Registration
No. 333-239783
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 1
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
AKERNA
CORP.
(Exact
Name of Registrant as Specified in its Charter)
Delaware
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7374
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83-2242651
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(State
or other jurisdiction of
incorporation
or organization)
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Primary
Standard Industrial
Classification
Code Number)
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(I.R.S.
Employer
Identification
No.)
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1550 Larimer Street
#246
Denver,
Colorado 80202
(Address,
including zip code, and telephone number,
including
area code, of principal executive offices)
Corporation
Service Company
251
Little Falls Drive
Wilmington,
Delaware 19808
(Address,
including zip code, and telephone number,
including
area code, of agent for service)
Copies
to:
Jason
K Brenkert, Esq.
Dorsey
& Whitney LLP
1400
Wewatta Street, Suite 400
Denver,
Colorado 80202
Telephone:
(303) 352-1133
Fax
Number: (303) 629-3450
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From
time to time after the effective date of this registration statement
(Approximate
date of commencement of proposed sale to public)
If
any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933 check the following box: ☒
If
this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration statement number of the earlier registration statement for the
same offering. ☐
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☒
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Smaller
reporting company
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☒
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Emerging
Growth Company
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☒
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If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of Securities Act. ☐
EXPLANATORY
NOTE
Akerna Corp. (“Akerna”, the “registrant”,
“we” or “our”) hereby filed this Post-Effective Amendment No. 1 to its Registration Statement on Form S-1
(No. 333-239783) to update the prospectus contained therein to (i) reflect that 627,225 shares of common stock were previously
issued upon conversion of Exchangeable Shares leaving 2,667,349 shares of common stock issuable upon conversion, (ii) add its financial
statements for the fiscal year ended June 30, 2020 and for the three-month period ended September 30, 2020, (iii) update the related
management’s discussion and analysis of financial condition and results of operations (iv) to reflect recent material events
and (v) update unaudited pro forma financial information.
Pursuant
to Rule 416, this Registration Statement also covers additional securities that may be offered as a result of anti-dilution provisions
regarding stock splits, stock dividends, or similar transactions relating to the shares of common stock issuable upon exchange
of redeemable preferred shares covered by this registration statement.
The
Registrant previously paid a registration fee of $3,369.77 in connection with the filing of the initial registration statement
on Form S-1 (No. 333-239783) filed with the Securities and Exchange Commission on July 9, 2020, to register the 3,294,574 shares
of common stock.
We
hereby amend this registration statement on such date or dates as may be necessary to delay our effective date until we will file
a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until this Registration Statement will become effective on such date as the
Securities and Exchange Commission, in accordance with Section 8(a) may determine.
The
information in this prospectus is not complete and may be changed. Akerna Corp. may not sell the securities until the Registration
Statement filed with the Securities and Exchange Commission, of which this prospectus is a part, is effective. This prospectus
is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
Subject
to Completion: Dated January 7, 2021
PRELIMINARY
PROSPECTUS
AKERNA
CORP.
2,667,349
SHARES OF COMMON STOCK
Akerna Corp. (“Akerna”) will issue from time to
time an aggregate of 2,667,349 our shares of common stock, par value $0.0001, in exchange for 2,667,349 redeemable preferred shares
(the “Exchangeable Shares”) of Akerna Canada Ample Exchange Inc., a company existing under the laws of the Province
of Ontario and a wholly owned subsidiary of Akerna (“Exchangeco”). Exchangeco issued the Exchangeable Shares to shareholders
of Ample Organics Inc., an Ontario corporation (“Ample”), on July 7, 2020. The shareholders of Ample received the Exchangeable
Shares in connection with the arrangement by and between Ample, Exchangeco and Akerna under a plan of arrangement in accordance
with Section 182 of the Business Corporations Act (Ontario). These shareholders of Exchangeco may exchange the exchangeable
shares for shares of our common stock on a one-for-one basis at any time following effectiveness of the registration statement
of which this Prospectus is a part.
We
will not receive any proceeds from the exchange of Exchangeable Shares for shares of our common stock.
Our common stock trades on the Nasdaq Capital
Market under the symbol “KERN”. On January 7, 2021, the last reported sale price of the common stock on the Nasdaq
Capital Market was $4.93 per share.
Investing
in our common stock involves risks. See “Risk Factors” beginning on page 7.
These
securities have not been approved or disapproved by the SEC or any state securities commission nor has the SEC or any state securities
commission passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
PROSPECTUS
DATED , 2021
TABLE
OF CONTENTS
ABOUT
THIS PROSPECTUS
The
registration statement of which this prospectus forms a part that we have filed with the Securities and Exchange Commission, or
SEC, includes and incorporates by reference exhibits that provide more detail of the matters discussed in this prospectus. You
should read this prospectus and the related exhibits filed with the SEC, together with the additional information described under
the heading “Where You Can Find More Information.”
You
should rely only on the information contained in or incorporated by reference in this prospectus and in any free
writing prospectus prepared by or on behalf of us. We have not authorized anyone to provide you with information different from,
or in addition to, that contained in or incorporated by reference in this prospectus or any related free writing
prospectus. This prospectus is an offer to sell only the securities offered hereby but only under circumstances and in jurisdictions
where it is lawful to do so. The information contained in or incorporated by reference in this prospectus is current
only as of its date. Our business, financial condition, results of operations and prospects may have changed since that date.
We
are not offering to sell or seeking offers to purchase these securities in any jurisdiction where the offer or sale is not permitted.
We have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction
where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession
of this prospectus and any free writing prospectus related to this offering in jurisdictions outside the United States are required
to inform themselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and
any such free writing prospectus applicable to that jurisdiction.
Unless
otherwise indicated, any reference to Akerna, or as “we”, “us”, or “our” refers to Akerna
Corp. and its consolidated subsidiaries (“Akerna” or the “Company”).
SUMMARY
The
following highlights certain information contained elsewhere in this prospectus. It does not contain all the details concerning
the Offering, including information that may be important to you. You should carefully review this entire prospectus including
the section entitled “Risk Factors” and the consolidated historical and pro forma financial statements and accompanying
notes contained herein. See “Where You Can Find More Information.”
Summary
of Our Business
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 enable 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 $20 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 – representing 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:
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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.
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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.
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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 solodTM to provenance
plants and products throughout the compliance supply chain.
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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.
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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.
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We
also resell a limited number of printers for printing compliance product labels and scales that are National Type Evaluation Program
certified legal for trade. Revenue from these resale activities ranged from 1% to 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, as well as benefiting from continued growth in the cannabis,
hemp, and CBD industries. 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:
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our
integration with tier one ERP software providers supplying sophisticated accounting solutions that collect and store business
transactions to satisfy external reporting requirements;
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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;
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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;
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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
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MJ
Analytics, a next-generation analytics platform that offers Enterprise-level data tools and provides users with what we believe
to be unparalleled access and insight into the cannabis supply chain, from seed to sale.
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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.
Our principal executive offices are located at 1550 Larimer
Street #246, Denver, Colorado 80202, and our telephone number is (888) 932-6537 and our Internet website address is www.akerna.com.
The information on our website is not a part of, or incorporated in, this prospectus.
The
Arrangement
On
December 18, 2019, we entered into an arrangement agreement, as amended by the Amendment to Arrangement Agreement, dated
February 28, 2020 (“Amendment to Arrangement Agreement”), Amendment No. 2 to Arrangement Agreement dated May 26, 2020
(“Amendment No. 2 to Arrangement Agreement), and Amendment No. 3 to Arrangement Agreement dated June 1, 2020 (“Amendment
No. 3 to Arrangement Agreement”) (the “Arrangement Agreement”), among us, Exchangeco and Ample, pursuant to
which we through Exchangeco agreed to acquire all of the issued and outstanding equity of Ample (the “Arrangement”).
On
July 7, 2020, the Arrangement was consummated by way of a court-approved plan of arrangement under Ontario law (the “Plan
of Arrangement”) and Ample became our indirect wholly-owned subsidiary.
Pursuant
to the Arrangement Agreement and the Plan of Arrangement, on the closing date, holders of Ample common shares (the “Ample
Shares”) received a number of Exchangeable Shares equal to the number of Ample Shares multiplied by the exchange ratio of
0.0524 (the “Exchange Ratio”). In the aggregate, Ample shareholders received 3,294,574 Exchangeable Shares. The Exchange
Ratio was agreed to on December 18, 2019, and was not adjusted for any subsequent changes in market price of our common stock,
par value $0.0001 per share (the “Akerna Shares”) or the Ample Shares prior to the closing date.
Ample’s
shareholders adopted and approved the Arrangement Agreement and the Plan of Arrangement on June 26, 2020. Akerna’s shareholders
approved the issuance of the Akerna Shares (including the Akerna shares issuable upon exchange of the Exchangeable Shares and
shares issuable pursuant to the CVRs) in connection with the Arrangement on June 26, 2020. The Ontario Superior Court of Justice
issued a final order approving the Plan of Arrangement on June 30, 2020.
The
Exchangeable Shares were issued as part of the Arrangement pursuant to Section 3(a)(10) of the Securities Act, based on the final
order of the Ontario Superior Court of Justice.
Exchangeable
Shares
The
Exchangeable Shares are exchangeable for shares of common stock, par value $0.0001 per share, of Akerna on a 1:1 basis, as determined
in accordance with the Arrangement Agreement. The Exchangeable Shares are intended to be substantially economically equivalent
to shares of common stock of Akerna. The rights, privileges, restrictions and conditions attaching to the Exchangeable Shares
and the related special voting stock are described herein under the headings “The Exchangeable Shares” and “Description
of Company Capital Stock—Special Voting Stock” respectively, and in the terms of our plan of arrangement with Ample,
which is included in the Arrangement Agreement filed as an exhibit to the registration statement of which this Prospectus forms
a part.
Of the 3,294,574 Exchangeable Shares that were issued to former
Ample shareholders in connection with the consummation of the Arrangement, an aggregate of 658,915 Exchangeable Shares were issued
as “Closing Consideration” and an aggregate of 2,635,659 Exchangeable Shares, constituting part of the “Escrowed
Consideration” were issued into escrow pursuant to an escrow agreement (the “Escrow Agreement”), entered into
on July 7, 2020 by and among the Company, Purchaser, John Prentice, as Shareholder Representative, and Odyssey Trust Company. Under
the Escrow Agreement, subject to unresolved claims, if any, by the Company under the Arrangement Agreement in respect of fraud,
the Escrowed Consideration shall be released to former Ample shareholders upon the six-, nine-, and twelve-month anniversaries
of the Closing Date in accordance with the following schedule -- 988,372 shares on the six-month anniversary, 823,643 shares on
the nine-month anniversary, and 823,644 shares on the twelve-month anniversary. As of the date hereof, 627,225 shares of common
stock of Akerna have been issued on conversion of Exchangeable Shares.
The
Offering
Common
stock offered herein:
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2,667,349
shares of common stock of Akerna, par value $0.0001, in exchange for the 2,667,349 Exchangeable Shares upon exchange by the holders
thereof pursuant to their terms
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Common
stock outstanding (1):
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20,128,995 shares of common stock
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Common
stock outstanding after the offering (1):
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22,796,344 shares of common Stock
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Use
of Proceeds:
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We
will not receive any proceeds from the issuance of shares of our common stock upon the exchange of Exchangeable Shares.
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Listing
of Common Stock:
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Our
common Stock is listed on the Nasdaq Capital Market under the symbol “KERN”.
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Dividend
policy:
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We
currently intend to retain any future earnings to fund the development and growth of our business. Therefore, we do not currently
anticipate paying cash dividends on our common stock.
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Risk
Factors:
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An
investment in our company is highly speculative and involves a significant degree of risk. See “Risk Factors”
on page 7 of this Prospectus and other information included in this Prospectus for a discussion of factors you should carefully
consider before deciding to invest in shares of our common stock.
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(1)
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The number of shares of common stock shown above to be outstanding
before and after this offering is based on the 20,128,995 shares outstanding as of January 7, 2021. The number of shares of common
stock outstanding after this offering assumes that all the Exchangeable Shares are exchanged for shares of common stock. The number
of shares of common stock outstanding excludes 8,182,596 shares of common stock reserved for issuance upon conversion of our outstanding
senior secured convertible notes, 5,874,439 shares of our common stock issuable upon exercise of our outstanding warrants, 824,143
shares of common stock underlying restricted stock units that are issued and outstanding but remain subject to vesting conditions
and 590,615 shares available for issuance upon grant of awards under our 2019 long term equity incentive plan.
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Selected
Financial Data
The
selected financial information presented below as of and for the periods indicated is derived from our financial statements contained
elsewhere in this Prospectus and should be read in conjunction with those financial statements.
Statement of Operations Data
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Year Ended
June 30,
2020
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Year Ended
June 30,
2019
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Three Months Ended
September 30,
2020
(Unaudited)
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Three Months Ended
September 30,
2019
(Unaudited)
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Total revenues
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$
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12,573,276
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$
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10,823,117
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$
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3,714,442
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$
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3,192,890
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Cost of revenues
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$
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6,209,724
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$
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4,633,844
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$
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1,739,937
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$
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1,379,701
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Gross profit
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$
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6,363,522
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$
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6,189,273
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$
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1,974,067
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$
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1,813,189
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Total operating expenses
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$
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23,635,403
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$
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18,701,619
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$
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7,497,537
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$
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4,212,616
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Loss from operations
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$
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(17,271,851
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)
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$
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(12,512,346
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)
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$
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(5,523,470
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)
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$
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(2,399,427
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)
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Net loss
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$
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(16,384,104
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)
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$
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(12,403,215
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)
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$
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(4,750,691
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)
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$
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(2,326,332
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)
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Basic and diluted net loss per common share
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$
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(1.31
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)
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$
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(2.05
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)
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$
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(0.34
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)
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$
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(0.21
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)
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Basic and diluted weighted average common stock outstanding
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11,860,212
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6,045,382
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14,058,412
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10,879,112
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Balance Sheet Data
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At
June 30,
2020
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At
June 30,
2019
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At
September 30,
2020
(Unaudited)
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Total current assets
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$
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27,732,703
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$
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24,202,237
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$
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19,032,696
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Total assets
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$
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58,529,619
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$
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24,202,237
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$
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81,334,782
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Total current liabilities
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$
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11,754,977
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$
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2,442,503
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$
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18,131,627
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Total liabilities
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$
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21,955,213
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$
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2,442,503
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$
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23,613,226
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Accumulated deficit
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$
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(41,101,091
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)
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$
|
(25,566,746
|
)
|
|
$
|
(45,842,967
|
)
|
Total stockholders’ equity
|
|
$
|
31,870,154
|
|
|
$
|
21,759,734
|
|
|
$
|
57,721,556
|
|
Selected
Unaudited Pro Forma Condensed Combined Financial Data
The selected unaudited pro forma condensed combined financial
data presented below for the periods indicated is derived from the unaudited pro forma condensed combined statements of operations
for the year ended June 30, 2020 contained elsewhere in this prospectus and should be read in conjunction with such financial
information and accompanying notes and are based on the historical financial statements of Akerna, solo sciences inc. (“Solo”),
and Ample Organic Inc. (“Ample”), giving effect to the acquisition of Solo, the exercise of the Solo Option, the acquisition
of Ample. The Company’s statement of operations for the three months ended September 30, 2020 contains the combined operations of the
Company, Solo and Ample for that period. While Ample wasn’t acquired until July 7, 2020, the impact of the seven (7) days
at the beginning of the period was determined to be immaterial by the Company and therefore separate pro forma condensed combined
financial data for that period is not presented herein.
Statement of Operations Data
|
|
Pro forma
Combined for the
Year Ended
June 30,
2020
(Unaudited)
|
|
Total net revenue
|
|
$
|
18,314,055
|
|
Cost of revenue
|
|
$
|
8,691,649
|
|
Gross profit
|
|
$
|
9,622,406
|
|
Total operating expenses
|
|
$
|
33,652,676
|
|
Loss from operations
|
|
$
|
(24,030,270
|
)
|
Net loss
|
|
$
|
(23,124,605
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(1.69
|
)
|
Basic and diluted shares used in computing loss per share
|
|
|
13,720,458
|
|
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should carefully consider the risks described below,
together with all of the other information included in this prospectus, before making an investment decision with regard to our
securities. The statements contained in this prospectus that are not historic facts are forward-looking statements that are subject
to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking
statements. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer.
In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
You
should carefully consider the following risk factors in evaluating our business and us. The factors listed below and in the prospectus,
represent certain important factors that we believe could cause our business results to differ. These factors are not intended
to represent a complete list of the general or specific risks that may affect us. It should be recognized that other risks may
be significant, presently or in the future, and the risks set forth below may affect us to a greater extent than indicated. If
any of the following risks occur, our business, financial condition or results of operations could be materially and adversely
affected.
Risks
Relating to 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,
and approximately $4.7 million for the period ended September 30, 2020. These losses have been due to the substantial investments
we have made to develop our monitoring and compliance platforms and related software, marketing these products to government regulatory
agencies and commercial businesses, and growing our infrastructure to support the increased business. We expect to continue to
invest in the further development of our platforms, software, and related product offerings and to grow both our government regulatory
and commercial business client base. As a result, we expect our operating expenses to increase in the future due to expected increased
sales and marketing expenses, operational costs, product development costs, and general and administrative costs and, therefore,
our operating losses will continue or even increase at least through the near term. In addition, because we are now a public company,
we will incur significant legal, accounting, and other expenses that 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:
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market
acceptance of our current and future products and services;
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changing
regulatory environments and costs associated with compliance;
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our
ability to compete with other companies offering similar products and services;
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our
ability to effectively market our products and services and attract new clients;
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existing
client retention rates and the ability to upsell clients;
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the
amount and timing of operating expenses, particularly sales and marketing expenses, related to the maintenance and expansion
of our business, operations, and infrastructure;
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our
ability to control costs, including operating expenses;
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our
ability to manage organic growth and growth fueled by acquisitions;
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public
perception and acceptance of cannabis-related products and services generally; and
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general
economic conditions and events.
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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 obtain fund in connection with 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 we have no current
intention 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.
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:
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create
a staggered Board of Directors making it more difficult for stockholders to remove a majority of the Board of Directors and
take control;
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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;
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impose
limitations on our stockholders’ ability to call special stockholders’ meetings; and
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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.
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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.
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 $14.3 million principal amount of convertible notes is convertible at a price of $11.50 per share, which
would result in the issuance of 1,241,943 shares of our common stock upon the conversion of the convertible notes in full. 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 8,182,596 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 5,874,439 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 5,874,439 shares of our common
stock at $11.50 per share and a $14.3 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:
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Variations
in our revenues and operating expenses;
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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;
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Market
conditions in our industry, the industries of our clients, and the economy as a whole;
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Actual
or expected changes in our growth rates or our competitors’ growth rates;
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Developments
in the financial markets and worldwide or regional economies;
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Announcements
of innovations or new products or services by us or our competitors;
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Announcements
by the government relating to regulations that govern our industry;
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Sales
of our common stock or other securities by us or in the open market; and
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Changes
in the market valuations of other comparable companies.
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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.
FORWARD-LOOKING
STATEMENTS
This
prospectus and the exhibits attached hereto contain “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, including statements regarding future events or our future results of operations, financial
condition, business, strategies, financial needs, and the plans and objectives of management, are forward-looking statements.
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 prospectus and our management’s good faith belief as of such date with respect to future events and are subject
to a number of risks, uncertainties, and assumptions that could cause actual performance or results to differ materially from
those expressed in or suggested by the forward-looking statements, in particular the substantial risks and uncertainties related
to the ongoing COVID-19 pandemic. Important factors that could cause such differences include, but are not limited to:
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our
ability to sustain our revenue growth rate, to achieve or maintain profitability, and to effectively manage our anticipated
growth;
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our
short operating history makes it difficult to evaluate our business and future prospects;
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our
dependence on the commercial success of our clients, the continued growth of the cannabis industry and the regulatory environment
in which the cannabis industry operates;
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our
ability to attract new clients on a cost-effective basis and the extent to which existing clients renew and upgrade their
subscriptions;
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the
timing of our introduction of new solutions or updates to existing solutions;
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our
ability to successfully diversify our solutions by developing or introducing new solutions or acquiring and integrating additional
businesses, products, services, or content;
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our
ability to respond to changes within the cannabis industry;
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the
effects of adverse changes in, or the enforcement of, federal laws regarding our clients’ cannabis operations or our
receipt of proceeds from such operations;
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our
ability to manage unique risks and uncertainties related to government contracts;
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our
ability to manage and protect our information technology systems;
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our
ability to maintain and expand our strategic relationships with third parties;
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our
ability to deliver our solutions to clients without disruption or delay;
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our
exposure to liability from errors, delays, fraud, or system failures, which may not be covered by insurance;
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our
ability to expand our international reach;
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our
ability to retain or recruit officers, key employees, and directors;
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our
ability to raise additional capital or obtain financing in the future;
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our
ability to successfully integrate acquired businesses with Akerna’s business within anticipated timelines and at
their expected costs;
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our
ability to complete planned acquisitions on time or at all due to failure to obtain stockholder approval or governmental or
regulatory clearances, or the failure to satisfy other conditions to completion, or the failure of completion for any other
reason;
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our
response to adverse developments in the general market, business, economic, labor, regulatory, and political conditions, including
worldwide demand for cannabis and the spot price and long-term contract price of cannabis;
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our
response to competitive risks;
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our
ability to protect our intellectual property;
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the
market reaction to negative publicity regarding cannabis;
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our
ability to manage the requirements of being a public company;
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our
ability to service our convertible debt;
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our
ability to effectively manage any disruptions to our business and/or any negative impact to our financial performance caused
by the economic and social effects of the COVID-19 pandemic and measures taken in response; and
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other
factors discussed in other sections of this prospectus, including the sections titled “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and “Risk Factors.”
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Should
one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may
vary materially from those anticipated, believed, estimated or expected. We caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made. We disclaim any obligation subsequently to revise 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 prospectus by the foregoing cautionary statements.
RECENT
DEVELOPMENTS
Solo
Acquisition
On
November 25, 2019, we entered into a stock purchase agreement with substantially all of the shareholders of Solo, Ashesh C. Shah,
Lokesh Chugh and Palle Pedersen, each an adult individual (collectively, the “Solo Shareholder Representatives”) and
Solo, pursuant to which we agreed to acquire all right, title and interest in 80.4% of the issued and outstanding capital stock
of Solo (calculated on a fully diluted basis), free and clear of all liens.
On
January 15, 2020, we closed on the stock purchase agreement and acquired 80.4% of the outstanding capital stock of Solo. The initial
consideration amount was 1,950,000 shares of our common stock, less 570,000 shares of our common stock to be held in escrow as
follows: (a) 375,000 are to be held and sold to cover costs of the Solo shareholders under a related intellectual property purchase
agreement, to be completed within 12 months of the closing date, with any remaining shares to be released to the Solo shareholders;
and (b) 195,000 shares to be held to cover any indemnity payment to certain Akerna parties under the indemnity provisions in the
agreement.
On
July 31, 2020, we closed on our option to acquire the remaining minority stake in Solo in exchange for 800,000 shares of our common
stock.
As
part of the closing of the option to acquire the remaining minority stake in Solo, the Solo Shareholder Representatives also agreed
to amend the stock purchase agreement to eliminate the fees we had agreed to pay to the legacy Solo shareholders equal to the
lesser of (i) $0.01 per solo*TAGTM and solo*CODETM sold or (ii) 7% of net revenue. The Shareholder Representatives
also waived any accrued but unpaid fees up to and including July 31, 2020 Ashesh C. Shah, one of the shareholder representatives
of the Solo shareholders in the transaction, is a former director of Akerna. Mr. Shah resigned as a director of Akerna on November
24, 2019, prior to the approval of the transactions in the Solo purchase agreement by the board of Akerna on November 25, 2019.
Trellis
Acquisition
On
April 8, 2020, we entered into a stock exchange agreement among each of the parties set forth in Exhibit E of the agreement, Pranav
Sood, an individual, and Trellis, pursuant to which we purchased and took assignment and delivery of 100% of the issued and outstanding
capital stock of Trellis. The consideration for the Trellis shares was 349,650 shares of our common stock with an aggregate contract
value of $2,000,000 at $5.72 per share. The acquisition closed on April 10, 2020, the acquisition date fair value of the shares
of stock issued was $2,531,466, or $7.24 per share, the closing price on the date of acquisition.
Ample Acquisition
On
December 18, 2019, we entered into an arrangement agreement, as amended by the Amendment to Arrangement Agreement, dated
February 28, 2020 (“Amendment to Arrangement Agreement”), Amendment No. 2 to Arrangement Agreement dated May 26, 2020
(“Amendment No. 2 to Arrangement Agreement), and Amendment No. 3 to Arrangement Agreement dated June 1, 2020 (“Amendment
No. 3 to Arrangement Agreement”) (collectively, the “Arrangement Agreement”), among us, Exchangeco, John Prentice
and Ample, pursuant to which we through Exchangeco agreed to acquire all of the issued and outstanding equity of Ample (the “Arrangement”).
On
July 7, 2020, the Arrangement was consummated by way of a court-approved plan of arrangement under Ontario law (the “Plan
of Arrangement”) and Ample became our indirect wholly-owned subsidiary.
Pursuant
to the Arrangement Agreement and the Plan of Arrangement, on the closing date, holders of Ample common shares (the “Ample
Shares”) received a number of Exchangeable Shares equal to the number of Ample Shares multiplied by the exchange ratio of
0.0524 (the “Exchange Ratio”). In the aggregate, Ample shareholders received 3,294,574 Exchangeable Shares. The Exchange
Ratio was agreed to on December 18, 2019, and was not adjusted for any subsequent changes in market price of our common stock,
par value $0.0001 per share (the “Akerna Shares”) or the Ample Shares prior to the closing date. The Exchangeable
Shares are exchangeable for shares of our common stock on a 1:1 basis, as determined in accordance with the Arrangement Agreement.
Ample’s
shareholders adopted and approved the Arrangement Agreement and the Plan of Arrangement on June 26, 2020. Akerna’s shareholders
approved the issuance of the Akerna Shares (including the Akerna shares issuable upon exchange of the Exchangeable Shares and
shares issuable pursuant to the Contingent Value Rights) in connection with the Arrangement on June 26, 2020. The Ontario Superior
Court of Justice issued a final order approving the Plan of Arrangement on June 30, 2020.
The
Exchangeable Shares were issued as part of the Arrangement pursuant to Section 3(a)(10) of the Securities Act, based on the final
order of the Ontario Superior Court of Justice.
Of the 3,294,574 Exchangeable Shares that were issued to former
Ample shareholders in connection with the consummation of the Arrangement, an aggregate of 658,915 Exchangeable Shares were issued
as “Closing Consideration” and an aggregate of 2,635,659 Exchangeable Shares, constituting part of the “Escrowed
Consideration” were issued into escrow pursuant to an escrow agreement (the “Escrow Agreement”), entered into
on July 7, 2020 by and among the Company, ExchangeCo, John Prentice, as Shareholder Representative, and Odyssey Trust Company.
Under the Escrow Agreement, subject to unresolved claims by the Company under the Arrangement Agreement in respect of fraud, the
Escrowed Consideration shall be released to former Ample shareholders upon the six-, nine-, and twelve-month anniversaries of the
Closing Date in accordance with the following schedule -- 988,372 shares on the six-month anniversary, 823,643 shares on the nine-month
anniversary, and 823,644 shares on the twelve-month anniversary. As of the date hereof, 627,225 shares of common stock of Akerna
have been issued on conversion of Exchangeable Shares.
In
addition to the Exchangeable Shares, each Ample shareholder, immediately prior to the time at which the Arrangement became effective
received one Contingent Value Right (each a “CVR” and collectively the “CVRs”). Each CVR entitles the
holder to receive a portion of Deferred Consideration (as defined in the Arrangement Agreement) that the initial holder of such
CVR is entitled to receive in its capacity as an Ample shareholder, with an aggregate of up to CAD$10,000,000 additional Exchangeable
Shares issuable to the holders of the CVRs subject to downward adjustment pursuant to the Arrangement Agreement. Pursuant to the
Rights Indenture entered into on July 7, 2020 by and among Akerna, Exchangeco, John Prentice as Shareholder Representative and
Odyssey Trust Company, holders of CVRs shall be entitled to additional Exchangeable Shares if certain revenue targets are achieved
by Ample during the twelve month period following effectiveness of the Arrangement.
On
July 7, 2020, we, entered into (i) an Exchangeable Share Support Agreement together with Exchangeco, Akerna Canada Holdings Inc.,
a corporation existing under the laws of the Province of Ontario, and John Prentice, as Shareholder Representative, and (ii) a
Voting and Exchange Trust Agreement (the “Voting and Exchange Trust Agreement”) with Exchangeco, Akerna Canada Holdings
Inc. and Odyssey Trust Company (the “Trustee”) solely for the purpose of ensuring that each Exchangeable Share is
substantially the economic and voting equivalent of a share of common stock of Akerna, and, following the registration of the
shares of common stock issuable upon exchange of the Exchangeable Shares and the CVRs with the Securities and Exchange Commission
(the “Commission”), ensuring that each Exchangeable Share is exchangeable on a one-for-one basis for a share of common
stock of Akerna, subject to certain limitations set forth therein. Together, the Voting and Exchange Trust Agreement and the Support
Agreement set forth the terms governing the Exchangeable Shares. Through the Voting and Exchange Trust Agreement and the issuance
by Akerna to the Trustee of a special voting share, each holder of Exchangeable Shares effectively has the ability to cast votes
along with holders of shares of our common stock.
Debt
Financing
On
June 8, 2020, we entered into a securities purchase agreement with two institutional investors to sell a new series of senior
secured convertible notes of Akerna, in the aggregate principal amount of $17,000,000 having an aggregate original issue discount
of 12%, and ranking senior to all of our outstanding and future indebtedness. On June 9, 2020, we issued the convertible notes
and entered into a security and pledge agreement related thereto. A.G.P./Alliance Global Partners, the placement agent for this
offering, acted as placement agent in connection with this private placement and received a cash fee of 5.5% of the principal
amount of the notes. See the description of the senior secured convertible notes below under the heading “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Convertible
Note Transaction”.
Equity
Financing
On
October 28, 2020, we entered into subscription agreements with certain investors (the “Investors”) relating to the
sale and issuance by the Company of 5,000,000 shares of common stock of the Company, par value $0.0001, at a price of $2.40 per
share (the “Equity Offering”). The Offering closed on October 30, 2020.
In
addition, on October 28, 2020,we entered into a placement agency agreement with A.G.P./Alliance Global Partners (the “Placement
Agent”), pursuant to which the Placement Agent agreed to act as the Company’s agent for the sale of the shares to
the public in the Equity Offering on a best efforts basis. The Company agreed to pay the Placement Agent a cash fee equal to 7%
of the gross proceeds from the Equity Offering and to reimburse the Placement Agent for up to $60,000 of its reasonable out-of-pocket
expenses.
USE
OF PROCEEDS
We
will not receive any proceeds from the issuance of shares of our common stock on the exchange of Exchangeable Shares.
DIVIDEND
POLICY
We
do not intend to pay dividends for the foreseeable future. In addition, our ability to pay dividends is restricted by agreements
governing Akerna’s and its subsidiaries’ debt, including the Company’s senior secured convertible notes. See
“Risk Factors” above.
DESCRIPTION
OF COMPANY CAPITAL STOCK
As of January 7, 2021, our authorized share capital consists
of 75,000,000 shares of Common Stock, $0.0001 par value per share, of which 20,128,995 shares of common stock are issued and outstanding,
5,000,000 shares of preferred stock, $0.0001 par value per share, of which none are issued and outstanding and one share of special
voting stock, of which one share is 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 public filings.
Common
Stock
All
outstanding shares of common stock are of the same class and have equal rights and attributes. The holders of common stock are
entitled to one vote per share on all matters submitted to a vote of our stockholders. Subject to the prior rights of all classes
or series of stock at the time outstanding having prior rights as to dividends or other distributions, all stockholders are entitled
to share equally in dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available.
Subject to the prior rights of creditors of Akerna and the holders of all classes or series of stock at the time outstanding having
prior rights as to distributions upon liquidation, dissolution or winding up of Akerna, in the event of liquidation, the holders
of common stock are entitled to share ratably in all assets remaining after payment of all liabilities. The stockholders do not
have cumulative, preemptive rights, or subscription rights.
Special
Voting Share
The
special voting share has a par value of $0.0001 per share. The special voting share entitles the holder thereof to an aggregate
number of votes equal to the number of the Exchangeable Shares issued and outstanding from time to time and that are not owned
by us or our subsidiaries. Except as otherwise provided herein or by law, the holder of the special voting share and the holders
of our common stock will vote together as a single class on all matters submitted to a vote of Akerna’s shareholders. With
respect to all meetings of shareholders of Akerna at which holders of Akerna shares are entitled to vote, each registered holder
of Exchangeable Shares shall be entitled to instruct the trustee holding the special voting share to cast and exercise, in the
manner instructed, that number of votes equal to the “Equivalent Vote Amount” for each Exchangeable Share owned of
record by such holder of Exchangeable Shares at the close of business on the record date established by Akerna or by applicable
law for such meeting, in respect of each matter, question, proposal or proposition to be voted on at such meeting. At such time
as the special voting share has no votes attached to it, the special voting share shall be automatically cancelled.
Exchangeable
Shares
The
Exchangeable Shares of Exchangeco are intended to be substantially economically equivalent to shares of our common stock. The
rights, privileges, restrictions and conditions attaching to the Exchangeable Shares of Exchangeco include the following:
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any
holder of Exchangeable Shares of Exchangeco is entitled to require Exchangeco to redeem any or all of the Exchangeable Shares
registered in his/her name in exchange for one share of our common stock for each Exchangeable Share presented and surrendered;
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in
the event Akerna declares a dividend on its common stock, the holders of Exchangeable Shares of Exchangeco are entitled to
receive from Exchangeco the same dividend, or an economically equivalent dividend, on their Exchangeable Shares;
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the
holders of the Exchangeable Shares of Exchangeco are not entitled to receive notice of or to attend any meeting of the shareholders
of Exchangeco or to vote at any such meeting, except as required by law or as specifically provided in the Exchangeable Share
conditions; and
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the
holders of Exchangeable Shares of Exchangeco are entitled to instruct the Trustee to vote the special voting stock as described
above.
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Of the 3,294,574 Exchangeable Shares that were issued to former
Ample shareholders in connection with the consummation of the Arrangement, an aggregate of 658,915 Exchangeable Shares were issued
as “Closing Consideration” and an aggregate of 2,635,659 Exchangeable Shares, constituting part of the “Escrowed
Consideration” were issued into escrow pursuant to an escrow agreement (the “Escrow Agreement”), entered into
on July 7, 2020 by and among the Company, ExchangeCo, John Prentice, as Shareholder Representative, and Odyssey Trust Company.
Under the Escrow Agreement, subject to unresolved claims by the Company under the Arrangement Agreement in respect of fraud, the
Escrowed Consideration shall be released to former Ample shareholders upon the six-, nine-, and twelve-month anniversaries of the
Closing Date in accordance with the following schedule -- 988,372 shares on the six-month anniversary, 823,643 shares on the nine-month
anniversary, and 823,644 shares on the twelve-month anniversary. As of the date hereof, 627,225 shares of common stock of Akerna
have been issued on conversion of Exchangeable Shares.
CVRs
In
addition to the Exchangeable Shares, each Ample shareholder, immediately prior to the time at which the Arrangement became effective
received one CVR. Each CVR entitles the holder to receive a portion of Deferred Consideration (as defined in the Arrangement Agreement)
that the initial holder of such CVR is entitled to receive in its capacity as an Ample shareholder, with an aggregate of up to
CAD$10,000,000 additional Exchangeable Shares issuable to the holders of the CVRs subject to downward adjustment pursuant to the
Arrangement Agreement. Pursuant to the Rights Indenture entered into on July 7, 2020 by and among Akerna, Exchangeco, John Prentice
as Shareholder Representative and Odyssey Trust Company, holders of CVRs shall be entitled to additional Exchangeable Shares if
certain revenue targets are achieved by Ample during the twelve month period following effectiveness of the Arrangement.
Registration
Rights
We
have granted registration rights under the Securities Act to certain holders of our common stock in relation to our acquisitions
of Solo, Trellis and Ample. In relation to Ample, we agreed to file and maintain, until no Exchangeable Shares remain outstanding,
a registration statement regarding the exchange of the Exchangeable Shares into shares of our common stock pursuant to their terms.
In relation thereto, we filed a registration statement on Form S-1 on July 9, 2020 (333-239783) which was brought effective on
August 14, 2020. In relation to Trellis, we agreed to file a registration statement registering the resale of shares of certain
of the shares of common stock held by the former shareholders of Trellis, totaling 314,684 shares. In relation thereto, we filed
a registration statement on Form S-1 on August 7, 2020 (333-242474) registering the resale of 314,684 shares of our common stock,
which was brought effective on August 14, 2020. In relation to Solo, we have agreed to use of commercially reasonable efforts
to file a registration statement to register the resale of 2,000,000 shares of common stock held by the former shareholders of
Solo. We anticipate making such filing after the 90-day lock-up period from our Equity Offering expires on January 30, 2021. We
may also be required in the future to file amendments to these registration statements to maintain effectiveness.
Election
of Directors
Our
Class I Directors held office until the 2019 annual meeting of stockholders and were reelected at such meeting. Our Class II Directors
hold office until the 2020 annual meeting of stockholders and are eligible for reelection at such meeting. Our Class III Directors
hold office until the 2021 annual meeting of stockholders and are eligible for reelection at such meeting. Directors are elected
by a plurality of the votes cast at the annual meeting by the holders of Common Stock present in person or represented by proxy
and entitled to vote at such meeting. There is no cumulative voting for directors.
Anti-Takeover
Provisions
Our
Amended and Restated Certificate of Incorporation contains provisions that may discourage unsolicited takeover proposals that
stockholders may consider to be in their best interests. We are also subject to anti-takeover provisions under Delaware law, which
could delay or prevent a change of control. Together these provisions may make more difficult the removal of management and may
discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
These
provisions:
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create
a staggered Board of Directors making it more difficult for stockholders to remove a majority of the Board of Directors and
take control;
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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;
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impose
limitations on our stockholders’ ability to call special stockholder meetings;
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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.
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DESCRIPTION
OF THE 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 enable 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 $20 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 – representing 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:
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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.
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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*TAGTM to
provenance plants and products throughout the compliance supply chain.
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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.
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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.
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We
also resell a limited number of printers for printing compliance product labels and scales that are National Type Evaluation Program
certified legal for trade. Revenue from these resale activities was 2% of total revenue in each of the three months ended September
30, 2020, and September 30, 2019. Beginning late in our fiscal year ended June 30, 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, as well as benefiting from continued growth in the cannabis,
hemp, and CBD industries. 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:
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our
integration with tier one ERP software providers supplying sophisticated accounting solutions that collect and store business
transactions to satisfy external reporting requirements;
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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;
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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;
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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
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MJ
Analytics, a next-generation analytics platform that offers Enterprise-level data tools and provides users with what we believe
to be unparalleled access and insight into the cannabis supply chain, from seed to sale.
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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.
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:
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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.
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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.
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Remote
Usage and Connectivity – This allows access through any Internet connection from anywhere and on any device.
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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, or MSOs, Licensed Producers, or 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 all of 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 these 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 44 full-time employees
and provides services to over 120 Canadian 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 purchased cannabis product.
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*TAGTM,, a key tagging and technology component in a closed-loop
system used by all Utah cannabis licensees as the state’s primary tracking system at the retail, wholesale, cultivation,
and manufacturing levels.
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 industry data for internal management, reporting, and business optimization purposes. The information typically supplied
to clients is aggregated and anonymized information regarding products, which may or may not be those of the client,
sold through sales generated through our online service platforms. Revenues generated from our various data services have historically
been immaterial to our business.
We
believe we have cultivated a substantial legal cannabis dataset with over $20 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.
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-derived products, our receipt of funds from clients that do conduct
such operations in violation of federal law exposes us to risks related to federal racketeering laws. The Racketeer Influenced
Corrupt Organizations Act (“RICO”) is a federal statute providing criminal penalties in addition to a civil cause
of action for acts performed as part of an ongoing criminal organization. Under RICO, it is unlawful for any person who has received
income derived from a pattern of racketeering activity (which includes most felonious violations of the CSA), to use or invest
any of that income in the acquisition of any interest, or the establishment or operation of, any enterprise which is engaged in
interstate commerce. RICO also authorizes private parties whose properties or businesses are harmed by such patterns of racketeering
activity to initiate a civil action against the individuals involved. Although RICO suits against the cannabis industry are rare,
a few cannabis businesses have been subject to a civil RICO action.
Our
receipt of payments from clients engaged in state-legal cannabis operations could also subject us to the consequences of a variety
of federal laws and regulations that involve money laundering, financial record keeping and proceeds of crime, including the Bank
Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001 (USA PATRIOT Act) and any related or similar rules, regulations or guidelines, issued, administered
or enforced by the federal government. Because the funds from activities that are illegal under the CSA, banks and other financial
institutions providing services to us risk violation of federal anti-money laundering statutes (18 U.S.C. §§ 1956 and
1957), the unlicensed money-remitter statute (18 U.S.C. § 1960) and the Bank Secrecy Act, among other applicable federal
statutes. Banks often refuse to provide banking services to businesses involved in the cannabis industry due to the present state
of federal laws and regulations governing financial institutions. The lack of banking and financial services presents unique and
significant challenges to businesses in the cannabis industry and we may experience similar difficulties in obtaining and maintaining
regular banking and financial services because of the activities of our clients.
Any
violations of federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions
or settlements arising from civil proceedings conducted by either the federal government or private citizens or criminal charges,
including but not limited to, seizure of assets, disgorgement of profits, cessation of business activities or divestiture.
In the event that any of our operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or
revenues accruing from such operations were found to be in violation of money laundering legislation or otherwise, such transactions
may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could
restrict or otherwise jeopardize our ability to declare or pay dividends or effect other distributions. Furthermore, while there
are no current intentions to declare or pay dividends in the foreseeable future, in the event that a determination was made that
our proceeds from operations (or any future operations) could reasonably be shown to constitute proceeds of crime, we may decide
or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
Privacy
& Customer Data
Regulation
related to the provision of services over the Internet is evolving, as federal, state, and foreign governments continue to adopt
new, or modify existing, laws and regulations addressing data privacy and the collection, processing, storage, transfer, and use
of data. In some cases, data privacy laws and regulations, such as the European Union’s (“EU”) General Data
Protection Regulation (“GDPR”) that took effect in May 2018, impose new obligations directly on us as both a data
controller and a data processor, as well as on many of our clients. In addition, 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 will continue to 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:
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range of services offered by us;
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our
management personnel and their industry knowledge and experience; and
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our
proprietary databases, which are only available to users of our platforms and consulting services.
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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 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.
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 152 employees as of December
31, 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 our wholly-owned
subsidiary, 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 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. 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 certain 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 then owners and management of MJF had 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.
DESCRIPTION
OF PROPERTY
We currently maintain offices at 1550
Larimer Street #246 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.
LEGAL
PROCEEDINGS
We
are not a party to any material pending legal proceedings, and no such proceedings are known to be contemplated.
On
December 4, 2020, TechMagic USA LLC filed suit against our wholly-owned subsidiary, Solo, in Massachusetts Superior Court,
Department Business Litigation, seeking recovery of up to approximately $1.07 million for unpaid invoices pursuant to a
Master Services Agreement dated February 5, 2018 by and between TechMagic and Solo. The invoices set forth services that
TechMagic USA LLC purports to have provided to Solo regarding development of mobile software applications for MJF and Solo
between March and November 2020 totaling approximately $767,000. During our fiscal year ended June 30, 2020, we received
invoices totaling an aggregate amount of approximately $392,000. After our year ended June 30, 2020, through to the date
hereof, we have received invoices totaling an aggregate amount of approximately $375,000. The suit seeks continued fees under
the Master Services Agreement through the end of January 2021. Akerna provided a notice of termination of the Master Services
Agreement on November 23, 2020 and the parties dispute the effective date of the termination. Solo disputes the validity of
the invoices, in whole or in part, and intends to defend the suit vigorously. Mr. Ashesh Shah, formerly the president of Solo
and currently the holder of 6.1% of our issued and outstanding shares of common stock is, to our knowledge, the founder and
one of the principal managers of TechMagic USA LLC. See “Certain Relationships and Related Transactions and Director
Independence” for more information.
MARKET
FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market
Information
Our common stock is listed on the Nasdaq Capital Market under
the trading symbol “KERN”. As of January 7, 2021, we had 20,128,995 shares of common stock issued and outstanding and
approximately 230 registered shareholders.
Purchases
of Equity Securities by the Company and Affiliates
None.
2019
Long Term Incentive Plan Summary
The
purpose of the Incentive Plan is to enable Akerna to offer its employees, officers, directors and consultants whose past, present
and/or potential future contributions to Akerna have been, are, or will be important to its success, an opportunity to acquire
a proprietary interest in Akerna. The various types of incentive awards that may be provided under the Incentive Plan are intended
to enable Akerna to respond to changes in compensation practices, tax laws, accounting regulations and the size and diversity
of its business.
Plan
Administration
The
Incentive Plan is administered by the compensation committee of the Akerna Board (the “Compensation Committee”) or
by the full Akerna Board, which may determine, among other things, (1) the persons who are to receive awards, (2) the type or
types of awards to be granted to such persons, (3) the number of shares of common stock to be covered by, or with respect to what
payments, rights, or other matters are to be calculated in connection with the awards, (4) the terms and conditions of any awards,
(5) whether, to what extent, and under what circumstances awards may be settled or exercised in cash, shares of common stock,
other securities, other awards or other property, or cancelled, forfeited, or suspended and the method or methods by which awards
may be settled, exercised, cancelled, forfeited, or suspended, (6) whether, to what extent, and under what circumstances the delivery
of cash, shares of common stock, other securities, other awards or other property and other amounts payable with respect to an
award, and (7) make any other determination and take any other action that the Compensation Committee deems necessary or desirable
for the administration of the Incentive Plan.
Stock
Options
Stock
options granted under the Incentive Plan may be of two types: (i) Incentive Stock Options (as defined in the Incentive Plan) and
(ii) Non-qualified Stock Options (as defined in the Incentive Plan). Any stock option granted under the Incentive Plan shall contain
such terms, as the Compensation Committee may from time to time approve.
The
term of each stock option shall be fixed by the Compensation Committee; provided, however, that no stock option may be exercisable
after the expiration of ten years from the date of grant; provided, further, that no Incentive Stock Option granted to a person
who, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of voting stock
of Akerna (“10% Shareholder”) may be exercisable after the expiration of five years from the date of grant.
The
exercise price per share purchasable under a stock option shall be determined by the Compensation Committee at the time of grant;
provided, however, that the exercise price of a stock option may not be less than 100% of the fair market value on the date of
grant; provided, further, that the exercise price of an Incentive Stock Option granted to a 10% Shareholder may not be less than
110% of the fair market value on the date of grant.
Stock
Appreciation Rights
The
Compensation Committee may grant Stock Appreciation Rights in tandem with a stock option or alone and unrelated to a stock option.
