While we’ve written extensively about cannabis stocks over the years, we’ve only briefly dabbled in them. There’s just too much risk, too much hype, too much volatility, and too many other exciting technology themes we’d rather invest in. Experts in the cannabis space advise that one way to reduce regulatory risk is by investing in the ancillary cannabis sector. For example, you might invest in the makers of hydroponics equipment used by both indoor growers and cannabis growers.
There aren’t many pure-play stocks for investing in cannabis that aren’t plant touching, certainly not in the United States. That’s why when we read about a publicly traded company called Akerna (KERN) that’s working on cannabis compliance solutions, we had to take a closer look.
About Akerna Stock
Akerna’s story starts with a company called MJ Freeway that we first came across in our 2017 piece on 9 Cannabis Startups with Seed-to-Sale Solutions. The Denver company had raised $21 million in disclosed funding since their inception in 2010 before going public in 2019 using the old reverse merger method which is similar to how special purpose acquisition companies (SPACs) go public so quickly. After changing their name to Akerna, the publicly traded company then acquired four more companies in the two years that followed:
- solo sciences – A seed-to-sale tracking system for the cannabis supply chain that uses a cryptographically secure digital trust mark – a unique identifier – for every product. Raised $3.4 million in disclosed funding.
- Trellis Solutions – Seed-to-sale cannabis management software that took in $2.5 million in funding.
- Ample Organics – Toronto startup that took in $1.8 million in funding. Health Canada-approved software for Canadian licensed producers (LPs) which serves more than 70% of Canadian cannabis license holders.
- Last Call Analytics – Retail sales analytics for alcohol brands which appears to be now pivoting into cannabis. Took in an undisclosed amount of funding.
There are several things to note here. First, these are all startups, which means Akerna is acquiring growing revenue streams and rapidly changing products. Second, acquiring companies in rapid succession can create problems because you then need to integrate a whole bunch of work cultures along with (oftentimes) a bunch of prima donna founders and head developers who now need to play nicely with lots of new people, some of whom they’re now expected to report to.
A Public Pissing Contest
One example of these problems is evident in a letter from the founder of Ample Organics, John X. Prentice, who resigned months after his company was acquired. Notably, he remarks that Akerna says they’re a software-as-a–service (SaaS) business but doesn’t walk the walk.
I challenge anyone to look at Akerna’s quarterly or annual reports and find even one instance where they explain to investors that they understand, manage or report on generally-accepted SaaS metrics like churn, LTV, CAC, CAC:LTV ratio and the like. You won’t find it because they don’t do it.
Credit: John X. Prentice
To be fair, we looked at both the Akerna Sept 2020 Investor Deck, and the deck announcing the Ample acquisition, neither of which mentioned a SaaS business model. Maybe they just haven’t gotten around to that yet because they’re so busy making new acquisitions. That said, we would absolutely expect to see Akerna model it’s business as a SaaS offering and begin to speak that language. Investors should push for this to happen.
It’s quite common to see these sorts of pissing contests between founders when companies merge, and there are two sides to every story. Mr. Prentice appeared to be on board when the acquisition was announced.
A competent management team should have been able to navigate this situation so that dirty laundry wasn’t aired. When you piss off the “proven management team” of a company you acquired for that reason, you can bet more talent is going to follow Mr. Prentice out the door, taking with them a lot of valuable tribal knowledge.
Someone else who seems to have butted heads with Akerna’s management team is Ashesh Shah, Founder of solo sciences. (While he may have made the horrible decision to name his company using lower case letters, we’re not holding that against him.) According to his LinkedIn profile, Mr. Shah came on as the Chief Technology Officer for Akerna following the acquisition of solo sciences, and lasted about eight months before moving on to start another venture. It appears that Akerna then filled the role internally with a promotion, as opposed to leveraging some of the talent they’ve been acquiring.
The Akerna website implies that their acquired companies are all operating independently by just listing them all out with links to each company’s website. If the founders are jumping ship just as fast as they come on board, just how much inner turmoil is happening behind the scenes while Akerna attempts to manage all these newly-acquired businesses?
Waiting for the Dust to Settle
In addition to the four acquisitions we mentioned earlier, Akerna continues on the warpath to acquire more companies, the latest being Viridian Sciences which was announced this past March. This means Akerna is now the only cannabis-compliant SAP Business One offering. In the deck announcing the deal, we see the first mention of SaaS – around $3.5 million in SaaS revenues during 2020 coming from Viridian Sciences.
Akerna’s latest 10-K filing lists numerous competitors, hinting at a fragmented space where further consolidation is likely to happen. Names listed include:
Acumatica, BDS Analytics, BioTrackTHC, Canna Advisors, Cannabis 365, Cova Cannabis, Denver Relief, Flowhub, Greenbits, Headset, LeafLogix, Medicine Man, Metrc, New Frontier Data, Nextec, 3C, Treez, and TILT Holdings.
In an industry this fragmented, there’s every reason to expect consolidation. But whenever we see companies making rapid fire acquisitions, we believe it’s prudent for risk averse investors to take a step back and wait for the dust to settle. Only after an acquisition is finalized do you end up finding out where all the bodies are buried. Having a set of consolidated financial statements is the only way we’ll be able to paint a proper picture of what’s being put together here.
One of the invisible costs these acquisitions incur is that the number of Akerna’s outstanding shares increases, not just when the deal is signed, but down the road. This dilutes existing shareholders. For example, the Ample Organics acquisition incurred $39.8 million USD upfront ($5.97 million in cash and $33.85 million in stock). Then, up to $7.96 million in “deferred consideration based on 2020 recurring revenue” will be paid in stock. Trellis was acquired for $2 million of stock, while Veridian Science was acquired for $6 million in stock. Lots of stock is being issued at varying price points, so we’d like to see the consolidated effects of all that dilution.
Should I Buy Akerna Stock?
We don’t invest in companies with a market cap less than $1 billion, so that’s that. As for what we’ve seen today of Akerna’s business, there’s a lot to like – the company’s ambitions, the potential for a quality SaaS business with diversified revenue streams, and the size of the total addressable market. On the other hand, when internal turmoil gets aired to the general public, that’s a huge red flag. It’s like when Organovo’s founder attacked the board publicly, or when MedMen’s ex-CFO said the CEO called him a “pussy-bitch” and made him share a parking space with his executive assistant (oh, the horror). When dirty laundry like this gets aired, you can be sure there’s a lot more where that came from.
For those of you with a high tolerance for risk, you have a very small business with meaningful revenues that’s dabbling in a space with the least amount of risk when it comes to investing in the cannabis growth story. If you’re going long, do so using dollar cost averaging, and be prepared for lots of volatility, especially when considering just how small Akerna is.
There aren’t many opportunities for retail investors to invest in the ancillary cannabis space, so Akerna stands alone when it comes to a publicly traded cannabis company that’s not touching any plants. That said, we believe it’s prudent to wait for all these acquisitions to be rolled up into a consolidated set of financial statements before investing in this risky cannabis stock.
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