock-based compensation | | | — | | | | — | | | | 301,948 | | | | — | | | | 301,948 | | | | — | | | | 301,948 | |
| Forfeitures of restricted shares | | | (15,183 | ) | | | (2 | ) | | | 2 | | | | — | | | | — | | | | — | | | | — | |
| Net loss | | | — | | | | — | | | | — | | | | (5,348,980 | ) | | | (5,348,980 | ) | | | (101,175 | ) | | | (5,450,155 | ) |
| Balance – March 31, 2020 | | | 12,856,302 | | | $ | 1,286 | | | $ | 69,916,857 | | | $ | (38,100,333 | ) | | $ | 31,817,810 | | | $ | 4,762,258 | | | $ | 36,580,068 | |
The accompanying notes are an integral part of these condensed consolidated financial statements
AKERNA CORP.
Condensed Consolidated Statements of Changes in Equity (unaudited)
For the NineThree Months Ended March 31, 20192022
(unaudited)
| | | Common | | | Additional
Paid-In | | | Accumulated | | | Total
Stockholders’ | |
| | | Shares | | | Amount | | | Capital | | | Deficit | | | Equity | |
| Balance – July 1, 2018 | | | 4,922,650 | | | $ | 492 | | | $ | 14,563,102 | | | $ | (13,163,531 | ) | | $ | 1,400,063 | |
| Issuance of shares in exchange for cash | | | 1,099,376 | | | | 110 | | | | 9,999,890 | | | | — | | | | 10,000,000 | |
| Net loss | | | — | | | | — | | | | — | | | | (1,695,683 | ) | | | (1,695,683 | ) |
| Balance – September 30, 2018 | | | 6,022,026 | | | | 602 | | | | 24,562,992 | | | | (14,859,214 | ) | | | 9,704,380 | |
| Net loss | | | — | | | | — | | | | — | | | | (2,394,371 | ) | | | (2,394,371 | ) |
| Balance – December 31, 2018 | | | 6,022,026 | | | | 602 | | | | 24,562,992 | | | | (17,253,585 | ) | | | 7,310,009 | |
| Net loss | | | — | | | | — | | | | — | | | | (2,490,103 | ) | | | (2,490,103 | ) |
| Balance – March 31, 2019 | | | 6,022,026 | | | $ | 602 | | | $ | 24,562,992 | | | $ | (19,743,688 | ) | | $ | (4,819,906 | ) |
| | | Special Voting Preferred Stock | | | Common | | | Additional
Paid-In
| | | Accumulated Other
Comprehensive
| | | Accumulated
| | | Total
| |
| | | Share | | | Amount | | | Shares | | | Amount | | | Capital | | | Income | | | Deficit | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance – January 1, 2022 | | | 309,286 | | | $ | 2,366,038 | | | | 31,001,884 | | | $ | 3,100 | | | $ | 146,027,258 | | | $ | 61,523 | | | $ | (88,508,236 | ) | | $ | 59,949,683 | |
| Conversion of Exchangeable Shares to common stock | | | (2,434 | ) | | | (18,620 | ) | | | 2,434 | | | | — | | | | 18,620 | | | | — | | | | — | | | | — | |
| Settlement of convertible debt | | | — | | | | — | | | | 3,396,842 | | | | 340 | | | | 3,299,660 | | | | — | | | | — | | | | 3,300,000 | |
| Shares withheld for withholding taxes | | | — | | | | — | | | | (4,421 | ) | | | — | | | | (5,615 | ) | | | — | | | | — | | | | (5,615 | ) |
| Shares returned in connection with 365 Cannabis acquisition | | | — | | | | — | | | | (279,762 | ) | | | (28 | ) | | | (939,972 | ) | | | — | | | | — | | | | (940,000 | ) |
| Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | 316,855 | | | | — | | | | — | | | | 316,855 | |
| Restricted stock vesting | | | — | | | | — | | | | 43,479 | | | | 4 | | | | (4 | ) | | | — | | | | — | | | | — | |
| Liabilities settled with shares | | | — | | | | — | | | | 14,632 | | | | 1 | | | | 45,065 | | | | — | | | | — | | | | 45,066 | |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | (33,800 | ) | | | — | | | | (33,800 | ) |
| Unrealized (loss) gain on convertible notes | | | — | | | | — | | | | — | | | | — | | | | — | | | | 101,000 | | | | — | | | | 101,000 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (21,952,893 | ) | | | (21,952,893 | ) |
| Balance – March 31, 2022 | | | 306,852 | | | $ | 2,347,418 | | | | 34,175,088 | | | $ | 3,417 | | | $ | 148,761,867 | | | $ | 128,723 | | | $ | (110,461,129 | ) | | $ | 40,780,296 | |
The accompanying notes are an integral part of these condensed consolidated financial statements
AKERNA CORP.
Condensed Consolidated Statements of Cash Flows
Changes in Equity
For the Three Months Ended March 31, 2021
(unaudited)
| | | For the Nine Months Ended
March 31, | |
| | | 2020 | | | 2019 | |
| Cash flows from operating activities | | | | | | |
| Net loss | | $ | (12,634,762 | ) | | $ | (6,580,157 | ) |
| Adjustment to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Bad debt expense | | | 933,079 | | | | 156,115 | |
| Stock-based compensation expense | | | 794,598 | | | | — | |
| Depreciation and amortization | | | 2,824 | | | | — | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (986,808 | ) | | | (1,394,378 | ) |
| Prepaid expenses and other current assets | | | (1,162,562 | ) | | | (204,991 | ) |
| Other assets | | | (58,925 | ) | | | — | |
| Accounts payable and accrued liabilities | | | 1,391,549 | | | | 1,229,298 | |
| Deferred revenue | | | 118,930 | | | | 436,178 | |
| Net cash used in operating activities | | | (11,602,077 | ) | | | (6,357,935 | ) |
| | | | | | | | | |
| Cash flows from investing activities | | | | | | | | |
| Furniture, fixtures and equipment additions | | | (53,621 | ) | | | — | |
| Cash acquired in business combination | | | 101,340 | | | | — | |
| Purchase of equity method investment | | | (250,000 | ) | | | — | |
| Net cash used in investing activities | | | (202,281 | ) | | | — | |
| | | | | | | | | |
| Cash flows from financing activities | | | | | | | | |
| Cash received in connection with exercise of warrants | | | 4,247,065 | | | | — | |
| Cash received in connection with issuance of shares | | | — | | | | 10,000,000 | |
| Net cash provided by financing activities | | | 4,247,065 | | | | 10,000,000 | |
| | | | | | | | | |
| Net change in cash and restricted cash | | | (7,557,293 | ) | | | 3,642,065 | |
| | | | | | | | | |
| Cash and restricted cash – beginning of period | | | 22,367,289 | | | | 2,572,401 | |
| | | | | | | | | |
| Cash and restricted cash – end of period | | $ | 14,809,996 | | | $ | 6,214,466 | |
| | | Special Voting
Preferred Stock | | | Common | | | Additional
Paid-In
| | | Accumulated Other
Comprehensive
| | | Accumulated
| | | Total
| |
| | | Share | | | Amount | | | Shares | | | Amount | | | Capital | | | Income | | | Deficit | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance – January 1, 2021 | | | 2,667,349 | | | $ | 20,405,219 | | | | 19,901,248 | | | $ | 1,990 | | | $ | 94,086,433 | | | $ | (91,497 | ) | | $ | (57,179,525 | ) | | $ | 57,222,620 | |
| Conversion of Exchangeable Shares to common stock | | | (1,020,062 | ) | | | (7,803,475 | ) | | | 1,020,062 | | | | 102 | | | | 7,803,373 | | | | — | | | | — | | | | — | |
| Settlement of convertible debt | | | — | | | | — | | | | 2,080,140 | | | | 208 | | | | 8,467,292 | | | | — | | | | — | | | | 8,467,500 | |
| Shares withheld for withholding taxes | | | — | | | | — | | | | (48,948 | ) | | | (5 | ) | | | (333,842 | ) | | | — | | | | — | | | | (333,847 | ) |
| Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | 503,379 | | | | — | | | | — | | | | 503,379 | |
| Settlement of liabilities with shares | | | — | | | | — | | | | 101,705 | | | | 10 | | | | 377,315 | | | | — | | | | — | | | | 377,325 | |
| Restricted stock vesting | | | — | | | | — | | | | 13,978 | | | | 1 | | | | (1 | ) | | | — | | | | — | | | | — | |
| Forfeitures of restricted shares | | | — | | | | — | | | | (668 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | (230 | ) | | | — | | | | (230 | ) |
| Unrealized (loss) gains on convertible notes | | | — | | | | — | | | | — | | | | — | | | | — | | | | (13,000 | ) | | | — | | | | (13,000 | ) |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6,457,703 | ) | | | (6,457,703 | ) |
| Balance – March 31, 2021 | | | 1,647,287 | | | $ | 12,601,744 | | | | 23,067,517 | | | $ | 2,306 | | | $ | 110,903,949 | | | $ | (104,727 | ) | | $ | (63,637,228 | ) | | $ | 59,766,044 | |
The accompanying notes are an integral part of these condensed consolidated financial statements
AKERNA CORP.
Condensed Consolidated Statements of Cash Flows
(unaudited)
| | | For the Three Months Ended
| |
| | | March 31, | |
| | | 2022 | | | 2021 | |
| Cash flows from operating activities: | | | | | | |
| Net loss | | $ | (21,952,893 | ) | | $ | (6,457,703 | ) |
| Adjustment to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Equity in losses of investment | | | — | | | | 3,782 | |
| Bad debt | | | 174,794 | | | | (10,516 | ) |
| Stock-based compensation expense | | | 304,237 | | | | 503,379 | |
| Amortization of deferred contract cost | | | 113,251 | | | | 118,519 | |
| Non-cash interest expense | | | — | | | | 769,773 | |
| Depreciation and amortization | | | 1,993,391 | | | | 1,052,882 | |
| Foreign currency loss (gain) | | | 5,596 | | | | (18,801 | ) |
| Impairment of long-lived assets | | | 15,478,521 | | | | — | |
| Change in fair value of convertible notes | | | 1,433,000 | | | | 1,991,272 | |
| Change in fair value of derivative liability | | | (18,051 | ) | | | 175,996 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (1,335,939 | ) | | | (177,832 | ) |
| Prepaid expenses and other current assets | | | 178,869 | | | | 236,339 | |
| Accounts payable and accrued liabilities | | | 445,969 | | | | 152,455 | |
| Deferred tax liabilities | | | (110,107 | ) | | | — | |
| Deferred revenue | | | (296,032 | ) | | | 286,637 | |
| Net cash used in operating activities | | | (3,585,394 | ) | | | (1,373,818 | ) |
| Cash flows from investing activities: | | | | | | | | |
| Developed software additions | | | (647,022 | ) | | | (704,637 | ) |
| Net cash used in investing activities | | | (647,022 | ) | | | (704,637 | ) |
| Cash flows from financing activities: | | | | | | | | |
| Value of shares withheld related to tax withholdings | | | (5,615 | ) | | | (333,847 | ) |
| Net cash used in financing activities | | | (5,615 | ) | | | (333,847 | ) |
| Effect of exchange rate changes on cash and restricted cash | | | (8,544 | ) | | | (1,579 | ) |
| Net change in cash and restricted cash | | | (4,246,575 | ) | | | (2,413,881 | ) |
| Cash and restricted cash - beginning of period | | | 14,442,526 | | | | 18,340,640 | |
| Cash and restricted cash - end of period | | $ | 10,195,951 | | | $ | 15,926,759 | |
| Cash paid for interest | | $ | — | | | $ | — | |
| Cash paid for taxes | | | 5,210 | | | | — | |
| Supplemental Disclosure of non-cash investing and financing activity: | | | | | | | | |
| Settlement of convertible notes in common stock | | $ | 3,300,000 | | | $ | 8,467,292 | |
| Conversion of exchangeable shares to common stock | | | 18,620 | | | | 7,803,475 | |
| Settlement of other liabilities in common stock | | | 45,065 | | | | 377,325 | |
| Stock-based compensation capitalized as software development | | | 12,618 | | | | — | |
| Vesting of restricted stock units | | | 4 | | | | — | |
| Capitalized software included in accrued expenses | | | 1,114,108 | | | | — | |
| Fixed asset purchases accrued or in accounts payable | | | 24,614 | | | | — | |
| Shares returned in connection with 365 Cannabis acquisition | | | 940,000 | | | | — | |
| 365 Cannabis working capital funds released from accrued expenses | | | 160,000 | | | | — | |
| 365 Cannabis working capital adjustment funds recorded in other current assets | | | 400,000 | | | | — | |
The accompanying notes are an integral part of these condensed consolidated financial statements
AKERNA CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 —- Description of Business Liquidity and Capital Resources
Description of Business
Akerna Corp., herein referred to as the Company, we, us, our or Akerna, through our wholly owned subsidiarywholly-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 developeddevelop 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®Systems®, to state government regulatory agencies, and our commercial software platform, MJ Platform®, to state-licensed businesses.agencies. Through our controlled subsidiary, solo sciences inc.,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™TAG™. The integration of MJ Platform®Platform® and solo*CODE™ 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 law. Ourlaws and regulations. We provide project-focused consulting services helpto clients obtain licensingwho are initiating or expanding their cannabis business operations or are interested in data consulting engagements with respect to initiate or expand their business operations.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.
The accompanying financial statementsGoing Concern and related notes reflect the historical results of MJF prior to the mergers completed in June 2019, or the Mergers, with MTech Acquisition Corp., or MTech, and other related entities, which resulted in the combined company, and do not include the historical results of MTech prior to the completion of the Mergers.
Management's Liquidity and Capital ResourcesPlans
SinceIn 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. Although we have continuing negative cash flow from operations,During the cash outflow since the Mergers is partially attributable to approximately $1.8 million in costs incurred in connection with specific transactions, including the Mergers and acquisitions completed or expected to close within the next twelve months. The transaction costs we expect to occur over the next twelve months are far less than the costs incurred during the ninethree months ended March 31, 2020. In addition,2022 and March 31, 2021, we incurred a loss from operations of $20.6 million and $3.5 million, respectively, and used cash in operations of $3.6 million and $1.4 million, respectively. As of March 31, 2022, a working capital deficit of $15.1 million with $9.7 million in cash available to fund future operations.
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 $5 million under the ATM program and an increase of 10% in the amount payable on the monthly installment payments if they are paid in cash and we have used the ATM program in the 12 months prior to the installment date, settling our contingent consideration and Senior Convertible Notes in common stock rather than cash as it comes due, to the extent that this is permissible, and implementing certain cost cutting strategies throughout the organization, while continuing to seek to grow our customer base and realize synergies as we continue to integrate our recent acquisitions. If the Company is unable to raise sufficient additional funds through the ATM Program and make it's convertible debt payments in stock, it will have to develop and implement a plan to extend payables, reduce expenditures (including by laying off employees and reducing or eliminating the funding of certain business units and initiatives of the Company), or scale back our business plan until sufficient additional capital is raised through other equity or debt offerings to support further operations and satisfaction of the debt, and the Company may be subject to additional risks, including retention of key employees. 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. If we are implementing a cost reduction plan during the fourth quarter 2020 thatrequired to raise additional capital as discussed above and if we expect to reduce recurring operating expenses between $2 million and $3 million annually. We anticipate our current cash willcannot timely raise additional funds, we may also be sufficientunable to meet the financial covenants of the Senior Convertible Notes, which could result in an event of default under those instruments which could negatively impact the Company. See the risks detailed in our Form 10-K under “Item 1A. Risk Factors – Risks Relating to our Convertible Debt”.
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 forand continue to meet the next twelve months. From timefinancial covenants of the Senior Convertible Notes. As noted above, we plan to time, we may pursue various strategic business opportunities. These opportunities may include investmentmeet those requirements in or ownershippart through the use of additional technology companies through direct investments, acquisitions, joint ventures and other arrangements.our ATM Facility, but there are no guarantees that the ATM Facility will permit us to raise sufficient cash to meet our ongoing requirements. We can provide no assurance that we will successfully identify such opportunities or that, if we identify and pursue any of these opportunities, any of them will be consummated. Consequently, we may raise additional equity or debt capital or enter into arrangements to secure necessary financing to fund the completion of such strategic business opportunities, although no assurance can be providedalso assume that we will be successfulable to pay our convertible debt in completingcommon stock rather than cash, however if at any point our stock price is below $2.00(which it is as of the date hereof), the debt holders may request the payments in cash rather than stock. These factors raise substantial doubt about the Company’s ability to continue as a futuregoing concern for one year from the issuance of the consolidated financial statements. If we are unable to raise sufficient capital raise.we may have to reduce operations which could significantly 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 saleaccompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of additional equity could result in additional dilutionassets and liabilities that might be necessary if the Company is unable to our existing stockholders, and financing arrangements may not be available to us, or may not be available in sufficient amounts or on acceptable terms. Our future operating performance will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.continue as a going concern.
AKERNA CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 2 —- Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Certain footnotes and other financial information normally required by 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 GAAP, have been condensed or omitted in accordance with suchSecurities and Exchange Commission rules and regulations.regulations for complete financial statements. In management’s opinion, these condensed consolidated financial statements have been prepared on the same basis as our annual consolidated financial statements and notes thereto and include all adjustments, consisting of normal recurring items, considered necessary for the fair presentation.presentation of the results of operations for the interim periods presented. The operating results for the three and nine months ended March 31, 20202022 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2020.December 31, 2022.
The condensed consolidated balance sheet as of and for the yearperiod ended June 30, 2019December 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 Prospectusquarterly report on Form 10-Q should be read in conjunction with our consolidated financial statements and notes thereto for the yearperiod ended June 30, 2019,December 31, 2021, which arewere included elsewhere in this Prospectus.our report on Form 10-K filed on March 31, 2022.
Principles of Consolidation
Our accompanying condensed consolidated financial statements include the accounts of Akerna, our wholly ownedwholly-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.
We evaluate our ownership interests, contractual rights and other interests in entities to determine if the entities are variable interest entities, or VIEs, when we have a variable interest in those entities. Generally, a VIE is a legal entity in which the equity investors do not have the characteristics of a controlling financial interest or the equity investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. These evaluations can be complex and involve judgment and the use of estimates and assumptions based on available historical information.
If we determine that we hold a variable interest in a VIE and we are the primary beneficiary of the VIE, we must consolidate the VIE in our financial statements. In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; and the similarity with and significance to our business activities and the business activities of the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of these VIE’s operations and general market conditions. We determine whether we are the primary beneficiary of a VIE upon our initial involvement with the VIE and reassess our status on an ongoing basis.
Use of Estimates
The preparation of our condensed 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. ActualOur 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 materially 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 $0.5$0.6 million as March 31, 2020 and $0.2$0.3 million as of June 30, 2019.March 31, 2022 and December 31, 2021, respectively.
AKERNA CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 2 — Summary of Significant Accounting Policies (cont.)
Concentrations of Credit Risk
We grant credit in the normal course of business to our customers.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, 2020, one2022 and 2021, 1 government customerclient accounted for 25%12% and 12% of total revenues. Atrevenues, respectively. As of March 31, 2020, the same2022, 1 government customer and one other government customerclient accounted for 24% and 16%19% of net accounts receivable respectively. During the three months ended Marchand as of December 31, 2019, one2021 2 government customerclients accounted for 33% of total revenues. At June 30, 2019, the same government customer and one other government customer accounted for 33% and 24%34% of net accounts receivable, respectively.receivable.
During the nine months ended March 31, 2020, one government customer accounted for 24% and one consulting customer accounted for 11% of total revenues. During the nine months ended March 31, 2019, two government customers accounted for 35% and 11% of total revenues, respectively.
Equity Method InvestmentsSegment Reporting
We make strategic investmentsThe Company operates its business as one operating segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, the Company’s Chief Executive Officer, in privately held equity securities of companies who provide technology solutions that are complementarydeciding how to ours. When we can exert significant influence over, but do not control, the investee’s operations, through voting rights or representation on the investee’s board of directors, we account for the investment using the equity method of accounting. We record our share in the investee’s earnings inallocate resources and assess performance. The Company’s chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated statement of operations. We assess our investment for other-than-temporary impairment when events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable and recognize an impairment loss to adjust the investment to its then current fair value.
Intangible Assets Acquired through Business Combinationslevel.
Intangible assets are amortized over their estimated useful lives. We evaluateIn the estimated remaining useful lifefollowing table, we disclose the combined gross balance of our intangiblefixed assets, when events or changes in circumstances indicate an adjustment to the remaining amortization may be needed. We similarly evaluate the recoverability of these assets upon events or changes in circumstances indicate a potential impairment. Recoverability of these assets is measured by comparing the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. If the undiscounted cash flows used in the test for recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value. There were no impairments of intangible assets during the nine months ended March 31, 2020 or 2019.
Goodwill Impairment Assessment
We evaluate and test the recoverability of our goodwill for impairment at least annually during the second quarter of each fiscal year or more often if circumstances indicate that goodwill may not be recoverable.
Business Combinations
We use our best estimates and assumptions to assign fair value to the tangiblecapitalized software, and intangible assets acquired and liabilities assumed at the acquisition date. Our estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we continue to collect information and reevaluate these estimates and assumptions quarterly and record any adjustments to our preliminary estimates to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in our condensed consolidated statement of operations.by geographical location (in thousands):
AKERNA CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 2 — Summary of Significant Accounting Policies (cont.)
In the event we acquire an entity with which we have a preexisting relationship, we will recognize a gain or loss to settle that relationship as of the acquisition date within the condensed consolidated statements of operations. In the event that we acquire an entity in which we previously held a noncontrolling interest, the difference between the fair value of the shares as of the date of the acquisition and the carrying value of our investment is recorded as a gain or loss in the condensed consolidated statement of operations.
Revenue Recognition
We derive our revenues primarily from the following sources: software revenues, which are primarily comprised of subscription fees from government and commercial customers accessing our enterprise cloud computing services and from customers paying for additional support beyond the standard support that is included in the basic subscription fees; and consulting services provided to operators interested in integrating our platform into their respective operations, such services include: assessing compliance requirements, monitoring systems and readiness; assisting with the application process; and evaluating the operator’s inspection readiness and business plan.
We commence revenue recognition when there is persuasive evidence of an arrangement, the service has been or is being provided to the customer, the collection of the fees is reasonably assured, and the amount of fees to be paid by the customer is fixed or determinable.
Software Revenue
Software revenue primarily consists of subscription revenue that is recognized ratably over the term of the contractual period, beginning when access to the applicable software is provided to the customer. We typically invoice customers at the beginning of the term, in multi-year, annual, quarterly, or monthly installments. When collection of fees occurs in advance of service delivery, revenue recognition is deferred until such services are delivered. Revenue for implementation fees is recognized ratably over the expected term of the agreement, including expected renewals.
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 Services Revenue
Consulting services revenue consists of contracts with fixed terms and fee structures based upon the volume and activity, or fixed price contracts for consulting and strategic services. When these services are not combined with subscription revenues as a single unit of account, as discussed below, these revenues are recognized as services are rendered and accepted by the customer.
Other Revenues
From time to time, we purchase equipment for resale to customers. Such equipment is generally drop-shipped to our customers. We recognize revenue as the products are delivered.
| | | As of
March 31,
2022 | | | As of
December 31,
2021 | |
| Long-lived assets: | | | | | | |
| United States | | $ | 33,793 | | | $ | 32,356 | |
| Canada | | | 5,590 | | | | 5,229 | |
| Total | | $ | 39,383 | | | $ | 37,585 | |
AKERNA CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 2 — Summary of Significant Accounting Policies (cont.)
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 datacenter operations, customer support and professional services personnel, payments to outside technology service providers, security services and other tools.
Deferred Revenue
Deferred revenue primarily consists of payments received in advance of revenue recognition from subscription services described above and is recognized as the revenue recognition criteria are met. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, size and new business within the year.
Deferred revenue that will be recognized during the succeeding twelve-month period is recorded as deferred revenue, which is a current liability on the accompany condensed consolidated balance sheets.
Supplemental Information Regarding Noncash Investing and Financing Activities
During the nine months ended March 31, 2020, we acquired 80.4% of the outstanding equity interest in solo sciences inc., or Solo, in exchange for Akerna common stock valued at $17.6 million, please refer to Note 3 for additional information about the transaction and a schedule of the assets acquired and liabilities assumed in conjunction with this transaction.
Reclassifications
Certain prior year financial statement amounts have been reclassified for consistency with the current year presentation.
Recent Accounting Pronouncements
ASU 2016-02
The Financial Accounting Standards Board, or the FASB, has issued guidance to revise accounting for revenue from contracts with customers, which supersedes the revenue recognition requirements and industry-specific guidance currently in effect for us. The new revenue standard requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The new revenue standard is effective for our fiscal 2020 annual reporting period and for interim periods thereafter. The new revenue standard allows for either full retrospective or modified retrospective adoption. We will adopt the new standard using the modified retrospective approach and anticipate that the timing of recognition of incremental costs of obtaining contracts will be the most significant change to our results of operations upon adoption.
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 12months.12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. The new standard is effective for us in our fiscal year beginning in 2021. We are evaluating the impact of adoption of thehave adopted this new standard on January 1, 2022 and due to the immaterial impact of applying this standard to our consolidated financial statements and do not anticipate a significantlimited 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. TheFollowing our change in fiscal year-end effective December 31, 2020, the new guidance is effective for us in our fiscal year beginning inon January 1, 2023. We are evaluating the impact of adoption of the new standard on our consolidated financial statements.
AKERNA CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)ASU 2020-01
Note 2 — Summary of Significant Accounting Policies (cont.)
The FASB has issued guidance related to the accounting for share-based compensation to nonemployees, which eliminates the separate accounting model for nonemployee share-based payment awards and generally requires companies to account for share-based payment transactions with nonemployees in the same way as share-based payment transactions with employees. Under the new guidance, nonemployee share-based payment transactions are measured at the grant-date fair value and are no longer remeasured at the then-current fair values at each reporting date until the share options have vested. The amended guidance is effective for our annual financial statements for the fiscal year beginning on July 1, 2020 and for interim periods beginning in the subsequent fiscal year. We do not anticipate the adoption of this guidance to have a significant effect on our results of operations.
The FASB has issued guidance regarding when internal-use software development costs should be capitalized or charged to expense. Depending upon on the nature of the costs and the project stage in which they are incurred. Capitalized development costs are subject to amortization and impairment guidance consistent with existing internal-use software development cost guidance. The guidance is applicable for us in our fiscal year beginning in 2023 with early adoption permitted, including adoption in an interim period. We are evaluating the impact of adoption of the new standard on our financial statements.
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 our fiscal year beginningEntity’s Own Equity, which simplifies the accounting for convertible instruments. This guidance eliminates certain models that require separate accounting for embedded conversion features, in 2022, with early adoption permitted. Adoptioncertain cases. Additionally, among other changes, the guidance eliminates certain of the standardconditions for equity classification for contracts in an entity’s own equity. The guidance also requires changesentities 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 made prospectively.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 of adoption of the new standardthis 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 — Business Combination– Revenue
On January 15, 2020, we closedIn 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 stock purchase agreement with substantially allstraight-line basis over the service term of the shareholders of Solo pursuantarrangement beginning on the date that our solution is made available to which we acquired all right, titlethe customer and interest in 80.40%ending at the expiration of the issuedsubscription 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.
We include service level commitments to customers warranting certain levels of uptime reliability and outstanding capital stockperformance 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 Solo, calculated onthe 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 fully diluted basis.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 investment, Solo became a controlled subsidiarycustomers, including employee compensation and we commenced consolidationrelated 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 Solo on January 15, 2020. Our preliminary estimatepayments received in advance of acquisition date fair valuerevenue 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 consideration transferred for Solo was $17.6 million. We are in the process of completing a valuation of contingent consideration,succeeding twelve-month period is recorded as deferred revenue, which is a complex financial instrument. Duecurrent 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.
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
March 31, | |
| | | 2022 | | | 2021 | |
| Enterprise | | $ | 3,035 | | | $ | — | |
| Non-enterprise | | | 3,916 | | | | 4,014 | |
| | | $ | 6,951 | | | $ | 4,014 | |
| | | For the Three Months Ended
March 31, | |
| | | 2022 | | | 2021 | |
| United States | | $ | 4,989 | | | $ | 2,659 | |
| Canada | | | 1,962 | | | | 1,355 | |
| | | $ | 6,951 | | | $ | 4,014 | |
Contracts with Multiple Performance Obligations
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 complexityperformance obligation has been sold separately. As the performance obligations are satisfied, revenue is recognized as discussed above in the product descriptions.
Transaction Price Allocated to Future Performance Obligation
ASC 606 provides certain practical expedients that limit the required disclosure of this financial instrument the completionaggregate amount of our valuationtransaction price that is still in process and therefore, weallocated to performance obligations that have not recorded an estimated liabilityyet 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, 2020. 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 $15.1 million as of March 31, 2022, of which $8.4 million is expected to be recognized as revenue over the next twelve months.
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 preliminary fair value of consideration recorded consisted offollowing table summarizes deferred revenue activity for the followingthree months ended March 31, 2022 (in thousands):
| | | Preliminary
Fair Value | |
| Common shares issued | | $ | 17,550 | |
| | | As of
December 31,
2021 | | | Net additions | | | Revenue recognized | | | As of
March 31,
2022 | |
| Deferred revenue | | $ | 4,126 | | | | 6,069 | | | | (6,339 | ) | | $ | 3,856 | |
We incurred $0.2Of the $7.0 million of transaction costsrevenue recognized in the three months ended March 31, 2022, $2.4 million was included in deferred revenue at December 31, 2021.
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
December 31,
2021 | | | Additions | | | Amortized costs (1) | | | As of
March 31,
2022 | |
| Deferred contract costs | | $ | 301 | | | | 112 | | | | (113 | ) | | $ | 300 | |
(1) Includes contract costs amortized to sales and marketing expense during the period.
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 reflectedbuilt on SAP Business One. We acquired Viridian in selling, general and administrative expenses in our condensed consolidated statement of operations.
The 1,950,000exchange for 1.0 million shares of our common stock were valued at $9 per share,$6.0 million. In addition to the closingstock consideration, the agreement provides for contingent consideration of up to $1.0 million, payable in additional common stock, if Viridian meets certain revenue criteria. We finalized our purchase price accounting during the three months ended March 31, 2022 and there were no changes to the previously disclosed purchase price accounting.
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 a share(1) $5,000,000 in cash, (2) $12,000,000 in stock, which was to be settled by issuing 3.6 million shares of our common stock, onand (3) contingent value rights to be issued pursuant to a rights indenture entitling the date of acquisition.
In additionholders thereof to the above consideration, we have agreedreceive, subject to pay contingent considerationcertain adjustments as set forth in the formAgreement, an aggregate of fees payableup to $8,000,000 in stock, in the legacy Solo shareholders equal toevent that 365 Cannabis achieves certain revenue targets as specified in the lesser of (i) $0.01 per solo*TAG™ and solo*CODE™ sold or (ii) 7% of net revenue. The fees will be paid annually until the earlier of: (1) our shares trading above $12 per shareAgreement. These rights are accounted for any consecutive 20 trading days in a 30-day period; (b) upon us no longer owning a majority stake in Solo; or (c) upon expiration of the patents related to solo*TAG™ and solo*CODE™, which is December 1, 2029. This fee representsas contingent consideration and are currently recorded at preliminary fair value which will be recorded at fair value asupdated upon finalization of purchase accounting.
We reached a working capital settlement agreement during the datethree months ended March 31, 2022 in the amount of acquisition.$1.5 million. As noted above due to the complexitya result of this valuation we have not included an estimated liabilitypost-close adjustment, the 365 Cannabis purchase price was reduced by $1.5 million during the first quarter of 2022. This was recorded as follows: 1) a receivable of $400,000 was booked in other current assets in our condensed consolidated balance sheet as of March 31, 20202022 and will recordwas received subsequent to March 31, 2022, 2) a reduction of $160,000 was made to the contingentworking capital accrual that was booked as of December 31, 2021, and 3) 279,762 shares worth $940,000 that were held in escrow were released back to Akerna to cover the remainder of the working capital adjustment. The updated consideration liability when we have completedtransferred is reflected in the valuation. Contingent consideration will be recorded at fair value with changes in fair value being recognized in earnings at each reporting period.table below (in thousands):
| | | Preliminary
Fair Value | |
| Shares issued | | $ | 11,060 | |
| Cash | | | 4,982 | |
| Contingent consideration | | | 6,300 | |
| Total preliminary fair value of consideration transferred | | $ | 22,342 | |
AKERNA CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 3 — Business Combination (cont.)
We have an option to acquire the noncontrolling interests in Solo during the 12months following the close for either cash or shares. Beginning with the expiration of our option, the noncontrolling interests in Solo have a 3-month option to acquire between 40% and 55% of Solo back from us for cash. The terms of this option will result in our accounting for the instrument as a derivative. Due to the complexity of the option we have not yet completed our valuation of the option and will record the option at fair value as of the date of acquisition when the valuation is complete.
The following table summarizesopening 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
Fair Value | |
| Cash | | $ | 101 | |
| Accounts receivable | | | 13 | |
| Prepaid expenses | | | 22 | |
| Intangible assets and goodwill | | | 23,138 | |
| Furniture, fixtures and equipment | | | 15 | |
| Accounts payable and accrued expenses | | | (876 | ) |
| Fair value of noncontrolling interests | | | (4,863 | ) |
| Net assets acquired | | $ | 17,550 | |
| | | Preliminary
Fair Value | |
| Cash | | $ | 527 | |
| Accounts receivable | | | 486 | |
| Prepaid expenses and other current asset | | | 261 | |
| Fixed Assets | | | 93 | |
| Non-compete agreement | | | 80 | |
| Acquired technology | | | 1,040 | |
| Customer relationships | | | 13,810 | |
| Acquired trade name | | | 270 | |
| Goodwill | | | 12,543 | |
| Accounts payable and accrued expenses | | | (826 | ) |
| Deferred tax liabilities | | | (2,642 | ) |
| Deferred revenue | | | (3,300 | ) |
| Net assets acquired | | $ | 22,342 | |
The excess of purchase consideration over the preliminary fair value of assets acquired and liabilities assumed will bewas 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 preliminary based on management’s estimates and assumptions and will change as additional information is received.assumptions. We expect to finalize the valuation as soon as practicable, but notno later than one year from the acquisition date.
The amounts of Solo’s revenue and net loss included in our condensed consolidated statement of operations from the acquisition date of January 15, 2020 to March 31, 2020 were $9,600 and $516,200, respectively.Pro Forma Financial Information
The following unaudited pro forma financial information summarizesconsolidated operating results give effect to the combined results of operations for AkernaViridian and Solo,365 Cannabis acquisitions, as though the companies were combinedif they had been completed as of the beginning of our fiscal 2019January 1, 2020 (in thousands).:
| | | Three Months Ended
March 31, | | | Nine Months Ended
March 31, | |
| | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| Revenues | | $ | 3,071 | | | $ | 2,328 | | | $ | 9,570 | | | $ | 7,202 | |
| Net loss | | | (5,521 | ) | | | (2,763 | ) | | | (14,660 | ) | | | (7,460 | ) |
| | | Three Months
Ended
March 31, | |
| | | 2021 | |
| Revenue | | $ | 7,407 | |
| Net loss | | $ | (6,574 | ) |
The pro forma financial information for all periodsthe period presented above has been calculated after adjusting the results of SoloViridian 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 Company’s fiscal year 2020. As notedperiods indicated above the allocation is preliminary and changes to the value of the contingent consideration and finalization of our valuation could result in changes to the amount of amortization expense from acquired intangible assets included in the pro forma financial information presented above. The Akerna historical condensed consolidated financial statements have been adjusted in the pro forma combined financial statements to give effect to pro forma events that are directly attributable to the business combination and factually supportable.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 Company’s fiscal 2020.years indicated above.
AKERNA CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)Special Voting Preferred Stock and Exchangeable Shares
Note 4 — Loss PerIn 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.
Basic net lossThe special voting preferred stock has a par value of $0.0001 per share is calculated by dividing net loss attributableand a preference in liquidation of $1.00. The special voting preferred stock entitles the holder to an aggregate number of votes equal to the number of the exchangeable shares issued and outstanding from time to time and which we do not own. The holder of the special voting preferred stock and the holders of shares of Akerna stockholders bycommon stock will both together as a single class on all matters submitted to a vote of our shareholders. At such time as the weighted-averagespecial voting preferred stock has no votes attached to it, the share shall be automatically cancelled. The exchangeable shares do not have a par value.
During the three months ended March 31, 2022, several Ample shareholders exchanged a total of 2,434 exchangeable shares with a value of $18,620 for the same number of shares of Akerna common stock outstanding. Diluted netstock. The exchange was accounted for as an equity transaction and we did not recognize a gain or loss per common share is calculated by giving effect to all potentially dilutive common stock, including warrants, restricted stock awards and restricted stock units. The dilutive effect of outstanding awards is reflected in diluted earnings per share by application of the treasury stock method and excludes potential common stock 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. There were no potentially outstanding shares ason this transaction. As of March 31, 2019. The table below details potentially outstanding2022, there were a total of 306,852 exchangeable shares on a fully diluted basis as of March 31, 2020 that were not included in the calculation of diluted earnings per shareissued and the weighted average amounts of potentially outstanding shares that would have been dilutive had we reported net income for the three and nine months ended March 31, 2020:outstanding.
| | | March 31, 2020 | |
| | | | | | Weighted Average | |
| | | Fully Diluted | | | Three Months Ended | | | Nine Months Ended | |
| Warrants | | | 5,813,804 | | | | 5,813,804 | | | | 5,840,644 | |
| Restricted Stock Units | | | 325,121 | | | | 22,620 | | | | 12,924 | |
| Restricted Stock Awards | | | 75,654 | | | | — | | | | — | |
| Total | | | 6,214,579 | | | | 5,836,424 | | | | 5,853,568 | |
Note 5 — Stockholders’ Equity and Stock-Based Compensation
A summary of our unvested Restricted Shares and Restricted Stock Units (“RSUs”) activity for the nine months ended March 31, 2020 is presented in the table below:
| | | Restricted Shares | | | Restricted
Stock Units | | | Total | | | Weighted Average
Grant Date
Fair Value | |
| Nonvested at July 1, 2019 | | | 215,063 | | | | — | | | | 215,063 | | | $ | 11.99 | |
| Granted | | | — | | | | 359,554 | | | | 359,554 | | | | 7.64 | |
| Vested | | | (86,654 | ) | | | (10,223 | ) | | | (96,877 | ) | | | 11.40 | |
| Forfeited | | | (52,755 | ) | | | (24,210 | ) | | | (76,965 | ) | | | 10.04 | |
| Nonvested at March 31, 2020 | | | 75,654 | | | | 325,121 | | | | 400,775 | | | $ | 8.61 | |
For the three and nine months ended March 31, 2020, stock-based compensation expense related to the ratable amortization of the unvested Restricted Shares and RSUs was $0.3 million and $0.8 million, respectively, and $3.1 million of total unrecognized costs related to Restricted Shares and RSUs will be ratably recognized over an estimated weighted average remaining vesting period of 3.2 years.- Balance Sheet Disclosures
F-14Prepaid expenses and other current assets consisted of the following:
| | | As of
March 31, | | | As of
December 31, | |
| | | 2022 | | | 2021 | |
| Software and technology | | $ | 723,513 | | | $ | 687,740 | |
| Professional services, dues and subscriptions | | | 284,333 | | | | 546,126 | |
| Insurance | | | 143,355 | | | | 264,097 | |
| Deferred contract costs | | | 254,771 | | | | 260,899 | |
| Unbilled receivables | | | 547,675 | | | | 506,984 | |
| Other | | | 538,442 | | | | 117,918 | |
| Total prepaid expenses and other current assets | | $ | 2,492,089 | | | $ | 2,383,764 | |
AKERNA CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)Accounts payable, accrued expenses, and other accrued liabilities consisted of the following:
| | | As of
March 31, | | | As of
December 31, | |
| | | 2022 | | | 2021 | |
| Accounts payable | | $ | 3,065,862 | | | $ | 1,943,457 | |
| Professional fees | | | 230,127 | | | | 319,590 | |
| Sales taxes | | | 422,580 | | | | 360,361 | |
| Compensation | | | 1,217,392 | | | | 1,123,467 | |
| Contractors | | | 1,158,447 | | | | 1,288,730 | |
| Settlements and legal | | | 1,189,561 | | | | 681,045 | |
| Other | | | 179,372 | | | | 346,870 | |
| Total accounts payable, accrued expenses, and other accrued liabilities | | $ | 7,463,341 | | | $ | 6,063,520 | |
Note 5 — Stockholders’ Equity and Stock-Based Compensation (cont.)6- Fair Value
WarrantsFair Value Option Election – Convertible Notes
A summaryWe issued convertible notes with a principal amount of $17.0 million at a purchase price of $15.0 million (the "2020 Notes") on June 9, 2020. The 2020 Notes were paid in full on October 5, 2021 and were replaced by convertible notes of $20.0 million at a purchase price of $18.0 million (the "2021 Notes") on the same date. We elected to account for both the 2020 Notes and the 2021 Notes using the fair value option. Under the fair value option, the financial liability is initially measured at its issue-date estimated fair value and subsequently remeasured at its estimated fair value on a recurring basis at each reporting period date. The change in estimated fair value resulting from changes in instrument-specific credit risk is recorded in other comprehensive income as a component of equity. The remaining estimated fair value adjustment is presented as a single line item within other (expense) income in our condensed consolidated statement of operations under the caption, change in fair value of convertible notes.
For the 2020 Note and 2021 Notes, which are measured at fair value categorized within Level 3 of the status of outstanding warrants to purchase common stock at March 31, 2020 and the changes during the nine months then ended, is presented infair value hierarchy, the following table:
| | | Shares
Issuable
upon
Exercise of
Warrants | | | Weighted
Average
Exercise
Price | | | Weighted
Average
Remaining
Life
(in years) | |
| Outstanding at July 1, 2019 | | | 6,183,115 | | | $ | 11.50 | | | | 3.72 | |
| Issued | | | — | | | | — | | | | — | |
| Exercised | | | (369,311 | ) | | | 11.50 | | | | — | |
| Expired/cancelled | | | — | | | | — | | | | — | |
| Outstanding at March 31, 2020 | | | 5,813,804 | | | $ | 11.50 | | | | 2.89 | |
There was no aggregate intrinsic value foris a reconciliation of the warrants outstanding as of March 31, 2020.
Note 6 — Commitments and Contingencies
Operating Leases
We lease office facilities under non-cancelable operating leases. Rent expensefair values for the three months ended March 31, 20202022 and 2019, was $67,000 and $36,000, respectively. Rent expense for the ninethree months ended March 31, 2020 and 2019, was $143,000 and $115,000, respectively.2021:
| | | Three Months Ended
March 31, | |
| | | 2022 | | | 2021 | |
| Fair value balance at beginning of period | | $ | 17,305,000 | | | $ | 13,398,000 | |
| Payments on Convertible Notes | | | (3,300,000 | ) | | | (7,697,727 | ) |
| Change in fair value reported in the statements of operations | | | 1,433,000 | | | | 1,991,272 | |
| Change in fair value reported in other comprehensive loss | | | (101,000 | ) | | | 13,000 | |
| Fair value balance at end of period | | $ | 15,337,000 | | | $ | 7,704,545 | |
On September 30, 2019, we entered into an agreement, or the Office Lease, to lease our new headquarters located at 1630 Welton Street, Denver, Colorado, 80202.
The Office Lease commenced on February 24, 2020 and expires January 31, 2022. We have paid a security deposit equal to one month’s rent, which is recorded in intangibles and other assets on our condensed consolidated balance sheet. The monthly payments of $41,925 are subject to a 4% annual increase at each anniversaryestimated fair value of the commencement date duringConvertible 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 termmarket, and thus represents a Level 3 measurement as defined by GAAP. The unobservable inputs utilized for measuring the fair value of the Office Lease. Rent expense related to this lease is recognized on a straight-line basis overConvertible Notes reflect our assumptions about the noncancelable termassumptions that market participants would use in valuing the Convertible Notes as of the lease.issuance date and subsequent reporting period.
Future minimum lease payments to be made pursuantWe estimated the fair value by using the following key inputs to the Office Lease and other leases are $124,000 for the remainder of the year ended June 30, 2020; $530,000 for the year ended June 30, 2021; and $316,000 for the year ended June 30, 2022.Monte Carlo Simulation Model:
| Fair Value Assumptions - Convertible Notes | | March 31,
2022 | | | December 31,
2021 | |
| Face value principal payable | | $ | 16,700,000 | | | $ | 20,000,000 | |
| Original conversion price | | $ | 4.05 | | | $ | 4.05 | |
| Value of Common Stock | | $ | 1.14 | | | $ | 1.75 | |
| Expected term (years) | | | 2.5 | | | | 2.8 | |
| Volatility | | | 79 | % | | | 75 | % |
| Market yield | | | 40.2 | % | | | 37.1 | % |
| Risk free rate | | | 2.4 | % | | | 1 | % |
| Issue date | | | October 5, 2021 | | | | October 5, 2021 | |
| Maturity date | | | October 5, 2024 | | | | October 5, 2024 | |
Compensation Agreement with Jessica BillingsleyFair Value Measurement – Warrants
On November 11,In connection with MTech Acquisition Corp.'s ("MTech") initial public offering, MTech sold 5,750,000 units at a purchase price of $10.00 per unit, inclusive of 750,000 units sold to the underwriters on February 8, 2018, upon the underwriters’ election to fully exercise their over-allotment option. Each unit consisted of 1 share of MTech’s common stock and 1 warrant of MTech (“MTech Public Warrant”). Each MTech Public Warrant entitled the holder to purchase 1 share of MTech’s common stock at an exercise price of $11.50. Concurrently with MTech’s initial public offering, MTech sold 243,750 units at a purchase price of $10.00 per unit on a private offering basis. Each unit consisted of 1 share of MTech’s common stock and 1 warrant of MTech (“MTech Private Warrant”). Each MTech Private Warrant entitled the holder to purchase 1 share of MTech’s common stock at an exercise price of $11.50.
Upon completion of the mergers between MTech and MJF on June 17, 2019, as contemplated by the Compensation CommitteeMerger 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 1 share of Akerna’s common stock with identical terms and conditions as the MTech Public Warrants (“Public Warrant”) and the MTech Private Warrants (“Private Warrant”, collectively with the Public Warrants, “Warrants”) In connection with the completion of the Mergers, we also issued 189,365 common stock purchase warrants upon the cashless exercise of a unit purchase option, which warrants have identical terms to the Public Warrants and are included in references to Public Warrants and Warrants herein.
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 | | $ | 63,178 | | | $ | 311,376 | |
| Change in fair value reported in the statements of operations | | | (18,051 | ) | | | 175,996 | |
| Fair value balance at end of period | | $ | 45,127 | | | $ | 487,372 | |
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 Boardestimates regarding the assumptions that market participants would use in valuing the Warrants as of Directors establishedthe 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 upon which Ms. Billingsley, our Chief Executive Officer, may earn a bonusof 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 fiscal year ended June 30, 2020. The Compensation Committee determined that Ms. Billingsley will be eligible for a bonus derived fromfair value hierarchy.
We estimated the same targets with respect to her bonuses in fiscal year 2019, which is determined based upon our performance relative tofair value by using the following four budget components: platform recurring revenue; government recurring revenue; services revenue; and net income. However, during fiscal year 2020 any bonus resulting from outperformance relative to budget may be paid in cash, stock, or a combination thereof at the sole discretion of the Compensation Committee.
In addition, the Compensation Committee determined that during fiscal year 2020, Ms. Billingsley is eligible to earn a performance based incentive of $250,000, payable in stock, whereby (a) 50% of the bonus is automatically granted if our stock price/shareholder return increases by 15% (measuring point starts at $10 per share) with respect to the consecutive 20-day volume weighted average price prior to and including June 30, 2020, and (b) the remaining 50% of the bonus may be paid at the sole discretion of the Compensation Committee.key inputs:
| Fair Value Assumptions - Private Warrants | | March 31,
2022 | | | December 31,
2021 | |
| Number of Private Warrants | | | 225,635 | | | | 225,635 | |
| Original conversion price | | $ | 11.50 | | | $ | 11.50 | |
| Value of Common Stock | | $ | 1.14 | | | $ | 1.75 | |
| Expected term (years) | | | 2.21 | | | | 2.46 | |
| Volatility | | | 114.4 | % | | | 93.9 | % |
| Risk free rate | | | 2.3 | % | | | 0.8 | % |
F-15
AKERNA CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 —7 - Commitments and Contingencies(cont.)
Letter-of-Credit
As of March 31, 2020, we had a standby letter-of-credit with a bank in the amount of $500,000, which was classified as restricted cash on the balance sheets. The beneficiary of the letter-of-credit is an insurance company. The letter-of-credit will expire on June 22, 2020.
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 $1.07 million for unpaid invoices pursuant to a Master Services Agreement dated February 5, 2018 by and between TechMagic and Solo. The invoices set forth services that TechMagic USA LLC purports to have provided to Solo regarding development of mobile software applications for MJF and Solo between March and November 2020 totaling approximately $787,000. The suit seeks continued fees under the Master Services Agreement through the end of January 2021. Akerna provided a notice of termination of the Master Services Agreement on November 23, 2020 and the parties dispute the effective date of the termination. Solo disputes the validity of the invoices, in whole or in part, and intends to defend the suit vigorously. Mr. Ashesh Shah, formerly the president of Solo and currently the holder of less than 5% of our issued and outstanding shares of common stock is, to our knowledge, the founder and one of the principal managers of TechMagic USA LLC. As of December 31, 2021 and March 31, 2022, we recognized a loss contingency of $0.5 million.
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 $2 million for services allegedly provided pursuant to a Subcontractor Agreement between MJ Freeway and TreCom. MJ Freeway provided a notice of termination of the operative Subcontractor Agreement on August 4, 2020. MJ Freeway disputes the validity of TreCom’s invoices and the enforceability of the alleged agreement that TreCom submitted to the court. Akerna filed counterclaims against TreCom for breach of contract, a declaratory judgment, commercial disparagement, and defamation. TreCom failed to return Akerna’s intellectual property and issued numerous disparaging statements to one of Akerna’s clients. TreCom subsequently filed a motion to dismiss these counterclaims, which was denied by the court. Akerna intends to vigorously defend against TreCom’s claims, and pursue its own claims. As of December 31, 2021 and March 31, 2022, we recognized a loss contingency of $0.2 million.
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, 2020,2022, 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.
Note 7 — Equity Method Investment and Related Party Transaction
Investment in and License Agreement with Zol Solutions, Inc.Operating Leases
On October 7, 2019,During the three months ended March 31, 2022, we participatedbegan negotiations to terminate the 365 Cannabis office lease in an offeringLas Vegas, Nevada. We booked a liability and lease termination expense of preferred$564,234 which is management’s best estimate of the costs to exit our existing lease. The lease termination expense is included within the General and Administrative expense line item on the condensed consolidated statement of operations.
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 Zol Solutions, Inc. (“ZolTrain”) along with other investorsstock has the right to participate in which we purchased 203,000sharesdividends should a dividend be declared payable to holders of Series Seed Preferred Stock (the “ZolTrain Preferred”)Akerna common stock. These participating securities were the Exchangeable Shares issued by our wholly owned subsidiary in exchange for a purchase price of $250,000, which represents a noncontrolling interest in ZolTrain.
Ample. The ZolTrain Preferredtwo-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 convertible intocomputed 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 ZolTrain at a conversion rate of $1.232 per share atcurrent period earnings that the optionparticipating securities would have been entitled to receive pursuant to their dividend rights had all of the holder and contains certain anti-dilution protection inperiod's earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the event of certain future issuances of securities by ZolTrain. We are entitled to vote the number of common shares in which the ZolTrain Preferred is convertible into at any meetingholders of the ZolTrain stockholders.
The ZolTrain Preferred also provides us with rights of first refusal with respectExchangeable Shares have no obligation to newly issued securities of ZolTrain as well as issued and outstanding securities of ZolTrain that are offered to third parties. In connection with the agreement, Nina Simosko, our Chief Revenue Officer, was appointed as one of three members of ZolTrain’s board of directors. Ms. Simosko may only be removed from the ZolTrain board by us and we retain the right to fill the vacancy.
We have determined that ZolTrain is a VIE for accounting purposes. However, we are not required to consolidate ZolTrain in our financial statements because we are not ZolTrain’s primary beneficiary. As of March 31, 2020, our maximum exposure to loss was equal to the carrying value of our initial investment of $250,000. We have concluded that the ZolTrain Preferred is in substance common stock because the liquidation preference provided is not substantive, the equity method of accounting is applicable to in substance common stock. As a result of our representation on the board of directors, we determined that we can exert significant influence over the day to day operations of ZolTrain therefore; we account for this investment using the equity method of accounting, which requires we recognize our share of the ZolTrain operations in our results of operations.
Subsequent to our investment, we entered into a nonexclusive license/reseller agreement with ZolTrain, effective October 24, 2019, to provide ZolTrain’s online cannabis training platform as a co-branded integration option into our MJ Platform and Leaf Data Systems, which is a related party transaction. ZolTrain will share subscription-based revenue generated from our customers with us. The amount of the share of revenue for each of us and ZolTrain will be depend on both (a) the number of training modules accessed by a customer and (b) which party created the accessed content. In addition to the revenue sharing arrangement, the license/reseller agreement provides us with the right to receive additional consideration from ZolTrain in the form of an equity earnout if certain revenue milestones are achieved during 2020, 2021, and 2022. Our ability to recognize revenue from the additional earnout consideration in the future will mainly depend on whether it becomes probable that such revenue milestones will be achieved. We have not recognized any revenue subject to this license agreement for the three and nine months ended March 31, 2020.fund losses.
AKERNA CORP.
NotesDiluted net loss per common share is calculated under the two-class method by giving effect to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 — Subsequent Events
Business Combinations
On April 10, 2020, we acquired 100% of the outstandingall potentially dilutive common stock, of Trellis Solutions, Inc., or Trellis, a cannabis cultivation managementincluding warrants, restricted stock awards, restricted stock units, and compliance software company. In exchange for the stock of Trellis, we issued 349,650 shares of common stock valued at $7.24 per share, the closing price of a shareissuable upon conversion of our common stock onConvertible Notes. We analyzed the datepotential dilutive effect of acquisition, or $2.5 million. Additionally, Trellis’ selling shareholders are entitled to contingent consideration based on annualized net new recurring revenue, as definedany outstanding convertible securities under the "if-converted" method, in the agreement, generated in September 2020, to be paid in Akerna stock, if any. We are in the process of valuing the contingent consideration, as well as the fair value of acquired assets and liabilities assumed.
On July 7, 2020, we acquired 100% ofwhich it is assumed that the outstanding stock of Ample Organics, Inc., or Ample, a technology provider for cannabis businesses with a focus on providing seed-to-sale solutions to Canadian licensed producers and cannabis producers outside of Canada operating in accordance with applicable laws, to ensure cannabis cultivation operations remain compliant with the applicable regulator landscape and facilitate compliance reporting. In exchange for the stock of Ample, our wholly owned subsidiary issued 3,294,574 redeemable preferred shares, or Exchangeable Shares valued at $25,203,491, or $7.65 per share, the closing price of a share of Akerna Common Stock on July 7, 2020. Each Exchangeable Share is exchangeable on a 1:1 basis for a share of Akerna common stock. In addition to the Exchangeable Shares, each Ample shareholder received on Contingent Value Right, or CVR, which entitles the holder to receive a portion of contingent consideration if Ample achieves certain revenue targets during the twelve-month period ending on July 7, 2021. We are in the process of valuing the contingent consideration, as well as the fair value of acquired assets and liabilities assumed.
Because these acquisitions occurred subsequent to March 31, 2020, no results of operations of Trellis or Ample are included in our condensed consolidated statements of operations for the three and nine months ended March 31, 2020. It is currently impractical to disclose a preliminary purchase price allocation, value of contingent consideration or pro forma financial information combining both companies as of the earliest period presented in these financial statements as Trellis is currently in the process of closing their books and records.
On July 31, 2020, we exercised our purchase option to acquire the remaining 19.6% interest in Solo in exchange for 800,000 shares of Akerna common stock. This transaction will be accounted for as a transaction between equity holders.
Paycheck Protection Program Loan
In April 2020, we were granted a loan, or the PPP Loan, from a lender in the aggregate amount of $2,204,600 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. The PPP Loan is evidenced by a promissory note dated April21, 2020, the Note. The PPP Loan bears interest at a fixed rate of 1.0% per annum, with the first six months of interest deferred from the date of the Note, has an initial term of two years from the date of the Note, and is unsecured and guaranteed by the Small Business Administration. We may prepay up to 20% of the PPP Loan amount at any time prior to maturity with no prepayment penalties. We must pay all accrued interest if we prepay greater than 20% of the PPP Loan amount and the PPP Loan has been sold on the secondary market. The Note provides for customary events of default. The PPP Loan may be accelerated upon the occurrence of an event of default. The PPP Loan may be forgiven in accordance with the terms of the CARES Act. Principal amount of the PPP Loan not forgiven and accrued interest are to be repaid in 18 equal monthly installments beginning seven months from the date of the disbursement of the PPP Loan.
We applied for the PPP Loan and received the proceeds from the PPP Loan prior to the issuance of the recent guidance from the United States Treasury Department and U.S. Small Business Administration on April23, 2020. We are currently evaluating the impact this guidance has on Akerna and the PPP Loan.
Convertible Notes Transaction
On June 8, 2020, we entered into a Securities Purchase Agreement, or SPA, with two institutional investors, or the Holders, to sell a new series of senior secured convertible notes, or the Convertible Notes, of Akerna in a private placement to the Holders, in the aggregate principal amount of $17,000,000 having an aggregate original issue discount of 12%, and ranking senior to all outstanding and future indebtedness of Akerna.
The Convertible Notes were sold on June 9, 2020 with an original issue discount pursuant to which the Holders paid $880 per each $1,000 in principal amount of the Convertible Notes. The Convertible Notes do not bear interest except upon the occurrence of an event of default, in which event the applicable rate will be 15.00% per annum.
AKERNA CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 — Subsequent Events (cont.)
The Convertible Notes mature on June 1, 2023, are payable in installments beginning on October 1, 2020, and may not be prepaid. The Convertible Notes are convertible at any time, at the election of the Holders and subjectconverted to certain limitations, into 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 | | | 306,852 | | | | 1,647,287 | |
| Shares of common stock issuable upon conversion of Convertible Notes | | | 12,370,370 | | | | 612,609 | |
| Warrants | | | 5,813,804 | | | | 5,813,804 | |
| Unvested restricted stock units | | | 627,840 | | | | 664,258 | |
| Unvested restricted stock awards | | | 6,679 | | | | 33,062 | |
| Total | | | 19,125,545 | | | | 8,771,020 | |
Note 9 - Goodwill and Intangible Assets, net
Impairment
Based on our qualitative assessment of goodwill, we determined it was necessary to perform a quantitative valuation of goodwill as of March 31, 2022. Unchanged from the year ended December 31, 2021, we determined there were two reporting units: the enterprise reporting unit which is comprised of the enterprise software offerings and the non-enterprise reporting unit which is comprised of the non-enterprise software offerings. The valuation of our goodwill was determined with the assistance of an independent valuation firm using the income approach (discounted cash flows method) and the market approach (guideline public company method). Our significant assumptions in these analyses include, but are not limited to, future cash flow projections, the weighted average cost of capital, the discount rate, the implied control premium, the terminal growth rate, and the tax rate. The Company’s estimates of future cash flows are based on current regulatory and economic climates, recent operating results, and planned business strategies. These estimates could be negatively affected by changes in federal, state, or local regulations or economic downturns. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from the Company’s estimates. If the Company’s ongoing estimates of future cash flows are not met, the Company may have to record additional impairment charges in future periods. The Company also uses the Guideline Public Company Method, a form of the market approach (utilizing Level 3 unobservable inputs), which is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. As such, we believe the current assumptions and estimates utilized are both reasonable and appropriate.
