Akerna Corp. — Form 10-Q Summary
Entity note: The supplied filing is for Akerna Corp. (Nasdaq: KERN), not American Bitcoin Corp. It covers the quarter and six months ended June 30, 2021; statements are unaudited.
Business context and reporting period
Akerna provides software for regulatory compliance, inventory management and tracking in the cannabis industry, as well as consulting services. It completed its acquisition of Viridian Sciences on April 1, 2021, issuing $6.0 million of common stock, with up to $1.0 million of contingent stock consideration.
Financial results and liquidity
| Metric | Q2 2021 | Six months ended June 30, 2021 | Comparable 2020 period |
|---|---|---|---|
| Revenue | $4.91 million, up 63% | $8.92 million, up 47% | Q2: $3.00 million; six months: $6.07 million |
| Gross profit / margin | $2.99 million / 61% | $5.55 million / 62% | Q2: $1.19 million / 39%; six months: $2.86 million / 47% |
| Operating loss | $6.05 million | $9.56 million | Q2: $6.18 million; six months: $11.06 million |
| Net loss | $6.11 million | $12.56 million | Q2: $6.06 million; six months: $10.67 million |
| Operating cash flow | Not separately provided in the filing text | Cash used: $3.72 million | Six months: cash used of $8.59 million |
- Q2 software revenue rose 56% to $4.46 million; consulting revenue increased to $0.41 million from $0.13 million. For the first half, software revenue rose 59% to $8.25 million, while consulting revenue fell 29% to $0.58 million.
- Management attributed revenue growth mainly to acquired businesses, including Ample, Trellis and Viridian. Government revenue declined; government clients generated 11% of first-half revenue versus 26% a year earlier.
- At June 30, cash was $11.78 million, restricted cash $0.51 million, and working capital $3.1 million. Total current and long-term debt was approximately $8.36 million, versus $15.60 million at December 31, 2020. The convertible notes had a reported fair value of $6.15 million.
- Investing cash outflow was $2.00 million, primarily for software development. Financing cash outflow was $0.33 million. Cash and restricted cash together declined by $6.05 million to $12.29 million during the first half.
Material changes versus the prior comparable period
- First-half revenue and gross profit increased, and operating loss narrowed, but net loss increased. The filing attributes the revenue increase substantially to acquisitions and the margin improvement partly to a greater contribution from higher-margin business-to-business customers.
- First-half operating cash use improved by $4.87 million, which management attributed primarily to working-capital changes.
- General and administrative expense included a Toronto office lease termination and asset write-off; the filing reports $2.45 million of restructuring charges for the first half and $2.41 million for Q2.
- Akerna reclassified private warrants from equity to fair-value derivative liabilities after reassessing their accounting. The change affected reported earnings and prior-period financial statements, but the company said it did not affect cash.
Outlook, risks and unusual items
- No quantitative revenue or earnings guidance was provided. Management expected consulting demand to increase in the second half of 2021 as pandemic restrictions eased and legalization activity expanded.
- Management stated that available working capital, potential repayment of senior secured convertible notes in shares, and spending reductions were expected to support operations for at least 12 months from issuance of the financial statements. It also cited possible additional financing and potential forgiveness of a $2 million PPP loan, without assurance.
- After quarter-end, the company entered an agreement allowing it to sell up to $25 million of common stock; proceeds, if raised, are intended for general corporate purposes. This could dilute existing shareholders.
- Management reported ineffective disclosure controls and material weaknesses in internal control over financial reporting, including deficiencies in documented controls and accounting for complex instruments. Remediation efforts were underway but were not yet considered complete.
- Disclosed contingencies included a TechMagic claim seeking up to approximately $1.07 million, for which Akerna accrued $0.6 million, and a TreCom claim seeking up to approximately $2 million, for which it accrued $0.1 million. The company disputes both claims. It also disclosed litigation brought by Solo against former directors.
- Other risks include recurring losses, dependence on cannabis industry growth and regulation, COVID-19 effects, customer concentration, access to capital, convertible debt servicing, and acquisition integration. Two government clients represented 37% of net accounts receivable at June 30.
Important facts for investors to verify
- Confirm the filing identity: the document is Akerna Corp.’s 10-Q, not a filing for American Bitcoin Corp.
- Review the debt terms, repayment schedule and conversion mechanics, and distinguish reported debt balances from the convertible notes’ fair value.
- Assess whether acquired businesses are contributing durable organic growth and whether gross-margin gains can be sustained as government revenue changes.
- Track cash burn, working capital, any use of the $25 million equity distribution program, and potential dilution.
- Follow remediation and testing of internal controls, as well as developments in the disclosed litigation and lease termination.