Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 1 - Description of Business, Liquidity
and Capital Resources
Description of Business
Akerna Corp., herein referred
to as the Company, we, our or Akerna, through our wholly owned subsidiary MJ Freeway, LLC, or MJF, 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 developed 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 regulatory software platform, Leaf Data Systems®, to state government regulatory agencies, and
our commercial software platform, MJ Platform®, to state-licensed businesses. 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 authenticity and
signify transparency.
We consult with clients
on a wide range of areas to help them maintain compliance with state law. Our project-focused consulting services help clients
obtain licensing to initiate or expand their business operations. Our advisory engagements include service offerings focused on
compliance requirement assessments, readiness and best practices, compliance monitoring systems, application processes, inspection
readiness and business plan and compliance reviews. We typically provide our consulting services to clients in emerging markets
that are seeking consultation on newly introduced licensing regimes and assistance with the regulatory compliant build-out of
operations.
The accompanying financial
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.
Liquidity and Capital Resources
Since our inception,
we have incurred recurring operating losses, used cash from operations, and relied on capital raising transactions to continue
ongoing operations. Although we have continuing negative cash flow from operations, the cash outflow since the Mergers is partially
attributable to approximately $1.8 million in costs incurred in connection with specific transactions, including the Mergers and
acquisitions completed or expected to close within the next twelve months. The transaction costs we expect to occur over the next
twelve months are far less than the costs incurred during the nine months ended March 31, 2020. In addition, we are implementing
a cost reduction plan during the fourth quarter 2020 that we expect to reduce recurring operating expenses between $2 million and
$3 million annually. We anticipate our current cash 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 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.
AKERNA CORP.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 2 - Summary of Significant Accounting
Policies
Basis of Presentation
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 8
of Regulation S-X. Certain footnotes and other financial information normally required by accounting principles generally accepted
in the United States of America, or GAAP, have been condensed or omitted in accordance with such rules and regulations. In management’s
opinion, these condensed consolidated financial statements have been prepared on the same basis as our annual consolidated financial
statements and notes thereto and include all adjustments, consisting of normal recurring items, considered necessary for the fair
presentation. The operating results for the three and nine months ended March 31, 2020 are not necessarily indicative
of the results that may be expected for the year ending June 30, 2020.
The condensed
consolidated balance sheet for the year ended June 30, 2019 has been derived from our audited financial statements at that date
but does not include all disclosures and financial information required by GAAP for complete financial statements. The information
included in this quarterly report on Form 10-Q should be read in conjunction with our consolidated financial statements and notes
thereto for the year ended June 30, 2019, which were included in our annual report on Form 10-K filed on September
23, 2019.
Principles of Consolidation
Our accompanying
condensed 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 condensed 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. Actual results could differ
materially from those estimates.
Accounts Receivable, Net
We maintain an allowance
for doubtful accounts equal to the estimated uncollectible amounts based on our historical collection experience and review of
the current status of trade accounts receivable. The allowance for doubtful accounts was $0.5 million as March 31, 2020 and $0.2
million as of June 30, 2019.
Concentrations of Credit Risk
We grant credit in
the normal course of business to our customers. We periodically perform credit analysis and monitor the financial condition of
our customers to reduce credit risk.
AKERNA CORP.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
During the three months
ended March 31, 2020, one government customer accounted for 25% of total revenues. At March 31, 2020, the same government customer
and one other government customer accounted for 24% and 16% of net accounts receivable, respectively. During the three months ended
March 31, 2019, one government customer accounted for 33% of total revenues. At June 30, 2019, the same government customer and
one other government customer accounted for 33% and 24% of net accounts receivable, respectively.
During the nine months
ended March 31, 2020, one government customer accounted for 24% and one consulting customer accounted for 11% of total revenues.
During the nine months ended March 31, 2019, two government customers accounted for 35% and 11% of total revenues, respectively.
Equity Method Investments
We make strategic investments
in privately held equity securities of companies who 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 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
nine months ended March 31, 2020 or 2019.
