The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2022, and the related notes thereto, which have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP").
Akerna Corp., herein referred to as “we”, “us”, “our,” the “Company” or “Akerna”, through our wholly-owned subsidiaries MJ Freeway, LLC, Trellis Solutions, Inc., Ample Organics, Inc., solo sciences, inc., Viridian Sciences Inc., and The NAV People, Inc. d.b.a. 365 Cannabis.
Forward-Looking Statements
This Quarterly Report on Form 10-Q including all exhibits hereto contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding future events or our future results of operations, financial condition, business, strategies, financial needs, and the plans and objectives of management. In some cases, forward-looking statements can be identified because they contain words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “likely,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. Forward-looking statements are based on information available to our management as of the date of this Quarterly Report and our management’s good faith belief as of such date with respect to future events and are subject to a number of risks, uncertainties, and assumptions that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements, in particular the substantial risks and uncertainties related to the ongoing COVID-19 pandemic. Important factors that could cause such differences include, but are not limited to:
| ● | our ability to continue as a going concern and manage our cash flow; |
| ● | our ability to manage our history of losses; |
| ● | our ability to sustain our revenue growth rate, to achieve or maintain profitability, and to effectively manage our anticipated growth; |
| ● | our dependence on the commercial success of our clients, the continued growth of the cannabis industry and the regulatory environment in which the cannabis industry operates |
| ● | our ability to attract new clients on a cost-effective basis and the extent to which existing clients renew and upgrade their subscriptions; |
| ● | the timing of our introduction of new solutions or updates to existing solutions; |
| ● | our ability to successfully diversify our solutions by developing or introducing new solutions or acquiring and integrating additional businesses, products, services, or content; |
| ● | our ability to respond to changes within the cannabis industry, including legal and regulatory changes; |
| ● | the effects of adverse changes in, or the enforcement of, federal laws regarding our clients’ cannabis operations or our receipt of proceeds from such operations; |
| ● | our ability to manage unique risks and uncertainties related to government contracts; |
| ● | our ability to manage and protect our information technology systems; |
| ● | our ability to maintain and expand our strategic relationships with third parties; |
| ● | our ability to deliver our solutions to clients without disruption or delay; |
| ● | our exposure to liability from errors, delays, fraud, or system failures, which may not be covered by insurance; |
| ●
| our ability to expand our international reach; |
| ●
| our ability to retain or recruit officers, key employees, and directors; |
| ● | our ability to raise additional capital or obtain financing in the future; |
| ● | our ability to successfully integrate acquired businesses with Akerna’s business within anticipated timelines and at their expected costs;
|
| ● | our ability to complete planned acquisitions on time or at all due to failure to obtain stockholder approval or governmental or regulatory clearances, or the failure to satisfy other conditions to completion, or the failure of completion for any other reason;
|
| ●
| our response to adverse developments in the general market, business, economic, labor, regulatory, and political conditions, including worldwide demand for cannabis and the spot price and long-term contract price of cannabis; |
| ● | our response to competitive risks; |
| ● | our ability to protect our intellectual property; |
| ● | the market reaction to negative publicity regarding cannabis; |
| ● | our ability to manage the requirements of being a public company; |
| ● | our ability to implement effective disclosure controls and procedures and internal control over financial reporting; |
| ● | our ability to service our convertible debt and meet ongoing covenants under our convertible notes; |
| ● | our accounting treatment of certain of our private warrants;
|
| ● | our ability to effectively manage any disruptions to our business and/or any negative impact to our financial performance caused by the economic and social effects of the COVID-19 pandemic and measures taken in response; and
|
| ● | other factors discussed in other sections of this Quarterly Report on Form 10-Q, including the sections of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under Part II, Item 1A. “Risk Factors” and in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission, or the SEC, on March 31, 2022, under Part I, Item 1A, “Risk Factors.” |
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated, or expected. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We disclaim any obligation to revise subsequently any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. We qualify all the forward-looking statements contained in this Quarterly Report by the foregoing cautionary statements.
Business Overview
Akerna is a leading provider of software solutions within the cannabis industry. Cannabis businesses face significant complexity due to the stringent regulations and restrictions that shift based on regional, state, and national governing bodies. As the first to market more than ten years ago, Akerna’s family of software platforms help to enable regulatory compliance and inventory management across the entire supply chain. When the legal cannabis market started to grow, we identified a need for organic material tracking and regulatory compliance software as a service (SaaS) solution customized specifically for the unique needs of the industry. By providing an integrated ecosystem of applications and services that help our clients enable compliance, regulation, consumer safety and taxation, Akerna is building the technology backbone of the cannabis industry. While designed specifically for the unique needs of the cannabis market, our solutions are adaptable for other industries requiring government regulatory oversight, or where the tracking of organic materials from seed or plant to end products is desired.
Executing upon our expansion strategy, we acquire complementary software brands that service the cannabis industry to grow the scope of Akerna’s cannabis ecosystem. Since 2019, we have integrated six new brands into the Akerna product and service offering. Our first acquisition, Solo Sciences (“Solo”), was initiated in the fall of 2019, with the full acquisition completed in July 2020. We added Trellis Solutions (“Trellis”) to our portfolio on April 10, 2020 and finalized the acquisition of Ample Organics (“Ample”) and Last Call Analytics (“Last Call”) on July 7, 2020. On April 1, 2021 we completed our acquisition of Viridian Sciences Inc. (“Viridian”), a cannabis business management software system built on SAP Business One, followed by the acquisition of The NAV People, Inc. d.b.a 365 Cannabis (“365” Cannabis”), a cannabis business management software system built on Microsoft Business Central, on October 1, 2021. Through our growing family of companies, Akerna provides highly versatile platforms that equip our clients with a central data management system for tracking regulated products. Our solutions also provide clients with integrated security, transparency, and scalability capabilities, all while helping maintaining compliance with their governing regulations.
