American Bitcoin Corp 8-K/A, filed Dec 14, 2021
American Bitcoin Corp. (ABTC)
About this 8-K/A
American Bitcoin Corp filed this 8-K/A on December 14, 2021, reporting on events of October 1, 2021.
Items reported
- Item 2.01: Completed an acquisition or sale of assets
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
(Exact name of registrant as specified in its charter)
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Registrant’s telephone number, including area code: (
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act (§230.405 of this chapter) or Rule 12b-2 of the Exchange Act (§240.12b-2 of this chapter).
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
EXPLANATORY NOTE
Item 2.01 Completion of Acquisition or Disposition of Assets.
This Amendment supplements the Original Form 8-K filed with the SEC on October 4, 2021, regarding the purchase of 365 Cannabis. The purpose of this Amendment is to file the financial statements of 365 Cannabis and the pro forma financial information required by Item 9.01 of Form 8-K. All other disclosure under Item 2.01 in the Original Form 8-K remains the same and is hereby incorporated by reference into this Current Report on Form 8-K/A.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements.
The audited consolidated financial statements of 365 Cannabis as of and for the year ended December 31, 2020, the related notes thereto and the report of the independent accounting firm, are filed herewith as Exhibit 99.1. The consent of independent auditors is attached as Exhibit 23.1 hereto.
The unaudited condensed consolidated financial statements of 365 Cannabis as at and for the period ended September 30, 2021 and the related notes thereto are filed herewith as Exhibit 99.2
(b) Pro Forma Financial Information.
The unaudited pro forma condensed combined financial information of the Company, giving effect to the acquisition of 365 Cannabis, which includes the unaudited pro forma condensed combined balance sheet as of September 30, 2021 and the unaudited pro forma condensed combined statements of income for the year ended December 31, 2020 and for the nine months ended September 30, 2021 and the related notes, are incorporated herein by reference as Exhibit 99.3 hereto.
The pro forma financial information included in this Form 8-K/A has been presented for informational purposes only and is not necessarily indicative of the combined financial position or results of operations that would have been realized had the acquisition of 365 Cannabis occurred as of the dates indicated, nor is it meant to be indicative of any anticipated combined financial position or future results of operations that the Company will experience after the acquisition.
(d) Exhibits
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Exhibit |
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Description |
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10.1 |
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10.2 |
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10.3 |
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23.1 |
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99.1 |
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99.2 |
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99.3 |
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104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document) |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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AKERNA CORP. |
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By: |
/s/ John Fowle |
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John Fowle |
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Chief Financial Officer |
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Dated: December 13, 2021 |
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Independent AUDITORS’ Consent
We consent to the incorporation by reference in the Registration Statements of Akerna Corp. on Form S-3 (File No. 333-232694), Form S-3 (File No. 333-256878), Form S-3 (File No. 333-260388), Form S-8 (File No. 333-233480) and Form S-8 (File No. 333-242480) of our report dated December 13, 2021, with respect to our audit of the consolidated financial statements of The NAV People, Inc. & Subsidiary as of December 31, 2020 and for the year then ended, which report is included in the Current Report on Form 8-K/A of Akerna Corp.
/s/ Marcum LLP
Marcum LLP
Costa Mesa, CA
December 13, 2021
The NAV People, Inc. & Subsidiary
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS’ REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2020
The NAV People, Inc. & Subsidiary
TABLE OF CONTENTS
December 31, 2020
| 1 |
To the Board of Directors and Stockholders of
The Nav People, Inc.
Report on the Financial Statements
We have audited the accompanying financial statements of The Nav People, Inc. & Subsidiary (the “Company”), which comprise the consolidated balance sheet as of December 31, 2020, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ deficit and cash flows for the year then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Nav People, Inc. as of December 31, 2020, and the consolidated results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ Marcum LLP
Costa Mesa, CA
December 13, 2021
| 2 |
The NAV People, Inc. & Subsidiary
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December 31, 2020 |
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Assets |
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Current Assets |
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Cash |
$ |
266,563 |
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Accounts receivable, net of allowance of $417,417 |
1,054,797 |
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Prepaid expenses and other current assets |
156,716 |
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Total Current Assets |
1,478,076 |
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Non-current Assets |
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Property and equipment, net |
96,774 |
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Intangible asset, net |
1,215,989 |
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Deposits |
23,507 |
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Total Non-Current Assets |
1,336,270 |
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Total Assets |
$ |
2,814,346 |
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Liabilities and Stockholders’ Deficit |
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Current Liabilities |
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Convertible note payable |
$ |
1,520,000 |
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Accounts payable |
232,283 |
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Accrued expenses |
324,077 |
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Deferred revenue |
1,778,207 |
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Total Current Liabilities |
3,854,567 |
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Long Term Liabilities |
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Stockholder notes payable |
3,326,759 |
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Notes payable |
1,104,984 |
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Total Long-Term Liabilities |
4,431,743 |
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Total Liabilities |
8,286,310 |
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Stockholders’ Deficit |
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Common stock, $1 par value, 10,000 shares authorized, 5,000 shares issued and outstanding |
5,000 |
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Additional paid-in capital |
2,000 |
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Accumulated other comprehensive loss |
(11,365) |
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Accumulated deficit |
(5,467,599) |
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Total Stockholders’ Deficit |
(5,471,964) |
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Total Liabilities and Stockholders’ Deficit |
$ |
2,814,346 |
See accompanying Notes to the Consolidated Financial Statements
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The NAV People, Inc. & Subsidiary
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For the Year Ended December 31, 2020 |
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Revenue |
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Recurring revenue |
$ |
4,875,121 |
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Services revenue |
2,233,415 |
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Other revenue |
426,293 |
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Total Revenue |
7,534,829 |
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Cost of revenue |
2,202,534 |
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Gross Profit |
5,332,295 |
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Operating Expenses |
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Operations and support |
5,374,077 |
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Sales and marketing |
46,954 |
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General and administrative |
784,785 |
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Bad debt expense |
424,089 |
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Depreciation and amortization |
301,064 |
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Total Operating expenses |
6,930,969 |
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Loss From Operations |
(1,598,674) |
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Other expense |
(467) |
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Interest expense |
(151,773) |
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Total Other Expense |
(152,240) |
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Net Loss Before Provision for Income Taxes |
(1,750,914) |
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Provision for income taxes |
(6,204) |
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Net Loss |
(1,757,118) |
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Foreign currency translation adjustment |
(12,222) |
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Comprehensive Loss |
$ |
(1,769,340) |
See accompanying Notes to the Consolidated Financial Statements
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The NAV People, Inc. & Subsidiary
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Shares |
Par |
Additional Paid-In Capital |
Accumulated Other Comprehensive Income (Loss) |
Accumulated Deficit |
Total Stockholders’ Deficit |
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Balance as of January 1, 2020 |
5,000 |
$ |
5,000 |
$ |
$ 2,000 |
$ |
857 |
$ |
(3,710,481) |
$ |
(3,702,624) |
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Net loss |
- |
- |
- |
- |
(1,757,118) |
(1,757,118) |
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Foreign currency translation adjustment |
- |
- |
- |
(12,222) |
- |
(12,222) |
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Balance as of December 31, 2020 |
5,000 |
$ |
5,000 |
$ |
$ 2,000 |
$ |
(11,365) |
$ |
(5,467,599) |
$ |
(5,471,964) |
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See accompanying Notes to the Consolidated Financial Statements
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The NAV People, Inc. & Subsidiary
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For the Year December 31, 2020 |
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Net loss |
$ |
(1,757,118) |
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Adjustment to reconcile net loss to net cash used in operating activities |
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Bad debt |
424,089 |
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Depreciation and amortization |
301,064 |
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Change in assets and liabilities: |
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Accounts receivable |
(253,055) |
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Prepaid expenses and other current assets |
59,300 |
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Accounts payable and accrued expenses |
(138,009) |
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Deferred revenue |
108,343 |
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Net cash used in operating activities |
(1,255,386) |
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Cash flows from investing activities |
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Developed software additions |
(692,380) |
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Purchases of property and equipment |
(14,240) |
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Net cash used in investing activities |
(706,620) |
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Cash flows from financing activities |
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Proceeds from debt issuances |
3,874,984 |
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Payments of principal amounts of debt |
(2,000,000) |
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Net cash provided by financing activities |
1,874,984 |
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Effect of exchange rates on cash |
16,286 |
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Net Change in cash |
(70,736) |
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Beginning Balance |
337,299 |
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Ending Balance |
$ |
266,563 |
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Supplemental Disclosure of Cash Flow Information: |
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Cash paid for interest |
$ |
151,773 |
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Cash paid for income taxes |
$ |
0 |
See accompanying Notes to the Consolidated Financial Statements
| 6 |
The NAV People, Inc. & Subsidiary
Note 1 – Nature of the Business and Summary of Significant Accounting Policies
Description of the Business
The NAV People, Inc. (“The NAV People” or the “Company”) provides software for highly regulated retailers in the legal cannabis space. Founded in 2016 and headquartered in Las Vegas, Nevada, the NAV People services a client base comprised of U.S.-based multi-state operators and single-state operators and Canadian LPs, in addition to global cannabis clients outside North America. The NAV People have over 85 customers.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) as found in the Accounting Standards Codification (“ASC”) of the Financial Accounting Standards Board (“FASB”) for consolidated financial information.
The accompanying consolidated financial statements include the accounts of The NAV People and its wholly-owned subsidiary, Dynamics 365 People Software and Services, Ltd. All intercompany balances have been eliminated in consolidation.
Use of Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions, which affect the reported amounts in the financial statements and accompanying notes. Estimates are based on historical experience, where applicable, and other assumptions which management believes are reasonable under circumstances. The Company has used estimates related to several financial statement amounts including useful lives of property and equipment, and internal use software. These estimates are inherently subject to judgement and actual results could differ from those estimates.
Concentrations of Credit Risk
Cash and cash equivalents and accounts receivable are potentially subject to credit risk concentration. We have not experienced any material losses related to these concentrations during the periods presented. Cash is deposited with financial institutions that the Company believes are of high credit quality. These deposits are typically in excess of insured limits.