Enterprise Reporting Unit
For the three months ended March 31, 2022, no impairment to goodwill was recorded for our enterprise reporting unit as the fair value exceeded the carrying value as of March 31, 2022. To perform our analysis, we applied a 50% weighting to the market approach and 50% weighted to the income approach.
Non-Enterprise Reporting Unit
For the three months ended March 31, 2022, primarily due to a continued decline in market valuation from December 31, 2021, we recorded an impairment expense of $15.5 million related to our non-enterprise reporting unit. To perform our analysis, we applied a 25% weighting to the income approach and a 75% weighting to the market approach.
Finite-lived Intangible Assets, Net
We performed a two step impairment test for the asset groups that had indicators of impairment during the three months ended March 31, 2022 under ASC 360 and as a result of this analysis we did not identify any impairment.
Note 10- Income Taxes
The Company's effective tax rate was 0.45% and 0.00% for the three months ended March 31, 2022 and 2021, respectively. Differences between the statutory rate and the Company's effective tax rate resulted from changes in valuation allowance and permanent differences for tax purposes in the treatment of certain nondeductible expenses. The Company's effective tax rate is impacted by activity related to deferred tax liabilities, resulting primarily from the acquisition of 365 Cannabis, which cannot be considered as a source of future taxable income available to utilize recorded deferred tax assets based on the Company's scheduling and the 80% limit on the utilization of net operating loss carry forwards under current US tax law.
Note 18 – Subsequent Events
On June 28, 2022, the Company and the holders of its Senior Convertible Notes agreed, subject to release of signatures from escrow conditioned solely on the pricing of the Company’s unit offering, to an amendment and waiver agreement pursuant to which the Company and the holders would amend the Securities Purchase Agreement under which the holders purchased the Senior Convertible Notes to add covenants of the Company such that (a) the Company will be subject to a daily cash test beginning on July 1, 2022 of having an available cash balance of at least $7 million, which amount shall be reduced by $1 million on each of the dates at which the aggregate principal due upon the Convertible Notes is equal to or less than $14 million and $11 million, subject in all cases to a minimum of $5 million, and (b) the Company will establish and maintain bank accounts for each holder and deposit in such accounts an aggregate amount of $7 million with such amount to be released from the accounts only upon the written consent of such holder, provided that $1 million will automatically release from the accounts upon the occurrence of each of the dates at which the aggregate principal interest, ifdue upon the Convertible Notes is equal to or less than $14 million and $11 million, so long as no Equity Condition Failure then exists. Further the holders of the Convertible Notes would waive provisions of the Senior Convertible Notes such that (i) no amortization payments are due and payable by the Company for any payments previously required to be made by the Company from July 1, 2022 through January 1, 2023, (ii) the holders of the Convertible Notes will not accelerate any previously deferred installment amounts under the Convertible Notes until January 1, 2023 and unpaid late charges, if any, divided by a conversion price of $11.50.
Under(iii) the terms of the Convertible Notes which would provide for reset of the conversion price of the Convertible Notes are convertible at any time, in whole or in part, at the optionas a result of the holdersissuance of securities under this prospectus and instead agree to a reset of the conversion price equal to a per share price of 135% of the pr unit offering price in this offering.
On May 27, 2022, the Company filed an amendment to its Amended and Restated Certificate of Incorporation to amend Article 4 thereof intoto increase the number of authorized shares of common stock, at a rate equalpar value $0.001, from 75,000,000 shares to 150,000,000 shares.
On May 25, 2022, the stockholders of the Company approved an amendment to the amountCompany’s Amended and Restated 2019 Long Term Incentive Plan (the “Incentive Plan”) to increase the number of principal, interest (if any) and unpaid late charges (if any), dividedshares available under the Incentive Plan by 2,934,962 shares of common stock of the Company.
On May 24, 2022, the Company received a conversionletter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of $11.50.the Company’s common stock, par value $0.0001 per share (“Common Stock”), for the last 30 consecutive business days, the Company is not currently in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Notice”).
In connectionThe Notice has no immediate effect on the continued listing status of the Company’s Common Stock on The Nasdaq Capital Market, and, therefore, the Company’s listing remains fully effective.
The Company is provided a compliance period of 180 calendar days from the date of the Notice, or until November 21, 2022, to regain compliance with the occurrence of an event of default,minimum closing bid requirement, pursuant to Nasdaq Listing Rule 5810(c)(3)(A). If at any time before November 21, 2022, the Holdersclosing bid price of the Convertible NotesCompany’s Common Stock closes at or above $1.00 per share for a minimum of 10 consecutive business days, subject to Nasdaq’s discretion to extend this period pursuant to Nasdaq Listing Rule 5810(c)(3)(G) to 20 consecutive business days, Nasdaq will provide written notification that the Company has achieved compliance with the minimum bid price requirement, and the matter would be entitledresolved. If the Company does not regain compliance during the compliance period ending November 21, 2022, then Nasdaq may grant the Company a second 180 calendar day period to convertregain compliance, provided the Company meets the continued listing requirement for market value of publicly-held shares and all other initial listing standards for The Nasdaq Capital Market, other than the minimum closing bid price requirement, and notifies Nasdaq of its intent to cure the deficiency.
On May 23, 2022, we entered into an amending agreement (the “Amendment”) to the Amended and Restated Stock Purchase Agreement, dated as of October 1, 2021 (the “Original Agreement”), by and among the Company, The Nav People, Inc., a Delaware corporation d/b/a “365 Cannabis”) (the “365 Cannabis”) and Matthew Dredge, Ian Humphries, Jeff Kiehn, David Walker and Quartermain Investment Holdings Ltd. (collectively, the “Sellers”).
Pursuant to the Amendment, Section 2.04(a) of the Original Agreement was amended to provide that the Sellers could elect to have the potential earn-out payment described therein paid in cash or in shares of the Company or in any combination thereof. The Original Agreement previously had provided that the Company could elect whether to pay the earn-out payment in cash or in shares of the Company. Under the Amendment, if a Seller elects to have any portion of the Convertible Notes at an alternate conversion price equalearn-out payment paid in cash such amount payable will be reduced by 25%. Further, Section 2.04(b) of the Original Agreement was amendment to reflect the administrative handling of the earn-out payment to the lower of (i) the conversion price thenSellers in effect,cash or (ii) 80%shares of the lower of (x)Company.
Pursuant to the volume weighted average price, or VWAP,Amendment, Section 2.06 of the common stock asOriginal Agreement was amended to require that $100,000 the Second Post-Closing Payment (as defined in the Original Agreement) will be made at the end of June 2022 on the tradingsame day immediately precedingon which the applicable date of determination, or (y) the quotient of (A) the sum of the VWAP of the common stock forBuyer’s end-of-month payroll is run and on each of the two trading days withnext four months thereafter, in each such month on the lowest VWAP of the common stock during the ten (10) consecutive tradingsame day period ending and including the trading day immediately prior to the applicable date of determination, divided by (B) two, but not less than $1.92.
The SPA contains customary representations and warranties of the Holders and the Company regarding the purchase and offer and sale of the Notes.
Note 9 — Revisions of Previously Issued Financial Statements
During the course of preparing the Quarterly Report on Form 10-Q for the three months ended September30, 2019, we identified certain previously duplicated revenues, which resulted in the overstatement of total assets and revenue during the periods outlined below, and the understatement of net losses for the periods outlined below. Additionally, during the course of preparing our Annual Report on Form 10-K for the fiscal year ended June30, 2019, we identified certain costs of revenue related to consulting services previously being recorded in operating expenses, which resulted in the overstatement of the gross profit for each of the quarters during the fiscal year ended June30, 2019. We assessed the materiality of these errors on prior periods’ financial statements and concluded that the errors were not material to any prior annual or interim periods, but the cumulative adjustments necessary to correct the errors would be material if we recorded the corrections the period in which the errors were identified. In accordance with GAAP, we are revising the prior periods’ financial statements when they are next issued. See Item. 4 of Part I, Controls and Procedures.Buyer’s end-of-month payroll is run.
F-18
AKERNA CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 9 — Revisions of Previously Issued Financial Statements (cont.)
The tables below disclose the effects on the financial statements included in Akerna’s Quarterly Report on Form 10-Q and the financial statements yet to be reissued:
| | | Year Ended June 30, 2018 | |
| | | As
Reported | | | Adjustment | | | As
Revised | |
| Consolidated Balance Sheet | | | | | | | | | |
| Total assets | | $ | 3,017,731 | | | $ | (223,766 | ) | | $ | 2,793,965 | |
| Total liabilities | | | 1,393,902 | | | | — | | | | 1,393,902 | |
| Total stockholders’ equity | | | 1,623,829 | | | | (223,766 | ) | | | 1,400,063 | |
| Net loss | | | (1,623,182 | ) | | | (72,501 | ) | | | (1,695,683 | ) |
| Net loss per share | | | (0.30 | ) | | | | | | | (0.31 | ) |
| | | As of March 31, 2019 | |
| | | As
Reported | | | Adjustment | | | As
Revised | |
| Condensed Consolidated Balance Sheet | | | | | | | | | |
| Total assets | | $ | 8,199,718 | | | $ | (320,434 | ) | | $ | 7,879,284 | |
| Total liabilities | | | 3,059,378 | | | | — | | | | 3,059,378 | |
| Total stockholders’ equity | | | 5,140,340 | | | | (320,434 | ) | | | 4,819,906 | |
| | | Three Months Ended March 31, 2019 | |
| | | As
Reported | | | Adjustment | | | As
Revised | |
| Condensed Consolidated Statements of Operations | | | | | | | | | |
| Total revenue | | $ | 2,327,880 | | | $ | — | | | $ | 2,327,880 | |
| Cost of revenue | | | 1,042,403 | | | | 124,079 | | | | 1,166,482 | |
| Gross profit | | | 1,285,477 | | | | (124,079 | ) | | | 1,161,398 | |
| Operating expenses | | | 3,788,644 | | | | (124,079 | ) | | | 3,664,565 | |
| Net loss | | | (2,490,103 | ) | | | — | | | | (2,490,103 | ) |
| Net loss per share | | | (0.41 | ) | | | | | | | (0.41 | ) |
| | | Nine Months Ended March 31, 2019 | |
| | | As
Reported | | | Adjustment | | | As
Revised | |
| Condensed Consolidated Statements of Operations | | | | | | | | | |
| Total revenue | | | 7,297,859 | | | | (96,668 | ) | | | 7,201,191 | |
| Cost of revenue | | | 3,197,437 | | | | 353,175 | | | | 3,550,612 | |
| Gross profit | | | 4,100,422 | | | | (449,843 | ) | | | 3,650,579 | |
| Operating expenses | | | 10,671,159 | | | | (353,175 | ) | | | 10,317,984 | |
| Net loss | | | (6,483,489 | ) | | | (96,668 | ) | | | (6,580,157 | ) |
| Net loss per share | | | (1.10 | ) | | | | | | | (1.13 | ) |
AKERNA CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 9 — Revisions of Previously Issued Financial Statements (cont.)
| | | Year Ended June 30, 2019 | |
| | | As
Reported | | | Adjustment | | | As
Revised | |
| Consolidated Balance Sheet | | | | | | | | | |
| Total assets | | | 24,522,671 | | | | (320,434 | ) | | | 24,202,237 | |
| Total liabilities | | | 2,442,503 | | | | — | | | | 2,442,503 | |
| Total stockholders’ equity | | | 22,080,168 | | | | (320,434 | ) | | | 21,759,734 | |
| | | | | | | | | | | | | |
| Consolidated Statements of Operations | | | | | | | | | | | | |
| Total revenue | | | 10,919,785 | | | | (96,668 | ) | | | 10,823,117 | |
| Cost of revenue | | | 4,633,844 | | | | — | | | | 4,633,844 | |
| Gross profit | | | 6,285,941 | | | | (96,668 | ) | | | 6,189,273 | |
| Operating expenses | | | 18,701,619 | | | | — | | | | 18,701,619 | |
| Net loss | | | (12,306,547 | ) | | | (96,668 | ) | | | (12,403,215 | ) |
| Net loss per share | | | (2.04 | ) | | | | | | | (2.05 | ) |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the ShareholdersStockholders and Board of Directors of
Akerna Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetssheets of Akerna Corp. (the “Company”) as of June 30, 2019December 31, 2021 and 2018,2020, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity and cash flows for each of the two years inyear ended December 31, 2021, for the periodtransitional six months ended June30, 2019,December 31, 2020, and for the year ended June 30, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019December 31, 2021 and 2018,2020, and the results of its operations and its cash flows for each of the two years inyear ended December 31, 2021, for the periodtransitional six months ended December 31, 2020, and for the year ended June 30, 2019,2020, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits providesprovide a reasonable basis for our opinion.
/s/ Marcum llp
Marcum llp
We have served as the Company’s auditor since 2018.
New York, NY
September 23, 2019
F-21Los Angeles, CA
March 31, 2022
AKERNA CORP.
Consolidated Balance Sheets
| | | June 30,
2019 | | | June 30,
2018 | |
| Assets | | | | | | |
| Current assets | | | | | | |
| Cash | | $ | 21,867,289 | | | $ | 1,572,090 | |
| Restricted cash | | | 500,000 | | | | 1,000,311 | |
| Accounts receivable, net | | | 1,577,708 | | | | 254,092 | |
| Prepaid expenses and other assets | | | 577,674 | | | | 191,238 | |
| Total current assets | | $ | 24,522,671 | | | $ | 3,017,731 | |
| | | | | | | | | |
| Liabilities and Stockholders’ Equity | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable | | $ | 1,317,566 | | | $ | 550,437 | |
| Accrued liabilities | | | 500,550 | | | | 373,834 | |
| Deferred revenue | | | 624,387 | | | | 469,631 | |
| Total current liabilities | | | 2,442,503 | | | | 1,393,902 | |
| | | | | | | | | |
| Commitments and contingencies (Note 7) | | | | | | | | |
| | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
| Preferred stock, par value $0.0001; 5,000,000 shares authorized, none are issued and outstanding at June 30, 2019 and 2018 | | | — | | | | — | |
| Common stock, par value $0.0001; 75,000,000 shares authorized, 10,589,746 issued and outstanding at June 30, 2019, and 4,922,650 shares authorized, issued and outstanding at June 30, 2018 | | | 1,059 | | | | 492 | |
| Additional paid-in capital | | | 47,325,421 | | | | 14,563,102 | |
| Accumulated deficit | | | (25,246,312 | ) | | | (12,939,765 | ) |
| Total stockholders’ equity | | | 22,080,168 | | | | 1,623,829 | |
| | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 24,522,671 | | | $ | 3,017,731 | |
| | | December 31, | | | December 31, | |
| | | 2021 | | | 2020 | |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash | | $ | 13,934,265 | | | $ | 17,840,640 | |
| Restricted cash | | | 508,261 | | | | 500,000 | |
| Accounts receivable, net | | | 1,403,774 | | | | 1,753,547 | |
| Prepaid expenses and other current assets | | | 2,383,764 | | | | 2,458,727 | |
| Total current assets | | | 18,230,064 | | | | 22,552,914 | |
| | | | | | | | | |
| Fixed assets, net | | | 153,151 | | | | 1,193,433 | |
| Investment, net | | | 226,101 | | | | 233,664 | |
| Capitalized software, net | | | 7,311,676 | | | | 3,925,739 | |
| Intangible assets, net | | | 21,609,794 | | | | 7,388,795 | |
| Goodwill | | | 46,942,681 | | | | 41,874,527 | |
| Other noncurrent assets | | | 9,700 | | | | — | |
| Total assets | | $ | 94,483,167 | | | $ | 77,169,072 | |
| | | | | | | | | |
| Liabilities and Equity | | | | | | | | |
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable, accrued expenses and other current liabilities | | $ | 6,063,520 | | | $ | 3,188,576 | |
| Contingent consideration payable | | | 6,300,000 | | | | — | |
| Deferred revenue | | | 3,543,819 | | | | 843,900 | |
| Current portion of long-term debt | | | 13,200,000 | | | | 11,707,363 | |
| Derivative liability | | | 63,178 | | | | 311,376 | |
| Total current liabilities | | | 29,170,517 | | | | 16,051,215 | |
| | | | | | | | | |
| Long-term portion of deferred revenue | | | 582,676 | | | | — | |
| Long-term debt, less current portion | | | 4,105,000 | | | | 3,895,237 | |
| Deferred tax liabilities | | | 675,291 | | | | — | |
| | | | | | | | | |
| Total liabilities | | | 34,533,484 | | | | 19,946,452 | |
| | | | | | | | | |
| Commitments and contingencies (Note 14) | | | | | | | | |
| | | | | | | | | |
| Equity: | | | | | | | | |
| Preferred stock, par value $0.0001; 5,000,000 shares authorized, 1 share special voting preferred stock issued and outstanding at December 31, 2021 and December 31, 2020 | | | — | | | | — | |
| Special voting preferred stock, par value $0.0001; 1 share authorized, issued and outstanding as of December 31, 2021 and December 31, 2020, with $1 preference in liquidation; exchangeable shares, no par value, 309,286 and 2,667,349 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively (See Note 4) | | | 2,366,038 | | | | 20,405,219 | |
| Common stock, par value $0.0001; 75,000,000 shares authorized, 31,001,884 and 19,901,248, issued and outstanding at December 31, 2021 and December 31, 2020, respectively | | | 3,100 | | | | 1,990 | |
| Additional paid-in capital | | | 146,027,258 | | | | 94,086,433 | |
| Accumulated other comprehensive loss | | | 61,523 | | | | (91,497 | ) |
| Accumulated deficit | | | (88,508,236 | ) | | | (57,179,525 | ) |
| Total equity | | | 59,949,683 | | | | 57,222,620 | |
| Total liabilities and equity | | $ | 94,483,167 | | | $ | 77,169,072 | |
SeeThe accompanying notes toare an integral part of these consolidated financial statements.
AKERNA CORP.
Consolidated Statements of Operations
| | | For the Year Ended
June 30, | |
| | | 2019 | | | 2018 | |
| Revenues | | | | | | |
| Software | | $ | 8,256,492 | | | $ | 8,082,424 | |
| Consulting | | | 2,403,797 | | | | 2,281,836 | |
| Other | | | 259,496 | | | | 112,523 | |
| Total revenues | | | 10,919,785 | | | | 10,476,783 | |
| | | | | | | | | |
| Cost of revenues | | | 4,633,844 | | | | 4,361,963 | |
| | | | | | | | | |
| Gross profit | | | 6,285,941 | | | | 6,114,820 | |
| | | | | | | | | |
| Operating expenses | | | | | | | | |
| Product development | | | 5,565,097 | | | | 2,645,093 | |
| Selling, general, and administrative | | | 13,136,522 | | | | 5,932,887 | |
| Total operating expenses | | | 18,701,619 | | | | 8,577,980 | |
| | | | | | | | | |
| Loss from operations | | | (12,415,678 | ) | | | (2,463,160 | ) |
| | | | | | | | | |
| Other income (expense) | | | | | | | | |
| Interest | | | 91,239 | | | | 5,841 | |
| Other | | | 17,892 | | | | (30,990 | ) |
| Total other income (expense) | | | 109,131 | | | | (25,149 | ) |
| | | | | | | | | |
| Net loss | | $ | (12,306,547 | ) | | $ | (2,488,309 | ) |
| | | | | | | | | |
| Basic and diluted weighted average common shares outstanding | | | 6,045,382 | | | | 4,870,950 | |
| Basic and diluted net loss per common share | | $ | (2.04 | ) | | $ | (0.51 | ) |
| | | Year Ended
December 31, | | | Six Months
Ended
December 31, | | | Year Ended
June 30, | |
| | | 2021 | | | 2020 | | | 2020 | |
| | | | | | | | | | |
| Revenue | | | | | | | | | |
| Software | | $ | 18,998,409 | | | $ | 6,766,985 | | | $ | 9,976,580 | |
| Consulting | | | 1,510,413 | | | | 916,099 | | | | 2,379,947 | |
| Other revenue | | | 176,152 | | | | 141,700 | | | | 216,749 | |
| Total revenue | | | 20,684,974 | | | | 7,824,784 | | | | 12,573,276 | |
| Cost of revenue | | | 8,119,487 | | | | 3,141,041 | | | | 6,209,724 | |
| Gross profit | | | 12,565,487 | | | | 4,683,743 | | | | 6,363,552 | |
| Total Operating expenses: | | | | | | | | | | | | |
| Product development | | | 6,271,966 | | | �� | 3,166,088 | | | | 3,206,310 | |
| Sales and marketing | | | 9,108,173 | | | | 3,928,028 | | | | 7,792,480 | |
| General and administrative | | | 10,422,207 | | | | 4,435,067 | | | | 11,320,715 | |
| Depreciation and amortization | | | 5,735,150 | | | | 2,007,237 | | | | 1,315,898 | |
| Impairment of long-lived assets | | | 14,383,310 | | | | 6,887,000 | | | | — | |
| Total operating expenses | | | 45,920,806 | | | | 20,423,420 | | | | 23,635,403 | |
| Loss from operations | | | (33,355,319 | ) | | | (15,739,677 | ) | | | (17,271,851 | ) |
| | | | | | | | | | | | | |
| Other (expense) income: | | | | | | | | | | | | |
| Interest (expense) income, net | | | (1,531,497 | ) | | | (193,084 | ) | | | 156,678 | |
| Change in fair value of convertible notes | | | (1,365,904 | ) | | | (961,273 | ) | | | 766,000 | |
| Change in fair value of derivative liability | | | 248,198 | | | | 746,852 | | | | 1,962,034 | |
| Gain on forgiveness of PPP Loan | | | 2,234,730 | | | | — | | | | — | |
| Other (expense) income | | | 186,420 | | | | (59,273 | ) | | | (254 | ) |
| Total other (expense) income | | | (228,053 | ) | | | (466,778 | ) | | | 2,884,458 | |
| | | | | | | | | | | | | |
| Net loss before income taxes and equity in losses of investee | | | (33,583,372 | ) | | | (16,206,455 | ) | | | (14,387,393 | ) |
| Income tax (expense) benefit | | | 2,262,225 | | | | (200 | ) | | | (30,985 | ) |
| Equity in losses of investee | | | (7,564 | ) | | | (12,641 | ) | | | (3,692 | ) |
| Net Loss | | $ | (31,328,711 | ) | | $ | (16,219,296 | ) | | $ | (14,422,070 | ) |
| Net loss attributable to noncontrolling interest in consolidated subsidiary | | | — | | | | 8,815 | | | | 849,759 | |
| Net loss attributable to Akerna shareholders | | $ | (31,328,711 | ) | | $ | (16,210,481 | ) | | $ | (13,572,311 | ) |
| Basic and diluted weighted average common shares outstanding | | | 25,641,950 | | | | 16,056,030 | | | | 11,860,212 | |
| Basic and diluted net loss per common share | | $ | (1.22 | ) | | $ | (1.01 | ) | | $ | (1.14 | ) |
SeeThe accompanying notes toare an integral part of these consolidated financial statements
AKERNA CORP.
Consolidated Statements of Comprehensive Loss
| | | Year Ended
December 31, | | | Six Months
Ended
December 31, | | | Year Ended
June 30, | |
| | | 2021 | | | 2020 | | | 2020 | |
| | | | | | | | | | |
| Net loss | | $ | (31,328,711 | ) | | $ | (16,219,296 | ) | | $ | (14,422,070 | ) |
| Other comprehensive (loss) income: | | | | | | | | | | | | |
| Foreign currency translation | | | 53,020 | | | | (21,497 | ) | | | — | |
| Unrealized (loss) gain on convertible notes | | | 100,000 | | | | (133,000 | ) | | | 63,000 | |
| Comprehensive loss | | | (31,175,691 | ) | | | (16,373,793 | ) | | | (14,359,070 | ) |
| Comprehensive loss attributable to the noncontrolling interest | | | — | | | | 8,815 | | | | 849,759 | |
| Comprehensive loss attributable to Akerna shareholders | | $ | (31,175,691 | ) | | $ | (16,364,978 | ) | | $ | (13,509,311 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
AKERNA CORP.
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended June 30, 2019 and 2018
| | | Common | | | Additional
Paid-In | | | Accumulated | | | Total
Stockholders’ | |
| | | Shares | | | Amount | | | Capital | | | Deficit | | | Equity | |
| Balance – July 1, 2017 | | | 4,784,910 | | | $ | 478 | | | $ | 13,563,116 | | | $ | (10,451,456 | ) | | $ | 3,112,138 | |
| Issuance of shares in exchange for cash | | | 137,740 | | | | 14 | | | | 999,986 | | | | — | | | | 1,000,000 | |
| Net loss | | | — | | | | — | | | | — | | | | (2,488,309 | ) | | | (2,488,309 | ) |
| Balance – July 1, 2018 | | | 4,922,650 | | | | 492 | | | | 14,563,102 | | | | (12,939,765 | ) | | | 1,623,829 | |
| Issuance of shares in exchange for cash | | | 1,099,376 | | | | 110 | | | | 9,999,890 | | | | — | | | | 10,000,000 | |
| Issuance of shares in connection with reverse merger | | | 3,880,282 | | | | 388 | | | | 18,878,387 | | | | — | | | | 18,878,775 | |
| Issuance of shares for compensation in connection with reverse merger | | | 498,073 | | | | 50 | | | | 3,393,231 | | | | | | | | 3,393,281 | |
| Stock-based compensation | | | | | | | | | | | 490,830 | | | | | | | | 490,830 | |
| Cashless exercise of options | | | 189,365 | | | | 19 | | | | (19 | ) | | | — | | | | — | |
| Net loss | | | — | | | | — | | | | — | | | | (12,306,547 | ) | | | (12,306,547 | ) |
| Balance – June 30, 2019 | | | 10,589,746 | | | $ | 1,059 | | | $ | 47,325,421 | | | $ | (25,246,312 | ) | | $ | 22,080,168 | |
| | | Special Voting | | | Common Stock | | | Additional
Paid-In | | | Accumulated
Other
Comprehensive | | | Accumulated | | | Total
Stockholder's | | | Noncontrolling
Interest in
Consolidated | | | Total | |
| | | Preferred Stock | | | Shares | | | Amount | | | Capital | | | Loss | | | Deficit | | | Equity | | | Subsidiary | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of June 30, 2019 | | | — | | | $ | — | | | | 10,589,746 | | | $ | 1,059 | | | $ | 46,299,233 | | | $ | — | | | $ | (27,582,558 | ) | | $ | 18,717,734 | | | $ | — | | | $ | 18,717,734 | |
| Common stock issued upon warrant exercise | | | — | | | | — | | | | 369,311 | | | | 37 | | | | 4,247,028 | | | | — | | | | — | | | | 4,247,065 | | | | — | | | | 4,247,065 | |
| Common stock issued in business combinations | | | — | | | | — | | | | 2,299,650 | | | | 230 | | | | 20,081,236 | | | | — | | | | — | | | | 20,081,466 | | | | — | | | | 20,081,466 | |
| Non-controlling interest in acquired subsidiary | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5,554,011 | | | | 5,554,011 | |
| Stock-based compensation amortization | | | — | | | | — | | | | — | | | | — | | | | 1,253,234 | | | | — | | | | — | | | | 1,253,234 | | | | — | | | | 1,253,234 | |
| Forfeitures of restricted shares | | | — | | | | — | | | | (54,901 | ) | | | (5 | ) | | | 5 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Change in fair value of Convertible Notes | | | — | | | | — | | | | — | | | | — | | | | — | | | | 63,000 | | | | — | | | | 63,000 | | | | — | | | | 63,000 | |
| Warrant Adjustment | | | — | | | | — | | | | — | | | | — | | | | 21,738 | | | | — | | | | — | | | | 21,738 | | | | — | | | | 21,738 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (13,572,311 | ) | | | (13,572,311 | ) | | | (849,759 | ) | | | (14,422,070 | ) |
| Balance as of June 30, 2020 | | | — | | | $ | — | | | | 13,203,806 | | | $ | 1,321 | | | $ | 71,902,474 | | | $ | 63,000 | | | $ | (41,154,869 | ) | | $ | 30,811,926 | | | $ | 4,704,252 | | | $ | 35,516,178 | |
| Adoption of ASC 606 Adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 185,825 | | | | 185,825 | | | | — | | | | 185,825 | |
| Balance as of July 1, 2020 | | | — | | | $ | — | | | | 13,203,806 | | | $ | 1,321 | | | $ | 71,902,474 | | | $ | 63,000 | | | $ | (40,969,044 | ) | | $ | 30,997,751 | | | $ | 4,704,252 | | | $ | 35,702,003 | |
| Issuance of common stock | | | — | | | | — | | | | 5,000,000 | | | | 500 | | | | 11,031,880 | | | | — | | | | — | | | | 11,032,380 | | | | — | | | | 11,032,380 | |
| Special voting preferred stock issued in business combination | | | 3,294,574 | | | | 25,203,490 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 25,203,490 | | | | — | | | | 25,203,490 | |
| Conversion of exchangable shares to common | | | (627,225 | ) | | | (4,798,271 | ) | | | 627,225 | | | | 63 | | | | 4,798,208 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Acquisition of noncontrolling interest | | | — | | | | — | | | | 800,000 | | | | 80 | | | | 4,695,357 | | | | — | | | | — | | | | 4,695,437 | | | | (4,695,437 | ) | | | — | |
| Stock-based compensation amortization | | | — | | | | — | | | | — | | | | — | | | | 1,298,540 | | | | — | | | | — | | | | 1,298,540 | | | | — | | | | 1,298,540 | |
| Settlement of convertible debt | | | — | | | | — | | | | 112,867 | | | | 11 | | | | 359,989 | | | | — | | | | — | | | | 360,000 | | | | — | | | | 360,000 | |
| Restricted stock unit vesting | | | — | | | | — | | | | 157,350 | | | | 15 | | | | (15 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Unrealized loss (gains) on Convertible Notes | | | — | | | | — | | | | — | | | | — | | | | — | | | | (133,000 | ) | | | — | | | | (133,000 | ) | | | — | | | | (133,000 | ) |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | (21,497 | ) | | | — | | | | (21,497 | ) | | | — | | | | (21,497 | ) |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (16,210,481 | ) | | | (16,210,481 | ) | | | (8,815 | ) | | | (16,219,296 | ) |
| Balance – December 31, 2020 | | | 2,667,349 | | | $ | 20,405,219 | | | | 19,901,248 | | | $ | 1,990 | | | $ | 94,086,433 | | | $ | (91,497 | ) | | $ | (57,179,525 | ) | | $ | 57,222,620 | | | $ | — | | | $ | 57,222,620 | |
| Conversion of Exchangeable Shares to common stock | | | (2,358,063 | ) | | | (18,039,181 | ) | | | 2,358,063 | | | | 237 | | | | 18,038,944 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Settlement of convertible debt | | | — | | | | — | | | | 3,094,129 | | | | 309 | | | | 11,610,277 | | | | — | | | | — | | | | 11,610,586 | | | | — | | | | 11,610,586 | |
| Shares withheld for withholding taxes | | | — | | | | — | | | | (121,786 | ) | | | (12 | ) | | | (520,383 | ) | | | — | | | | — | | | | (520,395 | ) | | | — | | | | (520,395 | ) |
| Shares issued in connection with Viridian Acquisition | | | — | | | | — | | | | 1,031,000 | | | | 103 | | | | 6,187,897 | | | | — | | | | — | | | | 6,188,000 | | | | — | | | | 6,188,000 | |
| Shares issued in connection with Asset Purchase | | | — | | | | — | | | | 83,333 | | | | 8 | | | | 299,992 | | | | — | | | | — | | | | 300,000 | | | | — | | | | 300,000 | |
| Shares issued in connection with 365 Cannabis Acquisition | | | — | | | | — | | | | 3,571,429 | | | | 357 | | | | 11,995,704 | | | | — | | | | — | | | | 11,996,061 | | | | — | | | | 11,996,061 | |
| Stock-based compensation | | | — | | | | — | | | | — | | | | — | | | | 2,070,358 | | | | — | | | | — | | | | 2,070,358 | | | | — | | | | 2,070,358 | |
| Shares issued in connection with the ATM program | | | — | | | | — | | | | 556,388 | | | | 56 | | | | 1,828,063 | | | | — | | | | — | | | | 1,828,119 | | | | — | | | | 1,828,119 | |
| Settlement of liabilities with shares | | | — | | | | — | | | | 101,705 | | | | 10 | | | | 430,015 | | | | — | | | | — | | | | 430,025 | | | | — | | | | 430,025 | |
| Restricted stock vesting | | | — | | | | — | | | | 427,711 | | | | 42 | | | | (42 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Forfeitures of restricted shares | | | — | | | | — | | | | (1,336 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | 53,020 | | | | — | | | | 53,020 | | | | — | | | | 53,020 | |
| Unrealized loss (gains) on convertible notes | | | — | | | | — | | | | — | | | | — | | | | — | | | | 100,000 | | | | — | | | | 100,000 | | | | — | | | | 100,000 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (31,328,711 | ) | | | (31,328,711 | ) | | | — | | | | (31,328,711 | ) |
| Balance – December 31, 2021 | | | 309,286 | | | $ | 2,366,038 | | | | 31,001,884 | | | $ | 3,100 | | | $ | 146,027,258 | | | $ | 61,523 | | | $ | (88,508,236 | ) | | $ | 59,949,683 | | | $ | — | | | $ | 59,949,683 | |
SeeThe accompanying notes toare an integral part of these consolidated financial statements.
AKERNA CORP.
Consolidated Statements of Cash Flows
| | | For the year ended
June 30, | |
| | | 2019 | | | 2018 | |
| Cash flows from operating activities | | | | | | |
| Net loss | | $ | (12,306,547 | ) | | $ | (2,488,309 | ) |
| Adjustment to reconcile net loss to net cash used in operating activities | | | | | | | | |
| Bad debt expense | | | 345,941 | | | | 169,784 | |
| Stock-based compensation expense | | | 3,884,111 | | | | — | |
| Changes in operating assets and liabilities | | | | | | | | |
| Accounts receivable | | | (1,669,557 | ) | | | (329,013 | ) |
| Prepaid expenses and other current assets | | | (351,144 | ) | | | 161,889 | |
| Accounts payable | | | 767,129 | | | | (555,290 | ) |
| Accrued liabilities | | | 126,716 | | | | (51,603 | ) |
| Deferred revenue | | | 154,756 | | | | (651,339 | ) |
| Net cash used in operating activities | | | (9,048,595 | ) | | | (3,743,881 | ) |
| | | | | | | | | |
| Cash flows from investing activities | | | | | | | | |
| Cash received in connection with the reverse merger | | | 18,843,483 | | | | — | |
| Net cash provided by investing activities | | | 18,843,483 | | | | — | |
| | | | | | | | | |
| Cash flows from financing activities | | | | | | | | |
| Cash received in connection with issuance of shares | | | 10,000,000 | | | | 1,000,000 | |
| Net cash provided by financing activities | | | 10,000,000 | | | | 1,000,000 | |
| | | | | | | | | |
| Net increase (decrease) in cash and restricted cash | | | 19,794,888 | | | | (2,743,881 | ) |
| | | | | | | | | |
| Cash and restricted cash – beginning of period | | | 2,572,401 | | | | 5,316,282 | |
| | | | | | | | | |
| Cash and restricted cash – end of period | | $ | 22,367,289 | | | $ | 2,572,401 | |
| | | | | | | | | |
| Cash paid for taxes | | $ | — | | | $ | — | |
| | | | | | | | | |
| Cash paid for interest | | $ | — | | | $ | — | |
| | | | | | | | | |
| Supplemental disclosure of non-cash investing and financing activity: | | | | | | | | |
| | | | | | | | | |
| Cashless exercise of options | | $ | 19 | | | $ | — | |
| Prepaid expenses received in connection with reverse merger | | $ | 35,292 | | | $ | — | |
| | | Year Ended
December 31, | | | Six Months
Ended
December 31, | | | Year Ended
June 30, | |
| | | 2021 | | | 2020 | | | 2020 | |
| Cash flows from operating activities | | | | | | | | | |
| Net Loss | | $ | (31,328,711 | ) | | $ | (16,219,296 | ) | | $ | (14,422,070 | ) |
| Adjustment to reconcile net loss to net cash used in operating activities | | | | | | | | | | | | |
| Equity in losses of investment | | | 7,564 | | | | 12,643 | | | | 3,692 | |
| Bad debt expense | | | 556,890 | | | | 72,832 | | | | 1,094,507 | |
| Stock-based compensation expense | | | 2,070,359 | | | | 1,197,589 | | | | 1,166,130 | |
| Loss on write off of fixed assets | | | 1,045,179 | | | | — | | | | — | |
| Gain on forgiveness of PPP loan | | | (2,234,730 | ) | | | — | | | | — | |
| Depreciation and amortization | | | 5,735,150 | | | | 2,007,237 | | | | 1,315,898 | |
| Amortization of deferred contract costs | | | 492,683 | | | | 228,766 | | | | — | |
| Non-cash interest expense | | | 1,009,331 | | | | 32,727 | | | | — | |
| Foreign currency gain | | | (3,312 | ) | | | — | | | | — | |
| Impairment of long-lived assets | | | 14,383,310 | | | | 6,887,000 | | | | — | |
| Gain on debt extinguishment | | | (186,177 | ) | | | — | | | | — | |
| Loss on sale of fixed asset | | | — | | | | 84,835 | | | | — | |
| Debt issuance costs | | | — | | | | — | | | | 1,177,390 | |
| Change in fair value of convertible notes | | | 1,365,904 | | | | 961,273 | | | | (766,000 | ) |
| Change in fair value of derivative liability | | | (248,198 | ) | | | (746,852 | ) | | | (1,962,034 | ) |
| Change in fair value of contingent consideration | | | — | | | | (993,000 | ) | | | (998,000 | ) |
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
| Accounts receivable | | | 849,785 | | | | 1,008,775 | | | | (1,621,262 | ) |
| Prepaid expenses and other current assets | | | (8,988 | ) | | | (689,729 | ) | | | (592,807 | ) |
| Other assets | | | — | | | | 41,925 | | | | (58,925 | ) |
| Accounts payable, accrued expenses and other current liabilities | | | 1,610,470 | | | | (2,498,375 | ) | | | 1,602,751 | |
| Deferred tax liabilities | | | (2,274,295 | ) | | | — | | | | — | |
| Deferred revenue | | | (1,010,118 | ) | | | (94,088 | ) | | | (286,922 | ) |
| Net cash used in operating activities | | | (8,167,904 | ) | | | (8,705,738 | ) | | | (14,347,652 | ) |
| | | | | | | | | | | | | |
| Cash flows from investing activities | | | | | | | | | | | | |
| Developed software additions | | | (5,427,230 | ) | | | (1,847,710 | ) | | | (3,102,728 | ) |
| Furniture, fixtures, and equipment additions | | | (39,263 | ) | | | (12,203 | ) | | | (156,636 | ) |
| Cash paid for business combinations, net of cash acquired | | | (5,018,592 | ) | | | (5,279,134 | ) | | | (88,720 | ) |
| Investment in equity method investee | | | — | | | | — | | | | (250,000 | ) |
| Net cash used by investing activities | | | (10,485,085 | ) | | | (7,139,047 | ) | | | (3,598,084 | ) |
| | | | | | | | | | | | | |
| Cash flows from financing activities | | | | | | | | | | | | |
| Value of shares withheld related to tax withholdings | | | (520,395 | ) | | | — | | | | — | |
| Proceeds from stock offering, net | | | 1,828,119 | | | | — | | | | — | |
| Proceeds from the issuance of long term debt | | | 18,000,000 | | | | — | | | | 17,164,600 | |
| Payments of principal amounts of debt | | | — | | | | — | | | | — | |
| Payments on debt | | | (4,571,472 | ) | | | (1,500,000 | ) | | | — | |
| Cash paid for debt issuance costs | | | — | | | | — | | | | (1,177,390 | ) |
| Proceeds from the exercise of warrants | | | — | | | | — | | | | 4,247,065 | |
| Proceeds from the issuance of common stock | | | — | | | | 12,000,000 | | | | — | |
| Offering costs from the issuance of common stock | | | — | | | | (967,620 | ) | | | — | |
| Net cash provided by financing activities | | | 14,736,252 | | | | 9,532,380 | | | | 20,234,275 | |
| Effect of exchange rate changes on cash and restricted cash | | | 18,623 | | | | (2,783 | ) | | | — | |
| Net (decrease) increase in cash and restricted cash | | $ | (3,898,114 | ) | | $ | (6,315,188 | ) | | $ | 2,288,539 | |
| Cash and restricted cash - beginning of period | | | 18,340,640 | | | | 24,655,828 | | | | 22,367,289 | |
| Cash and restricted cash - end of period | | $ | 14,442,526 | | | $ | 18,340,640 | | | $ | 24,655,828 | |
| Cash paid for taxes | | $ | 10,570 | | | $ | — | | | $ | — | |
| Cash paid for interest | | $ | 507,941 | | | $ | 150,000 | | | $ | — | |
| | | | | | | | | | | | | |
| Supplemental disclosure of non-cash investing and financing activity: | | | | | | | | | | | | |
| Adjustments due to the adoption of ASC 606 | | | — | | | | 185,826 | | | | — | |
| Vesting of restricted stock units | | | 42 | | | | 15 | | | | — | |
| Settlement of convertible notes in common stock | | | 11,610,586 | | | | 327,273 | | | | — | |
| Stock-based compensation capitalized as software development | | | 36,915 | | | | 100,951 | | | | 87,104 | |
| Acquisition of noncontrolling interest | | | — | | | | 4,695,437 | | | | — | |
| Capitalized software included in accrued expenses | | | 554,127 | | | | 189,198 | | | | — | |
| Special voting preferred stock issued in business combination | | | — | | | | 25,203,490 | | | | — | |
| Conversion of exchangeable shares to common stock | | | 18,038,944 | | | | 4,798,271 | | | | — | |
| Adjustment to Trellis purchase price allocation | | | — | | | | 14,300 | | | | — | |
| Settlement of liabilities with common stock | | | 430,015 | | | | — | | | | — | |
| Shares issued in connection with an asset purchase | | | 8 | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Assets acquired and liabilities assumed in business combinations: | | | | | | | | | | | | |
| Cash | | | 527,346 | | | | 445,269 | | | | — | |
| Accounts receivable | | | 1,041,912 | | | | 917,205 | | | | 77,505 | |
| Prepaid expenses and other current assets | | | 408,973 | | | | 596,233 | | | | 27,860 | |
| Fixed assets | | | 93,365 | | | | 1,326,996 | | | | 2,410 | |
| Intangible assets | | | 16,933,000 | | | | 3,795,000 | | | | 8,010,000 | |
| Goodwill | | | 19,451,464 | | | | 25,805,615 | | | | 20,254,309 | |
| Accounts payable and accrued liabilities | | | 1,174,961 | | | | 805,114 | | | | 1,441,062 | |
| Deferred tax liabilities | | | 2,949,586 | | | | — | | | | — | |
| Deferred revenue | | | 4,301,514 | | | | 549,311 | | | | 31,220 | |
| Contingent consideration | | | 6,300,000 | | | | 604,000 | | | | 1,387,000 | |
SeeThe accompanying notes toare an integral part of these consolidated financial statements.
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2019
December 31, 2021
Note 1 — - Description of Business, Liquidity, and Capital Resources
Description of Business
Akerna Corp. (the “Company”, herein referred to as we, us, our or “Akerna”),Akerna, through itsour wholly-owned subsidiarysubsidiaries MJ Freeway, LLC, (“MJF”) is aor 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 technology company. The Company’smanagement. Our proprietary, software platform isbroad 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. The Company developedWe 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. The Company provides itsWe 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®Systems®, to state government regulatory agencies,agencies. Through Solo, we provide an innovative, next-generation solution for state and its commercial software platform,national governments to securely track product and waste throughout the supply chain with solo*TAG™. The integration of MJ PlatformPlatform® and solo*CODE®™ ,results in technology for consumers and brands that brings a consumer-facing mark designed to state-licensed businesses.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.
On October 10, 2018 (as amendedWe consult with clients on April 17, 2019), MJF entered into a definitive merger agreement (the “Merger Agreement”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”) with MTech Acquisition Corp. (“MTech”),standard on going concern, Accounting Standard Update, 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 Company (f/k/a MTech Acquisition Holdings Inc.), MTech Purchaser Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Akerna (“Purchaser Merger Sub”), MTech Company Merger Sub LLC, a Colorado limited liability company and a wholly-owned subsidiary of Akerna (“Company Merger Sub” and, together with Purchaser Merger Sub,date the “Merger Subs”, and the Merger Subs collectively with MTech and Akerna, the “Purchaser Parties”), MTech Sponsor LLC, a Florida limited liability company, in the capacity as the representative for the equity holders of Akerna (other than the Sellers) thereunder (the “Purchaser Representative”), and Harold Handelsman, in the capacity as the representative for the Sellers thereunder (the “Seller Representative”). MTech, collectively with Akerna, Purchaser Merger Sub and MTech Company Merger Sub, shall beconsolidated financial statements are issued, which is referred to as “MTech”.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 Merger Agreement provided for two mergers: (i)Company, it will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the mergertiming and nature of Purchaser Merger Sub withprojected cash expenditures or programs, and into MTech, with MTech continuingits 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 surviving entity (the “Purchaser Merger”),nature and (ii)timing of programs and expenditures to the merger of MTechextent The Company Merger Sub withdeems probable those implementations can be achieved and intoit has the Company, withproper authority to execute them within the Company continuing as the surviving entity (the “Company Merger”, and together with the Purchaser Merger, the “Mergers”).
On June 17, 2019, the Mergers contemplated by the Merger Agreement were consummated. In connection with the closing of the Mergers, the registrant changed its name from MTech Acquisition Holdings Inc. to Akerna Corp.
Upon the closing of the Mergers (Note 4), the outstanding Common Units, Preferred Units, and Profit Interest Units of MJF were exchanged for shares of common stock of Akerna at an exchange ratio of one Unit of MJF to 0.26716 shares of Akerna common stock (the “Exchange Ratio). Except as otherwise noted, all common share amounts and per share amounts have been adjusted to reflect this Exchange Ratio, which was effected upon the Merger.
The Mergers have been accounted for as a reverse mergerlook-forward period in accordance with accounting principles generally acceptedASU No. 2014-15.
The accompanying 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 United Statesnormal course of America (“U.S. GAAP”). The owners and management of MJFbusiness. However, since our inception we have actual or effective voting and operating control of the combined company. In the Merger transaction, MTech is the accounting acquiree and MJF is the accounting acquirer. A reverse recapitalization is equivalent to the issuance of stock by the private operating company for the net monetary assets of the accounting acquiree accompanied by a recapitalization with accounting similar to that resulting from a reverse acquisition, except that no goodwill or intangible assets are recorded.
The accompanying financial statements and related notes reflect the historical results of MJF prior to the merger and of the combined company following the Mergers, and do not include the historical results of MTech prior to the completion of the Mergers.
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2019
Note 1 — Description of Business, Liquidity and Capital Resources(cont.)
Liquidity and Capital Resources
Since its inception, the Company has incurred recurring operating losses, used cash from operations, and relied on capital raising transactions to continue ongoing operations. However, basedDuring the year ended December 31, 2021, six months ended December 31, 2020, and year ended June 30, 2020, we incurred a loss from operations of $33.4 million, $15.7 million, and $17.3 million, respectively, and used cash in operations of $8.2 million, $8.7 million, and $14.3 million, respectively. At December 31, 2021, the Company had a working capital deficit of $10.9 million with $13.9 million in cash available to fund future operations. These factors raise substantial doubt, as defined by generally accepted accounting principles in the United States of America ("GAAP"), about the ability of the Company to continue to operate as a going concern for the twelve months following the issuance of these consolidated financial statements. These consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
On July 23, 2021, we entered into an Equity Distribution Agreement with Oppenheimer & Co. Inc. and A.G.P./Alliance Global Partners ("ATM Program"). Pursuant to the terms of the ATM Program, we may offer and sell from time to time, up to $25 million of shares of our common stock. As of December 31, 2021, we have raised gross proceeds of $1.9 million through the issuance of 556,388 shares through the ATM program. While no assurance can be provided that we will be able to raise further capital under the program, we intend to use the net proceeds from the sale of our shares of common stock, if any, for general corporate purposes, including working capital, marketing, product development, capital expenditures and merger and acquisition activities.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
On October 5, 2021, we entered into a securities purchase agreement with the two institutional investors that held the Company's convertible notes issued in June of 2020 (the "2020 Notes") to sell senior secured notes in a private placement (the "Senior Convertible Notes"). The Senior Convertible Notes have an aggregate principal amount of $20 million, an aggregate original issue discount of 10%, and rank senior to all our other outstanding and future indebtedness. Approximately $3.3 million of the proceeds from the Senior Convertible Notes were used to payoff the 2020 Notes, which were then to be cancelled. The net proceeds from the issuance of the Senior Convertible Notes was approximately $14.6 million, following the original issue discount and deductions for expenses and paydown of the 2020 Notes. These net proceeds will be used to support Akerna's ongoing growth initiatives and continued investment in current and future technology infrastructure. The Senior Convertible Notes are convertible into shares of common stock of Akerna at a conversion price of $4.05 per share. The Senior Convertible Notes mature on October 5, 2024 and are to be repaid in monthly installments beginning on January 1, 2022. The Senior Convertible Notes can be repaid in common shares or cash.
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 fundsSenior Convertible Notes should we utilize the program, including resetting the conversion price of the Senior Convertible Notes should we raise more than $5 million under the ATM program, settling our contingent consideration and Senior Convertible Notes in common stock rather than cash as it comes due, and implementing certain cost cutting strategies throughout the organization, while continuing to seek to grow our customer base and realize synergies as we continue to integrate our recent acquisitions. If the Company has available asis unable to raise sufficient additional funds through the ATM Program, it will have to develop and implement a plan to extend payables, reduce expenditures, or scale back our business plan until sufficient additional capital is raised through other equity or debt offerings to support further operations. 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.
The ability of the date theseCompany 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. These factors raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the consolidated financial statements. If we are unable to raise sufficient capital we may have to reduce operations which could significantly 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 are issued primarilydo 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 result of the business combination (Note 4), the Company believes that it has sufficient capital to fund its anticipated operating expenses for at least next twelve months from the date these financial statements are issued. Management will continue to evaluate the impact of this standard on the Company’s consolidated financial statements.going concern.
Note 2 —- Summary of Significant Accounting Policies
Basis of Presentation
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (“SEC”).GAAP.
In September 2020, the Company changed its fiscal year from June 30 to December 31. As a result, this annual report on Form 10-K includes the consolidated financial statements as of December 31, 2021 and December 31, 2020 and for (i) the calendar year ended December 31, 2021, (ii) the transitional six months ended December 31, 2020; and (iii) the fiscal year ended June 30, 2020.
Principles of Consolidation
TheOur accompanying consolidated financial statements include the accounts of the CompanyAkerna, our wholly-owned subsidiaries, and its wholly owned subsidiary.those entities in which we otherwise have a controlling financial interest. All significant intercompany transactionsbalances and balancestransactions have been eliminated in consolidation.
Use of estimatesEstimates
The preparation of our consolidated financial statements in conformity with U.S. 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, and disclosurescapitalization of contingentinternal costs associated with software development, fair value measurements, impairment assessments, loss contingencies, valuation allowance associated with deferred tax assets, and liabilities at the date of the financial statements and the reported amounts of revenues andstock based compensation expenses, during the reporting period. Significant estimates for the years ended June 30, 2019 and 2018 were the Company’s allowance for doubtful accounts, the estimated average customer life used in the calculation of the deferral and recognition of implementation fees earned from certain customers, the estimated useful lives of long-lived assets, stock-based compensationintangible assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the deferred tax asset valuation allowance. Actualcircumstances. Accordingly, actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
Foreign Currency
The functional currency of the Company's non-U.S. operations is the local currency. Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing at the balance sheet dates. Non-monetary assets and liabilities are translated at the historical rates in effect when the assets were acquired or obligations incurred. Revenue and expenses are translated into U.S. dollars using the average rates of exchange prevailing during the period. Translation gains or losses are included as a component of accumulated other comprehensive loss in stockholders' equity. Gains and losses resulting from foreign currency transactions are recognized as other income (expense).
Cash and cash equivalentsCash Equivalents
The Company considers all highlyWe consider liquid instruments purchased with an original maturity of three months or less to be cash equivalents. There were no cash equivalents for the years ended June 30, 2019as of December 31, 2021, and 2018. The Company2020. We continually monitors itsmonitor our positions with, and the credit quality of, the financial institutions with which it invests.we invest. As of the balance sheet date, and periodically throughout the year, the Company haswe have maintained balances in various operating accounts in excess of federally insured limits. At June 30, 2019, approximately $22 million of the Company’s cash balances were uninsured. The Company has not experienced any losses on such accounts.
Restricted Cash
Restricted cash consists of funds that are contractually or legally restricted as to usage or withdrawal and is presented separately from cash and cash equivalents on our consolidated balance sheets. Our restricted cash serves as collateral for the Company’s letter-of-credit (See Note 7).
Prepaid Expenses
Prepaid expenses consist primarilya letter of third-party technology and software used by in the Company in its day-to-day operations and professional services expenses paid in advance. (See Note 3).credit.
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2019Accounts Receivable, Net
Note 2 — Summary of Significant Accounting Policies(cont.)
Accounts Receivable, Net
The Company providesWe maintain an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate isamounts based on our historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible thatReceivables are written-off and charged against the Company’s estimate of therecorded allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts estimated in determining the allowance.when we have exhausted collection efforts without success. The allowance for doubtful accounts was $190,088$0.3 million and $39,571$0.2 million as of June 30, 2019December 31, 2021, and 2018,2020, respectively.
The allowance for doubtful accounts consists of the following activity:
| | | Year Ended
December 31, | | | Six Months
Ended
December 31, | |
| | | 2021 | | | 2020 | |
| Allowance for doubtful accounts, balance at beginning of period | | $ | 153,500 | | | $ | 208,422 | |
| Bad debt expense | | | 556,890 | | | | 72,832 | |
| Write-off uncollectable accounts | | | (393,306 | ) | | | (127,754 | ) |
| Allowance for doubtful accounts, balance at end of period | | $ | 317,084 | | | $ | 153,500 | |
Concentrations of Credit Risk
The Company grantsWe grant credit in the normal course of business to customers in the United States. The CompanyWe periodically performsperform credit analysis and monitorsmonitor the financial condition of itsour customers to reduce credit risk.
During the year ended December 31, 2021, the six months ended December 31, 2020 and the year ended June 30, 2019, one customer2020, 1 government client accounted for 30%11%, 14% and 25% of total revenues. At June 30, 2019, two customersrevenues, respectively. As of December 31, 2020, 2 government clients accounted for 33% and 24%a total of 36% of net accounts receivable, respectively. Duringreceivable.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized. Depreciation and amortization is provided over the estimated useful lives of the related assets using the straight-line method.
The estimated useful lives for significant property and equipment categories are generally as follows:
| Furniture and computer equipment | 3 to 7 years |
| Leasehold improvements | Lesser of remaining lease term or useful life |
Repairs and maintenance costs are expensed as incurred.
Warrant Liabilities
Company’s Private Warrants are not indexed to the Company’s common stock in the manner contemplated by ASC Section 815-40. As a result, these warrants are precluded from equity classification and are recorded as derivative liabilities. At the end of each reporting period, changes in fair value during the period are recognized within the condensed consolidated statements of operations and comprehensive loss. We will continue to adjust the warrant liability for changes in the fair value until the earlier of a) the exercise or expiration of the warrants or b) the redemption of the warrants, at which time the warrants will be reclassified to additional paid-in capital.
Investment
We hold an equity security in Zoltrain, Inc. (Zoltrain) for which the fair value is not readily determinable. Accordingly, we measure this investment at cost minus impairment, plus or minus changes resulting from observable price changes. When indicators of impairment exist, we estimate the fair value and record an impairment charge if the carrying value of the investment exceeds its estimated fair value. Any impairment charges are recorded in other (expense) income, net, in our consolidated statements of operations. Prior to the quarter ended September 30, 2021, we had determined we could exert significant influence over Zoltrain's operations through voting rights and representation on the board of directors and we accounted for our investment in Zoltrain using the equity method of accounting, recording our share in the investee’s earnings and losses in the consolidated statement of operations.
Intangible Assets Acquired through Business Combinations
Intangible assets are amortized over their estimated useful lives. We evaluate the estimated remaining useful life of our intangible assets when events or changes in circumstances indicate an adjustment to the remaining amortization may be needed. We similarly evaluate the recoverability of these assets upon events or changes in circumstances indicate a potential impairment. Recoverability of these assets is measured by comparing the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. If the undiscounted cash flows used in the test for recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value. We recorded an impairment of $2.7 million during the six months ended December 31, 2020 related to the intangible assets acquired in the Solo transaction. There were no impairments of intangible assets during the years ended December 31, 2021 or June 30, 2020. See Note 6 – Goodwill and Intangible Assets, Net for further discussion on the impairment.
Goodwill Impairment Assessment
Goodwill represents the excess purchase consideration of an acquired business over the fair value of the net tangible and identifiable intangible assets. Goodwill is evaluated for impairment annually on October 31, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate or a significant decrease in expected cash flows. An impairment loss is recognized to the extent that the carrying amount exceeds the reporting unit’s fair value, not to exceed the carrying amount of goodwill. The Company has the option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount and determine whether further action is needed. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the quantitative impairment test is unnecessary. Due to a continued decline in market conditions and declines in the operating results of our non-enterprise reporting unit, we recognized an impairment to goodwill of $14.4 million during the year ended December 31, 2021 and we recorded an impairment to goodwill of $4.2 million during the six months ended December 31, 2020. There were no impairments of goodwill during the year ended June 30, 2018,2020. See Note 6 – Goodwill and Intangible Assets, Net for further discussion on the same customer accounted for 37%impairment.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
Software Development Costs
Costs incurred during the application development stage of total revenues. Ata newly developed application and costs we incur to enhance our existing platforms that meet certain criteria are subject to capitalization and subsequent amortization. Capitalized software development costs were approximately $5.9 million during the year ended December 31, 2021, $2.1 million during the six months ended December 31, 2020, and $3.1 million during the year ended June 30, 2018,2020. Product development costs are primarily comprised of personnel costs such as payroll and benefits, vendor costs, and other costs directly attributable to the same two customers accounted for 55% and 11% of net accounts receivable, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided utilizingproject. We capitalize costs only during the straight-line method over the estimated useful lives for owned assets, ranging from fivedevelopment phase. Any costs in connection to seven years, and the shorter of the estimated economic life or related lease terms for leasehold improvements. Repairsplanning, design, and maintenance costs that do not improve the service potential or extend the economic lifesubsequent to release are expensed as incurred. The Company’s purchasesWe amortize software development costs over the expected useful life of property and equipment have historically been immaterial.the specific application, generally 2-5 years. We evaluate capitalized software development costs for impairment when there is an indication that the unamortized cost may not be recoverable.
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash, restricted cash, accounts receivable, prepaid expenses, accounts payable and accrued liabilities approximatedGAAP defines fair value as of June 30, 2019the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, we are required to classify certain assets and 2018 because of the relatively short term nature of these instruments. The Company accounts for fair value measurements in accordance with Accounting Standards Codification (“ASC”) Topic No. 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.
ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels ofbased on the fair value hierarchy, under ASC Topic 820 are described below:which groups fair value-measured assets and liabilities based upon the following levels of inputs:
| ● | Level 1: | | 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.liabilities; |
| ● | | | |
| | Level 2: | | Applies to assets or liabilities for which there are inputs other than quoted2 – Quoted prices included within Level 1in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.liability; |
| ● | | | |
| | Level 3: | | 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported(i.e. supported by little or no market activity). |
F-28The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying values of financial instruments such as accounts receivable, accounts payable and accrued liabilities approximate fair value based on their short maturities. Please refer to Note 13- Fair Value Measurements for additional information regarding the fair value of financial instruments that we measure at fair value, including senior secured convertible notes and contingent consideration.
Fair Value Option
The fair value option provides an election that allows a company to irrevocably elect to record certain financial assets and liabilities at fair value on an instrument-by-instrument basis at initial recognition. We have elected to apply the fair value option to certain convertible notes due to the complexity of the various conversion and settlement options available to both the Note Holders and Akerna.
The convertible notes accounted for under the fair value option election are each a debt host financial instrument containing embedded features that would otherwise be required to be bifurcated from the debt-host and recognized as separate derivative liabilities subject to initial and subsequent periodic estimated fair value measurements in accordance with GAAP. Notwithstanding, when the fair value option election is applied to financial liabilities, bifurcation of an embedded derivative is not required, and the financial liability is initially measured at its issue-date estimated fair value and then subsequently remeasured at estimated fair value on a recurring basis as of each reporting period date.
The portion of the change in fair value attributed to a change in the instrument-specific credit risk is recognized as a component of other comprehensive income and the remaining amount of the fair value adjustment is recognized as other income (expense) in our consolidated statement of operations. The estimated fair value adjustment is presented in a respective single line item within other income (expense) in the accompanying consolidated statement of operations because the change in fair value of the convertible notes was not attributable to instrument-specific credit risk.
Revenue Recognition
See Note 3 for further discussion of our revenue recognition policies.
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2019
December 31, 2021
Cost of Revenue
Note 2 — SummaryCost of Significant Accounting Policies(cont.)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.
SoftwareProduct Development Costs
The Company accountsProduct development expenses consist primarily of employee-related costs for costs incurred in the design and development of computer software in accordance with ASC Subtopic 350-40, Intangibles — Goodwillthe Company's platform, contractor costs to supplement staff levels, third-party web services, consulting services, and Other — Internal-Use Software. Costs incurred in the application development stage are subject to capitalization and subsequent amortization and impairment. Application development stage costs were not material for the Company during the years ended June 30, 2019 or 2018.allocated overhead. Product development costs are primarily comprised of personnel costs incurred related to activities for evaluating future changes to theexpenses, other than software testing, bug fixes, and other maintenance activities. Product development costs qualifying for capitalization, are expensed as incurred.
Revenue RecognitionSales and Marketing Expenses
The Company recognizes revenue only when allSales and marketing expenses consist primarily of the following criteria have been met: persuasive evidence of an arrangement exists, delivery has occurred or services have been performed, the fee for the arrangement is fixed or determinable,personnel and collectability is reasonable assured.related costs, including salaries, benefits, bonuses, commissions, travel, and stock-based compensation. Other costs included in this expense are marketing and promotional events, online marketing, product marketing, information technology costs, and facility costs.
The Company’s software-as-a-service fees are earned through arrangements in which customers pay the Company a recurring subscription fee based upon the terms of their respective contracts. The Company’s software revenues generated from government customers totaled $4,251,263General and $4,470,310 of total revenues during the years ended June 30, 2019 and 2018, respectively (See Note 2, “Concentration of Credit Risk”). Total costs of government revenues incurred by the Company, which are included in cost of revenues on the statements of operations, were $2,150,062 and $2,670,319 during the years ended June 30, 2019 and 2018, respectively.Administrative Expenses
The Company also offers various software consulting services to its customers,General and administrative expenses consist primarily of personnel and related costs for our executive, finance, legal, human resources, and administrative personnel, including implementation services, business planning, support,salaries, benefits, bonuses, and stock-based compensation; legal, accounting, and other customer services. professional service fees; other corporate expenses; information technology costs; restructuring charges such as lease termination costs; and facility costs.
Legal and Other Contingencies
From time to time, the Company purchases equipmentmay be a party to litigation and subject to claims incident to the ordinary course of business, including intellectual property claims, labor and employment claims, breach of contract claims and other asserted and unasserted claims. The Company investigates these claims as they arise and accrues estimates for resale to customers. Such equipmentresolution of legal and other contingencies when losses are probable and estimable.
Stock-Based Compensation
We measured stock-based compensation based on the fair value of the share-based awards on the date of grant and recognize the related costs on a straight-line basis over the requisite service period, which is generally drop-shipped to the Company’s customers. The Company recognizes revenue as the services are performed or products are delivered, or in the case of up-front implementation fees, over the longer of the contract term or estimated customer life.vesting period.
In most arrangements, the Company bills the customer prior to performing services, which requires the Company to record deferred revenue on the accompanying balance sheets.Income Taxes
Reclassifications
Certain prior year financial statement amounts have been reclassified for consistency with the current year presentation. More specifically, $319,798 has been reclassified from selling, general and administrative expenses to cost of revenues. These reclassifications had no effect on the reported results of operations.
Income Taxes
Income taxes are accounted for using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of other assets and liabilities. The Company providesWe provide for income taxes at the current and future enacted tax rates and laws applicable in each taxing jurisdiction. The Company usesWe use a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. The Company recognizesWe recognize interest and penalties related to income tax matters in selling, general and administrative expenseexpenses in the consolidated statement of operations.
The Company recognizesWe recognize deferred tax assets to the extent that its assets are more likely than not to be realized. In making such a determination, the Company considerswe consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. If the Company determineswe determine that itwe would be able to realize itsour deferred tax assets in the future in excess of theirits net recorded amount, itwe will make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. As of December 31, 2021, management has applied a valuation allowance to deferred tax assets when it is determined that the benefit from the deferred tax asset will not be able to be utilized in a future period.
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2019
December 31, 2021
Segments
Note 2 — Summary of Significant Accounting Policies(cont.)
Stock-Based Compensation
The Company accounts for grants of share-based awards to employees in accordance with ASC 718, Compensation— Stock Compensation. This standard requires compensation expense to be measured based on the estimated fair value of the share-based awards on the date of grant and recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. Share-based payments issued to non-employees are recorded at their fair values, are revalued quarterly as the equity instruments vest and are recognized as expense over the related service period in accordance with the provisions of ASC 718 and ASC 505, Equity. The value of each share grant is based on the share price on the grant date.
Segments
The Company’sOur chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance and information for different revenue streams is not evaluated separately. As such, the Company’s operations constitute a singleCompany has one operating segment, and one reportable segment.the decision-making group is the senior executive management team. In the following table, we disclose our long-lived assets by geographical location (in thousands):
| | | As of December 31, | |
| | | 2021 | | | 2020 | |
| Long-lived assets: | | | | | | |
| United States | | $ | 32,356 | | | $ | 9,994 | |
| Canada | | | 5,229 | | | | 5,074 | |
| Total | | $ | 37,585 | | | $ | 15,068 | |
Subsequent Events
The Company performs a review of events subsequent to the balance sheet date through the date the consolidated financial statements were issued. If we determine there are events requiring recognition or disclosure in the consolidated financial statements., we disclose the subsequent event.
Recently Issued Accounting Pronouncements
ASU 2014-09, Revenue from Contracts with Customers (Topic 606),2016-02 supersedes the revenue recognition requirements and industry-specific guidance under Revenue Recognition (Topic 605). Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. ASU No. 2014-09 also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. As an Emerging Growth Company, ASU No. 2014-09 is effective for the Company’s fiscal 2020 annual reporting period and for interim periods thereafter, with early adoption permitted, and allows for either full retrospective or modified retrospective adoption. The Company is evaluating the impact of adoption of the new standard on its consolidated financial statements.
In January 2016,The Financial Accounting Standards Board, or the FASB, has issued ASU No. 2016-01, Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which requires certain equity investmentsnew guidance related to be measured at fair value with changes in fair value recognized in net income, to record changes in instrument-specific credit riskthe accounting for financial liabilities measured under the fair value option in other comprehensive income.leases. The new standard is expected to reduce diversity in practice. The new standard is effective for the Company’s fiscal 2020 annual reporting period and for interim periods thereafter. The Company is evaluating the impact of adoption of the new standard on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard, as subsequently amended, 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 12months.12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. TheWe 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 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 the Companyus beginning July1, 2020 with early adoption permitted. The Company ison January 1, 2023. We are evaluating the impact of adoption of the new standard on itsour consolidated financial statements.
ASU 2018-15
The FASB has issued guidance to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance (i) provides criteria for determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense, (ii) requires an entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and (iii) clarifies the presentation requirements for reporting such costs in the entity’s consolidated financial statements. We have adopted this standard effective December 15, 2021, and there is currently no impact to our consolidated financial statements as a result of this guidance.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
ASU 2019-12
In March 2016,December 2019, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation: Improvements2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which aims to Employee Share-Based Paymentreduce complexity in accounting standards by improving certain areas of U.S. Generally Accepted Accounting which simplifies the accounting for share-based payment transactions, including the income tax consequences, classification Principles (“U.S. GAAP”) without compromising information provided to users of awards as either equity or liabilities, and classification on the statement of cash flows. Among other changes, the new standard allows non-public business entities to make an accounting policy election to either estimate the number of awards that are expected to vest or to account for forfeitures as they occur. The Company has adopted the new standard effective July 1, 2018. The adoption of this standard had no material impact on the Company’s consolidated financial statements.
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2019
Note 2 — Summary of Significant Accounting Policies (cont.)
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments. Among other things, these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The new standard2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the Company beginning July 1, 2021 with early adoption permitted. The Company is evaluating the impact of adoption of the new standard on its consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which eliminates the separate accounting model for nonemployee share-based payment awards and generally requires companies to account for share-based payment transactions with nonemployees in the same way as share-based payment transactions with employees. Under the new guidance, nonemployee share-based payment transactions are measured at the grant-date fair value and are no longer remeasured at the then-current fair values at each reporting date until the share options have vested. The amended guidance is effective for fiscal years beginning after December 15, 2018,2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company has adopted ASU 2019-12 effective December 15, 2021 and the adoption of this guidance did not have a significant effect on our consolidated financial statements.
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, with early adoption permitted. Adoption of the standard requires changes to be made prospectively. We do not anticipate a significant impact to our consolidated financial statements as a result of this new guidance.
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 Companyguidance 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 of adoption of the new standardthis guidance will have on itsour 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 are currently evaluating the impact this guidance will have on our consolidated financial statements..
ASU 2021-08
In August 2018,October 2021, the FASB issued ASU No. 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40)2021-08, Business Combinations (Topic 805): Customers Accounting for Implementation Costs IncurredContract 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 Cloud Computing Arrangement That Is a Service Contract, which broadens the scope of existing guidance applicable to internal-use software development costs. The update requires costs to be capitalized or expensed basedbusiness combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the natureacquisition 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 costs and the project stage in which theyamendment. We are incurred subject to amortization and impairment guidance consistent with existing internal-use software development cost guidance. The guidance is applicable for the Company beginning July 1, 2020 with early adoption permitted, including adoption in an interim period. The Company iscurrently evaluating the impact of adoption of the new standardthis guidance will have on itsour consolidated financial statements.
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU provides supplemental guidance and clarification to ASU No. 2016-13 and must be adopted concurrently with the adoption of ASU No. 2016-13. The Company has adopted the new standard effective April, 2019. The adoption of this standard had no material impact on the Company’s consolidated financial statements.
Note 3 — Balance Sheet Disclosures
Prepaid expenses consist of the following:
| | | June 30,
2019 | | | June 30,
2018 | |
| Software and technology | | $ | 237,930 | | | $ | 115,516 | |
| Professional services | | | 169,804 | | | | 47,626 | |
| Insurance | | | 159,940 | | | | 18,096 | |
| Deposit | | | 10,000 | | | | 10,000 | |
| | | $ | 577,674 | | | $ | 191,238 | |
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2019
December 31, 2021
Note 3 - Revenue
Financial Statement Impact of Adopting ASC 606, "Revenue from Contracts with Customers"
Note 3 — Balance Sheet Disclosures(cont.)On July 1, 2020, we adopted ASC 606 using the modified retrospective transition method and applied this method to all contracts that were not complete as of the date of adoption. The reported results as of December 31, 2021 and December 31, 2020, and for the year ended December 31, 2021 and the six months ended December 31, 2020 in the accompanying consolidated financial statements are presented under ASC 606, while the year ended June 30, 2020 has not been adjusted and is reported in accordance with historical accounting guidance in effect for that period.
Accrued liabilities consistThe most significant impacts of this standard relate to the timing of revenue recognition of fixed fees under our contracts, as well as the accounting for costs to obtain contracts. Under ASC 606, revenue recognition for subscription and implementation fees begins on the launch date and is recognized over time through the term of the following:contract. We then recognized the remaining balance of the fixed fees ratably over the remaining term of the contract. Additionally, under ASC 606, we now defer recognition of expense for sales commissions ("contract costs"). These contract costs are amortized to expense over the expected period of benefit. Before the adoption of ASC 606, we expensed these contract costs as incurred.
| | | June 30,
2019 | | | June 30,
2018 | |
| Professional fees | | $ | 49,205 | | | $ | 24,404 | |
| Sales taxes | | | 36,358 | | | | 66,347 | |
| Compensation | | | 354,724 | | | | 251,393 | |
| Leaf Data Systems contractors | | | 19,557 | | | | — | |
| Other | | | 40,706 | | | | 31,690 | |
| | | $ | 500,550 | | | $ | 373,834 | |
The adoption of ASC 606 under the modified retrospective transition method resulted in a net adjustment reducing the accumulated deficit by $0.2 million at July 1, 2020 and an increase to capitalized commissions, which are included in prepaid expenses and other current assets on the accompanying balance sheet. The adjustment consisted of $0.2 million related to the deferral of contract costs that were historically expensed as incurred
Revenue Recognition Policies for the year ended December 31, 2021 and the six months ended December 31, 2020
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. Software contracts are annual or multi-year 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. 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.
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. Consulting services revenue 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.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
Other Revenue. Our other revenue is derived primarily from point-of-sale hardware and other non-recurring revenue. We sell solo*TAG™ s and solo*CODE™s to customers by the roll of printed labels or as a digital code that allows customers to print directly their packing. When customers active a solo*TAG™ or solo*CODE™, we receive an activation fee, which is recognized upon activation by the customer. From time to time, we may purchase equipment for resale to customers. Such equipment is generally drop-shipped to our customers. 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.
Unbilled Receivables. Unbilled receivables are booked when services are delivered to our customers but not yet invoiced. Once invoiced, the unbilled receivables are reclassified to accounts receivable.
Revenue Recognition Policies for the year ended June 30, 2020
We derive our revenues primarily from the following sources: software revenues, which are primarily comprised of subscription fees from government and commercial customers accessing our enterprise cloud computing services and from customers paying for additional support beyond the standard support that is included in the basic subscription fees; and consulting services provided to operators interested in integrating our platform into their respective operations, such services include: assessing compliance requirements, monitoring systems and readiness; assisting with the application process; and evaluating the operator’s inspection readiness and business plan.
We commence revenue recognition when there is persuasive evidence of an arrangement, the service has been or is being provided to the customer, the collection of the fees is reasonably assured, and the amount of fees to be paid by the customer is fixed or determinable.
Deferred Revenue
Deferred revenue consists of payments received in advance of revenue recognition from subscription 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 accrued compensationCompany 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.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
The following table summarizes revenue disaggregation by product for the following periods (in thousands):
| | | Year Ended
December 31,
2021 | | | Six Months
Ended
December 31,
2020 | | | Year Ended
June 30,
2020 (1) | |
| Government | | $ | 3,258 | | | $ | 1,939 | | | $ | 4,906 | |
| Non-government | | | 17,427 | | | | 5,886 | | | | 7,667 | |
| | | $ | 20,685 | | | $ | 7,825 | | | $ | 12,573 | |
| (1) | As noted above, prior periods have not been adjusted for the adoption of ASC 606 and are presented in accordance with historical accounting guidance in effect for those periods. |
| | | Year Ended
December 31,
2021 | | | Six Months
Ended
December 31,
2020 | | | Year Ended
June 30,
2020 | |
| United States | | $ | 15,800 | | | $ | 5,212 | | | $ | 12,573 | |
| Canada | | | 4,885 | | | | 2,613 | | | | — | |
| | | $ | 20,685 | | | $ | 7,825 | | | $ | 12,573 | |
Contracts with Multiple Performance Obligations
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.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
Transaction Price Allocated to Future Performance Obligations
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 June 30, 2018 includes $122,000December 31, 2021 are part of accrued bonus earned bya 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 Company’s Chief Executive Officerpractical expedient does not apply, the aggregate transaction price allocated to the unsatisfied performance obligations was $16.6 million as of December 31, 2021, of which $11.1 million is expected to be recognized as revenue over the next twelve months.
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 year. 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 year ended December 31, 2021 (in thousands):
| | | As of
January 1,
2021 | | | Net
additions | | | Revenue
recognized | | | As of
December 31,
2021 | |
| Deferred revenue | | $ | 844 | | | | 12,657 | | | | 9,375 | | | $ | 4,126 | |
Of the $20.7 million of revenue recognized during the year ended December 31, 2021, $0.7 million was included in deferred revenue as of December 31, 2020.
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 year based on the estimated customer relationship period. The following table summarizes deferred contract cost activity for the year ended December 31, 2021 (in thousand):
| | | As of
January 1,
2021 | | | Additions | | | Amortized
costs (1) | | | As of
December 31,
2021 | |
| Deferred contract costs | | $ | 228 | | | | 512 | | | | (479 | ) | | $ | 261 | |
| (1) | Includes contract costs amortized to sales and marketing expense during the period. |
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
Note 4 - Acquisitions
2021 Acquisitions
Viridian Sciences
On April 1, 2021, we completed the acquisition of Viridian, a membercannabis business management software provider that is built on SAP Business One. We acquired Viridian in exchange for 1.0 million shares of our common stock valued at approximately $6.0 million. In addition to the stock consideration, the agreement provides for contingent consideration of up to $1.0 million, payable in additional common stock, if Viridian meets certain revenue criteria. The contingent consideration will be recorded as the estimated fair value on the acquisition date and adjusted to estimated fair value in each subsequent reporting period until settlement.
| | | Preliminary
Fair Value | |
| Shares issued | | $ | 6,186 | |
| Contingent consideration | | | 2 | |
| Total preliminary fair value of consideration transferred | | $ | 6,188 | |
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the Company’s Boarddate of Managersacquisition (in thousands):
| | | Preliminary
Fair Value | |
| Accounts receivable | | | 556 | |
| Prepaid expenses and other current assets | | | 148 | |
| Capitalized software | | | 423 | |
| Acquired technology | | | 470 | |
| Customer relationships | | | 820 | |
| Acquired trade name | | | 20 | |
| Goodwill | | | 5,408 | |
| Accounts payable and accrued expenses | | | (350 | ) |
| Deferred tax liabilities | | | (307 | ) |
| Deferred revenue | | | (1,000 | ) |
| Net assets acquired | | $ | 6,188 | |
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.
The amounts of Viridian's revenue and net income included in our consolidated statement of operations from the acquisition date of April 1, 2021, to December 31, 2021 were $2.4 million and $0.3 million, respectively.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
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 consists of (1) $5,000,000 in cash, (2) $12,000,000 in stock, which was settled by issuing 3.6 million shares of our common stock, and (3) contingent value rights to be issued pursuant to a rights indenture entitling the holders thereof to receive, subject to certain adjustments as set forth in the Agreement, an aggregate of up to $8,000,000 in stock, in the event that NAV achieves certain revenue targets as specified in the Agreement. These rights are accounted for as contingent consideration and are currently recorded at preliminary fair value which will be updated upon finalization of purchase accounting.
| | | Preliminary
Fair Value | |
| Shares issued | | $ | 12,000 | |
| Cash | | | 5,542 | |
| Contingent consideration | | | 6,300 | |
| Total preliminary fair value of consideration transferred | | $ | 23,842 | |
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
| | | Preliminary
Fair Value | |
| Cash | | | 527 | |
| Accounts receivable | | | 486 | |
| Prepaid expenses and other current asset | | | 261 | |
| Fixed Assets | | | 93 | |
| Non-compete agreement | | | 80 | |
| Acquired technology | | | 1,040 | |
| Customer relationships | | | 13,810 | |
| Acquired trade name | | | 270 | |
| Goodwill | | | 14,043 | |
| Accounts payable and accrued expenses | | | (826 | ) |
| Deferred tax liabilities | | | (2,642 | ) |
| Deferred revenue | | | (3,300 | ) |
| Net assets acquired | | $ | 23,842 | |
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.
The amounts of 365 Cannabis' revenue and net loss included in our consolidated statement of operations from the acquisition date of October 1, 2021, to December 31, 2021 were $2.4 million and $0.4 million, respectively.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
2020 Acquisitions
Trellis Solutions, Inc.
On April 8, 2020, we acquired Trellis, a cannabis cultivation management and compliance software company in an all-stock transaction. Our estimated acquisition date fair value of the consideration transferred for Trellis was as follows (in thousands):
| Common shares issued | | $ | 2,531 | |
| Contingent consideration | | | 998 | |
| Total estimated fair value of consideration | | $ | 3,529 | |
We incurred $0.1 million of transaction costs directly related to the acquisition that is reflected in general and administrative expenses in our consolidated statement of operations during the year ended June 30, 2018 and such bonus2020.
We issued 349,650 shares of our common stock valued at $7.24 per share, the closing price of a share of our common stock on the date of acquisition in exchange for 100% of the outstanding stock of Trellis. We have also agreed to pay additional consideration calculated as annualized revenue derived from previously identified customers for the month of September 2020 multiplied by five. The contingent consideration is calculatedpayable in shares based on the Company’s operational results. 20-day volume-weighted average price, or VWAP. At June 30, 2020, we estimated the fair value of the contingent consideration to be $0 and recorded a gain of $1.0 million on the change in the fair value of contingent consideration included in general and administrative expenses in the consolidated statement of operations during the year ended June 30, 2020.
The accrued compensationfollowing table summarizes our estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
| Cash | | $ | 21 | |
| Accounts receivable, net | | | 91 | |
| Other assets | | | 6 | |
| Acquired technology | | | 210 | |
| Acquired trade name | | | 80 | |
| Customer relationships | | | 220 | |
| Goodwill | | | 3,216 | |
| Accounts payable and accrued expenses | | | (284 | ) |
| Deferred revenue | | | (31 | ) |
| Net assets acquired | | $ | 3,529 | |
The excess of purchase consideration over the fair value of net tangible and intangible assets acquired 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. During the six months ended December 31, 2020, we recorded net adjustments to assets and liabilities acquired of $14.3 thousand. The amounts of Trellis’s revenue and net loss included in our consolidated statement of operations from the acquisition date of April 10, 2020 to June 30, 2019, includes approximately $215,0002020 were $216.0 thousand and $17.0 thousand, respectively.
solo sciences, inc.
On January 15, 2020, we closed on a stock purchase agreement with substantially all of the shareholders of Solo pursuant to which we acquired all right, title, and interest in 80.4% of the issued and outstanding capital stock of Solo, calculated on a fully diluted basis. As a result of our initial investment, Solo became a controlled subsidiary and we commenced consolidation of Solo on January 15, 2020. The estimated acquisition date fair value of the consideration transferred for Solo was $17.9 million. During the year ended June 30, 2020, we completed the preliminary valuation of the contingent consideration and recorded a measurement period adjustment to reflect this liability on our balance sheet. The estimated fair value of consideration recorded consisted of the following (in thousands):
| Common shares issued | | $ | 17,550 | |
| Contingent consideration | | | 389 | |
| Total estimated fair value of consideration | | $ | 17,939 | |
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
We incurred $0.3 million of transaction costs directly related to the acquisition, which is reflected in general and administrative expenses in our consolidated statement of operations during the year ended June 30, 2020.
We exchanged 1,950,000 shares of our common stock, valued at $9.00 per share, the closing price of a share of our common stock on the date of acquisition. In addition to the stock consideration, we agreed to pay contingent consideration in the form of fees payable to the legacy Solo shareholders equal to the lesser of (i) $0.01 per solo*TAG™ and solo*CODE™ sold or (ii) 7% of net revenue. The fees were to be paid annually until the earlier of: (1) our shares trading above $12 per share for any consecutive 20 trading days in a 30-day period; (b) upon our no longer owning a majority stake in Solo; or (c) upon expiration of the patents related to solo*TAG™ and solo*CODE™, which is December 1, 2029. This fee represents contingent consideration and was recorded at fair value as of the date of acquisition. Contingent consideration is adjusted to fair value each period with changes in fair value being recognized in earnings at each reporting period.
We also acquired an option to acquire the noncontrolling interests in Solo during the 12 months following the close for either cash or shares. Beginning with the expiration of our option, the noncontrolling interests in Solo have a 3-month option to acquire between 40% and 55% of Solo back from us for cash. On July 31, 2020, we entered into an amendment to the stock purchase agreement to exercise our option to acquire the noncontrolling interests in Solo, for 800,000 shares of our common stock, this transaction will be recorded as an equity transaction, with no effect to the value of the assets acquired or liabilities assumed. In connection with the amendment, the selling shareholders agreed to cancel the contingent consideration in the future and waived a right to any amount that would have been earned prior to the amendment. We recorded a gain on settlement of the contingent consideration liability during the six months ended December 31, 2020 in general and administrative expenses in our consolidated statement of operations.
During the year ended June 30, 2020, we obtained additional information regarding the valuation of the assets acquired and liabilities assumed. We have recorded a measurement period adjustment to allocate the acquisition price to intangible assets, goodwill, accrued bonus earnedliabilities, and the fair value of noncontrolling interests. The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
| Cash | | $ | 101 | |
| Prepaid expenses and other assets | | | 22 | |
| Furniture, fixtures, and equipment | | | 2 | |
| Acquired technology | | | 7,160 | |
| Acquired trade name | | | 340 | |
| Goodwill | | | 17,025 | |
| Accounts payable and accrued liabilities | | | (1,158 | ) |
| Fair value of noncontrolling interests | | | (5,553 | ) |
| Net assets acquired | | $ | 17,939 | |
The excess of purchase consideration over the fair value of net tangible and intangible assets acquired was recorded as goodwill, which is primarily attributed to expanded market opportunities, for which there is no basis for U.S. income tax purposes. The amounts of Solo’s revenue and net loss included in our consolidated statement of operations from the acquisition date of January 15, 2020 to June 30, 2020 were $23.0 thousand and $1.5 million, respectively.
During the six months ended December 31, 2020, the Company recorded an impairment of $2.7 million related to Solo’s developed technology. See Note 6 – Goodwill and Intangible Assets, Net for further discussion of the intangible asset impairment.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
Ample Organics
On July 7, 2020, we completed the acquisition of Ample Organics (“Ample”), Ample provides a seed-to-sale platform to clients in Canada, which offers tracking, reporting, and compliance tools to cannabis cultivators, processors, sellers, and clinics. We acquired 100% of the stock of Ample Organics for 3.3 million exchangeable shares of one of our wholly-owned subsidiaries. The exchangeable shares may be exchanged, at the option of the holder, for shares of Akerna common stock on a one-for-one basis, therefore the exchangeable shares issued were valued at $7.65 per share, the closing price of an equivalent share of Akerna common stock, $30.7 million was the aggregate value of the exchangeable shares. In addition to the stock consideration, we paid $5.5 million in cash, which was used to settle all of Ample's then outstanding debt. In addition to the stock and cash consideration, the agreement provides for contingent consideration of up to CAD$10,000,000, payable in exchangeable shares, payable if Ample's Recurring Revenue recognized during the 12 months after the acquisition date is CAD$9,000,000 or more. The contingent consideration amount is reduced by an amount equal to the product of CAD$6.67 multiplied by the difference between CAD$9,000,000 and the amount of Recurring Revenue realized during the 12 months following the acquisition. The contingent consideration will be recorded as the estimated fair value on the acquisition date and adjusted to estimated fair value in each subsequent reporting period until settlement.
| | | Preliminary
Fair Value | |
| Exchangeable shares issued | | $ | 25,203 | |
| Cash | | | 5,724 | |
| Contingent consideration | | | 604 | |
| Total estimated fair value of consideration transferred | | $ | 31,531 | |
We incurred $2.9 million of total transaction costs directly related to the acquisition of Ample that is reflected in general and administrative expenses in our consolidated statements of operations, of which $1.1 million and $1.8 million was recognized during the six months ended December 31, 2020 and the year ended June 30, 2020, respectively.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
| | | Preliminary
Fair Value | |
| Cash | | $ | 445 | |
| Accounts receivable | | | 917 | |
| Prepaid expenses and other current assets | | | 595 | |
| Acquired technology | | | 850 | |
| Customer relationships | | | 2,660 | |
| Acquired trade name | | | 285 | |
| Goodwill | | | 25,806 | |
| Furniture, fixtures and equipment | | | 1,327 | |
| Accounts payable and accrued expenses | | | (805 | ) |
| Deferred revenue | | | (549 | ) |
| Net assets acquired | | $ | 31,531 | |
The excess of purchase consideration over the preliminary 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.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
During the six months ended December 31, 2020, the Company recorded an impairment to goodwill for $4.2 million related to Ample. See Note 6 – Goodwill and Intangible Assets, Net for further discussion of the goodwill impairment.
The amounts of Ample’s revenue and net income included in our consolidated statement of operations from the acquisition date of July 7, 2020, to December 31, 2020 were $2.6 million and $0.1 million, respectively.
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):
| | | Year Ended December 31, | |
| | | 2021 | |
| Revenue | | $ | 28,847 | |
| Net loss | | $ | (31,423 | ) |
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, and the Trellis, Solo and Ample acquisitions, as if they had been completed as of July 1, 2019 (in thousands):
| | | Six Months
Ended
December 31, | | | Year Ended June 30, | |
| | | 2020 | | | 2020 | |
| Revenue | | $ | 14,026 | | | $ | 27,523 | |
| Net loss | | $ | (17,650 | ) | | $ | (20,250 | ) |
The pro forma financial information for all periods presented above has been calculated after adjusting the results of Solo, Trellis, Ample, 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. 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, 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 $0.0001 per share and a preference in liquidation of $1.00. The special voting preferred stock entitles the holder to an aggregate number of votes equal to the number of the exchangeable shares issued and outstanding from time to time and which we do not own. The holder of the special voting preferred stock and the holders of shares of Akerna common stock will both together as a single class on all matters submitted to a vote of our shareholders. At such time as the special voting preferred stock has not votes attached to it, the share shall be automatically cancelled. The exchangeable shares do not have a par value.
On September 1, 2020, several Ample shareholders exchanged a total of 627,225 exchangeable shares with a value of $4,798,271 for the same number of shares of Akerna common stock.The exchange was accounted for as an equity transaction and we did not recognize a gain or loss on this transaction. As of December 31, 2021, there were a total of 309,286 Exchangeable Shares issued and outstanding.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
Note 5 - Balance Sheet Disclosures
Prepaid expenses and other current assets consisted of the following:
| | | As of December 31, | |
| | | 2021 | | | 2020 | |
| | | | | | | |
| Software and technology | | $ | 687,740 | | | $ | 480,651 | |
| Professional services, dues and subscriptions | | | 546,126 | | | | 826,195 | |
| Insurance | | | 264,097 | | | | 243,222 | |
| Deferred contract costs | | | 260,899 | | | | 227,718 | |
| Unbilled receivable | | | 506,984 | | | | 612,446 | |
| Other | | | 117,918 | | | | 68,495 | |
| Total prepaid expenses and other current assets | | $ | 2,383,764 | | | $ | 2,458,727 | |
Accounts payable, accrued expenses and other current liabilities consisted of the following:
| | | As of December 31, | |
| | | 2021 | | | 2020 | |
| Accounts payable | | $ | 1,943,457 | | | $ | 513,610 | |
| Professional fees | | | 319,590 | | | | 233,667 | |
| Sales taxes | | | 360,361 | | | | 216,367 | |
| Compensation | | | 1,123,467 | | | | 311,379 | |
| Contractors | | | 1,288,730 | | | | 538,618 | |
| Settlements and legal | | | 681,045 | | | | 831,232 | |
| Other | | | 346,870 | | | | 543,703 | |
| Total accounts payable, accrued expenses and other current liabilities | | $ | 6,063,520 | | | $ | 3,188,576 | |
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
Note 6 - Goodwill and Intangible Assets, Net
Goodwill
The following table reflects the changes in the carrying amount of goodwill:
| Balance as of June 30, 2020 | | $ | 20,254,309 | |
| Adjustments to Trellis' goodwill | | | (14,300 | ) |
| Additions due to acquisition of Ample | | | 25,806,518 | |
| Goodwill impairment | | | (4,172,000 | ) |
| Balance as of December 31, 2020 | | $ | 41,874,527 | |
| Additions due to acquisition of Viridian | | | 5,408,884 | |
| Additions due to acquisition of 365 Cannabis | | | 14,042,580 | |
| Goodwill impairment | | | (14,383,310 | ) |
| Balance as of December 31, 2021 | | $ | 46,942,681 | |
Impairment
Based on our qualitative assessment of goodwill, we determined it was necessary to perform a quantitative valuation of goodwill as of December 31, 2021. We determined there were two reporting units: the enterprise reporting unit which is comprised of the enterprise software offerings and the non-enterprise reporting unit which is comprised of the non-enterprise software offerings. The valuation of our goodwill was determined with the assistance of an independent valuation firm using the income approach (discounted cash flows method) and the market approach (guideline public company method). Our significant assumptions in these analyses include, but are not limited to, future cash flow projections, the weighted average cost of capital, the discount rate, the implied control premium, the terminal growth rate, and the tax rate. The Company’s Chief Executive Officer.estimates of future cash flows are based on current regulatory and economic climates, recent operating results, and planned business strategies. These estimates could be negatively affected by changes in federal, state, or local regulations or economic downturns. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from the Company’s estimates. If the Company’s ongoing estimates of future cash flows are not met, the Company may have to record additional impairment charges in future periods. The Company also uses the Guideline Public Company Method, a form of the market approach (utilizing Level 3 unobservable inputs), which is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. As such, we believe the current assumptions and estimates utilized are both reasonable and appropriate. During the six months ended December 31, 2020, primarily as a result of delays in executing on strategic initiatives related to acquisitions completed in 2020, we recorded a $4.2 million impairment to goodwill.
Enterprise Reporting Unit
For the year ended December 31, 2021, no impairment to goodwill was recorded for our enterprise reporting unit as the fair value exceeded the carrying value as of December 31, 2021. To perform our analysis, we applied a 50% weighting to the market approach and 50% weighted to the income approach.
Non-Enterprise Reporting Unit
For the year ended December 31, 2021, primarily due to a continued decline in market valuation and a flattening in the operating results of our non-enterprise reporting unit compared to acquisition assumption, we recorded an impairment expense of $14.4 million related to our non-enterprise reporting unit. To perform our analysis, we applied a 25% weighting to the income approach and a 75% weighting to the market approach.
Finite-lived Intangible Assets, Net
We performed a two step impairment test for the asset groups that had indicators of impairment in the current year under ASC 360 and as a result of this analysis we did not identify any impairment. For the six months ended December 31, 2020, we determined that the carrying value of Solo’s developed technology and trade name exceeded it’s fair value, resulting in an impairment of $2.7 million.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
Intangible assets as of December 31, 2021 consist of the following:
| | | Weighted average remaining amortization period
(in years) | | Gross carrying amount | | | Accumulated
amortization | | | Impairment | | | Net carrying
amount | |
| Acquired developed technology | | 3.35 | | $ | 7,138,080 | | | $ | (2,815,158 | ) | | $ | — | | | $ | 4,322,922 | |
| Acquired trade names | | 3.09 | | | 871,920 | | | | (286,799 | ) | | | — | | | | 585,121 | |
| Customer relationships | | 10.18 | | | 17,510,000 | | | | (878,250 | ) | | | — | | | | 16,631,750 | |
| Non-compete agreement | | 1.75 | | | 80,000 | | | | (10,000 | ) | | | — | | | | 70,000 | |
| Total Intangible assets | | | | $ | 25,600,000 | | | $ | (3,990,207 | ) | | $ | — | | | $ | 21,609,793 | |
| | | | | | | | | | | | | | | | | | | |
| Capitalized software - In-service | | 2.02 | | | 8,807,843 | | | | (4,423,887 | ) | | | — | | | | 4,383,956 | |
| Capitalized software - Work in Progress | | N/A | | | 3,224,203 | | | | — | | | | (296,483 | ) | | | 2,927,720 | |
| Total Capitalized Software | | | | | 12,032,046 | | | | (4,423,887 | ) | | | (296,483 | ) | | | 7,311,676 | |
| Total finite-lived intangible assets | | | | $ | 37,632,046 | | | $ | (8,414,094 | ) | | $ | (296,483 | ) | | $ | 28,921,469 | |
Intangible assets as of December 31, 2020 consist of the following:
| | | Weighted average
remaining amortization
period
(in years) | | Gross carrying amount | | | Accumulated
amortization | | | Impairment | | | Net carrying
amount | |
| Acquired developed technology | | 3.77 | | $ | 8,220,000 | | | $ | (1,434,155 | ) | | $ | (2,591,920 | ) | | $ | 4,193,925 | |
| Acquired trade names | | 5.12 | | | 705,000 | | | | (97,676 | ) | | | (123,080 | ) | | | 484,244 | |
| Customer relationships | | 13.04 | | | 2,880,000 | | | | (169,374 | ) | | | — | | | | 2,710,626 | |
| Total Intangible assets | | | | $ | 11,805,000 | | | $ | (1,701,205 | ) | | $ | (2,715,000 | ) | | $ | 7,388,795 | |
| | | | | | | | | | | | | | | | | | | |
| Capitalized software - In-service | | 1.62 | | | 4,593,512 | | | | (1,401,953 | ) | | | — | | | | 3,191,559 | |
| Capitalized software - Work in Progress | | N/A | | | 734,180 | | | | — | | | | — | | | | 734,180 | |
| Total Capitalized Software | | | | | 5,327,692 | | | | (1,401,953 | ) | | | — | | | | 3,925,739 | |
| Total finite-lived intangible assets | | | | $ | 17,132,692 | | | $ | (3,103,158 | ) | | $ | (2,715,000 | ) | | $ | 11,314,534 | |
We record amortization expense associated with acquired developed technology, acquired trade names, and customer relationships. The amortization expense of all finite-lived intangible assets, which includes capitalized software was $5.6 million, $1.8 million, and $1.3 million for the year ended December 31, 2021, six months ended December 31, 2020, and year ended June 30, 2020, respectively. The amortization expense for the year ended December 31, 2021 includes $0.3 million of capitalized software write offs.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
As of December 31, 2021, expected amortization expense relating to in-service capitalized software and purchased intangible assets for each of the next five years and thereafter is as follows:
| | | Acquired Intangible Assets | | | Capitalized Software- In-service | |
| 2022 | | $ | 3,445,741 | | | $ | 2,722,663 | |
| 2023 | | | 3,131,575 | | | | 1,144,351 | |
| 2024 | | | 2,801,991 | | | | 275,884 | |
| 2025 | | | 1,973,934 | | | | 110,215 | |
| 2026 | | | 1,851,434 | | | | 59,112 | |
| Thereafter | | | 8,405,118 | | | | 71,731 | |
| Total | | $ | 21,609,793 | | | $ | 4,383,956 | |
Note 4 — Reverse Merger7 - Fixed assets, net
Fixed assets consisted of the following:
| | | As of
December 31, | | | As of
December 31, | |
| | | 2021 | | | 2020 | |
| | | | | | | |
| Furniture and computer equipment | | $ | 235,042 | | | $ | 131,300 | |
| Leasehold improvements | | | 14,064 | | | | 1,175,556 | |
| | | | 249,106 | | | | 1,306,856 | |
| Less: accumulated depreciation | | | (95,955 | ) | | | (113,423 | ) |
| Fixed assets, net | | $ | 153,151 | | | $ | 1,193,433 | |
Depreciation expense related to our fixed assets for the year ended December 31, 2021, six months ended December 31, 2020, and Private Placementyear ended June 30, 2020 was $127,731, $240,742, and $27,951, respectively. During the year ended December 31, 2021, we terminated our office lease in Toronto, Canada and wrote off $1.2 million of fixed assets. During the six months ended December 31, 2020, we sold furniture and computer equipment for $25,561 with a cost of $191,389 and accumulated depreciation of $106,555 resulting in a $59,273 loss in the consolidated statements of operations for the six months ended December 31, 2020 related to these disposals.
Note 8 - Investments
Investment in and License Agreement with Zol Solutions, Inc.
On October 7, 2019, we participated in an offering of preferred stock of Zol Solutions, Inc. (“ZolTrain”) along with other investors in which we purchased 203,000 shares of Series Seed Preferred Stock (the “ZolTrain Preferred”) for a purchase price of $250,000, which represents a noncontrolling interest in ZolTrain.
The ZolTrain Preferred is convertible into shares of common stock of ZolTrain at a conversion rate of $1.232 per share at the option of the holder and contains certain anti-dilution protection in the event of certain future issuances of securities by ZolTrain. We are entitled to vote the number of common shares in which the ZolTrain Preferred is convertible into at any meeting of the ZolTrain stockholders.
Reverse Merger
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
The ZolTrain Preferred also provides us with rights of first refusal with respect to newly issued securities of ZolTrain as well as issued and outstanding securities of ZolTrain that are offered to third parties. In connection with the agreement, one of Akerna's executives was appointed as one of three members of ZolTrain’s board of directors. At that time, we had determined that ZolTrain is a VIE for accounting purposes, given we could exercise significant influence, however we were not required to consolidate ZolTrain in our consolidated financial statements because we are not ZolTrain’s primary beneficiary. We had concluded that the ZolTrain Preferred was in-substance common stock because the liquidation preference provided was not substantive, and the equity method of accounting is applicable to in-substance common stock. As a result of our representation on the board of directors, we determined that we can exert significant influence over the day to day operations of ZolTrain and therefore; we account for this investment using the equity method of accounting, which required us to recognize our share of the ZolTrain operations in our results of operations. For year ended December 31, 2021, we recognized equity in loss of investee of $12,641 which represents our share of ZolTrain's losses since our investment
During the third quarter of 2021, following the loss of our seat on the Board, we concluded that we should no longer apply the equity method of accounting for the investment in ZolTrain. We determined that we hold an equity security in ZolTrain for which the fair value is not readily determinable. Accordingly, starting in the third quarter we elected to measure the investment at cost minus impairment, plus or minus changes resulting from observable price changes. When indicators of impairment exist, we estimate the fair value and record an impairment charge if the carrying value of the investment exceeds its estimated fair value. Any impairment charges are recorded in other (expense) income, net, in our consolidated statements of operations. The carrying amount of our investment in ZolTrain was $226,101 as of December 31, 2021 and we did not recognize any impairment on the investment during the current year.
As noted above, on October 10, 2018, the Company
Subsequent to our initial investment, we entered into a nonexclusive license/reseller agreement with ZolTrain, effective October 24, 2019, to provide ZolTrain’s online cannabis training platform as a co-branded integration option into our MJ Platform and Leaf Data Systems, which was a related party transaction in the Merger Agreement (Note 1). On January 18, 2019,prior year. Under the partiesterm of the agreement we entered into, ZolTrain will share subscription-based revenue generated from our customers with us. The amount of the share of the revenue for each of us and ZolTrain will depend on both (a) the number of training modules accessed by a customer and (b) which party created the accessed content. In addition to the Mergerrevenue sharing arrangement, the license/reseller agreement provides us with the right to receive additional consideration from ZolTrain in the form of an equity earnout if certain revenue milestones are achieved during 2020, 2021, and 2022. Our ability to recognize revenue from the additional earnout consideration in the future will mainly depend on whether it becomes probable that such revenue milestones will be achieved. For the year ended December 31, 2021, the six months ended December 31, 2021, and the year ended June 30, 2020, we recognized $25.9 thousand, $0, and $0 of revenue from this agreement.
Note 9 - Long Term Debt
Long-term debt consisted of the following at December 31, 2021:
| Convertible notes (at fair value) | | $ | 17,305,000 | |
| Less: current maturities | | | 13,200,000 | |
| Total long-term debt, less current portion | | $ | 4,105,000 | |
Senior Secured Convertible Notes - 2020
On June 8, 2020, we entered into a Securities Purchase Agreement, or SPA, with two institutional investors (the "2020 Note Holders"), to sell a new series of senior secured convertible notes (the "2020 Notes"), of Akerna in a private placement to the 2020 Note Holders, in the aggregate principal amount of $17.0 million having an aggregate original issue discount of 12%, and ranking senior to all outstanding and future indebtedness of Akerna. The 2020 Notes were sold on June 9, 2020, with an original issue discount pursuant to which the Note Holders paid $880 per each $1,000 in principal amount of the 2020 Notes. The 2020 Notes do not bear interest except upon the occurrence of an event of default, in which event the applicable rate will be 15.00% per annum.
Pursuant to the SPA and the 2020 Notes, we and certain of its subsidiaries will enter into a Security and Pledge Agreement (the “Security Agreement”) with the lead investor, in its capacity as collateral agent (in such capacity, the “Collateral Agent”) for all holders of the Notes. The Security Agreement creates a first priority security interest in all of the personal property of the Company and certain of its subsidiaries of every kind and description, tangible or intangible, whether currently owned and existing or created or acquired in the future (the “Collateral”).
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
Under the Security Agreement we agree to certain conditions on its maintenance and use of the Collateral, including but not limited to the location of equipment and inventory, the condition of equipment, the payment of taxes and prevention of liens or encumbrances, the maintenance of insurance, the protection of intellectual property rights, and limitations on transfers and sales.
Upon the occurrence of an “Event of Default” under the Security Agreement, the Collateral Agent will have certain rights under the Security Agreement including taking control of the Collateral and, in certain circumstances, selling the Collateral to cover obligations owed to the holders of MJF’s outstanding preferredthe 2020 Notes pursuant to its terms. “Event of Default” under the Security Agreement means (i) any defined event of default under any one or more of the transaction documents (including the 2020 Notes), in each instance, after giving effect to any notice, grace, or cure periods provided for in the applicable document, (ii) the failure by us to pay any amounts when due under the 2020 Notes or any other transaction document, or (iii) the breach of any representation, warranty or covenant by the Company under the Security Agreement.
The 2020 Notes mature on June 1, 2023, are payable in installments beginning on October 1, 2020, and may not be prepaid. The 2020 Notes are convertible at any time, at the election of the Holders and subject to certain limitations, into shares of common unitsstock at a rate equal to the amount of principal, interest, if any, and unpaid late charges, if any, divided by a conversion price of $11.50.
In connection with the occurrence of an event of default, the Holders of the 2020 Notes will be entitled to convert all or any portion of the 2020 Notes at an alternate conversion price equal to the lower of (i) the conversion price then in effect, or (ii) 80% of the lower of (x) the volume-weighted average price, or VWAP, of the common stock as of the trading day immediately preceding the applicable date of determination, or (y) the quotient of (A) the sum of the VWAP of the common stock for each of the two trading days with the lowest VWAP of the common stock during the ten (10) consecutive trading day period ending and including the trading day immediately prior to the applicable date of determination, divided by (B) two, but not less than $1.92.
We elected to use the fair value option to account for the 2020 Notes. The fair value of the 2020 Notes on issuance was recorded as $15.0 million. During the year ended June 30, 2020, the fair value of the 2020 Notes decreased by $0.8 million. Of the adjustment, a decrease of $0.1 million resulted from instrument-specific credit risk and was recognized as other comprehensive income and accumulated in equity and a decrease of $0.7 million was recognized as current period other expense in our consolidated statement of operations.
During the six months ended December 31, 2020, we made $1.8 million in principal payments on the 2020 Notes, of which $1.5 million was settled in cash and the remaining $0.3 million was settled in common stock. During the six months ended December 31, 2020, the fair value of the 2020 Notes increased by $1.0 million. Of the adjustment, an increase of $0.1 million resulted from instrument-specific credit risk and was recognized as other comprehensive income and accumulated in equity and an increase of $0.9 million was recognized as current period other expense in our consolidated statement of operations. As of December 31, 2020, the fair value of the 2020 Notes on our consolidated balance sheet was $13.4 million.
During the year ended December 31, 2021, up until the date the 2020 Notes were paid in full and replaced by the 2021 Senior Convertible Notes, we made $15.2 million in principal payments on our convertible notes, of which $5.1 million was settled in cash and the remaining $10.1 million was settled in common stock. During the year ended December 31, 2021, the fair value of the Convertible Notes increased by $2.0 million. Of the adjustment, an increase of $0.02 million resulted from instrument-specific credit risk and was recognized as other comprehensive income and accumulated in equity and an increase of $2.0 million was recognized as current period other expense in our consolidated statement of operations. On October 5, 2021, we recognized a gain of $0.2 million in connection with the payoff of the 2020 Notes.
Amendment
On December 23, 2020, we entered into an allocation agreement which served to modifywaivers with the allocationHolders of the merger consideration prescribed2020 Notes, pursuant to which we and the Holders, separately and not jointly, agreed to waive certain terms and conditions of the 2020 Notes as follows:
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
The Holders irrevocably waived the last sentence of Section 8(a) of the Notes requiring that all installment amounts payable under the 2020 Notes prior to April 1, 2021 be paid in cash pursuant to installment redemptions. We may now elect, in its sole discretion, to pay installment amounts under the 2020 Notes prior to April 1, 2021, by issuing shares of common stock pursuant to installment conversions or by paying cash pursuant to installment redemptions, in each case in accordance with the existing terms of the Convertible Notes.
We irrevocably waived the prohibition on acceleration of installment amounts in Section 8(e) of the 2020 Notes solely in relation to the Installment Amount for January 4, 2020, to permit the Holders to accelerate the January 4, 2021 installment amount, in whole or in part, to one or more acceleration dates from December 24, 2020 through to and including January 4, 2021, as elected by each Holder.
We and the Holders agreed that we may irrevocably waive the installment scheduled principal amount for any installment date by setting forth in the installment notice for that installment date an installment amount greater than the installment scheduled principal amount due and payable on the next installment date. Each Holder may then consent to all or a portion of such increased installment amount for such installment date on the trading day immediately prior to such installment date. Any increased amount for an installment amount above the installment scheduled principal amount for such installment date will reduce the principal amount under the 2020 Notes.
In relation to the January 4, 2021 installment amount, the Company delivered installment notices to the Holders increasing the installment amount for January 4, 2021, in the aggregate, by $2,062,500.
Senior Secured Convertible Notes - 2021
On October 5, 2021, we entered into a securities purchase agreement with the two institutional investors that held the Company's 2020 Notes to sell senior secured notes in a private placement (the "Senior Convertible Notes"). The Senior Convertible Notes have an aggregate principal amount of $20.0 million, an aggregate original issue discount of 10%, and rank senior to all our other outstanding and future indebtedness. Approximately $3.3 million of the proceeds from the Senior Convertible Notes were used to payoff the 2020 Notes, which were then to be cancelled. The net proceeds from the issuance of the Senior Convertible Notes was approximately $14.6 million, following the original issue discount and deductions for expenses and paydown of the 2020 Notes. These net proceeds will be used to support Akerna's ongoing growth initiatives and continued investment in current and future technology infrastructure. The Senior Convertible Notes are convertible into shares of common stock of Akerna at a conversion price of $4.05 per share. The Senior Convertible Notes mature on October 5, 2024 and are to be repaid in monthly installments beginning on January 1, 2022. The Senior Convertible Notes can be repaid in common shares or cash.
In connection with the occurrence of an event of default, the Holders of the Senior Convertible Notes will be entitled to convert all or any portion of the Senior Convertible Notes at an alternate conversion price equal to the lower of
(i) the conversion price then in effect, or (ii) 80% of the lower of (x) the volume-weighted average price, or VWAP, of the common stock as of the trading day immediately preceding the applicable date of determination, or (y) the quotient of (A) the sum of the VWAP of the common stock for each of the two trading days with the lowest VWAP of the common stock during the ten (10) consecutive trading day period ending and including the trading day immediately prior to the applicable date of determination, divided by (B) two, but not less than $0.54.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
We have elected to use the fair value option to account for the Senior Convertible Notes. The fair value of the Senior Convertible Notes on issuance was recorded as $18.0 million. During the year ended December 31, 2021, the fair value of the Senior Convertible Notes decreased by $0.7 million. Of the adjustment, a decrease of $0.03 million resulted from instrument-specific credit risk and was recognized as other comprehensive income and accumulated in equity and a decrease of $0.7 million was recognized as current period other expense in our consolidated statement of operations. As of December 31, 2020, the fair value of the Senior Convertible Notes on our consolidated balance sheet was $17.3 million. During the year ended December 31, 2021, we made no principal payments on our Senior Convertible Notes.
Paycheck Protection Program Loan
On March 27, 2020, former President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlined the provisions of the Paycheck Protection Program (the “PPP”). On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act, was signed into law increasing funding provided by the Merger Agreement.CARES Act and on June 5, 2020, the Paycheck Protection Program Flexibility Act extended the program until December 31, 2020. Under the terms of the allocation agreement, ifCARES Act, PPP loan recipients can apply for and be granted forgiveness for all, or a portion of loan granted under the merger closes, additional shares comprisingprogram. Such forgiveness will be determined, subject to limitations, based on the merger consideration shall be reallocated to holdersuse of the profitloan proceeds for payment of payroll costs and any payments of mortgage interest, units of MJF, which additional shares shall be funded from shares otherwise issuable to such holders of MJF’s preferredrent, and common units.utilities.
On April 17, 2019,21, 2020, the Merger Agreement was amendedCompany issued a promissory note to (i) increaseKeyBank National Association (“KeyBank”) in the size of the MTech board of directors following the closing of the merger from seven (7) to eight (8) directors, (ii) increase the number of directors appointed prior to the Closing by MJF from four (4) to five (5) directors (which additional director will qualify as an independent director under the Nasdaq Stock Market rules) and (iii) revise the classification of directors so that the Class B directors will include two (2) MJF directors and one (1) MTech director.
On June 17, 2019, MTech and MJF consummated the Mergers contemplated by the Merger Agreement. In connection with the closing of the Mergers, the registrant changed its name from MTech Acquisition Holdings Inc. to Akerna Corp (“Akerna”). The Merger Consideration was paid through the issuance of 6,520,099 shares of MTech common stock (the “Consideration Shares”) to the former holders of MJF common units, preferred units, and profit interest units at a price per share equal to $10.16 per share. Of the totalprincipal aggregate amount of Akerna shares issued in the merger, 283,010 fully vested shares of Akerna common stock and 215,063 unvested shares of Akerna common stock were allocated to the former holders of MJF profit interest units. Notwithstanding the foregoing, 652,010 of the total issuable shares$2,204,600 (the “Escrow Shares”“PPP Loan”) will be held in an escrow account (the “Escrow Account”) to cover any adjustments to the Merger Consideration or claims for indemnification pursuant to the Merger Agreement until ninety (90) days after Akerna files its Annual Report on Form 10-KPaycheck Protection Program under the CARES Act. The PPP Loan had a two-year term bearing interest at a rate of 1% per annum with the Commission for the fiscal year ending June 30, 2019, with the exceptionprincipal and interest payments of Escrow Shares held to satisfy then pending claims which shall remain in the Escrow Account until the claims are resolved.
As disclosed above, (a) 283,011 fully vested shares of common stock were allocated to the former holders of MJF profit interest units, resulting in an immediate one-time charge of approximately $3.4 million$92,818 to be recorded by MJFpaid monthly on June 17, 2019 and (b) 215,063 unvested shares of common stock were allocated to the holders of MJF profit interest units, of which approximately $2.1 million of compensation expense related to such profit interest units will be ratably recognized over an estimated remaining vesting period of 3 years. The calculation12th of the amount of the current and future expenses to be taken by MJF was based on the closing price of the Akerna common shares onmonth beginning 7 months from the date of the Mergers.PPP Loan. The PPP Loan provides for prepayment of 20% or less of the unpaid principal balance at any time. If more than 20% is prepaid, then all accrued interest must also be paid.
F-32In August 2021, the Company submitted its application for 100% loan forgiveness and on September 3, 2021, the loan was 100% forgiven by the Small Business Administration. As a result, the Company recorded a gain on the forgiveness of the loan in the amount of $2,234,730.
Maturities of Debt
Maturities of our debt as of December 31, 2021 are presented below.
| Year ending December 31: | | | |
| 2022 | | $ | 13,200,000 | |
| 2023 | | | 6,800,000 | |
| Aggregate maturities | | | 20,000,000 | |
| Original issue discount on Convertible Notes | | | (2,000,000 | ) |
| Unrealized change in fair value of Convertible Notes | | | (695,000 | ) |
| Total debt outstanding as of December 31, 2021 | | $ | 17,305,000 | |
| Current portion | | | 13,200,000 | |
| Noncurrent portion | | | 4,105,000 | |
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2019
December 31, 2021
Note 10 - Stockholders’ Equity
Common and Preferred Stock
Note 4 — Reverse Merger and Private Placement(cont.)
In connection with the Merger Agreement, all recipients of the Consideration Shares executed a lock-up agreement (the “Lock-up Agreement”). Pursuant to the Lock-up Agreement, each holder agreed not to engage in any transfer or other transaction with respect to the Consideration Shares for a period of time. With respect to 50% of the Consideration Shares, each holder agreed not to engage in a transfer or other transaction until the earlier of (1) one year from the closing of the Business Combination and (2) the date on which Akerna closes a subsequent corporate transaction with an unaffiliated third party that results in all of Akerna’s shareholders having the right to exchange their shares for cash, securities or other property. With respect to the remaining 50% of the Consideration Shares, each holder agreed not to engage in a transfer or other transaction until the earlier of (1) one year from the closing the business combination, (2) the date on which Akerna closes a subsequent corporate transaction with an unaffiliated third party that results in all of Akerna’s shareholders having the right to exchange their shares for cash, securities or other property and (3) the date on which the closing share price of Akerna common stock equals or exceeds $12.50 per share for any twenty trading days with any thirty trading day period.
Upon the Closing of the Merger, Akerna’s certificate of incorporation was amended and restated toWe have one single class of common stock and 75,000,000 authorized shares of common stock, par value $0.0001 per share. Akerna also had 5,000,000 authorized shares of preferred stock.
MTech also entered into a series of securities purchase agreements with certain investors (the “PIPE Investors”), whereby MTech issued 901,074 shares of Class A common stock (the “Private Placement Shares”) for an aggregate purchase price of $9.2 million (the “Private Placement”), which closed simultaneously with the consummation of the Mergers. Upon the closing of the Mergers, the Private Placement Shares were automatically converted into shares of Akerna common stock on a one-for-one basis. Each PIPE Investor was also granted an option for a period of sixty days to purchase additional shares of Akerna common stock at a price of $10.21 per share. None of these options were exercised within sixty days.
The proceeds received from the Mergers totaled approximately $18 million, which is net of $4.4 million of underwriting discounts and commissions and other expenses related to the Mergers.
Note 5 — Loss Per Share
Basic net loss per common share is calculated based on the weighted-average number of common shares outstanding in accordance with ASC Topic 260, Earnings per Share. Diluted net loss per common share is calculated based on the weighted-average number of common shares outstanding plus the effect of potentially dilutive common shares. When the Company reports a net loss, the calculation of diluted net loss per common share excludes potential common shares as the effect would be anti-dilutive. For the year ended June 30, 2019, 6,398,178 potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding because the effect would be anti-dilutive. Of the total securities excluded, 6,183,115 were related to warrants issued (Note 6) and 215,063 were related to the unvested Restricted Shares. For the year ended June 30, 2018, 5,993,750 potentially dilutive securities all related to warrants issued have been excluded from the computation of diluted weighted average shares outstanding because the effect would be anti-dilutive.
