Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1 - Description of Business, Liquidity and Capital Resources
Description
of Business
Akerna
Corp. (the “Company”, “We”, “Our” or “Akerna”), through its wholly-owned subsidiary
MJ Freeway, LLC (“MJF”) provides enterprise software solutions that enable regulatory compliance and inventory management.
The Company’s proprietary, broad and growing suite of solutions are adaptable for industries in which interfacing with government
regulatory agencies for compliance purposes is required, or where the tracking of organic materials from seed or plant to end
products is desired. The Company developed products intended to assist states in monitoring licensed businesses’ compliance
with state regulations, and to help state-licensed businesses operate in compliance with such law. The Company provides its regulatory
software platform, Leaf Data Systems®, to state government regulatory agencies, and its commercial software platform, MJ Platform®,
to state-licensed businesses.
We
consult with clients on a wide range of areas to help them maintain compliance with state law. Our project-focused consulting
services help clients initiate or expand business operations. Our advisory engagements include service offerings focused on compliance
requirement assessments, readiness and best practices, compliance monitoring systems, application processes, inspection readiness
and business plan and compliance reviews. We typically provide our consulting services to clients in emerging markets that are
seeking consultation on newly introduced licensing regimes and assistance with the regulatory compliant build-out of operations.
The
accompanying financial statements and related notes reflect the historical results of MJF prior to the mergers completed in June
2019 (“the Mergers”) with MTech Acquisition Corp. (“MTech”) and other related entities, which resulted
in the combined company, and do not include the historical results of MTech prior to the completion of the Mergers.
Liquidity
and Capital Resources
Since
its inception, the Company has incurred recurring operating losses, used cash from operations, and relied on capital raising transactions
to continue ongoing operations. Although we have continuing negative cash flow from operations, the Company anticipates that its
current cash will be sufficient to meet the working capital requirements for the next twelve months. From time to time,
we may pursue various strategic business opportunities. These opportunities may include investment in or ownership of additional
technology companies through direct investments, acquisitions, joint ventures and other arrangements. We can provide no
assurance that we will successfully identify such opportunities or that, if we identify and pursue any of these opportunities,
any of them will be consummated. Consequently, the Company may raise additional equity or debt capital or enter into arrangements
to secure necessary financing to fund the completion of such strategic business opportunities, although no assurance can be provided
that we will be successful in completing a future capital raise. The sale of additional equity could result in additional
dilution to the Company’s existing stockholders, and financing arrangements may not be available to us, or may not be available
in sufficient amounts or on acceptable terms. Our future operating performance will be subject to future economic conditions and
to financial, business and other factors, many of which are beyond our control. See “Risk Factors” in our Annual Report
on Form 10-K for the fiscal year ended June 30, 2019 for a discussion of the risks related to our liquidity and capital structure.
AKERNA
CORP.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
2 - Summary of Significant Accounting Policies
Since
the date of the Annual Report, there have been no material changes to the Company’s significant accounting policies, except
as disclosed below.
Basis
of Presentation
These
unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange
Commission (“SEC”), for interim reporting. As permitted under those rules, certain footnotes and other financial information
that are normally required by accounting principles generally accepted in the United States of America (“U.S. GAAP”)
can be condensed or omitted. The condensed consolidated balance sheet for the year ended June 30, 2019 was derived from the
Company’s audited financial statements, but does not include all disclosures required by U.S. GAAP. The information
included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes
thereto of the Company for the year ended June 30, 2019 which were included in the annual report on Form 10-K
filed by the Company on September 23, 2019.
In
the opinion of management, these condensed consolidated financial statements have been prepared on the same basis as the annual
consolidated financial statements and notes thereto of the Company and include all adjustments, consisting only of normal recurring
adjustments, considered necessary for the fair presentation of the Company’s financial position and operating results. The
results for the three and six months ended December 31, 2019 are not necessarily indicative of the operating results
for the year ending June 30, 2020, or any other interim or future periods.
Accounts
Receivable, Net
The
Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate
is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably
possible that the Company’s estimate of the allowance for doubtful accounts will change and that losses ultimately incurred
could differ materially from the amounts estimated in determining the allowance. The allowance for doubtful accounts was $417,028
as December 31, 2019 and $190,088 as of June 30, 2019.
Concentrations
of Credit Risk
The
Company grants credit in the normal course of business to its customers. The Company periodically performs credit analysis and
monitors the financial condition of its customers to reduce credit risk.