The Company derives a portion of its revenue from several large customers, as well as a large number of individual small businesses. If the financial condition or results of any one of the large customers deteriorates substantially, the Company’s operating results could be adversely affected. The Company does not require collateral and maintains an allowance for estimated credit losses on customer accounts when considered necessary.
There was one customer which represented 10% of consolidated revenue for the year ended December 31, 2020. The Company has not experienced any losses related to these concentrations during the period presented.
| 7 |
The NAV People, Inc. & Subsidiary
The Company relies on a third party to provide payment processing services ("payment service provider") to collect amounts due from end-users. Payment service providers are financial institutions or credit card companies that the Company believes are of high credit quality.
Certain Significant Risks and Uncertainties
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. COVID-19 has rapidly impacted market and economic conditions globally. In an attempt to limit the spread of the virus, various governmental restrictions have been implemented, including business activities and travel restrictions, and “shelter-at-home” orders, that have had an adverse impact on our business and operations by reducing demand for transportation. In light of the evolving nature of COVID-19 and the uncertainty it has produced, it is not possible to predict the COVID-19 pandemics cumulative and ultimate impact on our future consolidated business operations, results of operations, financial position, liquidity, and cash flows. The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak within the United States, including whether there will be further resurgences of COVID-19 in various regions, the distribution of the vaccines in various regions, the impact on capital, and financial markets, governmental or regulatory orders that impact our business and whether the impacts may result in permanent changes to our end-users’ behavior, all of which are highly uncertain and cannot be predicted. Also, see Note 10, Commitments and Contingencies.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents. As of December 31, 2020, cash and cash equivalents consist of cash deposited with banks. The recorded carrying amount of cash and cash equivalents approximates their fair value. The Company places its cash equivalents with high credit-quality financial institutions.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company reviews customer receivables and collections to evaluate and estimate a reserve for doubtful accounts, including the periodic write off of uncollectible receivables. The Company determines the allowance based on analysis of historical bad debts, customer concentrations, customer creditworthiness, and current economic trends. The methodology used to calculate the reserve for receivables is supported by the historical information and is applied appropriately to all receivable balances.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is calculated using the straight-line method over their estimated useful lives of the assets (see Note 3). When assets are retired or otherwise disposed of, the cost, accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in the consolidated statement of operations and comprehensive loss in the period realized. Maintenance and repairs that do not enhance or extend the asset’s useful life are charged to operating expenses as incurred.
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The NAV People, Inc. & Subsidiary
Intangible Assets
The Company capitalizes certain costs, such as compensation costs incurred in developing internal-use software once planning has been completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will function as intended. Amortization of such costs occurs on a straight-line basis over the estimated useful life of the related asset and begins once the asset is ready for its intended use. Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed as incurred.
Evaluation of Long-Lived Assets for Impairment
The Company evaluates its held-and-used long-lived assets for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of an asset or asset group (collectively, the “asset group”) may not be recoverable. The Company measures the recoverability of the asset group by comparing the carrying amount of such asset groups to the future undiscounted cash flows it expects the asset group to generate. If the Company considers the asset group to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset group exceeds its fair value. No such impairments have been identified as of December 31, 2020.
Deferred Revenue
Deferred revenue primarily consists of billings or payments received in advance of revenue recognition and is recognized as the revenue recognition criteria are met. All deferred revenue is expected to be recognized during the succeeding 12-month period and is recorded as a current liability.
Research and Development
Research and development costs are charged to operations as incurred.
Foreign Currency Translation
The functional currency of the Company's non-U.S. operations is the local currency. Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing at the balance sheet date. Revenue and expenses are translated into U.S. dollars using the average rates of exchange prevailing during the period. Translation gains or losses are included as a component of accumulated other comprehensive loss in stockholders' equity. Gains and losses resulting from foreign currency transactions are recognized in operating expenses.
Income Taxes
The Company accounts for income taxes in accordance with the asset and liability approach method. Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of the consolidated income tax expense. We are subject to income taxes in the United States and Canada.
| 9 |
The NAV People, Inc. & Subsidiary
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. As of December 31, 2020, we have significant federal, state and foreign income tax net operating loss (“NOL”) carryforwards. We believe that it is more likely than not that the benefit from federal and state NOL carryforwards will not be realized. In recognition of this risk, we have provided a full valuation allowance on the deferred tax assets related to these NOL carryforwards.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASC Topic 842, Leases. This standard requires all entities that leased assets under leases with terms of more than 12 months to capitalize the assets and related lease liabilities on the consolidated balance sheet. The new standard will become effective for us beginning January 1, 2022; however, early adoption is permitted. While we continue to assess all potential impacts of this new standard, we anticipate this standard will have a material impact on our consolidated financial position as we will be required to recognize right-of-use assets and lease liabilities on our consolidated balance sheet. However, we do not expect the adoption to have a significant impact on our consolidated results of operations or cash flows.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” to require the measurement of expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance also amends the impairment model for available for sale debt securities and requires entities to determine whether all or a portion of the unrealized loss on such debt security is a credit loss. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. All other entities, ASU No. 2016-13 is effective for fiscal years beginning after Dec. 15, 2022. Early adoption is permitted. The Company will adopt the new standard on January 1, 2022. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements. We are still evaluating the impact on our consolidated financial statements.
Note 2 – Revenue Recognition
The Company adopted ASC 606 under the modified retrospective transition method with an effective date of January 1, 2019 and applied this guidance to those contracts which were not completed at the date of adoption. The standard requires entities to recognize revenue upon transfer of goods or services to customers in amounts that reflect the consideration that the entities expect to receive in exchange for those goods or services.
We recognize revenue when or as we satisfy our obligations. We derive our revenues from recurring revenue (subscriptions sales, support, hosting, and enhancement), services revenue (packages and projects), and other revenue (perpetual licenses and hardware).
| 10 |
The NAV People, Inc. & Subsidiary
The Company determines revenue recognition under ASC 606 through the following steps:
- Identification of the contract, or contracts, with a customer;
- Identification of the performance obligations in the contract;
- Determination of the transaction price;
- Allocation of the transaction price to the performance obligations in the contract; and
- Recognition of revenue when, or as, the Company satisfies a performance obligation.
The Company has the following revenue streams:
- Recurring (subscription sales, support, hosting, enhancement)
- Services revenue (projects and packages)
- Other Revenue (perpetual licenses and hardware)
The Company offers its software under a cloud-based delivery model, where it provides access to its software on a hosted basis as a service and customers do not have the contractual right to take possession of the software. Revenue is recognized when control of the promised services is transferred to the Company's customers at an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. The majority of customer contracts have performance obligations that the Company satisfies over time and revenue is recognized by consistently applying a method of measuring progress toward satisfaction of that performance obligation.
The Company’s recurring revenue is comprised of subscription sales, support, hosting and enhancement revenue. Revenue is recognized ratably over the contract term based on the commencement date of the contract, which is the date our cloud-based software is made available to customers.
Revenue from the Company’s service for project and packages revenue are recorded as the services are performed. Once the contract is signed, invoices are generated for professional services on a time and material basis, although the Company occasionally engages in fixed-price service engagements and invoices for those based upon agreed milestone payments. Revenue is recognized as services are performed for time and material engagements and on a proportional performance method as the services are performed for fixed-fee engagements. Training revenue is recognized as the services are performed.
Perpetual software is recognized when delivered, which is typically within a day of receipt of the order. Hardware is recognized when invoiced and usually ships within a few days after receipt of order.
Any of the above agreements would be a complete contract. Each party’s rights regarding the services to be transferred, pricing, and payment terms are listed in the contract. These factors indicate that the contract has commercial substance. Risk, timing, or the Company’s future cash flows are expected to change as a result of a contract. Risk includes non-performance risk, non-payment risk, and mis-usage risk. Payments are generally due within 15-45, days upon receipt of an invoice.
The Company considered the guidance of ASC 606-10-55-3A regarding the collection probability. At contract inception, the Company deems it is probable that the Company will collect substantially all of the consideration to which it will be entitled to in exchange for the services that will be transferred to the customer, based on historical experience with customers. The Company also periodically completes an assessment of collectability from new customers. This assessment includes reviewing publicly available financial information and inquiring of customer’s financial creditability. Arrangements for which collection of fees is not deemed probable are recognized upon cash collection.
| 11 |
The NAV People, Inc. & Subsidiary
The Company considered the terms of the contract to determine the transaction price. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract may include fixed amounts, variable amounts, or both. The Company’s contracts typically have either (1) annual; (2) monthly; (3) variable based on completion of performance obligation. Therefore, the Company’s contracts have both fixed (e.g., stated annual, monthly, etc. fee) and variable components (e.g., per hour, time and material).
Deferred Commissions
The Company capitalizes sales commission expenses and associated payroll taxes paid to internal sales personnel that are incremental to obtaining customer contracts. These costs are deferred and then amortized over the expected period of benefit. Commissions for existing customer renewals are deferred and amortized over twelve months. We have determined the period of benefit taking into consideration several factors including the expected subscription term and expected renewals of our customer contracts, the duration of our relationships with our customers, and the life of our technology. Amortization expense is included in sales and marketing in the accompanying consolidated statement of operations and comprehensive loss.
Variable consideration
At the end of the reporting period, the Company knows the amount of time and material to invoice the customer in order to recognize revenue. Therefore, no estimation of variable consideration is necessary.
Principal vs. Agent Considerations
Judgment is required in determining whether we are the principal or agent in its transactions with the customers. We evaluate the presentation of revenue on a gross or net basis based on whether we control the service provided to the end-user and are the principal (i.e. “gross”), or we arrange for other parties to provide the service to the end-user and are an agent (i.e. “net”).
The following tables present our revenues disaggregated by offering. This level of disaggregation takes into consideration how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Revenue is presented in the following tables for the year ended December 31, 2020, respectively:
There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. Below is a list of practical expedients the Company applied in the adoption and application of Topic 606:
Application Practical Expedients
- The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.