Goodwill Impairment Assessment
We evaluate and test
the recoverability of our goodwill for impairment at least annually during the second quarter of each fiscal year or more often
if circumstances indicate that goodwill may not be recoverable.
Business Combinations
We use our best
estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition
date. Our estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one
year from the acquisition date, we continue to collect information and reevaluate these estimates and assumptions quarterly and
record any adjustments to our preliminary estimates to goodwill. Upon the conclusion of the measurement period or final determination
of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in
our condensed consolidated statement of operations.
In the event we
acquire an entity with which we have a preexisting relationship, we will recognize a gain or loss to settle that relationship
as of the acquisition date within the condensed consolidated statements of operations. In the event that we acquire an entity
in which we previously held a noncontrolling interest, the difference between the fair value of the shares as of the date of the
acquisition and the carrying value of our investment is recorded as a gain or loss in the condensed consolidated statement of
operations.
AKERNA CORP.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Revenue Recognition
We derive our revenues
primarily from the following sources: software revenues, which are primarily comprised of subscription fees from government and
commercial customers accessing our enterprise cloud computing services and from customers paying for additional support beyond
the standard support that is included in the basic subscription fees; and consulting services provided to operators interested
in integrating our platform into their respective operations, such services include: assessing compliance requirements, monitoring
systems and readiness; assisting with the application process; and evaluating the operator’s inspection readiness and business
plan.
We commence revenue
recognition when there is persuasive evidence of an arrangement, the service has been or is being provided to the customer, the
collection of the fees is reasonably assured, and the amount of fees to be paid by the customer is fixed or determinable.
Software Revenue
Software revenue primarily
consists of subscription revenue that is recognized ratably over the term of the contractual period, beginning when access to the
applicable software is provided to the customer. We typically invoice customers at the beginning of the term, in multi-year, annual,
quarterly, or monthly installments. When collection of fees occurs in advance of service delivery, revenue recognition is deferred
until such services are delivered. Revenue for implementation fees is recognized ratably over the expected term of the agreement,
including expected renewals.
We include service
level commitments to customers warranting certain levels of uptime reliability and performance and permitting those customers
to receive credits if those levels are not met. In addition, customer contracts often include: specific obligations that require
us to maintain the availability of the customer’s data through the service and that customer content is secured against
unauthorized access or loss; and indemnity provisions whereby we indemnify customers from third-party claims asserted against
them that result from our failure to maintain the availability of their content or securing the same from unauthorized access
or loss. To date, we have not incurred any material costs as a result of such commitments. Any such credits or payments made to
customers under these arrangements are recorded as a reduction of revenue.
Consulting Services Revenue
Consulting services
revenue consists of contracts with fixed terms and fee structures based upon the volume and activity, or fixed price contracts
for consulting and strategic services. When these services are not combined with subscription revenues as a single unit of account,
as discussed below, these revenues are recognized as services are rendered and accepted by the customer.
Other Revenues
From time to time,
we purchase equipment for resale to customers. Such equipment is generally drop-shipped to our customers. We recognize revenue
as the products are delivered.
Cost of Revenue
Cost of revenue consists
primarily of costs related to providing subscription and other services to our customers, including employee compensation and
related expenses for datacenter operations, customer support and professional services personnel, payments to outside technology
service providers, security services and other tools.
Deferred Revenue
Deferred revenue primarily
consists of payments received in advance of revenue recognition from subscription services described above and is recognized as
the revenue recognition criteria are met. The deferred revenue balance is influenced by several factors, including seasonality,
the compounding effects of renewals, invoice duration, invoice timing, size and new business within the year.
AKERNA CORP.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Deferred revenue that
will be recognized during the succeeding twelve-month period is recorded as deferred revenue, which is a current liability on the
accompany condensed consolidated balance sheets.
Supplemental Information Regarding Noncash Investing and
Financing Activities
During the nine months
ended March 31, 2020, we acquired 80.4% of the outstanding equity interest in solo sciences inc., or Solo, in exchange for Akerna
common stock valued at $17.6 million, please refer to Note 3 for additional information about the transaction and a schedule of
the assets acquired and liabilities assumed in conjunction with this transaction.