During
the three months ended December 31, 2019, two customers accounted for 23% and 14% of total revenues, respectively. At December
31, 2019, the same two customers accounted for 50% and 24% of net accounts receivable, respectively. During the three months ended
December 31, 2018, two customers accounted for 38% and 14% of total revenues, respectively. At December 31, 2018, one customer
accounted for 61% of net accounts receivable.
AKERNA
CORP.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
During
the six months ended December 31, 2019, two customers accounted for 23% and 13% of total revenues, respectively. During the six
months ended December 31, 2018, two customers accounted for 36% and 12% of total revenues, respectively.
Investments
The Company makes strategic
investments comprised of non-marketable equity securities. Non-marketable equity securities are recorded within Other assets
in the accompanying Condensed Consolidated Balance Sheets. Determining how an investment will be accounted for depends upon the
characteristics of the security it has purchased and the degree of control or influence, both direct and indirect, that the Company
will be able to exert over that investment.
Revenue
Recognition
The Company derives its
revenues from the following two primary sources: (1) subscription revenues, which are comprised of subscription fees from government
and commercial customers accessing the Company’s enterprise cloud computing services and from customers paying for additional
support beyond the standard support that is included in the basic subscription fees; and (2) consulting services, which include
service offerings focused on compliance requirement assessments, readiness and best practices, compliance monitoring systems, application
processes, inspection readiness and business plan and compliance reviews to operators interested in integrating our platform into
their respective operations.
The
Company commences revenue recognition when all of the following conditions are satisfied:
|
●
|
There
is persuasive evidence of an arrangement
|
|
●
|
The
service has been or is being provided to the customer
|
|
●
|
The
collection of the fees is reasonably assured
|
|
●
|
The
amount of fees to be paid by the customer is fixed or determinable
|
Subscription
Revenue
Subscription
revenue is recognized ratably, beginning when access to the applicable software is provided to the customer, over the contractual
period. The Company typically invoices customers at the beginning of the term, in multi-year, annual, quarterly or monthly installments.
In instances where collection of fees occurs in advance of service delivery, revenue recognition is deferred until such services
are delivered. Revenue for implementation fees is recognized ratably over the expected term of the agreement, including expected
renewals.
The
Company includes service level commitments to customers warranting certain levels of uptime reliability and performance and permitting
those customers to receive credits in the event that those levels are not met. In addition, customer contracts often include (i)
specific obligations that require the Company to maintain the availability of the customer’s data through the service and
that customer content is secured against unauthorized access or loss, and (ii) indemnity provisions whereby the Company indemnifies
customers from third-party claims asserted against them that result from the Company’s failure to maintain the availability
of their content or securing the same from unauthorized access or loss. To date, the Company has not incurred any material costs
as a result of such commitments. Any such credits or payments made to customers under these arrangements are recorded as a reduction
of revenue.
Consulting
Services and Other Revenues
Consulting
services revenue consists of contracts with fixed terms and fee structures based upon the volume and activity, or fixed price
contracts for consulting and strategic services. When these services are not combined with subscription revenues as a single unit
of accounting, as discussed below, these revenues are recognized as services are rendered and accepted by the customer. From time
to time, the Company purchases equipment for resale to customers. Such equipment is generally drop-shipped to the Company’s
customers. The Company recognizes revenue as the services are performed or products are delivered.
AKERNA
CORP.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Cost
of Revenue
Cost
of revenue consists primarily of costs related to providing the subscription and other services to the Company’s customers,
including employee compensation and related expenses for datacenter operations, customer support and professional services personnel,
payments to outside technology service providers, security services and other tools.
Deferred
Revenue
Deferred
revenue primarily consists of payments received in advance of revenue recognition from subscription services described above and
is recognized as the revenue recognition criteria are met. The deferred revenue balance is influenced by several factors, including
seasonality, the compounding effects of renewals, invoice duration, invoice timing, size and new business within the year.
Deferred revenue that will
be recognized during the succeeding twelve-month period is recorded as Deferred revenue, which is a current liability in the accompany
Consolidated Balance Sheets.
Reclassifications
Certain
prior year financial statement amounts have been reclassified for consistency with the current year presentation.
