UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-39096
AKERNA CORP.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1630 Welton St., 4th Floor
Denver, Colorado
(Address of principal executive offices)
83-2242651
(I.R.S. Employer
Identification No.)
80202
(Zip Code)
(888) 932-6537
Registrant’s telephone number, including area code
Securities registered under Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Common Stock, $0.0001 par value per share
Warrants to purchase one share of common stock
KERN
KERNW
Securities registered under Section 12(g) of the Act: None
Name of each exchange on which
registered
Nasdaq Stock Market LLC
(Nasdaq Capital Market)
Nasdaq Stock Market LLC
(Nasdaq Capital Market)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an
emerging growth company. See 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
Non-accelerated filer
☐
☒
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 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock of Akerna Corp held by non-affiliates of Akerna Corp was approximately $24.5 million
based upon the closing price per share of $8.43 on December 31, 2019.
As of September 25, 2020, there were 14,685,932 shares of the registrant’s common stock, par value $0.0001 per share, issued and outstanding.
To the extent herein specifically referenced, portions of Akerna Corp’s Definitive Proxy Statement on Schedule 14A for the 2020 Annual General Meeting of Shareholders
are incorporated herein by reference into Part III of this Form 10-K.
Documents Incorporated by Reference
INDEX
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
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FORWARD-LOOKING STATEMENTS
PART I
This Annual Report on Form 10-K , including all exhibits hereto and any documents that are incorporated by reference as set forth on the face page under
“Documents incorporated by reference,” contains “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 Annual 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 to include, but are not limited to:
● our ability to sustain our revenue growth rate, to achieve or maintain profitability, and to effectively manage our anticipated growth;
● our short operating history makes it difficult to evaluate our business and future prospects;
● our dependence on the commercial success of our clients, the continued growth of the cannabis industry and the regulatory environment in which the cannabis industry
operates;
● our ability to attract new clients on a cost-effective basis and the extent to which existing clients renew and upgrade their subscriptions;
● the timing of our introduction of new solutions or updates to existing solutions;
● our ability to successfully diversify our solutions by developing or introducing new solutions or acquiring and integrating additional businesses, products, services, or
content;
● our ability to respond to changes within the cannabis industry;
● the effects of adverse changes in, or the enforcement of, federal laws regarding our clients’ cannabis operations or our receipt of proceeds from such operations;
● our ability to manage unique risks and uncertainties related to government contracts;
● our ability to manage and protect our information technology systems;
● our ability to maintain and expand our strategic relationships with third parties;
● our ability to deliver our solutions to clients without disruption or delay;
● our exposure to liability from errors, delays, fraud, or system failures, which may not be covered by insurance;
● our ability to expand our international reach;
● our ability to retain or recruit officers, key employees, and directors;
● our ability to raise additional capital or obtain financing in the future;
● our ability to successfully integrate acquired businesses with Akerna’s business within anticipated timelines and at their expected costs;
● our ability to complete planned acquisitions on time or at all due to failure to obtain stockholder approval or governmental or regulatory clearances, or the failure to
satisfy other conditions to completion, or the failure of completion for any other reason;
● our response to adverse developments in the general market, business, economic, labor, regulatory, and political conditions, including worldwide demand for cannabis
and the spot price and long-term contract price of cannabis;
● our response to competitive risks;
● our ability to protect our intellectual property;
● the market reaction to negative publicity regarding cannabis;
● our ability to manage the requirements of being a public company;
● our ability to service our convertible debt;
● our 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 Annual Report on Form 10-K, including the sections of this report titled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” under Part II, Item 7 and "Risk Factors" Part I, Item 1A.
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 Annual Report by the foregoing cautionary statements.
Item 1. Business.
Business Overview
We are a leading provider of enterprise software solutions that enable regulatory compliance and inventory management. Our proprietary software platforms 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. Ten years ago, we identified a need for organic material tracking and regulatory compliance software as a service, or SaaS, solutions in
the growing cannabis and cannabidiol, or CBD, industry. We now seek to create the backbone on which the cannabis industry is built by providing an integrated ecosystem
of applications and services that enables compliance, regulation and taxation. We develop products intended to help state-licensed businesses operate in compliance with
applicable laws and to assist states in monitoring licensed businesses’ compliance with state regulations. We provide commercial software platforms to state and federally
licensed businesses and our regulatory software platform to government regulatory agencies. Our integrated ecosystem provided additional integrations and add-ons that
enhance the capabilities of our commercial software platforms. Although we have helped monitor legal compliance for more than $18 billion in cannabis sales to date, we do
not handle any cannabis-related material, do not process cannabis sales transactions within the United States, and our revenue generation 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.
Executing upon the expansion strategy detailed by CEO Jessica Billingsley in 2019, we have acquired competitive brands Ample Organics, or Ample, on July 7,
2020 and Trellis Solutions, or Trellis, on April 10, 2020. These additions to the Akerna family of brands add two well-known seed-to-sale software options with reputable
experience and significant market share. Ample Organics, the leading Health Canada approved software for Canadian Licensed Producers, or LPs, has majority market share
in Canada, the only G7 country with federally legal cannabis. Trellis also brings a streamlined solution for Cultivators, Manufacturers, and Distributors, trusted by some of
California’s largest brands.
Through the Akerna family companies, MJ Freeway, or MJF, Ample, and Trellis, we provide highly-versatile platforms that provide our clients with a central data
management system for tracking regulated products – from seed to initial plant growth to the product to the final sale of the product to a patient or consumer – 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 commercial businesses are complying with their states’ regulations.
We generate revenue from software sales and by providing consulting services as follows:
● Commercial Software Products – MJ Platform® is our SaaS offering for state and legally-licensed businesses. MJ Platform is an Enterprise Resource Planning, or
ERP, compliance system specific to the cannabis industry, including state-legal marijuana, hemp, and 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.
Following our acquisition of Ample in July 2020, the Ample suite of products includes AmpleOrganics, a seed-to-sale SaaS cannabis compliance offering for
Canadian Licensed Producers; AmplePayments, a payment processing offering; 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 licensed producers using the AmpleOrganics seed-to-sale platform;
and AmpleLearn, an education and training platform designed to educate and onboard personnel working within a licensed cannabis company.
Trellis’ seed-to-sale SaaS offering features inventory tracking to manage a licensee’s cannabis inventory from cultivation to extraction and sale. The Trellis
product is designed to meet the needs of smaller licensees.
● Government Regulatory Software Products – 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 are serving three clients for Leaf Data Systems, the
Commonwealth of Pennsylvania, the State of Washington and the State of Utah. The Commonwealth of Pennsylvania and the State of Utah both require licensed
cannabis operators to also use MJ Platform to report their compliance information. The State of Utah mandates the use of solo*TAG TM to provenance plants and
products throughout the compliance supply chain.
● 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 from 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.
● Business Intelligence and Data Analytics Products—Akerna Business Intelligence is an Infrastructure as a Service (IaS) tool which delivers supply chain analytics
for the cannabis, hemp, and CBD industry. Last Call Analytics provides a subscription analytics tool for alcohol brands to analyze their retail sales analytics.
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 2% of total revenue in the years ended June 30, 2020, and June 30, 2019. Beginning in our fiscal year 2020, we
entered into a revenue-sharing arrangement with a printer supplier, as a result, we expect our revenue and cost of sales related to this activity to decrease in the
future. Following our acquisition of solo sciences, inc., or Solo, in January 2020, we sell a cannabis tracking technology that provides our clients with seed-to-sale-to-self
data throughout a product’s lifecycle.
We drive commercial software revenue growth by leveraging our reputation and we benefit from continued growth in the cannabis, hemp, and CBD industry. We
believe we are well known in these industries and 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 operating cultivation, manufacturing, and dispensary clients who are seeking comprehensive services as well as attracting newly
formed clients as they enter into existing markets or newly legalized markets. We also experience revenue growth in states and countries with an established market by
providing a solution to operators seeking to vertically integrate and improve their business processes. We provide not only a vertically integrated solution across the
cannabis, hemp, and CBD supply chain, but also provide a business intelligence capture, MJ Analytics, which provides operators with timely information about their
business to allow them to run their businesses efficiently. This business intelligence capture is derived from the suite of services we provide and sets us apart from
competitors.
Through our ecosystem strategy including acquisition, investment, and partnership strategies, we are creating the backbone on which the cannabis industry is built,
enabling compliance, regulation, and taxation. With the Akerna family of companies, we are able to provide our new and existing clients with full transparency through the
tracking of organic matter from seed-to-sale. We believe our integrated ecosystem creates further value by providing additional integrations and add-ons that enhance the
capabilities and experience of our full client base. For example:
● our integration with tier one ERP software providers supplying sophisticated accounting solutions that collect and store business transactions to satisfy external
reporting requirements;
● our integration with over 85 partners to 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;
● our license with ZolTrain provides our MJ Platform clients with training modules to educate their staff and improve the patient /consumer experience by pairing
education with product information both in person and through digital channels;
● 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
● MJ Analytics, a next-generation analytics platform that offers Enterprise-level data tools and provides users with unparalleled access and insight into the cannabis
supply chain, from seed to sale.
We use our years of experience, proprietary databases, and resources to identify trends and predict changes in the cannabis industry in order to 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. Following our July 2020 acquisition of Ample Organics, we have four data products: The MJ
Analytics, or MJA; and Akerna Acumen Business Insights, 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. MJA gives MJ Platform clients access to aggregated 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. These proprietary databases assist users in making important decisions in real-
time with respect to product monitoring, tracking, planning, and pricing.
1
Table of Contents
Cannabis Industry
General
We believe the growing cannabis industry in numerous U.S. states and other countries represents a significant market opportunity for our technology, as legally
licensed operating companies need to ensure they operate within applicable laws and carefully track inventory. Furthermore, both states and countries require supply chain
transparency to ensure compliance and the maintenance of the seed-to-sale life cycle within their jurisdictions.
The regulated cannabis industry (medicinal and adult-use) is experiencing rapid growth. According to Arcview Market Research and BDS Analytics’ latest “State
of Legal Cannabis Markets” report, total legal spending on medical and adult-use cannabis in the U.S. reached an estimated $12.2 billion in 2019, an increase of 34% over
2018’s total of $9.1 billion. U.S. legal spending is forecast to reach $31.1 billion in 2024, rising at a compound annual growth rate, or CAGR, of nearly 23% from $9.1
billion in 2018. The worldwide legal cannabis industry generated an estimated $14.9 billion in 2019, up 45.7% from 2018, which saw just 17% 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 outside of the U.S. and
Canada could rise from $517 million in 2018 to $5.4 billion in 2024 at a 47.7% CAGR.
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, the global CBD market was valued at $4.6
billion in 2018 and is expected to grow at a CAGR of 22.2% from 2019 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%.
The unfortunate events of the 2019 vape scare in the United States prompted regulatory changes and additional requirements, including anti-counterfeiting tags and
codes. With major investment and partnership with solo* sciences, 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. MarketsandMarkets projects that the anti-
counterfeit packaging market size will grow from $105.9 billion in 2018 to $182.2 billion by 2023, at a CAGR of 11.5%. The anti-counterfeit packaging market is projected
to witness 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.
Our Platform Capabilities
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 – This allows 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 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 a 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.
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Table of Contents
MJ Platform
Seed-to-Sale
We provide state-licensed cultivators, manufacturers, distributors, and retail dispensaries 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 sizes, 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 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.
Every stage of the product life cycle 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 mature 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 MJ Platform.
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 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.
As a result of MJ Platform being fully built along with 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.
Ample Organics
We acquired Ample in July 2020. 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 50 full-time employees and provides services to over 120 LPs and five 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.
Trellis
We acquired Trellis in April 2020 Trellis is a cannabis cultivation management, and compliance software company, that provides clients with the technology to
manage and optimize their operational workflow while providing valuable business analytics. Trellis' platform integrates with state track and trace systems generates Health
Canada compliant reports and provides reports and other documents for clients including order manifests, packaging labels, and batch reports. Trellis facilitates compliance
by maintaining a chain of custody records from seed-to-sale with two-factor authorization and permission driven user profiles.
Solo
We acquired Solo in January 2020. 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, 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: 14th Round, a leading cannabis packaging innovator 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, through Akerna's Leaf Data Systems contract including solo*TAG TM,, 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.
Leaf Data Systems
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 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.
Data Analytics
We have four data products: 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.
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.
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
is aggregated
industry data for
and anonymized information regarding products, which may or may not be those of the client, sold through sales generated through our online service platforms.
internal management, reporting, and business optimization purposes. The
typically supplied
information
to clients
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.
Ample’s wholly-owned subsidiary, Last Call Analytics, or 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 that applies the same proven solution to data streams ingested from various points within the regulated supply chain.