- The Company generally expenses sales commissions when incurred when the amortization period would have been one year or less. These costs are recorded within selling, general, and administrative in the Statement of Operations.
- The Company is permitted to recognize revenue at the amount to which it has the right to invoice for services performed if the Company’s right to payment is for an amount that corresponds directly with the value provided to the customer.
| 12 |
The NAV People, Inc. & Subsidiary
For contract modifications, the Company reflected the aggregate effect of all modifications that occurred prior to the adoption date when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to satisfied and unsatisfied performance obligations for the modified contract at transition.
Note 3 – Property and Equipment
Depreciation and amortization is calculated using the straight-line method over the estimated useful life of the assets. Estimated useful lives of major classes of depreciable assets are as follows:
|
Property and Equipment |
Estimated Useful Life |
|
Computers and Peripherals |
3 |
|
Furniture and Fixtures |
5 |
|
Leasehold Improvements |
5 |
Property and equipment consist of the following at December 31, 2020:
|
|
|
|
|
Computers and Peripherals |
$ |
108,166 |
|
Furniture and Fixtures |
40,695 |
|
|
Leasehold Improvements |
24,110 |
|
|
Total Depreciable Assets |
172,971 |
|
|
Less: accumulated depreciation and amortization |
(76,197) |
|
|
Property and equipment, net |
$ |
96,774 |
Depreciation expense amounted to $47,724 for the year ended December 31, 2020.
Note 4 – Intangible Assets
Intangible assets is comprised entirely of capitalized software for which amortization is calculated using the straight-line method over a 5 year estimated useful life.
Intangible assets consist of the following at December 31, 2020:
|
|
|
|
|
Software development costs |
$ |
1,541,411 |
|
Less: accumulated amortization |
(325,422) |
|
|
Total |
$ |
1,215,989 |
Amortization expense amounted to $253,340 for the year ended December 31, 2020.
| 13 |
The NAV People, Inc. & Subsidiary
Based on our net amortizable intangible asset balance of $1,215,989 at December 31, 2020, we expect that amortization expense will be as follows for the next five years and thereafter:
|
Year ending December 31 |
|
|
|
2021 |
$ |
275,171 |
|
2022 |
305,030 |
|
|
2023 |
305,030 |
|
|
2024 |
262,999 |
|
|
2025 |
67,759 |
|
|
Total |
$ |
1,215,989 |
Note 5 – Debt
Debt consists of the following as of December 31, 2020:
|
Stockholder notes payable |
$ |
3,326,759 |
|
Convertible notes payable |
1,520,000 |
|
|
PPP Loan |
954,984 |
|
|
SBA Disaster Loan |
150,000 |
|
|
Total |
$ |
5,951,743 |
Interest expense for the year ended December 31, 2020 was $151,773.
Stockholder notes payable
In June 2017, the Company entered into a $2,000,000 note payable agreement with a stockholder. The note has a 0% stated interest rate, and the entire principal balance is due upon maturity of June 13, 2022.
In June 2018, the Company entered into a $1,326,759 note payable agreement with a second stockholder. The note has a 0% stated interest rate, and the entire principal balance is due upon maturity of June 20, 2023.
Convertible note payable
In June 2017, the Company entered into a convertible note payable agreement with a stockholder.
Effective December 23, 2020, this note was assigned to an affiliate of the stockholder. The note allows for up to $1,750,000 to be borrowed at 12% per annum. Interest is paid monthly, and the entire principal balance is due upon maturity of June 13, 2022.
The note is convertible into common stock of the Company at the option of the lender or upon a change in control event, as defined in the agreement.
The note agreement contains certain financial covenants and the Company was not in compliance as of December 31, 2020, and therefore the entire outstanding principal balance of $1,520,000 is shown as current on the accompanying consolidated balance sheet.
| 14 |
The NAV People, Inc. & Subsidiary
Paycheck Protection Program (“PPP”) Loan
On April 29, 2020, the Company received a loan in the amount of $954,984 under the Paycheck Protection Program administered by the SBA. According to the Coronavirus Aid, Relief, and Economic Security Act (the “Cares Act”), PPP loan provides for forgiveness of up to the full principal amount and accrued interest if the funds are used for payroll costs, interest on mortgages, rent, and utilities. However, at least 60% of the forgiven amount must have been used for payroll. The loan bears interest at a rate of 1.00% per annum.
The entire loan (principal and accrued interest) was forgiven on June 30, 2021.
SBA Disaster Loan
In April 2020, the Company received a $2,000,000 loan under the Disaster Loan Assistance Program administered by the United States Small Business Administration (the “SBA”), which was repaid in full in May 2020. Then, in July 2020, the Company received a loan in the amount of $150,000 under the same program. The loan bears interest at a rate of 3.75% per annum and is a 30 year loan.
The future principal payments for the Company’s debt are as follows:
|
Year ending December 31 |
|
|
|
2021 |
$ |
1,522,586 |
|
2022 |
2,960,156 |
|
|
2023 |
1,331,931 |
|
|
2024 |
5,172 |
|
|
2025 |
131,898 |
|
|
Total |
$ |
5,951,743 |
| 15 |
The NAV People, Inc. & Subsidiary
Note 6 – Income Taxes
For financial reporting purposes, net loss before provision for income taxes, includes the following components:
|
Domestic |
$ |
(1,516,485) |
|
Foreign |
(234,429) |
|
|
Net loss before provision for income taxes |
$ |
(1,750,914) |
The provision for income taxes consists of the following:
| Current: |
||
| Federal | $ | - |
|
State |
6,204 |
|
|
Foreign |
- |
|
|
Total Current |
$ |
6,204 |
| Deferred: | ||
|
Federal |
$ |
- |
|
State |
- |
|
|
Foreign |
- |
|
|
Total Deferred |
$ |
- |
|
|
|
|
|
Provision for income taxes |
$ |
6,204 |
| 16 |
The NAV People, Inc. & Subsidiary
Income tax provision differs from the amount computed by applying the statutory as follows:
|
Net loss before income taxes |
$ |
(1,750,914) |
|
Statutory rate: |
21.00% |
|
|
|
|
|
|
Income Tax Expense at Statutory Rate |
(367,692) |
|
|
State Tax Expense |
6,204 |
|
|
Foreign Tax Differential |
(36,512) |
|
|
Nondeductible Perm |
41,022 |
|
|
PTBI Reported in PY Tax Return |
87,576 |
|
|
Uncertain Tax Position |
155,428 |
|
|
Change in Valuation Allowance |
127,168 |
|
|
Other |
(6,990) |
|
|
Total |
$ |
6,204 |
Below is a summary of the Company’s deferred tax assets and liabilities:
|
Deferred Tax Assets and Liabilities |
|
||
|
|
|
|
|
|
The deferred assets and liabilities consist of the following: |
|
||
|
|
|
|
|
|
|
Deferred Revenue |
$ |
163,383 |
|
|
Bad Debt Reserve |
53,975 |
|
|
|
Accrued Vacation |
296 |
|
|
|
NOL & Charitable Contribution CF |
807,111 |
|
|
|
Gross Deferred Tax Assets |
$ |
1,024,765 |
|
|
|
|
|
|
|
Valuation Allowance |
$ |
(947,363) |
|
|
|
|
|
|
|
Property & Equipment |
(15,651) |
|
|
|
Intangibles |
(61,751) |
|
|
|
Deferred Tax Liabilities |
$ |
(77,402) |
|
|
Total Deferred Asset / Liability |
$ |
- |
| 17 |
The NAV People, Inc. & Subsidiary
At December 31, 2020 the Company has $3,650,863 federal net operating loss carryforwards, of which $667,770 has a carryforward period of 20 years and the remainder carry forward indefinitely. The federal NOLs begin to expire in 2037. We have not reflected any benefit of such net operating loss carryforwards in the accompanying consolidated financial statements. We have established a full valuation against the related deferred tax assets due to the uncertainty surrounding the realization of such assets. The utilization of the Company’s NOLs may be subject to annual Internal Revenue Code Section 382 limitations. The Company has not yet completed a 382 study as of December 31, 2020
The Company has $2,191,851 of state net operating loss carryforwards with carryforward periods ranging from 15 to 20 years, with state statute period of 4 years. The state NOLs begin to expire in 2032. The Company has a foreign net operating loss carryforward of $608,604 with carryforward period of 20 years, with statute period of 4 years. The foreign NOLs begin to expire in 2037. We have not reflected any benefit of such net operating loss carryforwards in the accompanying consolidated financial statements. We have established a full valuation against the related deferred tax assets due to the uncertainty surrounding the realization of such assets.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and projects for future taxable income over periods in which the deferred tax assets are deductible. Management believes it is more likely than not that the Company will realize the benefits of these deductible differences. The change in valuation allowance during the year ended December 31, 2020, was an increase of $127,168.
Management believes that there is an uncertain tax position for the cumulative exclusion of deferred revenue and as such, has recognized this uncertain tax position against federal and state NOLs. There are no interest and penalties related to uncertain tax positions in 2020. The statute of limitation is 3 years for federal tax and years ending 3/31/18, 3/31/19 and 3/31/20 are open to examination. The statute of limitation is 4 years for state tax and the years ending 3/31/17, 3/31/18, 3/31/19 and 3/31/20 are open to examination. The Company currently is not under examination by any tax authority.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer's social security payments, net operating loss utilization and carryback periods and modifications to the net interest deduction limitations. The CARES Act did not have a material impact on the Company’s income tax provision for 2020. The Company will continue to evaluate the impact of the CARES Act on its financial position, results of operations, and cash flows.
