Filing summary
Entity and period: The supplied filing is Akerna Corp.’s Form 10-Q for the quarter ended March 31, 2022, not a filing for American Bitcoin Corp. Akerna reported under ticker KERN. The unaudited results compare the three months ended March 31, 2022 with the same period in 2021.
Business context and financial results
Akerna provides software for cannabis-industry compliance, inventory management and enterprise resource planning, along with consulting services. The quarter included revenue from its Viridian and 365 Cannabis acquisitions; 365 Cannabis was acquired in October 2021.
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $6.95 million | $4.01 million |
| Gross profit / margin | $4.75 million / 68% | $2.56 million / 64% |
| Operating loss | $20.64 million | $3.51 million |
| Net loss | $21.95 million | $6.46 million |
| Basic and diluted loss per share | $0.69 | $0.29 |
| Net cash used in operating activities | $3.59 million | $1.37 million |
| Adjusted EBITDA, non-GAAP | $(2.26) million | $(1.84) million |
Software revenue was $6.51 million, up 71%; consulting revenue was $427,000, up 147%. Enterprise offerings contributed $3.04 million versus none in the prior-year quarter, largely reflecting acquisitions. Non-enterprise software revenue was lower, according to management. Gross margin improved by four percentage points, which management attributed to acquisition synergies, operating-efficiency initiatives and a higher mix of business-to-business customers.
Liquidity, debt and balance sheet
At March 31, 2022, cash was $9.69 million and restricted cash was $508,000. Working capital was in deficit by $15.1 million. Current liabilities were $30.38 million, including $13.2 million of current debt and $6.3 million of contingent consideration. Long-term debt was $2.14 million; total balance-sheet debt was therefore approximately $15.34 million. The notes report the convertible notes’ fair value at $15.34 million. Cash and restricted cash together fell $4.25 million during the quarter.
Total assets declined to $74.35 million from $94.48 million at year-end 2021, including a $17.0 million decrease in goodwill. Total equity fell to $40.78 million from $59.95 million. The company reported no cash interest paid in the quarter.
Material changes, outlook and risks
- Impairment: Akerna recorded a $15.48 million impairment charge against its non-enterprise reporting unit, citing continued declines in market valuation. No goodwill impairment was recorded for the enterprise unit. The charge was a major contributor to the year-over-year increase in operating and net losses.
- Costs and unusual items: Operating expenses rose to $25.38 million, including the impairment. General and administrative expense included a $564,000 charge for terminating the 365 Cannabis Las Vegas office lease. Depreciation and amortization also increased, partly due to acquired intangible assets.
- Going concern and funding: Management said additional financing was required in Q2 2022 for working capital and to meet debt covenants. It disclosed substantial doubt about the company’s ability to continue as a going concern for one year from issuance. Plans included using its at-the-market equity program, reducing costs, and settling debt and contingent consideration in shares where permitted; funding availability and execution were not assured.
- Convertible debt and dilution: Management said noteholders could request cash installments if the share price was below $2.00; it stated the share price was below that level as of the filing date. Raising more than $5 million through the ATM program could reset the notes’ conversion price, and cash installment amounts could increase under specified conditions. After quarter-end through the filing date, Akerna issued 751,686 shares on note conversions. Potentially outstanding shares excluded from diluted loss per share totaled 19.1 million at quarter-end.
- Controls: Management concluded disclosure controls and procedures were ineffective as of March 31, 2022 because of material weaknesses in the design and/or operation of controls over key financial-reporting processes. Remediation was underway, but management said the weaknesses were not yet fully remediated.
- Contingencies: The company had recorded litigation loss contingencies of $500,000 for the TechMagic dispute and $200,000 for the TreCom dispute. The filing describes claims and defenses but does not provide a clear estimate of total possible exposure.
- Guidance: The filing provides no quantified revenue, earnings or cash-flow guidance. Management discussed growth, integration synergies, cost reductions and the need for financing; results remain subject to cannabis regulation, customer demand, competition, acquisition integration and access to capital.
Most important facts for investors to verify
- Confirm the issuer: this is Akerna Corp. (KERN), not American Bitcoin Corp.
- Check subsequent financing, ATM proceeds, cash balances and the company’s ability to meet convertible-note installments and covenants.
- Review the note terms, including potential cash-payment rights, conversion-price resets and resulting dilution.
- Assess whether operating cash use, losses and the working-capital deficit improved after March 31, 2022.
- Monitor impairment assumptions and any further goodwill or intangible-asset charges.
- Track remediation and testing of the disclosed material weaknesses in internal controls.
- Review developments in the disclosed litigation and any change in recorded contingencies.