The Compensation Committee may grant stock appreciation rights to participants who have been or are being granted stock options
under the Incentive Plan as a means of allowing such participants to exercise their stock options without the need to pay the
exercise price in cash. In the case of a Non-qualified Stock Option, a stock appreciation right may be granted either at or after
the time of the grant of such Non-qualified Stock Option. In the case of an Incentive Stock Option, a stock appreciation right
may be granted only at the time of the grant of such Incentive Stock Option. Stock appreciation rights shall be exercisable as
shall be determined by the Compensation Committee. All or a portion of a stock appreciation right granted in tandem with a stock
option shall terminate and shall no longer be exercisable upon the termination or after the exercise of the applicable portion
of the related stock option.
Restricted
Stock and Restricted Stock Units
Shares
of restricted stock may be awarded either alone or in addition to other awards granted under the Incentive Plan. The Compensation
Committee shall determine the eligible persons to whom, and the time or times at which, grants of restricted stock will be awarded,
the number of shares to be awarded, the price (if any) to be paid by the holder, any restriction period, the vesting schedule
and rights to acceleration thereof, and all other terms and conditions of the awards. In addition, the Compensation Committee
may award restricted stock units, which may be subject to vesting and forfeiture conditions during the applicable restriction
period, as set forth in an agreement.
Restricted
stock constitutes issued and outstanding shares of common stock for all corporate purposes. The holder will have the right to
vote such restricted stock and to exercise all other rights, powers and privileges of a holder of common stock with respect to
such restricted stock, subject to certain limited exceptions. Upon the expiration of the restriction period with respect to each
award of restricted stock and the satisfaction of any other applicable restrictions, terms and conditions, all or part of such
restricted stock shall become vested in accordance with the terms of the agreement. Any restricted stock that do not vest shall
be forfeited to Akerna and the holder shall not thereafter have any rights with respect to such restricted stock.
The
Compensation Committee may provide that settlement of restricted stock units will occur upon or as soon as reasonably practicable
after the restricted stock units vest or will instead be deferred, on a mandatory basis or at the holder’s election, in
a manner intended to comply with tax laws. A Holder will have no rights of a holder of common stock with respect to shares subject
to any restricted stock unit unless and until the shares are delivered in settlement of the restricted stock unit. If the Committee
provides, a grant of restricted stock units may provide a holder with the right to receive dividend equivalents.
Other
Stock-Based Awards
Other
Stock-Based Awards may be awarded, subject to limitations under applicable law, that are denominated or payable in, valued in
whole or in part by reference to, or otherwise based on or related to, shares of common stock, as deemed by the Compensation Committee
to be consistent with the purposes of the Incentive Plan, including, without limitation, purchase rights, shares of common stock
awarded that are not subject to any restrictions or conditions, convertible or exchangeable debentures, or other rights convertible
into shares of common stock and awards valued by reference to the value of securities of or the performance of specified subsidiaries.
Change
of Control Provisions
The
Incentive Plan provides that in the event of a change of control event, (1) all of the then outstanding options and stock appreciation
rights granted pursuant to the Incentive Plan will immediately vest and become immediately exercisable as of a time prior to the
change in control and (2) any performance goal restrictions related to an award will be deemed achieved at 100% of target levels
and all other conditions met as of a time prior to the change in control. In the event of the sale of all of Akerna’s assets
or a change of control event, then the Compensation Committee may (1) accelerate the vesting of any and all Stock Options and
other awards granted and outstanding under the Incentive Plan; (2) require a holder of outstanding options to relinquish such
award to Akerna upon the tender by Akerna to holder of cash, stock or other property, or any combination thereof pursuant to the
terms of the Incentive Plan and (3) terminate all incomplete performance periods in respect of awards in effect on the date the
acquisition occurs, determine the extent to which performance goals have been met based upon such information then available as
it deems relevant and cause to be paid to the holder all or the applicable portion of the award based upon the Compensation Committee’s
determination of the degree of attainment of performance goals, or on such other basis determined by the Compensation Committee.
The
Akerna Board may at any time, and from time to time, amend alter, suspend or discontinue any of the provisions of the Incentive
Plan, but no amendment, alteration, suspension or discontinuance shall be made that would impair the rights of a holder under
any agreement theretofore entered into hereunder, without the holder’s consent, except as set forth in this Incentive Plan
or the agreement. Notwithstanding anything to the contrary herein, no amendment to the provisions of the Incentive Plan shall
be effective unless approved by the stockholders of Akerna to the extent stockholder approval is necessary to satisfy any provision
of the Ethics Code or other applicable law or the listing requirements of any national securities exchange on which Akerna’s
securities are listed.
Equity
Compensation Plans
The
following summary information is presented as of June 30, 2020
|
|
Number of
securities to be
issued upon
exercise of
outstanding options,
warrants,
and rights
(a)
|
|
|
Weighted-average
exercise price of
outstanding
options,
warrants, and
rights
(b)
|
|
|
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
(c)
|
|
Equity compensation plans approved by security holders(1)
|
|
|
525,278
|
(1)
|
|
$
|
0
|
|
|
|
1,039,760
|
|
Equity compensation plans not approved by security holders
|
|
|
Not Applicable
|
|
|
|
Not Applicable
|
|
|
|
Not Applicable
|
|
TOTAL
|
|
|
525,278
|
(1)
|
|
$
|
0
|
|
|
|
1,039,760
|
|
|
(1)
|
See
“2019 Long Term Incentive Plan Summary” above.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You
should read the following discussion and analysis of our financial condition and results of operations together with our financial
statements and related notes appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of many factors, including, but not limited to, those set forth under “Risk Factors”
and “Note Regarding Forward-Looking Statements” above.
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 the industry as a whole. 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®, Ample 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
commercial software contracts. Leaf Data Systems contracts are generally multi-year contracts payable annually or quarterly in
advance of service. Commercial software and Leaf Data Systems contracts generally may only be terminated early for breach of contract
as defined in the respective agreements.
Consulting
services revenue growth is driven by numerous factors. In new emerging states, we provide solutions for operators in the pre-application
for licensure 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 the sale of business intelligence and data analytics products, point of sale hardware
and labels, including solo*TAG™ and solo*CODE™.
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.
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:
|
|
Year Ended June 30,
|
|
|
Change
|
|
|
|
2020
|
|
|
2019
|
|
|
Period over
Period
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$
|
9,976,580
|
|
|
$
|
8,256,492
|
|
|
$
|
1,720,088
|
|
|
|
21
|
%
|
Consulting
|
|
|
2,379,947
|
|
|
|
2,307,129
|
|
|
|
72,818
|
|
|
|
3
|
%
|
Other
|
|
|
216,749
|
|
|
|
259,496
|
|
|
|
(42,747
|
)
|
|
|
(16
|
%)
|
Total revenue
|
|
|
12,573,276
|
|
|
|
10,823,117
|
|
|
|
1,750,159
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
6,209,724
|
|
|
|
4,633,844
|
|
|
|
1,575,880
|
|
|
|
34
|
%
|
Gross profit
|
|
|
6,363,552
|
|
|
|
6,189,273
|
|
|
|
174,279
|
|
|
|
3
|
%
|
Gross profit margin
|
|
|
51
|
%
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development:
|
|
|
3,206,310
|
|
|
|
5,565,097
|
|
|
|
(2,358,787
|
)
|
|
|
(42
|
%)
|
Sales and marketing
|
|
|
7,792,480
|
|
|
|
7,498,114
|
|
|
|
294,366
|
|
|
|
4
|
%
|
General and administrative
|
|
|
11,320,715
|
|
|
|
5,638,408
|
|
|
|
5,682,307
|
|
|
|
101
|
%
|
Depreciation and amortization
|
|
|
1,315,898
|
|
|
|
—
|
|
|
|
1,315,898
|
|
|
|
nm
|
|
Total operating expenses
|
|
|
23,635,403
|
|
|
|
18,701,619
|
|
|
|
4,933,784
|
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(17,271,851
|
)
|
|
$
|
(12,512,346
|
)
|
|
$
|
(4,759,505
|
)
|
|
|
38
|
%
|
nm
– percentage change not meaningful
Total
Revenue
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.
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*TAGTMs, solo*CODETMs 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
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,
|
|
|
Change
|
|
|
|
2020
|
|
|
2019
|
|
|
Period over
Period
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development salary expenses, excluding Solo and Trellis
|
|
$
|
2,077,006
|
|
|
$
|
5,256,020
|
|
|
$
|
(3,179,014
|
)
|
|
|
(60
|
%)
|
Solo product development
|
|
|
362,108
|
|
|
|
—
|
|
|
|
362,108
|
|
|
|
nm
|
|
Trellis product development
|
|
|
141,602
|
|
|
|
—
|
|
|
|
141,602
|
|
|
|
nm
|
|
Other product development
|
|
|
625,594
|
|
|
|
309,077
|
|
|
|
316,517
|
|
|
|
102
|
%
|
Product development
|
|
|
3,206,310
|
|
|
|
5,565,097
|
|
|
|
(2,358,787
|
)
|
|
|
(42
|
)%
|
Percentage of revenue
|
|
|
26
|
%
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing, excluding Solo and Trellis
|
|
|
7,351,865
|
|
|
|
7,498,114
|
|
|
|
(146,249
|
)
|
|
|
(2
|
%)
|
Solo sales and marketing
|
|
|
390,308
|
|
|
|
—
|
|
|
|
390,308
|
|
|
|
nm
|
|
Trellis sales and marketing
|
|
|
50,307
|
|
|
|
—
|
|
|
|
50,307
|
|
|
|
nm
|
|
Sales and marketing
|
|
|
7,792,480
|
|
|
|
7,498,114
|
|
|
|
294,366
|
|
|
|
4
|
%
|
Percentage of revenue
|
|
|
62
|
%
|
|
|
69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative salaries
|
|
|
3,238,361
|
|
|
|
2,635,046
|
|
|
|
603,315
|
|
|
|
23
|
%
|
Transaction related costs
|
|
|
3,158,618
|
|
|
|
1,080,870
|
|
|
|
2,077,748
|
|
|
|
192
|
%
|
Bad debt expense
|
|
|
1,094,507
|
|
|
|
345,941
|
|
|
|
748,566
|
|
|
|
216
|
%
|
Other general and administrative
|
|
|
3,829,229
|
|
|
|
1,576,551
|
|
|
|
2,252,678
|
|
|
|
143
|
%
|
General and administrative
|
|
|
11,320,715
|
|
|
|
5,638,408
|
|
|
|
5,682,307
|
|
|
|
101
|
%
|
Percentage of revenue
|
|
|
90
|
%
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,315,898
|
|
|
|
—
|
|
|
|
1,315,898
|
|
|
|
nm
|
|
Total operating expenses
|
|
$
|
23,635,403
|
|
|
$
|
18,701,619
|
|
|
$
|
4,933,784
|
|
|
|
26
|
%
|
Percentage of revenue
|
|
|
188
|
%
|
|
|
173
|
%
|
|
|
|
|
|
|
|
|
nm
– percentage change not meaningful
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.
Results
of Operations for the Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
The
following table highlights the various sources of revenues and expenses for the three months ended September 30, 2020 as compared
to the three months ended September 30, 2019:
|
|
Three Months Ended
September 30,
|
|
|
Change
|
|
|
|
2020
|
|
|
2019
|
|
|
Period
over Period
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$
|
3,154,442
|
|
|
$
|
2,254,480
|
|
|
$
|
899,962
|
|
|
|
40
|
%
|
Consulting
|
|
|
331,080
|
|
|
|
831,363
|
|
|
|
(500,283
|
)
|
|
|
(60
|
)%
|
Other
|
|
|
228,482
|
|
|
|
107,047
|
|
|
|
121,435
|
|
|
|
113
|
%
|
Total revenue
|
|
|
3,714,004
|
|
|
|
3,192,890
|
|
|
|
521,114
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
1,739,937
|
|
|
|
1,379,701
|
|
|
|
360,236
|
|
|
|
26
|
%
|
Gross profit
|
|
|
1,974,067
|
|
|
|
1,813,189
|
|
|
|
160,878
|
|
|
|
9
|
%
|
Gross profit margin
|
|
|
53
|
%
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development:
|
|
|
1,758,826
|
|
|
|
610,902
|
|
|
|
1,147,924
|
|
|
|
188
|
%
|
Sales and marketing
|
|
|
2,097,502
|
|
|
|
1,841,514
|
|
|
|
255,988
|
|
|
|
14
|
%
|
General and administrative
|
|
|
2,470,187
|
|
|
|
1,742,301
|
|
|
|
727,886
|
|
|
|
42
|
%
|
Depreciation and amortization
|
|
|
1,171,022
|
|
|
|
17,899
|
|
|
|
1,153,123
|
|
|
|
nm
|
|
Total operating expenses
|
|
|
7,497,537
|
|
|
|
4,212,616
|
|
|
|
3,284,921
|
|
|
|
78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(5,523,470
|
)
|
|
$
|
(2,399,427
|
)
|
|
$
|
(3,124,043
|
)
|
|
|
130
|
%
|
nm
– percentage change not meaningful
Total
Revenue
Total
revenue increased to $3.7 million for the three months ended September 30, 2020 from $3.2 million for the three months ended September
30, 2019, an increase of $0.5 million, or 16%. The increase in total revenue compared to the fiscal three months ended September
30, 2019 was driven primarily by our growth achieved following our acquisition of Ample, partially offset by a decrease in
consulting revenue, discussed below.
Software
Revenue
Our
total software revenue increased to $3.2 million for the fiscal three months ended September 30, 2020 from
$2.3 million for the three months ended September 30, 2019, for an increase of $0.9 million, or 40%.
Software revenue accounted for 85% and 71% of total revenue for the three months ended September 30, 2020 and 2019,
respectively. The increase in software revenue during the three months ended September 30, 2020 was primarily driven
by our acquisition of Ample.
Software
revenues generated from government clients totaled $0.9 million and $1.1 million during the three months ended
September 30, 2020 and 2019, respectively. Leaf Data Systems revenue decreased for the three months ended
September 30, 2020 compared to 2019 primarily as a result of a decrease in the volume of change orders. 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 and may be impacted
by the timing of entering into agreements and the number of requested change orders in any given period.
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 $0.3 million for the three months ended September
30, 2020 compared to $0.8 million for the three months ended September 30, 2019, a decrease of $0.5 million,
or 60%. This decrease is mainly due to the impact of COVID-19. Consulting services are correlated to state legalizations
and other regulatory expansion activity. As a result, individual year-over-year comparisons experienced 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 first quarter of fiscal 2020. However, many state ballot initiatives were passed for new medical or adult-use
marijuana laws in 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 elections.
Consulting
revenue was 9% and 26% of total revenue for the three months ended September 30, 2020 and 2019, respectively.
Due to the nature of consulting revenue, our dependence on emerging market activity as well as the ongoing pandemic 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 business intelligence and data analytics revenue, 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 increased to $0.2 million for the three months ended September 30, 2020 from
$0.1 million for the three months ended September 30, 2019 due to the acquisition of Ample. Other revenue was 6%
and 3% of total revenue for the three months ended September 30, 2020 and 2019. 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 Profit
Our
cost of revenue increased to $1.7 million for the three months ended September 30, 2020 from $1.4 million
for the three months ended September 30, 2019, an increase of 26%. 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 $0.2 million.
Because
the applications and services available through the Leaf Data Systems 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 $0.8 million and $0.7 million during
the three months ended September 30, 2020 and 2019, respectively. The increase in the cost of government revenues incurred
by us was due to the additional customer requests of our contracts with the state of Utah and Pennsylvania, and a higher volume
of ongoing support and maintenance services provided by subcontractors in connection with the contracts with Pennsylvania and
Washington.
Operating
Expenses
The
following table presents operating expense line items for the three months ended September 30, 2020 and 2019 and the period-over-period
dollar and percentage changes for those line items:
|
|
Three Months Ended
September 30,
|
|
|
Change
|
|
|
|
2020
|
|
|
2019
|
|
|
Period
over Period
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary expenses, excluding Solo, Trellis, and Ample
|
|
$
|
884,016
|
|
|
$
|
317,377
|
|
|
$
|
566,639
|
|
|
|
179
|
%
|
Product development of Solo, Trellis, and Ample
|
|
|
592,740
|
|
|
|
—
|
|
|
|
253,292
|
|
|
|
nm
|
|
Other product development
|
|
|
282,070
|
|
|
|
—
|
|
|
|
592,740
|
|
|
|
nm
|
|
Product development
|
|
|
1,758,826
|
|
|
|
610,902
|
|
|
|
1,147,924
|
|
|
|
188
|
%
|
Percentage of revenue
|
|
|
47
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing, excluding Solo, Trellis, and Ample
|
|
|
1,700,930
|
|
|
|
1,841,514
|
|
|
|
(140,584
|
)
|
|
|
(8
|
)%
|
Sales and marketing of Solo, Trellis, and Ample
|
|
|
396,572
|
|
|
|
—
|
|
|
|
396,572
|
|
|
|
nm
|
|
Sales and marketing
|
|
|
2,097,502
|
|
|
|
1,841,514
|
|
|
|
255,988
|
|
|
|
14
|
%
|
Percentage of revenue
|
|
|
56
|
%
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative salaries, excluding Solo, Trellis, and Ample
|
|
|
646,530
|
|
|
|
445,647
|
|
|
|
200,883
|
|
|
|
45
|
%
|
Transaction related costs
|
|
|
951,865
|
|
|
|
142,437
|
|
|
|
809,428
|
|
|
|
nm
|
|
Change in fair value of contingent consideration
|
|
|
(389,000
|
)
|
|
|
—
|
|
|
|
(389,000
|
)
|
|
|
nm
|
|
Bad debt expense
|
|
|
12,450
|
|
|
|
252,809
|
|
|
|
(240,359
|
)
|
|
|
(95
|
)%
|
Restructuring costs
|
|
|
68,190
|
|
|
|
—
|
|
|
|
68,190
|
|
|
|
nm
|
|
General and administrative expenses of Solo, Trellis, and Ample
|
|
|
330,538
|
|
|
|
—
|
|
|
|
330,538
|
|
|
|
nm
|
|
General and administrative stock-based compensation
|
|
|
346,059
|
|
|
|
41,542
|
|
|
|
304,517
|
|
|
|
733
|
)%
|
Other general and administrative
|
|
|
503,555
|
|
|
|
859,866
|
|
|
|
(356,311
|
)
|
|
|
(41
|
)%
|
General and administrative
|
|
|
2,470,187
|
|
|
|
1,742,301
|
|
|
|
727,886
|
|
|
|
42
|
%
|
Percentage of revenue
|
|
|
67
|
%
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
7,497,537
|
|
|
$
|
4,212,616
|
|
|
$
|
3,284,921
|
|
|
|
78
|
%
|
Percentage of revenue
|
|
|
202
|
%
|
|
|
132
|
%
|
|
|
|
|
|
|
|
|
nm
– percentage change not meaningful
Our
operating expenses increased to $7.5 million for the three months ended September 30, 2020, from $4.2 million
for the three months ended September 30, 2019, an increase of $3.3 million, or 78%. The increased level of
operating expenses for the three months ended September 30, 2020, was the result of 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.
Product
development expenses increased to $1.8 million for the three months ended September 30, 2020, from $0.6 million
for the three months ended September 30, 2019, an increase of $1.2 million, or 188%. Salary expense for
product development functions increased by $0.6 million, primarily due to the reduced usage of third party contractors
associated with software development. Our acquisitions also contributed to the increase in product development spend for the three
months ended September 30, 2020.
Sales
and marketing expenses increased $0.3 million during the three months ended September 30, 2020, as compared
to September 30, 2019, primarily as a result of our acquisitions.
General
and administrative expenses increased to $2.5 million for the three months ended September 30, 2020, from $1.7 million for
the three months ended September 30, 2019, an increase of $0.7 million, or 42%. This increase was primarily due to transactional
costs we are required to expense as incurred and an increase in other general and administrative costs. During the three
months ended September 30, 2020, we incurred legal and other costs totaling $1.0 million primarily in connection with
our acquisition of Ample. We also recognized a $0.4 million reduction in the estimated fair value of contingent consideration
paid for our acquisition of Solo in July 2020. Bad debt expense decreased by $0.2 million, during the three months ended
September 30, 2020, as compared to 2019, due to our improvement in the overall quality of our revenue and client portfolio,
enhancement of our sales and marketing team has resulted in a steady decline in the number and amount of delinquent accounts resulting
in bad debt expense since the three months ended September 30, 2019. During the three months ended September 30, 2020, we
have an additional $0.3 million in general and administrative expenses associated with Solo, Trellis, and Ample compared
to the three months ended September 30, 2019. Other general and administrative expenses decreased by $0.4 million, most
notably due to lower technology costs as compared to the three months ended September 30, 2019.
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:
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
Net loss
|
|
$
|
(16,384,104
|
)
|
|
$
|
(12,403,215
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
Interest (income) expense and change in fair value of convertible notes
|
|
|
(922,678
|
)
|
|
|
(91,239
|
)
|
Income tax provision
|
|
|
30,985
|
|
|
|
—
|
|
Depreciation and amortization
|
|
|
1,315,898
|
|
|
|
—
|
|
EBITDA
|
|
$
|
(15,959,899
|
)
|
|
$
|
(12,494,454
|
)
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
1,166,130
|
|
|
|
3,884,110
|
|
Business combination and merger related costs
|
|
|
2,979,228
|
|
|
|
1,080,870
|
|
Debt issuance costs related to fair value option debt instruments
|
|
|
1,177,390
|
|
|
|
—
|
|
Changes in fair value of contingent consideration
|
|
|
(998,000
|
)
|
|
|
—
|
|
Equity in losses of investee
|
|
|
3,692
|
|
|
|
—
|
|
Adjusted EBITDA
|
|
$
|
(11,631,459
|
)
|
|
$
|
(7,529,474
|
)
|
The
reconciliation of net loss to EBITDA and Adjusted EBITDA for the three months ended September 30, 2020 and 2019 is as
follows:
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Net loss
|
|
$
|
(4,750,691
|
)
|
|
$
|
(2,326,332
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
Interest (income) expense and change in fair value of convertible notes
|
|
|
(774,313
|
)
|
|
|
(73,382
|
)
|
Depreciation and amortization
|
|
|
1,171,022
|
|
|
|
17,899
|
|
EBITDA
|
|
$
|
(4,353,982
|
)
|
|
$
|
(2,381,815
|
)
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
681,419
|
|
|
|
161,165
|
|
Business combination and merger related costs
|
|
|
951,865
|
|
|
|
—
|
|
Debt issuance costs related to fair value option debt instruments
|
|
|
43,167
|
|
|
|
—
|
|
Restructuring charges
|
|
|
68,190
|
|
|
|
—
|
|
Changes in fair value of contingent consideration
|
|
|
(389,000
|
)
|
|
|
—
|
|
Equity in losses of investee
|
|
|
1,534
|
|
|
|
—
|
|
Adjusted EBITDA
|
|
$
|
(2,996,807
|
)
|
|
$
|
(2,220,650
|
)
|
Liquidity
and Capital Resources
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. As of September 30, 2020, we had cash of $14.3 million, excluding restricted cash,
and working capital of $0.9 million. Additionally, on October 30, 2020, we closed on the public offering of 5 million shares of
common stock with proceeds of approximately $11.0 million net of offering costs, which will be used for general corporate purposes.
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. During
the three months ended September 30, 2020, we incurred a loss from operations of $5.5 million and used cash in operations of $4.2
million. During the three months ended September 30, 2020, we implemented a number of cost reduction initiatives reducing
costs and identifying cost savings that we expect to result in annual savings of an additional $3.0 million to $4.0 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, 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 September 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 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 will
continue to 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.
In
the event the Company requires additional liquidity, the Company can further reduce or defer expenses. More specifically, the
Company could implement certain discretionary cost reduction initiatives relating to our spending on employee travel and entertainment,
consulting costs and marketing expenses, negotiate deferred salary arrangements, furlough employees or reduce headcount or negotiate
extensions of payments of rent and utilities. The Company also believes it has access to capital through future debt or
equity offerings and could be successful in renegotiating the maturity dates or conversion option relating to its current outstanding
notes payable, although no assurance can be provided that we would be successful in these efforts. Further, the potential
continues to exist that our $2 million PPP loan could be forgiven. Management will continue to evaluate our liquidity and capital
resources.
Cash
Flows – June 30, 2020 and 2019
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:
|
|
Years Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(14,347,652
|
)
|
|
$
|
(9,048,595
|
)
|
Investing activities
|
|
|
(3,598,084
|
)
|
|
|
18,843,483
|
|
Financing activities
|
|
|
20,234,275
|
|
|
|
10,000,000
|
|
Net increase (decrease) in cash and restricted cash
|
|
$
|
2,288,539
|
|
|
$
|
19,794,888
|
|
Sources
and Uses of Cash for the Years Ended June 30, 2020 and 2019
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.
Cash
Flows – September 30, 2020 and 2019
Our
cash and restricted cash balances were $14.8 million and $24.7 million as of September 30, 2020 and 2019, respectively. Cash
flow information for the three months ended September 30, 2020, and 2019 is as follows:
|
|
Three Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(4,181,159
|
)
|
|
$
|
(3,142,174
|
)
|
Investing activities
|
|
|
(5,704,806
|
)
|
|
|
(519,739
|
)
|
Financing activities
|
|
|
(12,668
|
)
|
|
|
4,242,454
|
|
Net change in cash and restricted cash
|
|
$
|
(9,898,633
|
)
|
|
$
|
580,541
|
|
Sources
and Uses of Cash for the three months ended September 30, 2020 and 2019
Net
cash used in operating activities increased to $4.2 million during the three months ended September 30, 2020, from
$3.1 million during the three months ended September 30, 2019, an increase of $1.0 million. The increase
in cash used in operating activities was primarily driven by the increase in net loss from operations of $3.1 million described above,
partially offset by the effect of the timing of cash received from clients relative to when we recognize revenue.
Net
cash used in investing activities totaled $5.7 million during the three months ended September 30, 2020, as a result of net
cash paid as consideration for the Ample acquisition and amounts invested in the development of our software products. Net cash
used by investing activities during the three months ended September 30, 2019, was $0.5 million as a result of amounts
invested in the development of our software products.
Net
cash used in financing activities totaled $13,000 during the three months ended September 30, 2020 and represents cash
paid in connection with our common stock offering that closed on October 30, 2020. Net cash provided by financing activities totaled
$4.2 million and represents the proceeds from the exercise of warrants.
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, 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
have used and continue to 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 were 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 were not 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. We obtained stockholder approval on December 14,
2020, and the Convertible Notes are no longer subject to this restriction.
Events
of Default
The
Convertible Notes are subject to certain customary events of default, see “Risk Factors – Risks Related to our Convertible
Debt” for a short discussion of events of default under the Convertible Notes
December
Waivers
On
December 23, 2020, we entered into waivers with all the holders of the outstanding senior secured convertible notes, pursuant
to which we and the holders, separately and not jointly, agreed to waive certain terms and conditions of the convertible notes
as follows:
|
●
|
The
holders irrevocably waived the last sentence of Section 8(a) of the notes requiring that all installment amounts payable under
the notes prior to April 1, 2021 be paid in cash pursuant to installment redemptions. We may now elect, in its sole discretion,
to pay installment amounts under the notes prior to April 1, 2021, by issuing shares of common stock pursuant to installment
conversions or by paying cash pursuant to installment redemptions, in each case in accordance with the existing terms of the
notes.
|
|
●
|
We irrevocably waived the prohibition on acceleration of installment
amounts in Section 8(e) of the notes solely in relation to the installment amount for January 4, 2021, to permit the holders to
accelerate the January 4, 2021 installment amount, in whole or in part, to one or more acceleration dates from December 24, 2020
through to and including January 4, 2021, as elected by each holder pursuant to Section 8(e) of the notes.
|
|
●
|
We
and the holders agreed that we may irrevocably waive the installment scheduled principal amount for any installment date by
setting forth in the installment notice for that installment date an installment amount greater than the installment scheduled
principal amount due and payable on the next installment date. Each holder may then consent to all or a portion of such increased
installment amount for such installment date by written confirmation no later than 4:00 p.m. New York time on the trading
day immediately prior to such installment date. Any increased amount for an installment amount above the installment scheduled
principal amount for such installment date will reduce the principal amount under the notes.
|
|
●
|
In
relation to the January 4, 2021 installment amount, we delivered installment notices to the holders increasing the installment
amount for January 4, 2021, in the aggregate, by $2,062,500.
|
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 mergers with MTech and MJF, the Series C Preferred Units issued in connection with these two transactions
were exchanged for shares of our common stock.
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 included elsewhere in this prospectus for our
discussion about new accounting pronouncements adopted and those pending.
DIRECTORS
AND EXECUTIVE OFFICERS
Directors
and Executive Officers
Name
|
|
Age
|
|
Position
|
Jessica
Billingsley
|
|
43
|
|
Chairman
of the Board and Chief Executive Officer(3)
|
Scott
Sozio
|
|
40
|
|
Director(3)
|
Matthew
R. Kane
|
|
40
|
|
Director(1)
|
Tahira
Rehmatullah
|
|
38
|
|
Director(1)
|
Mark
Iwanowski
|
|
65
|
|
Director(3)
|
John
Fowle
|
|
42
|
|
Chief
Financial Officer and Secretary
|
Nina
Simosko
|
|
52
|
|
Chief
Commercial Officer
|
Ray
Thompson
|
|
50
|
|
Chief
Operating Officer
|
David
McCullough
|
|
44
|
|
Chief
Technology Officer
|
Jessica
Billingsley has served as Chief Executive Officer and director since the consummation of our merger on June 17, 2019, and
Chairman of the Board since July 2019. Ms. Billingsley co-founded MJF, our wholly-owned subsidiary, in 2010 and served as President
of MJF from 2010 to April 2018 and Chief Executive Officer since May 2018. An early investor in one of Colorado’s first
legal medical cannabis businesses, Ms. Billingsley created the category of cannabis seed-to-sale technology after seeing the need
first-hand. Prior to MJF, Ms. Billingsley was the founder and chief executive officer of Zoco, a technology services firm with
clients across the United States. Ms. Billingsley has 20 years of technology and systems experience with rapidly scaling businesses
and founded her first business at the age of 22. Ms. Billingsley has served on the board of the National Cannabis Industry Association
from 2012 to 2019 and has served on the board of the Cannabis Trade Federation since 2019. Ms. Billingsley was named one of Fortune’s
10 most promising women entrepreneurs in 2015 and named one of Inc. Magazine’s 100 Female Founders in 2018. Ms. Billingsley
holds a dual degree from the University of Georgia in Computer Science and Communications. Ms. Billingsley was selected to serve
on our Board based on her extensive experience with technology and systems companies, broad experience in the telecommunications
industry, and her background as an entrepreneur.
Scott
Sozio has served as a director since October 2018, prior to the consummation of our merger on June 17, 2019. From October
2018 until the consummation of the merger on June 17, 2019, Mr. Sozio served as President and Secretary of Akerna. From September
2017 and until the merger in June 2019, Mr. Sozio served as the chief executive officer and a director of MTech Acquisition Corp.
Since July 2019, Mr. Sozio has served as Head of Corporate Development., Mr. Sozio is the co-founder of Hypur Ventures and
since June 2016, has served as its managing director. Since April 2015, Mr. Sozio has served as a director of Hypur Inc., a financial
technology firm focused on banking compliance. Since September 2016, Mr. Sozio has served as a director of Simplifya Holdings,
LLC, a cannabis compliance technology business, both portfolio companies of Hypur Ventures. Since February 2013, Mr. Sozio has
served as a partner in Van Dyke Holdings, where he is responsible for its private investment portfolio. Prior to joining Van Dyke
Holdings, Mr. Sozio was a vice president of Bay Harbour Management L.C., a distressed-debt focused hedge fund. He joined Bay Harbour
in 2004 after working in the Financial Restructuring Advisory Group at CIBC World Markets. Mr. Sozio is the former Chairman of
Island One, Inc., a timeshare company based in Florida (from 2011 to 2012), and acquired by Diamond Resorts as part of Diamond’s
initial public offering, and a former director of Great Destinations, Inc., a timeshare sales business based in California (from
2013 to 2016), and acquired by Interval International in 2016. Mr. Sozio holds a B.A. in Architecture from Columbia University.
Mr. Sozio was selected to serve on our Board based on his extensive experience in finance and investment management and his broad
experience with working with cannabis companies.
Matthew
R. Kane has served as a director since the consummation of our merger on June 17, 2019. Since December 2015, Mr. Kane
has served as a director or MJF. In 2002, Mr. Kane co-founded and served as co-chief executive officer of Green Shades Software,
Inc., a human resources, payroll and tax reporting software company, until 2019 where he has since served as a board member. Additionally,
Mr. Kane has served as chief executive officer of Welltality, a health care technology start-up, from 2014 to 2018, where he has
since served as a board member. He received his bachelor’s degree in Computer Information Systems from Jacksonville University
in 2001, an MBA from the Warrington College of Business at the University of Florida in 2006, and a Masters in Information and
Data Service at the University of California, Berkeley in 2020. He previously served for 11 years on the board of Jacksonville
University from 2007 to May 2018 and was reappointed in 2019. Mr. Kane was selected to serve on our Board based on his extensive
experience in in the software technology applications industry.
Tahira
Rehmatullah has served as a director since consummation of our merger on June 17, 2019. Since October 2018, prior to the merger
and until consummation of the merger in June 2019, Ms. Rehmatullah served as Vice President and Treasurer. Since 2016, Ms. Rehmatullah
has been president of T3 Ventures, a strategy and management consulting firm. From September 2017 to June 2019, Ms. Rehmatullah
was the chief financial officer of MTech Acquisitions Inc. From 2016 to 2019, Ms. Rehmatullah was a managing director of Hypur
Ventures, where she was responsible for portfolio company management as well as investment sourcing and execution. From June 2017
to June 2018, Ms. Rehmatullah served as a director of Dope Media, a cannabis media company and portfolio company of Hypur Ventures.
Prior to joining Hypur Ventures, from 2014 to 2016 Ms. Rehmatullah served as the general manager of Marley Natural, a cannabis
brand based on the life and legacy of Bob Marley, where she was responsible for the brand launch as well as managing its day-to-day
operations. From 2014 to 2016, Ms. Rehmatullah served as an investment manager at Privateer Holdings, a private equity firm with
investments in the legal cannabis industry. Prior to her activities in the cannabis industry, from 2011 to 2012, Ms. Rehmatullah
was a portfolio manager at City First Enterprises where she was responsible for underwriting, structuring and managing deals for
their community development and investment portfolio. From 2007 to 2011, Ms. Rehmatullah was an associate at Perry Capital where
she led research initiatives for the asset-backed securities team. Her career began in Ernst & Young’s Financial Services
Advisory practice in 2005. Ms. Rehmatullah holds an M.B.A. from the Yale School of Management and a B.S. in Finance and minor
in Life Sciences from The Ohio State University. Ms. Rehmatullah was selected to serve on our Board based on her extensive experience
in finance and investment management and her broad experience working with cannabis companies
Mark
D. Iwanowski has served as a director since the consummation of the merger on June 17, 2019. Since May 2019, Mr. Iwanowski
has served as a director of MJF. Mr. Iwanowski is the founder of Global Visions-Silicon Valley, Inc., a global consulting group
focused on venture, mergers and acquisitions, and turnarounds, and has served as its president and chief executive officer since
August 2011. Mr. Iwanowski advises and invests in a variety of early stage companies and is an experienced veteran in the international
technology sector. Recent projects including overseeing the selection, mentoring and seed funding of approximately 20 start-up
companies in the Republic of Georgia. Mr. Iwanowski also serves on the Virgin Galactic advisory board, which recently made it
first successful commercial flight into space. Mr. Iwanowski was a managing director with Trident Capital from April 2005 to November
2011. During this time, Mr. Iwanowski also served as chairman of Neohapsis (KSR INC) a cyber-security firm that was then acquired
by Cisco from 2006 to 2010. From 2002 to 2005, Mr. Iwanowski was senior vice president - Global IT and chief information officer
for Oracle Corporation (NYSE: ORCL). Prior to Oracle, Mr. Iwanowski co-managed an outsourcing business at Science Applications
International Corp (NASDAQ: SAIC) and served as its chief operating officer - Telecom and IT Outsourcing Business Unit from 1997
to 2002. Mr. Iwanowski served as a principal at Quantum Magnetics, an airport explosive detection system company, as a general
manager and vice president from 1995 to 1997. Mr. Iwanowski also held executive positions with Raytheon (NASDAQ:RTN) as the vice
president of Business Development from 1993 to 1995, and was a principal at Applied Remote Technology, an underwater robotics
company that was acquired by Raytheon (NASDAQ:RTN), serving as its executive vice president - business development from 1991 to
1993. Mr. Iwanowski played professional football from 1978 to 1980 with the New York Jets, Oakland Raiders and Kansas City Chiefs.
Mr. Iwanowski received an MBA from National University in 1989, an MS in Engineering from California Institute of Technology in
1979, and a BS in Engineering from the University of Pennsylvania in 1977. Mr. Iwanowski was selected to serve on our Board based
on his extensive experience in business operation and public companies.
John
Fowle has served as Chief Financial Officer since December 17, 2019. From May 2019 through December 2019, Mr. Fowle served
as Chief Financial Officer of Rev360, an optometry software and business services company. During that time, Mr. Fowle oversaw
the company’s financial operations and risk management functions and supported the company’s strategic divestiture
of the software business unit. From July 2015 through May 2019, Mr. Fowle served as Vice President, Corporate Controller and Officer
of Welltok, Inc., an emerging-growth, data-driven, enterprise SaaS company that delivers the healthcare industry’s leading
consumer activation platform. From May 2013 through July 2015, Mr. Fowle served as Corporate Controller of Clarient Diagnostic
Services, Inc., a NeoGenomics Company, a specialty molecular biology laboratory focused on cancer diagnostics, testing and research.
Prior to that, Mr. Fowle held a variety of increasingly responsible senior financial management positions in GE Healthcare, Panasonic
Avionics and Freedom Communications. Mr. Fowle holds a Bachelor of Science degree in Business Administration from the University
of Southern California, a Master of Business Administration from the University of California, Irvine, and is a Certified Public
Accountant.
Nina
Simosko has served as Chief Commercial Officer since September 23, 2019. From Feb 2015 through 2018, Ms. Simosko served as
president, chief executive officer, and chief product officer of NTT Innovation Institute Inc., a Silicon Valley-based innovation
center for NTT Group, one of the world’s largest information and communications technology companies. From Feb 2013 through
July 2015, Ms. Simosko was responsible at Nike, Inc. for leading the creation and execution of the Nike technology strategy, planning
and operations world-wide. Additionally, from February 2013 through February 2015, Ms. Simosko served on the advisory board of
Appcelerator. From August 2012 through August 2014, Ms. Simosko served on the advisory board of Taulia, Inc. and from October 2012
through October 2014 served on the advisory board of K2Partnering Solutions. From June 2004 through May 2012, Ms. Simosko
was the senior vice president of the Global Premier Customer Network of the SAP America, Inc. (“SAP”). At SAP, she
led both the PCN Center of Excellence and SAP’s Global Executive Advisory Board. During her tenure, she was a part of SAP’s
Global Ecosystem & Partner Group which was charged with continuing to build and enable an open ecosystem of software, service
and technology partners together with SAP’s communities of innovation. Additionally, she served as the global chief operating
officer for the worldwide Customer Education organization, responsible for driving more than half a billion euros in global education
software and services revenue, as well as the senior vice president of the SAP’s Education Sales. From July 2008 through
June 2011, Ms. Simosko served as a director of Reading Partners. From May 2000 through June 2004, Ms. Simosko
served as the executive director of Siebel University and Worldwide Maintenance Renewal Sales, where she was responsible for $100M
in annual revenues. From April 1998 through April 2000, Ms. Simosko served as the senior sales and marketing director of Oracle
Corporation’s, Oracle Education (Americas Division), where she managed a P&L for a $13M annual budget. Ms. Simosko currently
serves on the advisory board of: since January 2018, Silicon Valley in Your Pocket; since January 2015, AppOrchid; since
September 2014, Reflection; since May, DeepSense.ai; and since June, 2019 Scanta, Inc. Ms. Simosko holds a Bachelor of Arts
degree from Montclair State University where she graduated cum laude.
Ray
Thompson has served as Chief Operating Officer of MJF since November 2018. From November 2016 to January 2018, Mr. Thompson
worked as the head of customer and sales Operations for Gloo, a people development SaaS company. During that time, Mr. Thompson
reported to the executive team to develop and execute on market strategies, product offerings, financial projections, and talent
management. From October 2008 to October 2016, Mr. Thompson served as corporate senior vice president of VisionLink, a multiagency
humanitarian software platform, managing across all aspects of the business providing enterprise SaaS solutions to federal and
state governments and international humanitarian organizations. From 1996 to 2008, Mr. Thompson served in various executive sales
and marketing roles across multiple technologies companies. Mr. Thompson holds a Masters in Business Administration from the University
of Denver.
David
McCullough has served as Chief Technology Officer of Akerna since July 1, 2020. Mr. McCullough has been with Akerna and MJF
since 2015, previously serving as Akerna’s executive vice president of product & engineering. Before joining MJF, Mr.
McCullough was the Chief Technology Officer of StudentPublishing.com, during that time, he actively managed the technical aspects
of Student Publishing’s sale to and system integration with lulu.com. Mr. McCullough has over 16 years of software engineering
experience, including extensive government systems experience. Mr. McCullough has previously served as a profession at New Mexico
State University where he taught courses in data communications and networking. Mr. McCullough holds a master’s degree in
Computer Science. MCSE, CCNP, A+. N+.
Board
Qualifications
Our
Board has not formally established any specific, minimum qualifications that must be met by each of its officers or directors
or specific qualities or skills that are necessary for one or more of its officers or members of the board of directors to possess.
However, we expect to generally evaluate the following qualities: educational background, diversity of professional experience,
including whether the person is a current or was a former chief executive officer or chief financial officer of a public company
or the head of a division of a prominent organization, knowledge of our business, integrity, professional reputation, independence,
wisdom, and ability to represent the best interests of our stockholders.
Our
officers and board of directors will be composed of a diverse group of leaders in their respective fields. Many of these officers
or directors have senior leadership experience at various companies. In these positions, they have also gained experience in core
management skills, such as strategic and financial planning, public company financial reporting, compliance, risk management,
and leadership development. Many of our officers and directors also have experience serving on boards of directors and/or board
committees of other public companies and private companies, and have an understanding of corporate governance practices and trends,
which provides an understanding of different business processes, challenges, and strategies. Further, these officers and directors
also have other experience that makes them valuable, such as managing and investing assets or facilitating the consummation of
business investments and combinations.
We,
along with our officers and directors, believe that the above-mentioned attributes, along with the leadership skills and other
experiences of our officers and board members described above, provide us with a diverse range of perspectives and judgment necessary
to facilitate our goals of shareholder value appreciation through organic and acquisition growth.
Number
and Terms of Office of Officers and Directors
Our
board of directors 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. The Class I directors
are Matthew R. Kane and Tahira Rehmatullah, there are currently no Class II directors, and the Class III directors are Jessica
Billingsley, Scott Sozio, and Mark Iwanowski.
Our
officers are appointed by the Board and serve at the discretion of the Board, rather than for specific terms of office. Our Board
is authorized to appoint persons to the offices set forth in our Amended and Restated Bylaws as it deems appropriate.
Arrangements
between Officers and Directors
To
our knowledge, there is no arrangement or understanding between any of our officers and any other person, including Directors,
pursuant to which the officer was selected to serve as an officer.
Family
Relationships
None
of our Directors are related by blood, marriage, or adoption to any other Director, executive officer, or other key employees.
Other
Directorships
None
of the Directors of Akerna are also directors of issuers with a class of securities registered under Section 12 of the Exchange
Act (or which otherwise are required to file periodic reports under the Exchange Act).
Legal
Proceedings
We
are not aware of any of our directors or officers being involved in any legal proceedings in the past ten years relating to any
matters in bankruptcy, insolvency, criminal proceedings (other than traffic and other minor offenses) or being subject to any
of the items set forth under Item 401(f) of Regulation S-K.
Director
Independence
The
Board evaluates the independence of each nominee for election as a director of our Company in accordance with the Listing Rules
(the “Nasdaq Listing Rules”) of the Nasdaq Stock Market LLC (“Nasdaq”). Pursuant to these rules,
a majority of our Board must be “independent directors” within the meaning of the Nasdaq Listing Rules, and all directors
who sit on our Audit Committee, Nominating Committee and Compensation Committee must also be independent directors.
The
Nasdaq definition of “independence” includes a series of objective tests, such as the director or director nominee
is not, and was not during the last three years, an employee of the Company and has not received certain payments from, or engaged
in various types of business dealings with, the Company. In addition, as further required by the Nasdaq Listing Rules, the
Board has made a subjective determination as to each independent director that no relationships exist which, in the opinion of
the Board, would interfere with such individual’s exercise of independent judgment in carrying out his or her responsibilities
as a director. In making these determinations, the Board reviewed and discussed information provided by the directors with
regard to each director’s business and personal activities as they may relate to Company and its management.
As
a result, the Board has affirmatively determined that each of Matthew R. Kane, Tahira Rehmatullah, Mark Iwanowski, and Ashesh
Shah are independent in accordance with the Nasdaq listing rules. The Board has also affirmatively determined that all members
of our Audit Committee, Nominating Committee and Compensation Committee are independent directors.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
On
October 10, 2018 (as amended on April 17, 2019), Akerna entered into a definitive merger agreement (the “Merger Agreement”)
with MTech Acquisition Corp. (“MTech”), MJ Freeway, LLC (“MJF”), MTech Purchaser Merger Sub Inc., a Delaware
corporation and a wholly-owned subsidiary of Akerna (“Purchaser Merger Sub”), MTech Company Merger Sub LLC, a Colorado
limited liability company and a wholly-owned subsidiary of Akerna (“Company Merger Sub”), MTech Sponsor LLC (“MTech
Sponsor”), a Florida limited liability company, in the capacity as the representative for the equity holders of Akerna (other
than the sellers) thereunder, and MJF and Jessica Billingsley, in the capacity as the representative for the sellers thereunder.
The Merger Agreement provided for two mergers: (1) the merger of Purchaser Merger Sub with and into MTech, with MTech continuing
as the surviving entity; and (2) the merger of Company Merger Sub with and into MJF, with MJF continuing as the surviving entity.
Prior
to the above mergers, none of MTech Holdings’ executive officers or directors received any cash (or non-cash) compensation
for services rendered to Akerna.
The
following table sets forth all information concerning the compensation earned, for the fiscal years ended June 30, 2020 and 2019
for services rendered to us by persons who served as our named executive officers at the end of 2019. Individuals we refer to
as our “named executive officers” include our chief executive officer and our most highly compensated executive officers
whose salary and bonus for services rendered in all capacities exceeded $100,000 during the fiscal year ended June 30, 2019.
