424B3: Prospectus filed pursuant to Rule 424(b)(3)
Published on January 9, 2024
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-271857
January 5, 2024
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PROPOSED MERGER
YOUR VOTE IS VERY IMPORTANT
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To the Stockholders of Akerna Corp.:
On January 27, 2023, Akerna Corp., a Delaware corporation (“Akerna”), Akerna Merger Co., a Delaware corporation and wholly owned direct subsidiary of Akerna (“Merger Sub”), and Gryphon Digital Mining, Inc., a Delaware corporation (“Gryphon”), entered into an Agreement and Plan of Merger, as may be amended from time to time (the “Merger Agreement”), pursuant to which, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Gryphon, with Gryphon surviving as a wholly owned subsidiary of Akerna (the “Merger”). Akerna following the Merger is referred to herein as the “combined company.”
At the effective time of the Merger (the “Effective Time”), each share of Gryphon’s common stock, par value $0.0001 per share (the “Gryphon Common Stock”), and Gryphon’s preferred stock, par value $0.0001 per share (the “Gryphon Preferred Stock,” collectively referred to herein with the Gryphon Common Stock as the “Gryphon Shares”), outstanding immediately prior to the Effective Time will be converted into the right to receive a per share portion of the aggregate number of shares of Akerna’s common stock, par value $0.0001 per share (the “Akerna Common Stock”), to be issued at the Effective Time as consideration for the Merger, as calculated pursuant to the terms set forth in the Merger Agreement (the “Merger Consideration”) (subject to adjustment to account for the proposed Akerna reverse stock split), as described in more detail in the section titled “The Merger Agreement — Merger Consideration” beginning on page 116 of the accompanying proxy statement/prospectus.
The estimated exchange ratio of shares of Akerna’s common stock for Gryphon Common Stock and Gryphon Preferred Stock will be approximately 1.6834 shares of Akerna common stock for each one share of Gryphon Common Stock and Preferred Stock based on Merger Consideration of 34,318,117 shares of Akerna Common Stock. The estimated exchange ratio assumes: (i) a fully-diluted number of shares of Akerna common stock after giving effect to an assumed 20 to 1 reverse stock split in Akerna common stock of 2,869,142 shares at the effective time of the Merger, which includes (pre-reverse stock split) 10,352,069 shares outstanding on the date hereof, warrants exercisable to acquire 2,573,299 shares of Akerna common stock, restricted stock units which vest and settle for 9,347 shares of Akerna common stock, 12,476 shares issuable upon redemption of Akerna exchangeable shares, Akerna Series C Preferred Stock exchanged at an assumed price of $0.20 per share into 17,110,000 shares of Akerna common stock, approximately 19,075,660 shares of Akerna common stock issuable upon conversion of $3.15 million principal amount of Akerna’s convertible notes and 8,250,000 shares of Akerna common stock issuable upon conversion of $1.65 million principal amount of Akerna’s promissory note held by MJ Acquisition Corp. (“MJ Acquisition”) at an assumed conversion price of $0.20 per share. The assumed number of shares issuable upon exchange of Akerna’s convertible notes is based on an assumed principal amount outstanding of approximately $3.15 million ($6.58 million currently outstanding less $3.42 million exchanged into Series C Preferred Stock at an exchange price of $0.50 per share) and a conversion price of $0.50 per share (exchanged at 121% of principal amount). The assumed number of shares issuable upon exchange of Series C Preferred Stock is based on an assumed exchange price of $0.20 per share. The estimated exchange ratio also assumes 20,386,730 shares of Gryphon Common Stock and Preferred Stock issued and outstanding at the closing of the Merger, Gryphon warrants to acquire 1,067,968 Gryphon Common Stock and a post-reverse stock split closing
price per share of Akerna Common Stock of $4.00 on the date that is two trading days preceding the closing of the Merger, the trading day immediately preceding closing of the Merger and the 5-day volume weighted average price for the 5-day period ending on the trading day immediately prior to the closing of the Sale Transaction.
Each share of Akerna Common Stock reserved for issuance upon the exercise of each warrant to purchase Akerna Common Stock, that is issued and outstanding at the Effective Time will remain issued and outstanding, and such securities will be unaffected by the Merger.
Immediately after the consummation of the Merger, Akerna equityholders as of immediately prior to the Merger are expected to own approximately 7.5% of the outstanding equity interests of the combined company on a fully diluted basis and former Gryphon equityholders are expected to own approximately 92.5% of the outstanding equity interests of the combined company on a fully diluted basis. Actual ownership percentages will depend on the actual calculation of the Merger Consideration at closing, which will depend on a number of variables, including the last sales price of Akerna Common Stock on the second trading day immediately prior to closing of the Merger and the amount of the principal remaining outstanding on Akerna’s convertible notes following any conversions or company redemptions that occur prior to closing and the number of shares of Akerna Common Stock that may be issued to settle accounts payable of Akerna prior to closing. Following the Merger, Gryphon’s business will be the business of the combined company.
Akerna has also entered into a Securities Purchase Agreement, as may be amended from time to time (the “Purchase Agreement”), with Akerna Canada Ample Exchange Inc. (“Akerna Exchange”), a wholly owned subsidiary of Akerna, and MJ Acquisition Corp. (“MJ Acquisition”), on April 28, 2023 as amended on September 28, 2023 and November 15, 2023, pursuant to which, subject to the satisfaction or waiver of the conditions set forth in the Purchase Agreement, Akerna will sell to MJ Acquisition all of the issued and outstanding membership interests of MJ Freeway, LLC, a Colorado limited liability company (“MJ Freeway” and such membership interests, the “Membership Interests”), and Akerna Exchange will sell to MJ Acquisition all of the issued and outstanding common and preferred shares of Ample Organics, Inc., an Ontario corporation (“Ample” and such common and preferred shares, the “Capital Stock”), for an aggregate purchase price of $1,850,000, subject to adjustments as set forth in the Purchase Agreement, and a loan to Akerna from MJ Acquisition in the amount of $1,650,000 (funded $1,000,000 on April 28, 2023, $500,000 on October 11, 2023 and $150,000 on November 15, 2023), which principal amount will convert into shares of common stock of Akerna at closing (the “Sale Transaction”). Subsequently, on December 28, 2023, pursuant to the terms of the Purchase Agreement, Akerna and Akerna Exchange entered into a share purchase agreement with Wilcompute Systems Group Inc. (“Wilcompute”) pursuant to which Akerna Exchange sold all of the Capital Stock of Ample to Wilcompute for approximately $638,000. In accordance with the Purchase Agreement, in lieu of delivering the Capital Stock of Ample at the closing of the Sale Transaction, Akerna will instead deliver to MJ Acquisition the $638,000 purchase price received from Wilcompute, which Akerna expects to be in the form of a reduction of the purchase price paid by MJ Acquisition from $1.85 million to approximately $1.22 million.
Shares of Akerna Common Stock are currently listed on The Nasdaq Capital Market under the symbol “KERN.” Akerna will file an initial listing application for the combined company with The Nasdaq Stock Market Inc., or Nasdaq. After completion of the Merger, Akerna will be renamed “Gryphon Digital Mining, Inc.” and it is expected that the common stock of the combined company will trade on The Nasdaq Capital Market under the symbol “GRYP.”
On January 4, 2024, the last trading day before the date of the accompanying proxy statement/prospectus, the closing sale price of Akerna Common Stock was $0.3940 per share.
Akerna is holding its special meeting of stockholders in order to obtain the stockholder approvals necessary to complete the Merger, the Sale Transaction and related matters. The Akerna special meeting will be held on January 29, 2024, at 9:00 a.m. Mountain Time at 201 Milwaukee Street, Suite 200, Denver, CO 80206, unless postponed or adjourned to a later date. At the Akerna special meeting, Akerna will ask its stockholders to:
1. approve the issuance of shares of Akerna Common Stock to Gryphon stockholders, pursuant to the terms of the Merger Agreement, and the change of control resulting from the Merger;
2. approve the sale of the Membership Interests of MJ Freeway and the Capital Stock of Ample to MJ Acquisition, pursuant to the terms of the Purchase Agreement and the transactions contemplated thereby;
3. approve an amendment to the amended and restated certificate of incorporation of Akerna to effect a reverse stock split of the issued and outstanding Akerna Common Stock within a range, as determined by the board of directors of Akerna and agreed to by Gryphon, of one new share of Akerna Common Stock for every fifteen (15) to one hundred (100) shares (or any number in between) of outstanding shares of Akerna Common Stock;
4. approve an amendment to the amended and restated certificate of incorporation of Akerna to increase the number of authorized shares of Akerna Common Stock from 150,000,000 to 300,000,000;
5. approve an amendment to the amended and restated certificate of incorporation of Akerna to change the corporate name from Akerna Corp. to “Gryphon Digital Mining, Inc.”;
6. approve the Akerna Corp. 2024 Omnibus Incentive Plan;
7. approve the issuance of shares of Akerna Common Stock to MJ Acquisition Corp. upon the conversion of $1,650,000 in principal amount of a secured convertible promissory note held by MJ Acquisition Corp. in accordance with the terms of such secured convertible promissory note;
8. authorize the adjournment of the Akerna special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1 — 7; and
9. transact such other business as may properly come before the stockholders at the Akerna special meeting or any adjournment or postponement thereof.
As described in the accompanying proxy statement/prospectus, certain Akerna stockholders who in the aggregate own approximately 41% of the outstanding voting securities of Akerna as of December 21, 2023, and certain Gryphon stockholders who in the aggregate own approximately 72% of the Gryphon Shares as of December 21, 2023, are parties to support agreements or support letters with Gryphon and/or Akerna, as the case may be (the “Support Agreements”). Pursuant to the Support Agreements, such Akerna securityholders have agreed to vote in favor of the foregoing proposals and certain other matters at any meeting of Akerna’s stockholders (or any adjournment or postponement thereof), and such Gryphon stockholders have agreed to vote in favor of, and to adopt and approve, the Merger, the Merger Agreement and the related transactions at any meeting of Gryphon’s stockholders (or any adjournment or postponement thereof), or by written consent, in each case subject to the terms of the Support Agreements. The Support Agreements will terminate upon certain events, including any termination of the Merger Agreement in accordance with its terms.
Following the effectiveness of the Registration Statement on Form S-4 of which the accompanying proxy statement/prospectus is a part and pursuant to the Merger Agreement, Gryphon shall seek approval by written consent of the Merger Agreement and the Merger from its stockholders.
After careful consideration, the Akerna and Gryphon boards of directors have approved the Merger Agreement and the Merger and the respective proposals referred to above, and each of the Akerna and Gryphon boards of directors has determined that it is advisable to enter into the Merger Agreement and related transactions. The Akerna board of directors has also approved the Purchase Agreement and the Sale Transaction and has determined that it is advisable to enter into the Purchase Agreement and related transactions. The Akerna board of directors recommends that its stockholders vote “FOR” the proposals described in the accompanying proxy statement/prospectus.
More information about Akerna, Gryphon, the Merger Agreement, the Purchase Agreement, the transactions contemplated thereby and the foregoing proposals is contained in the accompanying proxy statement/prospectus. Akerna urges you to read the accompanying proxy statement/prospectus carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE 25 OF THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS.
Akerna and Gryphon are excited about the opportunities the Merger brings to both Akerna’s and Gryphon’s securityholders and thank you for your consideration and continued support.
Sincerely,
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Jessica Billingsley |
Robby Chang |
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Chief Executive Officer |
Chief Executive Officer and President |
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Akerna Corp. |
Gryphon Digital Mining, Inc. |
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of the accompanying proxy statement/prospectus. Any representation to the contrary is a criminal offense.
The accompanying proxy statement/prospectus is dated January 5, 2024 and is first being mailed to Akerna stockholders on or about January 9, 2024.
AKERNA CORP.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 29, 2024
Dear Stockholders of Akerna:
On behalf of the board of directors of Akerna Corp., a Delaware corporation (“Akerna”), we are pleased to deliver this proxy statement/prospectus for (i) the proposed merger between Akerna and Gryphon Digital Mining, Inc., a Delaware corporation (“Gryphon”), pursuant to which Akerna Merger Co., a wholly owned subsidiary of Akerna (“Merger Sub”) will merge with and into Gryphon, with Gryphon surviving as a wholly owned subsidiary of Akerna (the “Merger”) and (ii) the proposed sales by (A) Akerna of all of the issued and outstanding membership interests of MJ Freeway LLC, a Colorado limited liability company, and (B) Akerna Canada Ample Exchange Inc. (“Akerna Exchange”) of all of the issued and outstanding common and preferred shares of Ample Organics Inc., an Ontario corporation, to MJ Acquisition Corp, a Delaware corporation (“MJ Acquisition” and such transactions, the “Sale Transaction”).
The special meeting of stockholders of Akerna will be held on January 29, 2024 at 9:00 a.m. local time, at 201 Milwaukee Street, Suite 200, Denver, CO 80206 for the following purposes:
1. To approve the issuance of Akerna common stock in the Merger in accordance with the terms of the Agreement and Plan of Merger, dated as of January 27, 2023, as amended, by and among Akerna, Merger Sub and Gryphon, a copy of which is attached as Annex A to the accompanying proxy statement/prospectus (as may be amended from time to time, the “Merger Agreement”) and the change of control of Akerna resulting from the Merger (the “Merger Proposal”).
2. To approve the Securities Purchase Agreement, dated as of April 28, 2023, as amended, by and by and among Akerna, Akerna Exchange and MJ Acquisition, a copy of which is attached as Annex B to the accompanying proxy statement/prospectus (the “Purchase Agreement”), the Sale Transaction and the other transactions contemplated thereby (the “Sale Transaction Proposal”).
3. To approve the amendment to the amended and restated certificate of incorporation of Akerna to effect a reverse stock split of Akerna common stock, at a ratio of one (1) new share for every fifteen (15) to one hundred (100) shares of outstanding Akerna common stock, with the exact ratio and effective time of the reverse stock split of Akerna common stock to be determined by the Akerna board of directors, agreed to by Gryphon and publicly announced by press release (the “Akerna Reverse Stock Split”), in the form attached as Annex C to the accompanying proxy statement/prospectus.
4. To approve an amendment to the amended and restated certificate of incorporation of Akerna to increase the number of authorized shares of common stock of Akerna from 150,000,000 to 300,000,000 (the “Akerna Authorized Share Increase”), in the form attached as Annex D to the accompanying proxy statement/prospectus.
5. To approve an amendment to the amended and restated certificate of incorporation of Akerna to change the corporate name from Akerna Corp. to “Gryphon Digital Mining, Inc.” (the “Akerna Name Change”), in the form attached as Annex E to the accompanying proxy statement/prospectus.
6. To approve the Akerna 2024 Omnibus Incentive Plan (the “2024 Plan”), in the form attached as Annex F to the accompanying proxy statement/prospectus.
7. To approve the issuance of Akerna common stock upon the conversion of $1,650,000 in principal amount of a secured convertible promissory note held by MJ Acquisition Corp. in accordance with the terms of such secured convertible promissory note a copy of which is attached as Annex G to the accompanying proxy statement/prospectus (the “MJ Acquisition Promissory Note Conversion”).
8. To consider and vote upon an adjournment of the Akerna special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1 — 7 (the “Adjournment Proposal”).
9. To transact such other business as may properly come before the Akerna special meeting or any adjournment or postponement thereof
The Akerna Board has fixed, December 21, 2023 as the record date for the determination of stockholders entitled to notice of, and to vote at, the Akerna special meeting and any adjournment or postponement thereof. Only holders of record of shares of common stock of Akerna or shares of preferred stock of Akerna at the close of business on the record date are entitled to notice of, and to vote at, the Akerna special meeting. At the close of business on the record date, Akerna had shares of common stock outstanding and entitled to vote and shares of preferred stock outstanding and entitled to vote on a common stock equivalent basis with the shares of common stock at the special meeting.
Your vote is important. The affirmative vote of a majority of the votes properly cast at the Akerna special meeting, whether present at the special meeting or represented by proxy at the special meeting, is required for approval of Proposal Nos. 1, 6, 7 and 8. The affirmative vote of the holders of a majority of shares of Akerna common stock and preferred stock having voting power outstanding on the record date for the Akerna special meeting is required for approval of Proposal Nos. 2, 3, 4 and 5. The affirmative vote of the holders of a majority of shares of Akerna common stock having voting power outstanding on the record date for the Akerna special meeting and voting as a separate class is required for the approval of Proposal No. 4. Proposal No. 1 is conditioned upon the approval of Proposal Nos. 2, 3, 4, 5 and 6. Proposal No. 2 is conditioned upon the approval of Proposal No. 1 and 7. Therefore, the Merger cannot be consummated without the approval of the Sale Transaction Proposal, the Akerna Reverse Stock Split, the Akerna Authorized Share Increase, the Akerna Name Change and the 2024 Plan, and the Sale Transaction cannot be consummated without the approval of the Merger Proposal and the MJ Acquisition Promissory Note Conversion.
Even if you plan to virtually attend the Akerna special meeting, Akerna requests that you sign and return the enclosed proxy or vote by mail or online to ensure that your shares will be represented at the Akerna special meeting if you are unable to attend. You may change or revoke your proxy at any time before it is voted at the Akerna special meeting.
By Order of Akerna Board,
Jessica Billingsley
Chief Executive Officer
Denver, Colorado
January 5, 2024
THE AKERNA BOARD HAS DETERMINED AND BELIEVES THAT EACH OF THE PROPOSALS OUTLINED ABOVE IS IN THE BEST INTERESTS OF, AND ADVISABLE TO, AKERNA AND ITS STOCKHOLDERS AND HAS APPROVED EACH SUCH PROPOSAL. THE AKERNA BOARD UNANIMOUSLY RECOMMENDS THAT AKERNA STOCKHOLDERS VOTE “FOR” EACH SUCH PROPOSAL.
REFERENCES TO ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates important additional business and financial information about Akerna Corp. that is not included in or delivered with the document but can be found in documents previously filed by Akerna with the Securities and Exchange Commission (the “SEC”). You may obtain this information without charge through the SEC’s website (http://www.sec.gov) or upon your written or oral request by contacting the Secretary of Akerna Corp., 1550 Larimer Street #246, Denver, Colorado 80202, Attention: Secretary or by calling (888) 492-3540.
To ensure timely delivery of these documents, any request should be made no later than January 17, 2024 to receive them before the Akerna special meeting.
For additional details about where you can find information about Akerna, please see the section titled “Where You Can Find More Information” in this proxy statement/prospectus.
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PROPOSAL NO. 2: SALE TRANSACTION APPROVAL OF THE SALE TRANSACTION |
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PROPOSAL NO. 8: ADJOURNMENT APPROVAL OF POSSIBLE ADJOURNMENT OF THE SPECIAL MEETING |
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AKERNA MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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GRYPHON MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS OF THE COMBINED COMPANY |
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COMPARISON OF RIGHTS OF HOLDERS OF AKERNA CAPITAL STOCK AND GRYPHON SHARE CAPITAL |
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ANNEX B — SECURITIES PURCHASE AGREEMENT AND FIRST AMENDMENT TO SECURITIES PURCHASE AGREEMENT |
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ANNEX C — FORM OF REVERSE STOCK SPLIT CERTIFICATE OF AMENDMENT |
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ANNEX D — FORM OF AUTHORIZED SHARE INCREASE CERTIFICATE OF AMENDMENT |
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Unless otherwise stated in this proxy statement / prospectus or the context otherwise requires, the following terms shall have the meanings below:
“AD&D” means accidental death and dismemberment.
“AML” means anti-money laundering.
“API Interface” means application programming interface, which is a way for two or more computer programs to communicate with each other.
“ASC” means the Accounting Standards Codification.
“ASIC” means application-specific integrated circuit, which is a device designed for the sole purpose of mining cryptocurrencies.
“BI Platform” means business intelligence platform, which is an application that helps businesses gather, understand and visualize their data.
“Bitcoin Core Project” means the most popular software used to connect to the Bitcoin network and run a node.
“BitLicense” means a business license permitting regulated virtual currency activities, issued by the New York State Department of Financial Services.
“Bitmain Antminer” means a bitcoin mining machine produced by Bitmain.
“Black-Scholes Option Pricing Model” means a pricing model used to determine the fair price or theoretical value for a call or a put option based on six variables such as volatility, type of option, underlying stock price, time, strike price, and risk-free rate.
“Block” means a file containing information on transactions completed during a given time period. Blocks are the constituent parts of a blockchain.
“Blockchain” means a distributed ledger system that is a sequence of blocks, or units of digital information, stored consecutively in a public database.
“BTC” means bitcoin.
“BTC Block Reward” means the bitcoin awarded to a miner or group of miners for solving the cryptographic problem required to create a new block on the Bitcoin blockchain.
“BTC Network Hashrate” means the hashrate being used by the Bitcoin network.
“CAD” means Canadian dollar.
“CBD” means cannabidiol, which is a chemical found in marijuana.
“CCSS” means the Cryptocurrency Security Standard, which are security standards for any information system that handles and manages crypto wallets as part of its business logic.
“CFPB” means the Consumer Financial Protection Bureau.
“CFTC” means the Commodity Futures Trading Commission.
“CIS” means the Center for Internet Security.
“Cold Storage” means offline storage of cryptocurrencies, typically involving hardware non-custodial wallets, USBs, offline computers, or paper wallets.
“CPU” means central processing unit, which is the primary component of a computer that acts as its control center.
“CRM” means customer relationship management.
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“Cryptographic Protocol” means an abstract or concrete protocol that performs a security-related function and applies cryptographic methods. Cryptographic protocols are widely used for secure application-level data transport.
“CSA” means the Controlled Substances Act.
“DAI” means the stablecoin on the Ethereum blockchain whose value is kept as close to one USD as possible through a system of decentralized participants incentivized by smart contracts to perform maintenance and governance functions.
“Distributed Ledger” means a ledger in which data is stored across a network of decentralized nodes. A distributed ledger is a system for recording the transaction of assets in a decentralized manner. Unlike centralized solutions, such as databases, distributed ledgers do not have a central repository for storing recorded data. Nodes process and verify transactions.
“EBITDA” means earnings before interest, taxes, depreciation, and amortization.
“ERP” means enterprise resource planning software.
“FFIEC” means the Federal Financial Institutions Examination Council.
“GitHub” means the platform and cloud-based service for software development and version control using Git, allowing developers to store and manage their code.
“GPU” means a graphics processing unit, which is a specialized electronic circuit initially designed to accelerate computer graphics and image processing.
“Hash” means the computation run by mining hardware in support of the blockchain; therefore, a miner’s “hash rate” refers to the rate at which it is capable of solving such computations.
“Hash Rate” means the speed at which a computer can take any set of information and use an algorithm to reduce that information into a string of letters and numbers of a certain length, known as a “hash.”
“HSM” means a physical computing device that safeguards and manages secrets (most importantly digital keys), performs encryption and decryption functions for digital signatures, strong authentication and other cryptographic functions.
“Luna” means the cryptocurrency coin associated with the Terra open-source blockchain.
“Monte Carlo Model” means an algorithm that relies on repeated random sampling to obtain numerical results.
“NIST” means the National Institute of Standards and Technology.
“Node” means the most basic unit and critical part of a blockchain infrastructure, storing its data and allowing all communication (transaction) to pass through it. It can be run by any personal computing device or server. Nodes are interconnected, and hence, can readily pass data amongst each other. It is essential for them to be always up-to-date in order to function properly.
“Private Key” means an alphanumeric string that is generated at the creation of a crypto wallet address and serves as its password or the access code. Whoever has access to a private key has absolute control over its corresponding wallet, access to the funds contained within, and can transfer or trade assets and use the account for other purposes.
“Proof-of-Stake” means a blockchain consensus mechanism in addition to Proof-of-Work that maintains the integrity of blockchain. Proof-of-Stake involves miners validating additional blocks if they have greater amounts of money locked up in the system. For example, a miner who stakes 10% of coins will only be able to mine 10% of the blocks. Proof-of-Stake can be less vulnerable to cyberattacks as its structure penalizes the miner who attacks the system. Additionally, many researchers believe Proof-of-Stake is significantly more energy efficient and secure compared to Proof-of-Work, although some critics question the integrity of these claims.
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“Proof-of-Work” means a consensus mechanism used in many cryptocurrencies, including Bitcoin, to validate transactions and create new blocks on the blockchain. Proof-of-Work is a process by which miners compete with each other to solve complex mathematical puzzles in order to validate transactions and create new blocks. The miner who solves the puzzle first is rewarded with a certain amount of cryptocurrency.
“Public Key” means a series of alphanumeric characters used to encrypt plain text messages into ciphertext. A public key is used in conducting peer-to-peer transactions without the need to reveal the composition of one’s private keys, supporting a cryptographic function that allows for a safe and secure exchange of assets and information without the need for a third party. A user provides his public key in order to engage in a peer-to-peer transaction with any individual. They can also keep this key publicly available. All private keys, which are secret keys used to access crypto funds, are associated with a corresponding particular public key since they are mutually generated using advanced asymmetric algorithm systems. This ensures that no one can derive the private key of any user just by knowing their public keys.
“S19 Antminer” means the S19 model miner produced by Bitmain.
“S19 Pro Antminer” means the S19 Pro model miner produced by Bitmain.
“S19j Pro Antminer” means the S19j Pro model miner produced by Bitmain.
“Section 404” means Section 404 of the Sarbanes-Oxley Act.
“Securities Act” means the Securities Act of 1933.
“SHA 256” means the patented cryptographic hash function that outputs a value that is 256 bits long.
“SOC 1 & SOC 2” mean the Service Organization Control audit reports.
“Stablecoin” means a cryptocurrency with a fixed value that is usually pegged to a leading fiat currency like the U.S. dollar, a basket of fiat currencies or exchange-traded commodity such as precious metals.
“TerraUSD” means the decentralized and algorithmic stablecoin of the Terra blockchain.
“Tether” means the stablecoin platform that pioneered the stablecoin model with its launch of USDT tokens in 2014.
“USDT” means the cryptocurrency stablecoin pegged to the U.S. dollar and backed “100%” by Tether’s reserves.
“Wallet” means a device, physical medium, program or service that stores users’ public and private keys, while providing an easy-to-use interface to manage crypto balances. They also support cryptocurrency transfers through the blockchain.
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QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS
Except where specifically noted, the following information and all other information contained in this proxy statement/prospectus does not give effect to the proposed reverse stock split at a ratio of one (1) new share for every fifteen (15) to one hundred (100) shares of outstanding Akerna common stock described in Proposal No. 3 (the “Akerna Reverse Stock Split”) in this proxy statement/prospectus. If the Merger (as defined below) and the Akerna Reverse Stock Split are approved, the Akerna Reverse Stock Split will be effected immediately prior to the closing of the Merger.
The following section provides answers to frequently asked questions about the Transactions (as defined below). This section, however, provides only summary information. For a more complete response to these questions and for additional information, please refer to the cross-referenced sections.
Q: What are the Transactions?
A: Akerna Corp. (“Akerna”, also referred to herein as “we,” “us,” “our,” and the “Company”), Gryphon Digital Mining, Inc. (“Gryphon”) and Akerna Merger Co., a wholly owned subsidiary of Akerna (“Merger Sub”) have entered into an Agreement and Plan of Merger, dated as of January 27, 2023, as may be amended from time to time (the “Merger Agreement”). Under the Merger Agreement, Merger Sub will, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, merge with and into Gryphon, with Gryphon surviving as a wholly owned subsidiary of Akerna (the “Merger”). Under specified circumstances, Akerna may be required to pay a termination fee to Gryphon, as further described in the section titled “The Merger Agreement — Termination Fee” in this proxy statement/prospectus.
Akerna has also entered into a Securities Purchase Agreement, dated April 28, 2023, as may be amended from time to time (the “Purchase Agreement”) with MJ Acquisition Corp. (“MJ Acquisition”), pursuant to which, subject to the satisfaction or waiver of the conditions set forth in the Purchase Agreement, Akerna will sell to MJ Acquisition all of the issued and outstanding membership interests of MJ Freeway LLC, a Colorado limited liability company (“MJ Freeway” and such membership interests, the “Membership Interests”), and Akerna’s wholly owned subsidiary Akerna Canada Ample Exchange Inc. (“Akerna Exchange”) will sell to MJ Acquisition all of the issued and outstanding common and preferred shares of Ample Organics Inc., an Ontario corporation (“Ample” and such common and preferred shares, the “Capital Stock”) for an aggregate cash purchase price of $1.85 million (the “Purchase Price”), subject to adjustments as set forth in the Purchase Agreement and a loan to Akerna from MJ Acquisition in the amount of $1,650,000 (funded $1,000,000 on April 28, 2023, $500,000 on October 11, 2023 and $150,000 on November 15, 2023), which principal amount will convert into shares of common stock of Akerna, par value $0.0001 per share (the “Akerna Common Stock”) at closing (the “Sale Transaction”). Subsequently, on December 28, 2023, pursuant to the terms of the Purchase Agreement, Akerna and Akerna Exchange entered into a share purchase agreement with Wilcompute Systems Group Inc. (“Wilcompute”) pursuant to which Akerna Exchange sold all of the Capital Stock of Ample to Wilcompute for approximately $638,000. In accordance with the Purchase Agreement, in lieu of delivering the Capital Stock of Ample at the closing of the Sale Transaction, Akerna will instead deliver to MJ Acquisition the $638,000 purchase price received from Wilcompute, which Akerna expects to be in the form of a reduction of the purchase price paid by MJ Acquisition from $1.85 million to approximately $1.22 million. The $1.65 million loan was made pursuant to a secured convertible promissory note dated November 15, 2023 (the “MJA Promissory Note”) and related security documents, which the MJA Promissory Note will be converted in full at the closing of the Sale Transaction with any interest being surrendered at the closing of the Sale Transaction. The $1.85 million will be paid in cash at closing. Akerna may at its sole option request that a portion of the $1.85 million to be paid at closing be paid prior to closing to fund ongoing operations and any such amounts funded will be moved from the Purchase Price to the MJA Promissory Note. Under specified circumstances, Akerna may be required to pay MJ Acquisition a termination fee, as further described in the section titled “The Purchase Agreement — Termination Fee” beginning on page 142 of this proxy statement/prospectus.
The Merger and the Sale Transaction are collectively referred to herein as the “Transactions.” The consummation of the Merger and the closing of the Sale Transaction are conditioned on each other, and the parties expect that, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement and the Purchase Agreement, respectively, the Sale Transaction will be consummated immediately following the closing of the Merger.
Q: What will happen in the Merger?
A: Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”) each share of Gryphon’s common stock, par value $0.0001 per share (the “Gryphon Common Stock”), and Gryphon’s preferred stock, par value $0.0001 per share (the “Gryphon Preferred Stock,” collectively referred
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to herein with the Gryphon Common Stock as the “Gryphon Shares”) outstanding immediately prior to the Effective Time, will be converted into the right to receive a per share portion of the aggregate number of Akerna Common Stock, to be issued at the Effective Time as consideration for the Merger, as calculated pursuant to the terms set forth in the Merger Agreement (the “Merger Consideration”) (subject to adjustment to account for the Akerna Reverse Stock Split), as described in more detail in the section titled “The Merger Agreement — Merger Consideration” beginning on page 116 of this proxy statement/prospectus.
Each share of Akerna Common Stock, each share of Akerna Common Stock reserved for issuance upon the exercise of each warrant to purchase Akerna Common Stock, that is issued and outstanding at the Effective Time will remain issued and outstanding, and such securities will be unaffected by the Merger. Akerna anticipates that the outstanding exchangeable shares of Akerna will be redeemed for shares of Akerna Common Stock prior to the closing of the Merger.
Akerna following the Merger is referred to herein as the “combined company.” Immediately after the consummation of the Merger, Akerna equityholders as of immediately prior to the Merger are expected to own approximately 7.5% of the outstanding equity interests of the combined company on a fully diluted basis and former Gryphon equityholders are expected to own approximately 92.5% of the outstanding equity interests of the combined company on a fully diluted basis. Actual ownership percentages will depend on the actual calculation of the Merger Consideration at closing, which will depend on a number of variable factors, including the trading price of Akerna Common Stock on the second trading day immediately prior to closing and the amount of the principal remaining outstanding on Akerna’s convertible notes and the amount of accounts payable by Akerna that is settled in shares of Akerna Common Stock. Following the Merger, Gryphon’s business will be the business of the combined company. After the completion of the Merger, the combined company will change its corporate name to “Gryphon Digital Mining, Inc.”
Q: What are the exchange agreements with the holders of Akerna’s senior secured convertible notes?
A: Concurrently with the signing of the Merger Agreement, Akerna entered into exchange agreements (the “Exchange Agreements”) with each of the holders (each, an “Akerna Note Holder”) of its senior secured convertible notes (the “Akerna Notes”) issued pursuant to a securities purchase agreement dated October 5, 2021.
Pursuant to the Exchange Agreements, each Akerna Note Holder agreed to exchange a certain aggregate conversion amount of the Notes no greater than the lesser of (i) the aggregate amount then outstanding under the Akerna Notes and (ii) such portion of the maximum note amount set forth in the Exchange Agreement for such Holder that is convertible into 19.9% of the voting rights of the Company outstanding as of the time immediately following the issuance of the Series C Preferred Stock into such number of shares of newly designated Series C Preferred Stock of Akerna, which will have an aggregate voting power and economic value equal to the aggregate number of shares of Akerna Common Stock then issuable upon conversion of such amount of Akerna Notes.
Q: What are the terms of the Series C Preferred Stock into which the Akerna Notes will convert?
A: The Series C Preferred Stock is non-convertible, voting preferred stock. Each Akerna Note Holder will hold Series C Preferred Stock with voting power equal to 19.9% of the total voting power outstanding as of the record date for the special meeting of stockholders of Akerna. Upon the closing of the Merger, Akerna expects that the Series C Preferred Stock will be exchanged into Akerna Common Stock at the market price for the Akerna Common Stock immediately preceding the closing of the Merger (the “New Preferred Exchange Shares”). The Series C Preferred Stock can also be redeemed for cash at the option of Akerna and in limited circumstances redeemed for cash at the option of the holder.
Q: What will happen at the closing of the Merger to the remaining amount of Akerna Notes not exchanged for Series C Preferred Stock, if any?
A: Under the Exchange Agreements, Akerna has agreed that 50% of the gross proceeds from any subsequent placement will be used to repay the aggregate amounts then outstanding under the Akerna Notes, allocated pro rata to the Akerna Note Holders then outstanding based on the aggregate principal amount of Akerna Notes outstanding as of the time of such applicable subsequent placement (“Subsequent Placement Redemption”).
Akerna has agreed that on or prior to the closing of the Merger, if any Akerna Notes are then outstanding, Akerna will consummate one or more Company Optional Redemptions (as defined in the Akerna Notes) pursuant to the terms of the Akerna Notes (as amended under the Exchange Agreements), using the lesser of (A) the difference
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of (I) the sum of (x) all cash then held by Akerna (or any of its subsidiaries) and (y) any cash to be paid, directly or indirectly, to Akerna (or any of its subsidiaries) in connection with the transactions contemplated by the Merger Agreement and/or the Purchase Agreement, as applicable, less (II) $500,000 and (B) an aggregate amount of cash equal to the Company Optional Redemption Price of the aggregate Conversion Amount (as defined in the Akerna Notes) of the Akerna Notes then outstanding (with each such Company Optional Redemption allocated pro rata to the Akerna Note Holders then outstanding based upon the aggregate principal amount of Akerna Notes then outstanding) (the “Cash Sweep”).
Upon closing of the Merger, the Exchange Agreements provide that if any portion of the Akerna Notes remain outstanding other than such portion of the applicable Company Optional Redemption Price of the Akerna Notes to be paid in cash pursuant to the Cash Sweep, to exchange the remaining Conversion Amount of the Notes into such aggregate number of shares of common stock of the combined company (the “New Note Exchange Shares” together with the New Preferred Exchange Shares, the “Final Closing Exchange Shares”) equal to the quotient of (A) the applicable Company Optional Redemption Price of the remaining Conversion Amount of the Akerna Notes then outstanding divided by (B) the lower of (x) the lowest volume weighted average price of the Akerna Common Stock during the five (5) trading day period ending, and including, the trading day immediately prior to the closing and (y) the Conversion Price (as defined in the Akerna Notes) in effect as of the closing. The Company Optional Redemption price will be the greater of (i) 121% of the Conversion Amount and (ii) 115% of the product of (a) the Conversion Rate (as defined in the Akerna Notes) and (b) the highest closing sale price of Akerna Common Stock on the date preceding the exchange.
However, that to the extent that any issuances of Final Closing Exchange Shares to an Akerna Note Holder at the closing in accordance with the Exchange Agreements or pursuant to the Series C Certificate of Designations, as applicable would result in such Akerna Holder and its other attribution parties exceeding 4.99% of the issued and outstanding shares of common stock of the combined company (a “Maximum Percentage Event”), then such Akerna Holder shall not be entitled to receive such aggregate number of Final Closing Exchange Shares in excess of the maximum percentage (and shall not have beneficial ownership of such Final Closing Exchange Shares (or other equivalent security) as a result of the closing (and beneficial ownership) to such extent of any such excess), such remaining portion of such Final Closing Exchange Shares that would have otherwise been issued to the Akerna Holder at the Final Closing (such remaining portion of Final Closing Exchange Shares, the “Abeyance Shares”), such portion of the Akerna Note and/or shares of Series C Preferred Stock, as applicable, shall alternatively be exchanged for the right to receive such Abeyance Shares, at such time or times as its right thereto would not result in such Akerna Holder and the other attribution parties exceeding the maximum percentage, at which time or times, if any, such Akerna Holder shall be granted such remaining portion of such Abeyance Shares in accordance with the Exchange Agreements and/or pursuant to the Series C Certificate of Designations, as applicable.
Q: How many shares of Akerna Common Stock will be issued upon exchange of Series C Preferred Stock?
A: It is anticipated that the Series C Preferred Stock will be exchanged for shares of Akerna Common Stock at a market price at the time of the closing of the Merger. Assuming a market price of $0.20 per a share of Akerna Common Stock, the Series C Preferred Stock with be exchange for approximately 17,110,000 shares of Akerna Common Stock pre-reverse stock split or 855,500 shares of Akerna Common Stock post-reverse stock split assuming a 20 for 1 reverse stock split.
Q: How many shares of Akerna Common Stock will be issued upon conversion of the MJA Promissory Note?
A: Under the MJA Promissory Note, the $1,650,000 in principal amount of the MJA Promissory Note will convert at the 5-day volume weighted average price of the Akerna Common Stock as quoted on The Nasdaq Capital Market for the 5 trading days immediately preceding the date of the closing of the Sale Transaction. Based on an assumed price per share of $0.20 per share, this would result in 8,250,000 shares of Akerna Common Stock being issued upon conversion or 412,500 shares of Akerna Common Stock post-reverse stock split assuming a 20 for 1 reverse stock split. This amount may increase if Akerna requests that a portion of the Purchase Price be loaned to Akerna prior to the closing, in which case, such additional amount loaned to Akerna will increase the principal amount of the MJA Promissory Note by the amount loaned and reduce the amount of cash payable to Akerna at the closing of the Sale Transaction. All shares of Akerna Common Stock issued upon conversion of the MJA Promissory Note will be included in the shares of Akerna Common Stock outstanding prior to the closing of the Merger and will be taken into account in calculating the Merger Consideration, which will dilute current Akerna stockholders.
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Q: Will Akerna stockholders receive any portion of the proceeds from the Sale Transaction?
A: Akerna currently has outstanding Akerna Notes in aggregate principal amount of approximately $6.58 million and accounts payable of approximately $1.4 million as of the date hereof that are not being assumed by MJ Acquisition in connection with the Sale Transaction. Further, as a condition to the closing of the Merger, Akerna must be free of debt, not have any outstanding accounts payable or other liabilities and have at least $500,000 in cash to help Gryphon cover any potential future liabilities arising from the Sale Transaction or otherwise.
Following adjustments to the Purchase Price at closing of the Sale Transaction, payment of expenses related to the Transactions (including severance and transaction bonuses to certain Akerna employees), payment of accounts payable of Akerna not assumed by MJ Acquisition, and setting aside the minimum $500,000 in cash for closing the Merger, pursuant to the terms of the Exchange Agreements, as discussed above, any cash remaining in the accounts of Akerna will be used to conduct a cash redemption of any remaining principal amount of the Akerna Notes pursuant to their terms. Akerna may seek to settle certain amounts of its outstanding accounts payable and the amounts payable to its officers in relation to the closing of the Merger and the Sale Transaction through the issuance of shares of Akerna Common Stock. Any such issuances would be included in the shares of Akerna Common Stock outstanding prior to the closing of the Merger and will be taken into account in calculating the Merger Consideration, which could dilute current Akerna stockholders. Any principal amount of Akerna Notes remaining following the cash redemption will be exchanged into common stock of the combined company immediately following the consummation of the Merger, but such shares of common stock will be treated as shares of Akerna Common Stock outstanding immediately prior to the Effective Time and will be taken into account in calculating the Merger Consideration. Given the ongoing significant expenses incurred by Akerna in relation to the Transactions, current and expected accounts payable and the principal amount left on the Akerna Notes, Akerna does not expect any proceeds from the Sale Transaction to remain following the cash redemption of the Akerna Notes. Any proceeds of the Sale Transaction that do remain will fund the combined company. To the extent that proceeds from the Sale Transaction are used to conduct a cash redemption of the Akerna Notes, this will reduce the amount of principal of the Akerna Notes that will be exchanged into shares of common stock of the combined company and thereby reduce dilution of the estimated 7.5% of the equity interests of the combined company on a fully diluted basis that equityholders of Akerna will hold following completion of the Merger.
Q: What will happen if, for any reason, either of the Transactions does not close?
A: The closing of the Merger and the closing of the Sale Transaction are conditioned on each other. Therefore, if, for any reason, the Merger does not close and the Merger Agreement is terminated, the Sale Transaction will not close, unless Akerna and MJ Acquisition determine to waive that condition to closing and proceed with the Sale Transaction. Similarly, if, for any reason, the Sale Transaction does not close and the Purchase Agreement is terminated, the Merger will not close unless Akerna and Gryphon determine to waive that condition to closing and proceed with the Merger. Akerna does not currently believe that it would waive the condition to closing for either of the Transactions and therefore if either fails close it is not anticipated that the other Transaction would proceed.
In the event that the Merger does not close and the Merger Agreement is terminated but the Sale Transaction proceeds, the Akerna board of directors (the “Akerna Board”) may elect to, among other things, attempt to complete another strategic transaction including a transaction similar to the Merger, continue to operate the remaining business of Akerna or to dissolve and liquidate the remaining assets of Akerna, and may still elect to implement the Akerna Reverse Stock Split.
In the event that the Sale Transaction does not close and the Purchase Agreement is terminated, Akerna would not have sufficient cash to eliminate its debt or pay its accounts payable, which would not be sufficient to satisfy these closing conditions under the Merger Agreement and it is unlikely that Gryphon would elect to proceed with the Merger.
Akerna has invested significant time and incurred, and expects to continue to incur, significant expenses related to the Transactions. In the event that either of the Transactions does not close, the Akerna Board may elect, among other things, to attempt to complete other strategic transactions or the Akerna Board may instead divest all or a portion of Akerna’s business or assets if viable alternative strategic transactions are not available. Under certain
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circumstances, Akerna may be obligated to pay Gryphon or MJ Acquisition a termination fee or reimburse certain expenses of Gryphon or MJ Acquisition, as more fully described in the section titled “Prospectus Summary — The Merger Agreement — Termination” beginning on page 128 of this proxy statement/prospectus, the section titled “The Merger Agreement — Termination Fee” beginning on page 130 of this proxy statement/prospectus, the section titled “Prospectus Summary — The Purchase Agreement — Termination” beginning of page 141 of this proxy statement/prospectus, and the section titled “The Purchase Agreement — Termination” beginning on page 141 of this proxy statement/prospectus.
Q: What are the conditions to closing the Transactions?
A: For more information regarding the conditions to closing the Transactions, see the sections “The Merger Agreement — Conditions to the Completion of the Merger” and “The Purchase Agreement — Conditions to the Completion of the Sale Transaction” beginning on pages 119 and 135, respectively, of this proxy statement/prospectus.
Q: Why are Akerna and Gryphon proposing to merge?
A: Akerna and Gryphon believe that the Merger will result in a company with a strong leadership team and substantial capital resources, which will better position Gryphon to advance its bitcoin mining operations. For a more complete description of the reasons for the Merger, please see the sections titled “The Merger — Akerna Reasons for the Merger” and “The Merger — Gryphon Reasons for the Merger” beginning on pages 95 and 99, respectively, of this proxy statement/prospectus.
Q: Why am I receiving this proxy statement/prospectus?
A: You are receiving this proxy statement/prospectus because you have been identified as a stockholder of Akerna as of December 21, 2023, the record date for the special meeting, and you are entitled to vote at the Akerna special meeting to approve the matters set forth herein or you have been identified as a holder of Gryphon Shares who will receive shares of Akerna Common Stock in the Merger. Stockholders of Akerna as of the record date are entitled to vote at the Akerna special meeting to approve the issuance of shares of Akerna Common Stock in the Merger in accordance with the terms of the Merger Agreement and the change of control resulting from the Merger, the Sale Transaction with MJ Acquisition, the proposed Akerna Reverse Stock Split, the Akerna Authorized Share Increase, the Akerna Name Change, the 2024 Plan, the MJA Promissory Note Conversion and the adjournment of the special meeting, if necessary, to solicit additional proxies. This document serves as:
• a proxy statement of Akerna used to solicit proxies for the Akerna special meeting to vote on the matters set forth herein; and
• a prospectus of Akerna used to offer shares of Akerna Common Stock in exchange for Gryphon Shares in the Merger.
Q: What is required to consummate the Merger?
A: To consummate the Merger, Akerna stockholders must approve:
• the issuance of shares of Akerna Common Stock in the Merger in accordance with the terms of the Merger Agreement and the change of control resulting from the Merger;
• the Sale Transaction and the transactions contemplated under the Purchase Agreement;
• the amendment to the amended and restated certificate of incorporation of Akerna effecting the Akerna Reverse Stock Split;
• the amendment to the amended and restated certificate of incorporation of Akerna effecting the Akerna Authorized Share Increase;
• the amendment to the amended and restated certificate of incorporation of Akerna effecting the Akerna Name Change;
• the adoption of the 2024 Plan; and
• the issuance of shares of Akerna Common Stock upon conversion of the MJA Promissory Note.
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Holders of Gryphon Shares must adopt the Merger Agreement and approve the transactions contemplated in the Merger Agreement.
The approval by the stockholders of Akerna of the issuance of Akerna Common Stock in the Merger in accordance with the terms of the Merger Agreement requires the affirmative vote of a majority of the votes properly cast at the Akerna special meeting. The approval of the Sale Transaction and the transactions contemplated under the Purchase Agreement requires the affirmative vote of the holders of a majority of the shares of Akerna Common Stock and Akerna voting preferred stock, voting as one class, outstanding on the record date for the Akerna special meeting. The approval of the Akerna Reverse Stock Split requires the affirmative vote of the holders of a majority of shares of Akerna Common Stock and Akerna voting preferred stock, voting as one class, outstanding on the record date for the Akerna special meeting. The approval of the Akerna Authorized Share Increase requires the affirmative vote of the holders of a majority of shares of Akerna Common Stock and Akerna voting preferred stock, voting as one class, outstanding on the record date for the Akerna special meeting and the affirmative vote of the holders of a majority of the shares of Akerna Common Stock, voting as a separate class, outstanding on the record date for the Akerna special meeting. The approval of the Akerna Name Change requires the affirmative vote of the holders of a majority of shares of Akerna Common Stock and Akerna voting preferred stock, voting as one class, outstanding on the record date for the Akerna special meeting. The approval of the 2024 Plan requires the affirmative vote of a majority of the votes properly cast at the Akerna special meeting. The approval by the stockholders of Akerna of the issuance of Akerna Common Stock upon conversion of the MJA Promissory Note requires the affirmative vote of a majority of the votes properly cast at the Akerna special meeting.
The adoption of the Merger Agreement and approval of the transactions contemplated in the Merger Agreement by the stockholders of Gryphon requires the affirmative vote (or written consent) by the holders of a majority of the outstanding Gryphon Shares, voting as one class on an as-converted basis.
In addition to the requirement of obtaining such securityholder approvals and appropriate regulatory approvals, including the approval of The Nasdaq Capital Market, each of the other closing conditions set forth in the Merger Agreement must be satisfied or waived. One such closing condition consists of a requirement that Akerna have a minimum of $500,000 of net cash at the closing of the Merger. For a more complete description of the closing conditions under the Merger Agreement, please see the section titled “The Merger Agreement — Conditions to the Completion of the Merger” beginning on page 119 of this proxy statement/prospectus.
Certain Gryphon stockholders, including directors and executive officers of Gryphon, who in the aggregate own approximately 72% of the outstanding Gryphon Shares, certain Akerna securityholders, including certain directors and executive officers of Akerna, who in the aggregate own or have the right to acquire approximately 1.6% of the outstanding shares of Akerna Common Stock, and holders of the Akerna Notes who in the aggregate own Series C Preferred Stock with voting power equivalent to 39.8% of the outstanding voting power as of the record date for the Special Meeting, are parties to support agreements or support letters with Akerna or Gryphon, as applicable. The Akerna securityholders who are a party to the support agreement with Gryphon (the “Merger Support Agreement”) and the holders of Akerna Notes who are a party to support letters with Akerna (the “Merger Lender Support Letters”) have agreed to vote (a) in favor of the Akerna stockholder proposals set forth herein and (b) against any “acquisition proposal,” as defined in the Merger Agreement, and subject to certain exceptions, have also agreed not to transfer their shares of Akerna Common Stock or voting preferred stock.
Following the Registration Statement on Form S-4, of which this proxy statement/prospectus is a part, being declared effective by the U.S. Securities and Exchange Commission (the “SEC”) and pursuant to the conditions of the Merger Agreement, Gryphon stockholders who are party to the support agreements with Akerna have each agreed to execute an action by written consent, referred to as the written consent, in favor of the approval and adoption of the Merger Agreement, and approval of the transactions contemplated by the Merger Agreement.
Therefore, absent termination of the Merger Agreement, holders of a sufficient number of Gryphon Shares required to adopt the Merger Agreement and approve the Merger have agreed to adopt the Merger Agreement and approve the Merger, and no meeting of Gryphon stockholders to adopt the Merger Agreement and approve the Merger will be held. Nevertheless, all Gryphon stockholders will have the opportunity to elect to adopt the Merger Agreement, thereby approving the Merger and related transactions, by signing and returning to Gryphon a written consent.
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For a more complete description of the closing conditions under the Merger Agreement, Akerna and Gryphon urge you to read the section titled “The Merger Agreement — Conditions to the Completion of the Merger” in this proxy statement/prospectus.
Q: What is required to consummate the Sale Transaction?
A: To consummate the Sale Transaction, Akerna stockholders must authorize the Sale Transaction by approving the Purchase Agreement and the transactions contemplated thereby. The approval of the Purchase Agreement and the transactions contemplated thereby requires the affirmative vote of holders of a majority of the outstanding Akerna Common Stock and preferred stock having voting power on the record date for the Akerna special meeting. In addition to the requirement of obtaining such stockholder approval and appropriate regulatory approvals, each of the other closing conditions set forth in the Purchase Agreement must be satisfied or waived. This includes approval of the MJA Promissory Note Conversion which requires the affirmative vote of a majority of the votes properly cast at the Akerna special meeting.
Certain Akerna securityholders, including certain directors and executive officers of Akerna, who in the aggregate own or have the right to acquire approximately 1.6% of the outstanding shares of Akerna Common Stock and holders of the Akerna Notes who in the aggregate own Series C Preferred Stock with voting power equivalent to 39.8% of the outstanding voting power as of the record date, are parties to support agreements or support letters with Akerna or MJ Acquisition, as applicable. The Akerna securityholders who are a party to the support agreement with MJ Acquisition (the “Sale Transaction Support Agreement”) and the holders of Akerna Notes who are a party to support letters with Akerna (the “Sale Transaction Lender Support Letters”) have agreed to vote (a) in favor of the Akerna stockholder proposals set forth herein and (b) against any “acquisition proposal,” as defined in the Purchase Agreement, and subject to certain exceptions, have also agreed not to transfer their shares of Akerna Common Stock or voting preferred stock.
For a more complete description of the closing conditions under the Purchase Agreement, Akerna urges you to read the section titled “The Purchase Agreement — Conditions to the Completion of the Sale Transaction” beginning on page 135 in this proxy statement/prospectus.
Q: What will stockholders and warrant holders of Gryphon receive in the Merger?
A: Gryphon stockholders holding issued and outstanding Gryphon Shares immediately prior to the Effective Time of the Merger will receive shares of Akerna Common Stock, and warrants to purchase shares of Gryphon Common Stock (the “Gryphon Warrants”) that are outstanding and unexercised immediately prior to the Effective Time will be assumed by the combined company and become a warrant to purchase an adjusted number of shares of common stock of the combined company, at an adjusted exercise price per share but subject to the same terms and conditions as the applicable Gryphon Warrant.
The estimated exchange ratio of shares of Akerna’s common stock for Gryphon Common Stock and Gryphon Preferred Stock will be approximately 1.6834 shares of Akerna common stock for each one share of Gryphon Common Stock and Preferred Stock based on Merger Consideration of 34,318,117 shares of Akerna Common Stock. The estimated exchange ratio assumes: (i) a fully-diluted number of shares of Akerna common stock after giving effect to an assumed 20 to 1 reverse stock split in Akerna common stock of 2,869,142 shares at the effective time of the Merger, which includes (pre-reverse stock split) 10,352,069 shares outstanding on the date hereof, warrants exercisable to acquire 2,573,299 shares of Akerna common stock, restricted stock units which vest and settle for 9,347 shares of Akerna common stock, 12,476 shares issuable upon redemption of Akerna exchangeable shares, Akerna Series C Preferred Stock exchanged at an assumed price of $0.20 per share into 17,110,000 shares of Akerna common stock, approximately 19,075,660 shares of Akerna common stock issuable upon conversion of $3.15 million principal amount of Akerna’s convertible notes and 8,250,000 shares of Akerna common stock issuable upon conversion of $1.65 million principal amount of Akerna’s promissory note held by MJ Acquisition Corp. (“MJ Acquisition”) at an assumed conversion price of $0.20 per share. The assumed number of shares issuable upon exchange of Akerna’s convertible notes is based on an assumed principal amount outstanding of approximately $3.15 million ($6.58 million currently outstanding less $3.42 million exchanged into Series C Preferred Stock at an exchange price of $0.50 per share) and a conversion price of $0.50 per share (exchanged at 121% of principal amount). The assumed number of shares issuable upon exchange of Series C Preferred Stock is based on an assumed exchange price of $0.20 per share. The estimated exchange ratio also assumes 20,386,730 shares of Gryphon Common Stock and Preferred Stock issued and outstanding at the closing of the
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Merger, Gryphon warrants to acquire 1,067,968 Gryphon Common Stock and a post-reverse stock split closing price per share of Akerna Common Stock of $4.00 on the date that is two trading days preceding the closing of the Merger, the trading day immediately preceding closing of the Merger and the 5-day volume weighted average price for the 5-day period ending on the trading day immediately prior to the closing of the Sale Transaction.
Following the closing of the Merger, the former Gryphon equityholders immediately before the Merger are expected to own approximately 92.5% of the outstanding equity interests of the combined company on a fully diluted basis and the securityholders of Akerna immediately before the Merger are expected to own approximately 7.5% of the outstanding equity interests of the combined company on a fully diluted basis. Actual ownership percentages will depend on the actual calculation of the Merger Consideration at closing, which will depend on a number of variables, including the last sales price of Akerna Common Stock on the second trading day immediately prior to closing of the Merger and the amount of the principal remaining outstanding on the Akerna Notes following any conversions or company redemptions that occur prior to closing.
For a more complete description of what Gryphon stockholders and warrant holders will receive in the Merger, please see the sections titled “The Merger Agreement — Merger Consideration” beginning on pages 116 of this proxy statement/prospectus.
Q: Who will be the directors of the combined company following the Merger?
A: Following the Merger, the board of directors of Gryphon Digital Mining, Inc. will be as follows:
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Name |
Current Principal Affiliation |
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Robby Chang |
Gryphon Chief Executive Officer, President and Director |
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Brittany Kaiser |
Gryphon Chair of the Board |
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Heather Cox |
Gryphon Director |
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Steve Gutterman |
Gryphon Director |
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Jessica Billingsley |
Akerna Chief Executive Officer and Chair of the Board |
Q: Who will be the executive officers of the combined company following the Merger?
A: Immediately following the Merger, the executive management team of the combined company is expected to be composed solely of the members of the Gryphon executive management team prior to the Merger as set forth below:
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Name |
Position |
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Robby Chang |
Chief Executive Officer and President |
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Simeon Salzman |
Chief Financial Officer |
Q: Will the common stock of the combined company trade on an exchange?
A: Shares of Akerna Common Stock are currently listed on The Nasdaq Capital Market under the symbol “KERN.” Akerna will file an application to list the shares of Akerna Common Stock comprising the Merger Consideration, and to continue to list the common stock of the combined company, on Nasdaq following the consummation of the Merger and the transactions contemplated by the Merger Agreement and the Purchase Agreement. After completion of the Merger, Akerna will be renamed “Gryphon Digital Mining, Inc.” and it is expected that the common stock of the combined company will trade on The Nasdaq Capital Market under the symbol “GRYP” On January 4, 2024 the last trading day before the date of this proxy statement/prospectus, the closing sale price of Akerna Common Stock was $0.3940 per share.
Q: What are the material U.S. federal income tax consequences of the Merger to Gryphon stockholders?
A: Each of Akerna and Gryphon intends the Merger to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”). In general and subject to the qualifications and limitations set forth in the section titled “The Transactions — Certain Material U.S. Federal
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Income Tax Consequences,” if the Merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code, the material tax consequences to U.S. Holders (as defined in the section titled “The Transactions — Certain Material U.S. Federal Income Tax Consequences”) of Gryphon Shares should be as follows:
• a Gryphon stockholder generally will not recognize gain or loss upon the exchange of Gryphon Shares for Akerna Common Stock pursuant to the Merger;
• a Gryphon stockholder’s aggregate tax basis for the shares of Akerna Common Stock received in the Merger generally will equal the stockholder’s aggregate tax basis in the Gryphon Shares surrendered in the Merger; and
• the holding period of the shares of Akerna Common Stock received by a Gryphon stockholder in the Merger generally will include the holding period of the Gryphon Shares surrendered in exchange therefor.
Ellenoff Grossman & Schole LLP, counsel to Gryphon, has delivered an opinion to Gryphon that, on the basis of certain factual representations made by Akerna and Gryphon, and subject to certain assumptions set forth therein, the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. This opinion is attached as Exhibit 8.1 to the Registration Statement of which this proxy statement/prospectus forms a part. However, tax matters are very complicated, and the tax consequences of the Merger to a particular Gryphon stockholder will depend on such stockholder’s circumstances. Accordingly, each Gryphon stockholder is strongly urged to consult with his, her or its tax advisor for a full understanding of the tax consequences of the Merger to that stockholder, including the applicability and effect of federal, state, local and non-U.S. income and other tax laws. For more information, please see the section titled “The Transactions — Certain Material U.S. Federal Income Tax Consequences” beginning of page 112 of this proxy statement/prospectus.
Q: What are the material U.S. federal income tax consequences of the Akerna Reverse Stock Split to U.S. Holders of Akerna Common Stock?
A: An Akerna U.S. Holder (as defined below) generally should not recognize gain or loss upon the Akerna Reverse Stock Split. Please review the information in the section titled “Proposal No. 3: Approval of the Amendment to the Amended and Restated Certificate of Incorporation of Akerna Effecting the Akerna Reverse Stock Split — Tax Consequences of the Akerna Reverse Stock Split” beginning on page 165 of this proxy statement/prospectus for a more complete description of the material U.S. federal income tax consequences of the Akerna Reverse Stock Split to Akerna U.S. Holders.
The tax consequences to an Akerna U.S. Holder of the Akerna Reverse Stock Split will depend on if the Akerna Reverse Stock Split is treated as a tax deferred “recapitalization” for U.S. federal income tax purposes. If the Akerna Reverse Stock Split qualifies as a recapitalization, then an Akerna U.S. Holder generally will not recognize gain or loss on the Akerna Reverse Stock Split. In general, the aggregate tax basis of the post-split shares of Akerna Common Stock received will be equal to the aggregate tax basis of the pre-split shares of Akerna Common Stock exchanged therefor and the holding period of the post-split shares of Akerna Common Stock received will include the holding period of the pre-split shares of Akerna Common Stock exchanged. Treasury Regulations promulgated under the Code provide detailed rules for allocating the tax basis and holding period of the shares of Akerna Common Stock surrendered to the shares of Akerna Common Stock received pursuant to the Akerna Reverse Stock Split. U.S. Holders of shares of Akerna Common Stock acquired on different dates and at different prices should consult their tax advisors regarding the allocation of the tax basis and holding period of such shares.
The state and local tax consequences of the Akerna Reverse Stock Split may vary significantly as to each Akerna U.S. Holder depending upon the jurisdiction in which such holder resides. Each Akerna U.S. Holder should consult their tax advisors as to the specific tax consequences to them.
Q: What are the material U.S. federal income tax consequences of the Sale Transaction to U.S. Holders of Akerna?
A: The proceeds of the Sale Transaction will be used to pay accounts payable and Transaction expenses, and to pay down existing debt under the Akerna Notes. After these payments, any remaining proceeds will be used to fund the combined company, and such proceeds will not be distributed to Akerna stockholders. As a result, there should not be any material U.S. federal income tax consequences to Akerna U.S. Holders in relation to the Sale Transaction.
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Q: Why am I being asked to approve the Akerna Authorized Share Increase?
A: The Akerna Board approved the proposal approving the amendment to the Akerna amended and restated certificate of incorporation effecting the Akerna Reverse Stock Split to ensure that the combined company has adequate available shares of common stock in financing ongoing operations through future equity financings, if required, so that the combined company can maintain working capital and meet its plan of operations. Currently, there are 150,000,000 shares of Akerna Common Stock authorized for issuance with 10,352,069 shares of Akerna Common Stock issued and outstanding, warrants exercisable to acquire 2,573,299 shares of Akerna Common Stock, and restricted stock units which vest and settle for 9,347 shares of Akerna Common Stock, exchangeable shares to be redeemed for 12,476 shares of Akerna Common Stock and the Akerna Notes which we estimate will be exchanged into shares of Series C Preferred Stock exchangeable into 17,110,000 shares of Akerna Common Stock and the remaining Akerna Notes convertible for approximately 19,075,660 shares of Akerna Common Stock (based on approximately $3.15 million outstanding principal amount after the exchange of a portion thereof into Series C Preferred Stock, 121% repayment premium and a conversion price of $0.50, which is the current conversion price for the Akerna Notes) and 8,250,000 shares of Akerna Common Stock estimated to be issuable upon conversion of $1.65 million in principal amount of the MJA Promissory Note at a conversion price of $0.20 per share for an aggregate total of approximately 57,382,841 shares of Akerna Common Stock on a fully diluted basis immediately prior to the Reverse Stock Split. Assuming a Reverse Stock Split ratio of 20 to 1 in the Akerna Reverse Stock Split, this would result in approximately 2,869,142 shares of common stock outstanding on a fully diluted basis immediately prior to closing of the Merger and would result in the issuance of approximately 34,318,117 shares to Gryphon’s stockholders as Merger Consideration for an aggregate total of approximately 38,255,227 shares of common stock outstanding or reserved for issuance and leaving 111,744,773 shares of common stock available for issuance. To ensure that the combined company has adequate authorized share capital the Akerna Board is asking stockholders to increase the number of authorized shares of common stock from 150,000,000 to 300,000,000.
Q: Why am I being asked to approve the Akerna Reverse Stock Split?
A: The Akerna Board approved the proposal approving the amendment to the Akerna amended and restated certificate of incorporation effecting the Akerna Reverse Stock Split primarily because in order for Nasdaq to approve the continued listing of the common stock of the combined company on The Nasdaq Capital Market following the completion of the Merger, the combined company will need to meet the initial listing standards for The Nasdaq Capital Market. One of the initial listing standards is a minimum trading price of $4.00 per share. Given the recent trading price of the Akerna Common Stock, Gryphon and Akerna anticipate that the Akerna Reverse Stock Split will be required in order to meet this standard. If Proposal No. 1 is not approved at the Akerna special meeting, the Akerna board of directors may still elect to effect the Akerna Reverse Stock Split, primarily to regain compliance with the continued listing standards of The Nasdaq Capital Market. For further details, see the section titled “Akerna Proposal No. 2: Approval of the Amendment to the Amended and Restated Certificate of Incorporation of Akerna Effecting the Akerna Reverse Stock Split.”
Q: Why am I being asked to approve the 2024 Plan?
A: The Akerna Board approved the proposal approving the 2024 Plan to ensure that the combined company has a comprehensive equity incentive plan in place to attract and retain qualified officers, directors, employees and consultants and to provide adequate incentive to align the goals of management of the combined company with increased stockholder value. The 2024 Plan will replace Akerna’s 2019 Long-Term Incentive Plan which is out dated and does not have sufficient shares of common stock authorized for issuance of awards thereunder to meet the needs of the combined company. The 2024 Plan modernizes the combined company’s equity incentive structure and will provide for sufficient shares to meet the combined company’s equity incentive goals.
Q: Why am I being asked to approve the MJA Promissory Note Conversion?
A: The Akerna Board approved the proposal approving the MJA Promissory Note Conversion as it is a condition to the closing of the Sale Transaction. The MJA Promissory Note will convert concurrently with the closing of the Sale Transaction at the 5-day volume weighted average price of the Akerna Common Stock as quoted on The Nasdaq Capital Market for the 5 trading days immediately preceding the date of the closing of the Sale Transaction. The amount of shares to be issued pursuant to the MJA Promissory Note Conversion will likely exceed 19.9% of the issued and outstanding shares of Akerna Common Stock on the date that the MJA Promissory Note was executed and delivered by Akerna. Pursuant to the rules of the Nasdaq Capital Market, the approval of
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the stockholders of Akerna is required to permit the issuance of shares of Akerna Common Stock at a price that is below the market value of the Akerna Common Stock (as determined under the rules of the Nasdaq Capital Market) and therefore Akerna is seeking the approval of the stockholders to issue the shares of Akerna Common Stock upon conversion.
Q: As an Akerna stockholder, how does Akerna Board recommend that I vote?
A: After careful consideration, Akerna Board unanimously recommends that Akerna stockholders vote:
• “FOR” Proposal No. 1 to approve the issuance of shares of Akerna Common Stock to the holders of Gryphon Shares in accordance with the terms of the Merger Agreement and the change of control resulting from the Merger;
• “FOR” Proposal No. 2 to approve the Purchase Agreement and the transactions contemplated thereby, including the Sale Transaction;
• “FOR” Proposal No. 3 to approve an amendment to the amended and restated certificate of incorporation of Akerna to effect the Akerna Reverse Stock Split, at a ratio of one (1) new share for every fifteen (15) to one hundred (100) shares outstanding;
• “FOR” Proposal No. 4 to approve an amendment to the amended and restated certificate of incorporation of Akerna to effect the Akerna Authorized Share Increase;
• “FOR” Proposal No. 5 to approve an amendment to the amended and restated certificate of incorporation of Akerna to effect the Akerna Name Change;
• “FOR” Proposal No. 6 to approve the 2024 Plan;
• “FOR” Proposal No. 7 to approve the MJA Promissory Note Conversion; and
• “FOR” Proposal No. 8 to adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1 through 7.
Q: Do persons involved in the Transactions have interests that may conflict with mine as an Akerna stockholder?
A: Yes. In considering the recommendation of the Akerna Board with respect to issuing shares of Akerna Common Stock pursuant to the Merger Agreement, the change of control of Akerna resulting from the Merger, the Sale Transaction and the other matters to be acted upon by Akerna stockholders at the special meeting, Akerna stockholders should be aware that certain members of the Akerna Board and executive officers of Akerna have interests in the Merger that may be different from, or in addition to, interests they have as Akerna stockholders.
Akerna’s executive officers, including Jessica Billingsley, its Chief Executive Officer, who is also the Chairman of the Akerna Board, Scott Sozio, Head of Corporate Development and a director on the Akerna Board, and Dean Ditto, its Chief Financial Officer are contractually entitled to severance payments and/or change in control bonus incentive fees.
In addition, each member of the Akerna executive team and the Akerna Board is entitled to full accelerated vesting of all outstanding restricted stock units of Akerna upon a change in control, as defined in Akerna’s Equity Incentive Plan, regardless of whether s/he is terminated as a result of the transaction.
Based on the terms of her current employment agreement, Jessica Billingsley will be entitled to receive a total value of approximately $602,854 in connection with the consummation of the Merger, which includes approximately $602,400 as part of her severance payments under her employment agreement and approximately $454 in value associated with the acceleration of outstanding restricted stock units. Additionally, Ms. Billingsley will continue on the board of the combined company after the closing of the Merger and would be eligible for certain compensation as a non-employee director.
Based on his current employment terms, Dean Ditto will be entitled to receive a total value of approximately $210,733 in connection with the consummation of the Merger, which includes approximately $85,733 as part of his severance payments and benefits under his employment terms.
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Under the terms of a change in control bonus incentive agreement with Akerna, Scott Sozio will be entitled to receive a total value of approximately $350,924 in connection with the consummation of the Merger, which includes approximately $350,000 as part of his change in control incentive bonus and approximately $924 in value associated with the acceleration of outstanding restricted stock units.
As of December 21, 2023, the record date for the special meeting, the directors and executive officers of Akerna owned, in the aggregate, 1.2% of the outstanding shares of Akerna Common Stock (0.7% of the outstanding voting shares) and have agreed to vote in favor of the Merger and related transactions. The above officers of Akerna may acquire additional share of Akerna Common Stock at the closing of the Merger as settlement, in part, of the amounts owed to them as stated above. Such issuances would be done at market value under the rules of the Nasdaq Capital Market.
The Akerna Board was aware of these interests and considered them, among other matters, in the decision to approve the Merger Agreement. For more information, please see the section titled “The Transactions — Interests of the Akerna Directors and Executive Officers in the Transactions” in this proxy statement/prospectus.
Q: What risks should I consider in deciding whether to vote in favor of the Merger Proposal and the Sale Transaction Proposal?
A: You should carefully review the section titled “Risk Factors” beginning on page 25 of this proxy statement/prospectus, which set forth certain risks and uncertainties related to the Merger, risks and uncertainties to which the combined company’s business will be subject, and risks and uncertainties to which each of Akerna and Gryphon, as independent companies, are subject.
Q: What stockholder presence is required for quorum at the Akerna special meeting?
A: The presence, in person or being represented by proxy, at the Akerna special meeting of the holders of one-third of the shares of Akerna Common Stock and Akerna voting preferred stock outstanding, or equal to 5,736,182 voting shares, is necessary to constitute a quorum at the meeting for the purpose of approving the proposals.
Q: How many votes am I entitled per share?
A: Each share of Akerna Common Stock entitles the holder thereof to one vote on each proposal at the Akerna special meeting. Akerna’s special voting preferred share is entitled to vote a number of shares equivalent to 12,476 shares of Akerna Common Stock on each proposal at the Akerna special meeting. Each share of Series C Preferred Stock is entitled to vote a number of shares equivalent to 2,000 shares of Akerna Common Stock on each proposal. In the aggregate, the Series C Preferred Stock is entitled to vote a number of shares equivalent to 6,844,000 shares of Akerna Common Stock. Holders of Akerna Common Stock, special voting share and Series C Preferred Stock will vote on all matters at the Akerna special meeting as a single class, except for the Akerna Authorized Shares Increase upon which the holders of the Akerna Common Stock will also vote as a separate class. Only the holders of Akerna Common Stock, our special voting share and Series C Preferred Stock are entitled to vote at the Akerna special meeting. There are no cumulative voting rights.