On the commercial side, our products help state-licensed businesses operate in compliance with applicable regional laws. Our integrated ecosystem provides integrations with third-party vendors and add-ons that enhance the capabilities of our commercial software platforms. On the regulatory side, we provide track and trace solutions that allow state governments to monitor compliance of licensed cannabis businesses. To date, our software has helped monitor the compliance of more than $30 billion in legal cannabis. While our software facilitates the success of legal cannabis businesses, we do not handle any cannabis-related material, do not process cannabis sales transactions within the United States (“U.S.”), and our revenue is generated from a fixed-fee based subscription and professional services model and is not related to the type or amount of sales made by our clients.
We drive revenue growth through the development of our product line, our acquisitions and from continued expansion of our software and consulting offerings within the cannabis, hemp, and cannabidiol (“CBD”) industry. Businesses across the regulated cannabis industry use our solutions. The brand recognition of our existing products, our ability to provide services in all areas of the seed-to-sale life cycle, and our wealth of relevant experience attracts cultivation, manufacturing, and dispensary clients who are seeking comprehensive business optimization solutions. Our software solutions are designed to be scalable, and while mid-market and smaller customers have historically been our primary target segment, we are focused on extending our customer reach to address the needs of the emerging enterprise level operator. We believe these larger multi-state/multi-vertical operations represent significant long-term future growth opportunities as the cannabis industry continues to consolidate at a rapid rate. The sophistication of our platform accommodates the complexities of both multi-vertical and multi-state business needs, making us critical partners and allowing us to cultivate long-term, successful relationships with our clients.
Our platforms provide licensed businesses with a true enterprise solution for managing their inventory and compliance and allow government regulators to engage in accurate and real-time compliance monitoring. Key capabilities of our technology infrastructure include:
Seed-to-Sale Tracking allows the tracking of products from cultivation, through harvest and processing and manufacturing, to the monitoring of the final sale to the patient or consumer. Our traceability technology captures every step in an individual plant’s life, providing visibility into the supply chain from any measurement of finished product dispensed to a patient or customer, back to the plant it came from, and all activity, transportation, and transactions that happen in between. While we do not provide payment processing, and never take, own, or handle any product or cash transaction, our platform records all sales as part of state and jurisdictional compliance Track-and-Trace processes. The data gathered throughout all of these processes is captured, and provides the insights and information needed to run an efficient and streamlined cannabis business. Seed-to-Sale software operates in a complementary relationship with state-mandated Track-and-Trace systems, replicating the reporting functionality and eliminating the need for operators to duplicate their compliance data into two disparate systems. Track-and-Trace systems are designed solely for government regulators to maintain compliance and do not have the sophistication or functionality to provide cannabis business owners with the insights and tools for effective business management. Our seed-to-sale platforms integrate with the state Track-and-Trace compliance system, reporting in the mandated data along the supply chain while also providing business owners with the capabilities to make informed business decisions based on the fully overview of their operations.
Track-and-Trace is the compliance reporting system used by regulatory bodies in most states. In order to adhere to their state-specific compliance regulations, cannabis operators are required to enter specific data points along the supply chain into the state-mandated track-and-trace system. By doing so, regulators can track the movement of cannabis inventory through the full supply chain, even when it moves between facilities or operators. The aggregated view that Track-and-Trace software seeks to ensure that the end product being sold has been grown, harvested, processed, transferred and sold compliantly, and provides assurance of safety to consumers.
Single System Integration allows state-licensed clients to manage inventory, customer records, and staff in one tracking system. MJ Platform and Leaf Data Systems platforms can be fully integrated with one another to create a streamlined Seed-to-Sale/Track-and-Trace solution. Additionally, our platforms can also be integrated with systems of numerous third-party suppliers. We have certified integrations with world class accounting solutions, including Sage, SAP, Microsoft and Netsuite.
Anti-Counterfeiting Technology. Solo sciences provides next-generation anti-counterfeiting technology fused with a direct communication system between brands and consumers. The solo sciences mission is to build confidence and establish trust among consumers, while enabling retailers and distributors to close the loop with creators and producers.
Cannabis Market Insights are curated using the anonymized data aggregated through our Seed-to-Sale platform for key industry intelligence. With over $30 billion in cannabis sales tracked over the past twelve years, we have cultivated a substantial legal cannabis dataset across 30+ states and multiple countries. This data provides a detailed overview of key industry trends, giving us the ability to provide banks, investors, researchers, cannabis businesses, and non-cannabis businesses with cannabis market intelligence and comparison data.
Enterprise Resource Planning (ERP) software is a business process management software that manages and integrates a company’s financials, manufacturing, inventory, supply chain, operations, commerce, and reporting activities. ERP systems improve an operator's efficiency and effectiveness by eliminating disparate systems, consolidating business critical information in a single location, reducing double entry data, and streamlining operations. ERP software solutions built for cannabis operators combine traditional accounting, manufacturing, inventory, and supply chain management with cannabis-specific track and trace and compliance functionality.
Using our years of experience, proprietary databases, and resources to identify trends and predict changes in the cannabis industry we evolve our products and better assist our clients in operating in compliance with the applicable laws of their jurisdictions and capitalizing on commercial opportunities within the applicable regulatory framework, with accuracy, efficiency, and geographic specificity. We have worked with clients and governments across the globe to create customized solutions that fit their specific regulatory and commercially compliant needs. While the majority of our clients are in the U.S. and Canada, our solutions allow cannabis businesses to operate efficiently in this fast-changing industry and comply with state, local, and federal (in countries such as Canada, Italy, Macedonia, and Colombia). Akerna and our family of companies is well-positioned to provide compliance solutions for the expanding national and international legal cannabis market.
Key Developments
The following general business development had or may have a significant impact on our results of operations, financial position and cash flows.
Convertible Notes Amendment
On June 30, 2022, we and the holders that are parties to the securities purchase agreement associated with our 2021 Senior Convertible Notes (the “Senior Convertible Notes”) entered into an amendment and waiver agreement (the “Convertible Notes Amendment”) to add covenants such that (a) we 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 Senior 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) we 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 Senior Convertible Notes is equal to or less than $14 million and $11 million, subject to certain conditions. Further the holders of the Senior Convertible Notes waived provisions such that (i) no amortization payments are due and payable for any payments previously required to be made from July 1, 2022 through January 1, 2023, (ii) the holders of the Senior Convertible Notes will not accelerate any previously deferred installment amounts until January 1, 2023 and (iii) the terms of the Senior Convertible Notes which would provide for reset of the conversion price of the Senior Convertible Notes as a result of the issuance of the Company’s common stock, par value $0.0001 per share (“Common Stock”) and warrants (the “Unit Offering”) and instead agree to a reset of the conversion price equal to a per share price of 135% of the Unit Offering price, or $0.3105 per unit.