Name and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(i)
|
|
|
(j)
|
|
Jessica Billingsley
|
|
|
2020
|
|
|
|
250,000
|
|
|
|
54,750
|
(1)
|
|
|
153,474
|
(2)
|
|
|
21,780
|
(3)
|
|
|
480,004
|
|
Chief Executive Officer
|
|
|
2019
|
|
|
|
8,904
|
(4)
|
|
|
309,659
|
(5)
|
|
|
—
|
|
|
|
—
|
|
|
|
318,563
|
|
Nina Simosko(6)
|
|
|
2020
|
|
|
|
154,545
|
|
|
|
—
|
|
|
|
999,996
|
(7)
|
|
|
—
|
|
|
|
1,154,541
|
|
Chief Commercial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Fowle(8)
|
|
|
2020
|
|
|
|
106,250
|
|
|
|
—
|
|
|
|
799,997
|
(9)
|
|
|
—
|
|
|
|
906,247
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Pursuant
to Ms. Billingsley’s employment agreement with Akerna, she is eligible for an annual bonus that is determined by the
board of directors on the basis of fulfillment of the objective performance criteria established in its discretion. For the
2020 fiscal year, the annual bonus was determined based Akerna’s relative performance against budgeted targets, as further
described below. The board of directors evaluated the achievement of these targets and Ms. Billingsley’s 2020 annual
bonus amount was $54,750.
|
(2)
|
During
2020, Ms. Billingsley was awarded 10,000 restricted stock units with a grant date fair value of $57,900. These awards vest
25% annually on July 1 with the final vesting occurring on July 1, 2023. Ms. Billingsley was awarded share-based compensation
that was conditioned upon the price of a share of Akerna common stock achieving a specified total return as of June 30, 2020.
This award had a grant date fair value of $12,465. The total return target was not achieved, as such no shares will be issued
pursuant to this award. Ms. Billingsley was also awarded a share based annual bonus award of 19,694 shares of common stock.
This award had a grant date fair value of $83,109.
|
(3)
|
In
addition to cash and stock awards, Ms. Billingsley may redeem loyalty awards generated by corporate purchases made on certain
credit cards for her personal use. During 2020, Ms. Billingsley redeemed $21,780 in loyalty awards for her personal use.
|
(4)
|
Ms.
Billingsley became Chief Executive Officer of Akerna on June 17, 2019. Ms. Billingsley will be paid an annual salary of $250,000,
pursuant to an employment agreement with Akerna, and was paid $8,904, as a pro rata portion of her salary for year ended June
30, 2019.
|
(5)
|
Within
ten days consummation of the Merger Agreement, Akerna paid Ms. Billingsley a single lump sum of $95,000. Additionally, as
a result of reaching a certain target, Ms. Billingsley’s received a bonus of $214,659.
|
(6)
|
Ms.
Simosko became Chief Revenue Officer of Akerna on September 23, 2019, her title was subsequently changed to Chief Commercial
Officer without any change in duties or compensation.
|
(7)
|
During
2020, Ms. Simosko was awarded 125,156 restricted stock units with a grant date fair value of $999,996, these awards vest 25%
annually on the grant date anniversary in each of the subsequent four years.
|
(8)
|
Mr.
Fowle became Chief Financial Officer of Akerna on December 17, 2019.
|
(9)
|
During
2020, Mr. Fowle was awarded 72,727 restricted stock units with a grant date fair value of $799,997, these awards vest 25%
annually on the grant date anniversary in each of the subsequent four years.
|
Employment
Agreements
Jessica
Billingsley
In
connection with the consummation of the mergers on June 17, 2019, Ms. Billingsley and Akerna entered into an employment agreement,
dated June 17, 2019 (the “Billingsley Employment Agreement”). Under the terms of the Billingsley Employment Agreement,
Ms. Billingsley serves at the Chief Executive Officer of Akerna at will, and must devote substantially all of her working time,
skill and attention to her position and to the business and interests of Akerna (except for customary exclusions).
Akerna
pays Ms. Billingsley an annual base salary in the amount of $250,000. The base salary is subject to (1) review at least annually
by the board of directors of Akerna for increase, but not decrease, and (2) automatic increase by an amount equal to $50,000 from
its then current level on the date upon which Akerna’s aggregate, gross consolidated trailing twelve month (TTM) revenue
equals the product of (x) two multiplied by (y) Akerna’s TTM revenue as of the Closing. Within ten days of the consummation
of the Merger Agreement, Akerna paid Ms. Billingsley a completion award in a single lump sum of $95,000.
Ms.
Billingsley will be eligible for an annual bonus (the “Annual Bonus”) with respect to each fiscal year ending during
her employment. Her target annual cash bonus shall be in the amount of one hundred percent (100%) of her base salary (the “Target
Bonus”) with the opportunity to earn greater than the Target Bonus upon achievement of above target performance. The amount
of the Annual Bonus shall be determined by the board of directors of Akerna on the basis of fulfillment of the objective performance
criteria established in its reasonable discretion. The performance criteria for any particular fiscal year shall be set no later
than ninety days after the commencement of the relevant fiscal year. For the 2020 and 2019 fiscal years, the Annual Bonus was
determined based upon the following four (4) budget components, each of which scales linearly between achieving 75% to 100%, and
greater than 100% with respect to the Platform Recurring Revenue (as defined in Billingsley Employment Agreement) and Government
Recurring Revenue (as defined in Billingsley Employment Agreement) budget components respectively, of the applicable fiscal year’s
budget for each such component (with 50% of the Target Bonus payable upon achievement of 75% of budget, 100% of the Target Bonus
payable upon achievement of budget (and, with respect to the Platform Recurring Revenue and Government Recurring Revenue budget
components, with 200% of each weighted portion of the Target Bonus payable upon achievement of 125% of the corresponding component
of budget, with linear interpolation between points)). During fiscal year ended June 30, 2019, due to achieving a target Ms. Billingsley
received a bonus of $214,659. During the fiscal year ended June 30, 2020, due to achieving targets Ms. Billingsley received a
bonus of $54,750 and she received a discretionary share bonus of $90,000 worth of the Company’s shares of common stock based
on the 10-day volume weighted average price as of the date of the award, which resulted in the issuance of 19,694 shares of common
stock with a grant date fair value of $83,109.
Ms.
Billingsley is entitled to participate in annual equity awards and employee benefits. She is indemnified by Akerna to for any
and all expenses (including advancement and payment of attorneys’ fees) and losses arising out of or relating to any of
her actual or alleged acts, omissions, negligence or active or passive wrongdoing, including, the advancement of expenses she
incurs. The foregoing indemnification is in addition to the indemnification provided to her by Akerna pursuant to her Indemnification
Agreement.
In
the event of Ms. Billingsley’s termination for cause or without good reason, Akerna will be obligated to pay any accrued
but unpaid base salary and any annual bonus earned and awarded for the fiscal year prior to that in which the termination occurs.
In the event of Ms. Billingsley’s termination without cause or with good reason, Akerna will be obligated to pay any accrued
but unpaid base salary, any annual bonus earned and awarded for the fiscal year prior to that in which the termination occurs,
a cash severance payment equal to her base salary, pro-rated annual bonus for the fiscal year in which the termination occurs
through the date of termination, and twelve months of health benefits.
The
Billingsley Employment Agreement also contains noncompetition and non-solicitation provisions that apply through her employment
and for a term of one year thereafter, and which are in addition to the noncompetition and non-solicitation provisions prescribed
under a certain Non-Competition Agreement between Ms. Billingsley and Akerna. The Billingsley Employment Agreement also contains
a non-disparagement provision that apply through her employment and for a term of two years thereafter.
John
Fowle
On
December 17, 2019, Mr. Fowle entered into a letter agreement with Akerna. Mr. Fowle serves as the Chief Financial Officer of Akerna
at will. Akerna pays Mr. Fowle an annual base salary of $200,000. At the Board’s discretion, Mr. Fowle may be eligible for
a bonus. Mr. Fowle received a grant of approximately $800,000 of restricted stock units, which will vest as to 25% on the first
anniversary of the grant date, as to the next 25% on the second anniversary of the grant date, as to the next 25% on the third
anniversary of the grant date and as to the remaining 25% on the fourth anniversary of the grant date. Mr. Fowle is entitled to
participate in employee benefits.
Akerna
entered into an Employee Covenant Agreement with Mr. Fowle, which obligates Mr. Fowle from disclosing any confidential information,
including without limitation, trade secrets. The agreement also prohibits Mr. Fowle during the term of his employment and for
a period of two years after his employment from soliciting any customer, client, employee, supplier or vendor of Akerna, and rendering
any services or giving advice to any competitor or affiliate of a competitor. The agreement also requires Mr. Fowle to return
all Akerna property and disclose all work product to Akerna.
Nina
Simosko
On
September 23, 2019, Ms. Simosko entered into a letter agreement with Akerna. Ms. Simosko serves as the Chief Commercial Officer
of Akerna at will. Akerna pays Ms. Simosko an annual base salary of $200,000. At the Board’s discretion, Ms. Simosko may
be eligible for a bonus. Ms. Simosko will receive an approximate grant of $1,000,000 of restricted stock units, which will vest
as to 25% on the first anniversary of the grant date, as to the next 25% on the second anniversary of the grant date, as to the
next 25% on the third anniversary of the grant date and as to the remaining 25% on the fourth anniversary of the grant date. Upon
a change of control transaction, Ms. Simosko’s unvested restricted stock units or any other equity interests that she may
be granted, will immediately vest. If Ms. Simosko’s employment is terminated by Akerna without cause or by her with
good reason, she is entitled to her base salary through the date of termination and the immediate vesting of 33% of the restricted
stock units that are unvested on the date of termination. Ms. Simosko is entitled to reimbursement of reasonable expense incurred
with her relocation to Denver, Colorado, in amount not to exceed $5,000. Ms. Simosko is entitled to participate in employee benefits.
Akerna
entered into an Employee Covenant Agreement with Ms. Simosko, which obligates Ms. Simosko from disclosing any confidential information,
including without limitation, trade secrets. The agreement also prohibits Ms. Simosko during the term of her employment and for
a period of two years after her employment from soliciting any customer, client, employee, supplier or vendor of Akerna, and rendering
any services or giving advice to any competitor or affiliate of a competitor. The agreement also requires Ms. Simosko to return
all Akerna property and disclose all work product to Akerna.
Outstanding
Equity Awards at Fiscal Year-End
A
summary of the number and the value of the outstanding equity awards as of June 30, 2020 held by the named executive officers
is set out in the table below.
|
|
Stock Awards(1)
|
|
Name
|
|
Number of Shares or Units of Stock That Have Not Vested (#)
|
|
|
Market Value of Shares or Units of Stock That Have Not Vested ($)
|
|
|
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested(#)
|
|
|
Equity
Incentive
Plan Awards:
Market or Payout
Value of Unearned
Shares,
Units or
Other Rights That
Have Not Vested ($)
|
|
(a)
|
|
(g)
|
|
|
(h)
|
|
|
(i)
|
|
|
(j)
|
|
Jessica Billingsley
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
(2)
|
|
|
88,000
|
|
Chief Executive Officer
|
|
|
—
|
|
|
|
—
|
|
|
|
19,694
|
(3)
|
|
|
83,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nina Simosko
|
|
|
—
|
|
|
|
—
|
|
|
|
125,156
|
(4)
|
|
|
1,101,373
|
|
Chief Commercial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Fowle
|
|
|
—
|
|
|
|
—
|
|
|
|
72,727
|
(5)
|
|
|
639,998
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Each
RSU represents a contingent right to receive one share of common stock of the Company.
|
(2)
|
Represents
10,000 RSUs, which vest as follows: 2,500 units shall vest on July 1, 2020, 2,500 units shall vest on July 1, 2021, 2,500
units shall vest on July 1 2022, and 2,500 units shall vest on July 1, 2023.
|
(3)
|
Represents
19,694 shares awarded at the discretion of the board of directors for performance for fiscal year 2020, with a fair market
value of $83,109. Does not include 26,023 RSUs granted during 2020, the vesting of which was contingent upon Akerna achieving
a specified total shareholder return, measured at the end of the fiscal year. This target was not achieved and as such the
RSUs will not vest.
|
(4)
|
Represents
125,156 RSUs, which vest as follows; 31,289 units shall vest on October 7, 2020, 31,289 units shall vest on October 7, 2021, 31,289
units shall of October 7, 2022, and 31,289 units shall on October 7, 2023; however, there is immediate vesting in the event of
a Change in Control (as defined in the award) and there is immediate vesting of 33% of the restricted stock units that are unvested
on the date that she is terminated without cause or by her with good reason.
|
(5)
|
Represents
72,727 RSUs, which vest as follows; 18,181 shares shall vest on December 17, 2020, 18,182 shares shall vest on December 17,
2021, 18,182 shares shall vest on December 17, 2022 and 18,182 shares shall vest on December 17, 2023.
|
Options
There
were no options granted in the fiscal year ended June 30, 2020.
Pension
Benefits
None
of our employees participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by us.
Our Compensation Committee may elect to adopt qualified or non-qualified benefit plans in the future if it determines that doing
so is in our company’s best interest.
Non-qualified
Deferred Compensation
None
of our employees participate in or have account balances in non-qualified defined contribution plans or other non-qualified deferred
compensation plans maintained by us. Our Compensation Committee may elect to provide our officers and other employees with non-qualified
defined contribution or other non-qualified compensation benefits in the future if it determines that doing so is in our company’s
best interest.
Director
Compensation
The
following table sets forth the compensation granted to our directors who are not also executive officers during the fiscal year
ended June 30, 2020. Compensation to directors that are also executive officers is detailed above and is not included on this
table.
Name
|
|
Fees
earned or paid in cash
($)
|
|
|
Stock
awards
($)
|
|
|
Option
award(1)
($)
|
|
|
Non-equity
incentive plan
compensation
($)
|
|
|
Nonqualified
deferred
compensation
earnings
($)
|
|
|
All other
compensation
($)
|
|
|
Total
($)
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
Matthew Kane
|
|
|
20,250
|
|
|
|
15,196
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,446
|
|
Mark Iwanowski
|
|
|
20,575
|
|
|
|
15,936
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
36,511
|
|
Tahira Rehmatullah
|
|
|
21,750
|
|
|
|
16,325
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38,075
|
|
Scott Sozio(1)
|
|
|
234,271
|
|
|
|
11,132
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
245,403
|
|
(1)
|
Mr.
Sozio receives compensation pursuant to his role as Head of Corporate Development and is not compensated as an independent
director.
|
Narrative
Disclosure to Director Compensation Table
Compensation
granted to our directors who are not also executive officers in fiscal year 2020 included an annual fee of $30,000 and additional
fees for service on committees of the board of directors, paid in a mix of cash and stock awards. Stock awards were granted on
October 7, 2019 and January 28, 2020 and vest 25% at the end of each fiscal quarter. Directors did not receive meeting fees in
2020.
Compensation
Policies and Practices and Risk Management
The
Compensation Committee has reviewed the design and operation of Akerna’s compensation policies and practices for all employees,
including executives, as they relate to risk management practices and risk-taking incentives. The Compensation Committee believes
that Akerna’s compensation policies and practices do not encourage unnecessary or excessive risk taking and that any risks
arising from Akerna’s compensation policies and practices for its employees are not reasonably likely to have a material
adverse effect on Akerna.
Compensation
Committee Interlocks and Insider Participation
No
member of the Compensation Committee has ever been an officer or employee of Akerna. None of Akerna’s executive officers
serve, or have served during the last fiscal year, as a member of the board of directors, compensation committee, or other board
committee performing equivalent functions of any other entity that has one or more executive officers serving as one of Akerna’s
directors or on the Compensation Committee.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth information concerning beneficial ownership of Akerna’s capital stock outstanding as of the date
of this prospectus, by: (1) each stockholder known to be the beneficial owner of more than five percent of any class of Akerna’s
voting stock then outstanding; (2) each of Akerna’s directors and nominees to serve as director; (3) each of Akerna’s
named executive officers; and (4) Akerna’s current directors and executive officers as a group.
As of January 7, 2021 there were 20,128,995
shares of common stock issued and outstanding. Each share entitles the holder thereof to one vote.
The
information regarding beneficial ownership of shares of common stock has been presented in accordance with the rules of the SEC.
Under these rules, a person may be deemed to beneficially own any shares of capital stock as to which such person, directly or
indirectly, has or shares voting power or investment power, and as to which such person has the right to acquire voting or investment
power within 60 days through the exercise of any stock option or other right. The percentage of beneficial ownership as to any
person as of a particular date is calculated by dividing (1) (i) the number of shares beneficially owned by such person plus (ii)
the number of shares as to which such person has the right to acquire voting or investment power within 60 days by (2) the total
number of shares outstanding as of such date, plus any shares that such person has the right to acquire from Akerna within 60
days. Including those shares in the tables does not, however, constitute an admission that the named stockholder is a direct or
indirect beneficial owner of those shares. Unless otherwise indicated, each person or entity named in the table has sole voting
power and investment power (or shares that power with that person’s spouse) with respect to all shares of capital stock
listed as owned by that person or entity.
|
|
Beneficial Ownership
|
|
Name and Address of Beneficial Owner(1)
|
|
Number of
Akerna
Shares of
Common Stock
|
|
|
Percentage(2)
|
|
DIRECTORS AND OFFICERS
|
|
|
|
|
|
|
Jessica Billingsley(3)
|
|
|
1,177,996
|
|
|
|
5.9
|
%
|
Matthew Kane(4)
|
|
|
263,254
|
|
|
|
1.3
|
%
|
Scott Sozio(5)
|
|
|
273,672
|
|
|
|
1.4
|
%
|
Tahira Rehmatullah(6)
|
|
|
51,307
|
|
|
|
*
|
|
Mark Iwanowski
|
|
|
3,988
|
|
|
|
*
|
|
David McCullough(7)
|
|
|
50,089
|
|
|
|
*
|
|
Ray Thompson(8)
|
|
|
42,145
|
|
|
|
*
|
|
Nina Simosko(9)
|
|
|
—
|
|
|
|
*
|
|
John Fowle(10)
|
|
|
—
|
|
|
|
*
|
|
All directors and officers as a group (nine persons)
|
|
|
1,862,451
|
|
|
|
9.4
|
%
|
|
|
|
|
|
|
|
|
|
5% STOCKHOLDERS
|
|
|
|
|
|
|
|
|
Ashesh Shah(11)
|
|
|
1,218,005
|
|
|
|
6.1
|
%
|
John X. Prentice(12)
|
|
|
1,000,657
|
|
|
|
5.0
|
%
|
|
(1)
|
Unless
otherwise noted, the address of each of the persons listed above is 1630 Welton Street, Denver, Colorado 80202.
|
|
(2)
|
The percentage is based on 20,128,995 shares of common stock
issued and outstanding as of January 7, 2021.
|
|
(3)
|
Represents 1,155,802 shares held by Jessica Billingsley Living
Trust and 22,194 vested restricted stock units held by Ms. Billingsley. Ms. Billingsley, the trustee of the Jessica Billingsley
Living Trust, has sole and dispositive power over the shares held by the Jessica Billingsley Living Trust. Does not reflect 27,500
restricted stock units issued pursuant to Akerna’s Incentive Plan, which vest as follows: 7,500 units shall vest on July
1, 2021, 7,500 units shall vest on July 1 2022, 7,500 units shall vest on July 1, 2023, and 5,000 units shall vest on July 1, 2024.
|
(4)
|
Includes
263,254 shares held by Seam Capital, LLC. Mr. Kane is a manager of Seam Capital, LLC, and as such, Mr. Kane has sole and dispositive
power of the shares held by Seam Capital, LLC. Does not reflect 1,854 restricted stock units issued pursuant to Akerna’s
Incentive Plan, which vest on December 31, 2020.
|
(5)
|
Represents
241,362 shares and warrants to acquire 32,310 common shares held by Mr. Sozio. Does not reflect 102,166 restricted stock units
issued pursuant to Akerna’s Incentive Plan, which vest as follows: 25,541 units shall vest on July 1, 2021, 25,541 units
shall vest on July 1, 2022, 25,541 units shall vest on July 1, 2023 and 25,543 units shall vest on July 1, 2024.
|
(6)
|
Represents
46,180 shares and warrants to acquire 5,127 common shares held by Ms. Rehmatullah. Does not reflect 1,992 restricted stock
units issued pursuant to Akerna’s Incentive Plan, which vest on December 31, 2020.
|
(7)
|
Does
not reflect 26,000 restricted stock units issued pursuant to Akerna’s Incentive Plan, which vest as follows; 7,000 units
shall vest on July 1, 2021, 7,000 units shall vest on July 1, 2022, 7,000 units shall on July 1, 2023 and 5,000 units shall
vest on July 1, 2024.
|
(8)
|
Of
the 42,145 shares issued to Mr. Thompson: 20,037 are subject to the terms of a restricted stock agreement and vest as follows:
6,679 shares shall vest on January 1, 2021, 6,679 shares shall vest on January 1, 2022 and 6,679 shares shall vest on January
1, 2023. Does not include 66,287 restricted stock units issued pursuant to Akerna’s Incentive Plan, which vest as follows:
12,929 units shall vest on January 1, 2021, 7,500 units shall vest on July 1, 2021, 12,929 units shall vest on January 1,
2022, 7,500 units shall vest on July 1, 2022, 12,929 units shall vest on January 1, 2023, 7,500 units shall vest on July 1,
2023 and 5,000 units shall vest on July 1, 2024.
|
(9)
|
Does
not reflect 125,156 restricted stock units issued pursuant to Akerna’s Incentive Plan, which vest as follows; 31,289
units shall vest on October 7, 2020, 31,289 units shall vest on October 7, 2021, 31,289 units shall of October 7, 2022, and
31,289 units shall on October 7, 2023; however, there is immediate vesting in the event of a Change in Control (as defined
in the award) and there is immediate vesting of 33% of the restricted stock units that are unvested on the date that Ms. Simosko
is terminated without cause or by Ms. Simosko with good reason.
|
(10)
|
Does
not reflect 72,727 restricted stock units issued pursuant to Akerna’s Incentive Plan, which vest as follows; 18,181
shares shall vest on December 17, 2020, 18,182 shares shall vest on December 17, 2021, 18,182 shares shall vest on December
17, 2022 and 18,182 shares shall vest on December 17, 2023.
|
(11)
|
Includes
676,186 shares held by ACS Pedersen LLC (d/b/a The London Fund SPV 10, LLC) and 97,639 shares held by Heath Hill Syndicate
SPV 2, LLC. Of these shares, 76,294 are subject to the terms of an escrow agreement. Ashesh C. Shah and Palle Pedersen are
the managing members of ACS Pedersen LLC and as such, Messrs. Shah and Pedersen have shared voting and dispositive power over
the shares held by ACS Pedersen LLC. The address for Mr. Shah is 12 Heath Hill, Chestnut Hill, MA 02445.
|
(12)
|
Includes
998,037 Exchangeable Shares issued by Akerna’s wholly owned subsidiary, Akerna Canada Ample Exchange, Inc. The Exchangeable
Shares may be exchanged on a one-for-one basis into shares of Akerna common stock. These shares are subject to the terms of
an escrow agreement that may result in an increase or decrease in the number of Exchangeable Shares ultimately issued to Mr.
Prentice. Also, includes options to acquire 2,620 shares of Akerna common stock issued pursuant to Akerna’s Incentive
Plan. The address for Mr. Prentice is 14A Bingham Ave., Toronto, ON M4E 3P9.
|
Change
in Control
We
are not aware of any arrangement that might result in a change in control in the future. We have no knowledge of any arrangements,
including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in Akerna’s
control.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Employment
of Scott Sozio
In
July 2019, we hired Mr. Scott Sozio, at will, to serve as our Head of Corporate Development. Mr. Sozio receives an annual base
salary of $150,000, which is to be credited against certain variable bonus compensation to be paid in a combination of cash and
equity pursuant to the Incentive Plan once every twelve-month period. The terms of such bonus payment include the payment of 1%
of the transaction value of acquisition transactions completed by Akerna, payable one-half as cash compensation and one-half in
restricted stock units of Akerna.
In
April 2020, Mr. Sozio was granted 1,230 restricted stock units of the Akerna under our 2019 Equity Incentive Plan in relation
to the closing of our acquisition of Trellis, which vested immediately. In August of 2020, Mr. Sozio’s compensation was
restructured and he was granted 92,166 restricted stock units, which vest one quarter each year beginning on July 1, 2021. In
September 2020, Mr. Sozio was granted 10,000 restricted stock units as part of our annual employee grants, which vest one quarter
each year beginning on July 1, 2021 and 38,527 restricted stock units in connection with the closing of our acquisition of Ample,
which vested immediately.
TechMagic
During
the fiscal year ended June 30, 2020, we have been invoiced through our wholly-owned subsidiary Solo by TechMagic USA LLC, a Massachusetts
limited liability, in an amount of approximately $657,000. When we acquired Solo in January 2020, there was an open balance payable
to TechMagic of approximately $265,000. Subsequently, during the remainder of our fiscal year ended June 30, 2020, we received
invoices totaling an aggregate additional amount of approximately $392,000. After our year ended June 30, 2020, through to the
date hereof, we have received invoices totaling an aggregate amount of approximately $375,000. Currently, there are outstanding
invoices totaling approximately $767,000. The invoices set forth services that TechMagic USA LLC purports to have provided to
Solo regarding development of mobile software applications for MJF and Solo between March and November 2020. Mr. Ashesh Shah,
formerly the president of Solo and currently the beneficial holder of 6.2% of our issued and outstanding shares of common stock
is, to our knowledge, the founder and one of the principal managers of TechMagic USA LLC. The invoices state that the services
were rendered pursuant to the terms of an agreement regarding the development of mobile software products for Solo, entered into
between Solo and TechMagic at a time when Mr. Shah was a principal at both entities. On December 4, 2020, TechMagic filed suit
against Solo in Massachusetts Superior Court seeking recovery of up to approximately $1.07 million. See “Legal Proceedings” above
for more information regarding the lawsuit.
Indemnification
Akerna’s
amended and restated certificate of incorporation contains provisions limiting the liability of directors, and its amended and
restated bylaws provides that it will indemnify the directors and executive officers to the fullest extent permitted under Delaware
law. Akerna’s amended and restated certificate of incorporation and bylaws also provides the board of directors with discretion
to indemnify the other officers, employees, and agents when determined appropriate by the board of directors. In addition, Akerna
entered into an indemnification agreement with each of its directors and executive officers, which requires it to indemnify them.
Related
Person Transactions Policy and Procedure
Akerna’s
Code of Ethics requires it to avoid, wherever possible, all related party transactions that could result in actual or potential
conflicts of interests, except under guidelines approved by the Board (or the audit committee). Related-party transactions are
defined as transactions in which (1) the aggregate amount involved will or may be expected to exceed $120,000 in any calendar
year, (2) Akerna or any of its subsidiaries is a participant, and (3) any (a) executive officer, director or nominee for election
as a director, (b) greater than 5% beneficial owner of Akerna’s shares of common stock, or (c) immediate family member,
of the persons referred to in clauses (a) and (b), has or will have a direct or indirect material interest (other than solely
as a result of being a director or a less than 10% beneficial owner of another entity). A conflict of interest situation can arise
when a person takes actions or has interests that may make it difficult to perform his or her work objectively and effectively.
Conflicts of interest may also arise if a person, or a member of his or her family, receives improper personal benefits as a result
of his or her position.
Ours
audit committee, pursuant to its written charter, is responsible for reviewing and approving related-party transactions to the
extent we enter into such transactions. The audit committee will consider all relevant factors when determining whether to approve
a related party transaction, including whether the related party transaction is on terms no less favorable to us than terms generally
available from an unaffiliated third-party under the same or similar circumstances and the extent of the related party’s
interest in the transaction.
Director
Independence
The
Board evaluates the independence of each nominee for election as a director of our Company in accordance with the Listing Rules
(the “Nasdaq Listing Rules”) of the Nasdaq Stock Market LLC (“Nasdaq”). Pursuant to these rules,
a majority of our Board must be “independent directors” within the meaning of the Nasdaq Listing Rules, and all directors
who sit on our Audit Committee, Nominating Committee and Compensation Committee must also be independent directors.
The
Nasdaq definition of “independence” includes a series of objective tests, such as the director or director nominee
is not, and was not during the last three years, an employee of Akerna or our subsidiaries and has not received certain payments
from, or engaged in various types of business dealings with us. In addition, as further required by the Nasdaq Listing Rules,
the Board has made a subjective determination as to each independent director that no relationships exist, which, in the opinion
of the Board, would interfere with such individual’s exercise of independent judgment in carrying out his or her responsibilities
as a director. In making these determinations, the Board reviewed and discussed information provided by the directors with
regard to each director’s business and personal activities as they may relate to Company and its management.
As
a result, the Board has affirmatively determined that each of Matthew R. Kane, Tahira Rehmatullah, and Mark Iwanowski are independent
in accordance with the Nasdaq listing rules. The Board has also affirmatively determined that all members of our Audit Committee,
Nominating Committee and Compensation Committee are independent directors.
CERTAIN
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The
following is a general discussion of certain material U.S. federal income tax considerations relating to the purchase, ownership
and disposition of our common stock. This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended
(the “Internal Revenue Code”), existing and proposed U.S. Treasury Regulations promulgated or proposed thereunder
and current administrative and judicial interpretations thereof, all as in effect as of the date of this prospectus and all of
which are subject to change or to differing interpretation, possibly with retroactive effect. We have not sought and will not
seek any rulings from the Internal Revenue Service (the “IRS”), or opinion of counsel, regarding the matters discussed
below. There can be no assurance that the IRS or a court will not take a contrary position.
This
discussion is limited to U.S. holders and non-U.S. holders who hold our common stock as a capital asset within the meaning of
Section 1221 of the Internal Revenue Code (generally, as property held for investment). This discussion does not address
all aspects of U.S. federal income taxation, such as the U.S. alternative minimum income tax and the additional tax on net investment
income, nor does it address any aspect of state, local or non-U.S. taxes, or U.S. federal taxes other than income taxes, such
as federal estate and gift taxes. Except as provided below, this summary does not address tax reporting requirements. This discussion
does not consider any specific facts or circumstances that may apply to a holder and does not address the special tax considerations
that may be applicable to particular holders, such as:
|
●
|
tax-exempt
organizations;
|
|
●
|
banks
or other financial institutions;
|
|
●
|
brokers
or dealers in securities or foreign currency;
|
|
●
|
traders
in securities who elect to apply a mark-to-market method of accounting;
|
|
●
|
real
estate investment trusts, regulated investment companies or mutual funds;
|
|
●
|
controlled
foreign corporations;
|
|
●
|
passive
foreign investment companies;
|
|
●
|
persons
that own (directly, indirectly or constructively) more than 5% of the total voting power or total value of our common stock;
|
|
●
|
corporations
that accumulate earnings to avoid U.S. federal income tax;
|
|
●
|
certain
former citizens or long-term residents of the United States;
|
|
●
|
persons
that have a “functional currency” other than the U.S. dollar;
|
|
●
|
persons
that acquire our common stock as compensation for services;
|
|
●
|
owners
that hold our stock as part of a straddle, hedge, conversion transaction, synthetic security or other integrated investment;
|
|
●
|
holders
subject to special accounting rules;
|
|
●
|
partnerships
or other entities treated as partnerships for U.S. federal income tax purposes.
|
If
any entity taxable as a partnership for U.S. federal income tax purposes holds our common stock, the U.S. federal income tax treatment
of a partner in the partnership generally will depend on the status of the partner, the activities of the partnership and certain
determinations made at the partner level. A partner in a partnership or other pass-through entity that holds our common stock
should consult his, her or its own tax advisor regarding the applicable tax consequences.
For
purposes of this discussion, the term “U.S. holder” means a beneficial owner of our common stock that is, for U.S.
federal income tax purposes:
|
●
|
an
individual who is a citizen or resident of the United States;
|
|
●
|
a
corporation created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
|
|
●
|
an
estate the income of which is subject to U.S. federal income taxation regardless of its source; or
|
|
●
|
a
trust, if (1) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more
U.S. persons have authority to control all substantial decisions of the trust or (2) the trust has a valid election to
be treated as a U.S. person under applicable U.S. Treasury Regulations.
|
A
“non-U.S. holder” is a beneficial owner of our common stock that is neither a U.S. holder nor a partnership (or other
entity treated as a partnership for U.S. federal income tax purposes).
Prospective
investors should consult their own tax advisors regarding the U.S. federal, state, local and non-U.S. income and other tax considerations
of the purchase, ownership and disposition of our common stock.
U.S.
Holders
Distributions
on Common Stock
If
we pay distributions of cash or property with respect to our common stock, those distributions generally will constitute dividends
for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under
U.S. federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits, the excess will
be treated as a tax-free return of the U.S. holder’s investment, up to such holder’s adjusted tax basis in its shares
of our common stock. Any remaining excess will be treated as capital gain, subject to the tax treatment described below under
the heading “U.S. Holders—Gain on Sale, Exchange or Other Taxable Disposition.”
Dividends
we pay to a U.S. holder that is a taxable corporation generally will qualify for the dividends received deduction if the requisite
holding period is satisfied. With certain exceptions (including, but not limited to, dividends treated as investment income for
purposes of investment interest deduction limitations), and provided certain holding period requirements are met, dividends we
pay to a non-corporate U.S. holder generally will constitute “qualified dividends” that will be subject to tax at
the maximum tax rate accorded to long-term capital gains.
Gain
on Sale, Exchange or Other Taxable Disposition
Upon
the sale or other taxable disposition of common shares, a U.S. holder generally will recognize capital gain or loss in an amount
equal to the difference between (a) the amount of cash plus the fair market value of any property received and (b) such
U.S. holder’s tax basis in such common shares sold or otherwise disposed of. Such gain or loss generally will be long-term
capital gain or loss if, at the time of the sale or other disposition, the common shares have been held by the U.S. holder for
more than one year. Preferential tax rates may apply to long-term capital gain of a U.S. holder that is an individual, estate,
or trust. Deductions for capital losses are subject to significant limitations.
Non-U.S.
Holders
Distributions
on Common Stock
If
we pay distributions of cash or property with respect to our common stock, those distributions generally will constitute dividends
for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under
U.S. federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits, the excess will
be treated as a tax-free return of the non-U.S. holder’s investment, up to such holder’s tax basis in its shares of
our common stock. Any remaining excess will be treated as capital gain, subject to the tax treatment described below under the
heading “Non-U.S. Holders —Gain on Sale, Exchange or Other Taxable Disposition.” Dividends paid to a non-U.S.
holder generally will be subject to withholding of U.S. federal income tax at a 30% rate, or such lower rate as may be specified
by an applicable income tax treaty between the United States and such holder’s country of residence. In the case of any
constructive distribution, it is possible that this tax would be withheld from any amount owed to the non-U.S. holder, including,
but not limited to, distributions of cash, common stock or sales proceeds subsequently paid or credited to that holder. If we
are unable to determine, at the time of payment of a distribution, whether the distribution will constitute a dividend, we may
nonetheless choose to withhold any U.S. federal income tax on the distribution as permitted by U.S. Treasury Regulations.
Distributions
that are treated as effectively connected with a trade or business conducted by a non-U.S. holder within the United States are
generally not subject to the 30% withholding tax if the non-U.S. holder provides a properly executed IRS Form W-8ECI stating
that the distributions are not subject to withholding because they are effectively connected with the non-U.S. holder’s
conduct of a trade or business in the United States. If a non-U.S. holder is engaged in a trade or business in the United States
and the distribution is effectively connected with the conduct of that trade or business, the distribution will generally have
the consequences described above for a U.S. holder (subject to any modification provided under an applicable income tax treaty).
Any U.S. effectively connected income received by a non-U.S. holder that is treated as a corporation for U.S. federal income tax
purposes may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate (or
such lower rate as may be specified by an applicable income tax treaty).
A
non-U.S. holder who claims the benefit of an applicable income tax treaty between the United States and such holder’s country
of residence generally will be required to provide a properly executed IRS Form W-8BEN or W-8BEN-E, as applicable, and satisfy
applicable certification and other requirements. A non-U.S. holder that is eligible for a reduced rate of U.S. withholding tax
under an income tax treaty generally may obtain a refund or credit of any excess amounts withheld by timely filing an appropriate
claim with the IRS. Non-U.S. holders should consult their own tax advisors regarding their entitlement to benefits under a relevant
income tax treaty.
Gain
on Sale, Exchange or Other Taxable Disposition
Subject
to the discussions below in “—Information Reporting and Backup Withholding” and “—Foreign Account
Tax Compliance Act,” a non-U.S. holder generally will not be subject to U.S. federal income tax on gain recognized
on a sale, exchange or other taxable disposition of our common stock unless:
|
●
|
the
gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States and, if
an applicable income tax treaty so provides, the gain is attributable to a permanent establishment maintained by the non-U.S.
holder in the United States; in these cases, the non-U.S. holder will be taxed on a net income basis at the regular graduated
rates and in the manner applicable to a U.S. holder, and, if the non-U.S. holder is a corporation, an additional branch profits
tax at a rate of 30%, or a lower rate as may be specified by an applicable income tax treaty, may also apply;
|
|
●
|
the
non-U.S. holder is an individual present in the United States for 183 days or more in the taxable year of the disposition
and certain other conditions are met, in which case the non-U.S. holder will be subject to a 30% tax (or such lower rate as
may be specified by an applicable income tax treaty) on the amount by which such non-U.S. holder’s capital gains allocable
to U.S. sources exceed capital losses allocable to U.S. sources during the taxable year of the disposition; or
|
|
●
|
our
common stock constitutes “U.S. real property interests” by reason of our being or having been a “U.S. real
property holding corporation” during the shorter of the five-year period ending on the date of the disposition or the
period that the non-U.S. holder held our common stock. Generally, a domestic corporation is a “U.S. real property holding
corporation” if the fair market value of its “U.S. real property interests” (within the meaning of the Internal
Revenue Code) equals or exceeds 50% of the sum of the fair market value of its U.S. and worldwide real property interests
plus its other assets used or held for use in a trade or business. We believe that we are not currently, and we do not anticipate
becoming, a “U.S. real property holding corporation” for U.S. federal income tax purposes. However, because the
determination of whether we are a U.S. real property holding corporation depends on the fair market value of our U.S. real
property interests relative to the fair market value of our U.S. and worldwide real property interests plus our other assets
used or held for use in a trade or business, there can be no assurance that we will not become a U.S. real property holding
corporation in the future. Even if we become a U.S. real property holding corporation, as long as our common stock is regularly
traded on an established securities market under the rules set forth in the Treasury Regulations, common stock held by a non-U.S.
holder will be treated as U.S. real property interests only if such non-U.S. holder actually (directly or indirectly) or constructively
holds more than five percent of the total voting power or total value of such regularly traded common stock at any time during
the shorter of the five-year period preceding such non-U.S. holder’s disposition of, or holding period for, our common
stock.
|
Information
Reporting and Backup Withholding
Distributions
on, and the payment of the proceeds of a disposition of, our common stock generally will be subject to information reporting if
made within the United States or through certain U.S.-related financial intermediaries. Information returns are required to be
filed with the IRS and copies of information returns may be made available to the tax authorities of the country in which a holder
resides or is incorporated under the provisions of a specific treaty or agreement.
Backup
withholding may also apply if the holder fails to provide certification of exempt status or a correct U.S. taxpayer identification
number and otherwise comply with the applicable backup withholding requirements. Generally, a holder will not be subject to backup
withholding if it provides a properly completed and executed IRS Form W-9 or appropriate IRS Form W-8, as applicable.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be refunded or credited against
the holder’s U.S. federal income tax liability, if any, provided certain information is timely filed with the IRS.
Foreign
Account Tax Compliance Act
Sections
1471 through 1474 of the Code (commonly referred to as “FATCA”) impose a separate reporting regime and potentially
a 30% withholding tax on certain payments, including payments of dividends on our common shares. Withholding under FATCA generally
applies to payments made to or through a foreign entity if such entity fails to satisfy certain disclosure and reporting rules.
These rules generally require (i) in the case of a foreign financial institution, that the financial institution agree to identify
and provide information in respect of financial accounts held (directly or indirectly) by U.S. persons and U.S.-owned entities,
and, in certain instances, to withhold on payments to account holders that fail to provide the required information, and (ii)
in the case of a non-financial foreign entity, that the entity either identify and provide information in respect of its substantial
U.S. owners or certify that it has no such U.S. owners.
FATCA
withholding also potentially applies to payments of gross proceeds from the sale or other disposition of our common shares. Proposed
regulations, however, would eliminate FATCA withholding on such payments, and the U.S. Treasury Department has indicated that
taxpayers may rely on this aspect of the proposed regulations until final regulations are issued.
Non-U.S.
Holders typically will be required to furnish certifications (generally on the applicable IRS Form W-8) or other documentation
to provide the information required by FATCA or to establish compliance with or an exemption from withholding under FATCA. FATCA
withholding may apply where payments are made through a non-U.S. intermediary that is not FATCA compliant, even where the Non-U.S.
Holder satisfies the holder’s own FATCA obligations.
The
United States and a number of other jurisdictions have entered into intergovernmental agreements to facilitate the implementation
of FATCA. Any applicable intergovernmental agreement may alter one or more of the FATCA information reporting and withholding
requirements. You are encouraged to consult with your own tax advisor regarding the possible implications of FATCA on your investment
in our common shares, including the applicability of any intergovernmental agreements.
PLAN
OF DISTRIBUTION
The
common stock offered under this Prospectus will be issued in exchange for Exchangeable Shares. No broker, dealer or underwriter
has been engaged in connection with soliciting the exchange and no commission or other compensation will be paid to any person
in connection with the solicitation of the exchange. Exchangeco issued the Exchangeable Shares to shareholders of Ample, on July
7, 2020. The shareholders of Ample received the Exchangeable Shares in connection with the arrangement by and between Ample, Exchangeco
and Akerna under a plan of arrangement in accordance with Section 182 of the Business Corporations Act (Ontario).
The Ontario Superior Court of Justice issued a final order approving the plan of arrangement on June 30, 2020. The Exchangeable
Shares were issued pursuant to Section 3(a)(10) of the Securities Act, based on the final order of the Ontario Superior Court
of Justice.
THE
SEC’S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our
directors and officers are indemnified to the fullest extent permitted under Delaware law. We have purchased and do maintain insurance,
which protects our officers and directors against any liabilities incurred in connection with their service in such a capacity.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the foregoing, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person
of ours in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
EXPERTS
The
consolidated financial statements of Akerna as of June 30, 2020 and 2019 and for each of the two years in the period ended June
30, 2020 included elsewhere in this prospectus, have been audited by Marcum LLP, independent registered public accounting firm,
as set forth in their report thereon, and are included in reliance upon such report given on the authority of such firm as experts
in accounting and auditing.
The
financial statements of Solo as of December 31, 2019 and 2018 and for years then ended included elsewhere in this prospectus,
have been audited by Marcum LLP, independent auditors, as set forth in their report thereon, and are included in reliance upon
such report given on the authority of such firm as experts in accounting and auditing.
The
consolidated financial statements of Ample as of December 31, 2019 and 2018 and for years then ended included in this prospectus,
have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon, which report includes
an explanatory paragraph as to the ability of Ample to continue as a going concern as described in Note 1 to the financial statements,
and are included in reliance on such report given upon such firm as experts in accounting and auditing.
LEGAL
MATTERS
The
validity of the securities offered hereby will be passed upon for Akerna by Dorsey & Whitney LLP.
WHERE
YOU CAN FIND MORE INFORMATION
We
have filed with the SEC a registration statement on Form S-1 under the Securities Act relating to the offering of these securities.
The registration statement, including the attached exhibits and schedules, contains additional relevant information about us and
the securities. This prospectus does not contain all of the information set forth in the registration statement and the exhibits
and schedules thereto. For further information respecting our company and the shares offered by this prospectus, you should refer
to the registration statement, including the exhibits and schedules thereto.
We
file annual, quarterly and other reports, proxy statements and other information with the SEC. Our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, including any amendments to those reports, and other information
that we file with or furnish to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act can be accessed free of charge
through the Internet. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC at http://www.sec.gov. You may access the registration statement of which
this prospectus is a part at the SEC’s Internet site.
INDEX
TO AKERNA’S FINANCIAL STATEMENTS
AKERNA
CORP.
Condensed
Consolidated Balance Sheets
(unaudited)
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2020
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
14,257,858
|
|
|
$
|
24,155,828
|
|
Restricted cash
|
|
|
500,000
|
|
|
|
500,000
|
|
Accounts receivable, net
|
|
|
2,799,225
|
|
|
|
1,861,534
|
|
Prepaid expenses and other current assets
|
|
|
1,475,613
|
|
|
|
1,215,341
|
|
Total current assets
|
|
|
19,032,696
|
|
|
|
27,732,703
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
1,395,690
|
|
|
|
131,095
|
|
Investment, net
|
|
|
244,774
|
|
|
|
246,308
|
|
Capitalized software, net
|
|
|
3,389,646
|
|
|
|
2,629,304
|
|
Intangible assets, net
|
|
|
10,730,021
|
|
|
|
7,493,975
|
|
Goodwill
|
|
|
46,500,030
|
|
|
|
20,254,309
|
|
Other non-current assets
|
|
|
41,925
|
|
|
|
41,925
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
81,334,782
|
|
|
$
|
58,529,619
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
5,998,001
|
|
|
$
|
4,861,928
|
|
Contingent consideration payable
|
|
|
817,000
|
|
|
|
389,000
|
|
Deferred revenue
|
|
|
1,170,625
|
|
|
|
368,685
|
|
Current portion of long-term debt
|
|
|
10,146,001
|
|
|
|
6,135,364
|
|
Total current liabilities
|
|
|
18,131,627
|
|
|
|
11,754,977
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
5,481,599
|
|
|
|
10,200,236
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
23,613,226
|
|
|
|
21,955,213
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.0001; 4,999,999 shares authorized, none are issued and outstanding at September 30, 2020 and 5,000,000 shares authorized and none are issued and outstanding at June 30, 2020
|
|
|
—
|
|
|
|
—
|
|
Special voting preferred stock, par value $0.0001; 1 share authorized, issued and outstanding as of September 30, 2020, with $1.00 preference in liquidation and none authorized, issued and outstanding as of June 30, 2020; exchangeable shares, no par value, 2,667,349 shares issued and outstanding as of September 30, 2020, and none as of June 30, 2020 (See Note 3)
|
|
|
20,405,219
|
|
|
|
—
|
|
Common stock, par value $0.0001; 75,000,000 shares authorized, 14,685,932 issued and outstanding at September 30, 2020, and 13,258,707 shares issued and outstanding at June 30, 2020
|
|
|
1,464
|
|
|
|
1,321
|
|
Additional paid-in capital
|
|
|
83,164,840
|
|
|
|
72,906,924
|
|
Accumulated other comprehensive (loss) income
|
|
|
(7,000
|
)
|
|
|
63,000
|
|
Accumulated deficit
|
|
|
(45,842,967
|
)
|
|
|
(41,101,091
|
)
|
Total stockholders’ equity
|
|
$
|
57,721,556
|
|
|
$
|
31,870,154
|
|
Noncontrolling interests in consolidated subsidiary
|
|
|
—
|
|
|
|
4,704,252
|
|
Total equity
|
|
|
57,721,556
|
|
|
|
36,574,406
|
|
Total liabilities and equity
|
|
$
|
81,334,782
|
|
|
$
|
58,529,619
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
AKERNA
CORP.