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2019
Note 6 — Stockholders’ Equity
Common and preferred stock
In conjunction with the Mergers in June 2019, Akerna’s certificate of incorporation was amended and restated to have one single class of common stock and 75,000,000 authorized shares of common stock, par value $0.0001 per share. Akerna willWe also have 5,000,000 authorized shares of preferred stock, $0.0001 par value per share, of which none are issued and outstanding. The holders of common stock are entitled to one vote per share on all matters submitted to a vote of stockholders of the Company. Subject to the prior rights of all classes or series of stock at the time outstanding having prior rights as to dividends or other distributions, all stockholders are entitled to share equally in dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available. Subject to the prior rights of creditors of the Corporation and the holders of all classes or series of stock at the time outstanding having prior rights as to distributions upon liquidation, dissolution, or winding up of the Corporation, in the event of liquidation, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of all liabilities. The stockholders do not have cumulative, preemptive rights, or subscription rights.
Issuances for Cash
In November 2017, MJFOn October 30, 2020, we issued 515,570 Series B Preferred Units (137,740shares5,000,000 shares, at a price of $2.40 per share, of Akerna common stock after retroactively applyingin a public offering for gross proceeds of $12.0 million, offset by offering costs of approximately $1.0 million for net proceeds $11.0 million dollars.
Warrants
In connection with MTech Acquisition Corp.'s ("MTech") initial public offering, MTech sold 5,750,000 units at a purchase price of $10.00 per unit, inclusive of 750,000 units sold to the underwriters on February 8, 2018, upon the DD’ election to fully exercise their over-allotment option. Each unit consisted of one share of MTech’s common stock and one warrant of MTech (“MTech Public Warrant”). Each Mtech Public Warrant entitled the holder to purchase one share of MTech’s common stock at an exercise price of $11.50. Upon the Mergers, the Public Warrants were converted to those of Akerna at the exchange ratio)ratio of one-for-one.
A summary of our common stock warrants is presented in the following table:
| | | Shares Issuable
Under Warrants | | | Weighted-average
Exercise Price | | | Weighted Average
Remaining Life | | | Aggregate Intrinsic Value | |
| Outstanding at June 30, 2020 | | | 5,813,804 | | | $ | 11.50 | | | | 3.97 | | | $ | — | |
| Issued | | | — | | | | — | | | | — | | | | — | |
| Exercised | | | — | | | | — | | | | — | | | | — | |
| Expired/canceled | | | — | | | | — | | | | — | | | | — | |
| Outstanding at December 31, 2020 | | | 5,813,804 | | | $ | 11.50 | | | | 3.37 | | | $ | — | |
| Issued | | | — | | | | — | | | | — | | | | — | |
| Exercised | | | — | | | | — | | | | — | | | | — | |
| Expired/canceled | | | — | | | | — | | | | — | | | | — | |
| Outstanding at December 31, 2021 | | | 5,813,804 | | | $ | 11.50 | | | | 2.97 | | | $ | — | |
There was no aggregate intrinsic value for cash considerationthe warrants outstanding as of $1,000,000. In August 2018, MJF issued 4,115,042 Series C PreferredDecember 31, 2021 and December 31, 2020.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
Note 11 - Stock-Based Compensation
Restricted Shares and Restricted Stock Units (1,099,376
On June 17, 2019, our stockholders considered and approved the 2019 Long Term Incentive Plan, or the Equity Incentive Plan, and reserved 1,040,038 shares of common stock after retroactively applyingfor issuance thereunder. The Equity Incentive Plan was previously approved, subject to stockholder approval, by the exchange ratio)board of directors of Akerna on January 23, 2019. The Equity Incentive Plan became effective immediately upon the Closing of the Mergers. On June 26, 2020, the stockholders approved an amendment to the Equity Incentive Plan and increased the shares authorized for cash considerationissuance thereunder by 525,000 to 1,565,038.
We grant restricted stock units, or RSUs, that are subject to time-based vesting and require continuous employment, typically over a period of $10,000,000. Followingfour years from the Mergers, allgrant date or the Units were converted into Akerna’s common stock.first day of the service period.
Restricted Shares
Prior to the Mergers, MJF had Profit Interest Incentive Plan (the “Profits Interest Plan”) in place whereby it could grant Profits Interest Units, or PIUs, to employees or consultants and other independent advisors of the Company. PIUs granted under the Profits Interest Plan would generally vest once a year over four years commencing on the date granted or based on specified performance targets. MJF had the right, but not the obligation, to repurchase vested PIUs from holders upon their termination of employment. Unvested PIUs were to be forfeited upon termination of employment. If the holder was terminated for cause, as defined, all vested and unvested units would be forfeited. PIUs repurchased or canceled or forfeited by the award recipient were available for reissuance. Upon completion of the Mergers, the non-vested PIUs were exchanged for and became subject to restricted stock agreements, (“or Restricted Shares”)Shares, with varying vesting terms that reflect the vesting conditions applicationapplicable to equity interests of the applicable MJF equity holdersindividual PIUs at the time of the merger.
The management assessed whether itsWe determined the PIUs represented share-based payments within the scope of ASC Topic 718 or were more akin to a profit-sharing compensation arrangement. The management determined PIUs were more akin to a profit-sharing compensation arrangement. The management determined PIUs onlyarrangement that had value only upon a defined liquidating event. Accordingly, no value had beenwas accrued for the PIUs untilprior to the business combination occurredMergers on June 17, 2019, which met the definition of a liquidating event. As a result, MJFwe recorded a one-time charge of approximately $3.4million,$3.4 million, which represented the charge associated with issuing fully vested shares of common stock issued in exchange for the PIUs.
A summary of our unvested Restricted Shares and RSUs activity is presented in the table below:
During
| | | Restricted Shares | | | Restricted Stock Units | | | Total | | | Weighted Average Grant Date Fair Value | |
| Unvested as of June 30, 2020 | | | 72,313 | | | | 534,302 | | | | 606,615 | | | $ | 6.56 | |
| Granted | | | — | | | | 429,974 | | | | 429,974 | | | | 4.88 | |
| Vested | | | (8,024 | ) | | | (157,350 | ) | | | (165,374 | ) | | | 5.08 | |
| Forfeited | | | — | | | | (43,906 | ) | | | (43,906 | ) | | | 6.83 | |
| Unvested as of December 31, 2020 | | | 64,289 | | | | 763,020 | | | | 827,309 | | | $ | 6.77 | |
| Granted | | | — | | | | 447,642 | | | | 447,642 | | | | 4.05 | |
| Vested | | | (30,559 | ) | | | (427,711 | ) | | | (458,270 | ) | | | 5.55 | |
| Forfeited | | | (1,336 | ) | | | (99,184 | ) | | | (100,520 | ) | | | 4.51 | |
| Unvested as of December 31, 2021 | | | 32,394 | | | | 683,767 | | | | 716,161 | | | | 5.47 | |
For the year ended December 31, 2021, six months ended December 31, 2020, and year ended June 30, 2018, 181,000 Restricted Shares were granted (677,500 PIUs before retroactively applying the exchange ratio), 64,785 Restricted Shares were forfeited (242,500 PIUs before retroactively applying the exchange ratio), and 75,406 Restricted Shares vested (282,250 PIUs before retroactively applying the exchange ratio). At June 30, 2018, there were 294,944 Restricted Shares outstanding (1,104,000 PIUs before retroactively applying the exchange ratio).
During the year ended June 30, 2019, additional 107,618 Restricted Shares were granted (402,824 PIUs before retroactively applying the exchange ratio), 68,794 Restricted Shares were forfeited (257,500 PIUs before retroactively applying the exchange ratio), and 118,705 Restricted Shares vested (444,324 PIUs before retroactively applying the exchange ratio). At June 30, 2019, there were 215,063 unvested Restricted Shares outstanding (805,000 PIUs before retroactively applying the exchange ratio).
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2019
Note 6 — Stockholders’ Equity(cont.)
For the year ended June 30, 2019,2020 we recognized stock-based compensation expensesexpense related to the ratable amortization of the unvested Restricted Shares was $0.5 million. Approximately, $2.1and RSUs of $2.0 million, $2.0 million, and $1.3 million, respectively. Stock-based compensation expense is included in operating expenses and cost of sales on our consolidated statements of operations consistent with the allocation of other compensation arrangements. During the year ended December 31, 2021, six months ended December 31, 2020, and year ended June 30, 2020, we capitalized $0.04 million, $0.2 million and $0.1 million, respectively, in stock-based compensation costs as software development cost. The $3.7 million of total unrecognized costs as of December 31, 2021 related to Restricted Shares and RSUs will be ratably recognized over an estimated weighted average remaining vesting period of 32.41 years.
Warrants
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
Note 12 - Loss Per Share
During the year ended December 31, 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:
| | | December 31,
2021 | | | December 31,
2020 | |
| Shares issuable upon exchange of Exchangeable Shares | | | 309,286 | | | | 2,667,349 | |
| Warrants | | | 5,813,804 | | | | 5,813,804 | |
| Restricted Stock Units | | | 683,767 | | | | 694,512 | |
| Restricted Stock Awards | | | 32,394 | | | | 64,289 | |
| Shares of common stock issuable in upon conversion of Convertible Notes | | | 12,484,395 | | | | 1,319,368 | |
| Total | | | 19,323,646 | | | | 10,559,322 | |
Note 13 - Fair Value
Contingent Consideration
Solo
In connection with MTech’sour acquisition of Solo, the Solo selling shareholders have the potential to earn the contingent consideration, which is calculated as the lesser of (i) $0.01 per solo*TAGTM and solo*CODETM sold or (ii) 7% of net revenue. The fees were to be paid annually until the earlier of: (1) our shares trading above $12 per share for any consecutive 20 trading days in a 30-day period; (b) upon our no longer owning a majority stake in Solo; or (c) upon expiration of the patents related to solo*TAGTM and solo*CODETM, which is December 1, 2029.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
We record the fair value of the liability in the consolidated balance sheets under the caption “current contingent consideration” and recognize changes to the liability against earnings or loss each reporting period until settlement. The fair value of the contingent consideration on the date of the acquisition of Solo was $389,000. In connection with our exercise of the option to acquire the remaining interest in Solo, the selling shareholders agreed to retrospectively and prospectively relieve the contingent consideration obligation. Therefore, the settled value of the contingent consideration was $0. We have recorded a gain of $389,000 on settlement of the contingent consideration liability during the six months ended December 31, 2020 in general and administrative expenses in our consolidated statement of operations.
Trellis
In connection with our acquisition of Trellis, the Trellis selling shareholders have the potential to earn contingent consideration, which is calculated as five times the annualized revenue of certain customers generated in September 2020. The fair value of the contingent consideration on the date of acquisition of Trellis was $998,000. The carrying amount at the fair value of the liability for the contingent consideration recorded on our consolidated balance sheet as of June 30, 2020 was $0. As such, we recorded a gain of $998,000 due the change in the fair value of the contingent consideration during the year ended June 30, 2020 in general and administrative expenses in our consolidated statement of operations.
Ample
In addition to the stock and cash consideration, the agreement provides for contingent consideration of up to CAD$10,000,000, payable in exchangeable shares, payable if Ample's Recurring Revenue recognized during the 12 months after the acquisition date is CAD$9,000,000 or more. The contingent consideration amount is reduced by an amount equal to the product of CAD$6.67 multiplied by the difference between CAD$9,000,000and the amount of Recurring Revenue realized during the twelve months following the acquisition.
We record the fair value of the liability in the consolidated balance sheets as contingent consideration payable and recognize changes to the liability against earnings or loss in general and administrative expenses in the consolidated statements of operations. The fair value of the contingent consideration on the date of the acquisition of Ample was $604,000. The carrying amount at fair value of the aggregate liability for the contingent consideration recorded on the consolidated balance sheet as of December 31, 2020, is $0. We have recorded a gain of $604,000 due the change in the fair value of the contingent consideration during the six months ended December 31, 2020 in general and administrative expenses in our consolidated statement of operations.
Viridian
In connection with our acquisition of Viridian, the Viridian selling shareholders have the potential to earn contingent consideration payable in common stock if Viridian meets certain revenue criteria. The fair value of the contingent consideration on the date of acquisition of Viridian was $2,000. The carrying amount at the fair value of the liability for the contingent consideration recorded on our consolidated balance sheet as of December 31, 2021 was unchanged at $2,000.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
365 Cannabis
In connection with our acquisition of 365 Cannabis, the 365 Cannabis selling shareholders have the potential to earn contingent consideration payable in common stock if certain revenue criteria is met. The fair value of the contingent consideration on the date of acquisition of 365 Cannabis was $6,300,000. The carrying amount at the fair value of the liability for the contingent consideration recorded on our consolidated balance sheet as of December 31, 2021 was unchanged at $6,300,000.
We valued the contingent consideration using a probability-weighted discounted cash flow model, which incorporates inputs 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 contingent consideration reflect management's own assumptions about the assumptions that market participants would use in valuing the contingent consideration as of the valuation date, as well as our knowledge of specific transactions that effect the calculation.
Fair Value Option Election – Convertible Notes
We issued Convertible Notes with a principal amount of $17.0 million at a purchase price of $15.0 million on June 9, 2020. We elected to account for the Convertible Notes using the fair value option. Under the fair value option, the financial liability is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date. The remaining estimated fair value adjustment is presented as a single line item within other income (expense) in our consolidated statement of operations under the caption, change in fair value of convertible notes.
For the 2020 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 from June 30, 2020 to October 5, 2021:
| Beginning fair value balance on June 30, 2020 | | $ | 14,131,000 | |
| Payments on Convertible Notes | | | (1,827,273 | ) |
| Change in fair value reported in the statements of operations | | | 961,273 | |
| Change in fair value reported in other comprehensive income | | | 133,000 | |
| Ending fair value balance - December 31, 2020 | | $ | 13,398,000 | |
| Payments on Convertible Notes | | | (15,172,727 | ) |
| Change in fair value reported in the statements of operations | | | 2,030,904 | |
| Change in fair value reported in other comprehensive income | | | (70,000 | ) |
| Gain on extinguishment of debt reported on the statement of operations | | | (186,177 | ) |
| Ending fair value balance - October 5, 2021 | | $ | — | |
We issued the Senior Secured Notes with a principal amount of $20.0 million at a purchase price of $18.0 million on October 5, 2021. We have elected to account for the Senior Secured Notes using the fair value option. Under the fair value option, the financial liability is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date. The change in estimated fair value resulting from changes in instrument specific credit risk is recorded in other comprehensive income as a component of equity. The remaining estimated fair value adjustment is presented as a single line item within other income (expense) in our consolidated statement of operations under the caption, change in fair value of convertible notes.
For the Senior Secured 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 from October 5, 2021 to December 31, 2021:
| Beginning fair value balance on October 5, 2021 | | $ | 18,000,000 | |
| Payments on Convertible Notes | | | — | |
| Change in fair value reported in the statements of operations | | | (665,000 | ) |
| Change in fair value reported in other comprehensive income | | | (30,000 | ) |
| Ending fair value balance - December 31, 2021 | | $ | 17,305,000 | |
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
The estimated fair value of the Convertible Notes as of December 31, 2021, and December 31, 2020 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 reflects 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 determined the fair value by using the following key inputs to the Monte Carlo Simulation Model:
| Fair Value Assumptions - Convertible Notes | | December 31,
2021 | | | December 31,
2020 | |
| Face value principal payable | | $ | 20,000,000 | | | $ | 15,172,272 | |
| Original conversion price | | $ | 4.05 | | | $ | 11.5 | |
| Value of Common Stock | | $ | 1.75 | | | $ | 3.24 | |
| Expected term (years) | | | 2.8 | | | | 2.3 | |
| Volatility | | | 75 | % | | | 77 | % |
| Market yield (range) | | | 37.1 | % | | | 27.1 to 27.2 | % |
| Risk free rate | | | 1.0 | % | | | 0.1 | % |
| Issue date | | | October 5, 2021 | | | | June 9, 2020 | |
| Maturity date | | | October 5, 2024 | | | | June 1, 2023 | |
Fair Value Measurement – Warrants
In connection with MTech Acquisition Corp.'s ("MTech") initial public offering, the CompanyMTech sold 5,750,000 units at a purchase price of $10.00 per unit, inclusive of 750,000 units sold to the underwriters on February 8, 2018, upon the underwriters’ election to fully exercise their over-allotment option. Each unit consisted of one share of MTech’s common stock and one warrant of MTech (“MTech Public Warrant”). Each MTech Public Warrant entitled the holder to purchase one share of MTech’s common stock at an exercise price of $11.50. Upon the Mergers, the Public Warrants were converted to those of Akerna at the exchange ratio of one-for-one.
SimultaneouslyConcurrently with MTech’s initial public offering, an affiliated party purchased an aggregate of 225,000MTech sold 243,750 units at $10.00 per unit, for an aggregatea purchase price of $2,250,000. On February 8, 2018, the MTech consummated the sale of an additional 18,750 private units at a price of $10.00 per unit generating gross proceeds of $187,500.on a private offering basis. Each unit consistsconsisted of one share of MTech’s common stock and one warrant of MTech (“MTech Private Warrants”Warrant”). Each MTech Private Warrant was exercisableentitled the holder to purchase one share of MTech’s common stock at an exercise price of $11.50.
Upon completion of the Mergers,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, to those of Akernarespectively, at thean exchange ratio of one-for-one.
A summary of the status of common stock warrants at June 30, 2019 and the changes during the two years then ended, is presented in the following table:
| | | Shares under
warrants | | | Weighted average
exercise price | | | Weighted
average
remaining life | | | Aggregate
intrinsic value | |
| Outstanding at July 1, 2017 | | | — | | | | | | | | | | | | | |
| Issued | | | 5,993,750 | | | $ | 11.50 | | | | | | | | | |
| Exercised | | | — | | | | | | | | | | | | | |
| Expired/cancelled | | | — | | | | | | | | | | | | | |
| Outstanding at June 30, 2018 | | | 5,993,750 | | | | 11.50 | | | | 4.61 | | | | | |
| Issued | | | 189,365 | | | | 11.50 | | | | | | | | | |
| Exercised | | | — | | | | | | | | | | | | | |
| Expired/cancelled | | | — | | | | | | | | | | | | | |
| Outstanding at June 30, 2019 | | | 6,183,115 | | | $ | 11.50 | | | | 3.72 | | | $ | 2,473,000 | |
Unit Purchase Option and Other Rights
In connection with MTech’s initial public offering, there were also 250,000 options soldone-for-one to an affiliate party to purchase up to 250,000 units exercisable at $10.00 per unit (“Option Shares”). The unit purchase option could be exercised for cash or on a cashless basis, at the holder’s option. Each unit consisted of one share of Company’s common stock, par value $0.0001 per share, and one warrant entitling the holder to purchase one share of Company’s common stock. The unit purchase option was exercised on a cashless basis into 189,365shares ofAkerna’s common stock with identical terms and 189,365 warrants, which were outstandingconditions as of June 30, 2019.
the MTech Public Warrants (“Public Warrant”) and the MTech Private Warrants (“Private Warrant”, collectively with the Public Warrants, “Warrants”) In connection with the completion of the Mergers, we also issued 189,365 common stock purchase warrants upon the cashless exercise of a unit purchase option, which warrants have identical terms to the Public Warrants and are included in references to Public Warrants and Warrants herein.
For the Private Placement,Warrants classified as derivative liabilities, which are measured at fair value categorized within Level 3 of the Company also providedfair value hierarchy, the following is a reconciliation of the fair values for the year ended December 31, 2021 and December 31, 2020:
| | | Year Ended December 31, | |
| | | 2021 | | | 2020 | |
| Fair value balance at beginning of period | | $ | 311,376 | | | $ | 688,187 | |
| Change in fair value reported in the statements of operations | | | (248,198 | ) | | | (376,811 | ) |
| Fair value balance at end of period | | $ | 63,178 | | | $ | 311,376 | |
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.
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
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 investorreporting period. Upon exercise of the ability to purchase additional sharesPrivate Warrants, holders will receive a delivery of Akerna common stock atshares on a price of $10.21net or gross share basis per share, up to their pro rata sharethe terms of the 901,074 Private Placement Shares purchased. No investor exercised this right duringWarrants 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 | | December 31,
2021 | | | December 31,
2020 | |
| Number of Private Warrants | | | 225,635 | | | | 225,635 | |
| Original conversion price | | $ | 11.50 | | | $ | 11.50 | |
| Value of Common Stock | | $ | 1.75 | | | $ | 3.24 | |
| Expected term (years) | | | 2.46 | | | | 3.46 | |
| Volatility | | | 85.8 | % | | | 102.3 | % |
| Risk free rate | | | 0.8 | % | | | 0.2 | % |
Note 14 - Commitments and Contingencies
Operating Leases
As of December 31, 2021, we had one facility under a non-cancelable operating leases in Las Vegas. Rent expense for the year ended December 31, 2021, six months ended December 31, 2020 and the year ended June 30, 2019, which expired subsequently. The aggregate intrinsic value of the rights as of June 30, 2019,2020 was $1,522,815.$157,593, $552,861, and $299,629 respectively.
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2019
Note 6 — Stockholders’ Equity(cont.)
2019 Incentive plan
On June 17, 2019, the MTech stockholders considered and approved the 2019 Long Term Incentive Plan (the “Equity Incentive Plan”) and reserved 1,040,038 shares of common stock for issuance thereunder. The Equity Incentive Plan was previously approved, subject to stockholder approval, by the board of directors of Akerna on January 23, 2019. The Equity Incentive Plan became effective immediately upon the Closing of the Mergers.
Note 7 — Commitments and Contingencies
Operating Leases
The Company leases facilities, equipment, and vehicles under non-cancelable operating leases. Rent expense for the years ended June 30, 2019 and 2018 was $151,458 and $140,946, respectively. Future minimum lease payments under these leases are as follows:
| 2022 | | $ | 252,525 | |
| 2023 | | | 260,100 | |
| 2024 | | | 110,480 | |
| Total | | $ | 623,105 | |
During the third quarter of 2021, we reached an agreement to terminate our office lease in Toronto, Canada for a termination fee of approximately $96,000 for$980,000, which is included within the General and Administrative expense line item on the condensed consolidated statement of operations and was paid in full during the year ending June 30, 2020.ended December 31, 2021. In connection with the lease termination, we also wrote off certain assets, primarily leasehold improvements, and the resulting loss of $1,045,209 was also recorded in the General and Administrative expense line item on the condensed consolidated statement of operations.
During the four quarter of 2020, we reached an agreement to terminate our office lease in Denver, CO. The lease termination agreement included the forfeiture of our $41,250 security deposit and a termination fee of $402,480. The lease termination fee was settled in the first quarter of 2021 by issuing 113,375 shares of common stock, calculated using a VWAP of $3.55/share.
Letter-of-Credit
As of June 30, 2018, the CompanyDecember 31, 2021 and December 31, 2020, we had a standby letter-of-credit with a bank in the amount of $1,000,000,$500,000. The standby letter of credit is collateralized by $500,000 of cash, which wasis classified as restricted cash on theour consolidated balance sheets. The beneficiary of the letter-of-credit is an insurance company. Upon
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
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 $1.07 million for unpaid invoices pursuant to a Master Services Agreement dated February 5, 2018 by and between TechMagic and Solo. The invoices set forth services that TechMagic USA LLC purports to have provided to Solo regarding development of mobile software applications for MJF and Solo between March and November 2020 totaling approximately $787,000. The suit seeks continued fees under the Master Services Agreement through the end of January 2021. Akerna provided a notice of termination of the Master Services Agreement on November 23, 2020 and the parties dispute the effective date of the termination. Solo disputes the validity of the invoices, in whole or in part, and intends to defend the suit vigorously. Mr. Ashesh Shah, formerly the president of Solo and currently the holder of less than 5% of our issued and outstanding shares of common stock is, to our knowledge, the founder and one of the principal managers of TechMagic USA LLC. As of December 31, 2021 and December 31, 2020, we recognized a loss contingency of $0.5 million and $0.6 million, respectively.
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 $2 million for services allegedly provided pursuant to a Subcontractor Agreement between MJ Freeway and TreCom. MJ Freeway provided a notice of termination of the operative Subcontractor Agreement on August 4, 2020. MJ Freeway disputes the validity of TreCom’s invoices and the enforceability of the alleged agreement that TreCom submitted to the court. Akerna filed counterclaims against TreCom for breach of contract, a declaratory judgment, commercial disparagement, and defamation. TreCom failed to return Akerna’s intellectual property and issued numerous disparaging statements to one of Akerna’s clients. TreCom subsequently filed a motion to dismiss these counterclaims, which was denied by the court. Akerna intends to vigorously defend against TreCom’s claims, and pursue its termination on June 22, 2019,own claims. As of December 31, 2021 and December 31, 2020, we recognized a loss contingency of $0.2 million and $0, respectively.
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 letter-of-credit was reneweddefendants’ breaches of various fiduciary duties owed to Solo. Defendant Shah engaged in improper communications with Solo’s customers with the required balance reduced to $500,000. Accordingly,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 restricted cash on the balance sheets asdefendants had a conflict of June 30, 2019 is $500,000.interest with. The defendants have not asserted any counterclaims, and we therefore have not recognized a loss contingency.
Litigation
From time to time, the Companywe may be involved in litigation relating to claims arising out of itsour operations in the normal course of business. The CompanyWe 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 June 30, 2019December 31, 2021, and 2018, respectively,through the date these consolidated financial statements were issued, there were no other legal proceedings requiring recognition or disclosure in the consolidated financial statements.
Employment Agreement
In connection with the consummation of the Mergers, Ms. Jessica Billingsley and Akerna entered into an employment agreement, dated June 17, 2019 (the “Billingsley Employment Agreement”). Under the terms of the Billingsley Employment Agreement, Ms. Billingsley serves at the Chief Executive Officer of Akerna, at will, and must devote substantially all of her working time, skill and attention to her position and to the business and interests of Akerna (except for customary exclusions).
Akerna will pay Ms. Billingsley an annual base salary in the amount of $250,000. The base salary subject to (i) review at least annually by board of directors of Akerna for increase, but not decrease, and (ii) automatic increase by an amount equal to $50,000 from its then current level on the date upon which Akerna’s aggregate, gross consolidated trailing twelve month (TTM) revenue equals the product of (x) two multiplied by (y) Akerna’s aggregate, gross consolidated trailing twelve month (TTM) revenue as the Closing. Within 10 days of the Closing, Akerna also paid to Ms. Billingsley a single lump sum of $95,000.
Ms. Billingsley will be eligible for an annual bonus (the “Annual Bonus”) with respect to each fiscal year ending during her employment. Her target annual cash bonus shall be in the amount of one hundred percent (100%) of her base salary (the “Target Bonus”) with the opportunity to earn greater than the Target Bonus upon achievement of above target performance. The amount of the Annual Bonus shall be determined by the board of directors of Akerna on the basis of fulfillment of the objective performance criteria established in its reasonable discretion. The performance criteria for any particular fiscal year shall be set no later than 90 days after the commencement of the relevant fiscal year. As of June 30, 2019, Ms. Billingsley’s bonus accrual was approximately $215,000.
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2019
Note 7 — Commitments and Contingencies(cont.)
Ms. Billingsley is entitled to participate in annual equity awards and employee benefits.
The Billingsley Employment Agreement also contains noncompetition and non-solicitation provisions that apply through her employment and for a term of 1 year thereafter, and which are in addition to the noncompetition and non-solicitation provisions prescribed under the Non-Competition Agreements below.
Employee Benefit Plan
The Company hasWe have a 401(k) Plan (the “Plan”) to provide retirement benefits for itsour employees. Employees may contribute up to 100%a portion of their annual compensation to the Plan, limited to a maximum annual amount as updated annually by the IRS. The Company doesWe do not offer a match of employee contributions nor any discretionary contributions.
Insurance Claim
AKERNA CORP.
In March 2018, the Company received approximately $940,000 in proceeds, net of legal fees, from an insurance claim relatedNotes to business interruption, which was included as a component of selling, general, and administrative operating expenses on the statement of operations.Consolidated Financial Statements
December 31, 2021
Note 8 —15 - Income Taxes
Akerna Corporation isSince June 17, 2019, we have been the sole owner of MJF, as of June 17, 2019, which is a disregarded entity for federal income taxes. Prior to June 17, 2019 MJF was treated as a partnership for U.S.U.S income tax purposes. Accordingly, prior to the business combination, our taxable income and losses of the Company were reported on the income tax returns of MJF’s members. Therefore, no income tax provision is provided prior to June 17, 2019.
On March 27, 2020 the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, was enacted in response to the COVID-19 pandemic. It was determined the CARES Act did not materially impact our tax provision as of December 31, 2021 and December 31, 2020.
The accounting for the business combinations of Viridian and 365 Cannabis reflected in the accompanying consolidated financial statements is preliminary and is based upon estimates and assumptions that are subject to change within the measurement period (up to one year from the acquisition date). The measurement period remains open pending the completion of valuation procedures related to the acquired assets and assumed liabilities, intangible assets and income taxes.
In April 2020, we were granted a loan, or the PPP Loan, from a lender in the aggregate amount of $2.2 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which we obtained debt forgiveness on during the year ended December 31, 2021.
The following table sets forth the expense or (benefit)benefit for income taxes:
| | June 30,
2019 | | | June 30,
2018 | |
Income tax expense | | | | | | |
Current income taxes | | | | | | |
U.S. federal | | $ | — | | | $ | — | |
U.S. state | | | — | | | | — | |
Total current income taxes | | $ | — | | | $ | — | |
| | June 30,
2019 | | | June 30,
2018 | |
Deferred income taxes | | | | | | |
U.S. federal | | $ | — | | | $ | — | |
U.S. state | | | — | | | | — | |
Total deferred income tax benefit | | $ | — | | | $ | — | |
| | | Year Ended
December 31, | | | Six Months
Ended
December 31, | | | Year Ended
June 30, | |
| | | 2021 | | | 2020 | | | 2020 | |
| Income tax | | | | | | | | | |
| Current income taxes | | | | | | | | | |
| U.S. federal | | $ | — | | | $ | — | | | $ | 30,985 | |
| U.S. state | | | 5,800 | | | | 200 | | | | — | |
| Foreign | | | 6,270 | | | | — | | | | | |
| Total current income taxes | | $ | 12,070 | | | $ | 200 | | | $ | 30,985 | |
| | | Year Ended
December 31, | | | Six Months
Ended
December 31, | | | Year Ended
June 30, | |
| | | 2021 | | | 2020 | | | 2020 | |
| Deferred income tax | | | | | | | | | |
| U.S. federal | | $ | (2,274,295 | ) | | $ | — | | | $ | — | |
| U.S. state | | | — | | | | — | | | | — | |
| Total deferred income tax benefit | | $ | (2,274,295 | ) | | $ | — | | | $ | — | |
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2019
Note 8 — Income Taxes (cont.)
The following table sets forth reconciliations of the income tax expense at the statutory federal income tax rate to actual ratesexpense based on income or loss before income taxes:
| | | Year Ended
December 31, | | | Six Months
Ended
December 31, | | | June 30, | |
| | | 2021 | | | 2020 | | | 2020 | |
| Income tax expense (benefit) attributable to: | | | | | | | | | |
| Federal | | $ | (6,692,267 | ) | | $ | (3,560,998 | ) | | $ | (3,255,706 | ) |
| State, net of federal benefit | | | (672,148 | ) | | | (553,871 | ) | | | (862,690 | ) |
| Foreign tax rate differential | | | (138,292 | ) | | | 29,617 | | | | (2,645 | ) |
| Permanent differences | | | 2,428,631 | | | | 1,263,151 | | | | 312,525 | |
| Rate change | | | 54,295 | | | | 60,220 | | | | — | |
| Changes in valuation allowance | | | 3,361,603 | | | | 2,762,081 | | | | 3,884,440 | |
| Provision to return adjustment | | | 273,489 | | | | — | | | | (45,134 | ) |
| Losses from flow-through entity not subject to tax | | | — | | | | — | | | | — | |
| Deferred True-Ups | | | (928,743 | ) | | | — | | | | — | |
| Other adjustments | | | 51,207 | | | | — | | | | 195 | |
| Effective income tax expense (benefit) | | $ | (2,262,225 | ) | | $ | 200 | | | $ | 30,985 | |
| | | June 30,
2019 | | | June 30,
2018 | |
| Income tax expense and rate attributable to: | | | | | | |
| Federal | | $ | (2,509,246 | ) | | $ | — | |
| State, net of federal benefit | | | (13,452 | ) | | | — | |
| Restricted stock awards | | | 816,505 | | | | — | |
| Changes in valuation allowance | | | 85,455 | | | | — | |
| Losses from flow-through entity not subject to tax | | | 1,640,066 | | | | — | |
| Other adjustments | | | (19,328 | ) | | | — | |
| Effective income tax expense and rate | | $ | — | | | $ | — | |
| | | June 30,
2019 | | | June 30,
2018 | |
| Noncurrent deferred tax assets: | | | | | | |
| Allowance for doubtful accounts | | $ | 22,226 | | | $ | — | |
| Charitable contribution carryforward | | | 147 | | | | — | |
| Federal and state net operating loss | | | 63,082 | | | | — | |
| Total deferred tax assets | | $ | 85,455 | | | $ | — | |
| | | | | | | | | |
| Valuation allowance | | | (85,455 | ) | | | — | |
| Deferred tax assets after valuation allowance | | $ | — | | | $ | — | |
AKERNA CORP.
Notes to Consolidated Financial Statements
December 31, 2021
| | | December 31, | | | December 31, | |
| | | 2021 | | | 2020 | |
| Noncurrent deferred tax assets: | | | | | | |
| Employee compensation | | $ | 820,410 | | | $ | 679,106 | |
| Debt issuance costs | | | 138,778 | | | | 343,612 | |
| Revenue recognition | | | 105,735 | | | | — | |
| Settlement accrual | | | 146,604 | | | | 182,896 | |
| Fixed assets | | | 242,006 | | | | 831,196 | |
| Federal and state net operating loss | | | 10,673,908 | | | | 6,337,897 | |
| Foreign net operating loss | | | 4,904,857 | | | | 2,586,671 | |
| Other | | | 225,340 | | | | 27,410 | |
| Total deferred tax assets | | $ | 17,257,638 | | | $ | 10,988,788 | |
| | | | | | | | | |
| Noncurrent deferred tax liabilities: | | | | | | | | |
| Fixed assets | | | — | | | | — | |
| Intangibles | | | (6,051,459 | ) | | | (2,717,717 | ) |
| Deferred tax liabilities | | $ | (6,051,459 | ) | | $ | (2,717,717 | ) |
| Valuation allowance | | | (11,881,470 | ) | | | (8,271,071 | ) |
| Deferred taxes after valuation allowance | | $ | (675,291 | ) | | $ | — | |
During the year ended June30, 2019,December 31, 2021, valuation allowances on deferred tax assets that are not anticipated to be realized increased by $85,455.$3.6 million of which $0.2 million was recorded in purchase accounting and the remainder of $3.4 million was recorded to deferred expense. During the six months ended December 31, 2020, valuation allowances on deferred tax assets that are not anticipated to be realized increased by $5.5 million of which $2.7 million was recorded in purchase accounting and the remainder of $2.8 million was recorded to deferred expense.
DeferredOur deferred tax valuation allowances are primarily the result of uncertainties regarding the future realization of recorded tax benefits on tax loss.losses. The measurement of deferred tax assets is reduced by a valuation allowance if based upon available evidence, it is more likely than not that the deferred tax assets will not be realized. The Company hasWe have evaluated the realizability of itsour deferred tax assets in each jurisdiction by assessing the adequacy of expected taxable income, including the reversal of existing temporary differences, historical and projected operating results, and the availability of prudent and feasible tax planning strategies. Based on this analysis, the Company haswe have determined that the valuation allowances recorded in the period presentedas of December 31, 2021 and December 31, 2020 are appropriate.
The Company’s aggregateWe have deferred tax assets related to U.S. federal tax and state tax carryforwards for net operating losses in the amount of $44.5 million. The majority of U.S. federal net operating loss carryforwards are carried forward indefinitely. Federal net operating losses generated after 2017 have an indefinite carryforward and are only available to offset 80% taxable income beginning in 2021. U.S. state net operating loss carryforwards expire at various dates of which will notthe majority begin to expire were $239,281. The Company recordedin 2039. We have deferred tax assets related to U.S. state taxforeign net operating loss carryforwards,carryforward, which begin to expire at various dates beginning in 2039.2034, in the amount of $18.5 million.
The Company isWe are not currently under examination for any of the major jurisdictions where it conductswe conduct business as of June 30, 2019. TheDecember 31, 2021, however, all of our tax years remain subject to examination. Our management does not believe that there are significant uncertain tax positions in 2019.2021 and as a result we do not expect any cash payments in the next 12 months, however, uncertain tax positions related to potential penalties in the amounts of $30,000 and $50,000 have been recorded in connection with business combinations during the years ended December 31, 2021 and June 30, 2020, respectively. There areis no interest and penalties related to uncertain tax positions in 2019.
2021 or 2020.
F-38
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2019
December 31, 2021
Note 9 —16 - Revisions of Previously Issued Financial Statements for
On June 17, 2019, we completed the Fiscal Quarters during Fiscal Years 2019Mergers with MTech. Prior to the Mergers, MTech was a special purpose acquisition company and had completed an initial public offering in October 2018,
During which included the course of preparing the annual report on Form 10-K for the year ended June30, 2019, the Company identified certain costs of revenue related to consulting services previously being recorded in operating expenses, which resulted in the overstatementissuances of the gross profitMTech Private Warrants in a simultaneous private placement transaction. The MTech Private Warrants were exchanged for eachour Private Warrants as part of the quarters during the fiscal years ended June 30, 2019Mergers and 2018, respectively. These reclassifications had no effect on the reported net losses.
| | | Fiscal 2019 | | | Fiscal year 2018 | |
| | | As reported | | | Adjustment | | | As revised | | | As reported | | | Adjustment | | | As revised | |
| Quarter Ended September 30 | | | | | | | | | | | | | | | | | | |
| Total revenue | | $ | 2,371,900 | | | | | | | $ | 2,371,900 | | | $ | 2,672,502 | | | | | | | $ | 2,672,502 | |
| Cost of revenues | | | 956,123 | | | | 107,012 | | | | 1,063,135 | | | | 1,283,246 | | | | 79,949 | | | | 1,363,195 | |
| Gross profit | | | 1,415,777 | | | | (107,012 | ) | | | 1,308,765 | | | | 1,389,256 | | | | (79,949 | ) | | | 1,309,307 | |
| Operating expenses | | | 3,055,976 | | | | (107,012 | ) | | | 2,948,964 | | | | 3,038,013 | | | | (79,949 | ) | | | 2,958,064 | |
| Net less | | | (1,623,182 | ) | | | | | | | (1,623,182 | ) | | | (1,664,706 | ) | | | | | | | (1,664,706 | ) |
| Net loss per share | | | (0.15 | ) | | | | | | | (0.15 | ) | | | (0.21 | ) | | | | | | | (0.21 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended December 31 | | | | | | | | | | | | | | | | | | | | | | | | |
| Total revenue | | | 2,598,079 | | | | | | | | 2,598,079 | | | | 2,859,582 | | | | | | | | 2,859,582 | |
| Cost of revenues | | | 1,198,911 | | | | 122,084 | | | | 1,320,995 | | | | 1,068,828 | | | | 79,949 | | | | 1,148,777 | |
| Gross profit | | | 1,399,168 | | | | (122,084 | ) | | | 1,277,084 | | | | 1,790,754 | | | | (79,949 | ) | | | 1,710,805 | |
| Operating expenses | | | 3,826,539 | | | | (122,084 | ) | | | 3,704,455 | | | | 2,770,833 | | | | (79,949 | ) | | | 2,690,884 | |
| Net loss | | | (2,370,204 | ) | | | | | | | (2,370,204 | ) | | | (992,463 | ) | | | | | | | (992,463 | ) |
| Net loss per share | | | (0.19 | ) | | | | | | | (0.19 | ) | | | (0.12 | ) | | | | | | | (0.12 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended March 31 | | | | | | | | | | | | | | | | | | | | | | | | |
| Total revenue | | | 2,327,880 | | | | | | | | 2,327,880 | | | | 2,315,635 | | | | | | | | 2,315,635 | |
| Cost of revenues | | | 1,042,403 | | | | 124,079 | | | | 1,166,482 | | | | 737,762 | | | | 79,949 | | | | 817,711 | |
| Gross profit | | | 1,285,477 | | | | (124,079 | ) | | | 1,161,398 | | | | 1,577,873 | | | | (79,949 | ) | | | 1,497,924 | |
| Operating expenses | | | 3,788,644 | | | | (124,079 | ) | | | 3,664,565 | | | | 1,204,242 | | | | (79,949 | ) | | | 1,124,293 | |
| Net loss | | | (2,490,103 | ) | | | | | | | (2,490,103 | ) | | | (364,227 | ) | | | | | | | (364,227 | ) |
| Net loss per share | | | (0.20 | ) | | | | | | | (0.20 | ) | | | (0.04 | ) | | | | | | | (0.04 | ) |
In accordance with SEC Staff Accounting Bulletin No 108, the Company has evaluated these errors, based on an analysis of quantitative and qualitative factors, as to whether it was material to the condensed statements of operations for the three months ended March 31, 2019 and 2018, December 31, 2018 and 2017, and September 30, 2018 and 2017, respectively, and if amendments of previously filed financial statements with the SEC are required. The Company has determined that quantitatively and qualitatively, the errors have no material impact to the condensed statement of operations for these periods.
Note 10 — Subsequent Events
Subsequent to June 30, 2019, the Company was awarded a contract with the state of Utah following the submission of a response to a request for proposal for an interoperable medical cannabis inventory control and electronic verification system.
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2019
Note 10 — Subsequent Events(cont.)
In July 2019, the Company hired Mr. Scott Sozio, at will, to serve as the Company’s Head of Corporate Development. Mr. Sozio is the former Chief Executive Officer of MTech Acquisition Corp., is a current director of Akerna, and beneficially owns common stock of the Company. Mr. Sozio will receive an annual base salary of $150,000, which is to be credited against certain variable bonus compensation to be paid in a combination of cash and equity pursuant to the Equity Incentive Plan once every twelve month period. The terms of such bonus payment are still being negotiated between the Company and Mr. Sozio.
Subsequent to June 30, 2019, 368,910 warrants were exercised at the price of $11.50 per warrant for the total proceeds of $4,242,465.
INDEX TO AMPLE’S FINANCIAL STATEMENTS
Ample Organics Inc.
Interim condensed consolidated statements of financial position
[expressed in Canadian dollars]
[unaudited]
As at
| | | March 31,
2020
CAD$ | | | December 31,
2019
CAD$ | |
| Assets | | | | | | | | |
| Current | | | | | | | | |
| Cash | | | 1,144,834 | | | | 986,874 | |
| Trade and other receivables [note 4] | | | 1,553,158 | | | | 1,549,710 | |
| Inventories | | | 26,810 | | | | 39,437 | |
| Prepaid expenses | | | 228,804 | | | | 329,791 | |
| Total current assets | | | 2,953,606 | | | | 2,905,812 | |
| Property and equipment, net [note 5] | | | 1,896,538 | | | | 1,983,865 | |
| Right of use assets, net [note 6] | | | 2,566,826 | | | | 2,657,120 | |
| Other financial assets | | | — | | | | — | |
| Goodwill and other intangible assets [note 7] | | | 5,773,861 | | | | 5,856,821 | |
| | | | 13,190,831 | | | | 13,403,618 | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Current | | | | | | | | |
| Trade and other payables [note 8] | | | 1,498,116 | | | | 1,423,359 | |
| Deferred revenue | | | 501,940 | | | | 495,797 | |
| Lease liabilities [note 9] | | | 541,368 | | | | 544,226 | |
| Short-term debt [note 10] | | | 5,779,432 | | | | 4,746,189 | |
| Total current liabilities | | | 8,320,856 | | | | 7,209,571 | |
| Lease liabilities [note 9] | | | 3,035,642 | | | | 3,113,228 | |
| Preferred share liabilities [note 11] | | | 13,758,104 | | | | 13,636,522 | |
| Deferred tax liability | | | 326,384 | | | | 348,368 | |
| Total liabilities | | | 25,440,986 | | | | 24,307,689 | |
| | | | | | | | | |
| Shareholders’ equity | | | | | | | | |
| Share capital [note 12] | | | 14,345,721 | | | | 14,345,721 | |
| Warrants [note 12] | | | 823,778 | | | | 823,778 | |
| Contributed surplus | | | 777,274 | | | | 642,407 | |
| Deficit | | | (28,196,928 | ) | | | (26,715,977 | ) |
| Total shareholders’ equity | | | (12,250,155 | ) | | | (10,904,071 | ) |
| | | | 13,190,831 | | | | 13,403,618 | |
Commitments and contingencies [note 15]
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements
On behalf of the Board:
/s/ John Prentice | | /s/ Cal Miller |
Director | | Director |
Ample Organics Inc.
Interim condensed consolidated statements of loss and comprehensive loss
[Expressed in Canadian dollars]
[unaudited]
Three months ended March 31,
| | | 2020
CAD$ | | | 2019
CAD$ | |
| Revenue [note 13] | | | 1,874,726 | | | | 1,715,983 | |
| Cost of sales | | | 708,466 | | | | 1,085,636 | |
| Gross profit | | | 1,166,260 | | | | 630,347 | |
| | | | | | | | | |
| General and administrative expenses [note 14] | | | 738,965 | | | | 869,992 | |
| Sales and marketing [note 14] | | | 375,861 | | | | 578,330 | |
| Research and development [note 14] | | | 850,080 | | | | 2,280,974 | |
| Share-based compensation [note 12] | | | 134,867 | | | | 120,820 | |
| Depreciation and amortization [notes 5,6 and 7] | | | 260,581 | | | | 246,097 | |
| Finance costs | | | 308,841 | | | | 111,598 | |
| Loss on fair value of preferred share liabilities [note 11] | | | — | | | | 1,816,139 | |
| Loss before income taxes | | | (1,502,935 | ) | | | (5,393,603 | ) |
| Deferred income tax recovery | | | 21,984 | | | | 25,367 | |
| Net loss and comprehensive loss for the year | | | (1,480,951 | ) | | | (5,638,236 | ) |
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements
Ample Organics Inc.
Interim condensed consolidated statements of changes in shareholders’ deficiency
[Expressed in Canadian dollars]
[unaudited]
| | | Common Shares | | | Warrants | | | Contributed Surplus | | | Deficit | | | Total | |
| | | # | | | CAD$ | | | # | | | CAD$ | | | CAD$ | | | CAD$ | | | CAD$ | |
| Balance, December 31, 2018 | | | 33,271,650 | | | | 8,055,303 | | | | — | | | | — | | | | 260,790 | | | | (8,350,359 | ) | | | (34,266 | ) |
| Impact of IFRS 16 adoption | | | — | | | | — | | | | — | | | | — | | | | — | | | | (344,834 | ) | | | (344,834 | ) |
| Issuance of shares, net of costs [note 12] | | | 2,436,207 | | | | 3,817,067 | | | | 1,218,100 | | | | 471,828 | | | | — | | | | — | | | | 4,288,895 | |
| Share-based compensation [note 12] | | | — | | | | — | | | | — | | | | — | | | | 120,820 | | | | — | | | | 120,820 | |
| Net loss and comprehensive loss for the period | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5,368,236 | ) | | | (5,368,236 | ) |
| Balance, March 31, 2019 | | | 35,707,857 | | | | 11,872,370 | | | | 1,218,100 | | | | 471,828 | | | | 381,610 | | | | (14,063,429 | ) | | | (1,337,621 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2019 | | | 37,447,622 | | | | 14,345,721 | | | | 2,217,161 | | | | 823,778 | | | | 642,407 | | | | (26,196,928 | ) | | | (10,904,071 | ) |
| Share-based compensation [note 12] | | | — | | | | — | | | | — | | | | — | | | | 134,867 | | | | — | | | | 134,867 | |
| Net loss and comprehensive loss for the year | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,480,951 | ) | | | (1,480,951 | ) |
| Balance, March 31, 2020 | | | 37,447,622 | | | | 14,345,721 | | | | 2,217,161 | | | | 823,778 | | | | 777,274 | | | | (28,196,928 | ) | | | (12,250,155 | ) |
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements
Ample Organics Inc.
Interim condensed consolidated statements of cash flows
[Expressed in Canadian dollars]
[unaudited]
Three months ended March 31,
| | | 2020
CAD$ | | | 2019
CAD$ | |
| Operating activities | | | | | | | | |
| Net loss for the year | | | (1,480,951 | ) | | | (5,368,236 | ) |
| Add items not involving cash | | | | | | | | |
| Depreciation and amortization [notes 5,6,7] | | | 260,581 | | | | 246,097 | |
| Share-based compensation [note 12] | | | 134,867 | | | | 120,820 | |
| Loss on fair value of preferred share liabilities [note 11] | | | — | | | | 1,816,139 | |
| Finance costs | | | 242,668 | | | | 61,358 | |
| Deferred income tax recovery | | | (21,984 | ) | | | (25,367 | ) |
| Impairment of financial asset | | | — | | | | — | |
| Loss on sale of fixed assets | | | — | | | | 161 | |
| | | | (864,819 | ) | | | (3,149,028 | ) |
| Net changes in non-cash working capital balances related to operations | | | | | | | | |
| Trade and other receivables | | | (3,448 | ) | | | 59,985 | |
| Inventories | | | 12,627 | | | | 12,952 | |
| Prepaid expenses | | | 100,987 | | | | (6,773 | ) |
| Trade and other payables | | | 113,986 | | | | 143,688 | |
| Deferred revenue | | | 6,143 | | | | 130,093 | |
| Cash used in operating activities | | | (634,524 | ) | | | (2,809,083 | ) |
| | | | | | | | | |
| Investing activities | | | | | | | | |
| Disposal of property and equipment [note 5] | | | — | | | | 1,075 | |
| Purchase of property and equipment [note 5] | | | — | | | | (98,802 | ) |
| Cash used in investing activities | | | — | | | | (97,727 | ) |
| | | | | | | | | |
| Financing activities | | | | | | | | |
| Proceeds from issuance of shares and warrants, net of costs [note 12] | | | — | | | | 4,288,895 | |
| Repayment of short-term debt [note 10] | | | — | | | | (3,601,786 | ) |
| Proceeds from issuance of short-term debt, net of costs [note 10] | | | 929,473 | | | | 2,000,000 | |
| Payments for lease obligations | | | (136,989 | ) | | | (136,206 | ) |
| Cash provided by financing activities | | | 792,484 | | | | 2,550,903 | |
| | | | | | | | | |
| Net increase (decrease) in cash during the period | | | 157,960 | | | | (355,907 | ) |
| Cash, beginning of the period | | | 986,874 | | | | 1,062,209 | |
| Cash, end of the period | | | 1,144,834 | | | | 706,302 | |
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements
Ample Organics Inc.
Notes to the interim condensed consolidated financial statements
[Expressed in Canadian dollars, except share amounts]
[unaudited]
March 31, 2020 and 2019
1. Nature of business and going concern uncertainty
Nature of business
Ample Organics Inc. [the “Company” or “Ample Organics”] is Canada’s leading cannabis software company. The software is built for compliance with the Access to Cannabis for Medical Purposes Regulations [“ACMPR”], which tracks everything from seed to sale of cannabis and beyond. Ample Organics’ platform allows customers to run their licensed facilities from end-to-end while meeting the record keeping and traceability requirements of ACMPR.
The Company was incorporated on August 1, 2014. The Company’s head office is located at 629 Eastern Ave, Building B, Toronto, Ontario M4M 1E3.
Going concern uncertainty
The preparation of these unaudited interim condensed consolidated financial statements requires management to make judgments regarding the Company’s ability to continue as a going concern. Management has determined that as at March 31, 2020, it does not have adequate working capital for the coming year based on current capital resources. The Company has incurred a total comprehensive loss of CAD$1,480,951 for the three-month period ended March 31, 2020, an accumulated deficit of CAD$28,196,928 and, as of March 31, 2020, the Company’s current liabilities exceeded current assets by CAD$5,367,250. These events or conditions indicate that a material uncertainty exists that raises substantial doubt about the Company’s ability to continue as a going concern and therefore, that it may be unable to realize its assets or discharge its liabilities in the normal course of business. The Company believes it will be able to complete a transaction that will provide the consolidated entity with sufficient funding to meet its expenditure commitments and support its planned level of spending, and therefore it is appropriate to prepare the unaudited interim condensed consolidated financial statements on a going concern basis.
2. Basis of presentation
These unaudited interim condensed consolidated financial statements [“financial statements”] were prepared using the same accounting policies and methods as those used in the Company’s consolidated financial statements for the year ended December 31, 2019. These financial statements have been prepared in compliance with IAS 34 – Interim Financial Reporting. Accordingly, certain disclosures normally included in annual financial statements prepared in accordance with International Financial Reporting Standards [“IFRS”] as issued by the International Accounting Standards Board have been omitted or condensed. These interim condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December31, 2019.
These financial statements were approved and authorized for issuance by the Board of Directors of the Company on June 11, 2020.
COVID-19
During the three-month period ended March 31, 2020, the outbreak of the recent novel coronavirus [“COVID-19”] has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused disruption to certain businesses globally; as a result, there could be a possibility of recession in the near future. While the impact of COVID-19 on the Company has been minimal to date, there is uncertainty around its duration and future business conditions. If the outbreak were to cause disruption to the Company’s supply chain or its service capabilities in the future, it would have a negative impact on revenue, which could be material. In addition, any material negative impact on revenue would impact profitability, as well as liquidity and capital resources.
Ample Organics Inc.
Notes to the interim condensed consolidated financial statements
[Expressed in Canadian dollars, except share amounts]
[unaudited]
March 31, 2020 and 2019
3. Summary of Significant accounting policies
The preparation of these unaudited interim condensed consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities and reported amounts of revenues and expenses during the period. These estimates and assumptions are based on historical experience, expectations of the future, and other relevant factors and are reviewed regularly. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future period affected. Actual results may differ from these estimates.
In preparing these unaudited interim condensed consolidated financial statements, the significant judgments made by management in applying the Company’s accounting policies and the key sources of uncertainty are the same as those applied and described in the Company’s audited annual consolidated financial statements for the fiscal year ended December 31, 2019.
4. Trade and other receivables
The Company’s trade and other receivables include the following:
| | | March 31,
2020
CAD$ | | | December 31,
2019
CAD$ | |
| Trade receivable, net of allowance of CAD$13,667 [2019 – CAD$70,953] | | | 924,155 | | | | 920,707 | |
| Investment tax credit receivable | | | 629,003 | | | | 629,003 | |
| | | | 1,553,158 | | | | 1,549,710 | |
5. Property and equipment
| | | Leasehold
improvements
CAD$ | | | Furniture and
equipment
CAD$ | | | Computer
hardware
CAD$ | | | Total
CAD$ | |
| Cost | | | | | | | | | | | | | | | | |
| As at December 31, 2018 | | | 1,315,090 | | | | 203,919 | | | | 317,707 | | | | 1,836,716 | |
| Impact of IFRS 16 adoption | | | 383,294 | | | | — | | | | — | | | | 383,294 | |
| Additions | | | 100,167 | | | | 17,183 | | | | 31,143 | | | | 148,493 | |
| Disposals | | | — | | | | — | | | | (2,232 | ) | | | (2,232 | ) |
| As at December 31, 2019 | | | 1,798,551 | | | | 221,102 | | | | 346,618 | | | | 2,366,271 | |
| As at March 31, 2020 | | | 1,798,551 | | | | 221,102 | | | | 346,618 | | | | 2,366,271 | |
| | | | | | | | | | | | | | | | | |
| Accumulated depreciation | | | | | | | | | | | | | | | | |
| As at December 31, 2018 | | | 44,334 | | | | 32,854 | | | | 86,542 | | | | 163,730 | |
| Depreciation | | | 63,630 | | | | 42,822 | | | | 113,220 | | | | 219,672 | |
| Disposals | | | — | | | | — | | | | (996 | ) | | | (996 | ) |
| As at December 31, 2019 | | | 107,964 | | | | 75,676 | | | | 198,766 | | | | 382,406 | |
| Depreciation | | | 47,843 | | | | 10,879 | | | | 28,605 | | | | 87,327 | |
| As at March 31, 2020 | | | 155,807 | | | | 86,555 | | | | 227,371 | | | | 469,733 | |
| | | | | | | | | | | | | | | | | |
| Net book value | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| As at December 31, 2019 | | | 1,690,587 | | | | 145,426 | | | | 147,852 | | | | 1,983,865 | |
| As at March 31, 2020 | | | 1,642,744 | | | | 134,547 | | | | 119,247 | | | | 1,896,538 | |
For the three-month period ended March 31, 2020, a depreciation expense of CAD$87,327 [2019 – CAD$44,329] was recorded in the unaudited interim condensed consolidated statement of loss and comprehensive loss in relation to the property and equipment.
Ample Organics Inc.
Notes to the interim condensed consolidated financial statements
[Expressed in Canadian dollars, except share amounts]
[unaudited]
March 31, 2020 and 2019
6. Right-of-use assets
The Company has lease contracts for office space, vehicles and equipment with remaining terms up to eight years in length. The following is a summary of the changes in the Company’s right-of-use assets during the year:
| | CAD$ | |
As at January 1, 2019 | | | 3,034,001 | |
Depreciation | | | (376,881 | ) |
As at December 31, 2019 | | | 2,657,120 | |
Depreciation | | | (90,294 | ) |
As at March 31, 2020 | | | 2,566,826 | |
For the three-month period ended March 31, 2020, depreciation expense of CAD$90,294 [2019 – CAD$93,531] was recorded in the unaudited interim condensed consolidated statement of loss and comprehensive loss in relation to the right of use assets.
7. Goodwill and other intangible assets
The Company’s intangible assets comprise customer relationships and technology, both of which are being amortized over their useful lives of five years.
| | | 2020
CAD$ | | | 2019
CAD$ | |
| Goodwill | | | 4,542,224 | | | | 4,542,224 | |
| Intangible assets | | | 1,231,637 | | | | 1,314,597 | |
| | | | 5,773,861 | | | | 5,856,821 | |
Intangible assets | | CAD$ | |
Cost | | | | |
As at December 31, 2018 | | | 1,659,200 | |
As at March 31, 2020 and December 31, 2019 | | | 1,659,200 | |
| | | | |
Accumulated amortization | | | | |
As at December 31, 2018 | | | 12,763 | |
Amortization | | | 331,840 | |
As at December 31, 2019 | | | 344,603 | |
Amortization | | | 82,960 | |
As at March 31, 2020 | | | 427,563 | |
| | | | |
Net book value | | | | |
As at December 31, 2019 | | | 1,314,597 | |
As at March 31, 2020 | | | 1,231,637 | |
For the three-month period year ended March 31, 2020, amortization expense of CAD$82,960 [2019 – CAD$82,960] was recorded in the unaudited interim condensed consolidated statement of loss and comprehensive loss in relation to the intangible assets.
Ample Organics Inc.
Notes to the interim condensed consolidated financial statements
[Expressed in Canadian dollars, except share amounts]
[unaudited]
March 31, 2020 and 2019
8. Trade and other payables
The Company’s trade and other payables include the following:
| | | March 31,
2020
CAD$ | | | December 31,
2019
CAD$ | |
| Trade payables | | | 1,410,004 | | | | 1,316,653 | |
| Sales tax payable | | | 88,072 | | | | 106,706 | |
| | | | 1,498,076 | | | | 1,423,359 | |
9. Lease liabilities
The following is a summary of the changes in the Company’s lease liabilities during the period:
| | CAD$ | |
As at January 1, 2019 | | | 3,964,299 | |
Interest accretion | | | 237,977 | |
Lease repayments | | | (544,822 | ) |
As at December 31, 2019 | | | 3,657,454 | |
Interest accretion | | | 56,545 | |
Lease repayments | | | (136,989 | ) |
As at March 31, 2020 | | | 3,577,010 | |
Current | | | 541,368 | |
Non-current | | | 3,035,642 | |
For the three-month period ended March 31, 2020, interest expense of CAD$56,545 [2019 – CAD$61,356] was recorded in the unaudited interim condensed consolidated statement of loss and comprehensive loss in relation to the lease liability.
