Filing summary
Issuer mismatch: The supplied filing is Akerna Corp. (Nasdaq: KERN; warrants: KERNW), not American Bitcoin Corp. It is a Form 10-Q for the quarter ended June 30, 2022, filed August 12, 2022. Figures below describe Akerna.
Business context and reporting period
Akerna provides software for regulatory compliance, inventory management and enterprise resource planning, primarily for the cannabis industry. The filing reports unaudited results for the three and six months ended June 30, 2022, compared with the same periods in 2021.
Financial results and liquidity
| Metric | Q2 2022 | Six months 2022 | Comparable 2021 period |
|---|---|---|---|
| Revenue | $6.09 million | $13.04 million | $4.91 million; $8.92 million |
| Gross profit / margin | $4.25 million / 70% | $9.00 million / 69% | $2.99 million / 61%; $5.55 million / 62% |
| Operating loss | $29.22 million | $49.86 million | $6.05 million; $9.56 million |
| Net loss | $29.57 million | $51.52 million | $6.11 million; $12.56 million |
| Operating cash flow | Not separately presented here | $(7.19) million | $(3.72) million |
| Adjusted EBITDA (non-GAAP) | $(2.15) million | $(4.41) million | $(1.63) million; $(3.47) million |
Software revenue drove growth: six-month software revenue rose 51% to $12.43 million, largely reflecting the 365 Cannabis acquisition and enterprise offerings. Consulting revenue fell 7% for the six months and 72% in Q2. The company recorded $39.60 million of long-lived asset impairments in the first half, including goodwill, intangible assets and capitalized software; the impairment charge was $24.12 million in Q2.
At June 30, cash was $5.12 million and restricted cash was $0.01 million. Current assets were $9.17 million against current liabilities of $22.37 million, a $13.2 million working capital deficit. Total liabilities were $30.22 million. Senior convertible notes had a reported fair value of $13.39 million; face-value principal was $14.62 million. Six-month cash and restricted cash declined $9.31 million.
Material changes and unusual items
- Revenue increased 46% for the first half and 24% in Q2 year over year, while losses widened substantially, primarily reflecting the impairment charges.
- In May, Akerna reduced its workforce by 59 employees, approximately 33%, and executives agreed to a temporary 25% salary reduction. The filing reports restructuring costs of approximately $0.5 million in the notes; MD&A gives approximately $0.7 million, so the exact total is not clear from the filing text.
- A June 30 amendment to the senior convertible notes deferred scheduled amortization payments from July 2022 through January 2023, imposed minimum cash requirements and required $7 million to be placed in restricted accounts. It also reset the conversion price to $0.3105.
- A July 5 unit offering generated approximately $9.3 million net proceeds; $7 million was restricted under the debt amendment. The offering included common shares and warrants, creating substantial potential dilution.
- Akerna reversed a previously accrued $0.5 million litigation contingency after settling and dismissing TechMagic-related litigation. It continued to accrue $0.2 million for the TreCom dispute and recorded a $0.5 million estimated office lease termination obligation.
Outlook, risks and controls
Management stated that recurring losses and operating cash use, limited cash and the working capital deficit raise substantial doubt about Akerna’s ability to continue as a going concern for one year from issuance. Management expected its cost reductions, debt-payment deferral, offering proceeds and working-capital controls to support operations through the second half of 2022, including until a 365 Cannabis earn-out payment was due in December. It also planned to seek additional financing and strategic alternatives. Management said these plans did not eliminate the substantial doubt; failure to raise funds could require deeper cuts or expose the company to debt default.
Nasdaq notified Akerna that its share price did not meet the $1 minimum bid requirement; the stated compliance deadline was November 21, 2022. A proposed 1-for-20 reverse stock split was among the potential remedies. The company also reported ineffective disclosure controls and a material weakness in internal controls over financial reporting, with remediation underway.
Important facts for investors to verify
- Confirm the issuer: this filing is for Akerna Corp., not American Bitcoin Corp.
- Review subsequent filings for liquidity, cash use, financing needs, the earn-out payment and any debt covenant compliance or default developments.
- Verify the outcome of the Nasdaq minimum-bid-price deficiency and proposed reverse split.
- Assess potential dilution from the unit offering, warrants and convertible notes, including the notes’ conversion terms.
- Track impairment assumptions, performance of acquired businesses, litigation exposure and progress remediating the material weakness.