Condensed
Consolidated Statements of Operations
(unaudited)
|
|
For the Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
|
|
|
|
|
Software
|
|
$
|
3,154,442
|
|
|
$
|
2,254,480
|
|
Consulting
|
|
|
331,080
|
|
|
|
831,363
|
|
Other
|
|
|
228,482
|
|
|
|
107,047
|
|
Total revenues
|
|
|
3,714,004
|
|
|
|
3,192,890
|
|
Cost of revenues
|
|
|
1,739,937
|
|
|
|
1,379,701
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,974,067
|
|
|
|
1,813,189
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Product development
|
|
|
1,758,826
|
|
|
|
610,902
|
|
Sales and marketing
|
|
|
2,097,502
|
|
|
|
1,841,514
|
|
General and administrative
|
|
|
2,470,187
|
|
|
|
1,742,301
|
|
Depreciation and amortization
|
|
|
1,171,022
|
|
|
|
17,899
|
|
Total operating expenses
|
|
|
7,497,537
|
|
|
|
4,212,616
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,523,470
|
)
|
|
|
(2,399,427
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest (expense), net
|
|
|
(3,687
|
)
|
|
|
73,382
|
|
Change in fair value of Convertible Notes
|
|
|
778,000
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
(287
|
)
|
Total other income (expense)
|
|
|
774,313
|
|
|
|
73,095
|
|
|
|
|
|
|
|
|
|
|
Net loss before income tax expense
|
|
|
(4,749,157
|
)
|
|
|
(2,326,332
|
)
|
|
|
|
|
|
|
|
|
|
Equity in losses of investee
|
|
|
(1,534
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,750,691
|
)
|
|
|
(2,326,332
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interest in consolidated subsidiary
|
|
|
8,815
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Akerna shareholders
|
|
$
|
(4,741,876
|
)
|
|
$
|
(2,326,332
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common stock outstanding
|
|
|
14,058,412
|
|
|
|
10,879,112
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.34
|
)
|
|
$
|
(0.21
|
)
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
Condensed
Consolidated Statements of Comprehensive Loss
For
the Three Months Ended September 30, 2020 and 2019
(unaudited)
|
|
2020
|
|
|
2019
|
|
Net loss
|
|
$
|
(4,750,691
|
)
|
|
$
|
(2,326,332
|
)
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
Unrealized loss on Convertible Notes
|
|
|
(70,000
|
)
|
|
|
—
|
|
Comprehensive loss
|
|
|
(4,820,691
|
)
|
|
|
(2,326,332
|
)
|
Comprehensive loss attributable to the noncontrolling interest
|
|
|
8,815
|
|
|
|
—
|
|
Comprehensive loss attributable to Akerna shareholders
|
|
$
|
(4,811,876
|
)
|
|
$
|
(2,326,332
|
)
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
AKERNA
CORP.
Condensed
Consolidated Statements of Changes in Equity (unaudited)
For
the Three Months Ended September 30, 2020
|
|
Special
Voting Preferred
|
|
|
Common
|
|
|
Additional
Paid-In
|
|
|
Accumulated
Other Comprehensive
|
|
|
Accumulated
|
|
|
Akerna
Shareholders’
|
|
|
Noncontrolling
Interests in Consolidated
|
|
|
Total
|
|
|
|
Stock
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Equity
|
|
|
Subsidiary
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
– July 1, 2020
|
|
$
|
—
|
|
|
|
13,203,806
|
|
|
$
|
1,321
|
|
|
$
|
72,906,924
|
|
|
$
|
63,000
|
|
|
$
|
(41,101,091
|
)
|
|
$
|
31,870,154
|
|
|
$
|
4,704,252
|
|
|
$
|
36,574,406
|
|
Special
voting preferred stock issued in business combination
|
|
|
25,203,490
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,203,490
|
|
|
|
—
|
|
|
|
25,203,490
|
|
Conversion
of Exchangeable Shares to common stock
|
|
|
(4,798,271
|
)
|
|
|
627,225
|
|
|
|
63
|
|
|
|
4,798,208
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Acquisition
of noncontrolling interest
|
|
|
—
|
|
|
|
800,000
|
|
|
|
80
|
|
|
|
4,695,357
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,695,437
|
|
|
|
(4,695,437
|
)
|
|
|
—
|
|
Amortization
of stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
764,351
|
|
|
|
—
|
|
|
|
—
|
|
|
|
764,351
|
|
|
|
—
|
|
|
|
764,351
|
|
Restricted
stock unit vesting
|
|
|
—
|
|
|
|
3,025
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Change
in fair value of convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(70,000
|
)
|
|
|
—
|
|
|
|
(70,000
|
)
|
|
|
—
|
|
|
|
(70,000
|
)
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,741,876
|
)
|
|
|
(4,741,876
|
)
|
|
|
(8,815
|
)
|
|
|
(4,750,691
|
)
|
Balance
– September 30, 2020
|
|
$
|
20,405,219
|
|
|
|
14,634,056
|
|
|
$
|
1,464
|
|
|
$
|
83,164,840
|
|
|
$
|
(7,000
|
)
|
|
$
|
(45,842,967
|
)
|
|
$
|
57,721,556
|
|
|
$
|
—
|
|
|
$
|
57,721,556
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
AKERNA
CORP.
Condensed
Consolidated Statements of Changes in Equity (unaudited)
For
the Three Months Ended September 30, 2019
|
|
Special
Voting Preferred
|
|
|
Common
|
|
|
Additional
Paid-In
|
|
|
Accumulated
Other Comprehensive
|
|
|
Accumulated
|
|
|
Akerna
Shareholders’
|
|
|
Noncontrolling
Interests in Consolidated
|
|
|
Total
|
|
|
|
Stock
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Equity
|
|
|
Subsidiary
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
– July 1, 2019
|
|
$
|
—
|
|
|
|
10,589,746
|
|
|
$
|
1,059
|
|
|
$
|
47,325,421
|
|
|
$
|
—
|
|
|
$
|
(25,566,746
|
)
|
|
$
|
21,759,734
|
|
|
$
|
—
|
|
|
$
|
21,759,734
|
|
Amortization
of stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
161,165
|
|
|
|
—
|
|
|
|
—
|
|
|
|
161,165
|
|
|
|
—
|
|
|
|
161,165
|
|
Cash
received in connection with exercise of warrants
|
|
|
—
|
|
|
|
368,910
|
|
|
|
37
|
|
|
|
4,242,417
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,242,454
|
|
|
|
—
|
|
|
|
4,242,454
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,326,332
|
)
|
|
|
(2,326,332
|
)
|
|
|
—
|
|
|
|
(2,326,332
|
)
|
Balance
– September 30, 2019
|
|
$
|
—
|
|
|
|
10,958,656
|
|
|
$
|
1,096
|
|
|
$
|
51,729,003
|
|
|
$
|
—
|
|
|
$
|
(27,893,078
|
)
|
|
$
|
23,837,021
|
|
|
$
|
—
|
|
|
$
|
23,837,021
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
AKERNA
CORP.
Condensed
Consolidated Statements of Cash Flows
(unaudited)
|
|
For the Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,750,691
|
)
|
|
$
|
(2,326,332
|
)
|
Adjustment to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Equity in losses of investment
|
|
|
1,534
|
|
|
|
—
|
|
Bad debt
|
|
|
12,450
|
|
|
|
252,809
|
|
Stock-based compensation expense
|
|
|
681,419
|
|
|
|
161,165
|
|
Depreciation and amortization
|
|
|
1,171,022
|
|
|
|
17,899
|
|
Foreign currency loss
|
|
|
4,901
|
|
|
|
—
|
|
Change in fair value of convertible notes
|
|
|
(778,000
|
)
|
|
|
—
|
|
Change in fair value of contingent consideration
|
|
|
(389,000
|
)
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(9,298
|
)
|
|
|
(1,508,217
|
)
|
Prepaid expenses and other current assets
|
|
|
(74,023
|
)
|
|
|
(292,272
|
)
|
Accounts payable and accrued liabilities
|
|
|
(296,802
|
)
|
|
|
274,566
|
|
Deferred revenue
|
|
|
245,329
|
|
|
|
278,208
|
|
Net cash used in operating activities
|
|
|
(4,181,159
|
)
|
|
|
(3,142,174
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Developed software additions
|
|
|
(624,863
|
)
|
|
|
(519,739
|
)
|
Furniture, fixtures, and equipment additions
|
|
|
(12,203
|
)
|
|
|
—
|
|
Cash paid for business combination, net of cash acquired
|
|
|
(5,067,740
|
)
|
|
|
—
|
|
Net cash used in investing activities
|
|
|
(5,704,806
|
)
|
|
|
(519,739
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Cash paid for deferred stock offering costs
|
|
|
(12,668
|
)
|
|
|
—
|
|
Cash received in connection with exercise of warrants
|
|
|
—
|
|
|
|
4,242,454
|
|
Net cash (used in) provided by financing activities
|
|
|
(12,668
|
)
|
|
|
4,242,454
|
|
Effect of exchange rate changes on cash and restricted cash
|
|
|
663
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and restricted cash
|
|
|
(9,897,970
|
)
|
|
|
580,541
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash - beginning of period
|
|
|
24,655,828
|
|
|
|
22,367,289
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash - end of period
|
|
$
|
14,757,858
|
|
|
$
|
22,947,830
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
|
—
|
|
|
|
1,974
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of non-cash investing and financing activity:
|
|
|
|
|
|
|
|
|
Capitalized software included in accrued expense
|
|
|
807,218
|
|
|
|
—
|
|
Acquisition of noncontrolling interest
|
|
|
4,695,437
|
|
|
|
—
|
|
Special voting preferred stock issued in business combination
|
|
|
25,203,490
|
|
|
|
—
|
|
Conversion of exchangeable shares to common stock
|
|
|
4,798,271
|
|
|
|
—
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
AKERNA
CORP.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1 - Description of Business, Liquidity and Capital Resources
Description
of Business
Akerna
Corp., herein referred to as we, our or Akerna, through our wholly owned subsidiaries MJ Freeway, LLC, or MJF, Trellis Solutions,
Inc., or Trellis, Ample Organics, Inc, or Ample, 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 laws. We provide our commercial software platforms, MJ Platform®, Ample and Trellis® to
state- or federally-licensed businesses, and our regulatory software platform, Leaf Data Systems®, to state government
regulatory agencies. Through Solo, we provide an innovative, next-generation solution for state and national governments
to securely track product and waste throughout the supply chain with solo*TAG™. The integration of MJ Platform®
and solo*CODE™ results in technology for consumers and brands that brings a consumer-facing mark designed
to highlight 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 our expanding their cannabis business operations or
are interested in data consulting engagements with respect to the legal cannabis industry. Our consulting 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 who are seeking consultation on newly introduced licensing regimes and assistance with the regulatory
compliant build-out of operations.
Fiscal
Year-End
On
September 25, 2020, our Board of Directors adopted resolutions to change our fiscal year-end from June 30 to December 31, effective
for the year ending December 31, 2020. We will cover the transition period from July 1, 2020 to December 31, 2020 by filing an
Annual Report on Form 10-K for the transition year ending December 31, 2020.
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. During the three months ended September 30, 2020, we incurred a loss from operations of $5.5 million
and used cash in operations of $4.2 million. As of September 30, 2020, we had cash of $14.3 million, excluding restricted
cash, and working capital of $0.9 million.
During
the quarter ended September 30, 2020, the Company incurred a number of one-time, non-recurring expenses of approximately $1.1
million. These expenses include business combination expenses, restructuring and other non-recurring charges. Additionally,
on October 30, 2020, we closed on the public offering of 5 million shares of common stock with proceeds of approximately $11.0
million net of offering costs, which will be used for general corporate purposes. During the three months ended September 30,
2020 we implemented a number of cost reduction initiatives reducing costs and identifying costs savings that we expect to result
in annual savings of an additional $3.0 million to $4.0 million. As a result, we expect that our current working capital
is sufficient to fund our operations and commitments for a period of at least twelve months from the date these financial statements
are issued.
In
the event the Company requires additional liquidity, the Company can further reduce or defer expenses. More specifically, the
Company could implement certain discretionary cost reduction initiatives relating to our spend on employee travel and entertainment,
consulting costs and marketing expenses, negotiate deferred salary arrangements, furlough employees or reduce headcount or negotiate
extensions of payments of rent and utilities. The Company also believes it has access to capital through future debt or
equity offerings and could be successful in renegotiating the maturity dates or conversion option relating to its current outstanding
notes payable, although no assurance can be provided that we would be successful in these efforts. Further, the potential
continues to exist that our $2 million PPP loan could be forgiven. Management will continue to evaluate our liquidity and capital
resources.
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 months ended September 30, 2020 are
not necessarily indicative of the results that may be expected for the fiscal year transition period comprised of six months ending
December 31,2020.
The condensed
consolidated balance sheet for the year ended June 30, 2020, 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, 2020, which were included in our annual report on Form 10-K filed on September
29, 2020.
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.
Segment
Reporting
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, the Company
has one operating segment, and the decision-making group is the senior executive management team. In the following table, revenue
is disaggregated by primary geographical markets and revenue source.
|
|
For the Three Months Ended
|
|
|
|
2020
|
|
|
2019
|
|
Primary geographical markets:
|
|
|
|
|
|
|
United States
|
|
$
|
2,285,211
|
|
|
$
|
3,054,670
|
|
Canada
|
|
|
1,270,109
|
|
|
|
28,385
|
|
Other
|
|
|
158,684
|
|
|
|
109,835
|
|
Total
|
|
$
|
3,714,004
|
|
|
$
|
3,192,890
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30,
2020
|
|
|
As of
June 30,
2020
|
|
Long-lived assets:
|
|
|
|
|
|
|
United States
|
|
$
|
10,170,265
|
|
|
$
|
10,254,374
|
|
Canada
|
|
|
5,345,092
|
|
|
|
-
|
|
Total
|
|
$
|
15,515,357
|
|
|
$
|
10,254,374
|
|
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 $0.2 million as September
30, 2020 and $0.2 million as of June 30, 2020.
Concentrations
of Credit Risk
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 three months ended September 30, 2020, and 2019, one government client accounted for 17%
and 24% of total revenues, respectively. As of September 30, 2020, two government clients accounted
for a total of 38% and 20% of net accounts receivable and one government client had outstanding receivables as of September
30, 2019, which accounted for 63% of net accounts receivable.
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. To date, we have not recorded any impairment of our goodwill.
Foreign
Currency Translation
We
have Canadian operations with Canadian Dollar as the functional currency. Foreign exchange gains and losses and translation adjustments,
which result from the process of remeasuring foreign currency transactions into the appropriate functional currency, were immaterial
during the quarter ended September 30, 2020.
Supplemental
Information Regarding Noncash Investing and Financing Activities
During
the three months ended September 30, 2020, we acquired 100% of the outstanding equity interest in Ample Organics,
Inc., or Ample, in exchange for Akerna common stock valued at $25.2 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
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. During the three months ended
September 30, 2020, we granted 451,925 shares of Restricted Stock Units at an aggregate grant date fair value of approximately
$2.2 million, vesting equally over four years.
Reclassifications
and Revisions
Certain
prior year financial statement amounts have been reclassified for consistency with the current year presentation. Additionally,
certain prior year financial statement amounts have been revised to correct misstatements in the prior year, please refer to Note
9 for additional information regarding the corrections.
Recent
Accounting Pronouncements
The
Financial Accounting Standards Board, or the FASB, has issued guidance to simplify the remeasurement of goodwill when impairment
is identified. Under existing guidance we would have to perform procedures to determine the fair value of our assets and liabilities
as of the testing date in a manner similar to the procedures necessary to allocate purchase price to acquired assets and liabilities
in a business combination. Under the new guidance, the goodwill impairment charge is equal to the excess of the carrying value
of the reporting unit to which goodwill is assigned and the fair value of that reporting unit. We have elected to adopt the guidance
early effective July 1, 2020 and will utilize this approach if necessary when we perform our annual goodwill impairment test.
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 fiscal year end transition financial statements for the six months ending December 31, 2020 and for interim periods beginning
on January 1, 2021. We have completed our implementation procedures and concluded that there will be no material impact to our
results of operations or financial condition as a result of this new standard.
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. As
a result of our announced change in fiscal year end to December 31, 2020, as further discussed in Note 1, we will adopt the new
standard in our transition period financial statements for the six months ending December 31, 2020. We are in the process of finalizing
our implementation of this standard and expect to record a cumulative catch up adjustment to defer certain direct contract costs
that have previously been recognized as expense as incurred, Additionally, we expect to adjust the recognition pattern for certain
implementation fees earned in connection with government contracts.
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. Following our change in fiscal year effective on December 31, 2020, the new standard is effective
for us beginning with our fiscal year ending December 31, 2022 and in interim periods thereafter. We have limited assets
subject to operating lease and therefore expect the adoption of the new standard to result in the recognition of right of use
assets and lease liabilities for any office or vehicle leases in effect at that date, we do not expect 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. Following our change in fiscal
year-end effective December 31, 2020, the new guidance is effective for us beginning on January 1, 2023. We are evaluating the
impact of adoption of the new standard on our consolidated financial statements.
The
FASB has issued guidance regarding whether 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. Following
our change in fiscal year end effective December 31, 2020, the guidance is applicable for us for the year ending December 31,
2021 and in interim periods thereafter, with early adoption permitted, including adoption in an interim period. We are evaluating
the impact of adoption of the new standard on our financial statements.
The
FASB has issued guidance clarifying the interactions between various standards governing investments in equity securities. The
new guidance addresses accounting for the transition into and out of the equity method and measurement of certain purchased options
and forward contracts to acquire investments. The standard is effective for us for annual and interim periods beginning on January
1, 2022, with early adoption permitted. Adoption of the standard requires changes to be made prospectively. We do not anticipate
a significant impact to our financial statements as a result of this new guidance.
Note
3 – Significant Transactions
Business
Combinations
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 by issuing 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, for an aggregate value of $25.2 million. The exchangeable
shares are economically equivalent to shares of Akerna common stock. In addition to the stock consideration, we paid $5.7 million
in cash, which was used to settle all of Ample’s then outstanding debt and transaction costs. 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
was recorded as the estimated fair value of $0.8 million as of the acquisition date and will be adjusted to the estimated fair
value in each subsequent reporting period until settlement. The preliminary fair value of consideration transferred consisted
of the following (in thousands):
|
|
Preliminary
Fair Value
|
|
Common shares issued
|
|
$
|
25,203
|
|
Cash
|
|
|
5,724
|
|
Contingent consideration
|
|
|
817
|
|
Total preliminary fair value of consideration transferred
|
|
$
|
31,744
|
|
We
incurred $1.0 million of transaction costs directly related to the acquisition that is reflected in selling, general and administrative
expenses in our condensed consolidated statements of operations.
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
|
|
$
|
445
|
|
Accounts receivable
|
|
|
917
|
|
Prepaid expenses
|
|
|
149
|
|
Intangible assets and goodwill
|
|
|
30,433
|
|
Furniture, fixtures and equipment
|
|
|
1,327
|
|
Accounts payable and accrued expenses
|
|
|
(978
|
)
|
Deferred revenue
|
|
|
(549
|
)
|
Net assets acquired
|
|
$
|
31,744
|
|
The
excess of purchase consideration over the preliminary fair value of assets acquired and liabilities assumed was recorded as goodwill,
which is primarily attributed to the assembled workforce and expanded market opportunities, for which there is no basis for U.S.
income tax purposes. 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 no later than one year from the acquisition date.
The
amounts of Ample’s revenue and net loss included in our condensed consolidated statement of operations from the acquisition
date of July 7, 2020, to September 30, 2020 were $1.2 million and $0.4 million, respectively.
Pro
Forma Financial Information
The
following unaudited pro forma financial information summarizes the combined results of operations for Akerna, Trellis, Solo, and
Ample as though the companies were combined as of the beginning of our fiscal 2019 (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
$
|
3,790
|
|
|
$
|
4,130
|
|
Net loss
|
|
$
|
(4,686
|
)
|
|
$
|
(4,185
|
)
|
The
pro forma financial information for all periods presented above has been calculated after adjusting the results of Solo, Trellis,
and Ample 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 2019.
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 2019.
Special
Voting Preferred Stock and Exchangeable Shares
In
connection with the Ample acquisition, we entered into agreements with our wholly-owned subsidiary and the Ample shareholder representative
that resulted in the issuance of a single share of our special voting preferred stock, for the purpose of ensuring that each Exchangeable
Share is substantially the economic and voting equivalent of a share of Akerna common stock, and, following the registration
of the Akerna shares issuable upon exchange of the Exchangeable Shares under the Securities Act of 1933, ensuring that each
Exchangeable Share is exchangeable on a one-for-one basis for a share of Akerna common stock, subject to certain limitations.
As a result of these agreements and the issuance of the special voting preferred stock, each holder of Exchangeable Shares effectively
has the ability to cast votes along with holders of Akerna common stock. Additionally, these agreements grant exchange rights
to the holders of exchangeable shares upon the event of our liquidation, dissolution or winding up.
The
special voting preferred stock has a par value of $0.0001 per share and a preference in liquidation of $1.00. The special voting
preferred stock entitles the holder to an aggregate number of votes equal to the number of the exchangeable shares issued and
outstanding from time to time and which we do not own. The holder of the special voting preferred stock and the holders of shares
of Akerna common stock will both together as a single class on all matters submitted to a vote of our shareholders.
At such time as the special voting preferred stock has not votes attached to it, the share shall be automatically cancelled. The
exchangeable shares do not have a par value.
On
September 1, 2020, several Ample shareholders exchanged a total of 627,225 exchangeable shares with a value of $4,798,271 for
the same number of shares of Akerna common stock. The exchange was accounted for as an equity transaction and we did
not recognize a gain or loss on this transaction. As of September 30, 2020, there were a total of 2,667,349 Exchangeable Shares
issued and outstanding.
Note 4 -
Fair Value
Contingent
Consideration
Solo
In
connection with our acquisition of Solo, the Solo selling shareholders received the potential to earn the contingent consideration,
which was to be calculated as the lesser of (i) $0.01 per solo*TAGTM and solo*CODETM sold
or (ii) 7% of net revenue. The fees were to be paid annually until the earlier of (1) our shares trading above $12 per
share for any consecutive 20 trading days in a 30-day period; (b) upon our no longer owning a majority stake in
Solo; or (c) upon expiration of the patents related to solo*TAGTM and solo*CODETM, which is December
1, 2029.
We
recorded the fair value of the liability in the condensed consolidated balance sheets under the caption “current contingent
consideration” and recognized changes to the fair value of the liability against earnings or loss each reporting period
until settlement. The fair value of the contingent consideration on the date of the acquisition of Solo was $389,000. In
connection with our exercise of the option to acquire the remaining interest in Solo, the selling shareholders agreed to retrospectively
and prospectively relieve the contingent consideration obligation. Therefore the settled value of the contingent consideration
was $0. We have recorded a gain on settlement of the contingent consideration liability during the three months
ended September 30, 2020 in general and administrative expenses in our condensed consolidated statement of operations.
Ample
In
addition to the stock and cash consideration, the agreement provides for contingent consideration of up to CAD$10,000,000, payable
in exchangeable shares, payable if Ample’s Recurring Revenue recognized during the 12 months after the acquisition date
is CAD$9,000,000 or more. The contingent consideration amount is reduced by an amount equal to the product of CAD$6.67 multiplied
by the difference between CAD$9,000,000and the amount of Recurring Revenue realized during the twelve months following the
acquisition.
We
record the fair value of the liability in the condensed consolidated balance sheets as contingent consideration payable and recognize
changes to the liability against earnings or loss in general and administrative expenses in the condensed consolidated statements
of operations. The fair value of the contingent consideration on the date of the acquisition of Ample was
$817,000. The carrying amount at fair value of the aggregate liability for the contingent consideration recorded on the
condensed consolidated balance sheet as of September 30, 2020, is $817,000.
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 its estimated fair value on a
recurring basis at each reporting period date. The change in estimated fair value resulting from changes in instrument-specific
credit risk is recorded in other comprehensive income as a component of equity. The remaining estimated fair value adjustment
is presented as a single line item within other income (expense) in our condensed 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 30, 2020, to September 30, 2020:
Fair value balance as of June 30, 2020
|
|
$
|
14,131,000
|
|
Change in fair value reported in the statements of operations
|
|
|
(778,000
|
)
|
Change in fair value reported in other comprehensive income
|
|
|
70,000
|
|
Fair value balance as of September 30, 2020
|
|
$
|
13,423,000
|
|
The
estimated fair value of the Convertible Notes as of June 30, 2020, and September 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 reflect 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
estimated the fair value by using the following key inputs to the Monte Carlo Simulation Model:
Fair
Value Assumptions - Convertible Notes
|
|
September 30,
2020
|
|
|
June
30,
2020
|
|
Face
value principal payable
|
|
$
|
17,000,000
|
|
|
$
|
17,000,000
|
|
Original
conversion price
|
|
$
|
11.50
|
|
|
$
|
11.50
|
|
Value
of Common Stock
|
|
$
|
3.64
|
|
|
$
|
8.80
|
|
Expected
term (years)
|
|
|
2.67
|
|
|
|
2.90
|
|
Volatility
|
|
|
68
|
%
|
|
|
45
|
%
|
Market
yield
|
|
|
28.0
|
%
|
|
|
23.9
|
%
|
Risk
free rate
|
|
|
0.1%
to 0.2
|
%
|
|
|
0.2
|
%
|
Note
5 - Loss Per Share
During
the three months ended September 30, 2020, we used the two-class method to compute net loss per share because we issued securities
other than common stock that is economically equivalent to a common share in that the class of stock has the right to participate
in dividends should a dividend be declared payable to holders of Akerna common stock. These participating securities
were the Exchangeable Shares issued by our wholly owned subsidiary in exchange for interest in Ample. The two-class method requires
earnings for the period to be allocated between common stock and participating securities based on their respective rights to
receive distributed and undistributed earnings. Under the two-class method, for periods with net income, basic net income per
common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares
of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from
net income the portion of current period earnings that the participating securities would have been entitled to receive
pursuant to their dividend rights had all of the period’s earnings been distributed. No such adjustment to earnings is made during
periods with a net loss, as the holders of the Exchangeable Shares have no obligation to fund losses.
Diluted
net loss per common share is calculated under the two-class method by giving effect to all potentially dilutive common stock,
including warrants, restricted stock awards, restricted stock units, and shares of common stock issuable upon conversion of our
Convertible Notes. We analyzed the potential dilutive effect of any outstanding convertible securities under the “if-converted”
method, in which it is assumed that the outstanding Exchangeable Shares and Convertible Notes are converted to shares of common
stock at the beginning of the period or date of issuance, if later. We report the more dilutive of the approaches (two-class or
“if-converted) as the diluted net loss per share during the period. The dilutive effect of unvested restricted stock awards
and restricted stock units is reflected in diluted loss per share by application of the treasury stock method and is excluded
when the effect would be anti-dilutive.
The
weighted-average number of shares outstanding used in the computation of diluted earnings per share does not include the effect
of potential outstanding common shares that would have been anti-dilutive for the period. There were no potentially outstanding
shares as of September 30, 2019. The table below details potentially outstanding shares on a fully diluted basis as of September
30, 2020 that were not included in the calculation of diluted earnings per share:
|
|
Three Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Shares issuable upon exchange of Exchangeable Shares
|
|
|
2,667,349
|
|
|
|
—
|
|
Shares of common stock issuable in upon conversion of Convertible Notes
|
|
|
1,542,632
|
|
|
|
—
|
|
Warrants
|
|
|
5,813,804
|
|
|
|
5,814,205
|
|
Unvested restricted stock units
|
|
|
824,143
|
|
|
|
—
|
|
Unvested restricted stock awards
|
|
|
64,296
|
|
|
|
215,063
|
|
Total
|
|
|
10,912,224
|
|
|
|
6,029,268
|
|
Note
6 - Commitments and Contingencies
Operating
Leases
We
lease office facilities and vehicles under non-cancelable operating leases. Rent expense for the three months ended September
30, 2020 and 2019, was $273,000 and $36,000, respectively. Future minimum lease payments under these leases for the remainder
of the fiscal year transition period ending December 31, 2020 and each of the five years ending on December 31 thereafter are
as follows:
Three months ending December 31, 2020
|
|
$
|
226,687
|
|
2021
|
|
|
918,847
|
|
2022
|
|
|
439,633
|
|
2023
|
|
|
421,418
|
|
2024
|
|
|
426,495
|
|
2025
|
|
|
464,575
|
|
Thereafter
|
|
|
983,731
|
|
Total
|
|
$
|
3,881,386
|
|
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 September 30, 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 Transactions
Investment
in and License Agreement with Zol Solutions, Inc.
We
hold an investment in 203,000 shares of preferred stock of Zol Solutions, Inc., or ZolTrain. In connection
with the investment, we received the right to appoint one of three members of ZolTrain’s board
of directors and the Akerna board member may only be removed from the ZolTrain board by us and we retain
the right to fill the vacancy. The ZolTrain preferred stock is convertible into shares of common stock of ZolTrain at
a conversion rate of $1.232 per share at our option 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
stock is convertible into at any meeting of the ZolTrain stockholders. The investment 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.
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 September 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, as such, 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 three months ended September 30, 2020 we have recognized equity in loss of investee of $1,535, 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 three months ended September 30, 2020 we have not recognized any revenue from this agreement.
Employment
of Scott Sozio
In
July 2019, we hired Mr. Scott Sozio, at will, to serve as our Head of Corporate Development. Mr. Sozio receives an annual base
salary of $150,000, which is to be credited against certain variable bonus compensation to be paid in a combination of cash and
equity pursuant to the Incentive Plan once every twelve-month period. The terms of such bonus payment include the payment of 1%
of the transaction value of acquisition transactions completed by Akerna, payable one-half as cash compensation and one-half in
restricted stock units of Akerna.
In
April 2020, Mr. Sozio was granted 1,230 restricted stock units of the Akerna under our 2019 Equity Incentive Plan in relation
to the closing of our acquisition of Trellis, which vested immediately. In August of 2020, Mr. Sozio’s compensation was
restructured and he was granted 92,166 restricted stock units, which vest one quarter each year beginning on July 1, 2021. In
September 2020, Mr. Sozio was granted 10,000 restricted stock units as part of our annual employee grants, which vest one quarter
each year beginning on July 1, 2021 and 38,527 restricted stock units in connection with the closing of our acquisition of Ample,
which vested immediately. Additionally, Mr. Sozio received a cash bonus of $225,000 in connection with the Ample acquisition.
TechMagic Software
Development Services
During
the three months ended September 30, 2020, our wholly-owned subsidiary Solo was invoiced by TechMagic USA LLC, a Massachusetts
limited liability, or TechMagic, for an amount of $291,000. When we acquired Solo in January 2020, we recognized a preacquisition liability
of payable to TechMagic of $265,000. Following our acquisition and for the remainder of our fiscal year ended June 30, 2020, we
received invoices totaling an aggregate additional amount of $392,000. The invoices set forth services that TechMagic purports
to have provided to Solo regarding development of mobile software applications for MJF and Solo between March and September 2020.
Mr. Ashesh Shah, our Chief Technology Officer from the date of the Solo acquisition through June 30, 2020, formerly the president
of Solo and as of September 30, 2020, a minority holder of common stock, to our knowledge, the founder and one of the principal
managers of TechMagic. The invoices state that the services were rendered pursuant to the terms of an agreement regarding the
development of mobile software products for Solo, entered into between Solo and TechMagic at a time when Mr. Shah was a principal
at both entities. As of September 30, 2020, a $553,000 payable to TechMagic was included in accounts payable and accrued
liabilities on our condensed consolidated balance sheet.
Note
8 - Subsequent Events
Issuance
of Common Stock
On
October 30, 2020, we issued 5,000,000 shares of Akerna common stock in a public offering for net proceeds after offering
costs of approximately $11.0 million dollars.
MagicTech Lawsuit
On December 4, 2020, TechMagic USA
LLC filed suit against our wholly-owned subsidiary, Solo, in Massachusetts Superior Court, Department Business Litigation,
seeking recovery of up to approximately $1.07 million for unpaid invoices pursuant to a Master Services Agreement dated
February 5, 2018 by and between TechMagic and Solo.
Convertible Debt Waivers
On December 23, 2020, we entered into waivers
with all the holders of the outstanding senior secured convertible notes, pursuant to which we and the holders, separately and
not jointly, agreed to waive certain terms and conditions of the convertible notes as follows:
|
●
|
The holders irrevocably waived the last sentence of Section 8(a) of the notes requiring that all installment amounts payable under the notes prior to April 1, 2021 be paid in cash pursuant to installment redemptions. We may now elect, in its sole discretion, to pay installment amounts under the notes prior to April 1, 2021, by issuing shares of common stock pursuant to installment conversions or by paying cash pursuant to installment redemptions, in each case in accordance with the existing terms of the notes.
|
|
●
|
We irrevocably waived the prohibition on acceleration of installment
amounts in Section 8(e) of the notes solely in relation to the installment amount for January 4, 2021, to permit the holders to
accelerate the January 4, 2021 installment amount, in whole or in part, to one or more acceleration dates from December 24, 2020
through to and including January 4, 2021, as elected by each holder pursuant to Section 8(e) of the notes.
|
|
●
|
We and the holders agreed that we may irrevocably waive the installment scheduled principal amount for any installment date by setting forth in the installment notice for that installment date an installment amount greater than the installment scheduled principal amount due and payable on the next installment date. Each holder may then consent to all or a portion of such increased installment amount for such installment date by written confirmation no later than 4:00 p.m. New York time on the trading day immediately prior to such installment date. Any increased amount for an installment amount above the installment scheduled principal amount for such installment date will reduce the principal amount under the notes.
|
|
●
|
In relation to the January 4, 2021 installment amount, we delivered installment notices to the holders increasing the installment amount for January 4, 2021, in the aggregate, by $2,062,500.
|
Lease Settlement
On January 7, 2021, we issued 101,705 shares of common stock
to a private party in exchange for the termination of a long-term lease agreement.
Note
9 – Revisions of Previously Issued Financial Statements
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.
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:
|
|
Three Months Ended September 30, 2019
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
1,397,361
|
|
|
$
|
(17,660
|
)
|
|
$
|
1,379,701
|
|
Gross profit
|
|
|
1,795,529
|
|
|
|
17,660
|
|
|
|
1,813,189
|
|
Product development
|
|
|
1,130,880
|
|
|
|
(519,978
|
)
|
|
|
610,902
|
|
Selling, general and administrative
|
|
|
3,583,815
|
|
|
|
17,899
|
|
|
|
3,601,714
|
|
Net loss
|
|
|
(2,846,071
|
)
|
|
|
519,739
|
|
|
|
(2,326,332
|
)
|
Net loss per share
|
|
|
(0.26
|
)
|
|
|
—
|
|
|
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2019
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
1,638,840
|
|
|
$
|
(23,601
|
)
|
|
$
|
1,615,239
|
|
Gross profit
|
|
|
1,667,363
|
|
|
|
23,601
|
|
|
|
1,690,964
|
|
Product development
|
|
|
1,261,509
|
|
|
|
(638,008
|
)
|
|
|
623,501
|
|
Selling, general and administrative
|
|
|
4,796,404
|
|
|
|
86,768
|
|
|
|
4,883,172
|
|
Net loss
|
|
|
(4,338,536
|
)
|
|
|
574,841
|
|
|
|
(3,763,695
|
)
|
Net loss per share
|
|
|
(0.40
|
)
|
|
|
—
|
|
|
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31, 2019
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
3,036,201
|
|
|
$
|
(41,261
|
)
|
|
$
|
2,994,940
|
|
Gross profit
|
|
|
3,462,892
|
|
|
|
41,261
|
|
|
|
3,504,153
|
|
Product development
|
|
|
2,392,389
|
|
|
|
(1,157,986
|
)
|
|
|
1,234,403
|
|
Selling, general and administrative
|
|
|
8,380,219
|
|
|
|
104,667
|
|
|
|
8,484,886
|
|
Net loss
|
|
|
(7,184,607
|
)
|
|
|
1,094,580
|
|
|
|
(6,090,027
|
)
|
Net loss per share
|
|
|
(0.66
|
)
|
|
|
—
|
|
|
|
(0.56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Condensed Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
1,420,909
|
|
|
$
|
(24,690
|
)
|
|
$
|
1,396,219
|
|
Gross profit
|
|
|
1,649,637
|
|
|
|
24,690
|
|
|
|
1,674,327
|
|
Product development
|
|
|
1,632,353
|
|
|
|
(757,566
|
)
|
|
|
874,787
|
|
Selling, general and administrative
|
|
|
5,500,837
|
|
|
|
177,405
|
|
|
|
5,678,242
|
|
Net loss
|
|
|
(5,348,980
|
)
|
|
|
604,851
|
|
|
|
(4,744,129
|
)
|
Net loss per share
|
|
|
(0.43
|
)
|
|
|
—
|
|
|
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, 2020
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
4,457,110
|
|
|
$
|
(65,951
|
)
|
|
$
|
4,391,159
|
|
Gross profit
|
|
|
5,112,529
|
|
|
|
65,951
|
|
|
|
5,178,480
|
|
Product development
|
|
|
4,024,742
|
|
|
|
(1,915,552
|
)
|
|
|
2,109,190
|
|
Selling, general and administrative
|
|
|
13,881,056
|
|
|
|
282,072
|
|
|
|
14,163,128
|
|
Net loss
|
|
|
(12,533,587
|
)
|
|
|
1,699,431
|
|
|
|
(10,834,156
|
)
|
Net loss per share
|
|
|
(1.11
|
)
|
|
|
—
|
|
|
|
(0.96
|
)
|
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 provide 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
AKERNA
CORP.
Consolidated
Balance Sheets
As
of June 30, 2020 and 2019
|
|
2020
|
|
|
2019
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
24,155,828
|
|
|
$
|
21,867,289
|
|
Restricted cash
|
|
|
500,000
|
|
|
|
500,000
|
|
Accounts receivable, net
|
|
|
1,861,534
|
|
|
|
1,257,274
|
|
Prepaid expenses and other current assets
|
|
|
1,215,341
|
|
|
|
577,674
|
|
Total current assets
|
|
|
27,732,703
|
|
|
|
24,202,237
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
131,095
|
|
|
|
—
|
|
Investment, net
|
|
|
246,308
|
|
|
|
—
|
|
Capitalized software, net
|
|
|
2,629,304
|
|
|
|
—
|
|
Intangible assets, net
|
|
|
7,493,975
|
|
|
|
—
|
|
Goodwill
|
|
|
20,254,309
|
|
|
|
—
|
|
Other non-current assets
|
|
|
41,925
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
58,529,619
|
|
|
$
|
24,202,237
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
4,861,928
|
|
|
$
|
1,818,116
|
|
Contingent consideration payable
|
|
|
389,000
|
|
|
|
—
|
|
Deferred revenue
|
|
|
368,685
|
|
|
|
624,387
|
|
Current portion of long-term debt
|
|
|
6,135,364
|
|
|
|
—
|
|
Total current liabilities
|
|
|
11,754,977
|
|
|
|
2,442,503
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
10,200,236
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
21,955,213
|
|
|
|
2,442,503
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
1,321
|
|
|
|
1,059
|
|
Additional paid-in capital
|
|
|
72,906,924
|
|
|
|
47,325,421
|
|
Accumulated other comprehensive income
|
|
|
63,000
|
|
|
|
—
|
|
Accumulated deficit
|
|
|
(41,101,091
|
)
|
|
|
(25,566,746
|
)
|
Total stockholders’ equity
|
|
|
31,870,154
|
|
|
|
21,759,734
|
|
Noncontrolling interests in consolidated subsidiary
|
|
|
4,704,252
|
|
|
|
—
|
|
Total equity
|
|
|
36,574,406
|
|
|
|
21,759,734
|
|
Total liabilities and equity
|
|
$
|
58,529,619
|
|
|
$
|
24,202,237
|
|
See
notes to consolidated financial statements.
AKERNA
CORP.
Consolidated
Statements of Operations
For
the Years Ended June 30, 2020 and 2019
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
|
|
|
|
|
Software
|
|
$
|
9,976,580
|
|
|
$
|
8,256,492
|
|
Consulting
|
|
|
2,379,947
|
|
|
|
2,307,129
|
|
Other
|
|
|
216,749
|
|
|
|
259,496
|
|
Total revenues
|
|
|
12,573,276
|
|
|
|
10,823,117
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
6,209,724
|
|
|
|
4,633,844
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,363,552
|
|
|
|
6,189,273
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Product development
|
|
|
3,206,310
|
|
|
|
5,565,097
|
|
Sales and marketing
|
|
|
7,792,480
|
|
|
|
7,498,114
|
|
General and administrative
|
|
|
11,320,715
|
|
|
|
5,638,408
|
|
Depreciation and amortization
|
|
|
1,315,898
|
|
|
|
—
|
|
Total operating expenses
|
|
|
23,635,403
|
|
|
|
18,701,619
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(17,271,851
|
)
|
|
|
(12,512,346
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest income (expense) net
|
|
|
156,678
|
|
|
|
91,239
|
|
Change in fair value of Convertible Notes
|
|
|
766,000
|
|
|
|
—
|
|
Other
|
|
|
(254
|
)
|
|
|
17,892
|
|
Total other income (expense)
|
|
|
922,424
|
|
|
|
109,131
|
|
|
|
|
|
|
|
|
|
|
Net loss before income tax expense
|
|
|
(16,349,427
|
)
|
|
|
(12,403,215
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(30,985
|
)
|
|
|
—
|
|
Equity in losses of investee
|
|
|
(3,692
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(16,384,104
|
)
|
|
|
(12,403,215
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interest in consolidated subsidiary
|
|
|
849,759
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net Loss attributable to Akerna shareholders
|
|
$
|
(15,534,345
|
)
|
|
$
|
(12,403,215
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
11,860,212
|
|
|
|
6,045,382
|
|
Basic and diluted net loss per common share
|
|
$
|
(1.31
|
)
|
|
$
|
(2.05
|
)
|
See
notes to consolidated financial statements.
AKERNA CORP.
Consolidated
Statements of Comprehensive Income
For
the Years Ended June 30, 2020 and 2019
|
|
2020
|
|
|
2019
|
|
Net loss
|
|
$
|
(16,384,104
|
)
|
|
$
|
(12,403,215
|
)
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
Unrealized gains on Convertible Notes
|
|
|
63,000
|
|
|
|
—
|
|
Comprehensive loss
|
|
|
(16,321,104
|
)
|
|
|
(12,403,215
|
)
|
Comprehensive loss attributable to the noncontrolling interest
|
|
|
849,759
|
|
|
|
—
|
|
Comprehensive loss attributable to Akerna shareholders
|
|
$
|
(15,471,345
|
)
|
|
$
|
(12,403,215
|
)
|
See
notes to consolidated financial statements.
AKERNA
CORP.
Consolidated
Statements of Changes in Equity
For
the Years Ended June 30, 2020 and 2019
|
|
Common
|
|
|
Additional
Paid-In
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Accumulated
|
|
|
Total Stockholder’s
|
|
|
Noncontrolling
Interest in
Consolidated
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Deficit
|
|
|
Equity
|
|
|
Subsidiary
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 1, 2018
|
|
|
4,922,650
|
|
|
$
|
492
|
|
|
$
|
14,563,102
|
|
|
$
|
—
|
|
|
$
|
(13,163,531
|
)
|
|
$
|
1,400,063
|
|
|
$
|
—
|
|
|
$
|
1,400,063
|
|
Issuance of common stock
|
|
|
1,099,376
|
|
|
|
110
|
|
|
|
9,999,890
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000,000
|
|
|
|
—
|
|
|
|
10,000,000
|
|
Issuance of common stock in connection with reverse merger
|
|
|
3,880,282
|
|
|
|
388
|
|
|
|
18,878,387
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,878,775
|
|
|
|
—
|
|
|
|
18,878,775
|
|
Issuance of common stock for compensation in connection with reverse merger
|
|
|
498,073
|
|
|
|
50
|
|
|
|
3,393,231
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,393,281
|
|
|
|
—
|
|
|
|
3,393,281
|
|
Stock-based compensation amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
490,830
|
|
|
|
—
|
|
|
|
—
|
|
|
|
490,830
|
|
|
|
—
|
|
|
|
490,830
|
|
Common stock issued upon cashless exercise of options
|
|
|
189,365
|
|
|
|
19
|
|
|
|
(19
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,403,215
|
)
|
|
|
(12,403,215
|
)
|
|
|
—
|
|
|
|
(12,403,215
|
)
|
Balance as of June 30, 2019
|
|
|
10,589,746
|
|
|
|
1,059
|
|
|
|
47,325,421
|
|
|
|
—
|
|
|
|
(25,566,746
|
)
|
|
|
21,759,734
|
|
|
|
—
|
|
|
|
21,759,734
|
|
Common stock issued upon warrant exercise
|
|
|
369,311
|
|
|
|
37
|
|
|
|
4,247,028
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,247,065
|
|
|
|
—
|
|
|
|
4,247,065
|
|
Common stock issued in business combinations
|
|
|
2,299,650
|
|
|
|
230
|
|
|
|
20,081,236
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,081,466
|
|
|
|
—
|
|
|
|
20,081,466
|
|
Noncontrolling interest in acquired subsidiary
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,554,011
|
|
|
|
5,554,011
|
|
Stock-based compensation amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
1,253,234
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,253,234
|
|
|
|
—
|
|
|
|
1,253,234
|
|
Forfeitures of restricted shares
|
|
|
(54,901
|
)
|
|
|
(5
|
)
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Change in fair value of Convertible Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
63,000
|
|
|
|
—
|
|
|
|
63,000
|
|
|
|
—
|
|
|
|
63,000
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,534,345
|
)
|
|
|
(15,534,345
|
)
|
|
|
(849,759
|
)
|
|
|
(16,384,104
|
)
|
Balance as of June 30, 2020
|
|
|
13,203,806
|
|
|
$
|
1,321
|
|
|
$
|
72,906,924
|
|
|
$
|
63,000
|
|
|
$
|
(41,101,091
|
)
|
|
$
|
31,870,154
|
|
|
$
|
4,704,252
|
|
|
$
|
36,574,406
|
|
See
notes to consolidated financial statements.
AKERNA
CORP.