Q: What stockholder votes are required to approve the proposals at the Akerna special meeting?
A: The affirmative vote of the holders of a majority of the outstanding shares of Akerna Common Stock and preferred stock, voting as one class, is required for approval of the Sale Transaction, the Akerna Reverse Stock Split, the Akerna Authorized Share Increase, and the Akerna Name Change. The affirmative vote of a majority of the outstanding shares of Akerna Common Stock, voting as a separate class, is required for the approval of the Akerna Authorized Share Increase. The affirmative vote of a majority of the votes properly cast at the Akerna special meeting, whether present at the special meeting or represented by proxy at the special meeting, is required for approval of the Merger, the 2024 Plan, the MJA Promissory Note Conversion and the Adjournment Proposal.
Votes will be counted by the inspector of election appointed for the meeting, who will separately count “FOR” and “AGAINST” votes, abstentions and any broker non-votes. Abstentions and broker non-votes will be treated as shares present for the purpose of determining the presence of a quorum for the transaction of business at the special meeting. Abstentions will be counted toward the vote totals for each proposal and will have the same effect as “AGAINST” votes. Broker non-votes will have no effect on the Merger Proposal, the proposal to approve the
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2024 Plan, the MJA Promissory Note Conversion and the Adjournment Proposal but will have the same effect as votes “AGAINST” the Sale Transaction Proposal, the Akerna Reverse Stock Split, the Akerna Authorized Share Increase and the Akerna Name Change.
As of December 21, 2023, the record date for the special meeting, the directors and certain executive officers of Akerna owned or controlled approximately 1.2% of the outstanding shares of Akerna Common Stock entitled to vote at the Akerna special meeting. As of December 21, 2023, the record date for the special meeting, the Akerna stockholders that are party to the Merger Support Agreement with Gryphon and the Sale Transaction Support Agreement with MJ Acquisition, including the directors and certain executive officers of Akerna, owned an aggregate of shares of Akerna Common Stock representing approximately 1.2% of the outstanding shares of Akerna Common Stock. The holders of the Akerna Notes that entered into the Merger Lender Support Letters and the Sale Transaction Lender Support Letters own Series C Preferred Stock with voting rights equivalent to approximately 39.8% of the outstanding voting power on December 21, 2023, the record date for the special meeting. Therefore an aggregate total of approximately 41% of the outstanding shares entitled to vote on the matters at the Akerna special meeting are subject to the Merger Support Agreement, the Sale Transaction Support Agreement, the Merger Lender Support Letters or the Sale Transaction Lender Support Letters.
Pursuant to the Merger Support Agreement and the Sale Transaction Support Agreement, these stockholders, including the directors and certain executive officers of Akerna, have agreed to vote all shares of Akerna Common Stock owned by them as of the record date in favor of all the proposals at the Akerna special meeting. The Merger Lender Support Letters and the Sale Transaction Lender Support Letters provide, among other things, that the holders of the Akerna Notes will vote all of the shares of Akerna capital stock held or acquired by them in favor of the all the proposals at the Akerna special meeting and against any competing acquisition proposals. The Merger Lender Support Letters and the Sale Transaction Lender Support Letters also place certain customary restrictions on the transfer of shares of Akerna capital stock held by the respective signatories thereto prior to the closing of the Merger or the Sale Transaction, respectively. The Merger Support Agreement, the Sale Transaction Support Agreement, the Merger Lender Support Letters and the Sale Transaction Lender Support Letters are discussed in greater detail in the sections titled “Agreements Related to the Merger” and “Agreements Related to the Sale Transaction” in this proxy statement/prospectus.
Q: What do I need to do now?
A: Akerna urges you to read this proxy statement/prospectus carefully, including the annexes attached hereto, and to consider how the Transactions affect you.
If you are an Akerna stockholder of record, you may provide your proxy instructions in one of four different ways:
• You can attend the Akerna special meeting and vote during the special meeting.
• You can mail your signed proxy card in the enclosed return envelope.
• You can provide your proxy instructions via telephone by following the instructions on your proxy card.
• You can provide your proxy instructions via the internet by following the instructions on your proxy card.
Your signed proxy card, telephonic proxy instructions, or internet proxy instructions must be received by January 28, 2024, 11:59 p.m. Mountain Time, to be counted.
If you hold your shares in “street name” (as described below), you may provide your proxy instructions via telephone or the internet by following the instructions on your vote instruction form. Please provide your proxy instructions only once, unless you are revoking a previously delivered proxy instruction, and as soon as possible so that your shares can be voted at the Akerna special meeting.
Q: What happens if I do not return a proxy card or otherwise vote or provide proxy instructions, as applicable?
A: If you are an Akerna stockholder, the failure to return your proxy card or otherwise provide proxy instructions will reduce the aggregate number of votes required to approve Proposal Nos. 1, 6, 7 and 8 and will have the same effect as voting AGAINST Proposal Nos. 2, 3, 4 and 5, and your shares will not be counted for purposes of determining whether a quorum is present at the Akerna special meeting. Banks, brokers and other nominees will have discretion to vote on Proposal Nos. 2, 3 and 4.
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Q: May I attend the Akerna special meeting and vote in person?
A: Stockholders of record as of December 21, 2023, will be able to attend and participate in the Akerna special meeting. To join the Akerna special meeting and vote, you will need to provide proof that you are a stockholder of record as of the record date for the special meeting or the validly appointed proxy of a stockholder of record, which proof may include your proxy card. If your shares are held in “street name,” you should contact your bank, broker or other nominee to obtain a valid proxy to vote your shares at the meeting or otherwise vote through your bank, broker or other nominee.
Q: Where and when is the Akerna Special Meeting?
A: The Akerna special meeting will be held on January 29, 2024 at 9:00 a.m. Mountain Time at 201 Milwaukee Street, Suite 200, Denver, CO 80206. All Akerna stockholders of record as of the record date, or their duly appointed proxies, may attend the special meeting.
Q: Who counts the votes?
A: Continental Stock Transfer and Trust (“CST”) will be engaged as Akerna’s independent agent to tabulate stockholder votes, which Akerna refers to as the inspector of election. If you are a stockholder of record, your executed proxy card is returned directly to CST for tabulation. If you hold your shares through a broker, your broker returns one proxy card to its intermediaries on behalf of all its clients and a global proxy card is delivered to CST for counting proxy votes at the meeting.
Q: If my Akerna shares are held in “street name” by my broker, will my broker vote my shares for me?
A: Unless your broker has discretionary authority to vote on certain matters, your broker will not be able to vote your shares of Akerna Common Stock on matters requiring discretionary authority without instructions from you. If you do not give instructions to your broker, your broker can vote your Akerna shares with respect to “discretionary,” routine items but not with respect to “non-discretionary,” non-routine items. Discretionary items are proposals considered routine on which your broker may vote shares held in “street name” in the absence of your voting instructions. The Akerna Reverse Stock Split, the Akerna Authorized Share Increase and the Akerna Name Change will be routine matters. With respect to non-routine items for which you do not give your broker instructions, your Akerna shares will be treated as broker non-votes. To make sure that your vote is counted, you should instruct your broker to vote your shares, following the procedures provided by your broker.
Q: What are broker non-votes and do they count for determining a quorum?
A: Generally, broker non-votes occur when shares held by a broker in “street name” for a beneficial owner are not voted with respect to a particular proposal because the broker (i) has not received voting instructions from the beneficial owner and (ii) lacks discretionary voting power to vote those shares. A broker is entitled to vote shares held for a beneficial owner on routine matters without instructions from the beneficial owner of those shares. On the other hand, absent instructions from the beneficial owner of such shares, a broker is not entitled to vote shares held for a beneficial owner on non-routine matters.
Broker non-votes will be treated as shares present for the purpose of determining the presence of a quorum for the transaction of business at the Akerna special meeting. Broker non-votes will not be treated as votes cast for or against a proposal and accordingly will not have any effect with respect to the outcome of the approval of the Merger Proposal, the approval of the 2024 Plan, the approval of the MJA Promissory Note Conversion or the Adjournment Proposal and will have the same effect as a vote AGAINST the Sale Transaction Proposal, the Akerna Reverse Stock Split, the Akerna Authorized Share Increase and the Akerna Name Change.
Q: May I change my vote after I have submitted a proxy or provided proxy instructions?
A: Akerna stockholders of record, unless such stockholder’s vote is subject to a Merger Support Agreement, Sale Transaction Support Agreement, a Merger Lender Support Letter or a Sale Transaction Lender Support Letter, may change their vote at any time before their proxy is voted at the Akerna special meeting in one of four ways:
• You may submit another properly completed proxy with a later date by mail or via the internet.
• You can provide your proxy instructions via telephone at a later date.
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• You may send a written notice that you are revoking your proxy to Akerna Corp., 1550 Larimer Street #246, Denver, Colorado 80202, Attention: Secretary.
• You may attend the Akerna special meeting, revoke your proxy and vote in person. Simply attending the Akerna special meeting will not, by itself, revoke your proxy.
Your signed proxy card, telephonic proxy instructions, internet proxy instructions, or written notice must be received by January 28, 2024, 11:59 p.m. Mountain Time, to be counted.
If an Akerna stockholder that owns Akerna shares in “street name” has instructed a broker to vote its shares of Akerna Common Stock, the stockholder must follow directions received from its broker to change those instructions.
Q: Who is paying for this proxy solicitation?
A: Akerna will bear the cost of printing and filing of this proxy statement/prospectus and the proxy card. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of Akerna Common Stock for the forwarding of solicitation materials to the beneficial owners of Akerna Common Stock. Akerna will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.
Akerna will also retain Advantage Proxy, Inc. to assist it in soliciting proxies using the means referred to above. Akerna will pay the fees of Advantage Proxy, Inc., which Akerna expects to be approximately $10,000, plus reimbursement of out-of-pocket expenses.
Q: Who can help answer my questions?
A: If you are an Akerna stockholder and would like additional copies of this proxy statement/prospectus without charge or if you have questions about the Merger, the Sale Transaction or any of the other proposals, including the procedures for voting your shares, you should contact:
Akerna Corp.
1550 Larimer Street #246
Denver, Colorado 80202
Attention: Secretary
Telephone: 1-888-932-6537
If you have questions about the Merger, the Sale Transaction or any of the other proposals, including the procedures for voting your shares, please contact:
Advantage Proxy, Inc.
24925 13th P1 S
Des Moines, WA 98198
Call Toll-Free: 1-877-870-8565
Email: ksmith@advantageproxy.com
If you are a Gryphon equityholder and would like additional copies, without charge, of this proxy statement/prospectus or if you have questions about the Merger, you should contact:
Gryphon Digital Mining, Inc.
5953 Mabel Road, Unit 138
Las Vegas, NV 89110
Attention: Rob Chang
Telephone: (877) 646-3374
E-mail: rob@gryphonmining.com
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This summary highlights selected information from this proxy statement/prospectus and may not contain all of the information that is important to you. To better understand the Transactions and the proposals being considered at the Akerna special meeting, you should read this entire proxy statement/prospectus carefully, including the Merger Agreement, the Purchase Agreement and the other annexes to which you are referred in this proxy statement/prospectus. For more information, please see the section titled “Where You Can Find More Information” beginning on page 279 of this proxy statement/prospectus. Except where specifically noted, the following information and all other information contained in this proxy statement/prospectus does not give effect to the proposed Akerna Reverse Stock Split.
The Companies
Akerna Corp.
Akerna is a leading provider of enterprise software solutions within the cannabis industry. Cannabis businesses face significant complexity due to the stringent regulations and restrictions that shift based on regional, state, and national governing bodies. As the first to market more than ten years ago, Akerna’s family of software platforms help to enable regulatory compliance and inventory management across the entire supply chain. When the legal cannabis market started to grow, Akerna identified a need for organic material tracking and regulatory compliance software as a service (SaaS) solution customized specifically for the unique needs of the industry. By providing an integrated ecosystem of applications and services that help our clients enable compliance, regulation, consumer safety and taxation, Akerna is building the technology backbone of the cannabis industry. While designed specifically for the unique needs of the cannabis market, Akerna’s solutions are adaptable for other industries requiring government regulatory oversight, or where the tracking of organic materials from seed or plant to end products is desired.
Executing upon its expansion strategy, Akerna acquired complementary cannabis brands to grow the scope of Akerna’s cannabis ecosystem. Since 2019, Akerna has integrated six new brands into the Akerna product and service offering. Akerna’s first acquisition, Solo Sciences (“Solo”), was initiated in the fall of 2019, with the full acquisition completed in July 2020. Akerna added Trellis Solutions (“Trellis”) to our portfolio on April 10, 2020 and finalized the acquisition of Ample Organics (“Ample”) and Last Call Analytics (“Last Call”) on July 7, 2020. More recently, on April 1, 2021 Akerna completed its acquisition of Viridian Sciences Inc. (“Viridian”), a cannabis business management software system built on SAP Business One, followed by the acquisition of The NAV People, Inc. d.b.a 365 Cannabis (“365 Cannabis”), a cannabis business management software system built on Microsoft Business Central, on October 1, 2021. Through its growing family of companies, Akerna provides highly versatile platforms that equip its clients with a central data management system for tracking regulated products. Akerna’s solutions also provide clients with integrated security, transparency, and scalability capabilities, all while helping maintain compliance with their governing regulations.
In February of 2022, the Akerna Board determined to seek to engage a financial advisor to determine if Akerna should seek strategic alternatives to enhance stockholder value. In March 2022, Akerna engaged JMP Securities LLC (“JMP”) as its financial advisor and in May of 2022, Akerna announced that it was exploring strategic alternatives with the assistance of JMP. In May of 2022, Akerna also announced a corporate restructuring including a reduction in workforce and certain operating costs aimed at preserving capital.
In November of 2022, Akerna and Gryphon and Akerna and POSaBIT Systems Corporation (“POSaBIT”) entered into separate non-binding letters of intent to explore the possibility of engaging in a strategic transaction.
On January 27, 2023, Akerna entered into a purchase agreement (the “POSaBIT Purchase Agreement”) with Akerna Exchange and POSaBIT. Under the terms and subject to the satisfaction of the conditions described in the POSaBIT Purchase Agreement, including approval of the transaction by Akerna’s stockholders, Akerna agreed to sell to POSaBIT (or a subsidiary of POSaBIT) all of the membership interests in MJ Freeway and Akerna Exchange agreed to sell to POSaBIT all of the outstanding capital stock of Ample for an aggregate purchase price of $4,000,000 in cash.
Concurrently with the execution of the POSaBIT Purchase Agreement, on January 27, 2023, Akerna entered into the Merger Agreement with Gryphon and Merger Sub. Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, including approval of the transaction by the stockholders of Akerna and Gryphon, Merger Sub will be merged with and into Gryphon, with Gryphon surviving the Merger as a wholly owned subsidiary of Akerna. The Merger is intended to qualify as a tax-deferred reorganization for U.S. federal income tax purposes. If the Merger is completed, the business of Gryphon will become the business of the combined company as described beginning on page 224 of this proxy statement/prospectus under the caption “Gryphon’s Business.”
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On April 5, 2023, Akerna terminated the POSaBIT Purchase Agreement pursuant to section 9.01(c)(iii) thereof, because the Akerna Board determined that the offer letter of Alleaves Inc., a Delaware corporation (“Alleaves”) delivered to the Akerna Board on March 17, 2023, which ultimately resulted in the Purchase Agreement with MJ Acquisition, was or was likely to result in a “Superior Offer” under the terms of the POSaBIT Purchase Agreement and therefore the Akerna Board had a fiduciary obligation to Akerna’s securityholders to terminate the POSaBIT Purchase Agreement to pursue that offer. As a result of the termination, Akerna owes POSaBIT a termination fee of $140,000 and payment of up to $60,000 in reasonable fees and expenses of POSaBIT within 10 Business Days of receipt of reasonable documentation supporting such fees and expenses.
On April 28, 2023, Akerna entered into the Purchase Agreement with Akerna Exchange and MJ Acquisition. Under the terms and subject to the satisfaction of the conditions described in the Purchase Agreement, including approval of the transaction by Akerna’s stockholders, Akerna agreed to sell to MJ Acquisition (or a subsidiary of MJ Acquisition) all of the membership interests in MJ Freeway and Akerna Exchange agreed to sell to MJ Acquisition all of the outstanding capital stock of Ample for an aggregate purchase price of $5,000,000 in cash.
Concurrently with the execution of the Purchase Agreement, on April 28, 2023, Akerna, Merger Sub and Gryphon entered into a first amendment to agreement and plan of Merger (the “First Amending Agreement”) which amends the Merger Agreement to amend the definition of “MJF Purchaser” thereunder to MJ Acquisition Corp. and pursuant to which Gryphon consents to Akerna entering into the Purchase Agreement and related documents.
On June 14, 2023, Akerna, Merger Sub and Gryphon entered into a second amendment to agreement and plan of Merger (the “Second Amending Agreement”) which amends the definition of Merger Consideration to mean the greater of (a) a number of shares of Akerna Common Stock equal to (i) the quotient obtained by dividing (A) the number of shares of Akerna Common Stock on a fully diluted basis (B) 0.075, minus (ii) the Akerna fully diluted share number minus (iii) the adjusted Gryphon warrant reserve number, and (b) a number of shares of Akerna Common Stock equal to the quotient obtained by dividing (i) $115,625,000 by (ii) the last sale price of the Akerna Common Stock on the second trading day immediately preceding the closing of the Merger.
On September 28, 2023, Akerna, Akerna Exchange and MJ Acquisition Corp. entered into a first amendment to the Purchase Agreement (the “Purchase Agreement Amendment”) which amended certain of the terms of the Purchase Agreement. Principally, the Purchase Agreement Amendment: (i) changed the outside date of the Purchase Agreement to December 31, 2023; (ii) amended the Purchase Agreement to reduce the amount of cash to be paid at closing from $4 million to $2 million; (iii) amended the Purchase Agreement to add a new section which provides that prior to closing under the Purchase Agreement MJ Acquisition Corp will work in good faith on a best efforts basis across multiple interested parties on behalf of and with the express approval of Akerna to secure for Akerna the highest purchase price possible for the shares of Ample, and Akerna shall cause the proceeds from such sale to be included in the assets of MJ Freeway effective as of the closing of the Sale Transaction; provided that, notwithstanding the foregoing, in the event that the shares of Ample are sold to a third-party for a net purchase price above $700,000, Akerna shall be entitled to retain all net proceeds in excess of $700,000; (iv) provided that, within 3 business days of the Purchase Agreement Amendment, MJA will loan Akerna an additional $500,000 to fund Akerna’s working capital requirements; and (v) provided that concurrently with the funding of the additional $500,000 loan to Akerna, Akerna will issue an amended and restated convertible secured promissory note (“MJA Promissory Note”) to MJ Acquisition Corp. and related security documents. The MJA Promissory Note will convert into shares of Akerna Common Stock at the closing the Sale Transaction.
On November 15, 2023, Akerna, Akerna Exchange and MJ Acquisition Corp. entered into a second amendment to the Purchase Agreement (the “Second Purchase Agreement Amendment”) which amended certain of the terms of the Purchase Agreement. Principally, the Second Purchase Agreement Amendment: (i) amended the Purchase Agreement to reduce the amount of cash to be paid at closing from $2 million to $1.85 million; (ii) amended the Purchase Agreement to provide that the proceeds from any sale of the shares of Ample prior to the Closing are to be remitted to the MJ Acquisition Corp. upon the closing of such sale (not to exceed $700,000 less $20,000 to cover Akerna’s legal expenses; (iii) provided that concurrently with the Second Purchase Agreement Amendment, MJ Acquisition Corp. will loan Akerna an additional $150,000 to fund Akerna’s working capital requirements; and (iv) provided that concurrently with the funding of the additional $150,000 loan to Akerna, Akerna will issue an amended and restated convertible secured promissory note in the amount of $1.65 million (“MJA Promissory Note”) to MJ Acquisition Corp. and related security documents. The MJA Promissory Note will convert into shares of Akerna Common Stock at the closing the Sale Transaction.
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On December 20, 2023, Akerna and the Holders entered into Amendment No. 1 to the Exchange Agreements (the “Amended Exchange Agreements”), respectively, to amend the terms of the Exchange Agreements related to the Initial Closing (as defined therein) and the issuance of shares of the Company’s Series C Non-Convertible Preferred Stock (the “Series C Preferred Stock”) at the Initial Closing. In connection with the Initial Closing under the Amended Exchange Agreements, the Company issued an aggregate total of 3,244 shares of Series C Preferred Stock upon exchange of $3,422,000 in principal amount of Akerna Notes.
On December 28, 2023, pursuant to the terms of the Purchase Agreement, Akerna and Akerna Exchange entered into a share purchase agreement with Wilcompute Systems Group Inc. (“Wilcompute”) pursuant to which Akerna Exchange sold all of the Capital Stock of Ample to Wilcompute for approximately $638,000. In accordance with the Purchase Agreement, in lieu of delivering the Capital Stock of Ample at the closing of the Sale Transaction, Akerna will instead deliver to MJ Acquisition the $638,000 purchase price received from Wilcompute, which Akerna expects to be in the form of a reduction of the purchase price paid by MJ Acquisition from $1.85 million to approximately $1.22 million. On December 28, 2023, Akerna, Akerna Exchange and MJ Acquisition Corp. enerted into a third amendment to the Purchase Agreement to reduce certain of the indemnity caps therein to reflect the sale of the Capital Stock of Ample to Wilcompute.
Our principal executive offices are located at 1550 Larimer Street #246, Denver, Colorado 80202, and our telephone number is (888) 932-6537 and our Internet website address is www.akerna.com. The information on our website is not a part of, or incorporated in, this proxy statement/prospectus.
Gryphon Digital Mining Inc.
Founded in October 2020, Gryphon is a bitcoin mining company based in Las Vegas, Nevada. Gryphon commenced its digital assets mining operations in September 2021. Gryphon’s mission is to create a net carbon neutral bitcoin miner. Gryphon’s revenue model is to mine and hold bitcoin, and then sell only the bitcoin that is necessary to pay its operating expenses and to reinvest in operational expansion.
Gryphon’s operations encompass the following:
• Self-Mining: Gryphon operates approximately 7,400 bitcoin ASIC mining computers, referred to as “miners,” from Bitmain Technologies Limited (“Bitmain”) that Gryphon has installed at third-party hosted mining data centers located in New York, Georgia and North Carolina. Revenue generated by the mining of bitcoin is measured on a dollar per megawatt-hour (“MWh”) basis and is variable based on the price of Bitcoin, the measure of difficulty, transaction volume and global hash rates.
• ESG-Led Mining: Gryphon is an ESG-committed bitcoin miner with the mission to create the world’s largest bitcoin miner with a neutral carbon footprint. Gryphon currently uses net carbon neutral energy in its power mix.
Gryphon launched its mining operations in September 2021 upon the receipt of the first of 12 batches of 600 Bitmain S19j Pro Antminers. Gryphon has deployed a total of approximately 7,400 S19j Pro Antminers from Bitmain pursuant to the Bitmain Agreement (as defined below) and subsequent market purchases.
Given the significant amount of power that ASIC miners require to operate, Gryphon believes most mining companies focus completely on low-cost electricity without considering the impact of the power’s production on the climate. Gryphon’s strategy is to focus on working with power hosting partners that are committed to climate science and also can produce reliable, low-cost power. Gryphon uses 25 megawatts of space at its primary hosting facility in New York, which relies on renewable hydro energy. As it deploys additional miners, Gryphon will work with hosting partners that have committed to providing carbon neutral power.
Gryphon’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate the continuation of Gryphon as a going concern and the realization of assets and satisfaction of liabilities in the ordinary course of business. These financial statements do not include any adjustments that might result from Gryphon’s inability to continue as a going concern. However, Gryphon’s independent registered public accounting firm’s report contains an explanatory paragraph that expresses substantial doubt about Gryphon’s ability continue as a “going concern.” Gryphon is a privately-held corporation and its securities do not trade on any marketplace. The principal executive offices of Gryphon are located at 5953 Mabel Road, Unit 138, Las Vegas, NV 89110, and its telephone number is (877) 646-3374.
See “Gryphon’s Business” and “Gryphon Management’s Discussion and Analysis of Financial Condition and Results of Operations” for important business and financial information regarding Gryphon.
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Akerna Merger Co.
Akerna Merger Co. is a Delaware corporation and a wholly-owned subsidiary of Akerna, and was formed solely for the purposes of carrying out the Merger.
MJ Acquisition Corp.
MJ Acquisition Corp. is a Delaware corporation engaged in cannabis technologies. MJ Acquisition Corp. received a portion of its financing for the Sale Transaction Purchase Price from Alleaves through a loan. Alleaves is not a stockholder or an affiliate of MJ Acquisition Corp. and the two companies do not have any overlapping executive officers or directors. Alleaves is also involved in cannabis technologies, including integrated payments, point of sale, cultivation, delivery, production and distribution technologies. The principal executive offices of MJ Acquisition are located at 16192 Coastal Highway, Lewes, Delaware 19958 and its telephone number is 203-550-3679.
The Transactions
The Merger (see page 286)
If the Merger is completed, Merger Sub will merge with and into Gryphon, with Gryphon surviving as a wholly-owned subsidiary of Akerna. The Merger is expected to be accounted for as a reverse acquisition, at the time of the closing of the Merger.
Subject to the terms and conditions of the Merger Agreement, at the Effective Time, each Gryphon Share outstanding immediately prior to the Effective Time will be converted into the right to receive a per share portion of the shares of Akerna Common Stock comprising the Merger Consideration (subject to adjustment to account for the proposed Akerna Reverse Stock Split), as described in more detail in the section titled “The Merger Agreement — Merger Consideration” beginning on page 116 of this proxy statement/prospectus.
Each share of Akerna Common Stock, each share of Akerna Common Stock reserved for issuance upon the exercise of each warrant to purchase Akerna Common Stock, that is issued and outstanding at the Effective Time will remain issued and outstanding, and such securities will be unaffected by the Merger.
Akerna following the Merger is referred to herein as the “combined company.” After the completion of the Merger, the combined company will change its corporate name to “Gryphon Digital Mining, Inc.” Immediately after the consummation of the Merger, Akerna equityholders as of immediately prior to the Merger are expected to own approximately 7.5% of the outstanding equity interests of the combined company on a fully diluted basis and former Gryphon equityholders are expected to own approximately 92.5% of the outstanding equity interests of the combined company on a fully diluted basis. Ownership percentages will depend on the calculation of the Merger Consideration at closing, which will depend on a number of variables, including the last sales price of Akerna Common Stock on the second trading day immediately prior to closing of the Merger and the amount of the principal remaining outstanding on Akerna’s convertible notes following any conversions or company redemptions that occur prior to closing and the number of shares of Akerna Common Stock that may be issued to settle accounts payable of Akerna prior to closing.
The closing of the Merger will occur as promptly as practicable, but in no event later than the second business day, after the last of the conditions to the Merger has been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing of the Merger, but subject to the satisfaction or waiver of each such conditions)), or at such other time, date and place as Akerna and Gryphon mutually agree. Akerna and Gryphon anticipate that the consummation of the Merger will occur in Akerna’s first fiscal quarter of 2024. However, because the Merger is subject to a number of conditions, neither Akerna nor Gryphon can predict exactly when the closing of the Merger will occur or if it will occur at all. The closing of the Merger and the closing of the Sale Transaction are conditioned on each other and the parties expect that, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement and the Purchase Agreement, respectively, the Sale Transaction will be consummated immediately following the closing of the Merger.
Sale Transaction (see page 286)
Akerna has also entered into the Purchase Agreement with MJ Acquisition pursuant to which, subject to the satisfaction or waiver of the conditions set forth in the Purchase Agreement, Akerna will sell to MJ Acquisition all of the membership interests in MJ Freeway and Akerna Exchange will sell to MJ Acquisition all of the capital stock of Ample for an aggregate cash purchase price of $1.85 million, subject to adjustments and a loan to Akerna from MJ Acquisition in the amount of $1,650,000 (funded $1,000,000 on April 28, 2023, $500,000 on October 11, 2023 and $150,000 on November 15, 2023), which principal amount will convert into shares of common stock of Akerna at closing pursuant
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to the MJA Promissory Note. On December 28, 2023, pursuant to the terms of the Purchase Agreement, Akerna and Akerna Exchange entered into a share purchase agreement with Wilcompute pursuant to which Akerna Exchange sold all of the Capital Stock of Ample to Wilcompute for approximately $638,000. In accordance with the Purchase Agreement, in lieu of delivering the Capital Stock of Ample at the closing of the Sale Transaction, Akerna will instead deliver to MJ Acquisition the $638,000 purchase price received from Wilcompute, which Akerna expects to be in the form of a reduction of the purchase price paid by MJ Acquisition from $1.85 million to approximately $1.22 million. All shares of Akerna Common Stock issued upon conversion of the MJA Promissory Note will be included in the shares of Akerna Common Stock outstanding prior to the closing of the Merger and will be taken into account in calculating the Merger Consideration, which will dilute current Akerna stockholders.
The closing of the Sale Transaction will occur as promptly as practicable, but in no event later than the second business day, after the last of the conditions to the Sale Transaction has been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing of the Sale Transaction, but subject to the satisfaction or waiver of each such conditions), or at such other time as Akerna and MJ Acquisition agree. Akerna anticipates that the consummation of the Sale Transaction will occur in Akerna’s first fiscal quarter of 2024. However, because the Sale Transaction is subject to a number of conditions, Akerna cannot predict exactly when the closing of the Sale Transaction will occur or if it will occur at all. The closing of the Merger and the closing of the Sale Transaction are conditioned on each other and the parties expect that, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement and the Purchase Agreement, respectively, the Sale Transaction will be consummated immediately following the closing of the Merger.
Akerna Reasons for the Transactions (see page 95) and Gryphon Reasons for the Merger (see page 99)
After consideration and consultation with its senior management and its financial and legal advisors, the Akerna Board unanimously determined that the Merger Agreement, the Merger and the other transactions contemplated thereby and the Purchase Agreement, the Sale Transaction and the other transactions contemplated thereby are advisable, fair to and in the best interests of Akerna and its stockholders. The Akerna Board considered various reasons to reach its determination. For example the Akerna Board considered and assessed:
• the financial condition and prospects of Akerna and its current business and the risks associated with continued operations, including Akerna’s history of substantial losses, the need for a likely highly dilutive equity capital raise in the near term to fund ongoing operations, risks related to servicing the Akerna Notes and the potential for a default under the terms of the Akerna Notes, the current stock price of the Akerna Common Stock and overall prospects of Akerna’s current operations, the timeline for profitable operations and the costs of operating as a public company;
• the risks and delays associated with, and uncertain value and costs to Akerna stockholders of, liquidating Akerna, including the uncertainties of continuing cash burn while debt and contingent liabilities are resolved, the likelihood that there would not be sufficient cash upon liquidation to satisfy Akerna’s debt obligations resulting in no cash available for distribution to stockholders, uncertainty of timing of release of any remaining cash until contingent liabilities are resolved, and the risks and costs associated with being a shell company prior to any such cash distribution;
• the risks and challenges of attempting to continue to operate Akerna on a stand-alone basis, including the substantial time required and uncertainty to successfully address the ongoing losses of continued operations and the need to service the Akerna Notes and challenges in retaining staff with limited cash and projected financial losses;
• that the Akerna Board and its financial advisor undertook a comprehensive and thorough process of reviewing and analyzing potential strategic alternatives and merger partner candidates to identify the opportunity that would, in the Akerna Board’s view, create the most value for Akerna stockholders;
• the Akerna Board’s belief, after a thorough review of strategic alternatives and discussions with Akerna’s senior management, financial advisors and legal counsel, that the Merger and Sale Transaction are more favorable to Akerna stockholders than the potential value that might have resulted from other strategic alternatives available to Akerna, including to operate Akerna on a stand-alone basis;
• the Akerna Board’s belief that, as a result of arm’s length negotiations with Gryphon, Akerna and its representatives negotiated the best ratio to which Gryphon was willing to agree, and that the other terms of the Merger Agreement include the most favorable terms to Akerna in the aggregate to which Gryphon was willing to agree;
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• the Akerna Board’s belief that, as a result of arm’s length negotiations with MJ Acquisition, Akerna and its representatives negotiated the best cash purchase price to which MJ Acquisition was willing to agree, and that the other terms of the Purchase Agreement include the most favorable terms to Akerna in the aggregate to which MJ Acquisition was willing to agree;
• the expected cash resources of the combined company and the likelihood the combined company would possess sufficient cash resources to fund future operations of the combined company;
• Akerna’s management and its financial and legal advisors financial, regulatory, legal and technical due diligence on Gryphon’s business and operations;
• the Akerna Board’s view, following a review with Akerna’s management of Gryphon’s current business plan, of the likelihood that the combined company would possess sufficient cash resources at the closing of the Merger to fund the business of the combined company through upcoming value inflection points;
• the lack of prospects of and risks associated with finding other strategic candidates;
• the ability of Akerna stockholders to participate in the growth and value creation of the combined company following the closing of the Merger by virtue of their continued ownership of Akerna Common Stock;
• the current financial market conditions and historical market prices, volatility, and trading information for Akerna Common Stock;
• the experience of the senior management team and board of directors of the combined company, which will consist of experienced representatives from Gryphon’s management team and board of directors and one representative from Akerna’s Board;
• the Akerna Board’s consideration of the financial analyses of JMP, including its opinion to the Akerna Board as to the fairness, from a financial point of view and as of the date of the opinion, to Akerna of the consideration to be paid by Akerna in the Merger and the consideration to be received by Akerna in the POSaBIT Sale Transaction, as more fully described below under the caption “The Merger — Opinion of Akerna’s Financial Advisor,” beginning on page 103 in this proxy statement/prospectus; and
• the variety of risks and other countervailing factors related to entering into the Merger Agreement and Purchase Agreement as joint transactions, including the potential effect of termination fees, the substantial expense incurred in connection with the Transactions and the risks and uncertainties associated with Gryphon’s business and various other risks.
The board of directors of Gryphon (the “Gryphon Board”) has unanimously approved the Merger Agreement, the Merger and the transactions contemplated thereby. The Gryphon Board reviewed several factors in reaching its decision and believes that the Merger Agreement, the Merger and the transactions contemplated thereby are in the best interests of Gryphon and its stockholders. Several factors considered by the Gryphon Board included:
• the financial condition, historical results of operations and strategic objectives of Gryphon;
• the exchange ratio to be paid by Akerna pursuant to the Merger, where it is expected that Gryphon shareholders receive approximately 92.5% and Akerna shareholders receive approximately 7.5% of the combined company, and the related anticipated allocation of the equity interests of the combined company, on a fully diluted basis, following completion of the Merger;
• the risks associated with structuring the Merger and the Sale Transaction as joint transactions, including the potential difficulties associated with coordinating and completing both transactions simultaneously and the risk that the Sale Transaction does not close on a timely basis or at all;
• the terms of the Merger Agreement, the Purchase Agreement and related transaction documents, concluding the terms, in the aggregate, were reasonable;
• the current capitalization of Akerna, including the terms of the Akerna Notes, and the ability of Akerna to simplify its capitalization prior to completion of the Merger;
• the terms of the Exchange Agreements, the treatment of the Akerna Notes contemplated thereby and the entry by the holders of Akerna Notes into Merger Lender Support Letters;
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• the potential increased access to sources of capital and a broader range of investors to support Gryphon’s Bitcoin mining operations following consummation of the Merger and the expected continued listing of the combined company on The Nasdaq Capital Market, compared to if Gryphon continued to operate as a privately held company;
• the potential to provide its current stockholders with greater liquidity by owning stock in a public company;
• the cash resources of the combined company, with $5.5 million of cash and cash equivalents on a pro forma basis as of September 30, 2023 after giving effect to the Merger, which Gryphon Board believes is sufficient to enable Gryphon to pursue its near term goals and business plans;
• the determination that the expected relative percentage ownership of Akerna stockholders and Gryphon’s stockholders in the combined company was appropriately based, in the judgment of the Gryphon Board, on the Gryphon Board’s assessment of the approximate valuations of Akerna and Gryphon; and
• the expectation that the Merger with Akerna would be a more time- and cost-effective means to access capital than other options considered by the Gryphon Board, including additional private financings or an initial public offering.
For a more complete description of the reasons for the Merger, please see the sections titled “The Transactions — Akerna Reasons for the Transactions” and “The Transactions — Gryphon Reasons for the Merger” beginning on pages 95 and 99, respectively, of this proxy statement/prospectus.
Opinion of Akerna’s Financial Advisor (see page 103)
JMP rendered its opinion to the Akerna Board that, as of January 26, 2023, based on and subject to the factors and assumptions set forth in the opinion, the consideration to be received by Akerna in the sale transaction under the POSaBIT Purchase Agreement (the “POSaBIT Sale Transaction”) and the consideration to be paid by Akerna in the Merger was fair, from a financial point of view, to Akerna. For a more complete description of the opinion of JMP, please see the section titled “The Merger — Opinion of Akerna’s Financial Advisor” beginning on page 103.
The Akerna Board considered whether to obtain a new fairness opinion in relation to entering into the Purchase Agreement with MJ Acquisition subsequent to the January 26, 2023 opinion delivered by JMP. The Akerna Board determined that such fairness opinion was not necessary in determining that the new transaction with MJ Acquisition is advisable, fair to and in the best interests of Akerna and its stockholders for the following reasons: (i) the fact that the POSaBIT deal was a cash only deal and that the deal with MJ Acquisition was also cash only with a premium of an additional $1 million in purchase price representing an increase in value of 25% and a superior offer to the transaction with POSaBIT, (ii) the Purchase Agreement is materially identical to the POSaBIT Purchase Agreement outside of the increased purchase price, (iii) the consideration to be received by Akerna in the Merger remained unchanged (iv) the transaction with MJ Acquisition provided Akerna with access to $1 million of the cash purchase price immediately on signing of the Purchase Agreement in the form of a secured bridge loan, which additional cash resources increased the likelihood of Akerna being able to fund operations and corporate expenses through closing of the Merger and the Sale Transaction, making such closing more likely under the transaction with MJ Acquisition than the transaction with POSaBIT, (v) the Board’s determination in coordination with Akerna management that the business and prospects of Akerna’s business had not changed materially from January 26, 2023, the date the opinion was delivered by JMP and (vi) the significant cost and delay in timing of obtaining a new fairness opinion created additional risk to the closing of the Merger and the Sale Transaction.
The Akerna Board considered whether to obtain a new fairness opinion in relation to entering into the Second Amendment to the Merger Agreement subsequent to the January 26, 2023 opinion delivered by JMP. The Akerna Board determined that such fairness opinion was not necessary in determining that the Second Amendment to the Merger Agreement was advisable, fair and in the best interests of Akerna and its stockholders for the following reasons: (i) the presentation of share price scenarios by management of Akerna and representatives of JMP making it clear that the change in value to Akerna stockholders would only occur if there was a significant drop in the market value of Akerna shares immediately prior to closing of the Merger, including the analysis that even a drop to $0.01 per share of Akerna Common Stock would only result in a decrease in value to Akerna stockholders of approximately 1% of the combined company on a fully diluted basis, which would be valued at approximately $1.2 million based on a minimum valuation of Gryphon at approximately $116 million and since the combined deal value of the Merger and the Sale Transaction together had been increased by $1 million through entering into the transaction with MJ Acquisition, the
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Board determined that the overall deal value to Akerna since January 26, 2023 had not materially changed, and (ii) the Board’s determination in coordination with Akerna management that business and prospectus of Akerna had not materially changed since January 26, 2023.
The Akerna Board considered whether to obtain a new fairness opinion in relation to entering into the Purchase Agreement Amendment subsequent to the January 26, 2023 opinion delivered by JMP. The Akerna Board determined that such fairness opinion was not necessary in determining that the Purchase Agreement Amendment was advisable, fair and in the best interests of Akerna and its stockholders for the following reasons: (i) the combined deal value of the Merger and the Sale Transaction to the stockholders of Akerna was not materially decreased by the reduction in the cash Purchase Price, (ii) Akerna needed the additional $500,000 loan from MJ Acquisition Corp. to cover operating expenses to close and (iii) the Board’s determination in coordination with Akerna management that business and prospects of Akerna had not materially changed since January 26, 2023.
While the Akerna Board believes that the opinion delivered by JMP is still useful in determining the fairness of the Merger and the Sale Transaction to stockholders of Akerna due to the factors set forth above, stockholders should note that because the Akerna Board did not seek a new opinion from JMP following terminating the POSaBIT Purchase Agreement and entering into the Purchase Agreement and prior to entering into the Second Amendment to the Merger Agreement and the Purchase Agreement Amendment, the opinion of JMP does not address the current terms of the Merger and the Sale Transaction and Akerna stockholders should use caution in relying on such opinion.
The full text of JMP’s written opinion sets forth the assumptions made, procedures followed, matters considered and qualifications and limitations on and scope of the review undertaken by JMP in connection with its opinion. JMP’s written opinion is attached as Annex H to this proxy statement/prospectus and is incorporated herein by reference. The summary of JMP’s opinion set forth in this proxy statement/prospectus is qualified in its entirety by reference to the full text of JMP’s opinion. We urge Akerna stockholders to read carefully JMP’s opinion, together with the summary thereof in this proxy statement/prospectus, in its entirety.
JMP’s opinion was directed and addressed to the Akerna Board (in its capacity as such) in connection with its consideration of the POSaBIT Sale Transaction and the Merger. JMP’s opinion did not address the underlying decision of the Akerna Board to proceed with or effect the POSaBIT Sale Transaction or the Merger or the relative merits of the POSaBIT Sale Transaction or the Merger as compared to any alternative strategy or transaction that might exist for Akerna. JMP’s opinion does not constitute a recommendation as to how the Akerna Board or any Akerna stockholder should act or vote with respect to the Merger or any other matter.
Overview of the Merger Agreement
Merger Consideration (see page 116)
At the Effective Time, each Gryphon Share that is issued and outstanding immediately prior to the Effective Time will be converted into the right to receive a number of shares of Akerna Common Stock determined by the Merger Consideration as detailed below.
The Merger Agreement does provide for adjustment (including an adjustment as a result of the proposed Akerna Reverse Stock Split) to the total number of shares of Akerna Common Stock that Gryphon stockholders will be entitled to receive as part of the Merger, based on changes in the market price of Akerna Common Stock prior to the closing of the Merger, provided however that the Merger Agreement provides for a minimum valuation of Gryphon of approximately $116 million and Gryphon stockholders at a minimum will receive such number of shares of Akerna Common Stock as reflects this minimum valuation regardless of the market price of Akerna Common Stock at the closing of the Merger. The market value of the shares of Akerna Common Stock issued pursuant to the Merger will depend on the market value of the shares of Akerna Common Stock at the time the Merger closes, and could vary significantly from the market value of the shares of Akerna Common Stock on the date of this proxy statement/prospectus, subject to the minimum value of approximately $116 million.
At the Effective Time, by virtue of the Merger and without any action on the part of the Akerna or the Merger Sub, Gryphon or any holder of Gryphon Shares:
• each Gryphon Share that is issued and outstanding immediately prior to the Effective Time shall automatically be converted into and become the right to receive the applicable per share portion of the “merger consideration” with respect to such Gryphon Share as set forth in the allocation statement to be delivered pursuant to the Merger Agreement (“merger consideration” is defined in the Merger Agreement
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to mean the greater of: (A) a number of shares of Akerna Common Stock equal to (a) the quotient obtained by dividing (i) the number of shares of Akerna capital stock issued and outstanding at the Effective Time on a fully diluted basis (giving effect to the exchange of all amounts outstanding under the Akerna Notes and all shares of Series C Preferred Stock for shares of common stock of the combined company pursuant to the terms of the Exchange Agreements and the Akerna Notes) (the “Akerna Fully Diluted Share Number”) by (ii) 0.075, minus (b) the Akerna Fully Diluted Share Number minus (c) the number of shares of Akerna Common Stock the Gryphon Warrants will become exercisable for upon closing of the Merger and (B) a number of shares of Akerna Common Stock equal to the quotient obtained by dividing (a) $115,625,000 by (b) the last reported sale price of Akerna Common Stock on the Nasdaq on the second business day prior to the Effective Time). As of the Effective Time, all such Gryphon Shares shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and each holder shall thereafter cease to have any rights with respect thereto, except the right to receive the consideration set forth in the Merger Agreement;
• each outstanding Gryphon Warrant will be assumed by Akerna and become a warrant to purchase an adjusted number of shares of common stock of the combined company, at an adjusted exercise price per share but subject to the same terms and conditions as the Gryphon Warrant; and
• each issued and outstanding share of capital stock of Merger Sub shall be converted into and become one validly issued, fully paid and nonassessable share of common stock, par value $0.0001 per share, of the surviving company of the Merger.
Conditions to the Completion of the Merger (see page 119)
To consummate the Merger, Akerna stockholders must approve the Merger Proposal, the Sale Transaction Proposal, the Akerna Reverse Stock Split, the Akerna Name Change, the Akerna Authorized Share Increase and the 2024 Plan. Additionally, the Gryphon stockholders must approve the Merger and adopt the Merger Agreement and the related transactions. In addition to obtaining such securityholder approvals and appropriate regulatory approvals, each of the other closing conditions set forth in the Merger Agreement must be satisfied or waived, including, among other things:
• no order or law issued by any court of competent jurisdiction or other governmental entity or other legal restraint or prohibition preventing or making illegal the consummation of the Merger or the Sale Transaction shall be in effect;
• the Registration Statement on Form S-4, of which this proxy statement/prospectus is a part, must have become effective in accordance with the provisions of the Securities Act of 1933, as amended, and must not be subject to any stop order or proceeding, or any proceeding threatened by the SEC, seeking a stop order with respect to the registration statement that has not been withdrawn;
• each of Akerna and Gryphon must have performed or complied in all material respects with all covenants and obligations in the Merger Agreement required to be performed or complied with by it on or before the consummation of the Merger;
• all conditions for the closing of the Sale Transaction shall have been performed or waived in accordance with the Purchase Agreement and the Sale Transaction shall be consummated immediately after the consummation of the Merger; and
• Nasdaq shall have approved the continued listing of the Akerna Common Stock (including the shares of Akerna Common Stock comprising the Merger Consideration pursuant to the Merger Agreement) on Nasdaq following the consummation of the Merger and the other transactions contemplated therein.
The obligation of Gryphon to close the Merger is also subject to satisfaction of certain additional conditions, including, among other things, (i) the accuracy of Akerna’s representations and warranties in the Merger Agreement and compliance by Akerna with its covenants and agreements in the Merger Agreement; (ii) no Akerna material adverse effect; (iii) compliance with the Merger Support Agreement and Merger Lender Support Letters; (iv) continued listing of the Akerna Common Stock on The Nasdaq Capital Market through the Effective Time; (v) compliance by Akerna with the Purchase Agreement; (vi) compliance with the Exchange Agreements by the holders of Akerna Notes and Akerna, termination of all agreements relating to the Akerna Notes and the release of all related encumbrances; (vii) all redemptions of Akerna preferred stock (other than the Series C Preferred Stock) being completed; (viii) the winding down of Akerna’s legacy business; (ix) completion of the Akerna Reverse Stock Split; (x) Akerna having $500,000 in cash on hand; (xi) satisfaction of all conditions precedent to the exchange of all amounts outstanding under the Akerna Notes and all shares of Series C Preferred Stock for common
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stock of the combined company immediately following the completion of the Merger, pursuant to the Exchange Agreements; and (xii) the Registration Statement contemplated by that certain Registration Rights Agreement, dated as of June 12, 2023, by and between Akerna and MJ Bridge Co., Inc., shall have been declared effective under the Securities Act by the SEC.
No Solicitation (see page 122)
Pursuant to the Merger Agreement, Akerna has agreed that it will not, and will not permit or authorize any of its subsidiaries or their respective representatives, directly or indirectly, to:
• solicit, initiate, endorse, knowingly encourage or facilitate any inquiry, proposal or offer with respect to, or the making or completion of, any “Acquisition Proposal,” as defined in the Merger Agreement, or any inquiry, proposal or offer that is reasonably likely to lead to any Acquisition Proposal;
• enter into, continue or otherwise participate in any discussions or negotiations regarding, or furnish to any person any information or data with respect to, or otherwise cooperate in any way with, any Acquisition Proposal; and
• resolve, agree or propose to do any of the foregoing; provided, that Akerna may (x) advise any person of the restrictions of the Merger Agreement; and (y) advise any person making an acquisition proposal that the Akerna Board has determined that such acquisition proposal does not constitute a “Superior Proposal” (as defined in the Merger Agreement), in each case, if, in so doing, no other information that is prohibited from being communicated under the Merger Agreement is communicated to such person.
Further, Akerna has also agreed that it will, and will cause each of its subsidiaries their respective representatives to, (A) immediately cease and cause to be terminated all existing discussions and negotiations with any person conducted heretofore with respect to any Acquisition Proposal or potential Acquisition Proposal and immediately terminate all physical and electronic data room access previously granted to any such person, (B) request the prompt return or destruction of all confidential information previously furnished with respect to any Acquisition Proposal or potential Acquisition Proposal, and (C) not terminate, waive, amend, release or modify any provision of any confidentiality or standstill agreement to which it or any of its affiliates or representatives is a party with respect to any Acquisition Proposal or potential Acquisition Proposal, and will enforce the provisions of any such agreement, which shall include seeking any injunctive relief available to enforce such agreement (provided, that Akerna will be permitted to grant waivers of, and not enforce, any standstill agreement, but solely to the extent that the Akerna Board has determined in good faith, after consultation with its outside counsel, that failure to take such action (1) would prohibit the counterparty from making an unsolicited acquisition proposal to the Akerna Board in compliance with the terms of the Merger Agreement and (2) would constitute a breach of its fiduciary duties to the Akerna stockholders under applicable law).
Termination (see page 128)
Either Akerna or Gryphon may terminate the Merger Agreement upon mutual consent. Either party may terminate the Merger Agreement: (i) if any of the representations or warranties of the other party set forth in the Merger Agreement shall not be true and correct or if the other party has failed to perform any covenant or agreement on the part of such party set forth in the Merger Agreement; (ii) the Merger is not consummated by the outside date (July 15, 2023); (iii) there is a governmental order prohibiting the Merger; or (iv) upon failure to obtain the approval of the Akerna stockholders of all of the proposals set forth in this proxy statement/prospectus. Gryphon may terminate the Merger Agreement if: (A) the Akerna Board changes its recommendation to stockholders with respect to the Merger; (B) the Akerna Board fails to reaffirm its recommendation to stockholders with respect to the Merger following a tender offer for Akerna; (C) the Akerna Board fails to reaffirm its recommendation to stockholders with respect to the Merger following a publicly announced acquisition proposal for Akerna; (D) Akerna breaches its non-solicitation covenants in the Merger Agreement; or (E) the Akerna Board resolves to do any of the above. Akerna may terminate the Merger Agreement for acceptance of a superior proposal.
Termination Fee (see page 130)
In the event that Gryphon or Akerna terminates the Merger Agreement pursuant to certain of the sections set forth above, Akerna will be required to pay Gryphon a termination fee of $275,000, less any reimbursed expenses.
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Merger Support Agreements (see page 131)
Certain Gryphon stockholders, including directors and executive officers of Gryphon, are parties to Support Agreements with Akerna. Following the Registration Statement on Form S-4, of which this proxy statement/prospectus is a part, being declared effective by the SEC, and pursuant to the conditions of the Merger Agreement, Gryphon stockholders who are party to the Support Agreements have each agreed to execute an action by written consent, referred to as the written consent, in favor of the approval and adoption of the Merger Agreement, and approval of the transactions contemplated by the Merger Agreement. The Support Agreements will terminate upon certain events, including any termination of the Merger Agreement in accordance with its terms.
The Gryphon directors, officers and stockholders that are party to Support Agreements with Akerna owned approximately 72% of the outstanding Gryphon Shares as of January 4, 2024.
Akerna directors and officers who held shares of Akerna Common Stock as of the date of the Merger Agreement (each in their capacities as stockholders) are each party to a Merger Support Agreement with Gryphon pursuant to which, among other things, each of these stockholders agreed, solely in his or her capacity as a stockholder, to vote all of his or her shares of Akerna Common Stock (a) in favor of the Akerna stockholder proposals set forth herein and (b) against any “acquisition proposal,” as defined in the Merger Agreement, and subject to certain exceptions, have also agreed not to transfer their shares of Akerna Common Stock and voting preferred stock. The directors and officers of Akerna that are party to such Merger Support Agreement with Gryphon owned an aggregate of 120,073 outstanding shares of Akerna Common Stock, representing approximately 1.2% of the outstanding Akerna Common Stock as of December 21, 2023, which is the record date for the special meeting.
Each of the holders of the Akerna Notes entered into Merger Lender Support Letters with Akerna. The holders of the Akerna Notes that entered into Merger Lender Support Letters own Series C Preferred Stock with voting rights equivalent to approximately 39.8% of the outstanding voting rights on December 21, 2023, which is the record date for the special meeting. Therefore an aggregate total of approximately 41% of the outstanding shares of Akerna capital stock entitled to vote on the matters at the Akerna special meeting are subject to the Merger Support Agreement or Merger Lender Support Letters. The Merger Lender Support Letters provide, among other things, that the holders of the Akerna Notes will vote all of the shares of Akerna capital stock held or acquired by them in favor of the all the proposals at the Akerna special meeting and against any competing acquisition proposals. The Merger Lender Support Letters also place certain customary restrictions on the transfer of shares of Akerna capital stock held by the respective signatories thereto prior to the closing of the Merger.
Exchange Agreements, Akerna Notes and Series C Preferred Stock
Concurrently with the signing of the Merger Agreement, Akerna entered into the Exchange Agreements with the Akerna Note Holders.
Pursuant to the Exchange Agreements, as amended, each Akerna Note Holder agreed to exchange a certain aggregate conversion amount of the Akerna Notes no greater than the lesser of (i) the aggregate amount then outstanding under the Akerna Notes and (ii) such portion of the maximum note amount set forth in the Exchange Agreement for such Akerna Note Holder that is convertible into 19.9% of the voting rights of the Company outstanding as of the time immediately following the issuance of the Series C Preferred Stock into such number of shares of newly designated Series C Preferred Stock of Akerna, which will have an aggregate voting power and economic value equal to the aggregate number of shares of common stock then issuable upon conversion of such amount of Akerna Note.
The Series C Preferred Stock is non-convertible, voting preferred stock. Akerna anticipates that the Series C Preferred Stock will be exchanged into Akerna Common Stock at a price per share equal to the market price at the time of the exchange (the “New Preferred Exchange Shares”). The Series C Preferred Stock can also be redeemed for cash at the option of Akerna and in limited circumstances redeemed for cash at the option of the holder.
Under the Exchange Agreements, Akerna has agreed that 50% of the gross proceeds from any subsequent placement will be used to repay the aggregate amounts then outstanding under the Akerna Notes, allocated pro rata to the Akerna Note Holders then outstanding based on the aggregate principal amount of Akerna Notes outstanding as of the time of such applicable subsequent placement (“Subsequent Placement Redemption”).
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Further, Akerna has agreed that on or prior to the closing of the Merger, if any Akerna Notes are then outstanding, Akerna will consummate one or more Company Optional Redemptions (as defined in the Akerna Notes) pursuant to the terms of the Akerna Notes (as amended under the Exchange Agreements), using the lesser of (A) the difference of (I) the sum of (x) all cash then held by Akerna (or any of its subsidiaries) and (y) any cash to be paid, directly or indirectly, to Akerna (or any of its subsidiaries) in connection with the transactions contemplated by the Merger Agreement and/or the Purchase Agreement, as applicable, less (II) $500,000 and (B) an aggregate amount of cash equal to the Company Optional Redemption Price of the aggregate Conversion Amount (as defined in the Akerna Notes) of the Akerna Notes then outstanding (with each such Company Optional Redemption allocated pro rata to the Akerna Note Holders then outstanding based upon the aggregate principal amount of Akerna Notes then outstanding) (the “Cash Sweep”).
Upon closing of the Merger, the Exchange Agreements provide that if any portion of the Akerna Notes remain outstanding other than such portion of the applicable Company Optional Redemption Price of the Akerna Notes to be paid in cash pursuant to the Cash Sweep, to exchange the remaining Conversion Amount of the Notes into such aggregate number of shares of common stock of the combined company (the “New Note Exchange Shares”, together with the New Preferred Exchange Shares, the “Final Closing Exchange Shares”) equal to the quotient of (A) the applicable Company Optional Redemption Price of the remaining Conversion Amount of the Akerna Notes then outstanding divided by (B) the lower of (x) the lowest volume weighted average price of the Akerna Common Stock during the five (5) trading day period ending, and including, the trading day immediately prior to the closing and (y) the Conversion Price (as defined in the Akerna Notes) in effect as of the closing.
Provided, however, that to the extent that any issuances of Final Closing Exchange Shares to an Akerna Note Holder at the closing in accordance herewith or pursuant to the Series C Certificate of Designations, as applicable would result in such Akerna Note Holder and its other attribution parties exceeding 4.99% of the issued and outstanding shares of common stock of the combined company (a “Maximum Percentage Event”), then such Akerna Note Holder shall not be entitled to receive such aggregate number of Final Closing Exchange Shares in excess of the maximum percentage (and shall not have beneficial ownership of such Final Closing Exchange Shares (or other equivalent security) as a result of the closing (and beneficial ownership) to such extent of any such excess), such remaining portion of such Final Closing Exchange Shares that would have otherwise been issued to the Akerna Note Holder at the closing (such remaining portion of Final Closing Exchange Shares, the “Abeyance Shares”), such portion of the Akerna Note and/or shares of Series C Preferred Stock, as applicable, shall alternatively be exchanged for the right to receive such Abeyance Shares, at such time or times as its right thereto would not result in such Akerna Note Holder and the other attribution parties exceeding the maximum percentage, at which time or times, if any, such Akerna Note Holder shall be granted such remaining portion of such Abeyance Shares in accordance herewith and/or pursuant to the Series C Certificate of Designations, as applicable.
Management Following the Merger (see page 260)
Effective as of the closing of the Merger, the combined company’s executive officers are expected to be certain members of the Gryphon executive management team prior to the Merger, including:
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Name |
Position |
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Robby Chang |
Chief Executive Officer and President |
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Simeon Salzman |
Chief Financial Officer |
Overview of the Purchase Agreement
Purchase Agreement (see page 134)
Under the Purchase Agreement and subject to the terms and conditions contained therein, MJ Acquisition will acquire all of Akerna’s rights, title and interest in and to the Membership Interests and all of Akerna Exchange’s rights, title, and interest in and to the Capital Stock as described in the Purchase Agreement for a purchase price of $1,850,000 in cash and a loan to Akerna from MJ Acquisition in the amount of $1,650,000 (funded $1,000,000 on April 28, 2023, $500,000 on October 11, 2023 and $150,000 on November 15, 2023), which principal amount will convert into shares of common stock of Akerna at closing pursuant to the MJA Promissory Note. Subsequently, on December 28, 2023, pursuant to the terms of the Purchase Agreement, Akerna and Akerna Exchange entered into a share purchase agreement with Wilcompute pursuant to which Akerna Exchange sold all of the Capital Stock of Ample to Wilcompute for approximately $638,000. In accordance with the Purchase Agreement, in lieu of delivering the Capital Stock of Ample at the closing of the Sale Transaction, Akerna will instead deliver to MJ Acquisition the $638,000 purchase
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price received from Wilcompute, which Akerna expects to be in the form of a reduction of the purchase price paid by MJ Acquisition from $1.85 million to approximately $1.22 million. All shares of Akerna Common Stock issued upon conversion of the MJA Promissory Note will be included in the shares of Akerna Common Stock outstanding prior to the closing of the Merger and will be taken into account in calculating the Merger Consideration, which will dilute current Akerna stockholders.
Conditions to the Completion of the Sale Transaction (see page 135)
To consummate the Sale Transaction, Akerna stockholders must authorize the Sale Transaction by approving the Purchase Agreement and the transactions contemplated thereby and approve the MJA Promissory Note Conversion. In addition to obtaining such stockholder approval, each of the other closing conditions set forth in the Purchase Agreement must be satisfied or waived.
No Solicitation (see page 137)
Under the Purchase Agreement, Akerna may not, and may not authorize or permit any of its affiliates or any of its or their respective directors, officers, employees or other representatives to (i) directly or indirectly solicit, initiate or knowingly encourage, induce or facilitate any “acquisition proposal,” as defined in the Purchase Agreement, or any inquiry or proposal that may reasonably be expected to lead to an “acquisition proposal” or (ii) directly or indirectly participate in any discussions or negotiations with any person regarding, or furnish to any person any information with respect to, or cooperate in any way with any person (whether or not a person making an “acquisition proposal”) with respect to, any “acquisition proposal”, or any inquiry or proposal that may reasonably be expected to lead to an “acquisition proposal”. Akerna was also required to, among other things, immediately cease and cause to be terminated all existing solicitation, discussions or negotiations with any person conducted prior to entering into the Purchase Agreement with respect to any “acquisition proposal,” or any inquiry or proposal that may reasonably be expected to lead to an “acquisition proposal.”
Termination (see page 141)
Either Akerna or MJ Acquisition can terminate the Purchase Agreement under certain circumstances, which would prevent the Sale Transaction from being consummated.
Termination Fee (see page 142)
If the Purchase Agreement is terminated under certain circumstances, Akerna will be required to pay MJ Acquisition a termination fee equal to $290,000 and reimburse MJ Acquisition for up to a maximum of $60,000 in reasonable fees and expenses.
Sale Transaction Support Agreements (see page 143)
Akerna directors and officers who held shares of Akerna Common Stock as of the date of the Purchase Agreement (each in their capacities as stockholders) are each party to a Sale Transaction Support Agreement with MJ Acquisition pursuant to which, among other things, each of these stockholders agreed, solely in his or her capacity as a stockholder, to vote all of his or her shares of Akerna Common Stock (a) in favor of the Akerna stockholder proposals set forth herein and (b) against any “acquisition proposal,” as defined in the Purchase Agreement, and subject to certain exceptions, have also agreed not to transfer their shares of Akerna Common Stock and voting preferred stock. The directors and officers of Akerna that are party to such Sale Transaction Support Agreement with MJ Acquisition owned an aggregate of 120,073 outstanding shares of Akerna Common Stock, representing approximately 1.2% of the outstanding Akerna Common Stock as of December 21, 2023, which is the record date for the special meeting.
Each of the holders of the Akerna Notes entered into Sale Transaction Lender Support Letters with Akerna. The holders of the Akerna Notes that entered into Sale Transaction Lender Support Letters own Series C Preferred Stock with voting rights equivalent to approximately 39.8% of the outstanding voting rights on December 21, 2023, which is the record date for the special meeting. Therefore an aggregate total of approximately 41% of the outstanding shares of Akerna capital stock entitled to vote on the matters at the Akerna special meeting are subject to the Sale Transaction Support Agreement or Sale Transaction Lender Support Letters. The Merger Lender Support Letters provide, among other things, that the holders of the Akerna Notes will vote all of the shares of Akerna capital stock held or acquired by them in favor of the all the proposals at the Akerna special meeting and against any competing acquisition proposals. The Sale Transaction Lender Support Letters also place certain customary restrictions on the transfer of shares of Akerna capital stock held by the respective signatories thereto prior to the closing of the Sale Transaction.
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Interests of Certain Directors, Officers and Affiliates of Akerna and Gryphon (see pages 111 and 112)
In considering the recommendation of the Akerna Board with respect to issuing shares of Akerna Common Stock pursuant to the Merger Agreement, the change of control of Akerna resulting from the Merger, the Sale Transaction and the other matters to be acted upon by Akerna stockholders at the special meeting, Akerna stockholders should be aware that certain members of the Akerna Board and executive officers of Akerna have interests in the Merger that may be different from, or in addition to, interests they have as Akerna stockholders.
Akerna’s executive officers, including Jessica Billingsley, its Chief Executive Officer, who is also the Chairman of the Akerna Board, Scott Sozio, Head of Corporate Development and a director on the Akerna Board, and Dean Ditto, its Chief Financial Officer are contractually entitled to severance payments and/or change in control bonus incentive fees.
In addition, each member of the Akerna executive team and the Akerna Board is entitled to full accelerated vesting of all outstanding restricted stock units of Akerna upon a change in control, as defined in Akerna’s Equity Incentive Plan, regardless of whether s/he is terminated as a result of the transaction.
Based on the terms of her current employment agreement, Jessica Billingsley will be entitled to receive a total value of approximately $602,854 in connection with the consummation of the Merger, which includes approximately $602,400 as part of her severance payments and benefits under her employment agreement and approximately $454 in value associated with the acceleration of outstanding restricted stock units. Additionally, Ms. Billingsley will continue on the board of the combined company after the closing of the Merger and would be eligible for certain compensation as a non-employee director.
Based on his current employment terms, Dean Ditto will be entitled to receive a total value of approximately $210,733 in connection with the consummation of the Merger, which includes approximately $85,733 as part of his severance payments and benefits under his employment terms.
Under the terms of a change in control bonus incentive agreement with Akerna, Scott Sozio will be entitled to receive a total value of approximately $350,924 in connection with the consummation of the Merger, which includes approximately $350,000 as part of his change in control incentive bonus and approximately $924 in value associated with the acceleration of outstanding restricted stock units.
As of December 21, 2023, the directors and executive officers of Akerna owned, in the aggregate, 1.2% of the outstanding shares of Akerna Common Stock and have agreed to vote in favor of the Merger and related transactions. The above officers of Akerna may acquire additional share of Akerna Common Stock at the closing of the Merger as settlement, in part, of the amounts owed to them as stated above. Such issuances would be done at market value under the rules of the Nasdaq Capital Market.
The Akerna Board was aware of these interests and considered them, among other matters, in the decision to approve the Merger Agreement. For more information, please see the section titled “The Transactions — Interests of the Akerna Directors and Executive Officers in the Transactions” in this proxy statement/prospectus.
Regulatory Approvals
Akerna and Gryphon must comply with applicable federal and state securities laws and the rules and regulations of Nasdaq in connection with the issuance of shares of Akerna Common Stock to Gryphon’s stockholders in connection with the transactions contemplated by the Merger Agreement and the filing of this proxy statement/prospectus with the SEC. Akerna does not require, and consequently, does not intend to seek, any regulatory approval from antitrust authorities to consummate the transactions.
Certain Material U.S. Federal Income Tax Consequences
Certain Material U.S. Federal Income Tax Consequences of the Merger (see page 112)
Each of Akerna and Gryphon intends the Merger to qualify as a reorganization within the meaning of Section 368(a) of the Code. In general and subject to the qualifications and limitations set forth in the section titled “The Transactions — Certain Material U.S. Federal Income Tax Consequences of the Transactions,” if the Merger qualifies
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as a “reorganization” within the meaning of Section 368(a) of the Code, the material tax consequences to U.S. Holders (as defined in the section titled “The Transactions — Certain Material U.S. Federal Income Tax Consequences of the Transactions”) of Gryphon common stock will be as follows:
• a Gryphon stockholder generally will not recognize gain or loss upon the exchange of Gryphon Shares for Akerna Common Stock pursuant to the Merger;
• a Gryphon stockholder’s aggregate tax basis for the shares of Akerna Common Stock received in the Merger generally will equal the stockholder’s aggregate tax basis in the Gryphon Shares surrendered in the Merger; and
• the holding period of the shares of Akerna Common Stock received by a Gryphon stockholder in the Merger generally will include the holding period of the Gryphon Shares surrendered in exchange therefor;
Ellenoff Grossman & Schole LLP, counsel to Gryphon, has delivered an opinion to Gryphon that, on the basis of certain factual representations made by Akerna and Gryphon, and subject to certain assumptions set forth therein, the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. This opinion is attached as Exhibit 8.1 to the Registration Statement of which this proxy statement/prospectus forms a part. However, tax matters are very complicated, and the tax consequences of the Merger to a particular Gryphon shareholder will depend on such shareholder’s circumstances. Accordingly, you are strongly urged to consult your tax advisor for a full understanding of the tax consequences of the Merger to you, including the applicability and effect of federal, state, local and non-U.S. income and other tax laws. For more information, please see the section titled “The Transactions — Certain Material U.S. Federal Income Tax Consequences” beginning of page 112 of this proxy statement/prospectus.
Material U.S. Federal Income Tax Consequences of the Akerna Reverse Stock Split (see page 163)
An Akerna U.S. Holder (as defined below) generally should not recognize gain or loss upon the Akerna Reverse Stock Split. Please review the information in the section titled “Proposal No. 3: Approval of the Amendment to the Amended and Restated Certificate of Incorporation of Akerna Effecting the Akerna Reverse Stock Split — Tax Consequences of the Akerna Reverse Stock Split” beginning on page 165 of this proxy statement/prospectus for a more complete description of the material U.S. federal income tax consequences of the Akerna Reverse Stock Split to Akerna U.S. Holders.
The tax consequences to an Akerna U.S. Holder of the Akerna Reverse Stock Split will depend on if the Akerna Reverse Stock Split is treated as a tax deferred “recapitalization” for U.S. federal income tax purposes. If the Akerna Reverse Stock Split qualifies as a recapitalization, then an Akerna U.S. Holder generally will not recognize gain or loss on the Akerna Reverse Stock Split. In general, the aggregate tax basis of the post-split shares of Akerna Common Stock received will be equal to the aggregate tax basis of the pre-split shares of Akerna Common Stock exchanged therefor and the holding period of the post-split shares of Akerna Common Stock received will include the holding period of the pre-split shares of Akerna Common Stock exchanged. Treasury Regulations promulgated under the Code provide detailed rules for allocating the tax basis and holding period of the shares of Akerna Common Stock surrendered to the shares of Akerna Common Stock received pursuant to the Akerna Reverse Stock Split. U.S. Holders of shares of Akerna Common Stock acquired on different dates and at different prices should consult their tax advisors regarding the allocation of the tax basis and holding period of such shares.
The state and local tax consequences of the Akerna Reverse Stock Split may vary significantly as to each Akerna U.S. Holder depending upon the jurisdiction in which such holder resides. Each Akerna U.S. Holder should consult their tax advisors as to the specific tax consequences to them.
Material U.S. Federal Income Tax Consequences of the Sale Transaction (see page 112)
The proceeds of the Sale Transaction will be used to pay accounts payable and Transaction expenses and pay down existing debt under the Akerna Notes. After these payments, any remaining proceeds will be used to fund the combined company, and such proceeds will not be distributed to Akerna stockholders. As a result, there should not be any material U.S. federal income tax consequences to Akerna U.S. Holders in relation to the Sale Transaction.
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Nasdaq Stock Market Listing (see page 115)
Akerna will file an initial listing application for the combined company common stock with Nasdaq. If such application is accepted, Akerna anticipates that the common stock of the combined company will be listed on The Nasdaq Capital Market following the closing of the Merger under the trading symbol “GRYP.”
Anticipated Accounting Treatment (see page 115)
The Merger will be accounted for as a reverse acquisition in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Under this method of accounting, Gryphon will be deemed to be the accounting acquirer for financial reporting purposes. As a result of the Merger, the net assets of Akerna will be recorded at their acquisition-date fair value in the financial statements of Gryphon and the reported operating results prior to the Merger will be those of Gryphon.
Appraisal Rights and Dissenters’ Rights (see page 115)
Under the Delaware General Corporation Law (“DGCL”), Akerna stockholders are not entitled to appraisal rights in connection with the Merger.
Gryphon stockholders who hold voting common stock are entitled to appraisal rights in connection with the Merger under Delaware law. For more information about such rights, see the provisions of DGCL attached hereto as Annex I, and the section titled “The Transactions — Appraisal Rights and Dissenters’ Rights” in this proxy statement/prospectus.
