American Bitcoin Corp. annual report, FY2020

Filing identity and reporting period

The supplied filing is Akerna Corp.’s Form 10-K for the fiscal year ended June 30, 2020, not an American Bitcoin Corp. filing or a 2020 fourth-quarter report. The filing compares fiscal 2020 with fiscal 2019; it does not provide a distinct fourth-quarter income statement.

Business context

Akerna provided compliance, inventory-tracking and analytics software, plus consulting, primarily to cannabis businesses and government regulators. Revenue was largely subscription-based. The company stated that it did not handle cannabis or process clients’ cannabis sales. It acquired Solo in January 2020 and Trellis in April 2020; its Ample Organics acquisition closed July 7, 2020, after year-end.

Financial performance

Software revenue grew 21%, while total revenue rose 16%. Government contracts accounted for 39% of FY2020 revenue. Cost of revenue increased 34%, contributing to gross-margin contraction. Operating expenses rose 26%, including higher general and administrative costs, acquisition and financing expenses, and depreciation and amortization. The company reported net loss attributable to Akerna shareholders of $15.53 million, distinct from consolidated net loss of $16.38 million.

Liquidity, debt and cash flow

At June 30, 2020, cash was $24.16 million and restricted cash was $0.50 million; working capital was $16.0 million, down from $21.8 million a year earlier. Cash used in investing activities was $3.60 million, and financing activities provided $20.23 million, including proceeds from convertible notes, a PPP loan and warrant exercises.

Debt carrying value was $16.34 million: $14.13 million for $17 million principal of senior secured convertible notes and $2.20 million for the PPP loan. The notes mature in 2023, have monthly principal installments beginning October 2020, are secured by substantially all assets, and may convert into stock. The company warned that conversion could cause substantial dilution; default provisions include a 15% interest rate and potential redemption or foreclosure remedies. Management said available cash and financing were expected to fund at least 12 months from issuance of the financial statements.

Outlook, risks and unusual items

• No quantified revenue or earnings guidance was provided. Management expected delayed consulting revenue to be recognized in the next fiscal year and anticipated stronger consulting demand following November 2020 state ballot initiatives.
• COVID-19 delayed consulting project delivery and revenue recognition; the ultimate financial impact was described as uncertain. Management also reported cost reductions and expected additional annual savings of $2–$3 million from phase two of its cost initiative.
• The cannabis sector’s federal legal status, banking access, changing regulation, client licensing and government-contract concentration pose material risks. Cybersecurity, privacy compliance, acquisitions and competition are also identified risks.
• Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because of material weaknesses, including insufficiently documented controls, segregation-of-duties documentation and timely GAAP financial-statement controls. Remediation was underway; the auditor did not attest to internal-control effectiveness.
• The company revised prior FY2020 quarterly results after identifying software-development costs that should have been capitalized. It said the errors were not material to individual prior interim periods, but cumulative correction would have been material if recorded in the identification period.
• FY2020 included $2.98 million of business-combination and merger-related costs and $1.18 million of debt-issuance costs. The Trellis contingent consideration was revalued to zero, producing a $1.0 million gain.

Key facts investors should verify

• Confirm the intended issuer and period: this filing is Akerna Corp. FY2020, not American Bitcoin Corp. or a 2020 Q4 filing.
• Review the full financial statements and quarterly revisions, including the distinction between consolidated net loss and loss attributable to Akerna shareholders.
• Assess cash burn against installment obligations, PPP loan forgiveness or repayment, and the secured convertible notes’ default, conversion and dilution terms.
• Track remediation and subsequent testing of the disclosed material weaknesses in financial reporting controls.
• Evaluate integration, financing and contingent-consideration outcomes for the acquisitions, particularly Ample, which closed after year-end.