Unit Offering
On June 30, 2022, we entered into an underwriting agreement (the “Underwriting Agreement”) with A.G.P./Alliance Global Partners (the “Underwriter”), in connection with the Unit Offering which is comprised of an aggregate of (i) 29,382,861 units of the Company consisting of 29,382,861 shares of Common Stock together with Common Stock warrants (the “Common Warrants”) to purchase up to 29,382,861 shares of Common Stock and (ii) 14,095,400 pre-funded units, consisting of 14,095,400 pre-funded warrants (“Pre-Funded Warrants”), with each Pre-Funded Warrant exercisable for one share of Common Stock, together with Common Warrants to purchase up to 14,095,400 shares of Common Stock. The units were sold at a public offering price of $0.23 per unit and the pre-funded units were sold at a public offering price of $0.2299 per pre-funded unit. Each Share and each Pre-Funded Warrant was sold with an accompanying Common Warrant but were issued separately and are immediately tradeable separately upon issuance.
The Pre-Funded Warrants are immediately exercisable at a nominal exercise price of $0.0001 or on a cashless basis and may be exercised at any time until all of the Pre-Funded Warrants are exercised in full. The Common Warrants have an exercise price of $0.23 per share subject to certain adjustments, are immediately exercisable and will expire five years from the date of issuance.
The Pre-Funded Warrants were sold to purchasers whose purchase of shares of Common Stock in the Offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or at the election of the purchaser, 9.99%) of our outstanding Common Stock immediately following the consummation of the Unit Offering, in lieu of shares of Common Stock. Each Pre-Funded Warrant represents the right to purchase one share of Common Stock at an exercise price of $0.0001 per share.
Pursuant to the Underwriting Agreement, we granted the Underwriter a 45-day option from June 30, 2022 to purchase from the Company (i) additional shares of Common Stock and/or (ii) Common Warrants and/or (iii) Pre-Funded Warrants, in any combination thereof, up to, and not to exceed, 13,043,478 shares of Common Stock or shares of Common Stock underlying Pre-Funded Warrants or Common Warrants, in the aggregate, solely to cover over-allotments, if any.
Pursuant to the Underwriting Agreement and upon closing of the Unit Offering, we issued to the Underwriter warrants to purchase up to 2,173,913 shares of Common Stock (the “Underwriter Warrants” and, together with the Common Warrants and the Pre-Funded Warrants, the “Warrants”), which is 5.0% of the aggregate number of Shares and Shares issuable upon exercise of the Pre-Funded Warrants sold in the Unit Offering. The Underwriter Warrants are exercisable at any time and from time to time, in whole or in part, commencing from six months after June 29, 2022 (the “Effective Date”) and ending five years from the Effective Date, at a price per share equal to $0.23, which is the public offering price per unit.
The Unit Offering closed on July 5, 2022 and we received net proceeds of approximately $9.3 million after deducting underwriting discounts and commissions and related expenses. In connection with the Convertible Notes Amendment, a total of $7 million of the proceeds were deposited into certain restricted cash accounts. We intend to use the remaining net proceeds from the Unit Offering for general corporate purposes, including working capital, marketing, product development and capital expenditures.
Restructuring
In May 2022, we implemented a corporate restructuring initiative (the “Restructuring”) as approved by our board of directors. The Restructuring resulted in a reduction of the Company's workforce by 59 employees, or approximately 33 percent of the Company. We incurred costs of approximately $0.7 million in severance benefits, including employee insurance, associated payroll taxes and legal costs in connection with the Restructuring. Of the total amount incurred, $0.3 million was included in Sales and marketing costs, $0.2 million was recorded in Product development and less than $0.1 million was included in Cost of revenue and General and administrative expenses, respectively. All amounts directly attributable to the severed employees were settled in cash during the quarter ended June 30, 2022. Accordingly, we have no material obligations remaining associated with the Restructuring. In addition to the reduction in force, the Company's executive leadership team agreed to a temporary 25 percent reduction in salary, subject to certain conditions.
Financial Results of Operations
Revenue
We generate revenue from two primary sources: (1) software and (2) consulting services. Revenue from software comprised approximately 95% and 93% of our revenue for the six months ended June 30, 2022 and 2021, respectively. Revenue from consulting services comprised approximately 4% and 7% of our revenue for six months ended June 30, 2022 and 2021, respectively.
Software. Our software is solutioned for our key markets, small and medium-sized business (“SMB”) and enterprise customers. Our SMB customers become a natural funnel for our larger, more robust enterprise offerings built on SAP and Microsoft. In either market, software revenue is generated from subscriptions and services related to the use of our commercial software platforms, MJ Platform, Ample, Trellis, Viridian, and 365 Cannabis, our government regulatory platform, Leaf Data Systems, and the sale of business intelligence, data analytics and other software related services. Software contracts are generally quarterly, annual, or three-year long contracts paid monthly, quarterly, or annually in advance of service and cancellable upon 30 or 90 days’ notice, although we do have many multi-year commercial software contracts. Leaf Data Systems contracts are generally multi-year contracts payable annually or quarterly in advance of service. Commercial software and Leaf Data Systems contracts generally may only be terminated early for breach of contract as defined in the respective agreements. Amounts that have been invoiced are initially recorded as deferred revenue or contract liabilities. Subscription revenue is recognized on a straight-line basis over the service term of the arrangement beginning on the date that our solution is made available to the customer and ending at the expiration of the subscription term.
Consulting. Consulting services revenue is generated by providing solutions for operators in the pre-application of licensures and pre-operational phases of development. These services include application and business plan preparation as they seek licenses to be granted. Consulting projects completed during the pre-application phase generally solidify us as the software vendor of choice for subsequent operational phases once the operator is granted the license. As a result, our consulting revenue is driven as new emerging states pass legislation, and as our client-operators gain licenses. Accordingly, we expect our consulting services to grow over time as more states emerge with legalization reforms.