AKERNA
CORP.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Recently
Issued Accounting Pronouncements
ASU
2014-09, Revenue from Contracts with Customers (Topic 606), supersedes the revenue recognition requirements and industry-specific
guidance under Revenue Recognition (Topic 605). Topic 606 requires an entity to recognize revenue when it transfers promised
goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for
those goods or services. ASU No. 2014-09 also requires additional disclosure about the nature, amount, timing, and uncertainty
of revenue and cash flows arising from customer contracts. As an Emerging Growth Company, ASU No. 2014-09 is effective for the
Company’s fiscal 2020 annual reporting period and for interim periods thereafter, with early adoption permitted, and allows
for either full retrospective or modified retrospective adoption. The Company is evaluating the impact of adoption of the new
standard on its consolidated financial statements.
In
January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets
and Financial Liabilities, which requires certain equity investments to be measured at fair value with changes in fair value
recognized in net income, to record changes in instrument-specific credit risk for financial liabilities measured under the fair
value option in other comprehensive income. The new standard is expected to reduce diversity in practice. The new standard is
effective for the Company’s fiscal 2020 annual reporting period and for interim periods thereafter. The Company is evaluating
the impact of adoption of the new standard on its consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard, as subsequently amended, establishes a right-of-use
model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms
longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of
expense recognition in the statement of operations. The new standard is effective for the Company beginning July 1, 2021 with
early adoption permitted. The Company is evaluating the impact of adoption of the new standard on its consolidated financial statements.
In June 2016, the FASB
issued ASU 2016-13, Financial Instruments - Credit Losses, and also issued subsequent amendments to the initial guidance, ASU 2018-19,
ASU 2019-04, ASU 2019-05, and ASU 2019-11 (collectively, Topic 326), to introduce a new impairment model for recognizing credit
losses on financial instruments based on an estimate of current expected credit losses (CECL). Under Topic 326, an entity is required
to estimate CECL on available-for-sale (AFS) debt securities only when the fair value is below the amortized cost of the asset
and is no longer based on an impairment being “other-than-temporary”. Topic 326 also requires the impairment calculation
on an individual security level and requires an entity use present value of cash flows when estimating the CECL. The credit-related
losses are required to be recognized through earnings and non-credit related losses are reported in other comprehensive income.
In April 2019, the FASB further clarified the scope of Topic 326 and addressed issues related to accrued interest receivable balances,
recoveries, variable interest rates and prepayment. Topic 326 will be effective for the Company in fiscal years beginning after
July 1, 2023, with early adoption permitted. The Company is evaluating the impact of adoption of the new standard on its consolidated
financial statements.
In
June 2018, the FASB issued ASU No. 2018-07, Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which eliminates the separate accounting model for nonemployee share-based payment awards and generally
requires companies to account for share-based payment transactions with nonemployees in the same way as share-based payment transactions
with employees. Under the new guidance, nonemployee share-based payment transactions are measured at the grant-date fair value
and are no longer remeasured at the then-current fair values at each reporting date until the share options have vested. The amended
guidance is effective for the Company’s fiscal 2020 annual reporting period and for interim periods thereafter, with early
adoption permitted. The Company is evaluating the impact of adoption of the new standard on its consolidated financial statements.
In
August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):
Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which
broadens the scope of existing guidance applicable to internal-use software development costs. The update requires costs to be
capitalized or expensed based on the nature of the costs and the project stage in which they are incurred subject to amortization
and impairment guidance consistent with existing internal-use software development cost guidance. The guidance is applicable for
the Company beginning July 1, 2023 with early adoption permitted, including adoption in an interim period. The Company is evaluating
the impact of adoption of the new standard on its financial statements.
In
November 2019, the FASB issued ASU 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging
(Topic 815), and Leases (Topic 842)” (“ASU 2019-10”). ASU 2019-10 (i) provides a framework to stagger effective
dates for future major accounting standards and (ii) amends the effective dates for certain major new accounting standards to
give implementation relief to certain types of entities. Specifically, ASU 2019-10 changes some effective dates for certain new
standards on the following topics in the FASB Accounting Standards Codification (ASC): (a) Derivatives and Hedging (ASC 815) –
now effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December
15, 2021; (b) Leases (ASC 842) - now effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal
years beginning after December 15, 2021; (c) Financial Instruments — Credit Losses (ASC 326) - now effective for fiscal
years beginning after December 15, 2022, including interim periods within those fiscal years; and (d) Intangibles — Goodwill
and Other (ASC 350) - now effective for fiscal years beginning after December 15, 2022, including interim periods within those
fiscal years. The Company adopted ASU 2019-10 and its adoption did not have a material impact on the Company’s financial
statements and financial statement disclosures.