On December 27, 2020, the President of the United States signed the Consolidated Appropriations Act, 2021 (“Consolidated Appropriations Act”) into law. The Consolidated Appropriations Act is intended to enhance and expand certain provisions of the CARES Act, allows for the deductions of expenses related to the Payroll Protection Program funds received by companies, and provides an update to meals and entertainment expensing for 2021. The Consolidated Appropriations Act did not have a material impact to the Company’s income tax provision for the year ended December 31, 2020.
| 18 |
The NAV People, Inc. & Subsidiary
Note 7 – Commitment and Contingencies
Operating Lease
The Company leases one office facility under an operating lease arrangement which expires on April 30, 2024. Rent expense related to the Company’s operating leases was $211,343 for the year ended December 31, 2020. Future minimum payments, by year and in the aggregate, under operating leases at December 31, 2020, are as follows:
|
Year ending December 31 |
Future Minimum Payments |
|
|
2021 |
$ |
246,978 |
|
2022 |
254,376 |
|
|
2023 |
262,008 |
|
|
2024 |
89,956 |
|
|
Total future minimum lease payments |
$ |
853,318 |
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. As of December 31, 2020, and through the date these financial statements were available to be issued, there were no legal proceedings requiring recognition or disclosure in the financial statements.
Contingencies
As of the date of this report, there are no known contingent liabilities for the year ended December 31, 2020.
Note 8 – Subsequent Events
The Company has evaluated all subsequent events through December 13, 2021, which is the date the financial statements were available to be issued.
On October 1, 2021, the Company was acquired by Akerna Corp. (NASDAQ: KERN) for approximately $17 million, comprised of approximately $5 million in cash and $12 million in common stock of Akerna Corp.
| 19 |
The NAV People, Inc. & Subsidiary
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT ACCOUNTANTS’ REVIEW REPORT
FOR THE 9 MONTHS ENDED
SEPTEMBER 30, 2021
The NAV People, Inc. & Subsidiary
TABLE OF CONTENTS
September 30, 2021
| 1 |
|
|
September 30, 2021 |
|
|
Assets |
|
|
|
Current Assets |
|
|
|
Cash |
$ |
531,723 |
|
Accounts receivable, net of allowance of $435,430 |
961,140 |
|
|
Prepaid expenses and other current assets |
266,826 |
|
|
Total Current Assets |
1,759,689 |
|
|
|
|
|
|
Non-Current Assets |
|
|
|
Property and equipment, net |
92,437 |
|
|
Intangible assets, net |
1,362,710 |
|
|
Deposits |
11,361 |
|
|
Total Non-Current Assets |
1,466,508 |
|
|
Total Assets |
$ |
3,226,197 |
|
Liabilities and Stockholders’ Deficit |
|
|
|
Current Liabilities |
|
|
|
Convertible note payable |
$ |
1,520,000 |
|
Accounts Payable |
384,697 |
|
|
Accrued Expenses |
500,185 |
|
|
Deferred revenue |
2,448,982 |
|
|
Total Current Liabilities |
4,853,864 |
|
|
Long Term Liabilities |
|
|
|
Stockholder notes payable |
3,496,759 |
|
|
Notes payable |
148,817 |
|
|
Total Long-Term Liabilities |
3,645,576 |
|
|
Total Liabilities |
8,499,440 |
|
|
|
|
|
Stockholders’ Deficit |
|
|
|
Common stock, $1 par value, 10,000 shares authorized, 5,000 shares issued and outstanding |
5,000 |
|
|
Additional paid-in capital |
2,000 |
|
|
Accumulated other comprehensive loss |
(11,410) |
|
|
Accumulated deficit |
(5,268,833) |
|
|
Total Stockholders’ Deficit |
(5,273,243) |
|
|
Total Liabilities and Stockholders’ Deficit |
$ |
3,226,197 |
See accompanying Notes to the Consolidated Financial Statements
| 2 |
The NAV People, Inc. & Subsidiary
|
|
|
|
|
|
For the Nine Months Ended September 30, 2021 |
|
|
|
|
|
|
Revenue |
|
|
|
Recurring revenue |
$ |
4,397,990 |
|
Services revenue |
2,071,250 |
|
|
Other revenue |
685,213 |
|
|
Total revenue |
7,154,453 |
|
|
Cost of revenue |
1,913,331 |
|
|
Gross profit |
5,241,122 |
|
|
|
|
|
|
Operating Expenses |
|
|
|
Operations and support |
4,584,170 |
|
|
Sales and marketing |
35,213 |
|
|
General and administrative |
543,784 |
|
|
Bad debt expense |
286,094 |
|
|
Depreciation and amortization |
189,664 |
|
|
Acquisition Costs |
172,550 |
|
|
Total Operating Expenses |
5,811,475 |
|
|
Loss From Operations |
(570,353) |
|
|
|
|
|
|
Other loss |
(19,586) |
|
|
Gain on PPP loan forgiveness |
954,984 |
|
|
Interest expense |
(161,029) |
|
|
Total other Income |
774,369 |
|
|
|
|
|
|
Net Income before provision for income taxes |
204,016 |
|
|
Federal and State Income Tax |
(5,250) |
|
|
Net Income |
198,766 |
|
|
Foreign currency translation adjustment |
(45) |
|
|
Comprehensive Income |
$ |
198,721 |
See accompanying Notes to the Consolidated Financial Statements
| 3 |
|
|
|
|
||||||||||
|
|
Shares |
Par |
Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total Stockholders’ Deficit |
||||||
|
Balance as of January 1, 2021 |
5,000 |
$ |
5,000 |
$ |
2,000 |
$ |
(11,365) |
$ |
(5,467,599) |
$ |
(5,471,964) |
|
|
Net Income |
- |
- |
- |
- |
198,766 |
198,766 |
||||||
|
Foreign currency translation adjustment |
- |
- |
- |
(45) |
- |
(45) |
||||||
|
Balance as of September 30, 2021 |
5,000 |
$ |
5,000 |
$ |
2,000 |
$ |
(11,410) |
$ |
(5,268,833) |
$ |
(5,273,243) |
|
See accompanying Notes to the Consolidated Financial Statements
| 4 |
The NAV People, Inc. & Subsidiary
|
|
For the Nine months ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
Net Income |
$ |
198,766 |
|
Adjustment to reconcile net income to net cash provided by operating activities |
|
|
|
Gain on PPP loan forgiveness |
(954,984) |
|
|
Bad debt |
286,093 |
|
|
Depreciation and amortization |
189,664 |
|
|
Change in assets and liabilities: |
|
|
|
Accounts receivable |
(190,370) |
|
|
Prepaid expenses and other current assets |
(97,590) |
|
|
Accounts payable and accrued expenses |
327,837 |
|
|
Deferred revenue |
661,491 |
|
|
Net cash provided by operating activities |
420,907 |
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
Developed software additions |
(304,607) |
|
|
Purchases of property and equipment |
(14,241) |
|
|
Net cash used in investing activities |
(318,848) |
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
Proceeds from debt issuances |
170,000 |
|
|
Payments of principal amounts of debt |
(1,182) |
|
|
Net cash provided by financing activities |
168,818 |
|
|
Effect of exchange rates on cash |
(5,717) |
|
|
Net change in cash |
265,160 |
|
|
Beginning Balance |
266,563 |
|
|
Ending Balance |
$ |
531,723 |
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
Cash paid for interest |
$ |
137,151 |
See accompanying Notes to the Consolidated Financial Statements
| 5 |
The NAV People, Inc. & Subsidiary
Note 1 – Nature of the Business and Summary of Significant Accounting Policies
Description of the Business
The NAV People, Inc. (“The NAV People” or the “Company”) provides software for highly regulated retailers in the legal cannabis space. Founded in 2016 and headquartered in Las Vegas, Nevada, the NAV People services a client base comprised of U.S.-based multi-state operators and single-state operators and Canadian LPs, in addition to global cannabis clients outside North America. The NAV People have over 85 customers.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) as found in the Accounting Standards Codification (“ASC”) of the Financial Accounting Standards Board (“FASB”) for consolidated financial information.
The accompanying consolidated financial statements include the accounts of The NAV People and its wholly-owned subsidiary, Dynamics 365 People Software and Services, Ltd. All intercompany balances have been eliminated in consolidation.
Use of Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions, which affect the reported amounts in the financial statements and accompanying notes. Estimates are based on historical experience, where applicable, and other assumptions which management believes are reasonable under circumstances. The Company has used estimates related to several financial statement amounts including useful lives of property and equipment, and internal use software. These estimates are inherently subject to judgement and actual results could differ from those estimates.
Concentrations of Credit Risk
Cash and cash equivalents and accounts receivable are potentially subject to credit risk concentration. We have not experienced any material losses related to these concentrations during the periods presented. Cash is deposited with financial institutions that the Company believes are of high credit quality. These deposits are typically in excess of insured limits.
The Company derives a portion of its revenue from several large customers, as well as a large number of individual small businesses. If the financial condition or results of any one of the large customers deteriorates substantially, the Company’s operating results could be adversely affected. The Company does not require collateral and maintains an allowance for estimated credit losses on customer accounts when considered necessary.
There were two customers which represented 15% of consolidated revenue for the nine months ended September 30, 2021. The Company has not experienced any losses related to these concentrations during the period presented.
The Company relies on a third party to provide payment processing services ("payment service provider") to collect amounts due from end-users. Payment service providers are financial institutions or credit card companies that the Company believes are of high credit quality.
| 6 |
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Certain Significant Risks and Uncertainties
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. COVID-19 has rapidly impacted market and economic conditions globally. In an attempt to limit the spread of the virus, various governmental restrictions have been implemented, including business activities and travel restrictions, and “shelter-at-home” orders, that have had an adverse impact on our business and operations by reducing demand for transportation. In light of the evolving nature of COVID-19 and the uncertainty it has produced, it is not possible to predict the COVID-19 pandemics cumulative and ultimate impact on our future consolidated business operations, results of operations, financial position, liquidity, and cash flows. The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak within the United States, including whether there will be further resurgences of COVID-19 in various regions, the distribution of the vaccines in various regions, the impact on capital, and financial markets, governmental or regulatory orders that impact our business and whether the impacts may result in permanent changes to our end-users’ behavior, all of which are highly uncertain and cannot be predicted. Also, see Note 10, Commitments and Contingencies.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents. As of September 30, 2021, there were no cash equivalents. We continually monitor our positions with, and the credit quality of, the financial institutions with which we invest.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company reviews customer receivables and collections to evaluate and estimate a reserve for doubtful accounts, including the periodic write off of uncollectible receivables. The Company determines the allowance based on analysis of historical bad debts, customer concentrations, customer creditworthiness, and current economic trends. The methodology used to calculate the reserve for receivables is supported by the historical information and is applied appropriately to all receivable balances.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is calculated using the straight-line method over their estimated useful lives of the assets See Note 3. When assets are retired or otherwise disposed of, the cost, accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in the consolidated statement of operations and comprehensive income in the period realized. Maintenance and repairs that do not enhance or extend the asset’s useful life are charged to operating expenses as incurred.