10. Short-term debt
| | | March 31,
2020
CAD$ | | | December 31,
2019
CAD$ | |
| Short-term debt due in September 2020 | | | 2,134,468 | | | | 2,097,335 | |
| Short-term debt due in October 2020 | | | 3,644,964 | | | | 2,648,854 | |
| | | | 5,779,432 | | | | 4,746,189 | |
On February 15, 2019, in order to repay the promissory note for the acquisition of LCA, the Company entered into a CAD$2,000,000 loan bearing interest of 15% per annum, maturing in six months. At inception, the Company recognized the loan at its fair value plus transaction costs directly attributable to its issuance of CAD$87,165. Subsequent to initial recognition, the loan was carried at amortized cost. Financing costs of CAD$87,165 related to this loan were recorded in the consolidated statement of loss and comprehensive loss for the year ended December 31, 2019.
On September 25, 2019, the loan was amended to extend the maturity date to September25, 2020 and the interest rate to 12% per annum. In addition, 600,000 warrants convertible into Class A-3 Preferred Shares of the Company were issued to the lender [note 11]. On entering into the amended loan, the Company completed an assessment that showed that the present value of the cash flows under the amended loan facility, including the financing costs and cost of warrants issued, differed more than 10% from the present value of the remaining cash flows of the loan. The amendment was treated as an extinguishment of the original loan and the establishment of a new loan at its fair value plus transaction costs of CAD$211,567 directly attributable to its issuance. A loss on extinguishment of CAD$1,001,928 was recorded within finance costs related to the amendment. In December 2019, upon announcement of the Akerna Transaction [note 11], the carrying value of the amended loan was adjusted for a revised estimate of future expected cash flows discounted over the remaining estimated life of the amended loan.
Ample Organics Inc.
Notes to the interim condensed consolidated financial statements
[Expressed in Canadian dollars, except share amounts]
[unaudited]
March 31, 2020 and 2019
10. Short-term debt (cont.)
On October 1, 2019, the Company entered into a CAD$2,500,000 loan bearing interest of 12% per annum maturing on October 1, 2020. In addition, 204,000 warrants convertible into Class A-3 Preferred Shares of the Company were issued to the lender [note 11]. At inception, the Company recognized the loan at its fair value plus transaction costs directly attributable to its issuance of CAD$246,368. Subsequent to initial recognition, the loan was carried at amortized cost. In December 2019, upon announcement of the Akerna Transaction [see note 11], the carrying value of the loan was adjusted for a revised estimate of future expected cash flows discounted over the remaining estimated life of the amended loan.
On March 9, 2020, the Company drew down on a supplemental advance of CAD$1,000,000 from the October loan bearing interest of 14% per annum and maturing on October 1, 2020. In addition, 81,600 Class A-3 Preferred Shares warrants of the Company were issued to the lender [note 11]. The Company recognized the loan at its fair value plus transaction costs directly attributable to its issuance of CAD$170,527.
For the three-month period ended March 31, 2020, interest expense of CAD$252,296 [2019 – CAD$50,240] was recorded in the unaudited interim condensed consolidated statement of loss and comprehensive loss in relation to the short-term debt.
At March 31, 2020, the Company was in breach of the covenants for its short-term debt. No waivers were obtained by the Company for these covenant breaches.
11. Preferred share liabilities
The following is a summary of the changes in the Company’s preferred liabilities:
| | | March 31,
2020
CAD$ | | | December 31,
2019
CAD$ | |
| Opening balance | | | 13,636,522 | | | | 5,234,811 | |
| Additions | | | 121,582 | | | | 1,089,073 | |
| Change in fair value of preferred share liabilities | | | — | | | | 7,312,638 | |
| Ending balance | | | 13,758,104 | | | | 13,636,522 | |
In June 2018, the Company issued 3,000,000 preferred share units at CAD$1.50 per unit, consisting of 3,000,000 Class A-1 Preferred Shares and 1,500,000 warrants convertible into Class A-2 Preferred Shares at an exercise price of CAD$2.25 per share for gross proceeds of CAD$4,500,000. As the Class A-1 Preferred Shares and Class A-2 Preferred Shares are convertible into a variable number of common shares depending on subsequent issuances of common shares, these preferred shares and the warrants convertible to the preferred shares are considered financial liabilities. The net proceeds were allocated to the preferred shares and warrants based on the relative fair value of each instrument.
In October 2019, the Company issued 804,000 warrants convertible into Class A-3 Preferred Shares at an exercise price of CAD$1.20 to lenders in connection with loans received [note 10]. As the Class A-3 Preferred Shares are convertible into a variable number of common shares depending on subsequent issuances of common shares, these preferred shares and the warrants convertible to the preferred shares are considered financial liabilities.
Ample Organics Inc.
Notes to the interim condensed consolidated financial statements
[Expressed in Canadian dollars, except share amounts]
[unaudited]
March 31, 2020 and 2019
11. Preferred share liabilities (cont.)
In March 2020, the Company issued 81,600 warrants convertible into Class A-3 Preferred Shares at an exercise price of CAD$1.20 to lenders in connection with loans received [note 10].
The Company determined that each of the Company’s Class A-1 Preferred Shares, Class A-2 Preferred Shares and Class A-3 Preferred Shares [collectively the “Class A Preferred Shares”] and warrants that are convertible into Class A Preferred Shares, did not meet the IFRS definition of equity due to the variability of the conversion price. Accordingly, the Class A Preferred Shares and the related warrants are treated as financial liabilities measured at fair value through profit or loss.
In determining the fair values of the warrants issued, the Company used the Black-Scholes pricing model applying the following inputs:
| | | 2020 | | | 2019 | |
| Risk-free interest rate | | | 0.52 | % | | | 1.47 | % |
| Term [years] | | | 3 | | | | 3 | |
| Estimated volatility | | | 70 | % | | | 70 | % |
| Warrant value | | CAD$ | 2.08 | | | CAD$ | 1.40 | |
| Share price | | CAD$ | 3.00 | | | CAD$ | 2.22 | |
| Exercise price | | CAD$ | 1.20 | | | CAD$ | 1.20 | |
In December 2019, 1,500,000 warrants convertible into Class A-2 Preferred Shares were converted into 777,637 Class A-2 Preferred Shares and 492,000 warrants convertible into Class A-3 Preferred Shares were converted into 283,721 Class A-3 Preferred Shares.
For the three-month period year ended March 31, 2020, a CAD$nil change on fair value of preferred share liabilities [2019 – CAD$1,816,139 loss] was recorded in the unaudited interim condensed consolidated statement of loss and comprehensive loss.
12. Share capital
[a] Authorized
The authorized share capital of the Company consists of an unlimited number of common shares and 5,304,000 Class A Preferred Shares, issuable in series, of which 3,000,000 are designated as Class A-1 Preferred Shares, 1,500,000 are designated as Class A-2 Preferred Shares and 804,000 are designated as Class A-3 Preferred Shares.
Class A Preferred Shares are convertible, at the option of the holder, into a number of fully paid and non-assessable common shares as determined by dividing the original issue price of the series of Class A Preferred Shares by the then effective conversion price and adjustments to the conversion price in the event the Company issues additional common shares and amounts less than the original conversion price. The conversion and original issue price is CAD$1.50 for Class A-1 Preferred Shares, CAD$2.25 for Class A-2 Preferred Shares, and CAD$1.20 for Class A-3 Preferred Shares, subject to anti-dilution provisions. Preferred shares automatically convert to common shares upon: [i] an amalgamation, arrangement, consolidation, merger, reorganization or similar transaction of the Company, [ii] the sale, lease, transfer, exclusive license or disposition of substantially all of the Company’s assets, [iii] the closing of a public offering of the Company’s common shares provided the offering price per share is not less than CAD$4.50 and aggregate gross proceeds are greater than CAD$20,000,000, or [iv] the vote of the majority of holders of Class A Preferred Shares to convert.
Ample Organics Inc.
Notes to the interim condensed consolidated financial statements
[Expressed in Canadian dollars, except share amounts]
[unaudited]
March 31, 2020 and 2019
12. Share capital (cont.)
[b] Issued andour Private Warrants remain outstanding
On February 22, 2019, the Company issued 2,436,207 common share units at CAD$1.80 per unit, consisting of 2,436,207 common shares and 1,218,100 warrants convertible into common shares at an exercise price of CAD$2.70 until February 22, 2021. In connection with this transaction, the Company issued 27,698 broker warrants convertible into common shares at an exercise price of CAD$1.80 until February 22, 2021 and paid CAD$96,278 in transaction costs.
On April 25, 2019, the Company issued 1,358,052 common share units at CAD$1.80 per unit, consisting of 1,358,052 common shares and 679,024 warrants convertible into common shares at an exercise price of CAD$2.70 until April 25, 2021. In connection with this transaction, the Company issued 81,483 broker warrants convertible into common shares at an exercise price of CAD$1.80 until April 25, 2021 and paid CAD$246,389 in transaction costs.
On May 2, 2019, the Company issued 309,200 common share units at CAD$1.80 per unit, consisting of 309,200 common shares and 154,600 warrants convertible into common shares at an exercise price of CAD$2.70 until May 2, 2021. In connection with this transaction, the Company issued 20,000 advisory warrants convertible into common shares at an exercise price of CAD$1.80 until May 2, 2021 and paid CAD$29,944 in transaction costs.
On May 15, 2019, the Company issued 72,513 common share units at CAD$1.80 per unit, consisting of 72,513 common shares and 36,256 warrants convertible into common shares at an exercise price of CAD$2.70 until May 15, 2021. In connection with this transaction, the Company paid CAD$29,944 in transaction costs.
All of the warrants convertible to common shares for these transactions are convertible into common shares at a 1:1 ratio. The warrants were valued using the Black-Scholes pricing model with the following inputs:
| | 2019 | |
Risk-free interest rate | | | 1.54% – 1.79 | % |
Term [years] | | | 2 | |
Volatility | | | 70 | % |
Dividend yield | | | Nil | |
Warrant value | | | CAD$0.38 – CAD$0.57 | |
Share price | | | CAD$1.61 | |
Exercise price | | | CAD$1.80 – CAD$2.70 | |
[c] Employee stock option plan
The Company has an Employee Stock Option Plan [the “Plan”] that is administered by the Board of Directors of the Company who establishes exercise prices, at not less than market price at the date of grant, and expiry dates, which have been set at ten years from issuance. Options under the Plan remain exercisable in increments with 1/4 being exercisable on each of the first and second anniversary and 2/4 being exercisable on the third anniversary from the date of grant, except as otherwise approved by the Board of Directors. The maximum number of common shares reserved for issuance for options that may be granted under the Plan is 10% of the common shares outstanding, which amounts to 3,744,762 at March 31, 2020 [2019 – 3,744,762].
Ample Organics Inc.
Notes to the interim condensed consolidated financial statements
[Expressed in Canadian dollars, except share amounts]
[unaudited]
March 31, 2020 and 2019
12. Share capital (cont.)
The following is a summary of the changes in the Company’s stock options:
| | | Number of
options
# | | | Weighted
average
exercise price
CAD$ | |
| Outstanding as at December 31, 2018 | | | 1,070,500 | | | | 1.50 | |
| Granted | | | 888,500 | | | | 1.80 | |
| Forfeited | | | (915,188 | ) | | | 1.60 | |
| Expired | | | (25,312 | ) | | | 1.50 | |
| Outstanding as at December 31, 2019 | | | 1,018,500 | | | | 1.67 | |
| Forfeited | | | (37,500 | ) | | | 1.50 | |
| Expired | | | (31,250 | ) | | | 1.50 | |
| Outstanding as at March 31, 2020 | | | 949,750 | | | | 1.68 | |
For the three-month period ended March 31, 2020, the Company recorded CAD$134,867 [2019 – CAD$120,820] in share-based compensation expense related to options, which are measured at the fair value at the date of grant and expensed over the option’s vesting period.
In determining the amount of share-based compensation, the Company used the Black-Scholes option pricing model to establish the fair value of options granted by applying the following assumptions:
| | 2019 | |
Grant date share price | | CAD$ | 1.61 | |
Exercise price | | CAD$ | 1.80 | |
Expected dividend yield | | | — | |
Risk free interest rate | | | 1.49% – 1.76 | % |
Expected life | | | 10 years | |
Expected volatility | | | 70 | % |
Expected volatility was estimated by using the historical volatility of other companies that the Company considers comparable that have trading and volatility history. The expected option life represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on government bonds with a remaining term equal to the expected life of the options.
The following table is a summary of the Company’s share options outstanding as at March 31, 2020:
| | | Options outstanding | | | Options exercisable | |
Exercise
price
CAD$ | | Number
outstanding
# | | | Weighted average
remaining
contractual life
[years]
# | | | Exercise
price
CAD$ | | | Number
exercisable
# | |
| 1.50 | | | 376,750 | | | | 9.85 | | | | 1.50 | | | | 94,188 | |
| 1.80 | | | 573,000 | | | | 8.41 | | | | 1.80 | | | | 54,750 | |
| 1.68 | | | 949,750 | | | | 8.98 | | | | 1.61 | | | | 148,938 | |
Ample Organics Inc.
Notes to the interim condensed consolidated financial statements
[Expressed in Canadian dollars, except share amounts]
[unaudited]
March 31, 2020 and 2019
12. Share capital (cont.)
The following table is a summary of the Company’s share options outstanding as at March 31, 2019:
| | | Options outstanding | | | Options exercisable | |
Exercise
price
CAD$ | | Number
outstanding
# | | | Weighted average
remaining
contractual life
[years]
# | | | Exercise
price
CAD$ | | | Number
exercisable
# | |
| 1.50 | | | 944,500 | | | | 4.40 | | | | 1.50 | | | | — | |
| 1.80 | | | 276,500 | | | | 7.88 | | | | 1.80 | | | | — | |
| 1.57 | | | 1,221,000 | | | | 5.19 | | | | — | | | | — | |
13. Disaggregated revenue
The Company derives its revenues from two main sources, software-as-a-service application [“SaaS”], and professional services revenue, which includes services such system integration and training, and process-change analysis. Subscription revenue related to the provision of SaaS is recognized ratably over the contract term as the service is delivered. Professional services revenue is recognized as services are rendered. Other revenue relates mainly to sale of hardware.
The following table represents disaggregation of revenue for the three-month period ended March 31, 2020 and 2019:
| | | 2020
CAD$ | | | 2019
CAD$ | |
| Subscription revenues | | | 1,447,671 | | | | 911,039 | |
| Professional services | | | 198,432 | | | | 203,965 | |
| Other | | | 198,623 | | | | 600,979 | |
| Total | | | 1,874,726 | | | | 1,715,983 | |
14. Expenses by nature
Components of general and administrative expenses, sales and marketing and research and development expenses for the three-month period ended March 31, 2020 and 2019 were as follows:
| | | 2020
CAD$ | | | 2019
CAD$ | |
| Salaries and wages | | | 1,364,120 | | | | 1,850,419 | |
| Professional fees [include outsourced software development] | | | 479,377 | | | | 1,760,466 | |
| Other | | | 121,409 | | | | 118,411 | |
| | | | 1,964,906 | | | | 3,729,296 | |
15. Commitments and contingencies
In the ordinary course of business, from time to time, the Company is involved in various claims related to operations, rights, commercial, employment or other claims. Although such matters cannot be predicted with certainty, management does not consider the Company’s exposure to these claims to be material to these financial statements.
Report of independent auditor
To the Board of Directors of Ample Organics Inc.
We have audited the accompanying consolidated financial statements of Ample Organics Inc. [the “Company”], which comprise the consolidated statements of financial position as of December 31, 20192021. We initially accounted for these outstanding Private Warrants as components of equity rather than as derivative liabilities. In light of the Staff Statement on Accounting and 2018,Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) issued by the staff of the SEC on April 12, 2021 (the “SEC Staff Statement”), the Company’s management further evaluated our outstanding warrants under Accounting Standards Codification 815-40, Contracts in Entity’s Own Equity (“ASC 815-40”), which addresses equity versus liability treatment and classification of equity-linked financial instruments, including warrants, and states that a warrant may be classified as a component of equity only if, among other things, the relatedwarrant is indexed to the issuer’s common stock.
Based on management’s evaluation and in consultation with the Audit Committee, we concluded that the Company’s Private Warrants are not indexed to the Company’s common stock in the manner contemplated by ASC Section 815-40. As a result, these warrants are precluded from equity classification and should be recorded as derivative liabilities remeasured to fair value at each reporting period. We assessed the materiality of these errors on prior periods’ consolidated financial statements and concluded that the errors were not material to any prior annual or interim periods. However, we have revised the prior period financial information included in these consolidated financial statements to reclassify the Private Warrants as derivative liabilities measured at their estimated fair values at the end of losseach reporting period and comprehensive loss,recognized changes in stockholders’ deficiency, and cash flows for eachthe estimated fair value of the two yearsderivative instruments from the prior period in the period ended December 31, 2019, andCompany’s operating results.
The Company's change in accounting for the related notesPrivate Warrants from components of equity to derivative liabilities has no impact on the financial statements.Company's current or previously reported cash position.
Management’s responsibility forThe tables below disclose the effects on the consolidated financial statements included in this Annual Report on Form 10-K:
| | | Year Ended June 30, 2020 | |
| | | As reported | | | Adjustment | | | As revised | |
| Consolidated Statements of Operations | | | | | | | | | |
| Change in fair value of derivative liability | | | — | | | | 1,962,034 | | | | 1,962,034 | |
| Net loss attributable to Akerna shareholders | | | (15,534,345 | ) | | | 1,962,034 | | | | (13,572,311 | ) |
| Net loss per share | | | (1.31 | ) | | | — | | | | (1.14 | ) |
| | | Six Months Ended December 31, 2020 | |
| | | As reported | | | Adjustment | | | As revised | |
| Condensed Consolidated Statements of Operations | | | | | | | | | |
| Change in fair value of derivative liability | | | — | | | | 746,852 | | | | 746,852 | |
| Net loss attributable to Akerna shareholders | | | (16,957,334 | ) | | | 746,852 | | | | (16,210,482 | ) |
| Net loss per share | | | (1.01 | ) | | | — | | | | (1.01 | ) |
| | | As of December 31, 2020 | |
| | | As reported | | | Adjustment | | | As revised | |
| Consolidated Balance Sheet | | | | | | | | | |
| Derivative liability | | | — | | | | (311,376 | ) | | | (311,376 | ) |
| Total liabilities | | | (19,635,076 | ) | | | (311,376 | ) | | | (19,946,452 | ) |
| Additional paid-in capital | | | 95,090,833 | | | | (1,004,450 | ) | | | 94,086,433 | |
| Accumulated deficit | | | (57,872,599 | ) | | | 693,074 | | | | (57,179,525 | ) |
Management is responsible for the preparation and fair presentation of these consolidated financial statements in conformity with International Financial Reporting Standards [“IFRS”], this includes the design, implementation, and maintenance of internal control relevant
The NAV People, Inc. & Subsidiary
CONSOLIDATED BALANCE SHEET
| | | September 30,
2021 | |
| Assets | | | |
| Current Assets | | | |
| Cash | | $ | 531,723 | |
| Accounts receivable, net of allowance of $435,430 | | | 961,140 | |
| Prepaid expenses and other current assets | | | 266,826 | |
| Total Current Assets | | | 1,759,689 | |
| | | | | |
| Non-Current Assets | | | | |
| Property and equipment, net | | | 92,437 | |
| Intangible assets, net | | | 1,362,710 | |
| Deposits | | | 11,361 | |
| Total Non-Current Assets | | | 1,466,508 | |
| Total Assets | | $ | 3,226,197 | |
| | | | | |
| Liabilities and Stockholders’ Deficit | | | | |
| Current Liabilities | | | | |
| Convertible note payable | | $ | 1,520,000 | |
| Accounts Payable | | | 384,697 | |
| Accrued Expenses | | | 500,185 | |
| Deferred revenue | | | 2,448,982 | |
| Total Current Liabilities | | | 4,853,864 | |
| Long Term Liabilities | | | | |
| Stockholder notes payable | | | 3,496,759 | |
| Notes payable | | | 148,817 | |
| Total Long-Term Liabilities | | | 3,645,576 | |
| Total Liabilities | | | 8,499,440 | |
| | | | | |
| Stockholders’ Deficit | | | |
| Common stock, $1 par value, 10,000 shares authorized, 5,000 shares issued and outstanding | | | 5,000 | |
| Additional paid-in capital | | | 2,000 | |
| Accumulated other comprehensive loss | | | (11,410 | ) |
| Accumulated deficit | | | (5,268,833 | ) |
| Total Stockholders’ Deficit | | | (5,273,243 | ) |
| Total Liabilities and Stockholders’ Deficit | | $ | 3,226,197 | |
See accompanying Notes to the preparationConsolidated Financial Statements
The NAV People, Inc. & Subsidiary
CONSOLIDATED STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME
| | | For the
Nine Months
Ended
September 30,
2021 | |
| | | | |
| Revenue | | | |
| Recurring revenue | | $ | 4,397,990 | |
| Services revenue | | | 2,071,250 | |
| Other revenue | | | 685,213 | |
| Total revenue | | | 7,154,453 | |
| Cost of revenue | | | 1,913,331 | |
| Gross profit | | | 5,241,122 | |
| | | | | |
| Operating Expenses | | | | |
| Operations and support | | | 4,584,170 | |
| Sales and marketing | | | 35,213 | |
| General and administrative | | | 543,784 | |
| Bad debt expense | | | 286,094 | |
| Depreciation and amortization | | | 189,664 | |
| Acquisition Costs | | | 172,550 | |
| Total Operating Expenses | | | 5,811,475 | |
| Loss From Operations | | | (570,353 | ) |
| | | | | |
| Other loss | | | (19,586 | ) |
| Gain on PPP loan forgiveness | | | 954,984 | |
| Interest expense | | | (161,029 | ) |
| Total other Income | | | 774,369 | |
| | | | | |
| Net Income before provision for income taxes | | | 204,016 | |
| Federal and State Income Tax | | | (5,250 | ) |
| Net Income | | | 198,766 | |
| Foreign currency translation adjustment | | | (45 | ) |
| Comprehensive Income | | $ | 198,721 | |
See accompanying Notes to the Consolidated Financial Statements
The NAV People, Inc. & Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
| | | Shares | | | Par | | | Additional
Paid-In
Capital | | | Accumulated
Other
Comprehensive
Loss | | | Accumulated
Deficit | | | Total
Stockholders’
Deficit | |
| Balance as of January 1, 2021 | | | 5,000 | | | $ | 5,000 | | | $ | 2,000 | | | $ | (11,365 | ) | | $ | (5,467,599 | ) | | $ | (5,471,964 | ) |
| Net Income | | | - | | | | - | | | | - | | | | - | | | | 198,766 | | | | 198,766 | |
| Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | (45 | ) | | | - | | | | (45 | ) |
| Balance as of September 30, 2021 | | | 5,000 | | | $ | 5,000 | | | $ | 2,000 | | | $ | (11,410 | ) | | $ | (5,268,833 | ) | | $ | (5,273,243 | ) |
See accompanying Notes to the Consolidated Financial Statements
The NAV People, Inc. & Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS
| | | For the
Nine months
ended
September 30,
2021 | |
| | | | |
| Net Income | | $ | 198,766 | |
| Adjustment to reconcile net income to net cash provided by operating activities | | | | |
| Gain on PPP loan forgiveness | | | (954,984 | ) |
| Bad debt | | | 286,093 | |
| Depreciation and amortization | | | 189,664 | |
| Change in assets and liabilities: | | | | |
| Accounts receivable | | | (190,370 | ) |
| Prepaid expenses and other current assets | | | (97,590 | ) |
| Accounts payable and accrued expenses | | | 327,837 | |
| Deferred revenue | | | 661,491 | |
| Net cash provided by operating activities | | | 420,907 | |
| | | | | |
| Cash flows from investing activities | | | | |
| Developed software additions | | | (304,607 | ) |
| Purchases of property and equipment | | | (14,241 | ) |
| Net cash used in investing activities | | | (318,848 | ) |
| | | | | |
| Cash flows from financing activities | | | | |
| Proceeds from debt issuances | | | 170,000 | |
| Payments of principal amounts of debt | | | (1,182 | ) |
| Net cash provided by financing activities | | | 168,818 | |
| Effect of exchange rates on cash | | | (5,717 | ) |
| Net change in cash | | | 265,160 | |
| Beginning Balance | | | 266,563 | |
| Ending Balance | | $ | 531,723 | |
| | | | | |
| Supplemental Disclosure of Cash Flow Information: | | | | |
| Cash paid for interest | | $ | 137,151 | |
See accompanying Notes to the Consolidated Financial Statements
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature of the Business and fair presentationSummary of consolidated financial statements that are free from material misstatement, whether due to fraudSignificant Accounting Policies
Description of the Business
The NAV People, Inc. (“The NAV People” or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with auditing standards generally acceptedthe “Company”) provides software for highly regulated retailers in the United States. Those standards require that we planlegal cannabis space. Founded in 2016 and performheadquartered in Las Vegas, Nevada, the auditNAV People services a client base comprised of U.S.-based multi-state operators and single-state operators and Canadian LPs, in addition to obtain reasonable assurance about whether the financial statements are freeglobal cannabis clients outside North America. The NAV People have over 85 customers.
Basis of material misstatement.Presentation and Consolidation
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ample Organics Inc. at December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2019 in conformity with IFRS.
The Company’s ability to continue as a going concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has recurring losses from operations, has a working capital deficiency, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
/s/ Ernst & Young LLP
Toronto, Ontario
June11, 2020
Ample Organics Inc.
Consolidated statements of financial position
[Expressed in Canadian dollars]
As at December 31
| | | 2019
CAD$ | | | 2018
CAD$ | |
| Assets | | | | | | | | |
| Current | | | | | | | | |
| Cash | | | 986,874 | | | | 1,062,209 | |
| Trade and other receivables [note 4] | | | 1,549,710 | | | | 1,630,439 | |
| Inventories | | | 39,437 | | | | 210,507 | |
| Prepaid expenses | | | 329,791 | | | | 385,054 | |
| Total current assets | | | 2,905,812 | | | | 3,288,209 | |
| Property and equipment, net [note 5] | | | 1,983,865 | | | | 1,672,986 | |
| Right of use assets, net [note 6] | | | 2,657,120 | | | | — | |
| Other financial assets | | | — | | | | 25,000 | |
| Goodwill and other intangible assets [note 7] | | | 5,856,821 | | | | 6,188,661 | |
| | | | 13,403,618 | | | | 11,174,856 | |
| Liabilities | | | | | | | | |
| Current | | | | | | | | |
| Trade and other payables [note 8] | | | 1,423,359 | | | | 1,200,860 | |
| Deferred revenue | | | 495,797 | | | | 731,977 | |
| Lease liabilities [note 9] | | | 544,226 | | | | — | |
| Short-term debt [note 10] | | | 4,746,189 | | | | 3,601,786 | |
| Total current liabilities | | | 7,209,571 | | | | 5,534,623 | |
| Lease liabilities [note 9] | | | 3,113,228 | | | | — | |
| Preferred share liabilities [note 11] | | | 13,636,522 | | | | 5,234,811 | |
| Deferred tax liability [note 13] | | | 348,368 | | | | 439,688 | |
| Total liabilities | | | 24,307,689 | | | | 11,209,122 | |
| Shareholders’ deficiency | | | | | | | | |
| Share capital [note 12] | | | 14,345,721 | | | | 8,055,303 | |
| Warrants [note 12] | | | 823,778 | | | | — | |
| Contributed surplus | | | 642,407 | | | | 260,790 | |
| Deficit | | | (26,715,977 | ) | | | (8,350,359 | ) |
| Total shareholders’ deficiency | | | (10,904,071 | ) | | | (34,266 | ) |
| | | | 13,403,618 | | | | 11,174,856 | |
Commitments and contingencies [note 16]
Subsequent events [note 21]
The accompanying notes are an integral part of these consolidated financial statements
On behalf of the Board:
/s/ John Prentice | | /s/ Cal Miller |
Director | | Director |
Ample Organics Inc.
Consolidated statements of loss and comprehensive loss
[Expressed in Canadian dollars]
Years ended December 31
| | | 2019
CAD$ | | | 2018
CAD$ | |
| Revenue [note 14] | | | 7,420,199 | | | | 6,436,876 | |
| Cost of sales | | | 4,363,863 | | | | 3,291,566 | |
| Gross profit | | | 3,056,336 | | | | 3,145,310 | |
| General and administrative expenses [note 15] | | | 3,520,720 | | | | 2,283,351 | |
| Sales and marketing [note 15] | | | 2,079,045 | | | | 1,616,103 | |
| Research and development [note 15] | | | 4,777,996 | | | | 4,737,175 | |
| Share-based compensation [note 12] | | | 381,617 | | | | 260,790 | |
| Depreciation and amortization [notes 5,6,7] | | | 928,393 | | | | 162,853 | |
| Finance costs [note 10] | | | 2,143,031 | | | | 5,409 | |
| Loss on fair value of preferred share liabilities [note 11] | | | 7,312,638 | | | | 776,000 | |
| Other expense | | | 25,000 | | | | — | |
| Loss before income taxes | | | (18,112,104 | ) | | | (6,696,371 | ) |
| Deferred income tax recovery [note 13] | | | 91,320 | | | | — | |
| Net loss and comprehensive loss for the year | | | (18,020,784 | ) | | | (6,696,371 | ) |
The accompanying notes are an integral part of these consolidated financial statements
Ample Organics Inc.
Consolidated statements of changes in shareholders’ deficiency
[Expressed in Canadian dollars]
| | | Common Shares | | | Warrants | | | Contributed
Surplus | | | Deficit | | | Total | |
| | | # | | | CAD$ | | | # | | | CAD$ | | | CAD$ | | | CAD$ | | | CAD$ | |
| Balance, December 31, 2017 | | | 29,969,426 | | | | 2,975,522 | | | | — | | | | — | | | | — | | | | (1,653,988 | ) | | | 1,321,534 | |
| Issuance of shares, net of costs [note 12] | | | 3,302,224 | | | | 5,079,781 | | | | — | | | | — | | | | — | | | | — | | | | 5,079,781 | |
| Share-based compensation [note 12] | | | — | | | | — | | | | — | | | | — | | | | 260,790 | | | | — | | | | 260,790 | |
| Net loss and comprehensive loss for the year | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6,696,371 | ) | | | (6,696,371 | ) |
| Balance, December 31, 2018 | | | 33,271,650 | | | | 8,055,303 | | | | — | | | | — | | | | 260,790 | | | | (8,350,359 | ) | | | (34,266 | ) |
| Impact of IFRS 16 adoption [note 3] | | | — | | | | — | | | | — | | | | — | | | | — | | | | (344,834 | ) | | | (344,834 | ) |
| Issuances of shares and warrants, net of costs [note 12] | | | 4,175,972 | | | | 6,290,418 | | | | 2,217,161 | | | | 823,778 | | | | — | | | | — | | | | 7,114,196 | |
| Share-based compensation [note 12] | | | — | | | | — | | | | — | | | | — | | | | 381,617 | | | | — | | | | 381,617 | |
| Net loss and comprehensive loss for the year | | | — | | | | — | | | | — | | | | — | | | | — | | | | (18,020,784 | ) | | | (18,020,784 | ) |
| Balance, December 31, 2019 | | | 37,447,622 | | | | 14,345,721 | | | | 2,217,161 | | | | 823,778 | | | | 642,407 | | | | (26,715,977 | ) | | | (10,904,071 | ) |
The accompanying notes are an integral part of these consolidated financial statements
Ample Organics Inc.
Consolidated statements of cash flows
[Expressed in Canadian dollars]
Year ended December 31
| | | 2019
CAD$ | | | 2018
CAD$ | |
| Operating activities | | | | | | | | |
| Net loss for the year | | | (18,020,784 | ) | | | (6,696,371 | ) |
| Add items not involving cash | | | | | | | | |
| Depreciation and amortization [notes 5,6,7] | | | 928,393 | | | | 162,853 | |
| Share-based compensation [note 12] | | | 381,617 | | | | 260,790 | |
| Loss on fair value of preferred share liabilities [note 11] | | | 7,312,638 | | | | 776,000 | |
| Finance costs | | | 1,792,435 | | | | — | |
| Deferred income tax recovery | | | (91,320 | ) | | | — | |
| Impairment of financial asset | | | 25,000 | | | | — | |
| Loss on sale of fixed assets | | | 161 | | | | 1,070 | |
| | | | (7,671,860 | ) | | | (5,495,658 | ) |
| Net changes in non-cash working capital balances related to operations | | | | | | | | |
| Trade and other receivables | | | 282,899 | | | | (1,180,641 | ) |
| Inventories | | | 171,070 | | | | (161,945 | ) |
| Prepaid expenses | | | 55,263 | | | | (157,854 | ) |
| Trade and other payables | | | 222,497 | | | | 468,942 | |
| Deferred revenue | | | (236,180 | ) | | | 25,269 | |
| Cash used in operating activities | | | (7,176,311 | ) | | | (6,501,887 | ) |
| | | | | | | | | |
| Investing activities | | | | | | | | |
| Acquisition | | | — | | | | (3,525,627 | ) |
| Disposal of property and equipment [note 5] | | | 1,075 | | | | 8,988 | |
| Purchase of property and equipment [note 5] | | | (148,493 | ) | | | (981,901 | ) |
| Cash used in investing activities | | | (147,418 | ) | | | (4,498,540 | ) |
| | | | | | | | | |
| Financing activities | | | | | | | | |
| Proceeds from issuance of shares and warrants, net of costs [note 12] | | | 7,114,196 | | | | 7,303,283 | |
| Repayment of short-term debt [note 10] | | | (5,601,786 | ) | | | — | |
| Proceeds from issuance of short-term debt, net of costs [note 10] | | | 6,280,806 | | | | 3,601,786 | |
| Payments for lease obligations | | | (544,822 | ) | | | — | |
| Cash provided by financing activities | | | 7,248,394 | | | | 10,905,069 | |
| | | | | | | | | |
| Net decrease in cash during the year | | | (75,335 | ) | | | (95,358 | ) |
| Cash, beginning of the year | | | 1,062,209 | | | | 1,157,567 | |
| Cash, end of the year | | | 986,874 | | | | 1,062,209 | |
The accompanying notes are an integral part of these consolidated financial statements
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
1. Nature of business and going concern uncertainty
Nature of business
Ample Organics Inc. [the “Company” or “Ample Organics”] is Canada’s leading cannabis software company. The software is built for compliance with the Access to Cannabis for Medical Purposes Regulations [“ACMPR”], which tracks everything from seed to sale of cannabis and beyond. Ample Organics’ platform allows customers to run their licensed facilities from end-to-end while meeting the record keeping and traceability requirements of ACMPR.
The Company was incorporated on August 1, 2014. The Company’s head office is located at 629 Eastern Ave, Building B, Toronto, Ontario M4M 1E3.
Going concern uncertainty
The preparation of these consolidated financial statements requires management to make judgments regarding the Company’s ability to continue as a going concern. Management has determined that as at December 31, 2019, it does not have adequate working capital for the coming year based on current capital resources. The Company has incurred a total comprehensive loss of CAD$18,020,784 for the year ended December31, 2019, an accumulated deficit of CAD$26,715,977 and, as of December 31, 2019, the Company’s current liabilities exceeded current assets by CAD$4,303,759. These events or conditions indicate that a material uncertainty exists that raise substantial doubt about the Company’s ability to continue as a going concern and therefore, that it may be unable to realize its assets or discharge its liabilities in the normal course of business. The Company believes it will be able to complete a transaction that will provide the Company with sufficient funding to meet its expenditure commitments and support its planned level of spending, and therefore it is appropriate to prepare the consolidated financial statements on a going concern basis.
2. Basis of presentation
[a] Statement of compliance
These consolidated financial statements [the “financial statements”] have been prepared by management on a going concern basis in accordance with generally accepted accounting principles in Canada for publicly accountable enterprises,the United States of America (“GAAP”) as set outfound in the CPA Canada Handbook — Accounting which incorporates InternationalStandards Codification (“ASC”) of the Financial Reporting Standards [“IFRS”] as issued by the International Accounting Standards Board [“IASB”]. The policies set out below have been consistently applied to all periods presented unless otherwise noted.(“FASB”) for consolidated financial information.
TheseThe accompanying consolidated financial statements were approved and authorized for issuance by the Board of Directors of the Company on June 11, 2020.
[b] Basis of measurement
These financial statements have been prepared on a historical cost basis. Historical costs are generally based upon the fair value of the consideration given in exchange for goods and services.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2 Share-based Payment [“IFRS 2”] and measurements that have some similarities to fair value, but are not fair value, such as value in use in IAS 36 Impairment of Assets.
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
2. Basis of presentation (cont.)
[c] Basis of presentation
These financial statements compriseinclude the accounts of the Company,The NAV People and its wholly owned legalwholly-owned subsidiary, Last Call Analytics Inc. [“LCA”]Dynamics 365 People Software and Ample Organics Australia PTY LTD, after the elimination of allServices, Ltd. All intercompany balances and transactions.have been eliminated in consolidation.
Subsidiary
The subsidiary is an entity over which the Company has exposure to variable returns from its involvement and has the ability to use power over the investee to affect its returns. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. The subsidiary is fully consolidated from the date on which control is transferred to the Company until the date on which control ceases. The accounts of the subsidiary are prepared for the same reporting period as the parent company, using consistent accounting policies. Intercompany transactions, balances and unrealized gains or losses on transactions are eliminated upon consolidation.
[d] Functional currency and presentation currency
These financial statements are presented in Canadian dollars, which is the Company’s functional currency.
[e] Use of estimates and judgmentsEstimates
The preparation of theseour consolidated financial statements in conformity with IFRSGAAP requires management to make estimates judgments and assumptions, thatwhich affect the application of accounting policies and the reported amounts of assets and liabilities at the date ofin the financial statements and the reportedaccompanying notes. Estimates are based on historical experience, where applicable, and other assumptions which management believes are reasonable under circumstances. The Company has used estimates related to several financial statement amounts including useful lives of revenueproperty and expenses during the reporting period. Actualequipment, and internal use software. These estimates are inherently subject to judgement and actual results could differ from thesethose estimates.
EstimatesConcentrations of Credit Risk
Cash and cash equivalents and accounts receivable are based on management’s best knowledge of current events and actionspotentially subject to credit risk concentration. We have not experienced any material losses related to these concentrations during the periods presented. Cash is deposited with financial institutions that the Company may undertakebelieves are of high credit quality. These deposits are typically in the future. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that reporting period, or in the periodexcess of the revision and future periods if the revision affects both current and future periods.insured limits.
The following are the critical judgments, apart from those involving estimations, that management has made in the process of applying the Company’s accounting policies and that have the most significant effect on the amounts recognized in the financial statements:
[i] Revenue recognition
Multi-element or bundled contracts require an estimate of the relative stand-alone selling prices of separate elements. The Company assesses the criteria for the recognitionderives a portion of its revenue related to arrangements that have multiple components. These assessments require judgment by management to determine if there are separately identifiable componentsfrom several large customers, as well as howa large number of individual small businesses. If the financial condition or results of any one of the large customers deteriorates substantially, the Company’s operating results could be adversely affected. The Company does not require collateral and maintains an allowance for estimated credit losses on customer accounts when considered necessary.
There were two customers which represented 15% of consolidated revenue for the nine months ended September 30, 2021. The Company has not experienced any losses related to allocatethese concentrations during the total price amongperiod presented.
The Company relies on a third party to provide payment processing services ("payment service provider") to collect amounts due from end-users. Payment service providers are financial institutions or credit card companies that the components. DeliverablesCompany believes are accountedof high credit quality.
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Certain Significant Risks and Uncertainties
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. COVID-19 has rapidly impacted market and economic conditions globally. In an attempt to limit the spread of the virus, various governmental restrictions have been implemented, including business activities and travel restrictions, and “shelter-at-home” orders, that have had an adverse impact on our business and operations by reducing demand for as separately identifiable components.transportation. In concludinglight of the evolving nature of COVID-19 and the uncertainty it has produced, it is not possible to predict the COVID-19 pandemics cumulative and ultimate impact on our future consolidated business operations, results of operations, financial position, liquidity, and cash flows. The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak within the United States, including whether componentsthere will be further resurgences of COVID-19 in various regions, the distribution of the vaccines in various regions, the impact on capital, and financial markets, governmental or regulatory orders that impact our business and whether the impacts may result in permanent changes to our end-users’ behavior, all of which are separately identifiable, managementhighly uncertain and cannot be predicted. Also, see Note 10, Commitments and Contingencies.
Cash and Cash Equivalents
The Company considers the transactionall highly liquid investments with an original maturity from the customer’s perspective. Among other factors, management assesses whetherdate of purchase of three months or less to be cash equivalents. As of September 30, 2021, there were no cash equivalents. We continually monitor our positions with, and the service or productcredit quality of, the financial institutions with which we invest.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company reviews customer receivables and collections to evaluate and estimate a reserve for doubtful accounts, including the periodic write off of uncollectible receivables. The Company determines the allowance based on analysis of historical bad debts, customer concentrations, customer creditworthiness, and current economic trends. The methodology used to calculate the reserve for receivables is sold separatelysupported by the Company in the normal course of business or whether the customer could purchase the service or product separately.historical information and is applied appropriately to all receivable balances.
Ample Organics Inc.Property and Equipment
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
2. Basis of presentation (cont.)
[ii] Estimated useful lives, residual values and depreciation of property and equipment
Depreciation of propertyProperty and equipment are dependent upon estimatesstated at cost, net of useful livesaccumulated depreciation and residual values, which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.
[iii] Estimated useful livesamortization. Depreciation and amortization of intangible assets
The Company employs significant estimates to determineis calculated using the straight-line method over their estimated useful lives of intangiblethe assets considering technology trends, contractual rights, past experience, expected useSee Note 3. When assets are retired or otherwise disposed of, the cost, accumulated depreciation and reviewamortization are removed from the accounts and any resulting gain or loss is reflected in the consolidated statement of assetoperations and comprehensive income in the period realized. Maintenance and repairs that do not enhance or extend the asset’s useful lives. life are charged to operating expenses as incurred.
Intangible Assets
The Company reviews amortization methodscapitalizes certain costs, such as compensation costs incurred in developing internal-use software once planning has been completed, management has authorized and committed project funding, and it is probable that the project will be completed, and the software will function as intended. Amortization of such costs occurs on a straight-line basis over the estimated useful lives annually or when circumstances changelife of the related asset and adjustsbegins once the asset is ready for its amortization methodsintended use. Costs incurred prior to meeting these criteria, together with costs incurred for training and assumptions prospectively.maintenance, are expensed as incurred.
[iv] Valuation
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Evaluation of share-based payments, warrants and Class A-3 Preferred SharesLong-Lived Assets for Impairment
ManagementThe Company evaluates its held-and-used long-lived assets for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of an asset or asset group (collectively, the “asset group”) may not be recoverable. The Company measures the fair value for share-based payments, warrants and Class A-3 Preferred Shares using market-based option valuation techniques. Assumptions are made and estimates are used in applyingrecoverability of the valuation techniques. These include estimatingasset group by comparing the carrying amount of such asset groups to the future volatilityundiscounted cash flows it expects the asset group to generate. If the Company considers the asset group to be impaired, the impairment to be recognized equals the amount by which the carrying value of the share price,asset group exceeds its fair value. No such impairments have been identified as of September 30, 2021.
Deferred Revenue
Deferred revenue primarily consists of billings or payments received in advance of revenue recognition and is recognized as the revenue recognition criteria are met. All deferred revenue is expected dividend yield, expected risk-free interest rateto be recognized during the succeeding 12-month period and the rate of forfeiture. Such estimatesis recorded as a current liability.
Research and assumptionsDevelopment
Research and development costs are inherently uncertain. Changes in these assumptions affect the fair value estimates of share-based payments, warrants and Class A-3 preferred shares.charged to operations as incurred.
3. Significant accounting policiesForeign Currency Translation
[a] Cash
Cash includes cash deposits in financial institutions.
[b] ForeignThe functional currency translation
Foreign currency transactions are translated into Canadian dollars at exchange rates in effect on the date of the transactions. AtCompany's non-U.S. operations is the end of each reporting period, monetarylocal currency. Monetary assets and liabilities denominated in foreign currencies are translated into CanadianU.S. dollars at exchange rates prevailing at the balance sheet date. Revenue and expenses are translated into U.S. dollars using the average rates of exchange prevailing during the period. Translation gains or losses are included as a component of accumulated other comprehensive loss in stockholders' equity. Gains and losses resulting from foreign exchange rate applicable at that period-end date. Non-monetarycurrency transactions are recognized in operating expenses.
Income Taxes
The Company accounts for income taxes in accordance with the asset and liability approach method. Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of the consolidated income tax expense. We are subject to income taxes in the United States and Canada.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are measured inconsistent with the plans and estimates we are using to manage the underlying businesses. As of September 30, 2021, we have significant federal and state income tax net operating loss (“NOL”) carryforwards. We believe that it is more likely than not that the benefit from federal and state NOL carryforwards will not be realized. In recognition of this risk, we have provided a full valuation allowance on the deferred tax assets related to these NOL carryforwards.
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASC Topic 842, Leases. This standard requires all entities that leased assets under leases with terms of more than 12 months to capitalize the assets and related lease liabilities on the consolidated balance sheet. The new standard will become effective for us beginning January 1, 2022; however, early adoption is permitted. While we continue to assess all potential impacts of this new standard, we anticipate this standard will have a material impact on our consolidated financial position as we will be required to recognize right-of-use assets and lease liabilities on our consolidated balance sheet. However, we do not expect the adoption to have a significant impact on our consolidated results of operations or cash flows.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” to require the measurement of expected credit losses for financial assets held at the reporting date based on historical cost inexperience, current conditions, and reasonable and supportable forecasts. The guidance also amends the impairment model for available for sale debt securities and requires entities to determine whether all or a foreign currencyportion of the unrealized loss on such debt security is a credit loss. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. All other entities, ASU No. 2016-13 is effective for fiscal years beginning after Dec. 15, 2022. Early adoption is permitted. The Company will adopt the new standard on January 1, 2022. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements. We are translated usingstill evaluating the exchange rateimpact on our consolidated financial statements.
Note 2 – Revenue Recognition
The Company adopted ASC 606 under the modified retrospective transition method with an effective date of January 1, 2019 and applied this guidance to those contracts which were not completed at the date of the transaction. Expenses are translated at the exchange rates that approximate those in effect on the date of the transaction. Realized and unrealized exchange gains and losses are recognized in the consolidated statements of loss and comprehensive loss.
[c] Business combinations
Business combinations are accounted for using the acquisition method. In applying the acquisition method, the Company separately measures at their acquisition-date fair values, the identifiable assets acquired, the liabilities assumed, and goodwill acquired and any non-controlling interest in the acquired entity.adoption. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurredstandard requires entities to the former owners of the acquiree and the equity interests issued by the Company. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.
Acquisition costs in connection with a business combination are expensed as incurred.
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
3. Significant accounting policies (cont.)
Goodwill is measured as the excess of the fair value of the consideration transferred, less any non-controlling interest in the entity being acquired at the proportionate share of the recognized net identifiable assets acquired. Goodwill acquired through a business combination is allocated to each cash-generating unit [“CGU”] or group of CGUs that are expected to benefit from the related business combination. A group of CGUs represents the lowest level within the entity at which the goodwill is monitored for internal management purposes, which is not higher than an operating segment. Goodwill is tested for impairment annually or more frequently if certain indicators arise that indicate they are impaired.
[d] Inventories
Inventories are measured at the lower of cost and net realizable value. The costs of inventories are determined on a weighted average cost basis. Net realizable value represents the estimated selling price for inventories less estimated costs necessary to make the sale.
The cost of inventories, which consists of computer equipment, comprises all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. The cost of purchase comprises the purchase price, non-recoverable taxes, transport, handling, and other costs directly attributable to the acquisition of goods.
Inventory allowances are recorded in the period in which management determines the inventory to be obsolete.
[e] Revenue from contracts with customers
Revenue is recognizedrecognize revenue upon transfer of control of the promised goods or services to customers in amounts that reflect the consideration that the entities expect to receive in exchange for those goods or services.
We recognize revenue when or as we satisfy our obligations. We derive our revenues from recurring revenue (subscription sales, support, hosting, and enhancement), services revenue (packages and projects), and other revenue (perpetual licenses and hardware).
The Company determines revenue recognition under ASC 606 through the following steps:
| ● | Identification of the contract, or contracts, with a customer; |
| ● | Identification of the performance obligations in the contract; |
| ● | Determination of the transaction price; |
| ● | Allocation of the transaction price to the performance obligations in the contract; and |
| ● | Recognition of revenue when, or as, the Company satisfies a performance obligation. |
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company has the following revenue streams:
| ● | Recurring (subscription sales, support, hosting, enhancement) |
| ● | Services revenue (projects and packages) |
| ● | Other Revenue (perpetual licenses and hardware) |
The Company offers its software under a cloud-based delivery model, where it provides access to its software on a hosted basis as a service and customers do not have the contractual right to take possession of the software. Revenue is recognized when control of the promised services is transferred to the Company's customers at an amount that reflects the consideration the Company expects to receivebe entitled to in exchange for those goods or services. PerformanceThe majority of customer contracts have performance obligations related to a contract are satisfied through the transfer of a promised good or service [i.e., an asset] to a customer, either over time or at a point in time. An asset is transferred when [or as] the customer obtains control of that asset, which refers to the ability to use and obtain substantially all of the remaining benefits from the asset, such as by:
[i] using the asset to produce goods or provide services [including public services];
[ii] using the asset to enhance the value of other assets;
[iii] using the asset to settle liabilities or reduce expenses;
[iv] selling or exchanging the asset;
[v] pledging the asset to secure a loan; and
[vi] holding the asset.
Payment terms are typically 30 days with a CAD$20,000 credit limit on services. Deferred revenue, classified as contract liabilities under International Financial Reporting Standards [“IFRS”]15, relates to payments received in advance of performance under contracts with customers. Contract liabilities are recognized as [or when] the Company satisfies its performance obligation under the contracts.
Software licensesover time and services
The Company provides software licenses for contract terms of generally one year, along with implementation [professional] services to provide support and training for customers. These are considered to be one performance obligation under IFRS 15 and are satisfied over the contract term. Revenuerevenue is recognized ratably on the basisby consistently applying a method of time remaining from the startmeasuring progress toward satisfaction of the contract to its conclusion, on a contract-by-contract basis.
that performance obligation.
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
3. Significant accounting policies (cont.)
The first three months of a contract are typically pre-billed upon scheduling of an onsite implementation date, resulting in contract liabilities. The remaining payments under the contract are billed on a monthly basis, subsequent to revenue recognition and resulting in contract assets.
Hardware and third — party licenses
The Company provides its software pre-installed and configured on its own dedicated device/hardware and can also install third-party licenses necessary for the operation of the hardware network. These are considered distinct, separate performance obligations under IFRS15, and are satisfied at a point in time once the setup is complete. Hardware purchases by new customers must be paid for upfront prior to installation, resulting in contract liabilities until the setup is complete. Hardware purchases by existing customers are billed once the devices have been shipped and configured, resulting in contract assets.
The Company measures revenue at the fair value of consideration received or receivable, taking into account any contractually defined terms for volume discounts or refunds. As contracts are generally one year in length, performance obligations related to existing contract liabilities are expected to be satisfied by the end of the next fiscal year-end.
[f] Property and equipment
The Company’s propertyrecurring revenue is comprised of subscription sales, support, hosting and equipment are measured at cost less accumulated depreciation and impairment losses.
The cost of an item of property and equipment includes expenditures that are directly attributable to the acquisition or construction of the asset.
Depreciation is recorded over the estimated useful lives as outlined below:
Computer hardware | | 3 – 5 years |
Furniture and equipment | | 3 – 5 years |
Leasehold improvements | | Lesser of useful life or term of lease |
The Company assesses an asset’s residual value, useful life and depreciation method on a regular basis and if any events have indicated a change and makes adjustments if appropriate.
Gains and losses on disposal of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of the property and equipment and are recognized in the consolidated statement of loss and comprehensive loss.
[g] Intangible assets
The Company’s intangible assets relate to customer relationships and technology. The cost of an intangible asset acquired in a business combination is its fair value at the acquisition date.
Research costs are expensed as incurred.
The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with a finite life are amortized over the estimated useful life. Intangible assets are amortized on a straight-line basis as follows:
Customer relationships | | 5 years |
Technology | | 5 years |
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
3. Significant accounting policies (cont.)
The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates.
[h] Impairment of non-financial assets
The carrying amounts of the Company’s non-financial assets are reviewed for impairment as at each consolidated statement of financial position date or whenever events or changes in circumstances indicate that the carrying amount of an asset exceeds its recoverable amount. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets. The recoverable amount of an asset or a cash-generating unit is the higher of its fair value, less cost to sell, and its value in use. If the carrying amount of an asset exceeds its recoverable amount, an impairment charge is recognized immediately in profit or loss by the amount by which the carrying amount of the asset exceeds the recoverable amount. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the lesser of the revised estimate of recoverable amount and the carrying amount that would have been recorded had no impairment loss been recognized previously.
[i] Leases
At inception of a contract, the Company assesses whether a contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured based on the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The assets are depreciated to the earlier of the end of the useful life of the right-of-use asset or the lease term using the straight-line method as this most closely reflects the expected pattern of consumption of the future economic benefits. The lease term includes periods covered by an option to extend if the Company is reasonably certain to exercise that option. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate. Variable lease payments that do not depend on an index or rate are not included in the measurement of the lease liability. The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, or if the Company changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.
The Company has elected to apply the practical expedient to account for each lease component and any non-lease components as a single lease component. The Company has also elected to apply the practical expedient not to recognize right-of-use assets and lease liabilities for short-term leases that have a lease term of 12months or less and leases of low-value assets.
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
3. Significant accounting policies (cont.)
[j] Share-based compensation
The Company grants stock options to certain employees. When stock options are exercised, the Company issues new common shares. The consideration received on the exercise of stock options is credited to share capital at the time of exercise. The Company’s stock option compensation plan is described in note 12[c]. Stock options generally vest over three years in a tiered manner and expire after ten years. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. Fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model. Compensation expense is recognized over the tranche’s vesting period on a straight-line basis based on the number of awards expected to vest, with a corresponding credit to contributed surplus. The number of awards expected to vest is reviewed at least annually, with any impact being recognized immediately. The stock options recognized is also determined based on management’s grant date estimate of the forfeitures that are expected to occur over the life of the stock options. The number of stock options that actually vest could differ from the estimated number of awards expected to vest and any differences between the actual and estimated forfeitures are recognized prospectively as they occur.
[k] Income taxes
The income taxes currently payable is based on taxable profit for the year. Taxable profit differs from “income before income taxes” as reported in the consolidated statement of loss and comprehensive loss because of items of income or expenses that are taxable or deductible in other years and items that are never taxable or deductible. The Company’s current income taxes are calculated using tax rates that have been enacted or substantively enacted by the end of the year.
Deferred income taxes are recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred income tax liabilities are generally recognized for all taxable temporary differences. Deferred income tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such deferred income tax assets and liabilities are not recognized if the temporary difference arises from the initial recognition [other than in a business combination] of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. In addition, deferred income tax liabilities are not recognized if the temporary difference arises from the initial recognition of goodwill.
The carrying amount of deferred income tax assets is reviewed at the end of each year and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred income tax liabilities and assets are measured at the tax rates that are expected to apply in the year in which the liability is settled or the asset realized, based on tax rates [and tax laws] that have been enacted or substantively enacted by the end of the year.
The measurement of deferred income tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the year, to recover or settle the carrying amount of its assets and liabilities.
Current and deferred income taxes are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive loss or directly in equity, in which case the current and deferred income taxes are also recognized in other comprehensive loss or directly in equity, respectively. Where current income taxes or deferred income taxes arise from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
3. Significant accounting policies (cont.)
[l] Government assistance
Government assistance, which mainly consists of refundable investment tax credits for research and development expenses, is recognized when there is reasonable assurance that the government assistance will be received and all attached conditions will be complied with. When the government assistance relates to an expense item, it is recognized as a reduction in the related expense on a systematic basis over the period necessary to match the government assistance to the costs it is intended to subsidize.
[m] Financial instruments
Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the instruments.
Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities [other than financial assets and financial liabilities at fair value through profit or loss] are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.
Financial assets
The Company initially recognizes financial assets at fair value on the date at which the Company becomes a party to the contractual provisions of the instrument.
The Company classifies its financial assets on initial recognition and subsequent measurement as amortized cost, fair value through other comprehensive income [“FVTOCI”], or fair value through profit or loss [“FVTPL”].
Financial assets are subsequently measured at amortized cost if both the following conditions are met and they are not designated as FVTPL:
| ● | the financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and |
| | |
| ● | the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. |
These assets are subsequently measured at amortized cost using the effective interest method and are subject to impairment. Gains and losses are recognized in the statement of loss and comprehensive loss when the asset is derecognized, modified or impaired.
The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Company is recognized as a separate asset or liability.
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
3. Significant accounting policies (cont.)
Financial liabilities
The Company initially recognizes financial liabilities at fair value on the date at which the Company becomes a party to the contractual provisions of the instrument.
The Company classifies its financial liabilities as either financial liabilities at amortized cost or FVTPL on initial recognition and subsequent measurement. Financial liabilities are classified as FVTPL when the financial liability is (i) contingent consideration of an acquirer in a business combination, (ii) held for trading, or (iii) it is designated as FVTPL.
Financial liabilities that are not (i) contingent consideration of an acquirer in a business combination, (ii) held for trading, or (iii) designated as FVTPL are subsequently measured at amortized cost using the effective interest rate method. Interest paid from these financial liabilities is included in finance costs using the effective interest rate method.
The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire.
Financial liabilities and equity instruments
[i] Classification as debt or equity
Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.
[ii] Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by a group entity are recognized at the proceeds received, net of direct issue costs.
Classification of financial instruments
The Company classifies its financial assets and liabilities depending on the purpose for which the financial instruments were acquired, their characteristics, and management intent as outlined below:
Cash | | Fair value through profit and loss |
Trade and other receivables | | Amortized cost |
Other financial assets | | Fair value through profit and loss |
Trade and other payables | | Amortized cost |
Short-term debt | | Amortized cost |
Preferred share liabilities | | Fair value through profit and loss |
Warrant liabilities | | Fair value through profit and loss |
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
3. Significant accounting policies (cont.)
Impairment of financial assets
As the Company’s financial assets are substantially made up of trade receivables, which are measured at amortized cost, the Company has elected to apply the simplified approach for measuring the loss allowance at an amount equal to lifetime expected credit losses [“ECL”]. The Company recognizes lifetime expected losses on initial recognition through both the analysis of historical defaults and a reassessment of counterparty credit risk in revenue contracts on an annual basis. An impairment loss is reversed in subsequent periods if the amount of the expected loss decreases and the decrease can be objectively related to an event occurring after the initial impairment was recognized.
Preferred share liabilities
The preferred share and the warrants issued in 2018 met the definition of financial liabilities subject to measurement at fair value at each reporting period-end with changes in fair value to be reflected in the Company’s consolidated statements of loss and comprehensive loss. The Company determined that the preferred share liabilities did not meet the IFRS definition of equity due to the variability of the conversion ratio to common shares.
The warrants are convertible into preferred shares which are a financial liability, therefore, the warrants are measured at financial liability through profit or loss.