Reclassifications
Certain prior year
financial statement amounts have been reclassified for consistency with the current year presentation.
Recent Accounting Pronouncements
The Financial Accounting
Standards Board, or the FASB, has issued guidance to revise accounting for revenue from contracts with customers, which supersedes
the revenue recognition requirements and industry-specific guidance currently in effect for us. The new revenue standard requires
an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration
the entity expects to be entitled to in exchange for those goods or services. The new revenue standard is effective for our fiscal
2020 annual reporting period and for interim periods thereafter. The new revenue standard allows for either full retrospective
or modified retrospective adoption. We will adopt the new standard using the modified retrospective approach and anticipate that
the timing of recognition of incremental costs of obtaining contracts will be the most significant change to our results of operations
upon adoption.
The FASB has issued
new guidance related to the accounting for leases. The new standard establishes a right-of-use model that requires a lessee to
record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases
will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement
of operations. The new standard is effective for us in our fiscal year beginning in 2021. We are evaluating the impact of adoption
of the new standard on our consolidated financial statements and do not anticipate a significant impact to 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 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 on
the nature of the costs and the project stage in which they are incurred. Capitalized development costs are subject to amortization
and impairment guidance consistent with existing internal-use software development cost guidance. The guidance is applicable for
us in our fiscal year beginning in 2023 with early adoption permitted, including adoption in an interim period. We are evaluating
the impact of adoption of the new standard on our financial statements.
AKERNA CORP.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
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.
Note 3 – Business Combination
On January 15, 2020,
we closed on a stock purchase agreement with substantially all of the shareholders of Solo pursuant to which we acquired all right,
title and interest in 80.40% of the issued and outstanding capital stock of Solo, calculated on a fully diluted basis. As a result
of our investment, Solo became a controlled subsidiary and we commenced consolidation of Solo on January 15, 2020. Our preliminary
estimate of acquisition date fair value of the consideration transferred for Solo was $17.6 million. We are in the process
of completing a valuation of contingent consideration, which is a complex financial instrument. Due to the complexity of this financial
instrument the completion of our valuation is still in process and therefore, we have not recorded an estimated liability as of
March 31, 2020. The preliminary fair value of consideration recorded consisted of the following (in thousands):
|
|
Preliminary
Fair Value
|
|
Common shares issued
|
|
$
|
17,550
|
|
We incurred $0.2 million
of transaction costs directly related to the acquisition that is reflected in selling, general and administrative expenses in our
condensed consolidated statement of operations.
The 1,950,000 shares
of our common stock were valued at $9 per share, the closing price of a share of our common stock on the date of acquisition.
In addition to the
above consideration, we have 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 will 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 us no longer owning a majority stake in Solo; or (c) upon expiration of the patents related to
solo*TAG™ and solo*CODE™, which is December 1, 2029. This fee represents contingent consideration
and will be recorded at fair value as of the date of acquisition. As noted above due to the complexity of this valuation we have
not included an estimated liability as of March 31, 2020 and will record the contingent consideration liability when we have completed
the valuation. Contingent consideration will be recorded at fair value with changes in fair value being recognized in earnings
at each reporting period.
We have 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. The terms of this option will result in our accounting for the instrument as a derivative. Due to
the complexity of the option we have not yet completed our valuation of the option and will record the option at fair value as
of the date of acquisition when the valuation is complete.
The following table
summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
|
|
Preliminary
Fair Value
|
|
Cash
|
|
$
|
101
|
|
Accounts receivable
|
|
|
13
|
|
Prepaid expenses
|
|
|
22
|
|
Intangible assets and goodwill
|
|
|
23,138
|
|
Furniture, fixtures and equipment
|
|
|
15
|
|
Accounts payable and accrued expenses
|
|
|
(876
|
)
|
Fair value of noncontrolling interests
|
|
|
(4,863
|
)
|
Net assets acquired
|
|
$
|
17,550
|
|
AKERNA CORP.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The excess of purchase
consideration over the preliminary fair value of assets acquired and liabilities assumed will be recorded as goodwill, which is
primarily attributed to the assembled workforce and expanded market opportunities, for which there is no basis for U.S. income
tax purposes. The fair values assigned to identifiable assets acquired and liabilities assumed are preliminary based on management’s
estimates and assumptions and will change as additional information is received. We expect to finalize the valuation as soon as
practicable, but not later than one year from the acquisition date.