Consolidated
Statements of Cash Flows
For
the Years Ended June 30, 2020 and 2019
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,384,104
|
)
|
|
$
|
(12,403,215
|
)
|
Adjustment to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
1,094,507
|
|
|
|
345,941
|
|
Stock-based compensation expense
|
|
|
1,166,130
|
|
|
|
3,884,111
|
|
Depreciation and amortization
|
|
|
1,315,898
|
|
|
|
—
|
|
Equity in losses of investee
|
|
|
3,692
|
|
|
|
—
|
|
Debt issuance costs classified as financing
|
|
|
1,177,390
|
|
|
|
—
|
|
Change in fair value of convertible notes
|
|
|
(766,000
|
)
|
|
|
—
|
|
Change in fair value of contingent consideration
|
|
|
(998,000
|
)
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,621,262
|
)
|
|
|
(1,572,889
|
)
|
Prepaid expenses and other current assets
|
|
|
(592,807
|
)
|
|
|
(351,144
|
)
|
Other assets
|
|
|
(58,925
|
)
|
|
|
—
|
|
Accounts payable and accrued liabilities
|
|
|
1,602,751
|
|
|
|
893,845
|
|
Deferred revenue
|
|
|
(286,922
|
)
|
|
|
154,756
|
|
Net cash used in operating activities
|
|
|
(14,347,652
|
)
|
|
|
(9,048,595
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Developed software additions
|
|
|
(3,102,728
|
)
|
|
|
—
|
|
Furniture, fixtures, and equipment additions
|
|
|
(156,636
|
)
|
|
|
—
|
|
Cash paid for business combinations, net of cash acquired
|
|
|
(88,720
|
)
|
|
|
—
|
|
Investment in equity method investee
|
|
|
(250,000
|
)
|
|
|
—
|
|
Cash received in connection with the reverse merger
|
|
|
—
|
|
|
|
18,843,483
|
|
Net cash provided by investing activities
|
|
|
(3,598,084
|
)
|
|
|
18,843,483
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of long term debt
|
|
|
17,164,600
|
|
|
|
—
|
|
Cash paid for debt issuance costs
|
|
|
(1,177,390
|
)
|
|
|
—
|
|
Proceeds from the exercise of warrants
|
|
|
4,247,065
|
|
|
|
—
|
|
Proceeds from the issuance of common stock
|
|
|
—
|
|
|
|
10,000,000
|
|
Net cash provided by financing activities
|
|
|
20,234,275
|
|
|
|
10,000,000
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and restricted cash
|
|
|
2,288,539
|
|
|
|
19,794,888
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash - beginning of period
|
|
|
22,367,289
|
|
|
|
2,572,401
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash - end of period
|
|
$
|
24,655,828
|
|
|
$
|
22,367,289
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash paid for interest
|
|
$
|
—
|
|
|
$
|
—
|
|
Supplemental disclosure of non-cash investing and financing activity:
|
|
|
|
|
|
|
|
|
Cashless exercise of options
|
|
$
|
—
|
|
|
$
|
19
|
|
Stock-based compensation capitalized as software development
|
|
$
|
87,104
|
|
|
$
|
—
|
|
Assets acquired and liabilities assumed in business combinations and reverse merger:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
77,505
|
|
|
$
|
—
|
|
Prepaid expenses and other current assets
|
|
|
27,860
|
|
|
|
35,292
|
|
Fixed assets
|
|
|
2,410
|
|
|
|
—
|
|
Intangible assets
|
|
|
8,010,000
|
|
|
|
—
|
|
Goodwill
|
|
|
20,254,309
|
|
|
|
—
|
|
Accounts payable and accrued liabilities
|
|
|
1,441,062
|
|
|
|
—
|
|
Deferred revenue
|
|
|
31,220
|
|
|
|
—
|
|
Contingent consideration
|
|
|
1,387,000
|
|
|
|
—
|
|
See
notes to consolidated financial statements.
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.
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.
AKERNA
CORP.
Notes
to Consolidated Financial Statements
June
30, 2020
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:
|
|
2020
|
|
|
2019
|
|
Allowance for doubtful accounts, beginning balance
|
|
$
|
190,088
|
|
|
$
|
39,571
|
|
Additions:
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
1,094,507
|
|
|
|
345,941
|
|
Deductions:
|
|
|
|
|
|
|
|
|
Write-off uncollectable accounts
|
|
|
(1,076,173
|
)
|
|
|
(195,424
|
)
|
Allowance for doubtful accounts, ending balance
|
|
$
|
208,422
|
|
|
$
|
190,088
|
|
Concentrations
of Credit Risk
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.
AKERNA
CORP.
Notes
to Consolidated Financial Statements
June
30, 2020
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.
AKERNA
CORP.
Notes
to Consolidated Financial Statements
June
30, 2020
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.
AKERNA
CORP.
Notes
to Consolidated Financial Statements
June
30, 2020
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.
AKERNA
CORP.
Notes
to Consolidated Financial Statements
June
30, 2020
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.
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
|
|
$
|
2,531
|
|
Contingent consideration
|
|
|
998
|
|
Total estimated fair value of consideration
|
|
$
|
3,529
|
|
We
incurred $0.1 million of transaction costs
directly related to the acquisition that is reflected in general and administrative expenses in our consolidated statement of
operations.
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
|
|
$
|
21
|
|
Accounts receivable, net
|
|
|
77
|
|
Other assets
|
|
|
6
|
|
Acquired technology
|
|
|
210
|
|
Acquired trade name
|
|
|
80
|
|
Customer relationships
|
|
|
220
|
|
Goodwill
|
|
|
3,229
|
|
Accounts payable and accrued expenses
|
|
|
(283
|
)
|
Deferred revenue
|
|
|
(31
|
)
|
Net assets acquired
|
|
$
|
3,529
|
|
The
excess of purchase consideration over the fair value of net tangible and intangible assets acquired was recorded as goodwill,
which is primarily attributed to the assembled workforce and expanded market opportunities, for which there is no basis for U.S.
income tax purposes. 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.
AKERNA
CORP.
Notes
to Consolidated Financial Statements
June
30, 2020
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
|
|
$
|
17,550
|
|
Contingent consideration
|
|
|
389
|
|
Total estimated fair value of consideration
|
|
$
|
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
|
|
$
|
101
|
|
Prepaid expenses and other assets
|
|
|
22
|
|
Furniture, fixtures, and equipment
|
|
|
2
|
|
Acquired technology
|
|
|
7,160
|
|
Acquired trade name
|
|
|
340
|
|
Goodwill
|
|
|
17,025
|
|
Accounts payable and accrued liabilities
|
|
|
(1,158
|
)
|
Fair value of noncontrolling interests
|
|
|
(5,554
|
)
|
Net assets acquired
|
|
$
|
17,938
|
|
AKERNA
CORP.
Notes
to Consolidated Financial Statements
June
30, 2020
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:
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
$
|
13,584
|
|
|
$
|
12,220
|
|
Net loss
|
|
|
(20,589
|
)
|
|
|
(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.
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:
|
|
2020
|
|
|
2019
|
|
Software and technology
|
|
$
|
571,695
|
|
|
$
|
237,930
|
|
Professional services, dues, and subscriptions
|
|
|
473,731
|
|
|
|
169,804
|
|
Insurance
|
|
|
105,814
|
|
|
|
159,940
|
|
Rental deposit
|
|
|
38,303
|
|
|
|
10,000
|
|
Other
|
|
|
25,798
|
|
|
|
—
|
|
Total Prepaid Expenses and Other Current Assets
|
|
$
|
1,215,341
|
|
|
$
|
577,674
|
|
Accounts
payable and accrued liabilities as of June 30, 2020 and 2019 consisted of the following:
|
|
2020
|
|
|
2019
|
|
Accounts payable
|
|
$
|
1,443,895
|
|
|
$
|
1,317,566
|
|
Professional fees
|
|
|
2,273,659
|
|
|
|
49,205
|
|
Sales taxes
|
|
|
59,825
|
|
|
|
36,358
|
|
Compensation
|
|
|
260,042
|
|
|
|
354,724
|
|
Contractors
|
|
|
782,366
|
|
|
|
19,557
|
|
Other
|
|
|
42,141
|
|
|
|
40,706
|
|
Total accounts payable and accrued liabilities
|
|
$
|
4,861,928
|
|
|
$
|
1,818,116
|
|
The
accrued compensation includes accrued executive bonuses of $128,000 and $215,000 as of June 30, 2020, and 2019, respectively.
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
|
|
|
20,254,309
|
|
Balance as of June 30, 2020
|
|
$
|
20,254,309
|
|
AKERNA
CORP.
Notes
to Consolidated Financial Statements
June
30, 2020
Finite-lived
Intangible Assets, Net
Intangible
assets as of June 30, 2020 consist of the following:
|
|
Weighted average remaining amortization period (in years)
|
|
|
Gross carrying amount
|
|
|
Accumulated amortization
|
|
|
Net
carrying
amount
|
|
Acquired developed technology
|
|
|
4.42
|
|
|
$
|
7,370,000
|
|
|
$
|
(679,696
|
)
|
|
$
|
6,690,304
|
|
Acquired trade names
|
|
|
7.40
|
|
|
|
420,000
|
|
|
|
(23,248
|
)
|
|
|
396,752
|
|
Customer relationships
|
|
|
1.75
|
|
|
|
220,000
|
|
|
|
(24,475
|
)
|
|
|
195,525
|
|
Other intangible assets, not yet placed into service
|
|
|
N/A
|
|
|
|
211,394
|
|
|
|
—
|
|
|
|
211,394
|
|
Intangible assets
|
|
|
|
|
|
$
|
8,221,394
|
|
|
$
|
(727,419
|
)
|
|
$
|
7,493,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software - In-service
|
|
|
1.86
|
|
|
|
2,852,044
|
|
|
|
(560,528
|
)
|
|
|
2,291,516
|
|
Capitalized software - Work in Progress
|
|
|
N/A
|
|
|
|
337,788
|
|
|
|
—
|
|
|
|
337,788
|
|
Total Capitalized Software
|
|
|
|
|
|
|
3,189,832
|
|
|
|
(560,528
|
)
|
|
|
2,629,304
|
|
Total finite-lived intangible assets
|
|
|
|
|
|
$
|
11,411,226
|
|
|
$
|
(1,287,947
|
)
|
|
$
|
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:
|
|
Acquired Intangible Assets
|
|
|
Capitalized Software
|
|
2021
|
|
$
|
1,711,444
|
|
|
$
|
1,325,851
|
|
2022
|
|
|
1,663,607
|
|
|
|
806,012
|
|
2023
|
|
|
1,490,511
|
|
|
|
63,838
|
|
2024
|
|
|
1,469,778
|
|
|
|
63,838
|
|
2025
|
|
|
813,444
|
|
|
|
31,977
|
|
Thereafter
|
|
|
133,797
|
|
|
|
—
|
|
Total
|
|
$
|
7,282,581
|
|
|
$
|
2,291,516
|
|
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.
AKERNA
CORP.
Notes
to Consolidated Financial Statements
June
30, 2020
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 Commercial 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.
Note
7 - Long Term Debt
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)
|
|
$
|
14,131,000
|
|
PPP loan
|
|
|
2,204,600
|
|
Subtotal
|
|
|
16,335,600
|
|
Less: current maturities
|
|
|
(6,135,364
|
)
|
Total long-term debt, less current portion
|
|
$
|
10,200,236
|
|
Senior
Secured Convertible Notes
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.
AKERNA
CORP.
Notes
to Consolidated Financial Statements
June
30, 2020
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
|
|
$
|
6,844,620
|
|
2022
|
|
|
12,359,980
|
|
Aggregate maturities
|
|
|
19,204,600
|
|
Original issue discount on Convertible Notes
|
|
|
(2,040,000
|
)
|
Unrealized change in fair value of Convertible Notes
|
|
|
(829,000
|
)
|
Long term debt outstanding as of June 30, 2020
|
|
$
|
16,335,600
|
|
AKERNA
CORP.
Notes
to Consolidated Financial Statements
June
30, 2020
Note
8 - Stockholders’ Equity
Common
and Preferred Stock
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:
|
|
Shares Issuable Under Warrants
|
|
|
Weighted-average
Exercise
Price
|
|
|
Weighted Average Remaining Life
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding as of July 1, 2018
|
|
|
5,993,750
|
|
|
$
|
11.50
|
|
|
|
—
|
|
|
$
|
—
|
|
Issued
|
|
|
189,365
|
|
|
|
11.50
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/canceled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at June 30, 2019
|
|
|
6,183,115
|
|
|
$
|
11.50
|
|
|
|
4.97
|
|
|
$
|
2,473,000
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(369,311
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/canceled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at June 30, 2020
|
|
|
5,813,804
|
|
|
$
|
11.50
|
|
|
|
3.97
|
|
|
$
|
—
|
|
There
was no aggregate intrinsic value for the warrants outstanding as of June 30, 2020.
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:
|
|
Restricted Shares
|
|
|
Restricted Stock Units
|
|
|
Total
|
|
|
Weighted Average Grant Date Fair Value
|
|
Unvested as of June 30, 2019
|
|
|
215,063
|
|
|
|
—
|
|
|
|
215,063
|
|
|
$
|
11.99
|
|
Granted
|
|
|
—
|
|
|
|
571,229
|
|
|
|
571,229
|
|
|
|
7.24
|
|
Vested
|
|
|
(88,659
|
)
|
|
|
(26,965
|
)
|
|
|
(115,624
|
)
|
|
|
7.25
|
|
Forfeited
|
|
|
(54,091
|
)
|
|
|
(78,470
|
)
|
|
|
(132,561
|
)
|
|
|
10.83
|
|
Unvested as of June 30, 2020
|
|
|
72,313
|
|
|
|
465,794
|
|
|
|
538,107
|
|
|
$
|
6.56
|
|
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.
AKERNA
CORP.
Notes
to Consolidated Financial Statements
June
30, 2020
Note
10 - 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, 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.
|
|
Fully Diluted
|
|
|
Weighted Average for the Year Ended
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Warrants
|
|
|
5,813,804
|
|
|
|
6,183,115
|
|
|
|
5,833,971
|
|
|
|
6,001,013
|
|
Restricted Stock Units
|
|
|
325,121
|
|
|
|
—
|
|
|
|
37,709
|
|
|
|
—
|
|
Restricted Stock Awards
|
|
|
75,654
|
|
|
|
215,063
|
|
|
|
7,656
|
|
|
|
2,351
|
|
Shares of common stock issuable in upon conversion of Convertible Notes
|
|
|
1,936,845
|
|
|
|
—
|
|
|
|
111,130
|
|
|
|
—
|
|
Total
|
|
|
8,151,424
|
|
|
|
6,398,178
|
|
|
|
5,990,466
|
|
|
|
6,003,364
|
|
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*TAGTM and solo*CODETM sold or (ii) 7%
of net revenue. The fees were to be paid annually until the earlier of: (1) our shares trading above $12 per share for any
consecutive 20 trading days in a 30-day period; (b) upon our no longer owning a majority stake in Solo; or (c)
upon expiration of the patents related to solo*TAGTM and solo*CODETM, which is December 1, 2029.
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.
AKERNA
CORP.
Notes
to Consolidated Financial Statements
June
30, 2020
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
|
|
$
|
14,960,000
|
|
Change in fair value reported in the statements of operations
|
|
|
(766,000
|
)
|
Change in fair value reported in other comprehensive income
|
|
|
(63,000
|
)
|
Ending fair value balance - June 30, 2020
|
|
$
|
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.
AKERNA
CORP.
Notes
to Consolidated Financial Statements
June
30, 2020
We
determined the fair value by using the following key inputs to the Monte Carlo Simulation Model:
Fair Value Assumptions - Convertible Notes
|
|
June 30,
2020
|
|
|
June 9,
2020
|
|
Face value principal payable
|
|
$
|
17,000,000
|
|
|
$
|
17,000,000
|
|
Original conversion price
|
|
$
|
11.50
|
|
|
$
|
11.50
|
|
Value of Common Stock
|
|
$
|
8.80
|
|
|
$
|
10.28
|
|
Expected term (years)
|
|
|
2.9
|
|
|
|
3.0
|
|
Volatility
|
|
|
45.0
|
%
|
|
|
45.0
|
%
|
Market yield (range)
|
|
|
23.9
|
%
|
|
|
23.3% to 23.4
|
%
|
Risk free rate
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
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.
AKERNA
CORP.
Notes
to Consolidated Financial Statements
June
30, 2020
Note
13 - Income Taxes
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:
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Income tax expense
|
|
|
|
|
|
|
Current income taxes
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
30,985
|
|
|
$
|
—
|
|
U.S. state
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total current income taxes
|
|
$
|
30,985
|
|
|
$
|
—
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. state
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax benefit
|
|
$
|
—
|
|
|
$
|
—
|
|
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:
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Income tax expense attributable to:
|
|
|
|
|
|
|
Federal
|
|
$
|
(3,255,706
|
)
|
|
$
|
(2,509,246
|
)
|
State, net of federal benefit
|
|
|
(862,690
|
)
|
|
|
(13,452
|
)
|
Foreign tax rate less than federal rate
|
|
|
(2,645
|
)
|
|
|
—
|
|
Permanent differences
|
|
|
312,525
|
|
|
|
—
|
|
Restricted stock awards
|
|
|
—
|
|
|
|
816,505
|
|
Changes in valuation allowance
|
|
|
3,884,440
|
|
|
|
85,455
|
|
Provision to return adjustment
|
|
|
(45,134
|
)
|
|
|
—
|
|
Losses from flow-through entity not subject to tax
|
|
|
—
|
|
|
|
1,640,066
|
|
Other adjustments
|
|
|
195
|
|
|
|
(19,328
|
)
|
|
|
|
|
|
|
|
|
|
Effective income tax expense
|
|
$
|
30,985
|
|
|
$
|
—
|
|
AKERNA
CORP.
Notes
to Consolidated Financial Statements
June
30, 2020
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Noncurrent deferred tax assets:
|
|
|
|
|
|
|
Employee compensation
|
|
$
|
378,003
|
|
|
$
|
—
|
|
Debt issuance costs
|
|
|
323,183
|
|
|
|
—
|
|
Revenue recognition
|
|
|
156,022
|
|
|
|
22,226
|
|
Federal and state net operating loss
|
|
|
4,082,297
|
|
|
|
63,229
|
|
Foreign net operating loss
|
|
|
258,083
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
5,197,588
|
|
|
$
|
85,455
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
(653,819
|
)
|
|
|
—
|
|
Intangibles
|
|
|
(1,808,960
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
$
|
(2,462,779
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(2,734,809
|
)
|
|
|
(85,455
|
)
|
|
|
|
|
|
|
|
|
|
Deferred taxes after valuation allowance
|
|
$
|
—
|
|
|
$
|
—
|
|
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.
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.
|
|
Three Months Ended
September 30, 2019
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
1,397,361
|
|
|
$
|
(17,660
|
)
|
|
$
|
1,379,701
|
|
Gross profit
|
|
|
1,795,529
|
|
|
|
17,660
|
|
|
|
1,813,189
|
|
Product development
|
|
|
1,130,880
|
|
|
|
(519,978
|
)
|
|
|
610,902
|
|
Selling, general and administrative
|
|
|
3,583,815
|
|
|
|
17,899
|
|
|
|
3,601,714
|
|
Net loss
|
|
|
(2,846,071
|
)
|
|
|
519,739
|
|
|
|
(2,326,332
|
)
|
Net loss per share
|
|
|
(0.26
|
)
|
|
|
|
|
|
|
(0.21
|
)
|
|
|
Three Months Ended
December 31, 2019
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
1,638,840
|
|
|
|
(23,601
|
)
|
|
|
1,615,239
|
|
Gross profit
|
|
|
1,667,363
|
|
|
|
23,601
|
|
|
|
1,690,964
|
|
Product development
|
|
|
1,261,509
|
|
|
|
(638,008
|
)
|
|
|
623,501
|
|
Selling, general and administrative
|
|
|
4,796,404
|
|
|
|
86,768
|
|
|
|
4,883,172
|
|
Net loss
|
|
|
(4,338,536
|
)
|
|
|
574,841
|
|
|
|
(3,763,695
|
)
|
Net loss per share
|
|
|
(0.40
|
)
|
|
|
|
|
|
|
(0.34
|
)
|
|
|
Six Months Ended
December 31, 2019
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
3,036,201
|
|
|
|
(41,261
|
)
|
|
|
2,994,940
|
|
Gross profit
|
|
|
3,462,892
|
|
|
|
41,261
|
|
|
|
3,504,153
|
|
Product development
|
|
|
2,392,389
|
|
|
|
(1,157,986
|
)
|
|
|
1,234,403
|
|
Selling, general and administrative
|
|
|
8,380,219
|
|
|
|
104,667
|
|
|
|
8,484,886
|
|
Net loss
|
|
|
(7,184,607
|
)
|
|
|
1,094,580
|
|
|
|
(6,090,027
|
)
|
Net loss per share
|
|
|
(0.66
|
)
|
|
|
|
|
|
|
(0.56
|
)
|
|
|
Three Months Ended
March 31, 2020
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Condensed Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
1,420,909
|
|
|
|
(24,690
|
)
|
|
|
1,396,219
|
|
Gross profit
|
|
|
1,649,637
|
|
|
|
24,690
|
|
|
|
1,674,327
|
|
Product development
|
|
|
1,632,353
|
|
|
|
(757,566
|
)
|
|
|
874,787
|
|
Selling, general and administrative
|
|
|
5,500,837
|
|
|
|
177,405
|
|
|
|
5,678,242
|
|
Net loss
|
|
|
(5,348,980
|
)
|
|
|
604,851
|
|
|
|
(4,744,129
|
)
|
Net loss per share
|
|
|
(0.43
|
)
|
|
|
|
|
|
|
(0.38
|
)
|
|
|
Nine Months Ended
March 31, 2020
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
4,457,110
|
|
|
|
(65,951
|
)
|
|
|
4,391,159
|
|
Gross profit
|
|
|
5,112,529
|
|
|
|
65,951
|
|
|
|
5,178,480
|
|
Product development
|
|
|
4,024,742
|
|
|
|
(1,915,552
|
)
|
|
|
2,109,190
|
|
Selling, general and administrative
|
|
|
13,881,056
|
|
|
|
282,072
|
|
|
|
14,163,128
|
|
Net loss
|
|
|
(12,533,587
|
)
|
|
|
1,699,431
|
|
|
|
(10,834,156
|
)
|
Net loss per share
|
|
|
(1.11
|
)
|
|
|
|
|
|
|
(0.96
|
)
|
INDEX
TO AMPLE’S FINANCIAL STATEMENTS
Ample
Organics Inc.
Condensed
Consolidated Interim Statements of Financial Position
[Expressed
in Canadian Dollars]
[See
Going Concern Uncertainty – Note 1]
[Unaudited]
As at
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Cash
|
|
|
512,956
|
|
|
|
986,874
|
|
Trade and other receivables [note 3]
|
|
|
933,387
|
|
|
|
1,549,710
|
|
Inventories
|
|
|
23,106
|
|
|
|
39,437
|
|
Prepaid expenses
|
|
|
255,955
|
|
|
|
329,791
|
|
Total current assets
|
|
|
1,725,404
|
|
|
|
2,905,812
|
|
Property and equipment, net [note 4]
|
|
|
1,809,370
|
|
|
|
1,983,865
|
|
Right of use assets, net [note 5]
|
|
|
2,483,231
|
|
|
|
2,657,120
|
|
Other financial assets
|
|
|
7,910
|
|
|
|
—
|
|
Goodwill and other intangible assets [note 6]
|
|
|
5,690,901
|
|
|
|
5,856,821
|
|
|
|
|
11,716,816
|
|
|
|
13,403,618
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Trade and other payables [note 7]
|
|
|
2,254,708
|
|
|
|
1,423,359
|
|
Due to Akerna
|
|
|
211,552
|
|
|
|
—
|
|
Deferred revenue
|
|
|
397,266
|
|
|
|
495,797
|
|
Lease liabilities [note 8]
|
|
|
539,180
|
|
|
|
544,226
|
|
Short-term debt [note 9]
|
|
|
6,020,278
|
|
|
|
4,746,189
|
|
Total current liabilities
|
|
|
9,422,984
|
|
|
|
7,209,571
|
|
Lease liabilities [note 8]
|
|
|
2,957,382
|
|
|
|
3,113,228
|
|
Preferred share liabilities [note 10]
|
|
|
13,758,104
|
|
|
|
13,636,522
|
|
Deferred tax liability
|
|
|
304,399
|
|
|
|
348,368
|
|
Total liabilities
|
|
|
26,442,869
|
|
|
|
24,307,689
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ deficiency
|
|
|
|
|
|
|
|
|
Share capital [note 11]
|
|
|
14,345,721
|
|
|
|
14,345,721
|
|
Warrants [note 11]
|
|
|
823,778
|
|
|
|
823,778
|
|
Contributed surplus
|
|
|
919,854
|
|
|
|
642,407
|
|
Deficit
|
|
|
(30,815,406
|
)
|
|
|
(26,715,977
|
)
|
Total shareholders’ deficiency
|
|
|
(14,726,053
|
)
|
|
|
(10,904,071
|
)
|
|
|
|
11,716,816
|
|
|
|
13,403,618
|
|
Contingencies
[Note 14]
Subsequent
Events [Note 15]
The
accompanying notes are an integral part of these condensed consolidated interim financial statements
Ample
Organics Inc.
Condensed
Consolidated Statements of Loss and Comprehensive Loss
[Expressed
in Canadian Dollars]
[Unaudited]
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
[note
12]
|
|
|
1,803,495
|
|
|
|
1,797,565
|
|
|
|
3,678,221
|
|
|
|
3,513,548
|
|
Cost of sales
|
|
|
592,229
|
|
|
|
1,225,665
|
|
|
|
1,300,695
|
|
|
|
2,311,301
|
|
Gross profit
|
|
|
1,211,266
|
|
|
|
571,900
|
|
|
|
2,377,526
|
|
|
|
1,202,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses [note 13]
|
|
|
2,011,882
|
|
|
|
860,106
|
|
|
|
2,750,847
|
|
|
|
1,730,098
|
|
Sales and marketing [note 13]
|
|
|
275,376
|
|
|
|
608,727
|
|
|
|
651,237
|
|
|
|
1,187,057
|
|
Research and development [note 13]
|
|
|
729,129
|
|
|
|
1,460,619
|
|
|
|
1,579,209
|
|
|
|
3,741,593
|
|
Share-based compensation [note 11]
|
|
|
142,580
|
|
|
|
171,488
|
|
|
|
277,447
|
|
|
|
292,308
|
|
Depreciation and amortization [notes 4,5,6]
|
|
|
253,034
|
|
|
|
247,740
|
|
|
|
513,615
|
|
|
|
493,837
|
|
Finance costs
|
|
|
439,728
|
|
|
|
134,810
|
|
|
|
748,569
|
|
|
|
246,408
|
|
Loss on fair value of preferred share liabilities [note 10]
|
|
|
—
|
|
|
|
1,816,139
|
|
|
|
—
|
|
|
|
3,632,278
|
|
Loss before income taxes
|
|
|
(2,640,463
|
)
|
|
|
(4,727,729
|
)
|
|
|
(4,143,398
|
)
|
|
|
(10,121,332
|
)
|
Deferred income tax recovery
|
|
|
21,985
|
|
|
|
21,984
|
|
|
|
43,969
|
|
|
|
47,351
|
|
Net loss and comprehensive loss for the year
|
|
|
(2,618,478
|
)
|
|
|
(4,705,745
|
)
|
|
|
(4,099,429
|
)
|
|
|
(10,073,981
|
)
|
The
accompanying notes are an integral part of these condensed consolidated interim financial statements
Ample
Organics Inc.
Consolidated
statements of cash flows
[Expressed
in Canadian dollars]
Six
months ended June 30,
|
|
2020
|
|
|
2019
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
Net loss for the year
|
|
|
(4,099,429
|
)
|
|
|
(10,073,981
|
)
|
Add items not involving cash
|
|
|
|
|
|
|
|
|
Depreciation and amortization [notes 4,5,6]
|
|
|
513,615
|
|
|
|
493,837
|
|
Share-based compensation [note 11]
|
|
|
277,447
|
|
|
|
292,308
|
|
Loss on fair value of preferred share liabilities [note 10]
|
|
|
—
|
|
|
|
3,632,278
|
|
Finance costs
|
|
|
570,361
|
|
|
|
121,370
|
|
Deferred income tax recovery
|
|
|
(43,969
|
)
|
|
|
(47,351
|
)
|
Loss on sale of fixed assets
|
|
|
—
|
|
|
|
161
|
|
|
|
|
(2,781,975
|
)
|
|
|
(5,581,378
|
)
|
Net changes in non-cash working capital balances related to operations
|
|
|
|
|
|
|
|
|
Trade and other receivables
|
|
|
616,323
|
|
|
|
(505,957
|
)
|
Inventories
|
|
|
16,331
|
|
|
|
85,661
|
|
Prepaid expenses
|
|
|
73,836
|
|
|
|
(4,337
|
)
|
Trade and other payables
|
|
|
831,122
|
|
|
|
332,541
|
|
Deferred revenue
|
|
|
(98,531
|
)
|
|
|
125,698
|
|
Cash used in operating activities
|
|
|
(1,342,894
|
)
|
|
|
(5,547,772
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Disposal of property and equipment [note 4]
|
|
|
690
|
|
|
|
1,075
|
|
Purchase of property and equipment [note 4]
|
|
|
—
|
|
|
|
(146,093
|
)
|
Cash provided by (used in) investing activities
|
|
|
690
|
|
|
|
(145,018
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of shares and warrants, net of costs [note 11]
|
|
|
—
|
|
|
|
7,114,196
|
|
Proceeds from related party
|
|
|
211,552
|
|
|
|
—
|
|
Repayment of short-term debt [note 9]
|
|
|
—
|
|
|
|
(3,601,786
|
)
|
Proceeds from issuance of short-term debt, net of costs [note 9]
|
|
|
929,473
|
|
|
|
2,000,000
|
|
Payments for lease obligations
|
|
|
(272,739
|
)
|
|
|
(272,412
|
)
|
Cash provided by financing activities
|
|
|
868,286
|
|
|
|
5,239,998
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash during the period
|
|
|
(473,918
|
)
|
|
|
(452,792
|
)
|
Cash, beginning of the period
|
|
|
986,874
|
|
|
|
1,062,209
|
|
Cash, end of the period
|
|
|
512,956
|
|
|
|
609,417
|
|
The
accompanying notes are an integral part of these condensed consolidated interim financial statements
Ample
Organics Inc.
Condensed
consolidated interim statements of changes in shareholders’ deficiency
[Expressed
in Canadian dollars]
[unaudited]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributed
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
Warrants
|
|
|
Surplus
|
|
|
Deficit
|
|
|
Total
|
|
|
|
#
|
|
|
$
|
|
|
#
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Balance, December 31, 2018
|
|
|
33,271,650
|
|
|
|
8,055,303
|
|
|
|
—
|
|
|
|
—
|
|
|
|
260,790
|
|
|
|
(8,350,359
|
)
|
|
|
(34,266
|
)
|
Impact of IFRS 16 adoption
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(344,834
|
)
|
|
|
(344,834
|
)
|
Issuance of shares, net of costs [note 11]
|
|
|
4,175,972
|
|
|
|
6,290,418
|
|
|
|
2,217,161
|
|
|
|
823,778
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,114,196
|
|
Share-based compensation [note 11]
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
292,308
|
|
|
|
—
|
|
|
|
292,308
|
|
Net loss and comprehensive loss for the year
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,073,981
|
)
|
|
|
(10,073,981
|
)
|
Balance, June 30, 2019
|
|
|
37,447,622
|
|
|
|
14,345,721
|
|
|
|
2,217,161
|
|
|
|
823,778
|
|
|
|
553,098
|
|
|
|
(18,769,174
|
)
|
|
|
(3,046,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
|
37,447,622
|
|
|
|
14,345,721
|
|
|
|
2,217,161
|
|
|
|
823,778
|
|
|
|
642,407
|
|
|
|
(26,715,977
|
)
|
|
|
(10,904,071
|
)
|
Share-based compensation [note 11]
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
277,447
|
|
|
|
—
|
|
|
|
277,447
|
|
Net loss and comprehensive loss for the year
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,099,429
|
)
|
|
|
(4,099,429
|
)
|
Balance, June 30, 2020
|
|
|
37,447,622
|
|
|
|
14,345,721
|
|
|
|
2,217,161
|
|
|
|
823,778
|
|
|
|
919,854
|
|
|
|
(30,815,406
|
)
|
|
|
(14,726,053
|
)
|
The
accompanying notes are an integral part of these condensed consolidated interim financial statements
Ample
Organics Inc.
Notes
to the interim condensed consolidated financial statements
[Expressed
in Canadian dollars, except share amounts]
[unaudited]
June
30, 2020 and 2019
1.
Nature of business and going concern uncertainty
Nature
of business
Ample
Organics Inc. [the “Company” or “Ample Organics”] is Canada’s leading cannabis software company.
The software is built for compliance with the Access to Cannabis for Medical Purposes Regulations [“ACMPR”], which
tracks everything from seed to sale of cannabis and beyond. Ample Organics’ platform allows customers to run their licensed
facilities from end-to-end while meeting the record keeping and traceability requirements of ACMPR.
The
Company was incorporated on August 1, 2014. The Company’s head office is located at 629 Eastern Ave, Building B, Toronto,
Ontario M4M 1E3.
Going
concern uncertainty
The
preparation of these unaudited interim condensed consolidated financial statements requires management to make judgments regarding
the Company’s ability to continue as a going concern. The Company has incurred a total comprehensive loss of $4,099,429
for the six-month period ended June 30, 2020, an accumulated deficit of $30,815,406 and, as of June 30, 2020, the Company’s
current liabilities exceeded current assets by $7,697,580. These events or conditions indicate that a material uncertainty exists
that may cast significant doubt on the Company’s ability to continue as a going concern and therefore, that it may be unable
to realize its assets or discharge its liabilities in the normal course of business. The Company believes it will be able to complete
a transaction that will provide the consolidated entity with sufficient funding to meet its expenditure commitments and support
its planned level of spending, and therefore it is appropriate to prepare the unaudited interim condensed consolidated financial
statements on a going concern basis. Refer to note 15 for subsequent event related to the transaction.
2.
Basis of presentation
These
unaudited interim condensed consolidated financial statements [“financial statements”] were prepared using the same
accounting policies and methods as those used in the Company’s consolidated financial statements for the year ended December
31, 2019. These financial statements have been prepared in compliance with IAS 34 – Interim Financial Reporting.
Accordingly, certain disclosures normally included in annual financial statements prepared in accordance with International Financial
Reporting Standards [“IFRS”] as issued by the International Accounting Standards Board have been omitted or condensed.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited
consolidated financial statements for the year ended December 31, 2019.
These
financial statements were approved and authorized for issuance by the Board of Directors of the Company on October 7, 2020.
COVID-19
During
the six-month period ended June 30, 2020, the outbreak of the recent novel coronavirus [“COVID-19”] has resulted in
governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation
of travel bans, self-imposed quarantine periods and social distancing, have caused disruption to certain businesses globally;
as a result, there could be a possibility of recession in the near future. While the impact of COVID-19 on the Company has been
minimal to date, there is uncertainty around its duration and future business conditions. If the outbreak were to cause disruption
to the Company’s supply chain or its service capabilities in the future, it would have a negative impact on revenue, which
could be material. In addition, any material negative impact on revenue would impact profitability, as well as liquidity and capital
resources.
Use
of estimates and judgments
The
preparation of these unaudited interim condensed consolidated financial statements in accordance with IFRS requires management
to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets,
liabilities and reported amounts of revenues and expenses during the period. These estimates and assumptions are based on historical
experience, expectations of the future, and other relevant factors and are reviewed regularly. Revisions to accounting estimates
are recognized in the period in which the estimates are revised and in any future period affected. Actual results may differ from
these estimates.
In
preparing these unaudited interim condensed consolidated financial statements, the significant judgments made by management in
applying the Company’s accounting policies and the key sources of uncertainty are the same as those applied and described
in the Company’s audited annual consolidated financial statements for the fiscal year ended December 31, 2019.
3.
Trade and other receivables
The
Company’s trade and other receivables comprise the following:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Trade receivable, net of allowance of $75,889 [2019 – $70,953]
|
|
|
933,387
|
|
|
|
920,707
|
|
Investment tax credit receivable
|
|
|
—
|
|
|
|
629,003
|
|
|
|
|
933,387
|
|
|
|
1,549,710
|
|
4.
Property and equipment
|
|
Leasehold improvements
|
|
|
Furniture and equipment
|
|
|
Computer hardware
|
|
|
Total
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2018
|
|
|
1,315,090
|
|
|
|
203,919
|
|
|
|
317,707
|
|
|
|
1,836,716
|
|
Impact of IFRS 16 adoption
|
|
|
383,294
|
|
|
|
—
|
|
|
|
—
|
|
|
|
383,294
|
|
Additions
|
|
|
100,167
|
|
|
|
17,183
|
|
|
|
31,143
|
|
|
|
148,493
|
|
Disposals
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,232
|
)
|
|
|
(2,232
|
)
|
As at December 31, 2019
|
|
|
1,798,551
|
|
|
|
221,102
|
|
|
|
346,618
|
|
|
|
2,366,271
|
|
Disposals
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,846
|
)
|
|
|
(1,846
|
)
|
As at June 30, 2020
|
|
|
1,798,551
|
|
|
|
221,102
|
|
|
|
344,772
|
|
|
|
2,364,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2018
|
|
|
44,334
|
|
|
|
32,854
|
|
|
|
86,542
|
|
|
|
163,730
|
|
Depreciation
|
|
|
63,630
|
|
|
|
42,822
|
|
|
|
113,220
|
|
|
|
219,672
|
|
Disposals
|
|
|
—
|
|
|
|
—
|
|
|
|
(996
|
)
|
|
|
(996
|
)
|
As at December 31, 2019
|
|
|
107,964
|
|
|
|
75,676
|
|
|
|
198,766
|
|
|
|
382,406
|
|
Depreciation
|
|
|
96,685
|
|
|
|
21,757
|
|
|
|
56,363
|
|
|
|
173,806
|
|
Disposals
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,157
|
)
|
|
|
(1,157
|
)
|
As at June 30, 2020
|
|
|
203,649
|
|
|
|
97,433
|
|
|
|
253,972
|
|
|
|
555,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2019
|
|
|
1,690,587
|
|
|
|
145,426
|
|
|
|
147,852
|
|
|
|
1,983,865
|
|
As at June 30, 2020
|
|
|
1,594,902
|
|
|
|
123,669
|
|
|
|
90,800
|
|
|
|
1,809,370
|
|
For
the three- and six-month periods ended June 30, 2020, a depreciation expense of $86,479 and $173,806 [2019 – $46,276
and $140,605] was recorded in the unaudited interim condensed consolidated statement of loss and comprehensive loss in relation
to the property and equipment.
5.
Right-of-use assets
The
Company has lease contracts for office space, vehicles and equipment with remaining terms up to eight years in length. The following
is a summary of the changes in the Company’s right-of-use assets during the year:
|
|
$
|
|
|
|
|
|
As at January 1, 2019
|
|
|
3,034,001
|
|
Depreciation
|
|
|
(376,881
|
)
|
As at December 31, 2019
|
|
|
2,657,120
|
|
Depreciation
|
|
|
(173,889
|
)
|
As at June 30, 2020
|
|
|
2,483,231
|
|
For
the three- and six-month periods ended June 30, 2020, depreciation expense of $83,595 and $173,889 [2019 – $93,780
and $187,311] was recorded in the unaudited interim condensed consolidated statement of loss and comprehensive loss in relation
to the right of use assets.
6.
Goodwill and other intangible assets
The
Company’s intangible assets comprise customer relationships and technology, both of which are being amortized over their
useful lives of five years.
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
4,542,224
|
|
|
|
4,542,224
|
|
Intangible assets
|
|
|
1,148,677
|
|
|
|
1,314,597
|
|
|
|
|
5,690,901
|
|
|
|
5,856,821
|
|
|
|
|
|
|
|
|
|
|
Intangible assets as at June 30, 2020 is as follows:
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
|
|
As at December 31, 2018
|
|
|
|
|
|
|
1,659,200
|
|
As at June 30, 2020 and December 31, 2019
|
|
|
|
|
|
|
1,659,200
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
As at December 31, 2018
|
|
|
|
|
|
|
12,763
|
|
Amortization
|
|
|
|
|
|
|
331,840
|
|
As at December 31, 2019
|
|
|
|
|
|
|
344,603
|
|
Amortization
|
|
|
|
|
|
|
165,920
|
|
As at June 30, 2020
|
|
|
|
|
|
|
510,523
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
|
|
|
|
|
|
|
As at December 31, 2019
|
|
|
|
|
|
|
1,314,597
|
|
As at June 30, 2020
|
|
|
|
|
|
|
1,148,677
|
|
For
the three- and six-month periods ended June 30, 2020, amortization expense of $82,960 and $165,920 [2019 – $82,960
and $165,920] was recorded in the unaudited interim condensed consolidated statement of loss and comprehensive loss in relation
to the intangible assets.
7.
Trade and other payables
The
Company’s trade and other payables comprise the following:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Trade payables
|
|
|
2,199,175
|
|
|
|
1,316,653
|
|
Sales tax payable
|
|
|
55,533
|
|
|
|
106,706
|
|
|
|
|
2,254,708
|
|
|
|
1,423,359
|
|
8.
Lease liabilities
The
following is a summary of the changes in the Company’s lease liabilities during the period:
|
|
$
|
|
|
|
|
|
As at January 1, 2019
|
|
|
3,964,299
|
|
Interest accretion
|
|
|
237,977
|
|
Lease repayments
|
|
|
(544,822
|
)
|
As at December 31, 2019
|
|
|
3,657,454
|
|
Interest accretion
|
|
|
111,847
|
|
Lease repayments
|
|
|
(272,739
|
)
|
As at June 30, 2020
|
|
|
3,496,562
|
|
|
|
|
|
|
Current
|
|
|
539,180
|
|
Non-current
|
|
|
2,957,382
|
|
For
the three- and six-month periods ended June 30, 2020, interest expense of $55,302 and $111,847 [2019 – $60,012
and $121,368] was recorded in the unaudited interim condensed consolidated statement of loss and comprehensive loss in relation
to the lease liability.
For
the three- and six-month periods ended June 30, 2020, variable rent payments of $40,156 and $80,312 [2019 – $39,444
and $73,136] was recorded in the unaudited interim condensed consolidated statement of loss and comprehensive loss.
9.
Short-term debt
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Short-term debt due in September 2020
|
|
|
2,182,016
|
|
|
|
2,097,335
|
|
Short-term debt due in October 2020
|
|
|
3,838,262
|
|
|
|
2,648,854
|
|
|
|
|
6,020,278
|
|
|
|
4,746,189
|
|
On
February 15, 2019, in order to repay the promissory note for the acquisition of LCA, the Company entered into a $2,000,000 loan
bearing interest of 15% per annum, maturing in six months. At inception, the Company recognized the loan at its fair value plus
transaction costs directly attributable to its issuance of $87,165. Subsequent to initial recognition, the loan was carried at
amortized cost. Financing costs of $87,165 related to this loan were recorded in the consolidated statement of loss and comprehensive
loss for the year ended December 31, 2019.
On
September 25, 2019, the loan was amended to extend the maturity date to September 25, 2020 and the interest rate to 12% per annum.
In addition, 600,000 warrants convertible into Class A-3 Preferred Shares of the Company were issued to the lender [note 10].
On entering into the amended loan, the Company completed an assessment that showed that the present value of the cash flows under
the amended loan facility, including the financing costs and cost of warrants issued, differed more than 10% from the present
value of the remaining cash flows of the loan. The amendment was treated as an extinguishment of the original loan and the establishment
of a new loan at its fair value plus transaction costs of $211,567 directly attributable to its issuance. A loss on extinguishment
of $1,001,928 was recorded within finance costs related to the amendment. In December 2019, upon announcement of Akerna Corp.
acquiring Ample [the “Akerna Transaction”] [notes 10 and 15], the carrying value of the amended loan was adjusted
for a revised estimate of future expected cash flows discounted over the remaining estimated life of the amended loan.
On
October 1, 2019, the Company entered into a $2,500,000 loan bearing interest of 12% per annum maturing on October 1, 2020. In
addition, 204,000 warrants convertible into Class A-3 Preferred Shares of the Company were issued to the lender [note 10].
At inception, the Company recognized the loan at its fair value plus transaction costs directly attributable to its issuance of
$246,368. Subsequent to initial recognition, the loan was carried at amortized cost. In December 2019, upon announcement of the
Akerna Transaction [notes 10 and 15], the carrying value of the loan was adjusted for a revised estimate of future expected
cash flows discounted over the remaining estimated life of the amended loan.
On
March 9, 2020, the Company drew down on a supplemental advance of $1,000,000 from the October loan bearing interest of 14% per
annum and maturing on October 1, 2020. In addition, 81,600 Class A-3 Preferred Shares of the Company were issued to the lender
[note 10]. The Company recognized the loan at its fair value plus transaction costs directly attributable to its issuance
of $170,527.
For
the three-and six-month periods ended June 30, 2020, interest expense of $384,426 and $636,722 [2019 – $74,800
and $125,040] was recorded in the unaudited interim condensed consolidated statement of loss and comprehensive loss in relation
to the short-term debt.
At
June 30, 2020, the Company was in breach of the covenants for its short-term debt. No waivers were obtained by the Company for
these covenant breaches. Subsequent to June 30, 2020, the short-term debt was settled upon the closing of the Akerna Transaction.
10.
Preferred share liabilities
The
following is a summary of the changes in the Company’s preferred liabilities:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Opening balance
|
|
|
13,636,522
|
|
|
|
5,234,811
|
|
Additions
|
|
|
121,582
|
|
|
|
1,089,073
|
|
Change in fair value of preferred share liabilities
|
|
|
—
|
|
|
|
7,312,638
|
|
Ending balance
|
|
|
13,758,104
|
|
|
|
13,636,522
|
|
In
June 2018, the Company issued 3,000,000 preferred share units at $1.50 per unit, consisting of 3,000,000 Class A-1 Preferred Shares
and 1,500,000 warrants convertible into Class A-2 Preferred Shares at an exercise price of $2.25 per share for gross proceeds
of $4,500,000. As the Class A-1 Preferred Shares and Class A-2 Preferred Shares are convertible into a variable number of common
shares depending on subsequent issuances of common shares, these preferred shares and the warrants convertible to the preferred
shares are considered financial liabilities. The net proceeds were allocated to the preferred shares and warrants based on the
relative fair value of each instrument.
In
October 2019, the Company issued 804,000 warrants convertible into Class A-3 Preferred Shares at an exercise price of $1.20 to
lenders in connection with loans received [note 9]. As the Class A-3 Preferred Shares are convertible into a variable number
of common shares depending on subsequent issuances of common shares, these preferred shares and the warrants convertible to the
preferred shares are considered financial liabilities.
In
March 2020, the Company issued 81,600 warrants convertible into Class A-3 Preferred Shares at an exercise price of $1.20 to lenders
in connection with loans received [note 9].
The
Company determined that each of the Company’s Class A-1 Preferred Shares, Class A-2 Preferred Shares and Class A-3 Preferred
Shares [collectively the “Class A Preferred Shares”] and warrants that are convertible into Class A Preferred Shares,
did not meet the IFRS definition of equity due to the variability of the conversion price. Accordingly, the Class A Preferred
Shares and the related warrants are treated as financial liabilities measured at fair value through profit or loss.