Other Revenue. Our other revenue is derived primarily from point-of-sale hardware and other non-recurring revenue.
Cost of Revenue and Operating Expenses
Cost of Revenue
Our cost of revenue is derived from direct costs associated with operating our commercial and government regulatory software platforms and providing consulting services. The cost of revenue for our commercial and government regulatory platforms relates primarily to hosting and infrastructure costs and subcontractor expenses incurred in connection with certain government contracts. Consulting cost of revenue relates primarily to our employees’ and consultants’ salaries and other related compensation expenses. We record the cost of revenue using the direct cost method. This method requires the allocation of direct costs including support services and materials to the cost of revenue.
Product Development Expenses
Our product development expenses include salaries and benefits, nearshore contractor expenses, technology expenses, and other overhead related to the ongoing maintenance of our commercial and government regulatory software platforms and planning for new software development. Product development costs, other than software development expenses qualifying for capitalization, are expensed as incurred. Capitalized software development costs consist primarily of employee-related costs. We devote substantial resources to enhancing and maintaining our technology infrastructure, developing new and enhancing existing solutions, conducting quality assurance testing, and improving our core technology.
Sales and Marketing Expenses
Sales and marketing expense is primarily salaries and related expenses, including commissions, for our sales, marketing, and client service staff. We also categorize payments to partners and marketing programs as sales and marketing expenses. Marketing programs consist of advertising, events, such as trade shows, corporate communications, brand building, and product marketing activities. We plan to continue to invest in marketing and sales by expanding our domestic and international selling and marketing activities, building brand awareness, attracting new clients, and sponsoring additional marketing events. The timing of these marketing events will affect our marketing costs in a particular quarter.
We defer the portion of sales commissions that is considered a cost of obtaining a new contract with a customer in accordance with the revenue recognition standard and amortize these deferred costs over the period of benefit, 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 sale (new, renewal, or add-on service offering), 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.
Other (Expense) Income, Net
Other (expense) income, 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 non-operating gains and losses.
Critical Accounting Policies and Estimates
Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021. Since the date of the Annual Report, there have been no material changes to our critical accounting policies.
Results of Operations for the Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2022
The following table highlights our operating revenues and expenses for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021:
| Six Months Ended June 30 | |
| Change |
|
| 2022 | | | 2021 | |
| Period over Period |
|
Revenues: | | | | | |
| | |
| |
|
Software | $ | 12,429,442 | | | $ | 8,251,881 | |
| $ | 4,177,561 | |
| | 51 | %
|
Consulting | | 542,309 | | | | 583,631 | |
| | (41,322 | ) |
| | (7 | )% |
Other | | 64,971 | | | | 85,399 | |
| | (20,428 | ) |
| | (24 | )% |
Total revenue | | 13,036,722 | | | | 8,920,911 | |
| | 4,115,811 | |
| | 46 | %
|
| | | | | | | |
| | | |
| | |
|
Cost of revenues | | 4,039,648 | | | | 3,368,547 | |
| | 671,101 | |
| | 20 | % |
Gross profit | | 8,997,074 | | | | 5,552,364 | |
| | 3,444,710 | |
| | 62 | %
|
Gross profit margin | | 69 | % | | | 62 | % |
| | | |
| | |
|
| | | | | | | |
| | | |
| | |
|
Operating expenses: | | | | | | | |
| | | |
| | |
|
| Product development: |
| 3,866,789
|
|
|
| 2,951,358 |
|
|
| 915,431 |
|
|
| 31 | % |
| Sales and marketing |
| 6,421,431 |
|
|
| 3,562,058 |
|
|
| 2,859,373
| |
|
| 80 | % |
General and administrative | | 4,989,541 | | | | 6,228,943 | |
| | (1,239,402 | ) |
| | (20 | )% |
| Depreciation and amortization |
| 3,976,224 |
|
|
| 2,367,015 |
|
|
| 1,609,209 |
|
|
| 68 | % |
| Impairment of long-lived assets |
| 39,600,587 |
|
|
| — |
|
|
| 39,600,587 |
|
|
| nm |
|
Total operating expenses | | 58,854,572 | | | | 15,109,374 | |
| | 43,745,198 | |
| | nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations | $ | (49,857,498 | ) | | $ | (9,557,010 | ) |
| $ | (40,300,488 | ) |
| | nm |
|
nm – percentage change not meaningful
Revenue
Software Revenue
Total software revenue increased to $12.4 million for the six months ended June 30, 2022 from $8.3 million for the six months ended June 30, 2021, for an increase of $4.2 million, or 51%. Software revenue related to our enterprise offerings, Viridian and 365 Cannabis, for the six months ended June 30, 2022 were $5.9 million, compared to $0.9 for the six months ended June 30, 2021 and software revenue related to our non-enterprise offerings, which include MJ Platform, Ample, Trellis, Solo, and Leaf Data Systems, declined to $6.1 million for the six months ended June 30, 2022 compared to $6.6 million for the six months ended June 30, 2021. There was also a decrease in partnership and data revenue which was $0.4 million for the six months ended June 30, 2022 compared to $0.7 million during the same period in the prior year. Software revenue accounted for 95% and 93% of total revenue for the six months ended June 30, 2022 and 2021, respectively. As indicated above, the increase in software revenue during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was attributable to revenue generated from our enterprise offerings sourced primarily from 365 Cannabis which was acquired during the fourth quarter of 2021. Also contributing to the increase was $0.4 million of non-recurring contract termination fees attributable to two customers.
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 $0.5 million for the six months ended June 30, 2022 compared to $0.6 million for the six months ended June 30, 2021, decrease of less than $0.1 million, or 7%. Consulting revenue was 4% and 7% of total revenue for the six months ended June 30, 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, and other non-recurring revenues. Other revenue was less than $0.1 million for each of the six months ended June 30, 2022 and 2021, respectively.