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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 from 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 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 opened states.
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.
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 the
sale of the 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 products
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. 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 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 United States 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 United States 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-dervied 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, domestic data privacy laws, such as the California Consumer Privacy Act (“CCPA”), which took 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 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 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 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 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.
Competition
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 companies that are synergistic with our business. We have built a scalable infrastructure to support both rapid organic growth 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. We compete with
numerous technology companies 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, Flowhub, Greenbits, Guardian, Headset, Kind Financial, Medicine Man, Metrc, New Frontier, Nextec, 3C, Treez,
and TILT Holdings.
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 we possess a unique viewpoint into the industry because we offer solutions to, and work 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 life-cycle.
Industry Knowledge and Experience
Our management personnel has extensive technical and business operations knowledge and experience within the cannabis 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 clients operate. We face competition from companies that
have teams with technical expertise or cannabis industry experience, but there are a limited number of competitors who have both and who understand the interplay between
software and technology development and the application of the same to the evolving cannabis compliance landscape.
Proprietary Databases
Ten years of operations have 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
more accurately predict trends in the marketplace and make this dataset available to users of our platforms, providing greater utility to clients in this regard than can be
provided by competing platforms.
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Patents and Trademarks
We hold 2 patents in the United States, through 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 one patent application filed on April
22, 2011 by MJF, which is currently pending action by the United States Patent Office.
We and our wholly-owned subsidiaries hold 13 trademarks in the United States, principally related to Akerna, MJ Freeway, Leaf Data Systems, our Daily Dose
mailer, Solo*ID and our logos and designs, 6 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
We had 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.
Company Information
Merger Agreement with MJF et al.
On October 10, 2018, we (f/k/a MTech Acquisition Holdings Inc.) entered into a definitive merger agreement, or the Merger Agreement, with MTech Acquisition
Corp., or MTech, MJF, MTech Purchaser Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Akerna, MTech Company Merger Sub LLC, a
Colorado limited liability company and a wholly-owned subsidiary of Akerna, MTech Sponsor LLC, or the MTech Sponsor, a Florida limited liability company, in the
capacity as the representative for our equity holders (other than the sellers, as defined in the Merger Agreement) thereunder, and MJF and Jessica Billingsley, in the capacity
as the representative for the aellers thereunder. The Merger Agreement provided for two mergers: (i) the merger of MTech Purchaser Merger Sub, with and into MTech, with
MTech continuing as the surviving entity; and (ii) the merger of MTech Company Merger Sub LLC with and into MJF, with MJF continuing as the surviving entity, we refer
to these two transactions together as the mergers.
On June 17, 2019, the parties consummated the mergers. The merger consideration was paid in shares of our common stock, or the Consideration Shares, at a price
equal to $10.16 per share. In total, 6,520,099 Consideration Shares were issued pursuant to the Merger Agreement. At a special meeting of MTech shareholders, holders of
4,452,042 shares of MTech’s common stock sold in its initial public offering, exercised their right to redeem those shares for cash for an aggregate of $45,581,864. Upon
closing of the mergers, MTech’s common stock 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 mergers and the issuance of an additional 901,074 shares of common stock for an aggregate purchase price of approximately $9.2
million in a private placement consummated in connection with the mergers, there were 10,400,381 shares of common stock and warrants to purchase 5,993,750 shares of
our common stock issued and outstanding. As of the closing date of the mergers, the former security holders of MJF beneficially owned approximately 62.7% of
outstanding shares of our common stock, the former security holders of MTech beneficially owned approximately 27.7% of our outstanding shares of our common stock,
and the investors in our private placement (as discussed below) beneficially owned approximately 9.6% of our outstanding shares of common stock. Upon the closing of
The mergers, our management and principal stockholders beneficially owned approximately 59.70% of our outstanding shares of our common stock.
We received proceeds of approximately $18 million upon the consummation of the mergers and the private placement, described below, 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.
The mergers were accounted for as a reverse merger in accordance with accounting principles generally accepted in the United States of America, or GAAP. The
owners and management of MJF have actual or effective voting and operating control of the combined company. In the mergers, 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 mergers, 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 committed to purchase an aggregate of 901,074 shares of common stock of MTech for an aggregate purchase price of
approximately $9.2 million, or the Private Placement. Upon the closing of the mergers, such shares issued by MTech in the private placement were automatically converted
into shares of our common stock on a one-for-one basis.
In connection with the execution of the Subscription Agreements, MTech Sponsor and MTech entered into an Agreement to Transfer Sponsor Shares with each
investor in the private placement, 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.
Emerging Growth Company
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act because we went public in the U.S. in
January 2018 and meet the criteria outlined in the JOBS Act. We will remain an emerging growth company until 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. As allowed by the JOBS Act, we have elected to utilize the extended transition period provided to
non-public companies for complying with new or revised accounting standards.
Available Information
We make available, free of charge, on or thorough our website, at www.akerna.com, our annual report on Form 10-K, our quarterly reports on Form 10-Q and our
current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934. Our website
and the information contained therein or connected thereto are not intended to be, and are not incorporated into this Annual Report on Form 10-K.
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Item 1A. Risk Factors.
In addition to the other information contained in this report on Form 10-K, the following Risk Factors should be considered carefully in evaluating our business. If
any of the following risks actually occur, our business, financial condition, and results of operations could be materially and adversely affected.
Risks Relating to Us
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 experienced net losses of approximately $16.4 million and
$12.4 million for the years ended June 30, 2020 and June 30, 2019, respectively. These losses have been due to the substantial investments we have made to develop our
monitoring and compliance platforms and related software, market these products to government regulatory agencies and commercial businesses, and grow its 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 MJF did not incur as a
non-public company. Furthermore, to the extent that we are successful in increasing our client base, we will also incur increased expenses because costs associated with
generating and supporting client agreements are generally incurred 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.
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 the 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, or 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 makes it illegal 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. Since 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
On January 4, 2018, 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. 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, William Barr, 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 CSA against those users
and suppliers who comply with state marijuana laws.
In 2014, Congress passed a spending bill, or the 2015 Appropriations Bill, containing a provision , or 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. If Congress should pass a 2021 budget rather than an extension of the 2020 budget, it
would need to renew the Appropriations Rider at such time, and there can be no assurance that the Appropriations Rider would be renewed at such time. Additionally, in the
event of Congress failing either to pass a 2021 budget or an extension of the 2020 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 medical
marijuana laws would increase.
Despite Attorney General Sessions’ 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 which 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
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. Any violation of RICO 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 our business activities or divestiture.
Banking regulations could limit access to banking services and expose us to risk
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. Since we 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 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 willingness 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 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.
Dividends and distributions could be prevented if our receipt of payments from clients is deemed to be proceeds of crime
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 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 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.
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-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 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 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 clients 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.
Insurance risks
In the United States, 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.
6
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 any 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
Annual Report, 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.
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 Utah represented 39% of our revenue for the fiscal year ended
June 30, 2020. 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 contracts may also require the sharing of proprietary information, processes, software,
and research and 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, 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, 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, create 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 Canada’s Cannabis Act and related regulations and the European Union’s general data protection regulation, 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-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-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 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 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, 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 experienced and qualified talent in the 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 are general software design and integrated business
platform companies seeking to provide online and software-based business solutions and operations integration to clients 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 market space, which may negatively affect operations.
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, and Ample. 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. The
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, 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 protection may not be available or may be limited in foreign countries.
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 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.
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
disclosure controls and procedures were not effective as of June 30, 2020. 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.
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 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:
● 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 or initiate actions that are opposed by our then-
current Board of Directors, including to delay or impede a merger, tender offer or proxy contest involving us. Any delay or prevention of a change in control transaction or
changes in our Board of Directors could cause the market price of our common stock to decline.
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, 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 fear of any of the foregoing could adversely impact us by disruption 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.
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 June 30, 2020, 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.
7
Risks Relating to our Convertible Debt
The issuance of shares of our common stock pursuant to our convertible notes may result in significant dilution to our stockholders.
The conversion of our outstanding senior secured convertible notes, issued on June 9, 2020, could result in the issuance of a significant number of shares of our
common stock. Currently, the $17 million principal amount of convertible notes is convertible at a price of $11.50 per share, which would result in the issuance of 1,478,260
shares of our common stock upon the conversion of the convertible notes in full. Beginning on April 1, 2021, at the option of Akerna, the installment payments on the
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 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.
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-current market price, we could issue up to 8,854,167 shares of common stock upon conversion of the convertible notes at the floor price, which may
result in significant dilution to our stockholders and could negatively impact the trading price of our common stock.
Our obligations to the holders of our convertible notes are secured by a security interest in substantially all of our assets, if we default on those obligations, the
convertible noteholders could foreclose on our assets.
Our obligations under the senior secured convertible notes, issued on June 9, 2020, and the related transaction documents are secured by a security interest in
substantially all of our assets. As a result, if we default on our obligations under such convertible notes, the collateral agent on behalf of the holders of the 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 you may lose all or part of your investment.
Events of default under the convertible notes include: (i) suspension of trading of the common stock on a national securities exchange for five days; (ii) uncured
conversion failure; (iii) failure by us to maintain required share allocations for the conversion of the convertible notes; (iv) failure by us to pay principal when due; (v)
failure to remove restricted legends from shares issued to the holders upon conversion of the convertible notes; (vi) 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) bankruptcy, insolvency, reorganization or liquidation proceedings or other
proceedings for the relief of debtors shall be instituted by or against Akerna or any subsidiary and not dismissed within 45 days of initiation; (viii) the commencement by
Akerna or any subsidiary of a voluntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law; (ix)
the entry by a court of a decree, order, judgment or other similar document in respect of Akerna 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) final judgment for the payment of money aggregating in excess of
$50,000 are rendered against Akerna or any subsidiary and not bonded or discharged within 30 days; (xi) failure of Akerna or any subsidiary to pay when due any debts in
excess of $50,000 due to any third party; (xii) breaches by Akerna or any subsidiary of any representations or warranties in the securities purchase agreement pursuant to
which the convertible notes were purchased or any document contemplated thereby; (xiii) a false or inaccurate certification by Akerna that either (A) the “Equity
Conditions” (as defined in the convertible notes) are satisfied, (B) there has been no “Equity Conditions Failure,” (as defined in the Notes) or (C) as to whether any event of
default has occurred; (xiv) failure of Akerna or any subsidiary to comply with certain of the covenants in the convertible notes; (xv) 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 Akerna filed with the SEC; (xvi) any material adverse effect occurring; (xvii) any provision of any transaction
document shall at any time for any reason cease to be valid and binding or enforceable; (xviii) 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) any material damage to, or loss, theft or destruction of, any collateral, that is material to the business of Akerna or any subsidiary
and is not reimbursed by insurance; or (xx) any event of default occurs under any other convertible note.
The holders of the convertible notes have certain additional rights upon an event of default under such convertible notes, which could harm our business, financial
condition, and results of operations and could require us to reduce or cease or operations.
Under the convertible notes, the holders have certain rights upon an event of default. Such rights include (i) the remaining principal amount of the convertible notes
bearing interest at a rate of 15% per annum, (ii) during the event of default the holders of the convertible notes will be entitled to convert all or any portion of the 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 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 the floor price, and (iii) the holder
having the right to demand redemption of all or a portion of the convertible notes, as described below. At any time after certain notice requirements for an event of default
are triggered, a holder of 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, as determined in accordance with the 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, in cash, for an amount equal to 115% of the outstanding principal of the 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 you may lose all or part of your investment.
Risks Relating to our common stock
We may seek to raise additional funds, finance acquisitions, or develop strategic relationships by issuing securities that would dilute your 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 your 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, 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 notes will be funded and we may issue further equity or debt in order to raise funds to repay the promissory 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 you may lose all or part of your 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, there are warrants to purchase 5,813,804 shares of our common stock. Each one of our 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.
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, there are public warrants to purchase 5,813,804 shares of our common stock at
$11.50 per share and a $17 million in principal amount of convertible notes convertible at a price of $11.50 per share, 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 clients, 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.
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 attribute 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.
8
Table of Contents
Item 1B. Unresolved Staff Comments.
Not Applicable.
Item 2. Properties.
We currently maintain offices at 1630 Welton St., Floor 4, Denver, Colorado 80202, which we lease for an aggregate of approximately $41,900 per month. The
lease expires on January 31, 2022. We believe our current offices are suitable and adequate to operate our business at this time.
Item 3. Legal Proceedings.
To the knowledge of our management, there is no material litigation currently pending or contemplated against us, any of our officers or directors in their capacity
as such or against any of our properties other than ordinary routine litigation incidental to our business.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market and Trading Symbol for Common Stock and Warrants
Our common stock and warrants are currently quoted on the Nasdaq Capital Market under the symbols “KERN” and “KERNW”, respectively.