Intangible Assets
The Company capitalizes certain costs, such as compensation costs incurred in developing internal-use software once planning has been completed, management has authorized and committed project funding, and it is probable that the project will be completed, and the software will function as intended. Amortization of such costs occurs on a straight-line basis over the estimated useful life of the related asset and begins once the asset is ready for its intended use. Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed as incurred.
| 7 |
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Evaluation of Long-Lived Assets for Impairment
The Company evaluates its held-and-used long-lived assets for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of an asset or asset group (collectively, the “asset group”) may not be recoverable. The Company measures the recoverability of the asset group by comparing the carrying amount of such asset groups to the future undiscounted cash flows it expects the asset group to generate. If the Company considers the asset group to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset group exceeds its fair value. No such impairments have been identified as of September 30, 2021.
Deferred Revenue
Deferred revenue primarily consists of billings or payments received in advance of revenue recognition and is recognized as the revenue recognition criteria are met. All deferred revenue is expected to be recognized during the succeeding 12-month period and is recorded as a current liability.
Research and Development
Research and development costs are charged to operations as incurred.
Foreign Currency Translation
The functional currency of the Company's non-U.S. operations is the local currency. Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing at the balance sheet date. Revenue and expenses are translated into U.S. dollars using the average rates of exchange prevailing during the period. Translation gains or losses are included as a component of accumulated other comprehensive loss in stockholders' equity. Gains and losses resulting from foreign currency transactions are recognized in operating expenses.
Income Taxes
The Company accounts for income taxes in accordance with the asset and liability approach method. Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of the consolidated income tax expense. We are subject to income taxes in the United States and Canada.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. As of September 30, 2021, we have significant federal and state income tax net operating loss (“NOL”) carryforwards. We believe that it is more likely than not that the benefit from federal and state NOL carryforwards will not be realized. In recognition of this risk, we have provided a full valuation allowance on the deferred tax assets related to these NOL carryforwards.
| 8 |
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASC Topic 842, Leases. This standard requires all entities that leased assets under leases with terms of more than 12 months to capitalize the assets and related lease liabilities on the consolidated balance sheet. The new standard will become effective for us beginning January 1, 2022; however, early adoption is permitted. While we continue to assess all potential impacts of this new standard, we anticipate this standard will have a material impact on our consolidated financial position as we will be required to recognize right-of-use assets and lease liabilities on our consolidated balance sheet. However, we do not expect the adoption to have a significant impact on our consolidated results of operations or cash flows.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” to require the measurement of expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance also amends the impairment model for available for sale debt securities and requires entities to determine whether all or a portion of the unrealized loss on such debt security is a credit loss. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. All other entities, ASU No. 2016-13 is effective for fiscal years beginning after Dec. 15, 2022. Early adoption is permitted. The Company will adopt the new standard on January 1, 2022. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements. We are still evaluating the impact on our consolidated financial statements.
Note 2 – Revenue Recognition
The Company adopted ASC 606 under the modified retrospective transition method with an effective date of January 1, 2019 and applied this guidance to those contracts which were not completed at the date of adoption. The standard requires entities to recognize revenue upon transfer of goods or services to customers in amounts that reflect the consideration that the entities expect to receive in exchange for those goods or services.
We recognize revenue when or as we satisfy our obligations. We derive our revenues from recurring revenue (subscription sales, support, hosting, and enhancement), services revenue (packages and projects), and other revenue (perpetual licenses and hardware).
The Company determines revenue recognition under ASC 606 through the following steps:
- Identification of the contract, or contracts, with a customer;
- Identification of the performance obligations in the contract;
- Determination of the transaction price;
- Allocation of the transaction price to the performance obligations in the contract; and
- Recognition of revenue when, or as, the Company satisfies a performance obligation.
| 9 |
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company has the following revenue streams:
- Recurring (subscription sales, support, hosting, enhancement)
- Services revenue (projects and packages)
- Other Revenue (perpetual licenses and hardware)
The Company offers its software under a cloud-based delivery model, where it provides access to its software on a hosted basis as a service and customers do not have the contractual right to take possession of the software. Revenue is recognized when control of the promised services is transferred to the Company's customers at an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. The majority of customer contracts have performance obligations that the Company satisfies over time and revenue is recognized by consistently applying a method of measuring progress toward satisfaction of that performance obligation.
The Company’s recurring revenue is comprised of subscription sales, support, hosting and enhancement revenue. Revenue is recognized ratably over the contract term based on the commencement date of the contract, which is the date our cloud-based software is made available to customers.
Revenue from the Company’s service for project and packages revenue are recorded as the services are performed. Once the contract is signed, invoices are generated for professional services on a time and material basis, although the Company occasionally engage in fixed-price service engagements and invoices for those based upon agreed milestone payments. Revenue is recognized as services are performed for time and material engagements and on a proportional performance method as the services are performed for fixed-fee engagements. Training revenue is recognized as the services are performed.
Perpetual software is recognized when delivered, which is typically within a day of receipt of the order. Hardware is recognized when invoiced and usually ships within a few days after receipt of order.
Any of the above agreements would be a complete contract. Each party’s rights regarding the services to be transferred, pricing, and payment terms are listed in the contract. These factors indicate that the contract has commercial substance. Risk, timing, or the Company’s future cash flows are expected to change as a result of a contract. Risk includes non-performance risk, non-payment risk, and mis-usage risk. Payments are generally due within 15-45, days upon receipt of an invoice.
The Company considered the guidance of ASC 606-10-55-3A regarding the collection probability. At contract inception, the Company deems it is probable that the Company will collect substantially all of the consideration to which it will be entitled to in exchange for the services that will be transferred to the customer, based on historical experience with customers. The Company also periodically completes an assessment of collectability from new customers. This assessment includes reviewing publicly available financial information and inquiring of customer’s financial creditability. Arrangements for which collection of fees is not deemed probable are recognized upon cash collection.
The Company considered the terms of the contract to determine the transaction price. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract may include fixed amounts, variable amounts, or both. The Company’s contracts typically have either (1) annual; (2) monthly; (3) variable based on completion of performance obligation. Therefore, the Company’s contracts have both fixed (e.g., stated annual, monthly, etc. fee) and variable components (e.g., per hour, time and material).
| 10 |
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Deferred Commissions
The Company capitalizes sales commission expenses and associated payroll taxes paid to internal sales personnel that are incremental to obtaining customer contracts. These costs are deferred and then amortized over the expected period of benefit. Commissions for existing customer renewals are deferred and amortized over twelve months. We have determined the period of benefit taking into consideration several factors including the expected subscription term and expected renewals of our customer contracts, the duration of our relationships with our customers, and the life of our technology. Amortization expense is included in sales and marketing in the accompanying consolidated statement of operations and comprehensive income.
Variable consideration
At the end of the reporting period, the Company knows the amount of time and material to invoice the customer in order to recognize revenue. Therefore, no estimation of variable consideration is necessary.
Principal vs. Agent Considerations
Judgment is required in determining whether we are the principal or agent in its transactions with the customers. We evaluate the presentation of revenue on a gross or net basis based on whether we control the service provided to the end-user and are the principal (i.e. “gross”), or we arrange for other parties to provide the service to the end-user and are an agent (i.e. “net”).
The following tables present our revenues disaggregated by offering. This level of disaggregation takes into consideration how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
There are several practical expedients and exemptions allowed under Topic 606 that impact timing of revenue recognition and the Company’s disclosures. Below is a list of practical expedients the Company applied in the adoption and application of Topic 606:
Application Practical Expedients
- The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.
- The Company generally expenses sales commissions when incurred when the amortization period would have been one year or less. These costs are recorded within selling, general, and administrative in the Statement of Operations and Comprehensive Income.
- The Company is permitted to recognize revenue at the amount to which it has the right to invoice for services performed if the Company’s right to payment is for an amount that corresponds directly with the value provided to the customer.
| 11 |
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For contract modifications, the Company reflected the aggregate effect of all modifications that occurred prior to the adoption date when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to satisfied and unsatisfied performance obligations for the modified contract at transition.
Note 3 – Property and Equipment
Depreciation and amortization is calculated using the straight-line method over the estimated useful life of the assets. Estimated useful lives of major classes of depreciable assets are as follows:
|
Property and Equipment |
Estimated Useful Life |
|
Computers and Peripherals |
3 |
|
Furniture and Fixtures |
5 |
|
Leasehold Improvements |
5 |
Property and equipment consist of the following as of September 30, 2021:
|
|
|
|
|
Computers and Peripherals |
$ |
132,490 |
|
Furniture and Fixtures |
40,694 |
|
|
Leasehold Improvements |
24,110 |
|
|
Total Depreciable Assets |
$ |
197,294 |
|
Less: accumulated depreciation and amortization |
104,857 |
|
|
Property and equipment, net |
$ |
92,437 |
Depreciation expense amounted to $31,778 for the nine months ended September 30, 2021.
| 12 |
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Intangible Assets
Intangible assets is comprised entirely of capitalized software for which amortization is calculated using the straight-line method over a 5 year estimated useful life.
Intangible assets consist of the following at September 30, 2021:
|
|
|
|
|
Software development costs |
$ |
1,849,781 |
|
Less: accumulated amortization |
(487,071) |
|
|
Total |
$ |
1,362,710 |
Amortization expense amounted to $157,886 for the nine months ended September 30, 2021.