In
determining the fair values of the warrants issued, the Company used the Black-Scholes pricing model applying the following inputs:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.52
|
%
|
|
|
1.47
|
%
|
Term [years]
|
|
|
3
|
|
|
|
3
|
|
Estimated volatility
|
|
|
70
|
%
|
|
|
70
|
%
|
Warrant value
|
|
$
|
2.08
|
|
|
$
|
1.40
|
|
Share price
|
|
$
|
3.00
|
|
|
$
|
2.22
|
|
Exercise price
|
|
$
|
1.20
|
|
|
$
|
1.20
|
|
In
December 2019, 1,500,000 warrants convertible into Class A-2 Preferred Shares were converted into 777,637 Class A-2 Preferred
Shares and 492,000 warrants convertible into Class A-3 Preferred Shares were converted into 283,721 Class A-3 Preferred Shares.
For
the three- and six-month periods year ended June 30, 2020, a $nil and $nil change on fair value of preferred share liabilities
[2019 – $1,816,139 loss and $3,632,278 loss] was recorded in the unaudited interim condensed consolidated statement
of loss and comprehensive loss.
11.
Share capital
The
authorized share capital of the Company consists of an unlimited number of common shares and 5,304,000 Class A Preferred Shares,
issuable in series, of which 3,000,000 are designated as Class A-1 Preferred Shares, 1,500,000 are designated as Class A-2 Preferred
Shares and 885,600 are designated as Class A-3 Preferred Shares.
Class
A Preferred Shares are convertible, at the option of the holder, into a number of fully paid and non-assessable common shares
as determined by dividing the original issue price of the series of Class A Preferred Shares by the then effective conversion
price and adjustments to the conversion price in the event the Company issues additional common shares and amounts less than the
original conversion price. The conversion and original issue price is $1.50 for Class A-1 Preferred Shares, $2.25 for Class A-2
Preferred Shares, and $1.20 for Class A-3 Preferred Shares, subject to anti-dilution provisions. Preferred shares automatically
convert to common shares upon: [i] an amalgamation, arrangement, consolidation, merger, reorganization or similar transaction
of the Company, [ii] the sale, lease, transfer, exclusive license or disposition of substantially all of the Company’s assets,
[iii] the closing of a public offering of the Company’s common shares provided the offering price per share is not less
than $4.50 and aggregate gross proceeds are greater than $20,000,000, or [iv] the vote of the majority of holders of Class A Preferred
Shares to convert.
|
[b]
|
Issued
and outstanding
|
On
February 22, 2019, the Company issued 2,436,207 common share units at $1.80 per unit, consisting of 2,436,207 common shares and
1,218,100 warrants convertible into common shares at an exercise price of $2.70 until February 22, 2021. In connection with this
transaction, the Company issued 27,698 broker warrants convertible into common shares at an exercise price of $1.80 until February
22, 2021 and paid $96,278 in transaction costs.
On
April 25, 2019, the Company issued 1,358,052 common share units at $1.80 per unit, consisting of 1,358,052 common shares and 679,024
warrants convertible into common shares at an exercise price of $2.70 until April 25, 2021. In connection with this transaction,
the Company issued 81,483 broker warrants convertible into common shares at an exercise price of $1.80 until April 25, 2021 and
paid $246,389 in transaction costs.
On
May 2, 2019, the Company issued 309,200 common share units at $1.80 per unit, consisting of 309,200 common shares and 154,600
warrants convertible into common shares at an exercise price of $2.70 until May 2, 2021. In connection with this transaction,
the Company issued 20,000 advisory warrants convertible into common shares at an exercise price of $1.80 until May 2, 2021 and
paid $29,944 in transaction costs.
On
May 15, 2019, the Company issued 72,513 common share units at $1.80 per unit, consisting of 72,513 common shares and 36,256 warrants
convertible into common shares at an exercise price of $2.70 until May 15, 2021. In connection with this transaction, the Company
paid $29,944 in transaction costs.
All
of the warrants convertible to common shares for these transactions are convertible into common shares at a 1:1 ratio. The warrants
were valued using the Black-Scholes pricing model with the following inputs:
|
|
2019
|
|
|
|
|
|
Risk-free
interest rate
|
|
1.54%
– 1.79
|
%
|
Term
[years]
|
|
2
|
|
Volatility
|
|
70
|
%
|
Dividend
yield
|
|
Nil
|
|
Warrant
value
|
|
$0.38
– $0.57
|
|
Share
price
|
|
$1.61
|
|
Exercise
price
|
|
$1.80
– $2.70
|
|
|
[c]
|
Employee
stock option plan
|
The
Company has an Employee Stock Option Plan [the “Plan”] that is administered by the Board of Directors of the Company
who establishes exercise prices, at not less than market price at the date of grant, and expiry dates, which have been set at
ten years from issuance. Options under the Plan remain exercisable in increments with 1/4 being exercisable on each of the first
and second anniversary and 2/4 being exercisable on the third anniversary from the date of grant, except as otherwise approved
by the Board of Directors. The maximum number of common shares reserved for issuance for options that may be granted under the
Plan is 10% of the common shares outstanding, which amounts to 3,744,762 at June 30, 2020 [2019 – 3,744,762].
The
following is a summary of the changes in the Company’s stock options:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
average
|
|
|
|
options
|
|
|
exercise price
|
|
|
|
#
|
|
|
$
|
|
Outstanding as at December 31, 2018
|
|
|
1,070,500
|
|
|
|
1.50
|
|
Granted
|
|
|
888,500
|
|
|
|
1.80
|
|
Forfeited
|
|
|
(915,188
|
)
|
|
|
1.60
|
|
Expired
|
|
|
(25,312
|
)
|
|
|
1.50
|
|
Outstanding as at December 31, 2019
|
|
|
1,018,500
|
|
|
|
1.67
|
|
Forfeited
|
|
|
(37,500
|
)
|
|
|
1.50
|
|
Expired
|
|
|
(31,250
|
)
|
|
|
1.50
|
|
Outstanding as at June 30, 2020
|
|
|
949,750
|
|
|
|
1.68
|
|
For
the three- and six-month period ended June 30, 2020, the Company recorded $142,580 and $277,447 [2019 – $171,488
and $292,308] in share-based compensation expense related to options, which are measured at the fair value at the date of grant
and expensed over the option’s vesting period.
In
determining the amount of share-based compensation, the Company used the Black-Scholes option pricing model to establish the fair
value of options granted by applying the following assumptions:
|
|
2019
|
|
Grant
date share price
|
|
$
|
1.61
|
|
Exercise
price
|
|
$
|
1.80
|
|
Expected
dividend yield
|
|
|
—
|
|
Risk
free interest rate
|
|
|
1.49%
– 1.76
|
%
|
Expected
life
|
|
|
10
years
|
|
Expected
volatility
|
|
|
70
|
%
|
Expected
volatility was estimated by using the historical volatility of other companies that the Company considers comparable that have
trading and volatility history. The expected option life represents the period of time that options granted are expected to be
outstanding. The risk-free interest rate is based on government bonds with a remaining term equal to the expected life of the
options.
The
following table is a summary of the Company’s share options outstanding as at June 30, 2020:
|
|
|
|
Options
outstanding
|
|
|
Options
exercisable
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
remaining
contractual life
|
|
|
|
|
|
|
|
|
|
Exercise
price
|
|
|
outstanding
|
|
|
[years]
|
|
|
Exercise
price
|
|
|
Number
exercisable
|
|
|
|
$
|
|
|
#
|
|
|
#
|
|
|
$
|
|
|
#
|
|
|
|
|
1.50
|
|
|
|
376,750
|
|
|
|
9.55
|
|
|
|
1.50
|
|
|
94,188
|
|
|
|
|
1.80
|
|
|
|
530,250
|
|
|
|
8.95
|
|
|
|
1.80
|
|
|
69,000
|
|
|
|
|
1.68
|
|
|
|
907,000
|
|
|
|
9.20
|
|
|
|
1.63
|
|
|
163,188
|
|
|
The
following table is a summary of the Company’s share options outstanding as at June 30, 2019:
|
|
|
|
Options
outstanding
|
|
|
Options
exercisable
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
remaining
contractual life
|
|
|
|
|
|
|
|
|
|
Exercise
price
|
|
|
outstanding
|
|
|
[years]
|
|
|
Exercise
price
|
|
|
Number
exercisable
|
|
|
|
$
|
|
|
#
|
|
|
#
|
|
|
$
|
|
|
#
|
|
|
|
|
1.50
|
|
|
|
927,000
|
|
|
|
4.36
|
|
|
|
1.50
|
|
|
—
|
|
|
|
|
1.80
|
|
|
|
324,500
|
|
|
|
8.29
|
|
|
|
1.80
|
|
|
—
|
|
|
|
|
1.58
|
|
|
|
1,251,500
|
|
|
|
5.38
|
|
|
|
—
|
|
|
—
|
|
|
12.
Disaggregated revenue
The
Company derives its revenues from two main sources, software-as-a-service application [“SaaS”], and professional services
revenue, which includes services such system integration and training, and process-change analysis. Subscription revenue related
to the provision of SaaS is recognized ratably over the contract term as the service is delivered. Professional services revenue
is recognized as services are rendered. Other revenue relates mainly to sale of hardware.
The
following table represents disaggregation of revenue for the three- and six-month periods ended June 30, 2020 and 2019:
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
|
1,485,218
|
|
|
|
1,028,497
|
|
|
|
2,962,889
|
|
|
|
1,939,536
|
|
Professional services
|
|
|
220,624
|
|
|
|
113,197
|
|
|
|
419,056
|
|
|
|
317,162
|
|
Other
|
|
|
97,653
|
|
|
|
655,871
|
|
|
|
296,276
|
|
|
|
1,256,850
|
|
Total
|
|
|
1,803,495
|
|
|
|
1,797,565
|
|
|
|
3,678,221
|
|
|
|
3,513,548
|
|
13.
Expenses by nature
Components
of general and administrative expenses, sales and marketing and research and development expenses for the three- and six-month
periods ended June 30, 2020 and 2019 were as follows:
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
|
1,141,591
|
|
|
|
1,864,046
|
|
|
|
2,505,711
|
|
|
|
3,714,465
|
|
Professional fees
|
|
|
510,684
|
|
|
|
951,306
|
|
|
|
769,726
|
|
|
|
2,711,772
|
|
Acquisition related expenses
|
|
|
1,114,427
|
|
|
|
—
|
|
|
|
1,334,762
|
|
|
|
—
|
|
Other
|
|
|
249,685
|
|
|
|
114,100
|
|
|
|
371,094
|
|
|
|
232,511
|
|
|
|
|
3,016,387
|
|
|
|
2,929,452
|
|
|
|
4,981,293
|
|
|
|
6,658,748
|
|
14.
Contingencies
In
the ordinary course of business, from time to time, the Company is involved in various claims related to operations, rights, commercial,
employment or other claims. Although such matters cannot be predicted with certainty, management does not consider the Company’s
exposure to these claims to be material to these financial statements.
15.
Subsequent events
Akerna’s
acquisition of the Company was completed on July 7, 2020. The Company was acquired for $7.5 million [US$ 5.5 million] in
cash and approximately 3.3 million shares exchangeable, with an estimated value of $41.9 million [US$30.7 million], into an equivalent
number of Akerna common stock. As part of the acquisition, the short-term debt and preferred share liabilities were settled.
Report
of independent auditor
To
the Board of Directors of Ample Organics Inc.
We
have audited the accompanying consolidated financial statements of Ample Organics Inc. [the “Company”], which comprise
the consolidated statements of financial position as of December 31, 2019 and 2018, and the related consolidated statements of
loss and comprehensive loss, changes in stockholders’ deficiency, and cash flows for each of the two years in the period
ended December 31, 2019, and the related notes to the financial statements.
Management’s
responsibility for the consolidated financial statements
Management
is responsible for the preparation and fair presentation of these consolidated financial statements in conformity with International
Financial Reporting Standards [“IFRS”], this includes the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor’s
responsibility
Our
responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance
with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement.
An
audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of
the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.
We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Ample Organics Inc. at December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each
of the two years in the period ended December 31, 2019 in conformity with IFRS.
The
Company’s ability to continue as a going concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1 to the consolidated financial statements, the Company has recurring losses from operations, has a working
capital deficiency, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern.
Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our opinion is not modified with respect to this matter.
/s/
Ernst & Young LLP
Toronto,
Ontario
June
11, 2020
Ample
Organics Inc.
Consolidated
statements of financial position
[Expressed in Canadian dollars]
As
at December 31
|
|
2019
CAD$
|
|
|
2018
CAD$
|
|
Assets
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Cash
|
|
|
986,874
|
|
|
|
1,062,209
|
|
Trade and other receivables [note 4]
|
|
|
1,549,710
|
|
|
|
1,630,439
|
|
Inventories
|
|
|
39,437
|
|
|
|
210,507
|
|
Prepaid expenses
|
|
|
329,791
|
|
|
|
385,054
|
|
Total current assets
|
|
|
2,905,812
|
|
|
|
3,288,209
|
|
Property and equipment, net [note 5]
|
|
|
1,983,865
|
|
|
|
1,672,986
|
|
Right of use assets, net [note 6]
|
|
|
2,657,120
|
|
|
|
—
|
|
Other financial assets
|
|
|
—
|
|
|
|
25,000
|
|
Goodwill and other intangible assets [note 7]
|
|
|
5,856,821
|
|
|
|
6,188,661
|
|
|
|
|
13,403,618
|
|
|
|
11,174,856
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Trade and other payables [note 8]
|
|
|
1,423,359
|
|
|
|
1,200,860
|
|
Deferred revenue
|
|
|
495,797
|
|
|
|
731,977
|
|
Lease liabilities [note 9]
|
|
|
544,226
|
|
|
|
—
|
|
Short-term debt [note 10]
|
|
|
4,746,189
|
|
|
|
3,601,786
|
|
Total current liabilities
|
|
|
7,209,571
|
|
|
|
5,534,623
|
|
Lease liabilities [note 9]
|
|
|
3,113,228
|
|
|
|
—
|
|
Preferred share liabilities [note 11]
|
|
|
13,636,522
|
|
|
|
5,234,811
|
|
Deferred tax liability [note 13]
|
|
|
348,368
|
|
|
|
439,688
|
|
Total liabilities
|
|
|
24,307,689
|
|
|
|
11,209,122
|
|
Shareholders’ deficiency
|
|
|
|
|
|
|
|
|
Share capital [note 12]
|
|
|
14,345,721
|
|
|
|
8,055,303
|
|
Warrants [note 12]
|
|
|
823,778
|
|
|
|
—
|
|
Contributed surplus
|
|
|
642,407
|
|
|
|
260,790
|
|
Deficit
|
|
|
(26,715,977
|
)
|
|
|
(8,350,359
|
)
|
Total shareholders’ deficiency
|
|
|
(10,904,071
|
)
|
|
|
(34,266
|
)
|
|
|
|
13,403,618
|
|
|
|
11,174,856
|
|
Commitments
and contingencies [note 16]
Subsequent
events [note 21]
On
behalf of the Board:
/s/
John Prentice
|
|
/s/
Cal Miller
|
Director
|
|
Director
|
The
accompanying notes are an integral part of these consolidated financial statements
Ample
Organics Inc.
Consolidated
statements of loss and comprehensive loss
[Expressed
in Canadian dollars]
Years
ended December 31
|
|
2019
CAD$
|
|
|
2018
CAD$
|
|
Revenue [note 14]
|
|
|
7,420,199
|
|
|
|
6,436,876
|
|
Cost of sales
|
|
|
4,363,863
|
|
|
|
3,291,566
|
|
Gross profit
|
|
|
3,056,336
|
|
|
|
3,145,310
|
|
General and administrative expenses [note 15]
|
|
|
3,520,720
|
|
|
|
2,283,351
|
|
Sales and marketing [note 15]
|
|
|
2,079,045
|
|
|
|
1,616,103
|
|
Research and development [note 15]
|
|
|
4,777,996
|
|
|
|
4,737,175
|
|
Share-based compensation [note 12]
|
|
|
381,617
|
|
|
|
260,790
|
|
Depreciation and amortization [notes 5,6,7]
|
|
|
928,393
|
|
|
|
162,853
|
|
Finance costs [note 10]
|
|
|
2,143,031
|
|
|
|
5,409
|
|
Loss on fair value of preferred share liabilities [note 11]
|
|
|
7,312,638
|
|
|
|
776,000
|
|
Other expense
|
|
|
25,000
|
|
|
|
—
|
|
Loss before income taxes
|
|
|
(18,112,104
|
)
|
|
|
(6,696,371
|
)
|
Deferred income tax recovery [note 13]
|
|
|
91,320
|
|
|
|
—
|
|
Net loss and comprehensive loss for the year
|
|
|
(18,020,784
|
)
|
|
|
(6,696,371
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements
Ample
Organics Inc.
Consolidated
statements of changes in shareholders’ deficiency
[Expressed in Canadian dollars]
|
|
Common Shares
|
|
|
Warrants
|
|
|
Contributed
Surplus
|
|
|
Deficit
|
|
|
Total
|
|
|
|
#
|
|
|
CAD$
|
|
|
#
|
|
|
CAD$
|
|
|
CAD$
|
|
|
CAD$
|
|
|
CAD$
|
|
Balance, December 31, 2017
|
|
|
29,969,426
|
|
|
|
2,975,522
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,653,988
|
)
|
|
|
1,321,534
|
|
Issuance of shares, net of costs [note 12]
|
|
|
3,302,224
|
|
|
|
5,079,781
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,079,781
|
|
Share-based compensation [note 12]
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
260,790
|
|
|
|
—
|
|
|
|
260,790
|
|
Net loss and comprehensive loss for the year
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,696,371
|
)
|
|
|
(6,696,371
|
)
|
Balance, December 31, 2018
|
|
|
33,271,650
|
|
|
|
8,055,303
|
|
|
|
—
|
|
|
|
—
|
|
|
|
260,790
|
|
|
|
(8,350,359
|
)
|
|
|
(34,266
|
)
|
Impact of IFRS 16 adoption [note 3]
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(344,834
|
)
|
|
|
(344,834
|
)
|
Issuances of shares and warrants, net of costs [note 12]
|
|
|
4,175,972
|
|
|
|
6,290,418
|
|
|
|
2,217,161
|
|
|
|
823,778
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,114,196
|
|
Share-based compensation [note 12]
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
381,617
|
|
|
|
—
|
|
|
|
381,617
|
|
Net loss and comprehensive loss for the year
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(18,020,784
|
)
|
|
|
(18,020,784
|
)
|
Balance, December 31, 2019
|
|
|
37,447,622
|
|
|
|
14,345,721
|
|
|
|
2,217,161
|
|
|
|
823,778
|
|
|
|
642,407
|
|
|
|
(26,715,977
|
)
|
|
|
(10,904,071
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements
Ample
Organics Inc.
Consolidated
statements of cash flows
[Expressed in Canadian dollars]
Year
ended December 31
|
|
2019
CAD$
|
|
|
2018
CAD$
|
|
Operating activities
|
|
|
|
|
|
|
Net loss for the year
|
|
|
(18,020,784
|
)
|
|
|
(6,696,371
|
)
|
Add items not involving cash
|
|
|
|
|
|
|
|
|
Depreciation and amortization [notes 5,6,7]
|
|
|
928,393
|
|
|
|
162,853
|
|
Share-based compensation [note 12]
|
|
|
381,617
|
|
|
|
260,790
|
|
Loss on fair value of preferred share liabilities [note 11]
|
|
|
7,312,638
|
|
|
|
776,000
|
|
Finance costs
|
|
|
1,792,435
|
|
|
|
—
|
|
Deferred income tax recovery
|
|
|
(91,320
|
)
|
|
|
—
|
|
Impairment of financial asset
|
|
|
25,000
|
|
|
|
—
|
|
Loss on sale of fixed assets
|
|
|
161
|
|
|
|
1,070
|
|
|
|
|
(7,671,860
|
)
|
|
|
(5,495,658
|
)
|
Net changes in non-cash working capital balances related to operations
|
|
|
|
|
|
|
|
|
Trade and other receivables
|
|
|
282,899
|
|
|
|
(1,180,641
|
)
|
Inventories
|
|
|
171,070
|
|
|
|
(161,945
|
)
|
Prepaid expenses
|
|
|
55,263
|
|
|
|
(157,854
|
)
|
Trade and other payables
|
|
|
222,497
|
|
|
|
468,942
|
|
Deferred revenue
|
|
|
(236,180
|
)
|
|
|
25,269
|
|
Cash used in operating activities
|
|
|
(7,176,311
|
)
|
|
|
(6,501,887
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
—
|
|
|
|
(3,525,627
|
)
|
Disposal of property and equipment [note 5]
|
|
|
1,075
|
|
|
|
8,988
|
|
Purchase of property and equipment [note 5]
|
|
|
(148,493
|
)
|
|
|
(981,901
|
)
|
Cash used in investing activities
|
|
|
(147,418
|
)
|
|
|
(4,498,540
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of shares and warrants, net of costs [note 12]
|
|
|
7,114,196
|
|
|
|
7,303,283
|
|
Repayment of short-term debt [note 10]
|
|
|
(5,601,786
|
)
|
|
|
—
|
|
Proceeds from issuance of short-term debt, net of costs [note 10]
|
|
|
6,280,806
|
|
|
|
3,601,786
|
|
Payments for lease obligations
|
|
|
(544,822
|
)
|
|
|
—
|
|
Cash provided by financing activities
|
|
|
7,248,394
|
|
|
|
10,905,069
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash during the year
|
|
|
(75,335
|
)
|
|
|
(95,358
|
)
|
Cash, beginning of the year
|
|
|
1,062,209
|
|
|
|
1,157,567
|
|
Cash, end of the year
|
|
|
986,874
|
|
|
|
1,062,209
|
|
The
accompanying notes are an integral part of these consolidated financial statements
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
1.
Nature of business and going concern uncertainty
Nature
of business
Ample
Organics Inc. [the “Company” or “Ample Organics”] is Canada’s leading cannabis software company.
The software is built for compliance with the Access to Cannabis for Medical Purposes Regulations [“ACMPR”], which
tracks everything from seed to sale of cannabis and beyond. Ample Organics’ platform allows customers to run their licensed
facilities from end-to-end while meeting the record keeping and traceability requirements of ACMPR.
The
Company was incorporated on August 1, 2014. The Company’s head office is located at 629 Eastern Ave, Building B, Toronto,
Ontario M4M 1E3.
Going
concern uncertainty
The
preparation of these consolidated financial statements requires management to make judgments regarding the Company’s ability
to continue as a going concern. Management has determined that as at December 31, 2019, it does not have adequate working capital
for the coming year based on current capital resources. The Company has incurred a total comprehensive loss of CAD$18,020,784
for the year ended December31, 2019, an accumulated deficit of CAD$26,715,977 and, as of December 31, 2019, the Company’s
current liabilities exceeded current assets by CAD$4,303,759. These events or conditions indicate that a material uncertainty
exists that raise substantial doubt about the Company’s ability to continue as a going concern and therefore, that it may
be unable to realize its assets or discharge its liabilities in the normal course of business. The Company believes it will be
able to complete a transaction that will provide the Company with sufficient funding to meet its expenditure commitments and support
its planned level of spending, and therefore it is appropriate to prepare the consolidated financial statements on a going concern
basis.
2.
Basis of presentation
[a]
Statement of compliance
These
consolidated financial statements [the “financial statements”] have been prepared by management on a going concern
basis in accordance with generally accepted accounting principles in Canada for publicly accountable enterprises, as set out in
the CPA Canada Handbook — Accounting, which incorporates International Financial Reporting Standards [“IFRS”]
as issued by the International Accounting Standards Board [“IASB”]. The policies set out below have been consistently
applied to all periods presented unless otherwise noted.
These
financial statements were approved and authorized for issuance by the Board of Directors of the Company on June 11, 2020.
[b]
Basis of measurement
These
financial statements have been prepared on a historical cost basis. Historical costs are generally based upon the fair value of
the consideration given in exchange for goods and services.
Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation
technique. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the
asset or liability if market participants would take those characteristics into account when pricing the asset or liability at
the measurement date. Fair value for measurement and/or disclosure purposes in these financial statements is determined on such
a basis, except for share-based payment transactions that are within the scope of IFRS 2 Share-based Payment [“IFRS 2”]
and measurements that have some similarities to fair value, but are not fair value, such as value in use in IAS 36 Impairment
of Assets.
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
2.
Basis of presentation (cont.)
[c]
Basis of presentation
These
financial statements comprise the accounts of the Company, and its wholly owned legal subsidiary, Last Call Analytics Inc. [“LCA”]
and Ample Organics Australia PTY LTD, after the elimination of all intercompany balances and transactions.
Subsidiary
The
subsidiary is an entity over which the Company has exposure to variable returns from its involvement and has the ability to use
power over the investee to affect its returns. The existence and effect of potential voting rights that are currently exercisable
or convertible are considered when assessing whether the Company controls another entity. The subsidiary is fully consolidated
from the date on which control is transferred to the Company until the date on which control ceases. The accounts of the subsidiary
are prepared for the same reporting period as the parent company, using consistent accounting policies. Intercompany transactions,
balances and unrealized gains or losses on transactions are eliminated upon consolidation.
[d]
Functional currency and presentation currency
These
financial statements are presented in Canadian dollars, which is the Company’s functional currency.
[e]
Use of estimates and judgments
The
preparation of these financial statements in conformity with IFRS requires management to make estimates, judgments and assumptions
that affect the application of accounting policies and the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these
estimates.
Estimates
are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Estimates
and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in
which the estimate is revised if the revision affects only that reporting period, or in the period of the revision and future
periods if the revision affects both current and future periods.
The
following are the critical judgments, apart from those involving estimations, that management has made in the process of applying
the Company’s accounting policies and that have the most significant effect on the amounts recognized in the financial statements:
[i]
Revenue recognition
Multi-element
or bundled contracts require an estimate of the relative stand-alone selling prices of separate elements. The Company assesses
the criteria for the recognition of revenue related to arrangements that have multiple components. These assessments require judgment
by management to determine if there are separately identifiable components as well as how to allocate the total price among the
components. Deliverables are accounted for as separately identifiable components. In concluding whether components are separately
identifiable, management considers the transaction from the customer’s perspective. Among other factors, management assesses
whether the service or product is sold separately by the Company in the normal course of business or whether the customer could
purchase the service or product separately.
Ample Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
2.
Basis of presentation (cont.)
[ii]
Estimated useful lives, residual values and depreciation of property and equipment
Depreciation
of property and equipment are dependent upon estimates of useful lives and residual values, which are determined through the exercise
of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into
account factors such as economic and market conditions and the useful lives of assets.
[iii]
Estimated useful lives and amortization of intangible assets
The
Company employs significant estimates to determine the estimated useful lives of intangible assets, considering technology trends,
contractual rights, past experience, expected use and review of asset useful lives. The Company reviews amortization methods and
useful lives annually or when circumstances change and adjusts its amortization methods and assumptions prospectively.
[iv]
Valuation of share-based payments, warrants and Class A-3 Preferred Shares
Management
measures the fair value for share-based payments, warrants and Class A-3 Preferred Shares using market-based option valuation
techniques. Assumptions are made and estimates are used in applying the valuation techniques. These include estimating the future
volatility of the share price, expected dividend yield, expected risk-free interest rate and the rate of forfeiture. Such estimates
and assumptions are inherently uncertain. Changes in these assumptions affect the fair value estimates of share-based payments,
warrants and Class A-3 preferred shares.
3.
Significant accounting policies
[a]
Cash
Cash
includes cash deposits in financial institutions.
[b]
Foreign currency translation
Foreign
currency transactions are translated into Canadian dollars at exchange rates in effect on the date of the transactions. At the
end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars
at the foreign exchange rate applicable at that period-end date. Non-monetary assets and liabilities that are measured in terms
of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Expenses are translated
at the exchange rates that approximate those in effect on the date of the transaction. Realized and unrealized exchange gains
and losses are recognized in the consolidated statements of loss and comprehensive loss.
[c]
Business combinations
Business
combinations are accounted for using the acquisition method. In applying the acquisition method, the Company separately measures
at their acquisition-date fair values, the identifiable assets acquired, the liabilities assumed, and goodwill acquired and any
non-controlling interest in the acquired entity. The consideration transferred for the acquisition of a subsidiary is the fair
value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued
by the Company. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration
arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured
initially at their fair values at the acquisition date.
Acquisition
costs in connection with a business combination are expensed as incurred.
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
3.
Significant accounting policies (cont.)
Goodwill
is measured as the excess of the fair value of the consideration transferred, less any non-controlling interest in the entity
being acquired at the proportionate share of the recognized net identifiable assets acquired. Goodwill acquired through a business
combination is allocated to each cash-generating unit [“CGU”] or group of CGUs that are expected to benefit from the
related business combination. A group of CGUs represents the lowest level within the entity at which the goodwill is monitored
for internal management purposes, which is not higher than an operating segment. Goodwill is tested for impairment annually or
more frequently if certain indicators arise that indicate they are impaired.
[d]
Inventories
Inventories
are measured at the lower of cost and net realizable value. The costs of inventories are determined on a weighted average cost
basis. Net realizable value represents the estimated selling price for inventories less estimated costs necessary to make the
sale.
The
cost of inventories, which consists of computer equipment, comprises all costs of purchase and other costs incurred in bringing
the inventories to their present location and condition. The cost of purchase comprises the purchase price, non-recoverable taxes,
transport, handling, and other costs directly attributable to the acquisition of goods.
Inventory
allowances are recorded in the period in which management determines the inventory to be obsolete.
[e]
Revenue from contracts with customers
Revenue
is recognized upon transfer of control of the promised goods or services to customers in an amount that reflects the consideration
the Company expects to receive in exchange for those goods or services. Performance obligations related to a contract are satisfied
through the transfer of a promised good or service [i.e., an asset] to a customer, either over time or at a point in time. An
asset is transferred when [or as] the customer obtains control of that asset, which refers to the ability to use and obtain substantially
all of the remaining benefits from the asset, such as by:
[i]
using the asset to produce goods or provide services [including public services];
[ii]
using the asset to enhance the value of other assets;
[iii]
using the asset to settle liabilities or reduce expenses;
[iv]
selling or exchanging the asset;
[v]
pledging the asset to secure a loan; and
[vi]
holding the asset.
Payment
terms are typically 30 days with a CAD$20,000 credit limit on services. Deferred revenue, classified as contract liabilities under
International Financial Reporting Standards [“IFRS”]15, relates to payments received in advance of performance under
contracts with customers. Contract liabilities are recognized as [or when] the Company satisfies its performance obligation under
the contracts.
Software
licenses and services
The
Company provides software licenses for contract terms of generally one year, along with implementation [professional] services
to provide support and training for customers. These are considered to be one performance obligation under IFRS 15 and are satisfied
over the contract term. Revenue is recognized ratably on the basis of time remaining from the start of the contract to its conclusion,
on a contract-by-contract basis.
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
3.
Significant accounting policies (cont.)
The
first three months of a contract are typically pre-billed upon scheduling of an onsite implementation date, resulting in contract
liabilities. The remaining payments under the contract are billed on a monthly basis, subsequent to revenue recognition and resulting
in contract assets.
Hardware
and third — party licenses
The
Company provides its software pre-installed and configured on its own dedicated device/hardware and can also install third-party
licenses necessary for the operation of the hardware network. These are considered distinct, separate performance obligations
under IFRS15, and are satisfied at a point in time once the setup is complete. Hardware purchases by new customers must be paid
for upfront prior to installation, resulting in contract liabilities until the setup is complete. Hardware purchases by existing
customers are billed once the devices have been shipped and configured, resulting in contract assets.
The
Company measures revenue at the fair value of consideration received or receivable, taking into account any contractually defined
terms for volume discounts or refunds. As contracts are generally one year in length, performance obligations related to existing
contract liabilities are expected to be satisfied by the end of the next fiscal year-end.
[f]
Property and equipment
The
Company’s property and equipment are measured at cost less accumulated depreciation and impairment losses.
The
cost of an item of property and equipment includes expenditures that are directly attributable to the acquisition or construction
of the asset.
Depreciation
is recorded over the estimated useful lives as outlined below:
Computer hardware
|
|
3 – 5 years
|
Furniture and equipment
|
|
3 – 5 years
|
Leasehold improvements
|
|
Lesser of useful life or term of lease
|
The
Company assesses an asset’s residual value, useful life and depreciation method on a regular basis and if any events have
indicated a change and makes adjustments if appropriate.
Gains
and losses on disposal of property and equipment are determined by comparing the proceeds from disposal with the carrying amount
of the property and equipment and are recognized in the consolidated statement of loss and comprehensive loss.
[g]
Intangible assets
The
Company’s intangible assets relate to customer relationships and technology. The cost of an intangible asset acquired in
a business combination is its fair value at the acquisition date.
Research
costs are expensed as incurred.
The
useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with a finite life are amortized
over the estimated useful life. Intangible assets are amortized on a straight-line basis as follows:
Customer relationships
|
|
|
5 years
|
|
Technology
|
|
|
5 years
|
|
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
3.
Significant accounting policies (cont.)
The
amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the
end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits
embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and are treated as changes
in accounting estimates.
[h]
Impairment of non-financial assets
The
carrying amounts of the Company’s non-financial assets are reviewed for impairment as at each consolidated statement of
financial position date or whenever events or changes in circumstances indicate that the carrying amount of an asset exceeds its
recoverable amount. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into
the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows
of other assets or groups of assets. The recoverable amount of an asset or a cash-generating unit is the higher of its fair value,
less cost to sell, and its value in use. If the carrying amount of an asset exceeds its recoverable amount, an impairment charge
is recognized immediately in profit or loss by the amount by which the carrying amount of the asset exceeds the recoverable amount.
Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the lesser of the revised estimate
of recoverable amount and the carrying amount that would have been recorded had no impairment loss been recognized previously.
[i]
Leases
At
inception of a contract, the Company assesses whether a contract is, or contains, a lease based on whether the contract conveys
the right to control the use of an identified asset for a period of time in exchange for consideration.
The
Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially
measured based on the initial amount of the lease liability adjusted for any lease payments made at or before the commencement
date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore
the underlying asset or the site on which it is located, less any lease incentives received. The assets are depreciated to the
earlier of the end of the useful life of the right-of-use asset or the lease term using the straight-line method as this most
closely reflects the expected pattern of consumption of the future economic benefits. The lease term includes periods covered
by an option to extend if the Company is reasonably certain to exercise that option. In addition, the right-of-use asset is periodically
reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.
The
lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted
using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing
rate. Generally, the Company uses its incremental borrowing rate as the discount rate. Variable lease payments that do not depend
on an index or rate are not included in the measurement of the lease liability. The lease liability is measured at amortized cost
using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in
an index or rate, or if the Company changes its assessment of whether it will exercise a purchase, extension or termination option.
When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use
asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.
The
Company has elected to apply the practical expedient to account for each lease component and any non-lease components as a single
lease component. The Company has also elected to apply the practical expedient not to recognize right-of-use assets and lease
liabilities for short-term leases that have a lease term of 12months or less and leases of low-value assets.
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
3.
Significant accounting policies (cont.)
[j]
Share-based compensation
The
Company grants stock options to certain employees. When stock options are exercised, the Company issues new common shares. The
consideration received on the exercise of stock options is credited to share capital at the time of exercise. The Company’s
stock option compensation plan is described in note 12[c]. Stock options generally vest over three years in a tiered manner and
expire after ten years. Each tranche in an award is considered a separate award with its own vesting period and grant date fair
value. Fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model. Compensation
expense is recognized over the tranche’s vesting period on a straight-line basis based on the number of awards expected
to vest, with a corresponding credit to contributed surplus. The number of awards expected to vest is reviewed at least annually,
with any impact being recognized immediately. The stock options recognized is also determined based on management’s grant
date estimate of the forfeitures that are expected to occur over the life of the stock options. The number of stock options that
actually vest could differ from the estimated number of awards expected to vest and any differences between the actual and estimated
forfeitures are recognized prospectively as they occur.
[k]
Income taxes
The
income taxes currently payable is based on taxable profit for the year. Taxable profit differs from “income before income
taxes” as reported in the consolidated statement of loss and comprehensive loss because of items of income or expenses that
are taxable or deductible in other years and items that are never taxable or deductible. The Company’s current income taxes
are calculated using tax rates that have been enacted or substantively enacted by the end of the year.
Deferred
income taxes are recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements
and the corresponding tax bases used in the computation of taxable profit. Deferred income tax liabilities are generally recognized
for all taxable temporary differences. Deferred income tax assets are generally recognized for all deductible temporary differences
to the extent that it is probable that taxable profits will be available against which those deductible temporary differences
can be utilized. Such deferred income tax assets and liabilities are not recognized if the temporary difference arises from the
initial recognition [other than in a business combination] of assets and liabilities in a transaction that affects neither the
taxable profit nor the accounting profit. In addition, deferred income tax liabilities are not recognized if the temporary difference
arises from the initial recognition of goodwill.
The
carrying amount of deferred income tax assets is reviewed at the end of each year and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred income
tax liabilities and assets are measured at the tax rates that are expected to apply in the year in which the liability is settled
or the asset realized, based on tax rates [and tax laws] that have been enacted or substantively enacted by the end of the year.
The
measurement of deferred income tax liabilities and assets reflects the tax consequences that would follow from the manner in which
the Company expects, at the end of the year, to recover or settle the carrying amount of its assets and liabilities.
Current
and deferred income taxes are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive
loss or directly in equity, in which case the current and deferred income taxes are also recognized in other comprehensive loss
or directly in equity, respectively. Where current income taxes or deferred income taxes arise from the initial accounting for
a business combination, the tax effect is included in the accounting for the business combination.
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
3.
Significant accounting policies (cont.)
[l]
Government assistance
Government
assistance, which mainly consists of refundable investment tax credits for research and development expenses, is recognized when
there is reasonable assurance that the government assistance will be received and all attached conditions will be complied with.
When the government assistance relates to an expense item, it is recognized as a reduction in the related expense on a systematic
basis over the period necessary to match the government assistance to the costs it is intended to subsidize.
[m]
Financial instruments
Financial
assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the instruments.
Financial
assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the
acquisition or issue of financial assets and financial liabilities [other than financial assets and financial liabilities at fair
value through profit or loss] are added to or deducted from the fair value of the financial assets or financial liabilities, as
appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial
liabilities at fair value through profit or loss are recognized immediately in profit or loss.
Financial
assets
The
Company initially recognizes financial assets at fair value on the date at which the Company becomes a party to the contractual
provisions of the instrument.
The
Company classifies its financial assets on initial recognition and subsequent measurement as amortized cost, fair value through
other comprehensive income [“FVTOCI”], or fair value through profit or loss [“FVTPL”].
Financial
assets are subsequently measured at amortized cost if both the following conditions are met and they are not designated as FVTPL:
|
●
|
the
financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash
flows; and
|
|
●
|
the
contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding.
|
These
assets are subsequently measured at amortized cost using the effective interest method and are subject to impairment. Gains and
losses are recognized in the statement of loss and comprehensive loss when the asset is derecognized, modified or impaired.
The
Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the
rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and
rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained
by the Company is recognized as a separate asset or liability.
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
3.
Significant accounting policies (cont.)
Financial
liabilities
The
Company initially recognizes financial liabilities at fair value on the date at which the Company becomes a party to the contractual
provisions of the instrument.
The
Company classifies its financial liabilities as either financial liabilities at amortized cost or FVTPL on initial recognition
and subsequent measurement. Financial liabilities are classified as FVTPL when the financial liability is (i) contingent consideration
of an acquirer in a business combination, (ii) held for trading, or (iii) it is designated as FVTPL.
Financial
liabilities that are not (i) contingent consideration of an acquirer in a business combination, (ii) held for trading, or (iii)
designated as FVTPL are subsequently measured at amortized cost using the effective interest rate method. Interest paid from these
financial liabilities is included in finance costs using the effective interest rate method.
The
Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire.
Financial
liabilities and equity instruments
[i]
Classification as debt or equity
Debt
and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the
substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.
[ii]
Equity instruments
An
equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
Equity instruments issued by a group entity are recognized at the proceeds received, net of direct issue costs.
Classification
of financial instruments
The
Company classifies its financial assets and liabilities depending on the purpose for which the financial instruments were acquired,
their characteristics, and management intent as outlined below:
Cash
|
|
Fair
value through profit and loss
|
Trade
and other receivables
|
|
Amortized
cost
|
Other
financial assets
|
|
Fair
value through profit and loss
|
Trade
and other payables
|
|
Amortized
cost
|
Short-term
debt
|
|
Amortized
cost
|
Preferred
share liabilities
|
|
Fair
value through profit and loss
|
Warrant
liabilities
|
|
Fair
value through profit and loss
|
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
3.
Significant accounting policies (cont.)
Impairment
of financial assets
As
the Company’s financial assets are substantially made up of trade receivables, which are measured at amortized cost, the
Company has elected to apply the simplified approach for measuring the loss allowance at an amount equal to lifetime expected
credit losses [“ECL”]. The Company recognizes lifetime expected losses on initial recognition through both the analysis
of historical defaults and a reassessment of counterparty credit risk in revenue contracts on an annual basis. An impairment loss
is reversed in subsequent periods if the amount of the expected loss decreases and the decrease can be objectively related to
an event occurring after the initial impairment was recognized.
Preferred
share liabilities
The
preferred share and the warrants issued in 2018 met the definition of financial liabilities subject to measurement at fair value
at each reporting period-end with changes in fair value to be reflected in the Company’s consolidated statements of loss
and comprehensive loss. The Company determined that the preferred share liabilities did not meet the IFRS definition of equity
due to the variability of the conversion ratio to common shares.
The
warrants are convertible into preferred shares which are a financial liability, therefore, the warrants are measured at financial
liability through profit or loss.
[n]
New standards adopted in the current period
The
Company applied IFRS16, Leases and IFRIC Interpretation23, Uncertainty over Income Tax Treatments for the first-time
effective January1, 2019. The nature and effect of the changes as a result of adoption of these new accounting standards are described
below.
IFRS
16, Leases [“IFRS 16”]
IFRS
16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and
SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for
the recognition, measurement, presentation and disclosure of leases and requires lessees to recognise most leases on the balance
sheet.
The
Company, as a lessee, has applied IFRS 16 using the modified retrospective approach and recognized right-of-use assets representing
the rights to use the underlying assets, equal to the lease liabilities representing the obligation to make lease payments effective
January1, 2019. In accordance with the practical expedients permitted under the standard, comparative information for 2018 has
not been restated. In applying IFRS 16 for the first time, the Company used the following practical expedients permitted by the
standard:
|
●
|
Reliance
on previous assessments on whether leases are onerous
|
|
|
|
|
●
|
Use
of hindsight in determining the lease term where the contract contains options to extend or terminate the lease
|
|
|
|
|
●
|
Account
for leases for which the lease term ends within 12months of the date of initial application as short-term leases
|
|
|
|
|
●
|
Record
right-of-use assets based on the corresponding lease liability, with no net impact on deficit
|
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
3.
Significant accounting policies (cont.)
As
a result of the adoption of IFRS16, the Company recognized an increase to both assets and liabilities on the consolidated statement
of financial position. The Company also recognized a decrease in general and administrative expenses for the removal of rent expense
for operating leases partially offset by accretion of lease liabilities and an increase in depreciation and amortization related
to the right-of-use assets in the consolidated statement of loss and comprehensive loss. The weighted average incremental borrowing
rate applied to the lease liabilities on January 1, 2019 was 6.5%. The following table illustrates the impact of IFRS 16 on the
consolidated statements of financial position on the date of initial application using the modified retrospective approach resulting
in the recognition of a right-of-use assets as if the standard had always been applied, representing the rights to use the underlying
assets, a lease liabilities amount representing the future obligation associated with the underlying lease arrangement, resulting
in a charge to deficit as at January 1, 2019:
|
|
Balance at
December 31, 2018
|
|
|
IFRS 16
adjustments
|
|
|
Balance at
January 1, 2019
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Trade and other receivables
|
|
|
1,630,439
|
|
|
|
202,170
|
|
|
|
1,832,609
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,672,986
|
|
|
|
383,294
|
|
|
|
2,056,280
|
|
Right-of-use-assets, net
|
|
|
—
|
|
|
|
3,034,001
|
|
|
|
3,034,001
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease liabilities
|
|
|
—
|
|
|
|
544,822
|
|
|
|
544,822
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease liabilities
|
|
|
—
|
|
|
|
3,419,477
|
|
|
|
3,419,477
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
(7,574,359
|
)
|
|
|
(344,834
|
)
|
|
|
(7,919,193
|
)
|
The
adjustments to trade and other receivables and property and equipment, net relate to tenant inducements.
[ii]
IFRIC23, Uncertainty over Income Tax Treatment [“IFRIC 23”]
In
June 2017, the IASB issued IFRIC23, which clarifies the accounting for uncertainties in income taxes. IFRIC 23 is effective for
annual periods beginning on or after January 1, 2019. The requirements are applied by recognizing the cumulative effect of initially
applying them in retained earnings, or in other appropriate components of equity, at the start of the reporting period in which
the Company first applies them, without adjusting comparative information. Full retrospective application is permitted, if the
Company can do so without using hindsight. The Company has adopted the new Interpretation beginning January 1, 2019. The adoption
of IFRIC 23 did not have any impact on the Company’s financial statements.
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
4.
Trade and other receivables
The
Company’s trade and other receivables include the following:
|
|
2019
CAD$
|
|
|
2018
CAD$
|
|
Trade receivable, net of allowance of CAD$70,953 [2018 – CAD$22,348]
|
|
|
920,707
|
|
|
|
1,533,285
|
|
Input tax receivable
|
|
|
—
|
|
|
|
97,154
|
|
Investment tax credit receivable
|
|
|
629,003
|
|
|
|
—
|
|
|
|
|
1,549,710
|
|
|
|
1,630,439
|
|
5.
Property and equipment
|
|
Leasehold improvements
CAD$
|
|
|
Furniture and equipment
CAD$
|
|
|
Computer hardware
CAD$
|
|
|
Total
CAD$
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2017
|
|
|
665,466
|
|
|
|
85,292
|
|
|
|
115,241
|
|
|
|
865,999
|
|
Additions
|
|
|
649,624
|
|
|
|
119,172
|
|
|
|
213,105
|
|
|
|
981,901
|
|
Disposals
|
|
|
—
|
|
|
|
(545
|
)
|
|
|
(10,639
|
)
|
|
|
(11,184
|
)
|
As at December 31, 2018
|
|
|
1,315,090
|
|
|
|
203,919
|
|
|
|
317,707
|
|
|
|
1,836,716
|
|
Impact of IFRS 16 adoption
|
|
|
383,294
|
|
|
|
—
|
|
|
|
—
|
|
|
|
383,294
|
|
Additions
|
|
|
100,167
|
|
|
|
17,183
|
|
|
|
31,143
|
|
|
|
148,493
|
|
Disposals
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,232
|
)
|
|
|
(2,232
|
)
|
As at December 31, 2019
|
|
|
1,798,551
|
|
|
|
221,102
|
|
|
|
346,618
|
|
|
|
2,366,271
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2017
|
|
|
—
|
|
|
|
3,627
|
|
|
|
11,139
|
|
|
|
14,766
|
|
Depreciation
|
|
|
44,334
|
|
|
|
29,265
|
|
|
|
76,491
|
|
|
|
150,090
|
|
Disposals
|
|
|
—
|
|
|
|
(38
|
)
|
|
|
(1,088
|
)
|
|
|
(1,126
|
)
|
As at December 31, 2018
|
|
|
44,334
|
|
|
|
32,854
|
|
|
|
86,542
|
|
|
|
163,730
|
|
Depreciation
|
|
|
63,630
|
|
|
|
42,822
|
|
|
|
113,220
|
|
|
|
219,672
|
|
Disposals
|
|
|
—
|
|
|
|
—
|
|
|
|
(996
|
)
|
|
|
(996
|
)
|
As at December 31, 2018
|
|
|
107,964
|
|
|
|
75,676
|
|
|
|
198,766
|
|
|
|
382,406
|
|
Net book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2018
|
|
|
1,270,756
|
|
|
|
171,065
|
|
|
|
231,165
|
|
|
|
1,672,986
|
|
As at December 31, 2019
|
|
|
1,690,587
|
|
|
|
145,426
|
|
|
|
147,852
|
|
|
|
1,983,865
|
|
6.
