Business context and reporting period
This is Akerna Corp.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2023, filed August 14, 2023. The supplied request names American Bitcoin Corp., but the filing is for Akerna Corp. (Nasdaq: KERN, KERNW). Akerna provided cannabis-industry compliance and inventory-management software. It was pursuing an exit from SaaS through the proposed sale of its remaining core businesses and a proposed merger with Gryphon Digital Mining.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $2.29 million | $3.49 million | $4.89 million | $7.73 million |
| Gross profit / margin | $1.32 million / 58% | $2.31 million / 66% | $2.88 million / 59% | $5.04 million / 65% |
| Operating loss | $1.76 million | $20.16 million | $3.69 million | $40.05 million |
| Net loss | $3.08 million | $29.57 million | $5.56 million | $51.52 million |
| Adjusted EBITDA (non-GAAP) | Loss of $0.93 million | Loss of $2.64 million | Loss of $2.12 million | Loss of $5.27 million |
Revenue fell 34% in Q2 and 37% for the half year, mainly from customer churn, lower government-platform activity, and the planned wind-down of Solo, Trellis and Viridian. Gross margin also declined, which management attributed to a greater mix of lower-margin contracts and servicing products without new sales. The much smaller operating and net losses versus 2022 largely reflect the absence of the prior-year impairment charges; 2022 included $15.1 million of Q2 and $30.6 million of six-month continuing-operations impairment charges. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
Cash, debt and liquidity
- At June 30, cash was $828,000 and restricted cash was $500,000; the restriction was lifted in July. The filing reports $1.3 million of cash and restricted cash combined and a $9.7 million working-capital deficit.
- Six-month operating cash use was $4.09 million, compared with $7.19 million a year earlier. Investing activities provided $600,000, mainly sale proceeds; financing activities used $3.42 million. Cash and restricted cash declined $6.86 million over the period.
- Total debt on the balance sheet was $10.27 million, of which $7.77 million was current and $2.49 million noncurrent. This included $9.27 million fair value of senior convertible notes and a $1.0 million secured note from MJ Acquisition bearing 10% interest.
- Akerna paid $4.9 million of senior-note principal in cash and settled another $1.5 million through stock during the half year. The notes are senior, secured by substantially all personal property, and subject to covenants and default provisions.
Material changes, outlook and risks
- Akerna sold 365 Cannabis and Last Call Analytics in January 2023. It planned to wind down Viridian, Solo and Trellis, leaving MJF and Ample as its remaining core SaaS businesses.
- The proposed MJF and Ample sale to MJ Acquisition was for $5.0 million, comprising $4.0 million cash at closing and a $1.0 million loan to be deemed repaid at closing, subject to approvals, closing conditions and working-capital adjustments. The proposed Gryphon merger was also subject to approvals and closing conditions; the parties anticipated a third-quarter 2023 stockholder meeting and closing shortly thereafter. Neither transaction was assured.
- Management stated that recurring losses, cash use, the working-capital deficit and Nasdaq listing deficiencies raised substantial doubt about Akerna’s ability to continue as a going concern for the year following issuance. Its ability to continue depended on completing the proposed transactions and/or obtaining additional funding; failure could lead to further curtailments or liquidation.
- Nasdaq had notified Akerna of noncompliance with the $1.00 minimum bid-price and $2.5 million stockholders’ equity requirements. The company reported a Nasdaq extension through September 19, 2023, conditioned on merger completion, listing approval and meeting applicable listing standards.
- Disclosure controls and procedures were reported ineffective at June 30 because of a material weakness in financial-reporting controls. Remediation was underway, but management said the weakness would not be considered remediated until controls operated effectively for a sufficient period.
- Two shareholder derivative suits challenged disclosures about the proposed transactions; a separate Dutchie dispute concerned a Pennsylvania government contract. A TreCom claim of up to approximately $2.0 million remained disputed, with a $0.2 million loss contingency recorded. The filing did not provide a clear estimate of potential losses in the first two matters.
Important facts for investors to verify
- Confirm the status and final terms of the proposed MJ Acquisition sale and Gryphon merger, including stockholder and Nasdaq approvals, closing adjustments, termination fees and the ownership consequences.
- Assess near-term liquidity, access to additional financing, senior-note covenant compliance and the consequences if the transactions do not close.
- Track Nasdaq bid-price and stockholders’ equity compliance, including any post-quarter changes in shares, debt conversions or listing status.
- Review revenue retention and cash burn as Akerna winds down products, and distinguish continuing operations from discontinued operations in period comparisons.
- Monitor internal-control remediation, litigation developments and transaction-related fees, including the financial advisor’s success fee and potential employee transaction bonuses.