Akerna (US:KERN)2023-03-21 00:09Financial Performance - The company reported net losses of $79.1 million and $31.3 million for the years ended December 31, 2022, and 2021, respectively, due to substantial investments in developing monitoring and compliance platforms [146]. - The company has substantial doubt about its ability to continue as a going concern, which could limit its ability to raise additional funds through equity or debt securities [144]. - The company anticipates continuing to incur losses in the near term and may not achieve profitability in the future [146]. - The company generated 22% of its revenue from government contracts for Leaf Data Systems® in Pennsylvania and 18% in Utah for the years ended December 31, 2022, and 2021, respectively [170]. - As of December 31, 2022, the company had gross federal and state NOL carryforwards totaling $58.9 million, with the majority of state NOL carryforwards beginning to expire in 2039 [218]. Strategic Initiatives - Akerna plans to sell its membership interests in MJ Freeway and Ample Organics for a total purchase price of $4.0 million [48]. - The company is committed to a Sale Transaction to exit the SaaS industry and pursue a Merger as a strategic alternative for stockholders [144]. - The company has engaged JMP Securities as a financial advisor to explore strategic alternatives for enhancing shareholder value [43]. - Akerna is currently pursuing a merger with Gryphon, which is subject to various closing conditions, including stockholder approval [111]. - If the merger does not complete, Akerna's board will evaluate other strategic alternatives, which may not be as favorable to stockholders [112]. Market and Industry Trends - The U.S. legal cannabis sales surpassed $25 billion in 2021, marking a 40% increase from $18 billion in 2020, with forecasts predicting sales to reach $46 billion by 2026, representing a CAGR of 14% from 2021 [61]. - Global cannabis sales reached nearly $29 billion in 2021, a 45% increase over 2020, with projections estimating growth to $61 billion by 2026, reflecting a CAGR of over 16% [61]. - The cannabis industry is characterized by rapid growth and increasing complexity, necessitating compliance with a wide range of regulatory schemes [65]. - The global CBD market was valued at USD 2.8 billion in 2020, with expectations of a CAGR of 21.2% from 2021 to 2028 [63]. Compliance and Regulatory Environment - Akerna's platforms provide real-time compliance monitoring and inventory management for licensed cannabis businesses [39]. - The company has worked with clients globally, allowing cannabis businesses to comply with various regulatory frameworks [42]. - Akerna has secured exclusivity in the Pennsylvania and Utah markets due to government contracts mandating the use of its MJ Platform® [72]. - The cannabis industry could face opposition from established businesses in other sectors, which may attempt to impede legislative progress beneficial to the cannabis market [162]. - The company faces risks related to federal racketeering laws due to receipt of funds from clients engaged in cannabis operations, which could lead to significant fines and penalties [158]. Operational Challenges - The company faces risks related to the cannabis industry, including the potential for changes in federal enforcement policies that could impact demand for its products [152][154]. - The company’s access to banking services may be limited due to federal laws, which could hinder operations and increase reliance on cash transactions [159]. - Cybersecurity threats pose a significant risk to the company’s IT systems, potentially leading to data breaches and operational disruptions [174]. - The company may face challenges in maintaining existing government contracts or obtaining new ones due to the competitive bidding process and compliance requirements [173]. - The company relies on its clients obtaining various licenses from municipalities and state agencies, with no assurance that these licenses will be retained or renewed [166]. Financial Instruments and Capital Structure - The company has $14.7 million in Senior Convertible Notes convertible at $4.75 per share, potentially resulting in the issuance of 3,086,890 shares upon full conversion [197]. - Up to 26,562,911 shares of Common Stock could be issued upon conversion of Senior Convertible Notes at the floor price, leading to significant dilution for stockholders [198]. - Obligations under the Senior Convertible Notes are secured by a security interest in substantially all assets, risking foreclosure if obligations are defaulted [199]. - The Senior Convertible Notes bear interest at a rate of 15% per annum, and holders can demand redemption at 115% of the outstanding principal plus accrued interest [201]. Corporate Governance and Management - Certain officers and directors have interests in the Merger that differ from stockholders, potentially influencing their support for the Merger [122]. - The company is classified as an "emerging growth company" under the JOBS Act, remaining so until certain financial thresholds are met [108]. - The company identified material weaknesses in internal controls over financial reporting as of December 31, 2022, which could result in material misstatements in financial statements if not remediated [214]. - The company is subject to increased legal and financial compliance costs due to being a public company, which may divert management's attention from business operations [215]. Market Risks - The market price of the company's Common Stock may decline post-Merger if expected strategic and financial benefits are not realized [125]. - The trading price of the Common Stock could decline due to market conditions, changes in operating results, or sales of securities by the company or in the open market [210]. - The company may face additional risks due to material weaknesses in internal control over financial reporting, potentially leading to regulatory actions and negative impacts on stock price [208]. - The occurrence of any event of default could substantially harm the company's financial condition and may force it to cease operations [202].