PART II
Holders
According to Continental Stock Transfer & Trust Company, our transfer agent, there were 167 active holders of record of our common stock and 6 active holders of
record of our warrants as of September 25, 2020.
Dividends
During the past two fiscal years, we did not declare or pay any cash dividends with respect to our common stock and we do not anticipate declaring any cash
dividends on our common stock in the foreseeable future. We intend to retain all future earnings for use in the development of our business. There can be no assurance that
we will have, at any time, sufficient surplus under Delaware law to be able to pay any dividends.
Unregistered Sales of Equity Securities
All unregistered sales of equity securities during the three months ended June 30, 2020, were previously reported in our Current Reports on Form 8-K.
Repurchase of Securities
During the three months ended June 30, 2020, neither we nor any of our affiliates repurchased shares of our common stock or warrants registered under Section 12
of the Exchange Act.
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.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of June 30, 2020 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
Total
525,278 $
525,278 $
—
—
1,172,321
1,172,321
9
Item 6. Selected Financial Data
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated Financial Statements and Notes
thereto appearing elsewhere in this document.
See Item 1. "Business"
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.
In response to the COVID-19 pandemic, beginning in the third fiscal quarter of 2020, we took actions in response to the pandemic that focused on
maintaining business continuity, helping our employees, helping our customers and communities, and preparing for the future and the long-term success of our business. As
a result of the pandemic our results for the third fiscal quarter 2020 reflected a significant delay in consulting revenue as compared to the same period a year ago. Our
consulting bookings increased year-over-year, but delivery delays due to COVID- 19 caused our total revenue to remain flat. We expect to recognize the delayed revenue in
the coming fiscal year.
The COVID-19 pandemic impacted our clients’ business and industry. Nearly every state and country declared access to medical and adult use cannabis essential,
which we believe is a significant shift in sentiment and 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 sales across the industry rose 78% year-over-year. More state governments are looking to cannabis legalization to generate tax revenue and create jobs, as
evidenced by 12 new pending state ballot initiatives up for vote in November 2020, the most since the last presidential election in 2016, when eight of nine measures passed.
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.
Financial Results of Operations
Revenue
Our software revenue is derived from our commercial software platforms, MJ Platform® and Trellis, our data analytics offerings, our SaaS ERP offerings for state-
licensed businesses, and our government regulatory platform, Leaf Data Systems, our track-and-trace product for government agencies. Commercial software contracts are
generally annual contracts paid monthly in advance of service and cancellable upon 30 days’ notice after the first year, although we do have some multi-year MJ Platform
contracts. Leaf Data Systems contracts are generally multi-year contracts payable annually or quarterly in advance of service. MJ Platform and Leaf Data Systems contracts
generally may only be terminated early for breach of contract as defined in the respective agreements.
Consulting services revenue growth is driven by numerous factors. In new emerging states, we provide 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 continue to grow as more states emerge with legalization reforms.
Our other revenue is derived primarily from point of sale hardware and labels.
10
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 on 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, that do not qualify for capitalization. During the
year ended June 30, 2020, we determined that changes in our processes allowed us to cost effectively distinguish minor enhancements and upgrades to our existing
commercial and government regulatory software platforms from maintenance of the platforms, which allowed us to capitalize qualifying costs as internally developed
software. Prior to the year ended June 30, 2020, we were not able to cost effectively identify the cost of enhancements and upgrades from ongoing maintenance and
expensed all costs as incurred as product development expenses.
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.
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 nonpersonnel costs, such as professional
fees and other supporting corporate expenses not allocated to cost of revenue, product and development or sales and marketing. These expenses have grown over time, due
to our investments in personnel, technology and other infrastructure as we continue to position ourselves for growth both organically and through strategic acquisitions.
Additionally, there is a cost of compliance as a publicly traded company, which we expect to continue.
11
Results of Operations for the Year Ended June 30, 2020 Compared with the Year Ended June 30, 2019
The following table highlights the various sources of revenues and expenses for the year ended June 30, 2020 as compared to the year ended June 30, 2019:
Revenues:
Software
Consulting
Other
Total revenue
Cost of revenues
Gross profit
Gross profit margin
Operating expenses:
Product development:
Sales and marketing
General and administrative
Depreciation and amortization
Total operating expenses
Loss from operations
nm – percentage change not meaningful
Total Revenue
Year Ended June 30,
2020
2019
Change
Period over
Period
$
9,976,580 $ 8,256,492 $ 1,720,088 21%
2,307,129
72,818 3%
2,379,947
(42,747) (16%)
259,496
216,749
12,573,276 10,823,117 1,750,159 16%
6,209,724
6,363,552
51%
4,633,844 1,575,880 34%
6,189,273
174,279 3%
57%
5,565,097 (2,358,787) (42%)
4%
7,498,114
5,638,408 5,682,307 101%
3,206,310
7,792,480
11,320,715
1,315,898
23,635,403 18,701,619 4,933,784 26%
— 1,315,898 nm
294,366
$ (17,271,851 ) $ (12,512,346) $ (4,759,505) 38%
Total revenue increased to $12.6 million for the fiscal year ended June 30, 2020 from $10.8 million for the fiscal year ended June 30, 2019, an increase of $1.8
million, or 16%. The increase in total revenue compared to the fiscal year ended June 30, 2019 was driven primarily by growth achieved across our commercial software
business, MJ Platform, our government regulatory software business, Leaf Data Systems, and the acquisition of Trellis. Consulting revenue increased slightly year over
year.
Software Revenue
Our total software revenue increased to $10.0 million for the fiscal year ended June 30, 2020 from $8.3 million for the fiscal year ended June 30, 2019, for an
increase of $1.7 million, or 21%. Total software revenue accounted for 79% and 76% of total revenue for the years ended June 30, 2020 and 2019, respectively. The increase
in software revenue during the year ended June 30, 2020 was primarily driven by an $0.8 million increase in MJ Platform subscription revenue due to growth in the number
of subscriptions.
Software revenues generated from government clients totaled $4.9 million and $4.2 million during the years ended June 30, 2020 and 2019, respectively. Leaf Data
Systems revenue increased for the fiscal year ended June 30, 2020 primarily as a result of our new contract with the state of Utah partially offset by a decrease in volume of
change orders 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 acceptance and delivery of the requested modifications. As a result, revenues from change orders vary year to year and may be impacted by the
timing of entering into agreements and the number of requested change orders in any given period.
12
Consulting Revenue
Our 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 $2.4 million for the fiscal year ended June 30, 2020 compared to $2.3 million for the fiscal year ended June 30, 2019, an increase of
$0.1 million, or 3%, as a result of a higher demand for services and an increased number of application clients through the third quarter of fiscal 2020. Consulting services
are 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 fourth quarter of fiscal 2020. However, there are a number of states with ballot
initiatives to adopt new medical or adult use marijuana laws approved for the November 2020 elections. 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.
Consulting revenue was 19% and 21% of total revenue for the years ended June 30, 2020 and 2019, respectively. Due to the nature of consulting revenue and our
dependence on emerging market activity as a driver of demand, the quarters 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.
Other Revenue
Other revenue includes our retail/resale revenue, which was generated from point of sale hardware, and revenue generated by the sale of solo*TAGsTM,
solo*CODEsTM and the related activation fees. Other revenue decreased slightly to $0.2 million for the fiscal year ended June 30, 2020 from $0.3 million for the fiscal year
ended June 30, 2019. Other revenue was 2% of total revenue for the fiscal year ended June 30, 2020. We have entered into a revenue sharing agreement with a printer
supplier, whereby our clients will acquire hardware from the supplier and the supplier will share a percentage of revenue generated by our clients with us. In accordance
with GAAP, we may only recognize the portion of the revenue that the supplier shares with us pursuant to the new arrangement, as a result, we expect both revenue and cost
of sales to decrease in the future, with minimal effect on gross margin.
Cost of Revenue and Gross Margin
Our cost of revenue increased to $6.2 million for the fiscal year ended June 30, 2020 from $4.6 million for the fiscal year ended June 30, 2019, an increase of 34%.
This increase was primarily due to the addition of a subcontractor supporting our Leaf Data Systems contract with Utah, an increase in subcontractor costs to support our
contract with Pennsylvania, and an increase in the cost of hosting, software and applications as a result of our increased usage fees for cloud service providers to support the
growth in commercial software platform subscriptions and government regulatory platform contracts. We also incurred higher direct labor costs associated with providing
our consulting services of $0.1 million.
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 commercial software 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 the cost of revenues on the statement of operations, were $3.3 million and $2.0
million during the years ended June 30, 2020 and 2019, respectively. The increase in cost of government revenues incurred by us was due to the addition of our contract with
the state of Utah and a higher volume of ongoing support and maintenance services provided in connection with the contracts with Pennsylvania and Washington.
13
Operating Expenses
The following table presents operating expense line items for the years ended June 30, 2020 and 2019 and the period-over-period dollar and percentage changes for
those line items:
Year Ended June 30,
2019
2020
Change
Period over Period
Operating expenses:
Product development salary expenses, excluding Solo and Trellis
Solo product development
Trellis product development
Other product development
Product development
Percentage of revenue
Sales and marketing, excluding Solo and Trellis
Solo sales and marketing
Trellis sales and marketing
Sales and marketing
Percentage of revenue
General and administrative salaries
Transaction related costs
Bad debt expense
Other general and administrative
General and administrative
Percentage of revenue
Depreciation and amortization
Total operating expenses
Percentage of revenue
nm – percentage change not meaningful
$
2,077,006 $
362,108
141,602
625,594
3,206,310
26%
7,351,865
390,308
50,307
7,792,480
62%
3,238,361
3,158,618
1,094,507
3,829,229
11,320,715
90%
5,256,020 $ (3,179,014)
(60%)
—
—
309,077
5,565,097
51%
7,498,114
—
—
7,498,114
69%
2,635,046
1,080,870
345,941
1,576,551
5,638,408
52%
362,108 nm
nm
141,602
316,517 102%
(42%)
(2,358,787)
(2%)
(146,249)
390,308 nm
50,307
nm
294,366
4%
603,315
23%
2,077,748 192%
216%
2,252,678 143%
5,682,307 101%
748,566
1,315,898
—
1,315,898
nm
$ 23,635,403 $ 18,701,619 $ 4,933,784
26%
188%
173%
Our operating expenses increased to $23.6 million for the fiscal year ended June 30, 2020 from $18.7 million for the year ended June 30, 2019, an increase of $4.9
million, or 26%. The increased level of operating expenses for the fiscal year ended June 30, 2020 was the result of our being a public company for the full year ended June
30, 2020, investments made in personnel, technology and other infrastructure as we continue to position ourselves for growth both organically and through strategic
acquisitions, and transactional costs associated with acquisitions and financing activities.
General and administrative expenses increased to $11.3 million for the year ended June 30, 2020 from $5.6 million for the year ended June 30, 2019, an increase of
$5.7 million, or 101%. This increase was primarily due to transactional costs we are required to expense as incurred and an increase in other general and administrative
costs. The transaction related costs incurred during the year ended June 30, 2020 include legal and other costs totaling $2.8 million incurred primarily in connection with
our acquisitions of Solo in January 2020, Trellis in April 2020 and Ample, in July 2020, and debt issuance costs of $ 1.2 million incurred to issue our Convertible Notes in
June 2020, offset by $1.0 million reduction in the estimated fair value of contingent consideration to be paid for our acquisition of Trellis. Bad debt expense increased by
$0.7 million, during the year ended June 30, 2020 as compared to 2019, we noted an uptick in delinquent accounts beginning in the fourth quarter of 2019, and this trend
peaked during the second quarter of 2020. Of the total year-over-year increase in bad debt expense, 83% occurred during the first half of the year. To improve the overall
quality of our revenue and client portfolio, we enhanced our sales and marketing team and have seen the results demonstrated in the steady decline in the number and
amount of delinquent accounts resulting in bad debt expense during the second half to the year ended June 30, 2020. Other general and administrative expenses increased by
$2.3 million, most notably due to nearly $1.0 million in recurring costs associated with being a public company and our investments made to position ourselves for growth
including an additional $0.7 million in technology and infrastructure and $0.6 million in personnel.
Sales and marketing expenses increased $0.3 million during the year ended June 30, 2020 as compared to June 30, 2019 as a result of our acquisitions of Solo and
Trellis.