Based on our net amortizable intangible asset balance of $1,362,710 at September 30, 2021, we expect that amortization expense will be as follows for the next five years and thereafter:
|
2021 |
$ |
165,955 |
|
2022 |
366,947 |
|
|
2023 |
365,352 |
|
|
2024 |
316,225 |
|
|
2025 |
129,296 |
|
|
2026 |
18,935 |
|
|
Total |
$ |
1,362,710 |
Note 5 – Debt
Debt consists of the following as of September 30, 2021:
|
Stockholder notes payable |
$ |
3,496,759 |
|
Convertible note payable |
1,520,000 |
|
|
SBA Disaster Loan |
148,817 |
|
|
Total |
$ |
5,165,576 |
Interest expense for the nine months ended September 30, 2021 was $161,029.
Stockholder notes payable
In June 2017, the Company entered into a $2,000,000 note payable agreement with a stockholder. The note has a 0% stated interest rate, and the entire principal balance is due upon maturity of June 13, 2022.
In June 2018, the Company entered into a $1,326,759 note payable agreement with a second stockholder. The note has a 0% stated interest rate, and the entire principal balance is due upon maturity of June 20, 2023.
Convertible note payable
In June 2017, the Company entered into a convertible note payable agreement with a stockholder.
| 13 |
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Effective December 23, 2020, this note was assigned to an affiliate of the stockholder. The note allows for up to $1,750,000 to be borrowed at 12% per annum. Interest is paid monthly, and the entire principal balance is due upon maturity of June 13, 2022.
The note is convertible into common stock of the Company at the option of the lender or upon a change in control event, as defined in the agreement.
The note agreement contains certain financial covenants, and the Company was not in compliance as of September 30, 2021, and therefore the entire outstanding principal balance of $1,520,000 is shown as current on the accompanying consolidated balance sheet.
Paycheck Protection Program (“PPP”) Loan
On April 29, 2020, the Company received a loan in the amount of $954,984 under the Paycheck Protection Program administered by the United States Small Business Administration (the “SBA”). According to the Coronavirus Aid, Relief, and Economic Security Act (the “Cares Act”), PPP loan provides for forgiveness of up to the full principal amount and accrued interest if the funds are used for payroll costs, interest on mortgages, rent, and utilities. However, at least 60% of the forgiven amount must have been used for payroll. The loan bears interest at a rate of 1.00% per annum.
The entire loan (principal and accrued interest) was forgiven on June 30, 2021 and the $954,984 was recorded as a gain on the statement of operations and comprehensive income.
SBA Disaster Loan
In April 2020, the Company received a $2,000,000 loan under the Disaster Loan Assistance Program administered by the SBA, which was repaid in full in May 2020. Then, in July 2020, the Company received a loan in the amount of $150,000 under the same program. The loan bears interest at a rate of 3.75% per annum and is a 30 year loan.
The future principal payments for the Company’s debt are as follows:
|
Year ending December 31 |
|
|
|
2021 |
$ |
1,521,283 |
|
2022 |
2,173,037 |
|
|
2023 |
1,331,891 |
|
|
2024 |
5,132 |
|
|
2025 |
134,233 |
|
|
Total |
$ |
5,165,576 |
| 14 |
The NAV People, Inc. & Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 6 – Income Taxes
The Company’s effective tax rates from continuing operations for the nine months ended September 30, 2021 was 2.57%. Since the Company is in a full valuation allowance, the small tax expense is related to state tax minimum payments.
Note 7 – Commitment and Contingencies
Operating Lease
The Company leases one office facility under an operating lease arrangement which expires on April 30, 2024. Rent expense related to the Company’s operating leases was $194,514 for the nine months ended September 30, 2021. Future minimum payments, by year and in the aggregate, under operating leases at September 30, 2021, are as follows:
|
|
Future Minimum Payments |
|
|
2021 |
$ |
61,743 |
|
2022 |
254,376 |
|
|
2023 |
262,008 |
|
|
2024 |
89,956 |
|
|
Total future minimum lease payments |
$ |
668,083 |
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. As of September 30, 2021, and through the date these financial statements were available to be issued, there were no legal proceedings requiring recognition or disclosure in the financial statements.
Contingencies
As of the date of this report, there are no known contingent liabilities for the nine months ended September 30, 2021.
Note 8 – Subsequent Events
The Company has evaluated all subsequent events through December 13, 2021, which is the date the financial statements were available to be issued.
On October 1, 2021, the Company was acquired by Akerna Corp. (NASDAQ: KERN) for approximately $17 million, comprised of approximately $5 million in cash and $12 million in common stock of Akerna Corp.
| 15 |
AKERNA CORP.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheet as of September 30, 2021 and the unaudited pro forma condensed combined statements of operations for the twelve months ended December 31, 2020 and nine months ended September 30, 2021, are based on the historical financial statements of Akerna Corp. (“Akerna”, “we”, “our”) and The NAV People, Inc. and Subsidiary (“NAV”) after giving effect to the acquisition of NAV (the “Acquisition”) and after applying the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements.
The unaudited pro forma condensed combined statements of operations for the twelve months ended December 31, 2020 and nine months ended September 30, 2021 give effect to the Acquisition as if it had occurred on January 1, 2020, the first day of the first year presented.
The unaudited pro forma condensed combined balance sheet as of September 30, 2021, gives effect to the Acquisition as if it had occurred on September 30, 2021.
The Acquisition of NAV has been accounted for pursuant to Financial Accounting Standards Board Accounting Standards Codification 805, Business Combinations. The total consideration transferred, as described in Note 1 to these unaudited pro forma condensed combined financial statements, is allocated to the net tangible assets and intangible assets of NAV acquired in connection with the Acquisition, based on their estimated fair values as of the date of the Acquisition, and the excess is allocated to goodwill. We have made a preliminary allocation of the estimated purchase price to the tangible and intangible assets acquired and liabilities assumed. The acquisition accounting is dependent upon certain valuations and other studies that have yet to progress to a stage where there is sufficient information for a definitive measurement. We have made significant assumptions and estimates in determining the preliminary estimated purchase price and the preliminary allocation of the estimated purchase price in the unaudited pro forma condensed combined financial statements. These preliminary estimates and assumptions are subject to change during the estimated purchase price allocation period (generally one year from the acquisition date) as we finalize the valuations of the net intangible assets. The final valuations of identifiable intangible assets, fixed assets and deferred revenue and associated tax effects may change significantly from our preliminary estimates. Differences between these preliminary estimates and the final acquisition accounting could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and the combined company’s future results of operations and financial position. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma condensed combined financial statements.
The historical consolidated financial information has been adjusted in the unaudited pro forma condensed consolidated financial statements to give effect to pro forma events that are (1) directly attributable to the Acquisition; (2) factually supportable; and (3) with respect to the unaudited pro forma condensed consolidated statements of operations, expected to have a continuing impact on the combined results.
The unaudited pro forma condensed consolidated financial statements have been prepared by management for illustrative purposes only and are not necessarily indicative of the consolidated results of operations or financial position of Akerna that would have been reported had the Acquisition been completed as of the dates presented and should not be taken as representative of the future consolidated results of operations or financial position of Akerna. The unaudited pro forma financial statements do not reflect any operating efficiencies and cost savings that Akerna may achieve, or any additional expenses that it may incur, with respect to the combined companies.
| 1 |
The unaudited pro forma condensed combined financial statements, including the notes thereto should be read in conjunction with:
- The accompanying notes to the unaudited pro forma condensed combined financial statements;
- The audited consolidated financial statements, the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Akerna Corp.’s Transition Report on Form 10-KT for the period ended December 31, 2020 which was filed with the Securities and Exchange Commission ("SEC") on March 31, 2021 (the "Akerna 2020 10-K");
- The unaudited condensed consolidated financial statements, the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-Q for the three and nine months ended September 30, 2021 which was filed with the SEC on November 12, 2021;