Cost of Revenue
Our cost of revenue was $4.0 million for the six months ended June 30, 2022 compared to $3.4 million for the six months ended June 30, 2021, an increase of $0.6 million, or 20%. Total cost of revenue increased primarily as a result of an increase in software application and hosting expenses of $0.5 million and fees for Microsoft licenses in the amount of $0.9 million related to our acquisitions of Viridian and 365 Cannabis. These increases were partially offset by the reversal of a litigation contingency of approximately $0.5 million (see Note 7 – Commitments and Contingencies to the consolidated financial statements for further discussion of the reversal of the litigation reserves).
Gross Profit
Gross profit was $9.0 million for the six months ended June 30, 2022 compared to $5.6 million for the six months ended June 30, 2021, an increase of $3.4 million or 62%. The gross profit margin increased to 69% for the six months ended June 30, 2022 from 62% for the six months ended June 30, 2021.
Operating Expenses
Product Development
Product development expense was $3.9 million for the six months ended June 30, 2022, compared to $3.0 million for the six months ended June 30, 2021, an increase of $0.9 million, or 31%. Product development expense increased due primarily to the Viridian and 365 Cannabis acquisitions, which resulted in a $0.9 million increase in salary-related and contractor expenses for the six months ended June 30, 2022 compared to the same period in the prior year as well as higher software and application costs and severance benefit costs associated with the Restructuring partially offset by lower recruiting and share-based compensation costs.
Sales and Marketing
Sales and marketing expense was $6.4 million for the six months ended June 30, 2022, compared to $3.6 million for the six months ended June 30, 2021, an increase of $2.8 million, or 80%. The increase in sales and marketing expense is primarily related to the acquisitions of Viridian and 365 Cannabis which resulted in an increase of $2.5 million in salary-related and contractor expenses for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. In addition, the 2022 period included approximately $0.3 million of severance benefits associated with the Restructuring.
General and Administrative
General and administrative expense was $5.0 million for the six months ended June 30, 2022, compared to $6.2 million for the six months ended June 30, 2021, a decrease of $1.2 million, or 20%. The period in 2022 and 2021 include charges associated with office lease terminations and, in the case of 2021, the associated write-off of certain leasehold improvements. During the 2022 period, we terminated our Las Vegas office space which resulted in a restructuring charge of $0.5 million while the 2021 period reflected charges of $2.4 million associated with the exit from our former Toronto office. There was also an increase of $0.2 million in salary-related and contractor expenses for the six months ended June 30, 2022 compared to the same period in the prior year.
Depreciation and Amortization
Depreciation and amortization expense increased to $4.0 million for the six months ended June 30, 2022 from $2.4 million for the six months ended June 30, 2021, an increase of $1.6 million, or 68%. The increase in amortization expense is primarily attributable to the acquired intangible assets from our Viridian and 365 Cannabis acquisitions in the amount of $0.8 million, which both occurred after June 30, 2021, as well as an increase in capitalized software in the amount of $0.8 million.
Impairment of Long-lived Assets
Due to a continued decline in market conditions from December 31, 2021 to June 30, 2022, we recorded impairment charges of $36.4 million including $23.5 million attributable to goodwill associated with the non-enterprise reporting unit and $12.9 million associated with the goodwill of the enterprise reporting unit during the six months ended June 30, 2022, compared to no impairment charge for the six months ended June 30, 2021. In addition, we recorded impairments of $3.2 million attributable to certain intangible assets and capitalized software associated with one specific business line within the non-enterprise reporting unit during the six months ended June 30, 2022 (see Note 9 – Goodwill and Intangible Assets, Net to the consolidated financial statements for further discussion on the impairments recorded).
Results of Operations for the Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
The following table highlights our operating revenues and expenses for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021:
| Three Months Ended June 30 | |
| Change |
|
| 2022 | | | 2021 | |
| Period over Period |
|
Revenues: | | | | | |
| | | |
|
Software | $ | 5,920,929 | | | $ | 4,456,728 | |
| $ | 1,464,201 | | | 33 | %
|
Consulting | | 115,300 | | | | 410,884 | |
| | (295,584 | ) | | (72 | )% |
Other | | 49,652 | | | | 39,275 | |
| | 10,377 |
| | 26 | % |
Total revenue | | 6,085,881 | | | | 4,906,887 | |
| | 1,178,994 | | | 24 | %
|
| | | | | | | |
| | | | | |
|
Cost of revenues | | 1,835,977 | | | | 1,914,380 | |
| | (78,403 | ) | | (4 | )% |
Gross profit | | 4,249,904 | | | | 2,992,507 | |
| | 1,257,397 | | | 42 | %
|
Gross profit margin | | 70 | % | | | 61 | % |
| |
| | |
|
|
| | | | | | | |
| | | | | |
|
Operating expenses: | | | | | | | |
| | | | | |
|
| Product development: |
| 1,761,428 |
|
|
| 1,527,258 |
|
|
| 234,170 |
|
| 15 | % |
| Sales and marketing |
| 3,185,318 |
|
|
| 1,826,143 |
|
|
| 1,359,175 | |
| 74 | % |
General and administrative | | 2,419,109 | | | | 4,375,981 | |
| | (1,956,872 | ) | | (45 | )% |
| Depreciation and amortization |
| 1,982,833 |
|
|
| 1,314,132 |
|
|
| 668,701 |
|
| 51 | % |
| Impairment of long-lived assets |
| 24,122,066 |
|
|
| — |
|
|
| 24,122,066 |
|
| nm |
|
Total operating expenses | | 33,470,754 | | | | 9,043,514 | |
| | 24,427,240 | | | nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations | $ | (29,220,850 | ) | | $ | (6,051,007 | ) |
| $ | (23,169,843 | ) | | nm | |
nm – percentage change not meaningful
Revenue
Software Revenue
Total software revenue increased to $5.9 million for the three months ended June 30, 2022 from $4.5 million for the three months ended June 30, 2021, for an increase of $1.5 million, or 33%. Software revenue related to our enterprise offerings, Viridian and 365 Cannabis, for the three months ended June 30, 2022 were $2.8 million, compared to $0.9 for the three months ended June 30, 2021 and software revenue related to our non-enterprise offerings, which include MJ Platform, Ample, Trellis, Solo, and Leaf Data Systems, were $2.9 million for the three months ended June 30, 2022 compared to $3.2 million for the three months ended June 30, 2021. There was also a slight decrease in partnership and data revenue which was $0.2 million for the three months ended June 30, 2022 compared to $0.3 million during the same period in the prior year. Software revenue accounted for 97% and 91% of total revenue for the three months ended June 30, 2022 and 2021, respectively. As indicated above, the increase in software revenue during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 was attributable to revenue generated from our enterprise offerings. Also contributing to the increase was $0.4 million of non-recurring contract termination fees attributable to two customers.