Product development expenses decreased to $3.2 million for the year ended June 30, 2020 from $5.6 million for the year ended June 30, 2019, a decrease of
$2.4million, or 42%. Salary expense for product development functions decreased by $3.2 million, primarily due to the capitalization of $2.9 million in labor costs
associated with software development. During the year ended June 30, 2020 we capitalized labor costs associated with the implementation of Leaf Data Systems for the
State of Utah. We also determined that certain enhancements to our internal tracking process allow us to distinguish time spent enhancing our existing products from time
spent maintaining our products, we capitalize the cost of enhancements when they can be distinguished from maintenance costs. Prior to the year ended June 30, 2020, we
could not efficiently differentiate these costs and as such, expensed all costs as incurred. We expect to continue to capitalize a portion of labor costs in the future. The
remainder of the decrease in product development salaries is the result of a reduction in stock-based compensation expense, during the year ended June 30, 2019 we incurred
a significant one time charge for stock-based compensation in connection with the mergers. The decrease in salary costs is partially offset by additional costs following the
acquisitions of Solo and Trellis and continued investment in technology and infrastructure in order to position ourselves for growth.
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 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 and changes in fair value of convertible notes, provision for income taxes, 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:
●
●
●
●
●
share-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 that are required to be expensed as incurred in accordance with GAAP, because business
combination 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 debt issuance when we elect the fair value option to account for the debt instrument because if we had not elected the
fair value option such costs would be recognized as an adjustment to the effective interest and excluded from EBITDA;
restructuring costs because we believe these costs are not representative of operating performance; and
equity in earnings (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.
The reconciliation of net loss to EBITDA and Adjusted EBITDA for the years ended June 30, 2020 and 2019 is as follows:
Net loss
Adjustments:
Interest (income) expense and change in fair value of convertible notes
Income tax provision
Depreciation and amortization
EBITDA
Stock-based compensation expense
Business combination and merger related costs
Debt issuance costs related to fair value option debt instruments
Changes in fair value of contingent consideration
Equity in losses of investee
Adjusted EBITDA
Liquidity and Capital Resources
2020
$ (16,384,104 )
2019
$ (12,403,215 )
(922,678)
30,985
1,315,898
$ (15,959,899)
(91,239)
—
—
$ (12,494,454 )
1,166,130
2,979,228
1,177,390
(998,000 )
3,692
$ (11,631,459)
$
3,884,110
1,080,870
—
—
—
(7,529,474)
As of June 30, 2020, we had cash of $24.2 million, excluding restricted cash. We had a working capital balance of $16.0 million as of June 30, 2020, as compared to
$21.8 million as of June 30, 2019. The decrease in working capital is primarily due to our issuance of the Convertible Notes, $5.3 million of which are payable in the next
12 months, the Convertible Notes installment payments, under certain circumstances, be converted
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 June 30, 2020, we implemented a cost reduction initiative and achieved a reduction in cash used in operations in excess of $1.0 million
between the third and fourth quarters of fiscal year 2020. Subsequent to year end we implemented phase two of that initiative reducing recurring costs and identifying cost
savings that we expect to result in annual savings of an additional $2.0 million to $3.0 million. After considering all available evidence, we determined that, due to our
current positive working capital and the receipt of cash proceeds as a result of financing activities discussed below for aggregate net proceeds of $16.0 million, such capital
and proceeds will be sufficient to meet our capital requirements for a period of at least twelve months from the date that our June 30, 2020 financial statements were issued.
Management will continue to evaluate our liquidity and capital resources.
During the year ended June 30, 2020, we had a $0.8 million unrealized gain on the change in fair value of our convertible notes. This change in fair value is not an
indication of the amount that we have to pay to settle the Notes.
During the year ended June 30, 2020, we have executed against our acquisition strategy in order to accelerate growth. 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 companies that are synergistic with our
business. We have continued to invest in building a scalable infrastructure to support both organic growth and strategic acquisitions.
14
Cash Flows
Our cash and restricted cash balance were $24.7 million and $22.4 million as of June 30, 2020 and 2019, respectively. Cash flow information for the years ended
June 30, 2020 and 2019 is as follows:
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and restricted cash
Sources and Uses of Cash for the Years Ended June 30, 2020 and 2019
Years Ended June 30,
2020
2019
$
$
(14,347,652 ) $
(3,598,084)
20,234,275
2,288,539 $
(9,048,595)
18,843,483
10,000,000
19,794,888
Net cash used in operating activities increased to $14.3 million during the fiscal year ended June 30, 2020, from $9.0 million during the fiscal year ended June 30,
2019, an increase of $5.3 million. The increase in cash used in operating activities was primarily driven by the increase in net loss from operations of $4.8 million,
described above, and timing of cash received from clients relative to when we recognize revenue.
Net cash used in investing activities totaled $3.6 million during the fiscal year ended June 30, 2020, as a result of amounts invested in the development of our
software products and our acquisition of a minority stake in Zol Solutions, Inc. Net cash provided by investing activities during the fiscal year ended June 30, 2019 was
$18.8 million as a result of the net proceeds received in connection with the mergers.
Net cash provided by financing activities totaled $20.2 million during the year ended June 30, 2020, which includes net proceeds from the issuance of the
Convertible Notes and PPP Loan of $16.0 million and $4.2 million received upon the exercise of warrants to purchase our common stock. Net cash provided by financing
activities totaled $10.0 million raised in our Series C financing during the fiscal year ended June 30, 2019. In connection with the mergers, the Series C Preferred Units were
converted into shares of our common stock.
Convertible Notes Issuance
On June 8, 2020, we entered into a Securities Purchase Agreement, or the SPA, with two institutional investors, each a Note Holder and collectively the Note
Holders, to sell a new series of senior secured convertible notes, or the Convertible Notes, of Akerna in a private placement to the Note 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 and our subsidiaries.
The Convertible 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 Convertible Notes and do not bear interest except upon the occurrence of an event of default.
We will use the proceeds from the sale of the Convertible Notes 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 our subsidiaries, (ii) the redemption or repurchase of any securities of Akerna or any of our subsidiaries, or (iii) the
settlement of any outstanding litigation.
Maturity and Repayment Dates
The Convertible Notes mature on June 1, 2023, or the Maturity Date. The principal amount is payable in monthly installments beginning on October 1, 2020. Unless
deferred by the holder, on installment dates from October 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, 2021 through, and including, June 1, 2021, $825,000 in principal amount will be payable and (z) with respect to
installment dates from, and including, July 1, 2021 through, and including, the earlier of the repayment of the Principal and the Maturity Date, $1,000,000 in principal
amount will be payable. We may not prepay any portion of the principal amount nor interest, if any.
Interest
The 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% per annum.
Conversion
The Convertible Notes are convertible at any time in whole or in part, at the option of the 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, or the Conversion 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 Note Holders will be entitled to convert all or any portion of the 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, or VWAP, 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 VWAP of the common stock for each of the
two trading days with the lowest VWAP 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 (B) two, but not less than the floor price of $1.92.
Conversion Limitation and Exchange Cap
The Note Holders will not have the right to convert any portion of the Convertible Notes, to the extent that, after giving effect to such conversion, such Note 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 Note 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 Convertible Notes are subject to certain customary events of default, see Item 1A. “Risk Factors – Risks Related to our Convertible Debt” for a short discussion
of events of default under the Convertible Notes.
MJF Mergers and Private Placement
On October 10, 2018 (as amended on April 17, 2019), we (f/k/a MTech Acquisition Holdings Inc.) entered into the Merger Agreement, with MTech, MJF, MTech
Purchaser Merger Sub Inc., MTech Company Merger Sub LLC, the MTech Sponsor, in the capacity as the representative for our equity holders (other than the sellers, as
defined under the Merger Agreement) thereunder, and MJF and Jessica Billingsley, in the capacity as the representative for the sellers thereunder. The Merger Agreement
provided for two mergers: (i) the merger of MTech Purchaser Merger Sub, with and into MTech, with MTech continuing as the surviving entity; and (ii) the merger of
MTech Company Merger Sub LLC with and into MJF, with MJF continuing as the surviving entity, we refer to these two transactions together as the mergers.
On June 17, 2019, the parties consummated the mergers. The merger consideration was paid in shares of our common stock, or the Consideration Shares, at a price
equal to $10.16 per share. In total, 6,520,099 Consideration Shares were issued pursuant to the Merger Agreement. Upon closing of the mergers, MTech’s common stock
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 mergers and the
issuance of an additional 901,074 shares of common stock for an aggregate purchase price of $9.2 million in a private placement consummated in connection with the
mergers, there were 10,400,381 shares of our common stock and warrants to purchase 5,993,750 shares of our common stock issued and outstanding. As of the closing date
of the mergers, the former security holders of MJF beneficially owned 62.7% of our outstanding shares of our common stock, the former security holders of MTech
beneficially owned 27.7% of our outstanding shares of our common stock, and the Investors beneficially owned 9.6% of our outstanding shares of our common stock. Upon
the closing of the mergers, our management and principal stockholders beneficially owned 59.70% of our outstanding shares of our common stock.
We received net proceeds of $18.8 million upon the consummation of the mergers and the private placement.
Pursuant to the Merger Agreement, upon the closing of the mergers, the membership units of MJF (including the profits interest units) issued and outstanding
immediately prior to the mergers automatically converted into the right to receive our shares and the securities of MTech issued and outstanding immediately prior to the
mergers automatically converted into the right to receive our securities.
Series C Preferred Units Financing
In August 2018, we sold an aggregate of $10 million of Series C Preferred Units in private placements to accredited investors. Upon the consummation of the
Business Combination, the Series C Preferred Units issued in connection with these two transactions were exchanged for shares of our common stock.
15
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Significant Judgments and Estimates
Our financial statements and the related notes included in this Annual Report on Form 10-K 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.
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. Particularly for the acquisitions of Solo and Trellis, 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.
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 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 continuous 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 modified 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 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.
Senior Secured Convertible Notes
We determined at the issuance of or Convertible Notes to elect the fair value option. At issuance, the carrying value of the 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 Convertible Notes to estimated fair value 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 Convertible Notes are the fair value at the
reporting period end as well as the determination of the 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 the volatility could have a material impact to the
carrying value of the Convertible Notes as well as the amount of change recognized during the period in earnings.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable
16
Item 8. Financial Statements and Supplementary Data.
The independent registered public accounting firm's report, consolidated financial statements listed in the “Index to Financial Statements” on page F-1 of this
Annual Report are filed as part of this report and incorporated herein by this reference.
17
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our 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”)), as of the end of the period
covered by this report. Based on such evaluation and as a result of the unremediated material weaknesses described below, our chief executive officer and chief financial
officer have concluded that as of the end of such period, our disclosure controls and procedures were not effective 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.
Management determined that our disclosure controls and procedures were ineffective due to certain material weaknesses in our internal control over financial
reporting as set forth below.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial
officers and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
● pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets;
● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2020. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013 Framework).
Based on this assessment, management concluded that as of June 30, 2020, we have not maintained effective internal control over financial reporting.
Material Weaknesses
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 management's review of disclosure controls and procedures
and internal control over financial reporting, management determined that the following material weaknesses 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:
1) We lacked formally documented system policies and procedures to demonstrate that our system of internal control over financial reporting is designed effectively,
including a lack of documentation surrounding our information technology policies and procedures.
2) We lacked documentation necessary to demonstrate the controls in place are operating effectively, including controls related to the enforcement of segregation of
duties in key areas of financial reporting.
3) We did not have controls in place to ensure that we prepared complete and accurate financial statements in a timely manner in accordance with GAAP.
These deficiencies resulted in immaterial errors to our consolidated financial statements that were not detected timely through our internal controls over financial
reporting. Notwithstanding the identified material weaknesses described above, management believes that the consolidated financial statements included in this Annual
Report on Form 10-K are fairly presented in all material respects in accordance with GAAP, and our chief executive officer and chief financial officer have certified that,
based on their knowledge, the consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and
cash flows for each of the periods presented in this report.
Remediation
We have hired additional experienced resources to fill accounting functions and expects to add further resources. In addition, we have identified upgraded IT,
accounting and finance systems, which we expect will automate critical control functions and improve operational effectiveness and efficiencies.
We have contracted an outside consultant to assist in the overall evaluation and documentation of the design and operating effectiveness of our internal controls over
financial reporting.
We believe these actions will remediate the control weaknesses. However, the 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. Once implemented, we intend to continue periodic testing and reporting
of the internal controls to ensure continuity of compliance.
Attestation Report of Independent Registered Public Accounting Firm
An attestation report on our internal control over financial reporting by our independent registered public accounting firm is not included herein, because, as an
emerging growth company, we are exempt from the requirement to provide such report.
Changes in Internal Control over Financial Reporting
During the most recently completed fiscal quarter, there have been 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, as described above in our
remediation efforts.
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.
Item 9B. Other Information.
Not applicable.