[n] New standards adopted in the current period
The Company applied IFRS16, Leases and IFRIC Interpretation23, Uncertainty over Income Tax Treatments for the first-time effective January1, 2019. The nature and effect of the changes as a result of adoption of these new accounting standards are described below.
IFRS 16, Leases [“IFRS 16”]
IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to recognise most leases on the balance sheet.
The Company, as a lessee, has applied IFRS 16 using the modified retrospective approach and recognized right-of-use assets representing the rights to use the underlying assets, equal to the lease liabilities representing the obligation to make lease payments effective January1, 2019. In accordance with the practical expedients permitted under the standard, comparative information for 2018 has not been restated. In applying IFRS 16 for the first time, the Company used the following practical expedients permitted by the standard:
| ● | Reliance on previous assessments on whether leases are onerous |
| | |
| ● | Use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease |
| | |
| ● | Account for leases for which the lease term ends within 12months of the date of initial application as short-term leases |
| | |
| ● | Record right-of-use assets based on the corresponding lease liability, with no net impact on deficit |
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
3. Significant accounting policies (cont.)
As a result of the adoption of IFRS16, the Company recognized an increase to both assets and liabilities on the consolidated statement of financial position. The Company also recognized a decrease in general and administrative expenses for the removal of rent expense for operating leases partially offset by accretion of lease liabilities and an increase in depreciation and amortization related to the right-of-use assets in the consolidated statement of loss and comprehensive loss. The weighted average incremental borrowing rate applied to the lease liabilities on January 1, 2019 was 6.5%. The following table illustrates the impact of IFRS 16 on the consolidated statements of financial position on the date of initial application using the modified retrospective approach resulting in the recognition of a right-of-use assets as if the standard had always been applied, representing the rights to use the underlying assets, a lease liabilities amount representing the future obligation associated with the underlying lease arrangement, resulting in a charge to deficit as at January 1, 2019:
| | | Balance at
December 31, 2018 | | | IFRS 16
adjustments | | | Balance at
January 1, 2019 | |
| Assets | | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | | |
| Trade and other receivables | | | 1,630,439 | | | | 202,170 | | | | 1,832,609 | |
| Non-current assets: | | | | | | | | | | | | |
| Property and equipment, net | | | 1,672,986 | | | | 383,294 | | | | 2,056,280 | |
| Right-of-use-assets, net | | | — | | | | 3,034,001 | | | | 3,034,001 | |
| Liabilities | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | |
| Lease liabilities | | | — | | | | 544,822 | | | | 544,822 | |
| Non-current liabilities: | | | | | | | | | | | | |
| Lease liabilities | | | — | | | | 3,419,477 | | | | 3,419,477 | |
| Shareholders’ equity | | | | | | | | | | | | |
| Deficit | | | (7,574,359 | ) | | | (344,834 | ) | | | (7,919,193 | ) |
The adjustments to trade and other receivables and property and equipment, net relate to tenant inducements.
[ii] IFRIC23, Uncertainty over Income Tax Treatment [“IFRIC 23”]
In June 2017, the IASB issued IFRIC23, which clarifies the accounting for uncertainties in income taxes. IFRIC 23 is effective for annual periods beginning on or after January 1, 2019. The requirements are applied by recognizing the cumulative effect of initially applying them in retained earnings, or in other appropriate components of equity, at the start of the reporting period in which the Company first applies them, without adjusting comparative information. Full retrospective application is permitted, if the Company can do so without using hindsight. The Company has adopted the new Interpretation beginning January 1, 2019. The adoption of IFRIC 23 did not have any impact on the Company’s financial statements.
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
4. Trade and other receivables
The Company’s trade and other receivables include the following:
| | | 2019
CAD$ | | | 2018
CAD$ | |
| Trade receivable, net of allowance of CAD$70,953 [2018 – CAD$22,348] | | | 920,707 | | | | 1,533,285 | |
| Input tax receivable | | | — | | | | 97,154 | |
| Investment tax credit receivable | | | 629,003 | | | | — | |
| | | | 1,549,710 | | | | 1,630,439 | |
5. Property and equipment
| | | Leasehold improvements
CAD$ | | | Furniture and equipment
CAD$ | | | Computer hardware
CAD$ | | | Total
CAD$ | |
| Cost | | | | | | | | | | | | | | | | |
| As at December 31, 2017 | | | 665,466 | | | | 85,292 | | | | 115,241 | | | | 865,999 | |
| Additions | | | 649,624 | | | | 119,172 | | | | 213,105 | | | | 981,901 | |
| Disposals | | | — | | �� | | (545 | ) | | | (10,639 | ) | | | (11,184 | ) |
| As at December 31, 2018 | | | 1,315,090 | | | | 203,919 | | | | 317,707 | | | | 1,836,716 | |
| Impact of IFRS 16 adoption | | | 383,294 | | | | — | | | | — | | | | 383,294 | |
| Additions | | | 100,167 | | | | 17,183 | | | | 31,143 | | | | 148,493 | |
| Disposals | | | — | | | | — | | | | (2,232 | ) | | | (2,232 | ) |
| As at December 31, 2019 | | | 1,798,551 | | | | 221,102 | | | | 346,618 | | | | 2,366,271 | |
| Accumulated depreciation | | | | | | | | | | | | | | | | |
| As at December 31, 2017 | | | — | | | | 3,627 | | | | 11,139 | | | | 14,766 | |
| Depreciation | | | 44,334 | | | | 29,265 | | | | 76,491 | | | | 150,090 | |
| Disposals | | | — | | | | (38 | ) | | | (1,088 | ) | | | (1,126 | ) |
| As at December 31, 2018 | | | 44,334 | | | | 32,854 | | | | 86,542 | | | | 163,730 | |
| Depreciation | | | 63,630 | | | | 42,822 | | | | 113,220 | | | | 219,672 | |
| Disposals | | | — | | | | — | | | | (996 | ) | | | (996 | ) |
| As at December 31, 2018 | | | 107,964 | | | | 75,676 | | | | 198,766 | | | | 382,406 | |
| Net book value | | | | | | | | | | | | | | | | |
| As at December 31, 2018 | | | 1,270,756 | | | | 171,065 | | | | 231,165 | | | | 1,672,986 | |
| As at December 31, 2019 | | | 1,690,587 | | | | 145,426 | | | | 147,852 | | | | 1,983,865 | |
6. Right-of-use assets
The Company has lease contracts for office space, vehicles and equipment with remaining terms up to eight years in length. The following is a summary of the changes in the Company’s right-of-use assets during the year:
| | CAD$ | |
As at January 1, 2019 | | | 3,034,001 | |
Depreciation | | | (376,881 | ) |
As at December 31, 2019 | | | 2,657,120 | |
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
7. Goodwill and other intangible assets
The Company’s intangible assets consist of customer relationships and technology, both of which are being amortized over their useful lives of five years.
| | | 2019
CAD$ | | | 2018
CAD$ | |
| Goodwill | | | 4,542,224 | | | | 4,542,224 | |
| Intangible assets | | | 1,314,597 | | | | 1,646,437 | |
| | | | 5,856,821 | | | | 6,188,661 | |
Intangible assets | | CAD$ | |
Cost | | | | |
As at December 31, 2018 | | | 1,659,200 | |
As at December 31, 2019 | | | 1,659,200 | |
Accumulated amortization | | | | |
As at December 31, 2018 | | | 12,763 | |
Amortization | | | 331,840 | |
As at December 31, 2019 | | | 344,603 | |
Net book value | | | | |
As at December 31, 2018 | | | 1,646,437 | |
As at December 31, 2019 | | | 1,314,597 | |
8. Trade and other payables
The Company’s trade and other payables include the following:
| | | 2019
CAD$ | | | 2018
CAD$ | |
| Trade payables | | | 1,316,653 | | | | 1,190,701 | |
| Sales tax payable | | | 106,706 | | | | 10,159 | |
| | | | 1,423,359 | | | | 1,200,860 | |
9. Lease liabilities
The Company has lease contracts for office space and equipment, which range from one and nine years.
The following is a summary of the changes in the Company’s lease liabilities during the period:
| | CAD$ | |
As at January 1, 2019 | | | 3,964,299 | |
Interest accretion | | | 237,977 | |
Lease repayments | | | (544,822 | ) |
As at December 31, 2019 | | | 3,657,454 | |
Current | | | 544,226 | |
Non-current | | | 3,113,228 | |
Expenses incurred for the year ended December 31, 2019 relating to variable lease payments were CAD$157,553.
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
10. Short-term debt
| | | 2019
CAD$ | | | 2018
CAD$ | |
| Promissory note due in February 2019 | | | — | | | | 3,601,786 | |
| Short-term debt due in September 2020 | | | 2,097,335 | | | | — | |
| Short-term debt due in October 2020 | | | 2,648,854 | | | | — | |
| | | | 4,746,189 | | | | 3,601,786 | |
In December 2018, the Company obtained a promissory note in the amount of CAD$3,601,786 to finance its acquisition of LCA, payable in 60 days with no interest. In February 2019, the Company paid this note in full. Due to late payment, CAD$13,254 in interest was incurred and paid.
On February 15, 2019, in order to repay the promissory note for the acquisition of LCA, the Company entered into a CAD$2,000,000 loan bearing interest of 15% per annum, maturing in six months. At inception, the Company recognized the loan at its fair value plus transaction costs directly attributable to its issuance of CAD$87,165, which was recorded as finance costs in the consolidated statement of loss and comprehensive loss for the year ended December 31, 2019. Subsequent to initial recognition, the loan was carried at amortized cost.
On September 25, 2019, the loan was amended to extend the maturity date to September 25, 2020 and the interest rate to 12% per annum. In addition, 600,000 warrants convertible into Class A-3 Preferred Shares of the Company were issued to the lender [see note 11]. On entering into the amended loan, the Company completed an assessment that showed that the present value of the cash flows under the amended loan facility, including the financing costs and cost of warrants issued, differed more than 10% from the present value of the remaining cash flows of the loan. The amendment was treated as an extinguishment of the original loan and the establishment of a new loan at its fair value plus transaction costs of CAD$211,567 directly attributable to its issuance. A loss on extinguishment of CAD$1,001,928 was recorded within finance costs related to the amendment. In December 2019, upon announcement of the Akerna Transaction [see note 11], the carrying value of the amended loan was adjusted for a revised estimate of future expected cash flows discounted over the remaining estimated life of the amended loan.
On October 1, 2019, the Company entered into a CAD$2,500,000 loan bearing interest of 12% per annum maturing on October 1, 2020. In addition, 204,000 warrants convertible into Class A-3 Preferred Shares of the Company were issued to the lender [see note 11]. At inception, the Company recognized the loan at its fair value plus transaction costs directly attributable to its issuance of CAD$246,368. Subsequent to initial recognition, the loan was carried at amortized cost. In December 2019, upon announcement of the Akerna Transaction [see note 11], the carrying value of the loan was adjusted for a revised estimate of future expected cash flows discounted over the remaining estimated life of the amended loan.
At December 31, 2019, the Company was in compliance with all covenants for its short-term debt. Subsequent to December 31, 2019, the Company was in breach of its covenants for its short-term debt.
11. Preferred share liabilities
The following is a summary of the changes in the Company’s preferred liabilities:
| | | 2019
CAD$ | | | 2018
CAD$ | |
| As at January 1 | | | 5,234,811 | | | | — | |
| Additions | | | 1,089,073 | | | | 4,458,811 | |
| Change in fair value of preferred share liabilities | | | 7,312,638 | | | | 776,000 | |
| As at December 31 | | | 13,636,522 | | | | 5,234,811 | |
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
11. Preferred share liabilities (cont.)
In June 2018, the Company issued 3,000,000 preferred share units at CAD$1.50 per unit, consisting of 3,000,000 Class A-1 Preferred Shares and 1,500,000 warrants convertible into Class A-2 Preferred Shares at an exercise price of CAD$2.25 per share for gross proceeds of CAD$4,500,000. As the Class A-1 Preferred Shares and Class A-2 Preferred Shares are convertible into a variable number of common shares depending on subsequent issuances of common shares, these preferred shares and the warrants convertible to the preferred shares are considered financial liabilities. The net proceeds were allocated to the preferred shares and warrants based on the relative fair value of each instrument.
In October 2019, the Company issued 804,000 warrants convertible into Class A-3 Preferred Shares at an exercise price of CAD$1.20 to lenders in connection with loans received [see note 10].
The Company determined that each of the Company’s Class A-1 Preferred Shares, Class A-2 Preferred Shares and Class A-3 Preferred Shares [collectively the “Class A Preferred Shares”] and warrants that are convertible into Class A Preferred Shares, did not meet the IFRS definition of equity due to the variability of the conversion price. Accordingly, the Class A Preferred Shares and the related warrants are treated as financial liabilities measured at fair value through profit or loss. The fair values of the convertible notes are classified as Level 3 in the fair value hierarchy.
In determining the fair values of the warrants issued, the Company used the Black-Scholes pricing model applying the following inputs:
| | | 2019 | | | 2018 | |
| Risk-free interest rate | | | 1.47 | % | | | 1.46 | % |
| Term [years] | | | 3 | | | | 3 | |
| Estimated volatility | | | 70 | % | | | 70 | % |
| Expected dividend yield | | | Nil | | | | Nil | |
| Warrant value | | CAD$ | 1.40 | | | CAD$ | 0.41 | |
| Share price | | CAD$ | 2.22 | | | CAD$ | 1.30 | |
| Exercise price | | CAD$ | 1.20 | | | CAD$ | 2.25 | |
In December 2019, 1,500,000 warrants convertible into Class A-2 Preferred Shares were converted into 777,637 Class A-2 Preferred Shares and 492,000 warrants convertible into Class A-3 Preferred Shares were converted into 283,721 Class A-3 Preferred Shares.
For the year ended December 31, 2019, a CAD$7,312,638 loss on fair value of preferred share liabilities [2018 — CAD$776,000 loss] was recorded in the statement of loss and comprehensive loss.
12. Share capital
[a] Authorized
The authorized share capital of the Company consists of an unlimited number of common shares and 5,304,000 Class A Preferred Shares, issuable in series, of which 3,000,000 are designated as Class A-1 Preferred Shares, 1,500,000 are designated as Class A-2 Preferred Shares and 804,000 are designated as Class A-3 Preferred Shares.
Class A Preferred Shares are convertible, at the option of the holder, into a number of fully paid and non-assessable common shares as determined by dividing the original issue price of the series of Class A Preferred Shares by the then effective conversion price and adjustments to the conversion price in the event the Company issues additional common shares and amounts less than the original conversion price. The conversion and original issue price is
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
12. Share capital (cont.)
CAD$1.50 for Class A-1 Preferred Shares, CAD$2.25 for Class A-2 Preferred Shares, and CAD$1.20 for Class A-3 Preferred Shares, subject to anti-dilution provisions. Preferred shares automatically convert to common shares upon: (i) an amalgamation, arrangement, consolidation, merger, reorganization or similar transaction of the Company, (ii) the sale, lease, transfer, exclusive license or disposition of substantially all of the Company’s assets, (iii) the closing of a public offering of the Company’s common shares provided the offering price per share is not less than CAD$4.50 and aggregate gross proceeds are greater than CAD$20,000,000, or (iv) the vote of the majority of holders of Class A Preferred Shares to convert.
[b] Issued and outstanding
On February 22, 2019, the Company issued 2,436,207 common share units at CAD$1.80 per unit, consisting of 2,436,207 common shares and 1,218,100 warrants convertible into common shares at an exercise price of CAD$2.70 until February22, 2021. In connection with this transaction, the Company issued 27,698 broker warrants convertible into common shares at an exercise price of CAD$1.80 until February22, 2021 and paid CAD$96,278 in transaction costs.
On April 25, 2019, the Company issued 1,358,052 common share units at CAD$1.80 per unit, consisting of 1,358,052 common shares and 679,024 warrants convertible into common shares at an exercise price of CAD$2.70 until April 25, 2021. In connection with this transaction, the Company issued 81,483 broker warrants convertible into common shares at an exercise price of CAD$1.80 until April 25, 2021 and paid CAD$246,389 in transaction costs.
On May 2, 2019, the Company issued 309,200 common share units at CAD$1.80 per unit, consisting of 309,200 common shares and 154,600 warrants convertible into common shares at an exercise price of CAD$2.70 until May 2, 2021. In connection with this transaction, the Company issued 20,000 advisory warrants convertible into common shares at an exercise price of CAD$1.80 until May 2, 2021 and paid CAD$29,944 in transaction costs.
On May 15, 2019, the Company issued 72,513 common share units at CAD$1.80 per unit, consisting of 72,513 common shares and 36,256 warrants convertible into common shares at an exercise price of CAD$2.70 until May 15, 2021. In connection with this transaction, the Company paid CAD$29,944 in transaction costs.
All of the warrants convertible to common shares for these transactions are convertible into common shares at a 1:1 ratio. The warrants were valued using the Black-Scholes pricing model with the following inputs:
| | 2019 | |
Risk-free interest rate | | | 1.54% – 1.79 | % |
Term [years] | | | 2 | |
Volatility | | | 70 | % |
Dividend yield | | | Nil | |
Warrant value | | | CAD$0.38 – CAD$0.57 | |
Share price | | | CAD$1.61 | |
Exercise price | | | CAD$1.80 – CAD$2.70 | |
[c] Employee stock option plan
The Company has an Employee Stock Option Plan [the “Plan”] that is administered by the Board of Directors of the Company who establishes exercise prices, at not less than market price at the date of grant, and expiry dates, which have been set at ten years from issuance. Options under the Plan remain exercisable in increments with 1/4 being exercisable on each of the first and second anniversary and 2/4 being exercisable on the third anniversary from the date of grant, except as otherwise approved by the Board of Directors. The maximum number of common shares reserved for issuance for options that may be granted under the Plan is 10% of the common shares outstanding, which amounts to 3,744,762 at December 31, 2019 [2018 — 3,327,165].
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
12. Share capital (cont.)
The following is a summary of the changes in the Company’s stock options:
| | | Number of options
# | | | Weighted average
exercise price
CAD$ | |
| Outstanding as at December 31, 2017 | | | — | | | | — | |
| Granted | | | 1,180,500 | | | | 1.50 | |
| Forfeited | | | (110,000 | ) | | | 1.50 | |
| Outstanding as at December 31, 2018 | | | 1,070,500 | | | | 1.50 | |
| Granted | | | 888,500 | | | | 1.80 | |
| Forfeited | | | (915,188 | ) | | | 1.60 | |
| Expired | | | (25,312 | ) | | | 1.50 | |
| Outstanding as at December 31, 2019 | | | 1,018,500 | | | | 1.67 | |
The Company recorded CAD$381,617 [2018 — CAD$260,970] in share-based compensation expense related to options, which are measured at the fair value at the date of grant and expensed over the option’s vesting period.
In determining the amount of share-based compensation, the Company used the Black-Scholes option pricing model to establish the fair value of options granted during the years ended December 31, 2019 and 2018 by applying the following assumptions:
| | | 2019 | | | 2018 | |
| Grant date share price | | CAD$ | 1.61 | | | CAD$ | 1.50 | |
| Exercise price | | CAD$ | 1.80 | | | CAD$ | 1.50 | |
| Expected dividend yield | | | — | | | | — | |
| Risk free interest rate | | | 1.49% – 1.76 | % | | | 1.46 | % |
| Expected life | | | 10 years | | | | 10 years | |
| Expected volatility | | | 70 | % | | | 70 | % |
Expected volatility was estimated by using the historical volatility of other companies that the Company considers comparable that have trading and volatility history. The expected option life represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on government bonds with a remaining term equal to the expected life of the options.
The following table is a summary of the Company’s share options outstanding as at December 31, 2019:
| Options outstanding | | Options exercisable | |
Exercise
price
CAD$ | | Number
outstanding
# | | | Weighted average
remaining
contractual life
[years]
# | | | Exercise
price
CAD$ | | | Number
exercisable
# | |
| 1.50 | | | 445,500 | | | | 8.58 | | | | 1.50 | | | | 125,438 | |
| 1.80 | | | 573,000 | | | | 9.44 | | | | 1.80 | | | | — | |
| 1.67 | | | 1,018,500 | | | | 9.06 | | | | 1.50 | | | | 125,438 | |
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
12. Share capital (cont.)
The following table is a summary of the Company’s share options outstanding as at December 31, 2018:
| Options outstanding | | Options exercisable | |
Exercise
price
CAD$ | | Number
outstanding
# | | | Weighted average
remaining
contractual life
[years]
# | | | Exercise
price
CAD$ | | | Number
exercisable
# | |
| 1.50 | | | 125,438 | | | | 9.60 | | | | 1.50 | | | | — | |
13. Income taxes
A reconciliation of income taxes at statutory rates to actual income taxes are as follows:
| | | 2019
CAD$ | | | 2018
CAD$ | |
| Loss before income taxes | | | (18,112,104 | ) | | | (6,696,371 | ) |
| Statutory federal and provincial tax rate | | | 26.5 | % | | | 26.5 | % |
| Income tax recovery at the statutory tax rate | | | (4,799,708 | ) | | | (1,774,538 | ) |
| Permanent differences | | | 2,045,604 | | | | 317,905 | |
| Reversal of temporary differences | | | 576,641 | | | | — | |
| Deferred income tax asset not recognized | | | 2,086,144 | | | | 1,456,633 | |
| Deferred income tax recovery | | | (91,320 | ) | | | — | |
Deferred income tax assets have not been recognized in respect of tax losses, because it is not probable that future taxable profit will be available against which the Company can utilize the benefits therefrom.
The Company’s deferred tax liability is the result of the origination and reversal of temporary differences and comprise the following:
| | | 2019
CAD$ | | | 2018
CAD$ | |
| Deferred tax liability | | | | | | | | |
| Intangible assets | | | 348,368 | | | | 439,688 | |
As at December 31, 2019, The Company’s estimated non-capital losses that can be applied against future taxable profit amount to CAD$15,256,571. These non-capital losses expire in the years ended:
| | | CAD$ | |
| 2035 | | | 111,000 | |
| 2036 | | | 469,000 | |
| 2037 | | | 963,000 | |
| 2038 | | | 5,496,728 | |
| 2039 | | | 8,216,843 | |
| | | | 15,256,571 | |
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
14. Disaggregated revenue
The Company derives its revenues from two main sources, software-as-a-service application (“SaaS”), and professional services revenue, which includes services such system integration and training, and process-change analysis. Subscription revenue related to the provision of SaaSenhancement revenue. Revenue is recognized ratably over the contract term based on the commencement date of the contract, which is the date our cloud-based software is made available to customers.
Revenue from the Company’s service for project and packages revenue are recorded as the services are performed. Once the contract is signed, invoices are generated for professional services on a time and material basis, although the Company occasionally engage in fixed-price service is delivered. Professional services revenueengagements and invoices for those based upon agreed milestone payments. Revenue is recognized as services are rendered. Otherperformed for time and material engagements and on a proportional performance method as the services are performed for fixed-fee engagements. Training revenue relates mainlyis recognized as the services are performed.
Perpetual software is recognized when delivered, which is typically within a day of receipt of the order. Hardware is recognized when invoiced and usually ships within a few days after receipt of order.
Any of the above agreements would be a complete contract. Each party’s rights regarding the services to salebe transferred, pricing, and payment terms are listed in the contract. These factors indicate that the contract has commercial substance. Risk, timing, or the Company’s future cash flows are expected to change as a result of hardware.a contract. Risk includes non-performance risk, non-payment risk, and mis-usage risk. Payments are generally due within 15-45, days upon receipt of an invoice.
The following table represents disaggregationCompany considered the guidance of revenueASC 606-10-55-3A regarding the collection probability. At contract inception, the Company deems it is probable that the Company will collect substantially all of the consideration to which it will be entitled to in exchange for the year ended December 31, 2019services that will be transferred to the customer, based on historical experience with customers. The Company also periodically completes an assessment of collectability from new customers. This assessment includes reviewing publicly available financial information and 2018:inquiring of customer’s financial creditability. Arrangements for which collection of fees is not deemed probable are recognized upon cash collection.
| | | 2019
CAD$ | | | 2018
CAD$ | |
| Subscription revenues | | | 5,001,026 | | | | 2,402,140 | |
| Professional services | | | 727,792 | | | | 1,337,707 | |
| Other | | | 1,691,381 | | | | 2,697,029 | |
| Total | | | 7,420,199 | | | | 6,436,876 | |
The Company considered the terms of the contract to determine the transaction price. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract may include fixed amounts, variable amounts, or both. The Company’s contracts typically have either (1) annual; (2) monthly; (3) variable based on completion of performance obligation. Therefore, the Company’s contracts have both fixed (e.g., stated annual, monthly, etc. fee) and variable components (e.g., per hour, time and material).
15. Expenses by nature
Components
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Deferred Commissions
The Company capitalizes sales commission expenses and associated payroll taxes paid to internal sales personnel that are incremental to obtaining customer contracts. These costs are deferred and then amortized over the expected period of generalbenefit. Commissions for existing customer renewals are deferred and administrative expenses,amortized over twelve months. We have determined the period of benefit taking into consideration several factors including the expected subscription term and expected renewals of our customer contracts, the duration of our relationships with our customers, and the life of our technology. Amortization expense is included in sales and marketing in the accompanying consolidated statement of operations and researchcomprehensive income.
Variable consideration
At the end of the reporting period, the Company knows the amount of time and developmentmaterial to invoice the customer in order to recognize revenue. Therefore, no estimation of variable consideration is necessary.
Principal vs. Agent Considerations
Judgment is required in determining whether we are the principal or agent in its transactions with the customers. We evaluate the presentation of revenue on a gross or net basis based on whether we control the service provided to the end-user and are the principal (i.e. “gross”), or we arrange for other parties to provide the service to the end-user and are an agent (i.e. “net”).
The following tables present our revenues disaggregated by offering. This level of disaggregation takes into consideration how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. Below is a list of practical expedients the Company applied in the adoption and application of Topic 606:
Application Practical Expedients
| ○ | The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer. |
| ○ | The Company generally expenses sales commissions when incurred when the amortization period would have been one year or less. These costs are recorded within selling, general, and administrative in the Statement of Operations and Comprehensive Income. |
| ○ | The Company is permitted to recognize revenue at the amount to which it has the right to invoice for services performed if the Company’s right to payment is for an amount that corresponds directly with the value provided to the customer. |
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For contract modifications, the Company reflected the aggregate effect of all modifications that occurred prior to the adoption date when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to satisfied and unsatisfied performance obligations for the year ended December 31, 2019 weremodified contract at transition.
Note 3 – Property and Equipment
Depreciation and amortization is calculated using the straight-line method over the estimated useful life of the assets. Estimated useful lives of major classes of depreciable assets are as follows:
| | | 2019
CAD$ | | | 2018
CAD$ | |
| Salaries and wages | | | 5,422,757 | | | | 5,342,674 | |
| Professional fees [include outsourced software development] | | | 4,143,494 | | | | 2,444,456 | |
| Other | | | 811,510 | | | | 849,499 | |
| | | | 10,377,761 | | | | 8,636,629 | |
| Property and Equipment | | Estimated
Useful Life | |
| Computers and Peripherals | | | 3 | |
| Furniture and Fixtures | | | 5 | |
| Leasehold Improvements | | | 5 | |
Property and equipment consist of the following as of September 30, 2021:
| Computers and Peripherals | | $ | 132,490 | |
| Furniture and Fixtures | | | 40,694 | |
| Leasehold Improvements | | | 24,110 | |
| Total Depreciable Assets | | $ | 197,294 | |
| Less: accumulated depreciation and amortization | | | 104,857 | |
| Property and equipment, net | | $ | 92,437 | |
Depreciation expense amounted to $31,778 for the nine months ended September 30, 2021.
The salariesNAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Intangible Assets
Intangible assets is comprised entirely of capitalized software for which amortization is calculated using the straight-line method over a 5 year estimated useful life.
Intangible assets consist of the following at September 30, 2021:
| Software development costs | | $ | 1,849,781 | |
| Less: accumulated amortization | | | (487,071 | ) |
| Total | | $ | 1,362,710 | |
Amortization expense amounted to $157,886 for the nine months ended September 30, 2021.
Based on our net amortizable intangible asset balance of $1,362,710 at September 30, 2021, we expect that amortization expense will be as follows for the next five years and wagesthereafter:
| 2021 | | | $ | 165,955 | |
| 2022 | | | | 366,947 | |
| 2023 | | | | 365,352 | |
| 2024 | | | | 316,225 | |
| 2025 | | | | 129,296 | |
| 2026 | | | | 18,935 | |
| Total | | | $ | 1,362,710 | |
Note 5 – Debt
Debt consists of the following as of September 30, 2021:
| Stockholder notes payable | | $ | 3,496,759 | |
| Convertible note payable | | | 1,520,000 | |
| SBA Disaster Loan | | | 148,817 | |
| Total | | $ | 5,165,576 | |
Interest expense for researchthe nine months ended September 30, 2021 was $161,029.
Stockholder notes payable
In June 2017, the Company entered into a $2,000,000 note payable agreement with a stockholder. The note has a 0% stated interest rate, and developmentthe entire principal balance is due upon maturity of June 13, 2022.
In June 2018, the Company entered into a $1,326,759 note payable agreement with a second stockholder. The note has a 0% stated interest rate, and the entire principal balance is due upon maturity of June 20, 2023.
Convertible note payable
In June 2017, the Company entered into a convertible note payable agreement with a stockholder.
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Effective December 23, 2020, this note was assigned to an affiliate of the stockholder. The note allows for up to $1,750,000 to be borrowed at 12% per annum. Interest is paid monthly, and the entire principal balance is due upon maturity of June 13, 2022.
The note is convertible into common stock of the Company at the option of the lender or upon a change in control event, as defined in the agreement.
The note agreement contains certain financial covenants, and the Company was not in compliance as of September 30, 2021, and therefore the entire outstanding principal balance of $1,520,000 is shown as current on the accompanying consolidated balance sheet.
Paycheck Protection Program (“PPP”) Loan
On April 29, 2020, the Company received a loan in the amount of $954,984 under the Paycheck Protection Program administered by the United States Small Business Administration (the “SBA”). According to the Coronavirus Aid, Relief, and Economic Security Act (the “Cares Act”), PPP loan provides for forgiveness of up to the full principal amount and accrued interest if the funds are presented netused for payroll costs, interest on mortgages, rent, and utilities. However, at least 60% of CAD$629,003 investmentthe forgiven amount must have been used for payroll. The loan bears interest at a rate of 1.00% per annum.
The entire loan (principal and accrued interest) was forgiven on June 30, 2021 and the $954,984 was recorded as a gain on the statement of operations and comprehensive income.
SBA Disaster Loan
In April 2020, the Company received a $2,000,000 loan under the Disaster Loan Assistance Program administered by the SBA, which was repaid in full in May 2020. Then, in July 2020, the Company received a loan in the amount of $150,000 under the same program. The loan bears interest at a rate of 3.75% per annum and is a 30 year loan.
The future principal payments for the Company’s debt are as follows:
| Year ending December 31 | | | |
| 2021 | | $ | 1,521,283 | |
| 2022 | | | 2,173,037 | |
| 2023 | | | 1,331,891 | |
| 2024 | | | 5,132 | |
| 2025 | | | 134,233 | |
| Total | | $ | 5,165,576 | |
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 6 – Income Taxes
The Company’s effective tax credit expectedrates from continuing operations for the nine months ended September 30, 2021 was 2.57%. Since the Company is in a full valuation allowance, the small tax expense is related to state tax minimum payments.
Note 7 – Commitment and CAD$366,280 grant receivedContingencies
Operating Lease
The Company leases one office facility under an operating lease arrangement which expires on April 30, 2024. Rent expense related to the Company’s operating leases was $194,514 for researchthe nine months ended September 30, 2021. Future minimum payments, by year and development activities conducted in 2019 [see note 4].the aggregate, under operating leases at September 30, 2021, are as follows:
| | | | Future Minimum Payments | |
| 2021 | | | $ | 61,743 | |
| 2022 | | | | 254,376 | |
| 2023 | | | | 262,008 | |
| 2024 | | | | 89,956 | |
| Total future minimum lease payments | | | $ | 668,083 | |
16. Commitments and contingencies
Litigation
In the ordinary course of business, fromFrom time to time, the Company ismay be involved in variouslitigation relating to claims related toarising out of its operations rights, commercial, employment or other claims. Althoughin the normal course of business. The Company will accrue a liability for such matters cannotwhen it is probable that a liability has been incurred and the amount can be predicted with certainty, management does not considerreasonably estimated. As of September 30, 2021, and through the Company’s exposure todate these claimsfinancial statements were available to be material to theseissued, there were no legal proceedings requiring recognition or disclosure in the financial statements.
F-78Contingencies
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
17. AcquisitionAs of LCA
On December 14, 2018, the Company completed the acquisition of Last Call Analytics Inc. [“LCA”], an alcohol and beverage data analytics company. The total consideration paid was CAD$5,837,896, consisting of CAD$2,236,110 in the Company’s common shares, valued at CAD$1.61 per share, based on the fair value of the common shares at the date of acquisition, and CAD$3,601,786 in promissory notes. The fair values of the assets acquired andthis report, there are no known contingent liabilities assumed of the acquisition of LCA presented in the 2018 Annual Consolidated Financial Statements have been finalized and are as follows:
| | CAD$ | |
Purchase price | | | 5,837,896 | |
Assets acquired: | | | | |
Net working capital | | | 51,924 | |
Cash acquired | | | 24,236 | |
Intangible assets | | | 1,659,200 | |
Goodwill | | | 4,542,224 | |
Deferred tax liability | | | (439,688 | ) |
Total assets | | | 5,837,896 | |
18. Related party transactions
Key management personnel are those persons having the authority and responsibility for planning, directing and controlling activities of the entity, directly or indirectly, including the Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Technology Officer and equivalent, and Directors.
Compensation expense for the Company’s key management personnel are as follows:nine months ended September 30, 2021.
| | | 2019
CAD$ | | | 2018
CAD$ | |
| Salaries and benefits | | | 689,903 | | | | 624,347 | |
| Share-based compensation | | | 129,681 | | | | 90,625 | |
| | | | 819,584 | | | | 714,972 | |
Note 8 – Subsequent Events
DuringThe Company has evaluated all subsequent events through December 13, 2021, which is the year ended December 31, 2019,date the financial statements were available to be issued.
On October 1, 2021, the Company paid CAD$9,341 (2018 – CAD$nil) of legal fees on behalf of employees.
19. Capital management
Ample Organics is an early stage company that is dependent on raising further capital to fund its capital and operating expenses in excess of revenue until such time that it reaches cash break-even. The Company’s capital structure as at December 31, 2019 primarily consists of shareholders’ equity from common shares and warrants, preferred share liabilities from preferred shares and warrants for preferred shares, and short-term debt.
On December 18, 2019, the Company entered into a definitive agreement to bewas acquired by Akerna Corp. (“Akerna”) whereby Akerna will acquire all issued and outstanding shares(NASDAQ: KERN) for approximately $17 million, comprised of the Company for up to CAD$60million (US$45million) (the “Akerna Transaction”). The purchase consideration consists of CAD$7.5millionapproximately $5 million in cash (US$5.7million) and 3,294,574 redeemable preferred shares$12 million in common stock of Akerna with a value of CAD$42.5million (US$32.3million) in Akerna shares on close, as well as contingent consideration of up to CAD$10million (US$7.6million) in deferred share-based consideration upon the Company’s achievement of certain revenue targets in 2020. The transaction is expected to close in mid-2020. The Company expects the Akerna Transaction to provide sufficient funding to meet its objectives stated above.Corp.
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
19. Capital management (cont.)
In the event that the Akerna Transaction does not close, the Company is dependent on raising further capital in the form of equity, debt, or instruments convertible into equity to fund its capital and operating expenses in excess of revenue until such time that it reaches cash break-even. While the Company raised CAD$4,500,000 in gross proceeds for short-term debt and CAD$7,516,750 in gross proceeds for common shares as well as warrants for common shares and preferred shares during the year ended December 31, 2019, there can be no assurance that the Company will be successful in raising additional funds in the future.
20. Financial instruments and risk management
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from deposits with banks and outstanding receivables. The Company trades only with recognized, creditworthy third parties. The Company performs credit checks for all customers who wish to trade on credit terms. As at December 31, 2019, no customers represented greater than 10% of the outstanding receivable balance [2018 — one customer represented 10%].
The Company does not hold any collateral as security, but mitigates this risk by dealing only with what management believes to be financially sound counterparties and, accordingly, does not anticipate significant loss for non-performance.
The aging of trade receivables is as follows:
| | | 2019
CAD$ | | | 2018
CAD$ | |
| Current | | | 625,969 | | | | 1,373,663 | |
| 1 to 30 days | | | 206,074 | | | | 57,777 | |
| 30 to 60 days | | | 22,130 | | | | 9,369 | |
| > 60 days | | | 137,487 | | | | 114,824 | |
| Total gross trade receivables | | | 991,660 | | | | 1,555,633 | |
| Less allowance for doubtful accounts | | | 70,953 | | | | 22,348 | |
| Total trade receivables, net | | | 920,707 | | | | 1,533,285 | |
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company’s exposure to liquidity risk is dependent on the Company’s ability to raise additional financing to meet its commitments and sustain operations. The Company mitigates liquidity risk through management of working capital, cash flows and the issuance of share capital.
The Company is obligated to the following contractual maturities of undiscounted cash flows:
| | | Carrying amount
CAD$ | | | Contractual cash flows
CAD$ | | | Year 1
CAD$ | | | Year 2
CAD$ | | | Year 3
CAD$ | | | Year 4
CAD$ | | | Year 5
CAD$ | | | Thereafter
CAD$ | |
| Trade and other payables | | | 1,423,359 | | | | 1,423,359 | | | | 1,423,359 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Lease liability | | | 3,657,454 | | | | 4,701,803 | | | | 544,237 | | | | 534,739 | | | | 533,208 | | | | 565,695 | | | | 570,024 | | | | 1,953,900 | |
| Short-term debt | | | 4,746,189 | | | | 5,048,503 | | | | 5,048,503 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | 9,827,002 | | | | 11,173,665 | | | | 7,016,099 | | | | 534,739 | | | | 533,208 | | | | 565,695 | | | | 570,024 | | | | 1,953,900 | |
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
20. Financial instruments and risk management (cont.)
Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk.
Currency risk
Currency risk is the risk to the Company’s earnings that arise from fluctuations of foreign exchange rates. The Company is not exposed to foreign currency exchange risk as it has minimal financial instruments denominated in foreign currencies. Substantially all of the Company’s transactions are in Canadian dollars, which is the Company’s functional currency.
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Given that the Company holds short-term debt at fixed interest rates, it is not exposed to interest rate risk as at December 31, 2019.
Other price risk
Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices [other than those arising from interest rate risk or currency risk], whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. The Company is not exposed to significant other price risks as at December 31, 2019.
Fair values
The carrying values of cash, trade and other receivables, other financial assets, trade and other payables, and short-term debt approximate their fair values due to the short-term nature of these items. The risk of material change in fair value is not considered to be significant due to a relatively short-term nature. The Company does not use derivative financial instruments to manage this risk.
Financial instruments recorded at fair value on the consolidated statement of financial position are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Company’s valuation techniques. A level is assigned to each fair value measurement based on the lowest level input significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:
| ● | Level 1 — Unadjusted quoted prices as at the measurement date for identical assets or liabilities in active markets. |
| | |
| ● | Level 2 — Observable inputs other than quoted prices included in Level1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| | |
| ● | Level 3 — Significant unobservable inputs that are supported by little or no market activity. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. |
Ample Organics Inc.
Notes to the consolidated financial statement
[Expressed in Canadian dollars, except share amounts]
December 31, 2019
20. Financial instruments and risk management (cont.)
The fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument is classified to the lowest level of the hierarchy for which a significant input has been considered in measuring fair value.
The fair value hierarchy for the Company’s financial instruments measured at fair value are as follows:
| | | Level 1
CAD$ | | | Level 2
CAD$ | | | Level 3
CAD$ | | | Total
CAD$ | |
| Preferred share liabilities including associated warrants | | | | | | | | | | | | | | | | |
| As at December 31, 2018 | | | — | | | | 5,234,811 | | | | — | | | | 5,234,811 | |
| As at December 31, 2019 | | | — | | | | 13,636,522 | | | | — | | | | 13,636,522 | |
The fair values of the Company’s preferred share liabilities as at December31, 2019 was determined using the purchase price of the Akerna Transaction.
There were no transfers between fair value measurement hierarchy levels during the year ended December31, 2019.
21. Subsequent events
COVID-19
Since December 31, 2019, the outbreak of the recent novel coronavirus (COVID-19) has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused disruption to certain businesses globally; as a result, there could be a possibility of recession in the near future. While the impact of COVID-19 on the Company has been minimal to date, there is uncertainty around its duration and future business conditions. If the outbreak were to cause disruption to the Company’s supply chain or its service capabilities in the future, it would have a negative impact on revenue, which could be material. In addition, any material negative impact on revenue would impact profitability, as well as liquidity and capital resources.
INDEX TO SOLO’S FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Stockholders of
Solo Sciences,The Nav People, Inc.
Report on the Financial Statements
We have audited the accompanying financial statements of Solo Sciences,The Nav People, Inc. & Subsidiary (the “Company”), which comprise the consolidatedbalance sheetssheet as of December 31, 2019 and 2018,2020, and the related consolidatedstatements of operations and comprehensive loss, changes in stockholders’ equity (deficit)deficit and cash flows for the yearsyear then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits.audit. We conducted our auditsaudit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidatedfinancial position of Solo Sciences,The Nav People, Inc. as of December 31, 2019 and 2018,2020, and the consolidatedresults of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ Marcum, LLP
New York, New York
May 29, 2020
F-84
| /s/ Marcum LLP | |
| |
| Costa Mesa, CA | |
| December 13, 2021 | |
The NAV People, Inc. & Subsidiary
Balance SheetsCONSOLIDATED BALANCE SHEET
| | | As of
December 31, | |
| | | 2019 | | | 2018 | |
| Assets | | | | | | |
| Current assets | | | | | | |
| Cash | | $ | 101,341 | | | $ | 76,608 | |
| Cash held in escrow | | | 124,970 | | | | — | |
| Accounts receivable | | | 73,048 | | | | 299 | |
| Prepaid expenses | | | 22,135 | | | | 38,105 | |
| Total current assets | | | 321,494 | | | | 115,012 | |
| | | | | | | | | |
| Fixed assets, net | | | 14,785 | | | | 18,361 | |
| Software development cost and other intangible assets, net | | | 5,163,072 | | | | 3,620,881 | |
| Total assets | | $ | 5,499,351 | | | $ | 3,754,254 | |
| | | | | | | | | |
| Liabilities and Stockholders’ Equity | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 700,013 | | | $ | 31,067 | |
| Total current liabilities | | | 700,013 | | | | 31,067 | |
| Deferred purchase price | | | 3,000,000 | | | | 3,000,000 | |
| Total liabilities | | | 3,700,013 | | | | 3,031,067 | |
| Commitments and Contingencies (Note 7) | | | | | | | | |
| Stockholders’ equity | | | | | | | | |
| Preferred Stock AA, par value $.00001; 10,000,000 and 10,000,000 shares authorized at December 31, 2019 and 2018; and 4,165,938 and 1,738,688 shares issued and outstanding at December 31, 2019 and 2018, respectively | | | 3,332,750 | | | | 1,390,950 | |
| Common stock, par value $0.00001, 20,000,000 and 20,000,000 shares authorized and 10,156,250 and 10,020,000 issued and outstanding as of December 31, 2019 and 2018, respectively | | | 102 | | | | 100 | |
| Additional paid-in capital | | | 2,288,269 | | | | 347,576 | |
| Accumulated deficit | | | (3,821,783 | ) | | | (1,015,439 | ) |
| Total stockholders’ equity | | | 1,799,338 | | | | 723,187 | |
| Total liabilities and stockholders’ equity | | $ | 5,499,351 | | | $ | 3,754,254 | |
| | | December 31,
2020 | |
| Assets | | | |
| Current Assets | | | |
| Cash | | $ | 266,563 | |
| Accounts receivable, net of allowance of $417,417 | | | 1,054,797 | |
| Prepaid expenses and other current assets | | | 156,716 | |
| Total Current Assets | | | 1,478,076 | |
| | | | | |
| | | | | |
| Non-current Assets | | | | |
| Property and equipment, net | | | 96,774 | |
| Intangible asset, net | | | 1,215,989 | |
| Deposits | | | 23,507 | |
| Total Non-Current Assets | | | 1,336,270 | |
| Total Assets | | $ | 2,814,346 | |
| | | | | |
| Liabilities and Stockholders’ Deficit | | | | |
| Current Liabilities | | | | |
| Convertible note payable | | $ | 1,520,000 | |
| Accounts payable | | | 232,283 | |
| Accrued expenses | | | 324,077 | |
| Deferred revenue | | | 1,778,207 | |
| Total Current Liabilities | | | 3,854,567 | |
| Long Term Liabilities | | | | |
| Stockholder notes payable | | | 3,326,759 | |
| Notes payable | | | 1,104,984 | |
| Total Long-Term Liabilities | | | 4,431,743 | |
| Total Liabilities | | | 8,286,310 | |
| | | | | |
| Stockholders’ Deficit | | | |
| Common stock, $1 par value, 10,000 shares authorized, 5,000 shares issued and outstanding | | | 5,000 | |
| Additional paid-in capital | | | 2,000 | |
| Accumulated other comprehensive loss | | | (11,365 | ) |
| Accumulated deficit | | | (5,467,599 | ) |
| Total Stockholders’ Deficit | | | (5,471,964 | ) |
| Total Liabilities and Stockholders’ Deficit | | $ | 2,814,346 | |
TheSee accompanying notes are an integral part of these financial statementsNotes to the Consolidated Financial Statements
F-85
SOLO SCIENCES, INC.
Statements of Operations
| | | For the Year Ended
December 31, | |
| | | 2019 | | | 2018 | |
| Revenues | | | | | | |
| solo*TAGTM and solo*CODETM sales | | $ | 103,250 | | | $ | — | |
| Membership application fees | | | 1,520 | | | | 299 | |
| Total revenues | | | 104,770 | | | | 299 | |
| Cost of revenues | | | 4,234 | | | | — | |
| Gross profit | | | 100,536 | | | | 299 | |
| Operating expenses: | | | | | | | | |
| Research and development | | | 59,294 | | | | 27,000 | |
| Selling, general and administrative | | | 2,852,455 | | | | 988,936 | |
| Total operating expenses | | | 2,911,749 | | | | 1,015,936 | |
| Loss from operations | | | (2,811,213 | ) | | | (1,015,637 | ) |
| Other income | | | | | | | | |
| Interest | | | 4,869 | | | | 198 | |
| Total other income | | | 4,869 | | | | 198 | |
| Net loss | | $ | (2,806,344 | ) | | $ | (1,015,439 | ) |
The accompanying notes are an integral part of these financial statements
SOLO SCIENCES, INC.The NAV People, Inc. & Subsidiary
Statements of Changes in Stockholders’ EquityCONSOLIDATED STATEMENT OF OPERATIONS & COMPREHENSIVE LOSS
For the years ended December 31, 2019 and 2018
| | | | | | | | | Additional | | | | | | Total | |
| | | Common Stock | | | Preferred Stock | | | Paid-In | | | Accumulated | | | Stockholder’s | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Deficit | | | Equity | |
| Balance at December 31, 2017 | | | — | | | $ | — | | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Common shares issued | | | 6,570,000 | | | | 66 | | | | — | | | | — | | | | (66 | ) | | | — | | | | — | |
| Common shares issued to acquire intangible assets | | | 230,000 | | | | 2 | | | | — | | | | — | | | | 66,698 | | | | — | | | | 66,700 | |
| Series AA Preferred shares issued | | | — | | | | — | | | | 1,738,688 | | | | 1,390,950 | | | | — | | | | — | | | | 1,390,950 | |
| Restricted shares granted to nonemployees | | | 3,220,000 | | | | 32 | | | | — | | | | — | | | | (32 | ) | | | — | | | | — | |
| Stock-based compensation expense | | | — | | | | — | | | | — | | | | — | | | | 280,976 | | | | — | | | | 280,976 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,015,439 | ) | | | (1,015,439 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2018 | | | 10,020,000 | | | | 100 | | | | 1,738,688 | | | | 1,390,950 | | | | 347,576 | | | | (1,015,439 | ) | | | 723,187 | |
| Common shares issued upon warrant exercise | | | 156,250 | | | | 2 | | | | — | | | | — | | | | 124,998 | | | | — | | | | 125,000 | |
| Series AA Preferred shares issued | | | — | | | | — | | | | 2,427,250 | | | | 1,941,800 | | | | — | | | | | | | | 1,941,800 | |
| Restricted shares forfeited | | | (20,000 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Stock-based compensation expense | | | — | | | | — | | | | — | | | | — | | | | 1,815,695 | | | | — | | | | 1,815,695 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,806,344 | ) | | | (2,806,344 | ) |
| Balance at December 31, 2019 | | | 10,156,250 | | | $ | 102 | | | | 4,165,938 | | | $ | 3,332,750 | | | $ | 2,288,269 | | | $ | (3,821,783 | ) | | $ | 1,799,338 | |
| | | For the Year Ended
December 31, 2020 | |
| Revenue | | | |
| Recurring revenue | | $ | 4,875,121 | |
| Services revenue | | | 2,233,415 | |
| Other revenue | | | 426,293 | |
| Total Revenue | | | 7,534,829 | |
| Cost of revenue | | | 2,202,534 | |
| Gross Profit | | | 5,332,295 | |
| | | | | |
| Operating Expenses | | | | |
| Operations and support | | | 5,374,077 | |
| Sales and marketing | | | 46,954 | |
| General and administrative | | | 784,785 | |
| Bad debt expense | | | 424,089 | |
| Depreciation and amortization | | | 301,064 | |
| Total Operating expenses | | | 6,930,969 | |
| Loss From Operations | | | (1,598,674 | ) |
| | | | | |
| Other expense | | | (467 | ) |
| Interest expense | | | (151,773 | ) |
| Total Other Expense | | | (152,240 | ) |
| | | | | |
| Net Loss Before Provision for Income Taxes | | | (1,750,914 | ) |
| Provision for income taxes | | | (6,204 | ) |
| Net Loss | | | (1,757,118 | ) |
| Foreign currency translation adjustment | | | (12,222 | ) |
| Comprehensive Loss | | $ | (1,769,340 | ) |
TheSee accompanying notes are an integral part of these financial statementsNotes to the Consolidated Financial Statements
The NAV People, Inc. & Subsidiary
Statements of Cash FlowsCONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
| | | For the Year Ended
December 31, | |
| | | 2019 | | | 2018 | |
| Cash flows from operating activities | | | | | | |
| Net loss | | $ | (2,806,344 | ) | | $ | (1,015,439 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Depreciation and amortization expense | | | 398,820 | | | | 240,382 | |
| Stock-based compensation expense | | | 1,275,490 | | | | 194,504 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (72,749 | ) | | | (299 | ) |
| Prepaid expenses | | | 15,970 | | | | (38,105 | ) |
| Accounts payable and accrued liabilities | | | 668,946 | | | | 31,067 | |
| Net cash used in operating activities | | | (519,867 | ) | | | (587,890 | ) |
| | | | | | | | | |
| Cash flows from investing activities | | | | | | | | |
| Purchase of fixed assets | | | — | | | | (21,228 | ) |
| Software development | | | (1,397,230 | ) | | | (705,224 | ) |
| Net cash used in investing activities | | | (1,397,230 | ) | | | (726,452 | ) |
| | | | | | | | | |
| Cash flows from financing activities | | | | | | | | |
| Proceeds from issuance of Series AA preferred shares | | | 1,941,800 | | | | 1,390,950 | |
| Proceeds from exercise of warrants | | | 125,000 | | | | — | |
| Net cash provided by financing activities | | | 2,066,800 | | | | 1,390,950 | |
| Net increase in cash and cash held in escrow | | | 149,703 | | | | 76,608 | |
| Cash and cash held in escrow at beginning of year | | | 76,608 | | | | — | |
| Cash and cash held in escrow at end of year | | $ | 226,311 | | | $ | 76,608 | |
| | | | | | | | | |
| Cash paid for interest | | $ | 4,869 | | | $ | 198 | |
| Cash paid for income taxes | | $ | — | | | $ | — | |
| | | | | | | | — | |
| Supplemental disclosures of noncash investing and financing activities: | | | | | | | | |
| Share based compensation for software development | | $ | 540,205 | | | $ | 86,472 | |
| Common stock issued to acquire intangible assets | | $ | — | | | $ | 66,700 | |
| Deferred purchase obligation for intangible assets acquired | | $ | — | | | $ | 3,000,000 | |
| | | Shares | | | Par | | | Additional
Paid-In Capital | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Accumulated
Deficit | | | Total
Stockholders’
Deficit | |
| Balance as of January 1, 2020 | | | 5,000 | | | $ | 5,000 | | | $ | $ 2,000 | | | $ | 857 | | | $ | (3,710,481 | ) | | $ | (3,702,624 | ) |
| Net loss | | | - | | | | - | | | | - | | | | - | | | | (1,757,118 | ) | | | (1,757,118 | ) |
| Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | (12,222 | ) | | | - | | | | (12,222 | ) |
| Balance as of December 31, 2020 | | | 5,000 | | | $ | 5,000 | | | $ | $ 2,000 | | | $ | (11,365 | ) | | $ | (5,467,599 | ) | | $ | (5,471,964 | ) |
TheSee accompanying notes are an integral part of these financial statementsNotes to the Consolidated Financial Statements
The NAV People, Inc. & Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS
| | | For the Year
December 31, 2020 | |
| | | | |
| | | | |
| Net loss | | $ | (1,757,118 | ) |
| Adjustment to reconcile net loss to net cash used in operating activities | | | | |
| Bad debt | | | 424,089 | |
| Depreciation and amortization | | | 301,064 | |
| Change in assets and liabilities: | | | | |
| Accounts receivable | | | (253,055 | ) |
| Prepaid expenses and other current assets | | | 59,300 | |
| Accounts payable and accrued expenses | | | (138,009 | ) |
| Deferred revenue | | | 108,343 | |
| Net cash used in operating activities | | | (1,255,386 | ) |
| | | | | |
| Cash flows from investing activities | | | | |
| Developed software additions | | | (692,380 | ) |
| Purchases of property and equipment | | | (14,240 | ) |
| Net cash used in investing activities | | | (706,620 | ) |
| | | | | |
| Cash flows from financing activities | | | | |
| Proceeds from debt issuances | | | 3,874,984 | |
| Payments of principal amounts of debt | | | (2,000,000 | ) |
| Net cash provided by financing activities | | | 1,874,984 | |
| Effect of exchange rates on cash | | | 16,286 | |
| Net Change in cash | | | (70,736 | ) |
| Beginning Balance | | | 337,299 | |
| Ending Balance | | $ | 266,563 | |
| | | | | |
| Supplemental Disclosure of Cash Flow Information: | | | | |
| Cash paid for interest | | $ | 151,773 | |
| Cash paid for income taxes | | $ | 0 | |
See accompanying Notes to the Consolidated Financial Statements
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Description– Nature of the Business Liquidity and Capital Resources
Description of Business
Solo Sciences, Inc. (the “Company” or “Solo”) was founded in January 2018. Since its inception the Company has been developing anti-counterfeiting technology for sale to retailers and government consumers and a mobile phone application for use by end consumers.
Note 2 — Summary of Significant Accounting Policies
Description of the Business
The NAV People, Inc. (“The NAV People” or the “Company”) provides software for highly regulated retailers in the legal cannabis space. Founded in 2016 and headquartered in Las Vegas, Nevada, the NAV People services a client base comprised of U.S.-based multi-state operators and single-state operators and Canadian LPs, in addition to global cannabis clients outside North America. The NAV People have over 85 customers.
Basis of presentationPresentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). as found in the Accounting Standards Codification (“ASC”) of the Financial Accounting Standards Board (“FASB”) for consolidated financial information.
The accompanying consolidated financial statements include the accounts of The NAV People and its wholly-owned subsidiary, Dynamics 365 People Software and Services, Ltd. All intercompany balances have been eliminated in consolidation.
Use of estimatesEstimates
The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions, thatwhich affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date ofin the financial statements and the reportedaccompanying notes. Estimates are based on historical experience, where applicable, and other assumptions which management believes are reasonable under circumstances. The Company has used estimates related to several financial statement amounts of revenues and expenses during the reporting period. Significant estimates for the years ended December 31, 2019 and 2018 were the Company’s estimatedincluding useful lives of long-lived assets, which include capitalized software development costs, assumptions usedproperty and equipment, and internal use software. These estimates are inherently subject to value of stock-based compensation, including valuation of common stock underlying the compensation agreements,judgement and assumptions used to value the Company’s intellectual property. Actualactual results could differ from those estimates.
CashConcentrations of Credit Risk
Cash and cash equivalents and accounts receivable are potentially subject to credit risk concentration. We have not experienced any material losses related to these concentrations during the periods presented. Cash is deposited with financial institutions that the Company believes are of high credit quality. These deposits are typically in excess of insured limits.
The Company derives a portion of its revenue from several large customers, as well as a large number of individual small businesses. If the financial condition or results of any one of the large customers deteriorates substantially, the Company’s operating results could be adversely affected. The Company does not require collateral and maintains an allowance for estimated credit losses on customer accounts when considered necessary.
There was one customer which represented 10% of consolidated revenue for the year ended December 31, 2020. The Company has not experienced any losses related to these concentrations during the period presented.
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company relies on a third party to provide payment processing services ("payment service provider") to collect amounts due from end-users. Payment service providers are financial institutions or credit card companies that the Company believes are of high credit quality.
Certain Significant Risks and Uncertainties
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. COVID-19 has rapidly impacted market and economic conditions globally. In an attempt to limit the spread of the virus, various governmental restrictions have been implemented, including business activities and travel restrictions, and “shelter-at-home” orders, that have had an adverse impact on our business and operations by reducing demand for transportation. In light of the evolving nature of COVID-19 and the uncertainty it has produced, it is not possible to predict the COVID-19 pandemics cumulative and ultimate impact on our future consolidated business operations, results of operations, financial position, liquidity, and cash flows. The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak within the United States, including whether there will be further resurgences of COVID-19 in various regions, the distribution of the vaccines in various regions, the impact on capital, and financial markets, governmental or regulatory orders that impact our business and whether the impacts may result in permanent changes to our end-users’ behavior, all of which are highly uncertain and cannot be predicted. Also, see Note 10, Commitments and Contingencies.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchasedinvestments with an original maturity from the date of purchase of three months or less to be cash equivalents. There were no cash equivalents asAs of December 31, 20192020, cash and 2018. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. As December 31, 2019 and 2018, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. The Company has not experienced any losses on such accounts.
Cash Held in Escrow
Cash held in escrow is recorded at fair value. Cash held in escrow consistedcash equivalents consist of cash was contractually restricted to be paid to distributed to the Company’s selling shareholders prior to the of the partial sale of their interests in January 15, 2020, as further described in Note 9.
Prepaid Expenses
Prepaid expenses consist primarily of third-party technology and software used by the Company in its day-to-day operations paid in advance and recognized as expense ratably over the term of the contract.
Accounts Receivable, Net
When estimating its allowance for doubtful accounts the Company’s estimate is based on historical collection experience and a review of the status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts estimated in determining the allowance.deposited with banks. The Company did not record an allowance for doubtful accounts as of December 31, 2019 or 2018.
SOLO SCIENCES, INC.
Notes to Financial Statements
Note 2 — Summary of Significant Accounting Policies(cont.)
Concentrations of Credit Risk
The Company grants credit in the normal course of business to customers in the United States. The Company periodically performs credit analysis and monitors the financial condition of its customers to reduce credit risk.