- The unaudited condensed consolidated financial statements, the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-Q for the three and six months ended June 30, 2021 which was filed with the SEC on August 12, 2021;
- The unaudited condensed consolidated financial statements, the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-Q for the three months ended March 31, 2021 which was filed with the SEC on May 21, 2021;
- NAV’s audited financial statements as of and for the year ended December 31, 2020, included elsewhere in this Current Report on Form 8-K/A;
- NAV’s unaudited condensed consolidated interim financial statements as of and for the nine months ended September 30, 2021, included elsewhere in this Current Report on Form 8-K/A;
| 2 |
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2021
|
|
Akerna Corp. |
The NAV People, (Note 1) |
Pro forma |
Note 3 |
Pro forma |
|||||||
|
ASSETS |
|
|
|
|
|
|||||||
|
CURRENT ASSETS: |
|
|
|
|
|
|||||||
|
Cash |
$ |
9,608,788 |
$ |
531,723 |
$ |
(5,606,017) |
A |
$ |
4,534,494 |
|||
|
Restricted cash |
508,261 |
– |
– |
|
508,261 |
|||||||
|
Accounts receivable, net |
1,647,619 |
961,140 |
– |
|
2,608,759 |
|||||||
|
Prepaid expenses and other current assets |
2,194,221 |
266,826 |
– |
|
2,461,047 |
|||||||
|
Total current assets |
13,958,889 |
1,759,689 |
(5,606,107) |
|
10,112,561 |
|||||||
|
Fixed assets, net |
52,322 |
92,437 |
– |
|
144,759 |
|||||||
|
Investments, net |
226,101 |
– |
– |
|
226,101 |
|||||||
|
Capitalized software, net |
6,167,413 |
– |
– |
|
6,167,413 |
|||||||
|
Intangible assets, net |
7,311,541 |
1,362,710 |
4,244,507 |
C |
12,918,758 |
|||||||
|
Goodwill |
46,790,018 |
– |
21,037,766 |
B |
67,827,784 |
|||||||
|
Deposits |
– |
11,361 |
– |
|
11,361 |
|||||||
|
TOTAL ASSETS |
$ |
74,506,284 |
$ |
3,226,197 |
$ |
19,676,256 |
|
$ |
97,408,737 |
|||
|
|
|
|
|
|||||||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|||||||
|
CURRENT LIABILITIES: |
|
|
|
|
|
|||||||
|
Accounts payable, accrued expenses and other accrued liabilities |
$ |
5,185,519 |
$ |
944,806 |
A, E, G |
$ |
6,130,325 |
|||||
|
Accounts payable |
– |
384,697 |
(384,697) |
E |
– |
|||||||
|
Accrued expenses |
– |
500,185 |
(500,185) |
E |
– |
|||||||
|
Convertible note payable |
– |
1,520,000 |
(1,520,000) |
A |
– |
|||||||
|
Deferred revenue |
908,256 |
2,448,982 |
(431,411) |
F |
2,925,827 |
|||||||
|
Derivative liability |
160,201 |
– |
– |
|
160,201 |
|||||||
|
Total current liabilities |
6,253 ,976 |
4,853,864 |
(1,891,487) |
|
9,216,353 |
|||||||
|
Long-term debt, less current portion |
3,834,001 |
– |
– |
|
3,834,001 |
|||||||
|
Stockholder notes payable |
– |
3,496,759 |
(3,496,759) |
A |
– |
|||||||
|
Notes payable |
– |
148,817 |
(148,817) |
A |
– |
|||||||
|
TOTAL LIABILITIES |
10,087,977 |
8,499,440 |
(5,537,063) |
|
13,050,354 |
|||||||
|
STOCKHOLDERS' EQUITY: |
|
|
|
|
|
|||||||
|
Special voting preferred stock |
2,952,495 |
– |
– |
|
2,952,495 |
|||||||
|
Common stock |
2,717 |
5,000 |
(4,643) |
A, D |
3,074 |
|||||||
|
Additional paid-in capital |
132,803,659 |
2,000 |
20,020,463 |
A, D |
152,826,122 |
|||||||
|
Accumulated other comprehensive loss |
(44,639) |
(11,410) |
(11,410) |
D |
(67,459) |
|||||||
|
Accumulated deficit |
(71,295,925) |
(5,268,833) |
5,208,909 |
D, G |
(71,355,849) |
|||||||
|
TOTAL STOCKHOLDERS' EQUITY |
64,418,307 |
(5,273,243) |
25,213,319 |
|
84,358,383 |
|||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
$ |
74,506,284 |
$ |
3,226,197 |
$ |
19,676,256 |
|
$ |
97,408,737 |
|||
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information
| 3 |
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2020
|
|
Akerna Corp. (Note 1) |
The NAV People, (Note 1) |
Pro forma |
Note 4 |
Pro forma |
|||||||
|
|
|
|
|
|
|
|||||||
|
Revenue |
|
|
|
|
|
|||||||
|
Software |
$ |
11,963,028 |
|
$ |
7,108,536 |
A |
$ |
19,071,564 |
||||
|
Consulting |
1,739,683 |
|
– |
|
1,739,683 |
|||||||
|
Other |
196,257 |
426,293 |
– |
|
622,550 |
|||||||
|
Recurring revenue |
– |
4,875,121 |
(4,875,121) |
A |
– |
|||||||
|
Services revenue |
– |
2,233,415 |
(2,233,415) |
A |
– |
|||||||
|
Total net revenue |
13,898,968 |
7,534,829 |
– |
|
21,433,797 |
|||||||
|
Cost of revenue |
6,355,825 |
2,202,534 |
– |
|
8,558,359 |
|||||||
|
Gross Profit |
7,543,143 |
5,332,295 |
– |
|
12,875,438 |
|||||||
|
Operating expenses: |
|
|
|
|
|
|||||||
|
Product development |
5,129,814 |
– |
– |
|
5,129,814 |
|||||||
|
Sales and marketing |
8,085,897 |
46,954 |
– |
|
8,132,851 |
|||||||
|
General and administrative |
11,018,356 |
784,785 |
5,798,166 |
A |
17,601,307 |
|||||||
|
Operations and support |
– |
5,374,077 |
(5,374,077) |
A |
– |
|||||||
|
Bad debt expense |
– |
424,089 |
(424,089) |
A |
– |
|||||||
|
Depreciation and amortization |
3,223,844 |
301,064 |
542,799 |
B |
4,067,707 |
|||||||
|
Impairment of long-lived assets |
6,887,000 |
– |
– |
|
6,887,000 |
|||||||
|
Total operating expenses |
34,344,911 |
6,930,969 |
542,799 |
|
41,818,679 |
|||||||
|
Loss from operations |
(26,801,768) |
(1,598,674) |
(542,799) |
|
(28,943,241) |
|||||||
|
Other income (expense): |
|
|
– |
|
– |
|||||||
|
Interest income (expense) |
(161,646) |
(151,773) |
151,773 |
C |
(161,646) |
|||||||
|
Change in fair value of convertible notes |
(195,273) |
– |
– |
|
(195,273) |
|||||||
|
Change in fair value of derivative liability |
376,811 |
– |
– |
|
376,811 |
|||||||
|
Other income (expense), net |
(59,397) |
(467) |
– |
|
(59,864) |
|||||||
|
Net loss before income taxes and equity in losses of investee |
(26,841,273) |
(1,750,914) |
(391,026) |
|
(28,983,213) |
|||||||
|
Income tax expense |
(31,185) |
(6,204) |
– |
|
(37,389) |
|||||||
|
Equity in losses of investee |
(16,335) |
– |
– |
|
(16,335) |
|||||||
|
Net income (loss) |
$ |
(26,888,793) |
$ |
(1,757,118) |
$ |
(391,026) |
|
$ |
(29,036,937) |
|||
|
Earnings per share |
|
|
|
|
|
|||||||
|
Basic |
$ |
(1.87) |
|
|
|
$ |
(1.61) |
|||||
|
Diluted |
$ |
(1.87) |
|
|
|
$ |
(1.61) |
|||||
|
Shares used in computing earnings per share |
|
|
|
|
|
|||||||
|
Basic |
14,409,780 |
|
3,571,429 |
|
17,981,209 |
|||||||
|
Diluted |
14,409,780 |
|
3,571,429 |
|
17,981,209 |
|||||||
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information
| 4 |
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021
|
|
Akerna Corp. |
The NAV People, |
Pro forma |
Note 5 |
Pro forma |
|||||||
|
|
|
|
|
|
|
|||||||
|
Revenues |
|
|
|
|
|
|||||||
|
Software |
$ |
12,809,841 |
– |
$ |
6,469,240 |
A |
$ |
19,279,081 |
||||
|
Consulting |
1,135,033 |
– |
– |
|
1,135,033 |
|||||||
|
Other |
111,540 |
685,213 |
– |
|
796,753 |
|||||||
|
Recurring revenue |
– |
4,397,990 |
(4,397,990) |
A |
– |
|||||||
|
Services revenue |
– |
2,071,250 |
(2,071,250) |
A |
– |
|||||||
|
Total revenues |
14,056,414 |
7,154,453 |
– |
|
21,210,867 |
|||||||
|
Cost of revenue |
5,339,929 |
1,913,331 |
– |
|
7,253,260 |
|||||||
|
Gross Profit |
8,716,485 |
5,241,122 |
– |
|
13,957,607 |
|||||||
|
Operating expenses: |
|
|
|
|
|
|||||||
|
Product development |
4,517,836 |
– |
|
|
4,517,836 |
|||||||
|
Sales and marketing |
5,564,519 |
35,213 |
– |
|
5,599,732 |
|||||||
|
General and administrative |
8,306,417 |
543,784 |
4,691,077 |
D, A |
13,541,278 |
|||||||
|
Operations and support |
– |
4,584,170 |
(4,584,170) |
A |
– |
|||||||
|
Bad debt expense |
– |
286,094 |
(286,094) |
A |
– |
|||||||
|
Acquisition costs |
– |
172,550 |
(172,550) |
A |
– |
|||||||
|
Depreciation and amortization |
3,605,435 |
189,664 |
439,218 |
B |
4,234,317 |
|||||||
|
Total operating expenses |
21,994,207 |
5,811,475 |
87,481 |
|
27,893,163 |
|||||||
|
Loss from operations |
(13,277,722) |
(570,353) |
(87,481) |
|
(13,935,556) |
|||||||
|
Other (expense) income: |
|
|
|
|
|
|||||||
|
Interest (expense) income, net |
(1,175,789) |
(161,029) |
161,029 |
C |
(1,175,789) |
|||||||
|
Change in fair value of convertible notes |
(2,030,904) |
– |
– |
|
(2,030,904) |
|||||||
|
Change in fair value of derivative liability |
151,175 |
– |
– |
|
151,175 |
|||||||
|
Gain on forgiveness of PPP Loan |
2,234,730 |
954,984 |
– |
|
3,189,714 |
|||||||
|
Other (expense) income, net |
243 |
(19,585) |
– |
|
(19,342) |
|||||||
|
Total other (expense) income |
(820,545) |
774,370 |
161,029 |
|
114,854 |
|||||||
|
Net loss before income taxes and equity in losses of investee |
(14,098,267) |
204,017 |
73,548 |
|
(13,820,702) |
|||||||
|
Income tax expense |
(10,570) |
(5,251) |
– |
|
(15,821) |
|||||||
|
Equity in losses of investee |
(7,564) |
– |
– |
|
(7,564) |
|||||||
|
Net loss before income taxes and equity in losses of investee |
$ |
(14,116,401) |
$ |
198,766 |
$ |
73,548 |
|
$ |
(13,844,087) |
|||
|
Earnings per share |
|
|
|
|
|
|||||||
|
Basic |
$ |
(0.58) |
|
|
|
$ |
(0.50) |
|||||
|
Diluted |
$ |
(0.58) |
|
|
|
$ |
(0.50) |
|||||
|
Shares used in computing earnings per share |
|
|
|
|
||||||||
|
Basic |
24,312,510 |
|
3,571,429 |
|
27,883,939 |
|||||||
|
Diluted |
24,312,510 |
|
3,571,429 |
|
27,883,939 |
|||||||
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information
| 5 |
Note 1: Basis of Pro Forma Presentation
Accounting Periods Presented
The unaudited pro forma condensed combined balance sheet as of September 30, 2021, is presented as if the NAV acquisition had occurred on September 30, 2021. Certain pro forma adjustments to record differences between historical book values and preliminary values as of the date of the pro forma condensed combined financial statements are based on the assumption that the Acquisition occurred on September 30, 2021. The actual adjustments to be recorded in Akerna’s financial statements will be as of the acquisition date and the option exercise date.