18
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this item concerning directors, executive officers, and corporate governance matters is hereby incorporated by reference to our
definitive proxy statement for our 2020 Annual Meeting of Stockholders (the “2020 Proxy Statement”), to be filed with the U.S. Securities and Exchange Commission
within 120 days after June 30, 2020, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
Code of Business Conduct and Ethics
We have a code of business conduct and ethics, or the Code of Ethics, that applies to all of our employees, officers and directors of Akerna and our affiliated
entities. The Code of Ethics is available on our website at www.akerna.com and we will post any amendments to, or waivers from, including an implicit waiver, the Code of
Ethics on that website.
Item 11. Executive Compensation
The information required by this item is hereby incorporated by reference to the 2020 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters
The information required by this item is hereby incorporated by reference to the 2020 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is hereby incorporated by reference to the 2020 Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this item is hereby incorporated by reference to the 2020 Proxy Statement.
19
Item 15. Exhibits, Financial Statement Schedules.
The following documents are filed as part of this Report:
(1)Financial Statements
PART IV
Our audited consolidated balance sheets as of June 30, 2020 and 2019, and the related consolidated statements of operations, changes in stockholders’ equity and
cash flows for each of the two years in the period ended June 30, 2020, the footnotes thereto, and the report of Marcum LLP, independent registered public accounting firm,
are filed herewith.
(2)Financial Schedules:
None.
Financial statement schedules have been omitted because they are either not applicable or the required information is included in the financial statements or notes
hereto.
Exhibits
Exhibit
Number
2.1+
2.2
2.3
2.4
2.5
2.6
3.1
3.2
3.3
3.4*
4.1
4.2
4.3
Description
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 Akerna’s Registration Statement on Form S-4 (File No.
333-228220))
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 Akerna’s Registration Statement on Form S-4 (File No. 333-228220))
Arrangement Agreement dated December 18, 2019 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Akerna on
December 18, 2019)
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
Akerna on March 3, 2020)
Amendment No. 2 to Arrangement Agreement dated May 26, 2020 (incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K filed by
Akerna on July 8, 2020)
Amendment No. 3 to Arrangement Agreement dated June 1, 2020 (incorporated by reference to Exhibit 4.4 to the Current Report on Form 8-K filed by
Akerna on July 8, 2020)
Amended and Restated Certificate of Incorporation of Akerna Corp. (incorporated by reference to Exhibit 3.1 on Current Report on Form 8-K filed by
Akerna on June 21, 2019)
Amended and Restated Bylaws of Akerna Corp. (incorporated by reference to Exhibit 3.2 on Current Report on Form 8-K filed by Akerna on June 21,
2019)
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 Akerna on July
8, 2020)
Description of Securities
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Akerna’s Registration Statement on Form S-4 (File No. 333-228220))
Specimen Warrant Certificate (incorporated by reference to Exhibit 4.2 to Akerna’s Registration Statement on Form S-4 (File No. 333-228220))
Form of Warrant Agreement (incorporated by reference to Exhibit 4.3 on Current Report on Form 8-K filed by Akerna on June 21, 2019)
20
4.4
4.5
4.6
4.7
4.8
9.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10^
10.11^
10.12^
10.13^
10.14^
10.15^
Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Akerna on June 8, 2020)
Form of Secured Convertible Promissory Note (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Akerna on June 8,
2020)
Form of Security Agreement (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by Akerna on June 8, 2020)
Form of Guaranty Agreement (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by Akerna on June 8, 2020)
Form of Voting Agreement (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed by Akerna on June 8, 2020)
Voting and Exchange Trust Agreement (incorporated by reverence to Exhibit 9.1 to the Current Report on Form 8-K filed by Akerna on July 8, 2020)
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 Akerna on June 21, 2019)
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 Akerna on June 21, 2019)
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 Akerna on June 21, 2019)
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 Akerna on June 21,
2019)
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 Akerna on June 21, 2019)
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 Akerna on June 21, 2019)
Form of Indemnification Agreement of Officers and Directors (incorporated by reference to Exhibit 10.7 on Current Report on Form 8-K filed by Akerna
on June 21, 2019)
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 Akerna on June 21, 2019)
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 Akerna on June 21, 2019)
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 Akerna on June 21, 2019)
MTech Acquisition Holdings Inc. 2019 Long Term Incentive Plan (incorporated by reference to Exhibit 10.5 to Akerna's Registration Statement on Form
S-4 (File No. 333-228220))
Form of Option Grant Certificate (incorporated by reference to Exhibit 10.12 on Current Report on Form 8-K filed by Akerna on June 21, 2019)
Form of Restricted Stock Unit Award (incorporated by reference to Exhibit 10.13 on Current Report on Form 8-K filed by Akerna on June 21, 2019)
Form of Stock Award (incorporated by reference to Exhibit 10.14 on Current Report on Form 8-K filed by Akerna on June 21, 2019)
Form of Restricted Stock Award (incorporated by reference to Exhibit 10.15 on Current Report on Form 8-K filed by Akerna on June 21, 2019)
21
10.16^
10.17
10.18
10.19
10.20^
10.21^
10.22
10.23
10.24^
10.25
10.26
10.27
10.28
21.1*
23.1*
31.1*
31.2*
32.1*
101*
Form of Appreciation Rights Award (incorporated by reference to Exhibit 10.16 on Current Report on Form 8-K filed by Akerna on June 21, 2019)
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 Akerna’s Registration Statement on Form S-4 (File No. 333-228220))
Office Service Agreement, dated September 30, 2019, effective February 1, 2020 (incorporated by reference to Exhibit 10.1 to Akerna's Quarterly Report on
Form 10-Q for the three months ended September 30, 2019)
Stock Purchase Agreement, dated November 25, 2018 (incorporated by reference to Exhibit 10.1 to Akerna’s Current Report on Form 8-K filed on
November 26, 2019)
Letter Agreement effective September 23, 2019 between Akerna and Nina Simosko (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed by Akerna on October 1, 2019)
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 Akerna on October 1, 2019)
Covenant Agreement effective September 23, 2019 between Akerna and Nina Simosko (incorporated by reference to Exhibit 10.3 to the Current Report of
Form 8-K filed by Akerna on October 1, 2019)
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
Akerna on October 1, 2019)
Letter Agreement dated December 17, 2019 between Akerna and John Fowle (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed by Akerna on December 23, 2019)
Covenant Agreement dated December 17, 2019 between Akerna and John Fowle (incorporated by reference to Exhibit 10.2 to the Current Report on Form
8-K filed by Akerna on December 23, 2019)
Exchangeable Share Support Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Akerna on July 8, 2020)
Escrow Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Akerna on July 8, 2020)
Rights Indenture (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by Akerna on July 8, 2020)
Subsidiaries of Akerna Corp.
Consent of Marcum LLP
Chief Executive Officer certification under Section 302 of Sarbanes-Oxley Act of 2002
Chief Financial Officer certification under Section 302 of Sarbanes-Oxley Act of 2002.
Chief Executive Officer and Chief Financial Officer certification under Section 906 of Sarbanes-Oxley Act of 2002.
Interactive Data Files
*
+
^
Filed herewith
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 contract or compensatory plan or arrangement
Item 16. Form 10-K Summary
None.
22
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AKERNA CORP.
SIGNATURES
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and
By:
Jessica Billingsley
/s/ Jessica Billingsley
Name:
Title: Chief Executive Officer
Date:
September 28, 2020
Signature
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Date
September 28, 2020
Chief Financial Officer (Principal Financial and Accounting Officer)
September 28, 2020
on the dates indicated.
/s/ Jessica Billingsley
Jessica Billingsley
/s/ John Fowle
John Fowle
/s/ Scott Sozio
Scott Sozio
/s/ Matthew R. Kane
Matthew R. Kane
/s/ Tahira Rehmatullah
Tahira Rehmatullah
/s/ Mark Iwanowski
Mark Iwanowski
Director
Director
Director
Director
23
AKERNA CORP.
Consolidated Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2020 and 2019
Consolidated Statements of Operations for the years ended June 30, 2020 and 2019
Consolidated Statements of Changes in Stockholders’ Equity for the years ended June 30, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended June 30, 2020 and 2019
Notes to Consolidated Financial Statements
F-1
September 28, 2020
September 28, 2020
September 28, 2020
September 28, 2020
F-2
F-3
F-4
F-5
F-6
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Akerna Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Akerna Corp. (the “Company”) as of June 30, 2020 and 2019, the related consolidated statements of
operations, comprehensive income, changes in equity and cash flows for each of the two years in the period 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, 2020
and 2019, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2020, in conformity with accounting principles generally
accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on
our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“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’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 provides 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 28, 2020
F-2
AKERNA CORP.
Consolidated Balance Sheets
As of June 30, 2020 and 2019
Assets
Current assets:
Cash
Restricted cash
Accounts receivable, net
Prepaid expenses and other current assets
Total current assets
Non-current assets:
Fixed assets, net
Investment, net
Capitalized software, net
Intangible assets, net
Goodwill
Other non-current assets
Total Assets
Liabilities and Equity
Current liabilities:
Accounts payable and accrued liabilities
Contingent consideration payable
Deferred revenue
Current portion of long-term debt
Total current liabilities
Long-term debt, less current portion
Total liabilities
Commitments and contingencies (Note 12)
Equity:
Preferred stock, par value $0.0001; 5,000,000 shares authorized, none are issued and outstanding at June 30, 2020 and 2019
Common stock, par value $0.0001; 75,000,000 shares authorized, 13,258,707 issued and outstanding at June 30, 2020, and
10,589,746 shares authorized, issued and outstanding at June 30, 2019
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Noncontrolling interests in consolidated subsidiary
Total equity
Total liabilities and equity
See notes to consolidated financial statements.
F-3
2020
2019
$
24,155,828 $
500,000
1,861,534
1,215,341
27,732,703
21,867,289
500,000
1,257,274
577,674
24,202,237
131,095
246,308
2,629,304
7,493,975
20,254,309
41,925
—
—
—
—
—
—
$
58,529,619
$
24,202,237
$
4,861,928 $
389,000
368,685
6,135,364
11,754,977
1,818,116
—
624,387
—
2,442,503
10,200,236
—
21,955,213
2,442,503
—
1,321
—
1,059
72,906,924
63,000
(41,101,091)
31,870,154
4,704,252
36,574,406
58,529,619 $
47,325,421
—
(25,566,746 )
21,759,734
—
21,759,734
24,202,237
$
AKERNA CORP.
Consolidated Statements of Operations
For the Years Ended June 30, 2020 and 2019
Revenues
Software
Consulting
Other
Total revenues
Cost of revenues
Gross profit
Operating expenses
Product development
Sales and marketing
General and administrative
Depreciation and amortization
Total operating expenses
Loss from operations
Other income (expense)
Interest income (expense) net
Change in fair value of Convertible Notes
Other
Total other income (expense)
Net loss before income tax expense
Income tax expense
Equity in losses of investee
Net loss
Net loss attributable to noncontrolling interest in consolidated subsidiary
Net Loss attributable to Akerna shareholders
Basic and diluted weighted average common shares outstanding
Basic and diluted net loss per common share
See notes to consolidated financial statements.
F-4
2020
2019
$
9,976,580 $
2,379,947
216,749
12,573,276
8,256,492
2,307,129
259,496
10,823,117
6,209,724
4,633,844
6,363,552
6,189,273
3,206,310
7,792,480
11,320,715
1,315,898
23,635,403
5,565,097
7,498,114
5,638,408
—
18,701,619
(17,271,851 )
(12,512,346 )
156,678
766,000
(254 )
922,424
91,239
—
17,892
109,131
(16,349,427)
(12,403,215)
(30,985)
(3,692)
—
—
(16,384,104 )
(12,403,215 )
849,759
—
$
(15,534,345)
$
(12,403,215)
11,860,212
$
(1.31)
6,045,382
(2.05 )
$
AKERNA CORP.
Consolidated Statements of Comprehensive Income
For the Years Ended June 30, 2020 and 2019
Net loss
Other comprehensive (loss) income:
Unrealized gains on Convertible Notes
Comprehensive loss
Comprehensive loss attributable to the noncontrolling interest
Comprehensive loss attributable to Akerna shareholders
See notes to consolidated financial statements.
24
2020
2019
$ (16,384,104 ) $ (12,403,215 )
63,000
(16,321,104 )
849,759
—
(12,403,215 )
—
$ (15,471,345 ) $ (12,403,215 )
AKERNA CORP.