Comparison of Rights of Holders of Shares (see page 269)
Akerna is incorporated under the laws of the State of Delaware and Gryphon is incorporated under the laws of the State of Delaware. Accordingly, the rights of Akerna stockholders and Gryphon stockholders are governed by the DGCL. As a result of the Merger, Gryphon stockholders who receive shares of Akerna Common Stock will become Akerna stockholders; their rights as stockholders will be governed by the DGCL and the Akerna organizational documents and will have different rights as holders of Akerna Common Stock than they had as holders of Gryphon Common Stock or Gryphon Preferred Stock. The differences between the rights of these respective holders result from the differences between the respective governing documents of Gryphon and Akerna, as the same may be amended in connection with the Merger. For additional information, see the section titled “Comparison of Rights of Holders of Akerna Capital Stock and Gryphon Share Capital” beginning on page 269 of this proxy statement/prospectus.
Risk Factors (see page 25)
Both Akerna and Gryphon are subject to various risks associated with their businesses and their industries. In addition, the Transactions, including the possibility that the Transactions may not be completed, poses a number of risks to each company and its respective stockholders. These risks include the following:
Risks Related to the Merger:
• Neither Akerna nor Gryphon can be sure if or when the Merger will be completed.
• The market value of Gryphon may be difficult to determine, the market value of Akerna and Gryphon may change between the date of this proxy statement/prospectus and the date that the Merger is completed and the fairness opinion obtained by Akerna will not reflect subsequent changes.
• The percentage ownership of the combined company as determined in the Merger Agreement is not adjustable based on the market price of Akerna Common Stock, so the Merger Consideration at the closing of the Merger may have a greater or lesser value than at the time the Merger Agreement was signed.
• Failure to complete the Merger may result in Akerna paying a termination fee to Gryphon and could significantly harm the market price of the Akerna Common Stock and negatively affect Akerna’s future business and operations.
• The closing of the Merger is subject to approval by the Akerna stockholders and the Gryphon stockholders. Failure to obtain these approvals would prevent the closing of the Merger.
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• The Merger may be completed even though certain events occur prior to the closing that materially and adversely affect Akerna or Gryphon.
• Certain officer and directors of Akerna and Gryphon have interests in the Merger that are different from Akerna and Gryphon stockholders.
• The market price of the combined company’s common stock following the Merger may decline as a result of the Merger.
• Akerna stockholders may not realize a benefit from the Merger commensurate with the ownership dilution they will experience in connection with or following the Merger.
• Certain provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement.
• Because the lack of a public market for the Gryphon Shares makes it difficult to evaluate their value, the stockholders of Gryphon may receive shares of Akerna Common Stock in the Merger that have a value that is less than, or greater than, the fair market value of the Gryphon Shares.
• If the conditions to the Merger are not met, the Merger will not occur.
• Litigation relating to the Merger could require Akerna or Gryphon to incur significant costs and suffer management distraction, and could delay or enjoin the Merger.
• If the Merger is not completed, the Akerna Board may decide to pursue a dissolution and liquidation of Akerna. In such an event, the amount of cash available for distribution to its stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.
• The combined company’s ability to use net operating loss carryforwards and certain tax credit carryforwards may be subject to limitation in connection with the Merger and other ownership changes.
• Following the completion of the Merger, the combined company may issue additional securities.
Risks Related to the Exchange Agreements
• The exchange of the Akerna Notes in Series C Preferred Stock and the exchange of any remaining Akerna Notes into shares of common stock of the combined company will significantly dilute current Akerna stockholders and diminish the pro rata portion of the 7.5% of the combined company to be held by Akerna stockholders.
Risks Related to the Proposed Sale Transaction
• While the Sale Transaction is pending, it creates unknown impacts on Akerna’s future which could materially and adversely affect Akerna business, financial condition and results of operations.
• The failure to consummate the Sale Transaction may materially and adversely affect Akerna’s business, financial condition and results of operations.
• Certain provisions of the Purchase Agreement may discourage third parties from submitting alternative proposals for the subsidiaries and assets being sold, including proposals that may be superior to the arrangements contemplated by the Purchase Agreement.
• The closing of the Merger is conditioned on the consummation of the Sale Transaction.
• A Superior Offer under the Purchase Agreements or a Superior Proposal under the Merger Agreement could result in either or both of the Merger and the Sale Transaction being significantly delayed or not being consummated at all.
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• There could be litigation surrounding our termination of the POSaBIT Purchase Agreement which could delay closing of the Merger and Sale Transaction or otherwise result in the combined company owing damages for breach of the POSaBIT Purchase Agreement which could impact the combined company’s financial condition.
• The conversion of the MJA Promissory Note into shares of common stock of the combined company will significantly dilute current Akerna stockholders and diminish the pro rata portion of the 7.5% of the combined company to be held by Akerna stockholders.
Risks Related to Akerna
Risks Related to Our Financial Condition and Operating History
• There is substantial doubt about our ability to continue as a going concern.
• We have a history of losses, expect to continue to incur losses in the near term and may not achieve or sustain profitability in the future.
• We have a relatively short operating history, which makes it difficult to evaluate our business and future prospects.
• Our long-term results of operations are difficult to predict and depend on the commercial success of our clients, the continued growth of the cannabis industry generally, and the regulatory environment within which the cannabis industry operates.
• Direct and indirect consequences of the COVID-19 pandemic may have material adverse consequences.
Risks Related to the Cannabis Industry
• As a company whose clients operate in the cannabis industry, we face many unique and evolving risks.
• Marijuana remains illegal under U.S. federal law
• Uncertainty of federal enforcement
• We could become subject to racketeering laws
• Banking regulations could limit access to banking services and expose us to risk
• Dividends and distributions could be prevented if our receipt of payments from clients is deemed to be proceeds of crime
• Further legislative development beneficial to our operations is not guaranteed
• The cannabis industry could face strong opposition from other industries
• The legality of marijuana could be reversed in one or more states
• Changing legislation and evolving interpretations of the law
• Dependence on client licensing
• Insurance risks
• Bankruptcy risks
• The cannabis industry is an evolving industry and we must anticipate and respond to changes.
Risks Related to Our Business
• A significant portion of our business is from government contracts, which present certain unique risks.
• Our operations may be adversely affected by disruptions to our information technology, or IT, systems, including disruptions from cybersecurity breaches of our IT infrastructure.
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• Privacy regulation is an evolving area and compliance with applicable privacy regulations may increase our operating costs or adversely impact our ability to service our clients and market our products and services.
• We rely on third parties for certain services made available to users of our platforms, which could limit our control over the quality of the user experience and our cost of providing services.
• Acquisitions and integration issues may expose us to risks.
• To grow and be successful, we need to attract and retain qualified personnel.
• We are smaller and less diversified than many of our potential competitors.
• Our business and stock price may suffer as a result of our limited public company operating experience and if securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our common stock in an adverse manner, the price and trading volume of our common stock could decline.
Risks Related to Intellectual Property
• Protecting and defending against intellectual property claims may have a material adverse effect on our business.
• Our success depends in part upon our ability to protect our core technology and intellectual property.
• Others may assert intellectual property infringement claims against us.
Risks Related to Our Charter Documents
• Anti-takeover provisions contained in Akerna’s amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt and limit the price investors might be willing to pay in the future for our common stock and could entrench management.
• create a staggered Board of Directors making it more difficult for stockholders to remove a majority of the Board of Directors and take control;
• grant the Board of Directors the ability to designate the terms of and issue new series of preferred shares, which can be created and issued by the Board of Directors without prior stockholder approval, with rights senior to those of the common stock; and
• impose limitations on our stockholders’ ability to call special stockholders’ meetings.
• Our corporate opportunity provisions in Akerna’s amended and restated certificate of incorporation could enable management to benefit from corporate opportunities that might otherwise be available to us.
• Akerna’s amended and restated certificate of incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.
Risks Related to the Akerna Notes
• The issuance of shares of our common stock pursuant to the Akerna Notes may result in significant dilution to our stockholders.
• Our obligations to the Akerna Note Holders are secured by a security interest in substantially all of our assets, if we default on those obligations, the Akerna Note Holders could foreclose on our assets.
• The Akerna Note Holders have certain additional rights upon an event of default under such Akerna Notes, which could harm our business, financial condition, and results of operations and could require us to reduce or cease our operations.
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Risks Related to Akerna Common Stock
• If Akerna’s Common Stock is delisted from Nasdaq, the liquidity and price of Akerna’s Common Stock could decrease and Akerna’s ability to obtain financing could be impaired.
• We may seek to raise additional funds, finance acquisitions, or develop strategic relationships by issuing securities that would dilute investors’ ownership. Depending on the terms available to us, if these activities result in significant dilution, it may negatively impact the trading price of shares of Akerna Common Stock.
• Warrants are exercisable for Akerna Common Stock, which could increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.
• Certain of our warrants are accounted for as a derivative liability and are recorded at fair value upon issuance with any changes in fair value each period reported in our statement of operations, which may have an adverse effect on the market price of our securities.
• If we do not maintain a current and effective prospectus relating to the common stock issuable upon exercise of the warrants, public holders will only be able to exercise such warrants on a “cashless basis.”
• Provisions of the warrants could discourage an acquisition of us by a third party.
• We may face additional risks, including regulatory, litigation, stockholder or other actions and negative impacts on our stock price, as a result of the material weakness in our internal control over financial reporting and revisions to our financial statements.
• The market price of Akerna Common Stock is particularly volatile given our status as a relatively new public company with a generally small and thinly traded public float, which could lead to wide fluctuations in our share price. Stockholders may be unable to sell their shares of Akerna Common Stock at or above their purchase price, which may result in substantial losses to them.
• The market price of Akerna Common Stock is still likely to be highly volatile and subject to wide fluctuations, and stockholders may be unable to resell shares of common stock at or above the price at which they are acquired.
• We have not paid dividends in the past and do not expect to pay dividends for the foreseeable future, and any return on investment may be limited to potential future appreciation in the value of Akerna Common Stock.
General Risks
• Any failure to maintain effective disclosure controls and procedures and internal control over our financial reporting could materially adversely affect us.
• Failure to remediate material weaknesses in internal controls over financial reporting could result in material misstatements in our financial statements.
• The requirements of being a public company may strain our resources and divert management’s attention.
• We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our shares of common stock less attractive to investors.
• Our operations could be adversely affected by events outside of our control, such as natural disasters, wars, or health epidemics.
• Proposed legislation in the U.S. Congress, including changes in U.S. tax law, and the recently enacted Inflation Reduction Act of 2022, may adversely impact us and the value of our common stock.
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Risks Related to Gryphon
Risks Related to the Price of Bitcoin
• Gryphon’s future success will depend upon the value of Bitcoin; the value of Bitcoin may be subject to pricing risk and has historically been subject to wide swings.
• The lack of regulation of digital asset exchanges which Bitcoin, and other cryptocurrencies, are traded on, may expose Gryphon to the effects of negative publicity resulting from fraudulent actors in the cryptocurrency space, and can adversely affect an investment in Gryphon.
• The Bitcoin market is exposed to financially troubled cryptocurrency-based companies.
• There is a lack of liquid markets for, and possible manipulation of, blockchain/cryptocurrency-based assets.
• Acceptance and/or widespread use of Bitcoin are uncertain.
• The bitcoin reward for successfully uncovering a block will halve several times in the future and Bitcoin value may not adjust to compensate Gryphon for the reduction in the rewards Gryphon receives from its mining efforts.
• Cryptocurrencies, including Bitcoin, face significant scaling obstacles that can lead to high fees or slow transaction settlement times.
• Transaction fees may decrease demand for Bitcoin and prevent expansion that could adversely impact an investment in Gryphon.
• The price of Bitcoin may be affected by the sale of Bitcoin by other vehicles investing in Bitcoin or tracking Bitcoin markets.
• The development of other cryptocurrencies and/or digital currencies may adversely affect the value of Bitcoin.
• If a malicious actor or botnet obtains control in excess of 50% of the processing power active on any digital asset network, including the Bitcoin network, it is possible that such actor or botnet could manipulate the blockchain in a manner that adversely affects an investment in Gryphon.
• The decentralized nature of cryptocurrency systems may lead to slow or inadequate responses to crises, which may negatively affect Gryphon’s business.
• The impact of geopolitical and economic events on the supply and demand for Bitcoin is uncertain.
• Gryphon faces risks of Internet disruptions, which could have an adverse effect on the price of Bitcoin.
Risks Related to Operations
• Gryphon is an early-stage company and has a limited history of generating profits.
• Gryphon’s independent registered public accounting firm’s report contains an explanatory paragraph that expresses substantial doubt about Gryphon’s ability continue as a “going concern.”
• Gryphon may be unable to access sufficient additional capital to fund its operations or for future strategic growth initiatives.
• Gryphon has a substantial amount of debt and significant debt service obligations.
• Any valuation at this stage is difficult to assess.
• If the bitcoin reward for solving blocks and transaction fees is not sufficiently high, Gryphon may not have an adequate incentive to continue mining and may cease mining operations, which will likely lead to Gryphon’s failure to achieve profitability.
• Bitcoin mining activities are energy-intensive, which may restrict the geographic locations of mining machines and have a negative environmental impact. Government regulators may potentially restrict the ability of electricity suppliers to provide electricity to mining operations, such as Gryphon’s.
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• Gryphon’s bitcoin may be subject to loss, theft or restriction on access.
• Incorrect or fraudulent cryptocurrency transactions may be irreversible.
• Gryphon may be affected by price fluctuations in the wholesale and retail power markets.
• If Gryphon is unable to secure power supply at prices or on terms acceptable to it, a material adverse effect on Gryphon’s business, prospects, financial condition, and operating results would occur.
• Gryphon’s business is dependent on a small number of digital asset mining equipment suppliers.
• Mining machines rely on components and raw materials that may be subject to price fluctuations or shortages, including ASIC chips that have been subject to an ongoing significant shortage.
• Gryphon’s reliance primarily on a single model of miner may subject its operations to increased risk of design flaws.
• There are risks related to technological obsolescence, the vulnerability of the global supply chain to Bitcoin hardware disruption, and difficulty in obtaining new hardware, which may have a negative effect on Gryphon’s business.
• Gryphon’s use of third-party mining pools exposes it to additional risks.
• Gryphon relies on hosting arrangements to conduct its business, and the availability of such hosting arrangements is uncertain and competitive and may be affected by changes in regulation in one or more countries.
• The mining data centers at which Gryphon maintains its mining equipment may experience damages, including damages that are not covered by insurance.
• Gryphon may not be able to compete with other companies, some of whom have greater resources and experience.
• Gryphon’s operations, investment strategies and profitability may be adversely affected by competition from other methods of investing in Bitcoin.
• The development and acceptance of competing blockchain platforms or technologies may cause consumers to use alternative distributed ledgers or other alternatives.
• Gryphon may not adequately respond to price fluctuations and rapidly changing technology, which may negatively affect Gryphon’s business.
• There is a possibility of Bitcoin mining algorithms transitioning to proof of stake validation and other mining related risks, which could make Gryphon less competitive and ultimately adversely affect Gryphon’s business.
• Gryphon may not be able to realize the benefits of forks. Forks in a digital asset network may occur in the future which may affect the value of bitcoin held by Gryphon.
• Gryphon’s business, results of operations, and financial condition may be impacted by the recent coronavirus (COVID-19) outbreak.
• The impacts of climate change may result in additional costs or risks.
Risks Related to Governmental Regulation and Enforcement
• As cryptocurrencies may be determined to be investment securities, Gryphon may inadvertently violate the Investment Company Act of 1940 and incur large losses as a result and potentially be required to register as an investment company or terminate operations and Gryphon may incur third-party liabilities.
• If regulatory changes or interpretations of Gryphon’s activities require its registration as a money services business under the regulations promulgated by The Financial Crimes Enforcement Network under the authority of the U.S. Bank Secrecy Act, Gryphon may be required to register and comply with such regulations. If regulatory changes or interpretations of Gryphon’s activities require the licensing or other
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registration of Gryphon as a money transmitter (or equivalent designation) under state law in any state in which Gryphon operates, Gryphon may be required to seek licensure or otherwise register and comply with such state law. In the event of any such requirement, to the extent Gryphon decides to continue, the required registrations, licensure and regulatory compliance steps may result in extraordinary, non-recurring expenses to Gryphon. Gryphon may also decide to cease its operations. Any termination of certain operations in response to the changed regulatory circumstances may be at a time that is disadvantageous to investors.
• There is no one unifying principle governing the regulatory status of cryptocurrency nor whether cryptocurrency is a security in each context in which it is viewed. Regulatory changes or actions in one or more countries may alter the nature of an investment in Gryphon or restrict the use of digital assets, such as cryptocurrencies, in a manner that adversely affects Gryphon’s business, prospects or operations.
• Banks and financial institutions may not provide banking services, or may cut off services, to businesses that engage in Bitcoin-related activities or that accept bitcoin as payment, including financial institutions of investors in Gryphon’s common stock.
• It may be illegal now, or in the future, to acquire, own, hold, sell or use bitcoin, ether, or other cryptocurrencies, participate in blockchains or utilize similar cryptocurrency assets in one or more countries, the ruling of which would adversely affect Gryphon.
• Gryphon’s interactions with a blockchain may expose Gryphon to specially designated nationals or blocked persons or cause Gryphon to violate provisions of law that did not contemplate distributed ledger technology.
• Since there has been limited precedent set for financial accounting or taxation of digital assets other than digital securities, it is unclear how Gryphon will be required to account for digital asset transactions and the taxation of Gryphon’s businesses.
Risks Related to the Combined Company
• If any of the events described in “Risks Related to Akerna” or “Risks Related to Gryphon” occur, those events could cause potential benefits of the Merger not to be realized.
• There has been no prior public market for Gryphon’s common stock, the stock price of the combined company’s common stock may be volatile or may decline regardless of its operating performance and you may not be able to resell your shares at or above the purchase price.
• The combined company will continue to incur increased costs as a result of operating as a public company, and its management team will be required to devote substantial time to new compliance initiatives.
• The combined company’s failure to meet the continued listing requirements of Nasdaq could result in a delisting of the combined company’s common stock.
• The combined company’s operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts, each of which may cause the combined company’s stock price to fluctuate or decline.
• After the Merger, the combined company’s executive officers, directors and principal stockholders, if they choose to act together, will continue to control or significantly influence all matters submitted to stockholders for approval.
• Sales of a substantial number of shares of the combined company’s common stock by the combined company’s stockholders in the public market could cause the combined company’s stock price to fall.
• Delaware law and provisions in the combined company’s amended and restated certificate of incorporation and bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of the combined company’s common stock.
• The combined company’s amended and restated bylaws designate a state or federal court located within the state of Delaware as the exclusive forum for substantially all disputes between the combined company and its stockholders, which could limit the combined company’s stockholders’ ability to choose the judicial forum for disputes with the combined company or its directors, officers or employees.
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• To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder.
• Future sales and issuances of the combined company’s common stock or rights to purchase common stock, including pursuant to the combined company’s equity incentive plans, could result in dilution of the percentage ownership of its stockholders and could cause the combined company’s stock price to fall.
• Gryphon does not currently intend to pay dividends on the combined company’s common stock, and, consequently, your ability to achieve a return on your investment will depend on appreciation, if any, in the price of the combined company’s common stock.
• If the Merger does not qualify as a “reorganization” for U.S. federal income tax purposes, U.S. Holders of Gryphon common stock will be required to recognize gain or loss for U.S. federal income tax purposes upon the exchange of their Gryphon common stock for the combined company’s common stock in the Merger.
• The historical financial information of Akerna and Gryphon presented herein may not be representative of their respective results or financial condition if they had been operated as a combined company, and as a result may not be representative of the combined company’s results or financial condition after the Merger.
• The unaudited pro forma condensed combined financial information presented herein may not be representative of the combined company’s results after the Merger.
• Failure by the combined company to comply with the initial listing standards of Nasdaq will prevent its stock from being listed on Nasdaq and may prevent the closing of the Merger.
• The Merger will result in changes to Akerna’s board of directors and the combined company may pursue different strategies than either Akerna or Gryphon may have pursued independently.
• Following the Merger, the combined company may be unable to realize the anticipated benefits of the Merger.
• The combined company’s management will be required to devote a substantial amount of time to comply with public company regulations.
These risks and other risks are discussed in greater detail under the section titled “Risk Factors” beginning on page 25 of this proxy statement/prospectus. Akerna and Gryphon, both encourage you to read and consider all of these risks carefully.
Market Price and Dividend Information
The closing price of Akerna Common Stock on January 26, 2023, the last trading day prior to the public announcement of the Merger, was $1.78 per share, and the closing price of Akerna Common Stock on January 4, 2024 was $0.3940 per share, in each case as reported on The Nasdaq Capital Market. As of December 21, 2023, which is the record date for the special meeting, there were approximately 229 holders of record of Akerna Common Stock, one holder of record of our special voting preferred share and two holders of record of our Series C Preferred Stock.
Because the market price of Akerna Common Stock is subject to fluctuation, the market value of the shares of Akerna Common Stock that Gryphon stockholders will be entitled to receive in the Merger may increase or decrease.
Gryphon is a private company, and the Gryphon Common Stock and the Gryphon Preferred Stock are not publicly traded.
Dividends
Akerna has never declared or paid cash dividends on its capital stock and does not anticipate paying any cash dividends in the foreseeable future. Gryphon has never paid or declared any cash dividends on its share capital. Gryphon intends to retain all available funds and any future earnings for use in the operation of its business and does not anticipate paying any cash dividends on its share capital in the foreseeable future. Notwithstanding the foregoing, any determination to pay cash dividends subsequent to the Merger will be at the discretion of the combined company’s board of directors and will depend upon a number of factors, including the combined company’s results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors the combined company’s board of directors deems relevant.
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The combined company (for the purpose of this “Risk Factors” section, “we,” “us” and “our”) will be faced with a market environment that cannot be predicted and that involves significant risks and uncertainties, many of which will be beyond our control. You should carefully consider all of the information set forth in this proxy statement/prospectus. The combined company’s business, financial condition and results of operations could be materially and adversely affected by any of these risks. In that event, the trading price its common stock would likely decline and you might lose all or part of your investment. In addition to the other information contained in this proxy statement/ prospectus, you should carefully consider the material risks described below before deciding how to vote your shares of Akerna Common Stock. You should also read and consider the other information in this proxy statement/prospectus and additional information about Akerna set forth in its Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which is filed with the SEC. Please see the section titled “Where You Can Find More Information” beginning on page 279 of this proxy statement / prospectus for further information. This proxy statement/prospectus also contains forward-looking statements that involve risks and uncertainties. The combined company’s results could materially differ from those anticipated in these forward-looking statements, as a result of certain factors including the risks described below and elsewhere in this proxy statement/prospectus and Akerna’s other SEC filings. See also “Cautionary Statement Concerning Forward-Looking Statements” on page 79 of this proxy statement / prospectus.
Risks Related to the Merger
Neither Akerna nor Gryphon can be sure if or when the Merger will be completed.
The consummation of the Merger is subject to the satisfaction or waiver of various conditions, including the authorization of the Merger by Gryphon’s stockholders and the approval of the proposals described in this proxy statement / prospectus by Akerna’s stockholders. Neither Akerna nor Gryphon can guarantee that the closing conditions set forth in the Merger Agreement will be satisfied. If Akerna is unable to satisfy the closing conditions in Gryphon’s favor or if other mutual closing conditions are not satisfied, Gryphon will not be obligated to complete the Merger. Under certain circumstances, Akerna would be required to pay Gryphon a termination fee of $275,000 less any reimbursed expenses.
If the Merger is not completed, the Akerna Board, in discharging its fiduciary obligations to Akerna stockholders, will evaluate other strategic alternatives or financing options that may be available, which alternatives may not be as favorable to Akerna stockholders as the Merger. Any future sale or merger, financing or other transaction may be subject to further stockholder approval. Akerna may also be unable to find, evaluate or complete other strategic alternatives, which may have a materially adverse effect Akerna’s business.
Akerna’s and Gryphon’s efforts to complete the Merger could cause substantial disruptions in, and create uncertainty surrounding, their respective businesses, which may materially adversely affect their results of operation and businesses. Uncertainty as to whether the Merger will be completed may affect Akerna’s and Gryphon’s ability to retain and motivate existing employees. A substantial amount of Akerna’s and Gryphon’s management’s and employees’ attention is being directed toward the completion of the Merger and Sale Transaction and thus is being diverted from their respective day-to-day operations. Uncertainty as to Akerna’s and Gryphon’s future could adversely affect their respective business and relationship with customers, collaborators, suppliers, vendors, regulators and other business partners. For example, customers, vendors, collaborators and other counterparties may defer decisions concerning working with Akerna or Gryphon, or seek to change existing business relationships with Akerna or Gryphon. Changes to, or termination of, existing business relationships could adversely affect Akerna’s results of operations and financial condition, as well as the market price of Akerna Common Stock. The adverse effects of the pendency of the Transactions could be exacerbated by any delays in completion of the Transactions or termination of the Merger Agreement and/or Purchase Agreement.
Until the Merger is completed, the Merger Agreement restricts Gryphon and Akerna from taking specified actions without the consent of the other party, and requires them to operate in the ordinary course of business consistent with past practice. These restrictions may prevent Gryphon and Akerna from making appropriate changes to their respective businesses or pursuing attractive business opportunities that may arise prior to the completion of the Merger.
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The market value of Gryphon may be difficult to determine, the market value of Akerna and Gryphon may change between the date of this proxy statement / prospectus and the date that the Merger is completed and the fairness opinion obtained by Akerna will not reflect subsequent changes.
The Akerna Board obtained an opinion of JMP to address the fairness of the consideration to be received by Akerna in the POSaBIT Sale Transaction and the consideration to be paid by Akerna in the Merger, from a financial point of view, to Akerna as of January 26, 2023. The Akerna Board determined that it was not necessary to receive an updated opinion from JMP in relation to entering into the Sale Transaction with MJ Acquisition and entering into the Second Amendment to the Merger Agreement subsequent to January 26, 2023 due to the factors discussed herein. Subsequent changes in the operation and prospects of Akerna or Gryphon, general market and economic conditions and other factors that may be beyond the control of Akerna or Gryphon, and on which JMP’s opinion was based, may significantly alter the value of Gryphon or Akerna, or the price of the shares of Akerna Common Stock, by the time the Merger is completed. Because Akerna does not anticipate asking JMP to update its opinion, the opinion will not address the fairness of the consideration from a financial point of view as of any other date other than the date of such opinion. For a description of the opinion that Akerna obtained from JMP, please refer to “The Merger — Opinion of Akerna’s Financial Advisor” beginning on page 103.
The percentage ownership of the combined company as determined in the Merger Agreement is adjustable based on the market price of Akerna Common Stock, so the Merger Consideration at the closing of the Merger may have a greater or lesser value than at the time the Merger Agreement was signed and amended, provided however that the Merger Consideration will be subject to a minimum value of approximately $116 million.
The Merger Agreement has set ownership percentage for the combined company based on the fully diluted capitalization of the parties as of the closing of the Merger, taking into account Gryphon’s outstanding warrants and Akerna’s outstanding warrants, restricted stock units, exchangeable shares, convertible notes, preferred stock and restricted stock awards, and subject to adjustment for the Akerna Reverse Stock Split to be implemented prior to the consummation of the Merger and subject to a minimum value of Akerna Common Stock to be issued to stockholders of Gryphon of approximately $116 million.
Any changes in the market price of Akerna Common Stock before the completion of the Merger will affect the number of shares of Akerna Common Stock issuable to Gryphon’s securityholders pursuant to the Merger Agreement to the extent that a drop in the price of Akerna Common Stock requires more shares of Akerna Common Stock to be issued to meet the minimum value of Gryphon of approximately $116 million. Therefore, if before the completion of the Merger the market price of the Akerna Common Stock increases from the market price of the Akerna Common Stock on the date of the Merger Agreement, then Gryphon’s securityholders could receive Merger Consideration with substantially greater value than the value of such Merger Consideration on the date of the Merger Agreement. Similarly, if before the completion of the Merger the market price of the Akerna Common Stock declines from the market price on the date of the Merger Agreement, then Gryphon’s securityholders could receive Merger Consideration with substantially lower value than the value of such Merger Consideration on the date of the Merger Agreement, subject to a minimum value of $116 million. Because the ownership percentage may adjust as a result of changes in the market price of the Akerna Common Stock, for each one percentage point change in the market price of the Akerna Common Stock, there is a corresponding one percentage point rise or decline, respectively, in the value of the total Merger Consideration payable to Gryphon’s securityholders pursuant to the Merger Agreement subject to a minimum value of $116 million.
Failure to complete the Merger may result in Akerna paying a termination fee to Gryphon and could significantly harm the market price of the Akerna Common Stock and negatively affect Akerna’s future business and operations.
If the Merger is not completed and the Merger Agreement is terminated under certain circumstances, Akerna may be required to pay Gryphon a termination fee of $275,000 less any reimbursed expenses. Even if a termination fee is not payable in connection with a termination of the Merger Agreement, Akerna will have incurred significant fees and expenses, which must be paid whether or not the Merger is completed. Further, if the Merger is not completed, it could significantly harm the market price of the Akerna Common Stock.
In addition, if the Merger Agreement is terminated and Akerna determines to seek another business combination, there can be no assurance that Akerna will be able to find a partner and close an alternative transaction on terms that are as favorable as or more favorable to Akerna than the terms set forth in the Merger Agreement.
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The closing of the Merger is subject to approval by Akerna stockholders and the Gryphon stockholders. Failure to obtain these approvals would prevent the closing of the Merger.
The closing of the Merger is subject to certain approvals by the Akerna stockholders and the Gryphon stockholders. Failure to obtain the required stockholder approvals may result in a material delay in, or the abandonment of, the Merger. Any delay in completing the Merger may materially adversely affect the timing and benefits that are expected to be achieved from the Merger.
The Merger may be completed even though certain events occur prior to the closing that materially and adversely affect Akerna or Gryphon.
The Merger Agreement provides that either Akerna or Gryphon can refuse to complete the Merger if there is a material adverse change affecting the other party between January 27, 2023, the date of the Merger Agreement, and the closing of the Merger. However, certain types of changes do not permit either party to refuse to complete the Merger, even if such change could be said to have a material adverse effect on Akerna or Gryphon, including, but not limited to:
• any change in applicable laws (including any quarantine, “shelter in place,” “stay at home,” workforce reduction, social distancing, shut down, closure, sequester or any other law, directive, guidelines or recommendations by any governmental entity in each case in connection with or in response to COVID-19, including the Coronavirus Aid, Relief, and Economic Security Act) or United States generally accepted accounting principles or any official interpretation thereof after the date of the Merger Agreement;
• changes in conditions of the financial, banking, capital or securities markets generally in the United States or any other country or region in the world, or changes therein, including changes in interest rates in the United States or any other country and changes in exchange rates for the currencies of any countries, or any change generally affecting the economy or the industry in which the party operates;
• the announcement or the execution of the Merger Agreement, the pendency or consummation of the Merger or the performance of the Merger Agreement, the ancillary documents thereto and the Transactions, including the impact thereof on the relationships, contractual or otherwise, of any such party, with customers, suppliers, licensors, distributors, partners, providers and employees;
• the compliance with the express terms of the Merger Agreement, the ancillary documents thereto and the Transactions or the taking of any action expressly required by the Merger Agreement, the ancillary documents thereto and the Transaction;
• any strike, embargo, labor disturbance, riot, protests, cyberterrorism event, earthquake, hurricane, tsunami, tornado, flood, mudslide, wild fire, meteorological event or other natural disaster, act of God or other force majeure event or any epidemic, disease, outbreak or pandemic (including COVID-19);
• any national or international political or social conditions in countries in which, or in the proximate geographic region of which, any such party operates, including the engagement by the United States or such other countries in hostilities or the escalation thereof, whether or not pursuant to the declaration of a national emergency or war, or the occurrence or the escalation of any military or terrorist attack upon the United States or such other country, or any territories, possessions, or diplomatic or consular offices of the United States or such other countries or upon any United States or such other country military installation, equipment or personnel; and
• any failure of such party, taken as a whole, to meet any projections, forecasts or budgets (although the underlying facts and circumstances resulting in such failure may be taken into account to the extent not otherwise excluded).
Certain officer and directors of Akerna and Gryphon have interests in the Merger that are different from Akerna and Gryphon stockholders.
Some of Akerna’s and Gryphon’s officers and directors have interests in the Merger that are different from Akerna and Gryphon’s respective stockholders and that may influence them to support or approve the Merger without regard to the interests of Akerna and Gryphon’s respective stockholders.
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Certain officers and directors of Akerna and Gryphon participate in arrangements that provide them with interests in the Merger that are different from the interests of Akerna and Gryphon’s respective stockholders, including, among others, the continued service as an officer or director of the combined company, severance benefits, transaction bonuses, the acceleration of stock option and restricted stock unit vesting, continued indemnification and the potential ability to sell an increased number of shares of common stock of the combined company in accordance with Rule 144 under the Securities Act.
For example, Akerna is party to arrangements with its executive officers pursuant to their employment agreements and transaction success agreements that may result in the receipt by such executive officers of cash severance payments and other transaction success bonuses and benefits with a total value of approximately $1.2 million (collectively and not individually), but not including the value of any accelerated vesting of Akerna’s equity awards held by those officers. Additionally, Akerna’s officers and directors are parties to the Merger Support Agreement with Gryphon.
The Akerna Board was aware of these interests and considered them, among other matters, in the decision to approve the Merger Agreement.
The market price of the combined company’s common stock following the Merger may decline as a result of the Merger.
The market price of the combined company’s common stock may decline as a result of the Merger for a number of reasons, including if:
• investors react negatively to the prospects of the combined company’s business and financial condition following the Merger;
• the effect of the Merger on the combined company’s business and prospects is not consistent with the expectations of financial or industry analysts; or
• the combined company does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by financial or industry analysts.
Akerna stockholders may not realize a benefit from the Merger commensurate with the ownership dilution they will experience in connection with or following the Merger.
If the combined company is unable to realize the strategic and financial benefits currently anticipated from the Merger, Akerna stockholders will have experienced substantial dilution of their ownership interests in Akerna without receiving the expected commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined company is able to realize only part of the expected strategic and financial benefits currently anticipated from the Merger.
During the pendency of the Merger, Akerna may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect Akerna’s business.
Covenants in the Merger Agreement impede the ability of Akerna to enter into material transactions that are not in the ordinary course of business pending completion of the Merger, other than the Sale Transaction. As a result, if the Merger is not completed, Akerna may be at a disadvantage to its competitors during such period. In addition, while the Merger Agreement is in effect, Akerna generally prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets, or other business combination with any third party, subject to certain exceptions relating to fiduciary duties. Any such transactions that are impeded or prohibited pursuant to these covenants could be favorable to Akerna stockholders if consummated.
Certain provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement.
The Merger Agreement contains “no-shop” restrictions on Akerna’s ability to solicit, initiate, endorse, knowingly encourage or facilitate third party proposals relating to alternative transactions or to provide information to, or engage in discussions with, a third party in relation to an alternative transaction, subject to certain exceptions to permit the Akerna Board to comply with its fiduciary duties. Before the Akerna Board may change its recommendation to stockholders to adopt the Merger or terminate the Merger Agreement to accept a Superior Proposal (as defined in the
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Merger Agreement), Akerna must, among other things, provide Gryphon with notice and matching rights. Upon the termination of the Merger Agreement, including in connection with a Superior Proposal, Akerna may be required to pay up to $275,000 (less reimbursed expenses) as a termination fee.
These provisions could discourage a potential third party acquiror from considering or proposing an acquisition transaction, even if it were prepared to pay a higher price than what would be received in the Merger. These provisions might also result in a potential third party acquiror proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the $275,000 termination fee that may become payable.
If the Merger Agreement is terminated and Akerna determines to seek another business combination, Akerna may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the Merger Agreement.
Furthermore, as noted above, certain Akerna securityholders who in the aggregate own approximately 41% of the outstanding voting securities of Akerna as of December 21, 2023, which is the record date for the special meeting have entered into the Merger Support Agreement or Merger Lender Support Letters. These Akerna stockholders also agreed to vote against any Acquisition Proposal with respect to Akerna that competes with the transactions contemplated by the Merger Agreement (See “Agreements Related to the Merger — Support Agreements”). As a result, the Merger Support Agreement and Merger Lender Support Letters may discourage other parties from attempting to engage in a transaction with Akerna, even if those parties would otherwise be willing to offer greater value to Akerna stockholders than that offered by Gryphon under the Merger.
Because the lack of a public market for the Gryphon Shares makes it difficult to evaluate their value, the stockholders of Gryphon may receive shares of Akerna Common Stock in the Merger that have a value that is less than, or greater than, the fair market value of the Gryphon Shares.
The Gryphon Shares are privately held and are not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Gryphon. Because the percentage of Akerna Common Stock to be issued to Gryphon’s stockholders was determined based on negotiations between the parties, it is possible that the value of Akerna Common Stock to be received by Gryphon’s stockholders will be less than the fair market value of Gryphon, or Akerna may pay more than the aggregate fair market value for Gryphon.
If the conditions to the Merger are not met, the Merger will not occur.
Even if the Merger is approved by Akerna and Gryphon’s stockholders, specified conditions must be satisfied or waived to complete the Merger. Neither Akerna nor Gryphon can assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the Merger will not occur or will be delayed, and Akerna or Gryphon may lose some or all of the intended benefits of the Merger. Additionally, if the Merger does not occur, Akerna may not have sufficient cash to conduct an orderly wind-down and dissolution of its business. Akerna may seek an immediate dissolution, subject to a vote of its stockholders, in the event the Merger is not completed.
Litigation relating to the Merger could require Akerna or Gryphon to incur significant costs and suffer management distraction, and could delay or enjoin the Merger.
Akerna or Gryphon could be subject to demands or litigation related to the Merger, whether or not the Merger is consummated. Such actions may create uncertainty relating to the Merger, or delay or enjoin the Merger, and responding to such demands could divert management time and resources. In addition, such demands or litigation could lead to a dissolution or bankruptcy of Akerna if the costs associated with such demands or litigation are significant enough. For additional information regarding certain pending litigation matters relating to the Merger, see “Akerna’s Business — Legal Proceedings” on page 191 of this proxy statement/prospectus.
If the Merger is not completed, the Akerna Board may decide to pursue a dissolution and liquidation of Akerna. In such an event, the amount of cash available for distribution to its stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.
There can be no assurance that the Merger will be completed. If the Merger is not completed, the Akerna Board may decide to pursue a dissolution and liquidation of Akerna. In such an event, the amount of cash available for distribution to Akerna stockholders will depend heavily on the timing of such decision, as with the passage of time the amount of
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cash available for distribution will be reduced as Akerna continues to fund its operations. In addition, if the Akerna Board were to approve and recommend, and Akerna stockholders were to approve, a dissolution and liquidation of Akerna, Akerna would be required under Delaware corporate law to pay its outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to Akerna stockholders. As a result of this requirement, a portion of Akerna’s remaining cash assets may need to be reserved pending the resolution of such obligations. In addition, Akerna may be subject to litigation or other claims related to a dissolution and liquidation. If a dissolution and liquidation were pursued, the Akerna Board, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of Akerna Common Stock could lose all or a significant portion of their investment in the event of liquidation, dissolution or winding up of Akerna.
The combined company’s ability to use Akerna’s net operating loss carryforwards and certain tax credit carryforwards may be subject to limitation in connection with the Merger and other ownership changes.
As of December 31, 2022, Akerna had federal and state net operating loss (“NOL”) carryforwards of $58.9 million. The majority of federal NOL carryforwards are carried forward indefinitely. As of December 31, 2022, Akerna had $17.5 million of foreign net operating loss carryforwards that do not expire. Under Section 382 of the Code, changes in Akerna’s ownership may limit the amount of NOL carryforwards, research and development tax credit carryforwards and other tax attributes that could be utilized annually to reduce its future taxable income or tax liability, if any. This limitation would generally apply in the event of a cumulative change in its ownership of more than 50% within a three-year period. Any such limitation may significantly reduce the combined company’s ability to utilize Akerna’s NOL carryforwards and research and development tax credit carryforwards before they expire. The completion of the Merger, together with private placements and other transactions that have occurred since the inception of Akerna, may trigger such an ownership change pursuant to Section 382 of the Code. Any such limitation, whether as the result of the Merger, prior private placements, sales of common stock by existing Akerna stockholders, or additional sales of common stock by the combined company after the Merger, could have a material adverse effect on the combined company’s results of operations in future years.
Following the completion of the Merger, the combined company may issue additional securities.
Following the completion of the Merger, the combined company may issue additional securities (including equity securities) to finance its activities. If the combined company were to issue additional equity securities, the ownership interest of existing Akerna and Gryphon stockholders may be diluted and some or all of the combined company’s financial measures on a per share basis could be reduced. Moreover, as the combined company’s intention to issue additional equity securities becomes publicly known, the combined company’s share price may be materially adversely affected.
Risks Related to the Exchange Agreements
The exchange of the Akerna Notes in Series C Preferred Stock and the exchange of any remaining Akerna Notes into shares of common stock of the combined company will significantly dilute current Akerna stockholders and diminish the pro rata portion of the percentage of the combined company to be held by Akerna stockholders.
At closing of the Merger, both the Series C Preferred Stock and the conversion amount of any remaining Akerna Notes will be exchanged for shares of common stock of the combined company. Akerna intends to exchange the Series C Preferred Stock into shares of common stock in the combined company at the market price at the close of the Merger, which at an assumed exchange price of $4.00 (post-reverse stock split) per share would total approximately 855,500 shares of common stock of the combined company (post-reverse stock split), and assuming the remaining portion of the Akerna Notes remains outstanding at closing of the Merger, then an additional 953,783 shares of common stock in the combined company (post-reverse stock split) will be issued to the Akerna Note Holders. The issuance of these shares of common stock will be counted in the calculation of fully diluted Akerna Common Stock for purposes of determining the numbers of share of Akerna Common Stock to be issued as Merger Consideration at the closing of the Merger. This will result in significant dilution to the Akerna stockholders in relation to their pro rata portion of the percentage of the combined company to be held by Akerna stockholders.
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Risks Related to the Proposed Sale Transaction
While the Sale Transaction is pending, it creates unknown impacts on our future which could materially and adversely affect Akerna’s business, financial condition and results of operations.
While the Sale Transaction is pending, it creates unknown impacts on our future. Therefore, our current or potential business partners may decide to delay, defer or cancel entering into new business arrangements with us pending consummation of the Sale Transaction. The occurrence of these events individually or in combination could materially and adversely affect our business, financial condition and results of operations.
The failure to consummate the Sale Transaction may materially and adversely affect our business, financial condition and results of operations.
The Sale Transaction is subject to various closing conditions including, among others, the approval of the Sale Transaction by our stockholders. We cannot control these conditions and cannot assure you that they will be satisfied. If the Sale Transaction is not consummated, we may be subject to a number of risks, including the following:
• we may not be able to identify an alternate transaction, or if an alternate transaction is identified, such alternate transaction may not result in equivalent terms as compared to what is proposed in the Sale Transaction;
• the trading price of our common stock may decline to the extent that the current market price reflects a market assumption that the Sale Transaction will be consummated;
• the failure to complete the Sale Transaction may create doubt as to our ability to effectively implement our current business strategies;
• our costs related to the Sale Transaction, such as legal, accounting and financial advisory fees, must be paid even if the Sale Transaction is not completed; and
• our relationships with our customers, suppliers and employees may be damaged and our business may be harmed.
The occurrence of any of these events individually or in combination could materially and adversely affect our business, financial condition and results of operations, which could cause the market value of our common stock to decline.
Certain provisions of the Purchase Agreement may discourage third parties from submitting alternative proposals for the subsidiaries and assets being sold, including proposals that may be superior to the arrangements contemplated by the Purchase Agreement.
The Purchase Agreement contains “no-shop” restrictions on Akerna’s ability to solicit, initiate or knowingly encourage third party proposals relating to alternative transactions or to provide information to, or engage in discussions with, a third party in relation to an alternative transaction, subject to the ability of our Board of Directors to change their recommendation and terminate the Purchase Agreement in accordance with their fiduciary duties. Before our Board Directors may change its recommendation to stockholders or terminate the Purchase Agreement to accept a Superior Offer (as defined in the Purchase Agreement), Akerna must, among other things, provide MJ Acquisition with notice. Upon the termination of the Purchase Agreement, including in connection with a Superior Offer, we may be required to pay up to $290,000 as a termination fee plus $60,000 in reasonable fees and expenses.
These provisions could discourage a potential third party acquiror from considering or proposing an acquisition transaction, even if it were prepared to pay a higher price than what would be received in the Sale Transaction. These provisions might also result in a potential third party acquiror proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the $290,000 termination fee and $60,000 in fees and expenses that may become payable.
If the Purchase Agreement is terminated and we determine to seek another business combination, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the Purchase Agreement.
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The closing of the Merger is conditioned on the conditions precedent of the Sale Transaction being satisfied or waived such that the Sale Transaction can be consummated immediately thereafter.
The closing of the Merger is conditioned on the conditions precedent of the Sale Transaction being satisfied or waived such that the Sale Transaction can be consummated immediately after the closing of the Merger. If we fail to meet all the conditions precedent to consummate the Sale Transaction, the Merger may still proceed if Gryphon waives that condition to closing, provided that the other closing conditions contained in the Merger Agreement are satisfied or waived. The occurrence of these events would result in the combined company continuing to own MJ Freeway and Ample following the closing of the Merger, which could cause the combined company to incur unanticipated costs and expenses in connection with such continued ownership, or pursuit of an alternative disposition of MJ Freeway and Ample. It is not currently anticipated that Gryphon would waive the condition of the conditions precedent to completion of the Sale Transaction being satisfied or waived and therefore failure to meet those conditions precedent to the Sale Transaction will likely result in the failure to consummate the Merger and will result in us continuing our operations, which may be adversely impacted by the failure of the Sale Transaction and Merger Transaction, seeking alternative transactions, which may have less value to the stockholders, or seeking to dissolve and liquidate Akerna.
A Superior Offer under the Purchase Agreements or a Superior Proposal under the Merger Agreement could result in either or both of the Merger and the Sale Transaction being significantly delayed or not being consummated at all.
If our Board of Directors receives either a Superior Proposal under the Merger Agreement and/or a Superior Offer under the Purchase Agreement, the Akerna Board may be required pursuant to its fiduciary duties to pursue such alternative transactions in the best interests of the stockholders. This may result in the delay of either of the Merger or the Sale Transaction if an alternative party needs to complete due diligence, finalize transaction documents and be substituted into the current structure of the Merger and/or Sale Transaction, and it could result in either or both of the Merger Agreement or Purchase Agreement being terminated in order for Akerna to pursue the Superior Proposal or Superior Offer, as the case may be. In such circumstances, in addition to the termination fees that may be payable under the terms of the Merger Agreement or Purchase Agreement (as discussed above) for the termination of such agreements, we may be sued for terminating such agreements by either Gryphon or MJ Acquisition, as the case may be, if the opposite party in those agreements disagrees with the Akerna Board’s determination of their fiduciary duties or otherwise believes we violated the terms of such agreements, including the “no-shop” provisions contained therein, in obtaining the proposed Superior Proposal or Superior Offer, as the case may be. Such lawsuit(s) could significantly delay the closing of the Merger and/or the Sale Transaction or prevent them from occurring altogether. If we terminate either of the Merger Agreement or the Purchase Agreement, there is no guarantee that the alternative Superior Proposal or Superior Offer, as the case may be, will be consummated. If such alternative transactions are not consummated, any other alternative transactions we may pursue may have less value to the stockholders or we may be forced to dissolve and liquidate Akerna.
There could be litigation surrounding our termination of the POSaBIT Purchase Agreement which could delay closing of the Merger and Sale Transaction or otherwise result in the combined company owing damages for breach of the POSaBIT Purchase Agreement which could impact the combined company’s financial condition.
The POSaBIT Purchase Agreement prohibited Akerna from soliciting a superior offer and only permitted the Akerna Board to terminate the POSaBIT Purchase Agreement pursuant to receipt of an unsolicited acquisition proposal that the Board determined to be a superior offer or reasonably likely to result in a superior offer. Upon receipt of a superior offer, the POSaBIT Purchase Agreement permitted the Akerna Board to terminate the agreement if the Akerna Board determined that their fiduciary duties to the securityholders of Akerna mandated that the Akerna Board change its recommendation and pursue the superior offer. While the Akerna Board did determine that the offer made by Alleaves on March 17, 2023 was reasonable likely to result in a superior offer and that their fiduciary duties mandated that they change their recommendation and Akerna terminate the POSaBIT Purchase Agreement, POSaBIT disagreed with those determinations and questioned whether Akerna violated the non-solicitation provisions of the POSaBIT Purchase Agreement and may seek legal action in the future to seek damages for breach of such provisions. Akerna does not believe that it has violated any of the terms of the POSaBIT Purchase Agreement, but any lawsuit by POSaBIT may delay closing or result in the combined company owing significant damages to POSaBIT for breach of the POSaBIT Purchase Agreement. Alleaves has entered into an indemnification agreement with Gryphon, of which Akerna is a third-party beneficiary, pursuant to which Alleaves has agreed to indemnify Gryphon and Akerna for any liability arising from Akerna terminating the POSaBIT Purchase Agreement.
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The exchange of the MJA Promissory Note into shares of common stock of the combined company will significantly dilute current Akerna stockholders and diminish the pro rata portion of the percentage of the combined company to be held by Akerna stockholders.
At closing of the Sale Transaction, MJA Promissory Note will convert into shares of common stock of the combined company. The MJA Promissory Note will convert into 7,500,000 shares of common stock in the combined company assuming the 5-day volume weighted average price of Akerna Common Stock for the 5 days ending immediately prior to the closing of the Sale Transaction if $0.20 per share on a pre-reverse stock split basis. The issuance of these shares of common stock will be counted in the calculation of fully diluted Akerna Common Stock for purposes of determining the numbers of share of Akerna Common Stock to be issued as Merger Consideration at the closing of the Merger. This will result in significant dilution to the Akerna stockholders in relation to their pro rata portion of the percentage of the combined company to be held by Akerna stockholders.
Risks Related to Akerna
Risks Related to Our Financial Condition and Operating History
There is substantial doubt about our ability to continue as a going concern.
The notes to our financial statements include disclosure regarding the substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of the uncertainty regarding our ability to continue as a going concern. This uncertainty could materially limit our ability to raise additional funds through the issuance of equity or debt securities or otherwise. Further reports on our financial statements may include an explanatory paragraph with respect to our ability to continue as a going concern. Our ability to continue as a going concern is uncertain and dependent upon obtaining the financing necessary to meet our financial commitments and to continue our ongoing operations as currently planned. We do not have sufficient funds to meet planned expenditures over the next twelve months, and will need to seek additional debt or equity financing to meet our planned expenditures. We raised an additional $500,000 on June 14, 2023 to help fund our ongoing working capital requirements. We will require additional financing in the third quarter of 2023 to meet our ongoing operational working capital requirements and continue to meet the financial covenants of the Akerna Notes if the Merger and the Sale Transaction do not close prior to the end of August 2023. We plan to meet those requirements in part through the use of our at-the-market (“ATM”) facility, but there are no guarantees that the facility will permit us to raise sufficient cash to meet our ongoing requirements. These factors raise substantial doubt regarding our ability to continue as a going concern. If we are unable to raise sufficient capital we may have to reduce operations which could significantly affect our results of operations. If we fail to meet the financial covenants of our debt and cannot obtain a waiver from such provisions or otherwise come to an agreement with the holders of our debt, such holders may declare a default on the debt which could subject our assets to seizure and sale, negatively impacting our business. See “Risks Related to our Convertible Debt” below.
We have a history of losses, expect to continue to incur losses in the near term and may not achieve or sustain profitability in the future.
We have incurred significant losses in each fiscal year since our inception in 2010. For the year ended December 31, 2022, we had a net loss of $79.1 million. For the year ended December 31, 2021 we had a net loss of $31.3 million. For fiscal year ended June 30, 2020, we had a net loss of $14.4 million. These losses have been due to the substantial investments we have made to develop our monitoring and compliance platforms and related software, market these products to government regulatory agencies and commercial businesses and growing our infrastructure to support the increased business. We expect to continue to invest in the further development of our platforms, software, and related product offerings and to grow both our government regulatory and commercial business client base. As a result, we expect our operating expenses to increase in the future due to expected increased sales and marketing expenses, operational costs, product development costs, and general and administrative costs and, therefore, our operating losses will continue or even increase at least through the near term. In addition, because we are a public company, we will incur significant legal, accounting, and other expenses that MJ Freeway did not incur as a non- public company. Furthermore, to the extent that we are successful in increasing our client base, we will also incur increased expenses because costs associated with generating and supporting client agreements are generally incurred upfront, while revenue is generally recognized ratably over the term of the agreement. You should not rely upon our recent revenue growth as indicative of future performance. We may not reach profitability in the near future or at any specific time in the future. If and when our operations do become profitable, we may not sustain profitability.
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We have a relatively short operating history, which makes it difficult to evaluate our business and future prospects.
We have a relatively short operating history, which makes it difficult to evaluate our business and future prospects. Our wholly-owned subsidiary, MJ Freeway, has been in existence since 2010, and much of our revenue growth has occurred during the past four years. We have encountered, and will continue to encounter, risks and difficulties frequently experienced by growing companies in rapidly changing industries, including those related to:
• market acceptance of our current and future products and services;
• changing regulatory environments and costs associated with compliance;
• our ability to compete with other companies offering similar products and services;
• our ability to effectively market our products and services and attract new clients;
• existing client retention rates and the ability to upsell clients;
• the amount and timing of operating expenses, particularly sales and marketing expenses, related to the maintenance and expansion of our business, operations, and infrastructure;
• our ability to control costs, including operating expenses;
• our ability to manage organic growth and growth fueled by acquisitions;
• public perception and acceptance of cannabis-related products and services generally; and
• general economic conditions and events.
If we do not manage these risks successfully, our business and financial performance will be adversely affected.
Our long-term results of operations are difficult to predict and depend on the commercial success of our clients, the continued growth of the cannabis industry generally, and the regulatory environment within which the cannabis industry operates.
Our offers of products and services help government regulatory agencies and commercial businesses monitor regulatory compliance and operate efficiently and successfully in compliance with applicable state laws. Our long-term results will directly depend on the continued growth of the legalized cannabis industry (and public acceptance of cannabis-related products) and the ability of our current and future clients to successfully market their own products and services. If the legalized cannabis marketplace does not continue to grow because the public does not increasingly accept cannabis-related products or government regulators adopt laws, rules, or regulations that terminate or diminish the ability for commercial businesses to develop, market, and sell cannabis-related products, our business and financial performance would be materially adversely affected. Additionally, even if the cannabis marketplace continues to grow rapidly, and government regulation allows for the free-market development of this industry, products, and services competitive with those offered by us may enjoy better market acceptance.
The legalized cannabis industry may not continue to grow and the regulatory environment may not remain favorable to participants in the industry. More generally, our products and services may not experience growing market acceptance, which would adversely impact our ability to grow revenue.
Direct and indirect consequences of the COVID-19 pandemic may have material adverse consequences.
The current COVID-19 pandemic is creating extensive disruptions to the global economy. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, we may experience adverse effects on our operations. Specifically, if our clients are forced to reduce business hours or close their businesses for an extended period of time or if their customer base experiences financial hardship, our clients may experience a sharp decline in revenue and be unable to meet their obligations to us
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under existing agreements or be unwilling to extend their agreements past current terms, which may adversely impact our financial results. Further, we may experience a decrease in new clients due to a lack of financial resources or a decline in new markets as businesses and financial markets deal with the impact of COVID-19. As governments are focused on relief efforts and fiscal stimulus measures, important legislation to expand or clarify certain existing or new markets for our products may be postponed or abandoned, which may adversely impact our results. Further, these conditions may impact our ability to access financial markets to obtain the necessary funding to operate our business as currently contemplated, which may adversely affect our liquidity and working capital. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this registration statement, such as those relating to our operations and financial condition. Due to the highly uncertain and dynamic nature of events relating to the COVID-19 pandemic, it is not currently possible to estimate the impact of the pandemic on our business. However, these effects could have a material impact on our operations, and we will continue to monitor the COVID-19 situation closely. Through December 31, 2022, we have experienced delays in our consulting projects and the corresponding delay in revenue recognition for such projects, which we believe could be the result of government shutdowns and other regulatory uncertainty surrounding COVID-19.
Risks Related to the Cannabis Industry
As a company whose clients operate in the cannabis industry, we face many unique and evolving risks.
We currently serve government and private clients with respect to their tracking, monitoring, and compliance needs as they operate in the growing cannabis industry. Any risks related to the cannabis industry that may adversely affect our clients and potential clients may, in turn, adversely affect demand for our products. Specific risks faced by companies operating in the cannabis industry include, but are not limited to, the following:
Marijuana remains illegal under U.S. federal law
Marijuana is a Schedule-I controlled substance under the CSA, and is illegal under federal law. It remains illegal under U.S.’s federal law to grow, cultivate, sell or possess marijuana for any purpose or to assist or conspire with those who do so. Additionally, 21 U.S.C. 856 a.1. states that it shall be unlawful to “knowingly open, lease, rent, use, or maintain any place, whether permanently or temporarily, for the purpose of manufacturing, distributing, or using any controlled substance.” Even in those states in which the use of marijuana has been authorized, its use remains a violation of federal law. Since federal law criminalizing the use of marijuana is not preempted by state laws that legalize its use, strict enforcement of federal law regarding marijuana would likely result in our clients’ inability to proceed with their operations, which would adversely affect demands for our products and services.
Uncertainty of federal enforcement
Any presidential administration, current or future, could change federal enforcement policy or execution and decide to enforce the federal cannabis laws more strongly. Recent administrations have disagreed on how strongly to enforce federal cannabis laws. For example, on August 29, 2013, the U.S. Department of Justice (the “DOJ”) under the Obama administration issued a memorandum (the “Cole Memorandum”), characterizing strict enforcement as an inefficient use of federal investigative and prosecutorial resources. The Cole Memorandum provided guidance to all federal prosecutors and indicated that federal enforcement of the CSA against cannabis-related conduct should be focused on specific priorities, including cannabis distribution to minors, violence in connection with cannabis distribution, cannabis cultivation on federal property, and collection of cannabis-derived revenue by criminal enterprises, gangs and cartels. On January 4, 2018, the DOJ under the Trump administration issued a memorandum (the “Sessions Memorandum”), which effectively rescinded the Cole Memorandum and directed federal prosecutors to enforce the CSA and to follow well-established principles when pursuing prosecutions related to cannabis activities. The DOJ under the Biden administration has not readopted the Cole Memorandum, but President Biden has indicated support for decriminalization of cannabis. On October 6, 2022, President Biden issued an executive order pardoning all persons convicted of simple possession of cannabis under the CSA and directed the Secretary of Health and Human Services and the Attorney General to initiate an administrative process to review the scheduling of cannabis under the CSA. Further, on December 2, 2022, President Biden signed into law the Medical Marijuana and Cannabidiol Research Expansion Act, which streamlines and expands the process for researching the medical use of cannabis. We
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cannot predict how the current administration or future administrations will enforce the CSA or other laws against cannabis activities. Any change in the federal government’s enforcement of current federal laws could cause significant financial damage to us. The legal uncertainty and possible future changes in law could negatively affect our revenues, results of operations and success generally.
Unless and until Congress amends the CSA with respect to medical and/or adult use cannabis, there is a risk that federal prosecutors may enforce the existing CSA. Federal authorities may decide to change their current posture and begin to enforce current federal cannabis law and, if they begin to aggressively enforce such laws, it is possible that they could allege that we violated federal laws by selling products used in the cannabis industry. As a result, active enforcement of the current federal regulatory position on cannabis may directly or indirectly adversely affect our revenues and profits.
In 2014, Congress passed a spending bill, (the 2015 Appropriations Bill), containing a provision (the “Appropriations Rider”), blocking federal funds and resources allocated under the 2015 Appropriations Bill from being used to “prevent such States from implementing their own State medical marijuana law.” The Appropriations Rider provided a budgetary constraint on the federal government from interfering with the ability of states to administer their medical marijuana laws, although it did not codify federal protections for medical marijuana patients and producers. Moreover, despite the Appropriations Rider, the DOJ maintains that it can still prosecute violations of the federal marijuana ban and continue cases already in the courts. In USA vs. McIntosh, the U.S. Court of Appeals for the Ninth Circuit held that this provision prohibits the DOJ from spending funds from relevant appropriations acts to prosecute individuals who engage in conduct permitted by state medical-use cannabis laws and who strictly comply with such laws. However, the Ninth Circuit’s opinion, which only applies to the states of Alaska, Arizona, California, Hawaii, and Idaho, also held that persons who do not strictly comply with all state laws and regulations regarding the distribution, possession and cultivation of medical-use cannabis have engaged in conduct that is unauthorized, and in such instances the DOJ may prosecute those individuals. The Appropriations Rider was included in the omnibus spending bill for fiscal years 2015, 2016, 2017, 2018, 2019, 2020 and 2021. On December 29, 2022, President Biden signed the omnibus spending bill, which included the Appropriations Rider, extending its application until September 30, 2023. However, there is no assurance that Congress will approve inclusion of a similar prohibition in future appropriations bills to prevent DOJ from using congressionally appropriated funds to enforce federal cannabis laws against regulated medical cannabis actors operating in compliance with state and local law. If the Appropriation Rider is not extended in the future, the risk of federal enforcement and override of state medical marijuana laws would increase.
Despite the rescission of the Cole Memorandum, the Department of the Treasury, Financial Crimes Enforcement Network, has not rescinded the “FinCEN Memo” dated February 14, 2014, which de-prioritizes enforcement of the Bank Secrecy Act against financial institutions and marijuana-related businesses which utilize them. This memo appears to be a standalone document and is presumptively still in effect. At any time, however, the Department of the Treasury, Financial Crimes Enforcement Network, could elect to rescind the FinCEN Memo. This would make it more difficult for us and our clients and potential clients to access the U.S. banking systems and conduct financial transactions, which would adversely affect our operations.
We could become subject to racketeering laws
While we do not grow, handle, process or sell cannabis or cannabis-derived products, our receipt of funds from clients that do conduct such operations in violation of federal law exposes us to risks related to federal racketeering laws. RICO is a federal statute providing criminal penalties in addition to a civil cause of action for acts performed as part of an ongoing criminal organization. Under RICO, it is unlawful for any person who has received income derived from a pattern of racketeering activity (which includes most felonious violations of the CSA), to use or invest any of that income in the acquisition of any interest, or the establishment or operation of, any enterprise which is engaged in interstate commerce. RICO also authorizes private parties whose properties or businesses are harmed by such patterns of racketeering activity to initiate a civil action against the individuals involved. Although RICO suits against the cannabis industry are rare, a few cannabis businesses have been subject to a civil RICO action. Any violation of RICO could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens or criminal charges, including but not limited to, seizure of assets, disgorgement of profits, cessation of our business activities or divestiture.
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Banking regulations could limit access to banking services and expose us to risk
Our receipt of payments from clients engaged in state-legal cannabis operations could also subject us to the consequences of a variety of federal laws and regulations that involve money laundering, financial record keeping and proceeds of crime, including the Bank Secrecy Act, as amended by Title III of the USA PATRIOT Act and any related or similar rules, regulations or guidelines, issued, administered or enforced by the federal government. Since we fund from activities that are illegal under the CSA, banks and other financial institutions providing services to us risk violation of federal anti-money laundering statutes (18 U.S.C. §§ 1956 and 1957), the unlicensed money-remitter statute (18 U.S.C. § 1960) and the Bank Secrecy Act, among other applicable federal statutes. Banks often refuse to provide banking services to businesses involved in the cannabis industry due to the present state of federal laws and regulations governing financial institutions. The inability to open bank accounts may make it difficult for us or our clients to operate and our client’s reliance on cash can result in a heightened risk of theft, which could harm their businesses and, in turn, harm our business. Additionally, some courts have denied marijuana-related businesses bankruptcy protection, thus, making it very difficult for lenders to recoup their investments, which may limit the willingness of banks to lend to our clients and to us. The lack of banking and financial services presents unique and significant challenges to businesses in the cannabis industry and we may experience similar difficulties in obtaining and maintaining regular banking and financial services because of the activities of our clients.
Dividends and distributions could be prevented if our receipt of payments from clients is deemed to be proceeds of crime
In the event that any of our operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more federal statutes or any other applicable legislation. This could restrict or otherwise jeopardize our ability to declare or pay dividends or effect other distributions. Furthermore, while there are no current intentions to declare or pay dividends in the foreseeable future, in the event that a determination was made that our proceeds from operations (or any future operations) could reasonably be shown to constitute proceeds of crime, we may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
Further legislative development beneficial to our operations is not guaranteed
Among other things, our business involves the provision of an online platform that provides monitoring and tracking of those involved in the cultivation, distribution, manufacture, storage, transportation, and/or sale of medical and adult-use cannabis products in compliance with applicable state law. The success of our business depends on the continued development of the cannabis industry and the activity of commercial business and government regulatory agencies within the industry. The continued development of the cannabis industry is dependent upon continued legislative and regulatory authorization of cannabis at the state level and a continued laissez-faire approach by federal enforcement agencies. Any number of factors could slow or halt progress in this area. Further regulatory progress beneficial to the industry cannot be assured. While there may be ample public support for legislative action, numerous factors impact the legislative and regulatory process, including election results, scientific findings or general public events. Any one of these factors could slow or halt progressive legislation relating to cannabis and the current tolerance for the use of cannabis by consumers, which could adversely affect the demand for our product and operations.
The cannabis industry could face strong opposition from other industries
We believe that established businesses in other industries may have a strong economic interest in opposing the development of the cannabis industry. Cannabis may be seen by companies in other industries as an attractive alternative to their products, including recreational marijuana as an alternative to alcohol, and medical marijuana as an alternative to various commercial pharmaceuticals. Many industries that could view the emerging cannabis industry as an economic threat are well established, with vast economic and federal and state lobbying resources. It is possible that companies within these industries could use their resources to attempt to slow or reverse legislation legalizing cannabis. Any inroads these companies make in halting or impeding legislative initiatives that would be beneficial to the cannabis industry could have a detrimental impact on our clients and, in turn on our operations.
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The legality of marijuana could be reversed in one or more states
The voters or legislatures of states in which marijuana has already been legalized could potentially repeal applicable laws that permit the operation of both medical and retail marijuana businesses. These actions might force businesses, including those that are our clients, to cease operations in one or more states entirely.
Changing legislation and evolving interpretations of the law
Laws and regulations affecting the medical and adult-use marijuana industry are constantly changing, which could detrimentally affect our clients and, in turn, our operations. Local, state, and federal marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require our clients and thus us to incur substantial costs associated with modification of operations to help ensure such clients’ compliance. In addition, violations of these laws, or allegations of such violations, could disrupt our clients’ business and result in a material adverse effect on our operations. In addition, it is possible that regulations may be enacted in the future that will limit the amount of cannabis growth or related products that our commercial clients are authorized to produce. We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our operations.
Dependence on client licensing
Our business is dependent on our clients obtaining various licenses from various municipalities and state licensing agencies. There can be no assurance that any or all licenses necessary for our clients to operate their businesses will be obtained, retained or renewed. If a licensing body were to determine that a client of ours had violated applicable rules and regulations, there is a risk the license granted to that client could be revoked, which could adversely affect our operations. There can be no assurance that our existing clients will be able to retain their licenses going forward, or that new licenses will be granted to existing and new market entrants.
Insurance risks
In the U.S, many marijuana-related businesses are subject to a lack of adequate insurance coverage. In addition, many insurance companies may deny claims for any loss relating to marijuana or marijuana-related operations based on their illegality under federal law, noting that a contract for an illegal transaction is unenforceable.
Bankruptcy risks
Because cannabis is illegal under U.S. federal law, and bankruptcy is a strictly federal proceeding, many courts have denied cannabis businesses federal bankruptcy protections, thus making it very difficult for lenders to recoup their investments in the cannabis industry in the event of a bankruptcy. If we were to seek protection from creditors pursuant to applicable bankruptcy or insolvency laws, even though we are not directly engaged in manufacturing, distributing, selling or otherwise handling cannabis under state cannabis laws, there is no guarantee that U.S. federal bankruptcy protections would be available to our United States operations, which would have a material adverse effect on us, our lenders and other stakeholders. While state-level receivership options do exist in some states as an alternative to bankruptcy, the efficacy of these alternatives cannot be guaranteed.
The cannabis industry is an evolving industry and we must anticipate and respond to changes.
The cannabis industry is not yet well-developed, and many aspects of this industry’s development and evolution cannot be accurately predicted. While we have attempted to identify any risks specific to the cannabis industry, you should carefully consider that there are other risks that cannot be foreseen or are not described in this Annual Report, which could materially and adversely affect our business and financial performance. We expect that the cannabis market and our business will evolve in ways that are difficult to predict. For example, it is anticipated that over time, we will reach a point in most markets where we have achieved a market penetration level in which new client acquisitions are less productive, and the continued growth of our revenue will require more focus on increasing the rate at which existing clients purchase products and services across our platforms. Our long-term success will depend on our ability to successfully adjust our strategy to meet the changing market dynamics. If we are unable to successfully adapt to changes in the cannabis industry, our operations could be adversely affected.
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Risks Related to Our Business
A significant portion of our business is from government contracts, which present certain unique risks.
Contracts for Leaf Data Systems with government agencies in Pennsylvania and Utah represented 16%, 25% and 39% of our revenue for the year ended December 31, 2022, December 31, 2021 and six months ended December 31, 2020, respectively. In order to obtain a government contract for Leaf Data Systems, we are required to follow a competitive bidding process in each state where we seek a contract. Government contracts have very specific compliance requirements that often require contractors to invest material time and money to prepare a bid to ensure that our technology, processes, and staff meet these specific requirements. After expenditures of such time and money, there is no assurance that the bid will result in an award of a contract. Further, even if a contract is awarded, there are strict procedures that government agencies follow when it comes to reimbursement of the costs incurred in the course of fulfilling contracts. Accordingly, it is possible that some or all costs might not be reimbursed under a government contract as contemplated by us.
Government agencies also typically audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, its cost structure, its business systems, and compliance with applicable laws, regulations, and standards. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and administrative sanctions, including reductions of the value of contracts, contract modifications or terminations, forfeiture of profits, suspension of payments, penalties, fines, and suspension, or prohibition from doing business with the government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. Any such imposition of penalties, or the loss of such government contracts, could materially adversely affect our business, financial condition, results of operations, and growth prospects.
There also is typically a longer window of liability under government contracts than private contracts, and the government can seek claims after the contract has ended and payments under the contract have been made. The terms of government contracts may also require the sharing of proprietary information, processes, software, and product development efforts with the government. Additionally, government employees are required to follow certain protocols to ensure there is no appearance of impropriety in the bidding process. As a result, bidders on government contracts must ensure that there is no appearance of favoritism, gift-giving, bribery, or the exertion of other influences in the bidding process. Any finding of the same can result in fines to the bidder and cancellation of contracts. The applicable state government generally has the ability to terminate our contract, in whole or in part, without prior notice, for convenience or for default based on performance. If a government contract were to be terminated for convenience, we generally would be protected by provisions covering reimbursement for costs incurred on the contract and profit on those costs, but not the anticipated profit that would have been earned had the contract been completed. The state government also has the ability to stop work under a contract for a limited period of time for its convenience.
We cannot assure you that we will be able to maintain our existing government contracts.
Our operations may be adversely affected by disruptions to our information technology, or IT, systems, including disruptions from cybersecurity breaches of our IT infrastructure.