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 $0.1 million for the three months ended June 30, 2022 compared to $0.4 million for the three months ended June 30, 2021, a decrease of $0.3 million, or 72%. Consulting revenue was 2% and 8% of total revenue for the three months ended June 30, 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, and other non-recurring revenues. Other revenue was less than $0.1 million for each of the three months ended June 30, 2022 and 2021, respectively.
Cost of Revenue
Our cost of revenue was $1.8 million for the three months ended June 30, 2022 compared to $1.9 million for the three months ended June 30, 2021, a decrease of $0.1 million, or 4%. The 2022 period includes a benefit of approximately $0.5 million from the reversal of a litigation reserve (see Note 7 – Commitments and Contingencies to the consolidated financial statements for further discussion of the reversal of the litigation reserve). Excluding this item, the total cost of revenue increased primarily as a result of an increase in Microsoft licenses in the amount of $0.4 million related to our acquisitions of Viridian and 365 Cannabis.
Gross Profit
Gross profit was $4.2 million for the three months ended June 30, 2022 compared to $3.0 million for the three months ended June 30, 2021, an increase of $1.3 million or 42%. Gross profit margin also improved from 61% for the three months ended June 30, 2021 to 70% for the three months ended June 30, 2022. This improvement in gross margin was due primarily 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 gross margin.
Operating Expenses
Product Development
Product development expense was $1.8 million for the three months ended June 30, 2022, compared to $1.5 million for the three months ended June 30, 2021, an increase of $0.3 million, or 15%. Product development expense increased primarily due the Viridian and 365 Cannabis acquisitions, which resulted in a $0.3 million increase in salary-related and contractor expenses for the six months ended June 30, 2022 compared to the same period in the prior year. The 2022 period also includes severance benefit costs associated with the Restructuring partially offset by lower recruiting and share-based compensation costs
Sales and Marketing
Sales and marketing expense was $3.2 million for the three months ended June 30, 2022, compared to $1.8 million for the three months ended June 30, 2021, an increase of $1.4 million, or 74%. The increase in sales and marketing expense is primarily related to the acquisitions of Viridian and 365 Cannabis which resulted in an increase of $1.1 million in salary-related and contractor expenses for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. In addition, the 2022 period included approximately $0.3 million of severance benefits associated with the Restructuring.
General and Administrative
General and administrative expense was $2.4 million for the three months ended June 30, 2022, compared to $4.4 million for the three months ended June 30, 2021, a decrease of $2.0 million, or 45%. The period in 2021 includes $2.4 million of charges associated with the termination of our former Toronto office lease and the associated write-off of certain leasehold improvements. In addition, bad debt expense was lower by $0.2 million during the 2022 period when compared to the 2021 period. These decreases were partially offset by higher professional fees and severance benefits associated with the Restructuring.
Depreciation and Amortization
Depreciation and amortization expense increased to $2.0 million for the three months ended June 30, 2022 from $1.3 million for the three months ended June 30, 2021, an increase of $0.7 million, or 51%. The increase in amortization expense is primarily attributable to the acquired intangible assets from our Viridian and 365 Cannabis acquisitions in the amount of $0.3 million, which both occurred after June 30, 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 March 31, 2022 to June 30, 2022, we recorded impairment charges of $24.1 million including $8.0 million attributable to goodwill associated with the non-enterprise reporting unit and $12.9 million associated with the goodwill of the enterprise reporting unit during the six months ended June 30, 2022, compared to no impairment charge for the three months ended June 30, 2021. In addition, we recorded impairments of $3.2 million attributable to certain intangible assets and capitalized software associated with one specific business line within the non-enterprise reporting unit during the three months ended June 30, 2022 (see Note 9 – Goodwill and Intangible Assets, Net to the consolidated financial statements for further discussion on the impairments recorded).
Non-GAAP Financial Measures
In addition to our 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 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 to 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 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:
| ● | impairment 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, because this represents a non-cash charge and our mix of cash and share-based compensation may differ from other companies, which effects the comparability of results of operations and liquidity; |
| ● | cost incurred in connection with business combinations and mergers that are required to be expensed as incurred in accordance with GAAP, because business combination and merger related costs are specific to the complexity and size of the underlying transactions as well as the frequency of our acquisition activity these costs are not reflective of our ongoing operations; |
| ● | costs incurred in connection with non-recurring financing, including fees incurred as a direct result of electing the fair value option to account for our debt instruments; |
| ● | restructuring charges, which includes costs to terminate a lease and the related write-off 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 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; |
| ●
| 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; and |
| ● | other non-operating expenses which includes items such as 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. |
The reconciliation of net loss to EBITDA and Adjusted EBITDA is as follows:
|
| Six Months Ended June 30,
|
|
| | 2022 | |
| 2021 |
|
Net loss | | $ | (51,518,840 | ) |
| $ | (12,562,954 | ) |
Adjustments: | | | | |
|
|
|
|
| Interest expense (income) |
|
| 213,724 | |
|
| 937,504 | |
| Change in fair value of convertible notes |
|
| 1,727,000 |
|
|
| 2,007,677 | |
| Change in fair value of derivative liability |
|
| (51,896 | ) |
|
| 42,871 | |
| Income tax expense (benefit) |
|
| (227,486 | ) |
|
| 10,570 |
|
Depreciation and amortization | | | 3,976,224 | |
|
| 2,367,015 |
|
EBITDA | | $ | (45,881,274 | ) |
| $ | (7,197,317 | ) |
| Impairment of long-lived assets |
|
| 39,600,587 |
|
|
| — |
|
Stock-based compensation expense
| | | 445,056 | |
|
| 1,024,715 |
|
Business combination and merger related costs (income) | | | 5,425 | |
|
| 107,726 |
|
Non-recurring financing fees | | | 353,483 |