The amounts of Solo’s
revenue and net loss included in our condensed consolidated statement of operations from the acquisition date of January 15, 2020
to March 31, 2020 were $9,600 and $516,200, respectively.
The following unaudited
pro forma financial information summarizes the combined results of operations for Akerna and Solo, as though the companies were
combined as of the beginning of our fiscal 2019 (in thousands).
|
|
Three Months Ended
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
$
|
3,071
|
|
|
$
|
2,328
|
|
|
$
|
9,570
|
|
|
$
|
7,202
|
|
Net loss
|
|
|
(5,521
|
)
|
|
|
(2,763
|
)
|
|
|
(14,660
|
)
|
|
|
(7,460
|
)
|
The pro forma financial
information for all periods presented above has been calculated after adjusting the results of Solo to reflect the business combination
accounting effects resulting from this acquisition, including the amortization expense from acquired intangible assets as though
the acquisition occurred as of the beginning of the Company’s fiscal year 2020. As noted above, the allocation is preliminary
and changes to the value of the contingent consideration and finalization of our valuation could result in changes to the amount
of amortization expense from acquired intangible assets included in the pro forma financial information presented above. The Akerna
historical condensed consolidated financial statements have been adjusted in the pro forma combined financial statements to give
effect to pro forma events that are directly attributable to the business combination and factually supportable. The pro forma
financial information is for informational purposes only and is not indicative of the results of operations that would have been
achieved if the acquisition had taken place at the beginning of the Company’s fiscal 2020.
Note 4 - Loss Per Share
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 and restricted stock units. The dilutive effect of outstanding awards is reflected in diluted
earnings per share by application of the treasury stock method and excludes potential common stock when the effect would be anti-dilutive.
The weighted-average
number of shares outstanding used in the computation of diluted earnings per share does not include the effect of potential outstanding
common shares that would have been anti-dilutive for the period. There were no potentially outstanding shares as of March 31, 2019.
The table below details potentially outstanding shares on a fully diluted basis as of March 31, 2020 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 three and nine months ended March 31, 2020:
|
|
March 31, 2020
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Fully Diluted
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
Warrants
|
|
|
5,813,804
|
|
|
|
5,813,804
|
|
|
|
5,840,644
|
|
Restricted Stock Units
|
|
|
325,121
|
|
|
|
22,620
|
|
|
|
12,924
|
|
Restricted Stock Awards
|
|
|
75,654
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
6,214,579
|
|
|
|
5,836,424
|
|
|
|
5,853,568
|
|
AKERNA CORP.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 5 – Stockholders’
Equity and Stock-Based Compensation
A summary of our unvested
Restricted Shares and Restricted Stock Units (“RSUs”) activity for the nine months ended March 31, 2020 is presented
in the table below:
|
|
Restricted
Shares
|
|
|
Restricted
Stock Units
|
|
|
Total
|
|
|
Weighted Average Grant Date Fair Value
|
|
Nonvested at July 1, 2019
|
|
|
215,063
|
|
|
|
-
|
|
|
|
215,063
|
|
|
$
|
11.99
|
|
Granted
|
|
|
-
|
|
|
|
359,554
|
|
|
|
359,554
|
|
|
|
7.64
|
|
Vested
|
|
|
(86,654
|
)
|
|
|
(10,223
|
)
|
|
|
(96,877
|
)
|
|
|
11.40
|
|
Forfeited
|
|
|
(52,755
|
)
|
|
|
(24,210
|
)
|
|
|
(76,965
|
)
|
|
|
10.04
|
|
Nonvested at March 31, 2020
|
|
|
75,654
|
|
|
|
325,121
|
|
|
|
400,775
|
|
|
$
|
8.61
|
|
For the three and nine
months ended March 31, 2020, stock-based compensation expense related to the ratable amortization of the unvested Restricted Shares
and RSUs was $0.3 million and $0.8 million, respectively, and $3.1 million of total unrecognized costs related to Restricted Shares
and RSUs will be ratably recognized over an estimated weighted average remaining vesting period of 3.2 years.