We rely on information technology networks and systems, including those of third-party service providers, to process, transmit, and store electronic information. In particular, we depend on our information technology infrastructure for a variety of functions, including financial reporting, data management, project development, and email communications. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, terrorist attacks, sabotage, and similar events. Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to our information technology systems to sophisticated and targeted measures known as advanced persistent threats. The ever-increasing use and evolution of technology, including cloud-based computing, create opportunities for the unintentional dissemination or intentional destruction of confidential information stored in our systems or in non- encrypted portable media or storage devices. We could also experience a business interruption, information theft of confidential information, or reputational damage from industrial espionage attacks, malware, or other cyber-attacks, which may compromise our system infrastructure or lead to data leakage, either internally or at our third-party providers. Despite the implementation of network security measures and disaster recovery plans, our systems and those of third parties on which we rely may also be vulnerable to computer viruses, break-ins, and similar disruptions. If we or our vendors are unable (or are perceived as unable) to prevent such outages and breaches, our operations may be disrupted, and our business reputation could be adversely affected.
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We expect that risks and exposures related to cybersecurity attacks will remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats.
Privacy regulation is an evolving area and compliance with applicable privacy regulations may increase our operating costs or adversely impact our ability to service our clients and market our products and services.
Because we store, processes, and use data, some of which contains personal information, we are subject to complex and evolving federal, state, and foreign laws and regulations (including Canada’s Cannabis Act and related regulations and the European Union’s general data protection regulation, or GDPR) regarding privacy, data protection, and other matters. While we believe we are currently in compliance with applicable laws and regulations, many of these laws and regulations are subject to change and uncertain interpretation, and could result in investigations, claims, changes to our business practices, increased cost of operations, and declines in user growth, retention, or engagement, any of which could seriously harm our business.
We rely on third parties for certain services made available to users of our platforms, which could limit our control over the quality of the user experience and our cost of providing services.
Some of the applications and services available through the Leaf Data System and MJ Platform are provided through relationships with third-party service providers. We do not typically have any direct control over these third-party service providers. These third-party service providers could experience service outages, data loss, privacy breaches, including cyber-attacks, and other events relating to the applications and services they provide that could diminish the utility of these services and which could harm users thereof. The MJ Platform itself does not depend on any third-party software or applications and is based entirely on open source technologies and custom programming. The MJ Platform, however, is hosted by Amazon Web Services, a third-party service provider. There are readily available alternative hosting services available should we desire or need to move to a different web host. Certain ancillary services provided by us also uses the services of third- party providers, for which, we believe, there are readily available alternatives on comparable economic terms. Offering integrated platforms, such as the Leaf Data System and MJ Platform which rely, in part, on the services of other providers lessens the control that we have over the total client experience. Should the third-party service providers we rely upon not deliver at standards we expect and desires, acceptance of our platforms could suffer, which would have an adverse effect on our business and financial performance. Further, we cannot be assured of entering into agreements with such third-party service providers on economically favorable terms.
Acquisitions and integration issues may expose us to risks.
Our business strategy includes making targeted acquisitions. Any acquisition that we make may be of significant size, may change the scale of our business and operations, and may expose us to new geographic, political, operating, financial, and geological risks. Our success in our acquisition activities depends on our ability to identify suitable acquisition candidates, negotiate acceptable terms for any such acquisition, and integrate the acquired operations successfully with our own. Any acquisitions would be accompanied by risks. For example, there may be significant changes in our market value after we have committed to complete the transaction and have established the purchase price or exchange ratio; a potential targeted acquisition’s business and prospects may prove to be below expectations; we may have difficulty integrating and assimilating the operations and personnel of any acquired companies, realizing anticipated synergies and maximizing the financial and strategic position of the combined enterprise and maintaining uniform standards, policies, and controls across the organization; the integration of the acquired business or assets may disrupt our ongoing business and our relationships with employees, clients, suppliers, and contractors; and the acquired business or assets may have unknown liabilities that may be significant. If we choose to use equity securities as consideration for such an acquisition, existing shareholders may suffer dilution. Alternatively, we may choose to finance any such acquisition with our existing resources. There can be no assurance that we would be successful in overcoming these risks or any other problems encountered in connection with such acquisitions. To grow and be successful, we need to attract and retain qualified personnel.
In any future acquisitions, we may not be able to successfully integrate acquired personnel, operations, and technologies, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from future acquisitions due to a number of factors, including: (a) an inability to integrate or benefit from acquisitions in a profitable manner; (b) unanticipated costs or liabilities associated with the acquisition; (c) the incurrence of acquisition-related costs; (d) the diversion of management’s attention from other business concerns; (e) the loss of our or the acquired business’ key employees; or (f) the issuance of dilutive equity securities, the incurrence of debt, or the use of cash to fund such acquisitions.
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To grow and be successful, we need to attract and retain qualified personnel.
Our growth and success will depend to a significant extent on our ability to identify, attract, hire, train, and retain qualified professional, creative, technical, and managerial personnel. Competition for experienced and qualified talent in the cannabis industry can be intense. We may not be successful in identifying, attracting, hiring, training, and retaining such personnel in the future. If we are unable to hire, assimilate, and retain qualified personnel in the future, such inability could adversely affect our operations.
We are smaller and less diversified than many of our potential competitors.
While we believe we are a leading provider in the software solutions segment of the cannabis industry, there are general software design and integrated business platform companies seeking to provide online and software-based business solutions and operations integration to clients in numerous industries. The continued growth of the cannabis industry will likely attract some of these existing companies and incentivize them to produce solutions that are competitive with those offered by us. Many of these potential competitors are a part of large diversified corporate groups with a variety of other operations and expansive resources. We may not be able to successfully compete with larger enterprises devoting significant resources to compete in our target market space, which may negatively affect operations.
Our business and stock price may suffer as a result of our limited public company operating experience and if securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our common stock in an adverse manner, the price and trading volume of our common stock could decline.
If we are unable to execute our business strategy, either as a result of our inability to manage effectively our business in a public company environment or for any other reason, our business, prospects, financial condition, and operating results may be harmed.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. We currently have limited coverage by securities and industry analysts. If no additional securities or industry analysts commence coverage of us, our stock price and trading volume would likely be negatively impacted. If any of the analysts who cover, or who may cover us in the future, change their recommendation regarding our stock in an adverse manner, or provide more favorable relative recommendations about our competitors, the price of our common stock would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
Risks Related to Intellectual Property
Protecting and defending against intellectual property claims may have a material adverse effect on our business.
Our ability to compete depends, in part, upon successful protection of our intellectual property relating to our Leaf Data Systems and MJ Platform, and intellectual property acquired in business combinations, such as Solo, Trellis, and Ample. We seek to protect our proprietary and intellectual property rights through patent applications, available copyright and trademark laws, nondisclosure agreements, and licensing and distribution arrangements with reputable companies in our target markets. While patent protection for inventions related to cannabis and cannabis-related products is available, there are substantial difficulties faced in the patent process by cannabis-related businesses. Further, patent applications may be rejected for numerous other reasons beyond those related to the cannabis industry, including that the subject matter of the application is found to be non-patentable. Our previous patent applications were denied and while we are continuing to pursue such applications and believe they are with merit, there can be no assurance that patents will be issued on these applications. The failure to be awarded patents on our technology could weaken our ability to enforce our intellectual property rights. Any such enforcement, whether we have been granted patent protection or not, would be costly, and there can be no assurance that we will have the resources to undertake all necessary action to protect our intellectual property rights or that we will be successful. Any infringement of our material intellectual property rights could require us to redirect resources to actions necessary to protect the same and could distract management from our underlying business operations. The infringement of our material intellectual property rights and resulting actions could adversely affect our operations.
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Our success depends in part upon our ability to protect our core technology and intellectual property.
Our success depends in part upon our ability to protect our core technology and intellectual property. To establish and protect our proprietary rights, we rely on a combination of patent applications, trade secrets, including know-how, license agreements, confidentiality procedures, non-disclosure agreements with third parties, employee disclosure and invention assignment agreements, and other contractual rights.
We generally control access to and use of our proprietary technology and other confidential information through the use of internal and external controls, including contractual protections with employees, contractors, clients, and partners, and our software is protected by the U.S. and international copyright laws.
Despite efforts to protect our trade secrets and proprietary rights through intellectual property rights, licenses, and confidentiality agreements, unauthorized parties may still copy or otherwise obtain and use our software and technology, as was the case when our source code was compromised in June 2017. We have taken significant actions to improve security but will be required to regularly modify our systems to combat new hacking approaches as they develop. In addition, as our international operations expand, effective intellectual property protection may not be available or may be limited in foreign countries.
Others may assert intellectual property infringement claims against us.
Companies in the software and technology industries own large numbers of patents, copyrights, trademarks, and trade secrets, and frequently enter into litigation based on allegations of infringement, misappropriation, or other violations of intellectual property or other rights. In addition, various “non-practicing entities” that own patents and other intellectual property rights often attempt to aggressively assert their rights in order to extract value from technology companies. It is possible that others may claim from time to time that our products misappropriate or infringe the intellectual property rights of third parties. Irrespective of the validity or the successful assertion of any such claims, we could incur significant costs and diversion of resources in defending against these claims, which could adversely affect our operations. We may receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurances that favorable final outcomes will be obtained in all cases. We may decide to settle such lawsuits and disputes on terms that are unfavorable to us. As a result, we may also be required to develop alternative non-infringing technology or practices or discontinue the practices. The development of alternative non-infringing technology or practices could require significant effort and expense or may not be feasible.
Risks Related to Akerna’s Charter Documents
Anti-takeover provisions contained in Akerna’s amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt and limit the price investors might be willing to pay in the future for our common stock and could entrench management.
Akerna’s amended and restated certificate of incorporation contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
These provisions:
• create a staggered board of directors making it more difficult for stockholders to remove a majority of the board of directors and take control;
• grant the board of directors the ability to designate the terms of and issue new series of preferred shares, which can be created and issued by the board of directors without prior stockholder approval, with rights senior to those of the common stock;
• impose limitations on our stockholders’ ability to call special stockholders’ meetings; and
• make it more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
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In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our amended and restated certificate of incorporation, our bylaws, and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of the Akerna Board or initiate actions that are opposed by our then-current Akerna Board, including to delay or impede a merger, tender offer or proxy contest involving us. Any delay or prevention of a change in control transaction or changes in the Akerna Board could cause the market price of our common stock to decline.
Our corporate opportunity provisions in Akerna’s amended and restated certificate of incorporation could enable management to benefit from corporate opportunities that might otherwise be available to us.
Akerna’s amended and restated certificate of incorporation provides that the doctrine of corporate opportunity, or any other analogous doctrine, shall not apply with respect to us, or any of our directors or officers in circumstances where the application of such doctrine would conflict with any fiduciary duties or contractual obligations they may otherwise have.
Our management may become aware, from time to time, of certain business opportunities (such as acquisition opportunities) and may direct such opportunities to other businesses in which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity. Further, such businesses may choose to compete with us for these opportunities, possibly causing these opportunities to not be available to us or causing them to be more expensive for us to pursue. These potential conflicts of interest could adversely impact our business or prospects if attractive business opportunities are procured by such parties for their own benefit rather than for ours.
Akerna’s amended and restated certificate of incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.
Akerna’s amended and restated certificate of incorporation requires, to the fullest extent permitted by law, that derivative actions brought in our name, actions against directors, officers, and employees for breach of fiduciary duty, actions under the Delaware general corporation law or under our Amended and Restated Certificate of Incorporation, or actions asserting a claim governed by the internal affairs doctrine may be brought only in the Court of Chancery in the State of Delaware and, if brought outside of Delaware, the stockholder bringing the suit will be deemed to have consented to service of process on such stockholder’s counsel. This choice of forum provision does not preclude or contract the scope of exclusive federal or concurrent jurisdiction for any actions brought under the Securities Act or the Exchange Act of 1934, as amended, or the Exchange Act. Accordingly, our exclusive forum provision will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations.
Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation. This choice of forum provision does not exclude stockholders from suing in federal court for claims under the federal securities laws but may limit a stockholder’s ability to bring such claims in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims.
Alternatively, if a court were to find the choice of forum provision contained in our Amended and Restated Certificate of Incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.
Risks Related to the Akerna Notes
The issuance of shares of our common stock pursuant to the Akerna Notes may result in significant dilution to our stockholders.
The conversion of the Akerna Notes could result in the issuance of a significant number of shares of our common stock. The current $3.15 million principal amount of the Akerna Notes is convertible at a price of $0.50 per share, which would result in the issuance of approximately 6.3 million shares of Akerna Common Stock upon the conversion
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of the Akerna Notes in full. At the option of Akerna, the installment payments on the Akerna Notes can be converted into shares of Akerna Common Stock at a price per share equal to the lower of (i) the conversion price then in effect, or (ii) the greater of (x) the floor price of $10.80 and (y) 90% of the lower of (A) the volume-weighted average price of the common stock as of the trading day immediately preceding the applicable date of determination and (B) the quotient of (I) the sum of the volume-weighted average price of the common stock for each of the two (2) trading days with the lowest volume-weighted average price of the common stock during the ten consecutive trading day period ending on and including the trading day immediately prior to the applicable date of determination, divided by (II) two.
Our obligations to the Akerna Note Holders are secured by a security interest in substantially all of our assets, if we default on those obligations, the Akerna Note Holders could foreclose on our assets.
Our obligations under the Akerna Notes and the related transaction documents are secured by a security interest in substantially all of our assets. As a result, if we default on our obligations under the Akerna Notes, the collateral agent on behalf of the Akerna Note Holders could foreclose on the security interests and liquidate some or all of our assets, which would harm our business, financial condition and results of operations and could require us to reduce or cease operations and investors may lose all or part of their investment.
Events of default under the Akerna Notes include: (i) the failure of the registration statement under the registration rights agreement between the Company and the holders of Akerna Notes to be filed with the SEC or the failure of the applicable registration statement to be declared effective by the SEC by deadlines set forth in the registration rights agreement; (ii) the effectiveness of the applicable registration statement lapses for any reason or such registration statement is unavailable to any holder of registrable securities and Rule 144 (subject to certain conditions) is not unavailable to any holder of the conversion shares; (iii) suspension of trading of the Akerna Common Stock a national securities exchange for five days; (iv) uncured conversion failure; (v) failure by Akerna to maintain required share allocations for the conversion of the Akerna Notes; (vi) failure by Akerna to pay principal when due; (vii) failure of Akerna to remove restricted legends from shares issued to a holder upon conversion of the Akerna Notes; (viii) the occurrence of any default under, redemption of or acceleration prior to maturity of at least an aggregate of $50,000 of indebtedness of Akerna; (ix) bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for the relief of debtors shall be instituted by or against Akerna or any subsidiary and not dismissed within 45 days of initiation; (x) the commencement by Akerna or any subsidiary of a voluntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law; (xi) the entry by a court of a decree, order, judgment or other similar document in respect of Akerna or any subsidiary of a voluntary or involuntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law; (xii) final judgment for the payment of money aggregating in excess of $50,000 are rendered against Akerna or any subsidiary of Akerna and not bonded or discharged within 30 days; (xiii) failure of Akerna or any subsidiary to pay when due any debts in excess of $50,000 due to any third party; (xiv) breaches by Akerna or any subsidiary of any representations or warranties in the securities purchase agreement for the Akerna Notes or any document contemplated thereby; (xv) a false or inaccurate certification by Akerna that either (A) the “Equity Conditions” (as defined in the Akerna Notes) are satisfied, (B) there has been no “Equity Conditions Failure,” (as defined in the Akerna Notes) or (C) as to whether any Event of Default has occurred; (xvi) failure of Akerna or any subsidiary to comply with certain of the covenants in the Akerna Notes; (xvii) the occurrence of (A) at any time after the six month anniversary of the issuance date, any current public information failure that remains outstanding for a period of twenty (20) trading days or (B) any restatement of any financial statements of Akerna filed with the SEC; (xviii) any material adverse effect occurring; (xix) any provision of any transaction document shall at any time for any reason cease to be valid and binding or enforceable; (xx) any security document shall for any reason (other than pursuant to the express terms thereof or due to any failure or omission of the collateral agent) fail or cease to create a separate valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority lien; (xxi) any material damage to, or loss, theft or destruction of, any collateral, that is material to the business of the Company or any subsidiary and is not reimbursed by insurance; or (xxii) any Event of Default occurs under any other Akerna Notes.
The Akerna Note Holders have certain additional rights upon an event of default under such Akerna Notes, which could harm our business, financial condition, and results of operations and could require us to reduce or cease our operations.
Under the Akerna Notes, the holders have certain rights upon an event of default. Such rights include (i) the remaining principal amount of the Akerna Notes bearing interest at a rate of 15% per annum, (ii) during the event of default the holders of the Akerna Notes will be entitled to convert all or any portion of the Akerna Notes at an alternate conversion
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price equal to the lower of (i) the conversion price then in effect, and (ii) 80% of the lower of (x) the volume weighted average price of the common stock as of the trading day immediately preceding the applicable date of determination and (y) the quotient of (A) the sum of the volume weighted average price of the common stock for each of the two (2) trading days with the lowest volume weighted average price of the common stock during the ten consecutive trading day period ending and including the trading day immediately prior to the applicable date of determination, divided by (B) two, but not less than the floor price, and (iii) the holder having the right to demand redemption of all or a portion of the Akerna Notes, as described below. At any time after certain notice requirements for an event of default are triggered, an Akerna Note Holder may require us to redeem all or any portion of the convertible note by delivering written notice. The redemption price will equal the greater of (i) 115% of the outstanding principal of the convertible note to be redeemed and accrued and unpaid interest and unpaid late charges thereon, and (ii) an amount equal to the market value of the shares of the common stock underlying the Akerna Notes, as determined in accordance with the Akerna Notes. Upon the occurrence of certain events of default relating to the bankruptcy of Akerna, whether occurring prior to or following the maturity date, Akerna will be required to immediately redeem the Akerna Notes, in cash, for an amount equal to 115% of the outstanding principal of the Akerna Notes, and accrued and unpaid interest and unpaid late charges thereon, without the requirement for any notice or demand or other action by any holder or any other person or entity. We may not have sufficient funds to settle the redemption price and, as described above, this could trigger rights under the security interest granted to the holders and result in the foreclosure of their security interests and liquidation of some or all of our assets.
The exercise of any of these rights upon an event of default could substantially harm our financial condition, substantially dilute our other shareholders and force us to reduce or cease operations and investors may lose all or part of their investment.
Risks Related to Akerna Common Stock
If Akerna’s Common Stock is delisted from Nasdaq, the liquidity and price of Akerna’s Common Stock could decrease and Akerna’s ability to obtain financing could be impaired.
On March 22, 2023, Akerna received a notification letter from The Nasdaq Stock Market stating that Akerna is not in compliance with the minimum bid price requirement, which requires our listed securities to maintain a minimum bid price of $1.00 per share (the “Minimum Bid Price Requirement”). The notification stated that Akerna had a compliance period of 180 calendar days, or until September 18, 2023, to regain compliance with the Minimum Bid Price Requirement.
On March 23, 2023, Akerna received notice from The Nasdaq Stock Market advising Akerna that it is not in compliance with the minimum stockholders’ equity requirement for continued listing on The Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(1) requires companies listed on The Nasdaq Capital Market to maintain stockholders’ equity of at least $2,500,000 (the “Stockholders’ Equity Requirement”). In Akerna’s Annual Report on Form 10-K for the year ended December 31, 2022, Akerna reported stockholders’ equity of ($4,825,528), which is below the Stockholders’ Equity Requirement for continued listing.
Pursuant to the notice, Nasdaq gave Akerna 45 calendar days, or until May 8, 2023, to submit to Nasdaq a plan to regain compliance. Akerna submitted its plan on May 8, 2023 and the staff of the Nasdaq granted an extension for Akerna to regain compliance through September 19, 2023.
On September 19, 2023, Akerna received a determination letter (the “Determination Letter”) from The Nasdaq Stock Market stating that it had not regained compliance with Listing Rule 5550(a)(2) and is not eligible for a second 180 day period to regain compliance and that unless Akerna requested an appeal of this determination the trading of Akerna Common Stock would be suspended at the opening of business on September 28, 2023, and a Form 25-NSE would be filed with the SEC which will remove the Company’s securities from listing and registration on The Nasdaq Capital Market. The Company appealed the determination, pursuant to the procedures set forth in the Nasdaq Listing Rule 5800 Series and requested a hearing (the “Hearing”) before a Nasdaq Hearing Panel (the “Panel”) which is scheduled for November 9, 2023. The Hearing request stayed any delisting or suspension action pending the issuance of the Panel’s decision. The Hearing was held on November 9, 2023 and on November 17, 2023 the Panel granted Akerna an extension until January 31, 2024 to regain compliance by completing the Sale Transaction and the Merger. The Akerna Common Stock will remain listed pending continued compliance through January 31, 2024.
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In addition, as disclosed above Akerna received a notice from The Nasdaq Stock Market notifying Akerna that it was not in compliance with the Stockholders’ Equity Requirement and the Company had until September 19, 2023, to regain compliance with the Stockholders’ Equity Rule. However, The Nasdaq Stock Market indicated in the Determination Letter that, pursuant to Listing Rule 5810(d)(2), this deficiency serves as an additional and separate basis for delisting, and as such, Akerna should address its non-compliance with the Stockholders’ Equity Rule before a Panel at the Hearing.
There can be no assurance that Akerna will be able to regain compliance with the applicable Nasdaq listing requirements by January 31, 2024.
We may seek to raise additional funds, finance acquisitions, or develop strategic relationships by issuing securities that would dilute investors’ ownership. Depending on the terms available to us, if these activities result in significant dilution, it may negatively impact the trading price of our shares of Akerna Common Stock.
Any additional financing that we secure, may require the granting of rights, preferences, or privileges senior to, or pari passu with, those of Akerna Common Stock. Any issuances by us of equity securities may be at or below the prevailing market price of Akerna Common Stock and in any event, may have a dilutive impact on stockholders’ ownership interest, which could cause the market price of our common stock to decline. We may also raise additional funds through the incurrence of debt, subject to the limitations imposed by the Akerna Notes, or the issuance or sale of other securities or instruments senior to our shares of common stock. We cannot be certain how the repayment of the Akerna Notes will be funded and we may issue further equity or debt in order to raise funds to repay the promissory notes, including funding that may be highly dilutive. The holders of any securities or instruments we may issue may have rights superior to the rights of our common stockholders. If we experience dilution from the issuance of additional securities and we grant superior rights to new securities over holders of our common stock, it may negatively impact the trading price of our shares of common stock and stockholders may lose all or part of their investment.
Pursuant to the Merger Agreement, Akerna can raise up to $5 million in financings to meet its ongoing expenses until closing of the Merger. Any amounts above $5 million have to be loaned to Gryphon pursuant to the terms of the Merger Agreement.
Warrants are exercisable for Akerna Common Stock, which could increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.
Currently, there are warrants to purchase 2,573,299 shares of Akerna Common Stock. Akerna’s warrants issued in 2019 are exercisable for 290,690 shares of Akerna Common Stock at $230.00 per share. Akerna’s warrants issued in July of 2022 are exercisable for a combined amount of 2,282,609 shares of Akerna Common Stock at $0.37 per share. To the extent such warrants are exercised, additional shares of common stock will be issued, which will result in dilution to the then-existing holders of common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our common stock.
Certain of our warrants are accounted for as a derivative liability and are recorded at fair value upon issuance with any changes in fair value each period reported in our statement of operations, which may have an adverse effect on the market price of our securities.
We had 225,635 warrants that were issued in private placements that occurred concurrently with the initial public offering of Mtech Acquisitions Corp., our successor (the “private warrants”). These private warrants and the shares of Akerna Common Stock issuable upon the exercise of the private warrants are exercisable for cash or on a cashless basis, at the holder’s option, and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the private warrants are held by someone other than the initial purchasers or their permitted transferees, the private warrants will be redeemable by Akerna and exercisable by such holders on the same basis as the warrants included in the units sold in the initial public offering, in which case the 225,635 private warrants could be redeemed by Akerna for $2,256.35. Under generally accepted accounting principles in the United States (“GAAP”), Akerna is required to evaluate contingent exercise provisions of these warrants and then their settlement provisions to determine whether they should be accounted for as a warrant liability or as equity. As a result of the provision that the private warrants, when held by someone other than the initial purchasers or their permitted transferees, will be redeemable by Akerna, the requirements for accounting for these warrants as equity are not satisfied. Therefore, we are required to account for these private warrants as a warrant liability and record (a) that liability at fair value and (b) any subsequent changes in fair value as of the end of each period for which earnings are reported. The impact of changes in fair value on earnings may have an adverse effect on the market price of our common stock.
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If we do not maintain a current and effective prospectus relating to the common stock issuable upon exercise of the warrants, public holders will only be able to exercise such warrants or pre-funded warrants on a “cashless basis.”
If we do not maintain a current and effective prospectus relating to the shares of common stock issuable upon exercise of the warrants at the time that holders wish to exercise such warrants, they will only be able to exercise them on a “cashless basis,” and under no circumstances would we be required to make any cash payments or net cash settle such warrants to the holders. As a result, the number of shares of common stock that holders will receive upon exercise of the warrants will be fewer than it would have been had such holders exercised their warrants. Under the terms of the warrants, we have agreed to use our best efforts to maintain a current and effective prospectus relating to the shares of common stock issuable upon exercise of such warrants until the expiration of such warrants. However, we cannot assure you that we will be able to do so. If we are unable to do so, the potential “upside” of the holder’s investment in our company may be reduced.
Provisions of the warrants could discourage an acquisition of us by a third party.
Certain provisions of the warrants could make it more difficult or expensive for a third party to acquire us. The warrants prohibit us from engaging in certain transactions constituting “fundamental transactions” unless, among other things, the surviving entity assumes our obligations under the warrants.
We may face additional risks, including regulatory, litigation, stockholder or other actions and negative impacts on our stock price, as a result of the material weakness in our internal control over financial reporting and revisions to our financial statements.
As a result of our material weaknesses in internal control over financial reporting, we face potential additional risks, including regulatory, litigation, stockholder or other actions and negative impacts on our stock price, which may include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the material weakness in our internal control over financial reporting and the preparation of our financial statements. As of the date of this report, we have no knowledge of any such litigation or dispute. However, we can provide no assurance that such litigation or dispute will not arise in the future. Any such litigation or dispute, whether successful or not, could have a material adverse effect on our business, results of operations and financial condition.
The market price of the Akerna Common Stock is particularly volatile given our status as a relatively new public company with a generally small and thinly traded public float, which could lead to wide fluctuations in our share price. Stockholders may be unable to sell their shares of Akerna Common Stock at or above their purchase price, which may result in substantial losses to them.
The market for shares of Akerna Common Stock is characterized by significant price volatility when compared to the shares of larger, more established companies that trade on a national securities exchange and have large public floats, and we expect that our share price will continue to be more volatile than the shares of such larger, more established companies for the indefinite future. The volatility in our share price is attributable to a number of factors, including the fact that our shares are thinly traded relative to larger, more established companies. The price for shares of Akerna Common Stock could, for example, decline precipitously in the event that a large number of shares of Akerna Common Stock are sold on the market without commensurate demand. Currently, there are warrants to purchase 2,573,299 shares of Akerna Common Stock. Akerna’s warrants issued in 2019 are exercisable for 290,690 shares of Akerna Common Stock at $230.00 per share. Akerna’s warrants issued in July of 2022 are exercisable for a combined amount of 2,282,609 shares of Akerna Common Stock at $0.37 per share. Further, the current $3.15 million principal amount of the Akerna Notes is convertible at a price of $0.50 per share, which would result in the issuance of approximately 6.3 million shares of Akerna Common Stock upon the conversion of the Akerna Notes in full. If these securities are exercised or converted and sold into the open market could cause our stock price to decline. In addition, because we may be considered a speculative or “risky” investment due to our lack of profits to date, certain investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares of Akerna Common Stock on the market more quickly and at greater discounts, thus resulting in a rapid downward decline in the price of Akerna Common Stock. Many of these factors are beyond our control and may decrease the market price of Akerna Common Stock, regardless of our operating performance.
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The market price of Akerna Common Stock is still likely to be highly volatile and subject to wide fluctuations, and stockholders may be unable to resell shares of Akerna Common Stock at or above the price at which they are acquired.
The market price of Akerna Common Stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including, but not limited to:
• Variations in our revenues and operating expenses;
• Actual or anticipated changes in the estimates of our operating results or changes in stock market analyst recommendations regarding Akerna Common Stock, other comparable companies, or our industry generally;
• Market conditions in our industry, the industries of our clients, and the economy as a whole;
• Actual or expected changes in our growth rates or our competitors’ growth rates;
• Developments in the financial markets and worldwide or regional economies;
• Announcements of innovations or new products or services by us or our competitors;
• Announcements by the governments and other regulatory authorities relating to regulations that apply to our industry;
• Sales of Akerna Common Stock or other securities by us or in the open market; and
• Changes in the market valuations of other comparable companies.
The trading price of our shares of Akerna Common Stock might also decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, operating results, and financial condition.
We have not paid dividends in the past and do not expect to pay dividends for the foreseeable future, and any return on investment may be limited to potential future appreciation in the value of our common stock.
We currently intend to retain any future earnings to pay Transaction expenses and do not anticipate paying cash dividends on our shares of Akerna Common Stock in the foreseeable future. Payment of any future dividends will be at the discretion of the board of directors of the combined company after taking into account various factors, including without limitation, financial condition, operating results, cash needs, growth plans, and the terms of any credit agreements that the combined company may be a party to at the time. To the extent we do not pay dividends, the common stock of the combined company may be less valuable because a return on investment will only occur if and to the extent its stock price appreciates, which may never occur. In addition, investors must rely on sales of their common stock after price appreciation as the only way to realize their investment, and if the price of the combined company’s common stock does not appreciate, then there will be no return on investment.
General Risks
Any failure to maintain effective disclosure controls and procedures and internal control over our financial reporting could materially adversely affect us.
We do not currently have effective disclosure controls and procedures and internal control over financial reporting. Effective disclosure controls and procedures provides reasonable assure that our public reports contain necessary material information as required by applicable securities laws. Effective internal control over financial reporting provides reasonable assurance on our ability to provide reliable financial reports, effectively prevent fraud and operate successfully as a public company. If we cannot provide accurate and timely reports and reliable financial reports or prevent fraud, our reputation and operating results would be harmed. Management may not be able to effectively and timely implement controls and procedures that adequately respond to the regulatory compliance and reporting requirements that are applicable to us. Failure to remediate material weaknesses in internal controls over financial reporting could result in material misstatements in our financial statements.
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Our management has identified material weaknesses in our internal controls over financial reporting and has concluded that due to such material weaknesses, our internal controls over financial reporting (including disclosure controls and procedures) were not effective as of December 31, 2022. If not remediated, our failure to establish and maintain effective disclosure controls and procedures over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.
The requirements of being a public company may strain our resources and divert management’s attention.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the Dodd-Frank Act, the listing requirements of Nasdaq, and other applicable securities rules and regulations. Compliance with these rules and regulations increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. We may need to hire more employees in the future or engage outside consultants to comply with these requirements, which will increase our costs and expenses.
In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our shares of common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act (“Section 404”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Additionally, as an emerging growth company, we have elected to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As such, our financial statements may not be comparable to companies that comply with public company effective dates. It cannot be predicted if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our share price may be more volatile.
Our operations could be adversely affected by events outside of our control, such as natural disasters, wars, or health epidemics.
We may be impacted by business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods, and fires. An outbreak of any of the foregoing or fear of any of the foregoing could adversely impact us by disrupting the operations of our clients, which could result in delayed payments, non-renewal of contracts, and other adverse effects on the market for our products or by causing
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product development and implementation delays and disruptions (including as a result of government regulation and prevention measures). We may incur expenses or delays relating to such events outside of our control, which could have a material adverse impact on our business, operating results, and financial condition.
Proposed legislation in the U.S. Congress, including changes in U.S. tax law, and the recently enacted Inflation Reduction Act of 2022, may adversely impact us and the value of our common stock.
Changes to U.S. tax laws (which changes may have retroactive application) could adversely affect us or holders of our common stock. In recent years, many changes to U.S. federal income tax laws have been proposed and made, and additional changes to U.S. federal income tax laws are likely to continue to occur in the future.
The U.S. Congress is currently considering numerous items of legislation which may be enacted prospectively or with retroactive effect, which legislation could adversely impact our financial performance and the value of shares of our common stock. Additionally, states in which we operate or own assets may impose new or increased taxes. If enacted, most of the proposals would be effective for the current or later years. The proposed legislation remains subject to change, and its impact on us or our investors is uncertain.
In addition, the recently enacted Inflation Reduction Act of 2022 includes provisions that will impact the U.S. federal income taxation of corporations. Among other items, this legislation includes provisions that will impose a minimum tax on the book income of certain large corporations and an excise tax on certain corporate stock repurchases that would be imposed on the corporation repurchasing such stock. It is unclear how this legislation will be implemented by the U.S. Department of Treasury and we cannot predict how this legislation or any future changes in tax laws might affect us or investors in our common stock.
Risks Related to Gryphon
Risks Related to the Price of Bitcoin
Gryphon’s future success will depend upon the value of Bitcoin; the value of Bitcoin may be subject to pricing risk and has historically been subject to wide swings.
Gryphon’s operating results depend on the value of Bitcoin because it is the only cryptocurrency that Gryphon mines. Specifically, Gryphon’s revenues from its bitcoin mining operations are based on two factors: (1) the number of bitcoin rewards Gryphon successfully mines and (2) the value of Bitcoin. In addition, Gryphon’s operating results are directly impacted by changes in the value of Bitcoin, because under the value measurement model, impairment of Bitcoin and realized gains will be reflected in Gryphon’s statement of operations (i.e., Gryphon will be marking bitcoin to fair value each closing period). This means that Gryphon’s operating results will be subject to swings based upon increases or decreases in the value of Bitcoin. Further, Gryphon’s current application-specific integrated circuit, or ASIC, machines (which Gryphon refers to as “miners”) are principally utilized for mining bitcoin and cannot mine other cryptocurrencies, such as ether, that are not mined utilizing the “SHA-256 algorithm.” If other cryptocurrencies were to achieve acceptance at the expense of Bitcoin causing the value of Bitcoin to decline, or if Bitcoin were to switch its proof of work algorithm from SHA-256 to another algorithm for which Gryphon’s miners are not specialized, or the value of Bitcoin were to decline for other reasons, particularly if such decline were significant or over an extended period of time, Gryphon’s operating results would be adversely affected, and there could be a material adverse effect on Gryphon’s ability to continue as a going concern or to pursue Gryphon’s strategy at all, which could have a material adverse effect on Gryphon’s business, prospects or operations, and harm investors.
Bitcoin market prices, which have historically been volatile and are impacted by a variety of factors (including those discussed below), are determined primarily using data from various exchanges, over-the-counter markets and derivative platforms. Furthermore, such prices may be subject to factors such as those that impact commodities, more so than business activities, which could be subjected to additional influence from fraudulent or illegitimate actors, real or perceived scarcity, and political, economic, regulatory or other conditions. Pricing may be the result of, and may continue to result in, speculation regarding future appreciation in the value of Bitcoin, which inflates and makes its market prices more volatile or creates “bubble” type risks for Bitcoin.
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Gryphon may face several risks due to disruptions in the crypto asset markets, including but not limited to the risk from depreciation in Gryphon’s stock price, financing risk, risk of increased losses or impairments in its investments or other assets, risks of legal proceedings and government investigations, and risks from price declines or price volatility of crypto assets.
The use of crypto assets to, among other things, buy and sell goods and services and complete other transactions is part of a new and rapidly evolving industry that employs crypto assets based upon a computer generated mathematical and/or cryptographic protocol. The growth of this industry in general, and the use of crypto assets in particular, is subject to a high degree of uncertainty, and the slowing or stopping of the development or acceptance of developing protocols may adversely affect Gryphon’s operations. The factors affecting the further development of the industry, include, but are not limited to:
• Continued worldwide growth in the adoption and use of crypto assets;
• Governmental and quasi-governmental regulation of crypto assets and their use, or restrictions on or regulation of access to and operation of the network or similar crypto asset systems;
• Changes in consumer demographics and public tastes and preferences;
• The maintenance and development of the open source software protocol of the network;
• The availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies;
• General economic conditions and the regulatory environment relating to crypto assets; and
• Consumer sentiment and perception of Bitcoin specifically and crypto assets generally.
Many crypto asset exchanges currently do not provide the public with significant information regarding their ownership structure, management teams, corporate practices or regulatory compliance. As a result, the marketplace may lose confidence in, or may experience problems relating to, crypto asset exchanges, which may cause the price of Bitcoin to decline. For example, in the first half of 2022, each of Celsius Network LLC, et al. (“Celsius”), Voyager Digital Ltd., et al. (“Voyager”), and Three Arrows Capital (“Three Arrows”) declared bankruptcy, resulting in a loss of confidence among participants in the crypto asset ecosystem and negative publicity surrounding crypto assets more broadly. In November 2022, BlockFi Inc. (“BlockFi”) and FTX Trading Ltd. (“FTX”), the third largest crypto asset exchange by volume at the time, halted customer withdrawals and shortly thereafter, FTX and its subsidiaries filed for bankruptcy. In December 2022, Core Scientific Inc. (“Core”), one of the largest publicly traded crypto mining companies in the U.S., filed for bankruptcy. Most recently, in January 2023, Genesis Global Holdco, LLC, et al. (“Genesis”) filed for bankruptcy.
In response to these events, the crypto asset markets, including the market for Bitcoin specifically, have experienced extreme price volatility and several other entities in the crypto asset industry have been, and may continue to be, negatively affected, further undermining confidence in the crypto asset market and in Bitcoin. These events have also negatively impacted the liquidity of the crypto asset market as certain entities affiliated with FTX engaged in significant trading activity. If the liquidity of the crypto asset market continues to be negatively impacted by these events, crypto asset prices, including the price of Bitcoin, may continue to experience significant volatility and confidence in the crypto asset markets may be further undermined. A perceived lack of stability in the crypto asset exchange market and the closure or temporary shutdown of crypto asset exchanges due to business failure, hackers or malware, government-mandated regulation or fraud, may reduce confidence at least in part in crypto asset networks and result in greater volatility in Bitcoin’s value. Because the value of Bitcoin is derived from the continued willingness of market participants to exchange government-issued currency that is designated as legal tender in its country of issuance through government decree, regulation or law for Bitcoin, should the marketplace for Bitcoin be jeopardized or disappear entirely, permanent and total loss of the value of Bitcoin may result. Such a decrease in Bitcoin price may have a material and adverse effect on Gryphon’s results of operations and financial condition as the results of Gryphon’s operations are significantly tied to the price of Bitcoin.
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The failure or insolvency of large exchanges like FTX may cause the price of Bitcoin to fall and decrease confidence in the ecosystem, which could adversely affect an investment in Gryphon. Such market volatility and decrease in Bitcoin price may have a material and adverse effect on Gryphon’s results of operations and financial condition as the results of Gryphon’s operations are significantly tied to the price of Bitcoin.
As of the date hereof, Gryphon has not experienced any material impact resulting from the bankruptcy filings of FTX, Three Arrows, Celsius, Voyager, BlockFi, and Genesis and the attendant disruptions in the crypto asset markets. Genesis is owned by Digital Currency Group Inc. (“DCG”), which also owns Foundry Digital LLC (“Foundry”), one of Gryphon’s mining pool providers. However, at this time, Gryphon believes it is not subject to any material risks arising from its previous exposure to Genesis. Other than the Genesis entities, Gryphon (i) has no direct exposure to any crypto asset entities that have recently filed for bankruptcy; (ii) has no assets that may not be recovered due to these bankruptcies; and (iii) has no exposure to any other counterparties, customers, custodians or other crypto asset market third parties known to Gryphon to have (x) experienced material excessive redemptions or withdrawals or suspended redemptions or withdrawals of crypto assets, (y) the crypto assets of their customers unaccounted for, or (z) experienced material compliance failures. Similarly, Gryphon believes it is not subject to any material risks arising from its previous exposure to Core. Core provides hosting services for approximately 2% of Gryphon’s existing fleet and has continued to provide services throughout its bankruptcy process, with no noticeable impact to the level of service provided. Gryphon does not have any assets which may be lost due to the bankruptcy proceedings of Core.
The lack of regulation of digital asset exchanges which Bitcoin, and other cryptocurrencies, are traded on, may expose Gryphon to the effects of negative publicity resulting from fraudulent actors in the cryptocurrency space, and can adversely affect an investment in Gryphon.
The digital asset exchanges on which Bitcoin is traded are relatively new and largely unregulated. Many digital asset exchanges do not provide the public with significant information regarding their ownership structure, management teams, corporate practices, or regulatory compliance. As a result, the marketplace may lose confidence in, or may experience problems relating to, such digital asset exchanges, including prominent exchanges handling a significant portion of the volume of digital asset trading. In 2022, FTX and a number of other digital asset exchanges filed for bankruptcy proceedings after failing to solve financial issues caused by the falling prices of Bitcoin and other cryptocurrencies. FTX and others became the subjects of investigations by various governmental agencies for, among other things, fraud, which caused a loss of confidence in cryptocurrency market participants and an increase in negative publicity for the digital asset ecosystem. As a result, many digital asset markets, including the market for Bitcoin, did and continue to experience increased price volatility. The Bitcoin ecosystem may continue to be negatively impacted and experience long term volatility if public confidence cannot rebound or decreases again due similar future events.
These events are continuing to develop and it is not possible to predict, at this time, every risk that they may pose to Gryphon, Gryphon’s service providers, or the digital asset industry as a whole. A perceived lack of stability in the digital asset exchange market and the closure or temporary shutdown of digital asset exchanges due to business failure, hackers or malware, government-mandated regulation, or fraud, may reduce confidence in digital asset networks and result in greater volatility in cryptocurrency values. These potential consequences of a digital asset exchange’s failure could adversely affect an investment in Gryphon.
The Bitcoin market is exposed to financially troubled cryptocurrency-based companies.
The failure of several cryptocurrency platforms has impacted and may continue to impact the broader cryptocurrency economy; the full extent of these impacts may not yet be known. Bitcoin is part of the cryptocurrency environment and is subject to price volatility resulting from financial instability, poor business practices, and fraudulent activities of players in the cryptocurrency market. When investors in cryptocurrency and cryptocurrency-based companies experience financial difficulty as a result of price volatility, poor business practices, and/or fraud, it has caused, and may continue to cause, loss of confidence in the cryptocurrency space, reputational harm to cryptocurrency assets, heightened scrutiny by regulatory authorities and law makers, and a steep decline in the value of Bitcoin, among other material impacts. Such adverse effects have affected, and may in the future continue to affect, the profitability of Gryphon’s bitcoin mining operations.
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There is a lack of liquid markets for, and possible manipulation of, blockchain/cryptocurrency-based assets.
Cryptocurrencies that are represented and trade on a ledger-based platform may not necessarily benefit from viable trading markets. Stock exchanges have listing requirements and vet issuers, requiring them to be subjected to rigorous listing standards and rules, and monitor investors transacting on such platform for fraud and other improprieties. These conditions may not necessarily be replicated on a distributed ledger platform, depending on the platform’s controls and other policies. The more relaxed a distributed ledger platform is about vetting issuers of cryptocurrency assets or users that transact on the platform, the higher the potential risk for fraud or the manipulation of the ledger due to a control event. These factors may decrease liquidity or volume or may otherwise increase volatility of investment securities or other assets trading on a ledger-based system. Such circumstances could have a material adverse effect on Gryphon’s ability to continue as a going concern or to pursue its strategy at all, which could have a material adverse effect on Gryphon’s business, prospects or operations and potentially the value of any bitcoin that Gryphon mines or otherwise acquires or holds for its own account, which in turn could harm investors.
Acceptance and/or widespread use of Bitcoin are uncertain.
Currently, there is a relatively limited use of Bitcoin in the retail and commercial marketplace. Banks and other established financial institutions may refuse to process funds for Bitcoin transactions, process wire transfers to or from Bitcoin exchanges, Bitcoin-related companies or service providers, or maintain accounts for persons or entities transacting in Bitcoin. Conversely, a significant portion of Bitcoin demand is generated by investors seeking a long-term store of value or speculators seeking to profit from the short- or long-term holding of the asset. Price volatility undermines Bitcoin’s role as a medium of exchange, as retailers are much less likely to accept it as a form of payment. Market capitalization for Bitcoin as a medium of exchange and payment method may always be low.
The relative lack of acceptance of Bitcoin in the retail and commercial marketplace limits the ability of end users to use bitcoin to pay for goods and services. Such lack of acceptance could have a material adverse effect on Gryphon’s ability to continue as a going concern or to pursue Gryphon’s strategy at all, which could have a material adverse effect on Gryphon’s business, prospects or operations and potentially the value of Bitcoin Gryphon mines or otherwise acquires or holds for its own account.
The further development and acceptance of digital asset networks and other digital assets, which represent a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of digital asset systems may adversely affect an investment in Gryphon.
The use of cryptocurrencies to, among other things, buy and sell goods and services and complete transactions, is part of a new and rapidly evolving industry that employs cryptocurrency assets, including Bitcoin, based upon a computer-generated mathematical and/or cryptographic protocol. Large-scale acceptance of Bitcoin as a means of payment has not, and may never, occur. The growth of this industry in general, and the use of Bitcoin in particular, is subject to a high degree of uncertainty, and the slowing or stopping of the development or acceptance of developing protocols may occur unpredictably. The factors include, but are not limited to:
• continued worldwide growth in the adoption and use of Bitcoin as a medium of exchange;
• governmental and quasi-governmental regulation of Bitcoin and its use, or restrictions on or regulation of access to and operation of the Bitcoin network or similar cryptocurrency systems;
• changes in consumer demographics and public tastes and preferences;
• the maintenance and development of the open-source software protocol of the network;
• the increased consolidation of contributors to the Bitcoin blockchain through mining pools;
• the availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies;
• the use of the networks supporting cryptocurrencies for developing smart contracts and distributed applications;
• general economic conditions and the regulatory environment relating to cryptocurrencies; and
• negative consumer sentiment and perception of Bitcoin specifically and cryptocurrencies generally.
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The outcome of these factors could have negative effects on Gryphon’s ability to continue as a going concern or to pursue Gryphon’s business strategy at all, which could have a material adverse effect on Gryphon’s business, prospects or operations as well as a potentially negative effect on the value of any bitcoin that Gryphon mines or otherwise acquires or holds for Gryphon’s own account, which would harm investors.
The bitcoin reward for successfully uncovering a block will halve several times in the future and Bitcoin value may not adjust to compensate Gryphon for the reduction in the rewards Gryphon receives from its mining efforts.
Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a proof-of-work consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term “halving.” For Bitcoin, the reward was initially set at 50 bitcoin currency rewards per block. This was cut in half to 25 on November 28, 2012 at block 210,000, and then again to 12.5 on July 9, 2016 at block 420,000. The most recent halving for Bitcoin happened on May 11, 2020 at block 630,000 and the reward reduced to 6.25. The next halving will likely occur in 2024 and the reward will reduce to 3.125. This process will reoccur until the total amount of bitcoin currency rewards issued reaches 21 million, which is expected around 2140.
While Bitcoin prices have historically increased around these halving events, which increases in price have correspondingly mitigated the decrease in mining reward, there is no guarantee that the price change would be favorable or would compensate for the reduction in mining reward. If a corresponding and proportionate increase in the trading price of Bitcoin or a proportionate decrease in mining difficulty does not follow these anticipated halving events, the revenue Gryphon earns from its bitcoin mining operations would see a corresponding decrease, which would have a material adverse effect on Gryphon’s business and the economics of Gryphon’s mining operations.
Gryphon aims to mitigate the impacts of halving by maintaining a breakeven profitability floor far below the network average. To do so, Gryphon has developed and implemented a curtailment agreement with its hosting partners to maximize the marginal profitability of its machines.
Gryphon’s partners have also implemented standard operating procedures to maximize the operational efficiency of its sites, such as preventative maintenance and cleaning of equipment. Gryphon believes that these steps can enable it to maintain survivability above its competitors and mitigate the downside risk of decreased rewards.
Cryptocurrencies, including Bitcoin, face significant scaling obstacles that can lead to high fees or slow transaction settlement times.
Cryptocurrencies face significant scaling obstacles that can lead to high fees or slow transaction settlement times, and attempts to increase the volume of transactions may not be effective. Scaling cryptocurrencies is essential to the widespread acceptance of cryptocurrencies as a means of payment, which widespread acceptance is important to the continued growth and development of Gryphon’s business. Many cryptocurrency networks, including the Bitcoin network, face significant scaling challenges. For example, cryptocurrencies are limited with respect to how many transactions can occur per second. Participants in the cryptocurrency ecosystem debate potential approaches to increasing the average number of transactions per second that the network can handle and have implemented mechanisms or are researching ways to increase scale, such as increasing the allowable sizes of blocks, and therefore the number of transactions per block, and sharding (a horizontal partition of data in a database or search engine), which would not require every single transaction to be included in every single miner’s or validator’s block. However, there is no guarantee that any of the mechanisms in place or being explored for increasing the scale of settlement of cryptocurrency and, specifically, Bitcoin transactions will be effective, or how long they will take to become effective, which could adversely affect Gryphon’s business.
Transaction fees may decrease demand for Bitcoin and prevent expansion that could adversely impact an investment in Gryphon.
As the number of bitcoins awarded for solving a block in a blockchain decreases, the incentive for miners to continue to contribute to the Bitcoin network may transition from a set reward to transaction fees. In order to incentivize miners to continue to contribute to the Bitcoin network, the Bitcoin network may either formally or informally transition from a set reward to transaction fees earned upon solving a block. This transition could be accomplished by miners independently electing to record in the blocks they solve only those transactions that include payment of a transaction fee. If transaction fees paid for Bitcoin transactions become too high, the marketplace may be reluctant to accept Bitcoin as a means of payment and existing users may be motivated to switch from Bitcoin to another cryptocurrency
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or to fiat currency. Either the requirement from miners of higher transaction fees in exchange for recording transactions in a blockchain or a software upgrade that automatically charges fees for all transactions may decrease demand for Bitcoin and prevent the expansion of the Bitcoin network to retail merchants and commercial businesses, resulting in a reduction in the price of Bitcoin that could adversely impact Gryphon’s business. Decreased use and demand for bitcoins that Gryphon has accumulated may adversely affect their value and may adversely impact an investment in Gryphon.
The price of Bitcoin may be affected by the sale of Bitcoin by other vehicles investing in Bitcoin or tracking Bitcoin markets.
The global market for Bitcoin is characterized by supply constraints that differ from those present in the markets for commodities or other assets such as gold and silver. The mathematical protocols under which Bitcoin is mined permit the creation of a limited, predetermined amount of currency, while others have no limit established on total supply. To the extent that other vehicles investing in Bitcoin or tracking Bitcoin markets form and come to represent a significant proportion of the demand for Bitcoin, large redemptions of the securities of those vehicles and the subsequent sale of Bitcoin by such vehicles could negatively affect Bitcoin prices and therefore affect the value of the Bitcoin holdings Gryphon holds. Such events could have a material adverse effect on Gryphon’s ability to continue as a going concern or to pursue Gryphon’s new strategy at all, which could have a material adverse effect on Gryphon’s business, prospects or operations and potentially the value of any bitcoin that Gryphon mines or otherwise acquires or holds for its own account.
The development of other cryptocurrencies and/or digital currencies may adversely affect the value of Bitcoin.
To the extent that other cryptocurrencies are introduced into the market, gain traction and are supported by the deployment of significant resources, the success of any such cryptocurrency could lead to a decrease in demand and the potential exclusion of existing cryptocurrencies, such as Bitcoin.
In addition, central banks in some countries have started to introduce digital forms of legal tender. Whether or not they incorporate blockchain or similar technology, central bank digital currencies as legal tender in the issuing jurisdiction could have an advantage in competing with, or replacing, Bitcoin and other cryptocurrencies as a medium of exchange or store of value. As a result, the value of Bitcoin could decrease, which could have a material adverse effect on Gryphon’s business, prospects, financial condition, and operating results.
If a malicious actor or botnet obtains control in excess of 50% of the processing power active on any digital asset network, including the Bitcoin network, it is possible that such actor or botnet could manipulate the blockchain in a manner that adversely affects an investment in Gryphon.
If a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority of the processing power dedicated to mining on any digital asset network, including the Bitcoin network, it may be able to alter the blockchain by constructing alternate blocks if it is able to solve for such blocks faster than the remainder of the miners on the blockchain can add valid blocks. In such alternate blocks, the malicious actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate new digital assets or transactions using such control. Using alternate blocks, the malicious actor could “double-spend” its own digital assets (i.e., spend the same digital assets in more than one transaction) and prevent the confirmation of other users’ transactions for so long as it maintains control. To the extent that such malicious actor or botnet does not yield its majority control of the processing power or the digital asset community does not reject the fraudulent blocks as malicious, reversing any changes made to the blockchain may not be possible. Such changes could adversely affect an investment in Gryphon.
For example, in late May and early June 2014, a mining pool known as GHash.io approached and, during a 24- to 48-hour period may have exceeded, the threshold of 50% of the processing power on the Bitcoin network. To the extent that GHash.io did exceed 50% of the processing power on the network, reports indicate that such threshold was surpassed for only a short period, and there are no reports of any malicious activity or control of the blockchain performed by GHash.io. Furthermore, the processing power in the mining pool appears to have been redirected to other pools on a voluntary basis by participants in the GHash.io pool, as had been done in prior instances when a mining pool exceeded 40% of the processing power on the Bitcoin network.
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The approach towards and possible crossing of the 50% threshold indicate a greater risk that a single mining pool could exert authority over the validation of digital asset transactions. To the extent that the digital assets ecosystems do not act to ensure greater decentralization of digital asset mining processing power, the feasibility of a malicious actor obtaining in excess of 50% of the processing power on any digital asset network (e.g., through control of a large mining pool or through hacking such a mining pool) will increase, which may adversely impact an investment in Gryphon.
The decentralized nature of cryptocurrency systems may lead to slow or inadequate responses to crises, which may negatively affect Gryphon’s business.
The decentralized nature of the governance of cryptocurrency systems may lead to ineffective decision making that slows development or prevents a network from overcoming emergent obstacles. Governance of many cryptocurrency systems is by voluntary consensus and open competition with no clear leadership structure or authority. To the extent lack of clarity in corporate governance of the Bitcoin blockchain leads to ineffective decision making that slows development and growth of the Bitcoin network protocol, Gryphon’s business may be adversely affected.
The open-source structure of the Bitcoin network protocol means that the contributors to the protocol are generally not directly compensated for their contributions in maintaining and developing the protocol. A failure to properly monitor and upgrade the protocol could damage the Bitcoin network and an investment in Gryphon.
The Bitcoin network operates based on an open-source protocol maintained by contributors, largely on the Bitcoin Core project on GitHub. As an open-source project, Bitcoin is not represented by an official organization or authority. As the Bitcoin network protocol is not sold and its use does not generate revenues for contributors, contributors are generally not compensated for maintaining and updating the Bitcoin network protocol. The lack of guaranteed financial incentive for contributors to maintain or develop the Bitcoin network and the lack of guaranteed resources to adequately address emerging issues with the Bitcoin network may reduce incentives to address the issues adequately or in a timely manner. Changes to a digital asset network that Gryphon is mining on may adversely affect an investment in Gryphon.
The impact of geopolitical and economic events on the supply and demand for Bitcoin is uncertain.
Geopolitical crises may motivate large-scale purchases of Bitcoin and other cryptocurrencies, which could increase the price of Bitcoin and other cryptocurrencies rapidly. This may increase the likelihood of a subsequent price decrease as crisis-driven purchasing behavior dissipates, which would adversely affect the value of Gryphon’s Bitcoin value following such downward adjustment. Such risks are similar to the risks of purchasing commodities in uncertain times, such as the risk of purchasing, holding or selling gold. Alternatively, as an emerging asset class with limited acceptance as a payment system or commodity, global crises and general economic downturns may discourage investment in Bitcoin as investors focus their investments on less volatile asset classes as a means of hedging their investment risks.
As an alternative to fiat currencies that are backed by central governments, Bitcoin, which is relatively new, is subject to supply and demand forces. How such supply and demand will be impacted by geopolitical events is largely uncertain but could be harmful to Gryphon. Political or economic crises may motivate large-scale acquisitions or sales of Bitcoin either globally or locally. Such events could have a material adverse effect on Gryphon’s ability to continue as a going concern or to pursue Gryphon’s new strategy at all, which could have a material adverse effect on Gryphon’s business, prospects or operations and potentially the value of any bitcoin that Gryphon mines or otherwise acquires or holds for its own account.
Gryphon faces risks of Internet disruptions, which could have an adverse effect on the price of Bitcoin.
A disruption of the Internet may affect the use of Bitcoin. Generally, Bitcoin and Gryphon’s business of mining Bitcoin are dependent upon the Internet. A significant disruption in Internet connectivity could disrupt a currency’s network operations until the disruption is resolved and have an adverse effect on the price of Bitcoin and Gryphon’s ability to mine bitcoin.
Risks Related to Operations
Gryphon is an early-stage company and has a limited history of generating profits.
Gryphon was formed in October 2020 and has a limited history upon which an evaluation of Gryphon’s performance and future prospects can be made. Gryphon began mining operations in September 2021, and had no previous existing operations. Gryphon’s current and proposed operations are subject to all of the business risks associated with new enterprises. These include likely fluctuations in operating results as Gryphon reacts to developments in its market,
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manages its growth and operations, and responds to the entry of competitors into the market. Further, there is no assurance that Gryphon can successfully execute its business plan. Gryphon has had limited revenues generated since its bitcoin miners became operational in September 2021, and consequently recorded losses in 2020 and 2021. Gryphon generated minimal profits in 2022 and may not be able to sustain profitability in the future.
Gryphon may be unable to access sufficient additional capital to fund its operations or for future strategic growth initiatives.
Gryphon’s purchase of its fleet of bitcoin miners was a capital intensive project, and Gryphon anticipates that future strategic growth initiatives will likewise be capital-intensive. Gryphon has raised limited capital through private placements to date and expects to raise additional capital to fund its operations and future strategic growth initiatives. If Gryphon raises additional capital through public or private equity offerings, the ownership interest of Gryphon’s existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect Gryphon’s stockholders’ rights. If Gryphon raises additional capital through debt financing, Gryphon may be subject to covenants limiting or restricting Gryphon’s ability to take specific actions, such as incurring additional debt or liens, making capital expenditures or declaring dividends. Further, Gryphon may be unable to raise capital in a timely manner, in sufficient quantities, or on terms acceptable to Gryphon, if at all. If Gryphon is unable to raise the additional capital needed to fund its operations or execute future strategic growth initiatives, Gryphon may be less competitive in its industry and its results of operations and financial condition may suffer. The value of its securities may also be materially and adversely affected.
Gryphon has a substantial amount of debt and significant debt service obligations.
On May 25, 2022, Anchorage Lending CA, LLC (“Anchorage”) entered into an Equipment Loan and Security Agreement (the “Anchorage Loan Agreement”) with Gryphon Opco I LLC (“Gryphon Opco”), a wholly owned subsidiary of Gryphon, pursuant to which Anchorage loaned Gryphon Opco the principal amount of 933.333333 bitcoin. The loan is payable in principal installments of 42.424242 bitcoin together with initial interest at 5.0% per annum, payable monthly in bitcoin. On March 29, 2023, Gryphon executed an amendment to the Anchorage Loan Agreement (the “Anchorage Loan Amendment”), which, among other things, increased the interest rate to 6.0% per annum.
The Anchorage Loan Agreement, as amended by the Anchorage Loan Amendment, contains certain covenants that limit Gryphon’s ability to engage in certain transactions that may be in Gryphon’s long-term best interest. Subject to certain limited exceptions, these covenants do or may limit Gryphon’s ability to or prohibit Gryphon from permitting any of its subsidiaries to, as applicable, among other things:
• convey, sell, lease, transfer, assign, or otherwise dispose of all or any part of 7,200 of Gryphon’s bitcoin mining machines and the Coinmint Agreement (as defined below) that are posted as collateral for the loan;
• keep Gryphon’s bitcoin mining machines at hosting facilities of Gryphon’s choice after March 31, 2024;
• create, incur, assume, or be liable for any additional indebtedness, or create, incur, allow, or permit to exist any additional liens;
• declare dividends or other distributions on Gryphon shares, redeem, retire or purchase for value any Gryphon shares, make any payment to retire or obtain the surrender of any Gryphon warrants or options, or make any payment with respect to any earnout obligation;
• use bitcoin wallet custody or trading execution services of Gryphon’s choice; or
• merge or consolidate with any entity where Gryphon is not the surviving entity without the execution of additional loan documents.
In addition, under the Anchorage Loan Agreement, Gryphon is required to maintain a collateral (mining equipment, digital assets or US dollars) coverage ratio of 110%. If this collateral coverage ratio decreases below 110%, including as a result of a decrease in the value of the bitcoin or bitcoin mining machines posted as collateral under the Anchorage Loan Agreement (due to volatility in the crypto asset markets or otherwise), Gryphon will have to provide Anchorage with additional collateral in the form of bitcoin, U.S. dollars, or additional equipment. If Gryphon is unable to do so, Gryphon may be in default under the Anchorage Loan Agreement, which could have a material adverse effect on its operations, liquidity, financial condition, and results of operations.
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While Gryphon has not previously breached and is currently in compliance with the covenants contained in the Anchorage Loan Agreement, as amended by the Anchorage Loan Amendment, Gryphon may breach these covenants in the future. Gryphon’s ability to comply with these covenants may be affected by events and factors beyond its control. In the event that Gryphon breaches one or more covenants, Anchorage may choose to declare an event of default and require that Gryphon immediately repay all amounts outstanding under the Anchorage Loan Agreement and terminate any commitment to extend further credit and foreclose on the collateral. The occurrence of any of these events could have a material adverse effect on Gryphon’s business, financial condition and results of operations.
Gryphon’s independent registered public accounting firm’s report contains an explanatory paragraph that expresses substantial doubt about Gryphon’s ability continue as a “going concern.”
Gryphon’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which contemplate the continuation of Gryphon as a going concern and the realization of assets and satisfaction of liabilities in the ordinary course of business.
Since Gryphon began revenue generation in September 2021, management has financed Gryphon’s operations through equity and debt financing and the sale of the digital assets earned through mining operations.
Gryphon may incur additional losses from operations and negative cash outflows from operations in the foreseeable future. In the event Gryphon does incur losses, it may need to raise debt or equity financing to finance its operations until operations are cashflow positive. However, there can be no assurance that such financing will be available in sufficient amounts and on acceptable terms, when and if needed, or at all. The precise amount and timing of the funding needs cannot be determined accurately at this time and will depend on several factors, including the market price for the underlying commodity mined by Gryphon and its ability to procure the required mining equipment and operate profitably. Gryphon’s financial statements contained elsewhere in this proxy statement/prospectus have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the ordinary course of business. These financial statements do not include any adjustments that might result from Gryphon’s inability to continue as a going concern.
Gryphon’s loss of any of its management or advisory team, its inability to execute an effective succession plan, or its inability to attract and retain qualified personnel, could adversely affect Gryphon’s business.
Gryphon’s success and future growth will depend to a significant degree on the skills and services of its management and advisors, including Robby Chang, Gryphon’s Chief Executive Officer and President. Gryphon will need to continue to grow its management in order to alleviate pressure on its existing team and in order to continue to develop its business. If Gryphon’s management, including any new hires that Gryphon may make, fail to work together effectively and to execute Gryphon’s plans and strategies on a timely basis, Gryphon’s business could be harmed. Furthermore, if Gryphon fails to execute an effective contingency or succession plan with the loss of any member of management, the loss of such management personnel may significantly disrupt its business.
The loss of key members of management or advisory team could inhibit Gryphon’s growth prospects. Gryphon’s future success also depends in large part on its ability to attract, retain and motivate key management and operating personnel. As Gryphon continues to develop and expand its operations, it may require personnel with different skills and experiences, and who have sound understandings of Gryphon’s business and the Bitcoin network industry. The market for highly qualified personnel in this industry is very competitive, and Gryphon may be unable to attract such personnel. If Gryphon is unable to attract such personnel, its business could be harmed.
Any valuation at this stage is difficult to assess.
Gryphon’s valuation is based upon a number of estimates and assumptions that may prove later to be inaccurate or incomplete. Unlike listed companies that are valued publicly through market-driven stock prices, the valuation of private companies, especially startups, is difficult to assess and investors may risk overpaying for their investments. Gryphon began its operations in September 2021 and has limited operating experience and performance history, which makes valuation difficult.
If the bitcoin reward for solving blocks and transaction fees is not sufficiently high, Gryphon may not have an adequate incentive to continue mining and may cease mining operations, which will likely lead to Gryphon’s failure to achieve profitability.
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As the number of bitcoin rewards awarded for solving a block in a blockchain decreases, Gryphon’s ability to achieve profitability worsens. Decreased use and demand for bitcoin rewards may adversely affect Gryphon’s incentive to expend processing power to solve blocks. If the award of bitcoin rewards for solving blocks and transaction fees are not sufficiently high, Gryphon or other miners may not have an adequate incentive to continue mining and may cease mining operations. Miners ceasing operations would reduce the collective processing power on the network, which would adversely affect the confirmation process for transactions (i.e., temporarily decreasing the speed at which blocks are added to a blockchain until the next scheduled adjustment in difficulty for block solutions) and make the Bitcoin network more vulnerable to a malicious actor or botnet obtaining control in excess of 50 percent of the processing power active on a blockchain, potentially permitting such actor or botnet to manipulate a blockchain in a manner that adversely affects Gryphon’s activities. A reduction in confidence in the confirmation process or processing power of the network could result and be irreversible. Such events could have a material adverse effect on Gryphon’s business, prospects or operations and potentially the value of any Bitcoin that Gryphon mines or otherwise acquires or holds for its own account.
Bitcoin mining activities are energy-intensive, which may restrict the geographic locations of mining machines and have a negative environmental impact. Government regulators may potentially restrict the ability of electricity suppliers to provide electricity to mining operations, such as Gryphon’s.
Mining bitcoin requires massive amounts of electrical power, and electricity costs are expected to account for a significant portion of Gryphon’s overall costs. The availability and cost of electricity will restrict the geographic locations of Gryphon’s mining activities. Any shortage of electricity supply or increase in electricity costs in any location where Gryphon plans to operate may negatively impact the viability and the expected economic return for bitcoin mining activities in that location.
Further, Gryphon’s business model can only be successful and Gryphon’s mining operations can only be profitable if the costs, including electrical power costs, associated with bitcoin mining are lower than the price of Bitcoin itself. As a result, any equipment Gryphon deploys can only be successful if Gryphon can obtain access to sufficient electrical power on a cost-effective basis through hosting arrangements with mining data centers. Gryphon’s deployment of new mining equipment requires Gryphon to find sites where that is the case. Even if Gryphon’s electrical power costs do not increase, significant fluctuations in, and any prolonged periods of, low Bitcoin prices may also cause Gryphon’s electrical supply to no longer be cost-effective.
Furthermore, if cryptocurrency mining becomes more widespread, government scrutiny related to restrictions on cryptocurrency mining facilities and their energy consumption may significantly increase. The considerable consumption of electricity by mining operators may also have a negative environmental impact, including contribution to climate change, which could set the public opinion against allowing the use of electricity for bitcoin mining activities. This, in turn, could lead to governmental measures restricting or prohibiting the use of electricity for bitcoin mining activities. For example, in September 2022, the White House issued a report regarding the Climate and Energy Implications of Crypto-Assets in the United States. The report states that the Department of Energy and Environmental Protection Agency should initiate a process to solicit data and develop environmental performance and energy conservation standards for crypto-asset technologies, including mining equipment. Should such measures prove ineffective at achieving the Administration’s environmental goals, the report calls for the Administration to explore executive actions and legislation to limit or eliminate the use of high energy intensity consensus mechanisms for crypto-asset mining in the United States. Any such development in the jurisdictions where Gryphon plans to operate could increase Gryphon’s compliance burdens and have a material adverse effect on Gryphon’s business, prospects, financial condition, and operating results.
Additionally, the mining data centers at which Gryphon maintains its mining equipment could be materially adversely affected by power outages and similar disruptions. Given the power requirements for Gryphon’s mining equipment, it would not be feasible to run this equipment on back-up power generators in the event of a government restriction on electricity or a power outage. If Gryphon is unable to receive adequate power supply and is forced to reduce its operations due to the availability or cost of electrical power, it would have a material adverse effect on Gryphon’s business, prospects, financial condition, and operating results.
Gryphon’s bitcoin may be subject to loss, theft or restriction on access.
There is a risk that some or all of Gryphon’s bitcoin could be lost or stolen. Cryptocurrencies are stored in cryptocurrency sites commonly referred to as “wallets” by holders of cryptocurrencies, which may be accessed to exchange a holder’s cryptocurrency assets. Access to Gryphon’s bitcoin assets could also be restricted by cybercrime
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(such as a denial of service attack) against a service at which Gryphon maintains a hosted hot wallet. A hot wallet refers to any cryptocurrency wallet that is connected to the Internet. Generally, hot wallets are easier to set up and access than wallets in cold storage, but they are also more susceptible to hackers and other technical vulnerabilities. Cold storage refers to any cryptocurrency wallet that is not connected to the Internet. Gryphon holds its bitcoin solely in cold custodial wallets with keys managed by BitGo Trust. Cold storage is generally more secure than hot storage, but is not ideal for quick or regular transactions, and Gryphon may experience lag time in its ability to respond to market fluctuations in the price of Gryphon’s bitcoin assets.
Hackers or malicious actors may launch attacks to steal, compromise or secure bitcoin, such as by attacking the Bitcoin network source code, exchange miners, third-party platforms, cold and hot storage locations or software, through phishing schemes or by other means. Several errors and defects in such codes have been found previously, including those that disabled some functionality for users and exposed users’ information. Exploitations of flaws in the source code that allow malicious actors to take or create money have previously occurred. Despite Gryphon’s efforts and processes to prevent breaches, Gryphon’s devices, as well as Gryphon’s miners, computer systems and those of third parties that Gryphon uses in its operations, are vulnerable to cybersecurity risks, including cyberattacks such as viruses and worms, phishing attacks, denial-of-service attacks, physical or electronic break-ins, employee theft or misuse, and similar disruptions from unauthorized tampering with Gryphon’s miners and computer systems or those of third parties that Gryphon uses in its operations. Any of these events may adversely affect Gryphon’s operations and, consequently, Gryphon’s investments and profitability. The loss or destruction of a private key required to access Gryphon’s digital wallets may be irreversible and Gryphon may be denied access for all time to its bitcoin holdings or the holdings of others held in those compromised wallets. Gryphon’s loss of access to its private keys or a data loss relating to Gryphon’s digital wallets could adversely affect Gryphon’s investments and assets.
Cryptocurrencies are controllable only by the possessor of both the unique public and private keys relating to the local or online digital wallet in which they are held, which wallet’s public key or address is reflected in the network’s public blockchain. Gryphon will publish the public key relating to digital wallets in use when Gryphon verifies the receipt of transfers and disseminates such information into the network, but Gryphon will need to safeguard the private keys relating to such digital wallets. We safeguard and keep private the private keys relating to our digital assets by relying on BitGo Trust’s (as defined herein) 100% cold storage custody solution held in a purpose-built physically-secure environment based on established, industry best practices to safeguard our digital assets from theft, loss, destruction or other issues relating to hackers and technological attack. Gryphon’s CEO, President and CFO each hold Gryphon side private keys that are protected with two-factor authentication. Gryphon confirms transactional validity and data for revenue recognition through a daily review and reconciliation of BitGo reports. Custodial side keys are held by BitGo Trust who verifies requests with two factor authentication and video reviews. To the extent such private keys are lost, destroyed or otherwise compromised, Gryphon will be unable to access its bitcoin rewards and such private keys may not be capable of being restored by any network. Any loss of private keys relating to digital wallets used to store Gryphon’s bitcoin could have a material adverse effect on Gryphon’s ability to continue as a going concern or to pursue its new strategy at all, which could have a material adverse effect on Gryphon’s business, prospects or operations and potentially the value of any bitcoin that Gryphon mines or otherwise acquires or holds for its own account.