During the year ended December 31, 2019, Akerna Corp. (“Akerna”) accounted for 82% of total revenues. At December 31, 2019, Akerna accounted for 82% and another customer accounted for 17% of net accounts receivable. During the year ended December 31, 2018, the Company did not have significant operations.
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from three to ten years. Fixed assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that therecorded carrying amount of an asset may not be recoverable.cash and cash equivalents approximates their fair value. The Company did not recognize any property impairment charges in fiscal 2019 or 2018.places its cash equivalents with high credit-quality financial institutions.
Intangible AssetsAccounts Receivable and Allowance for Doubtful Accounts
Finite-lived intangible assets resulting from the acquisition of intellectual property, trademarks and patentsAccounts receivable are recorded at the estimated fair valueinvoiced amount and do not bear interest. The Company reviews customer receivables and collections to evaluate and estimate a reserve for doubtful accounts, including the periodic write off of uncollectible receivables. The Company determines the allowance based on analysis of historical bad debts, customer concentrations, customer creditworthiness, and current economic trends. The methodology used to calculate the datereserve for receivables is supported by the historical information and is applied appropriately to all receivable balances.
Property and Equipment
Property and equipment are stated at cost, net of acquisition. The fair value of acquired intangible assetsaccumulated depreciation and amortization. Depreciation and amortization is determined using appropriate valuation techniques. Amortization expense is computedcalculated using the straight-line basis of accountingmethod over their estimated useful lives a weighted average of 11 years asthe assets (see Note 3). When assets are retired or otherwise disposed of, December 31, 2019. Costs incurred to renewthe cost, accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in the consolidated statement of operations and comprehensive loss in the period realized. Maintenance and repairs that do not enhance or extend the term of recognized intangible assets are capitalized and amortized over the estimatedasset’s useful life of the asset.are charged to operating expenses as incurred.
Impairment of
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets
Recoverability of finite lived intangible assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is determined to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. The Company did not recognize any intangible asset impairment charges in fiscal 2019 or 2018. At least annually, the Company assesses the useful lives of our finite lived intangible assets and may adjust the period over which these assets are amortized whenever events or changes in circumstances indicate that a shorter amortization period is more reflective of the period in which these assets contribute to our cash flows.
Software Development Costs
The Company expenses software development costs incurred before technological feasibility is reached.
Software development costs are incurred to develop software to be used solely to meet its internal needs. The Company capitalizes application developmentcertain costs, related to thesesuch as compensation costs incurred in developing internal-use software applications once the preliminaryplanning has been completed, management has authorized and committed project stage is complete,funding, and it is probable that the project will be completed and the software will be used to performfunction as intended. Amortization of such costs occurs on a straight-line basis over the function intended. Application development stage costs capitalized were $2.2 million and $0.8 million during the years ended December 31, 2019 and 2018. Application development costs are primarily comprisedestimated useful life of the cost of the Company’s consultants including equity-based compensation awarded to these consultants. The Company commences amortization of capitalized software development costs when the application development stage completerelated asset and begins once the asset is ready for its intended use. Software developmentCosts incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are amortized over their estimated useful life, generally five years.expensed as incurred.
Fair ValueEvaluation of Financial InstrumentsLong-Lived Assets for Impairment
The Company evaluates its held-and-used long-lived assets for indicators of possible impairment when events or changes in circumstances indicate the carrying amountsamount of financial instruments, includingan asset or asset group (collectively, the “asset group”) may not be recoverable. The Company measures the recoverability of the asset group by comparing the carrying amount of such asset groups to the future undiscounted cash cash held in escrow, accounts receivable, prepaid expenses, accounts payable and accrued liabilities approximated theirflows it expects the asset group to generate. If the Company considers the asset group to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset group exceeds its fair valuevalue. No such impairments have been identified as of December 31, 20192020.
Deferred Revenue
Deferred revenue primarily consists of billings or payments received in advance of revenue recognition and 2018 becauseis recognized as the revenue recognition criteria are met. All deferred revenue is expected to be recognized during the succeeding 12-month period and is recorded as a current liability.
Research and Development
Research and development costs are charged to operations as incurred.
Foreign Currency Translation
The functional currency of the relatively short-term natureCompany's non-U.S. operations is the local currency. Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing at the balance sheet date. Revenue and expenses are translated into U.S. dollars using the average rates of these instruments. exchange prevailing during the period. Translation gains or losses are included as a component of accumulated other comprehensive loss in stockholders' equity. Gains and losses resulting from foreign currency transactions are recognized in operating expenses.
Income Taxes
The Company accounts for fair value measurementsincome taxes in accordance with GAAP, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
SOLO SCIENCES, INC.
Notes to Financial Statements
Note 2 — Summary of Significant Accounting Policies(cont.)
GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under GAAP are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
Revenue Recognition
The Company’s solo*CODE products consist of a unique tag that is configured for the customers’ packaged goods and an app which communicates with the Company’s software that works in conjunction with the tag to identify the customers’ products. The app may be accessed using handheld devices such as smart phones. The Company’s solo*TAG product is a unique tag configured to facilitate tracking and tracing of cannabis plants and products to ensure compliance with government regulations. During the year ended December 31, 2019, the Company entered into an agreement with Akerna to develop cloud-based software for governments to utilize solo*TAG for compliance monitoring activities.
The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. To determine revenue recognition contracts with its customers, the Company performs the following five step assessment: (i) identify the contract or contracts with a customer; (ii) identify the performance obligations in each contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception and once the contract is determined to be a contract with a customer, the Company assesses the goods or services promised within each contract, determines which goods and services are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when, or as, the performance obligation is satisfied.
Income Taxes
Income taxes are accounted for using the asset and liability method, which requires the recognition ofapproach method. Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. Significant judgments and estimates are required in the expected futuredetermination of the consolidated income tax consequences ofexpense. We are subject to income taxes in the United States and Canada.
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes arise from temporary differences between the carrying amounts and the tax basis of other assets and liabilities. The Company provides for income taxes at the currentliabilities and future enacted tax rates and laws applicable in each taxing jurisdiction. The Company uses a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. The Company recognizes interest and penalties related to income tax matters in selling, general, and administrative expensetheir reported amounts in the statement of operations. The Company did not recognize any interestfinancial statements, which will result in taxable or penalties fordeductible amounts in the years ended December 31, 2019 and 2018.
SOLO SCIENCES, INC.
Notesfuture. In evaluating our ability to Financial Statements
Note 2 — Summary of Significant Accounting Policies(cont.)
The Company recognizesrecover our deferred tax assets toin the extent that its assets are more likely than not to be realized. In making such a determination, the Company considersjurisdiction from which they arise, we consider all available positive and negative evidence, including futurescheduled reversals of existing taxable temporary differences,deferred tax liabilities, projected future taxable income, tax planningtax-planning strategies, and results of recent operations. IfIn projecting future taxable income, we begin with historical results adjusted for the Company determinesresults of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. As of December 31, 2020, we have significant federal, state and foreign income tax net operating loss (“NOL”) carryforwards. We believe that it wouldis more likely than not that the benefit from federal and state NOL carryforwards will not be able to realize its deferred tax assets in the future in excessrealized. In recognition of their net recorded amount, it will make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company has recordedthis risk, we have provided a full valuation allowance against itson the deferred tax assets asrelated to these NOL carryforwards.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASC Topic 842, Leases. This standard requires all entities that leased assets under leases with terms of December 31, 2019more than 12 months to capitalize the assets and 2018.
Nonemployee Stock-Based Compensation
The Company accounts for nonemployee equity awards using the fair value method. Compensation cost for all stock awards expected to vest is measured at fair valuerelated lease liabilities on the dateconsolidated balance sheet. The new standard will become effective for us beginning January 1, 2022; however, early adoption is permitted. While we continue to assess all potential impacts of grant, which typically coincides with vesting, and recognized over the service period. The Company uses the fair value of its common stock to value its restricted stock awards. The fair values of its nonqualified stock options are estimated using the Black-Scholes option pricing model. The value is recognizedthis new standard, we anticipate this standard will have a material impact on our consolidated financial position as expense over the service period. The Company accounts for forfeitures when they occur. The estimated number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amountswe will be recorded asrequired to recognize right-of-use assets and lease liabilities on our consolidated balance sheet. However, we do not expect the adoption to have a cumulative adjustment in the period estimates are revised.significant impact on our consolidated results of operations or cash flows.
The fair values of the Company’s nonemployee awards are revalued each reporting period with the change recorded as stock-based compensation expense. Certain amounts of the of stock-based compensation are capitalized as software development costs.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Accounting Standards Board (“FASB”) issued guidance for measuring credit losses on financial instruments. Among other things, this guidance willInstruments” to require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Businesses will now use forward-looking informationThe guidance also amends the impairment model for available for sale debt securities and requires entities to better inform theirdetermine whether all or a portion of the unrealized loss on such debt security is a credit loss estimates.loss. The new guidancestandard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. All other entities, ASU No. 2016-13 is effective for fiscal years beginning after Dec. 15, 2022. Early adoption is permitted. The Company will adopt the Company beginningnew standard on January 1, 2021.2022. The Company is currently evaluating the impact of adoptionthis accounting standard update on its consolidated financial statements. We are still evaluating the impact on our consolidated financial statements.
Note 2 – Revenue Recognition
The Company adopted ASC 606 under the modified retrospective transition method with an effective date of January 1, 2019 and applied this guidance to those contracts which were not completed at the date of adoption. The standard requires entities to recognize revenue upon transfer of goods or services to customers in amounts that reflect the consideration that the entities expect to receive in exchange for those goods or services.
We recognize revenue when or as we satisfy our obligations. We derive our revenues from recurring revenue (subscriptions sales, support, hosting, and enhancement), services revenue (packages and projects), and other revenue (perpetual licenses and hardware).
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company determines revenue recognition under ASC 606 through the following steps:
| ● | Identification of the contract, or contracts, with a customer; |
| ● | Identification of the performance obligations in the contract; |
| ● | Determination of the transaction price; |
| ● | Allocation of the transaction price to the performance obligations in the contract; and |
| ● | Recognition of revenue when, or as, the Company satisfies a performance obligation. |
The Company has the following revenue streams:
| ● | Recurring (subscription sales, support, hosting, enhancement) |
| ● | Services revenue (projects and packages) |
| ● | Other Revenue (perpetual licenses and hardware) |
The Company offers its software under a cloud-based delivery model, where it provides access to its software on a hosted basis as a service and customers do not have the contractual right to take possession of the new standard on its financial statements.
In November 2016,software. Revenue is recognized when control of the FASB issued guidance requirespromised services is transferred to the Company's customers at an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. The majority of customer contracts have performance obligations that the statementsCompany satisfies over time and revenue is recognized by consistently applying a method of measuring progress toward satisfaction of that performance obligation.
The Company’s recurring revenue is comprised of subscription sales, support, hosting and enhancement revenue. Revenue is recognized ratably over the contract term based on the commencement date of the contract, which is the date our cloud-based software is made available to customers.
Revenue from the Company’s service for project and packages revenue are recorded as the services are performed. Once the contract is signed, invoices are generated for professional services on a time and material basis, although the Company occasionally engages in fixed-price service engagements and invoices for those based upon agreed milestone payments. Revenue is recognized as services are performed for time and material engagements and on a proportional performance method as the services are performed for fixed-fee engagements. Training revenue is recognized as the services are performed.
Perpetual software is recognized when delivered, which is typically within a day of receipt of the order. Hardware is recognized when invoiced and usually ships within a few days after receipt of order.
Any of the above agreements would be a complete contract. Each party’s rights regarding the services to be transferred, pricing, and payment terms are listed in the contract. These factors indicate that the contract has commercial substance. Risk, timing, or the Company’s future cash flows explainare expected to change as a result of a contract. Risk includes non-performance risk, non-payment risk, and mis-usage risk. Payments are generally due within 15-45, days upon receipt of an invoice.
The Company considered the change duringguidance of ASC 606-10-55-3A regarding the collection probability. At contract inception, the Company deems it is probable that the Company will collect substantially all of the consideration to which it will be entitled to in exchange for the services that will be transferred to the customer, based on historical experience with customers. The Company also periodically completes an assessment of collectability from new customers. This assessment includes reviewing publicly available financial information and inquiring of customer’s financial creditability. Arrangements for which collection of fees is not deemed probable are recognized upon cash collection.
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company considered the terms of the contract to determine the transaction price. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract may include fixed amounts, variable amounts, or both. The Company’s contracts typically have either (1) annual; (2) monthly; (3) variable based on completion of performance obligation. Therefore, the Company’s contracts have both fixed (e.g., stated annual, monthly, etc. fee) and variable components (e.g., per hour, time and material).
Deferred Commissions
The Company capitalizes sales commission expenses and associated payroll taxes paid to internal sales personnel that are incremental to obtaining customer contracts. These costs are deferred and then amortized over the expected period of benefit. Commissions for existing customer renewals are deferred and amortized over twelve months. We have determined the period of benefit taking into consideration several factors including the expected subscription term and expected renewals of our customer contracts, the duration of our relationships with our customers, and the life of our technology. Amortization expense is included in sales and marketing in the accompanying consolidated statement of operations and comprehensive loss.
Variable consideration
At the end of the reporting period, the Company knows the amount of time and material to invoice the totalscustomer in order to recognize revenue. Therefore, no estimation of cash, cash equivalents, restricted cashvariable consideration is necessary.
Principal vs. Agent Considerations
Judgment is required in determining whether we are the principal or agent in its transactions with the customers. We evaluate the presentation of revenue on a gross or net basis based on whether we control the service provided to the end-user and restricted cash equivalents. Therefore, amountsare the principal (i.e. “gross”), or we arrange for restricted cashother parties to provide the service to the end-user and restricted cash equivalents are to be included with cashan agent (i.e. “net”).
The following tables present our revenues disaggregated by offering. This level of disaggregation takes into consideration how the nature, amount, timing, and uncertainty of revenue and cash equivalents when reconcilingflows are affected by economic factors. Revenue is presented in the beginning-of-period and end-of-period total amounts shown on the Statements of cash flows. The Company adopted this guidance on January 1, 2019, using the retrospective transition guidance required by the standard, as such, the statement of cash flowsfollowing tables for the year ended December 31, 2018 has been presented in accordance with this guidance.2020, respectively:
In June 2018,There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the FASB issued new guidance for stock-based compensation paid to nonemployees. The new guidance conforms the measurementCompany’s disclosures. Below is a list of stock-based compensation for both employees and nonemployees. This guidance is effective forpractical expedients the Company on January 1, 2020applied in the adoption and will result in measurementapplication of stock-based compensation paid to nonemployees for services to be provided over a period of time as of the date of the agreement. The Company currently measures the value of shares transferred upon completion of the service requirement, had this new guidance been effective in 2019, the Company’s net loss would have been $0.8 million less than as reported.Topic 606:
In August 2018, the FASB issued new guidance for implementation costs incurred by customers in cloud computing arrangements, which broadens the scope of existing guidance applicable to internal-use software development costs. The update requires costs to be capitalized or expensed based on the nature of the costs and the project stage in which they are incurred subject to amortization and impairment guidance consistent with existing internal-use software development cost guidance. The guidance is applicable for the Company beginning January 1, 2021. The Company has not completed its evaluation of this standard or the effect it will have on the Company’s financial position or results of operations once adopted.
F-92Application Practical Expedients
| o | The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer. |
| o | The Company generally expenses sales commissions when incurred when the amortization period would have been one year or less. These costs are recorded within selling, general, and administrative in the Statement of Operations. |
| o | The Company is permitted to recognize revenue at the amount to which it has the right to invoice for services performed if the Company’s right to payment is for an amount that corresponds directly with the value provided to the customer. |
SOLO SCIENCES, INC.
NotesThe NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For contract modifications, the Company reflected the aggregate effect of all modifications that occurred prior to Financial Statementsthe adoption date when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to satisfied and unsatisfied performance obligations for the modified contract at transition.
Note 3 — Balance Sheet Disclosures– Property and Equipment
FixedDepreciation and amortization is calculated using the straight-line method over the estimated useful life of the assets. Estimated useful lives of major classes of depreciable assets are as follows:
| Property and Equipment | | Estimated Useful Life | |
| Computers and Peripherals | | | 3 | |
| Furniture and Fixtures | | | 5 | |
| Leasehold Improvements | | | 5 | |
Property and equipment consist of the following:following at December 31, 2020:
| | | As of December 31, | |
| | | 2019 | | | 2018 | |
| Computer equipment | | $ | 6,228 | | | $ | 6,228 | |
| Artwork | | | 15,000 | | | | 15,000 | |
| | | | 21,228 | | | | 21,228 | |
| Less accumulated depreciation | | | (6,443 | ) | | | (2,867 | ) |
| | | $ | 14,785 | | | $ | 18,361 | |
| | | | |
| Computers and Peripherals | | $ | 108,166 | |
| Furniture and Fixtures | | | 40,695 | |
| Leasehold Improvements | | | 24,110 | |
| Total Depreciable Assets | | | 172,971 | |
| Less: accumulated depreciation and amortization | | | (76,197 | ) |
| Property and equipment, net | | $ | 96,774 | |
Depreciation expense for the year ended December31, 2019 and 2018 was $3,576 and $2,867.
Prepaid expenses consist of the following:
| | | As of December 31, | |
| | | 2019 | | | 2018 | |
| Software license | | $ | 22,135 | | | $ | 24,105 | |
| Contractor services | | | — | | | | 14,000 | |
| | | $ | 22,135 | | | $ | 38,105 | |
Software development cost and intangibles consist of the following:
| | | As of December 31, | |
| | | 2019 | | | 2018 | |
| Software development cost | | $ | 2,729,131 | | | $ | 791,696 | |
| Intellectual property | | | 3,066,700 | | | | 3,066,700 | |
| Accumulated amortization | | | (632,759 | ) | | | (237,515 | ) |
| | | $ | 5,163,072 | | | $ | 3,620,881 | |
Amortization expense for capitalized software and finite lived intellectual propertyamounted to $47,724 for the year ended December 31, 2019 and 2018 was $0.4 million and $0.2 million, respectively. For each2020.
Note 4 – Intangible Assets
Intangible assets is comprised entirely of capitalized software for which amortization is calculated using the straight-line method over a 5 year estimated useful life.
Intangible assets consist of the years endingfollowing at December 31, 2020 through 2023, amortization expense related to capitalized software and finite lived intellectual property that has been placed into service as of December31, 2019 will be $0.7 million, for the year ending December 31, 2024, amortization expense related to these assets will be $0.5 million.2020:
Note 4 — Intellectual Property Acquisition
On February2, 2018, the Company entered into an intellectual property purchase agreement for intellectual property assets, trademarks and domain names owned by Get Solo, LLC. Get Solo, LLC is a related party to the Company because an officer of the Company held a noncontrolling interest in Get Solo, LLC at the time of the transaction. At closing, the Company exchanged 230,000shares of common stock for the worldwide rights to the intellectual property. In addition to the shares the agreement provides for deferred purchase payments in two tranches, first, following a qualified financing transaction within 180 days of closing, the Company would have been required to pay $1.0 million in cash or shares of common stock; second on or prior to the fifth anniversary of closing, the Company was required to pay $2.0 million, or $3.0 million if a qualified financing transaction did not occur, also in cash or shares of common stock at the Company’s option. The qualified financing did not occur during 2018, therefore the deferred purchase price liability as of December 31, 2019 and 2018 was $3.0million. This transaction was accounted for as an asset acquisition in accordance with GAAP. Subsequent to year end, the Company’s shareholders sold 80.4% of their interests in the Company to Akerna, as further discussed in Note 9. In connection with this transaction, 375,000 shares of Akerna common stock, contractually valued at $8 per share issued to the Company’s shareholders was allocated to Get Solo, LLC in full satisfaction of the deferred purchase price liability.
SOLO SCIENCES, INC.
Notes to Financial Statements
Note 5 — Stockholders’ Equity
Common Stock Transactions
In January 2018, the Company issued 6,570,000 shares of common stock to its founders and received no proceeds in exchange. In February 2018, the Company issued 230,000 shares to Get Solo, LLC, a related party, in exchange for certain intellectual property, as further discussed in Note 4. The Company recorded the issuance of these shares at their estimated fair value of $0.29 per share.
The Company did not declare or pay any dividends during the years end December 31, 2019 and 2018.
Series AA Preferred Stock Transactions
The Company has been financed through its issuance of Series AA preferred stock. Since its inception, the Company has issued 4.2 million Series AA preference shares at $0.80 per share for proceeds of $3.3 million. On January 15, 2020 and immediately prior to the partial sale of the Company’s equity to Akerna, discussed further in Note9, the Company converted all outstanding shares of Series AA preferred stock to common stock using a one-for-one conversion rate.
The different classes of shares carry different transfer rights and distribution rights as described in the Company’s certificate of incorporation. Transfer of the common and preferred shares is conditioned on obtaining written approval from the Company.
Voting
Preferred shares and common shares vote as a single class. Each holder of the preferred stock is entitled to the number of votes equal to the number of shares that the preferred shares may be converted. The conversion price is $0.80 per share.
Dividends
The preferred shareholders are entitled to dividends out of assets legally available in preference to common shareholders at $0.48 per share when and if declared by the board of directors of the Company. Dividends are not cumulative.
Liquidation
In the event of liquidation, dissolution or windup, the preferred shareholders are entitled to receive the amount equal to the conversion price of $0.80 per share. In the event the legally assets of the Company are insufficient, then the asset will be distributed pro rata based on the amount the preferred shareholders are entitled.
Conversion
Each share of preferred stock may be converted at any time at the option of the holder at the conversion rate. Each share of preferred stock is automatically converted immediately prior to a firm commitment of an initial public offering or a written request from 60% of the preferred stock shareholder then outstanding.
Note 6 — Stock-Based Compensation
During 2018, the Company’s board of directors adopted its 2018 Stock Option Plan (“2018 Plan”), which was approved by its stockholders. The 2018 plan provides for the grants of restricted stock awards and nonqualified stock options to members of the Company’s the board of directors and the Company’s consultants. The plan allows for a maximum aggregate number of nonqualified stock options for 500,000 shares to be granted pursuant to the plan.
| | | | |
| Software development costs | | $ | 1,541,411 | |
| Less: accumulated amortization | | | (325,422 | ) |
| Total | | $ | 1,215,989 | |
SOLO SCIENCES, INC.
NotesAmortization expense amounted to Financial Statements
Note 6 — Stock-Based Compensation (cont.)
Restricted Common Stock Awards
During 2018, the Company granted 3.2 million restricted stock awards to nonemployees under the 2018 Plan at its fair value of $0.29 per share. The restricted stock awards generally vest ratably, on a monthly basis, over a three-year period.
On November 25, 2019, the Company’s shareholders entered into an agreement to sell 80.4% of their interest in the Company at a contracted value of $1.49 per share, the subsequent sale is described in Note 9. As a result of the increase in the fair value of unvested restricted shares, the Company recorded a true-up of previously recorded stock-based compensation relating to unvested restricted shares as of November 25, 2019. The Company recognized stock-based compensation costs of $1.7 million, of which $0.5 million was capitalized as software development costs. During the year ended December31, 2018, the Company recognized stock-based compensation costs related to these awards of $0.3 million, of which $0.1 million was capitalized as software development costs.
There were no grants of restricted stock awards$253,340 for the year ended December 31, 2019.2020.
The following table summarizes restricted stock activity during the years endedNAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Based on our net amortizable intangible asset balance of $1,215,989 at December 31, 20192020, we expect that amortization expense will be as follows for the next five years and 2018:thereafter:
| | | Number of
Shares | | | Weighted-
Average
fair value | |
| Outstanding and unvested, as of December 31, 2017 | | | — | | | $ | — | |
| Granted | | | 3,220,000 | | | $ | 0.29 | |
| Vested | | | (1,029,552 | ) | | $ | 0.29 | |
| Outstanding and unvested, as of December 31, 2018 | | | 2,190,448 | | | $ | 0.29 | |
| Forfeited | | | (20,000 | ) | | $ | 0.29 | |
| Vested | | | (789,440 | ) | | $ | 0.40 | |
| Outstanding and unvested, as of December 31, 2019 | | | 1,381,008 | | | $ | 1.49 | |
| Year ending December 31 | | | |
| 2021 | | $ | 275,171 | |
| 2022 | | | 305,030 | |
| 2023 | | | 305,030 | |
| 2024 | | | 262,999 | |
| 2025 | | | 67,759 | |
| Total | | $ | 1,215,989 | |
The aggregate fair valueNote 5 – Debt
Debt consists of restricted stock awards vested during each the years ended December 31, 2019 and 2018 was $0.3 million. There were no outstanding unvested restricted stock awardsfollowing as of December 31, 2019. Total intrinsic value of outstanding unvested restricted stock awards as of2020:
| Stockholder notes payable | | $ | 3,326,759 | |
| Convertible notes payable | | | 1,520,000 | |
| PPP Loan | | | 954,984 | |
| SBA Disaster Loan | | | 150,000 | |
| Total | | $ | 5,951,743 | |
Interest expense for the year ended December 31, 20192020 was $151,773.
Stockholder notes payable
In June 2017, the Company entered into a $2,000,000 note payable agreement with a stockholder. The note has a 0% stated interest rate, and 2018 was $2.1 million and $0.6 million.the entire principal balance is due upon maturity of June 13, 2022.
On January 15,In June 2018, the Company entered into a $1,326,759 note payable agreement with a second stockholder. The note has a 0% stated interest rate, and the entire principal balance is due upon maturity of June 20, 2023.
Convertible note payable
In June 2017, the Company entered into a convertible note payable agreement with a stockholder.
Effective December 23, 2020, and immediately priorthis note was assigned to the partial salean affiliate of the Company’s outstanding equity, as further described in Note9, the Company accelerated vesting of the then unvested restricted common stock awardsstockholder. The note allows for up to $1,750,000 to be borrowed at 12% per annum. Interest is paid monthly, and the shares pursuant to these agreements were converted toentire principal balance is due upon maturity of June 13, 2022.
The note is convertible into common stock of the Company on a one-for-one basis.
Nonqualified Stock Options
Stock options issued underat the Plan generally vest over a four-year period and expire ten years fromoption of the date of grant. Certain options provide for accelerated vesting if there islender or upon a change in control event, as defined in the Plan.agreement.
The note agreement contains certain financial covenants and the Company used Black-Scholes option pricing model to estimate stock-based compensation expense for stock option awards with the following assumptions for the years endedwas not in compliance as of December 31, 20192020, and 2018:therefore the entire outstanding principal balance of $1,520,000 is shown as current on the accompanying consolidated balance sheet.
| | | 2019 | | | 2018 | |
| Expected volatility | | | 1.89 | % | | | 1.97 | % |
| Risk-free interest rate | | | 1.53 | % | | | 2.63 | % |
| Expected dividend | | | — | | | | — | |
| Expected term (in years) | | | 5.00 | | | | 6.00 | |
| Underlying common stock fair value | | $ | 1.49 | | | $ | 0.29 | |
F-95
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SOLO SCIENCES, INC.
Notes to Financial Statements
Paycheck Protection Program (“PPP”) Loan
On April 29, 2020, the Company received a loan in the amount of $954,984 under the Paycheck Protection Program administered by the SBA. According to the Coronavirus Aid, Relief, and Economic Security Act (the “Cares Act”), PPP loan provides for forgiveness of up to the full principal amount and accrued interest if the funds are used for payroll costs, interest on mortgages, rent, and utilities. However, at least 60% of the forgiven amount must have been used for payroll. The loan bears interest at a rate of 1.00% per annum.
The entire loan (principal and accrued interest) was forgiven on June 30, 2021.
SBA Disaster Loan
In April 2020, the Company received a $2,000,000 loan under the Disaster Loan Assistance Program administered by the United States Small Business Administration (the “SBA”), which was repaid in full in May 2020. Then, in July 2020, the Company received a loan in the amount of $150,000 under the same program. The loan bears interest at a rate of 3.75% per annum and is a 30 year loan.
The future principal payments for the Company’s debt are as follows:
| Year ending December 31 | | | |
| 2021 | | $ | 1,522,586 | |
| 2022 | | | 2,960,156 | |
| 2023 | | | 1,331,931 | |
| 2024 | | | 5,172 | |
| 2025 | | | 131,898 | |
| Total | | $ | 5,951,743 | |
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Stock-Based Compensation(cont.)– Income Taxes
AsFor financial reporting purposes, net loss before provision for income taxes, includes the following components:
| Domestic | | $ | (1,516,485 | ) |
| Foreign | | | (234,429 | ) |
| Net loss before provision for income taxes | | $ | (1,750,914 | ) |
The provision for income taxes consists of the following:
| Current: | | | |
| Federal | | $ | - | |
| State | | | 6,204 | |
| Foreign | | | - | |
| Total Current | | $ | 6,204 | |
| | | | | |
| Deferred: | | | |
| Federal | | $ | - | |
| State | | | - | |
| Foreign | | | - | |
| Total Deferred | | $ | - | |
| | | | | |
| Provision for income taxes | | $ | 6,204 | |
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Income tax provision differs from the amount computed by applying the statutory as follows:
| Net loss before income taxes | | $ | (1,750,914 | ) |
| Statutory rate: | | | 21.00 | % |
| | | | | |
| Income Tax Expense at Statutory Rate | | | (367,692 | ) |
| State Tax Expense | | | 6,204 | |
| Foreign Tax Differential | | | (36,512 | ) |
| Nondeductible Perm | | | 41,022 | |
| PTBI Reported in PY Tax Return | | | 87,576 | |
| Uncertain Tax Position | | | 155,428 | |
| Change in Valuation Allowance | | | 127,168 | |
| Other | | | (6,990 | ) |
| Total | | $ | 6,204 | |
Below is a resultsummary of the Company’s shareholders’ agreementdeferred tax assets and liabilities:
Deferred Tax Assets and Liabilities
The deferred assets and liabilities consist of the following:
| | | | |
| Deferred Revenue | | $ | 163,383 | |
| Bad Debt Reserve | | | 53,975 | |
| Accrued Vacation | | | 296 | |
| NOL & Charitable Contribution CF | | | 807,111 | |
| Gross Deferred Tax Assets | | $ | 1,024,765 | |
| | | | | |
| Valuation Allowance | | $ | (947,363 | ) |
| | | | | |
| Property & Equipment | | | (15,651 | ) |
| Intangibles | | | (61,751 | ) |
| Deferred Tax Liabilities | | $ | (77,402 | ) |
| Total Deferred Asset / Liability | | $ | - | |
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2020 the Company has $3,650,863 federal net operating loss carryforwards, of which $667,770 has a carryforward period of 20 years and the remainder carry forward indefinitely. The federal NOLs begin to sell 80.4%expire in 2037. We have not reflected any benefit of their interestsuch net operating loss carryforwards in the accompanying consolidated financial statements. We have established a full valuation against the related deferred tax assets due to the uncertainty surrounding the realization of such assets. The utilization of the Company’s NOLs may be subject to annual Internal Revenue Code Section 382 limitations. The Company described above,has not yet completed a 382 study as of December 31, 2020
The Company has $2,191,851 of state net operating loss carryforwards with carryforward periods ranging from 15 to 20 years, with state statute period of 4 years. The state NOLs begin to expire in 2032. The Company has a foreign net operating loss carryforward of $608,604 with carryforward period of 20 years, with statute period of 4 years. The foreign NOLs begin to expire in 2037. We have not reflected any benefit of such net operating loss carryforwards in the accompanying consolidated financial statements. We have established a full valuation against the related deferred tax assets due to the uncertainty surrounding the realization of such assets.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and projects for future taxable income over periods in which the deferred tax assets are deductible. Management believes it is more likely than not that the Company will realize the benefits of these deductible differences. The change in valuation allowance during the year ended December 31, 2019,2020, was an increase of $127,168.
Management believes that there is an uncertain tax position for the previouslycumulative exclusion of deferred revenue and as such, has recognized stock-based compensation coststhis uncertain tax position against federal and state NOLs. There are no interest and penalties related to unvested stock optionsuncertain tax positions in 2020. The statute of limitation is 3 years for federal tax and years ending 3/31/18, 3/31/19 and 3/31/20 are open to examination. The statute of limitation is 4 years for state tax and the years ending 3/31/17, 3/31/18, 3/31/19 and 3/31/20 are open to examination. The Company currently is not under examination by any tax authority.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law on November 25, 2019 was adjustedMarch 27, 2020. The CARES Act, among other things, includes tax provisions relating to reflectrefundable payroll tax credits, deferment of employer's social security payments, net operating loss utilization and carryback periods and modifications to the increase innet interest deduction limitations. The CARES Act did not have a material impact on the estimated fair valueCompany’s income tax provision for 2020. The Company will continue to evaluate the impact of a common share.the CARES Act on its financial position, results of operations, and cash flows.
A summaryOn December 27, 2020, the President of option activity under the 2018 PlanUnited States signed the Consolidated Appropriations Act, 2021 (“Consolidated Appropriations Act”) into law. The Consolidated Appropriations Act is as follows:
| | | Number of
Options | | | Weighted-
Average
Exercise
Price per
Share | | | Weighted-
Average
Estimated
Grant Date
Fair Value | | | Weighted-
Average
Remaining
Contractual
Term
(in Years) | | | Aggregate
Intrinsic
Value | |
| Outstanding as of December 31, 2018 | | | 253,000 | | | $ | 0.80 | | | $ | 0.12 | | | | 9.78 | | | $ | 30,360 | |
| Granted | | | 240,000 | | | $ | 0.80 | | | | | | | | | | | | | |
| Forfeited | | | (109,000 | ) | | $ | 0.80 | | | | | | | | | | | | | |
| Outstanding as of December 31, 2019 | | | 384,000 | | | $ | 0.80 | | | $ | 0.75 | | | | 9.17 | | | $ | 288,000 | |
| Exercisable as of December 31, 2019 | | | 384,000 | | | $ | 0.80 | | | $ | 0.75 | | | | 9.18 | | | $ | 288,000 | |
| Vested and expected to vest as of December 31, 2019 | | | 384,000 | | | $ | 0.80 | | | $ | 0.75 | | | | 9.17 | | | $ | 288,000 | |
Stock-based compensation expenseintended to enhance and expand certain provisions of the CARES Act, allows for the deductions of expenses related to the Payroll Protection Program funds received by companies, and provides an update to meals and entertainment expensing for 2021. The Consolidated Appropriations Act did not have a material impact to the Company’s stock-based awardsincome tax provision for the yearsyear ended December 31, 20192020.
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Commitment and 2018Contingencies
Operating Lease
The Company leases one office facility under an operating lease arrangement which expires on April 30, 2024. Rent expense related to the Company’s operating leases was $77,000$211,343 for the year ended December 31, 2020. Future minimum payments, by year and $2,000, respectively, and is included in selling, general and administrative in the Company’s statements of operations. On January 15,aggregate, under operating leases at December 31, 2020, and immediately prior to the partial sale of the Company’s outstanding equity,are as further described in Note9, the Company exercised a cashless conversion of the then outstanding stock options for 178,124 shares of the Company’s common stock.follows:
Note 7 — Commitments and Contingencies
| Year ending December 31 | | Future Minimum
Payments | |
| 2021 | | $ | 246,978 | |
| 2022 | | | 254,376 | |
| 2023 | | | 262,008 | |
| 2024 | | | 89,956 | |
| Total future minimum lease payments | | $ | 853,318 | |
Litigation
From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business. The Company will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. As of December 31, 2019,2020, and through the date these financial statements were available to be issued, there were no legal proceedings requiring recognition or disclosure in the financial statements.
Contingencies
Note 8 — Income Taxes
For the years ended December 31, 2019 and 2018, the Company did not incur any current or deferred tax expense or benefit at the U.S. federal or state level. The Company’s effective tax rate for the years ended December 31, 2019 and 2018 was 0% because it is more likely than not that the Company will not be able to realize the tax benefit from deferred tax assets generated during the years. Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilitiesAs of the Company for financial reporting purposes and the amounts used for income tax purposes.
SOLO SCIENCES, INC.
Notes to Financial Statements
Note 8 — Income Taxes (cont.)
Significant componentsdate of our deferred taxthis report, there are no known contingent liabilities and assets are as follows:
| | | As of December 31, | |
| | | 2019 | | | 2018 | |
| Noncurrent deferred tax assets: | | | | | | |
| Federal net operating loss | | $ | 1,060,165 | | | $ | 283,058 | |
| Stock-based compensation | | | 188,722 | | | | 40,846 | |
| Total deferred tax assets | | | 1,248,936 | | | | 373,783 | |
| | | | | | | | | |
| Noncurrent deferred tax liabilities: | | | | | | | | |
| Software development costs | | $ | 675,500 | | | $ | 161,006 | |
| Intangible assets | | | 92,365 | | | | 35,871 | |
| Total deferred tax liabilities | | | 767,865 | | | | 196,877 | |
| | | | | | | | | |
| Valuation allowance | | | (481,071 | ) | | | (127,026 | ) |
| | | | | | | | | |
| Net deferred tax assets after valuation allowance | | $ | — | | | $ | — | |
During the years ended December 31, 2019 and 2018, valuation allowances on deferred tax assets that are not anticipated to be realized increased by $0.4 million and $0.1 million, respectively.
In accordance with the accounting requirements for stock-based compensation, we may recognize tax benefits in connection with the exercise of stock options by nonemployees and the vesting of restricted stock awards. We recognize the tax effects related to stock-based compensation through earnings in the period the compensation was recognized.
The Company had federal net operating loss carryforwards for which the deferred tax assets were approximately $1.1 million and $0.3 million, respectively, as of December 31, 2019 and 2018. The net operating loss carryforwards and do not expire. The Company has evaluated the realizability of its deferred tax assets by assessing the adequacy of expected taxable income, including the reversal of existing temporary differences, historical and projected operating results, and the availability of prudent and feasible tax planning strategies. Based on this analysis, the Company has determined that the valuation allowance recorded in the period presented are appropriate.
The Company is not currently under examination for the major jurisdictions where it conducts business as of December 31, 2019. Because the statute of limitations has not yet elapsed, the Company’s initial United States federal income tax return for the year ended December 31, 2018 is currently subject to examination by the Internal Revenue Service. The Company’s management does not believe that there are significant uncertain tax positions in 2019. There are no interest and penalties related to uncertain tax positions in 2019.2020.
Note 9 —8 – Subsequent Events
The Company has evaluated all subsequent events for financial statement purposes occurring through May 29, 2020,December 13, 2021, which is the date thesethe financial statements were ready for issuance.available to be issued.
On January 15, 2020, the Company’s shareholders sold 80.4% of their interests to Akerna in exchange for shares of Akerna’s common stock. Pursuant to the agreement, Akerna will provide $2.4 million of additional capital infusion toOctober 1, 2021, the Company during the 12months following the closing date.was acquired by Akerna has a 12-month option to acquire the remaining 19.6% interestCorp. (NASDAQ: KERN) for approximately $17 million, comprised of approximately $5 million in the Company. If Akerna does not exercise this option, the shareholders have a three-month option to repurchase between 40%cash and 55% of the interest$12 million in the Company. Immediately prior to the transaction, the Company’s directors elected to accelerate the vesting of all unvested stock options issued to nonemployees effected a cashless exercise of these options, resulting in the issuance of 178,124 common shares. Also, immediately prior to the transaction all outstanding shares of Series AA preferred stock were converted to common stock on a one-for-one basis.of Akerna Corp.
AKERNA CORP.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheet as of March 31, 2020September 30, 2021 and the unaudited pro forma condensed combined statements of operations for the yeartwelve months ended June 30, 2019December 31, 2020 and nine months ended March 31, 2020,September 30, 2021, are based on the historical financial statements of Akerna Corp. (“Akerna”, “we”, “our”), Solo Sciences and The NAV People, Inc. and Subsidiary (“Solo”NAV”) and Ample Organics Inc. (“Ample”), after giving effect to the acquisition of Solo, the probable exercise of the option to acquiring the remaining outstanding shares of Solo not held by Akerna, the acquisition of Ample (collectively “the Acquisitions”NAV (the “Acquisition”) and after applying the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements.
The unaudited pro forma condensed combined statements of operations for the yeartwelve months ended June 30, 2019December 31, 2020 and nine months ended March 31, 2020September 30, 2021 give effect to the AcquisitionsAcquisition as if theyit had occurred on JulyJanuary 1, 2018,2020, the first day of the first year presented.
The unaudited pro forma condensed combined balance sheet as of March 31, 2020,September 30, 2021, gives effect to the acquisition of Ample and the exercise of the Solo OptionAcquisition as if theyit had occurred on March 31, 2020. We have not exercised the Solo Option and we acquired Ample on July 7, 2020.September 30, 2021.
The partial acquisitionAcquisition of Solo and the acquisition of AmpleNAV has been and will be accounted for pursuant to Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 805, Business Combinations. The exercise of the Solo Option will also be accounted for pursuant to ASC 810, Consolidation. The total estimated consideration to be transferred, calculated as described in Note 1 to these unaudited pro forma condensed combined financial statements, is allocated to the net tangible assets and intangible assets of AmpleNAV acquired in connection with the acquisition,Acquisition, based on their estimated fair values as of the date of the acquisition,Acquisition, and the excess is allocated to goodwill. Akerna hasWe have made a preliminary allocation of the estimated purchase price to the tangible and intangible assets acquired and liabilities assumed. The acquisition accounting is dependent upon certain valuations and other studies that have yet to progress to a stage where there is sufficient information for a definitive measurement. We have made significant assumptions and estimates in determining the preliminary estimated purchase price and the preliminary allocation of the estimated purchase price in the unaudited pro forma condensed combined financial statements. These preliminary estimates and assumptions are subject to change during the estimated purchase price allocation period (generally one year from the acquisition date) as we finalize the valuations of the net intangible assets. The final valuations of identifiable intangible assets, fixed assets and deferred revenue and associated tax effects may change significantly from our preliminary estimates. Differences between these preliminary estimates and the final acquisition accounting could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and the combined company’s future results of operations and financial position. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma condensed combined financial statements.
The historical consolidated financial information has been adjusted in the unaudited pro forma condensed combinedconsolidated financial statements to give effect to pro forma events that are (1) directly attributable to the acquisition;Acquisition; (2) factually supportable; and (3) with respect to the unaudited pro forma condensed combinedconsolidated statements of operations, expected to have a continuing impact on the combined results.
The unaudited pro forma condensed consolidated financial statements have been prepared by management for illustrative purposes only and are not necessarily indicative of the consolidated results of operations or financial position of Akerna that would have been reported had the AcquisitionsAcquisition been completed as of the dates presented and should not be taken as representative of the future consolidated results of operations or financial position of Akerna. The unaudited pro forma financial statements do not reflect any operating efficiencies and cost savings that Akerna may achieve, or any additional expenses that it may incur, with respect to the combined companies.
The unaudited pro forma condensed combined financial statements, including the notes thereto should be read in conjunction with:
| ● | The accompanying notes to the unaudited pro forma condensed combined financial statements; |
| ● | OurThe audited consolidated financial statements, andthe accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Akerna Corp.’s Transition Report on Form 10-KT for the period ended December 31, 2020 which was filed with the Securities and Exchange Commission ("SEC") on March 31, 2021 (the "Akerna 2020 10-K"); |
| ● | The unaudited condensed consolidated financial statements, the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-Q for the three and nine months ended September 30, 2021 which was filed with the SEC on November 12, 2021; |
| ● | The unaudited condensed consolidated financial statements, the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-Q for the three and six months ended June 30, 2021 which was filed with the SEC on August 12, 2021; |
| ● | The unaudited condensed consolidated financial statements, the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-Q for the three months ended March 31, 2021 which was filed with the SEC on May 21, 2021; |
| ● | NAV’s audited financial statements as of and for the year ended June 30, 2019 and 2018,December 31, 2020, included elsewhere in this Prospectus;Current Report on Form 8-K/A; |
| ● | OurNAV’s unaudited condensedcondensed consolidated interim financial statements as of and for the three and nine months ended March 31, 2020 and 2019,September 30, 2021, included elsewhere in this Prospectus;Current Report on Form 8-K/A; |
| ● | Ample’s unaudited condensed consolidated interim financial statements as of and for the three months ended March 31, 2020 and 2019, included elsewhere in this Prospectus; |
| ● | Ample’s audited consolidated financial statements as of and for the years ended December 31, 2019 and 2018, included elsewhere in this Prospectus, and |
| ● | Solo’s audited financial statements as of and for the years ended December 31, 2019 and 2018, included elsewhere in this Prospectus. |
On January 15, 2020, we closed on a stock purchase agreement with substantially all of the shareholders of Solo pursuant to which we acquired all right, title and interest in 80.40% of the issued and outstanding capital stock of Solo, calculated on a fully diluted basis. As a result of our investment, Solo became a controlled subsidiary and we commenced consolidation of Solo on January 15, 2020, the results of which are included in our March 31, 2020 unaudited condensed consolidated balance sheet.
We have the option to acquire the remaining 19.6% equity interest in Solo for either cash or Akerna shares in an amount dependent upon the market value of Akerna shares. This transaction would be accounted for as an equity transaction with the difference between the fair value of the consideration exchanged and the carrying value of the non-controlling interest recorded in additional paid in capital.
F-98
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of March 31, 2020
AS OF SEPTEMBER 30, 2021
| | | Historical | | | | | | IFRS to US | | | | | | | | | |
| | | Akerna Corp. | | | Ample
(Note 1)
CAD$ | | | Ample
(USD) | | | GAAP
Adjustments
Note 2 | | | Pro forma
adjustments | | | Note 2 | | Pro forma
combined | |
| ASSETS | | | | | | | | | | | | | | | | | | | | |
| CURRENT ASSETS: | | | | | | | | | | | | | | | | | | | | |
| Cash | | $ | 14,309,996 | | | | CAD 1,144,834 | | | $ | 814,017 | | | $ | — | | | $ | (5,332,765 | ) | | A | | $ | 9,791,248 | |
| Restricted cash | | | 500,000 | | | | — | | | | — | | | | — | | | | — | | | | | | 500,000 | |
| Accounts receivable, net | | | 1,324,051 | | | | 1,553,158 | | | | 1,104,350 | | | | — | | | | — | | | | | | 2,428,401 | |
| Inventory | | | — | | | | 26,810 | | | | 19,063 | | | | — | | | | — | | | | | | 19,063 | |
| Prepaid expenses and other current assets | | | 1,762,371 | | | | 228,804 | | | | 162,688 | | | | — | | | | — | | | | | | 1,925,059 | |
| Total current assets | | | 17,896,418 | | | | 2,953,606 | | | | 2,100,118 | | | | — | | | | (5,332,765 | ) | | | | | 14,663,771 | |
| Property and equipment, net | | | 65,582 | | | | 1,896,538 | | | | 1,348,505 | | | | — | | | | — | | | | | | 1,414,087 | |
| Goodwill | | | — | | | | 4,542,224 | | | | 3,229,681 | | | | — | | | | 21,796,594 | | | B | | | 25,026,275 | |
| Intangible assets, net | | | 23,136,584 | | | | 1,231,637 | | | | 875,737 | | | | — | | | | 5,724,263 | | | C | | | 29,736,584 | |
| Right of use asset | | | — | | | | 2,566,826 | | | | 1,825,104 | | | | (1,825,104 | ) | | | — | | | D | | | — | |
| Investments | | | 250,000 | | | | — | | | | — | | | | — | | | | — | | | | | | 250,000 | |
| TOTAL ASSETS | | $ | 41,348,584 | | | | CAD 13,190,831 | | | $ | 9,379,145 | | | $ | (1,825,104 | ) | | $ | 22,188,092 | | | | | $ | 71,090,717 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 4,025,199 | | | | CAD 1,498,116 | | | $ | 1,065,213 | | | $ | — | | | $ | — | | | | | $ | 5,090,412 | |
| Short-term debt, current | | | — | | | | 5,779,432 | | | | 4,109,380 | | | | — | | | | — | | | | | | 4,109,380 | |
| Lease liabilities | | | — | | | | 541,368 | | | | 384,932 | | | | (384,932 | ) | | | — | | | D | | | — | |
| Deferred revenue, current | | | 743,317 | | | | 501,940 | | | | 356,897 | | | | — | | | | — | | | | | | 1,100,214 | |
| Total current liabilities | | | 4,768,516 | | | | 8,320,856 | | | | 5,916,422 | | | | (384,932 | ) | | | — | | | | | | 10,300,006 | |
| Lease liabilities | | | — | | | | 3,035,642 | | | | 2,158,449 | | | | (2,158,449 | ) | | | — | | | D | | | — | |
| Preferred stock liabilities | | | — | | | | 13,758,104 | | | | 9,782,497 | | | | — | | | | (9,782,497 | ) | | E | | | — | |
| Deferred tax liabilities | | | — | | | | 326,384 | | | | 232,071 | | | | — | | | | — | | | | | | 232,071 | |
| TOTAL LIABILITIES | | | 4,768,516 | | | | 25,440,986 | | | | 18,089,439 | | | | (2,543,381 | ) | | | (9,782,497 | ) | | | | | 10,532,077 | |
| | | | | | | | | | | | | | | | | | | | | |
| STOCKHOLDERS’ EQUITY: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Warrants | | | — | | | | 823,778 | | | | 585,735 | | | | — | | | | (585,735 | ) | | E | | | — | |
| Preferred stock | | | — | | | | — | | | | — | | | | — | | | | 23,978,572 | | | F | | | 23,978,572 | |
| Common stock | | | 1,286 | | | | 14,345,721 | | | | 10,934,970 | | | | — | | | | (10,934,970 | ) | | E | | | 1,286 | |
| Additional paid-in capital | | | 69,916,857 | | | | 777,274 | | | | 592,670 | | | | — | | | | 4,169,588 | | | E,G | | | 74,679,115 | |
| Accumulated other comprehensive loss | | | — | | | | — | | | | 554,457 | | | | — | | | | (554,457 | ) | | E | | | — | |
| Accumulated deficit | | | (38,100,333 | ) | | | (28,196,928 | ) | | | (21,378,126 | ) | | | 718,277 | | | | 20,659,849 | | | D,E | | | (38,100,333 | ) |
| TOTAL STOCKHOLDERS’ EQUITY | | | 31,817,810 | | | | (12,250,155 | ) | | | (8,710,294 | ) | | | 718,277 | | | | 36,732,847 | | | | | | 60,558,640 | |
| Noncontrolling interests in consolidated subsidiary | | | 4,762,258 | | | | — | | | | — | | | | — | | | | (4,762,258 | ) | | G | | | — | |
| TOTAL EQUITY | | | 36,580,068 | | | | (12,250,155 | ) | | | (8,710,294 | ) | | | 718,277 | | | | 31,970,589 | | | | | | 60,558,640 | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 41,348,584 | | | | CAD 13,190,831 | | | $ | 9,379,145 | | | $ | (1,825,104 | ) | | $ | 22,188,092 | | | | | $ | 71,090,717 | |
| | | Akerna
Corp. | | | The NAV
People,
Inc. &
Subsidiary
(Note 1) | | | Pro forma
adjustments | | | Note 3 | | Pro forma
combined | |
| ASSETS | | | | | | | | | | | | | | |
| CURRENT ASSETS: | | | | | | | | | | | | | | |
| Cash | | $ | 9,608,788 | | | $ | 531,723 | | | $ | (5,606,017 | ) | | A | | $ | 4,534,494 | |
| Restricted cash | | | 508,261 | | | | – | | | | – | | | | | | 508,261 | |
| Accounts receivable, net | | | 1,647,619 | | | | 961,140 | | | | – | | | | | | 2,608,759 | |
| Prepaid expenses and other current assets | | | 2,194,221 | | | | 266,826 | | | | – | | | | | | 2,461,047 | |
| Total current assets | | | 13,958,889 | | | | 1,759,689 | | | | (5,606,107 | ) | | | | | 10,112,561 | |
| Fixed assets, net | | | 52,322 | | | | 92,437 | | | | – | | | | | | 144,759 | |
| Investments, net | | | 226,101 | | | | – | | | | – | | | | | | 226,101 | |
| Capitalized software, net | | | 6,167,413 | | | | – | | | | – | | | | | | 6,167,413 | |
| Intangible assets, net | | | 7,311,541 | | | | 1,362,710 | | | | 4,244,507 | | | C | | | 12,918,758 | |
| Goodwill | | | 46,790,018 | | | | – | | | | 21,037,766 | | | B | | | 67,827,784 | |
| Deposits | | | – | | | | 11,361 | | | | – | | | | | | 11,361 | |
| TOTAL ASSETS | | $ | 74,506,284 | | | $ | 3,226,197 | | | $ | 19,676,256 | | | | | $ | 97,408,737 | |
| | | | | | | | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | | | | | | | | | | | |
| Accounts payable, accrued expenses and other accrued liabilities | | $ | 5,185,519 | | | | | | | $ | 944,806 | | | A, E, G | | $ | 6,130,325 | |
| Accounts payable | | | – | | | | 384,697 | | | | (384,697 | ) | | E | | | – | |
| Accrued expenses | | | – | | | | 500,185 | | | | (500,185 | ) | | E | | | – | |
| Convertible note payable | | | – | | | | 1,520,000 | | | | (1,520,000 | ) | | A | | | – | |
| Deferred revenue | | | 908,256 | | | | 2,448,982 | | | | (431,411 | ) | | F | | | 2,925,827 | |
| Derivative liability | | | 160,201 | | | | – | | | | – | | | | | | 160,201 | |
| Total current liabilities | | | 6,253 ,976 | | | | 4,853,864 | | | | (1,891,487 | ) | | | | | 9,216,353 | |
| Long-term debt, less current portion | | | 3,834,001 | | | | – | | | | – | | | | | | 3,834,001 | |
| Stockholder notes payable | | | – | | | | 3,496,759 | | | | (3,496,759 | ) | | A | | | – | |
| Notes payable | | | – | | | | 148,817 | | | | (148,817 | ) | | A | | | – | |
| TOTAL LIABILITIES | | | 10,087,977 | | | | 8,499,440 | | | | (5,537,063 | ) | | | | | 13,050,354 | |
| STOCKHOLDERS' EQUITY: | | | | | | | | | | | | | | | | | | |
| Special voting preferred stock | | | 2,952,495 | | | | – | | | | – | | | | | | 2,952,495 | |
| Common stock | | | 2,717 | | | | 5,000 | | | | (4,643 | ) | | A, D | | | 3,074 | |
| Additional paid-in capital | | | 132,803,659 | | | | 2,000 | | | | 20,020,463 | | | A, D | | | 152,826,122 | |
| Accumulated other comprehensive loss | | | (44,639 | ) | | | (11,410 | ) | | | (11,410 | ) | | D | | | (67,459 | ) |
| Accumulated deficit | | | (71,295,925 | ) | | | (5,268,833 | ) | | | 5,208,909 | | | D, G | | | (71,355,849 | ) |
| TOTAL STOCKHOLDERS' EQUITY | | | 64,418,307 | | | | (5,273,243 | ) | | | 25,213,319 | | | | | | 84,358,383 | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 74,506,284 | | | $ | 3,226,197 | | | $ | 19,676,256 | | | | | $ | 97,408,737 | |
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information
F-99
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEARTWELVE MONTHS ENDED JUNE 30, 2019DECEMBER 31, 2020
| | | Historical | | | | | | | | | |
| | | Akerna
Corp. | | | Solo | | | Pro forma
adjustments | | | Note 3 | | Pro forma
Combined | |
| Net revenue: | | | | | | | | | | | | | | |
| Software | | $ | 8,256,492 | | | $ | — | | | $ | — | | | | | $ | 8,256,492 | |
| Consulting | | | 2,403,797 | | | | — | | | | — | | | | | | 2,403,797 | |
| Other | | | 259,496 | | | | 14,770 | | | | — | | | | | | 274,266 | |
| Total net revenue | | | 10,919,785 | | | | 14,770 | | | | — | | | | | | 10,934,555 | |
| Cost of revenue | | | 4,633,844 | | | | 1,170 | | | | — | | | | | | 4,635,014 | |
| Gross profit | | | 6,285,941 | | | | 13,600 | | | | — | | | | | | 6,299,541 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Product development | | | 5,565,097 | | | | 7,787 | | | | — | | | | | | 5,572,884 | |
| Selling, general and administrative | | | 13,136,522 | | | | 1,038,017 | | | | 778,597 | | | A,B | | | 14,953,136 | |
| Total operating expenses | | | 18,701,619 | | | | 1,045,805 | | | | 778,597 | | | | | | 20,526,020 | |
| Loss from operations | | | (12,415,678 | ) | | | (1,032,204 | ) | | | (778,597 | ) | | | | | (14,226,479 | ) |
| Interest income, net | | | 91,239 | | | | 1,146 | | | | — | | | | | | 92,385 | |
| Other income | | | 17,892 | | | | — | | | | — | | | | | | 17,892 | |
| Loss before provision for income taxes | | | (12,306,547 | ) | | | (1,031,058 | ) | | | (778,597 | ) | | | | | (14,116,202 | ) |
| Provision for income taxes | | | — | | | | — | | | | — | | | | | | — | |
| Net loss | | $ | (12,306,547 | ) | | $ | (1,031,058 | ) | | $ | (778,597 | ) | | | | $ | (14,116,202 | ) |
| Net loss per share | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (2.04 | ) | | | | | | | | | | | | $ | (1.60 | ) |
| Diluted | | $ | (2.04 | ) | | | | | | | | | | | | $ | (1.60 | ) |
| Shares used in computing loss per share: | | | | | | | | | | | | | | | | | | |
| Basic | | | 6,045,382 | | | | | | | | 2,750,000 | | | C | | | 8,795,382 | |
| Diluted | | | 6,045,382 | | | | | | | | 2,750,000 | | | C | | | 8,795,382 | |
| | | Akerna
Corp.