The unaudited pro forma condensed combined statements of operations of Akerna and NAV for the twelve months ended December 31, 2020 and the nine months ended on September 30, 2021, are presented as if the Acquisition had taken place on January 1, 2020. As disclosed in the Akerna 2020 10-K, we changed our fiscal year from June 30 to December 31. In the Akerna 2020 10-K we presented the Consolidated statements of operations for the fiscal year ended June 30, 2020 and the transition period for the six months ended December 31, 2020. For the pro forma condensed combined statements of operations we have elected to present Akerna results for the year ended December 31, 2020 which consists of the combined transition period for the six months ended December 31, 2020 plus the six months period from January 1, 2020 to June 30, 2020 consistent with rules 13a-10 and 15d-10 of the Exchange Act.
These unaudited pro forma condensed combined financial information, including the preliminary purchase price allocation, are presented for illustrative purposes only and do not necessarily reflect the operating results or financial position that would have occurred if the Acquisition had been consummated on the dates indicated, nor is it necessarily indicative of the results of operations or financial condition that may be expected for any future period or date. Accordingly, such information should not be relied upon as an indicator of future performance, financial condition or liquidity.
Preliminary Purchase Consideration
On October 1, 2021, we entered into an arrangement agreement (the “Agreement”) to acquire all of the issued and outstanding shares of NAV. Under the terms of the Agreement, the aggregate consideration for the NAV shares consists of (1) $5,000,000 in cash, (2) $12,000,000 in stock and (3) contingent value rights to be issued pursuant to a rights indenture entitling the holders thereof to receive, subject to certain adjustments as set forth in the Agreement, an aggregate of up to $8,000,000 in stock, in the event that NAV achieves certain revenue targets as specified in the Agreement. These rights are accounted for as contingent consideration and are currently recorded at preliminary fair value which will be updated upon finalization of purchase accounting.
|
|
|
|
|
Cash |
$ |
5,606,017 |
| Common shares | 12,000,000 | |
|
Contingent consideration |
8,000,000 |
|
|
Total purchase consideration |
$ |
25,606,017 |
Preliminary Purchase Consideration Allocation
The following represents the preliminary allocation of the fair value of the purchase consideration to the acquired assets and assumed liabilities based on NAV’s balance sheet as of September 30, 2021 and is for illustrative purposes only.
|
Cash |
$ |
531,723 |
| Accounts receivable | 961,140 | |
| Prepaid expenses and other current assets | 266,826 | |
| Fixed assets, net | 92,437 | |
| Deposits | 11,361 | |
|
Intangible assets: |
|
|
|
Customer relationships |
3,509,861 |
|
|
Acquired technology |
2,011,750 |
|
|
Trade Name |
85,606 |
|
| Goodwill | 21,037,766 | |
| Deferred revenue | (2,017,571) | |
| Accounts payable and accrued expenses |
(884,882) |
|
|
Total purchase consideration |
$ |
25,606,017 |
Goodwill of approximately $21.0 million represents the excess of the purchase consideration over the fair value of the net tangible and intangible assets acquired. Goodwill is primarily attributable to expected post-acquisition synergies from integrating NAV’s industry-leading ERP platform into Akerna’s supply chain solutions. None of the goodwill recorded as part of the NAV acquisition is expected to be deductible for U.S. federal income tax purposes.
Akerna has considered the existing intangible assets of NAV prior to the Acquisition and while we anticipate there will be deferred tax assets arising from the purchase price, we expect these would have a full valuation allowance given historical losses.
| 6 |
The following table sets forth the components of identifiable intangible assets acquired and their preliminary estimated useful lives as of the date of Acquisition:
|
Intangible assets: |
Preliminary Fair |
Estimated Useful |
||
|
Customer relationships |
$ |
3,509,861 |
10 |
|
|
Acquired technology |
2,011,750 |
5 |
||
|
Trade name |
85,606 |
2 |
||
|
Total |
$ |
5,607,217 |
|
Following the end of Akerna’s fiscal year ended June 30, 2020, Akerna transitioned to a December 31 fiscal year-end date. The following table presents a reconciliation to Akerna’s historical unaudited financial data for the twelve months ended December 31, 2020 which was derived by adding the audited six-month transition period ended December 31, 2020 to Akerna’s three-month period ended March 31, 2020 and three-month period ended June 30, 2020.
|
|
Historical |
||||||||||
|
Akerna Corp. three months ended (unaudited) |
Akerna Corp. three months ended (unaudited) |
Akerna Corp. six months ended (audited) |
Akerna Corp. twelve months ended (unaudited)
|
||||||||
|
Net revenue: |
|
|
|
|
|||||||
|
Software |
$ |
2,346,309 |
$ |
2,849,734 |
$ |
6,766,985 |
$ |
11,963,028 |
|||
|
Consulting |
692,584 |
131,000 |
916,099 |
1,739,683 |
|||||||
|
Other |
31,652 |
22,905 |
141,700 |
196,257 |
|||||||
|
Total net revenue |
3,070,545 |
3,003,639 |
7,824,784 |
13,898,968 |
|||||||
|
Cost of revenue |
1,396,219 |
1,818,565 |
3,141,041 |
6,355,825 |
|||||||
|
Gross profit |
1,674,326 |
1,185,074 |
4,683,743 |
7,543,143 |
|||||||
|
Operating expenses: |
|
|
|
|
|||||||
|
Product development |
874,787 |
1,088,939 |
3,166,088 |
5,129,814 |
|||||||
|
Sales and marketing |
2,040,751 |
2,117,118 |
3,928,028 |
8,085,897 |
|||||||
|
General and administrative |
3,457,262 |
3,126,027 |
4,435,067 |
11,018,356 |
|||||||
|
Depreciation and amortization |
180,229 |
1,036,378 |
2,007,237 |
3,223,844 |
|||||||
|
Impairment of long-lived assets |
– |
– |
6,887,000 |
6,887,000 |
|||||||
|
Total operating expenses |
6,553,029 |
7,368,462 |
20,423,420 |
34,344,911 |
|||||||
|
Loss from operations |
(4,878,703) |
(6,183,388) |
(15,739,677) |
(26,801,768) |
|||||||
|
Interest income (expense), net |
33,522 |
(2,084) |
(193,084) |
(161,646) |
|||||||
|
Change in fair value of convertible notes |
– |
766,000 |
(961,273) |
(195,273) |
|||||||
|
Change in fair value of derivative liability |
236,917 |
(606,958) |
746,852 |
376,811 |
|||||||
|
Other expense |
(124) |
– |
(59,273) |
(59,397) |
|||||||
|
Loss before provision for income taxes |
(4,608,388) |
(6,026,430) |
(16,206,455) |
(26,841,273) |
|||||||
|
Provision for income taxes |
– |
(30,985) |
(200) |
(31,185) |
|||||||
|
Equity in losses of investee |
– |
(3,692) |
(12,643) |
(16,335) |
|||||||
|
Net loss |
(4,608,388) |
(6,061,107) |
(16,219,298) |
(26,888,793) |
|||||||
| 7 |
Note 2: Conforming Accounting Policies and Reclassification Adjustments
Based on a preliminary review of the accounting policies of Akerna and NAV, Akerna is not aware of any differences that would have a material impact on the combined company unaudited pro forma condensed combined financial information. Following completion of the Acquisition, or as more information becomes available, Akerna will perform a full and detailed review of the NAV accounting policies and financial statements. As a result of the review, accounting policy differences may be identified and these differences, when identified, could have a material impact on the combined company unaudited pro forma condensed combined financial information. Certain items included in the NAV historical combined financial information have been reclassified to conform the NAV financial statement presentation to Akerna’s financial statement presentation.
Note 3: Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 2021
The pro forma adjustments included in the unaudited pro forma condensed combined balance sheet for the Acquisition of NAV are as follows:
- To record the purchase consideration of $5,606,017 in cash which was used to pay NAV debtors in the amount of $988,874, NAV obligations in the amount of $890,000, and NAV shareholders in the amount of $2,103,425 and funded from cash and $12.0 million in common stock issued, which was used to pay down debtors in the amount of $4,299,280 and NAV shareholders in the amount of $7,700,721.
- To record estimated preliminary goodwill of $21,037,766.
- To adjust the historical NAV intangible assets to fair value in connection with the Acquisition.
- To eliminate NAV’s historical equity, accumulated deficit, paid in capital and accumulated other comprehensive loss.
- To record reclassifications to conform NAV financial statements with Akerna’s historical financial statement presentation.
- To record the estimated preliminary fair value of deferred revenue.
- To record transaction cost paid after the close of the Acquisition
Note 4: Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations for the twelve months ended December 31, 2020
The pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the Acquisition of NAV are as follows:
- To record reclassifications to conform NAV financial statements with Akerna’s historical financial statement presentation.
- To reflect $769,139 amortization expense of preliminarily estimated purchased intangible assets and to eliminate the historical amortization expense of $253,340.
- To eliminate interest expense related to the historical debt of NAV.
The pro forma combined basic and diluted net loss per share are based on the number of 17,981,209 shares common stock used in computing basic and diluted net loss per share for the acquisition of Solo, respectively. Dilutive potential common shares are included only if they have a dilutive effect on earnings per share.
| 8 |
Note 5: Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations for the nine months ended September 30, 2021
The pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the acquisition of NAV are as follows:
- To record reclassifications to conform NAV financial statements with Akerna’s historical financial statement presentation.
- To reflect $597,104 amortization expense of preliminarily estimated purchased intangible assets and to eliminate the historical amortization expense of $157,886.
- To eliminate interest expense related to the historical debt of NAV.
- To eliminate transaction related expenses of $179,187 from the historical financial statements of Akerna and $172,550 from the historical financial statements of NAV.
The pro forma combined basic and diluted net loss per share are based on the number of 27,883,939 shares common stock used in computing basic and diluted net loss per share for the acquisition of Solo, respectively. Dilutive potential common shares are included only if they have a dilutive effect on earnings per share.