Our ability to adopt technology in response to changing security needs or trends and reliance on third party, Bitgo Prime, for custody poses a challenge to the safekeeping of our digital assets.
The history of digital asset exchanges has shown that exchanges and large holders of digital assets must adapt to technological change in order to secure and safeguard their digital assets. We rely on Bitgo Trust’s 100% cold storage custody solution held in a purpose-built physically-secure environment based on established, industry best practices to safeguard our digital assets from theft, loss, destruction or other issues relating to hackers and technological attack. We believe that it may become a more appealing target of security threats as the size of our bitcoin holdings grow. To the extent that either BitGo Trust or we are unable to identify and mitigate or stop new security threats, our digital assets may be subject to theft, loss, destruction or other attack, which could adversely affect an investment in us. To the extent that BitGo Trust is no longer, due to the current banking crisis, able to safeguard our assets, we would be at risk of loss if safeguarding protocols fail.
Incorrect or fraudulent cryptocurrency transactions may be irreversible.
Cryptocurrency transactions are irrevocable and stolen or incorrectly transferred cryptocurrencies may be irretrievable. As a result, any incorrectly executed or fraudulent Bitcoin transactions could adversely affect Gryphon’s investments and assets. Cryptocurrency transactions are not, from an administrative perspective, reversible without the consent and
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active participation of the recipient of the cryptocurrency from the transaction. In theory, Bitcoin transactions may be reversible with the control or consent of a majority of processing power on the Bitcoin network; however, Gryphon does not now, nor is it feasible that Gryphon could in the future, possess sufficient processing power to effect such a reversal. Once a transaction has been verified and recorded in a block that is added to a blockchain, an incorrect transfer of a cryptocurrency or a theft thereof generally will not be reversible and Gryphon may not have sufficient recourse to recover its losses from any such transfer or theft. It is possible that, through computer or human error, or through theft, fraud, phishing schemes or other criminal action, Gryphon’s cryptocurrency rewards could be transferred in incorrect amounts or to unauthorized third parties or uncontrolled accounts. Further, at this time, there is no specifically enumerated U.S. or foreign governmental, regulatory, investigative or prosecutorial authority or mechanism through which to bring an action or complaint regarding missing or stolen cryptocurrency. In the event of a loss, Gryphon would be reliant on existing private investigative entities to investigate any such loss of Gryphon’s bitcoin assets. These third-party service providers rely on data analysis and compliance of Internet service providers with traditional court orders to reveal information such as the IP addresses of any attackers who may have targeted Gryphon. To the extent that Gryphon is unable to recover its losses from such action, error, theft or other criminal action, such events could have a material adverse effect on Gryphon’s ability to continue as a going concern or to pursue Gryphon’s new strategy at all, which could have a material adverse effect on Gryphon’s business, prospects or operations of and potentially the value of any bitcoin that Gryphon mines or otherwise acquires or holds for its own account.
Gryphon may be affected by price fluctuations in the wholesale and retail power markets.
Market prices for power, generation capacity and ancillary services, are unpredictable. Depending upon the effectiveness of any price risk management activity undertaken by Gryphon, including but not limited to attempts to secure hosting services contracts at fixed fees, an increase in market prices for power, generation capacity, and ancillary services may adversely affect Gryphon’s business, prospects, financial condition, and operating results. Long- and short-term power prices may fluctuate substantially due to a variety of factors outside of Gryphon’s control, including, but not limited to:
• increases and decreases in generation capacity;
• changes in power transmission or fuel transportation capacity constraints or inefficiencies;
• volatile weather conditions, particularly unusually hot or mild summers or unusually cold or warm winters;
• technological shifts resulting in changes in the demand for power or in patterns of power usage, including the potential development of demand-side management tools, expansion and technological advancements in power storage capability and the development of new fuels or new technologies for the production or storage of power;
• federal and state power, market and environmental regulation and legislation; and
• changes in capacity prices and capacity markets.
If Gryphon is unable to secure power supply at prices or on terms acceptable to it, a material adverse effect on Gryphon’s business, prospects, financial condition, and operating results would occur.
To remain competitive in Gryphon’s industry, Gryphon seeks to grow its hash rate to match the growing network hash rate and increasing network difficulty of the Bitcoin blockchain, and if Gryphon is unable to grow its hash rate at pace with the network hash rate, Gryphon’s chance of earning bitcoin from its mining operations would decline.
As the adoption of Bitcoin has increased, the price of Bitcoin has generally appreciated, causing the demand for new bitcoin rewards for successfully solving blocks on the Bitcoin blockchain to likewise increase. This has encouraged more miners to attempt to mine bitcoin, which increases the global network hash rate deployed in support of the Bitcoin blockchain.
Because a miner’s relative chance of successfully solving a block and earning a new bitcoin reward is generally a function of the ratio the miner’s individual hash rate bears to the global network hash rate, as the global network hash rate increases, a miner must increase its individual hash rate to maintain its chances of earning new bitcoin rewards. Therefore, as new miners enter the industry and as miners deploy greater and greater numbers of increasingly powerful machines, existing miners must seek to continually increase their hash rates to remain competitive. Thus, a feedback loop is created: as Bitcoin gains popularity and its relative market price increases, more miners attempt to mine bitcoin and the Bitcoin
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network hash rate is increased; in response, existing miners and new miners devote more and more hash rate to the Bitcoin blockchain by deploying greater numbers of increasingly powerful machines in an attempt to ensure their abilities to earn additional bitcoin rewards do not decrease. Compounding this feedback loop, the network difficulty of the Bitcoin network (i.e., the amount of work (measured in hashes) necessary to solve a block) is periodically adjusted to maintain the pace of new block additions (with one new block added to the blockchain approximately every ten minutes), and thereby control the supply of Bitcoin. As miners deploy more hash rate and the Bitcoin network hash rate is increased, the Bitcoin network difficulty is adjusted upwards by requiring more hash rate to be deployed to solve a block. Thus, miners are further incentivized to grow their hash rates to maintain their chances of earning new bitcoin rewards. In theory, these dual processes should continually replicate themselves until the supply of available bitcoin is exhausted. In response, miners have attempted to achieve greater hash rates by deploying increasingly sophisticated and expensive miners in ever greater quantities. This has become the Bitcoin mining industry’s great “arms race.” Moreover, because there are very few manufacturers of miners capable of producing a sufficient number of miners of adequate quality to meet this need, scarcity results and miner prices increase. Compounding this phenomenon, it has been observed that some manufacturers of bitcoin miners may increase their prices for new miners as the market price of Bitcoin increases.
Accordingly, for Gryphon to maintain its chances of earning new bitcoin rewards and remaining competitive in its industry, Gryphon must seek to continually add new miners to grow its hash rate at pace with the growth in the Bitcoin network hash rate. However, as demand has increased and scarcity in the supply of new miners has resulted, the price of new miners has increased, and Gryphon expects this process to continue in the future as demand for bitcoin increases. Therefore, if the price of Bitcoin is not sufficiently high to allow Gryphon to fund its hash rate growth through new miner acquisitions, and if Gryphon is otherwise unable to access additional capital to acquire these miners, Gryphon’s hash rate may stagnate and Gryphon may fall behind its competitors. If this happens, Gryphon’s chances of earning new bitcoin rewards would decline and, as such, its results of operations and financial condition may suffer.
Gryphon’s business is dependent on a small number of digital asset mining equipment suppliers.
Gryphon’s business is dependent upon digital asset mining equipment suppliers providing an adequate supply of new generation digital asset mining machines at economical prices to customers intending to purchase its hosting and other solutions. The growth in Gryphon’s business is directly related to increased demand for hosting services and digital assets such as Bitcoin, which is dependent in large part on the availability of new generation mining machines offered for sale at a price conducive to profitable digital asset mining, as well as the trading price of digital assets such as Bitcoin. The market price and availability of new mining machines fluctuates with the price of Bitcoin and can be volatile. Higher Bitcoin prices increase the demand for mining equipment and increase the cost. In addition, as more companies seek to enter the mining industry, the demand for machines may outpace supply and create mining machine equipment shortages. There are no assurances that digital asset mining equipment suppliers will be able to keep pace with any surge in demand for mining equipment. Further, manufacturing mining machine purchase contracts are not favorable to purchasers and Gryphon may have little or no recourse in the event a mining machine manufacturer defaults on its mining machine delivery commitments. If Gryphon and its customers are not able to obtain a sufficient number of digital asset mining machines at favorable prices, its growth expectations, liquidity, financial condition and results of operations will be negatively impacted.
Mining machines rely on components and raw materials that may be subject to price fluctuations or shortages, including ASIC chips that have been subject to an ongoing significant shortage.
In order to build and sustain Gryphon’s self-mining operations, Gryphon will depend on third parties to provide it with ASIC chips and other critical components for its mining equipment, which may be subject to price fluctuations or shortages. For example, the ASIC chip is the key component of a mining machine as it determines the efficiency of the device. The production of ASIC chips typically requires highly sophisticated silicon wafers, which currently only a small number of fabrication facilities, or wafer foundries, in the world are capable of producing. ASIC chips were recently subject to significant price increases and shortages that may occur again in the future.
There is also a risk that a manufacturer or seller of ASIC chips or other necessary mining equipment may adjust the prices according to Bitcoin, other cryptocurrency prices or otherwise, so the cost of new machines could become unpredictable and extremely high. As a result, at times, Gryphon may be forced to obtain mining machines and other hardware at premium prices, to the extent they are even available. Such events could have a material adverse effect on Gryphon’s business, prospects, financial condition, and operating results.
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Gryphon’s reliance primarily on a single model of miner may subject its operations to increased risk of design flaws.
The performance and reliability of Gryphon’s miners and its technology is critical to Gryphon’s reputation and its operations. Because Gryphon currently only uses Bitmain Antminer type miners, if there are issues with those machines, such as a design flaw in the ASIC chips they employ, Gryphon’s entire system could be affected. Any system error or failure may significantly delay response times or even cause Gryphon’s system to fail. Any disruption in Gryphon’s ability to continue mining could result in lower yields and harm its reputation and business. Any exploitable weakness, flaw, or error common to Bitmain miners could affect all of Gryphon’s miners; therefore, if a defect or other flaw exists and is exploited, Gryphon’s entire miner fleet could be adversely impacted. Any interruption, delay or system failure could result in financial losses, a decrease in the value of Gryphon’s stock and damage to Gryphon’s reputation.
There are risks related to technological obsolescence, the vulnerability of the global supply chain to Bitcoin hardware disruption, and difficulty in obtaining new hardware, which may have a negative effect on Gryphon’s business.
Gryphon’s mining operations can only be successful and profitable if the costs of mining Bitcoin, including hardware and electricity costs, associated with mining Bitcoin are lower than the price of a bitcoin. As Gryphon’s mining facility operates, Gryphon’s miners experience ordinary wear and tear, and may also face more significant malfunctions caused by a number of extraneous factors beyond Gryphon’s control. The physical degradation of Gryphon’s miners will require Gryphon to, over time, replace those miners which are no longer functional. Additionally, as the technology evolves, Gryphon may be required to acquire newer models of miners to remain competitive in the market.
Also, because Gryphon expects to depreciate all new miners, Gryphon’s reported operating results will be negatively affected. Further, the global supply chain for bitcoin miners is presently heavily dependent on China, which has been severely affected by the emergence of the COVID-19 coronavirus global pandemic. The global reliance on China as a main supplier of bitcoin miners has been called into question in the wake of the COVID-19 pandemic and China’s ban on cryptocurrency mining and trading in 2021. Should similar outbreaks or other disruptions to the China-based global supply chain for Bitcoin hardware occur, Gryphon may not be able to obtain adequate replacement parts for Gryphon’s existing miners or to obtain additional miners from the manufacturer on a timely basis. Such events could have a material adverse effect on Gryphon’s ability to pursue Gryphon’s new strategy, which could have a material adverse effect on Gryphon’s business.
Gryphon’s use of third-party mining pools exposes it to additional risks.
Gryphon receives bitcoin rewards from its mining activity through a third-party mining pool operator. Mining pools allow miners to combine their processing power, which increases miners’ chances of solving blocks and receiving bitcoin rewards from the network. The rewards are distributed by the pool operator, proportionally to Gryphon’s contribution to the pool’s overall mining power, after deducting the applicable pool fee, if any, used to solve a particular block on the Bitcoin blockchain. Should the pool operator’s system suffer downtime due to a cyber-attack, software malfunction or other issue, Gryphon’s ability to mine and receive revenue will be negatively impacted.
Gryphon relies on hosting arrangements to conduct its business, and the availability of such hosting arrangements is uncertain and competitive and may be affected by changes in regulation in one or more countries.
Gryphon relies on its hosting arrangements with Coinmint, LLC and, to a lesser degree, Core Scientific, Inc., to provide mining data centers and host its mining equipment. If these mining data centers fail to perform their obligations under their agreements with Gryphon, Gryphon may be forced to look for alternative mining data centers to host its mining equipment, which may not be available on favorable terms or at all. Additionally, if the mining data centers shut down or cannot accommodate additional miners as Gryphon expands its fleet, Gryphon may be forced to look for alternative centers.
In May 2021, China’s State Council issued a statement signaling its intent to restrict cryptocurrency mining and trading activities, resulting in provincial governments taking proactive measurements to prohibit cryptocurrency mining. On September 24, 2021, China’s central bank and its National Development and Reform Commission issued a nation-wide ban on cryptocurrency mining and declaring all financial transactions involving cryptocurrencies illegal. As a result, mining data centers previously operating in China have been forced to shut down and owners of cryptocurrency mining equipment located in China have been attempting to relocate the equipment to mining data centers in other jurisdictions, with a particular focus on locations within the United States. Combined with the increase in the price of
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bitcoin in 2021, the influx of cryptocurrency miners from China has created conditions of great demand for mining data centers and limited supply. Due to these conditions, there is no assurance that Gryphon will be able to procure alternative hosting agreements on acceptable terms in a timely manner or at all.
Significant competition for suitable mining data centers is expected to continue, and other government regulators, including local permitting officials, may potentially restrict the ability of potential mining data centers to begin or continue operations in certain locations. They can also restrict the ability of electricity suppliers to provide electricity to mining operations in times of electricity shortage, or may otherwise potentially restrict or prohibit the provision of electricity to mining operations. While Gryphon is not aware of the existence of any such restrictions in New York, Georgia and North Carolina, the jurisdictions in which the mining data centers that Gryphon is currently maintaining its machines at are located, new ordinances and other regulations at the federal, state and local levels can be introduced at any time and can be triggered by certain adverse weather conditions or natural disasters, among other reasons.
The mining data centers at which Gryphon maintains its mining equipment may experience damages, including damages that are not covered by insurance.
Gryphon maintains its mining equipment at mining data centers in New York, Georgia and North Carolina. 98% of Gryphon’s miners are in New York, 1.1% are in Georgia, and 0.6% are in North Carolina. The mining data centers at which Gryphon maintains its mining equipment, and any future mining data centers at which Gryphon maintains its mining equipment will be, subject to a variety of risks relating to physical condition and operation, including:
• the presence of construction or repair defects or other structural or building damage;
• any non-compliance with or liabilities under applicable environmental, health or safety regulations or requirements or building permit requirements;
• any damage resulting from natural disasters, such as hurricanes, earthquakes, fires, floods and windstorms; and
• claims by employees and others for injuries sustained at Gryphon’s properties.
For example, the mining data centers at which Gryphon maintains its mining equipment could be rendered inoperable, temporarily or permanently, as a result of a fire or other natural disaster or by a terrorist or other attack on the facilities where Gryphon’s mining equipment is located. The security and other measures Gryphon takes to protect against these risks may not be sufficient. Any property insurance Gryphon obtained in the future may not be adequate to cover the losses Gryphon suffers as a result of any of these events. In the event of an uninsured loss, including a loss in excess of insured limits, at any of the mining data centers at which Gryphon maintains its mining equipment, such mining data centers may not be adequately repaired in a timely manner or at all and Gryphon may lose some or all of the future revenues anticipated to be derived from Gryphon’s equipment located at such mining data centers. Additionally, Gryphon is exposed to regulatory risk in New York given the high concentration of Gryphon’s mining equipment in the state. The recent regulatory changes in New York have not impacted Gryphon’s operations due the scope of the changes being limited to carbon-based electricity. However, Gryphon is acutely aware that further regulatory changes could impact its ability to operate in the state and is prepared to shift its operations to alternative jurisdictions should it be required. Such a shift could be costly, which could have a material adverse effect on Gryphon’s business, financial condition and results of operations.
Gryphon may not be able to compete with other companies, some of whom have greater resources and experience.
Gryphon may not be able to compete successfully against present or future competitors. Gryphon does not have the resources to compete with larger providers of similar services at this time. The Bitcoin industry has attracted various high-profile and well-established operators, some of which have substantially greater liquidity and financial resources than Gryphon does. With the limited resources Gryphon has available, Gryphon may experience great difficulties in expanding and improving its network of computers to remain competitive. Competition from existing and future competitors, particularly those that have access to competitively-priced energy, could result in Gryphon’s inability to secure acquisitions and partnerships that Gryphon may need to expand Gryphon’s business in the future. This competition from other entities with greater resources, experience and reputations may result in Gryphon’s failure to maintain or expand its business, as Gryphon may never be able to successfully execute its business plan. If Gryphon is unable to expand and remain competitive, its business could be negatively affected.
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Gryphon’s operations, investment strategies and profitability may be adversely affected by competition from other methods of investing in Bitcoin.
Gryphon competes with other users and/or companies that are mining Bitcoin and other potential financial vehicles, including securities backed by or linked to Bitcoin through entities similar to Gryphon. Market and financial conditions, and other conditions beyond Gryphon’s control, may make it more attractive to invest in other financial vehicles, or to invest in Bitcoin directly. The emergence of other financial vehicles and exchange-traded funds have been scrutinized by regulators and such scrutiny and the negative impressions or conclusions resulting from such scrutiny could be applicable to Gryphon and impact Gryphon’s ability to successfully pursue its strategy or operate at all, or to establish or maintain a public market for Gryphon’s securities. Such circumstances could have a material adverse effect on Gryphon’s ability to continue as a going concern or to pursue its strategy at all, which could have a material adverse effect on Gryphon’s business, prospects or operations and potentially the value of any bitcoin that Gryphon mines or otherwise acquires or holds for its own account, and harm investors.
The development and acceptance of competing blockchain platforms or technologies may cause consumers to use alternative distributed ledgers or other alternatives.
The development and acceptance of competing blockchain platforms or technologies may cause consumers to use alternative distributed ledgers or an alternative to distributed ledgers altogether. Gryphon’s business utilizes presently existent digital ledgers and blockchains and Gryphon could face difficulty adapting to emergent digital ledgers, blockchains, or alternatives thereto. This may adversely affect Gryphon and Gryphon’s exposure to various blockchain technologies and prevent Gryphon from realizing the anticipated profits from its investments. Such circumstances could have a material adverse effect on Gryphon’s ability to continue as a going concern or to pursue Gryphon’s strategy at all, which could have a material adverse effect on its business, prospects or operations and potentially the value of any bitcoin that Gryphon mines or otherwise acquires or holds for Gryphon’s own account, which could in turn harm investors.
Gryphon may not adequately respond to price fluctuations and rapidly changing technology, which may negatively affect Gryphon’s business.
Competitive conditions within the Bitcoin industry require that Gryphon use sophisticated technology in the operation of Gryphon’s business. The industry for blockchain technology is characterized by rapid technological changes, new product introductions, enhancements and evolving industry standards. New technologies, techniques or products could emerge that might offer better performance than the software and other technologies Gryphon currently utilizes, and Gryphon may have to manage transitions to these new technologies to remain competitive. Gryphon may not be successful, generally or relative to Gryphon’s competitors in the Bitcoin industry, in timely implementing new technology into Gryphon’s systems, or doing so in a cost-effective manner. During the course of implementing any such new technology into Gryphon’s operations, Gryphon may experience system interruptions and failures during such implementation. Furthermore, there can be no assurances that Gryphon will recognize, in a timely manner or at all, the benefits that Gryphon may expect as a result of implementing new technology into its operations. As a result, Gryphon’s business and operations may suffer.
There is a possibility of Bitcoin mining algorithms transitioning to proof of stake validation and other mining related risks, which could make Gryphon less competitive and ultimately adversely affect Gryphon’s business.
Proof of stake is an alternative method in validating Bitcoin transactions. Should the algorithm shift from a proof of work validation method to a proof of stake method, mining would require less energy and may render any company that maintains advantages in the current climate (for example, from lower priced electricity, processing, real estate, or hosting) less competitive. Gryphon, as a result of its efforts to optimize and improve the efficiency of its bitcoin mining operations, may be exposed to the risk in the future of losing the benefit of Gryphon’s capital investments and the competitive advantage Gryphon hopes to gain from this as a result, and may be negatively impacted if a switch to proof of stake validation were to occur. Such events could have a material adverse effect on Gryphon’s ability to continue as a going concern or to pursue its new strategy at all, which could have a material adverse effect on Gryphon’s business, prospects or operations and potentially the value of any bitcoin that Gryphon mines or otherwise acquires or holds for its own account.
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Gryphon may not be able to realize the benefits of forks. Forks in a digital asset network may occur in the future which may affect the value of bitcoin held by Gryphon.
To the extent that a significant majority of users and miners on a cryptocurrency network install software that changes the cryptocurrency network or properties of a cryptocurrency, including the irreversibility of transactions and limitations on the mining of new cryptocurrency, the cryptocurrency network would be subject to new protocols and software. However, if less than a significant majority of users and miners on the cryptocurrency network consent to the proposed modification, and the modification is not compatible with the software prior to its modification, the consequence would be what is known as a “fork” of the network, with one prong running the pre-modified software and the other running the modified software. The effect of such a fork would be the existence of two versions of the cryptocurrency running in parallel, yet lacking interchangeability and necessitating exchange-type transactions to convert currencies between the two forks. Additionally, it may be unclear following a fork which fork represents the original asset and which is the new asset. Different metrics adopted by industry participants to determine which is the original asset include: referring to the wishes of the core developers of a cryptocurrency, blockchains with the greatest amount of hashing power contributed by miners or validators, or blockchains with the longest chain. A fork in the Bitcoin network could adversely affect Gryphon’s ability to operate.
Gryphon may not be able to realize the economic benefit of a fork, either immediately or ever, which could adversely affect Gryphon’s business. If Gryphon holds bitcoin at the time of a hard fork into two cryptocurrencies, industry standards would dictate that Gryphon would be expected to hold an equivalent amount of the old and new assets following the fork. However, Gryphon may not be able, or it may not be practical, to secure or realize the economic benefit of the new asset for various reasons. For instance, Gryphon may determine that there is no safe or practical way to custody the new asset, that trying to do so may pose an unacceptable risk to Gryphon’s holdings in the old asset, or that the costs of taking possession and/or maintaining ownership of the new cryptocurrency exceed the benefits of owning the new cryptocurrency. Additionally, laws, regulations or other factors may prevent Gryphon from benefitting from the new asset even if there is a safe and practical way to custody and secure the new asset.
Gryphon’s business, results of operations, and financial condition may be impacted by the recent coronavirus (COVID-19) outbreak.
The ongoing and evolving coronavirus (COVID-19) outbreak, which was designated as a pandemic by the World Health Organization on March 11, 2020, has caused substantial disruption in international and U.S. economies and markets. The outbreak has potential to have an adverse impact on the digital mining industry and, if repercussions of the outbreak are prolonged, could have a significant adverse impact on Gryphon’s business, which could be material. Gryphon’s management cannot at this point estimate the impact of the outbreak on Gryphon’s business and no provision for this outbreak is reflected in the accompanying financial statements.
The impacts of climate change may result in additional costs or risks.
The physical risks of climate change may impact the availability and cost of materials and natural resources, sources and supply of energy, demand for Bitcoin and other cryptocurrencies, and other operating costs. If environmental laws or regulations or industry standards are either changed or adopted and impose significant operational restrictions and compliance requirements on Gryphon’s operations, or if Gryphon’s operations are disrupted due to physical impacts of climate change, Gryphon’s business, capital expenditures, results of operations, financial condition and competitive position could be negatively impacted.
Risks Related to Governmental Regulation and Enforcement
As cryptocurrencies may be determined to be investment securities, Gryphon may inadvertently violate the Investment Company Act of 1940 and incur large losses as a result and potentially be required to register as an investment company or terminate operations and Gryphon may incur third-party liabilities.
Gryphon believes that it is not engaged in the business of investing, reinvesting, or trading in securities, and it does not hold itself out as being engaged in those activities. However, under the Investment Company Act of 1940 (the “Investment Company Act”), a company may be deemed an investment company under section 3(a)(1)(C) thereof if the value of its investment securities is more than 40% of its total assets (exclusive of government securities and cash items) on an unconsolidated basis.
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As a result of Gryphon’s investments and its mining activities, including investments in which it does not have a controlling interest, the investment securities Gryphon holds could exceed 40% of Gryphon’s total assets, exclusive of cash items and, accordingly, Gryphon could determine that it has become an inadvertent investment company. The bitcoin that Gryphon owns, acquires or mines may be deemed an investment security by the SEC, although Gryphon does not believe any of the bitcoin it owns, acquires or mines are securities. An inadvertent investment company can avoid being classified as an investment company if it can rely on one of the exclusions under the Investment Company Act. One such exclusion, Rule 3a-2 under the Investment Company Act, allows an inadvertent investment company a grace period of one year from the earlier of (a) the date on which an issuer owns securities and/or cash having a value exceeding 50% of the issuer’s total assets on either a consolidated or unconsolidated basis and (b) the date on which an issuer owns or proposes to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of government securities and cash items) on an unconsolidated basis. As of the date of this proxy statement / prospectus, Gryphon does not believe it is an inadvertent investment company. Gryphon may take actions to cause the investment securities held by it to be less than 40% of its total assets, which may include acquiring assets with Gryphon’s cash and bitcoin on hand or liquidating Gryphon’s investment securities or bitcoin or seeking a no-action letter from the SEC if Gryphon is unable to acquire sufficient assets or liquidate sufficient investment securities in a timely manner.
As the Rule 3a-2 exception is available to a company no more than once every three years, and assuming no other exclusion were available to Gryphon, Gryphon would have to keep within the 40% limit for at least three years after it ceases being an inadvertent investment company. This may limit Gryphon’s ability to make certain investments or enter into joint ventures that could otherwise have a positive impact on Gryphon’s earnings. In any event, Gryphon does not intend to become an investment company engaged in the business of investing and trading securities.
Classification as an investment company under the Investment Company Act requires registration with the SEC. If an investment company fails to register, it would have to stop doing almost all business, and its contracts would become voidable. Registration is time consuming and restrictive and would require a restructuring of Gryphon’s operations, and Gryphon would be very constrained in the kind of business it could do as a registered investment company. Further, Gryphon would become subject to substantial regulation concerning management, operations, transactions with affiliated persons and portfolio composition, and would need to file reports under the Investment Company Act regime. The cost of such compliance would result in Gryphon incurring substantial additional expenses, and the failure to register if required would have a materially adverse impact to conduct Gryphon’s operations.
If regulatory changes or interpretations of Gryphon’s activities require its registration as a money services business under the regulations promulgated by The Financial Crimes Enforcement Network under the authority of the U.S. Bank Secrecy Act, Gryphon may be required to register and comply with such regulations. If regulatory changes or interpretations of Gryphon’s activities require the licensing or other registration of Gryphon as a money transmitter (or equivalent designation) under state law in any state in which Gryphon operates, Gryphon may be required to seek licensure or otherwise register and comply with such state law. In the event of any such requirement, to the extent Gryphon decides to continue, the required registrations, licensure and regulatory compliance steps may result in extraordinary, non-recurring expenses to Gryphon. Gryphon may also decide to cease its operations. Any termination of certain operations in response to the changed regulatory circumstances may be at a time that is disadvantageous to investors.
To the extent that Gryphon’s activities cause it to be deemed a money service business under the regulations promulgated by the Financial Crimes Enforcement Network of the U.S. Treasury Department (“FinCEN”) under the authority of the U.S. Bank Secrecy Act, Gryphon may be required to comply with FinCEN regulations, including those that would mandate Gryphon to implement anti-money laundering programs, make certain reports to FinCEN and maintain certain records.
To the extent that Gryphon’s activities cause Gryphon to be deemed a money transmitter or equivalent designation under state law in any state in which Gryphon operates, Gryphon may be required to seek a license or otherwise register with a state regulator and comply with state regulations that may include the implementation of anti-money laundering programs, maintenance of certain records and other operational requirements. Currently, the New York Department of Financial Services maintains a comprehensive “BitLicense” framework for businesses that conduct “virtual currency business activity.” Gryphon will continue to monitor for developments in New York legislation, guidance and regulations.
Such additional federal or state regulatory obligations may cause Gryphon to incur extraordinary expenses, which could affect Gryphon’s business in a material and adverse manner. Furthermore, Gryphon and its service providers may not be capable of complying with certain federal or state regulatory obligations applicable to money service
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businesses and money transmitters. If Gryphon is deemed to be subject to and determined not to comply with such additional regulatory and registration requirements, Gryphon may act to dissolve and liquidate Gryphon. Any such action may adversely affect an investment in Gryphon.
Gryphon is subject to an extensive, highly evolving and uncertain regulatory and business landscape and any adverse changes to, or its failure to comply with, any laws and regulations, and adverse business reactions from counterparties could adversely affect its brand, reputation, business, operating results, and financial condition.
Gryphon’s business is subject to extensive laws, rules, regulations, policies, orders, determinations, directives, treaties, and legal and regulatory interpretations and guidance, as well as counterparty risk in the markets in which it operates, including regulatory aspects from financial services, federal energy and other regulators, the SEC, the CFTC, credit, crypto asset custody, exchange, and transfer, cross-border and domestic money and crypto asset transmission, consumer and commercial lending, usury, foreign currency exchange, privacy, data governance, data protection, cybersecurity, fraud detection, antitrust and competition, bankruptcy, tax, anti-bribery, economic and trade sanctions, anti-money laundering, and counter-terrorist financing, as well as the same regulatory risks applicable to counterparties, most notably hosting businesses, as well as the recent economic issues and bankruptcies befalling some in this industry. Many of these legal and regulatory regimes were adopted prior to the advent of the internet, mobile technologies, crypto assets, and related technologies. As a result, some applicable laws and regulations do not contemplate or address unique issues associated with the crypto economy, are subject to significant uncertainty, and vary widely across U.S. federal, state, and local and international jurisdictions. These legal and regulatory regimes, including the laws, rules, and regulations thereunder, evolve frequently and may be modified, interpreted, and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another. Moreover, the complexity and evolving nature of Gryphon’s business and the significant uncertainty surrounding the regulation of the crypto economy requires Gryphon to exercise its judgment as to whether certain laws, rules, and regulations apply to us, and it is possible that governmental bodies and regulators may disagree with Gryphon’s conclusions. To the extent Gryphon has not complied with such laws, rules, and regulations, it could be subject to significant fines, revocation of licenses, limitations on its products and services, reputational harm, and other regulatory consequences, each of which may be significant and could adversely affect its business, operating results, and financial condition.
Additionally, various governmental and regulatory bodies, including legislative and executive bodies, in the United States and in other countries may adopt new laws and regulations, the direction and timing of which may be influenced by changes in the governing administrations and major events in the crypto economy. The collapse of TerraUSD and Luna and the bankruptcy filings of FTX and its subsidiaries, Three Arrows, Celsius, Voyager, Genesis and BlockFi have resulted in calls for heightened scrutiny and regulation of the digital asset industry, with a specific focus on digital asset exchanges, platforms, and custodians. Federal and state legislatures and regulatory agencies are expected to introduce and enact new laws and regulations to regulate digital asset intermediaries, such as digital asset exchanges and custodians. The U.S. regulatory regime — namely the Federal Reserve Board, U.S. Congress and certain U.S. agencies (e.g., the SEC, the CFTC, FinCEN, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (“FDIC”), and the Federal Bureau of Investigation) as well as the White House have issued reports and releases concerning digital assets, including Bitcoin and digital asset markets. In the near future, various governmental and regulatory bodies, including in the United States, may introduce new policies, laws, and regulations relating to crypto assets and the crypto economy generally, and crypto asset platforms in particular. However, the extent and content of any forthcoming laws and regulations are not yet ascertainable with certainty, and it may not be ascertainable in the near future. The failures of risk management and other control functions at other companies that played a role in these events could accelerate an existing regulatory trend toward stricter oversight of crypto asset platforms and the crypto economy.
Although Gryphon is not directly connected to the recent cryptocurrency market events, Gryphon may still suffer reputational harm due to its association with the cryptocurrency industry in light of the recent disruption in the crypto asset markets. Due to its business activities, Gryphon may be subject to ongoing examinations, oversight, and reviews and currently are, and expect in the future, to be subject to investigations and inquiries, by U.S. federal and state regulators, many of which have broad discretion to audit and examine its business. Moreover, new laws, regulations, or interpretations may result in additional litigation, regulatory investigations, and enforcement or other actions, including preventing or delaying Gryphon from offering certain products or services offered by its competitors or could impact how it offers such products and services. Adverse changes to, or its failure to comply with, any laws and regulations have had, and may continue to have, an adverse effect on its reputation and brand and its business, operating results, and financial condition.
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There is no one unifying principle governing the regulatory status of cryptocurrency nor whether cryptocurrency is a security in each context in which it is viewed. Regulatory changes or actions in one or more countries may alter the nature of an investment in Gryphon or restrict the use of digital assets, such as cryptocurrencies, in a manner that adversely affects Gryphon’s business, prospects or operations.
As cryptocurrencies have grown in both popularity and market size, governments around the world have reacted differently, with certain governments deeming cryptocurrencies illegal, and others allowing their use and trade without restriction. In some jurisdictions, such as in the U.S., digital assets, like cryptocurrencies, are subject to extensive, and in some cases overlapping, unclear and evolving regulatory requirements. On March 8, 2022, President Biden announced an executive order on cryptocurrencies, which seeks to establish a unified federal regulatory regime for cryptocurrencies. In connection with FTX’s collapse and bankruptcy filing, the U.S. Department of Justice brought criminal charges, including charges of fraud, violations of federal securities laws, money laundering, and campaign finance offenses against FTX’s former CEO and others. FTX is also under investigation by the SEC, the Justice Department, and the Commodity Futures Trading Commission, as well as by various regulatory authorities in the Bahamas, Europe and other jurisdictions. Regulatory and enforcement scrutiny has also increased, including from the DOJ, the SEC, the CFTC, the White House and Congress. Gryphon is unable to predict the nature or extent of new and proposed legislation and regulation potentially stemming from the Biden Administration executive order and proceedings surrounding FTX.
Bitcoin is the oldest and most well-known form of cryptocurrency. Bitcoin and other forms of cryptocurrencies have been the source of much regulatory consternation, resulting in differing definitional outcomes without a single unifying statement. Bitcoin and other digital assets are viewed differently by different regulatory and standards setting organizations globally as well as in the United States on the federal and state levels. For example, the Financial Action Task Force (“FATF”) and the Internal Revenue Service (“IRS”) consider a cryptocurrency as currency or an asset or property. Further, the IRS applies general tax principles that apply to property transactions to transactions involving virtual currency.
If regulatory changes or interpretations require the regulation of Bitcoin or other digital assets under the securities laws of the United States or elsewhere, including the Securities Act of 1933, the Exchange Act and the 1940 Act or similar laws of other jurisdictions and interpretations by the SEC, the CFTC, the IRS, Department of Treasury or other agencies or authorities, Gryphon may be required to register and comply with such regulations, including at a state or local level. To the extent that Gryphon decides to continue operations, the required registrations and regulatory compliance steps may result in extraordinary expense or burdens to Gryphon. Gryphon may also decide to cease certain operations and change Gryphon’s business model. Any disruption of Gryphon’s operations in response to the changed regulatory circumstances may be at a time that is disadvantageous to Gryphon.
Current and future legislation and SEC-rulemaking and other regulatory developments, including interpretations released by a regulatory authority, may impact the manner in which Bitcoin or other cryptocurrencies are viewed or treated for classification and clearing purposes. In particular, Bitcoin and other cryptocurrencies may not be excluded from the definition of “security” by SEC rulemaking or interpretation requiring registration of all transactions unless another exemption is available, including transacting in bitcoin or cryptocurrency among owners and require registration of trading platforms as “exchanges”.
Gryphon cannot be certain as to how future regulatory developments will impact the treatment of Bitcoin and other cryptocurrencies under the law. While Gryphon received crypto assets other than Bitcoin from the private placement of stock, Gryphon has long since sold these assets and currently does not hold any crypto assets other than Bitcoin. Additionally, Gryphon does not intend to expand its business by acquiring digital assets other than Bitcoin. Nonetheless, if Bitcoin becomes subject to additional regulatory and registration requirements, and Gryphon fails to comply with these, Gryphon may seek to cease certain of its operations or be subjected to fines, penalties and other governmental action. Such circumstances could have a material adverse effect on Gryphon’s ability to continue as a going concern or to pursue its business model at all, which could have a material adverse effect on its business, prospects or operations and potentially the value of any cryptocurrencies Gryphon plans to hold or expect to acquire for its own account.
Banks and financial institutions may not provide banking services, or may cut off services, to businesses that engage in Bitcoin-related activities or that accept bitcoin as payment, including financial institutions of investors in Gryphon’s common stock.
A number of companies that engage in Bitcoin and/or other cryptocurrency-related activities have been unable to find banks or financial institutions that are willing to provide them with bank accounts and other services. Similarly, a number of companies and individuals or businesses associated with Bitcoin may have had and may continue to have
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their existing bank accounts closed or services discontinued with financial institutions in response to government action, particularly in China, where regulatory response to cryptocurrencies has been to exclude their use for ordinary consumer transactions within China. In January 2023, the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation issued a joint statement effectively discouraging banks from doing business with clients in crypto-asset industries. The Federal Reserve also issued a policy statement broadening its authority to cover state-chartered institutions. Moreover, in January 2023, the White House issued a statement cautioning deepening ties between crypto-assets and the broader financial system. Gryphon also may be unable to obtain or maintain these financial services for Gryphon’s business. The difficulty that many businesses that provide Bitcoin and/or derivatives on other cryptocurrency-related activities have and may continue to have in finding banks and financial institutions willing to provide them services could decrease their usefulness and harm their public perception in the future and may be decreasing the usefulness of Bitcoin as a payment system and harming public perception of Bitcoin.
The usefulness of Bitcoin as a payment system and the public perception of Bitcoin could be damaged if banks or financial institutions were to close the accounts of businesses engaging in Bitcoin and/or other cryptocurrency-related activities. This could occur as a result of compliance risk, cost, government regulation or public pressure. The risk applies to securities firms, clearance and settlement firms, national stock exchanges and commodities derivatives exchanges, the over-the-counter market, and the Depository Trust Company, which, if any of such entities adopts or implements similar policies, rules or regulations, could negatively affect Gryphon’s relationships with financial institutions and impede Gryphon’s ability to convert bitcoin to fiat currencies. Such factors could have a material adverse effect on Gryphon’s ability to continue as a going concern or to pursue its strategy at all, which could have a material adverse effect on Gryphon’s business, prospects or operations and harm investors.
It may be illegal now, or in the future, to acquire, own, hold, sell or use bitcoin, ether, or other cryptocurrencies, participate in blockchains or utilize similar cryptocurrency assets in one or more countries, the ruling of which would adversely affect Gryphon.
As Bitcoin has grown in both popularity and market size, governments around the world have reacted differently to Bitcoin; certain governments have deemed them illegal, and others have allowed their use and trade without restriction, while in some jurisdictions, such as in the U.S., subject to extensive, and in some cases overlapping, unclear and evolving regulatory requirements. Until recently, little or no regulatory attention has been directed toward Bitcoin and the Bitcoin network by U.S. federal and state governments, foreign governments and self-regulatory agencies. As Bitcoin has grown in popularity and in market size, the Federal Reserve Board, U.S. Congress and certain U.S. agencies (e.g., the Commodity Futures Trading Commission, the SEC, FinCEN and the Federal Bureau of Investigation) have begun to examine the operations of the Bitcoin network, Bitcoin users and the Bitcoin exchange market.
One or more countries such as China and Russia, which have taken harsh regulatory action in the past, may take regulatory actions in the future that could severely restrict the right to acquire, own, hold, sell or use these cryptocurrency assets or to exchange for fiat currency. In many nations, particularly in China and Russia, it is illegal to accept payment in Bitcoin and other cryptocurrencies for consumer transactions and banking institutions are barred from accepting deposits of Bitcoin. Such restrictions may adversely affect Gryphon as the large-scale use of Bitcoin as a means of exchange is presently confined to certain regions globally. Such circumstances could have a material adverse effect on Gryphon’s ability to continue as a going concern or to pursue Gryphon’s strategy at all, which could have a material adverse effect on Gryphon’s business, prospects or operations and potentially the value of any Bitcoin that Gryphon mines or otherwise acquires or holds for its own account, and harm investors.
Gryphon’s interactions with a blockchain may expose Gryphon to specially designated nationals or blocked persons or cause Gryphon to violate provisions of law that did not contemplate distributed ledger technology.
The Office of Financial Assets Control of the U.S. Department of Treasury (“OFAC”) requires Gryphon to comply with its sanction program and not conduct business with persons named on its specially designated nationals list. However, because of the pseudonymous nature of blockchain transactions, Gryphon may inadvertently and without Gryphon’s knowledge engage in transactions with persons named on OFAC’s specially designated nationals list. Gryphon’s policy prohibits any transactions with such specially designated national individuals, but Gryphon may not be adequately capable of determining the ultimate identity of the individual with whom Gryphon transacts with respect to selling bitcoin assets. Moreover, federal law prohibits any U.S. person from knowingly or unknowingly possessing any visual depiction commonly known as child pornography. Recent media reports have suggested that persons have imbedded such depictions on one or more blockchains. Because Gryphon’s business requires it to download and retain
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one or more blockchains to effectuate Gryphon’s ongoing business, it is possible that such digital ledgers contain prohibited depictions without Gryphon’s knowledge or consent. To the extent government enforcement authorities literally enforce these and other laws and regulations that are impacted by decentralized distributed ledger technology, Gryphon may be subject to investigation, administrative or court proceedings, and civil or criminal monetary fines and penalties, all of which could harm Gryphon’s reputation.
Gryphon’s management and compliance personnel have limited experience handling a listed cryptocurrency mining-related services company.
Gryphon’s management and compliance personnel have limited experience in handling regulatory and compliance matters relating to a listed cryptocurrency mining-related services company. Gryphon’s key compliance documents and compliance programs, such as AML and KYC procedures, also have a recent history only. Gryphon believes that its measures designed to limit its counterparty risks are appropriate. While Gryphon has been devoting a substantial amount of time and resources to various compliance initiatives and risk management measures, including but not limited to, developing a dedicated internal compliance function, Gryphon cannot assure you the practical application and effectiveness of its compliance program and risk management measures, nor that there will not be a failure in detecting regulatory compliance issues or managing risk exposure, which may adversely affect its reputation, business, financial condition and results of operations
Risks Related to the Combined Company
In determining whether you should approve the issuance of shares of Akerna Common Stock and other matters related to the Merger, as the case may be, you should carefully read the following risk factors in addition to the risks described above.
If any of the events described in “Risks Related to Akerna” or “Risks Related to Gryphon” occur, those events could cause potential benefits of the Merger not to be realized.
Following completion of the Merger, the combined company will be susceptible to many of the risks described in the sections herein entitled “Risks Related to Akerna” and “Risks Related to Gryphon.” To the extent any of the events in the risks described in those sections occur, those events could cause the potential benefits of the Merger not to be realized and the market price of the combined company’s common stock to decline.
There has been no prior public market for Gryphon’s common stock, the stock price of the combined company’s common stock may be volatile or may decline regardless of its operating performance and you may not be able to resell your shares at or above the purchase price.
There has been no public market for Gryphon’s common stock. Although the Akerna’s Common Stock is listed on Nasdaq, and Gryphon and Akerna will apply to have the combined company’s common stock listed on Nasdaq, an active trading market for the combined company’s common stock may never develop or be sustained following the Merger. Gryphon, Akerna and their financial advisors will set the final ratio of the Akerna Reverse Stock Split to target a trading price to provide for sufficient liquidity. The price that the combined company trades at immediately following the Merger may not necessarily reflect the price at which investors in the market will be willing to buy and sell the shares on a sustained basis. In addition, an active trading market may not develop following the consummation of the Merger or, if it is developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. An inactive market may also impair the combined company’s ability to raise capital by selling shares of common stock and may impair the combined company’s ability to acquire other businesses or technologies using the combined company’s shares of common stock as consideration, which, in turn, could materially adversely affect the combined company’s business. The market price of the combined company’s common stock may fluctuate significantly in response to numerous factors, many of which are beyond the combined company’s control, including:
• overall performance of the equity markets;
• the combined company’s operating performance and the performance of other similar companies;
• the published opinions and third-party valuations by banking and market analysts;
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• changes in the combined company’s projected operating results that it provides to the public, the combined company’s failure to meet these projections or changes in recommendations by securities analysts that elect to follow the combined organization’s common stock;
• regulatory or legal developments in the United States and other countries;
• the level of expenses related to operations;
• the combined company’s failure to achieve its goals in the timeframe it announces;
• announcements of acquisitions, strategic alliances or significant agreements by the combined company;
• recruitment or departure of key personnel;
• the economy as a whole and market conditions in the combined company’s industry;
• trading activity by a limited number of stockholders who together beneficially own a majority of the combined company’s outstanding common stock;
• the expiration of market standoff or contractual lock-up agreements;
• the size of the combined company’s market float;
• political uncertainty and/or instability in the United States;
• the ongoing and future impact of the COVID-19 pandemic and actions taken to slow its spread; and
• any other factors discussed in this proxy statement / prospectus / information statement.
In addition, the equity markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many data mining and cryptocurrency companies. Stock prices of many data mining and cryptocurrency companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. The trading prices for common stock of other cryptocurrency mining companies have also been highly volatile as a result of the COVID-19 pandemic. In the past, stockholders have filed securities class action litigation following periods of market volatility. If the combined company were to become involved in securities litigation, it could subject the combined company to substantial costs, divert resources and the attention of management from the combined company’s business and adversely affect its business.
The combined company will continue to incur increased costs as a result of operating as a public company, and its management team will be required to devote substantial time to new compliance initiatives.
As a public company, the combined company will continue to incur significant legal, accounting, and other expenses that Gryphon did not incur as a private company. In addition, the Sarbanes-Oxley Act and rules subsequently implemented by the SEC and Nasdaq have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. The combined company’s management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase the combined company’s legal and financial compliance costs and will make some activities more time-consuming and costly.
Pursuant to Section 404, the combined company is required to furnish a report by its management on its internal control over financial reporting, which may include an attestation report on internal control over financial reporting issued by its independent registered public accounting firm. While the combined company remains a “smaller reporting company” with less than $100 million in annual revenues, it will not be required to include an attestation report on internal control over financial reporting issued by its independent registered public accounting firm. Following the closing of the Merger, the combined company will need to continue to dedicate internal resources, potentially engage outside consultants, maintain a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented, and implement a continuous reporting and improvement process for internal control over financial reporting. Despite the combined company’s efforts, there is a risk that neither it nor its independent registered public accounting firm if required will be able to conclude that its internal control over financial reporting remains effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of the combined company’s financial statements.
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The combined company’s failure to meet the continued listing requirements of Nasdaq could result in a delisting of the combined company’s common stock.
If, after listing, the combined company fails to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to delist the combined company’s common stock. Such a delisting would likely have a negative effect on the price of the combined company’s common stock and would impair your ability to sell or purchase the combined company’s common stock when you wish to do so. In the event of a delisting, the combined company can provide no assurance that any action taken by the combined company to restore compliance with listing requirements would allow the combined company’s common stock to become listed again, stabilize the market price or improve the liquidity of the combined company’s common stock, prevent the combined company’s common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.
The combined company’s operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts, each of which may cause the combined company’s stock price to fluctuate or decline.
Gryphon expects the combined company’s operating results to be subject to annual and quarterly fluctuations. The combined company’s net income and other operating results will be affected by numerous factors, including:
• the combined company’s execution of any additional collaboration or similar arrangements, and the timing of payments the combined company may make or receive under existing or future arrangements or the termination or modification of any such existing or future arrangements;
• additions and departures of key personnel;
• strategic decisions by the combined company or its competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy; and
• changes in general market and economic conditions.
If the combined company’s operating results fall below the expectations of investors or securities analysts, the price of the combined company’s common stock could decline substantially. Furthermore, any fluctuations in the combined company’s operating results may, in turn, cause the price of its stock to fluctuate substantially.
After the Merger, the combined company’s executive officers, directors and principal stockholders, if they choose to act together, will continue to control or significantly influence all matters submitted to stockholders for approval.
Immediately following the completion of the Merger, the combined company’s executive officers, directors and greater than 5% stockholders will own, in the aggregate, approximately 48% of the combined company’s outstanding common stock (assuming no exercise of outstanding warrants). As a result, such persons or their appointees to the combined company’s board of directors, acting together, will have the ability to control or significantly influence all matters submitted to the combined company’s board of directors or stockholders for approval, including the appointment of the combined company’s management, the election and removal of directors and approval of any significant transaction, as well as the combined company’s management and business affairs. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving the combined company, or discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of the combined company’s business, even if such a transaction would benefit other stockholders.
Current or future litigation may harm our financial condition or results of operations.
As described in the section entitled “Gryphon’s Business — Legal Proceedings” in this proxy statement/prospectus, Gryphon is engaged in litigation, including the Sphere 3D Litigation and the Core Litigation (each as defined below). Litigation proceedings may be uncertain, and adverse rulings could occur, resulting in significant liabilities, penalties or damages. Such current or future substantial legal liabilities or regulatory actions could have a material adverse effect on our business, financial condition, cash flows and reputation.
Gryphon intends to continue to vigorously defend against the Sphere 3D Litigation, including but not limited to the Sphere 3D MSA Termination, which it believes are without merit, and to aggressively pursue its counterclaims against Sphere 3D. However, Gryphon cannot predict the outcome of these proceedings or provide an estimate of potential damages or recovery, if any. Failure by Gryphon to obtain a favorable resolution of the Sphere 3D Litigation could require it to pay damage awards or otherwise enter into settlement arrangements for which its insurance coverage may be insufficient.
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While Gryphon disputes the allegations in the Core Litigation and does not believe that the Core Litigation will have any material impact on its financial statements, if the settlement is not approved by the court, any damage awards or settlement arrangements in current or future litigation could have a material adverse effect on Gryphon’s business, operating results or financial condition.
Further, any valid termination of the Sphere MSA in accordance with its terms could also have a negative impact on Gryphon’s business and operating results. In addition, such lawsuits may make it more difficult for Gryphon to finance its operations in the future.
The issuance of shares of our common stock pursuant to the Akerna Notes and the Anchorage Loan Agreement may result in significant dilution to our stockholders.
The Anchorage Loan Agreement includes conversion provision whereby Anchorage has a limited right to convert all or any portion of the outstanding principal on the loan into a number of shares of Gryphon or any public company that is Gryphon’s parent, if Gryphon is not the public company (the “Conversion Right”). The Conversion Right is available at any time during the one month period (the “Conversion Period”) after which the market capitalization of Gryphon, or its public company parent if Gryphon is not the public company, for the first time exceeds $125,000,000 for five consecutive days. The conversion price is equal to $150,000,000 divided by the number of shares of Gryphon, or its public company parent if Gryphon is not the public company, common stock outstanding immediately prior to Anchorage’s exercise of the Conversion Right during the Conversion Period.
Sales of substantial amounts of common stock in the public market, or the perception that such sales could occur, could materially adversely affect the market price of the common stock and may make it more difficult for you to sell your securities at a time and price which you deem appropriate. See also “Risk Factors — Risks Related to the Akerna Notes — The issuance of shares of our common stock pursuant to the Akerna Notes may result in significant dilution to our stockholders.”
Sales of a substantial number of shares of the combined company’s common stock by the combined company’s stockholders in the public market could cause the combined company’s stock price to fall.
Sales of a substantial number of shares of the combined company’s common stock in the public market or the perception that these sales might occur could significantly reduce the market price of the combined company’s common stock and impair the combined company’s ability to raise adequate capital through the sale of additional equity securities.
Upon the closing of the Merger, the combined company will have outstanding a total of approximately 741 million shares of common stock, assuming no exercise of outstanding warrants and without giving effect to the Akerna Reverse Stock Split. Of these shares, approximately 733 million shares of common stock will be freely tradable, without restriction, in the public market immediately following the Merger, unless they are purchased by one of the combined company’s affiliates.
Sales of these shares, or perceptions that they will be sold, could cause the trading price of the combined company’s common stock to decline.
Delaware law and provisions in the combined company’s amended and restated certificate of incorporation and bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of the combined company’s common stock.
The combined company’s amended and restated certificate of incorporation (as amended) and bylaws contain provisions that could depress the trading price of the combined company’s common stock by acting to discourage, delay or prevent a change of control of the combined company or changes in its management that the stockholders of the combined company may deem advantageous. These provisions include the following:
• establish a classified board of directors so that not all members of the combined company’s board of directors are elected at one time;
• permit the board of directors to establish the number of directors and fill any vacancies and newly-created directorships;
• provide that directors may only be removed for cause and only by the affirmative vote of the holders of 75% or more of the outstanding shares of the combined company’s capital stock then entitled to vote;
• require super-majority voting to amend some provisions in the combined company’s amended and restated certificate of incorporation and bylaws;
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• prohibit stockholders from calling special meetings of stockholders;
• prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of the combined company’s stockholders;
• provide that the board of directors is expressly authorized to amend or repeal the combined company’s bylaws;
• restrict the forum for certain litigation against the combined company to Delaware; and
• establish advance notice requirements for nominations for election to the combined company’s board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.
Any provision of the combined company’s amended and restated certificate of incorporation (as amended) or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for the combined company’s stockholders to receive a premium for their shares of the combined company’s common stock, and could also affect the price that some investors are willing to pay for the combined company’s common stock.
The combined company’s amended and restated bylaws designate a state or federal court located within the state of Delaware as the exclusive forum for substantially all disputes between the combined company and its stockholders, which could limit the combined company’s stockholders’ ability to choose the judicial forum for disputes with the combined company or its directors, officers or employees.
The combined company’s amended and restated bylaws provide that, unless it consents in writing to the selection of an alternative forum, to the fullest extent permitted by law, the sole and exclusive forum for (1) any derivative action or proceeding brought on the combined company’s behalf under Delaware law, (2) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any of the combined company’s directors, officers or other employees to the combined company or its stockholders, (3) any action or proceeding asserting a claim against the combined company or any of its directors, officers or other employees arising pursuant to any provision of the DGCL, the combined company’s amended and restated certificate of incorporation or bylaws, (4) any action or proceeding to interpret, apply, enforce or determine the validity of the combined company’s amended and restated certificate of incorporation or bylaws, (5) any action or proceeding as to which the DGCL confers jurisdiction to the Court of Chancery (the “Chancery Court”) of the State of Delaware, or (6) any other action or proceeding against the combined company or any of its directors, officers or other employees asserting a claim that is governed by the internal affairs doctrine, shall be the Chancery Court (or, if and only if the Chancery Court lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) in all cases subject to the court having jurisdiction over indispensable parties named as defendants. These exclusive forum provisions do not apply to claims under the Securities Act or the Exchange Act.
To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder.
Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. However, the combined company’s amended and restated certificate of incorporation contains a federal forum provision which provides that unless the combined company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act.
Any person or entity purchasing or otherwise acquiring any interest in any of the combined company’s securities shall be deemed to have notice of and consented to this provision. This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with the combined company or its directors, officers or other employees, which may discourage lawsuits against the combined company or its directors, officers and other employees. If a court were to find the exclusive forum provision in the combined company’s amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, the combined company may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm the combined company’s results of operations.
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Future sales and issuances of the combined company’s common stock or rights to purchase common stock, including pursuant to the combined company’s equity incentive plan, could result in dilution of the percentage ownership of its stockholders and could cause the combined company’s stock price to fall.
Additional capital will be needed in the future to continue the combined company’s planned operations. To the extent the combined company raises additional capital by issuing equity securities, its stockholders may experience substantial dilution. The combined company may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner it determines from time to time. If the combined company sells common stock, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. These sales may also result in material dilution to the combined company’s existing stockholders, and new investors could gain rights superior to existing stockholders.
Pursuant to the 2024 Plan, the combined company’s board of directors is authorized to grant stock options and other equity-based awards to its employees, directors and consultants, which equity-based awards would also cause dilution to its stockholders. The number of shares of the combined company’s common stock reserved for issuance under the 2024 Plan will be 15% of the total number of the shares of Common Stock outstanding at the closing of the Merger or approximately 5,738,284 shares of Common Stock assuming a 20 for 1 reverse stock split and approximately 38,255,227 shares of Common Stock outstanding. If the board of directors of the combined company elects to increase the number of shares available for future grant by the maximum amount each year, stockholders may experience additional dilution, which could cause the combined company’s stock price to fall.
Gryphon does not currently intend to pay dividends on the combined company’s common stock, and, consequently, your ability to achieve a return on your investment will depend on appreciation, if any, in the price of the combined company’s common stock.
Gryphon has never declared or paid any cash dividend on Gryphon common stock. The expectation is that the combined company will retain future earnings for the development, operation and expansion of the combined company’s business and Gryphon does not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, the Anchorage Loan Agreement prohibits Gryphon, and will prohibit the combined company, from declaring or paying any cash dividends without Anchorage’s prior written consent, and the terms of any future debt agreements may preclude the combined company from paying dividends. Any return to stockholders will therefore be limited to the appreciation of their stock. There is no guarantee that shares of the combined company’s common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.
If the Merger does not qualify as a “reorganization” for U.S. federal income tax purposes, U.S. Holders of Gryphon Shares will be required to recognize gain or loss for U.S. federal income tax purposes upon the exchange of their Gryphon Shares for Akerna Common Stock in the Merger.
The U.S. federal income tax consequences of the Merger to U.S. Holders (as defined under the heading “The Transactions — Certain Material U.S. Federal Income Tax Consequences of the Merger”) will depend on whether the Merger qualifies as a “reorganization” for U.S. federal income tax purposes. Ellenoff Grossman & Schole LLP, counsel to Gryphon, has delivered an opinion to Gryphon that, on the basis of certain factual representations made by Akerna and Gryphon, and subject to certain assumptions set forth therein, the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. This opinion is attached as Exhibit 8.1 to the Registration Statement of which this proxy statement/prospectus forms a part. However, if the Merger fails to qualify as a reorganization within the meaning of Section 368(a) of the Code, a U.S. Holder of Gryphon Shares would recognize gain or loss for U.S. federal income tax purposes on each Gryphon Share surrendered in the Merger for Akerna Common Stock. For a more complete discussion of the material U.S. federal income tax consequences of the Merger, please carefully review the information set forth in the section entitled “The Transactions — Certain Material U.S. Federal Income Tax Consequences of the Merger.”
The historical financial information of Gryphon presented herein may not be representative of its results or financial condition if Gryphon had been operated as a public company, and as a result may not be representative of the combined company’s results or financial condition after the Merger.
The historical financial information of Gryphon included elsewhere in this proxy statement / prospectus reflects assumptions and allocations made by Gryphon based in part on its status as a privately held company. The historical results and financial condition of Gryphon presented herein may be different from those that would have resulted had
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Gryphon been operated as a public company during the applicable periods or at the applicable dates. As a result, the historical financial information of Gryphon may not be indicative of the future operating results or financial position of the combined company.
The unaudited pro forma condensed combined financial information presented herein may not be representative of the combined company’s results after the Merger.
The unaudited pro forma condensed combined financial information included elsewhere in this proxy statement / prospectus has been presented for informational purposes only and is not necessarily indicative of the financial position or results of operations that actually would have occurred had the Merger been completed as of the date indicated, nor is it indicative of future operating results or financial position. The unaudited pro forma condensed combined financial information has been derived from the historical financial statements of Akerna and Gryphon and adjustments and assumptions have been made regarding the combined company after giving effect to the Merger and the Sale Transaction. Akerna is also planning to effect the Akerna Reverse Stock Split, subject to the approval of the Akerna stockholders, and the Akerna Reverse Stock Split will impact the financial information on a per share basis. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and assumptions are difficult to make with accuracy. Moreover, the unaudited pro forma condensed combined financial information does not reflect all costs that are expected to be incurred by the combined company as an operating company after the Merger. The assumptions used in preparing the unaudited pro forma condensed combined financial information may not ultimately be accurate, and other factors may affect the combined company’s results and financial condition following consummation of the Merger. The unaudited pro forma condensed combined financial information does not reflect the costs of integration activities contemplated as part of the Merger. Accordingly, the unaudited pro forma condensed combined financial information included elsewhere in this proxy statement / prospectus does not reflect what Akerna’s or Gryphon’s results or financial condition would have been had Akerna and Gryphon been a consolidated entity during all periods presented.
Failure by the combined company to comply with the initial listing standards of Nasdaq will prevent its stock from being listed on Nasdaq and may prevent the closing of the Merger.
Akerna, under the new name “Gryphon Digital Mining, Inc.,” will be required to meet the initial listing requirements of Nasdaq to maintain the listing and continued trading of its shares on Nasdaq. These initial listing requirements are more difficult to achieve than the continued listing requirements. Pursuant to the Merger Agreement, Akerna agreed to use its commercially reasonable efforts to cause the shares of Akerna Common Stock being issued in the Merger to be approved for listing on Nasdaq at or prior to the Effective Time. Based on information currently available to Akerna, Akerna anticipates that its stock will be unable to meet the $4.00 minimum bid price (or, to the extent applicable, $3.00 or $2.00 minimum closing price) initial listing requirement at the closing of the Merger unless it effects the Akerna Reverse Stock Split. The Akerna Board intends to effect the Akerna Reverse Stock Split of the Akerna Common Stock. In addition, often times a reverse stock split will not result in a trading price for the affected common stock that is proportional to the ratio of the split. If Akerna is unable to satisfy Nasdaq listing requirements, neither party is obligated to close the Merger. Also, following the Merger, if the combined company is unable to satisfy Nasdaq listing requirements, Nasdaq may notify the combined company that its shares of common stock will not be listed on Nasdaq. Upon a potential delisting from Nasdaq, if the combined company’s common stock is not then eligible for quotation on another market or exchange, trading of the shares could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it is likely that there would be significantly less liquidity in the trading of the combined company’s common stock; decreases in institutional and other investor demand for the shares, coverage by securities analysts, market making activity and information available concerning trading prices and volume; and fewer broker dealers willing to execute trades in the combined company’s common stock. Also, it may be difficult for the combined company to raise additional capital if the combined company’s common stock is not listed on a major exchange. The occurrence of any of these events could result in a further decline in the market price of the combined company’s common stock and could have a material adverse effect on the combined company.
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The Merger will result in changes to the Akerna Board and the combined company will pursue different strategies than Akerna pursued independently.
If Akerna and Gryphon complete the Merger, the composition of the Akerna Board will change in accordance with the Merger Agreement. Following completion of the Merger, the combined company’s board of directors is expected to consist of seven members, one of whom shall be designated by Akerna and the other six of whom shall be designated by Gryphon. Currently, it is anticipated that the combined company will continue to advance the business strategies of Gryphon.
The combined company’s management will be required to devote a substantial amount of time to comply with public company regulations.
As a public company, the combined company will incur significant legal, accounting and other expenses that Gryphon did not incur as a private company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as rules implemented by the SEC and Nasdaq, impose various requirements on public companies, including those related to corporate governance practices. The combined company’s management and other personnel will need to devote a substantial amount of time to these requirements. Certain members of Gryphon’ management, which will continue as the management of the combined company, do not have significant experience in addressing these requirements. Moreover, these rules and regulations will increase the combined company’s legal and financial compliance costs relative to those of Gryphon and will make some activities more time-consuming and costly.
Among other things, Gryphon’ management will be responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The combined company’s compliance with these requirements will require that it incur substantial accounting and related expenses and expend significant management efforts. The combined company will need to hire additional accounting and financial staff to comply with public company regulations. The costs of hiring such staff may be material and there can be no assurance that such staff will be immediately available to the combined company.
Moreover, if the combined company identifies deficiencies in its internal control over financial reporting that are deemed to be material weaknesses, investors could lose confidence in the accuracy and completeness of the combined company’s financial reports, the market price of the combined company’s common stock could decline and the combined company could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities.
The sale or availability for sale of a substantial number of shares of common stock of the combined company after the Merger could adversely affect the market price of such shares after the Merger.
Sales of a substantial number of shares of common stock of the combined company in the public market after the Merger and other legal restrictions on resale, or the perception that these sales could occur, could adversely affect the market price of such shares and could materially impair the combined company’s ability to raise capital through equity offerings in the future. Akerna and Gryphon are unable to predict what effect, if any, market sales of securities held by significant stockholders, directors or officers of the combined company or the availability of these securities for future sale will have on the market price of the combined company’s common stock after the Merger.
Once the combined company is no longer a smaller reporting company or otherwise no longer qualifies for applicable exemptions, the combined company will be subject to additional laws and regulations affecting public companies that will increase the combined company’s costs and the demands on management and could harm the combined company’s operating results.
The combined company will be subject to the reporting requirements of the Exchange Act, which requires, among other things, that the combined company file with the SEC annual, quarterly and current reports with respect to the combined company’s business and financial condition as well as other disclosure and corporate governance requirements. However, as a “smaller reporting company,” the combined company may take advantage of some exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in the combined company’s periodic reports and proxy statements. Once the combined company is no longer a smaller reporting company or otherwise qualifies for these exemptions, the combined company will be required to comply with these additional legal and regulatory requirements applicable to public companies and will incur significant legal, accounting and other expenses to do so. If the combined company is not able to comply with the requirements in a timely manner or at all, the combined company’s financial condition or the market price of the combined company’s common stock may be harmed.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This proxy statement / prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding future financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “design,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “seek,” “should,” “will” or the negative of these terms or other similar expressions.
All statements other than statements of historical fact are statements that could be deemed forward-looking statements. For example, forward-looking statements include any statements of the plans, strategies and objectives of management for future operations, including the execution of integration and restructuring plans and the anticipated timing of filings; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing. Forward-looking statements may also include any statements of the plans, strategies and objectives of management with respect to the approval and consummation of the Merger, Akerna’s ability to solicit a sufficient number of proxies to approve the Merger and other matters related to the consummation of the Merger.
For a discussion of the factors that may cause Akerna, Gryphon or the combined company’s actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied in such forward-looking statements, or for a discussion of risk associated with the ability of Akerna and Gryphon to complete the Merger and the effect of the Merger on the business of Akerna, Gryphon and the combined company, see the section titled “Risk Factors” in this proxy statement / prospectus.
These forward-looking statements include, but are not limited to, statements concerning the following:
• the expected benefits of and potential value created by the Merger for the stockholders of Akerna and Gryphon;
• likelihood of the satisfaction of certain conditions to the completion of the Merger and whether and when the Merger will be consummated;
• Akerna’s ability to control and correctly estimate its operating expenses and its expenses associated with the Merger;
• any statements of the plans, strategies and objectives of management for future operations;
• any statements concerning the attraction and retention of highly qualified personnel;
• any statements regarding expectations concerning Gryphon’s relationships and actions with third parties; and
• future regulatory, judicial and legislative changes in Gryphon’s industry.
You should not rely upon forward-looking statements as predictions of future events. Neither Akerna nor Gryphon can assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. In addition, statements that “we believe” and similar statements reflect the beliefs and opinions on the relevant subject of Akerna, Gryphon or the combined company, as applicable. These statements are based upon information available as of the date of this prospectus, and while Akerna, Gryphon or the combined company, as applicable, believes such information forms a reasonable basis for such statements, such information may be limited or incomplete.
Actual results could differ materially from those contained in any forward-looking statement as a result of various factors, including, without limitation, the risk that the conditions to the closing are not satisfied, including the failure to timely, or at all, obtain stockholder approval for the Merger; uncertainties as to the timing of the consummation of the Merger; risks related to Akerna’s ability to correctly estimate its operating expenses and its expenses associated with the Merger; competitive responses to the Merger; unexpected costs, charges or expenses resulting from the Merger; potential adverse reactions or changes to business relationships resulting from the announcement or completion of the
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Merger; and legislative, regulatory, political and economic developments. The foregoing review of important factors that could cause actual events to differ from expectations should not be construed as exhaustive and should be read in conjunction with statements that are included herein and elsewhere.
If any of these risks or uncertainties materializes or any of these assumptions proves incorrect, the results of Akerna, Gryphon or the combined company could differ materially from the forward-looking statements. All forward-looking statements in this proxy statement / prospectus are current only as of the date on which the statements were made. Akerna and Gryphon do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any statement is made or to reflect the occurrence of unanticipated events, except as otherwise required by the federal securities laws.
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THE SPECIAL MEETING OF AKERNA STOCKHOLDERS
Date, Time and Place
The Akerna special meeting will be held on held on January 29, 2024 at 9:00 a.m. Mountain Time at 201 Milwaukee Street, Suite 200, Denver, CO 80206, unless postponed or adjourned to a later date. Akerna is sending this proxy statement/prospectus to its stockholders in connection with the solicitation of proxies by Akerna Board for use at the Akerna special meeting and any adjournments or postponements of the Akerna special meeting. This proxy statement/prospectus is first being furnished to Akerna stockholders on or about January 9, 2024.
Purposes of the Akerna Special Meeting
The purposes of the Akerna special meeting are:
1. to approve the issuance of shares of Akerna Common Stock to Gryphon stockholders, pursuant to the terms of the Merger Agreement, and the change of control resulting from the Merger;
2. to approve the sale of the Membership Interests of MJ Freeway and the Capital Stock of Ample to MJ Acquisition, pursuant to the terms of the Purchase Agreement and the transactions contemplated thereby;
3. to approve an amendment to the amended and restated certificate of incorporation of Akerna to effect a reverse stock split of the issued and outstanding Akerna Common Stock within a range, as determined by the board of directors of Akerna and agreed to by Gryphon, of one new share of Akerna Common Stock for every fifteen (15) to one hundred (100) shares (or any number in between) of outstanding shares of Akerna Common Stock;
4. to approve an amendment to the amended and restated certificate of incorporation of Akerna to increase the number of authorized shares of Akerna Common Stock from 150,000,000 to 300,000,000;
5. to approve an amendment to the amended and restated certificate of incorporation of Akerna to change the corporate name from Akerna Corp. to “Gryphon Digital Mining, Inc.”;
6. to approve the 2024 Plan;
7. approve the MJA Promissory Note Conversion;
8. to authorize the adjournment of the Akerna special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1-7; and
9. to transact such other business as may properly come before the stockholders at the Akerna special meeting or any adjournment or postponement thereof.
Proposal No. 1 is referred to herein as the Merger Proposal. Proposal No. 2 is referred to herein as the Sale Transaction Proposal. Proposal No. 3 is referred to herein as the Akerna Reverse Stock Split Proposal. Proposal No. 4 is referred to herein as the Akerna Authorized Shares Proposal. Proposal No. 5 is referred to herein as the Akerna Name Change Proposal. Proposal No. 6 is referred to herein as 2024 Plan Proposal. Proposal No. 7 is referred to herein as the MJA Promissory Note Conversion. The approval of the Merger Proposal, the Sale Transaction Proposal, the Akerna Reverse Stock Split Proposal, the Akerna Authorized Shares Proposal, the Akerna Name Change Proposal and the 2024 Plan Proposal are all conditions to the completion of the Merger. The approval of the Merger Proposal and the MJ Acquisition Promissory Note Conversion are conditions to the completion of the Sale Transaction.
