Filing summary
Entity mismatch: The supplied filing is Akerna Corp.’s Form 10-Q, not an American Bitcoin Corp. filing. It covers the quarter ended March 31, 2021; Akerna’s listed symbols were KERN and KERNW. Verify that this is the intended filing before relying on the summary.
Business context and reporting period
Akerna provides software and consulting services focused on compliance, inventory management, and regulatory tracking, primarily for the cannabis industry. The unaudited results are for the three months ended March 31, 2021, compared with the three months ended March 31, 2020. The comparison includes acquired businesses, including Ample and Trellis; prior-year results were not adjusted for the adoption of ASC 606.
Financial results and liquidity
- Revenue: $4.01 million, up 31% from $3.07 million. Software revenue rose 62% to $3.80 million, partly reflecting Ample and Trellis; consulting revenue fell 75% to $0.17 million.
- Profitability: Gross profit was $2.56 million, up 53%; gross margin increased to 64% from 55%. Operating loss narrowed to $3.51 million from $4.88 million. Net loss attributable to Akerna shareholders widened to $6.46 million from $4.51 million, mainly reflecting a $1.99 million unfavorable fair-value change in convertible notes and increased interest expense. Basic and diluted loss per share was $0.29, versus $0.36.
- Non-GAAP measure: Adjusted EBITDA loss was $1.84 million, compared with a $3.18 million loss in Q1 2020. This is a company-defined supplemental measure, not a substitute for GAAP results.
- Cash flow: Operating cash used was $1.37 million, versus $3.91 million. Investing cash used was $0.70 million, mainly for software development; financing cash used was $0.33 million. Cash and restricted cash declined $2.41 million during the quarter.
- Cash and liquidity: Cash was $15.43 million, plus $0.50 million restricted cash, at March 31. Working capital was $6.5 million. Current assets were $19.91 million and current liabilities $13.44 million.
- Debt: Senior secured convertible-note principal was approximately $7.5 million at March 31; the company could elect to settle installments in cash or common shares. Balance-sheet current and long-term debt totaled approximately $9.91 million. The filing reports a $7.70 million fair value for the convertible notes, which differs from principal.
- Equity and dilution: Common shares outstanding were 23.07 million at quarter-end; the filing lists 8.77 million potentially dilutive shares excluded from diluted loss per share as anti-dilutive.
Material changes versus the prior comparable period
- Revenue growth was driven by software, while consulting contracted substantially. Software increased from 76% to about 95% of revenue.
- Gross margin improved, aided by Ample’s higher margin profile. Operating expenses declined 7% overall: lower general and administrative and sales and marketing costs partly offset higher product development and depreciation and amortization.
- Operating cash use improved by $2.54 million, primarily from working-capital changes.
- Net loss increased despite a narrower operating loss, as Q1 2021 included substantial non-cash fair-value and interest expense associated with convertible notes.
Outlook, risks, contingencies, and unusual items
- Management said existing working capital, the option to repay convertible-note installments with shares, and cost reductions were expected to fund operations for at least 12 months from issuance of the financial statements. This is management’s assessment, not a guarantee.
- Management expected $3 million to $4 million in annual savings from cost initiatives, primarily workforce reductions, and anticipated increased consulting demand in the second half of calendar 2021 as legalization activity resumed. No specific revenue or earnings guidance was provided.
- Akerna reported recurring operating losses and reliance on capital raising. Additional equity or debt may be needed; equity financing could dilute shareholders, and financing availability is not assured. The company also cited cannabis regulation, client growth and retention, competition, acquisitions, COVID-19, and its ability to service debt as risks.
- The company reclassified private warrants from equity to derivative liabilities following SEC staff guidance. Fair-value changes affect earnings but not cash. The filing revised prior-period financial statements; management said the errors were not material to any individual prior period, while the cumulative correction would have been material if recorded in the period identified.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2021. Reported material weaknesses included insufficiently documented controls and IT policies, inadequate evidence of control operation and segregation of duties, and improper accounting evaluation of complex instruments. Remediation efforts included added accounting resources, systems upgrades, and an outside consultant; remediation was not yet complete.
- Two disputed vendor lawsuits were disclosed: TechMagic sought up to approximately $1.07 million, with a $0.6 million loss contingency recorded; TreCom sought up to approximately $2 million, with a $0.5 million contingency recorded. Akerna disputed the claims and intended to defend them.
- After quarter-end, Akerna acquired Viridian Sciences on April 1, 2021, in an all-stock deal valued at $6.0 million. No Viridian results were included in the quarter.
Investor verification priorities
- Confirm the intended issuer: the supplied 10-Q is for Akerna Corp., not American Bitcoin Corp.
- Review the convertible notes’ settlement terms, remaining principal, fair-value assumptions, and potential share dilution.
- Assess whether cash burn, working capital, and management’s stated 12-month liquidity runway remain adequate.
- Track remediation and testing of the disclosed internal-control material weaknesses, including complex-instrument accounting.
- Verify outcomes and possible exposure from the TechMagic and TreCom disputes, and the integration and purchase accounting for Viridian.
- Evaluate the sustainability of software growth and margin improvement given acquisition contributions, the decline in consulting revenue, and government-client concentration.