In January 2020, the FASB
issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic
323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topics 321, 323 and 815. The new standard addresses
accounting for the transition into and out of the equity method and measurement of certain purchased options and forward contracts
to acquire investments. The standard is effective for the Company for annual and interim periods beginning after July 1, 2022,
with early adoption permitted. Adoption of the standard requires changes to be made prospectively. The Company is evaluating the
impact of adoption of the new standard on its consolidated financial statements.
AKERNA
CORP.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
3 - Balance Sheet Disclosures
Prepaid
expenses and other current assets consist of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Software and technology
|
|
$
|
675,306
|
|
|
$
|
237,930
|
|
Professional services
|
|
|
292,484
|
|
|
|
169,804
|
|
Insurance
|
|
|
89,202
|
|
|
|
159,940
|
|
Deposit
|
|
|
51,925
|
|
|
|
10,000
|
|
|
|
$
|
1,108,917
|
|
|
$
|
577,674
|
|
At
December 31, 2019, approximately $277,000 of software and technology prepaid expenses was related to a contract with a cloud software
company specializing in business intelligence. The balance will be amortized over one year.
As
of December 31, 2019, approximately $181,000 of professional services prepaid expenses related to the contract with the State
of Utah. These costs will be deferred and recognized at the same time as the related revenue is recognized, under the matching
principle.
Accrued
liabilities consist of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Professional fees
|
|
$
|
-
|
|
|
$
|
49,205
|
|
Accrued acquisition-related costs
|
|
|
500,000
|
|
|
|
-
|
|
Sales taxes
|
|
|
2,390
|
|
|
|
36,358
|
|
Compensation
|
|
|
61,958
|
|
|
|
354,724
|
|
Leaf Data Systems contractors
|
|
|
-
|
|
|
|
19,557
|
|
Other
|
|
|
-
|
|
|
|
40,706
|
|
|
|
$
|
564,348
|
|
|
$
|
500,550
|
|
The
accrued compensation as of June 30, 2019 includes approximately $215,000 of accrued bonus earned by the Company’s Chief
Executive Officer with respect to fiscal year 2019. The balance was paid in October, 2019.
At
December 31, 2019, the Company accrued $500,000 in fees related to deal costs for the Solo acquisition (Note 8).
Note
4 - Loss Per Share
Basic
net loss per share is calculated based on the weighted-average number of shares of common stock outstanding in accordance with
ASC Topic 260, Earnings per Share. Diluted net loss per common share is calculated based on the weighted-average number of shares
of common stock outstanding plus the effect of potentially dilutive issuances of common stock. When the Company reports a net
loss, the calculation of diluted net loss per common stock excludes issuances of common stock as the effect would be anti-dilutive.
For the six months ended December 31, 2019, 6,183,594 potentially dilutive issuances of shares of common stock have been excluded
from the computation of diluted weighted average shares outstanding because the effect would be anti-dilutive. Of the total securities
excluded, 5,813,804 shares of common stock are underlying outstanding warrants to purchase common stock and 369,790 were related
to the unvested shares of restricted common stock. For the six months ended December 31, 2018, 5,993,750 potentially dilutive
issuances of shares of common stock all related to warrants to purchase shares of common stock have been excluded from the computation
of diluted weighted average shares of common stock outstanding because the effect would be anti-dilutive.
AKERNA
CORP.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
5 - Stockholders’ Equity
Issuances
for Cash
In
August 2018, MJF issued 4,115,042 Series C Preferred Units (1,099,376 shares of common stock after retroactively applying the
exchange ratio) for cash consideration of $10,000,000. Following the Mergers, all the Units were converted into Akerna’s
common stock.
Restricted
Shares
Prior
to the Mergers, MJF had in place a Profit Interest Incentive Plan (the “Profits Interest Plan”) whereby it could grant
profit interest units (“PIUs”) to employees or consultants and other independent advisors of the Company. PIUs granted
under the Profits Interest Plan would generally vest once a year over four years commencing on the date granted, or based on specified
performance targets. MJF had the right, but not the obligation, to repurchase vested PIUs from holders upon their termination
of employment. Unvested PIUs were to be forfeited upon termination of employment. If the holder was terminated for cause, as defined,
all vested and unvested units would be forfeited. PIUs repurchased or canceled or forfeited by the award recipient were available
for reissuance. Upon completion of the Mergers in June 2019, the non-vested PIUs were exchanged for restricted shares of common
stock (“Restricted Shares”) subject to restricted stock agreements with varying vesting terms that reflect the vesting
conditions applicable to PIUs of the applicable MJF equity holders at the time of the Mergers.