Warrants
A summary of the status
of outstanding warrants to purchase common stock at March 31, 2020 and the changes during the nine months then ended, is presented
in the following table:
|
|
Shares
Issuable
upon
Exercise of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
(in years)
|
|
Outstanding at July 1, 2019
|
|
|
6,183,115
|
|
|
$
|
11.50
|
|
|
|
3.72
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(369,311
|
)
|
|
|
11.50
|
|
|
|
-
|
|
Expired/cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2020
|
|
|
5,813,804
|
|
|
$
|
11.50
|
|
|
|
2.89
|
|
There was no aggregate
intrinsic value for the warrants outstanding as of March 31, 2020.
AKERNA CORP.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 6 - Commitments and Contingencies
Operating Leases
We lease office facilities
under non-cancelable operating leases. Rent expense for the three months ended March 31, 2020 and 2019, was $67,000 and $36,000,
respectively. Rent expense for the nine months ended March 31, 2020 and 2019, was $143,000 and $115,000, respectively.
On September 30, 2019,
we entered into an agreement, or the Office Lease, to lease our new headquarters located at 1630 Welton Street, Denver, Colorado,
80202. The Office Lease commenced on February 24, 2020 and expires January 31, 2022. We have paid a security deposit equal to
one month’s rent, which is recorded in intangibles and other assets on our condensed consolidated balance sheet. The monthly
payments of $41,925 are subject to a 4% annual increase at each anniversary of the commencement date during the term of the Office
Lease. Rent expense related to this lease is recognized on a straight-line basis over the noncancelable term of the lease.
Future minimum lease
payments to be made pursuant to the Office Lease and other leases are $124,000 for the remainder of the year ended June 30, 2020;
$530,000 for the year ended June 30, 2021; and $316,000 for the year ended June 30, 2022.
Compensation Agreement with Jessica
Billingsley
On November 11, 2019,
the Compensation Committee of our Board of Directors established the terms upon which Ms. Billingsley, our Chief Executive Officer,
may earn a bonus for the fiscal year ended June 30, 2020. The Compensation Committee determined that Ms. Billingsley will be eligible
for a bonus derived from the same targets with respect to her bonuses in fiscal year 2019, which is determined based upon our
performance relative to the following four budget components: platform recurring revenue; government recurring revenue; services
revenue; and net income. However, during fiscal year 2020 any bonus resulting from outperformance relative to budget may be paid
in cash, stock, or a combination thereof at the sole discretion of the Compensation Committee.
In addition, the Compensation
Committee determined that during fiscal year 2020, Ms. Billingsley is eligible to earn a performance based incentive of $250,000,
payable in stock, whereby (a) 50% of the bonus is automatically granted if our stock price/shareholder return increases by 15%
(measuring point starts at $10 per share) with respect to the consecutive 20-day volume weighted average price prior to and including
June 30, 2020, and (b) the remaining 50% of the bonus may be paid at the sole discretion of the Compensation Committee.
Letter-of-Credit
As of March 31, 2020,
we had a standby letter-of-credit with a bank in the amount of $500,000, which was classified as restricted cash on the balance
sheets. The beneficiary of the letter-of-credit is an insurance company. The letter-of-credit will expire on June 22, 2020.
Litigation
From time to time,
we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We will accrue
a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated.
When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this
range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for
a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly
related costs expected to be incurred. As of March 31, 2020, and through the date these financial statements were issued, there
were no legal proceedings requiring recognition or disclosure in the financial statements.
Note 7 – 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.