Right-of-use assets
The
Company has lease contracts for office space, vehicles and equipment with remaining terms up to eight years in length. The following
is a summary of the changes in the Company’s right-of-use assets during the year:
|
|
CAD$
|
|
As at January 1, 2019
|
|
|
3,034,001
|
|
Depreciation
|
|
|
(376,881
|
)
|
As at December 31, 2019
|
|
|
2,657,120
|
|
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
7.
Goodwill and other intangible assets
The
Company’s intangible assets consist of customer relationships and technology, both of which are being amortized over their
useful lives of five years.
|
|
2019
CAD$
|
|
|
2018
CAD$
|
|
Goodwill
|
|
|
4,542,224
|
|
|
|
4,542,224
|
|
Intangible assets
|
|
|
1,314,597
|
|
|
|
1,646,437
|
|
|
|
|
5,856,821
|
|
|
|
6,188,661
|
|
Intangible assets
|
|
CAD$
|
|
Cost
|
|
|
|
As at December 31, 2018
|
|
|
1,659,200
|
|
As at December 31, 2019
|
|
|
1,659,200
|
|
Accumulated amortization
|
|
|
|
|
As at December 31, 2018
|
|
|
12,763
|
|
Amortization
|
|
|
331,840
|
|
As at December 31, 2019
|
|
|
344,603
|
|
Net book value
|
|
|
|
|
As at December 31, 2018
|
|
|
1,646,437
|
|
As at December 31, 2019
|
|
|
1,314,597
|
|
8.
Trade and other payables
The
Company’s trade and other payables include the following:
|
|
2019
CAD$
|
|
|
2018
CAD$
|
|
Trade payables
|
|
|
1,316,653
|
|
|
|
1,190,701
|
|
Sales tax payable
|
|
|
106,706
|
|
|
|
10,159
|
|
|
|
|
1,423,359
|
|
|
|
1,200,860
|
|
9.
Lease liabilities
The
Company has lease contracts for office space and equipment, which range from one and nine years.
The
following is a summary of the changes in the Company’s lease liabilities during the period:
|
|
CAD$
|
|
As at January 1, 2019
|
|
|
3,964,299
|
|
Interest accretion
|
|
|
237,977
|
|
Lease repayments
|
|
|
(544,822
|
)
|
As at December 31, 2019
|
|
|
3,657,454
|
|
Current
|
|
|
544,226
|
|
Non-current
|
|
|
3,113,228
|
|
Expenses
incurred for the year ended December 31, 2019 relating to variable lease payments were CAD$157,553.
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
10.
Short-term debt
|
|
2019
CAD$
|
|
|
2018
CAD$
|
|
Promissory note due in February 2019
|
|
|
—
|
|
|
|
3,601,786
|
|
Short-term debt due in September 2020
|
|
|
2,097,335
|
|
|
|
—
|
|
Short-term debt due in October 2020
|
|
|
2,648,854
|
|
|
|
—
|
|
|
|
|
4,746,189
|
|
|
|
3,601,786
|
|
In
December 2018, the Company obtained a promissory note in the amount of CAD$3,601,786 to finance its acquisition of LCA, payable
in 60 days with no interest. In February 2019, the Company paid this note in full. Due to late payment, CAD$13,254 in interest
was incurred and paid.
On
February 15, 2019, in order to repay the promissory note for the acquisition of LCA, the Company entered into a CAD$2,000,000
loan bearing interest of 15% per annum, maturing in six months. At inception, the Company recognized the loan at its fair value
plus transaction costs directly attributable to its issuance of CAD$87,165, which was recorded as finance costs in the consolidated
statement of loss and comprehensive loss for the year ended December 31, 2019. Subsequent to initial recognition, the loan was
carried at amortized cost.
On
September 25, 2019, the loan was amended to extend the maturity date to September 25, 2020 and the interest rate to 12% per annum.
In addition, 600,000 warrants convertible into Class A-3 Preferred Shares of the Company were issued to the lender [see note 11].
On entering into the amended loan, the Company completed an assessment that showed that the present value of the cash flows under
the amended loan facility, including the financing costs and cost of warrants issued, differed more than 10% from the present
value of the remaining cash flows of the loan. The amendment was treated as an extinguishment of the original loan and the establishment
of a new loan at its fair value plus transaction costs of CAD$211,567 directly attributable to its issuance. A loss on extinguishment
of CAD$1,001,928 was recorded within finance costs related to the amendment. In December 2019, upon announcement of the Akerna
Transaction [see note 11], the carrying value of the amended loan was adjusted for a revised estimate of future expected cash
flows discounted over the remaining estimated life of the amended loan.
On
October 1, 2019, the Company entered into a CAD$2,500,000 loan bearing interest of 12% per annum maturing on October 1, 2020.
In addition, 204,000 warrants convertible into Class A-3 Preferred Shares of the Company were issued to the lender [see note 11].
At inception, the Company recognized the loan at its fair value plus transaction costs directly attributable to its issuance of
CAD$246,368. Subsequent to initial recognition, the loan was carried at amortized cost. In December 2019, upon announcement of
the Akerna Transaction [see note 11], the carrying value of the loan was adjusted for a revised estimate of future expected cash
flows discounted over the remaining estimated life of the amended loan.
At
December 31, 2019, the Company was in compliance with all covenants for its short-term debt. Subsequent to December 31, 2019,
the Company was in breach of its covenants for its short-term debt.
11.
Preferred share liabilities
The
following is a summary of the changes in the Company’s preferred liabilities:
|
|
2019
CAD$
|
|
|
2018
CAD$
|
|
As at January 1
|
|
|
5,234,811
|
|
|
|
—
|
|
Additions
|
|
|
1,089,073
|
|
|
|
4,458,811
|
|
Change in fair value of preferred share liabilities
|
|
|
7,312,638
|
|
|
|
776,000
|
|
As at December 31
|
|
|
13,636,522
|
|
|
|
5,234,811
|
|
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
11.
Preferred share liabilities (cont.)
In
June 2018, the Company issued 3,000,000 preferred share units at CAD$1.50 per unit, consisting of 3,000,000 Class A-1 Preferred
Shares and 1,500,000 warrants convertible into Class A-2 Preferred Shares at an exercise price of CAD$2.25 per share for gross
proceeds of CAD$4,500,000. As the Class A-1 Preferred Shares and Class A-2 Preferred Shares are convertible into a variable number
of common shares depending on subsequent issuances of common shares, these preferred shares and the warrants convertible to the
preferred shares are considered financial liabilities. The net proceeds were allocated to the preferred shares and warrants based
on the relative fair value of each instrument.
In
October 2019, the Company issued 804,000 warrants convertible into Class A-3 Preferred Shares at an exercise price of CAD$1.20
to lenders in connection with loans received [see note 10].
The
Company determined that each of the Company’s Class A-1 Preferred Shares, Class A-2 Preferred Shares and Class A-3 Preferred
Shares [collectively the “Class A Preferred Shares”] and warrants that are convertible into Class A Preferred Shares,
did not meet the IFRS definition of equity due to the variability of the conversion price. Accordingly, the Class A Preferred
Shares and the related warrants are treated as financial liabilities measured at fair value through profit or loss. The fair values
of the convertible notes are classified as Level 3 in the fair value hierarchy.
In
determining the fair values of the warrants issued, the Company used the Black-Scholes pricing model applying the following inputs:
|
|
2019
|
|
|
2018
|
|
Risk-free
interest rate
|
|
|
1.47
|
%
|
|
|
1.46
|
%
|
Term
[years]
|
|
|
3
|
|
|
|
3
|
|
Estimated
volatility
|
|
|
70
|
%
|
|
|
70
|
%
|
Expected
dividend yield
|
|
|
Nil
|
|
|
|
Nil
|
|
Warrant
value
|
|
CAD$
|
1.40
|
|
|
CAD$
|
0.41
|
|
Share
price
|
|
CAD$
|
2.22
|
|
|
CAD$
|
1.30
|
|
Exercise
price
|
|
CAD$
|
1.20
|
|
|
CAD$
|
2.25
|
|
In
December 2019, 1,500,000 warrants convertible into Class A-2 Preferred Shares were converted into 777,637 Class A-2 Preferred
Shares and 492,000 warrants convertible into Class A-3 Preferred Shares were converted into 283,721 Class A-3 Preferred Shares.
For
the year ended December 31, 2019, a CAD$7,312,638 loss on fair value of preferred share liabilities [2018 — CAD$776,000
loss] was recorded in the statement of loss and comprehensive loss.
12.
Share capital
[a]
Authorized
The
authorized share capital of the Company consists of an unlimited number of common shares and 5,304,000 Class A Preferred Shares,
issuable in series, of which 3,000,000 are designated as Class A-1 Preferred Shares, 1,500,000 are designated as Class A-2 Preferred
Shares and 804,000 are designated as Class A-3 Preferred Shares.
Class
A Preferred Shares are convertible, at the option of the holder, into a number of fully paid and non-assessable common shares
as determined by dividing the original issue price of the series of Class A Preferred Shares by the then effective conversion
price and adjustments to the conversion price in the event the Company issues additional common shares and amounts less than the
original conversion price. The conversion and original issue price is
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
12.
Share capital (cont.)
CAD$1.50
for Class A-1 Preferred Shares, CAD$2.25 for Class A-2 Preferred Shares, and CAD$1.20 for Class A-3 Preferred Shares, subject
to anti-dilution provisions. Preferred shares automatically convert to common shares upon: (i) an amalgamation, arrangement, consolidation,
merger, reorganization or similar transaction of the Company, (ii) the sale, lease, transfer, exclusive license or disposition
of substantially all of the Company’s assets, (iii) the closing of a public offering of the Company’s common shares
provided the offering price per share is not less than CAD$4.50 and aggregate gross proceeds are greater than CAD$20,000,000,
or (iv) the vote of the majority of holders of Class A Preferred Shares to convert.
[b]
Issued and outstanding
On
February 22, 2019, the Company issued 2,436,207 common share units at CAD$1.80 per unit, consisting of 2,436,207 common shares
and 1,218,100 warrants convertible into common shares at an exercise price of CAD$2.70 until February22, 2021. In connection with
this transaction, the Company issued 27,698 broker warrants convertible into common shares at an exercise price of CAD$1.80 until
February22, 2021 and paid CAD$96,278 in transaction costs.
On
April 25, 2019, the Company issued 1,358,052 common share units at CAD$1.80 per unit, consisting of 1,358,052 common shares and
679,024 warrants convertible into common shares at an exercise price of CAD$2.70 until April 25, 2021. In connection with this
transaction, the Company issued 81,483 broker warrants convertible into common shares at an exercise price of CAD$1.80 until April
25, 2021 and paid CAD$246,389 in transaction costs.
On
May 2, 2019, the Company issued 309,200 common share units at CAD$1.80 per unit, consisting of 309,200 common shares and 154,600
warrants convertible into common shares at an exercise price of CAD$2.70 until May 2, 2021. In connection with this transaction,
the Company issued 20,000 advisory warrants convertible into common shares at an exercise price of CAD$1.80 until May 2, 2021
and paid CAD$29,944 in transaction costs.
On
May 15, 2019, the Company issued 72,513 common share units at CAD$1.80 per unit, consisting of 72,513 common shares and 36,256
warrants convertible into common shares at an exercise price of CAD$2.70 until May 15, 2021. In connection with this transaction,
the Company paid CAD$29,944 in transaction costs.
All
of the warrants convertible to common shares for these transactions are convertible into common shares at a 1:1 ratio. The warrants
were valued using the Black-Scholes pricing model with the following inputs:
|
|
2019
|
|
Risk-free
interest rate
|
|
|
1.54% – 1.79%
|
|
Term
[years]
|
|
|
2
|
|
Volatility
|
|
|
70%
|
|
Dividend
yield
|
|
|
Nil
|
|
Warrant
value
|
|
|
CAD$0.38 – CAD$0.57
|
|
Share
price
|
|
|
CAD$1.61
|
|
Exercise
price
|
|
|
CAD$1.80 – CAD$2.70
|
|
[c]
Employee stock option plan
The
Company has an Employee Stock Option Plan [the “Plan”] that is administered by the Board of Directors of the Company
who establishes exercise prices, at not less than market price at the date of grant, and expiry dates, which have been set at
ten years from issuance. Options under the Plan remain exercisable in increments with 1/4 being exercisable on each of the first
and second anniversary and 2/4 being exercisable on the third anniversary from the date of grant, except as otherwise approved
by the Board of Directors. The maximum number of common shares reserved for issuance for options that may be granted under the
Plan is 10% of the common shares outstanding, which amounts to 3,744,762 at December 31, 2019 [2018 — 3,327,165].
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
12.
Share capital (cont.)
The
following is a summary of the changes in the Company’s stock options:
|
|
Number of options
#
|
|
|
Weighted average
exercise price
CAD$
|
|
Outstanding as at December 31, 2017
|
|
|
—
|
|
|
|
—
|
|
Granted
|
|
|
1,180,500
|
|
|
|
1.50
|
|
Forfeited
|
|
|
(110,000
|
)
|
|
|
1.50
|
|
Outstanding as at December 31, 2018
|
|
|
1,070,500
|
|
|
|
1.50
|
|
Granted
|
|
|
888,500
|
|
|
|
1.80
|
|
Forfeited
|
|
|
(915,188
|
)
|
|
|
1.60
|
|
Expired
|
|
|
(25,312
|
)
|
|
|
1.50
|
|
Outstanding as at December 31, 2019
|
|
|
1,018,500
|
|
|
|
1.67
|
|
The
Company recorded CAD$381,617 [2018 — CAD$260,970] in share-based compensation expense related to options, which are measured
at the fair value at the date of grant and expensed over the option’s vesting period.
In
determining the amount of share-based compensation, the Company used the Black-Scholes option pricing model to establish the fair
value of options granted during the years ended December 31, 2019 and 2018 by applying the following assumptions:
|
|
2019
|
|
|
2018
|
|
Grant
date share price
|
|
CAD$
|
1.61
|
|
|
CAD$
|
1.50
|
|
Exercise
price
|
|
CAD$
|
1.80
|
|
|
CAD$
|
1.50
|
|
Expected
dividend yield
|
|
|
—
|
|
|
|
—
|
|
Risk
free interest rate
|
|
1.49% – 1.76
|
%
|
|
1.46
|
%
|
Expected
life
|
|
10
years
|
|
|
10
years
|
|
Expected
volatility
|
|
70
|
%
|
|
70
|
%
|
Expected
volatility was estimated by using the historical volatility of other companies that the Company considers comparable that have
trading and volatility history. The expected option life represents the period of time that options granted are expected to be
outstanding. The risk-free interest rate is based on government bonds with a remaining term equal to the expected life of the
options.
The
following table is a summary of the Company’s share options outstanding as at December 31, 2019:
Options
outstanding
|
|
Options
exercisable
|
|
Exercise
price
CAD$
|
|
Number
outstanding
#
|
|
|
Weighted
average
remaining
contractual life
[years]
#
|
|
|
Exercise
price
CAD$
|
|
|
Number
exercisable
#
|
|
1.50
|
|
|
445,500
|
|
|
|
8.58
|
|
|
|
1.50
|
|
|
|
125,438
|
|
1.80
|
|
|
573,000
|
|
|
|
9.44
|
|
|
|
1.80
|
|
|
|
—
|
|
1.67
|
|
|
1,018,500
|
|
|
|
9.06
|
|
|
|
1.50
|
|
|
|
125,438
|
|
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
12.
Share capital (cont.)
The
following table is a summary of the Company’s share options outstanding as at December 31, 2018:
Options
outstanding
|
|
Options
exercisable
|
|
Exercise
price
CAD$
|
|
Number
outstanding
#
|
|
|
Weighted
average
remaining
contractual life
[years]
#
|
|
|
Exercise
price
CAD$
|
|
|
Number
exercisable
#
|
|
1.50
|
|
|
125,438
|
|
|
|
9.60
|
|
|
|
1.50
|
|
|
|
—
|
|
13.
Income taxes
A
reconciliation of income taxes at statutory rates to actual income taxes are as follows:
|
|
2019
CAD$
|
|
|
2018
CAD$
|
|
Loss before income taxes
|
|
|
(18,112,104
|
)
|
|
|
(6,696,371
|
)
|
Statutory federal and provincial tax rate
|
|
|
26.5
|
%
|
|
|
26.5
|
%
|
Income tax recovery at the statutory tax rate
|
|
|
(4,799,708
|
)
|
|
|
(1,774,538
|
)
|
Permanent differences
|
|
|
2,045,604
|
|
|
|
317,905
|
|
Reversal of temporary differences
|
|
|
576,641
|
|
|
|
—
|
|
Deferred income tax asset not recognized
|
|
|
2,086,144
|
|
|
|
1,456,633
|
|
Deferred income tax recovery
|
|
|
(91,320
|
)
|
|
|
—
|
|
Deferred
income tax assets have not been recognized in respect of tax losses, because it is not probable that future taxable profit will
be available against which the Company can utilize the benefits therefrom.
The
Company’s deferred tax liability is the result of the origination and reversal of temporary differences and comprise the
following:
|
|
2019
CAD$
|
|
|
2018
CAD$
|
|
Deferred tax liability
|
|
|
|
|
|
|
Intangible assets
|
|
|
348,368
|
|
|
|
439,688
|
|
As
at December 31, 2019, The Company’s estimated non-capital losses that can be applied against future taxable profit amount
to CAD$15,256,571. These non-capital losses expire in the years ended:
|
|
CAD$
|
|
2035
|
|
|
111,000
|
|
2036
|
|
|
469,000
|
|
2037
|
|
|
963,000
|
|
2038
|
|
|
5,496,728
|
|
2039
|
|
|
8,216,843
|
|
|
|
|
15,256,571
|
|
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
14.
Disaggregated revenue
The
Company derives its revenues from two main sources, software-as-a-service application (“SaaS”), and professional services
revenue, which includes services such system integration and training, and process-change analysis. Subscription revenue related
to the provision of SaaS is recognized ratably over the contract term as the service is delivered. Professional services revenue
is recognized as services are rendered. Other revenue relates mainly to sale of hardware.
The
following table represents disaggregation of revenue for the year ended December 31, 2019 and 2018:
|
|
2019
CAD$
|
|
|
2018
CAD$
|
|
Subscription revenues
|
|
|
5,001,026
|
|
|
|
2,402,140
|
|
Professional services
|
|
|
727,792
|
|
|
|
1,337,707
|
|
Other
|
|
|
1,691,381
|
|
|
|
2,697,029
|
|
Total
|
|
|
7,420,199
|
|
|
|
6,436,876
|
|
15.
Expenses by nature
Components
of general and administrative expenses, sales and marketing and research and development expenses for the year ended December
31, 2019 were as follows:
|
|
2019
CAD$
|
|
|
2018
CAD$
|
|
Salaries and wages
|
|
|
5,422,757
|
|
|
|
5,342,674
|
|
Professional fees [include outsourced software development]
|
|
|
4,143,494
|
|
|
|
2,444,456
|
|
Other
|
|
|
811,510
|
|
|
|
849,499
|
|
|
|
|
10,377,761
|
|
|
|
8,636,629
|
|
The
salaries and wages for research and development are presented net of CAD$629,003 investment tax credit expected and CAD$366,280
grant received for research and development activities conducted in 2019 [see note 4].
16.
Commitments and contingencies
In
the ordinary course of business, from time to time, the Company is involved in various claims related to operations, rights, commercial,
employment or other claims. Although such matters cannot be predicted with certainty, management does not consider the Company’s
exposure to these claims to be material to these financial statements.
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
17.
Acquisition of LCA
On
December 14, 2018, the Company completed the acquisition of Last Call Analytics Inc. [“LCA”], an alcohol and beverage
data analytics company. The total consideration paid was CAD$5,837,896, consisting of CAD$2,236,110 in the Company’s common
shares, valued at CAD$1.61 per share, based on the fair value of the common shares at the date of acquisition, and CAD$3,601,786
in promissory notes. The fair values of the assets acquired and liabilities assumed of the acquisition of LCA presented in the
2018 Annual Consolidated Financial Statements have been finalized and are as follows:
|
|
CAD$
|
|
Purchase price
|
|
|
5,837,896
|
|
Assets acquired:
|
|
|
|
|
Net working capital
|
|
|
51,924
|
|
Cash acquired
|
|
|
24,236
|
|
Intangible assets
|
|
|
1,659,200
|
|
Goodwill
|
|
|
4,542,224
|
|
Deferred tax liability
|
|
|
(439,688
|
)
|
Total assets
|
|
|
5,837,896
|
|
18.
Related party transactions
Key
management personnel are those persons having the authority and responsibility for planning, directing and controlling activities
of the entity, directly or indirectly, including the Chief Executive Officer, Chief Financial Officer, Chief Operating Officer,
Chief Technology Officer and equivalent, and Directors.
Compensation
expense for the Company’s key management personnel are as follows:
|
|
2019
CAD$
|
|
|
2018
CAD$
|
|
Salaries and benefits
|
|
|
689,903
|
|
|
|
624,347
|
|
Share-based compensation
|
|
|
129,681
|
|
|
|
90,625
|
|
|
|
|
819,584
|
|
|
|
714,972
|
|
During
the year ended December 31, 2019, the Company paid CAD$9,341 (2018 – CAD$nil) of legal fees on behalf of employees.
19.
Capital management
Ample
Organics is an early stage company that is dependent on raising further capital to fund its capital and operating expenses in
excess of revenue until such time that it reaches cash break-even. The Company’s capital structure as at December 31, 2019
primarily consists of shareholders’ equity from common shares and warrants, preferred share liabilities from preferred shares
and warrants for preferred shares, and short-term debt.
On
December 18, 2019, the Company entered into a definitive agreement to be acquired by Akerna Corp. (“Akerna”) whereby
Akerna will acquire all issued and outstanding shares of the Company for up to CAD$60million (US$45million) (the “Akerna
Transaction”). The purchase consideration consists of CAD$7.5million in cash (US$5.7million) and 3,294,574 redeemable preferred
shares of Akerna with a value of CAD$42.5million (US$32.3million) in Akerna shares on close, as well as contingent consideration
of up to CAD$10million (US$7.6million) in deferred share-based consideration upon the Company’s achievement of certain revenue
targets in 2020. The transaction is expected to close in mid-2020. The Company expects the Akerna Transaction to provide sufficient
funding to meet its objectives stated above.
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
19.
Capital management (cont.)
In
the event that the Akerna Transaction does not close, the Company is dependent on raising further capital in the form of equity,
debt, or instruments convertible into equity to fund its capital and operating expenses in excess of revenue until such time that
it reaches cash break-even. While the Company raised CAD$4,500,000 in gross proceeds for short-term debt and CAD$7,516,750 in
gross proceeds for common shares as well as warrants for common shares and preferred shares during the year ended December 31,
2019, there can be no assurance that the Company will be successful in raising additional funds in the future.
20.
Financial instruments and risk management
Credit
risk
Credit
risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual
obligations and arises principally from deposits with banks and outstanding receivables. The Company trades only with recognized,
creditworthy third parties. The Company performs credit checks for all customers who wish to trade on credit terms. As at December
31, 2019, no customers represented greater than 10% of the outstanding receivable balance [2018 — one customer represented
10%].
The
Company does not hold any collateral as security, but mitigates this risk by dealing only with what management believes to be
financially sound counterparties and, accordingly, does not anticipate significant loss for non-performance.
The
aging of trade receivables is as follows:
|
|
2019
CAD$
|
|
|
2018
CAD$
|
|
Current
|
|
|
625,969
|
|
|
|
1,373,663
|
|
1 to 30 days
|
|
|
206,074
|
|
|
|
57,777
|
|
30 to 60 days
|
|
|
22,130
|
|
|
|
9,369
|
|
> 60 days
|
|
|
137,487
|
|
|
|
114,824
|
|
Total gross trade receivables
|
|
|
991,660
|
|
|
|
1,555,633
|
|
Less allowance for doubtful accounts
|
|
|
70,953
|
|
|
|
22,348
|
|
Total trade receivables, net
|
|
|
920,707
|
|
|
|
1,533,285
|
|
Liquidity
risk
Liquidity
risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company’s exposure
to liquidity risk is dependent on the Company’s ability to raise additional financing to meet its commitments and sustain
operations. The Company mitigates liquidity risk through management of working capital, cash flows and the issuance of share capital.
The
Company is obligated to the following contractual maturities of undiscounted cash flows:
|
|
Carrying amount
CAD$
|
|
|
Contractual cash flows
CAD$
|
|
|
Year 1
CAD$
|
|
|
Year 2
CAD$
|
|
|
Year 3
CAD$
|
|
|
Year 4
CAD$
|
|
|
Year 5
CAD$
|
|
|
Thereafter
CAD$
|
|
Trade and other payables
|
|
|
1,423,359
|
|
|
|
1,423,359
|
|
|
|
1,423,359
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Lease liability
|
|
|
3,657,454
|
|
|
|
4,701,803
|
|
|
|
544,237
|
|
|
|
534,739
|
|
|
|
533,208
|
|
|
|
565,695
|
|
|
|
570,024
|
|
|
|
1,953,900
|
|
Short-term debt
|
|
|
4,746,189
|
|
|
|
5,048,503
|
|
|
|
5,048,503
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
9,827,002
|
|
|
|
11,173,665
|
|
|
|
7,016,099
|
|
|
|
534,739
|
|
|
|
533,208
|
|
|
|
565,695
|
|
|
|
570,024
|
|
|
|
1,953,900
|
|
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
20.
Financial instruments and risk management (cont.)
Market
risk
Market
risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk.
Currency
risk
Currency
risk is the risk to the Company’s earnings that arise from fluctuations of foreign exchange rates. The Company is not exposed
to foreign currency exchange risk as it has minimal financial instruments denominated in foreign currencies. Substantially all
of the Company’s transactions are in Canadian dollars, which is the Company’s functional currency.
Interest
rate risk
Interest
rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market interest rates. Given that the Company holds short-term debt at fixed interest rates, it is not exposed to interest rate
risk as at December 31, 2019.
Other
price risk
Other
price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market prices [other than those arising from interest rate risk or currency risk], whether those changes are caused by factors
specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in
the market. The Company is not exposed to significant other price risks as at December 31, 2019.
Fair
values
The
carrying values of cash, trade and other receivables, other financial assets, trade and other payables, and short-term debt approximate
their fair values due to the short-term nature of these items. The risk of material change in fair value is not considered to
be significant due to a relatively short-term nature. The Company does not use derivative financial instruments to manage this
risk.
Financial
instruments recorded at fair value on the consolidated statement of financial position are classified using a fair value hierarchy
that reflects the significance of the inputs used in making the measurements. The Company categorizes its fair value measurements
according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Company’s valuation techniques. A
level is assigned to each fair value measurement based on the lowest level input significant to the fair value measurement in
its entirety. The three levels of the fair value hierarchy are defined as follows:
|
●
|
Level
1 — Unadjusted quoted prices as at the measurement date for identical assets or liabilities in active markets.
|
|
|
|
|
●
|
Level
2 — Observable inputs other than quoted prices included in Level1, such as quoted prices for similar assets and liabilities
in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data.
|
|
|
|
|
●
|
Level
3 — Significant unobservable inputs that are supported by little or no market activity. The fair value hierarchy also
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value.
|
Ample
Organics Inc.
Notes
to the consolidated financial statement
[Expressed
in Canadian dollars, except share amounts]
December
31, 2019
20.
Financial instruments and risk management (cont.)
The
fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument is classified
to the lowest level of the hierarchy for which a significant input has been considered in measuring fair value.
The
fair value hierarchy for the Company’s financial instruments measured at fair value are as follows:
|
|
Level 1
CAD$
|
|
|
Level 2
CAD$
|
|
|
Level 3
CAD$
|
|
|
Total
CAD$
|
|
Preferred share liabilities including associated warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2018
|
|
|
—
|
|
|
|
5,234,811
|
|
|
|
—
|
|
|
|
5,234,811
|
|
As at December 31, 2019
|
|
|
—
|
|
|
|
13,636,522
|
|
|
|
—
|
|
|
|
13,636,522
|
|
The
fair values of the Company’s preferred share liabilities as at December31, 2019 was determined using the purchase price
of the Akerna Transaction.
There
were no transfers between fair value measurement hierarchy levels during the year ended December31, 2019.
21.
Subsequent events
COVID-19
Since
December 31, 2019, the outbreak of the recent novel coronavirus (COVID-19) has resulted in governments worldwide enacting emergency
measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine
periods and social distancing, have caused disruption to certain businesses globally; as a result, there could be a possibility
of recession in the near future. While the impact of COVID-19 on the Company has been minimal to date, there is uncertainty around
its duration and future business conditions. If the outbreak were to cause disruption to the Company’s supply chain or its
service capabilities in the future, it would have a negative impact on revenue, which could be material. In addition, any material
negative impact on revenue would impact profitability, as well as liquidity and capital resources.
INDEX
TO SOLO’S FINANCIAL STATEMENTS
INDEPENDENT
AUDITORS’ REPORT
To
the Board of Directors and Stockholders of
Solo
Sciences, Inc.
Report
on the Financial Statements
We
have audited the accompanying financial statements of Solo Sciences, Inc. (the “Company”), which comprise the balance
sheets as of December 31, 2019 and 2018, and the related statements of operations, changes in stockholders’ equity (deficit)
and cash flows for the years then ended, and the related notes to the financial statements.
Management’s
Responsibility for the Financial Statements
Management
is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles
generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due
to fraud or error.
Auditors’
Responsibility
Our
responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance
with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An
audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of
the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.
We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Solo
Sciences, Inc. as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the year then ended
in accordance with accounting principles generally accepted in the United States of America.
/s/
Marcum, LLP
Marcum,
LLP
New
York, New York
May
29, 2020
SOLO
SCIENCES, INC.
Balance
Sheets
|
|
As of
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Assets
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
|
$
|
101,341
|
|
|
$
|
76,608
|
|
Cash held in escrow
|
|
|
124,970
|
|
|
|
—
|
|
Accounts receivable
|
|
|
73,048
|
|
|
|
299
|
|
Prepaid expenses
|
|
|
22,135
|
|
|
|
38,105
|
|
Total current assets
|
|
|
321,494
|
|
|
|
115,012
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
14,785
|
|
|
|
18,361
|
|
Software development cost and other intangible assets, net
|
|
|
5,163,072
|
|
|
|
3,620,881
|
|
Total assets
|
|
$
|
5,499,351
|
|
|
$
|
3,754,254
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
700,013
|
|
|
$
|
31,067
|
|
Total current liabilities
|
|
|
700,013
|
|
|
|
31,067
|
|
Deferred purchase price
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
Total liabilities
|
|
|
3,700,013
|
|
|
|
3,031,067
|
|
Commitments and Contingencies (Note 7)
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred Stock AA, par value $.00001; 10,000,000 and 10,000,000 shares authorized at December 31, 2019 and 2018; and 4,165,938 and 1,738,688 shares issued and outstanding at December 31, 2019 and 2018, respectively
|
|
|
3,332,750
|
|
|
|
1,390,950
|
|
Common stock, par value $0.00001, 20,000,000 and 20,000,000 shares authorized and 10,156,250 and 10,020,000 issued and outstanding as of December 31, 2019 and 2018, respectively
|
|
|
102
|
|
|
|
100
|
|
Additional paid-in capital
|
|
|
2,288,269
|
|
|
|
347,576
|
|
Accumulated deficit
|
|
|
(3,821,783
|
)
|
|
|
(1,015,439
|
)
|
Total stockholders’ equity
|
|
|
1,799,338
|
|
|
|
723,187
|
|
Total liabilities and stockholders’ equity
|
|
$
|
5,499,351
|
|
|
$
|
3,754,254
|
|
The
accompanying notes are an integral part of these financial statements
SOLO
SCIENCES, INC.
Statements
of Operations
|
|
For the Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
|
|
|
|
|
solo*TAGTM and solo*CODETM sales
|
|
$
|
103,250
|
|
|
$
|
—
|
|
Membership application fees
|
|
|
1,520
|
|
|
|
299
|
|
Total revenues
|
|
|
104,770
|
|
|
|
299
|
|
Cost of revenues
|
|
|
4,234
|
|
|
|
—
|
|
Gross profit
|
|
|
100,536
|
|
|
|
299
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
59,294
|
|
|
|
27,000
|
|
Selling, general and administrative
|
|
|
2,852,455
|
|
|
|
988,936
|
|
Total operating expenses
|
|
|
2,911,749
|
|
|
|
1,015,936
|
|
Loss from operations
|
|
|
(2,811,213
|
)
|
|
|
(1,015,637
|
)
|
Other income
|
|
|
|
|
|
|
|
|
Interest
|
|
|
4,869
|
|
|
|
198
|
|
Total other income
|
|
|
4,869
|
|
|
|
198
|
|
Net loss
|
|
$
|
(2,806,344
|
)
|
|
$
|
(1,015,439
|
)
|
The
accompanying notes are an integral part of these financial statements
SOLO
SCIENCES, INC.
Statements
of Changes in Stockholders’ Equity
For
the years ended December 31, 2019 and 2018
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Preferred Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Stockholder’s
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance at December 31, 2017
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Common shares issued
|
|
|
6,570,000
|
|
|
|
66
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(66
|
)
|
|
|
—
|
|
|
|
—
|
|
Common shares issued to acquire intangible assets
|
|
|
230,000
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,698
|
|
|
|
—
|
|
|
|
66,700
|
|
Series AA Preferred shares issued
|
|
|
—
|
|
|
|
—
|
|
|
|
1,738,688
|
|
|
|
1,390,950
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,390,950
|
|
Restricted shares granted to nonemployees
|
|
|
3,220,000
|
|
|
|
32
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(32
|
)
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
280,976
|
|
|
|
—
|
|
|
|
280,976
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,015,439
|
)
|
|
|
(1,015,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
10,020,000
|
|
|
|
100
|
|
|
|
1,738,688
|
|
|
|
1,390,950
|
|
|
|
347,576
|
|
|
|
(1,015,439
|
)
|
|
|
723,187
|
|
Common shares issued upon warrant exercise
|
|
|
156,250
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
124,998
|
|
|
|
—
|
|
|
|
125,000
|
|
Series AA Preferred shares issued
|
|
|
—
|
|
|
|
—
|
|
|
|
2,427,250
|
|
|
|
1,941,800
|
|
|
|
—
|
|
|
|
|
|
|
|
1,941,800
|
|
Restricted shares forfeited
|
|
|
(20,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,815,695
|
|
|
|
—
|
|
|
|
1,815,695
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,806,344
|
)
|
|
|
(2,806,344
|
)
|
Balance at December 31, 2019
|
|
|
10,156,250
|
|
|
$
|
102
|
|
|
|
4,165,938
|
|
|
$
|
3,332,750
|
|
|
$
|
2,288,269
|
|
|
$
|
(3,821,783
|
)
|
|
$
|
1,799,338
|
|
The
accompanying notes are an integral part of these financial statements
SOLO
SCIENCES, INC.
Statements
of Cash Flows
|
|
For the Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,806,344
|
)
|
|
$
|
(1,015,439
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
398,820
|
|
|
|
240,382
|
|
Stock-based compensation expense
|
|
|
1,275,490
|
|
|
|
194,504
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(72,749
|
)
|
|
|
(299
|
)
|
Prepaid expenses
|
|
|
15,970
|
|
|
|
(38,105
|
)
|
Accounts payable and accrued liabilities
|
|
|
668,946
|
|
|
|
31,067
|
|
Net cash used in operating activities
|
|
|
(519,867
|
)
|
|
|
(587,890
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
—
|
|
|
|
(21,228
|
)
|
Software development
|
|
|
(1,397,230
|
)
|
|
|
(705,224
|
)
|
Net cash used in investing activities
|
|
|
(1,397,230
|
)
|
|
|
(726,452
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Series AA preferred shares
|
|
|
1,941,800
|
|
|
|
1,390,950
|
|
Proceeds from exercise of warrants
|
|
|
125,000
|
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
2,066,800
|
|
|
|
1,390,950
|
|
Net increase in cash and cash held in escrow
|
|
|
149,703
|
|
|
|
76,608
|
|
Cash and cash held in escrow at beginning of year
|
|
|
76,608
|
|
|
|
—
|
|
Cash and cash held in escrow at end of year
|
|
$
|
226,311
|
|
|
$
|
76,608
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
4,869
|
|
|
$
|
198
|
|
Cash paid for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Supplemental disclosures of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Share based compensation for software development
|
|
$
|
540,205
|
|
|
$
|
86,472
|
|
Common stock issued to acquire intangible assets
|
|
$
|
—
|
|
|
$
|
66,700
|
|
Deferred purchase obligation for intangible assets acquired
|
|
$
|
—
|
|
|
$
|
3,000,000
|
|
The
accompanying notes are an integral part of these financial statements
SOLO
SCIENCES, INC.
Notes
to Financial Statements
Note
1 — Description of Business, Liquidity and Capital Resources
Description
of Business
Solo
Sciences, Inc. (the “Company” or “Solo”) was founded in January 2018. Since its inception the Company
has been developing anti-counterfeiting technology for sale to retailers and government consumers and a mobile phone application
for use by end consumers.
Note
2 — Summary of Significant Accounting Policies
Basis
of presentation
The
accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United
States, (“GAAP”).
Use
of estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates for the years
ended December 31, 2019 and 2018 were the Company’s estimated useful lives of long-lived assets, which include capitalized
software development costs, assumptions used to value of stock-based compensation, including valuation of common stock underlying
the compensation agreements, and assumptions used to value the Company’s intellectual property. Actual results could differ
from those estimates.
Cash
The
Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.
There were no cash equivalents as of December 31, 2019 and 2018. The Company continually monitors its positions with, and the
credit quality of, the financial institutions with which it invests. As December 31, 2019 and 2018, and periodically throughout
the year, the Company has maintained balances in various operating accounts in excess of federally insured limits. The Company
has not experienced any losses on such accounts.
Cash
Held in Escrow
Cash
held in escrow is recorded at fair value. Cash held in escrow consisted of cash was contractually restricted to be paid to distributed
to the Company’s selling shareholders prior to the of the partial sale of their interests in January 15, 2020, as further
described in Note 9.
Prepaid
Expenses
Prepaid
expenses consist primarily of third-party technology and software used by the Company in its day-to-day operations paid in advance
and recognized as expense ratably over the term of the contract.
Accounts
Receivable, Net
When
estimating its allowance for doubtful accounts the Company’s estimate is based on historical collection experience and a
review of the status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the allowance
for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts estimated in determining
the allowance. The Company did not record an allowance for doubtful accounts as of December 31, 2019 or 2018.
SOLO
SCIENCES, INC.
Notes to Financial Statements
Note
2 — Summary of Significant Accounting Policies (cont.)
Concentrations
of Credit Risk
The
Company grants credit in the normal course of business to customers in the United States. The Company periodically performs credit
analysis and monitors the financial condition of its customers to reduce credit risk.
During
the year ended December 31, 2019, Akerna Corp. (“Akerna”) accounted for 82% of total revenues. At December 31, 2019,
Akerna accounted for 82% and another customer accounted for 17% of net accounts receivable. During the year ended December 31,
2018, the Company did not have significant operations.
Fixed
Assets
Fixed
assets are stated at cost. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned
assets, ranging from three to ten years. Fixed assets are periodically reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The Company did not recognize any property impairment charges
in fiscal 2019 or 2018.
Intangible
Assets
Finite-lived
intangible assets resulting from the acquisition of intellectual property, trademarks and patents are recorded at the estimated
fair value on the date of acquisition. The fair value of acquired intangible assets is determined using appropriate valuation
techniques. Amortization expense is computed using the straight-line basis of accounting over their estimated useful lives, a
weighted average of 11 years as of December 31, 2019. Costs incurred to renew or extend the term of recognized intangible assets
are capitalized and amortized over the estimated useful life of the asset.
Impairment
of Intangible Assets
Recoverability
of finite lived intangible assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash
flows the asset is expected to generate. If the asset is determined to be impaired, the amount of any impairment is measured as
the difference between the carrying value and the fair value of the impaired asset. The Company did not recognize any intangible
asset impairment charges in fiscal 2019 or 2018. At least annually, the Company assesses the useful lives of our finite lived
intangible assets and may adjust the period over which these assets are amortized whenever events or changes in circumstances
indicate that a shorter amortization period is more reflective of the period in which these assets contribute to our cash flows.
Software
Development Costs
The
Company expenses software development costs incurred before technological feasibility is reached.
Software
development costs are incurred to develop software to be used solely to meet its internal needs. The Company capitalizes application
development costs related to these software applications once the preliminary project stage is complete, it is probable that the
project will be completed, and the software will be used to perform the function intended. Application development stage costs
capitalized were $2.2 million and $0.8 million during the years ended December 31, 2019 and 2018. Application development costs
are primarily comprised of the cost of the Company’s consultants including equity-based compensation awarded to these consultants.
The Company commences amortization of capitalized software development costs when the application development stage complete and
the asset is ready for its intended use. Software development costs are amortized over their estimated useful life, generally
five years.
Fair
Value of Financial Instruments
The
carrying amounts of financial instruments, including cash, cash held in escrow, accounts receivable, prepaid expenses, accounts
payable and accrued liabilities approximated their fair value as of December 31, 2019 and 2018 because of the relatively short-term
nature of these instruments. The Company accounts for fair value measurements in accordance with GAAP, which defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value measurements.
SOLO
SCIENCES, INC.
Notes to Financial Statements
Note
2 — Summary of Significant Accounting Policies (cont.)
GAAP
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under GAAP
are described below:
|
Level
1:
|
Unadjusted
quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
Level
2:
|
Applies
to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for
the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical
assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived
valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market
data.
|
|
Level
3:
|
Prices
or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported
by little or no market activity).
|
Revenue
Recognition
The
Company’s solo*CODETM products consist of a unique tag that is configured for the customers’ packaged goods
and an app which communicates with the Company’s software that works in conjunction with the tag to identify the customers’
products. The app may be accessed using handheld devices such as smart phones. The Company’s solo*TAGTM product
is a unique tag configured to facilitate tracking and tracing of cannabis plants and products to ensure compliance with government
regulations. During the year ended December 31, 2019, the Company entered into an agreement with Akerna to develop cloud-based
software for governments to utilize solo*TAGTM for compliance monitoring activities.
The
Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration
the Company expects to receive in exchange for those goods or services. To determine revenue recognition contracts with its customers,
the Company performs the following five step assessment: (i) identify the contract or contracts with a customer; (ii) identify
the performance obligations in each contract; (iii) determine the transaction price; (iv) allocate the transaction price to the
performance obligations in the contract; and (v) recognize revenue when, or as, the entity satisfies a performance obligation.
The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it
is entitled to in exchange for the goods or services it transfers to the customer. At contract inception and once the contract
is determined to be a contract with a customer, the Company assesses the goods or services promised within each contract, determines
which goods and services are performance obligations, and assesses whether each promised good or service is distinct. The Company
then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when,
or as, the performance obligation is satisfied.
Income
Taxes
Income
taxes are accounted for using the asset and liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of other assets
and liabilities. The Company provides for income taxes at the current and future enacted tax rates and laws applicable in each
taxing jurisdiction. The Company uses a two-step approach for recognizing and measuring tax benefits taken or expected to be taken
in a tax return and disclosures regarding uncertainties in income tax positions. The Company recognizes interest and penalties
related to income tax matters in selling, general, and administrative expense in the statement of operations. The Company did
not recognize any interest or penalties for the years ended December 31, 2019 and 2018.
SOLO
SCIENCES, INC.
Notes to Financial Statements
Note
2 — Summary of Significant Accounting Policies (cont.)
The
Company recognizes deferred tax assets to the extent that its assets are more likely than not to be realized. In making such a
determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. If the Company
determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, it will
make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company
has recorded a full valuation allowance against its deferred tax assets as of December 31, 2019 and 2018.
Nonemployee
Stock-Based Compensation
The
Company accounts for nonemployee equity awards using the fair value method. Compensation cost for all stock awards expected to
vest is measured at fair value on the date of grant, which typically coincides with vesting, and recognized over the service period.
The Company uses the fair value of its common stock to value its restricted stock awards. The fair values of its nonqualified
stock options are estimated using the Black-Scholes option pricing model. The value is recognized as expense over the service
period. The Company accounts for forfeitures when they occur. The estimated number of stock awards that will ultimately vest requires
judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded
as a cumulative adjustment in the period estimates are revised.
The
fair values of the Company’s nonemployee awards are revalued each reporting period with the change recorded as stock-based
compensation expense. Certain amounts of the stock-based compensation are capitalized as software development costs.
Recent
Accounting Pronouncements
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued guidance for measuring credit losses on financial
instruments. Among other things, this guidance will require the measurement of all expected credit losses for financial assets
held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Businesses
will now use forward-looking information to better inform their credit loss estimates. The new guidance is effective for the Company
beginning January 1, 2021. The Company is evaluating the impact of adoption of the new standard on its financial statements.
In
November 2016, the FASB issued guidance requires that the statements of cash flows explain the change during the reporting period
of the totals of cash, cash equivalents, restricted cash and restricted cash equivalents. Therefore, amounts for restricted cash
and restricted cash equivalents are to be included with cash and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the Statements of cash flows. The Company adopted this guidance on January 1, 2019, using
the retrospective transition guidance required by the standard, as such, the statement of cash flows for the year ended December
31, 2018 has been presented in accordance with this guidance.
In
June 2018, the FASB issued new guidance for stock-based compensation paid to nonemployees. The new guidance conforms the measurement
of stock-based compensation for both employees and nonemployees. This guidance is effective for the Company on January 1, 2020
and will result in measurement of stock-based compensation paid to nonemployees for services to be provided over a period of time
as of the date of the agreement. The Company currently measures the value of shares transferred upon completion of the service
requirement, had this new guidance been effective in 2019, the Company’s net loss would have been $0.8 million less than
as reported.
In
August 2018, the FASB issued new guidance for implementation costs incurred by customers in cloud computing arrangements, which
broadens the scope of existing guidance applicable to internal-use software development costs. The update requires costs to be
capitalized or expensed based on the nature of the costs and the project stage in which they are incurred subject to amortization
and impairment guidance consistent with existing internal-use software development cost guidance. The guidance is applicable for
the Company beginning January 1, 2021. The Company has not completed its evaluation of this standard or the effect it will have
on the Company’s financial position or results of operations once adopted.