Recommendation of Akerna Board
• The Akerna Board has determined and believes that the issuance of shares of Akerna Common Stock pursuant to the Merger Agreement is advisable, fair to, in the best interests of Akerna and its stockholders and has approved such issuance. The Akerna Board unanimously recommends that Akerna stockholders vote “FOR” Merger Proposal to approve the issuance of shares of Akerna Common Stock pursuant to the Merger Agreement and the change of control resulting from the Merger.
• The Akerna Board has determined and believes that the sale of the Membership Interests of MJ Freeway and the Capital Stock of Ample pursuant to the Purchase Agreement is advisable, fair to, in the best interests of Akerna and its stockholders and has approved such sale. The Akerna Board unanimously
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recommends that Akerna stockholders vote “FOR” the Sale Transaction Proposal to approve the Purchase Agreement and the sale of the Membership Interests of MJ Freeway and the Capital Stock of Ample pursuant to the Purchase Agreement and the transactions contemplated thereby.
• The Akerna Board has determined and believes that it is in the best interests of Akerna and its stockholders to approve the amendment to the amended and restated certificate of incorporation of Akerna to effect the Akerna Reverse Stock Split, as described in this proxy statement/prospectus. The Akerna Board unanimously recommends that Akerna stockholders vote “FOR” the Reverse Stock Split Proposal to approve the Akerna Reverse Stock Split.
• The Akerna Board has determined and believes that it is in the best interests of Akerna and its stockholders to approve the amendment to the amended and restated certificate of incorporation of Akerna to increase the number of authorized shares of Akerna Common Stock. The Akerna Board unanimously recommends that Akerna stockholders vote “FOR” the Authorized Shares Proposal to approve the Akerna Authorized Share Increase.
• The Akerna Board has determined and believes that it is in the best interests of Akerna and its stockholders to approve the amendment to the amended and restated certificate of incorporation of Akerna to change the corporate name from Akerna Corp. to “Gryphon Digital Mining, Inc.”, as described in this proxy statement/prospectus. The Akerna Board unanimously recommends that Akerna stockholders vote “FOR” the Name Change Proposal to approve the Akerna Name Change.
• The Akerna Board has determined and believes that it is in the best interests of Akerna and its stockholders to approve the 2024 Plan, in the form attached as Annex F to the accompanying proxy statement/prospectus. The Akerna Board unanimously recommends that Akerna stockholders vote “FOR” the 2024 Plan Proposal.
• The Akerna Board has determined and believes that it is in the best interests of Akerna and its stockholders to approve the MJA Promissory Note Conversion pursuant to the terms of the MJA Promissory Note in the form attached as Annex G. The Akerna Board unanimously recommends that Akerna stockholders vote “FOR” the MJA Promissory Note Conversion Proposal.
• The Akerna Board has determined and believes that adjourning the Akerna special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the other proposals is in the best interests of Akerna and its stockholders and has approved and adopted the proposal. The Akerna Board unanimously recommends that Akerna stockholders vote “FOR” the Adjournment Proposal to adjourn the Akerna special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the other proposals.
Record Date and Voting Power
Only holders of record of Akerna Common Stock and Akerna voting preferred stock at the close of business on the record date of December 21, 2023, are entitled to notice of, and to vote at, the Akerna special meeting. At the close of business on the record date, there were approximately 229 registered holders of record of Akerna Common Stock and there were 10,352,069 shares of Akerna Common Stock issued and outstanding and there were 3 registered holders of record of Akerna voting preferred stock, consisting of two holders of Series C Preferred Stock, with the right to vote an equivalent of 6,844,000 shares of Akerna Common Stock and the holder of Akerna’s special voting preferred share, with right to vote an equivalent of 12,476 shares of Akerna Common Stock. Each share of Akerna Common Stock entitles the holder thereof to one vote on each matter submitted for stockholder approval. Each share of Akerna Series C Preferred Stock entitles the holder thereof to vote the equivalent of 2,000 shares of Akerna Common Stock on each matter submitted for stockholder approval. The special voting preferred share entitles the holder thereof to vote the equivalent of 12,476 shares of Akerna Common Stock on each matter submitted for stockholder approval.
Voting and Revocation of Proxies
The proxy accompanying this proxy statement/prospectus is solicited on behalf of Akerna Board for use at the Akerna special meeting.
If, as of the record date referred to above, your shares were registered directly in your name with the transfer agent for Akerna Common Stock, CST, or with Akerna for the Akerna voting preferred stock, then you are a stockholder of record. Whether or not you plan to attend the Akerna special meeting online, Akerna urges you to fill out and return the proxy card or vote by proxy over the telephone or on the internet as instructed below to ensure your vote is counted.
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The procedures for voting are as follows:
If you are a stockholder of record, you may vote at the Akerna special meeting. Alternatively, you may vote by proxy by using the accompanying proxy card, over the internet or by telephone. Whether or not you plan to attend the Akerna special meeting, Akerna encourages you to vote by proxy to ensure your vote is counted. Even if you have submitted a proxy before the Akerna special meeting, you may still attend the Akerna special meeting and vote during the virtual meeting. In such case, your previously submitted proxy will be disregarded.
• To vote at the Akerna special meeting, attend the Akerna special meeting and follow the instructions to vote at the special meeting.
• To vote using the proxy card, simply complete, sign and date the accompanying proxy card and return it promptly in the envelope provided. If you return your signed proxy card before the Akerna special meeting, Akerna will vote your shares in accordance with the proxy card.
• To vote by proxy over the internet, follow the instructions provided on the proxy at vote at .
• To vote by telephone, you may vote by proxy by calling the toll-free number found on the proxy card.
If you are a beneficial owner of shares registered in the name of your broker, bank or other agent, you should have received a voting instruction card and voting instructions with these proxy materials from that organization rather than from us. Simply complete and mail the voting instruction card to ensure that your vote is counted. To vote in person at the Akerna special meeting, you must obtain a valid proxy from your broker, bank or other agent. Follow the instructions from your broker, bank or other agent included with these proxy materials, or contact your broker, bank or other agent to request a proxy.
Akerna provides internet proxy voting to allow you to vote your shares online, with procedures designed to ensure the authenticity and correctness of your proxy vote instructions. However, please be aware that you must bear any costs associated with your internet access, such as usage charges from internet access providers and telephone companies.
If you do not give instructions to your broker, your broker cannot vote your Akerna shares during the Special Meeting for anything besides the Reverse Stock Split Proposal and the Name Change Proposal because all the other proposals are considered “non-discretionary,” non-routine items.
All properly executed proxies that are not revoked will be voted at the Akerna special meeting and at any adjournments or postponements of the Akerna special meeting in accordance with the instructions contained in the proxy. If a holder of Akerna Common Stock or Akerna voting preferred stock executes and returns a proxy and does not specify otherwise, the shares represented by that proxy will be voted “FOR” all of the proposals in accordance with the recommendation of Akerna Board.
If you are a stockholder of record of Akerna and you have not executed the Merger Support Agreement, the Sale Transaction Support Agreement, a Merger Lender Support Letter or a Sale Transaction Lender Support Letter, you may change your vote at any time before your proxy is voted at the Akerna special meeting in any one of the following ways:
• You may submit another properly completed proxy with a later date by mail or via the internet.
• You can provide your proxy instructions via telephone at a later date.
• You may send a written notice that you are revoking your proxy to Akerna Corp., 1550 Larimer Street #246, Denver, Colorado 80202, Attention: Secretary.
• You may attend the Akerna special meeting, revoke your proxy at the special meeting and vote. Simply attending the Akerna special meeting will not, by itself, revoke your proxy.
If your shares of Akerna Common Stock or Akerna voting preferred stock are held by your broker, bank or other agent, you should follow the instructions provided by them.
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Required Vote
The affirmative vote of a majority of the votes properly cast at the Akerna special meeting, whether present at the special meeting or represented by proxy at the special meeting, is required for approval of Proposal Nos. 1, 6, 7 and 8. The affirmative vote of the holders of a majority of shares of Akerna Common Stock and Akerna preferred stock, voting as one class, having voting power outstanding on the record date for the Akerna special meeting is required for approval of Proposal Nos. 2, 3, 4 and 5. The affirmative vote of the holders of a majority of shares of Akerna Common Stock, voting as a separate class, having voting power outstanding on the record date for the Akerna special meeting is required for approval of Proposal No 4. Proposal No. 1 is conditioned upon Proposal Nos. 2, 3, 4, 5 and 6. Proposal No. 2 is conditioned upon Proposal No. 1 and Proposal No. 7. Therefore, the Merger cannot be consummated without the approval of the Sale Transaction, the Akerna Reverse Stock Split, the Akerna Authorized Share Increase, the Akerna Name Change and the 2024 Plan, and the Sale Transaction cannot be consummated without the approval of the Merger and the MJ Acquisition Promissory Note Conversion.
Votes will be counted by the inspector of election appointed for the meeting, who will separately count “FOR” and “AGAINST” votes, abstentions and any broker non-votes. Abstentions and broker non-votes will be treated as shares present for the purpose of determining the presence of a quorum for the transaction of business at the special meeting. Abstentions and broker non-votes will have no effect on the Merger Proposal, the 2024 Plan Proposal, the MJA Promissory Note Conversion and the Adjournment Proposal but will have the same effect as votes “AGAINST” the Sale Transaction Proposal, the Reverse Stock Split Proposal, the Authorized Share Increase Proposal and the Name Change Proposal.
Certain Akerna securityholders, including certain directors and executive officers of Akerna who in the aggregate own or have the right to acquire approximately 1.6% of the outstanding shares of Akerna Common Stock, are parties to the Merger Support Agreement. the Sale Transaction Support Agreement, the Merger Lender Support Letters or the Sale Transaction Lender Support Letters. The Akerna securityholders who are party to such Merger Support Agreement, the Sale Transaction Support Agreement, the Merger Lender Support Letters or the Sale Transaction Lender Support Letters have agreed to vote (a) in favor of the Akerna stockholder proposals set forth herein, and (b) against any “acquisition proposal,” as defined in the Merger Agreement or Purchase Agreement, as applicable, and subject to certain exceptions, have also agreed not to transfer their shares of Akerna Common Stock or voting preferred stock.
Solicitation of Proxies
In addition to solicitation by mail, the directors, officers, employees and agents of Akerna may solicit proxies from Akerna stockholders by personal interview, telephone, email, fax or otherwise. Akerna will pay all of the costs of printing and filing this proxy statement/prospectus and proxy card. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of Akerna Common Stock or Akerna voting preferred stock for the forwarding of solicitation materials to the beneficial owners of Akerna Common Stock or Akerna voting preferred stock. Akerna will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.
Akerna has retained Advantage Proxy, Inc. to assist it in soliciting proxies using the means referred to above. Akerna will pay the fees of Advantage Proxy, Inc., which Akerna expects to be approximately $10,000, plus reimbursement of out-of-pocket expenses.
Other Matters
As of the date of this proxy statement/prospectus, Akerna Board does not know of any business to be presented at the Akerna special meeting other than as set forth in the notice accompanying this proxy statement/prospectus. If any other matters should properly come before the Akerna special meeting, it is intended that the shares represented by proxies will be voted with respect to such matters in accordance with the judgment of the persons voting the proxies.
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This section and the sections titled “The Merger Agreement” and “The Purchase Agreement” in this this proxy statement/prospectus describe the material aspects of the Merger, including the Merger Agreement, and the Sale Transaction, including the Purchase Agreement, respectively. While Akerna believes that this description covers the material terms of the Merger and the Merger Agreement, it may not contain all of the information that is important to you. You should read carefully this entire proxy statement/prospectus for a more complete understanding of the Merger and the Merger Agreement and the other documents to which you are referred in this proxy statement/prospectus. Additionally, while Akerna believes that this description covers the material terms of the Sale Transaction and the Purchase Agreement, it may not contain all of the information that is important to you. You should read carefully this entire proxy statement/prospectus for a more complete understanding of the Sale Transaction and the Purchase Agreement, including the annexes to which you are referred herein. See the section titled “Where You Can Find More Information” in this proxy statement/prospectus.
Background of the Transactions
The terms of the Purchase Agreement are the result of arm’s-length negotiations between the Akerna Board and management team and the MJ Acquisition management team, along with their respective advisors. The terms of the Merger Agreement are the result of arm’s-length negotiations between the Akerna Board and management team, the Gryphon management team, under the guidance of Gryphon’s board of directors, along with their respective advisors. In this process, Akerna was assisted by experienced outside financial and legal advisors in examining and evaluating potential transactions and transaction candidates through outreach to a variety of companies and prospective strategic partners. Overall Akerna entered 21 non-disclosure agreements based on outreach to 36 potential strategic partners. Of those potential partners, only POSaBIT submitted a bid to acquire the assets of Akerna. Certain of the non-disclosure agreements entered into with Akerna contained stand-still provisions related preventing the other party from making unsolicited bids for Akerna or its assets, but those provisions either expired or were waived prior to the date hereof. MJ Acquisition and its related parties were not among those parties that signed a non-disclosure agreement with Akerna prior to Akerna entering in the POSaBIT Purchase Agreement and the Merger Agreement.
Following is a summary of the events leading up to the decision by the Akerna Board to explore strategic alternatives, the process undertaken by the Akerna Board and its management team to identify and evaluate prospective counterparties, and the negotiation of the Purchase Agreement with MJ Acquisition and the Merger Agreement with Gryphon. The following chronology summarizes the key meetings and events that led to the signing of the agreements. The following chronology does not catalogue every conversation among the respective parties, their boards of directors and management, their respective representatives, or other parties.
The Akerna Board and its management team have regularly evaluated the long-term strategic goals and plans, its operations and financial performance, and overall industry conditions. As part of these evaluations, Akerna has considered, among other things, potential opportunities for strategic partnerships and collaborations, business combinations, acquisitions and other financial and strategic alternatives, including a sale of Akerna.
On January 25, 2022, a meeting of the Akerna Board was held via teleconference during which management for Akerna presented to the Board regarding, among other items, the financial results of the year ended December 31, 2021 and the 2022 budget and operational plan. At the meeting the Akerna Board requested that the management for Akerna prepare a go-forward plan including cost reduction scenarios and strategic options.
On February 10, 2022, a meeting of the Akerna Board was held via teleconference during which management for Akerna presented the requested go-forward plan including Akerna’s 2022 business plan, current and prospective capital markets outlook, cost reduction scenarios and strategic options available to Akerna to address potential liquidity concerns and challenges in the upcoming fiscal year. The Akerna Board discussed whether to institute a hiring freeze, a reduction in work force or to hire a re-structuring consultant. The Akerna Board instructed Akerna management to institute a hiring freeze and seek budget reductions.
On February 16, 2022, a meeting of the Akerna Board was held via teleconference during which management for Akerna presented a liquidity and debt management update, including updated budgeting items, cash flow scenarios for the coming fiscal year, the debt covenants and potential challenges for meeting debt covenants in the coming fiscal year, capital markets solutions, including accessing Akerna’s at-the-market facility, engaging in a larger equity transaction, either public or private, or renegotiating the debt terms and covenants to address potential liquidity challenges through-out
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the coming fiscal year. The Akerna Board instructed Akerna management to continue to implement targeted budget cuts to assist in cash flows and begin initial conversations with a banker regarding potential strategic alternatives, on a preliminary basis, if and when such alternatives make sense in the best interests of the stockholders.
On March 18, 2022, a meeting of the Akerna Board was held via teleconference during which management provided an update on financial performance to date, including revenue, operating expenses, summary budget and performance to budget, new bookings and cash position.
On March 30, 2022, Akerna management held an initial meeting with representatives of JMP to discuss their engagement to assist the Akerna Board in exploring strategic alternatives for Akerna.
On April 1, 2022, JMP began initial outreach activities to selected parties regarding potential strategic transactions with Akerna.
On April 5, 2022, Akerna and JMP entered into an engagement letter regarding JMP providing investment banking and related services in connection with the possible merger, consolidation, tender or exchange offer, leveraged buyout, leveraged recapitalization, sale of assets or equity interests, lease, license or other transaction involving a majority of the business, assets or equity interests of Akerna and/or its subsidiaries and affiliates in one or more transactions.
From April 18, 2022 through August 2022, Akerna management made presentations to potential strategic partners regarding the business of Akerna.
On April 19, 2022, a meeting of the Akerna Board was held via teleconference during which, among other items, Akerna management provided a review of potential strategic partners and deals to maximize shareholder value and the Akerna Board discussed overall strategy for Akerna moving forward, including discussing various budget scenarios and strategic options. The Akerna Board determined that management of Akerna should continue to work with JMP to seek strategic alternatives with the goal of finding partners to purchase the business, purchase parts of the business or provide strategic opportunities that could assist Akerna in improving its financial position and reach break even or profitable operations in the near future. The Akerna Board tasked the management of Akerna with seeking strategic alternatives that would bring the highest value for the assets of Akerna or permit Akerna to reach break even or profitable operations by the end of the year or early next year.
On April 29, 2022, a meeting of the Akerna Board was held via teleconference during which management of Akerna presented regarding the status of managing Akerna’s convertible debt and cash balances.
On May 9, 2022, a meeting of the Akerna Board was held via teleconference during which management of Akerna presented to the Board regarding strategic priorities going forward, including enterprise software, payment opportunities, data revenue growth and go-forward scenario planning and cash forecasts and 2022 budget planning.
On May 16, 2022, Akerna granted access to its dataroom for its first potential strategic partner pursuant to a non-disclosure agreement. Over the course of the process to follow, 21 non-disclosure agreement would be signed based on outreach to 36 potential strategic partners.
On May 17, 2022, Akerna announced the engagement of JMP to advise Akerna on investment banking and related services in connection with the possible merger, consolidation, tender or exchange offer, leveraged buyout, leveraged recapitalization, sale of assets or equity interests, lease, license or other transaction involving a majority of the business, assets or equity interests of Akerna and/or its subsidiaries and affiliates in one or more transactions.
On May 20, 2022, a meeting of the Akerna Board was held via teleconference during which, among other items, Akerna management provided an update on the process with representatives of JMP and finding potential strategic partners. The Akerna Board reviewed the process with JMP and discussed with management for Akerna the scope of the strategic partners being reviewed relative to the Akerna Board’s goals for the strategic process as determined in the April 19, 2022 meeting of the Akerna Board.
On May 24, 2022, a meeting of the Akerna Board was held via teleconference during which management for Akerna presented regarding proposed restructuring of Akerna including a reduction in workforce.
On May 27, 2022, Akerna announced its restructuring and work force reduction.
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On June 7, 2022, a meeting of the Akerna Board was held via teleconference during which representatives of JMP presented an update on the effort to find strategic partners for Akerna, including efforts to date, current state of interested parties and handling of the process and related items. The Akerna Board reviewed with representatives of JMP each of the interested parties that JMP had reached out to, those parties that had entered into non-disclosure agreements and the status of process with each of those parties. At that time, none of the other interested parties had made a proposal or sought to discuss an initial proposal for a strategic transaction with Akerna. The Akerna Board instructed the management of Akerna and JMP to continue with the process as several parties were still active in the dataroom and other potential partners were still being pursued.
On July 1, 2022, management of Akerna made its first presentation to POSaBIT to discuss Akerna business, process and current capital structure.
On July 6, 2022, management of Akerna and POSaBIT held a call to discuss high level model and other current Akerna metrics.
On July 12, 2022, a meeting of the Akerna Board was held via telephone conference during which, among other items, Akerna management provided an update on the process of finding potential strategic partners. The Akerna Board and Akerna management discussed POSaBIT and the potential to sell POSaBIT Akerna’s MJ Freeway business. The Akerna Board also discussed the status of other parties that had entered into non-disclosure agreements and the management of Akerna presented to the Akerna Board that the process had slowed significantly with other parties, with many having completed their due diligence activities without making any proposal or seeking to discuss a proposal for a strategic transaction with Akerna. The Akerna Board discussed with management of Akerna the likelihood of getting any offers for a strategic transaction from other interested parties, which Akerna management viewed as unlikely at the time of the meeting.
On July 25, 2022, management of Akerna and Gryphon held an introductory call.
On July 28, 2022, management for POSaBIT submitted an initial offer for the MJ Freeway business for $5,000,000 in cash.
On August 1, 2022, management for Akerna and representatives of JMP held a call to discuss files that were prepared for POSaBIT.
On August 2, 2022, representatives of JMP and POSaBIT management held a call to discuss the current bid from POSaBIT. Representatives of JMP recommended there was no path forward with the current bid as a full company sale would be better than winding down a public company shell and suggested POSaBIT management speak with Akerna management to better understand the business. Valuation was not discussed on the call.
On August 8, 2022, management for Akerna, management for POSaBIT and representatives of JMP held a call to discuss Akerna’s business and POSaBIT requested a follow-up demo call.
On August 16, 2022, representatives of JMP and Gryphon management held a call to discuss a potential transaction. Gryphon management noted they wanted access to public markets and listing and would be contributing all of Gryphon to Akerna. Gryphon management provided an overview of their business and shared a financial model with JMP.
On August 17, 2022, Akerna management and POSaBIT management held a call for a demonstration of MJ Freeway software.
On August 19, 2022, Akerna management and POSaBIT management held a call for a demonstration of Akerna’s 365 software.
On August 25, 2022, POSaBIT management and representatives of JMP held a call to discuss POSaBIT’s interest in a transaction. POSaBIT noted that they didn’t want to acquire Akerna’s 365 business. The parties discussed the Akerna Notes and working capital adjustments related to shutting down other business units and dealing with the debt.
On August 29, 2022, Akerna management, Gryphon management and representatives of JMP held a call to discuss Gryphon’s business and business model, including Gryphon’s mining operations and financial model assumptions and projections.
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On September 15, 2022, POSaBIT management and representatives of JMP held a call to discuss potential transaction with Akerna and Gryphon. POSaBIT management discussed that they were still considering whether they wanted to acquire the entire business of Akerna. POSaBIT management indicated that they were comfortable not taking the public company and only acquiring MJ Freeway and Leaf Data Systems.
On September 16, 2022, Akerna management, Gryphon management and representatives of JMP held a call to discuss deal structure and timing for a deal with Akerna, Gryphon and POSaBIT. The parties discussed the Akerna Notes, revisited Gryphon’s preference on deal structure and the resulting balance sheet.
On September 21, 2022, representatives of JMP presented to the Akerna Board regarding the status of their efforts in finding strategic partners and purchasers for Akerna. Mr. Sozio presented a general overview of the current status of the process with each interested party. Representatives of JMP presented to the Board regarding the status of their efforts, current state of interested parties and the handling of the process and related items. The Akerna Board reviewed and discussed with JMP each of the various interested parties, including POSaBIT and Gryphon and reviewed the proposal from POSaBIT and the potential of a combined deal with POSaBIT and Gryphon. The Akerna Board evaluated the potential deal in relation to its stated goals in seeking a strategic transaction and discussed that no other parties that had entered into non-disclosure agreements that were previously interested in Akerna had made any proposals for transactions or pursued negotiating an initial proposal and had either directly stated that they were not interested in a transaction with Akerna or had gone silent in relation to ongoing diligence or requests by JMP and management of Akerna to discuss a potential transaction. Based on the state of Akerna’s business and the need to complete a strategic transaction, the Akerna Board authorized representatives of JMP and management of Akerna to proceed with the potential transaction with POSaBIT and Gryphon seeking to get the highest value possible for stockholders of Akerna.
On September 27, 2022, Akerna management and representatives of JMP held a call to discuss potential deal valuations and deal mechanics.
On September 30, 2022, POSaBIT management and representatives of JMP held a call to discuss deal mechanics and eliminating Akerna debt.
On October 11, 2022, Akerna management, Gryphon management and representatives of JMP held a call to discuss an initial term sheet from Gryphon. The parties discussed governance issues, the Akerna Notes and the holders of the Akerna Notes. The parties discussed and negotiated the proposed stock split for the resulting combined company focusing on the proposed 92.5% and 7.5% split.
On October 18, 2022, the Akerna Board held a meeting at which Mr. Sozio presented an update on strategic alternatives, the possible transactions with Gryphon and POSaBIT, progress with other interested parties and related matters. The Akerna Board discussed the Gryphon and POSaBIT transactions and the presented terms of such transactions. The Akerna Board reviewed that although Akerna had reached out to 36 other potential strategic partners and 21 of those parties had entered into non-disclosure agreements, many of the other interested parties had conducted only limited diligence reviews and of those few parties that had conducted more extensive diligence review and engaged in preliminary discussions with Akerna, such other interested parties had determined not to proceed with discussions of a potential transaction of any kind with Akerna. Based upon the significant amount of time spent seeking strategic alternatives, the financial position of Akerna, including decreasing available capital and upcoming payment events, including the earn-out payment to the stockholders who has sold Akerna its 365 business and other related factors, the Akerna Board determined to move forward with the potential transactions with Gryphon and POSaBIT.
On October 20, 2022, Gryphon delivered a non-binding term sheet to Akerna management.
On October 27, 2022, POSaBIT delivered a non-binding term sheet to Akerna management.
On November 3, 2022, the Akerna Board approved by written consent entering into non-binding letters of intent with Gryphon and POSaBIT with a 45-day exclusivity period.
On November 7, 2022, Akerna entered into the non-binding letters of intent with Gryphon and POSaBIT.
On November 8, 2022, Akerna management, POSaBIT management and representatives of JMP held a call with POSaBIT for the introduction to certain Akerna employees, learn about Akerna culture, and discuss timeline and mechanics.
On November 10, 2022, Akerna management and representatives of JMP held a call to discuss timeline for definitive agreements for POSaBIT and Gryphon transactions.
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On November 15, 2022, Akerna management, Gryphon management, legal counsel for both parties and representatives of JMP held a call to discuss timeline and definitive documents.
On November 16, 2022, Akerna management, POSaBIT management and representatives of JMP held a call to discuss timeline and definitive documents.
On November 22, 2022, Akerna management, POSaBIT management and representatives of JMP held calls to discuss key metrics and state contracts.
On November 29, 2022, Akerna management, POSaBIT management and representatives of JMP held a due diligence call and further discussed Akerna’s state contracts.
On November 29, 2022, Akerna management, POSaBIT management and representatives of JMP held a call to provide an update on transaction timeline and definitive documents.
On December 1, 2022, Akerna management, POSaBIT management and representatives of JMP held calls to discuss the Ample business.
On December 1, 2022, the Akerna Board held a meeting via telephone conference at which (i) Akerna management presented to the Board regarding the 2023 budget and financial projections, including cash forecasts, likely cash shortfall in early 2023, the need for further cost reductions and the need to raise capital to meet operating expenses and service the Akerna Notes and (ii) representatives of JMP and Akerna management presented to the Board the status of the definitive documents with Gryphon and POSaBIT and discuss deal points and timing.
On December 5, 2022, Akerna management, POSaBIT management and representatives of JMP held a call to discuss Ample metrics and an update on state contracts.
On December 6, 2022, Akerna management, POSaBIT management and representatives of JMP held a call to discuss timeline and current mechanics for the transaction.
On December 10, 2022, Akerna management, POSaBIT management, legal counsel for both parties and representatives of JMP held a call to discuss status of definitive agreements, deal mechanics and timeline.
On December 13, 2022, Akerna management, Gryphon management and representatives of JMP held a call to discuss status of definitive deal documents and mechanics for the transaction and timeline.
On December 14, 2022, Akerna and POSaBIT agreed to an extension of the exclusivity period in the non-binding letter of intent.
On December 16, 2022, Akerna management, POSaBIT management and representatives of JMP held a call to provide an update on process and timeline.
On December 19, 2022, Akerna management, POSaBIT management and representatives of JMP held a call to discuss Akerna employees and deal terms.
On December 20, 2022, the Akerna Board held a meeting via telephone conference at which representatives of JMP presented to the Board regarding the sale of The NAV People, Inc. and general market conditions for Akerna and the downturn in the SaaS market.
On December 20, 2022, Akerna management, Gryphon management and representatives of JMP held an update call on timing.
On December 21, 2022, Akerna management, POSaBIT management and representatives of JMP held a call regarding status of state contracts, working capital and Ample agreements.
On December 23, 2022, Akerna management, POSaBIT management and representatives of JMP held a call to discuss definitive documents and employee process.
On December 27, 2022, Akerna management, Gryphon management, legal counsel for both parties and representatives of JMP held a call to work through the definitive documents and discuss deal points and timing.
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On December 27, 2022, Akerna management, POSaBIT management, legal counsel for both parties and representatives of JMP held a call to work through the definitive documents and discuss deal points and timing.
On December 27, 2022, the Akerna Board held a meeting via telephone conference at which Akerna management presented to the Board regarding the status of the definitive documents with Gryphon and POSaBIT and related items on timing for the transactions.
On December 29, 2022, Akerna management, Gryphon management, legal counsel for both parties and representatives of JMP held a call to work through the definitive documents and discuss deal points and timing.
On January 3, 2023, Akerna management, Gryphon management, legal counsel for both parties and representatives of JMP held a call to work through the definitive documents and discuss deal points and timing.
On January 3, 2023, Akerna management, POSaBIT management, legal counsel for both parties and representatives of JMP held a call to work through the definitive documents and discuss deal points and timing.
On January 10, 2023, Akerna management, Gryphon management, legal counsel for both parties and representatives of JMP held a call to work through the definitive documents and discuss deal points and timing.
On January 10, 2023, Akerna management, POSaBIT management, legal counsel for both parties and representatives of JMP held a call to work through the definitive documents and discuss deal points and timing.
On January 12, 2023, the Akerna Board held a meeting via telephone conference at which Akerna management presented to the Board regarding the status of the definitive documents with Gryphon and POSaBIT, the current deal terms, the negotiations with the Akerna Note Holders and related items on timing for the transactions.
On January 17, 2023, the Akerna Board held a meeting via telephone conference at which Akerna management presented to the Board regarding the status of the definitive documents with Gryphon and POSaBIT, the current deal terms, the negotiations with the Akerna Note Holders and related items on timing for the transactions.
On January 18, 2023, Akerna management, POSaBIT management, legal counsel for both parties and representatives of JMP held a call to work through the definitive documents and discuss deal points and timing.
On January 20, 2023, Akerna management, POSaBIT management, legal counsel for both parties and representatives of JMP held a call to discuss voting agreement and updates on definitive documents.
On January 24, 2023, Akerna management, Gryphon management, legal counsel for both parties and representatives of JMP held a call to work through lender agreements and definitive deal documents.
On January 24, 2023, Akerna management, POSaBIT management, legal counsel for both parties and representatives of JMP held a call to work through lender agreement and definitive documents.
On January 25, 2023, the Akerna Board held a meeting via telephone conference at which Akerna management presented to the Board regarding the definitive documents with Gryphon and POSaBIT, the deal terms and related items on timing for the transactions.
On January 26, 2023, a meeting of the Akerna board of directors was held via teleconference, which representatives of Akerna management, representatives of JMP and legal counsel for Akerna attended. At this meeting, Akerna’s legal counsel provided a detailed legal review of the Merger Agreement and the POSaBIT Purchase Agreement and representatives of JMP provided a presentation regarding its financial analyses of the Merger and the Sale Transaction with POSaBIT and the fairness from a financial point of view to Akerna of the consideration to be received by Akerna in the Sale Transaction and the consideration to be paid by Akerna in the Merger, following which the Board approved the Merger Agreement and the Merger and determined that the Merger was fair to the Akerna stockholders and approved the POSaBIT Purchase Agreement and the Sale Transaction and determined that the Sale Transaction was fair to the Akerna stockholders.
On January 27, 2023, Akerna and Gryphon entered into the Merger Agreement and Akerna and POSaBIT entered into the POSaBIT Purchase Agreement.
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On February 3, 2023, the Akerna Board received an unsolicited letter of intent from Alleaves regarding an acquisition proposal for the Membership Interests and the Ample Shares at a price of $6 million in cash but contingent on completion of due diligence.
On February 5, 2023, the Akerna Board held a meeting via telephone conference at which Akerna management presented the February 3, 2023 letter of intent from Alleaves, representatives of JMP presented to the Akerna Board regarding the financial considerations and the superior financial offer of $6 million in cash over $4 million in cash, legal counsel presented to the Board regarding its fiduciary duties under Delaware law and the contractual provisions of the POSaBIT Purchase Agreement and the Akerna Board directed Akerna management to present the Alleaves letter to POSaBIT.
On February 6, 2023, Akerna management and POSaBIT management held a call to discuss the February 5, 2023 letter of intent from Alleaves.
On February 7, 2023, Akerna management and POSaBIT management held a call to discuss POSaBIT’s response to the February 3, 2023 letter of intent from Alleaves.
On February 8, 2023, the Akerna Board held a meeting via telephone conference at which Akerna management presented to the Board regarding POSaBIT’s response to the Alleaves letter of intent, legal counsel summarized the Akerna Board’s fiduciary duties and contractual obligations under the POSaBIT Purchase Agreement, the Board reviewed JMP’s prior presentation and the Board determined that the Alleaves February 3, 2023 letter of intent wasn’t a superior offer because of the extensive deal risk of needing to complete due diligence before entering into a definitive agreement.
On February 14, 2023, the Akerna Board received an unsolicited letter of support from Alleaves which provided that in support of the $6 million cash offer, Alleaves would agree to enter into the same purchase agreement as POSaBIT, subject to review of the schedules thereto, financial supporting documents showing ability to pay, and a shortened list of due diligence items with a statement that due diligence could be completed with 48 hours.
On February 15, 2023, the Akerna Board held a meeting via telephone conference at which Akerna management presented to the Board the February 14, 2023 support letter from Alleaves and the Board directed Akerna management to present the support letter to POSaBIT.
On February 16, 2023, Akerna management held a call at which Akerna management presented the February 14, 2023 support letter from Alleaves to POSaBIT management.
On February 18, 2023, Akerna management and POSaBIT management held a call at which POSaBIT management presented their view of the support letter from Alleaves and asked Akerna management to share with Alleaves the commercial agreement between Akerna and POSaBIT.
On February 19, 2023, the Akerna Board held a meeting via telephone conference at which Akerna management presented to the Board regarding POSaBIT’s response to the Alleaves support letter, legal counsel summarized the Akerna Board’s fiduciary duties and contractual obligations under the POSaBIT Purchase Agreement, the Board reviewed JMP’s prior presentation and the Board determined that the Alleaves February 3, 2023 letter of intent wasn’t a superior offer because of the extensive deal risk of Alleaves completing due diligence, the need for Gryphon’s consents and the potential that Alleaves would not find the commercial agreements between Akerna and POSaBIT favorable and the Board directed Akerna management to present the POSaBIT commercial agreements to Alleaves.
On March 3, 2023, the Akerna Board received an unsolicited revised support letter from Alleaves, pursuant to which Alleaves reaffirmed their offer of $6 million in cash, offered to make $1-2 million available upon execution of the purchase agreement and mentioned that the deal had been discussed with Gryphon which support the Alleaves offer.
On March 3, 2023, the Akerna Board held a meeting via telephone conference at which Akerna management presented to the Board regarding Alleaves revised support letter, the need for additional capital to get to closing and the ongoing issues presented by the Akerna Notes and the Akerna Board directed Akerna management to present the revised support agreement to POSaBIT.
On March 9, 2023, Akerna management held a call with POSaBIT management to discuss the revised support letter from Alleaves dated March 3, 2023.
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On March 9, 2023, Akerna management held a call with POSaBIT management to discuss POSaBIT’s response to the revised support letter from Alleaves.
On March 10, 2023, the Akerna Board held a meeting via telephone conference at which Akerna management presented to the Board regarding POSaBITs response to the Alleaves revised support letter and the Board determined to take no action in relation to the Alleaves revised support letter.
On March 17, 2023, the Akerna Board received an unsolicited revised letter of intent from Alleaves pursuant to which Alleaves revised its offer to $5 million in cash with $1 million being made available upon signing of the purchase agreement in the form of a loan and setting forth that Alleaves would agree to indemnify Gryphon for any legal actions caused as a result of the transaction with Alleaves.
On March 19, 2023, the Akerna Board held a meeting via telephone conference at which Akerna management presented to the Board regarding the revised letter of intent from Alleaves and the revised terms of the offer, legal counsel to Akerna described the Akerna Board’s fiduciary duties, the Board went through a number of financial, business and legal considerations and the Board directed Akerna management to present the revised letter of intent to POSaBIT management with the likely determination that it was a superior offer.
On March 21, 2023, Akerna management and POSaBIT management held a call to discuss the revised letter from Alleaves.
On March 21, 2023, Akerna management and POSaBIT management held a call to discuss POSaBIT’s response to the revised letter from Alleaves.
On March 22, 2023, the Akerna Board received an unsolicited signed indemnification agreement from Alleaves and Gryphon pursuant to which Alleaves agreed to indemnify Gryphon, with Akerna as a third-party beneficiary, for certain liabilities arising from any actual or alleged breach or violation of the POSaBIT Purchase Agreement by Akerna in connection with the acceptance of the Alleaves proposal or the termination of the POSaBIT Purchase Agreement related to such acceptance of the Alleaves proposal.
On March 23, 2023, Akerna management and POSaBIT management held a call to discuss the revised letter from Alleaves and the indemnity agreement.
On March 24, 2023, the Akerna Board held a meeting via telephone conference at which the revised letter of intent from Alleaves was discussed in detail, including a review of the presentation from representatives of JMP regarding the financial terms, a review of various business considerations and a review of the Akerna Board’s fiduciary duties and obligations under the POSaBIT Purchase Agreement. The Akerna Board discussed whether a new fairness opinion should be requested from JMP. Based upon (i) the fact that the POSaBIT deal was a cash only deal and that deal with MJ Acquisition was also cash only with a premium of an additional $1 million in purchase price representing an increase of value of 25% and a superior offer, (ii) the consideration to be received by Akerna in the Merger remained unchanged (iii) the transaction with MJ Acquisition provided Akerna with access to $1 million of the cash purchase price immediately upon signing of the Purchase Agreement in the form of a secured bridge loan, which additional cash resources increased the likelihood of Akerna being able to fund operations and corporate expenses through closing of the Merger and the Sale Transaction, making such closing more likely under the transaction with MJ Acquisition than the transaction with POSaBIT, (iv) the business and prospects of Akerna had not change materially from January 26, 2023, the date the opinion was delivered by JMP and (v) the significant cost and delay in timing of obtaining a new fairness opinion created additional risk to the closing of the Merger and the Sale Transaction, the Akerna Board determined that an updated fairness opinion was not advisable to evaluate the Alleaves letter of intent as being a superior offer and being advisable, fair and in the best interests of Akerna and its stockholders. The Akerna Board determined that the Alleaves letter of intent along with the indemnity agreement between Gryphon and Alleaves was reasonably likely to be a superior offer under the terms of the POSaBIT Purchase Agreement and directed management to provide appropriate notice to POSaBIT under the terms of the POSaBIT Purchase Agreement.
On March 24, 2023, Akerna delivered notice to POSaBIT of the Akerna Board’s determination with the Alleaves documents to follow on March 27, 2023.
On April 3, 2023, Akerna management and POSaBIT management held a call to discuss Akerna’s notice to POSaBIT and POSaBIT determined not to offer to change the terms of their transaction in the POSaBIT Purchase Agreement.
On April 4, 2023, the Akerna Board held a meeting via telephone conference at which the revised letter of intent from Alleaves was discussed in detail, including a review of the presentation by representatives of JMP regarding the financial terms, a review of various business considerations and a review of the Akerna Board’s fiduciary duties and
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obligations under the POSaBIT Purchase Agreement. The Board again reviewed the financial terms of the combined Gryphon and Alleaves transaction against those of the combined Gryphon and POSaBIT transaction and continued to believe that an updated fairness opinion was not required. The Akerna Board determined that the Alleaves letter of intent along with the indemnity agreement between Gryphon and Alleaves was a superior offer under the terms of the POSaBIT Purchase Agreement and advisable, fair and in the best interests of Akerna and its stockholders and directed management to provide appropriate notice to POSaBIT under the terms of the POSaBIT Purchase Agreement to terminated the POSaBIT Purchase Agreement.
On April 5, 2023, Akerna management delivered notice of termination to POSaBIT under the terms of the POSaBIT Purchase Agreement.
On April 6, 2023, Akerna management and management for Alleaves held a call to begin due diligence and discuss deal mechanics and timing.
On April 17, 2023, the Akerna Board held a meeting via telephone conference at which legal counsel presented to the Board regarding the Purchase Agreement with MJ Acquisition, the promissory note for the $1 million bridge loan and related security documents were discussed and the Board reviewed JMP’s prior financial analysis regarding the Merger and Sale Transaction. The Board again reviewed the financial terms of the combined Gryphon and Alleaves transaction against those of the combined Gryphon and POSaBIT transaction and continued to believe that an updated fairness opinion was not required.
On April 27, 2023, the Akerna Board by way of written consent approved the Purchase Agreement and related documents and determined that the Purchase Agreement was advisable, fair and in the best interests of Akerna and its stockholders.
On April 28, 2023, Akerna entered into the Purchase Agreement, the promissory note and related security documents.
On May 17, 2023, management for Akerna met with management for Gryphon to discuss the pricing terms for a proposed private placement of common stock of Akerna. Akerna needed to complete the private placement as Akerna needed additional cash to fund ongoing operating, corporate and administrative costs of Akerna until the Transactions close and Akerna was obligated to complete a $500,000 equity raise under the terms of the Exchange Agreements. Management of Akerna presented to management of Gryphon the proposed price per share of $0.50 that Akerna was able to negotiate with the private investor. Management for Gryphon presented that Gryphon would not accept the price per share of the private placement unless Akerna agreed to the Second Amendment to the Merger Agreement, which changed the Merger Consideration Akerna stockholders would receive from a fixed 7.5% of the combined company on a fully-diluted basis to a formula by which Gryphon would receive a minimum valuation of approximately $115 million based on the closing sales price of Akerna Common Stock on the Nasdaq two trading days prior to the closing of the Merger. Management to Akerna and management for Gryphon discussed the basis for the valuation, which included JMP’s financial analysis as presented to the Akerna Board on January 26, 2023.
On May 17, 2023, counsel to Gryphon sent counsel to Akerna a draft of the Second Amendment to the Merger Agreement setting forth a change in the definition of Merger Consideration by which Gryphon would receive the greater of (a) a number of shares of common stock of Akerna equal to (i) the quotient obtained by dividing (A) Akerna’s fully-diluted share number by (B) 0.075, minus (ii) Akerna’s fully diluted share number (iii) the adjusted number of shares reserved for Gryphon warrants, and (b) a number of shares of common stock of Akerna equal to the quotient obtained by dividing (i) $115,625,000 by (ii) the closing price of Akerna’s common stock two trading days before closing of the Merger.
On May 19, 2023, the Akerna Board met with management for Akerna, representatives of JMP and legal counsel to Akerna, to discuss the Second Amendment to the Merger Agreement. Akerna management presented to the Akerna Board the impact of the revised consideration relative to changes in the price of Akerna shares. The Akerna Board discussed with the representatives of JMP the financial analysis previously presented to the Akerna Board by representatives of JMP on January 26, 2023 and the impact of the revised consideration. The Akerna Board discussed various alternative courses of action, including not proceeding with the private placement, proceeding without Gryphon’s express consent based on certain provisions in the Merger Agreement, negotiating a smaller minimum valuation and other tactical and timing considerations. Counsel to Akerna presented to the Akerna Board regarding the Akerna Board’s fiduciary duties under Delaware law and legal alternatives to not agreeing to the Second Amendment to the Merger Agreement, including not conducting the private placement or conducting the private placement without the consent of Gryphon. The Akerna Board considered whether a new fairness opinion was required to evaluate the Second Amendment to the Merger Agreement. Given that a decrease in share price of Akerna Common Stock to $0.01 per share of Akerna Common Stock would
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only result in a decrease in value to Akerna stockholders of approximately 1% of the combined company on a fully diluted basis and since the combined deal value of the Merger and Sale Transaction together had been increased by $1 million through entering into the transaction with MJ Acquisition, the Board determined that the overall deal value to Akerna since January 26, 2023 had not materially changed and the business and prospectus of Akerna had not materially changed since January 26, 2023 and therefore a new fairness opinion was not necessary. The Akerna Board approved the Second Amendment to the Merger Agreement and determined that the Merger was advisable, fair and in the best interests of Akerna and its stockholders. The Board authorized management to Akerna to executed and deliver the Second Amendment to the Merger Agreement concurrently with the closing of the private placement transaction.
On June 14, 2023, Akerna closed the private placement for $500,000 of common stock of Akerna at a price per share of $0.50 and Akerna and Gryphon entered into the Second Amendment to the Merger Agreement.
On September 8, 2023, Akerna received a notice from MJ Acquisition Corp. noting that several conditions to closing the Sale Transaction were unlikely to be met by the outside date in the Purchase Agreement and indicating their intention to terminate the Purchase Agreement.
On September 13, 2023, management for Akerna and management for MJ Acquisition Corp. met to discuss revised terms for the Purchase Agreement including a reduction of the cash Purchase Price to $2 million and providing Akerna with an additional loan of $500,000 to be added to the existing promissory note of $1 million with the entire promissory note being made convertible in Akerna Common Stock at closing.
On September 14, 2023, the Akerna Board met with management of Akerna to discuss the revised terms proposed by MJ Acquisition Corp. and discuss alternative courses of action and negotiating the revised terms with MJ Acquisition Corp.
On September 26, 2023, the Akerna Board met with management of Akerna to discuss the proposed terms of the Purchase Agreement Amendment. The Akerna Board discussed the likely timing of the closing of the Merger, the need for additional cash to meet operating costs to get to the closing of the Merger, the lack of other interested parties for the assets under the Purchase Agreement, the lack of progress in negotiations with MJ Acquisition Corp. regarding the proposed revised terms for the Sale Transaction and the relative value to stockholders of Akerna of getting to the closing of the Merger. The Akerna Board considered whether to obtain a new fairness opinion in relation to entering into the Purchase Agreement Amendment subsequent to the January 26, 2023 opinion delivered by JMP. The Akerna Board determined that such fairness opinion was not necessary in determining that the Purchase Agreement Amendment was advisable, fair and in the best interests of Akerna and its stockholders for the following reasons: (i) the combined deal value of the Merger and the Sale Transaction to the stockholders of Akerna was not materially decreased by the reduction in the cash Purchase Price, (ii) Akerna needed the additional $500,000 loan from MJ Acquisition Corp. to cover operating expenses to close and (iii) the Board’s determination in coordination with Akerna management that business and prospectus of Akerna had not materially changed since January 26, 2023.
On September 28, 2023, Akerna and MJ Acquisition Corp. entered into the Purchase Agreement Amendment and on October 11, 2023, Akerna issued the amended and restated secured convertible promissory note to MJ Acquisition.
On November 15, 2023, Akerna and MJ Acquisition Corp. entered in the Second Purchase Agreement Amendment and Akerna issued the second amended and restated secured convertible promissory note to MJ Acquisition.
On December 20, 2023, Akerna and the Holders of the Akerna Notes entered into Amendment One to the Exchange Agreements with such Holders to amend the terms of the Exchange Agreement and finalize the provisions of the Initial Closing (as defined therein).
On December 20, 2023, Akerna issued an aggregate of 3,244 shares of Series C Preferred Stock upon exchange of $3,244,000 principal amount of Akerna Notes.
On December 28, 2023, pursuant to the terms of the Purchase Agreement, Akerna and Akerna Exchange entered into a share purchase agreement with Wilcompute pursuant to which Akerna Exchange sold all of the Capital Stock of Ample to Wilcompute for approximately $638,000. In accordance with the Purchase Agreement, in lieu of delivering the Capital Stock of Ample at the closing of the Sale Transaction, Akerna will instead deliver to MJ Acquisition the $638,000 purchase price received from Wilcompute, which Akerna expects to be in the form of a reduction of the purchase price paid by MJ Acquisition from $1.85 million to approximately $1.22 million.
On December 28, 2023, Akerna, Akerna Exchange and MJ Acquisition Corp. enerted into a third amendment to the Purchase Agreement to reduce certain of the indemnity caps therein to reflect the sale of the Capital Stock of Ample to Wilcompute.
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Akerna’s Corporate History
On October 10, 2018 (as amended on April 17, 2019), Akerna (f/k/a MTech Acquisition Holdings Inc.) entered into a definitive merger agreement with MTech Acquisition Corp. (“MTech”), MJ Freeway, MTech Purchaser Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Akerna (“Purchaser Merger Sub”), MTech Company Merger Sub LLC, a Colorado limited liability company and a wholly-owned subsidiary of Akerna (“Company Merger Sub”), MTech Sponsor LLC (“MTech Sponsor”), a Florida limited liability company, in the capacity as the representative for our equity holders (other than the Sellers) thereunder, and MJ Freeway and Jessica Billingsley (as successor to Harold Handelsman), in the capacity as the representative for the Sellers thereunder. The agreement provided for two mergers: (i) the merger of Purchaser Merger Sub with and into MTech, with MTech continuing as the surviving entity (the “Purchaser Merger”); and (ii) the merger of Company Merger Sub with and into MJF, with MJF continuing as the surviving entity (the “Company Merger” and together with the Purchaser Merger, the “Business Combination”).
On June 17, 2019, MTech held a Special Meeting at which the MTech stockholders considered and approved, among other matters, the merger agreement with MJ Freeway et al.
On June 17, 2019, the parties consummated the Business Combination.
Upon closing of the Business Combination, MTech’s units ceased trading, and Akerna Common Stock and warrants began trading on The Nasdaq Stock Market under the symbols “KERN” and “KERNW,” respectively, Akerna changed its name from MTech Acquisition Holdings Inc. to “Akerna Corp.”, and MJF became our wholly-owned subsidiary.
Executing upon our expansion strategy, we acquired complementary cannabis brands to grow the scope of Akerna’s cannabis ecosystem. Since 2019, we have integrated six new brands into the Akerna product and service offering. Our first acquisition, Solo Sciences (“Solo”), was initiated in the fall of 2019, with the full acquisition completed in July 2020. We added Trellis Solutions (“Trellis”) to our portfolio on April 10, 2020 and finalized the acquisition of Ample and Last Call Analytics (“Last Call”) on July 7, 2020. More recently, on April 1, 2021 we completed our acquisition of Viridian Sciences Inc. (“Viridian”), a cannabis business management software system built on SAP Business One, followed by the acquisition of The NAV People, Inc. d.b.a 365 Cannabis (“365 Cannabis”), a cannabis business management software system built on Microsoft Business Central, on October 1, 2021.
In May 2022, we announced that we were exploring strategic alternatives to enhance shareholder value and engaged JMP as our financial advisor to assist in this process. In May 2022, we announced the implementation of a strategic restructuring with the objective of preserving capital. Our board of directors approved a restructuring plan following a review of our operations, cost structure and growth opportunities. The restructuring included a reduction in headcount and operating costs. We recorded a charge of $0.6 million in the six months ended June 30, 2022 as a result of the restructuring, which consisted of one-time termination benefits for employee severance, benefits and related costs, all of which resulted in cash expenditures which were paid out by the end of 2022.
On January 11, 2023, we completed the sale of 365 Cannabis to 365 Holdco LLC (the “Buyers”) pursuant to a stock purchase agreement (the “365 SPA”) for (i) cash in the amount of $0.5 million and the (ii) the termination and release of our obligation to the Buyers for contingent consideration in connection with our original acquisition of 365 Cannabis from the Buyers in 2021 (the “Earn-out Obligation”), subject to customary post-closing adjustments, if any. Any post-closing adjustments are generally limited to certain adjustments in accounts payable and indemnification obligations in accordance with the 365 SPA. Upon completion of the sale, $0.4 million of the total cash proceeds was placed into restricted accounts held as security for the Senior Convertible Notes while $0.1 million was subject to a hold-back (the “365 Holdback”) by the Buyers to be released to us and also placed into certain restricted accounts (the “Restricted Accounts”) after all post-closing adjustments, if any, are resolved. In accordance with the 365 SPA, we and the Buyers agreed that the value of the Earn-out Obligation was $2.3 million, a reduction of $4.0 million from the original estimate, for purposes of the sale of 365 Cannabis and is reflected on our consolidated balance sheets as Contingent consideration payable.
Akerna Reasons for the Transactions
At a meeting held on January 26, 2023, among other things, the Akerna Board unanimously (i) the Akerna Board unanimously determined that the Merger Agreement, the Merger and other transactions contemplated thereby and the Purchase Agreement, the Sale Transaction and other transactions contemplated thereby are advisable, fair to and in the best interests of Akerna and its stockholders, (ii) approved, adopted and declared advisable the Merger Agreement and the Purchase Agreement, (iii) determined to solicit, upon the terms and subject to the conditions set forth in the Merger Agreement and the Purchase Agreement, the approval of the Akerna stockholders of the Merger Agreement and the Purchase Agreement, and (iv) approve and adopt the other transactions contemplated by
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the Merger Agreement and the Purchase Agreement and to recommend that the Akerna stockholders approve the Merger, the Sale Transaction, the Akerna Reverse Stock Split, the Akerna Authorized Share Increase, the Akerna Name Change, the 2024 Plan and the Adjournment Proposal.
During the course of its evaluation of the Merger Agreement and the Purchase Agreement and the transactions contemplated thereby, the Akerna Board held numerous meetings, consulted with Akerna’s senior management, legal counsel and financial advisor, and reviewed and assessed a significant amount of information. In reaching its decision to approve the Merger Agreement and Purchase Agreement and the transactions contemplated by the Merger Agreement and Purchase Agreement, the Akerna Board considered a number of factors that it viewed as supporting its decision to approve the Merger Agreement and the Purchase Agreement, including:
• the financial condition and prospects of Akerna and its current business and the risks associated with continued operations, including Akerna’s history of substantial losses, the need for a likely highly dilutive equity capital raise in the near term to fund ongoing operations, risks related to servicing the Akerna Notes and the potential for a default under the terms of the Akerna Notes, the current stock price of the Akerna Common Stock and overall prospects of Akerna’s current operations, the timeline for profitable operations and the costs of operating as a public company;
• the risks and delays associated with, and uncertain value and costs to Akerna stockholders of, liquidating Akerna, including the uncertainties of continuing cash burn while debt and contingent liabilities are resolved, the likelihood that there would not be sufficient cash upon liquidation to satisfy Akerna’s debt obligations resulting in no cash available for distribution to stockholders, uncertainty of timing of release of any remaining cash until contingent liabilities are resolved, and the risks and costs associated with being a shell company prior to any such cash distribution;
• the risks and challenges of attempting to continue to operate Akerna on a stand-alone basis, including the substantial time required and uncertainty to successfully address the ongoing losses of continued operations and the need to service the Akerna Notes and challenges in retaining staff with limited cash and projected financial losses;
• that the Akerna Board and its financial advisor undertook a comprehensive and thorough process of reviewing and analyzing potential strategic alternatives and merger partner candidates to identify the opportunity that would, in the Akerna Board’s view, create the most value for Akerna stockholders;
• the Akerna Board’s belief, after a thorough review of strategic alternatives and discussions with Akerna’s senior management, financial advisors and legal counsel, that the Merger and Sale Transaction are more favorable to Akerna stockholders than the potential value that might have resulted from other strategic alternatives available to Akerna, including to operate Akerna on a stand-alone basis;
• the Akerna Board’s belief that, as a result of arm’s length negotiations with Gryphon, Akerna and its representatives negotiated the best ratio to which Gryphon was willing to agree, and that the other terms of the Merger Agreement include the most favorable terms to Akerna in the aggregate to which Gryphon was willing to agree;
• the Akerna Board’s belief that, as a result of arm’s length negotiations with MJ Acquisition, Akerna and its representatives negotiated the best cash purchase price to which MJ Acquisition was willing to agree, and that the other terms of the Purchase Agreement include the most favorable terms to Akerna in the aggregate to which MJ Acquisition was willing to agree;
• the Akerna Board’s consideration of the expected cash resources of the combined company as of the closing of the Merger, with approximately $5.8 million of cash and cash equivalents on a pro forma basis after giving effect to the Merger;
• the Akerna Board’s view, following a review with Akerna’s management of Gryphon’s current business plan, of the likelihood that the combined company would possess sufficient cash resources at the closing of the Merger to fund the business of the combined company through upcoming value inflection points;
• the lack of prospects of and risks associated with finding other strategic candidates;
• the ability of Akerna stockholders to participate in the growth and value creation of the combined company following the closing of the Merger by virtue of their continued ownership of Akerna Common Stock;
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• the current financial market conditions and historical market prices, volatility, and trading information for Akerna Common Stock
• the experience of the senior management team and board of directors of the combined company, which will consist of experienced representatives from Gryphon’s management team and board of directors and one representative from Akerna’s Board;
• the Akerna Board’s consideration of the financial analyses of JMP, including its opinion to the Akerna Board as to the fairness, from a financial point of view and as of the date of the opinion, to Akerna of the consideration to be paid by Akerna in the Merger and the consideration to be received by Akerna in the POSaBIT Sale Transaction, as more fully described below under the caption “The Merger — Opinion of Akerna’s Financial Advisor,” beginning on page 103 in this proxy statement/prospectus; and
• the variety of risks and other countervailing factors related to entering into the Merger Agreement and Purchase Agreement as joint transactions, including the potential effect of termination fees, the substantial expense incurred in connection with the Transactions and the risks and uncertainties associated with Gryphon’s business and various other risks.
The Akerna Board also reviewed the terms of the Merger Agreement and the Purchase Agreement and related transaction documents, including those described below, and concluded that the terms of the Merger Agreement and the Purchase Agreement and related transaction documents, in the aggregate, were reasonable under the circumstances:
• the calculation of the ratio and the estimated number of shares of Akerna Common Stock to be issued in the Merger;
• the aggregate purchase price to be received by Akerna from MJ Acquisition pursuant to the Sale Transaction, the limited adjustments to the purchase price at closing, the limited indemnity granted by Akerna to MJ Acquisition under the Purchase Agreement and the indemnification by MJ Acquisition to Akerna for certain material litigations and liabilities;
• the number and nature of the conditions to Gryphon’s and Akerna’s respective obligations to complete the Merger and the likelihood that the Merger will be completed on a timely basis, as more fully described below under the caption “The Merger Agreement — Conditions to the Completion of the Merger,” beginning on page 119 in this proxy statement/prospectus;
• the rights of, and limitations on, Akerna under the Merger Agreement to consider and engage in discussions regarding unsolicited acquisition proposals under certain circumstances, and the limitations on the Akerna Board to change its recommendation in favor of the Merger, as more fully described below under the caption “The Merger Agreement — No Solicitation,” beginning on page 122 in this proxy statement/prospectus;
• the right of Akerna to terminate the Merger Agreement to accept an unsolicited Acquisition Proposal in certain circumstances, subject to payment of a termination fee, as more fully described below under the caption “The Merger Agreement — Termination Fee,” beginning on page 130 in this proxy statement/prospectus;
• the conclusion of the Akerna Board that the potential termination fee of $275,000, payable by Akerna to Gryphon, the reimbursement by Akerna of Gryphon’s expenses up to a maximum of $100,000, and the circumstances when such fees may be payable, were reasonable, as more fully described below under the caption “The Merger Agreement — Termination Fee,” beginning on page 130 in this proxy statement/prospectus; and
• the Merger Support Agreement and Merger Lender Support Letters, pursuant to which certain securityholders of Akerna and stockholders of Gryphon, respectively, have agreed, solely in their capacities as stockholders, to vote all of their shares of Akerna Common Stock or Akerna voting preferred stock or Gryphon Shares, as applicable, in favor of the proposals submitted to them in connection with the Merger and against any alternative acquisition proposals, as more fully described below under the caption “Agreements Related to the Merger — Support Agreements,” beginning on page 131 in this proxy statement/prospectus.
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• the number and nature of the conditions to MJ Acquisition’s and Akerna’s respective obligations to complete the Sale Transaction and the likelihood that the Sale Transaction will be completed on a timely basis, as more fully described below under the caption “The Purchase Agreement — Conditions to the Completion of the Sale Transaction,” beginning on page 135 in this proxy statement/prospectus;
• the rights of, and limitations on, Akerna under the Purchase Agreement to consider and engage in discussions regarding unsolicited acquisition proposals under certain circumstances, and the limitations on the board of directors of Akerna to change its recommendation in favor of the Merger, as more fully described below under the caption “The Purchase Agreement — No Solicitation,” beginning on page 137 in this proxy statement/prospectus;
• the right of Akerna to terminate the Purchase Agreement to accept an unsolicited Acquisition Proposal in certain circumstances, subject to payment of a termination fee, as more fully described below under the caption “The Purchase Agreement — Termination Fee,” beginning on page 142 in this proxy statement/prospectus;
• the conclusion of the Akerna Board that the potential termination fee of $290,000 and reimbursement for up to a maximum of $60,000 in reasonable fees and expenses, payable by Akerna to MJ Acquisition, and the circumstances when such fees may be payable, were reasonable, as more fully described below under the caption “The Purchase Agreement — Termination Fee,” beginning on page 142 in this proxy statement/prospectus; and
In the course of its deliberations, the Akerna Board also considered a variety of risks and other countervailing factors related to entering into the Merger and the Sale Transaction, including:
• the potential effect of the $275,000 termination fee payable by Akerna to Gryphon, Akerna’s expense reimbursement obligations to Gryphon of up to $100,000, the potential termination fee of $290,000 and reimbursement for up to a maximum of $60,000 in reasonable fees and expenses payable by Akerna to MJ Acquisition, in each case, upon the occurrence of certain events and in deterring other potential acquirors from proposing an alternative acquisition proposal that may be more advantageous to Akerna stockholders;
• the prohibition on Akerna to solicit alternative acquisition proposals during the pendency of the Merger and Sale Transaction;
• the substantial expenses to be incurred by Akerna in connection with the Merger and Sale Transaction;
• the possible volatility of the trading price of the Akerna Common Stock resulting from the announcement, pendency or completion of the Merger and Sale Transaction;
• the risk that the Merger or Sale Transaction might not be consummated in a timely manner or at all;
• the fact that the representations and warranties in the Merger Agreement and Purchase Agreement do not survive the closing of the Merger and Sale Transaction and the potential risk of liabilities that may arise post-closing;
• the lack of availability of appraisal rights under the DGCL to holders of Akerna Common Stock which would not allow holders to seek appraisal of the fair value of their shares of Akerna Common Stock; and
• the various other risks associated with the combined company and the transaction, including those described in the sections entitled “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” in this proxy statement/prospectus.
The foregoing information and factors considered by the Akerna Board are not intended to be exhaustive but are believed to include all of the material factors considered by the Akerna Board. In view of the wide variety of factors considered in connection with its evaluation of the Merger and Sale Transaction and the complexity of these matters, the Akerna Board did not find it useful, and did not attempt, to quantify, rank or otherwise assign relative weights to these factors. In considering the factors described above, individual members of the Akerna Board may have given different weight to different factors. The Akerna Board conducted an overall analysis of the factors described above, including thorough discussions with, and questioning of, the Akerna management team and the legal and financial advisors of Akerna, and considered the factors overall to be favorable to, and to support, its determination.
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Gryphon Reasons for the Merger
Acting by unanimous written consent on January 26, 2023, the Gryphon Board unanimously (i) determined that the Merger is fair to, advisable for, and in the best interests of, Gryphon and its stockholders, (ii) approved and declared advisable the Merger Agreement and (iii) determined to recommend, upon the terms and subject to the conditions set forth in the Merger Agreement, that its stockholders approve the Merger.
In the course of reaching its decision to approve the Merger, the Gryphon Board consulted with Gryphon’s management, financial and tax advisors and legal counsel, reviewed a significant amount of information and considered a number of factors, including, among others:
• the financial condition, historical results of operations and strategic objectives of Gryphon;
• the exchange ratio to be paid by Akerna pursuant to the Merger and the related anticipated allocation of the equity interests of the combined company, on a fully diluted basis, following completion of the Merger;
• the risks associated with structuring the Merger and the Sale Transaction as joint transactions, including the potential difficulties associated with coordinating and completing both transactions simultaneously and the risk that the Sale Transaction does not close on a timely basis or at all;
• the terms of the Merger Agreement, the Purchase Agreement and related transaction documents, concluding the terms, in the aggregate, were reasonable;
• the current capitalization of Akerna, including the terms of the Akerna Notes, and the ability of Akerna to simplify its capitalization prior to completion of the Merger;
• the terms of the Exchange Agreements, the treatment of the Akerna Notes contemplated thereby and the entry by the holders of Akerna Notes into Merger Lender Support Letters;
• the potential increased access to sources of capital and a broader range of investors to support Gryphon’s Bitcoin mining operations following consummation of the Merger and the expected continued listing of the combined company on The Nasdaq Capital Market, compared to if Gryphon continued to operate as a privately held company;
• the potential to provide its current stockholders with greater liquidity by owning stock in a public company;
• the Gryphon Board’s belief that no alternatives to the Merger were reasonably likely to create greater value for Gryphon’s stockholders, after reviewing the various financing and other strategic options to enhance shareholder value that were considered by the Gryphon Board;
• the cash resources of the combined company, with $5.5 million of cash and cash equivalents on a pro forma basis as of September 30, 2023 after giving effect to the Merger, which Gryphon believes is sufficient to enable Gryphon to pursue its near term goals and business plans;
• the expectation that the Merger with Akerna would be a more time- and cost-effective means to access capital than other options considered by the Gryphon Board, including additional private financings or an initial public offering;
• the terms and conditions of the Merger Agreement, including, without limitation, the following:
• the determination that the expected relative percentage ownership of Akerna stockholders and Gryphon’s stockholders in the combined company was appropriately based, in the judgment of the Gryphon Board, on the Gryphon Board’s assessment of the approximate valuations of Akerna and Gryphon;
• the limited number and nature of the conditions of the obligation of Akerna to consummate the Merger;
• the expectation that the Merger will be treated as a reorganization for U.S. federal income tax purposes;
• the belief that the other terms of the Merger Agreement, including the parties’ representations, warranties and covenants, and the conditions to their respective obligations, were reasonable in light of the entire transaction;
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• the shares of Akerna Common Stock issued to Gryphon’s stockholders will be registered on the Registration Statement of which this proxy statement/prospectus forms a part and will become freely tradable for Gryphon’s stockholders who are not affiliates of Gryphon and who are not parties to lock-up agreements;
• the Merger Support Agreement and Lender Support Letters, pursuant to which certain directors, officers and securityholders of Gryphon and Akerna, respectively, have agreed, solely in their capacity as securityholders of Gryphon and Akerna, respectively, to vote all of their Gryphon Shares or Akerna Common Stock and Akerna Preferred Stock in favor of the adoption or approval, respectively, of the Merger Agreement;
• the Merger may enable certain stockholders of Akerna and Gryphon to increase the value of their current shareholding; and
• the likelihood that the Merger will be consummated on a timely basis.
The Gryphon Board also considered a number of uncertainties and risks in its deliberations concerning the Merger and the other transactions contemplated by the Merger Agreement, including the following:
• the possibility that the Merger might not be completed and the potential adverse effect of the public announcement of the Merger on the reputation of Gryphon and the ability of Gryphon to obtain financing in the future in the event the Merger is not completed;
• the exchange ratio used to establish the number of shares of Akerna Common Stock to be issued to Gryphon’s stockholders in the Merger is fixed, except for adjustments due to issuances of equity securities by Akerna prior to Closing, and thus the relative percentage ownership of Akerna stockholders and Gryphon’s stockholders in the combined company immediately following the completion of the Merger is similarly fixed;
• the risk that the Merger might not be consummated in a timely manner or at all;
• the additional expenses and obligations to which Gryphon’s business will be subject following the Merger that Gryphon has not previously been subject to, and the operational changes to Gryphon’s business, in each case that may result from being a public company;
• the fact that the representations and warranties in the Merger Agreement do not survive the closing of the Merger and the potential risk of liabilities that may arise post-closing; and
• various other risks associated with the combined company and the Merger, including the risks described in the section entitled “Risk Factors” in this proxy statement/prospectus.
The foregoing information and factors considered by the Gryphon Board are not intended to be exhaustive but are believed to include all of the material factors considered by the Gryphon Board. In view of the wide variety of factors considered in connection with its evaluation of the Merger and the complexity of these matters, the Gryphon Board did not find it useful to attempt, and did not attempt, to quantify, rank or otherwise assign relative weights to these factors. In considering the factors described above, individual members of the Gryphon Board may have given different weight to different factors. The Gryphon Board conducted an overall analysis of the factors described above, including thorough discussions with, and questioning of, Gryphon’s management team, the legal and financial advisors of Gryphon, and considered the factors overall to be favorable to, and to support, its determination.
Certain Projected Financial Information
The information set forth below regarding cash spending projections of Akerna was used by Akerna in connection with its review of the business combination, as described below. Additionally, the information below constitutes all of the projection information provided by Akerna to JMP in connection with their preparation of their opinion to the Akerna Board regarding the business combination.
Akerna’s Financial Projections
In connection with their analyses of the business combination, Akerna provided JMP and Gryphon with the financial projections below.
100
Neither the management of Akerna nor any of its representatives, advisors or affiliates has made or makes any representation to any person regarding the ultimate expenses and receipts of Akerna compared to the information contained in the financial projections, and none of them intends to or undertakes any obligation to update or otherwise revise the financial projections to reflect circumstances existing after the date when made or to reflect the occurrence of future events in the event that any or all of the assumptions underlying the financial projections are shown to be in error. You are cautioned in relying on the financial projections in making a decision regarding the transaction, that actual results may be materially different than the financial projections.
The financial projections of Akerna are forward-looking statements that are based on assumptions that are inherently subject to significant risks, uncertainties and contingencies, many of which are beyond Akerna’s control. These include the risks described in the section entitled “Risk Factors.” There will be differences between actual and projected revenue and spending, and actual revenue and cash spending may be materially greater or materially less than those contained in the financial projections. The inclusion of the financial projections in this proxy statement/prospectus should not be regarded as an indication that Akerna or its representatives considered or currently consider the financial projections to be a reliable prediction of future events, and reliance should not be placed on the financial projections.
The projections were prepared by, and are the responsibility of, the management of Akerna. The projections were not prepared with a view towards compliance with GAAP, the published guidelines of the SEC, or the guidelines established by the American Institute of Certified Public Accountants for preparation of prospective financial information. Marcum LLP, Akerna’s independent registered public accounting firm, has not examined, compiled or otherwise applied procedures with respect to the accompanying prospective financial information presented herein and, accordingly, does not express an opinion or any other form of assurance on it. The report of Marcum LLP included in this proxy statement/prospectus relates to historical financial information of Akerna. It does not extend to the projections and should not be read as if it does.