During
the six months ended December 31, 2018, 285,324 PIUs were granted (which were exchanged for 76,239 Restricted Shares in the Mergers)
and 92,500 PIUs (which would equate to 24,716 Restricted Shares after applying the exchange ratio) were forfeited.
A
summary of the Company’s unvested Restricted Shares and Restricted Stock Units (“RSUs”) activity in the six
months ended December 31, 2019 is presented here:
|
|
Restricted
Shares
|
|
|
Restricted
Stock Units
|
|
|
Weighted
Average
Grant Date
Fair
|
|
|
Total
|
|
Nonvested at July 1, 2019
|
|
|
215,063
|
|
|
|
-
|
|
|
$
|
11.99
|
|
|
|
215,063
|
|
Vested
|
|
|
(7,347
|
)
|
|
|
-
|
|
|
|
11.99
|
|
|
|
(7,347
|
)
|
Granted
|
|
|
-
|
|
|
|
199,646
|
|
|
|
7.97
|
|
|
|
199,646
|
|
Forfeited
|
|
|
(37,572
|
)
|
|
|
-
|
|
|
|
11.99
|
|
|
|
(37,572
|
)
|
Nonvested at December 31, 2019
|
|
|
170,144
|
|
|
|
199,646
|
|
|
$
|
9.82
|
|
|
|
369,790
|
|
For
the six months ended December 31, 2019, stock-based compensation expense related to the ratable amortization of the unvested Restricted
Shares and RSUs was $492,650, and approximately $2.9 million of total unrecognized costs related to Restricted Shares and RSUs
will be ratably recognized over an estimated weighted average remaining vesting period of 2.9 years
AKERNA
CORP.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Warrants
A
summary of the status of outstanding warrants to purchase common stock at December 31, 2019 and the changes during the six months
then ended, is presented in the following table:
|
|
Shares
issuable
upon
exercise of
warrants
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
life
|
|
Outstanding at July 1, 2019
|
|
|
6,183,115
|
|
|
$
|
11.50
|
|
|
|
3.72
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(369,311
|
)
|
|
|
11.50
|
|
|
|
-
|
|
Expired/cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2019
|
|
|
5,813,804
|
|
|
$
|
11.50
|
|
|
|
3.15
|
|
There
was no aggregate intrinsic value for the warrants outstanding as of December 31, 2019.
Note
6 - Commitments and Contingencies
Operating
Leases
The
Company leases facilities, equipment, and vehicles under non-cancelable operating leases. Rent expense for the three months ended
December 31, 2019 and 2018, was $40,000 and $35,475, respectively. Rent expense for the six months ended December 31, 2019 and
2018, was $76,000 and $78,950, respectively.
On September 30, 2019,
the Company entered into an office service agreement (the “Office Lease”) effective and commencing February 1, 2020
and expiring January 31, 2022, unless earlier terminated by either party in accordance with the terms of the Office Lease. The
Office Lease relates to new office space located at 1630 Welton Street, Denver, Colorado, 80202. In October 2019, the Company
paid a security deposit equal to a one-month payment and initial set-up fees of $43,925. The monthly payments will be in the amount
of $41,925 subject to a 4% annual indexation increase at each anniversary of the commencement date during the term of the Office
Lease.
Future
minimum lease payments to be made pursuant to the Office Lease and the current leases are approximately $241,000 for the
remainder of the year ended June 30, 2020, approximately $530,000 for the year ended June 30, 2021, and approximately $316,000
for the year ended June 30, 2022.
Compensation
Agreement with Jessica Billingsley
On
November 11, 2019, the Compensation Committee of the Board of Directors of the Company established the terms on which Ms. Billingsley,
the Company’s Chief Executive Officer, may earn a bonus for the fiscal year ended June 30, 2020. The Compensation Committee
determined that Ms. Billingsley will be eligible for a bonus derived from the same targets with respect to her bonuses in fiscal
year 2019, which were as follows:
The
annual bonus was determined based upon the following four (4) budget components, platform recurring revenue, government recurring
revenue, services revenue and net income. Each scales linearly between achieving 75% to 100%, and greater than 100% with respect
to platform recurring revenue and government recurring revenue budget components respectively, of the applicable fiscal year’s
budget for each such component (with 50% of the target bonus payable upon achievement of 75% of budget, 100% of the target bonus
payable upon achievement of budget (and, with respect to the platform recurring revenue and government recurring revenue budget
components, with 200% of each weighted portion of the target bonus payable upon achievement of 125% of the corresponding component
of budget (the “Accelerator”), with linear interpolation between points)).
