Filing summary
Important identification discrepancy: The supplied filing is Akerna Corp.’s Form 10-Q for the quarter ended December 31, 2019, filed February 12, 2020. It is not an American Bitcoin Corp. filing for 2020 Q2. The summary below reflects the supplied document.
Business context and reporting period
Akerna provides compliance, inventory-management and consulting services, primarily to the cannabis and hemp industries. Its main software products are Leaf Data Systems for government regulators and MJ Platform for licensed businesses. The filing reports the three and six months ended December 31, 2019, compared with the corresponding 2018 periods; its fiscal year ends June 30.
Financial results and liquidity
- Quarter revenue: $3.31 million, up 28% from $2.57 million. Software revenue was $2.50 million; consulting was $725,000; other revenue was $83,000.
- Quarter profitability: Gross profit was $1.67 million, with a 50% gross margin, versus $1.25 million and 49% a year earlier. Operating expenses were $6.06 million; net loss was $4.34 million, compared with $2.39 million.
- Six-month revenue: $6.50 million, up 33% from $4.87 million. Software revenue rose 16% to $4.80 million; consulting revenue increased 155% to $1.56 million. Gross profit was $3.46 million, with a 53% margin, versus $2.49 million and 51%.
- Six-month profitability and cash flow: Operating expenses increased 62% to $10.77 million; net loss widened to $7.18 million from $4.09 million. Operating cash use was $7.08 million, compared with $3.49 million in the prior-year period. Investing used $250,000; financing provided $4.25 million, principally from warrant exercises.
- Balance sheet at December 31, 2019: Cash was $18.78 million, plus $500,000 of restricted cash; working capital was approximately $19.1 million. Total assets were $22.39 million, current liabilities $3.08 million, and stockholders’ equity $19.31 million. The filing reports no borrowings or debt balance.
Material changes and notable items
- Revenue growth came mainly from MJ Platform and consulting. Government software revenue was broadly flat for the six-month comparison: Utah contract revenue partly offset declines in Washington and Pennsylvania as professional services work concluded.
- Operating expenses rose faster than revenue, particularly selling, general and administrative costs, which increased 75% for the six months. Drivers included sales and marketing, public-company costs, stock-based compensation and acquisition-related expenses, including $500,000 of Solo deal costs.
- Cash and restricted cash declined by $3.09 million from June 30, 2019. Management said existing cash and expected cash generated from sales should cover anticipated needs for at least 12 months, while acknowledging continuing operating losses and cash use and the possibility of seeking additional capital.
- In October 2019, Akerna invested $250,000 for a minority interest in Zol Solutions and entered a reseller arrangement for its training platform.
- After quarter-end, on January 15, 2020, Akerna acquired 80.4% of Solo Sciences for a stated purchase price of $18 million, subject to working-capital adjustment. The filing says $15.6 million of remaining consideration was payable in 1.95 million Akerna shares, with some shares held in escrow. Solo’s results are not included in this quarter’s statements.
- The company disclosed revisions to previously issued financial statements related to duplicated revenue and classification of consulting costs. It concluded the errors were not material, but the revisions reduced previously reported revenue, assets and gross profit in affected periods and increased certain reported losses.
Outlook, risks and controls
- Management expected cash on hand and sales cash generation to meet needs for at least 12 months, but also anticipated increased operating spending and continued negative operating cash flow. No numerical revenue or earnings guidance was provided.
- Management cited risks including customer acquisition and retention, growth execution, product launches, strategic relationships, service interruptions, liability exposure, international expansion and uncertain consulting demand tied to regulatory changes.
- Customer concentration is notable: two customers represented 37% of quarter revenue and 74% of net receivables at December 31, 2019.
- Disclosure controls and procedures were deemed ineffective at December 31, 2019. Management identified material weaknesses involving undocumented controls and IT policies, insufficient evidence of control operation and segregation of duties, and inadequate controls over financial-statement presentation. Remediation efforts included hiring accounting resources, engaging an outside consultant and planning system upgrades; management said remediation would require successful operation and testing over time.
- The company reported no legal proceedings requiring financial-statement recognition or disclosure and no material changes to previously disclosed risk factors. A $500,000 standby letter of credit was backed by restricted cash and scheduled to expire June 22, 2020.
Key facts for investors to verify
- Confirm the intended issuer and reporting period: the supplied document is Akerna Corp., quarter ended December 31, 2019—not American Bitcoin Corp., 2020 Q2.
- Review subsequent filings for Solo’s final purchase-price allocation, financing and integration costs, and any exercise of the options concerning its remaining ownership.
- Track operating cash burn, customer concentration, receivable collections and the company’s ability to fund growth without additional financing or dilution.
- Assess progress remediating the disclosed material weaknesses and whether later filings report effective controls.
- Reconcile the previously revised financial statements and confirm the exact historical figures used in comparisons.