(Note 1) | | | The NAV
People,
Inc. &
Subsidiary
(Note 1) | | | Pro forma
adjustments | | | Note 4 | | Pro forma
combined | |
| | | | | | | | | | | | | | | |
| Revenue | | | | | | | | | | | | | | |
| Software | | $ | 11,963,028 | | | | | | | $ | 7,108,536 | | | A | | $ | 19,071,564 | |
| Consulting | | | 1,739,683 | | | | | | | | – | | | | | | 1,739,683 | |
| Other | | | 196,257 | | | | 426,293 | | | | – | | | | | | 622,550 | |
| Recurring revenue | | | – | | | | 4,875,121 | | | | (4,875,121 | ) | | A | | | – | |
| Services revenue | | | – | | | | 2,233,415 | | | | (2,233,415 | ) | | A | | | – | |
| Total net revenue | | | 13,898,968 | | | | 7,534,829 | | | | – | | | | | | 21,433,797 | |
| Cost of revenue | | | 6,355,825 | | | | 2,202,534 | | | | – | | | | | | 8,558,359 | |
| Gross Profit | | | 7,543,143 | | | | 5,332,295 | | | | – | | | | | | 12,875,438 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Product development | | | 5,129,814 | | | | – | | | | – | | | | | | 5,129,814 | |
| Sales and marketing | | | 8,085,897 | | | | 46,954 | | | | – | | | | | | 8,132,851 | |
| General and administrative | | | 11,018,356 | | | | 784,785 | | | | 5,798,166 | | | A | | | 17,601,307 | |
| Operations and support | | | – | | | | 5,374,077 | | | | (5,374,077 | ) | | A | | | – | |
| Bad debt expense | | | – | | | | 424,089 | | | | (424,089 | ) | | A | | | – | |
| Depreciation and amortization | | | 3,223,844 | | | | 301,064 | | | | 542,799 | | | B | | | 4,067,707 | |
| Impairment of long-lived assets | | | 6,887,000 | | | | – | | | | – | | | | | | 6,887,000 | |
| Total operating expenses | | | 34,344,911 | | | | 6,930,969 | | | | 542,799 | | | | | | 41,818,679 | |
| Loss from operations | | | (26,801,768 | ) | | | (1,598,674 | ) | | | (542,799 | ) | | | | | (28,943,241 | ) |
| Other income (expense): | | | | | | | | | | | – | | | | | | – | |
| Interest income (expense) | | | (161,646 | ) | | | (151,773 | ) | | | 151,773 | | | C | | | (161,646 | ) |
| Change in fair value of convertible notes | | | (195,273 | ) | | | – | | | | – | | | | | | (195,273 | ) |
| Change in fair value of derivative liability | | | 376,811 | | | | – | | | | – | | | | | | 376,811 | |
| Other income (expense), net | | | (59,397 | ) | | | (467 | ) | | | – | | | | | | (59,864 | ) |
| Net loss before income taxes and equity in losses of investee | | | (26,841,273 | ) | | | (1,750,914 | ) | | | (391,026 | ) | | | | | (28,983,213 | ) |
| Income tax expense | | | (31,185 | ) | | | (6,204 | ) | | | – | | | | | | (37,389 | ) |
| Equity in losses of investee | | | (16,335 | ) | | | – | | | | – | | | | | | (16,335 | ) |
| Net income (loss) | | $ | (26,888,793 | ) | | $ | (1,757,118 | ) | | $ | (391,026 | ) | | | | $ | (29,036,937 | ) |
| Earnings per share | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (1.87 | ) | | | | | | | | | | | | $ | (1.61 | ) |
| Diluted | | $ | (1.87 | ) | | | | | | | | | | | | $ | (1.61 | ) |
| Shares used in computing earnings per share | | | | | | | | | | | | | | | | | | |
| Basic | | | 14,409,780 | | | | | | | | 3,571,429 | | | | | | 17,981,209 | |
| Diluted | | | 14,409,780 | | | | | | | | 3,571,429 | | | | | | 17,981,209 | |
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information
F-100
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEARNINE MONTHS ENDED JUNESEPTEMBER 30, 20192021
| | | Historical | | | | | | | | | | | | | | | |
| | | Akerna Corp.
with Solo
acquisition | | | Ample
(CAD$) | | | Ample
(USD) | | | IFRS to
US GAAP
Adjustments | | | Pro forma
adjustments | | | Note 3 | | Pro forma
Combined | |
| Net revenue: | | | | | | | | | | | | | | | | | | | | |
| Software | | $ | 8,256,492 | | | CAD | 6,839,407 | | | $ | 5,165,876 | | | $ | — | | | $ | — | | | | | $ | 13,422,368 | |
| Consulting | | | 2,403,797 | | | | — | | | | — | | | | — | | | | — | | | | | | 2,403,797 | |
| Other | | | 274,266 | | | | — | | | | — | | | | — | | | | — | | | | | | 274,266 | |
| Total net revenue | | | 10,934,555 | | | | 6,839,407 | | | | 5,165,876 | | | | — | | | | — | | | | | | 16,100,431 | |
| Cost of revenue | | | 4,635,014 | | | | 4,249,276 | | | | 3,209,523 | | | | — | | | | — | | | | | | 7,844,537 | |
| Gross profit | | | 6,299,541 | | | | 2,590,131 | | | | 1,956,353 | | | | — | | | | — | | | | | | 8,255,894 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Product development | | | 5,572,884 | | | | 7,212,904 | | | | 5,447,982 | | | | — | | | | — | | | | | | 11,020,866 | |
| Sales, general and administrative | | | 14,953,136 | | | | 7,442,291 | | | | 5,621,240 | | | | — | | | | 966,264 | | | A,B | | | 21,540,640 | |
| Loss on fair value of preferred share liabilities | | | — | | | | 4,631,453 | | | | 3,498,185 | | | | — | | | | (3,498,185 | ) | | C | | | — | |
| Total operating expenses | | | 20,526,021 | | | | 19,286,648 | | | | 14,567,407 | | | | — | | | | (2,531,921 | ) | | | | | 32,561,506 | |
| Loss from operations | | | (14,226,479 | ) | | | (16,696,517 | ) | | | (12,611,054 | ) | | | — | | | | — | | | | | | (24,305,612 | ) |
| Interest income, net | | | 92,385 | | | | — | | | | — | | | | — | | | | — | | | | | | 92,385 | |
| Other income, net | | | 17,892 | | | | — | | | | — | | | | — | | | | — | | | | | | 17,892 | |
| Loss before provision for income taxes | | | (14,116,202 | ) | | | (16,696,517 | ) | | | (12,611,054 | ) | | | — | | | | 2,531,921 | | | | | | (24,195,335 | ) |
| Provision for income taxes | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | — | |
| Net loss | | $ | (14,116,202 | ) | | CAD | (16,696,517 | ) | | $ | (12,611,054 | ) | | $ | — | | | $ | 2,531,921 | | | | | $ | (24,195,335 | ) |
| Net loss per share: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (1.60 | ) | | | | | | | | | | | | | | | | | | | | $ | (2.75 | ) |
| Diluted | | $ | (1.60 | ) | | | | | | | | | | | | | | | | | | | | $ | (2.75 | ) |
| Shares used in computing earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 8,795,382 | | | | | | | | | | | | | | | | | | | | | | 8,795,382 | |
| Diluted | | | 8,795,382 | | | | | | | | | | | | | | | | | | | | | | 8,795,382 | |
| | | Akerna
Corp. | | | The NAV
People,
Inc. &
Subsidiary | | | Pro forma
adjustments | | | Note 5 | | Pro forma
combined | |
| | | | | | | | | | | | | | | |
| Revenues | | | | | | | | | | | | | | |
| Software | | $ | 12,809,841 | | | | – | | | $ | 6,469,240 | | | A | | $ | 19,279,081 | |
| Consulting | | | 1,135,033 | | | | – | | | | – | | | | | | 1,135,033 | |
| Other | | | 111,540 | | | | 685,213 | | | | – | | | | | | 796,753 | |
| Recurring revenue | | | – | | | | 4,397,990 | | | | (4,397,990 | ) | | A | | | – | |
| Services revenue | | | – | | | | 2,071,250 | | | | (2,071,250 | ) | | A | | | – | |
| Total revenues | | | 14,056,414 | | | | 7,154,453 | | | | – | | | | | | 21,210,867 | |
| Cost of revenue | | | 5,339,929 | | | | 1,913,331 | | | | – | | | | | | 7,253,260 | |
| Gross Profit | | | 8,716,485 | | | | 5,241,122 | | | | – | | | | | | 13,957,607 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Product development | | | 4,517,836 | | | | – | | | | | | | | | | 4,517,836 | |
| Sales and marketing | | | 5,564,519 | | | | 35,213 | | | | – | | | | | | 5,599,732 | |
| General and administrative | | | 8,306,417 | | | | 543,784 | | | | 4,691,077 | | | D, A | | | 13,541,278 | |
| Operations and support | | | – | | | | 4,584,170 | | | | (4,584,170 | ) | | A | | | – | |
| Bad debt expense | | | – | | | | 286,094 | | | | (286,094 | ) | | A | | | – | |
| Acquisition costs | | | – | | | | 172,550 | | | | (172,550 | ) | | A | | | – | |
| Depreciation and amortization | | | 3,605,435 | | | | 189,664 | | | | 439,218 | | | B | | | 4,234,317 | |
| Total operating expenses | | | 21,994,207 | | | | 5,811,475 | | | | 87,481 | | | | | | 27,893,163 | |
| Loss from operations | | | (13,277,722 | ) | | | (570,353 | ) | | | (87,481 | ) | | | | | (13,935,556 | ) |
| Other (expense) income: | | | | | | | | | | | | | | | | | | |
| Interest (expense) income, net | | | (1,175,789 | ) | | | (161,029 | ) | | | 161,029 | | | C | | | (1,175,789 | ) |
| Change in fair value of convertible notes | | | (2,030,904 | ) | | | – | | | | – | | | | | | (2,030,904 | ) |
| Change in fair value of derivative liability | | | 151,175 | | | | – | | | | – | | | | | | 151,175 | |
| Gain on forgiveness of PPP Loan | | | 2,234,730 | | | | 954,984 | | | | – | | | | | | 3,189,714 | |
| Other (expense) income, net | | | 243 | | | | (19,585 | ) | | | – | | | | | | (19,342 | ) |
| Total other (expense) income | | | (820,545 | ) | | | 774,370 | | | | 161,029 | | | | | | 114,854 | |
| Net loss before income taxes and equity in losses of investee | | | (14,098,267 | ) | | | 204,017 | | | | 73,548 | | | | | | (13,820,702 | ) |
| Income tax expense | | | (10,570 | ) | | | (5,251 | ) | | | – | | | | | | (15,821 | ) |
| Equity in losses of investee | | | (7,564 | ) | | | – | | | | – | | | | | | (7,564 | ) |
| Net loss before income taxes and equity in losses of investee | | $ | (14,116,401 | ) | | $ | 198,766 | | | $ | 73,548 | | | | | $ | (13,844,087 | ) |
| Earnings per share | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (0.58 | ) | | | | | | | | | | | | $ | (0.50 | ) |
| Diluted | | $ | (0.58 | ) | | | | | | | | | | | | $ | (0.50 | ) |
| Shares used in computing earnings per share | | | | | | | | | | | | | | | | | | |
| Basic | | | 24,312,510 | | | | | | | | 3,571,429 | | | | | | 27,883,939 | |
| Diluted | | | 24,312,510 | | | | | | | | 3,571,429 | | | | | | 27,883,939 | |
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information
F-101
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2020
| | | Historical | | | | | | | | | |
| | | Akerna
Corp. | | | Solo | | | Pro forma
adjustments | | | Note 4 | | Pro forma
Combined | |
| Net revenue: | | | | | | | | | | | | | | |
| Software | | $ | 7,148,964 | | | $ | — | | | $ | — | | | | | $ | 7,148,964 | |
| Consulting | | | 2,248,947 | | | | — | | | | — | | | | | | 2,248,947 | |
| Other | | | 171,727 | | | | 90,000 | | | | — | | | | | | 261,727 | |
| Total net revenue | | | 9,569,638 | | | | 90,000 | | | | — | | | | | | 9,659,638 | |
| Cost of revenue | | | 4,457,110 | | | | 3,064 | | | | — | | | | | | 4,460,174 | |
| Gross profit | | | 5,112,528 | | | | 86,936 | | | | — | | | | | | 5,199,464 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Product development | | | 4,024,743 | | | | 57,195 | | | | — | | | | | | 4,081,938 | |
| Sales, general and administrative | | | 13,881,055 | | | | 2,495,011 | | | | (1,115,720 | ) | | A,B,C | | | 15,260,346 | |
| Total operating expenses | | | 17,905,798 | | | | 2,552,206 | | | | (1,115,720 | ) | | | | | 19,342,284 | |
| Loss from operations | | | (12,793,270 | ) | | | (2,465,270 | ) | | | 1,115,720 | | | | | | (14,142,820 | ) |
| Gain on sale of business | | | — | | | | — | | | | — | | | | | | — | |
| Interest income, net | | | 158,762 | | | | 3,785 | | | | — | | | | | | 162,547 | |
| Other expense, net | | | (254 | ) | | | — | | | | — | | | | | | (254 | ) |
| Loss before provision for income taxes | | | (12,634,762 | ) | | | (2,461,485 | ) | | | 1,115,720 | | | | | | (13,980,527 | ) |
| Provision for income taxes | | | — | | | | — | | | | — | | | | | | — | |
| Net loss | | | (12,634,762 | ) | | | (2,461,485 | ) | | | 1,115,720 | | | | | | (13,980,527 | ) |
| Net loss attributable to noncontrolling interests in subsidiary | | | 101,175 | | | | — | | | | (101,175 | ) | | D | | | — | |
| Net loss attributable to Akerna stockholders | | $ | (12,533,587 | ) | | $ | (2,461,485 | ) | | $ | 1,014,545 | | | | | $ | (13,980,527 | ) |
| Net loss per share: | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (1.11 | ) | | | | | | | | | | | | $ | (0.99 | ) |
| Diluted | | $ | (1.11 | ) | | | | | | | | | | | | $ | (0.99 | ) |
| Shares used in computing earnings per share: | | | | | | | | | | | | | | | | | | |
| Basic | | | 11,299,997 | | | | | | | | 2,750,000 | | | E | | | 14,049,997 | |
| Diluted | | | 11,299,997 | | | | | | | | 2,750,000 | | | E | | | 14,049,997 | |
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2020
| | | Historical | | | | | | | | | | | | | | | |
| | | Akerna Corp.
with Solo
Acquisition | | | Ample
(CAD$) | | | Ample
(USD) | | | IFRS to
US GAAP
Adjustments | | | Pro forma
adjustments | | | Note 3 | | Pro forma
Combined | |
| Net revenue: | | | | | | | | | | | | | | | | | | | | |
| Software | | $ | 7,148,964 | | | CAD | 5,780,957 | | | $ | 4,353,490 | | | $ | — | | | $ | — | | | | | $ | 11,502,454 | |
| Consulting | | | 2,248,947 | | | | — | | | | — | | | | — | | | | — | | | | | | 2,248,947 | |
| Other | | | 261,727 | | | | — | | | | — | | | | — | | | | — | | | | | | 261,727 | |
| Total net revenue | | | 9,659,638 | | | | 5,780,957 | | | | 4,353,490 | | | | — | | | | — | | | | | | 14,013,128 | |
| Cost of revenue | | | 4,460,174 | | | | 2,771,134 | | | | 2,086,870 | | | | — | | | | — | | | | | | 6,547,044 | |
| Gross profit | | | 5,199,464 | | | | 3,009,823 | | | | 2,266,620 | | | | — | | | | — | | | | | | 7,466,084 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Product development | | | 4,081,938 | | | | 1,929,286 | | | | 1,452,896 | | | | — | | | | — | | | | | | 5,534,834 | |
| Sales, general and administrative | | | 15,260,346 | | | | 6,060,879 | | | | 4,564,292 | | | | — | | | | (267,864 | ) | | A,B,D | | | 19,556,774 | |
| Loss on fair value of preferred share liabilities | | | — | | | | 3,855,453 | | | | 2,903,442 | | | | — | | | | (2,903,442 | ) | | C | | | — | |
| Total operating expenses | | | 19,342,284 | | | | 11,845,618 | | | | 8,920,630 | | | | — | | | | (3,171,306 | ) | | | | | 25,091,608 | |
| Loss from operations | | | (14,142,820 | ) | | | (8,835,795 | ) | | | (6,654,010 | ) | | | — | | | | 3,171,306 | | | | | | (17,625,524 | ) |
| Interest income, net | | | 162,547 | | | | — | | | | — | | | | — | | | | — | | | | | | 162,547 | |
| Other expense, net | | | (254 | ) | | | (25,000 | ) | | | (18,827 | ) | | | — | | | | — | | | | | | (19,081 | ) |
| Loss before provision for income taxes | | | (13,980,527 | ) | | | (8,860,795 | ) | | | (6,672,837 | ) | | | — | | | | 3,171,306 | | | | | | (17,482,058 | ) |
| Provision for income taxes | | | — | | | | 21,984 | | | | 16,556 | | | | — | | | | — | | | | | | 16,556 | |
| Net loss | | $ | (13,980,527 | ) | | CAD | (8,838,811 | ) | | $ | (6,656,281 | ) | | $ | — | | | $ | 3,171,306 | | | | | $ | (17,465,502 | ) |
| Net loss per share: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (0.99 | ) | | | | | | | | | | | | | | | | | | | | $ | (1.24 | ) |
| Diluted | | $ | (0.99 | ) | | | | | | | | | | | | | | | | | | | | $ | (1.24 | ) |
| Shares used in computing earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 14,049,997 | | | | | | | | | | | | | | | | | | | | | | 14,049,997 | |
| Diluted | | | 14,049,997 | | | | | | | | | | | | | | | | | | | | | | 14,049,997 | |
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information
Note 1: Basis of Pro Forma Presentation
Accounting Periods Presented — Ample, Solo
The unaudited pro forma condensed combined balance sheet as of March 31, 2020,September 30, 2021, is presented as if the AmpleNAV acquisition had occurred and the Solo Option had been exercised on March 31, 2020.September 30, 2021. Certain pro forma adjustments to record differences between historical book values and preliminary values as of the date of the pro forma condensed combined financial statements are based on the assumption that the acquisitionAcquisition occurred on March 31, 2020.September 30, 2021. The actual adjustments to be recorded in Akerna’s consolidated financial statements will be as of the acquisition date and the option exercise date, respectively.date.
The unaudited pro forma condensed combined statements of operations of Akerna Solo and AmpleNAV for the yeartwelve months ended June 30, 2019December 31, 2020 and the nine months ended on March 31, 2020,September 30, 2021, are presented as if the AcquisitionsAcquisition had taken place on JulyJanuary 1, 2018.2020. As disclosed in the Akerna 2020 10-K, we changed our fiscal year from June 30 to December 31. In the Akerna 2020 10-K we presented the Consolidated statements of operations for the fiscal year ended June 30, 2020 and the transition period for the six months ended December 31, 2020. For the pro forma condensed combined statements of operations we have elected to present Akerna results for the year ended December 31, 2020 which consists of the combined transition period for the six months ended December 31, 2020 plus the six months period from January 1, 2020 to June 30, 2020 consistent with rules 13a-10 and 15d-10 of the Exchange Act.
These unaudited pro forma condensed combined financial information, including the preliminary purchase price allocation, are presented for illustrative purposes only and do not necessarily reflect the operating results or financial position that would have occurred if the Acquisition had been consummated on the dates indicated, nor is it necessarily indicative of the results of operations or financial condition that may be expected for any future period or date. Accordingly, such information should not be relied upon as an indicator of future performance, financial condition or liquidity.
Preliminary Purchase Consideration — Ample
On December 18, 2019,October 1, 2021, we entered into an arrangement agreement (the “Agreement”) to acquire all of the issued and outstanding shares of Ample.NAV. Under the terms of the Agreement, the aggregate consideration for the AmpleNAV shares consists of (1) CAD$7,500,000$5,000,000 in cash, (2) 3,294,574 redeemable preferred shares of a wholly-owned subsidiary of Akerna, which are exchangeable for shares of common$12,000,000 in stock par value $0.0001 per share, of Akerna on a 1:1 basis (“Exchangeable Shares”) as determined in accordance with the Agreement and (3) contingent value rights to be issued pursuant to a rights indenture entitling the holders thereof to receive, subject to certain adjustments as set forth in the Agreement, an aggregate of up to CAD$10,000,000$8,000,000 in redeemable preferred shares (“Exchangeable Shares”),stock, in the event that AmpleNAV achieves certain revenue targets as specified in the Agreement. These rights are accounted for as contingent consideration thatand are currently recorded at preliminary fair value which will be recorded at fair value when the acquisition closes.updated upon finalization of purchase accounting.
| | | (in thousands) | |
| Cash | | $ | 5,333 | |
| Redeemable preferred shares | | | 16,868 | |
| Exchangeable shares contingent value rights | | | 7,110 | |
| Total purchase consideration | | $ | 29,311 | |
| Cash | | $ | 5,606,017 | |
| Common shares | | | 12,000,000 | |
| Contingent consideration | | | 8,000,000 | |
| Total purchase consideration | | $ | 25,606,017 | |
Preliminary Purchase Consideration Allocation
The following represents the preliminary allocation of the fair value of the purchase consideration to the acquired assets and assumed liabilities based on Ample’sNAV’s balance sheet as of March 31, 2020September 30, 2021 and is for illustrative purposes only.
| | | (in thousands) | |
| Net tangible assets | | $ | (2,436 | ) |
| Intangible assets: | | | | |
| Developed technology | | | 6,000 | |
| Customer relationships | | | 600 | |
| Goodwill | | | 25,147 | |
| Total purchase consideration | | $ | 29,311 | |
| Cash | | $ | 531,723 | |
| Accounts receivable | | | 961,140 | |
| Prepaid expenses and other current assets | | | 266,826 | |
| Fixed assets, net | | | 92,437 | |
| Deposits | | | 11,361 | |
| Intangible assets: | | | | |
| Customer relationships | | | 3,509,861 | |
| Acquired technology | | | 2,011,750 | |
| Trade Name | | | 85,606 | |
| Goodwill | | | 21,037,766 | |
| Deferred revenue | | | (2,017,571 | ) |
| Accounts payable and accrued expenses | | | (884,882 | ) |
| Total purchase consideration | | $ | 25,606,017 | |
Goodwill of approximately $25.1$21.0 million represents the excess of the purchase consideration over the fair value of the net tangible and intangible assets acquired. Goodwill is primarily attributable to expected post-acquisition synergies from integrating Ample’sNAV’s industry-leading seed-to-saleERP platform into Akerna’s supply chain solutions. None of the goodwill recorded as part of the AmpleNAV acquisition willis expected to be deductible for U.S. federal income tax purposes.
Akerna has considered the existing intangible assets of NAV prior to the Acquisition and while we anticipate there will be deferred tax assets arising from the purchase price, we expect these would have a full valuation allowance given historical losses.
The following table sets forth the components of identifiable intangible assets acquired and their preliminary estimated useful lives as of the date of acquisition (in thousands):Acquisition:
| Intangible assets: | | Preliminary
Fair Value | | | Estimated
Useful Life
(in years) |
| Trade names | | $ | 6,000 | | | 5 |
| Developed technology | | | 600 | | | 5 |
| Total | | $ | 6,600 | | | |
| Intangible assets: | | Preliminary
Fair
Value | | | Estimated
Useful
Life
(in years) | |
| Customer relationships | | $ | 3,509,861 | | | 10 | |
| Acquired technology | | | 2,011,750 | | | 5 | |
| Trade name | | | 85,606 | | | 2 | |
| Total | | $ | 5,607,217 | | | | |
TheseFollowing the end of Akerna’s fiscal year ended June 30, 2020, Akerna transitioned to a December 31 fiscal year-end date. The following table presents a reconciliation to Akerna’s historical unaudited financial data for the twelve months ended December 31, 2020 which was derived by adding the audited six-month transition period ended December 31, 2020 to Akerna’s three-month period ended March 31, 2020 and three-month period ended June 30, 2020.
| | | Historical | |
| | | Akerna
Corp.
three
months
ended
3/31/2020
(unaudited) | | | Akerna
Corp.
three
months
ended
6/30/2020
(unaudited) | | | Akerna
Corp.
six months
ended
12/31/2020
(audited) | | | Akerna
Corp.
twelve
months
ended
12/31/2020
(unaudited) | |
| Net revenue: | | | | | | | | | | | | |
| Software | | $ | 2,346,309 | | | $ | 2,849,734 | | | $ | 6,766,985 | | | $ | 11,963,028 | |
| Consulting | | | 692,584 | | | | 131,000 | | | | 916,099 | | | | 1,739,683 | |
| Other | | | 31,652 | | | | 22,905 | | | | 141,700 | | | | 196,257 | |
| Total net revenue | | | 3,070,545 | | | | 3,003,639 | | | | 7,824,784 | | | | 13,898,968 | |
| Cost of revenue | | | 1,396,219 | | | | 1,818,565 | | | | 3,141,041 | | | | 6,355,825 | |
| Gross profit | | | 1,674,326 | | | | 1,185,074 | | | | 4,683,743 | | | | 7,543,143 | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Product development | | | 874,787 | | | | 1,088,939 | | | | 3,166,088 | | | | 5,129,814 | |
| Sales and marketing | | | 2,040,751 | | | | 2,117,118 | | | | 3,928,028 | | | | 8,085,897 | |
| General and administrative | | | 3,457,262 | | | | 3,126,027 | | | | 4,435,067 | | | | 11,018,356 | |
| Depreciation and amortization | | | 180,229 | | | | 1,036,378 | | | | 2,007,237 | | | | 3,223,844 | |
| Impairment of long-lived assets | | | – | | | | – | | | | 6,887,000 | | | | 6,887,000 | |
| Total operating expenses | | | 6,553,029 | | | | 7,368,462 | | | | 20,423,420 | | | | 34,344,911 | |
| Loss from operations | | | (4,878,703 | ) | | | (6,183,388 | ) | | | (15,739,677 | ) | | | (26,801,768 | ) |
| Interest income (expense), net | | | 33,522 | | | | (2,084 | ) | | | (193,084 | ) | | | (161,646 | ) |
| Change in fair value of convertible notes | | | – | | | | 766,000 | | | | (961,273 | ) | | | (195,273 | ) |
| Change in fair value of derivative liability | | | 236,917 | | | | (606,958 | ) | | | 746,852 | | | | 376,811 | |
| Other expense | | | (124 | ) | | | – | | | | (59,273 | ) | | | (59,397 | ) |
| Loss before provision for income taxes | | | (4,608,388 | ) | | | (6,026,430 | ) | | | (16,206,455 | ) | | | (26,841,273 | ) |
| Provision for income taxes | | | – | | | | (30,985 | ) | | | (200 | ) | | | (31,185 | ) |
| Equity in losses of investee | | | – | | | | (3,692 | ) | | | (12,643 | ) | | | (16,335 | ) |
| Net loss | | | (4,608,388 | ) | | | (6,061,107 | ) | | | (16,219,298 | ) | | | (26,888,793 | ) |
Note 2: Conforming Accounting Policies and Reclassification Adjustments
Based on a preliminary estimates of fair value and their preliminary estimated useful lives will likely be different from the amounts included in the acquisition accounting upon the closereview of the acquisitionaccounting policies of Akerna and NAV, Akerna is not aware of any differences that would have a material impact on the differencecombined company unaudited pro forma condensed combined financial information. Following completion of the Acquisition, or as more information becomes available, Akerna will perform a full and detailed review of the NAV accounting policies and financial statements. As a result of the review, accounting policy differences may be identified and these differences, when identified, could have a material impact on the accompanying unaudited pro forma combined condensed financial statements. Once Akerna has full access to information about Ample’s intangible assets, additional insight will be gained that could impact (i) the estimated total value assigned to identifiable intangible assets (ii) the estimated weighted average useful life of each category of intangible asset (iii) the value of fixed assets (iv) the value of deferred revenue and (v) the value of deferred tax liabilities associated with purchase accounting adjustments. The estimated intangible asset values and their useful lives could be impacted by a variety of factors that may become known to Akerna only upon access to additional information or by changes in such factors that may occur prior to completion of the offer and the merger. These factors include, but are not limited to, historical information obtained from Ample, discussions with management and product roadmap. Increased knowledge about these or other elements could result in a change to the estimated fair value of the identifiable intangible assets or to the estimated weighted average useful lives from what Akerna has assumed in these unaudited pro forma combined condensed financial statements. The combined effect of any such changes could then also result in a significant increase or decrease to Akerna’s estimate of associated amortization expense.
Prior to the acquisition, Ample had a net deferred tax liability and expects they will continue to be in a net deferred tax liability position, after adjustments for estimated preliminary deferred tax liability related to estimated purchase accounting adjustments and the net deferred tax asset is subject to a full valuation allowance. Therefore, the combined U.S. and international deferred tax asset position is expected to remain unchanged. As such, thecompany unaudited pro forma condensed combined financial information does not include adjustments for tax-related items.
Accounting Policies — Ample
We did not adopt new accounting standards for revenue or leasesinformation. Certain items included in the year ended June 30, 2019, and as an emerging growth company, weNAV historical combined financial information have electedbeen reclassified to implementconform the disclosure requirements of the new revenue standard in our annualNAV financial statements for the fiscal year ending June 30, 2021. We have electedstatement presentation to adopt the new leasing standard in our annualAkerna’s financial statements for the fiscal year ended June 30, 2022. Ample, as a Canadian company, has adopted these standards. We have reflected adjustments to remove the material differences between the new standards and the standards applied in our financial statements in the column “IFRS to US GAAP Adjustments” as described in Note 2.
The Solo Option
The Solo Option may be paid, at the sole option of Akerna, in either cash or shares of Akerna’s common stock the amount of which is dependent upon the market value of Akerna Shares. When the Solo Option is exercised, it will be accounted as an equity transaction with the difference between the fair value of the consideration exchanged and the carrying value of the non-controlling interest recorded in additional paid in capital. Because Akerna Shares were trading at a weighted average 20 day trading value ending March 31, 2020 of $5.19 per share, we calculated number of shares resulting for the exercise of the Solo Option as difference in the number of shares valued at $20,000,000 at $5.19 per share, or 3.9 million shares, and 1,950,000 Akerna Shares, which were issued to Solo shareholders in exchange for the initial 80.4% equity interest.
If the option had been exercised on March 31, 2020, Akerna would have issued an additional 1.9 million shares to the Solo Shareholders. Changes in trading price of the Akerna common shares could have a material effect on the number of shares ultimately issued.
statement presentation.
Note 2:3: Adjustments to Unaudited Pro Forma Condensed Combined Balance SheetsSheet as of September 30, 2021
The pro forma adjustments and IFRS to GAAP adjustments included in the unaudited pro forma condensed combined balance sheet for the acquisitionAcquisition of AmpleNAV are as follows:
| A. | To record the estimated cash portion of the purchase consideration of $5.3 million$5,606,017 in cash which was used to pay NAV debtors in the amount of $988,874, NAV obligations in the amount of $890,000, and NAV shareholders in the amount of $2,103,425 and funded from cash and cash equivalents, valued using exchange rate$12.0 million in effect on March 31, 2020. Changescommon stock issued, which was used to pay down debtors in the exchange rateamount of $4,299,280 and NAV shareholders in effect on the closing date could have a material effect on the valueamount of the consideration that we ultimately record.$7,700,721. |
| B. | To record estimated preliminary goodwill from acquisition of $25.1 million reduced by goodwill from prior acquisitions of $3.2 million.$21,037,766. |
| C. | To recordadjust the estimated preliminaryhistorical NAV intangible assets to fair value of identifiable intangible assets of $6.6 million reduced byin connection with the book value of intangible assets of $876,000 prior to the acquisition.Acquisition. |
| D. | To eliminate the accounting under the new lease accounting standard to conform to Akerna’s accounting principles. |
| E. | To record purchase accounting adjustments by eliminating preferred stock liabilities,NAV’s historical equity, accumulated deficit, paid in capital and accumulated other comprehensive loss from the impact of foreign exchange.loss. |
| E. | To record reclassifications to conform NAV financial statements with Akerna’s historical financial statement presentation. |
| F. | To record the estimated consideration of the preferred shares and the Exchangeable Shares contingent value rights of $24.0 million valued based on the closing price of an Akerna common share and the exchange rate in effect on March 31, 2020. Changes in either thepreliminary fair value of an Akerna common share of exchange rates on the closing date could have a material effect on the value of the aggregate consideration that we ultimately record.deferred revenue. |
| G. | To record transaction cost paid after the elimination of noncontrolling interest included in the condensed consolidated balance sheet of $4.8 million for the exerciseclose of the Solo Option.Acquisition |
Note 3:4: Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations for the yeartwelve months ended JuneDecember 31, 2020
The pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the Acquisition of NAV are as follows:
| A. | To record reclassifications to conform NAV financial statements with Akerna’s historical financial statement presentation. |
| B. | To reflect $769,139 amortization expense of preliminarily estimated purchased intangible assets and to eliminate the historical amortization expense of $253,340. |
| C. | To eliminate interest expense related to the historical debt of NAV. |
The pro forma combined basic and diluted net loss per share are based on the number of 17,981,209 shares common stock used in computing basic and diluted net loss per share for the acquisition of Solo, respectively. Dilutive potential common shares are included only if they have a dilutive effect on earnings per share.
Note 5: Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations for the nine months ended September 30, 20192021
The pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the acquisition of SoloNAV are as follows:
| A. | To record reclassifications to conform NAV financial statements with Akerna’s historical financial statement presentation. |
| B. | To reflect $996,000$597,104 amortization expense of preliminarily estimated purchased intangible assets.assets and to eliminate the historical amortization expense of $157,886. |
| B. | To reduce stock-based compensation of $217,403, due to accelerated vesting of Solo restricted stock and settlement of options in connection with the Acquisition. |
| C. | To reflecteliminate interest expense related to the issuancehistorical debt of shares for the partial acquisition of Solo and to reflect the estimated number of shares that would have been issued in connection with the exercise of the Solo Option as if it had occurred as if these transactions had occurred on July 1, 2018. Because Akerna shares were not traded on July 1, 2018, the estimated number of shares that would have been issued in connection with the Solo Option was 800,000.NAV. |
The pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the acquisition of Ample adjust the condensed combined pro forma financial statement of operations for Akerna and Solo as described above. The adjustments related to the Ample acquisition are as follows:
| A. | To record amortization of $1.3 million due to purchased intangibles as part of acquisition. |
| B. | To reduce stock-based compensation of $354,000, due to settlement of options in connection with the acquisition. |
| C. | To remove the effect of remeasurement of $3.5 million for preference shares as the preference shares will be settled in connection with the acquisition. |
The pro forma basic and diluted net loss per share are based on 8,795,382 shares common stock. Dilutive potential common shares, including the redeemable preference shares and Exchangeable Shares expected to be issued in the Ample acquisition, are included only if they have a dilutive effect on earnings per share. No adjustment has been made for assumed equity awards or the Exchangeable Shares in the computation of pro forma combined diluted net loss per share because their effect would be anti-dilutive.
Note 4: Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations for the nine months ended March 31, 2020
The pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the acquisition of Solo are as follows:
| A. | To reflect $747,000 of amortization expense of preliminarily estimated purchased intangible assets. |
| B. | To reduce stock-based compensation of $1.6 million due to accelerated vesting of Solo’s restricted stock and settlement of options in connection with the acquisition. |
| C. | To remove $0.3 million of nonrecurring transaction costs. |
| D. | To remove allocationeliminate transaction related expenses of net loss to noncontrolling interests in Solo, which would not have been recorded had$179,187 from the Solo Option been exercised on July 1, 2018.historical financial statements of Akerna and $172,550 from the historical financial statements of NAV. |
| E. | To reflect the issuance of shares for the partial acquisition of Solo and to reflect the estimated number of shares that would have been issued in connection with the exercise of the Solo Option as if it had occurred as if these transactions had occurred on July 1, 2018. Because Akerna shares were not traded on July 1, 2018, the estimated number of shares that would have been issued in connection with the Solo Option was 800,000. |
The pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the acquisition of Ample adjust the condensed combined pro forma financial statement of operations for Akerna and Solo as described above. The adjustments related to the Ample acquisition are as follows:
| A. | To reflect $990,000 of amortization expense of preliminary estimated purchased intangible assets. |
| B. | To reduce stock-based compensation of $258,000, due to settlement of options in connection with the acquisition. |
| C. | To remove the effect of remeasurement of preference shares of $2.9 million as the preference shares will be settled in connection with the acquisition. |
| D. | To remove $1.0 million of nonrecurring transaction costs. |
The pro forma combined basic and diluted net loss per share are based on 14,049,997the number of 27,883,939 shares common stock.stock used in computing basic and diluted net loss per share for the acquisition of Solo, respectively. Dilutive potential common shares including the redeemable preferred shares and the Exchangeable Shares expected to be issued as consideration for the Ample acquisition, are included only if they have a dilutive effect on earnings per share. No adjustment has been made for assumed equity awards or the Exchangeable Shares in the computation of pro forma combined diluted net loss per share because their effect would be anti-dilutive.
AKERNA CORP.
3,294,574 SHARES OF COMMON STOCK
, 2020
AKERNA CORP.
Up to 27,754,649 Units, Each Unit Consisting of One Share of Common Stock and One Warrant to Purchase One Share of Common Stock
Up to 27,754,649 Pre-funded Units, Each Pre-funded Unit Consisting of One Pre-funded Warrant to Purchase One Share of Common Stock and One Warrant to Purchase One Share of Common Stock
Shares of Common Stock Underlying the Warrants
Shares of Common Stock Underlying the Pre-Funded Warrants
PROSPECTUS
A.G.P.
, 2022
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13- OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
| | | Amount | |
| Securities and Exchange Commission Registration Fee | | $ | 3,369.77 | |
| Legal Fees and Expenses | | $ | 10,000 | |
| Accounting Fees and Expenses | | $ | 10,000 | |
| Printing and Engraving Expenses | | $ | 0 | |
| Miscellaneous Expenses | | $ | 0 | |
| Total | | $ | 23,369.77 | |
The following table indicates the expenses to be incurred in connection with the Offering described in this registration statement, other than underwriting discounts and commissions, all of which will be paid by us. All amounts are estimates, except for the Securities and Exchange Commission registration fee.
| | | Amount | |
| Securities and Exchange Commission Registration Fee | | $ | 2,179 | |
| FINRA Filing Fee | | $ | 4,250 | |
| Legal Fees and Expenses | | $ | 140,000 | * |
| Accounting Fees and Expenses | | $ | 50,000 | * |
| Printing and Engraving Expenses | | $ | 20,000 | * |
| Miscellaneous Expenses | | $ | 15,000 | * |
| Total | | $ | 231,429 | * |
ITEM 14- INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the DGCL, a corporation may indemnify its directors, officers, employees and agents and its former directors, officers, employees and agents and those who serve, at the corporation'scorporation’s request, in such capacities with another enterprise, against expenses (including attorney'sattorney’s fees), as well as judgments, fines and settlements, actually and reasonably incurred in connection with the defense of any action, suit or proceeding (other than an action by or in the right of the corporation) in which they or any of them were or are made parties or are threatened to be made parties by reason of their serving or having served in such capacity. The DGCL provides, however, that such person must have acted in good faith and in a manner he or she reasonably believed to be in (or not opposed to) the best interests of the corporation and, in the case of a criminal action, such person must have had no reasonable cause to believe his or her conduct was unlawful. In addition, the DGCL does not permit indemnification in an action or suit by or in the right of the corporation, where such person has been adjudged liable to the corporation for negligence or misconduct in the performance of his/her duty to the corporation, unless, and only to the extent that, a court determines that such person fairly and reasonably is entitled to indemnity for costs the court deems proper in light of liability adjudication. Indemnity is mandatory to the extent a claim, issue or matter has been successfully defended.
Section 102(b)(7) of the DGCL permits a corporation to include in its certificate of incorporation a provision eliminating or limiting the personal liability of a director to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director'sdirector’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL (relating to unlawful payment of dividends and unlawful stock purchase or redemption) or (iv) for any transaction from which the director derived an improper personal benefit.
Article VI of the Amended and Restated By-Laws of Akerna contains provisions which are designed to provide mandatory indemnification of directors and officers of Akerna to the full extent permitted by law, as now in effect or later amended. The Amended and Restated By-Laws further provide for reimbursement and advances of payment of expenses actually and reasonably incurred by a current or former director or officer of Akerna under the circumstances contained therein.
ITEM 15- RECENT SALES OF UNREGISTERED SECURITIES
From June 5, 2019, through June 10, 2019, MTech Acquisition Corp. entered into subscription agreements with certain investors, whereby the investors named therein committed to purchase an aggregate of 901,074Set forth below is information regarding shares of commoncapital stock of MTech for an aggregate purchase price of approximately $9.2 million (the “MTech Private Placement”). Upon the closing of the business combination between MTech and Akerna, such shares issued by MTech inus within the Private Placement (“Private Placement Shares”) were automatically converted into shares of common stock of Akerna on a one-for-one basis. The shares of common stock that were issued in connection with the subscription agreements described abovepast three years which were not registered under the Securities Act, and were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.
On January 15, 2020, Akerna closed on a stock purchase agreement previously entered into with substantially all of the shareholders of Solo Sciences, Inc., a Delaware corporation (“Solo”), pursuant to which Akerna acquired all right, title and interest in 80.40% of the issued and outstanding capital stock of Solo (calculated on a fully diluted basis), free and clear of all liens. The initial consideration amount under the agreement was 1,950,000 shares of the common stock of Akerna, less 570,000 shares of the common stock of Akerna to be held in escrow as follows: (a) 375,000 are to be held and sold to cover costs of the Solo shareholders under a related intellectual property purchase agreement, to be completed within 12 months of the closing date, with any remaining shares to be released to the Solo shareholders; and (b) 195,000 shares to be held to cover any indemnity payment to certain Akerna parties under the indemnity provisions in the Agreement. This initial consideration may be subject to an adjustment for final working capital acquired no later than 120 days following the closing date. The Akerna shares were issued in exchange for the shares of Solo held by the Solo shareholders pursuant to the exemption from the registration requirements of the Securities Act provided by Rule 506(b) of Regulation D thereunder, such exemption being available based on the representations of the Solo shareholders.
On April 8, 2020, Akerna entered into a stock exchange agreement, pursuant to which it issued shares of common stock of Akerna with an aggregate contractual value of $2,000,000 (the “Akerna Shares”) at $5.72 per share, subject to certain adjustments not later than 90 days post-closing. The acquisition closed on April 10, 2020, the acquisition date fair value of the shares of stock issued was $2,531,466, or $7.24 per share, the closing price on the date of acquisition. The Akerna Shares were issued in exchange for the shares of Trellis Solutions, Inc., an Ontario corporation held by the sellers under the stock exchange agreement. The Akerna shares of common stock were issued pursuant to the exemption from the registration requirements of the Securities Act provided by Section 4(a)(2) thereof, based on the representations and warranties of the sellers.
On June 9, 2020, Akerna issued senior secured convertible notes to holders in an aggregate original principal amount of $17,000,000 having an aggregate original issue discount of 12%, and ranking senior to all of our outstanding and future indebtedness, in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D under the Securities Act, based in part on the representations of the holders..
On July 7, 2020, Akerna Canada Ample Exchange Inc., a corporation incorporated under the Business Corporations Act (Ontario) and wholly-owned subsidiary of Akerna issued 3,294,574 Exchangeable Shares to Ample shareholders. The issuance of the Exchangeable Shares and the Special Voting Share on the closing in connection with the consummation of the plan of arrangement was not registered under the Securities Act and such securities were issued in reliance upon the exemption from registration pursuant to Section 3(a)(10) of the Securities Act.
On July 31, 2020, Akerna issued 800,000 shares of common stock of Akerna to acquire the remaining 19.6% of Solo. The Akerna shares were issued in exchange for the shares of Solo held by the Solo shareholders pursuant to the exemption from the registration requirements of the Securities Act provided by Rule 506(b) of Regulation D thereunder, such exemption being available based on the representations of the Solo shareholders.
From December 29, 2020 through January 8, 2021, Akerna issued 974,540 shares of common stock of Akerna to the holders of Akerna’s convertible notes upon conversion of installment amounts due under the terms of the notes. The shares were issued upon conversion of the installment amounts under the notes to the holders of the notes pursuant to the exemption from the registration requirements of the Securities Act provided by Section 3(a)(9) thereof.
On January 7, 2021, Akerna issued 101,705 shares of common stock to a private party in settlement of a lease agreement. The shares were issued to the private party in settlement of claims and payments due under the lease agreement pursuant to the exemption from the registration requirements of the Securities Act provided by Rule 506(b) of Regulation D thereunder, such exemption being available based on the representations of the private party.
From February 11, 2021 through March 10, 2021, Akerna issued 1,113,969 shares of common stock of Akerna to the holders of Akerna’s convertible notes upon conversion of installment amounts due under the terms of the notes. The shares were issued upon conversion of the installment amounts under the notes to the holders of the notes pursuant to the exemption from the registration requirements of the Securities Act provided by Section 3(a)(9) thereof.
On April 1, 2021, Akerna completed its acquisition of 100% of the issued and outstanding capital stock of Viridian Sciences Inc. (“Viridian”) from Navigator Acquisition Corp., a Delaware corporation (“Navigator”), pursuant to which Akerna issued 1,000,000 shares of common stock of Akerna to Navigator the acquisition of Viridian. The shares of common stock were issued to Navigator pursuant to the exemption from the registration requirements of the Securities Act provided by Rule 506(b) of Regulation D under the Securities Act and/or Section 4(a)(2) thereof based, in part, on the representations and warranties made by Navigator to Akerna.
On October 1, 2021, Akerna closed on a stock purchase agreement with the shareholders of The NAV People Inc., a Delaware corporation d/b/a “365 Cannabis” (“365 Cannabis”), pursuant to which Akerna acquired all right, title and interest in 100% of the issued and outstanding capital stock of 365 Cannabis (calculated on a fully diluted basis), free and clear of all liens. As part of the consideration for the acquisition, Akerna issued 3,571,429 shares of common stock, representing an aggregate value of approximately $12 million. 357,143 shares of the stock consideration will be held in escrow for a period of, and will be released from escrow after a period of, 12 months, subject to certain indemnity claims under the stock purchase agreement. The shares of common stock are also subject to a lock-up agreement between Akerna and the 365 Cannabis shareholders and will be released from lock-up as follows: (a) 50% of the stock consideration six months from the date of the closing, (b) 25% of the stock consideration nine months from the date of closing and (c) the remaining 25% of the stock consideration one year from the date of the closing. The shares of common stock were issued in exchange for the shares of 365 Cannabis held by the 365 Cannabis shareholders pursuant to the exemption from the registration requirements of the Securities Act provided by Section 4(a)(2) thereof and Rule 506(b) of Regulation D thereunder, such exemption being available based on the representations of the 365 Cannabis shareholders.
On October 5, 2021, Akerna entered into a securities purchase agreement with the two institutional investors to sell a new series of senior secured convertible notes of the Company in a private placement, with an aggregate principal amount of $20,000,000 having an aggregate original issue discount of 10%, and ranking senior to all outstanding and future indebtedness of the Company. Pursuant to the securities purchase agreement, the convertible notes in an aggregate original principal amount of $20,000,000 were issued to the institutional investors in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D as promulgated by the Commission under the Securities Act, based in part on the representations of the institutional investors in the securities purchase agreement.
On January 25, 2022, the Company’s board of directors approved the issuance of 30,000 shares of our common stock to service providers in relation to providing investor relations services to the Company. The shares were approved for issuance in consideration for the services to be provided by such service providers. The shares have not been issued as of the date of this prospectus. The shares are to be issued pursuant to Section 4(a)(2) of the Securities Act on the basis of the representations and warranties of the service providers in their service contracts.
From February 1, 2022 through April 1, 2022, the Company issued 3,948,372 shares of common stock of the Company to the holders of the Company’s convertible notes upon conversion of installment amounts due under the terms of the notes. The shares were issued upon conversion of the installment amounts under the notes to the holders of the notes pursuant to the exemption from the registration requirements of the Securities Act provided by Section 3(a)(9) thereof.
From April 2, 2022 through to the date of this prospectus, we issued 751,686 shares of our common stock to the holders of Akerna’s convertible notes upon conversion of installment amounts due under the terms of the notes. The shares were issued upon conversion of the installment amounts under the notes to the holders of the notes pursuant to the exemption from the registration requirements of the Securities Act provided by Section 3(a)(9) thereof.
ITEM 16- EXHIBITS
(a) Exhibits.
See the Exhibit Index.
(b) Financial Statement Schedules.
None.
(c) Reports, Opinions and Appraisals.
None.
ITEM 17- UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales of securities are being made, a post-effective amendment to this registration statement to:
| (i) | Include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;Act; |
| (ii) | Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and notwithstanding the forgoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectuses filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in the volume and price represent no more than a 20%20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.statement; and |
| (iii) | Include any additional or changed material information on the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;statement. |
(2) That, for the purpose of determining any liability under the Securities Act, of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) ForThat, for determining liability of the undersigned Registrant under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
| (i) | Any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 424 (§230.424 of this chapter); |
| (ii) | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned Registrant or used or referred to by the undersigned Registrant; |
| (iii) | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and |
| (iv) | Any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser. |
(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described herein, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
II-3(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all the requirements of filing on Form S-1/AS-1 and authorized registration statement to be signed on its behalf by the undersigned, in the city of Denver, Colorado on August 7, 2020.June 28, 2022.
| | AKERNA CORP. |
| | | |
| | By: | /s/ Jessica Billingsley |
| | | Name: Jessica Billingsley |
| | | Title: Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature | | Title | | Date |
| | | | | |
| /s/ Jessica Billingsley | | Chief Executive Officer and Director | | August 7, 2020June 28, 2022 |
| Jessica Billingsley | | (Principal Executive Officer) | | |
| | | | | |
/s/ John FowleLarry Dean Ditto Jr. | | Interim Chief Financial Officer | | August 7, 2020June 28, 2022 |
John FowleLarry Dean Ditto Jr. | | (Principal Financial and Accounting Officer) | | |
| | | | | |
/s/ Scott Sozio** | | Director | | August 7, 2020June 28, 2022 |
| Scott Sozio | | | | |
| | | | | |
/s/ Tahira Rehmatullah** | | Director | | August 7, 2020June 28, 2022 |
Tahira RehmatullahMatthew Kane | | | | |
| | | | | |
/s/ Matthew Kane** | | Director | | August 7, 2020June 28, 2022 |
Matthew KaneTahira Rehmatullah | | | | |
| | | | | |
/s/ Mark Iwanowski** | | Director | | August 7, 2020June 28, 2022 |
Mark IwanowskiBarry Fishman | | | | |
* By: | /s/ Jessica Billingsley | |
| Jessica Billingsley | |
| Attorney-in-Fact pursuant to Power of Attorney dated June 15, 2022 | |
EXHIBIT INDEX
| Exhibit | | |
| Number | | Description |
| 1.1* | | Form of Underwriting Agreement |
| | Description |
| 2.1+ | | Agreement and Plan of Merger, dated as of October 10, 2018, by and among MTech Acquisition Corp., Akerna Corp., Purchaser Merger Sub Inc., Company Merger Sub LLC, MTech Sponsor LLC in the capacity as the Purchaser Representative thereunder, MJ Freeway LLC and Harold Handelsman in the capacity as the Seller Representative thereunder (incorporated by reference to Exhibit 2.1 to the registrant’s Registration Statement on Form S-4 (File No. 333-228220)) |
| | | |
| 2.2 | | First Amendment to Agreement and Plan of Merger, effective as of April 17, 2019, by and among MTech Acquisition Corp., Akerna Corp., MTech Purchaser Merger Sub Inc., MTech Company Merger Sub LLC, MTech Sponsor LLC,, in the capacity as the Purchaser Representative under the Merger Agreement, MJ Freeway LLC, and Jessica Billingsley, in the capacity as the Seller Representative under the Merger Agreement (incorporated by reference to Exhibit 2.2 to the registrant’s Registration Statement on Form S-4S-4/A (File No. 333-228220)) |
| | | |
| 2.3 | | Arrangement Agreement dated December 18, 2019 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on December 18, 2019) |
| | | |
| 2.4 | | Amendment to Arrangement Agreement dated February 28, 2020 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on March 3, 2020) |
| | | |
| 2.5 | | Amendment No. 2 to Arrangement Agreement dated May 26, 2020 (incorporated by reference to Exhibit 4.32.3 to the Current Report on Form 8-K filed by the registrant on July 8, 2020) |
| | | |
| 2.6 | | Amendment No. 3 to Arrangement Agreement dated June 1, 2020 (incorporated by reference to Exhibit 4.42.4 to the Current Report on Form 8-K filed by the registrant on July 8, 2020) |
| | | |
| 3.1 | | Amended and Restated Certificate of Incorporation of Akerna Corp. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the registrant on June 21, 2019) |
| | | |
| 3.2 | | Amended and Restated Bylaws of Akerna Corp. (incorporated by reference to Exhibit 3.23.1 to the Current Report on Form 8-K10-KT filed by the registrant on June 21, 2019)March 31, 2021) |
| | | |
| 3.3 | | Certificate of Designation for the Special Voting Share (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the registrant on July 8, 2020) |
| | | |
| 4.1 | | Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-4 (File No. 333-228220)) |
| | | |
| 4.2 | | Specimen Warrant Certificate (incorporated by reference to Exhibit 4.2 to the registrant’s Registration Statement on Form S-4 (File No. 333-228220)) |
| | | |
| 4.3 | | Form of Warrant Agreement (incorporated by reference to Exhibit 4.3 on Current Report on Form 8-K filed by the registrant on June 21, 2019) |
| | | |
| 4.4 | | Form of SecuritiesStock Purchase Agreement, dated September 13, 2021, relating to the 365 Cannabis acquisition (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on June 8, 2020)September 21, 2021) |
| | | |
| 4.5 | | Securities Purchase Agreement, dated October 5, 2021 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on October 5, 2021) |
10.1 | | |
| 10.1 | | Registration Rights Agreement, dated January 29, 2018, by and among MTech Acquisition Corp., MTech Sponsor LLC, and MTech Sponsor LLC (incorporated by reference to Exhibit 10.1 on Current Report on Form 8-K filed by the registrant on June 21, 2019) |
| | | |
| 10.2 | | First Amendment to Registration Rights Agreement, dated June 17, 2019, by and among MTech Acquisition Corp., Akerna Corp. and MTech Sponsor LLC (incorporated by reference to Exhibit 10.2 on Current Report on Form 8-K filed by the registrant on June 21, 2019) |
| | | |
| 10.3 | | Stock Escrow Agreement, dated January 29, 2018, by and among MTech Acquisition Corp., MTech Sponsor LLC, and Continental Stock Transfer & Trust Company (incorporated by reference to Exhibit 10.3 on Current Report on Form 8-K filed by the registrant on June 21, 2019) |
| | | |
| 10.4 | | Amendment to Stock Escrow Agreement, dated June 17, 2019, by and among MTech Acquisition Corp., Akerna Corp., MTech Sponsor LLC, and Continental Stock Transfer & Trust Company (incorporated by reference to Exhibit 10.4 on Current Report on Form 8-K filed by the registrant on June 21, 2019) |
| | | |
| 10.5 | | Non-Competition and Non-Solicitation Agreement dated June 17, 2019, by and among Jessica Billingsley, Akerna Corp., MJ Freeway and MTech Sponsor LLC (incorporated by reference to Exhibit 10.5 on Current Report on Form 8-K filed by the registrant on June 21, 2019) |
| | | |
| 10.6 | | Non-Competition and Non-Solicitation Agreement dated June 17, 2019, by and among Amy Poinsett, Akerna Corp., MJ Freeway and MTech Sponsor LLC (incorporated by reference to Exhibit 10.6 on Current Report on Form 8-K filed by the registrant on June 21, 2019) |
| | | |
| 10.7 | | Form of Indemnification Agreement of Officers and Directors (incorporated by reference to Exhibit 10.7 on Current Report on Form 8-K filed by the registrant on June 21, 2019) |
| | | |
| 10.8 | | Form of Subscription Agreement, by and among MTech Acquisition Corp., Akerna Corp., and each purchaser signatory thereto (incorporated by reference to Exhibit 10.8 on Current Report on Form 8-K filed by the registrant on June 21, 2019) |
| 10.9 | | |
10.9 | | Form of Agreement to Transfer Sponsor Shares, by and among MTech Acquisition Corp., Akerna Corp., each transferee signatory thereto, and Continental Stock Transfer &Trust Company (incorporated by reference to Exhibit 10.9 on Current Report on Form 8-K filed by the registrant on June 21, 2019) |
| | | |
| 10.10^ | | Employment Agreement, dated June 17, 2019, by and between Jessica Billingsley and Akerna Corp. (incorporated by reference to Exhibit 10.10 on Current Report on Form 8-K filed by the registrant on June 21, 2019) |
| | | |
| 10.11^ | | MTech Acquisition Holdings Inc. 2019 Long Term Incentive Plan (incorporated by reference to Exhibit 10.5 to the registrant’s Registration Statement on Form S-4 (File No. 333-228220)) |
| | | |
| 10.12^ | | Form of Option Grant Certificate (incorporated by reference to Exhibit 10.12 on Current Report on Form 8-K filed by the registrant on June 21, 2019) |
| | | |
| 10.13^ | | Form of Restricted Stock Unit Award (incorporated by reference to Exhibit 10.13 on Current Report on Form 8-K filed by the registrant on June 21, 2019) |
| | | |
| 10.14^ | | Form of Stock Award (incorporated by reference to Exhibit 10.14 on Current Report on Form 8-K filed by the registrant on June 21, 2019) |
| | | |
| 10.15^ | | Form of Restricted Stock Award (incorporated by reference to Exhibit 10.15 on Current Report on Form 8-K filed by the registrant on June 21, 2019) |
| | | |
| 10.16^ | | Form of Appreciation Rights Award (incorporated by reference to Exhibit 10.16 on Current Report on Form 8-K filed by the registrant on June 21, 2019) |
10.17 | | |
| 10.17 | | Form of Lock-Up Agreement, by and among MTech Acquisition Holdings, Inc., MTech Sponsor LLC, and each holder signatory thereto (incorporated by reference to Exhibit 10.3 to the registrant’s Registration Statement on Form S-4 (File No. 333-228220)) |
| | | |
| 10.18 | | Office Service Agreement, dated September 30, 2019, effective February 1, 2020 (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the three months ended September 30, 2019 |
| | | |
| 10.19 | | Stock Purchase Agreement, dated November 25, 2018 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on November 26, 2019) |
| | | |
| 10.20^ | | Letter Agreement effective September 23, 2019 between the registrant and Nina Simosko (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on October 1, 2019) |
| | | |
| 10.21^ | | Letter Agreement effective September 26, 2019 between MJ Freeway, LLC and Ray Thompson (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the registrant on October 1, 2019) |
| | | |
| 10.22 | | Covenant Agreement effective September 23, 2019 between Akerna Corp and Nina Simosko (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the registrant on October 1, 2019) |
| | | |
| 10.23 | | Covenant Agreement between Akerna Corp. and Ray Thompson (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by the registrant on October 1, 2019) |
| | | |
| 10.24^ | | Letter Agreement dated December 17, 2019 between Akerna Corp. and John Fowle (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on December 23, 2019) |
| | | |
| 10.25 | | Covenant Agreement dated December 17, 2019 between Akerna Corp. and John Fowle (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the registrant on December 23, 2019) |
| 10.26 | | |
10.26 | | Exchangeable Share Support Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on July 8, 2020) |
| | | |
| 10.27 | | Escrow Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the registrant on July 8, 2020) |
| | | |
| 10.28 | | Rights Indenture (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the registrant on July 8, 2020) |
| | | |
21.110.29 | | Agreement and Plan of Reorganization with Navigator Acquisition Corp. dated March 10, 2021 (incorporated by reference to Exhibit 10.1 to the Form 10-Q filed by the registrant on May 21, 2021) |
| | |
| 10.30 | | At-the-Market Distribution Agreement dated July 23, 2021 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the registrant on July 23, 2021) |
| | |
| 10.31 | | Form of Lock-Up Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the registrant on October 4, 2021) |
| | |
| 10.32 | | Registration Rights Agreement with Sellers of 365 Cannabis (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the registrant on October 4, 2021) |
| | |
| 10.33 | | Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed by the registrant on October 5, 2021) |
| | |
| 10.34 | | Form of Voting Agreement (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed by the registrant on October 5, 2021) |
| | |
| 10.30 | | Consulting Agreement, between Akerna Corp. and Larry Dean Ditto, Jr., dated April 21, 2022 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on May 16, 2022) |
| | |
| 21.1 | | Subsidiaries of Akerna Corp. (incorporated by reference to Exhibit 21.1 to the Registration Statement on Form S-1 filed by the registrant on July 9, 2020) |
| | | |
| 23.1* | | Consents of Marcum LLP |
| | | |
| 23.2* | | Consent of Ernst & Young LLP |
| | |
23.3 | | Consent of Opinion of Dorsey & Whitney LLP (included as Exhibit 5.1) |
| | | |
24.1*24.1 | | Power of Attorney (included in theon signature page to the Registration Statement on Form S-1 filed by the registrantRegistrant on July 9, 2020)June 15, 2022) |
| | | |
101*101.INS* | | Inline XBRL Instance Document |
| | |
| 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document. |
| | |
| 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
| 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
| 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| | |
| 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
| 104* | | Cover Page Interactive Date FilesData File (formatted as Inline XBRL and contained in Exhibit 101). |
| | |
| 107* | | Calculation of Filing Fee Table |
| + | The exhibits and schedules to this Exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby agrees to furnish a copy of any omitted schedules to the Commission upon request. |
| ^ | Management compensation contract or arrangementarrangement. |
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