Consolidated Statements of Changes in Equity
For the Years Ended June 30, 2020 and 2019
Common
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Noncontrolling
Interest
Total
Accumulated
Stockholder's
in
Consolidated
Total
Deficit
Equity
Subsidiary
Equity
Balance as of July 1, 2018
Issuance of common stock
4,922,650 $
1,099,376
492 $ 14,563,102 $
110
9,999,890
— $ (13,163,531)$
—
—
1,400,063 $
10,000,000
Issuance of common stock in connection
3,880,282
388
18,878,387
with reverse merger
Issuance of common stock for
compensation in connection with
reverse merger
498,073
50
3,393,231
Stock-based compensation amortization
Common stock issued upon cashless
—
189,365
exercise of options
Net loss
Balance as of June 30, 2019
Common stock issued upon warrant
—
10,589,746
369,311
exercise
—
19
—
1,059
37
490,830
(19)
—
47,325,421
4,247,028
Common stock issued in business
2,299,650
230
20,081,236
combinations
Noncontrolling interest in acquired
subsidiary
Stock-based compensation amortization
Forfeitures of restricted shares
Change in fair value of Convertible Notes
Net loss
Balance as of June 30, 2020
—
—
(54,901)
—
—
—
—
(5)
—
—
—
1,253,234
5
—
—
13,203,806 $
1,321 $ 72,906,924 $
—
18,878,775
—
3,393,281
—
3,393,281
—
—
—
—
—
—
490,830
—
—
(12,403,215)
— (25,566,746)
—
—
(12,403,215)
21,759,734
4,247,065
— $ 1,400,063
— 10,000,000
— 18,878,775
—
—
490,830
—
— (12,403,215)
21,759,734
—
4,247,065
—
—
—
— 20,081,466
— 20,081,466
—
—
5,554,011
5,554,011
—
—
63,000
—
—
—
— (15,534,345)
1,253,234
—
63,000
(15,534,345)
63,000 $ (41,101,091)$ 31,870,154 $
1,253,234
—
—
—
63,000
—
(849,759)
(16,384,104)
4,704,252 $ 36,574,406
See notes to consolidated financial statements.
F-5
AKERNA CORP.
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2020 and 2019
Cash flows from operating activities
Net loss
Adjustment to reconcile net loss to net cash used in operating activities
2020
2019
$
(16,384,104 ) $
(12,403,215 )
Bad debt expense
Stock-based compensation expense
Depreciation and amortization
Equity in losses of investee
Debt issuance costs classified as financing
Change in fair value of convertible notes
Change in fair value of contingent consideration
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Other assets
Accounts payable and accrued liabilities
Deferred revenue
Net cash used in operating activities
Cash flows from investing activities
Developed software additions
Furniture, fixtures, and equipment additions
Cash paid for business combinations, net of cash acquired
Investment in equity method investee
Cash received in connection with the reverse merger
Net cash provided by investing activities
Cash flows from financing activities
Proceeds from the issuance of long term debt
Cash paid for debt issuance costs
Proceeds from the exercise of warrants
Proceeds from the issuance of common stock
Net cash provided by financing activities
Net increase in cash and restricted cash
Cash and restricted cash - beginning of period
Cash and restricted cash - end of period
Cash paid for taxes
Cash paid for interest
Supplemental disclosure of non-cash investing and financing activity:
Cashless exercise of options
Stock-based compensation capitalized as software development
Assets acquired and liabilities assumed in business combinations and reverse merger:
Accounts receivable
Prepaid expenses and other current assets
Fixed assets
Intangible assets
Goodwill
Accounts payable and accrued liabilities
Deferred revenue
Contingent consideration
See notes to consolidated financial statements.
F-6
1,094,507
1,166,130
1,315,898
3,692
1,177,390
(766,000)
(998,000)
(1,621,262)
(592,807)
(58,925 )
1,602,751
(286,922)
(14,347,652 )
(3,102,728)
(156,636)
(88,720)
(250,000)
—
345,941
3,884,111
—
—
—
—
—
(1,572,889)
(351,144)
—
893,845
154,756
(9,048,595)
—
—
—
—
18,843,483
(3,598,084)
18,843,483
17,164,600
(1,177,390)
4,247,065
—
20,234,275
—
—
—
10,000,000
10,000,000
2,288,539
19,794,888
22,367,289
2,572,401
24,655,828
$
22,367,289
—
—
$
$
—
$
$
$
87,104
77,505
27,860
2,410
8,010,000
20,254,309
1,441,062
31,220
1,387,000
—
—
19
—
—
35,292
—
—
—
—
—
—
$
$
$
$
$
$
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2020
Note 1 - Description of Business, Liquidity, and Capital Resources
Description of Business
Akerna Corp., herein referred to as we, us, our or Akerna, through our wholly-owned subsidiaries MJ Freeway, LLC, or MJF, Trellis Solutions, Inc., or Trellis,
and solo sciences, inc., or Solo provides enterprise software solutions that enable regulatory compliance and inventory management. Our proprietary, broad and growing
suite of solutions are adaptable for industries in which interfacing with government regulatory agencies for compliance purposes is required, or where the tracking of
organic materials from seed or plant to end products is desired. We develop products intended to assist states in monitoring licensed businesses’ compliance with state
regulations and to help state-licensed businesses operate in compliance with such law. We provide our commercial software platform, MJ Platform®, and Trellis®, to
state-licensed businesses, and our regulatory software platform, Leaf Data Systems®, to state government regulatory agencies. Through our controlled subsidiary, solo
sciences inc., we provide an innovative, next-generation solution for state and national governments to securely track product and waste throughout the supply chain with
solo*TAG™. The integration of MJ Platform® and solo*CODE™ results in technology for consumers and brands that brings a consumer-facing mark designed to
highlight the authenticity and signify transparency.
We consult with clients on a wide range of areas to help them successfully maintain compliance with state laws and regulations. We provide project-focused
consulting services to clients who are initiating or expanding their cannabis business operations or are interested in data consulting engagements with respect to the legal
cannabis industry. Our advisory engagements include service offerings focused on compliance requirement assessments, readiness and best practices, compliance
monitoring systems, application processes, inspection readiness, and business plan and compliance reviews. We typically provide our consulting services to clients in
emerging markets that are seeking consultation on newly introduced licensing regimes and assistance with the regulatory compliant build-out of operations.
Liquidity and Capital Resources
Since our inception, we have incurred recurring operating losses, used cash in 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 $4.1 million in
costs incurred in connection with specific transactions, including the Mergers, acquisitions completed or expected to close within the next twelve months and the issuance
of debt. We implemented a cost reduction initiative and achieved a reduction in cash used in operations in excess of $1.0 million between the third and fourth quarters of
fiscal year 2020. Subsequent to year end we implemented phase two of that initiative, the cost-cutting measures included reduction in headcount, as our business has
matured we have been able to streamline our operations, we also determined to forego certain costs, which have not historically yielded sufficient returns. On June 8,
2020, we authorized a new series of senior secured convertible notes with net proceeds of $13.8 million after debt issuance costs. We anticipate our current cash balances
will be sufficient to meet the working capital requirements for the next twelve months.
From time to time, we may pursue various strategic business opportunities. These opportunities may include investment in or ownership of additional technology
companies 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 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 the necessary financing to fund 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.
F-7
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2020
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements 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. The consolidated financial statements are presented in accordance with accounting principles generally accepted in the
United States, or GAAP, and our reporting currency is the United States Dollar.
Principles of Consolidation
Our accompanying consolidated financial statements include the accounts of Akerna, our wholly-owned subsidiaries, and those entities in which we
otherwise have a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.
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 consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts included in the financial statements and accompanying notes thereto. We base our estimates on assumptions that we believe to be reasonable
under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily available from
other sources. Actual results could differ from those estimates under different assumptions or conditions; however, we believe that our estimates are reasonable.
Cash and Cash Equivalents
We consider liquid instruments purchased with an original maturity of three months or less to be cash equivalents. There were no cash equivalents as
of June 30, 2020 and 2019. We continually monitor our positions with, and the credit quality of, the financial institutions with which we invest. As of the balance
sheet date, and periodically throughout the year, we have maintained balances in various operating accounts in excess of federally insured limits. As of June 30,
2020, approximately $23.5 million of our cash balances were uninsured. We have 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 a letter of credit.
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 $0.2 million as of June 30, 2020, and 2019. The allowance for doubtful accounts consists of the following
activity for the years ended June 30, 2020 and 2019:
Allowance for doubtful accounts, beginning balance
Additions:
Bad debt expense
Deductions:
Write-off uncollectable accounts
Allowance for doubtful accounts, ending balance
Concentrations of Credit Risk
2020
2019
$
190,088
$
39,571
1,094,507
345,941
(1,076,173 )
208,422
$
(195,424 )
$ 190,088
We grant credit in the normal course of business to customers in the United States. We periodically perform credit analysis and monitor the financial
condition of our customers to reduce credit risk.
During the year ended June 30, 2020 and 2019, one government client accounted for 25% and 30% of total revenues, respectively. As of June 30, 2020,
and 2019 two government clients accounted for a total of 36% and 18%, and 34% and 24% of net accounts receivable, respectively.
Equity Method Investments
We make strategic investments in privately held equity securities of companies that provide technology solutions that are complementary 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 and losses in 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 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. There were no impairments of intangible assets during the year ended June 30, 2020, or
2019.
Goodwill Impairment Assessment
We evaluate and test the recoverability of our goodwill for impairment at least annually during October of each year or more often if circumstances indicate
that goodwill may not be recoverable.
Software Development Costs
Costs incurred during the application development stage of a newly developed application and costs we incur to enhance our existing platforms that meet
certain criteria are subject to capitalization and subsequent amortization. Product development stage costs were approximately $3.2 million during the year ended
June 30, 2020. Product development costs are primarily comprised of personnel costs such as payroll and benefits, vendor costs, and other costs directly
attributable to the project. We capitalize costs only during the development phase. Any costs in connection to planning, design, and maintenance subsequent to
release are expensed as incurred. We amortize software development costs over the expected useful life of 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
GAAP defines fair value as 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. Under this guidance, we are required to classify certain assets and liabilities based on the fair value hierarchy, which
groups fair value-measured assets and liabilities based upon the following levels of inputs:
●Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
●Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of
the asset or liability;
●Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by
little or no market activity).
The 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 11 - 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 no 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
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 contract, 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 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 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
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.
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.
Reclassifications
Certain prior year financial statement amounts have been reclassified for consistency with the current year presentation.
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.
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 the vesting period.
Segments
Our 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, we have a single operating segment.
Recently Issued Accounting Pronouncements
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 2021 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 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 2022. We are evaluating the impact of the adoption of the new standard on our consolidated financial statements and do not anticipate a significant
impact on our results of operations.
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. The new guidance is effective for us in our fiscal year beginning in 2023. We are evaluating the impact of
the adoption of the new standard on our consolidated financial statements.
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 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 the 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 in our fiscal year beginning in 2022, with early adoption permitted. Adoption of the
standard requires changes to be made prospectively. We are evaluating the impact of adoption of the new standard on our consolidated financial statements.
F-10
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2020
Note 3 – Significant Transactions
Business Combinations
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
Contingent consideration
Total estimated fair value of consideration
$
$
2,531
998
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.
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 payable in shares based on the 20-day VWAP. As of 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.
Our purchase price allocation is preliminary as additional information may come to our attention regarding the acquisition date value of assets acquired and
liabilities assumed that could require measurement period adjustments to this allocation. The following table summarizes our preliminary estimated fair values of assets
acquired and liabilities assumed as of the date of acquisition (in thousands):
Cash
Accounts receivable, net
Other assets
Acquired technology
Acquired trade name
Customer relationships
Goodwill
Accounts payable and accrued expenses
Deferred revenue
Net assets acquired
$
$
21
77
6
210
80
220
3,229
(283)
(31)
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. 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, 2020 were $216,000 and $17,000, 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 fourth quarter of fiscal 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
Contingent consideration
Total estimated fair value of consideration
$
$
$17,550
389
17,939
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.
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 this
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. Because the amendment occurred subsequent to our fiscal year-end, the liability remains recorded as of June 30, 2020, the liability will be written off
upon the during our next fiscal quarter.
During the fourth quarter 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 liabilities, and the fair value of noncontrolling interests. As we
finalize this valuation, we may have additional adjustments to the allocated values. The following table summarizes the preliminary estimated fair values of assets
acquired and liabilities assumed as of the date of acquisition (in thousands):
Cash
Prepaid expenses and other assets
Furniture, fixtures, and equipment
Acquired technology
Acquired trade name
Goodwill
Accounts payable and accrued liabilities
Fair value of noncontrolling interests
Net assets acquired
$
$
101
22
2
7,160
340
17,025
(1,158)
(5,554)
17,938
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 condensed
consolidated statement of operations from the acquisition date of January 15, 2020 to June 30, 2020 were $23,000 and $1,471,000, respectively.