The key elements of the financial projections of Akerna provided to Gryphon and JMP are summarized in the table below (in thousands of dollars, unaudited).
|
11+1 Actual/Forecast |
Budget |
Var |
Inc/(Dec) |
Est. |
Est. |
Est. |
Est. |
Rates of Change |
||||||||||||||||||||||||||||
|
Figures in ($000K) |
2022 |
2023 |
Profit % |
2024 |
2025 |
2026 |
2027 |
2024 |
2025 |
2026 |
2027 |
|||||||||||||||||||||||||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Software – B2B |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Enterprise |
1,651 |
|
1,468 |
|
(183 |
) |
(11 |
)% |
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
365 (see Note) |
|
605 |
|
605 |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
|
Viridian |
1,651 |
|
863 |
|
(788 |
) |
(48 |
)% |
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Small and Medium Business |
7,686 |
|
7,836 |
|
150 |
|
2 |
% |
9,180 |
|
11,016 |
|
12,118 |
|
12,724 |
|
|
|
|
|
||||||||||||||||
|
MJ Platform |
4,410 |
|
5,248 |
|
838 |
|
19 |
% |
7,059 |
|
8,471 |
|
9,318 |
|
9,784 |
|
34.5 |
% |
20.0 |
% |
10.0 |
% |
5.0 |
% |
||||||||||||
|
Ample |
3,175 |
|
2,588 |
|
(586 |
) |
(18 |
)% |
2,121 |
|
2,545 |
|
2,800 |
|
2,940 |
|
(18.1 |
)% |
20.0 |
% |
10.0 |
% |
5.0 |
% |
||||||||||||
|
Trellis |
102 |
|
|
(102 |
) |
(100 |
)% |
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Data Revenue |
792 |
|
190 |
|
(601 |
) |
(76 |
)% |
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Solo Sciences |
57 |
|
|
(57 |
) |
(100 |
)% |
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Partnerships |
68 |
|
|
|
(68 |
) |
(100 |
)% |
|
|
551 |
|
1,818 |
|
2,545 |
|
|
|
230.0 |
% |
40.0 |
% |
||||||||||||||
|
Total Software – B2B |
10,254 |
|
9,494 |
|
(760 |
) |
(7 |
)% |
9,180 |
|
11,567 |
|
13,935 |
|
15,268 |
|
|
|
|
|
||||||||||||||||
|
Leaf Data Systems |
3,415 |
|
2,582 |
|
(833 |
) |
(24 |
)% |
2,391 |
|
2,630 |
|
2,762 |
|
2,900 |
|
(7.4 |
)% |
10.0 |
% |
5.0 |
% |
5.0 |
% |
||||||||||||
|
Total Software Revenue |
13,670 |
|
12,077 |
|
(1,593 |
) |
(12 |
)% |
11,571 |
|
14,197 |
|
16,697 |
|
18,168 |
|
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Consulting |
700 |
|
|
(700 |
) |
(100 |
)% |
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Other |
55 |
|
|
|
(55 |
) |
(100 |
)% |
300 |
|
100 |
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Total Revenue |
14,424 |
|
12,077 |
|
(2,348 |
) |
(16 |
)% |
11,871 |
|
14,297 |
|
16,697 |
|
18,168 |
|
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Business Unit Direct Expenses |
18,906 |
|
12,104 |
|
(6,802 |
) |
(36 |
)% |
10,635 |
|
10,104 |
|
10,104 |
|
10,104 |
|
(12.1 |
)% |
(5.0 |
)% |
0.0 |
% |
0.0 |
% |
||||||||||||
|
Capitalized Software |
(2,387 |
) |
(1,574 |
) |
814 |
|
(34 |
)% |
(1,383 |
) |
(1,313 |
) |
(1,313 |
) |
(1,313 |
) |
|
|
|
|
||||||||||||||||
|
Business Unit EBITDA |
(2,095 |
) |
1,546 |
|
3,640 |
|
174 |
% |
2,618 |
|
5,507 |
|
7,907 |
|
9,378 |
|
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Corporate Overhead |
6,995 |
|
6,602 |
|
(393 |
) |
(6 |
)% |
6,581 |
|
6,384 |
|
6,256 |
|
6,194 |
|
(0.3 |
)% |
(3.0 |
)% |
(2.0 |
)% |
(1.0 |
)% |
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Fully Burdened EBITDA |
(9,090 |
) |
(5,057 |
) |
4,033 |
|
44 |
% |
(3,963 |
) |
(877 |
) |
1,651 |
|
3,184 |
|
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Unidentified Cost Task |
|
800 |
|
800 |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Fully Burdened EBITDA |
(9,090 |
) |
(4,257 |
) |
4,833 |
|
53 |
% |
(3,963 |
) |
(877 |
) |
1,651 |
|
3,184 |
|
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Depreciation & Amortization |
3,788 |
|
1,980 |
|
(1,807 |
) |
(48 |
)% |
1,478 |
|
1,348 |
|
1,313 |
|
1,313 |
|
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
Net Income (Loss) |
(12,877 |
) |
(6,237 |
) |
6,640 |
|
(52 |
)% |
(5,441 |
) |
(2,225 |
) |
337 |
|
1,871 |
|
|
|
|
|
||||||||||||||||
101
Modeling Assumptions:
• The following business units are shut down at the beginning of 2023: Enterprise, Trellis, Solo Sciences, LCA and Consulting. Although, at the time this forecast was made, we had not notified every customer or negotiated the contract termination dates with every customer. We do not expect that all customer contracts will have the same termination date, and Akerna will continue to provide services to each customer through their contact termination date. We expect this will create a revenue tail, that is consistent with the company’s revenue recognition policy. For forecasting purposes, we included an estimate of this trailing revenue in the “Other” revenue line item.
• Dedicated and shared costs to support discontinued business will cease, resulting in Business Unit Direct and Corporate Overhead cost reductions.
• The MJ Platform will be revamped and relaunched in mid-2023 as MJ Operations. Updated functionality and user experience will drive a resurgence of growth.
• MJ Operations will include a universal ERP bridge functionality allowing Akerna to partner with any partner selling /re-selling ERP solutions. This drives MJ Operations growth and partnering fees.
• In 2023, Ample will decline due to churn. No significant development will be done on the system due to focus on MJ Operations development.
• In early 2024, MJ Operations will include the functionality offered by Ample, which will be replaced by a common platform, which will regain Canadian market share and result in technical cost efficiencies.
• Business Unit Costs will decline initially due to shut down and cost efficiencies associated with standardization of technologies. In the out years, cost targets will include zero year-over-year increases (efficiencies offset economics).
• Small and medium business (SMB) sales growth will be supported with the existing SMB team, which has considerable extra band-width.
• Corporate overhead costs will decline initially due to shut down/transferring costs to 365. In the out years, the business will continue to implement efficiencies that more than offset economics.
• Capitalized Software estimate of 13% Business Unit Direct Expenses based on historical capitalization rates.
• No income tax during forecast period due to ongoing net losses.
• Depreciation & Amortization largely consists of software amortization. MJP & Ample is amortized over 2 years and Leaf over 5 years. Estimate is based on forecasted capitalized software amortized over 2 years.
Except as set forth above, no projection information was provided by Akerna to JMP in connection with their preparation of their opinion to the Akerna Board regarding the business combination.
Gryphon’s Financial Projections
In connection with their analyses of the business combination, Gryphon provided JMP and Akerna with the financial projections below.
The financial projections of Gryphon are forward-looking statements that are based on assumptions that are inherently subject to significant risks, uncertainties and contingencies, many of which are beyond Gryphon’s control. These include the risks described in the section entitled “Risk Factors.” There will be differences between actual and projected revenue and spending, and actual revenue and cash spending may be materially greater or materially less than those contained in the financial projections. The inclusion of the financial projections in this proxy statement/prospectus should not be regarded as an indication that Gryphon or its representatives considered or currently consider the financial projections to be a reliable prediction of future events, and reliance should not be placed on the financial projections.
The projections were prepared by, and are the responsibility of, the management of Gryphon. The projections were not prepared with a view towards compliance with GAAP, the published guidelines of the SEC, or the guidelines established by the American Institute of Certified Public Accountants for preparation of prospective financial information. RBSM LLP, Gryphon’s independent registered public accounting firm, has not examined, compiled or otherwise applied
102
procedures with respect to the accompanying prospective financial information presented herein and, accordingly, does not express an opinion or any other form of assurance on it. The report of RBSM LLP included in this proxy statement/prospectus relates to historical financial information of RBSM LLP. It does not extend to the projections and should not be read as if it does.
The key elements of the financial projections of Gryphon provided to Akerna and JMP are summarized in the table below.
|
($ in thousands) |
||||||||||||||||||||||||
|
Income Statement (FYE 12/31) |
FY2022A |
FY2023E |
FY2024E |
FY2025E |
FY2026E |
FY2027E |
||||||||||||||||||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Total Revenue |
$ |
21,429 |
|
$ |
39,138 |
|
$ |
82,726 |
|
$ |
98,751 |
|
$ |
183,873 |
|
$ |
336,032 |
|
||||||
|
Growth % |
|
|
|
82.6 |
% |
|
111.4 |
% |
|
19.4 |
% |
|
86.2 |
% |
|
82.8 |
% |
|||||||
|
Cost of Goods Sold |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Total Cost of Goods Sold |
|
11,728 |
|
|
22,440 |
|
|
49,383 |
|
|
73,087 |
|
|
116,544 |
|
|
179,754 |
|
||||||
|
Gross Profit |
$ |
9,701 |
|
$ |
16,699 |
|
$ |
33,343 |
|
$ |
25,665 |
|
$ |
67,329 |
|
$ |
156,278 |
|
||||||
|
Gross Margin % |
|
45 |
% |
|
43 |
% |
|
40 |
% |
|
26 |
% |
|
37 |
% |
|
47 |
% |
||||||
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Total Operating Expenses |
|
12,498 |
|
|
20,814 |
|
|
28,053 |
|
|
24,384 |
|
|
32,078 |
|
|
44,416 |
|
||||||
|
Operating Income |
|
(2,797 |
) |
|
(4,115 |
) |
|
5,290 |
|
|
1,281 |
|
|
35,251 |
|
|
111,861 |
|
||||||
|
Sphere Profit Share |
|
— |
|
|
3,035 |
|
|
3,844 |
|
|
1,843 |
|
|
4,662 |
|
|
9,108 |
|
||||||
|
EBIT |
|
(2,797 |
) |
|
(1,080 |
) |
|
9,134 |
|
|
3,124 |
|
|
39,912 |
|
|
120,969 |
|
||||||
|
(+) D&A |
|
12,498 |
|
|
18,697 |
|
|
25,318 |
|
|
21,512 |
|
|
29,063 |
|
|
41,250 |
|
||||||
|
EBITDA |
$ |
9,701 |
|
$ |
17,617 |
|
$ |
34,451 |
|
$ |
24,636 |
|
$ |
68,975 |
|
$ |
162,219 |
|
||||||
|
EBITDA Margin % |
|
45 |
% |
|
45 |
% |
|
42 |
% |
|
25 |
% |
|
38 |
% |
|
48 |
% |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Other Expenses/(Income) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Interest Expense |
$ |
54 |
|
$ |
504 |
|
$ |
32 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
||||||
|
Total Other |
|
54 |
|
|
504 |
|
|
32 |
|
|
— |
|
|
— |
|
|
— |
|
||||||
|
Pre-Tax Income |
|
(2,851 |
) |
|
(1,584 |
) |
|
9,102 |
|
|
3,124 |
|
|
39,912 |
|
|
120,969 |
|
||||||
|
Pre-Tax Income Margin % |
|
(13 |
)% |
|
(4 |
)% |
|
11 |
% |
|
3 |
% |
|
22 |
% |
|
36 |
% |
||||||
|
Tax |
|
— |
|
|
— |
|
|
2,571 |
|
|
883 |
|
|
11,275 |
|
|
34,174 |
|
||||||
|
Net Income |
|
($2,851 |
) |
|
($1,584 |
) |
$ |
6,531 |
|
$ |
2,241 |
|
$ |
28,637 |
|
$ |
86,795 |
|
||||||
|
Net Income Margin % |
|
(13 |
)% |
|
(4 |
)% |
|
8 |
% |
|
2 |
% |
|
16 |
% |
|
26 |
% |
||||||
The financial projections of Gryphon were prepared with the following assumptions as of January 4, 2023:
|
BTC Price ($US) |
16,900 |
|
|
|
Monthly BTC Price Change |
4 |
% |
|
|
BTC Network Hashrate (TH/s) |
250,000,000 |
|
|
|
BTC Block Reward |
6.25 |
|
|
|
BTC Avg Blocks Per Hour |
6.00 |
|
|
|
Monthly Hashrate Increase |
4,000,000 |
|
|
|
S19J Hashrate |
100 |
|
|
|
S19J Wattage |
2950 |
|
Except as set forth above, no projection information was provided by Gryphon to JMP in connection with their preparation of their opinion to the Akerna Board regarding the business combination.
Opinion of Akerna’s Financial Advisor
Akerna has retained JMP as its financial advisor in connection with the Merger and the Sale Transaction. In connection with this engagement, the Akerna Board requested that JMP evaluate whether the (a) consideration to be received by Akerna in the POSaBIT Sale Transaction is fair, from a financial point of view, to Akerna and (b) the consideration to be paid by Akerna in the Merger is fair, from a financial point of view, to Akerna. On January 26, 2023, at a meeting of the Akerna Board at which the Merger was approved, JMP rendered to the Akerna Board an oral opinion, confirmed by delivery of a
103
written opinion dated January 26, 2023, to the effect that, as of that date and based on and subject to the matters described in its opinion, the consideration to be received by Akerna in the POSaBIT Sale Transaction is fair, from a financial point of view, to Akerna and the consideration to be paid by Akerna in the Merger is fair, from a financial point of view, to Akerna.
The Akerna Board considered whether to obtain a new fairness opinion in relation to entering into the Purchase Agreement with MJ Acquisition subsequent to the January 26, 2023 opinion delivered by JMP. The Akerna Board determined that such fairness opinion was not necessary in determining that the new transaction with MJ Acquisition is advisable, fair to and in the best interests of Akerna and its stockholders for the following reasons: (i) the fact that the transaction with POSaBIT was a cash only transaction and that the transaction with MJ Acquisition was also cash only with a premium of an additional $1 million representing an increase of value of 25% and a superior offer, (ii) the Purchase Agreement is materially identical to the POSaBIT Purchase Agreement outside of the increased purchase price, (iii) the consideration to be received by Akerna in the Merger remained unchanged (iv) the transaction with MJ Acquisition provided Akerna with access to $1 million of the cash purchase price immediately upon signing of the Purchase Agreement in the form of a secured bridge loan, which additional cash resources increased the likelihood of Akerna being able to fund operations and corporate expenses through closing of the Merger and the Sale Transaction, making such closing more likely under the transaction with MJ Acquisition than the transaction with POSaBIT, (v) the Board’s determination in coordination with Akerna management that the business and prospects of Akerna had not change materially from January 26, 2023, the date the opinion was delivered by JMP and (vi) the significant cost and delay in timing of obtaining a new fairness opinion created additional risk to the closing of the Merger and the Sale Transaction.
The Akerna Board considered whether to obtain a new fairness opinion in relation to entering into the Purchase Agreement Amendment subsequent to the January 26, 2023 opinion delivered by JMP. The Akerna Board determined that such fairness opinion was not necessary in determining that the Purchase Agreement Amendment was advisable, fair and in the best interests of Akerna and its stockholders for the following reasons: (i) the combined deal value of the Merger and the Sale Transaction to the stockholders of Akerna was not materially decreased by the reduction in the cash Purchase Price, (ii) Akerna needed the additional $500,000 loan from MJ Acquisition Corp. to cover operating expenses to close and (iii) the Board’s determination in coordination with Akerna management that business and prospectus of Akerna had not materially changed since January 26, 2023.
The Akerna Board considered whether to obtain a new fairness opinion in relation to entering into the Second Amendment to the Merger Agreement subsequent to the January 26, 2023 opinion delivered by JMP. The Akerna Board determined that such fairness opinion was not necessary in determining that the Second Amendment to the Merger Agreement was advisable, fair and in the best interests of Akerna and its stockholders for the following reasons: (i) the Akerna Board’s discussion with management of Akerna regarding the impact of changes in price of Akerna Common Stock to the value to Akerna stockholders under the revised consideration, including that a drop in share price to $0.01 per share of Akerna Common Stock would only result in a decrease in value to Akerna stockholders of approximately 1% of the combined company on a fully diluted basis and that the combined deal value of the Merger and the Sale Transaction together had been increased by $1 million through entering into the transaction with MJ Acquisition, the Akerna Board determined that the overall deal value to Akerna and its stockholders since January 26, 2023 had not materially changed, and (ii) the business and prospectus of Akerna had not materially changed since January 26, 2023.
While the Akerna Board believes that the opinion delivered by JMP is still useful in determining the fairness of the Merger and the Sales Transaction to stockholders of Akerna due to the factors set forth above, stockholders should note that because the Akerna Board did not seek a new opinion from JMP following terminating the POSaBIT Purchase Agreement and entering into the Purchase Agreement and entering into the Second Amendment to the Merger Agreement, the opinion of JMP does not address the current terms of the transaction and Akerna stockholders should use caution in relying on such opinion.
The full text of JMP’s written opinion, dated January 26, 2023, which describes the assumptions made, procedures followed, matters considered and limitations on the review undertaken, is attached to this proxy statement/prospectus as Annex H and is incorporated into this proxy statement/prospectus by reference. The description of JMP’s opinion set forth in this proxy statement/prospectus is qualified in its entirety by reference to the full text of JMP’s opinion. JMP’s opinion was directed and addressed to the Akerna Board (in its capacity as such) in connection with its consideration of the POSaBIT Sale Transaction and the Merger. JMP’s opinion did not address the underlying decision of the Akerna Board to proceed with or effect the POSaBIT Sale Transaction or the Merger or the relative merits of the POSaBIT Sale Transaction or the Merger as compared to any alternative strategy or transaction that might exist for Akerna. JMP’s opinion does not constitute a recommendation as to how the Akerna Board or any Akerna stockholder should act or vote with respect to the Merger or any other matter.
104
For purposes of its opinion, JMP:
• reviewed the financial terms and conditions of (i) a draft dated January 25, 2023 of the POSaBIT Purchase Agreement, (ii) the Merger Agreement, and (iii) certain related documents to each thereto;
• reviewed certain publicly available business and financial information relating to Akerna and Gryphon, including Akerna’s audited financial statements for the year ended December 31, 2021, and including Gryphon’s audited financial statements for the year ended December 31, 2021;
• reviewed certain financial projections provided to JMP by each of Akerna and Gryphon, and certain other historical and current financial and business information provided to JMP by each of Akerna and Gryphon;
• held discussions regarding the operations, financial condition and prospects of Gryphon and Akerna with the managements of each of Akerna and Gryphon;
• compared certain financial terms of the POSaBIT Sale Transaction and the Merger to financial terms, to the extent publicly available, of other transactions JMP deemed relevant;
• reviewed for information purposes the financial and stock market performances of certain publicly traded companies that JMP deemed to be relevant; and
• performed such other studies, analyses and inquiries and considered such other factors as JMP deemed appropriate.
In arriving at its opinion, JMP, with the consent of the Akerna Board, (i) relied upon and assumed the accuracy and completeness of all information and data that was publicly available or furnished to or otherwise reviewed by or discussed with JMP without independent verification, (ii) did not assume any responsibility for independently verifying such information, and (iii) relied on the assurances of the managements of Akerna and Gryphon that they were not aware of any facts or circumstances that would make such information inaccurate or misleading. In addition, with the Akerna Board’s consent, JMP did not make any independent evaluation or appraisal of any of the assets or liabilities (contingent or otherwise) of Akerna or Gryphon, nor was JMP furnished with any such evaluations or appraisals. With respect to the financial projections referred to above and any other forecasts or forward-looking information, JMP assumed, at the direction of the managements of Akerna and Gryphon that such projections, forecasts and information were reasonably prepared and reflect the best then-available estimates and good faith judgments of such management as to the expected future results of operations and financial condition of Akerna or Gryphon, as applicable, and the other matters covered thereby, and JMP relied on such information in arriving at its opinion and did not assess the reasonableness or achievability of such projections, forecasts and information. Further, with respect to such financial projections, as part of JMP’s analysis in connection with its opinion, JMP assumed, at the direction of Akerna and Gryphon, that the financial results reflected therein can be realized in the amounts and at the times indicated thereby.
In addition, in arriving at its opinion, JMP assumed, with the Akerna Board’s consent, that (i) there was no material change in any of the assets, liabilities, financial condition, business or prospects of Akerna or Gryphon since the date of the most recent financial statements and other information made available to JMP prior to the date of its opinion, and there will be no material adjustments to the consideration in the POSaBIT Sale Transaction or the consideration in the Merger, (ii) all material information JMP requested from Akerna and Gryphon during the scope of its engagement was provided to JMP fully and in good faith, (iii) the POSaBIT Sale Transaction and the Merger (together, the “Considered Transactions”) will be consummated in accordance with the terms and conditions set forth in the Merger Agreement, the POSaBIT Purchase Agreement and the ancillary documents thereto (the “Transaction Documents”) (the final terms and conditions of which JMP assumed will not differ in any respect material to its analysis from the aforementioned draft JMP reviewed), without any waiver, modification or amendment of any material terms or conditions, (iv) the representations and warranties made by the parties to the Transaction Documents were and will be true and correct in all respects material to JMP’s analysis, (v) all governmental and third party consents, approvals and agreements necessary for the consummation of the Considered Transactions will be obtained without any adverse effect on Akerna or Gryphon or the Considered Transactions, and (vi) the Considered Transactions will not violate any applicable federal or state statutes, rules or regulations.
JMP’s opinion does not constitute legal, regulatory, accounting, insurance, tax or other similar professional advice and did not address (i) the underlying decision of Akerna to proceed with or effect the Considered Transactions, (ii) the terms of the Considered Transactions (other than the consideration in the POSaBIT Sale Transaction and the consideration in the Merger to the extent expressly addressed therein) or any arrangements, understandings,
105
agreements or documents related to the Considered Transactions, (iii) the fairness of the Considered Transactions (other than with respect to the consideration in the POSaBIT Sale Transaction and the consideration in the Merger to the extent expressly addressed therein) or any other transaction to Akerna or Akerna’s equity holders or creditors or any other person or entity, (iv) the relative merits of the Considered Transactions as compared to any alternative strategy or transaction that might exist for Akerna, or the effect of any other transaction which it may consider in the future, (v) the tax, accounting or legal consequences of the Considered Transactions, or (vi) the solvency, creditworthiness, fair market value or fair value of any of Gryphon, Akerna or their respective assets under any applicable laws relating to bankruptcy, insolvency, fraudulent conveyance or similar matters. JMP’s opinion expresses no opinion as to the fairness of the amount or nature of any compensation to any officers, directors, or employees or debt holders, including the impact of consideration issued on conversion of convertible notes, of any party to the Considered Transactions, relative to the consideration in the POSaBIT Sale Transaction or the consideration in the Merger.
JMP’s opinion was necessarily based on business, economic, monetary, market and other conditions as they exist and can reasonably be evaluated on, and the information made available to JMP as of, the date of JMP’s opinion. The credit, financial and stock markets, and the industries in which Akerna, Gryphon and other companies that JMP may utilize in its analyses operate, have experienced, and continue to experience volatility and JMP expressed no opinion or view as to any potential effects of such volatility on Akerna, Gryphon or other companies that JMP may utilize in its analyses (or their respective businesses) of the Considered Transactions (including the respective contemplated benefits thereof). Subsequent developments may affect JMP’s opinion, and JMP assumes no responsibility for updating or revising its opinion based on circumstances or events occurring after the date of its opinion (regardless of the closing dates of the Considered Transactions). JMP was not engaged to amend, supplement or update its opinion at any time. JMP expressed no view or opinion as to the prices at which Akerna Common Stock may be sold or exchanged, or otherwise be transferable, at any time.
JMP’s opinion was directed and addressed to the Akerna Board (in its capacity as such) in connection with its consideration of the Considered Transactions. JMP’s opinion did not (i) constitute a recommendation as to how the Akerna Board or any shareholder should act or vote with respect to the Considered Transactions or any other matter, and (ii) create any fiduciary duties on the part of JMP to any persons or entities.
In preparing its opinion, JMP performed a variety of financial analyses, including those described below. This summary of the analyses is not a complete description of JMP’s opinion or the analyses underlying, and factors considered in connection with, JMP’s opinion, but summarizes the material analyses performed and presented in connection with such opinion. The preparation of a financial opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a financial opinion is not readily susceptible to summary description. JMP arrived at its ultimate opinion based on the results of all analyses undertaken by it and assessed as a whole, and did not draw, in isolation, conclusions from or with regard to any one factor or method of analysis for purposes of its opinion. Accordingly, JMP believes that its analyses must be considered as a whole and selecting portions of its analyses and factors, without considering all analyses and factors, could create a misleading or incomplete view of the processes underlying its analyses and opinion.
In its analyses, JMP considered industry performance, general business, economic, market and financial conditions and other matters existing as of the date of its opinion, many of which are beyond the control of Akerna. No company, business or transaction reviewed is identical to Akerna, Gryphon, the POSaBIT Sale Transaction or the Merger. An evaluation of these analyses is not entirely mathematical; rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the public trading or other values of the companies, businesses or transactions reviewed.
The estimates contained in JMP’s analyses and the valuation ranges resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by its analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold or acquired. Accordingly, the estimates used in, and the results derived from, JMP’s analyses are inherently subject to substantial uncertainty.
JMP was not requested to, and it did not, recommend the specific consideration payable in the POSaBIT Sale Transaction or the Merger. The type and amount of consideration payable in the POSaBIT Sale Transaction and the Merger was determined through negotiations between Akerna and Gryphon and the decision of Akerna to enter into the Purchase Agreement and the Merger Agreement was solely that of the Akerna Board. JMP’s opinion was only
106
one of many factors considered by the Akerna Board in its consideration of the Merger and should not be viewed as determinative of the views of the Akerna Board or Akerna management with respect to the POSaBIT Sale Transaction or the Merger or the consideration to be paid in the POSaBIT Sale Transaction or the Merger.
The following is a summary of the material financial analyses provided to the Akerna Board in connection with JMP’s opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand JMP’s financial analyses, the tables must be read together with the text of each summary. Considering the data below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of JMP’s financial analyses.
Akerna Financial Analyses
Information Reviewed
Illustrative Selected Public Companies Comparable Data
For illustrative purposes only, JMP reviewed and analyzed certain publicly available financial information for five selected publicly traded cannabis technology companies in the United States. Using publicly available information and market data as of January 25, 2023, JMP calculated (i) the enterprise value of the applicable selected company by multiplying such company’s share price by the number of fully diluted shares outstanding to derive the fully diluted market value and then subtracting net cash and (ii) the resulting multiples of such enterprise values to estimated revenue for calendar years 2022 and 2023, which indicated a median multiple of 0.8x for calendar year 2022 and 0.7x for calendar year 2023. The selected companies and the implied enterprise value to revenue multiples are set forth below.
|
EV/Revenue |
||||
|
Company |
CY 2022E |
CY 2023E |
||
|
Forian Inc. |
3.8x |
3.0x |
||
|
Leafly Holdings, Inc. |
0.5x |
0.5x |
||
|
POSaBIT Systems Corp. |
2.9x |
n/a |
||
|
SpringBig Holdings, Inc. |
0.8x |
0.7x |
||
|
WM Technology, Inc. |
0.8x |
0.8x |
||
Illustrative Selected Precedent Transactions Analysis
For illustrative purposes only, JMP reviewed and analyzed certain publicly available information relating to six selected M&A transactions involving publicly traded cannabis technology companies with under $50,000,000 in transaction enterprise value during the last three years. Using publicly available information for each of the selected transactions, JMP calculated the enterprise value of the applicable target company based on the consideration paid in the transaction as a multiple of the target company’s revenue for the trailing twelve months, which we refer to as TTM revenue, for the period ended prior to announcement of each transaction, which indicated a median multiple of 3.4x including the Akerna transactions, or a median multiple of 1.8x including the Akerna transaction, or a median multiple of 2.6x excluding the Akerna transactions. The selected transactions and the implied enterprise value to TTM revenue multiples calculated for the selected precedent transactions are set forth below.
|
Announcement Date |
Target |
Acquirer |
EV/TTM Revenue |
|||
|
December 19, 2019 |
Ample Organics Inc. |
Green Acre Capital |
9.3x |
|||
|
April 8, 2020 |
Trellis Solutions, Inc. |
Akerna |
3.2x |
|||
|
July 8, 2020 |
Ample Organics Inc. |
Akerna |
2.7x |
|||
|
October 8, 2020 |
Driven Deliveries, Inc. |
Stem Holdings, Inc. |
2.6x |
|||
|
March 11, 2021 |
Viridian Sciences Inc. |
Akerna |
1.8x |
|||
|
December 9, 2021 |
Pineapple Express Delivery Inc. |
World Class Extractions Inc. |
1.0x |
JMP then reviewed the trends indicated in the data above with the Akerna Board, including that the implied enterprise value to TTM revenue multiples calculated for the selected precedent transactions had fallen significantly over time and the number of selected precedent transactions had decreased as well.
107
Illustrative Liquidation Analysis
For illustrative purposes only, JMP conducted an analysis of Akerna in the event of a liquidation, assuming no holdback of funds to cover future claims. JMP’s analysis was based on information provided to JMP by Akerna, including projections which assumed, among other things, a liquidation date of May 1, 2023 (the “Illustrative Liquidation Date”) and that all wind-down costs are paid in full, certain employees are retained to facilitate the wind-down until the Illustrative Liquidation Date, The NAV People Inc. (365) and Last Call Analytics businesses are sold and all remaining accounts payable and expense accruals are settled.
JMP then calculated the net cash of Akerna as of the Illustrative Liquidation Date by subtracting certain wind-down costs from Akerna’s net cash as of January 11, 2023, and adding back certain assumed proceeds and refunds received at or prior to the Illustrative Liquidation Date. This figure was then divided by the number of outstanding Akerna common shares on a pro forma basis as of January 6, 2023 to determine the net cash per share as of the Illustrative Liquidation Date, assuming that the number of outstanding Akerna common shares as of the Illustrative Liquidation Date is the same as the number of outstanding Akerna common shares on a pro forma basis as of January 6, 2023.
|
($ in millions, other than per/share amounts) |
||||
|
Net Cash as of January 11, 2023 |
$ |
(7.2 |
) |
|
|
Less: Wind-Down Costs |
|
|
||
|
• Employee Severance (excluding Full Change of Control Packages) |
$ |
(1.2 |
) |
|
|
• Labor, research and development, general and administrative expenses and wind-down expenses |
$ |
(2.8 |
) |
|
|
Plus: |
|
|
||
|
• Proceeds from sale of 365 |
$ |
0.5 |
|
|
|
• Proceeds from sale of LCA |
$ |
0.1 |
|
|
|
• IRS tax refund |
$ |
1.9 |
|
|
|
Net Cash at Illustrative Liquidation Date |
$ |
(8.7 |
) |
|
|
|
|
|||
|
Akerna Fully Diluted Shares Outstanding (millions) |
|
4.629 |
|
|
|
|
|
|||
|
Net Cash Per Share at January 11, 2023 |
$ |
(1.88 |
) |
|
Discounted Cash Flow Analysis
JMP performed a discounted cash flow analysis based on financial projections of Akerna provided to JMP by Akerna. Using a discount rate of 25%, which was selected by JMP based on its professional judgment and experience, JMP calculated: (i) the present values of the estimated unlevered free cash flows of Akerna from fiscal year 2023 to fiscal year 2027, using mid-year convention, and (ii) the present value of the implied terminal value for Akerna using the estimated revenue for fiscal year 2027 and applying as the exit multiple the median implied enterprise value to revenue multiple for calendar year 2022 derived from the illustrative selected public companies comparable data analysis (0.8x) and applying the discount rate described above for a discount period of five years. JMP calculated the enterprise value of Akerna by adding the present value of the implied terminal value for Akerna to the total present value of the estimated cash flows of Akerna from fiscal year 2023 to fiscal year 2027, using mid-year convention.
|
($ in thousands) |
||||||||||||||||||||
|
FY2023E |
FY2024E |
FY2025E |
FY2026E |
FY2027E |
||||||||||||||||
|
Unlevered Free Cash Flows |
$ |
(5,530 |
) |
$ |
(5,545 |
) |
$ |
(2,290 |
) |
$ |
337 |
|
$ |
1,871 |
|
|||||
|
Illustrative Discount Rate |
|
25.0 |
% |
|
25.0 |
% |
|
25.0 |
% |
|
25.0 |
% |
|
25.0 |
% |
|||||
|
Discount Period |
|
0.5 years |
|
|
1.5 years |
|
|
2.5 years |
|
|
3.5 years |
|
|
4.5 years |
|
|||||
|
Present Value of Cash Flows |
$ |
(4,949 |
) |
$ |
(3,974 |
) |
$ |
(1,314 |
) |
$ |
155 |
|
$ |
688 |
|
|||||
|
Total Present Value of Cash Flows |
|
|
|
|
|
|
|
|
$ |
(9,394 |
) |
|||||||||
|
Present Value of Terminal Value |
|
|
|
|
|
|
|
|
$ |
4,901 |
|
|||||||||
|
Enterprise Value |
|
|
|
|
|
|
|
|
$ |
(4,493 |
) |
|||||||||
108
JMP then reviewed the implied enterprise value resulting from its discounted cash flow analysis with the Akerna Board, and compared these results to the consideration in the POSaBIT Sale Transaction.
JMP then calculated the equity value of Akerna by adding the total cash of Akerna and subtracting the total debt of Akerna from the enterprise value of Akerna calculated above.
|
($ in thousands) |
||||
|
Enterprise Value |
$ |
(4,493 |
) |
|
|
+ Cash |
$ |
8,143 |
|
|
|
- Debt |
$ |
(14,700 |
) |
|
|
Equity Value |
$ |
(11,050 |
) |
|
Gryphon Financial Analyses
Information Reviewed
Illustrative Selected Public Companies Comparable Data
For illustrative purposes only, JMP reviewed and analyzed certain publicly available financial information for nine selected publicly traded cryptocurrency companies with mining operations in the United States. Using publicly available information and market data as of January 25, 2023, JMP calculated (i) the enterprise value of the applicable selected company by multiplying such company’s share price by the number of fully diluted shares outstanding to derive the fully diluted market value and then subtracting net cash and (ii) the resulting multiples of such enterprise values to (x) estimated revenue for calendar years 2022 and 2023, which indicated a median multiple of 2.8x for calendar year 2022 and 2.7x for calendar year 2023 and (y) estimated earnings before interest, taxes, depreciation and amortization, which we refer to as EBITDA, for calendar years 2022 and 2023, which indicated a median multiple of 9.4x for calendar year 2022 and 9.2x for calendar year 2023. The selected companies and the implied enterprise value to revenue multiples and implied enterprise value to EBITDA multiples are set forth below.
|
EV/Revenue |
EV/EBITDA |
|||||||
|
Company |
CY 2022E |
CY 2023E |
CY 2022E |
CY 2023E |
||||
|
Hut 8 Mining Corp. |
3.3x |
4.5x |
14.1x |
35.6x |
||||
|
HIVE Blockchain Technologies Ltd. |
2.2x |
4.3x |
4.5x |
10.9x |
||||
|
Marathon Digital Holdings, Inc. |
14.1x |
4.0x |
n/m |
9.2x |
||||
|
Riot Platforms, Inc. |
3.2x |
2.1x |
n/m |
7.4x |
||||
|
Greenidge Generation Holdings Inc. |
1.4x |
1.0x |
13.9x |
3.4x |
||||
|
Bit Digital, Inc. |
2.8x |
2.7x |
n/a |
n/a |
||||
|
BitFarms Ltd. |
1.8x |
n/a |
4.8x |
n/a |
||||
|
Cipher Mining Inc. |
n/a |
2.5x |
n/a |
n/a |
||||
|
TeraWulf Inc. |
n/a |
n/a |
n/a |
n/a |
||||
Discounted Cash Flow Analysis
JMP performed a discounted cash flow analysis based on financial projections of Gryphon provided to JMP by Gryphon. Using a discount rate of 17%, which was selected by JMP based on its professional judgment and experience, JMP calculated: (i) the present values of the estimated unlevered free cash flows of Gryphon from fiscal year 2023 to fiscal year 2027, using mid-year convention, and (ii) the present value of the implied terminal value for Gryphon using the estimated EBITDA for fiscal year 2027 and applying as the exit multiple the median implied enterprise value to EBITDA multiple for calendar year 2023 derived from the illustrative selected public companies comparable data analysis (9.2x)
109
and applying the discount rate described above for a discount period of five years. JMP calculated the implied enterprise value of Gryphon by adding the present value of the implied terminal value for Gryphon to the total present value of the estimated cash flows of Gryphon from fiscal year 2023 to fiscal year 2027, using mid-year convention.
|
($ in millions) |
||||||||||||||||||||
|
FY2023E |
FY2024E |
FY2025E |
FY2026E |
FY2027E |
||||||||||||||||
|
Unlevered Free Cash Flows |
$ |
(6,758 |
) |
$ |
9,371 |
|
$ |
1,254 |
|
$ |
(2,300 |
) |
$ |
68,045 |
|
|||||
|
Illustrative Discount Rate |
|
17.0 |
% |
|
17.0 |
% |
|
17.0 |
% |
|
17.0 |
% |
|
17.0 |
% |
|||||
|
Discount Period |
|
0.5 years |
|
|
1.5 years |
|
|
2.5 years |
|
|
3.5 years |
|
|
4.5 years |
|
|||||
|
Present Value of Cash Flows |
$ |
(6,248 |
) |
$ |
7,405 |
|
$ |
847 |
|
$ |
(1,328 |
) |
$ |
33,571 |
|
|||||
|
Total Present Value of Cash Flows |
|
|
|
|
|
|
|
|
$ |
34,247 |
|
|||||||||
|
Present Value of Terminal Value |
|
|
|
|
|
|
|
|
$ |
681,561 |
|
|||||||||
|
Enterprise Value |
|
|
|
|
|
|
|
|
$ |
715,808 |
|
|||||||||
JMP then calculated the implied equity value of Gryphon by adding the total cash of Gryphon as of January 10, 2023 (as provided by Gryphon) and subtracting the total debt of Gryphon as of January 10, 2023 (as provided by Gryphon) from the implied enterprise value of Gryphon calculated above.
|
($ in thousands) |
||||
|
Enterprise Value |
$ |
715,808 |
|
|
|
+ Cash |
$ |
7,000 |
|
|
|
- Debt |
$ |
(12,000 |
) |
|
|
Equity Value |
$ |
710,808 |
|
|
JMP then calculated the range of implied equity values of Akerna based on the implied equity value of Gryphon calculated above, assuming (i) Akerna equityholders would hold 7.5% of the outstanding equity interests of the combined company on a fully diluted basis after the closing of the Merger and (ii) the equity value of the combined company attributable to Akerna was $0. JMP calculated this range by multiplying the ownership percentage of Akerna stockholders in the combined company after the closing by a range of equity values of the combined company derived from determining the:
• present values of the estimated unlevered free cash flows of Gryphon from fiscal year 2023 to fiscal year 2027 using discount rates ranging from of 15% to 19%;
• the resulting present value of the implied terminal value for Gryphon using the estimated EBITDA for fiscal year 2027, applying a range of exit multiples from 7.1x to 9.6x and applying discount rate ranging from 15% to 19% for a discount period of five years;
• the resulting implied enterprise value of Gryphon by adding the present values of the range of implied terminal values for Gryphon to the total present values of the range of estimated cash flows of Gryphon from fiscal year 2023 to fiscal year 2027, using mid-year convention; and adding the total cash of Gryphon as of January 10, 2023 (as provided by Gryphon) and subtracting the total debt of Gryphon as of January 10, 2023 (as provided by Gryphon) from the resulting range of implied enterprise values of Gryphon; and,
|
($ in thousands) |
||||||||||||||
|
Illustrative Discount Rate |
|
15.0 |
% |
|
17.0 |
% |
|
19.0 |
% |
|||||
|
|
Equity Values |
|
||||||||||||
|
Exit Multiple |
7.1x |
$ |
602,338 |
|
$ |
555,002 |
|
$ |
512,281 |
|
||||
|
9.2x |
$ |
772,172 |
|
$ |
710,808 |
|
$ |
655,427 |
|
|||||
|
9.6x |
$ |
803,967 |
|
$ |
739,977 |
|
$ |
682,226 |
|
|||||
These calculations resulted in a range of implied equity values of the combined company of $512,281,000 to $803,967,000 and a range of implied equity values of Akerna from $38,400,000 to $60,300,000.
110
JMP then reviewed the range of implied equity values of the combined company resulting from its discounted cash flow analysis with the Akerna Board, and compared these results to the implied equity value of Akerna resulting from its discounted cash flow analysis.
Miscellaneous
In addition, Akerna agreed to indemnify JMP against certain claims and liabilities related to or arising out of its engagement. JMP may seek to provide financial advisory services to Gryphon, Akerna, or their respective affiliates in the future, for which JMP would expect to receive compensation. JMP has not otherwise had a material relationship with, nor otherwise received fees from, Akerna, Gryphon, POSaBIT, MJ Acquisition, their respective affiliates or any other party to the Considered Transactions during the two years preceding the date of JMP’s opinion.
Under the terms of JMP’s engagement, Akerna has agreed to pay JMP for its financial advisory services in connection with the Merger and Sales Transaction an aggregate fee currently estimated to be approximately $1,500,000, of which $500,000 became payable upon delivery of JMP’s opinion and approximately $1,000,000 of which will become payable upon consummation of any transaction involving a majority of the business assets or equity interests of Akerna. However, if such transaction is not consummated and Akerna receives a “termination,” “break-up,” “topping” or other similar fee or option, Akerna will pay JMP one-half of any such fee or value of any such option up to a maximum amount equal to the transaction fee JMP would have been entitled to had the Merger and Sales Transaction been consummated. JMP is reimbursable, regardless of whether a transaction is consummated, for its reasonable costs and expenses and legal fees up to $150,000.
Akerna selected JMP as its financial advisor in connection with the Merger based on JMP’s reputation and experience and familiarity with Akerna and its business. JMP is a nationally recognized investment banking firm which provides capital raising, mergers and acquisitions transaction and other strategic advisory services to corporate clients. JMP’s opinion was approved by a JMP fairness opinion committee.
Interests of Akerna Directors and Executive Officers in the Transactions
In considering the recommendation of the Akerna Board with respect to issuing shares of Akerna Common Stock in the Merger and the other matters to be acted upon by the Akerna stockholders at the Akerna special meeting, the Akerna stockholders should be aware that Akerna’s directors and executive officers have interests in the Merger that may be different from, or in addition to, the interests of Akerna’s stockholders generally. These interests may present them with actual or potential conflicts of interest, and these interests, to the extent material, are described below.
Akerna’s executive officers, including Jessica Billingsley, its Chief Executive Officer, who is also the Chairman of the Akerna Board, Scott Sozio, Head of Corporate Development and a director on the Akerna Board, and Dean Ditto, its Chief Financial Officer are contractually entitled to severance payments and/or change in control bonus incentive fees.
In addition, each member of the Akerna executive team and the Akerna Board is entitled to full accelerated vesting of all outstanding restricted stock units of Akerna upon a change in control, as defined in Akerna’s Equity Incentive Plan, regardless of whether s/he is terminated as a result of the transaction.
Based on the terms of her current employment agreement, Jessica Billingsley will be entitled to receive a total value of approximately $602,854 in connection with the consummation of the Merger, which includes approximately $602,400 as part of her severance payments and benefits under her employment agreement and approximately $454 in value associated with the acceleration of outstanding restricted stock units. Additionally, Ms. Billingsley will continue on the board of the combined company after the closing of the Merger and would be eligible for certain compensation as a non-employee director.
Based on his current employment terms, Dean Ditto will be entitled to receive a total value of approximately $210,733 in connection with the consummation of the Merger, which includes approximately $85,733 as part of his severance payments and benefits under his employment terms.
Under the terms of a change in control bonus incentive agreement with Akerna, Scott Sozio will be entitled to receive a total value of approximately $350,924 in connection with the consummation of the Merger, which includes approximately $350,000 as part of his change in control incentive bonus and approximately $924 in value associated with the acceleration of outstanding restricted stock units.
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As of December 21, 2023, which is the record date for the special meeting, the directors and executive officers of Akerna owned, in the aggregate, 1.2% of the outstanding Akerna Common Stock (0.7% of the outstanding voting stock) and have agreed to vote in favor of the Merger and related transactions. The above officers of Akerna may acquire additional share of Akerna Common Stock at the closing of the Merger as settlement, in part, of the amounts owed to them as stated above. Such issuances would be done at market value under the rules of the Nasdaq Capital Market.
After the Effective Time, the combined company will also maintain Akerna’s directors and officers insurance policies, including by purchasing any “tail” policies as may be require, with coverage at least as favorable to Akerna’s former directors and executive officers as in effect at the Effective Time without any reduction in scope or coverage for six years from the Effective Time.
The Akerna Board was aware of these interests and considered them, among other matters, in the decision to approve the Merger Agreement. For more information, please see the section titled “The Transactions — Interests of the Akerna Directors and Executive Officers in the Transactions” in this proxy statement/prospectus.
Interests of Gryphon Directors and Executive Officers in the Merger
Certain members of the board of directors and executive officers of Gryphon have interests in the Merger that may be different from, or in addition to, interests they have as Gryphon stockholders. Gryphon’s directors and executive officers are expected to become directors and executive officers of the combined company upon the closing of the Merger, and all of Gryphon’s directors and executive officers are entitled to certain indemnification.
Certain current executive officers and directors of Gryphon hold Gryphon Shares, which will, at the Effective Time, be automatically converted into the right to receive the applicable per share portion of the Merger Consideration. As of January 4, 2024, Gryphon’s directors and executive officers beneficially owned approximately 21.1% of the outstanding Gryphon Shares on an as converted, fully diluted basis.
The Gryphon Board was aware of these interests and considered them, among other matters, in its decision to approve the Merger Agreement.
Simeon Salzman joined Gryphon as its Chief Financial Officer on June 19, 2023. Pursuant to his employment agreement with Gryphon, and as described on page 155. Mr. Salzman was granted 390,800 restricted Gryphon Shares. In connection with the Merger, such restricted shares will be automatically converted into an economically equivalent number of Akerna shares, and will otherwise be subject to the same material terms and conditions as before the Merger.
Regulatory Approvals
Akerna and Gryphon must comply with applicable federal and state securities laws and the rules and regulations of Nasdaq in connection with the issuance of shares of Akerna Common Stock to Gryphon’s stockholders in connection with the transactions contemplated by the Merger Agreement and the filing of this proxy statement/prospectus with the SEC. Akerna does not require, and consequently, does not intend to seek, any regulatory approval from antitrust authorities to consummate the transactions.
Material U.S. Federal Income Tax Consequences of the Merger
The following is a discussion of the material U.S. federal income tax consequences of the Merger that are applicable to U.S. Holders (as defined below) who exchange shares of Gryphon stock for shares of Akerna Common Stock in the Merger, assuming that the Merger is consummated in the manner described in the Merger Agreement and in this proxy statement/prospectus. This discussion does not purport to be a complete analysis of all potential tax consequences and is based upon current provisions of the Code, existing Treasury Regulations, judicial decisions and published rulings and administrative pronouncements of the IRS, all in effect as of the date hereof and all of which are subject to differing interpretations or change. Any such change or differing interpretation, which may be retroactive, could alter the tax consequences to Gryphon stockholders that are U.S. Holders as described in this summary.
This discussion does not address all U.S. federal income tax consequences relevant to a Gryphon shareholder that is a U.S. Holder. In addition, it does not address consequences relevant to Gryphon stockholders that are subject to particular U.S. or non-U.S. tax rules, including, without limitation to Gryphon stockholders that are:
• persons who do not hold their Gryphon share capital as a “capital asset” within the meaning of Section 1221 of the Code;
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• brokers, dealers or traders in securities, banks, insurance companies, other financial institutions or mutual funds;
• real estate investment trusts; regulated investment companies; tax-exempt organizations or governmental organizations;
• specified non-U.S. corporations including “controlled foreign corporations,” and “passive foreign investment companies” (each as defined in the Code) or corporations that accumulate earnings to avoid U.S. federal income tax;
• pass-through entities such as partnerships, S corporations, disregarded entities for federal income tax purposes and limited liability companies (and investors therein);
• subject to the alternative minimum tax provisions of the Code;
• persons who hold their shares as part of a hedge, wash sale, synthetic security, conversion transaction or other integrated transaction;
• persons that have a functional currency other than the U.S. dollar;
• traders in securities who elect to apply a mark-to-market method of accounting;
• persons who hold shares of Gryphon share capital that may constitute “qualified small business stock” under Section 1202 of the Code or “Section 1244 stock” for purposes of Section 1244 of the Code;
• persons who acquired their shares of Gryphon share capital in a transaction subject to the gain rollover provisions of Section 1045 of the Code;
• persons subject to special tax accounting rules as a result of any item of gross income with respect to Gryphon share capital being taken into account in an “applicable financial statement” (as defined in the Code);
• persons deemed to sell Gryphon share capital under the constructive sale provisions of the Code;
• persons holding Gryphon share capital who exercise dissenters’ rights;
• persons who acquired their shares of Gryphon share capital or Akerna Common Stock pursuant to the exercise of options or otherwise as compensation or through a tax-qualified retirement plan or through the exercise of a warrant or conversion rights under convertible instruments; and
• certain expatriates or former citizens or long-term residents of the United States.
Gryphon stockholders subject to particular U.S. or non-U.S. tax rules, including those that are described in this paragraph, are urged to consult their own tax advisors regarding the consequences to them of the Merger.
If an entity that is treated as a partnership or other pass-through entity for U.S. federal income tax purposes holds Gryphon share capital, the U.S. federal income tax treatment of a partner in the partnership or other pass-through entity will generally depend upon the status of the partner, the activities of the partnership or other pass-through entity and certain determinations made at the partner level. If you are a partner of a partnership or other pass-through entity holding Gryphon share capital, you should consult your tax advisors regarding the tax consequences of the Merger.
In addition, the following discussion does not address (a) the tax consequences of transactions effectuated before, after or at the same time as the Merger, whether or not they are in connection with the Merger, including, without limitation, transactions in which shares of Gryphon share capital are acquired or disposed of other than in exchange for shares of Akerna Common Stock in the Merger; (b) the tax consequences to holders of Gryphon convertible notes, or options or warrants issued by Gryphon which are assumed in connection with the Merger; (c) the tax consequences of the ownership of shares of Akerna Common Stock following the Merger; (d) any U.S. federal non-income tax consequences of the Merger, including U.S. federal estate, gift or other tax consequences; (e) any state, local or non-U.S. tax consequences of the Merger; (f) alternative minimum tax consequences; or (g) the Medicare contribution tax on net investment income. No ruling from the Internal Revenue Service, or the IRS, has been or will be requested in connection with the Merger. Gryphon stockholders should be aware that the IRS could adopt a position which could be sustained by a court contrary to that set forth in this discussion.
113
U.S. HOLDERS SHOULD CONSULT WITH THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES OF THE MERGER ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.
Definition of “U.S. Holder”
For purposes of this discussion, a “U.S. Holder” is a beneficial owner of Gryphon share capital that is, for U.S. federal income tax purposes:
• an individual who is a citizen or resident of the United States;
• a corporation or any other entity taxable as a corporation created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;
• a trust if either (i) a court within the United States is able to exercise primary supervision over the administration of such trust, and one or more United States persons (within the meaning of Section 7701(a)(30) of the Code) are authorized or have the authority to control all substantial decisions of such trust, or (ii) the trust was in existence on August 20, 1996, and has a valid election in effect under applicable Treasury Regulations to be treated as a United States person for U.S. federal income tax purposes; or
• an estate, the income of which is subject to U.S. federal income tax regardless of its source.
Tax Treatment of Gryphon Stockholders in the Merger
Assuming the Merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code and the Treasury Regulations promulgated thereunder, U.S. Holders generally will not recognize gain or loss upon the exchange of their Gryphon share capital for Akerna Common Stock. Ellenoff Grossman & Schole LLP, counsel to Gryphon, has delivered an opinion to Gryphon that, on the basis of certain factual representations made by Akerna and Gryphon, and subject to certain assumptions set forth therein, the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. This opinion is attached as Exhibit 8.1 to the Registration Statement of which this proxy statement/prospectus forms a part. A U.S. Holder generally will obtain an aggregate tax basis in the Akerna Common Stock such holder receives in the Merger equal to the holder’s aggregate adjusted tax basis in the Gryphon share capital exchanged therefor. The holding period of the shares of Akerna Common Stock received by a U.S. Holder in the Merger will include the holding period of the shares of Gryphon share capital surrendered in exchange therefor. Treasury Regulations provide detailed rules for allocating the tax basis and holding period of the shares of Gryphon share capital surrendered to the shares of Akerna Common Stock received. U.S. Holders of shares of Gryphon share capital acquired on different dates and at different prices should consult their tax advisors regarding the allocation of the tax basis and holding period of such shares.
Reporting Requirements
Assuming the Merger qualifies as a reorganization within the meaning of Section 368(a) of the Code and the Treasury Regulations promulgated thereunder, each U.S. Holder who receives shares of Akerna Common Stock in the Merger is required to retain permanent records pertaining to the Merger, and make such records available to any authorized IRS officers and employees. Such records should specifically include information regarding the amount, basis, and fair market value of the Gryphon share capital exchanged and the amount of Akerna Common Stock and cash received in exchange therefor. U.S. Holders who owned immediately before the Merger at least one percent (by vote or value) of the total outstanding stock of Gryphon are required to attach a statement to their tax returns for the year in which the Merger is consummated that contains the information listed in Treasury Regulations Section 1.368-3(b). Such statement must include the U.S. Holder’s tax basis in such holder’s Gryphon share capital surrendered in the Merger, the fair market value of such stock, the date of the Merger and the name and employer identification number of each of Gryphon and Akerna. U.S. Holders are urged to consult with their tax advisors to comply with these rules.
The foregoing summary is of a general nature only and is not intended to be, and should not be construed to be, legal, business or tax advice to any particular Gryphon shareholder. This summary does not take into account your particular circumstances and does not address consequences that may be particular to you. Therefore, you should consult your tax advisor regarding the particular consequences of the Merger to you.
114
Anticipated Accounting Treatment
The merger will be accounted for as a reverse acquisition in accordance with U.S. GAAP. Under this method of accounting, Gryphon will be deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the expectations that, immediately following the Merger (i) Gryphon’s stockholders are expected to own approximately 92.5% of the voting interests of the combined company immediately following the closing of the Merger; (ii) directors appointed by Gryphon will hold more board seats in the combined company than Akerna; (iii) Gryphon’s management will hold key positions in the management of the combined company; and (iv) the combined company will be named “Gryphon Digital Mining, Inc.” Accordingly, for accounting purposes, the Merger will be treated as the equivalent of Gryphon issuing stock to acquire the net assets of Akerna. As a result of the Merger, the net assets of Akerna will be recorded at their acquisition-date fair value in the financial statements of Gryphon and the reported operating results prior to the Merger will be those of Gryphon. See the section titled “Unaudited Pro Forma Condensed Combined Financial Information” elsewhere in this proxy statement/prospectus for additional information.
Nasdaq Stock Market Listing
Shares of Akerna Common Stock are currently listed on The Nasdaq Capital Market under the symbol “KERN.” Akerna has agreed to use commercially reasonable efforts to cause the shares of Akerna Common Stock being issued in the Merger to be approved for listing (subject to notice of issuance) on The Nasdaq Capital Market at or prior to the effective time.
In addition, under the Merger Agreement, each of Akerna’s and Gryphon’s obligation to complete the Merger is subject to the satisfaction or waiver by each of the parties, at or prior to the Merger, of various conditions, including that the shares of Akerna Common Stock to be issued in the Merger have been approved for listing (subject to official notice of issuance) on Nasdaq as of the closing of the Merger.
If the Nasdaq listing application is accepted, Akerna anticipates that the common stock of the combined company will be listed on The Nasdaq Capital Market following the closing of the Merger under the trading symbol “GYPR.”
In order for the Nasdaq listing application to be accepted the combined company must meet the initial listing standards of the Nasdaq Capital Market. These requirements include among other requirements:
• the combined company must maintain a bid price of $4.00 or higher or a closing price of $2 or $3 or higher (depending on the listing standard utilized) for a certain period following the proposed reverse stock split. As of May , 2023 the bid price of Akerna Common Stock was $ ;
• $15 million in market value of unrestricted publicly held shares;
• either a 2 year operating history and $5 million in stockholders’ equity or $50 million in market value of listed securities and $4 million in stockholders’ equity (depending on the listing standard utilized);
• 1 million in unrestricted publicly held shares, 300 unrestricted round lot shareholders and 3 market makers.
Appraisal Rights and Dissenters’ Rights
Under the DGCL, Akerna stockholders are not entitled to appraisal rights in connection with the Merger.
Under the DGCL, Gryphon stockholders are entitled to appraisal rights in connection with the Merger.
115
The following is a summary of the material terms of the Merger Agreement. A copy of the Merger Agreement and the amendments thereto are attached to this proxy statement/prospectus as Annex A and are incorporated by reference into this proxy statement/prospectus. The Merger Agreement has been attached to this proxy statement/prospectus to provide you with information regarding its terms. It is not intended to provide any other factual information about Akerna, Gryphon or Merger Sub. The following description does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement. You should refer to the full text of the Merger Agreement for details of the Merger and the terms and conditions of the Merger Agreement.
The Merger Agreement contains representations and warranties that Akerna and Merger Sub, on the one hand, and Gryphon, on the other hand, have made to one another as of specific dates. These representations and warranties have been made for the benefit of the other parties to the Merger Agreement and may be intended not as statements of fact but rather as a way of allocating the risk to one of the parties if those statements prove to be incorrect. In addition, the assertions embodied in the representations and warranties are qualified by information in confidential disclosure schedules exchanged by the parties in connection with signing the Merger Agreement. While Akerna and Gryphon do not believe that these disclosure schedules contain information required to be publicly disclosed under the applicable securities laws, other than information that has already been so disclosed, the disclosure schedules do contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the attached Merger Agreement. Accordingly, you should not rely on the representations and warranties as current characterizations of factual information about Akerna or Gryphon, because they were made as of specific dates, may be intended merely as a risk allocation mechanism between Akerna, Merger Sub and Gryphon and are modified by the disclosure schedules.
General
Under the Merger Agreement, Merger Sub, a wholly owned subsidiary of Akerna formed by Akerna in connection with the Merger under the laws of Delaware, will merge with and into Gryphon, with Gryphon surviving as a wholly owned subsidiary of Akerna.
Merger Consideration
At the Effective Time, each Gryphon Share that is issued and outstanding immediately prior to the Effective Time will be converted into the right to receive a number of shares of Akerna Common Stock.
At the Effective Time, by virtue of the Merger and without any action on the part of the Akerna or the Merger Sub, Gryphon or any holder of Gryphon Shares:
• each Gryphon Share that is issued and outstanding immediately prior to the Effective Time shall automatically be converted into and become the right to receive the applicable per share portion of the “merger consideration” with respect to such Gryphon Share as set forth in the allocation statement to be delivered pursuant to the Merger Agreement (“merger consideration” is defined in the Merger Agreement to mean the greater of (A) a number of shares of Akerna Common Stock equal to (a) the quotient obtained by dividing (i) the number of shares of Akerna capital stock issued and outstanding at the Effective Time on a fully diluted basis (giving effect to the exchange of all amounts outstanding under the Akerna Notes and all shares of Series C Preferred Stock for shares of common stock of the combined company pursuant to the terms of the Exchange Agreements and the Akerna Notes) (the “Akerna Fully Diluted Share Number”) by (ii) 0.075, minus (b) the Akerna Fully Diluted Share Number minus (c) the number of shares of Akerna Common Stock the Gryphon Warrants will become exercisable for upon closing of the Merger and (B) a number of shares of Akerna Common Stock equal to the quotient obtained by dividing (a) $115,625,000 by (b) the last reported sale price of Akerna Common Stock on the Nasdaq on the second business day prior to the Effective Time). As of the Effective Time, all such Gryphon Shares shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and each holder shall thereafter cease to have any rights with respect thereto, except the right to receive the consideration set forth in the Merger Agreement;
• each outstanding Gryphon Warrant will be assumed by Akerna and become a warrant to purchase an adjusted number of shares of common stock of Akerna, at an adjusted exercise price per share but subject to the same terms and conditions as the Gryphon Warrant; and
116
• each issued and outstanding share of capital stock of Merger Sub shall be converted into and become one validly issued, fully paid and nonassessable share of common stock, par value $0.0001 per share, of the surviving company of the Merger.
The actual number of shares of Akerna Common Stock issuable as Merger Consideration will depend upon a number of factors including the last sale price on the Nasdaq of Akerna Common Stock on the second trading day prior to the closing the Merger, the amount, if any, that the principal of the Akerna Notes is reduced by being converted or redeemed prior to the closing of the Merger and the conversion price of the Akerna Notes immediately prior to the closing of the Merger.
The estimated exchange ratio of shares of Akerna’s common stock for Gryphon Common Stock and Gryphon Preferred Stock will be approximately 1.6834 shares of Akerna common stock for each one share of Gryphon Common Stock and Preferred Stock based on Merger Consideration of 34,318,117 shares of Akerna Common Stock. The estimated exchange ratio assumes: (i) a fully-diluted number of shares of Akerna common stock after giving effect to an assumed 20 to 1 reverse stock split in Akerna common stock of 2,869,142 shares at the effective time of the Merger, which includes (pre-reverse stock split) 10,352,069 shares outstanding on the date hereof, warrants exercisable to acquire 2,573,299 shares of Akerna common stock, restricted stock units which vest and settle for 9,347 shares of Akerna common stock, 12,476 shares issuable upon redemption of Akerna exchangeable shares, Akerna Series C Preferred Stock exchanged at an assumed price of $0.20 per share into 17,110,000 shares of Akerna common stock, approximately 19,075,660 shares of Akerna common stock issuable upon conversion of $3.15 million principal amount of Akerna’s convertible notes and 8,250,000 shares of Akerna common stock issuable upon conversion of $1.65 million principal amount of Akerna’s promissory note held by MJ Acquisition Corp. (“MJ Acquisition”) at an assumed conversion price of $0.20 per share. The assumed number of shares issuable upon exchange of Akerna’s convertible notes is based on an assumed principal amount outstanding of approximately $3.15 million ($6.58 million currently outstanding less $3.42 million exchanged into Series C Preferred Stock at an exchange price of $0.50 per share) and a conversion price of $0.50 per share (exchanged at 121% of principal amount). The assumed number of shares issuable upon exchange of Series C Preferred Stock is based on an assumed exchange price of $0.20 per share. The estimated exchange ratio also assumes 20,386,730 shares of Gryphon Common Stock and Preferred Stock issued and outstanding at the closing of the Merger, Gryphon warrants to acquire 1,067,968 Gryphon Common Stock and a post-reverse stock split closing price per share of Akerna Common Stock of $4.00 on the date that is two trading days preceding the closing of the Merger, the trading day immediately preceding closing of the Merger and the 5-day volume weighted average price for the 5-day period ending on the trading day immediately prior to the closing of the Sale Transaction.
The following tables show the sensitivity of the Merger Consideration to variables of the market price of Akerna Common Stock and principal amount of Akerna Notes outstanding.
Sensitivity to Market Price of Akerna Common Stock
|
Post Reverse Market Price(1)(2) |
$ |
1.00 |
|
$ |
2.00 |
|
$ |
4.00 |
|
$ |
10.00 |
|
$ |
15.00 |
|
$ |
20.00 |
|
||||||
|
Number of Merger Consideration Shares(2) |
|
116,524,070 |
|
|
61,720,101 |
|
|
34,318,117 |
|
|
17,876,927 |
|
|
17,794,452 |
|
|
18,987,876 |
|
||||||
|
Percentage Ownership of Current Akerna Equityholders on a Fully Diluted Basis after Merger(3) |
|
7.5 |
% |
|
7.5 |
% |
|
7.5 |
% |
|
7.5 |
% |
|
7.5 |
% |
|
7.5 |
% |
____________
(1) The actual Merger Consideration will depend on the last sales price of Akerna Common Stock on the Nasdaq of the second trading day before closing the Merger and, if lower than the then effective Conversion Price for the Akerna Notes, the lowest VWAP during the 5 trading day period ending on the trading day immediately prior to the closing of the Merger. The table assumes $4.52 in aggregate principal amount of Akerna Notes outstanding and a conversion price of $10 per share, being the current conversion rate of $0.50 per share adjusted for the assumed Akerna Reverse Stock Split of 20 for 1. The table also assumes that the lowest VWAP in the 5 trading day period ending on the trading day immediately prior to the closing of the Merger is the same as the Market Price.
(2) Assumes the Akerna Reverse Stock Split is implemented on 20 for 1 ratio. Post Reverse Split Prices in the table relate a Pre Reverse Split Market Price of $0.05, $0.10, $0.20, $0.50, $0.75 and $1.00, respectively.
(3) Includes fully diluted Akerna Equityholders assuming exercise, conversion or exchange of all outstanding securities of Akerna, including the Akerna Notes.
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Sensitivity to Principal Amount of Akerna Notes
|
Amount of Note |
$ |
3.15 million |
|
$ |
2 million |
|
$ |
1 million |
|
|||
|
Number of Merger Consideration Shares(1) |
|
34,318,117 |
|
|
30,016,466 |
|
|
26,285,633 |
|
|||
|
Percentage Ownership of Current Akerna Equityholders on a Fully Diluted Basis after Merger(3) |
|
7.5 |
% |
|
7.5 |
% |
|
7.5 |
% |
____________
(1) The table assumes a conversion price of $4.00 per share, being the current conversion rate of $0.50 per share adjusted for the assumed Akerna Reverse Stock Split of 20 for 1. The table also assumes that the lowest VWAP in the 5 trading day period ending on the trading day immediately prior to the closing of the Merger is the same as the Market Price.
(2) Assumes the Akerna Reverse Stock Split is implemented on 20 for 1 ratio.
(3) Includes fully diluted Akerna Equityholders assuming exercise, conversion or exchange of all outstanding securities of Akerna, including the Akerna Notes.
No fraction of a share of Akerna Common Stock will be issued by virtue of the Merger Agreement or the transactions contemplated hereby, and each person who would otherwise be entitled to a fraction of a share of Akerna Common Stock (after aggregating all shares of Akerna Common Stock to which such person otherwise would be entitled) shall instead have the number of shares of Akerna Common Stock issued to such person rounded down to the nearest whole share of Akerna Common Stock.
The Merger Agreement provides that, at the effective time of the Merger, Akerna will deposit, or cause to be deposited, with an exchange agent (the “Exchange Agent”) as mutually agreed by Akerna and Gryphon, evidence of shares of Akerna Common Stock (which may include direct registration advice slips and/or certificates representing such shares of Akerna Common Stock, at Akerna’s election) representing the number of shares of Akerna Common Stock sufficient to deliver the Merger Consideration.
The Merger Agreement provides that at least three business days prior to the closing date of the Merger, Akerna or the Exchange Agent will mail or otherwise deliver to each holder of Gryphon Shares a letter of transmittal and instructions for surrendering and exchanging the record holder’s Gryphon Shares. No holder of Gryphon Shares will be entitled to receive any portion of the Merger Consideration unless such holder has delivered a properly completed and executed letter of transmittal (including any required certifications) to the Exchange Agent. With respect to any holder of Gryphon Shares that delivers a properly completed and executed letter of transmittal (including any required certifications) to the Exchange Agent at or prior to the Effective Time, Akerna will instruct the Exchange Agent to issue such holder the portion of the Merger consideration to which such holder is entitled pursuant to the terms of the Merger Agreement at or promptly after the closing of the Merger. With respect to any holder of Gryphon Shares that delivers a properly completed and executed letter of transmittal to the Exchange Agent after the Effective Time, Akerna will instruct the Exchange Agent to issue such holder the portion of the Merger consideration to which such holder is entitled pursuant to the terms of the Merger Agreement promptly following the Exchange Agent’s receipt of such documents. From and after the Effective Time, there shall be no further registration of transfers of Gryphon Shares on the transfer books of the surviving company.
From and after the effective time of the Merger, until it is surrendered, each certificate representing the Gryphon Shares will be deemed to represent only the right to receive shares of Akerna Common Stock. Akerna will not pay dividends or other distributions on any shares of Akerna Common Stock to be issued in exchange for any unsurrendered certificates representing the Gryphon Shares until such certificate is surrendered as provided in the Merger Agreement.
Treatment of Akerna Equity Securities
Each share of Akerna Common Stock, each share of Akerna Common Stock reserved for issuance upon the exercise of each warrant to purchase Akerna Common Stock, that is issued and outstanding at the Effective Time will remain issued and outstanding, and such securities will be unaffected by the Merger.
As of January 4, 2024, the last practicable date before the filing of this proxy statement/prospectus, there were 6,251 Akerna RSUs outstanding.
As of January 4, 2024, the last practicable date before filing of this proxy statement/prospectus, there were warrants exercisable to acquire 2,573,299 shares of Akerna Common Stock.
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Upon completion of the Merger, each then-outstanding Akerna RSU and share of Akerna Restricted Stock will become fully vested and will settle.
The table below shows the unvested Akerna RSUs and shares of Akerna Restricted Stock for each of the named executive officers as of the date hereof.
|
Name |
Restricted |
Weighted |
|||
|
Jessica Billingsley |
750 |
$ |
91.71 |
||
|
Ray Thompson |
625 |
$ |
91.71 |
||
|
David McCullough |
750 |
$ |
90.32 |
||
|
Dean Ditto |
— |
|
— |
||
Directors and Officers of the Combined Company Following the Merger
Pursuant to the Merger Agreement, all of the directors and executive officers of Akerna will resign at or prior to the Effective Time. Prior to the Effective Time but to be effective immediately following the closing of the Merger, the Akerna Board will elect four designees selected by Gryphon and one designee selected by Akerna to serve as members of the board of directors of the combined company effective upon consummation of the Merger. The composition of the board of directors of the combined company following the Effective Time in the aggregate is expected to satisfy the requisite independence requirements, as well as the sophistication and independence requirements for the required committees, pursuant to Nasdaq listing requirements. It is anticipated that after the Effective Time, the board of directors of the combined company will be the following:
|
• Robby Chang |
Gryphon Chief Executive Officer, President and Director |
|
|
• Brittany Kaiser |
Gryphon Chair of the Board |
|
|
• Steve Gutterman |
Gryphon Director |
|
|
• Heather Cox |
Gryphon Director |
|
|
• Jessica Billingsley |
Akerna Chief Executive Officer and Chair of the Board |
It is anticipated that the executive officers of Akerna upon the consummation of the Merger will be:
|
Name |
Title |
|
|
Robby Chang |
Chief Executive Officer and President |
|
|
Simeon Salzman |
Chief Financial Officer |
Amendments to Certificate of Incorporation of Akerna
Stockholders of record of Akerna Common Stock and Akerna voting preferred stock on the record date for the special meeting will also be asked to approve amendments to the certificate of incorporation of Akerna to effect (i) the Akerna Authorized Share Increase, (ii) the Akerna Name Change and (iii) the Akerna Reverse Stock Split. The consummation of the Merger is conditioned upon the approval of these matters at the special meeting.
Conditions to the Completion of the Merger
To consummate the Merger, Akerna stockholders must approve the Merger Proposal, the Sale Transaction Proposal, the Akerna Reverse Stock Split, the Akerna Name Change, the Akerna Authorized Share Increase and the 2024 Plan. Additionally, the Gryphon stockholders must approve the Merger and adopt the Merger Agreement and the related transactions. In addition to obtaining such securityholder approvals and appropriate regulatory approvals, each of the other closing conditions set forth in the Merger Agreement must be satisfied or waived, including, among other things:
• no order or law issued by any court of competent jurisdiction or other governmental entity or other legal restraint or prohibition preventing or making illegal the consummation of the Merger or the Sale Transaction shall be in effect;
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• the Registration Statement on Form S-4, of which this proxy statement/prospectus is a part, must have become effective in accordance with the provisions of the Securities Act of 1933, as amended, and must not be subject to any stop order or proceeding, or any proceeding threatened by the SEC, seeking a stop order with respect to the registration statement that has not been withdrawn;
• each of Akerna and Gryphon must have performed or complied in all material respects with all covenants and obligations in the Merger Agreement required to be performed or complied with by it on or before the consummation of the Merger;
• all conditions for the closing of the Sale Transaction shall have been performed or waived in accordance with the Purchase Agreement and the Sale Transaction shall be ready to be consummated immediately following to the consummation of the Merger; and
• Nasdaq shall have approved the continued listing of the Akerna Common Stock (including the shares of Akerna Common Stock comprising the Merger Consideration pursuant to the Merger Agreement) on Nasdaq following the consummation of the Merger and the other transactions contemplated therein.