However,
during fiscal year 2020 the Accelerator may be paid at the sole discretion of the Compensation Committee in cash, stock, or a
combination thereof.
AKERNA
CORP.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
In
addition, the Compensation Committee determined that, during fiscal year 2020, Ms. Billingsley is eligible to earn a performance
based incentive of $250,000, payable in stock, whereby (a) 50% of the bonus is automatically granted if the Company’s stock
price/shareholder return increases by 15% (measuring point starts at $10 per share) with respect to the consecutive 20-day volume
weighted average price prior to and including June 30, 2020, and (b) the remaining 50% of the bonus may be paid at the sole discretion
of the Compensation Committee.
Letter-of-Credit
As
of December 31, 2019, the Company had a standby letter-of-credit with a bank in the amount of $500,000, which was classified as
restricted cash on the balance sheets. The beneficiary of the letter-of-credit is an insurance company. The letter-of-credit will
expire on June 22, 2020.
Litigation
From
time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course
of business. The Company will accrue a liability for such matters when it is probable that a liability has been incurred and the
amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range
is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in
the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages,
outside legal fees and other directly related costs expected to be incurred. As of December 31, 2019, and through the date these
financial statements were issued, there were no legal proceedings requiring recognition or disclosure in the financial statements.
AKERNA
CORP.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
7 – Long-term Investments
License
Agreement with Zol Solutions, Inc.
On October 7, 2019, the
Company participated in an offering of preferred stock of Zol Solutions, Inc. (“ZolTrain”) along with other investors
in which the Company purchased approximately 203,000 shares of Series Seed Peferred Stock (the “ZolTrain Preferred”)
for a purchase price of $250,000, which represents a minority interest in ZolTrain.
The ZolTrain Preferred is
convertible into shares of common stock of ZolTrain at a price of $1.232 per share at the option of the holder and contains certain
anti-dilution protection in the event of certain future issuances of securities by ZolTrain. The Company is entitled to vote the
number of common shares in which the ZolTrain Preferred is convertible into at any meeting of the ZolTrain stockholders. Holders
of the Zoltrain Preferred are entitled to preference in liquidation of Zoltrain and maintain the right to put the ZolTrain Preferred
back to Zoltrain for cash in the event of the occurrence of certain liquidating events, as defined in the agreement.
The definitive agreement
also provides the Company with rights of first refusal with respect to newly issued securities of ZolTrain as well as issued and
outstanding securities of ZolTrain that are offered to third parties. In connection with the agreement, Nina Simosko, our Chief
Revenue Officer, was appointed as a member of ZolTrain’s board of directors. In the event that Ms. Simosko or any other representative
of the Company is not a member of ZolTrain’s board of directors, the Company is entitled to consult with and advise ZolTrain’s
management on significant business issues.
Subsequent to the investment,
the Company entered into a license/reseller agreement with ZolTrain, effective October 24, 2019, to provide ZolTrain’s online
cannabis training platform as a co-branded integration option into the Company’s MJ Platform and Leaf Data Systems. The Company
and ZolTrain will share subscription-based revenue generated from the Company’s customers. The amount of the share of revenue
for each of the Company and ZolTrain will be depend on both (a) the number of training modules accessed by a customer and (b) which
party created the accessed content. In addition to the revenue sharing arrangement, the license/reseller agreement provides the
Company with the right to receive additional consideration from ZolTrain in the form of an equity earnout if certain revenue milestones
are achieved during 2020, 2021, and 2022. The Company’s ability to recognize revenue from the additional earnout consideration
in the future will mainly depend on whether or not it becomes probable that such revenue milestones will be achieved.
Note
8 - Subsequent Events
On
January 15, 2020, the Company closed on a Stock Purchase Agreement (the “Agreement”) previously entered into with
substantially all of the shareholders of Solo Sciences, Inc. (“Solo”), pursuant to which the Company acquired all
right, title and interest in 80.40% of the issued and outstanding capital stock of Solo (calculated on a fully diluted basis),
free and clear of all liens.