Pro Forma Financial Information
The following unaudited pro forma financial information summarizes the combined results of operations for Akerna, Trellis, and Solo, as though the
companies were combined as of the beginning of our fiscal 2019:
Revenues
Net loss
June 30,
$
2020
2019
13,584 $
(20,589)
12,220
(15,884)
The pro forma financial information for the periods presented above has been calculated after adjusting the results of Solo and Trellis to reflect the business
combination accounting effects resulting from these acquisitions, including the amortization expense from acquired intangible assets as though the acquisitions
occurred as of the beginning of our fiscal year 2020. As noted above, the allocation is preliminary 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 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
combinations and factually supportable. 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 our 2019 fiscal year.
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.
Due to the short period of time since the acquisition date and limitations on access to Ample information prior to the acquisition date, our initial accounting for
the business combination is incomplete at this time. As a result, we are unable to provide amounts recognized as of the acquisition date for major classes of assets and
liabilities acquired and resulting from the transaction, including the information required for contingencies, intangible assets, and goodwill. This information is
expected to be reflected in our interim financial statements included in our quarterly report on Form 10-Q for the three months ending September 30, 2020.
Reverse Merger
On June 17, 2019, MTech and MJF consummated the Mergers contemplated by the Merger Agreement dated October 10, 2018, as amended. In connection with
the closing of the Mergers, we changed our name from MTech Acquisition Holdings Inc. to Akerna Corp. The Merger Consideration was paid through the issuance of
6,520,099 shares of our common stock (the “Consideration Shares”) to the former holders of MJF common units, preferred units, and profit interest units at a price equal
to $10.16 per share. We allocated 283,010 fully vested shares of Akerna common stock and 215,063 shares of unvested restricted stock were allocated to the former
holders of MJF profit interest units, which were accounted for as share-based compensation.
As disclosed above, (a) 283,110 fully vested shares of common stock were allocated to the former holders of MJF profit interest units, resulting in the recognition
of approximately $3.4 million on June 17, 2019 and approximately $2.1 million of compensation expense related to unvested restricted shares such profit interest units be
recognized over the remaining vesting period of 3 years.
25
Table of Contents
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2020
Note 4 - Balance Sheet Disclosures
Prepaid expenses and other current assets as of June 30, 2020 and 2019 consisted of the following:
Software and technology
Professional services, dues, and subscriptions
Insurance
Rental deposit
Other
Total Prepaid Expenses and Other Current Assets
Accounts payable and accrued liabilities as of June 30, 2020 and 2019 consisted of the following:
Accounts payable
Professional fees
Sales taxes
Compensation
Contractors
Other
Total accounts payable and accrued liabilities
2020
2019
571,695 $
473,731
105,814
38,303
25,798
1,215,341 $
237,930
169,804
159,940
10,000
—
577,674
2020
2019
1,443,895 $
2,273,659
59,825
260,042
782,366
42,141
4,861,928 $
1,317,566
49,205
36,358
354,724
19,557
40,706
1,818,116
$
$
$
$
The accrued compensation includes accrued executive bonuses of $128,000 and $215,000 as of June 30, 2020, and 2019, respectively.
26
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2020
Note 5 - Goodwill and Intangible Assets, Net
Goodwill
The following table reflects the changes in the carrying amount of goodwill during the year ended June 30, 2020:
Balance as of June 30, 2019
Additions due to acquisitions
Balance as of June 30, 2020
Finite-lived Intangible Assets, Net
Intangible assets as of June 30, 2020 consist of the following:
$
$
—
20,254,309
20,254,309
Acquired developed technology
Acquired trade names
Customer relationships
Other intangible assets, not yet placed into service
Intangible assets
Capitalized software - In-service
Capitalized software - Work in Progress
Total Capitalized Software
Total finite-lived intangible assets
Weighted
average
remaining
amortization
period (in
years)
4.42
7.40
1.75
N/A
1.86
N/A
Gross carrying
amount
Accumulated
amortization
Net carrying
amount
$
$
$
7,370,000 $
420,000
220,000
211,394
8,221,394 $
(679,696)$
(23,248 )
(24,475 )
—
(727,419)$
6,690,304
396,752
195,525
211,394
7,493,975
2,852,044
337,788
3,189,832
11,411,226 $
(560,528)
—
(560,528)
(1,287,947)$
2,291,516
337,788
2,629,304
10,123,279
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 $1.3 million for the year ended June 30, 2020.
As of June 30, 2020, expected amortization expense relating to capitalized software and purchased intangible assets for each of the next five years and
thereafter is as follows:
2021
2022
2023
2024
2025
Thereafter
Total
Acquired
Intangible
Assets
Capitalized
Software
$
$
1,711,444 $
1,663,607
1,490,511
1,469,778
813,444
133,797
7,282,581 $
1,325,851
806,012
63,838
63,838
31,977
—
2,291,516
27
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2020
Note 6 – Equity Method Investment and Related Party Transaction
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.
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, 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 June 30, 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. For the year ended June 30, 2020 we have recognized equity in loss of investee of $3,692, which represents our share of
ZolTrain's losses since our investment.
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 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 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. For the year ended June 30, 2020 we have not recognized any revenue from this agreement.
28
Table of Contents
Note 7 - Long Term Debt
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2020
Long-term debt consisted of the following at June 30, 2020, we had no long-term debt as of June 30, 2019:
Convertible Notes (at fair value)
PPP loan
Subtotal
Less: current maturities
Total long-term debt, less current portion
Senior Secured Convertible Notes
$
$
14,131,000
2,204,600
16,335,600
(6,135,364)
10,200,236
On June 8, 2020, we entered into a Securities Purchase Agreement, or SPA, with two institutional investors, or the Note Holders, to sell a new series of senior
secured convertible notes, or the Convertible Notes, of Akerna in a private placement to the 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 Convertible 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 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.
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 subject to certain limitations, 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. 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.
In connection with the occurrence of an event of default, the Holders of the Convertible Notes will be entitled to convert all or any portion of the 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 $1.92.
We have elected to use the fair value option to account for the Convertible Notes. The fair value of the Convertible Notes on issuance was recorded as $15.0
million. During the year ended June 30, 2020, the fair value of the Convertible 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 $0.8 million was
recognized as current period other expense in our consolidated statement of operations. As of June 30, 2020, the fair value of the Convertible Notes on our
consolidated balance sheet was $14.1 million.
Paycheck Protection Program Loan
In April 2020, we were granted a loan, or the PPP Loan, from a lender in the aggregate amount of $2.2 million 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 April 21, 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. The principal amount of the PPP Loan not forgiven and accrued interest is 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 April 23,
2020. We are currently evaluating the impact this guidance has on Akerna and the PPP Loan.
We are accounting for the PPP Loan as a liability and accrue interest expense using the effective interest method.
The aggregate scheduled maturities of outstanding long-term debt obligations in subsequent years are as follows:
Fiscal Year ending June 30,
2021
2022
Aggregate maturities
Original issue discount on Convertible Notes
Unrealized change in fair value of Convertible Notes
Long term debt outstanding as of June 30, 2020
29
$
$
6,844,620
12,359,980
19,204,600
(2,040,000)
(829,000)
16,335,600
Table of Contents
Note 8 - Stockholders’ Equity
Common and Preferred Stock
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2020
Upon the closing of the Merger, our 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.
We also entered into a series of securities purchase agreements with certain investors (the “PIPE Investors”), whereby we 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.
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.
We 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.
Warrants
In connection with MTech’s initial public offering, we 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 (“Public Warrant”). Each 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.
A summary of the status of common stock warrants as of June 30, 2020 and the changes during the two years then ended, is presented in the following table:
Outstanding as of July 1, 2018
Issued
Exercised
Expired/canceled
Outstanding at June 30, 2019
Issued
Exercised
Expired/canceled
Outstanding at June 30, 2020
Shares Issuable
Under Warrants
Weighted-average
Exercise Price
Weighted Average
Remaining Life
Aggregate Intrinsic
Value
5,993,750
189,365
—
—
6,183,115
—
$
$
(369,311 )
—
5,813,804
$
11.50
11.50
—
—
11.50
—
—
—
11.50
— $
—
—
—
4.97 $
—
—
—
3.97 $
—
—
—
—
2,473,000
—
—
—
—
There was no aggregate intrinsic value for the warrants outstanding as of June 30, 2020.
F-13
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2020
Note 9 - Stock-Based Compensation
Restricted Shares and Restricted Stock Units
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 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. On June 26, 2020, the stockholders
approved an amendment to the Equity Incentive Plan and increased the shares authorized for issuance 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 four
years from the grant date or the first day of the service period.
Prior to the Mergers, MJF had Profit Interest Incentive 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, with varying vesting terms that reflect the vesting conditions applicable to the
individual PIUs at the time of the merger.
We determined the PIUs represented a profit-sharing compensation arrangement that had value only upon a defined liquidating event. Accordingly, no value
was accrued for the PIUs prior to the Mergers on June 17, 2019, which met the definition of a liquidating event. As a result, we recorded a one-time charge of
approximately $3.4 million, which represented the charge associated with issuing fully vested shares of common stock in exchange for the PIUs.
A summary of our unvested Restricted Shares and Restricted Stock Units (“RSUs”) activity for the year ended June 30, 2020 is presented in the table below:
Unvested as of June 30, 2019
Granted
Vested
Forfeited
Unvested as of June 30, 2020
215,063
—
(88,659 )
(54,091 )
72,313
—
571,229
(26,965 )
(78,470 )
465,794
Restricted
Shares
Restricted Stock
Units
Total
Weighted
Average Grant
Date Fair Value
11.99
7.24
7.25
10.83
6.56
215,063 $
571,229
(115,624)
(132,561)
538,107 $
For the year ended June 30, 2020, we recognized stock-based compensation expense related to the ratable amortization of the unvested Restricted Shares and
RSUs of $1.3 million. 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 June 30, 2020, we capitalized $0.1 million in stock-based compensation costs as software
development cost. The $3.9 million of unrecognized costs as of June 30, 2020 related to Restricted Shares and RSUs will be ratably recognized over an estimated
weighted average remaining vesting period of 3.1 years.
30
Table of Contents
Note 10 - Loss Per Share
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2020
Basic net loss per share is calculated by dividing net loss attributable to Akerna stockholders by the weighted-average number of shares of common stock
outstanding. Diluted net loss per common share is calculated by giving effect to all potentially dilutive common stock, including warrants, restricted stock awards,
restricted stock units, and shares issuable upon conversion of debt. 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. The table below details potentially outstanding shares on a fully diluted basis as of June 30, 2020 and
2019 that were not included in the calculation of diluted earnings per share and the weighted average amounts of potentially outstanding shares that would have been
dilutive had we reported net income for the years ended June 30, 2020 and 2019.
Warrants
Restricted Stock Units
Restricted Stock Awards
Shares of common stock issuable in upon conversion of Convertible Notes
Total
31
Fully Diluted
Weighted Average for the Year
Ended
2020
5,813,804
325,121
75,654
1,936,845
8,151,424
2019
6,183,115
—
215,063
—
6,398,178
2020
5,833,971
37,709
7,656
111,130
5,990,466
2019
6,001,013
—
2,351
—
6,003,364
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2020
Note 11 - Fair Value
Contingent Consideration
Solo
In connection with our 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*TAG TM 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.
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 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 Solo was $389,000. The carrying amount at fair value of the aggregate liability for the contingent consideration recorded on the consolidated
balance sheet at June 30, 2020 is $389,000. As such we have not recorded a change in the fair value of the contingent consideration during the year ended June 30, 2020.
As discussed in Note 3, subsequent to year end, we reached an agreement with the Solo selling shareholders to eliminate any future obligation with respect to the
contingent consideration and waive any contingent consideration that would have been due prior to amending the agreement.
We utilized a Monte Carlo simulation model, which incorporates significant 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 our assumptions about the
assumptions that market participants would use in valuing the contingent consideration as of the acquisition date and subsequent reporting period.
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.
We have recorded 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.
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 have 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 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 Convertible 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 9, 2020 (date of issuance) to June 30, 2020:
Beginning fair value balance on issue date - June 9, 2020
Change in fair value reported in the statements of operations
Change in fair value reported in other comprehensive income
Ending fair value balance - June 30, 2020
$
$
14,960,000
(766,000)
(63,000 )
14,131,000
The estimated fair value of the Convertible Notes as of their June 9, 2020 issue date and as of June 30, 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
Face value principal payable
Original conversion price
Value of Common Stock
Expected term (years)
Volatility
Market yield (range)
Risk free rate
32
$
$
$
June 30,
2020
17,000,000 $
$
11.50
$
8.80
2.9
45.0 %
23.9 %
0.2%
June 9,
2020
17,000,000
11.50
10.28
3.0
45.0%
23.3% to 23.4%
0.2%
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2020
Note 12 - Commitments and Contingencies
Operating Leases
We lease facilities and vehicles under non-cancelable operating leases. Rent expense for the years ended June 30, 2020 and 2019 was $299,629 and $151,458,
respectively. Future minimum lease payments under these leases are $526,185 for the year ending June 30, 2021 and $305,214 for the year ending June 30, 2022.