|
|
| 129,594 |
|
| Restructuring charges |
|
| 1,067,943 |
|
|
| 2,453,776 |
|
| Equity in losses of investee |
|
| — |
|
|
| 7,564 |
|
Adjusted EBITDA | | $ | (4,408,780 | ) |
| $ | (3,473,942 | ) |
|
| Three Months Ended June 30,
|
|
| | 2022 | |
| 2021 |
|
Net loss | | $ | (29,565,947 | ) |
| $ | (6,105,251 | ) |
Adjustments: | | | | |
|
|
|
|
| Interest expense (income) |
|
| 212,983 | |
|
| 163,124 | |
| Change in fair value of convertible notes |
|
| 294,000 |
|
|
| 16,405 | |
| Change in fair value of derivative liability |
|
| (33,845 | ) |
|
| (133,125 | ) |
| Income tax expense (benefit) |
|
| (128,042 | ) |
|
| 4,300 |
|
Depreciation and amortization | | | 1,982,833 | |
|
| 1,314,132 |
|
EBITDA | | $ | (27,238,018 | ) |
| $ | (4,740,415 | ) |
| Impairment of long-lived assets |
|
| 24,122,066 |
|
|
| — |
|
Stock-based compensation expense
| | | 132,132 | |
|
| 521,335 |
|
Business combination and merger related costs (income) | | | 6,062 | |
|
| 63,735 |
|
Non-recurring financing fees | | | 325,529 |
|
|
| 111,761 |
|
| Restructuring charges |
|
| 503,709 |
|
|
| 2,406,589 |
|
| Equity in losses of investee |
|
| — |
|
|
| 3,782 |
|
Adjusted EBITDA | | $
| (2,148,520 | ) |
| $ | (1,633,213 | ) |
Going Concern and Management's Liquidity Plans
In accordance with the Financial Accounting Standards Board’s (“FASB”) standard on going concern, Accounting Standard Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern (“ASU 2014-15”), we assess going concern uncertainty in our consolidated financial statements to determine if we have sufficient cash, cash equivalents and working capital on hand, including marketable equity securities, and any available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued, which is defined to as the “look-forward period” in ASU 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and our ability to delay or curtail expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, we make certain assumptions regarding implementing curtailments or delays in the nature and timing of programs and expenditures to the extent we deem probable that such implementations can be achieved and we have the proper authority to execute them within the look-forward period in accordance with ASU 2014-15. The accompanying 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.
The accompanying condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. However, since our inception we have incurred recurring losses from operations, used cash from operating activities, and relied on capital raising transactions to continue ongoing operations. During the six months ended June 30, 2022 and June 30, 2021, we incurred losses from operations of $25.7 million and $9.6 million, respectively, and used cash in operating activities of $6.9 million and $3.7 million, respectively. As of June 30, 2022, we had a working capital deficit of $13.2 million with $5.1 million in cash available to fund future operations (subsequent to June 30, 2022, we received approximately $2 million in immediately available cash from the Unit Offering). Furthermore, on May 24, 2022, we received a notice (the “Notice”) from The Nasdaq Stock Market LLC indicating that the bid price of the Company’s common stock, par value $0.0001 per share (“Common Stock”), 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 (the “Nasdaq Market”). The Notice has no immediate effect on the continued listing status of our Common Stock on the Nasdaq Market, and, therefore, our listing remains fully effective. We are provided a compliance period of 180 calendar days from the date of the Notice, or until November 21, 2022, to regain compliance with the minimum closing bid requirement. These factors raise substantial doubt regarding the ability of the Company to continue as a going concern.
Management’s plan for the Company to continue as a going concern includes several initiatives and actions including those impacting our short and intermediate term financing, continuing costs, primarily labor and employee benefits, our working capital and the liquidity of our Common Stock. Certain of these initiatives and actions began during the quarter ended June 30, 2022 while others were initiated in July 2022.
The most significant components of our plan include the following: (i) realizing annualized cost savings associated with the Restructuring that we announced in May 2022 which resulted in a reduction in workforce and related operating costs (see Note 4), (ii) entering into Convertible Notes Amendment which, among other factors, provides for a deferral of the required amortization payments due and payable from July 1, 2022 through January 1, 2023, (iii) deploying for working capital needs of the net proceeds of approximately $2 million received from the Unit Offering in a transaction that closed on July 5, 2022, net of underwriting discounts and commissions and other offering expenses and after depositing $7 million of the proceeds into certain restricted cash accounts in accordance with the Convertible Notes Amendment (an additional $2 million of which may be released upon reducing the principal amount of the Senior Convertible Notes to certain thresholds as described above in relation to the Convertible Notes Amendment), (iv) conservatively managing our working capital through disciplined cost-containment efforts and strategic management of our accounts receivable and accounts payable cycles (v) addressing the potential liquidity of our Common Stock in connection with the minimum listing requirements for the Nasdaq Market through a proposed 1-to-20 reverse stock split (the “Reverse Stock Split”) and (vi) continuing to seek to grow our customer base and realize synergies as we continue to integrate our recent acquisitions.
We anticipate the initiatives and actions described above will provide us with sufficient liquidity in order to operate our business in the normal course for the second half of 2022 until such time that the 365 Cannabis Earn-Out is due in December 2022, in part, to the fact that the debt service obligations associated with the Senior Convertible Notes for the first half of 2023 have effectively been substantially pre-funded with the amounts deposited into restricted accounts as required by the Convertible Notes Amendment. In the second half of 2022, we plan to continue to rigorously explore potential financing alternatives and other strategic options in addition to enhancing the liquidity of our Common Stock. In addition to and to the extent practical in the future, based on market conditions, we will consider incremental offerings of Common Stock through our previously authorized ATM Program; however, we do not consider this a viable alternative unless and until we are able to successfully address the minimum listing requirements of the Nasdaq Market with the proposed Reverse Stock Split. Through July 31, 2022, we have utilized $2.7 million of the total $25 million authorized by the ATM Program leaving $22.3 million remaining under the ATM Program, subject to certain limitations imposed by Form S-3 on amounts we can raise in any 12-month period of time.
