American Bitcoin Corp. annual report, FY2022

Filing identity and reporting period

Important discrepancy: The supplied filing is Akerna Corp.’s Form 10-K, ticker KERN—not an American Bitcoin Corp. filing. It reports the fiscal year ended December 31, 2022, not a standalone 2022 fourth quarter. The financial comparisons below are full-year 2022 versus full-year 2021.

Business context

Akerna provided subscription software and consulting for cannabis-industry inventory tracking, regulatory compliance, and analytics, serving commercial customers and government regulators. It reported that software generated 95% of 2022 revenue. During the fourth quarter, Akerna committed to exiting the SaaS business and pursuing transactions that would transfer its remaining operations and change the company’s business.

Financial performance and position

Continuing-operations revenue fell 23% year over year, including a 19% decline in software revenue and a 55% decline in consulting revenue. Management attributed the software decrease mainly to customer attrition and reduced business development, the loss of Washington state subscription revenue, and a customer’s shift from implementation fees to subscriptions. Gross margin improved by two percentage points, but gross profit declined as revenue fell.

The 2022 net loss included $39.0 million of continuing-operations impairment charges; discontinued operations recorded a further $22.8 million of impairment charges. The filing reported $7.9 million of cash and restricted cash for continuing operations at year-end, including $0.9 million of unrestricted cash and $7.0 million restricted under the debt arrangements. Total cash and restricted cash, including discontinued operations, was $8.2 million. Working capital deficit was $7.8 million.

Senior Convertible Notes had a $14.7 million year-end fair value and $14.7 million aggregate principal maturity amount; $13.2 million was classified as current. The debt is secured by substantially all personal property of Akerna and certain subsidiaries. Convertible-note fair-value changes contributed $2.9 million of expense in 2022.

Material changes and transactions

• A May 2022 restructuring reduced headcount by 59 employees, approximately 33% of the workforce at the time, and generated $0.6 million of severance costs. Akerna had 112 full-time employees at year-end.
• Akerna recorded substantial impairments and decided to wind down or dispose of several businesses. It completed the sale of 365 Cannabis in January 2023 for $0.5 million cash and release of an earn-out obligation; it also sold Last Call Analytics for $0.1 million in January 2023 and sold its ZolTrain investment for a nominal amount in December 2022.
• In January 2023, Akerna agreed to sell MJ Freeway and Ample to POSaBIT for $4.0 million cash, subject to adjustments and closing conditions. It also agreed to merge with Gryphon Digital Mining, subject to approvals and other conditions. At closing, Akerna’s pre-merger security holders were expected to own about 7.5% of the combined company and former Gryphon holders about 92.5%. The merger was conditioned on completing the POSaBIT sale.
• Akerna stated that, if completed, the merger would shift the business from cannabis software to Gryphon’s net-carbon-neutral bitcoin-mining business. The filing describes the transactions as proposed and does not establish that they subsequently closed.
• Akerna raised approximately $9.2 million net in a July 2022 unit offering and approximately $1.9 million net through ATM offerings during 2022. It also issued and redeemed preferred stock, with $5.25 million paid to holders upon redemption.

Outlook, risks, and unusual items

The company provided no continuing-operations revenue or earnings guidance in the supplied filing. Management expected losses and operating cash outflows to continue, though at lower levels after restructuring and planned business wind-downs. Akerna said its ability to continue as a going concern depended on completing the proposed sale and merger, and potentially obtaining additional funding.

Management and the auditor both disclosed substantial doubt about Akerna’s ability to continue as a going concern. The audited financial statements received an unqualified opinion with a going-concern explanatory paragraph and were prepared without adjustments that might be needed if Akerna could not continue operating. Failure to complete the transactions or secure funding could require further curtailments or liquidation.

Other material risks include federal cannabis prohibition and changing enforcement, dependence on Pennsylvania and Utah government contracts (22% of revenue in 2022, versus 18% in 2021), customer attrition, and the company’s limited liquidity. The notes also include default and foreclosure risks, potential dilution from convertible debt and warrants, and transaction termination fees. Akerna reported that disclosure controls and internal control over financial reporting were ineffective at December 31, 2022 because of material weaknesses; remediation was ongoing.

Potential transaction-related costs include a financial-advisor success fee of up to 3% of transaction value, subject to a $1.5 million minimum, and approximately $1.4 million of potential executive and employee severance and transaction-success benefits. A TreCom legal contingency of $0.2 million remained accrued; Akerna disclosed a separate Dutchie lawsuit filed in January 2023 and said it could not then estimate a potential loss.

Key facts for investors to verify

• Confirm the issuer and security: this is Akerna Corp. (KERN), not American Bitcoin Corp.
• Check subsequent filings for the status and final terms of the POSaBIT sale and Gryphon merger, including approvals, closing conditions, consideration, dilution, and any termination fees.
• Verify liquidity available for operations: year-end unrestricted cash was $0.9 million, while $7.0 million was restricted; assess covenant compliance, debt repayments, and any additional financing.
• Review the Senior Convertible Notes’ exchange and redemption arrangements, collateral rights, and potential share issuance or dilution.
• Assess whether Akerna remediated its material weaknesses in internal controls and whether any restatement or reporting issues arose.
• Evaluate the sustainability of remaining revenue after business disposals and wind-downs, government-contract concentration, and the outcome of disclosed litigation.