Letter-of-Credit
As of June 30, 2020, and 2019, we had a standby letter-of-credit with a bank in the amount of $500,000. The standby letter of credit is collateralized by $500,000 of
cash, which is classified as restricted cash on our consolidated balance sheets. The beneficiary of the letter-of-credit is an insurance company.
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. When only a range of possible losses 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, 2020 and 2019, respectively, there were no legal proceedings requiring recognition or disclosure in the
financial statements.
Employee Benefit Plan
We have a 401(k) Plan (the “Plan”) to provide retirement benefits for its employees. Employees may contribute up to a portion of their annual compensation to the Plan,
limited to a maximum annual amount as updated annually by the IRS. We do not offer a match of employee contributions nor any discretionary contributions.
33
Note 13 - Income Taxes
AKERNA CORP.
Notes to Consolidated Financial Statements
We are 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 income tax purposes. Accordingly, prior to the business combination, our taxable income and losses were reported on the income tax returns of MJF’s members.
Therefore, no income tax 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 June 30, 2020.
The accounting for the business combinations of Solo and Trellis reflected in the accompanying 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.
The following table sets forth the expense or (benefit) for income taxes:
Income tax expense
Current income taxes
U.S. federal
U.S. state
Total current income taxes
Deferred income taxes
U.S. federal
U.S. state
Total deferred income tax benefit
June 30,
2020
2019
30,985 $
—
30,985 $
June 30,
2020
2019
$
—
—
—
$
—
—
—
—
—
—
$
$
$
$
The following table sets forth reconciliations of the income tax expense at the statutory federal income tax rate to actual expense based on income or loss before
income taxes:
Income tax expense attributable to:
Federal
State, net of federal benefit
Foreign tax rate less than federal rate
Permanent differences
Restricted stock awards
Changes in valuation allowance
Provision to return adjustment
Losses from flow-through entity not subject to tax
Other adjustments
Effective income tax expense
Noncurrent deferred tax assets:
Employee compensation
Debt issuance costs
Revenue recognition
Federal and state net operating loss
Foreign net operating loss
Total deferred tax assets
Noncurrent deferred tax liabilities:
Fixed assets
Intangibles
Deferred tax liabilities
Valuation allowance
Deferred taxes after valuation allowance
June 30,
2020
2019
$
(3,255,706) $
(862,690)
(2,645)
312,525
—
3,884,440
(45,134)
—
195
(2,509,246)
(13,452 )
—
—
816,505
85,455
—
1,640,066
(19,328 )
$
30,985 $
—
June 30,
2020
2019
$
378,003 $
323,183
156,022
4,082,297
258,083
—
—
22,226
63,229
—
$
5,197,588 $
85,455
(653,819)
(1,808,960)
$
(2,462,779)
$
—
—
—
(2,734,809)
(85,455 )
$
— $
—
During the year ended June 30, 2020, valuation allowances on deferred tax assets that are not anticipated to be realized increased by $2,649,354.
Our deferred tax valuation allowances are primarily the result of uncertainties regarding the future realization of recorded tax benefits on tax 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.
We have evaluated the realizability of our 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, we
have determined that the valuation allowances recorded as of June 30, 2020 and 2019 are appropriate.
We have deferred tax assets related to U.S. federal tax and state tax carryforwards for net operating losses, which will not expire in the amount of $15,286,374. The
U.S. federal net operating loss carryforwards do not expire and the U.S. state net operating loss carryforwards expire at various dates beginning in 2039. We have
deferred tax assets related to foreign net operating loss carryforward, which begin to expire in 2028, in the amount of $973,900.
We are not currently under examination for any of the major jurisdictions where we conduct business as of June 30, 2020, however, all of our tax years remain subject
to examination. Our management does not believe there are significant uncertain tax positions in 2020 and as a result we do not expect any cash payments in the next
12 months, however, an uncertain tax position related to potential penalties in the amount of $50,000 has been recorded in connection with one of the business
combinations during the year ended June 30, 2020. There are no interest related to uncertain tax positions in 2020.
34
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2020
Note 14 – Revisions of Financial Statements for the Fiscal Quarters during Fiscal Year 2020
During the course of preparing the annual report on Form 10-K for the year ended June 30, 2020, we determined that costs incurred during the application development
phase of certain new software applications and enhancements were not properly capitalized, which resulted in the overstatement of operating expenses and net loss, and
an understatement of amortization expense for each of the quarters during the year ended June 30, 2020. 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.
Condensed Consolidated Statements of Operations
Cost of revenue
Gross profit
Product development
Selling, general and administrative
Net loss
Net loss per share
Condensed Consolidated Statements of Operations
Cost of revenue
Gross profit
Product development
Selling, general and administrative
Net loss
Net loss per share
Condensed Consolidated Statements of Operations
Cost of revenue
Gross profit
Product development
Selling, general and administrative
Net loss
Net loss per share
Condensed Consolidated Statement of Operations
Cost of revenue
Gross profit
Product development
Selling, general and administrative
Net loss
Net loss per share
Condensed Consolidated Statements of Operations
Cost of revenue
Gross profit
Product development
Selling, general and administrative
Net loss
Net loss per share
Three Months Ended September 30, 2019
As reported
Adjustment
As revised
$
1,397,361 $
1,795,529
1,130,880
3,583,815
(2,846,071)
(0.26)
(17,660) $
17,660
(519,978)
17,899
519,739
1,379,701
1,813,189
610,902
3,601,714
(2,326,332)
(0.21)
Three Months Ended December 31, 2019
Adjustment
As reported
As revised
1,638,840
1,667,363
1,261,509
4,796,404
(4,338,536)
(0.40)
(23,601)
23,601
(638,008)
86,768
574,841
1,615,239
1,690,964
623,501
4,883,172
(3,763,695)
(0.34)
Six Months Ended December 31, 2019
Adjustment
As reported
As revised
3,036,201
3,462,892
2,392,389
8,380,219
(7,184,607)
(0.66)
(41,261)
41,261
(1,157,986)
104,667
1,094,580
2,994,940
3,504,153
1,234,403
8,484,886
(6,090,027)
(0.56)
Three Months Ended March 31, 2020
Adjustment
As revised
As reported
1,420,909
1,649,637
1,632,353
5,500,837
(5,348,980)
(0.43)
(24,690)
24,690
(757,566)
177,405
604,851
1,396,219
1,674,327
874,787
5,678,242
(4,744,129)
(0.38)
Nine Months Ended March 31, 2020
Adjustment
As revised
As reported
4,457,110
5,112,529
4,024,742
13,881,056
(12,533,587)
(1.11)
(65,951)
65,951
(1,915,552)
282,072
1,699,431
4,391,159
5,178,480
2,109,190
14,163,128
(10,834,156)
(0.96)
F-18
Note 15 - Subsequent Events
AKERNA CORP.
Notes to Consolidated Financial Statements
June 30, 2020
F-19
Exhibit 3.4
Common Stock
DESCRIPTION OF SECURITIES
Our authorized share capital consists of 75,000,000 shares of common stock, $0.0001 par value per share. As of September 25, 2020, there are 14,685,932 shares of
common stock issued and outstanding. 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 Annual Report on Form 10-K.
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. Our board of directors are divided into three classes: Class I; Class II;
and Class III. The directors in Class I have a term expiring at the 2022 annual meeting of stockholders, the directors in Class II have a term expiring at the 2020 annual
meeting of stockholders, and the directors in Class III have a term expiring at the 2021 annual meeting of stockholders.
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.
Warrants
As of September 25, 2020, there are 5,813,804 common stock purchase warrants issued and outstanding (the “Warrants”). Each Warrant entitles the registered holder to
purchase one share of common stock of the Company (a “Warrant Share”) at a price of $11.50 per Warrant Share, subject to adjustment as discussed below. No Warrants
will be exercisable for cash unless we have an effective and current registration statement covering the Warrant Shares issuable upon exercise of the Warrants and a current
prospectus relating to such Warrant Shares. If a registration statement covering the Warrant Shares issuable upon exercise of the Warrants is not effective, Warrant holders
may, until such time as there is an effective registration statement and during any period when we shall have failed to maintain an effective registration statement, exercise
Warrants on a cashless basis pursuant to the exemption provided by Section 3(a)(9) of the Securities Act, provided that such exemption is available. If that exemption, or
another exemption, is not available, holders will not be able to exercise their Warrants on a cashless basis. In such event, each holder would pay the exercise price by
surrendering the Warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of Warrant Shares underlying
the Warrants, multiplied by the difference between the exercise price of the Warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair
market value” for this purpose will mean the average reported last sale price of the Warrant Shares for the 5 trading days ending on the trading day prior to the date of
exercise. The Warrants will expire on June 17, 2024, or earlier upon redemption or liquidation.
The exercise price and number of Warrant Shares issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend,
extraordinary dividend or our recapitalization, reorganization, merger or consolidation.
Akerna may call the Warrants for redemption, subject to certain exceptions, in whole and not in part, at a price of $0.01 per warrant, at any time during the exercise period,
upon not less than 30 days’ prior written notice of redemption to each warrant holder, if, and only if, the reported last sale price of the common stock equals or exceeds
$18.00 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations), for any 20 trading days within a 30 trading day period ending on the
third business day prior to the notice of redemption to warrant holders; and if, and only if, there is a current registration statement in effect with respect to the Warrant Shares
underlying such warrants. The right to exercise will be forfeited unless the Warrants are exercised prior to the date specified in the notice of redemption. On and after the
redemption date, a record holder of a Warrant will have no further rights except to receive the redemption price for such holder’s warrant upon surrender of such Warrant.
The Warrants may be exercised upon surrender of the Warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the
reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to
us, for the number of Warrants being exercised. The Warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they
exercise their Warrants and receive Warrant Shares.
No fractional Warrant Shares will be issued upon exercise of the Warrants. If, by reason of any adjustment made pursuant to the warrant agreement, upon exercise of the
Warrants, a holder would be entitled to receive a fractional interest in a Warrant Share, Akerna will, upon exercise, round up to the nearest whole number the number of
Warrant Shares to be issued to the Warrant holder.
The Warrants are issued in registered form under the warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and Akerna. The warrant
agreement provides that the terms of the Warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires
the approval, by written consent or vote, of the holders of at least 50% of the then outstanding Warrants in order to make any change that adversely affects the interests of
the registered holders.
SUBSIDIARIES OF AKERNA CORP.
Subsidiary
MJ Freeway, LLC
solo sciences, inc.
Trellis Solutions, Inc
Akerna Canada Holdings Inc.
Akerna Canada Ample Exchange Inc.
Ample Organics Inc.
Exhibit 21.1
Place of
Incorporation
Colorado
Delaware
Ontario, Canada
Ontario, Canada
Ontario, Canada
Ontario, Canada
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statement of Akerna Corp. on Form S-8 (File No. 333-233480 and File No. 333-242480) of our report dated
September 28, 2020 with respect to our audits of the consolidated financial statements of Akerna Corp. as of June 30, 2020 and 2019 and for each of the two years in the
period ended June 30, 2020, which report is included in this Annual Report on Form 10-K of Akerna Corp. for the year ended June 30, 2020.
Exhibit 23.1
/s/ Marcum llp
Marcum llp
New York, NY
September 28, 2020
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Jessica Billingsley, certify that:
1. I have reviewed this Annual Report on Form 10-K of Akerna Corp.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: September 28, 2020
/s/ Jessica Billingsley
By:
Jessica Billingsley, Chief Executive Officer and Director
(Principal Executive Officer)
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, John Fowle, certify that:
1. I have reviewed this Annual Report on Form 10-K of Akerna Corp.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: September 28, 2020
/s/ John Fowle
By:
John Fowle, Chief Financial Officer (Principal Financial and
Accounting Officer)
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350), the undersigned, Jessica Billingsley, Chief Executive Officer of Akerna Corp., a Delaware
corporation (the “Company”), and John Fowle, Chief Financial Officer of the Company, do hereby certify, to his and her knowledge, that:
The Annual Report Form 10-K for the year ended June 30, 2020 of the Company (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: September 28, 2020
Date: September 28, 2020
/s/ Jessica Billingsley
By:
Jessica Billingsley, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ John Fowle
By:
John Fowle, Chief Financial Officer
(Principal Financial and Accounting Officer)
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request.