Solo
offers a tagging technology, the solo*TAG (“Solo Tag”), as an alternative to expensive RFID technology required by
states in which Metrc is used for the state tracking system. Solo Tag is less expensive and more secure than RFID technology,
leveraging Solo’s patented cryptographically secure technology. Additionally, Solo offers manufacturers to use its proprietary
graphic trust mark, the solo*CODE™ (“Solo Code”), on their product packaging to enable consumers to scan products
with the help of Solo proprietary phone application and learn if a product is real or fake as well get real-time notifications.
The
purchase price was $18.0 million, which will be adjusted for final working capital acquired. There were $500,000 of costs directly
related to the acquisition included in the condensed consolidated statements of operations for the three and six months ended
December 31, 2019 as well.
The
remaining portion of the purchase price, $15.6 million, is payable in 1,950,000 shares of the Company’s common stock, issued
without registration under the Securities Act in reliance on Regulation D thereunder, of which 570,000 shares of the Company’s
common stock will be held in escrow subject to the satisfaction of certain conditions stipulated in the Agreement. This initial
consideration is subject to an adjustment no later than 120 days following the closing date. The Company has an option to acquire
the remaining minority stake in Solo during the 12 months following the close in either cash or shares (the “Company Option”).
Beginning the expiration of the Company Option, Solo has a 3-month option to acquire between 40% and 55% of Solo back from the
Company in cash.
The
Company also agreed to pay fees to the legacy Solo shareholders equal to the lesser of (i) $0.01 per Solo Tag and Solo Code sold
or (ii) 7% of net revenue. The fees will be paid annually until the earlier of: (1) the Company’s shares trading above $12
per share for consecutive 20 days in a 30-day period; (b) the Company no longer owning a majority stake in Solo; or (c) the expiration
of the patents related to Solo Tag and Solo Code, which is December 1, 2029.
AKERNA
CORP.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Since
the acquisition occurred subsequent to December 31, 2019, no results from operations of Solo are included in our consolidated
statement of operations for the three and nine months ended December 31, 2019. It is currently impractical to disclose a preliminary
purchase price allocation of Solo or pro forma financial information combining both companies as of the earliest period presented
in these financial statements as Solo is currently in the process of closing its books and records.
In accordance with ASC
855-10, the Company has analyzed events and transactions that occurred subsequent to December 31, 2019, through the date these
financial statements were issued and have determined that other than as discussed above, there are no material subsequent events
to disclose or recognize in these financial statements.
Note
9 – Revisions of Previously Issued Financial Statements
During
the course of preparing the Quarterly Report on Form 10-Q for the three months ended September 30, 2019, the Company identified
certain previously duplicated revenues, which resulted in the overstatement of total assets and revenue during the periods outlined
below, and the understatement of net losses for the periods outlined below. Additionally, during the course of preparing its Annual
Report on Form 10-K for the fiscal year ended June 30, 2019, the Company identified certain costs of revenue related to consulting
services previously being recorded in operating expenses, which resulted in the overstatement of the gross profit for each of
the quarters during the fiscal year ended June 30, 2019. See Item. 4 of Part I, Controls and Procedures.
|
|
Year ended June 30, 2018
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,017,731
|
|
|
$
|
(223,766
|
)
|
|
$
|
2,793,965
|
|
Total liabilities
|
|
|
1,393,902
|
|
|
|
-
|
|
|
|
1,393,902
|
|
Total stockholders’ equity
|
|
|
1,623,829
|
|
|
|
(223,766
|
)
|
|
|
1,400,063
|
|
Net loss
|
|
|