AKERNA CORP.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
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 March 31, 2020, our maximum exposure to loss was equal to
the carrying value of our initial investment of $250,000. We have concluded that the ZolTrain Preferred is in substance common
stock because the liquidation preference provided is not substantive, the equity method of accounting is applicable to in substance
common stock. As a result of our representation on the board of directors, we determined that we can exert significant influence
over the day to day operations of ZolTrain therefore; we account for this investment using the equity method of accounting, which
requires we recognize our share of the ZolTrain operations in our results of operations.
Subsequent to our investment,
we entered into a nonexclusive license/reseller agreement with ZolTrain, effective October 24, 2019, to provide ZolTrain’s
online cannabis training platform as a co-branded integration option into our MJ Platform and Leaf Data Systems, which is a related
party transaction. ZolTrain will share subscription-based revenue generated from our customers with us. The amount of the share
of revenue for each of us and ZolTrain will be depend on both (a) the number of training modules accessed by a customer and (b)
which party created the accessed content. In addition to the revenue sharing arrangement, the license/reseller agreement provides
us with the right to receive additional consideration from ZolTrain in the form of an equity earnout if certain revenue milestones
are achieved during 2020, 2021, and 2022. Our ability to recognize revenue from the additional earnout consideration in the future
will mainly depend on whether it becomes probable that such revenue milestones will be achieved. We have not recognized any revenue
subject to this license agreement for the three and nine months ended March 31, 2020.
Note 8 - Subsequent Events
Business Combination
On April 10, 2020,
we acquired 100% of the outstanding stock of Trellis Solutions, Inc., or Trellis, a cannabis cultivation management and compliance
software company. In exchange for the stock of Trellis, we issued 349,650 shares of common stock, valued at $7.24 per share,
the closing price of a share of our common stock on the date of acquisition, or $2.5 million. Additionally, Trellis’ selling
shareholders are entitled to contingent consideration based on annualized net new recurring revenue, as defined in the agreement,
generated in September 2020, to be paid in Akerna stock, if any. We are in the process of valuing the contingent consideration,
as well as the fair value of acquired assets and liabilities assumed.
Because the acquisition
occurred subsequent to March 31, 2020, no results of operations of Trellis are included in our condensed consolidated statements
of operations for the three and nine months ended March 31, 2020. It is currently impractical to disclose a preliminary purchase
price allocation, value of contingent consideration or pro forma financial information combining both companies as of the earliest
period presented in these financial statements as Trellis is currently in the process of closing their books and records.
Paycheck Protection Program Loan
In April 2020, we
were granted a loan, or the PPP Loan, from a lender in the aggregate amount of $2,204,600 pursuant to the Paycheck Protection
Program under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. The PPP Loan is evidenced by a promissory
note dated 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. Principal
amount of the PPP Loan not forgiven and accrued interest are to be repaid in 18 equal monthly installments beginning seven months
from the date of the disbursement of the PPP Loan.
We applied for the
PPP Loan and received the proceeds from the PPP Loan prior to the issuance of the recent guidance from the United States Treasury
Department and U.S. Small Business Administration on April 23, 2020. We are currently evaluating the impact this guidance has on
Akerna and the PPP Loan.
Note 9 – Revisions of Previously
Issued Financial Statements
During the course of
preparing the Quarterly Report on Form 10-Q for the three months ended September 30, 2019, we identified certain previously duplicated
revenues, which resulted in the overstatement of total assets and revenue during the periods outlined below, and the understatement
of net losses for the periods outlined below. Additionally, during the course of preparing our Annual Report on Form 10-K for the
fiscal year ended June 30, 2019, we identified certain costs of revenue related to consulting services previously being recorded
in operating expenses, which resulted in the overstatement of the gross profit for each of the quarters during the fiscal year
ended June 30, 2019. We assessed the materiality of these errors on prior periods’ financial statements and concluded that
the errors were not material to any prior annual or interim periods, but the cumulative adjustments necessary to correct the errors
would be material if we recorded the corrections the period in which the errors were identified. In accordance with GAAP, we are
revising the prior periods’ financial statements when they are next issued. See Item. 4 of Part I, Controls and Procedures.