If we are unable to secure other potential financing alternatives or fail to execute any other strategic options to raise sufficient additional funds through the first half of 2023, including through the ATM Program, we will have to develop and implement more aggressive plans to address our liquidity needs and our ability to satisfy the scheduled maturity of our obligations under the Senior Convertible Notes. Such plans could include extending payables, further reductions of expenditures (including the termination of additional employees) and reducing or eliminating investments in and the funding of certain of our business units and initiatives, otherwise substantially scaling back our business plan until sufficient additional capital is raised through other equity or debt offerings or selling certain of our business units to generate funding for remaining operations. Additional equity or debt 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 significantly. Accordingly, we may be subject to additional risks, including retention of key employees and limitations on the extension of credit by our vendors and other service providers. If we are required to raise additional capital as discussed above and if we cannot timely raise additional funds, we may be unable to meet the financial covenants of the Senior Convertible Notes, which could result in an event of default under those instruments which could adversely impact the Company. See the risks detailed in our Form 10-K under “Item 1A. Risk Factors – Risks Relating to our Convertible Debt”.
Our ability to continue as a going concern is dependent upon our ability to successfully execute the plans described above and attain profitable operations. Despite the comprehensive scope of our plans, the inherent risks associated with their successful execution are not sufficient to fully overcome substantial doubt about our ability to continue as a going concern for one year from the date of issuance of the consolidated financial statements. Accordingly, if we are unable to raise sufficient capital we may have to reduce operations which could significantly and adversely affect our results of operations. If we fail to meet the financial covenants of the Senior Convertible Notes and cannot obtain a waiver from such provisions or otherwise come to an agreement with the holders of our debt, such holders may declare a default on the debt which could subject our assets to seizure and sale, negatively impacting our business.
Cash Flows
Our cash and restricted cash balance was $5.1 million as of June 30, 2022. Cash flow information is as follows:
| | Six Months Ended
June 30, | |
| | 2022 | | | 2021 | |
Cash (used in) provided by: | | | | | | |
Operating activities | | $ | (7,187,445 | ) | | $ | (3,715,198 | ) |
Investing activities | | | (1,364,503 | ) | | | (2,004,609 | ) |
Financing activities | | | (766,989 | ) | | | (333,847 | ) |
| Effect of change in exchange rates on cash and restricted cash |
|
| 9,225 | |
|
| (124 | ) |
Net decrease in cash and restricted cash | | $ | (9,309,712 | ) | | $ | (6,053,778 | ) |
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, impairments of long-lived assets, 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 increased to $7.2 million during the six months ended June 30, 2022, from $3.7 million during the six months ended June 30, 2021, an increase of $3.5 million. For the six months ended June 30, 2022, cash was consumed from operations by a net loss of $51.5 million, less non-cash items of $46.1 million and a net change in assets and liabilities of $1.8 million. For the six months ended June 30, 2021, cash was consumed from operations by a net loss of $12.6 million, less non-cash items of $7.8 million and a net change in assets and liabilities of $1.0 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 totaled $1.4 million during the six months ended June 30, 2022, as a result of cash outflows for the development of our software products. Net cash used by investing activities during the six months ended June 30, 2021, was $2.0 million which was also related to our software development.
Financing Activities
Our financing activities consist primarily of proceeds from issuance of our common stock, including those through our ATM Program, issuances and repayments attributable to the Senior Convertible Notes and the value of shares withheld from the vesting of certain stock-based compensation awards.
During the six months ended June 30, 2022, we made principal payments of $1.5 million on the Senior Convertible Notes which were partially offset by the receipt of net proceeds of $0.8 million from the issuance of 1,816,184 shares of Common Stock through the ATM Program. During the six months ended June 30, 2022 and 2021, the value of shares withheld for income taxes from the vesting of stock-based compensation awards was less than $0.1 million and $0.3 million, respectively.
Contractual Obligations
For information concerning our contingent consideration, convertible debt, and operating lease obligations, see Notes 4, 6, and 7, respectively, to our condensed consolidated financial statements.
Not applicable.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is processed, recorded, summarized, and reported within the time periods specified in the Security and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of June 30, 2022 with the participation, and under the supervision, of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2022, our disclosure controls and procedures were ineffective in ensuring that: (i) information required to be disclosed by us in reports that we file or submit to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for accurate and timely decisions regarding required disclosure.
Material Weakness
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. Pursuant to our management’s review of disclosure controls and procedures and internal control over financial reporting, management determined that the following material weakness in our internal control over financial reporting and prevented management from determining that our disclosure controls and procedures and internal control over financial reporting were effective as of the end of the period covered by this report:
| · | The Company’s internal control over financial reporting pertaining to certain key process areas of financial reporting were not properly designed and/or operating effectively. |
Remediation Efforts
We are in the process of executing our remediation plans to address the material weakness described above. As of June 30, 2022, we have:
| · | Hired additional experienced resources with the appropriate skills to fill key accounting functions. |
| · | Engaged an outside firm to assist in the overall evaluation and documentation of the design and operating effectiveness of our internal controls over financial reporting and have remediated past deficiencies in the design of our internal control framework for certain key process areas including revenue, capitalized software, business combinations, intangibles, goodwill, stock-based compensation, general financial reporting, and information technology. |
| · | Developed a long-term plan to both (i) complete the remediation of the design of our internal control over financial reporting for our remaining process areas, and (ii) begin the remediation of the deficiencies in operating effectiveness of our internal controls over financial reporting across all process areas. |
We believe these actions and the improvements we expect to achieve, when fully implemented, will strengthen our internal control over financial reporting and remediate the material weaknesses. However, the material weaknesses will not be considered fully remediated until the applicable controls operate for a sufficient period of time for management to test the results for operating effectiveness. While no assurance can be provided, the Company believes it will make further progress in remediating these material weaknesses during 2022.
Notwithstanding the material weakness, management has concluded that the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows in conformity with GAAP.
Changes in Internal Control over Financial Reporting
During the most recently completed fiscal quarter, there have been no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Management recognizes that a control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