(1,623,182
|
)
|
|
|
(72,501
|
)
|
|
|
(1,695,683
|
)
|
Net loss per share
|
|
|
(0.30
|
)
|
|
|
|
|
|
|
(0.31
|
)
|
|
|
Three months ended September
30, 2018
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Condensed Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
12,090,810
|
|
|
|
(296,267
|
)
|
|
|
11,794,543
|
|
Total liabilities
|
|
|
2,090,163
|
|
|
|
-
|
|
|
|
2,090,163
|
|
Total stockholders’ equity
|
|
|
10,000,647
|
|
|
|
(296,267
|
)
|
|
|
9,704,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,371,900
|
|
|
|
(72,501
|
)
|
|
|
2,299,399
|
|
Cost of revenue
|
|
|
956,123
|
|
|
|
107,012
|
|
|
|
1,063,135
|
|
Gross profit
|
|
|
1,415,777
|
|
|
|
(179,513
|
)
|
|
|
1,236,264
|
|
Operating expenses
|
|
|
3,055,976
|
|
|
|
(107,012
|
)
|
|
|
2,948,964
|
|
Net loss
|
|
|
(1,623,182
|
)
|
|
|
(72,501
|
)
|
|
|
(1,695,683
|
)
|
Net loss per share
|
|
|
(0.30
|
)
|
|
|
|
|
|
|
(0.31
|
)
|
AKERNA
CORP.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
|
|
Three months ended December
31, 2018
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Condensed Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
9,836,178
|
|
|
|
(320,434
|
)
|
|
|
9,515,744
|
|
Total liabilities
|
|
|
2,205,735
|
|
|
|
-
|
|
|
|
2,205,735
|
|
Total stockholders’ equity
|
|
|
7,630,443
|
|
|
|
(320,434
|
)
|
|
|
7,310,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,598,079
|
|
|
|
(24,167
|
)
|
|
|
2,573,912
|
|
Cost of revenue
|
|
|
1,198,911
|
|
|
|
122,084
|
|
|
|
1,320,995
|
|
Gross profit
|
|
|
1,399,168
|
|
|
|
(146,251
|
)
|
|
|
1,252,917
|
|
Operating expenses
|
|
|
3,826,539
|
|
|
|
(122,084
|
)
|
|
|
3,704,455
|
|
Net loss
|
|
|
(2,370,204
|
)
|
|
|
(24,167
|
)
|
|
|
(2,394,371
|
)
|
Net loss per share
|
|
|
(0.39
|
)
|
|
|
|
|
|
|
(0.40
|
)
|
|
|
Three months ended March
31, 2019
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Condensed Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
8,199,718
|
|
|
|
(320,434
|
)
|
|
|
7,879,284
|
|
Total liabilities
|
|
|
3,059,378
|
|
|
|
-
|
|
|
|
3,059,378
|
|
Total stockholders’ equity
|
|
|
5,140,340
|
|
|
|
(320,434
|
)
|
|
|
4,819,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,327,880
|
|
|
|
-
|
|
|
|
2,327,880
|
|
Cost of revenue
|
|
|
1,042,403
|
|
|
|
124,079
|
|
|
|
1,166,482
|
|
Gross profit
|
|
|
1,285,477
|
|
|
|
(124,079
|
)
|
|
|
1,161,398
|
|
Operating expenses
|
|
|
3,788,644
|
|
|
|
(124,079
|
)
|
|
|
3,664,565
|
|
Net loss
|
|
|
(2,490,103
|
)
|
|
|
-
|
|
|
|
(2,490,103
|
)
|
Net loss per share
|
|
|
(0.41
|
)
|
|
|
|
|
|
|
(0.41
|
)
|
|
|
Three months ended June 30,
2019
|
|
|
|
As reported
|
|
|
Adjustment
|
|
|
As revised
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
24,522,671
|
|
|
|
(320,434
|
)
|
|
|
24,202,237
|
|
Total liabilities
|
|
|
2,442,503
|
|
|
|
-
|
|
|
|
2,442,503
|
|
Total stockholders’ equity
|
|
|
22,080,168
|
|
|
|
(320,434
|
)
|
|
|
21,759,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
10,919,785
|
|
|
|
(96,668
|
)
|
|
|
10,823,117
|
|
Cost of revenue
|
|
|
4,633,844
|
|
|
|
-
|
|
|
|
4,633,844
|
|
Gross profit
|
|
|
6,285,941
|
|
|
|
(96,668
|
)
|
|
|
6,189,273
|
|
Operating expenses
|
|
|
18,701,619
|
|
|
|
-
|
|
|
|
18,701,619
|
|
Net loss
|
|
|
(12,306,547
|
)
|
|
|
(96,668
|
)
|
|
|
(12,403,215
|
)
|
Net loss per share
|
|
|
(2.04
|
)
|
|
|
|
|
|
|
(2.05
|
)
|
In
accordance with SEC Staff Accounting Bulletin No 108, the Company has evaluated these errors, based on an analysis of quantitative
and qualitative factors, as to whether it was material to the condensed consolidated statements of operations for the three months
ended September 30, 2018, December 31, 2018, and March 31, 2019, and consolidated statements of operations for the year ended
June 30, 2019, as well as to the consolidated balance sheets as of June 30, 2019 and 2018, condensed consolidated balance sheets
as of September 30, 2018, December 31, 2018, and March 30, 2019, and as to whether amendments of previously filed financial statements
with the SEC are required. The Company has determined that quantitatively and qualitatively, the errors have no material impact
to the above mentioned financial statements.