AKERNA CORP.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The tables below disclose
the effects on the financial statements included in this Quarterly Report on Form 10-Q and the financial statements yet to be
reissued:
|
|
Year Ended June 30, 2018
|
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
As
Revised
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,017,731
|
|
|
$
|
(223,766
|
)
|
|
$
|
2,793,965
|
|
Total liabilities
|
|
|
1,393,902
|
|
|
|
-
|
|
|
|
1,393,902
|
|
Total stockholders’ equity
|
|
|
1,623,829
|
|
|
|
(223,766
|
)
|
|
|
1,400,063
|
|
Net loss
|
|
|
(1,623,182
|
)
|
|
|
(72,501
|
)
|
|
|
(1,695,683
|
)
|
Net loss per share
|
|
|
(0.30
|
)
|
|
|
|
|
|
|
(0.31
|
)
|
|
|
As of March 31, 2019
|
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
As
Revised
|
|
Condensed Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,199,718
|
|
|
$
|
(320,434
|
)
|
|
$
|
7,879,284
|
|
Total liabilities
|
|
|
3,059,378
|
|
|
|
-
|
|
|
|
3,059,378
|
|
Total stockholders’ equity
|
|
|
5,140,340
|
|
|
|
(320,434
|
)
|
|
|
4,819,906
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
As
Revised
|
|
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
2,327,880
|
|
|
$
|
-
|
|
|
$
|
2,327,880
|
|
Cost of revenue
|
|
|
1,042,403
|
|
|
|
124,079
|
|
|
|
1,166,482
|
|
Gross profit
|
|
|
1,285,477
|
|
|
|
(124,079
|
)
|
|
|
1,161,398
|
|
Operating expenses
|
|
|
3,788,644
|
|
|
|
(124,079
|
)
|
|
|
3,664,565
|
|
Net loss
|
|
|
(2,490,103
|
)
|
|
|
-
|
|
|
|
(2,490,103
|
)
|
Net loss per share
|
|
|
(0.41
|
)
|
|
|
|
|
|
|
(0.41
|
)
|
|
|
Nine Months Ended March 31, 2019
|
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
As
Revised
|
|
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
7,297,859
|
|
|
|
(96,668
|
)
|
|
|
7,201,191
|
|
Cost of revenue
|
|
|
3,197,437
|
|
|
|
353,175
|
|
|
|
3,550,612
|
|
Gross profit
|
|
|
4,100,422
|
|
|
|
(449,843
|
)
|
|
|
3,650,579
|
|
Operating expenses
|
|
|
10,671,159
|
|
|
|
(353,175
|
)
|
|
|
10,317,984
|
|
Net loss
|
|
|
(6,483,489
|
)
|
|
|
(96,668
|
)
|
|
|
(6,580,157
|
)
|
Net loss per share
|
|
|
(1.10
|
)
|
|
|
|
|
|
|
(1.13
|
)
|
|
|
Year Ended June 30, 2019
|
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
As
Revised
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
24,522,671
|
|
|
|
(320,434
|
)
|
|
|
24,202,237
|
|
Total liabilities
|
|
|
2,442,503
|
|
|
|
-
|
|
|
|
2,442,503
|
|
Total stockholders’ equity
|
|
|
22,080,168
|
|
|
|
(320,434
|
)
|
|
|
21,759,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
10,919,785
|
|
|
|
(96,668
|
)
|
|
|
10,823,117
|
|
Cost of revenue
|
|
|
4,633,844
|
|
|
|
-
|
|
|
|
4,633,844
|
|
Gross profit
|
|
|
6,285,941
|
|
|
|
(96,668
|
)
|
|
|
6,189,273
|
|
Operating expenses
|
|
|
18,701,619
|
|
|
|
-
|
|
|
|
18,701,619
|
|
Net loss
|
|
|
(12,306,547
|
)
|
|
|
(96,668
|
)
|
|
|
(12,403,215
|
)
|
Net loss per share
|
|
|
(2.04
|
)
|
|
|
|
|
|
|
(2.05
|
)
|