SOLO
SCIENCES, INC.
Notes to Financial Statements
Note
3 — Balance Sheet Disclosures
Fixed
assets consist of the following:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Computer equipment
|
|
$
|
6,228
|
|
|
$
|
6,228
|
|
Artwork
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
|
21,228
|
|
|
|
21,228
|
|
Less accumulated depreciation
|
|
|
(6,443
|
)
|
|
|
(2,867
|
)
|
|
|
$
|
14,785
|
|
|
$
|
18,361
|
|
Depreciation
expense for the year ended December31, 2019 and 2018 was $3,576 and $2,867.
Prepaid
expenses consist of the following:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Software license
|
|
$
|
22,135
|
|
|
$
|
24,105
|
|
Contractor services
|
|
|
—
|
|
|
|
14,000
|
|
|
|
$
|
22,135
|
|
|
$
|
38,105
|
|
Software
development cost and intangibles consist of the following:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Software development cost
|
|
$
|
2,729,131
|
|
|
$
|
791,696
|
|
Intellectual property
|
|
|
3,066,700
|
|
|
|
3,066,700
|
|
Accumulated amortization
|
|
|
(632,759
|
)
|
|
|
(237,515
|
)
|
|
|
$
|
5,163,072
|
|
|
$
|
3,620,881
|
|
Amortization
expense for capitalized software and finite lived intellectual property for the year ended December 31, 2019 and 2018 was $0.4
million and $0.2 million, respectively. For each of the years ending December 31, 2020 through 2023, amortization expense related
to capitalized software and finite lived intellectual property that has been placed into service as of December31, 2019 will be
$0.7 million, for the year ending December 31, 2024, amortization expense related to these assets will be $0.5 million.
Note
4 — Intellectual Property Acquisition
On
February2, 2018, the Company entered into an intellectual property purchase agreement for intellectual property assets, trademarks
and domain names owned by Get Solo, LLC. Get Solo, LLC is a related party to the Company because an officer of the Company held
a noncontrolling interest in Get Solo, LLC at the time of the transaction. At closing, the Company exchanged 230,000shares of
common stock for the worldwide rights to the intellectual property. In addition to the shares the agreement provides for deferred
purchase payments in two tranches, first, following a qualified financing transaction within 180 days of closing, the Company
would have been required to pay $1.0 million in cash or shares of common stock; second on or prior to the fifth anniversary of
closing, the Company was required to pay $2.0 million, or $3.0 million if a qualified financing transaction did not occur, also
in cash or shares of common stock at the Company’s option. The qualified financing did not occur during 2018, therefore
the deferred purchase price liability as of December 31, 2019 and 2018 was $3.0million. This transaction was accounted for as
an asset acquisition in accordance with GAAP. Subsequent to year end, the Company’s shareholders sold 80.4% of their interests
in the Company to Akerna, as further discussed in Note 9. In connection with this transaction, 375,000 shares of Akerna common
stock, contractually valued at $8 per share issued to the Company’s shareholders was allocated to Get Solo, LLC in full
satisfaction of the deferred purchase price liability.
SOLO
SCIENCES, INC.
Notes to Financial Statements
Note
5 — Stockholders’ Equity
Common
Stock Transactions
In
January 2018, the Company issued 6,570,000 shares of common stock to its founders and received no proceeds in exchange. In February
2018, the Company issued 230,000 shares to Get Solo, LLC, a related party, in exchange for certain intellectual property, as further
discussed in Note 4. The Company recorded the issuance of these shares at their estimated fair value of $0.29 per share.
The
Company did not declare or pay any dividends during the years end December 31, 2019 and 2018.
Series
AA Preferred Stock Transactions
The
Company has been financed through its issuance of Series AA preferred stock. Since its inception, the Company has issued 4.2 million
Series AA preference shares at $0.80 per share for proceeds of $3.3 million. On January 15, 2020 and immediately prior to the
partial sale of the Company’s equity to Akerna, discussed further in Note9, the Company converted all outstanding shares
of Series AA preferred stock to common stock using a one-for-one conversion rate.
The
different classes of shares carry different transfer rights and distribution rights as described in the Company’s certificate
of incorporation. Transfer of the common and preferred shares is conditioned on obtaining written approval from the Company.
Voting
Preferred
shares and common shares vote as a single class. Each holder of the preferred stock is entitled to the number of votes equal to
the number of shares that the preferred shares may be converted. The conversion price is $0.80 per share.
Dividends
The
preferred shareholders are entitled to dividends out of assets legally available in preference to common shareholders at $0.48
per share when and if declared by the board of directors of the Company. Dividends are not cumulative.
Liquidation
In
the event of liquidation, dissolution or windup, the preferred shareholders are entitled to receive the amount equal to the conversion
price of $0.80 per share. In the event the legally assets of the Company are insufficient, then the asset will be distributed
pro rata based on the amount the preferred shareholders are entitled.
Conversion
Each
share of preferred stock may be converted at any time at the option of the holder at the conversion rate. Each share of preferred
stock is automatically converted immediately prior to a firm commitment of an initial public offering or a written request from
60% of the preferred stock shareholder then outstanding.
Note
6 — Stock-Based Compensation
During
2018, the Company’s board of directors adopted its 2018 Stock Option Plan (“2018 Plan”), which was approved
by its stockholders. The 2018 plan provides for the grants of restricted stock awards and nonqualified stock options to members
of the Company’s the board of directors and the Company’s consultants. The plan allows for a maximum aggregate number
of nonqualified stock options for 500,000 shares to be granted pursuant to the plan.
SOLO
SCIENCES, INC.
Notes to Financial Statements
Note
6 — Stock-Based Compensation (cont.)
Restricted
Common Stock Awards
During
2018, the Company granted 3.2 million restricted stock awards to nonemployees under the 2018 Plan at its fair value of $0.29 per
share. The restricted stock awards generally vest ratably, on a monthly basis, over a three-year period.
On
November 25, 2019, the Company’s shareholders entered into an agreement to sell 80.4% of their interest in the Company at
a contracted value of $1.49 per share, the subsequent sale is described in Note 9. As a result of the increase in the fair value
of unvested restricted shares, the Company recorded a true-up of previously recorded stock-based compensation relating to unvested
restricted shares as of November 25, 2019. The Company recognized stock-based compensation costs of $1.7 million, of which $0.5
million was capitalized as software development costs. During the year ended December31, 2018, the Company recognized stock-based
compensation costs related to these awards of $0.3 million, of which $0.1 million was capitalized as software development costs.
There
were no grants of restricted stock awards for the year ended December 31, 2019.
The
following table summarizes restricted stock activity during the years ended December 31, 2019 and 2018:
|
|
Number of
Shares
|
|
|
Weighted-
Average
fair value
|
|
Outstanding and unvested, as of December 31, 2017
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
3,220,000
|
|
|
$
|
0.29
|
|
Vested
|
|
|
(1,029,552
|
)
|
|
$
|
0.29
|
|
Outstanding and unvested, as of December 31, 2018
|
|
|
2,190,448
|
|
|
$
|
0.29
|
|
Forfeited
|
|
|
(20,000
|
)
|
|
$
|
0.29
|
|
Vested
|
|
|
(789,440
|
)
|
|
$
|
0.40
|
|
Outstanding and unvested, as of December 31, 2019
|
|
|
1,381,008
|
|
|
$
|
1.49
|
|
The
aggregate fair value of restricted stock awards vested during each the years ended December 31, 2019 and 2018 was $0.3 million.
There were no outstanding unvested restricted stock awards as of December 31, 2019. Total intrinsic value of outstanding unvested
restricted stock awards as of December 31, 2019 and 2018 was $2.1 million and $0.6 million.
On
January 15, 2020 and immediately prior to the partial sale of the Company’s outstanding equity, as further described in
Note9, the Company accelerated vesting of the then unvested restricted common stock awards and the shares pursuant to these agreements
were converted to common stock of the Company on a one-for-one basis.
Nonqualified
Stock Options
Stock
options issued under the Plan generally vest over a four-year period and expire ten years from the date of grant. Certain options
provide for accelerated vesting if there is a change in control, as defined in the Plan.
The
Company used Black-Scholes option pricing model to estimate stock-based compensation expense for stock option awards with the
following assumptions for the years ended December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Expected volatility
|
|
|
1.89
|
%
|
|
|
1.97
|
%
|
Risk-free interest rate
|
|
|
1.53
|
%
|
|
|
2.63
|
%
|
Expected dividend
|
|
|
—
|
|
|
|
—
|
|
Expected term (in years)
|
|
|
5.00
|
|
|
|
6.00
|
|
Underlying common stock fair value
|
|
$
|
1.49
|
|
|
$
|
0.29
|
|
SOLO
SCIENCES, INC.
Notes to Financial Statements
Note
6 — Stock-Based Compensation (cont.)
As
a result of the Company’s shareholders’ agreement to sell 80.4% of their interest in the Company, described above,
during the year ended December 31, 2019, the previously recognized stock-based compensation costs related to unvested stock options
on November 25, 2019 was adjusted to reflect the increase in the estimated fair value of a common share.
A
summary of option activity under the 2018 Plan is as follows:
|
|
Number of
Options
|
|
|
Weighted-
Average
Exercise
Price per
Share
|
|
|
Weighted-
Average
Estimated
Grant Date
Fair Value
|
|
|
Weighted-
Average
Remaining
Contractual
Term
(in Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of December 31, 2018
|
|
|
253,000
|
|
|
$
|
0.80
|
|
|
$
|
0.12
|
|
|
|
9.78
|
|
|
$
|
30,360
|
|
Granted
|
|
|
240,000
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(109,000
|
)
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
|
|
384,000
|
|
|
$
|
0.80
|
|
|
$
|
0.75
|
|
|
|
9.17
|
|
|
$
|
288,000
|
|
Exercisable as of December 31, 2019
|
|
|
384,000
|
|
|
$
|
0.80
|
|
|
$
|
0.75
|
|
|
|
9.18
|
|
|
$
|
288,000
|
|
Vested and expected to vest as of December 31, 2019
|
|
|
384,000
|
|
|
$
|
0.80
|
|
|
$
|
0.75
|
|
|
|
9.17
|
|
|
$
|
288,000
|
|
Stock-based
compensation expense for the Company’s stock-based awards for the years ended December 31, 2019 and 2018 was $77,000 and
$2,000, respectively, and is included in selling, general and administrative in the Company’s statements of operations.
On January 15, 2020 and immediately prior to the partial sale of the Company’s outstanding equity, as further described
in Note9, the Company exercised a cashless conversion of the then outstanding stock options for 178,124 shares of the Company’s
common stock.
Note
7 — Commitments and Contingencies
Litigation
From
time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course
of business. The Company will accrue a liability for such matters when it is probable that a liability has been incurred and the
amount can be reasonably estimated. As of December 31, 2019, and through the date these financial statements were issued, there
were no legal proceedings requiring recognition or disclosure in the financial statements.
Note
8 — Income Taxes
For
the years ended December 31, 2019 and 2018, the Company did not incur any current or deferred tax expense or benefit at the U.S.
federal or state level. The Company’s effective tax rate for the years ended December 31, 2019 and 2018 was 0% because it
is more likely than not that the Company will not be able to realize the tax benefit from deferred tax assets generated during
the years. Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities
of the Company for financial reporting purposes and the amounts used for income tax purposes.
SOLO
SCIENCES, INC.
Notes to Financial Statements
Note
8 — Income Taxes (cont.)
Significant
components of our deferred tax liabilities and assets are as follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Noncurrent deferred tax assets:
|
|
|
|
|
|
|
Federal net operating loss
|
|
$
|
1,060,165
|
|
|
$
|
283,058
|
|
Stock-based compensation
|
|
|
188,722
|
|
|
|
40,846
|
|
Total deferred tax assets
|
|
|
1,248,936
|
|
|
|
373,783
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Software development costs
|
|
$
|
675,500
|
|
|
$
|
161,006
|
|
Intangible assets
|
|
|
92,365
|
|
|
|
35,871
|
|
Total deferred tax liabilities
|
|
|
767,865
|
|
|
|
196,877
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(481,071
|
)
|
|
|
(127,026
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets after valuation allowance
|
|
$
|
—
|
|
|
$
|
—
|
|
During
the years ended December 31, 2019 and 2018, valuation allowances on deferred tax assets that are not anticipated to be realized
increased by $0.4 million and $0.1 million, respectively.
In
accordance with the accounting requirements for stock-based compensation, we may recognize tax benefits in connection with the
exercise of stock options by nonemployees and the vesting of restricted stock awards. We recognize the tax effects related to
stock-based compensation through earnings in the period the compensation was recognized.
The
Company had federal net operating loss carryforwards for which the deferred tax assets were approximately $1.1 million and $0.3
million, respectively, as of December 31, 2019 and 2018. The net operating loss carryforwards and do not expire. The Company has
evaluated the realizability of its deferred tax assets by assessing the adequacy of expected taxable income, including the reversal
of existing temporary differences, historical and projected operating results, and the availability of prudent and feasible tax
planning strategies. Based on this analysis, the Company has determined that the valuation allowance recorded in the period presented
are appropriate.
The
Company is not currently under examination for the major jurisdictions where it conducts business as of December 31, 2019. Because
the statute of limitations has not yet elapsed, the Company’s initial United States federal income tax return for the year
ended December 31, 2018 is currently subject to examination by the Internal Revenue Service. The Company’s management does
not believe that there are significant uncertain tax positions in 2019. There are no interest and penalties related to uncertain
tax positions in 2019.
Note
9 — Subsequent Events
The
Company has evaluated subsequent events for financial statement purposes occurring through May 29, 2020, the date these financial
statements were ready for issuance.
On
January 15, 2020, the Company’s shareholders sold 80.4% of their interests to Akerna in exchange for shares of Akerna’s
common stock. Pursuant to the agreement, Akerna will provide $2.4 million of additional capital infusion to the Company during
the 12months following the closing date. Akerna has a 12-month option to acquire the remaining 19.6% interest in the Company.
If Akerna does not exercise this option, the shareholders have a three-month option to repurchase between 40% and 55% of the interest
in the Company. Immediately prior to the transaction, the Company’s directors elected to accelerate the vesting of all unvested
stock options issued to nonemployees effected a cashless exercise of these options, resulting in the issuance of 178,124 common
shares. Also, immediately prior to the transaction all outstanding shares of Series AA preferred stock were converted to common
stock on a one-for-one basis.
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined statements
of operations for the year ended June 30, 2020 are based on the historical financial statements of Akerna Corp. (“Akerna”,
“we”, “our”), solo sciences inc. (“Solo”) and Ample Organics Inc. (“Ample”), after
giving effect to the acquisition of Solo, the exercise of the Solo Option, the acquisition of Ample (collectively “the Acquisitions”)
and after applying the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined
statements of operations.
The
unaudited pro forma condensed combined statements of operations for the year ended June 30, 2020 give effect to the Acquisitions
as if they had occurred on July 1, 2019, the first day of the earliest year presented.
The acquisition of Ample closed on July
7, 2020 and we exercised the Solo Option on July 31, 2020.
The partial acquisition of Solo and the
acquisition of Ample has been accounted for pursuant to Financial Accounting Standards Board Accounting Standards Codification
(“ASC”) 805, Business Combinations. We have made significant assumptions and estimates in determining the preliminary
estimated purchase price and the preliminary allocation of the estimated purchase price in the unaudited pro forma condensed combined
statements of operations Differences between these preliminary estimates and the final acquisition accounting could have a material
impact on the accompanying unaudited pro forma condensed combined statements of operations and the combined company’s future
results of operations and financial position. Accordingly, the pro forma adjustments are preliminary and have been made solely
for the purpose of providing unaudited pro forma condensed combined statements of operations.
The historical consolidated financial information
has been adjusted in the unaudited pro forma condensed consolidated statements of operations to give effect to pro forma events
that are (1) directly attributable to the acquisition; (2) factually supportable; and (3) with respect to the unaudited
pro forma condensed consolidated statements of operations, expected to have a continuing impact on the combined results.
The
unaudited pro forma condensed consolidated statements of operations have been prepared by management for illustrative purposes
only and are not necessarily indicative of the consolidated results of operations of Akerna that would have been reported had the
Acquisitions been completed as of the dates presented and should not be taken as representative of the future consolidated results
of operations of Akerna. The unaudited pro forma financial statements do not reflect any operating efficiencies and cost savings
that Akerna may achieve, or any additional expenses that it may incur, with respect to the combined companies.
The unaudited pro forma condensed combined
statements of operations, including the notes thereto should be read in conjunction with:
|
●
|
The accompanying notes to the unaudited pro forma condensed
combined statements of operations;
|
|
●
|
Our
audited consolidated financial statements and accompanying notes as of and for the years ended June 30, 2020 and 2019, included
elsewhere in this prospectus;
|
|
●
|
Ample’s
unaudited condensed consolidated interim financial statements as of and for the six months ended June 30, 2020;
|
|
●
|
Ample’s
audited consolidated financial statements as of and for the year ended December 31, 2019 and 2018, and
|
|
●
|
Solo’s
audited financial statements as of and for the years ended December 31, 2019 and 2018.
|
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 investment, Solo became a controlled subsidiary and we commenced consolidation of Solo on January
15, 2020, the results of which are included in our June 30, 2020 audited consolidated balance sheet.
We
had the option to acquire the remaining 19.6% equity interest in Solo for either cash or Akerna shares in an amount dependent
upon the market value of Akerna shares. On July 31, 2020, we exercised this option and issued 800,000 shares of Akerna common
stock in exchange for the remaining 19.6% equity interest. This transaction was accounted for as an equity transaction with the
difference between the fair value of the consideration exchanged and the carrying value of the non-controlling interest recorded
in additional paid in capital.
The Company’s statement of
operations for period ended September 30, 2020 contains the combined operations of the Company, Solo and Ample for that
period. While Ample wasn’t acquired until July 7, 2020, the impact of the seven (7) days at the beginning of the period
was determined to be immaterial by the Company and therefore separate pro forma condensed combined financial data for that
period is not presented herein
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR
THE YEAR ENDED JUNE 30, 2020
|
|
Historical
|
|
|
|
|
|
|
Akerna Corp.
|
|
|
Solo
|
|
|
Pro forma
adjustments
|
|
|
Note 2
|
|
Pro forma
Combined
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$
|
9,976,580
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
9,976,580
|
|
Consulting
|
|
|
2,379,947
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
2,379,947
|
|
Other
|
|
|
216,749
|
|
|
|
90,000
|
|
|
|
—
|
|
|
|
|
|
306,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
12,573,276
|
|
|
|
90,000
|
|
|
|
—
|
|
|
|
|
|
12,663,276
|
|
Cost of revenue
|
|
|
6,209,724
|
|
|
|
3,064
|
|
|
|
—
|
|
|
|
|
|
6,212,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,363,552
|
|
|
|
86,936
|
|
|
|
—
|
|
|
|
|
|
6,450,488
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
3,206,310
|
|
|
|
57,195
|
|
|
|
—
|
|
|
|
|
|
3,263,505
|
|
Sales and marketing
|
|
|
7,792,480
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
7,792,480
|
|
General and administrative
|
|
|
11,320,715
|
|
|
|
2,228,011
|
|
|
|
(1,862,720
|
)
|
|
B, C
|
|
|
11,686,006
|
|
Depreciation and amortization
|
|
|
1,315,898
|
|
|
|
267,000
|
|
|
|
288,000
|
|
|
A
|
|
|
1,870,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
23,635,403
|
|
|
|
2,552,206
|
|
|
|
(1,574,720
|
)
|
|
|
|
|
24,612,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(17,271,851
|
)
|
|
|
(2,465,270
|
)
|
|
|
1,574,720
|
|
|
|
|
|
(18,162,401
|
)
|
Interest income, net
|
|
|
156,678
|
|
|
|
3,785
|
|
|
|
—
|
|
|
|
|
|
160,463
|
|
Change in fair value of Convertible Notes
|
|
|
766,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
766,000
|
|
Other expense, net
|
|
|
(254
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
(254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(16,349,427
|
)
|
|
|
(2,461,485
|
)
|
|
|
1,574,720
|
|
|
|
|
|
(17,236,192
|
)
|
Income tax expense
|
|
|
(30,985
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
(30,985
|
)
|
Equity losses in investee
|
|
|
(3,692
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
(3,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,384,104
|
)
|
|
$
|
(2,461,485
|
)
|
|
$
|
1,574,720
|
|
|
|
|
$
|
(17,270,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributed to noncontrolling interest in consolidated subsidiary
|
|
|
849,759
|
|
|
|
—
|
|
|
|
(849,759
|
)
|
|
D
|
|
|
—
|
|
Net loss attributed to Akerna shareholders
|
|
$
|
(15,534,345
|
)
|
|
$
|
(2,461,485
|
)
|
|
$
|
724,961
|
|
|
|
|
$
|
(17,270,869
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(1.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,860,212
|
|
|
|
|
|
|
|
1,860,246
|
|
|
E
|
|
|
13,720,458
|
|
Diluted
|
|
|
11,860,212
|
|
|
|
|
|
|
|
1,860,246
|
|
|
E
|
|
|
13,720,458
|
|
See
accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR
THE YEAR ENDED JUNE 30, 2020
|
|
Historical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Akerna Corp.
and Solo
|
|
|
Ample
(CAD$)
|
|
|
Ample
(USD)
|
|
|
IFRS to US
GAAP
Adjustments
|
|
|
Pro forma
adjustments
|
|
|
Note 2
|
|
Pro forma Combined
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$
|
9,976,580
|
|
|
CAD
|
7,584,452
|
|
|
$
|
5,650,779
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
15,627,359
|
|
Consulting
|
|
|
2,379,947
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
2,379,947
|
|
Other
|
|
|
306,749
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
306,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
12,663,276
|
|
|
|
7,584,452
|
|
|
|
5,650,779
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
18,314,055
|
|
Cost of revenue
|
|
|
6,212,788
|
|
|
|
3,469,286
|
|
|
|
2,584,784
|
|
|
|
—
|
|
|
|
(105,923
|
)
|
|
A
|
|
|
8,691,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,450,488
|
|
|
|
4,115,166
|
|
|
|
3,065,995
|
|
|
|
—
|
|
|
|
105,923
|
|
|
|
|
|
9,622,406
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
3,263,505
|
|
|
|
2,898,439
|
|
|
|
2,159,476
|
|
|
|
—
|
|
|
|
(240,024
|
)
|
|
A
|
|
|
5,182,957
|
|
Sales and marketing
|
|
|
7,792,480
|
|
|
|
1,626,042
|
|
|
|
1,211,479
|
|
|
|
—
|
|
|
|
(110,045
|
)
|
|
A
|
|
|
8,893,914
|
|
General and administrative
|
|
|
11,686,006
|
|
|
|
6,087,191
|
|
|
|
4,535,248
|
|
|
|
—
|
|
|
|
(1,554,003
|
)
|
|
A, B
|
|
|
14,667,251
|
|
Depreciation and amortization
|
|
|
1,870,898
|
|
|
|
1,124,299
|
|
|
|
837,656
|
|
|
|
—
|
|
|
|
2,200,000
|
|
|
C
|
|
|
4,908,554
|
|
Loss on fair value of preferred share liabilities
|
|
|
—
|
|
|
|
3,855,453
|
|
|
|
2,872,497
|
|
|
|
—
|
|
|
|
(2,872,497
|
)
|
|
D
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
24,612,889
|
|
|
|
15,591,424
|
|
|
|
11,616,356
|
|
|
|
—
|
|
|
|
(2,576,569
|
)
|
|
|
|
|
33,652,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(18,162,401
|
)
|
|
|
(11,476,258
|
)
|
|
|
(8,550,361
|
)
|
|
|
—
|
|
|
|
2,682,492
|
|
|
|
|
|
(24,030,270
|
)
|
Interest income, net
|
|
|
160,463
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
160,463
|
|
Change in fair value of convertible notes
|
|
|
766,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
766,000
|
|
Other expense, net
|
|
|
(254
|
)
|
|
|
(25,000
|
)
|
|
|
(18,626
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
(18,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(17,236,192
|
)
|
|
|
(11,501,258
|
)
|
|
|
(8,568,987
|
)
|
|
|
—
|
|
|
|
2,682,492
|
|
|
|
|
|
(23,122,687
|
)
|
Provision for income taxes
|
|
|
(30,985
|
)
|
|
|
43,969
|
|
|
|
32,759
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
1,774
|
|
Equity in losses of investee
|
|
|
(3,692
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
(3,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,270,869
|
)
|
|
CAD
|
(11,457,289
|
)
|
|
$
|
(8,536,228
|
)
|
|
$
|
—
|
|
|
$
|
2,682,492
|
|
|
|
|
$
|
(23,124,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Akerna stockholders
|
|
$
|
(17,270,869
|
)
|
|
CAD
|
(11,457,289
|
)
|
|
$
|
(8,536,228
|
)
|
|
$
|
—
|
|
|
$
|
2,682,492
|
|
|
|
|
$
|
(23,124,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(1.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,720,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,720,458
|
|
Diluted
|
|
|
13,720,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,720,458
|
|
See
accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information
Note
1: Basis of Pro Forma Presentation
Accounting
Periods Presented — Ample, Solo
The
unaudited pro forma condensed combined statements of operations of Akerna, Solo and Ample for the year ended June 30, 2020, are
presented as if the Acquisitions had taken place on July 1, 2019. Certain pro forma adjustments to record differences between
historical book values and preliminary values as of the date of the pro forma condensed combined statements of operations are
based on the assumption that the acquisition occurred on July 1, 2019, 2020. The actual adjustments to be recorded in Akerna’s
consolidated financial statements will be as of the acquisition date and the option exercise date, respectively.
Accounting
Policies-Ample
We
did not adopt new accounting standards for revenue or leases in the year ended June 30, 2020, and as an emerging growth company,
we have elected to implement the disclosure requirements of the new revenue standard in our financial statements for the transition
period ending December 31, 2020. We have elected to adopt the new leasing standard in our annual financial statements for the
fiscal year ending December 31, 2022. Ample, as a Canadian company, has adopted these standards. We have reflected adjustments
to remove the material differences between the new standards and the standards applied in our financial statements in the “IFRS
to US GAAP Adjustments” as described in Note 2.
The
Solo Option
The
Solo Option may be paid, at the sole option of Akerna, in either cash or shares of Akerna’s common stock the amount of which
is dependent upon the market value of Akerna Shares. When the Solo Option is exercised, it will be accounted as an equity transaction
with the difference between the fair value of the consideration exchanged and the carrying value of the non-controlling interest
recorded in additional paid in capital. On July 31, 2020, Akerna exercised the Solo Option and issued an addition 800,000 shares
of Akerna common stock in exchange for the remaining 19.6% interest in Solo.
Note
2: Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended June 30, 2020
The
pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the acquisition of Solo
are as follows:
|
A.
|
To
reflect $0.6 million amortization expense of preliminarily estimated purchased intangible assets as if the acquisition had
closed on July 1, 2019, offset by $0.3 million to reduce amortization recorded in Solo’s historical financial statements.
|
|
B.
|
To
reduce stock-based compensation of $1.6 million due to accelerated vesting of Solo’s restricted stock and
settlement of options in connection with the acquisition.
|
|
C.
|
To
remove $0.3 million of nonrecurring transaction costs.
|
|
D.
|
To
remove allocation of net loss to noncontrolling interests in Solo, which would not have been recorded had the Solo Option
been exercised on July 1, 2019.
|
|
E.
|
To
adjust the weighted average number of shares issued for the partial acquisition of Solo included in the Akerna Corp. historical
calculation of loss per share and to reflect the number of shares that were issued in connection with the exercise of the
Solo Option as if both of these transactions had occurred on July 1, 2019.
|
The
pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the acquisition of Ample
adjust the condensed combined pro forma financial statement of operations for Akerna and Solo as described above. The adjustments
related to the Ample acquisition are as follows:
The
pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the acquisition of Ample
are as follows:
|
A.
|
To
reduce stock-based compensation of $485,000, due to settlement of options in connection with the acquisition.
|
|
B.
|
To
remove $1.5 million of nonrecurring transaction costs.
|
|
C.
|
To
record amortization of $2.2 million due to purchased intangibles as part of acquisition.
|
|
D.
|
To
remove the effect of remeasurement of $2.9 million for preference shares as the preference shares will be settled in connection
with the acquisition.
|
The
pro forma basic and diluted net loss per share are based on 11,860,212 shares common stock. Dilutive potential common shares,
including the Exchangeable Shares expected to be issued in the Ample acquisition, are included only if they have a dilutive effect
on earnings per share. No adjustment has been made for assumed equity awards or the Exchangeable Shares in the computation of
pro forma combined diluted net loss per share because their effect would be anti-dilutive.
2,667,349 SHARES OF COMMON STOCK
PROSPECTUS
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
13- OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
|
|
Amount
|
|
Securities
and Exchange Commission Registration Fee
|
|
$
|
3,369.77
|
|
Legal
Fees and Expenses
|
|
$
|
20,000
|
|
Accounting
Fees and Expenses
|
|
$
|
10,000
|
|
Printing
and Engraving Expenses
|
|
$
|
0
|
|
Miscellaneous
Expenses
|
|
$
|
0
|
|
Total
|
|
$
|
33,369.77
|
|
ITEM
14- INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under
Section 145 of the DGCL, a corporation may indemnify its directors, officers, employees and agents and its former directors, officers,
employees and agents and those who serve, at the corporation’s request, in such capacities with another enterprise, against
expenses (including attorney’s fees), as well as judgments, fines and settlements, actually and reasonably incurred in connection
with the defense of any action, suit or proceeding (other than an action by or in the right of the corporation) in which they
or any of them were or are made parties or are threatened to be made parties by reason of their serving or having served in such
capacity. The DGCL provides, however, that such person must have acted in good faith and in a manner he or she reasonably believed
to be in (or not opposed to) the best interests of the corporation and, in the case of a criminal action, such person must have
had no reasonable cause to believe his or her conduct was unlawful. In addition, the DGCL does not permit indemnification in an
action or suit by or in the right of the corporation, where such person has been adjudged liable to the corporation for negligence
or misconduct in the performance of his/her duty to the corporation, unless, and only to the extent that, a court determines that
such person fairly and reasonably is entitled to indemnity for costs the court deems proper in light of liability adjudication.
Indemnity is mandatory to the extent a claim, issue or matter has been successfully defended.
Section
102(b)(7) of the DGCL permits a corporation to include in its certificate of incorporation a provision eliminating or limiting
the personal liability of a director to the corporation or its shareholders for monetary damages for breach of fiduciary duty
as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the
director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL (relating to unlawful payment
of dividends and unlawful stock purchase or redemption) or (iv) for any transaction from which the director derived an improper
personal benefit.
Article
VI of the Amended and Restated By-Laws of Akerna contains provisions which are designed to provide mandatory indemnification of
directors and officers of Akerna to the full extent permitted by law, as now in effect or later amended. The Amended and Restated
By-Laws further provide for reimbursement and advances of payment of expenses actually and reasonably incurred by a current or
former director or officer of Akerna under the circumstances contained therein.
ITEM
15- RECENT SALES OF UNREGISTERED SECURITIES
From
June 5, 2019, through June 10, 2019, MTech Acquisition Corp. entered into subscription agreements with certain investors, whereby
the investors named therein committed to purchase an aggregate of 901,074 shares of common stock of MTech for an aggregate purchase
price of approximately $9.2 million (the “MTech Private Placement”). Upon the closing of the business combination
between MTech and Akerna, such shares issued by MTech in the Private Placement (“Private Placement Shares”) were automatically
converted into shares of common stock of Akerna on a one-for-one basis. The shares of common stock that were issued in connection
with the subscription agreements described above were not registered under the Securities Act, and were issued in reliance on
the exemption from registration provided by Section 4(a)(2) of the Securities Act.
On
January 15, 2020, Akerna closed on a stock purchase agreement previously entered into with substantially all of the shareholders
of Solo Sciences, Inc., a Delaware corporation (“Solo”), pursuant to which Akerna acquired all right, title and interest
in 80.40% of the issued and outstanding capital stock of Solo (calculated on a fully diluted basis), free and clear of all liens.
The initial consideration amount under the agreement was 1,950,000 shares of the common stock of Akerna, less 570,000 shares of
the common stock of Akerna to be held in escrow as follows: (a) 375,000 are to be held and sold to cover costs of the Solo shareholders
under a related intellectual property purchase agreement, to be completed within 12 months of the closing date, with any remaining
shares to be released to the Solo shareholders; and (b) 195,000 shares to be held to cover any indemnity payment to certain Akerna
parties under the indemnity provisions in the Agreement. This initial consideration may be subject to an adjustment for final
working capital acquired no later than 120 days following the closing date. The Akerna shares were issued in exchange for the
shares of Solo held by the Solo shareholders pursuant to the exemption from the registration requirements of the Securities Act
provided by Rule 506(b) of Regulation D thereunder, such exemption being available based on the representations of the Solo shareholders.
On
April 8, 2020, Akerna entered into a stock exchange agreement, pursuant to which it issued shares of common stock of Akerna with
an aggregate contractual value of $2,000,000 (the “Akerna Shares”) at $5.72 per share, subject to certain adjustments
not later than 90 days post-closing. The acquisition closed on April 10, 2020, the acquisition date fair value of the shares of
stock issued was $2,531,466, or $7.24 per share, the closing price on the date of acquisition. The Akerna Shares were issued in
exchange for the shares of Trellis Solutions, Inc., an Ontario corporation held by the sellers under the stock exchange agreement.
The Akerna shares of common stock were issued pursuant to the exemption from the registration requirements of the Securities Act
provided by Section 4(a)(2) thereof, based on the representations and warranties of the sellers.
On
June 9, 2020, Akerna issued senior secured convertible notes to holders in an aggregate original principal amount of $17,000,000
having an aggregate original issue discount of 12%, and ranking senior to all of our outstanding and future indebtedness, in reliance
upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation
D under the Securities Act, based in part on the representations of the holders..
On
July 7, 2020, Akerna Canada Ample Exchange Inc., a corporation incorporated under the Business Corporations Act (Ontario)
and wholly-owned subsidiary of Akerna issued 3,294,574 Exchangeable Shares to Ample shareholders. The issuance of the Exchangeable
Shares and the Special Voting Share on the closing in connection with the consummation of the plan of arrangement was not registered
under the Securities Act and such securities were issued in reliance upon the exemption from registration pursuant to Section
3(a)(10) of the Securities Act.
On
July 31, 2020, Akerna issued 800,000 shares of common stock of Akerna to acquire the remaining 19.6% of Solo. The Akerna shares
were issued in exchange for the shares of Solo held by the Solo shareholders pursuant to the exemption from the registration requirements
of the Securities Act provided by Rule 506(b) of Regulation D thereunder, such exemption being available based on the representations
of the Solo shareholders.
From December 29, 2020 through January 7, 2021, Akerna issued
443,063 shares of common stock of Akerna to the holders of Akerna’s convertible notes upon conversion of installment amounts
due under the terms of the notes. The shares were issued upon conversion of the installment amounts under the notes to the holders
of the notes pursuant to the exemption from the registration requirements of the Securities Act provided by Section 3(a)(9) thereof.
On January 7, 2021, Akerna issued
101,705 shares of common stock to a private party in settlement of a lease agreement. The shares were issued to the private party
in settlement of claims and payments due under the lease agreement pursuant to the exemption from the registration requirements
of the Securities Act provided by Rule 506(b) of Regulation D thereunder, such exemption being available based on the representations
of the private party.
ITEM
16- EXHIBITS
(a)
Exhibits.
See
the Exhibit Index.
(b)
Financial Statement Schedules.
None.
(c)
Reports, Opinions and Appraisals.
None.
ITEM
17- UNDERTAKINGS
(a)
The undersigned Registrant hereby undertakes:
(1)
To file, during any period in which offers or sales of securities are being made, a post-effective amendment to this registration
statement to:
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(i)
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Include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
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(ii)
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Reflect
in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in
the registration statement; and notwithstanding the forgoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of prospectuses filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in the volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration
statement.
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(iii)
|
Include
any additional or changed material information on the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;
|
(2)
That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3)
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold
at the termination of the offering.
(4)
For determining liability of the undersigned Registrant under the Securities Act to any purchaser in the initial distribution
of the securities, the undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant
pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if
the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant
will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
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(i)
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Any
preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant
to Rule 424 (§230.424 of this chapter);
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(ii)
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Any
free writing prospectus relating to the offering prepared by or on behalf of the undersigned Registrant or used or referred
to by the undersigned Registrant;
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(iii)
|
The
portion of any other free writing prospectus relating to the offering containing material information about the undersigned
Registrant or its securities provided by or on behalf of the undersigned Registrant; and
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(iv)
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Any
other communication that is an offer in the offering made by the undersigned Registrant to the purchaser.
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(b)
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described herein, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy
as expressed in the Act and will be governed by the final adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all the requirements of filing
on Form S-1 and authorized registration statement to be signed on its behalf by the undersigned, in the city of Denver, Colorado
on January 7, 2021.
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AKERNA CORP.
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By:
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/s/ Jessica Billingsley
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Name: Jessica Billingsley
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Title: Chief Executive Officer
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Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
Signature
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Title
|
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Date
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/s/ Jessica Billingsley
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Chief Executive Officer and Director
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January 7, 2021
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Jessica Billingsley
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(Principal Executive Officer)
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/s/ John Fowle
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Chief Financial Officer
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January 7, 2021
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John Fowle
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(Principal Financial and Accounting Officer)
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/s/ Scott Sozio*
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Director
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January 7, 2021
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Scott Sozio
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/s/ Tahira Rehmatullah*
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Director
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January 7, 2021
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Tahira Rehmatullah
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/s/ Matthew Kane*
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Director
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January 7, 2021
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Matthew Kane
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/s/ Mark Iwanowski*
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Director
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January 7, 2021
|
Mark Iwanowski
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* By:
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/s/
Jessica Billingsley
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Jessica
Billinglsey
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Attorney-in-Fact
pursuant to Power of Attorney dated July 9, 2020
|
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EXHIBIT
INDEX
Exhibit
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Number
|
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Description
|
2.1+
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|
Agreement and Plan of Merger, dated as of October 10, 2018, by and among MTech Acquisition Corp., Akerna Corp., Purchaser Merger Sub Inc., Company Merger Sub LLC, MTech Sponsor LLC in the capacity as the Purchaser Representative thereunder, MJ Freeway LLC and Harold Handelsman in the capacity as the Seller Representative thereunder (incorporated by reference to Exhibit 2.1 to the registrant’s Registration Statement on Form S-4 (File No. 333-228220))
|
|
|
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2.2
|
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First Amendment to Agreement and Plan of Merger, effective as of April 17, 2019, by and among MTech Acquisition Corp., Akerna Corp., MTech Purchaser Merger Sub Inc., MTech Company Merger Sub LLC, MTech Sponsor LLC,, in the capacity as the Purchaser Representative under the Merger Agreement, MJ Freeway LLC, and Jessica Billingsley, in the capacity as the Seller Representative under the Merger Agreement (incorporated by reference to Exhibit 2.2 to the registrant’s Registration Statement on Form S-4/A (File No. 333-228220))
|
|
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2.3
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|
Arrangement Agreement dated December 18, 2019 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on December 18, 2019)
|
|
|
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2.4
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|
Amendment to Arrangement Agreement dated February 28, 2020 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on March 3, 2020)
|
|
|
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2.5
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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 the registrant on July 8, 2020)
|
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2.6
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|
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 the registrant on July 8, 2020)
|
|
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3.1
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Amended and Restated Certificate of Incorporation of Akerna Corp. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
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3.2
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Amended and Restated Bylaws of Akerna Corp. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
|
|
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3.3
|
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Certificate of Designation for the Special Voting Share (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the registrant on July 8, 2020)
|
|
|
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3.4
|
|
Amendment to Bylaws (incorporated by reference to Exhibit 3.1
to the Current Report on Form 8-K filed by the registrant on November 19, 2020)
|
|
|
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4.1
|
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Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-4 (File No. 333-228220))
|
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4.2
|
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Specimen Warrant Certificate (incorporated by reference to Exhibit 4.2 to the registrant’s Registration Statement on Form S-4 (File No. 333-228220))
|
|
|
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4.3
|
|
Form of Warrant Agreement (incorporated by reference to Exhibit 4.3 on Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
|
|
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4.4
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|
Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on June 8, 2020)
|
|
|
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4.5
|
|
Form of Secured Convertible Promissory Note (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the registrant on June 8, 2020)
|
|
|
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4.6
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Form of Security Agreement (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the registrant on June 8, 2020)
|
|
|
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4.7
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|
Form of Guaranty Agreement (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by the registrant on June 8, 2020)
|
|
|
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4.8
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|
Form of Voting Agreement (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed by the registrant on June 8, 2020)
|
|
|
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5.1
|
|
Opinion of Dorsey & Whitney LLP (incorporated by reference to Exhibit 5.1 to the Registration Statement on Form S-1 filed by the registrant on July 9, 2020)
|
9.1
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|
Voting and Exchange Trust Agreement (incorporated by reference to Exhibit 9.1 to the Current Report on Form 8-K filed by the registrant on July 8, 2020)
|
|
|
|
10.1
|
|
Registration Rights Agreement, dated January 29, 2018, by and among MTech Acquisition Corp., MTech Sponsor LLC, and MTech Sponsor LLC (incorporated by reference to Exhibit 10.1 on Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
|
|
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10.2
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First Amendment to Registration Rights Agreement, dated June 17, 2019, by and among MTech Acquisition Corp., Akerna Corp. and MTech Sponsor LLC (incorporated by reference to Exhibit 10.2 on Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
|
|
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10.3
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Stock Escrow Agreement, dated January 29, 2018, by and among MTech Acquisition Corp., MTech Sponsor LLC, and Continental Stock Transfer & Trust Company (incorporated by reference to Exhibit 10.3 on Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
|
|
|
10.4
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|
Amendment to Stock Escrow Agreement, dated June 17, 2019, by and among MTech Acquisition Corp., Akerna Corp., MTech Sponsor LLC, and Continental Stock Transfer & Trust Company (incorporated by reference to Exhibit 10.4 on Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
|
|
|
10.5
|
|
Non-Competition and Non-Solicitation Agreement dated June 17, 2019, by and among Jessica Billingsley, Akerna Corp., MJ Freeway and MTech Sponsor LLC (incorporated by reference to Exhibit 10.5 on Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
|
|
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10.6
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|
Non-Competition and Non-Solicitation Agreement dated June 17, 2019, by and among Amy Poinsett, Akerna Corp., MJ Freeway and MTech Sponsor LLC (incorporated by reference to Exhibit 10.6 on Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
|
|
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10.7
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|
Form of Indemnification Agreement of Officers and Directors (incorporated by reference to Exhibit 10.7 on Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
|
|
|
10.8
|
|
Form of Subscription Agreement, by and among MTech Acquisition Corp., Akerna Corp., and each purchaser signatory thereto (incorporated by reference to Exhibit 10.8 on Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
|
|
|
10.9
|
|
Form of Agreement to Transfer Sponsor Shares, by and among MTech Acquisition Corp., Akerna Corp., each transferee signatory thereto, and Continental Stock Transfer &Trust Company (incorporated by reference to Exhibit 10.9 on Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
|
|
|
10.10^
|
|
Employment Agreement, dated June 17, 2019, by and between Jessica Billingsley and Akerna Corp. (incorporated by reference to Exhibit 10.10 on Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
|
|
|
10.11^
|
|
MTech Acquisition Holdings Inc. 2019 Long Term Incentive Plan (incorporated by reference to Exhibit 10.5 to the registrant’s Registration Statement on Form S-4 (File No. 333-228220))
|
|
|
|
10.12^
|
|
Form of Option Grant Certificate (incorporated by reference to Exhibit 10.12 on Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
|
|
|
10.13^
|
|
Form of Restricted Stock Unit Award (incorporated by reference to Exhibit 10.13 on Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
|
|
|
10.14^
|
|
Form of Stock Award (incorporated by reference to Exhibit 10.14 on Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
|
|
|
10.15^
|
|
Form of Restricted Stock Award (incorporated by reference to Exhibit 10.15 on Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
|
|
|
10.16^
|
|
Form of Appreciation Rights Award (incorporated by reference to Exhibit 10.16 on Current Report on Form 8-K filed by the registrant on June 21, 2019)
|
10.17
|
|
Form of Lock-Up Agreement, by and among MTech Acquisition Holdings, Inc., MTech Sponsor LLC, and each holder signatory thereto (incorporated by reference to Exhibit 10.3 to the registrant’s Registration Statement on Form S-4 (File No. 333-228220))
|
|
|
|
10.18
|
|
Office Service Agreement, dated September 30, 2019, effective February 1, 2020 (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the three months ended September 30, 2019
|
|
|
|
10.19
|
|
Stock Purchase Agreement, dated November 25, 2018 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on November 26, 2019)
|
|
|
|
10.20^
|
|
Letter Agreement effective September 23, 2019 between the registrant and Nina Simosko (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on October 1, 2019)
|
|
|
|
10.21^
|
|
Letter Agreement effective September 26, 2019 between MJ Freeway, LLC and Ray Thompson (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the registrant on October 1, 2019)
|
|
|
|
10.22
|
|
Covenant Agreement effective September 23, 2019 between Akerna Corp and Nina Simosko (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the registrant on October 1, 2019)
|
|
|
|
10.23
|
|
Covenant Agreement between Akerna Corp. and Ray Thompson (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by the registrant on October 1, 2019)
|
|
|
|
10.24^
|
|
Letter Agreement dated December 17, 2019 between Akerna Corp. and John Fowle (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on December 23, 2019)
|
|
|
|
10.25
|
|
Covenant Agreement dated December 17, 2019 between Akerna Corp. and John Fowle (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the registrant on December 23, 2019)
|
|
|
|
10.26
|
|
Exchangeable Share Support Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on July 8, 2020)
|
|
|
|
10.27
|
|
Escrow Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the registrant on July 8, 2020)
|
|
|
|
10.28
|
|
Rights Indenture (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the registrant on July 8, 2020)
|
|
|
|
10.29*
|
|
Form of Waiver Agreement between Akerna Corp. and the holders of its convertible notes
|
|
|
|
21.1
|
|
Subsidiaries of Akerna Corp. (incorporated by reference to Exhibit 21.1 to the Registration Statement on Form S-1 filed by the registrant on July 9, 2020)
|
|
|
|
23.1*
|
|
Consents of Marcum LLP
|
|
|
|
23.2*
|
|
Consent of Ernst & Young LLP
|
|
|
|
23.3*
|
|
Consent of Dorsey & Whitney LLP
|
|
|
|
24.1
|
|
Power of Attorney (incorporated by reference to the signature page to the Regsitration Statement on Form S-1 filed by the Regsitrant on July 9, 2020)
|
|
|
|
101*
|
|
Interactive Date Files
|
+
|
The
exhibits and schedules to this Exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby
agrees to furnish a copy of any omitted schedules to the Commission upon request.
|
^
|
Management
compensation contract or arrangement
|
II-7
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