The obligation of Gryphon to close the Merger is also subject to satisfaction of certain additional conditions, including, among other things, (i) the accuracy of Akerna’s representations and warranties in the Merger Agreement and compliance by Akerna with its covenants and agreements in the Merger Agreement; (ii) no Akerna material adverse effect; (iii) compliance with the Merger Support Agreement and Lender Support Letters by certain Akerna stockholders and holders of Akerna Notes; (iv) continued listing of the Akerna Common Stock on The Nasdaq Capital Market through the Effective Time; (v) compliance by Akerna with the Purchase Agreement; (vi) compliance with the Exchange Agreements by the holders of Akerna Notes and Akerna, termination of all agreements relating to the Akerna Notes and the release of all related encumbrances; (vii) all redemptions of Akerna preferred stock (other than the Series C Preferred Stock) being completed; (viii) the winding down of Akerna’s legacy business; (ix) completion of the Akerna Reverse Stock Split; (x) Akerna having $500,000 in cash on hand; (xi) satisfaction of all conditions precedent to the exchange of all amounts outstanding under the Akerna Notes and all shares of Series C Preferred Stock for common stock of the combined company immediately following the completion of the Merger, pursuant to the Exchange Agreements; and (xii) the Registration Statement contemplated by that certain Registration Rights Agreement, dated as of June 12, 2023, by and between Akerna and MJ Bridge Co., Inc., shall have been declared effective under the Securities Act by the SEC.
The obligation of Akerna to close the Merger is also subject to satisfaction of certain additional conditions, including, among other things, (i) the accuracy of Gryphon’s representations and warranties in the Merger Agreement and compliance by Gryphon with its covenants and agreements in the Merger Agreement; (ii) no Gryphon material adverse effect; and (iii) compliance with the support agreements by certain Gryphon stockholders.
The Merger Agreement provides that the following, alone or in combination, shall not be taken into account in determining whether a material adverse effect has occurred or would reasonably be expected to occur to Akerna or Gryphon, as applicable:
• any change in applicable laws (including any quarantine, “shelter in place,” “stay at home,” workforce reduction, social distancing, shut down, closure, sequester or any other law, directive, guidelines or recommendations by any governmental entity in each case in connection with or in response to COVID-19, including the Coronavirus Aid, Relief, and Economic Security Act) or United States generally accepted accounting principles or any official interpretation thereof after the date of the Merger Agreement;
• changes in conditions of the financial, banking, capital or securities markets generally in the United States or any other country or region in the world, or changes therein, including changes in interest rates in the United States or any other country and changes in exchange rates for the currencies of any countries, or any change generally affecting the economy or the industry in which the party operates;
• the announcement or the execution of the Merger Agreement, the pendency or consummation of the Merger or the performance of the Merger Agreement, the ancillary documents thereto and the Transactions, including the impact thereof on the relationships, contractual or otherwise, of any such party, with customers, suppliers, licensors, distributors, partners, providers and employees;
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• the compliance with the express terms of the Merger Agreement, the ancillary documents thereto and the Transactions or the taking of any action expressly required by the Merger Agreement, the ancillary documents thereto and the Transaction;
• any strike, embargo, labor disturbance, riot, protests, cyberterrorism event, earthquake, hurricane, tsunami, tornado, flood, mudslide, wild fire, meteorological event or other natural disaster, act of God or other force majeure event or any epidemic, disease, outbreak or pandemic (including COVID-19);
• any national or international political or social conditions in countries in which, or in the proximate geographic region of which, any such party operates, including the engagement by the United States or such other countries in hostilities or the escalation thereof, whether or not pursuant to the declaration of a national emergency or war, or the occurrence or the escalation of any military or terrorist attack upon the United States or such other country, or any territories, possessions, or diplomatic or consular offices of the United States or such other countries or upon any United States or such other country military installation, equipment or personnel; and
• any failure of such party, taken as a whole, to meet any projections, forecasts or budgets (although the underlying facts and circumstances resulting in such failure may be taken into account to the extent not otherwise excluded).
provided, that any effect referred to in the first, second, fifth and sixth bullets above may be taken into account in determining whether there has been, or would reasonably be expected to be, a material adverse effect to Gryphon or Akerna to the extent such effect has a disproportionate effect on Gryphon and its subsidiaries, or Akerna and its subsidiaries, as applicable, taken as a whole, as compared to other industry participants in the industries or markets in which they operate.
Representations and Warranties
The Merger Agreement contains customary, reciprocal (other than to the extent inapplicable to Akerna, Merger Sub or Gryphon) representations and warranties of Akerna, Merger Sub and Gryphon for a transaction of this type relating to, among other things:
• subsidiaries;
• organization and qualification;
• authority
• capital stock;
• Akerna SEC reports; financial statements; undisclosed liabilities
• the absence of changes;
• litigation;
• compliance with applicable law;
• environmental matters
• intellectual property;
• data privacy and security;
• compliance with international trade and anti-corruption laws;
• employee benefit plans;
• labor matters;
• insurance;
• tax matters;
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• Paycheck Protection Program Loan;
• real and personal property;
• transaction with affiliates;
• customers and suppliers;
• certain information;
• investigation, no other representations;
• any brokerage or finder’s fee or other fee or commission payable in connection with the Merger;
• Merger Sub activities; and
• Sale Transaction and wind down transactions.
The representations and warranties are, in many respects, qualified by materiality and knowledge, and will not survive the Merger, but their accuracy forms the basis of one of the conditions to the obligations of Akerna and Gryphon to complete the Merger.
No Solicitation
Pursuant to the terms of the Merger Agreement, Akerna has agreed that it shall not, and shall not permit or authorize any of its subsidiaries or any of its representatives or their subsidiaries, directly or indirectly, to (i) solicit, initiate, endorse, knowingly encourage or facilitate any inquiry, proposal or offer with respect to, or the making or completion of, any Acquisition Proposal (as defined below), or any inquiry, proposal or offer that is reasonably likely to lead to any Acquisition Proposal, (ii) enter into, continue or otherwise participate in any discussions or negotiations regarding, or furnish to any person any information or data with respect to, or otherwise cooperate in any way with, any Acquisition Proposal or (iii) resolve, agree or propose to do any of the foregoing; provided, that Akerna may (x) advise any person of the restrictions of the Merger Agreement; and (y) advise any person making an Acquisition Proposal that the Akerna Board has determined that such Acquisition Proposal does not constitute a Superior Proposal (as defined below), in each case, if, in so doing, no other information that is prohibited from being communicated under the Merger Agreement is communicated to such person. Akerna shall, and shall cause each of its subsidiaries and the representatives of Akerna and its subsidiaries to, (A) immediately cease and cause to be terminated all existing discussions and negotiations with any person conducted heretofore with respect to any Acquisition Proposal or potential Acquisition Proposal and immediately terminate all physical and electronic data room access previously granted to any such person, (B) request the prompt return or destruction of all confidential information previously furnished with respect to any Acquisition Proposal or potential Acquisition Proposal, and (C) not terminate, waive, amend, release or modify any provision of any confidentiality or standstill agreement to which it or any of its affiliates or representatives is a party with respect to any Acquisition Proposal or potential Acquisition Proposal, and shall enforce the provisions of any such agreement, which shall include seeking any injunctive relief available to enforce such agreement (provided, that Akerna shall be permitted to grant waivers of, and not enforce, any standstill agreement, but solely to the extent that the Akerna Board has determined in good faith, after consultation with its outside counsel, that failure to take such action (1) would prohibit the counterparty from making an unsolicited Acquisition Proposal to the Akerna Board in compliance with the Merger Agreement, and (2) would constitute a breach of its fiduciary duties to the stockholders of Akerna under applicable laws).
Notwithstanding the foregoing, if at any time following the date of the Merger Agreement and prior to obtaining the approval of stockholders of Akerna, (w) Akerna receives a written Acquisition Proposal that the Akerna Board believes in good faith to be bona fide, (x) such Acquisition Proposal was unsolicited and did not otherwise result from a breach of the Merger Agreement (other than de minimis breaches), (3) the Akerna Board determines in good faith (after consultation with outside counsel and its financial advisor) that such Acquisition Proposal constitutes or is reasonably likely to constitute or lead to a Superior Proposal, and (4) the Akerna Board determines in good faith (after consultation with outside counsel) that the failure to take the actions referred to in clause (I) and/or (II) below would constitute a breach of its fiduciary duties to the stockholders under applicable laws, then Akerna may (I) furnish information with respect to Akerna and its subsidiaries to the person making such Acquisition Proposal pursuant to a customary confidentiality agreement containing terms substantially similar to, and no less favorable to Akerna
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than, those set forth in that certain Confidentiality Agreement, dated as of August 17, 2022, between Gryphon and Akerna (including any standstill agreement contained therein); provided, that (x) Akerna shall provide Gryphon a non-redacted copy of each confidentiality agreement Akerna has execute and (y) any non-public information provided to any such person shall have been previously provided to Gryphon or shall be provided to Gryphon prior to or concurrently with the time it is provided to such person, and (II) participate in discussions or negotiations with the person making such Acquisition Proposal regarding such Acquisition Proposal. Akerna shall not provide (and shall not permit any of its subsidiaries or any of their respective representatives to provide) any commercially or competitively sensitive non-public information, except in accordance with “clean room” or other similar procedures designed to limit any adverse effect of the sharing of such information on Akerna, which procedures shall be consistent in all material respects with Akerna’s practices in dealing with the disclosures of such information to Gryphon or its representatives.
Neither the Akerna Board nor any committee thereof, shall: (i) (A) withdraw (or modify or qualify in any manner adverse to Gryphon) the recommendation or declaration of advisability by the Akerna Board or any such committee of the Merger Agreement, the Merger or any of the other Transactions, (B) recommend or otherwise declare advisable the approval by the Akerna stockholders of any Acquisition Proposal, or (C) resolve, agree or propose to take any such actions (an “Adverse Recommendation Change”); or (ii) cause or permit the any Akerna group member to enter into any letter of intent, memorandum of understanding, agreement in principle, acquisition agreement, merger agreement, option agreement, joint venture agreement, partnership agreement or other contract, except for an acceptable confidentiality agreement per the terms set forth above in each case constituting or related to, or which is intended to or is reasonably likely to lead to, any Acquisition Proposal, or resolve, agree or propose to take any such actions.
Notwithstanding the foregoing, at any time prior to obtaining the approval of Akerna stockholders, the Akerna Board may, if the Akerna Board determines in good faith (after consultation with outside counsel) that the failure to do so would result in a breach of its fiduciary duties to the Akerna stockholders under applicable law, taking into account all adjustments to the terms of the Merger Agreement that may be offered by Gryphon make an Adverse Recommendation Change in response to a Superior Proposal, or (y) solely in response to a Superior Proposal received after the date of the Merger Agreement that was unsolicited and did not otherwise result from a breach of the Merger Agreement, cause Akerna to terminate the Merger Agreement and concurrently enter into a binding alternative agreement with respect to such Superior Proposal; provided, however, that Akerna may not make an Adverse Recommendation Change in response to a Superior Proposal or terminate the Merger Agreement unless:
(A) Akerna notifies Gryphon in writing at least five business days before taking that action of its intention to do so, and specifies the reasons therefor, including the terms and conditions of, and the identity of the person making, such Superior Proposal, and contemporaneously furnishes a copy (if any) of the proposed alternative agreement and any other relevant transaction documents (it being understood and agreed that any material amendment to the financial terms or any other term of such Superior Proposal shall require a new written notice by Acquiror and a new five Business Day period); and
(B) if Gryphon makes a proposal during such five business day period to adjust the terms and conditions of the Merger Agreement, the Akerna Board, after taking into consideration the adjusted terms and conditions of the Merger Agreement as proposed by Gryphon, continues to determine in good faith (after consultation with outside counsel and its financial advisor) that such Superior Proposal continues to be a Superior Proposal and that the failure to make an Adverse Recommendation Change or terminate the Merger Agreement, as applicable, would result in a breach of its fiduciary duties to the Akerna stockholders under applicable law;
During the five business day period prior to its effecting an Adverse Recommendation Change or terminating the Merger Agreement as referred to above, Akerna shall, and shall cause its financial and legal advisors to, negotiate with Gryphon in good faith (to the extent Gryphon seeks to negotiate) regarding any revisions to the terms of the transactions contemplated by the Merger Agreement proposed by Gryphon. If the Akerna Board determines that an Acquisition Proposal would cease to be a Superior Proposal following the revisions to the Merger Agreement proposed by Gryphon, Akerna shall promptly so advise Gryphon and Akerna and Gryphon will amend the Merger Agreement to reflect such offer made by Gryphon.
An “Acquisition Proposal” means, other than the transactions contemplated by the Merger Agreement and the ancillary documents described therein and the Sale Transaction, any proposal or offer with respect to any direct or indirect acquisition or purchase or license, in one transaction or a series of transactions, and whether through any merger, reorganization, consolidation, tender offer, self-tender, exchange offer, stock acquisition, asset acquisition, binding
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share exchange, business combination, recapitalization, liquidation, dissolution, joint venture, licensing or similar transaction, or otherwise, of (a) assets or businesses of Akerna or its subsidiaries that generate 10% or more of the net revenues or net income (for the 12-month period ending on the last day of Akerna’s or its subsidiaries’ most recently completed fiscal quarter) or that represent 10% or more of the total assets (based on fair market value) of Akerna or its subsidiaries immediately prior to such transaction, or (b) 5% or more of any class of capital stock, other equity securities or voting power of Akerna, any of its subsidiaries or any resulting parent company of Akerna, in each case other than the Merger and the Sale Transaction.
A “Superior Proposal” means any unsolicited bona fide binding written Acquisition Proposal that is fully financed or has fully committed financing that the Akerna Board determines in good faith (after consultation with outside counsel and its financial advisor), taking into account all legal, financial, regulatory and other aspects of the proposal and the person making the proposal, is (a) more favorable to the stockholders of Akerna from a financial point of view than the Transactions (including any adjustment to the terms and conditions proposed by Gryphon in response to such proposal) and (b) reasonably likely of being completed on the terms proposed on a timely basis; provided, that, for purposes of this definition of “Superior Proposal,” references in the term “Acquisition Proposal” to “5%” or “10%” shall be deemed to be references to “all or substantially all”.
Preparation of Proxy Statement and Meeting of Akerna Stockholders
As promptly as practicable after the date of the Merger Agreement (and in any event within twenty-eight (28) calendar days thereafter), Akerna has agreed to (i) prepare (with Gryphon’s reasonable cooperation) and file with the SEC (A) a proxy statement (as amended or supplemented from time to time, the “Proxy Statement”) to be sent to the Akerna stockholders relating to the special meeting of the Akerna stockholders to be held to consider the stockholder approval matters set forth in the Merger Agreement and (B) a registration statement on Form S-4 (as amended or supplemented from time to time, the “Form S-4”), in which the Proxy Statement will be included as a prospectus, in connection with the registration under the Securities Act of the Akerna Common Stock comprising the Merger Consideration, and (ii) in consultation with Gryphon, set a preliminary record date for the Akerna special meeting and commence a broker search pursuant to Section 14a-13 of the Exchange Act in connection therewith.
Akerna has agreed to use its reasonable best efforts (1) to have the Form S-4 declared effective under the Securities Act as promptly as practicable after such filing and to keep the Form S-4 effective as long as is necessary to consummate the Merger and the other Transactions and (2) to cause the Proxy Statement to be mailed to the Akerna stockholders as promptly as practicable after the Form S-4 is declared effective under the Securities Act.
Akerna has also agreed to take any action (other than qualifying to do business in any jurisdiction in which it is not now so qualified or filing a general consent to service of process) required to be taken under any applicable state securities or “blue sky” laws in connection with the issuance of shares of Akerna Common Stock in the Merger and Gryphon shall furnish all information concerning Gryphon and the holders of Gryphon shares as may be reasonably requested in connection with any such action.
No filing of, or amendment or supplement to, the Form S-4 or the Proxy Statement will be made by Akerna without providing Gryphon a reasonable opportunity to review and comment thereon and without Gryphon’s prior approval (which shall not be unreasonably withheld). Akerna has agreed to advise Gryphon promptly after it receives oral or written notice thereof, of the time when the Form S-4 has become effective or any amendment or supplement thereto has been filed, the issuance of any stop order, the suspension of the qualification of the Akerna Common Stock issuable in connection with the Merger for offering or sale in any jurisdiction or any oral or written request by the SEC for amendment of the Proxy Statement or the Form S-4 or comments thereon and responses thereto or requests by the SEC for additional information, and will promptly provide Gryphon with copies of any written communication from the SEC or any state securities commission and a reasonable opportunity to participate in the responses thereto. Acquiror shall (i) provide Gryphon with reasonable prior notice of any scheduled telephone calls between Acquiror or its Representatives and the SEC, and (ii) use its reasonable best efforts to allow Gryphon or its representatives to participate in all such telephone call.
As promptly as practicable (and in any event within ten (10) calendar days) after the Form S-4 is declared effective under the Securities Act, Akerna has agreed to duly call, give notice of the special meeting of Akerna stockholders solely for the purpose of obtaining the required stockholder approvals. The special meeting shall be held as promptly after the date of such notice as permitted under applicable law, the listing rules of the Nasdaq and Akerna’s governing documents. Akerna may postpone or adjourn the special meeting solely: (i) with the prior written consent of Gryphon;
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(ii) (A) due to the absence of a quorum or (B) if Akerna has not received proxies representing a sufficient number of shares of to constitute obtain stockholder approval of the matters at the special meeting, whether or not a quorum is present, to solicit additional proxies; (iii) to allow reasonable additional time for the filing and mailing of any supplemental or amended disclosure which the Akerna Board has determined in good faith after consultation with outside legal counsel is necessary under applicable law and for such supplemental or amended disclosure to be disseminated and reviewed by the Akerna stockholders prior to the special meeting or (iv) that Akerna may not postpone or adjourn the special meeting more than a total of two (2) times pursuant to clause (ii)(A) and/or clause (ii)(B).
Notwithstanding the foregoing, Akerna shall, at the request of the Company, to the extent permitted by applicable law, adjourn the special meeting to a date specified by Gryphon for the absence of a quorum or if Akerna has not received proxies representing a sufficient number of shares of Akerna capital stock to obtain the necessary stockholder approvals; provided, that Akerna shall not be required to adjourn the special meeting more than one (1) time, and no such adjournment shall be required to be for a period exceeding 10 business days.
Except in the case of an Adverse Recommendation Change, Akerna, through the Akerna Board, has agreed to (I) recommend to Akerna stockholders that they adopt the Merger Agreement and the ancillary documents and approve of the matters before the special meeting, (II) include the Akerna Board’s recommendation in the Proxy Statement and (III) publicly reaffirm the Akerna Board’s recommendation within twenty-four (24) hours after a request to do so by Gryphon. Akerna has agreed that (x) except in the event of an Adverse Recommendation Change, Akerna shall use commercially reasonable efforts to solicit proxies to obtain the necessary stockholder approvals.
Covenants; Conduct of Business Pending the Merger
Each of Akerna and Gryphon has agreed that during the period from the date of the Merger Agreement to the earlier of the termination of the Merger Agreement in accordance with its terms and the Effective Time (the “Interim Period”), it will, and cause each of its respective subsidiaries to, (A) operate its business in the ordinary course consistent with past practice, and (B) use commercially reasonable efforts to maintain and preserve intact its business organization, assets, properties and material business relations, as applicable, and keep available the services of its respective directors, managers, officers, key employees and contractors.
Akerna and Gryphon have also agreed that, during the Interim Period and subject to certain limited exceptions as expressly contemplated or permitted by the Merger Agreement, they will not do any of the following:
• declare, set aside, make or pay a dividend on, or make any other distribution or payment in respect of any shares of capital stock; other than dividends or distributions to their respective parent entities and subsidiaries, as applicable;
• solely with respect to the Akerna and its subsidiaries, directly or indirectly acquire, whether by merging or consolidating with, by purchasing a substantial portion of the assets of, by purchasing any equity securities of, or by any other manner, any business or any corporation, partnership, limited liability company, joint venture, association or other entity or person or division thereof;
• adopt any amendments, supplements, restatements or modifications to their respective governing documents, other than as required to effect the transactions contemplated by the Merger Agreement;
• issue, deliver, sell, transfer, grant, pledge or otherwise directly or indirectly dispose of, or place any lien (other than the permitted liens as described in the Merger Agreement) on, any (A) equity securities of any of Gryphon, Akerna or their subsidiaries, as applicable, or (B) options, warrants or other rights to purchase or obtain any equity securities of any of Gryphon, Akerna or their subsidiaries, as applicable, in each case after the applicable freeze dates as described in the Merger Agreement;
• sell, assign, transfer, convey, lease, license, abandon or otherwise dispose of, any material assets, rights or properties (including intellectual property rights), other than as contemplated by the agreements relating to the Sale Transaction;
• solely with respect to Akerna and its subsidiaries, (1) incur, create or assume any indebtedness, (2) modify, in any material respect, the terms of any indebtedness or (3) assume, guarantee or endorse, or otherwise become responsible for, the obligations of any person for indebtedness and (B) solely with respect to Gryphon and its subsidiaries (1) incur, create or assume indebtedness not in the ordinary course of business in excess of $10,000,000 in the aggregate or (2) assume, guarantee or endorse, or otherwise
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become responsible for, the obligations of any person for indebtedness in excess of $10,000,000 in the aggregate; provided, that the foregoing limitations shall not restrict any of Gryphon or its subsidiaries from assuming, guaranteeing or endorsing any indebtedness in connection with any strategic acquisition of assets or equity securities;
• fail to maintain in full force and effect insurance policies covering Gryphon, Akerna or their subsidiaries, as applicable, and their respective properties, assets and businesses in a form and amount consistent with the policies in effect as of the date of the Merger Agreement;
• solely with respect to Akerna and its subsidiaries, enter into any contract that, if in existence as of the date of the Merger Agreement, would be a sale transaction agreement or a material contract, or amend, modify, waive any material benefit or right under or terminate any sale transaction agreement or material contract (excluding, for the avoidance of doubt, any expiration or automatic extension or renewal of any material contract pursuant to its terms);
• make any loans, advances or capital contributions to, or guarantees for the benefit of, or any investments in, any person, other than the reimbursement of business expenses of employees in the ordinary course of business; provided, that the foregoing limitation shall not restrict Gryphon or its subsidiaries from making any guarantee for the benefit of, or investment in, any person in connection with any strategic acquisition of assets or equity securities;
• solely with respect to Akerna and its subsidiaries or as contemplated in connection with adoption of the 2024 Plan, (A) amend, modify, adopt, enter into or terminate any employee benefit plan of Akerna, or any material benefit or compensation plan, policy, program or contract that would be an employee benefit plan of Akerna, as applicable, if in effect as of the date of the Merger Agreement, other than for renewals in the ordinary course of business; (B) increase the compensation payable to any individual contractor, manager, director, officer or employee of Akerna or its subsidiaries, as applicable; (C) take any action to accelerate any payment, right to payment, or benefit, or the funding of any payment, right to payment or benefit, payable or to become payable to any individual contractor, manager, director, officer or employee of Akerna or its subsidiaries, as applicable; (D) grant any additional rights to severance, termination, change in control, retention or similar compensation to any individual contractor, manager, director, officer or employee of Akerna or its subsidiaries; (E) hire or engage any employee or independent contractor, or any other individual who is providing or will provide services to Akerna or its subsidiaries; or (F) grant any compensatory arrangement or award that may settle in shares of capital stock of Akerna.
• waive or release any noncompetition, non-solicitation, nondisclosure, noninterference, nondisparagement, or other restrictive covenant obligation of any manager, employee, contractor, director or officer of Gryphon, Akerna or any of their subsidiaries, as applicable;
• except as contemplated in the agreements relating to the Sale Transaction or by the Merger Agreement, implement or announce any employee layoffs, plant closings, furloughs, reductions in force, reductions in compensation, salaries, wages, hours or benefits, work schedule changes or such similar actions that could implicate the Worker Adjustment Retraining and Notification Act of 1988, as well as analogous applicable foreign, state or local laws;
• (A) negotiate, modify, extend, or enter into any collective bargaining agreement or (B) recognize or certify any labor union, labor organization, works council, or group of employees as the bargaining representative for any employee of Gryphon, Akerna or their subsidiaries, as applicable;
• make or change any entity classification or other material tax election or adopt or change any material tax accounting method in a manner inconsistent with past practice, file any material tax return in a manner inconsistent with past practices or amend any material tax return or file a claim for material tax refunds, enter into any agreement with a governmental entity with respect to a material amount of taxes, settle or compromise any claim or assessment by a governmental entity in respect of any material amount of taxes, surrender any right to claim a tax refund, offset or other reduction in tax liability or consent to any extension or waiver of the statutory period of limitation applicable to any claim, audit or assessment in respect of a material amount of income taxes, or enter into any tax sharing or similar agreement other than in the ordinary course of business;
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• (A) cancel or compromise any claim or indebtedness owed to Gryphon, Akerna or any of their subsidiaries, as applicable, or (B) solely with respect to Akerna and its subsidiaries, settle any pending or threatened proceeding, (1) if such settlement would require payment by Akerna or its subsidiaries, as applicable, in an amount greater than $100,000, in the aggregate, (2) to the extent such settlement involves a governmental entity or alleged criminal wrongdoing, or (3) if such settlement will impose any material, non-monetary obligations on any Gryphon, Akerna or any of their subsidiaries, or any of their respective affiliates after the closing of the Merger;
• authorize, recommend, propose or announce an intention to adopt, or otherwise effect, a plan of complete or partial liquidation, dissolution, restructuring, recapitalization, reorganization or similar transaction, other than as required to effect the transactions contemplated by the Merger Agreement;
• solely with respect to Akerna and its subsidiaries, redeem, purchase, repurchase or otherwise acquire, or offer to redeem, purchase, repurchase or acquire, any equity securities, other than as required to effect the transactions contemplated by the Merger Agreement;
• adjust, split, combine, subdivide, recapitalize, reclassify or otherwise effect any change in respect of any equity securities, other than as required to effect the transactions contemplated by the Merger Agreement;
• solely with respect to Akerna and its subsidiaries, make any capital expenditures;
• enter into any contract with any broker, finder, investment banker or other person under which such person is or will be entitled to any brokerage fee, finders’ fee or other commission in connection with the Transactions;
• solely with respect to Akerna and its subsidiaries, (A) modify, extend or amend any of its real property lease (excluding, for the avoidance of doubt, any expiration or automatic extension or renewal of any such real property lease pursuant to its terms) or (B) enter into any new real property lease or other contract for the use or occupancy of any real property;
• solely with respect to the Akerna and its subsidiaries, conduct their cash management practices other than in the ordinary course of business (including with respect to the payment of accounts payable and accrued expenses, pricing of goods and services and credit practices and operation of cash management practices generally);
• change Gryphon’s or Akerna’s, as applicable, methods of accounting in any material respect, other than as may be required by GAAP; or
• enter into any contract to take, or cause to be taken, any of the foregoing actions.
Other Agreements
Each of Akerna and Gryphon has agreed to use its commercially reasonable efforts to:
• use commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things reasonably necessary or advisable to consummate and make effective as promptly as reasonably practicable the Transactions (including the satisfaction, but not waiver, of the closing conditions) and, in the case of any ancillary document to which such party will be a party after the date of the Merger Agreement;
• to execute and deliver such ancillary document when required pursuant to the Merger Agreement;
• use commercially reasonable efforts to obtain, file with or deliver to, as applicable, any consents of any governmental entities necessary, proper or advisable to consummate the Transactions, including preparing and submitting any required notices related to any registrations obtained by any Gryphon group member from any governmental entity and preparing and submitting any requests to amend or novate any permits that may be necessary as a consequence of the Transactions; and
• Akerna shall promptly inform Gryphon of any communication between any Akerna party, on the one hand, and any governmental entity, on the other hand, and Gryphon shall promptly inform Akerna of any communication between Gryphon, on the one hand, and any governmental entity, on the other hand, in either case, regarding any of the Transactions.
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Each of Akerna and Gryphon has also agreed that:
• Akerna, Merger Sub and Gryphon shall use commercially reasonable efforts to make all filings and other submissions and give all notices required to be made and given by such party in connection with the Merger and the transactions contemplated by the Merger Agreement;
• neither party will make any public statement concerning the Merger during the Interim Period, subject to certain exceptions;
• for a period of six years after the consummation of the Merger, the surviving company of the Merger will indemnify each of the current and former directors, managers and officers of Gryphon to the fullest extent required under such surviving company’s constituent documents;
• for a period of six years after the consummation of the Merger, Akerna will indemnify each of the current and former directors, managers and officers of Akerna to the fullest extent required under Akerna’s constituent documents; and
• Akerna, Merger Sub and Gryphon shall cooperate reasonably with each other and shall provide the other party with such assistance as may be reasonably requested for the purpose of facilitating the performance by each party of its respective obligations under the Merger Agreement and to enable the combined company to continue to meet its obligations following the consummation of the Merger.
Pre-Closing Financings
In the event that, prior to the closing of the Merger or termination of the Merger Agreement, Akerna consummates a transaction or series of transactions in which Akerna issues and sells equity securities for capital raising purposes, then no later than two business days following the consummation of such financing, Akerna shall pay to Gryphon an amount in cash equal to the proceeds received by Akerna from such financing (less transaction costs incurred by Akerna in connection therewith) in exchange for an unsecured promissory note in a form that is reasonably acceptable to Akerna and Gryphon. Each such note shall provide that (a) in the event that the closing occurs or the Merger Agreement is terminated and Akerna is obligated to pay a termination fee or reimbursed expenses to Gryphon, the note shall be deemed cancelled, paid and satisfied in full in accordance with its terms and (b) in the event that the Merger Agreement is terminated and Akerna is not obligated to pay the termination fee or reimbursed expenses to Gryphon, Gryphon shall be obligated to repay the amounts outstanding under the note to Akerna on the third anniversary of the date that the Merger Agreement is terminated.
Termination
The Merger Agreement may be terminated and the Transactions may be abandoned at any time prior to the closing of the Merger, whether before or after the required stockholder approvals to complete the Merger have been obtained, as set forth below:
• by mutual written consent of Akerna and Gryphon;
• by Akerna, if any of the representations or warranties of Gryphon shall not be true and correct or if Gryphon has failed to perform any covenant or agreement on the part of Gryphon set forth in the Merger Agreement (including an obligation to consummate the closing of the Merger) such that the conditions to closing set forth in the Merger Agreement will not be satisfied and the breach or breaches causing such representations or warranties not to be true and correct, or the failures to perform any covenant or agreement, as applicable, is (or are) not cured or cannot be cured within the earlier of (i) thirty (30) days after written notice thereof is delivered to Gryphon by Akerna, and (ii) the fifth (5th) business day prior to July 15, 2023 or as may be extended pursuant to the terms of the Merger Agreement (the “Termination Date”); provided, however, that none of Akerna or its subsidiaries is then in breach of the Merger Agreement so as to prevent the conditions to closing set forth in the Merger Agreement from being satisfied;
• by Gryphon, if any of the representations or warranties of Akerna shall not be true and correct or if any of Akerna or its subsidiaries has failed to perform any covenant or agreement on the part of such applicable party set forth in the Merger Agreement (including an obligation to consummate the closing), other than with respect to a breach of the covenants relating to non-solicitation, the Akerna stockholder meeting and
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solicitation of proxies, and non-competition, as to which Gryphon’s termination rights described below (including payment of the Termination Fee and reimbursement of expenses) will apply, such that the conditions to closing set forth in the Merger Agreement will not be satisfied and the breach or breaches causing such representations or warranties not to be true and correct, or the failures to perform any covenant or agreement, as applicable, is (or are) not cured or cannot be cured within the earlier of (i) thirty (30) days after written notice thereof is delivered to Akerna by Gryphon and (ii) the fifth (5th) business day prior to the Termination Date; provided, however, that Gryphon is not then in breach of the Merger Agreement so as to prevent the conditions to closing set forth in the Merger Agreement from being satisfied;
• by either Akerna or Gryphon, if the Transactions shall not have been consummated on or prior to the Termination Date; provided that this right shall not be available to (i) Akerna, if any of Akerna or its subsidiaries’ breach of any of its covenants or obligations under the Merger Agreement shall have proximately caused the failure to consummate the Transactions on or before the Termination Date, (ii) Gryphon, if Gryphon’s breach of its covenants or obligations under the Merger Agreement shall have proximately caused the failure to consummate the Transactions on or before the Termination Date and (iii) either Akerna or Gryphon if any proceeding for specific performance to compel the closing is pending as of the Termination Date;
• by Akerna, at any time prior to obtaining the required stockholder approval to complete the Merger, in order to accept a Superior Proposal in accordance with; provided, that Akerna shall have (i) simultaneously with such termination entered into the associated alternative acquisition agreement, (ii) otherwise complied with the non-solicitation provisions of the Merger Agreement, including the notice provisions thereof and Gryphon’s matching rights, and (iii) paid the Termination Fee and/or expense reimbursement, as applicable.
• by Gryphon, if:
• the Akerna Board or any committee thereof withdraws (or modifies or qualifies in any manner adverse to Gryphon) the recommendation or declaration of advisability by the Akerna Board or any such committee of the Merger Agreement, the Merger or the transactions contemplated thereby, (B) recommends or otherwise declares advisable the approval by the Akerna stockholders of any Acquisition Proposal, or (C) resolves, agrees or proposes to take any such actions,
• within 10 business days of a tender or exchange offer relating to securities of Akerna having been commenced, Akerna fails to publicly recommend against such tender or exchange offer;
• Akerna fails to publicly reaffirm its recommendation of the transactions contemplated by the Merger Agreement within 5 business days after the date any Acquisition Proposal or any material modification thereto is first commenced, publicly announced, distributed or disseminated to the Akerna stockholders upon a request to do so by Gryphon;
• Akerna breaches or fails to perform any of its obligations with respect to non-solicitation (including Gryphon’s notice and matching rights), the Akerna stockholder meeting and solicitation of proxies, or non-competition; or
• the Akerna Board (or any committee thereof) formally resolves or publicly authorizes or proposes to take any of the foregoing actions;
• by either Akerna or Gryphon, if:
• any governmental entity shall have issued an order or taken any other action permanently enjoining, restraining or otherwise prohibiting any of the transactions contemplated by the Merger Agreement and such order or other action shall have become final and nonappealable;
• approval of Akerna stockholders of any of the transactions contemplated by the Merger Agreement shall not have been obtained at the Akerna stockholder meeting; provided that Akerna shall not be permitted to terminate the Merger Agreement the failure to obtain such stockholder approval is proximately caused by any action or failure to act of Akerna that constitutes a breach of the Merger Agreement.
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Termination Fee
As further detailed in the Merger Agreement, Akerna will be required to pay a termination fee in the amount of $275,000 (the “Termination Fee”), less any amount of reimbursed expenses previously paid, to Gryphon if the Merger Agreement is terminated under certain circumstances. In addition, upon termination of the Merger Agreement under certain circumstances, and provided that Akerna has not paid the $275,000 termination fee, Akerna will be required to pay up to $100,000 to Gryphon for reimbursement of transaction-related expenses.
Amendment
The Merger Agreement may be amended by the parties at any time, with the approval of their respective boards, except that after the Merger Agreement has been adopted and approved by the stockholders of a party, no amendment which by law requires further approval by the stockholders of such party shall be made without such further approval.
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AGREEMENTS RELATED TO THE MERGER
Merger Support Agreements
In order to induce Akerna to enter into the Merger Agreement, certain current directors and executive officers of Gryphon are parties to support agreements with Akerna pursuant to which, among other things, each such person has agreed, solely in his or her capacity as a Gryphon stockholder, to vote all of his or her Gryphon Shares in favor of the adoption and approval of the Merger Agreement and the transactions contemplated thereunder. The Gryphon stockholders who are parties to support agreements with Akerna own in the aggregate approximately 72% of the outstanding Gryphon Shares.
Following the Registration Statement on Form S-4, of which this proxy statement/prospectus is a part, being declared effective by the SEC and pursuant to the conditions of the Merger Agreement, Gryphon stockholders who are party to the support agreements have each agreed to execute an action by written consent in favor of the approval and adoption of the Merger Agreement, and approval of the transactions contemplated by the Merger Agreement.
Under these support agreements, subject to certain exceptions, such Gryphon stockholders have also agreed not to sell or transfer their Gryphon equity securities, until the earlier of (i) the Effective Time, (ii) the termination of the support agreement in accordance with its, or (iii) it being determined (by mutual agreement of Akerna and Gryphon) that the approval of Gryphon’s stockholders is not required. To the extent that any such sale or transfer is permitted pursuant to the exceptions included in the support agreements, each person to which any Gryphon equity securities are so sold or transferred must agree in writing to be bound by the terms and provisions of the support agreement.
In order to induce Gryphon to enter into the Merger Agreement, certain current directors and executive officers of Akerna are parties to a Merger Support Agreement with Gryphon pursuant to which, among other things, each such person has agreed, solely in his or her capacity as an Akerna stockholder, to vote all of his or her shares of Akerna capital stock in favor of the adoption and approval of the proposals described herein.
Under the Merger Support Agreement, subject to certain exceptions, such Akerna stockholders have also agreed not to sell or transfer their Akerna equity securities, until the earlier of (i) the Effective Time, (ii) the termination of the Merger Support Agreement in accordance with its terms, or (iii) it being determined (by mutual agreement of Akerna and Gryphon) that the approval of Akerna’s stockholders is not required. To the extent that any such sale or transfer is permitted pursuant to the exceptions included in the Merger Support Agreement, each person to which any Akerna equity securities are so sold or transferred must agree in writing to be bound by the terms and provisions of the Merger Support Agreement.
Additionally, each holder of Akerna Notes entered into a Merger Lender Support Letter. The Merger Lender Support Letters provide, among other things, that the Holders of Akerna Notes will vote all of the shares of Akerna capital stock held by them in favor of the proposals described herein and against any competing acquisition proposals. The Merger Lender Support Letters also place certain customary restrictions on the transfer of shares of Akerna held by the respective signatories thereto prior to the closing of the Merger.
The Akerna stockholders and holders of Akerna Notes who are parties to Merger Support Agreement or Merger Lender Support Letters own or have the right to acquire, in the aggregate, approximately 41% of the outstanding voting shares of Akerna capital stock.
The foregoing description of the Merger Support Agreement and Merger Lender Support Letters does not purport to be complete and is qualified in its entirety by the full text of the forms of Merger Support Agreement and Lender Support Letter, which are attached hereto as Annex J and Annex K, respectively.
Exchange Agreements
Concurrently with the signing of the Merger Agreement, Akerna entered into exchange agreements (the “Exchange Agreements”) with each of holder (each, a “Holder”) of Akerna Notes.
Pursuant to the Exchange Agreements, each Holder has agreed to exchange a certain aggregate conversion amount of the Akerna Notes no greater than the lesser of (i) the aggregate amount then outstanding under the Notes and (ii) such portion of the maximum note amount set forth in the Exchange Agreement for such Holder that is 19.9% of the voting rights of the Company outstanding as of the time immediately following the issuance of the Series C
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Preferred Stock into such number of shares of newly designated Series C Preferred Stock of Akerna, which will have an aggregate voting power and economic value equal to the aggregate number of shares of Akerna Common Stock then issuable upon conversion of such amount of Akerna Note.
The Series C Preferred Stock will have the terms and conditions set forth in the Certificate of Designation of the Series C Preferred Stock which is attached to the Exchange Agreement. The Series C Preferred Stock is non-convertible, voting preferred stock. Upon the closing of the Merger, Akerna anticipates that the Series C Preferred Stock will be exchanged for Akerna Common Stock at the then market price per share of Akerna Common Stock. The Series C Preferred Stock can also be redeemed for cash at the option of Akerna and in limited circumstances redeemed for cash at the option of the holder.
Under the Exchange Agreements, Akerna has agreed that 50% of the gross proceeds from any subsequent placement will be used to repay the aggregate amounts then outstanding under the Akerna Notes, allocated pro rata to the holders of Akerna Notes then outstanding based on the aggregate principal amount of Akerna Notes outstanding as of the time of such applicable subsequent placement (“Subsequent Placement Redemption”).
Further, Akerna has agreed that on or prior to the closing of the Merger, if any Akerna Notes are then outstanding, Akerna will consummate one or more Company Optional Redemptions (as defined in the Akerna Notes) pursuant to Section 9(a) of the Notes (as amended under the Exchange Agreements), using the lesser of (A) the difference of (I) the sum of (x) all cash then held by Akerna (or any of its subsidiaries) and (y) any cash to be paid, directly or indirectly, to Akerna (or any of its subsidiaries) in connection with the transactions contemplated by the Merger Agreement and/or the Purchase Agreement, as applicable, less (II) $500,000 and (B) an aggregate amount of cash equal to the Company Optional Redemption Price of the aggregate Conversion Amount (as defined in the Akerna Notes) of the Akerna Notes then outstanding (with each such Company Optional Redemption allocated pro rata to the holders of Akerna Notes then outstanding based upon the aggregate principal amount of Akerna Notes then outstanding) (the “Cash Sweep”).
Upon closing of the Merger, the Exchange Agreements provide that if any portion of the Akerna Notes remain outstanding other than such portion of the applicable Company Optional Redemption Price of the Akerna Notes to be paid in cash pursuant to the Cash Sweep, to exchange the remaining Conversion Amount of the Akerna Notes into such aggregate number of shares of common stock of the combined company (the “New Note Exchange Shares”) equal to the quotient of (A) the applicable Company Optional Redemption Price of the remaining Conversion Amount of the Akerna Notes then outstanding divided by (B) the lower of (x) the lowest volume weighted average price of the Akerna Common Stock during the five (5) Trading Day period ending, and including, the Trading Day immediately prior to the closing and (y) the Conversion Price (as defined in the Akerna Notes) in effect as of the closing; and (ii) in accordance with the terms of the Series C Certificate of Designations, the Series C Preferred Stock shall be exchanged into the Change of Control Redemption/Exchange Consideration (as defined in the Series C Certificate of Designations) (with any shares of common stock of the combined company included in such applicable Change of Control Redemption/Exchange Consideration, if any, the “New Preferred Exchange Shares”, and together with the New Note Exchange Shares, the “Final Closing Exchange Shares”); provided, however, that to the extent that any issuances of Final Closing Exchange Shares to a Holder at the closing in accordance herewith or pursuant to the Series C Certificate of Designations, as applicable would result in such Holder and its other Attribution Parties (as defined in the Note) exceeding the Maximum Percentage (as defined in the Note) (as calculated in accordance with Section 3(d)(i) of the Note) (a “Maximum Percentage Event”), then such Holder shall not be entitled to receive such aggregate number of Final Closing Exchange Shares in excess of the Maximum Percentage (and shall not have beneficial ownership of such Final Closing Exchange Shares (or other equivalent security) as a result of the closing (and beneficial ownership) to such extent of any such excess), such remaining portion of such Final Closing Exchange Shares that would have otherwise been issued to the Holder at the Final Closing (such remaining portion of Final Closing Exchange Shares, the “Abeyance Shares”), such portion of the Note and/or shares of Series C Preferred Stock, as applicable, shall alternatively be exchanged for the right to receive such Abeyance Shares (with a beneficial ownership and issuance limitation substantially in the form of Section 3(d) of the Note, mutatis mutandis), at such time or times as its right thereto would not result in such Holder and the other Attribution Parties exceeding the Maximum Percentage, at which time or times, if any, such Holder shall be granted such remaining portion of such Abeyance Shares in accordance herewith and/or pursuant to the Series C Certificate of Designations, as applicable.
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All shares of combined company common stock issued or issuable upon any exchange or redemption of Akerna Notes or Series C Preferred Stock will be taken into account and included in the Akerna Fully Diluted Share Number for purposes of calculating the Merger Consideration, such that only Akerna stockholders will be diluted by the issuance of such shares (whether prior to or following consummation of the Merger).
Akerna and each of the Holders waived, in part, the terms and conditions of Section 9(a) of the Notes such that, in connection with any Subsequent Placement Redemption and/or the Cash Sweep, as applicable, the Akerna Note shall be subject to a Company Optional Redemption (as defined in the Akerna Note) (for the avoidance off doubt, at the applicable Company Optional Redemption Price (as defined in the Akerna Note) of the Conversion Amount subject to such Company Optional Redemption) without the requirement to satisfy any Equity Conditions (as defined in the Note) and a Company Optional Redemption Date (as defined in the Akerna Note) as of the date of consummation of such subsequent placement and/or the Cash Sweep, as applicable. Further, unless and until the Merger Agreement terminates prior to the consummation of the transactions contemplated thereunder, each Holder waived, in part, the Available Cash Test (as defined in the Akerna Note) in Section 14(r)(i) of the Note and the Daily Available Cash Test (as defined in Section 4(ff) of the Purchase Agreement), such that the Available Cash Test and the Daily Available Cash Test shall be deemed satisfied for the Holder if at least a certain amount set forth in the Exchange Agreement is held in the Master Restricted Account of such Holder.
In addition, subject to certain conditions, each Holder agreed to grant to Akerna certain releases from the security documents securing the Notes to permit Akerna to consummate the Sale Transaction and the Merger.
The closing of the exchange of a certain portion of the Notes into the Series C Preferred Stock and the exchange of any remaining Notes and the Series C Preferred Stock into shares of common stock at the Closing of the Merger is subject to certain customary conditions and, in relation to the exchange into Series C Preferred Stock, subject to Akerna completing a subsequent placement for gross aggregate proceeds of at least $500,000.
The Exchange Agreements contain customary representations, warranties and covenants made by Akerna and the Holders party thereto.
The foregoing description of the Exchange Agreements does not purport to be complete and is qualified in its entirety by the full text of the form of Exchange Agreement, which is attached hereto as Annex L.
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The following is a summary of the material terms of the Purchase Agreement. A copy of the Purchase Agreement and amendments thereto are attached as Annex B to this proxy statement/prospectus/information statement and are incorporated by reference into this proxy statement/prospectus/information statement. The Purchase Agreement has been attached to this proxy statement/prospectus/information statement to provide you with information regarding its terms. It is not intended to provide any other factual information about Akerna or MJ Acquisition. The following description does not purport to be complete and is qualified in its entirety by reference to the Purchase Agreement. You should refer to the full text of the Purchase Agreement for details of the Sale Transaction and the terms and conditions of the Purchase Agreement.
The Purchase Agreement contains representations and warranties that Akerna, on the one hand, and MJ Acquisition, on the other hand, have made to one another as of specific dates. These representations and warranties have been made for the benefit of the other parties to the Purchase Agreement and may be intended not as statements of fact but rather as a way of allocating the risk to one of the parties if those statements prove to be incorrect. In addition, the assertions embodied in the representations and warranties are qualified by information in confidential disclosure schedules exchanged by the parties in connection with signing the Purchase Agreement. While Akerna does not believe that these disclosure schedules contain information required to be publicly disclosed under the applicable securities laws, other than information that has already been so disclosed, the disclosure schedules do contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the attached Purchase Agreement. Accordingly, you should not rely on the representations and warranties as current characterizations of factual information about Akerna or MJ Acquisition because they were made as of specific dates, may be intended merely as a risk allocation mechanism between Akerna and MJ Acquisition and are modified by the disclosure schedules. If Akerna becomes aware of material facts that contradict the representations and warranties in the Purchase Agreement, Akerna will disclose those material facts in the public filings that it makes with the SEC if it determines that it has a legal obligation to do so.
General
Under the Purchase Agreement and subject to the terms and conditions contained therein, MJ Acquisition will acquire all of Akerna’s rights, title and interest in and to the Membership Interests and all of Akerna Exchange’s rights, title, and interest in and to the Capital Stock as described in the Purchase Agreement for a purchase price of $1,850,000 in cash and a loan to Akerna from MJ Acquisition in the amount of $1,650,000 (funded $1,000,000 on April 28, 2023, $500,000 on October 11, 2023 and $150,000 on November 15, 2023), which principal amount will convert into shares of common stock of Akerna at closing.
Sale Transaction Consideration
The purchase price to be paid by MJ Acquisition for the Membership Interests and the Capital Stock at the closing of the Sale Transaction is $1,850,000 in cash to be paid at closing and a loan to Akerna from MJ Acquisition in the amount of $1,650,000 (funded on $1,000,000 on April 28, 2023, $500,000 on October 11, 2023 and $150,000 on November 15, 2023), which principal amount will convert into shares of common stock of Akerna at closing (the “Loan”). The Loan terms are as follows:
• One (1) year term and a fixed interest rate of 10%;
• Prior to the closing of the Sale Transaction, the Loan shall be junior to existing Akerna debt;
• Upon the closing of Sale Transaction, all interest on the loan will be surrendered by MJ Acquisition Corp. and the principal amount of the Loan shall be converted into shares of Akerna Common Stock at the 5-day volume weighted average price of the common stock of the Company as quoted on The Nasdaq Capital Market for the 5 trading days immediately preceding the date of the consummation of the Sale Transaction; and
• Should MJ Freeway and Ample be sold to a party other than Alleaves or its affiliates, the Loan shall become senior debt to the party that acquires the MJ Freeway and Ample assets and shall be payable in full at maturity.
Subsequently, on December 28, 2023, pursuant to the terms of the Purchase Agreement, Akerna and Akerna Exchange entered into a share purchase agreement with Wilcompute pursuant to which Akerna Exchange sold all of the Capital Stock of Ample to Wilcompute for approximately $638,000. In accordance with the Purchase Agreement, in lieu of
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delivering the Capital Stock of Ample at the closing of the Sale Transaction, Akerna will instead deliver to MJ Acquisition the approximately $638,000 purchase price received from Wilcompute, which Akerna expects to be in the form of a reduction of the purchase price paid by MJ Acquisition from $1.85 million to approximately $1.22 million.
Conditions to the Completion of the Sale Transaction
General Conditions
The obligations of each party to consummate the transactions contemplated by the Purchase Agreement are subject to the satisfaction or waiver, on or prior to the closing of the Sale Transaction, of each of the following conditions:
• MJ Acquisition has delivered to Akerna the Loan by wire transfer of immediately available funds, to an account or accounts designated by Akerna;
• the filings of MJ Acquisition, Akerna, and Akerna Exchange pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended or other applicable law relating to antitrust, competition or foreign investment matters, if any, have been made and the applicable waiting period and any extensions thereof have expired or been terminated; and
• the absence of any enactment, issuance, promulgation, enforcement or entry of any governmental order which is in effect and has the effect of making the Sale Transaction illegal, otherwise restrain or prohibit consummation of the Sale Transaction or cause the Sale Transaction to be rescinded; and any action pending, or overtly threatened in writing, by an official of a governmental authority in which such governmental authority indicates that it intends to challenge or seek to restrain or prohibit the consummation of the Sale Transaction, but not including any notice received by a governmental authority that pursuant to applicable law such governmental authority reserving the right to review the transactions in the future
• the obtaining, termination or expiration of any authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any governmental authority under any applicable law that are required to effect the closing of the Sale Transaction and such authorization, orders or approval shall not have been revoked;
• the approval of the Purchase Agreement and the transactions contemplated thereby by Akerna’s stockholders and the approval of the MJA Promissory Note Conversion; and
• the Merger pursuant to the Merger Agreement has closed prior to the closing of the Sale Transaction or will close simultaneously with the closing of the Sale Transaction, provided that this condition shall be deemed to be waived in the event that the Merger has not closed by five business days prior to the Outside Date (as defined by the Purchase Agreement).
MJ Acquisition Conditions to Closing
The obligations of MJ Acquisition to consummate the transactions contemplated by the Purchase Agreement are subject to the satisfaction or MJ Acquisition’s waiver, on or prior to the closing of the Sale Transaction, of additional conditions, including the following:
• the representations and warranties of Akerna and Akerna Exchange contained in the Purchase Agreement or any ancillary documents or certificate related thereto being true and correct as of the closing date of the Sale Transaction with the same force and effect as if made on and as of April 28, 2023;
• each Akerna and Akerna Exchange having performed and complied in all material respects with all of covenants required by the Purchase Agreement to be performed or complied with prior to the closing of the Sale Transaction;
• the absence of any action commenced against the parties to the Purchase Agreement, restraining order or injunction any court of any governmental authority, which has the effect of preventing, restraining or prohibiting the consummation of the Sale Transaction;
• the approvals, consents, and waivers have been received, ancillary documents, assignments, and certificates have been executed, and such documents have been delivered to MJ Acquisition;
• the absence of material adverse effect or any or events have occurred that, individually or in the aggregate, with or without the lapse of time, could reasonably be expected to result in a material adverse effect since the Interim Balance Sheet Date (as defined in the Purchase Agreement);
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• the resignations of directors, managers, and officers of the Company Group (as defined in the Purchase Agreement);
• at least eighty percent (80%) of the MJF Retained Employees (such terms as defined in the Purchase Agreement), in the aggregate, shall be employees of MJ Acquisition, a subsidiary of MJ Acquisition, or the Company Group (as defined in the Purchase Agreement) and not have given notice of their intent to terminate their employment;
• the Company Group consists of only MJ Freeway;
• each material contract between the Commonwealth of Pennsylvania, Department of Health, Medical Marijuana or State of Utah Department of Technology (each, a “Contracting Party”) and MJ Freeway shall be in full force and effect; the absence of any notice of any intention to terminate or not renew any such material contract; the absence of material breached any such material contract; a Contracting Party has not alleged any such material breach; and a Contracting Party has not revoke or modify in any material way the terms of renewal as expressed in the renewal letter from it to MJ Freeway dated January 4, 2023;
• Material Contracts (as defined in the Purchase Agreement) constituting no more than 50% of MJ Freeway’s recurring subscription revenue that is up for renewal between the date of the Purchase Agreement and the closing shall have terminated, otherwise ceased to be in full force and effect, or been subject to a notice of termination or non-renewal; provided that, any such recurring subscription revenue that has migrated to MJ Acquisition Corp. or its subsidiaries shall be deemed not to have terminated, otherwise ceased to be in full force and effect, or been subject to a notice of termination;
• the absence of breach or default (or allegation of breach or default) by any of the Company Group in any material respect any material contract, and the absence of event or circumstance that, with notice or lapse of time or both, would constitute an event of default under any material contract or result in a termination thereof or would cause or permit the acceleration or other changes of any right or obligation or the loss of any benefit thereunder.
Akerna Conditions to Closing
The obligations of Akerna to consummate the transactions contemplated by the Purchase Agreement are subject to the satisfaction or Akerna’s waiver, at or prior to the closing of the Sale Transaction, of additional conditions, including the following:
• the representations and warranties of MJ Acquisition contained in the Purchase Agreement or any ancillary documents or certificate related thereto being true and correct as of the closing date of the Sale Transaction with the same force and effect as if made on and as of April 28, 2023;
• MJ Acquisition having performed and complied in all material respects with all of covenants required by the Purchase Agreement to be performed or complied with prior to the closing of the Sale Transaction;
• the absence of any restraining order or injunction any court of any governmental authority, which has the effect of restraining or prohibiting the consummation of the Sale Transaction;
• the ancillary documents and certificates have been executed, and such documents have been delivered to Akerna;
• MJ Acquisition has delivered to Akerna cash in an amount equal to $1,220,000 by wire transfer of immediately available funds, to an account or accounts designated at least three business days prior to the closing of the Sale Transaction;
Subject to the terms and conditions of the Purchase Agreement, the closing of the transactions contemplated thereby will take place no later than three business days after the satisfaction or, to the extent permitted thereunder, waiver of all of the foregoing conditions (other than those conditions that by their terms are to be satisfied or waived at the closing of the Sale Transaction, but subject to the satisfaction or waiver of all such conditions), unless the Purchase Agreement has been terminated pursuant to its terms or unless another time or date is agreed to by the parties thereto.
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Representations and Warranties; Indemnification
The Purchase Agreement contains customary representations and warranties of Akerna and MJ Acquisition relating to, among other things, their ability to enter into the Purchase Agreement, with respect to Akerna, its ownership of the Membership Interests, and with respect to Akerna Exchange, its ownership of the Capital Stock. None of the representations, warranties, covenants, agreements and obligations contained in the Purchase Agreement will survive beyond the closing of the Sale Transaction.
Under the Purchase Agreement, Akerna does not have any obligations to indemnify MJ Acquisition in connection with the Sale Transaction other than the obligation to indemnify MJ Acquisition and its affiliates against (i) any loss attributable to any breach of or inaccuracy in any representation or warranty made in relation to taxes; (ii) any loss attributable to any breach or violation of, or failure to fully perform, any covenant, agreement, undertaking or obligation of Akerna, Akerna Exchange or affiliates relating to taxes; (iii) all Indemnified Taxes (as defined in the Purchase Agreement; (iv) reasonable out-of-pocket fees and expenses attributable to the items described in the preceding clauses (i) through (iii); and (v) certain matters set forth in Schedule C of the Purchase Agreement and.
No Solicitation
Under the Purchase Agreement, Akerna may not, and may not authorize or permit any of its affiliates or any of its or their respective directors, officers, employees or other representatives to directly or indirectly: (i) encourage, solicit, initiate or continue inquiries regarding an Acquisition Proposal (as defined in the Purchase Agreement), (ii) enter into discussions or negotiations with, or provide any information to, any person concerning a possible Acquisition Proposal; or (iii) enter into any agreements or other instruments (whether or not binding) regarding an Acquisition Proposal. Akerna shall immediately cease and cause to be terminated, and shall cause its affiliates and all of its and their respective directors, officers, employees or other representatives to immediately cease and cause to be terminated, all existing discussions or negotiations with any persons conducted heretofore with respect to, or that could lead to, an Acquisition Proposal.
In addition to the foregoing, Akerna is required to promptly (and in any event within three (3) business days after receipt thereof by Akerna or its directors, officers, employees or other representatives) advise MJ Acquisition orally and in writing of any Acquisition Proposal, any request for information with respect to any Acquisition Proposal, or any inquiry with respect to or which could reasonably be expected to result in an Acquisition Proposal, the material terms and conditions of such request, Acquisition Proposal or inquiry, and the identity of the person making the same.
Akerna Board of Directors’ Recommendation; Change of Recommendation
As described above, and subject to the provisions described below, Akerna’s board of directors has made the recommendation that Akerna’s stockholders vote “FOR” Proposal No. 2 to approve the Purchase Agreement and the transactions contemplated thereby. The Purchase Agreement provides that Akerna’s board of directors will not effect a Sale Transaction Adverse Recommendation Change (as defined below) except as described below.
Prior to the adoption of the Purchase Agreement by Akerna’s stockholders, Akerna’s board of directors may not (A) withdraw (or modify in any manner adverse to MJ Acquisition), or adopt a resolutions of Akerna’s board of directors to withdraw (or modify in any manner adverse to MJ Acquisition), its recommendation that Akerna’s stockholders approve the transactions contemplated by the Purchase Agreement or (B) recommend, any Acquisition Proposal or alternative transaction (the foregoing actions being referred to as an “Sale Transaction Adverse Recommendation Change”).
Notwithstanding the restrictions described above, at any time prior to the receipt of the required vote from Akerna’s stockholders, Akerna’s board of directors may make a Sale Transaction Board Adverse Recommendation Change, if Akerna’s board of directors has received an Acquisition Proposal for Akerna that Akerna’s board of directors has determined in its good faith judgment, after consultation with Akerna’s outside legal counsel and financial advisors, constitutes, or would reasonably be expected to result in, a Superior Offer (as defined below), Akerna’s board of directors determines in its good faith judgment, after consultation with Akerna’s outside legal counsel and financial advisors, that a Sale Transaction Board Adverse Recommendation Change is consistent with Akerna’s board of directors’ compliance with its fiduciary obligations to Akerna’s stockholders under applicable law. Prior to Akerna
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taking any action permitted under this exception, in the case of a Superior Offer, (1) Akerna must promptly notify MJ Acquisition, in writing, at least five business days (the “Notice Period”) before making a Sale Transaction Board Adverse Recommendation Change, of its intention to take such action with respect to a Superior Offer, (2) Akerna attaches to such notice the most current version of the proposed agreement and the identity of the third party making such Superior Offer; and (3) Akerna negotiates with MJ Acquisition in good faith to make such adjustments in the terms and conditions of this Agreement so that such Acquisition Proposal for Akerna ceases to constitute a Superior Offer, if MJ Acquisition, in its discretion, proposes to make such adjustments.
Nothing contained in the Purchase Agreement prohibits Akerna from (i) taking and disclosing to its stockholders positions required by Rule 14d-9 or Rule 14e-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), (ii) making any disclosure to Akerna’s stockholders if Akerna’s board of directors determines in good faith, after consultation with its outside legal counsel, that the failure to make such disclosure would be inconsistent with its fiduciary duties to Akerna’s stockholders under applicable law, and (iii) issuing a “stop-look-and-listen communication” pursuant to Rule 14d-9(f) promulgated under the Exchange Act. In the case of each of the foregoing clauses “(i)” and “(ii),” any such disclosure or public statement shall be deemed to be a Sale Transaction Board Adverse Recommendation Change subject to the terms and conditions of the Purchase Agreement unless Akerna’s board of directors reaffirms its recommendation for the Sale Transaction in such disclosure or public statement or within five business days of such disclosure or public statement.
A “Superior Offer” means a bona fide Acquisition Proposal for Akerna (with all references to 20% in the definition of Acquisition Transaction for Seller (as defined by the Purchase Agreement) being treated as references to 50% for these purposes) made by a third party that is on terms and conditions that Akerna’s board of directors determines, in its reasonable, good faith judgment, after obtaining and taking into account such matters that Akerna’s board of directors deems relevant following consultation with its outside legal counsel and financial advisor, if any, (i) is more favorable, from a financial point of view, to Akerna’s stockholders than the terms of the transactions contemplated by the Purchase Agreement and the Merger, taking into account any factors that Akerna’s board of directors deems appropriate; and (ii) is reasonably capable of being consummated.
Meeting of Stockholders
Promptly after the Registration Statement has been declared effective by the SEC under the Securities Act, Akerna is required (i) take reasonable action necessary under applicable law to call, give notice of and, within 60 calendar days after the date the Registration Statement is declared effective by the SEC, hold a meeting of Akerna’s stockholders for the purpose of seeking approval of (A) the issuance of shares of Akerna’s common stock pursuant to the terms of the Merger and under the applicable requirements of Nasdaq, (B) the change of control of Akerna resulting from the Merger, to the extent such approval is necessary, (C) the amendment of Akerna’s certificate of incorporation to effect the reverse stock split, (D) if requested by Gryphon prior to the filing with the SEC of this proxy statement/prospectus, the amendment of Akerna’s certificate of incorporation to increase the authorized shares of Akerna’s common stock, (E) the amendment of Akerna’s certificate of incorporation to effect the name change of Akerna, (F) in accordance with Section 14A of the Exchange Act and the applicable SEC rules issued thereunder, seeking advisory approval of a proposal to Akerna’s stockholders for a non-binding, advisory vote to approve certain compensation that may become payable to Akerna’s named executed officers in connection with the completion of the Merger, if applicable, and (G) approve the transactions under the Purchase Agreement and the ancillary documents related thereto (items A-G collectively, “Akerna Stockholder Matters”).
Covenants; Conduct of Business Pending the Sale Transaction
During the period from the signing of the Purchase Agreement until the closing of the Sale Transaction, except as otherwise provided in the Purchase Agreement, Akerna and Akerna Exchange shall, and shall cause the Company Group to, (i) maintain and preserve in all respects to permits, (ii) to pay its debts, Taxes and other obligations when due, (iii) to maintain the properties and assets owned, operated or used by the Company Group in the same condition as they were on the date of the Purchase Agreement, subject to reasonable wear and tear, (iv) to continue in full force and effect without modification all insurance policies, except as required by applicable law, (v) to take commercially reasonable action to defend and protect its properties and assets from infringement or usurpation, (vi) to perform all of its obligations under all contracts relating to or affecting its properties, assets or business, (vii) to maintain its books and records in accordance with past practice, (viii) to comply in all material respects with all applicable laws, (ix) not enter into, renew, amend, or extend any contract (A) with any new or existing
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customer or supplier of the Company Group if the term of such contract will end 30 days or more thereafter or (B) if all such new, renewed, amended or extended contracts would impose, in the aggregate, an obligation of more than One Hundred Thousand Dollars ($100,000) on the Company Group; and (x) not to take or permit any action that would cause any of the changes, events or conditions described in Section 3.08 of the Purchase Agreement to occur; provided, however, that the foregoing shall not be interpreted as limiting in any way the right of Akerna or Akerna Exchange to cause the Company Group to either: (i) sell all of the issued and outstanding common shares of Last Call Analytics, Inc. or all of the assets and liabilities of Last Call Analytics, Inc. to a third-party buyer, in each case if the Company Group does not incur or assume any liabilities in connection with such sale; and/or (ii) wind-up the business of and dissolve Last Call Analytics, Inc. if the Company Group does not incur or assume any liabilities in connection with such wind-up.
Regulatory Approvals
Each of Akerna, Akerna Exchange, and MJ Acquisition has agreed, among other things:
• that each party would make (i) make, or cause or be made, all filings and submissions (including those under the HSR Act) required under any law applicable to such party or any of its affiliates; and (ii) use reasonable best efforts to obtain, or cause to be obtained, all consents, authorizations, orders and approvals from all governmental authorities that may be or become necessary for its execution and delivery of the Purchase Agreement and the performance of its obligations pursuant to the Purchase Agreement and the ancillary documents related thereto; and
• to use its cooperate fully with the other party and its affiliates in promptly seeking to obtain all such consents, authorizations, orders and approvals and not willfully take any action that will have the effect of delaying, impairing or impeding the receipt of any required consents, authorizations, orders and approvals.
Notwithstanding anything to the contrary contained in the Purchase Agreement, each of Akerna and MJ Acquisition agreed that MJ Acquisition and any of its affiliates will not be required to (i) sell, hold, divest, discontinue or limit, before or after the closing of the Sale Transaction, any assets, businesses or interests of MJ Acquisition, the Company Group or any of their respective affiliates; (ii) agree to any conditions relating to, or changes or restrictions in, the operations of any such assets, businesses or interests which, in either case, could reasonably be expected to result in a material adverse effect or materially and adversely impact the economic or business benefits to MJ Acquisition of the transactions contemplated by the Purchase Agreement; or (iii) agree to any material modification or waiver of the terms and conditions of the Purchase Agreement.
Other Agreements
Akerna has agreed during the period between the dates of the Purchase Agreement until the closing of the Sale Transaction to notify MJ Acquisition in writing of:
• any fact, circumstance, event or action the existence, occurrence or taking of which (A) has had, or could reasonably be expected to have, individually or in the aggregate, a material adverse effect, (B) has resulted in, or could reasonably be expected to result in, any representation or warranty made by Akerna or Akerna Exchange hereunder not being true and correct or (C) has resulted in, or could reasonably be expected to result in, the failure of any of the conditions set forth in Section 7.02 of the Purchase Agreement to be satisfied;
• any notice or other communication from any person alleging that the consent of such person is or may be required in connection with Sale Transaction;
• any notice or other communication from any governmental authority in connection with the Sale Transaction;
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• any actions commenced or, to Seller’s Knowledge (as defined in the Purchase Agreement), threatened against, relating to or involving or otherwise affecting Akerna, Akerna Exchange or the Company Group that, if pending on the date of the Purchase Agreement, would have been required to have been disclosed pursuant to Section 3.20 of the Purchase Agreement or that relates to the Sale Transaction; and
• any termination or non-renewal of a contract with a material customer or a material supplier or (b) any notice or other communication from a material customer or a material supplier of its intention to terminate or not renew any such contract.
MJ Acquisition Corp. has agreed to work in good faith on a best efforts basis across multiple interested parties on behalf of and with the express approval of Akerna to secure for Akerna the highest purchase price possible for the shares of Ample. Akerna shall cause the proceeds from such sale to be included in the assets of MJ Freeway effective as of the closing. Notwithstanding the foregoing, in the event that the shares of Ample are sold to a third-party for a net purchase price above $700,000, Akerna shall be entitled to retain all net proceeds in excess of $700,000.
Akerna and Akerna Exchange have agreed among other things, after the closing of the Sale Transaction:
• each will cause its affiliates to hold, and use its reasonable best efforts to cause its directors, officers, employees or other representatives to hold, in confidence any and all information, whether written or oral, concerning the Company Group, except to the extent such information (a) is generally available to and known by the public, (b) is lawfully acquired by Akerna, Akerna Exchange, any of their affiliates or their respective directors, officers, employees or other representatives from and after the closing of the Sale Transaction from sources which are not prohibited from disclosing such information by a legal, contractual or fiduciary obligation, or (c) is compelled to disclose by judicial or administrative process or by other requirements of law;
for a period of five (5) years commencing on the closing of the Sale Transaction (the “Restricted Period”), each of Akerna and Akerna Exchange will not directly or indirectly, (i) engage in or assist others in engaging in the Restricted Business in the Territory (such terms as defined in the Purchase Agreement); (ii) have an interest in any person that engages directly or indirectly in the Restricted Business in the Territory in any capacity, including as a partner, shareholder, member, employee, principal, agent, trustee or consultant; or (iii) intentionally interfere in any material respect with the business relationships (whether formed prior to or after the date of the Purchase Agreement) between the Company Group and customers or suppliers of the Company Group. Notwithstanding the foregoing, Akerna may own, directly or indirectly, solely as an investment, securities of any person traded on any national securities exchange if Akerna is not a controlling person of, or a member of a group which controls, such person and does not, directly or indirectly, own 1% or more of any class of securities of such person;
during the Restricted Period, each of Akerna and Akerna Exchange will not, directly or indirectly, (i) solicit (except pursuant to a general solicitation which is not directed specifically to any employees of the Company Group) or hire any employee of the Company Group or any former employee of the Company Group or (ii) encourage any employee of the Company Group to leave such employment; and
during the Restricted Period, each of Akerna and Akerna Exchange will not, directly or indirectly, solicit or entice, or attempt to solicit or entice, any clients or customers of the Company Group or potential clients or customers of the Company Group for purposes of diverting their business or services from the Company Group.
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Termination
The Purchase Agreement may be terminated at any time prior to the closing of the Sale Transaction:
• by the mutual written consent of Akerna, Akerna Exchange, and MJ Acquisition;
• by either Akerna or MJ Acquisition if:
• the other party has breached or failed to perform any of its representations, warranties, or covenants contained in the Purchase Agreement, and such breach or failure to perform (A) would give rise to the failure of a closing condition and (B) cannot be cured within ten (10) days of receipt of written notice of such breach from the other party;
• any of the closing conditions to be satisfied by the other party has not been, or if it becomes apparent that any of such conditions will not be, fulfilled by the Outside Date (as defined in the Purchase Agreement) or if the sale and purchase of the Membership Interests contemplated by the Purchase Agreement has not been consummated by the Outside Date, unless such failure shall be due to the failure of the other party to perform or comply with any of the covenants, agreements or conditions of the Purchase Agreement to be performed or complied with by it prior to the closing of the Sale Transaction;
• Akerna’s board of directors, prior to obtaining the approvals from the Akerna’s stockholders, has determined to make a Sale Transaction Board Adverse Change Recommendation and accept a Superior Offer; or
• any law making the consummation of the Sale Transaction illegal or otherwise prohibited or (ii) any governmental authority issuing a governmental order restraining or enjoining the Sale Transaction, and such governmental order shall have become final and non-appealable.
• by MJ Acquisition if:
• (A) the meeting of Akerna’s stockholders (including any adjournments and postponements thereof) has been held and completed and Akerna’s stockholders have taken a final vote on the Akerna Stockholder Matters and (B) the Akerna Stockholder Matters have not been approved at the meeting of Akerna’s stockholders (or any adjournment or postponement thereof) by the required vote;
• at any time prior to obtaining the required vote and approval from Akerna’s stockholders, (A) Akerna failed to include the recommendation of the Akerna’s board of directors in the Proxy Statement/Prospectus for the Sale Transaction; (B) Akerna’s board of directors shall have made a Sale Transaction Board Adverse Recommendation Change; (C) Akerna’s board of directors has approved, endorsed or recommended any Acquisition Proposal; (D) Akerna has executed or entered into any letter of intent or similar document or any contract contemplating or otherwise relating to any Acquisition Proposal; (E) Akerna has not held the meeting of Akerna’s stockholders by five business days prior to the Outside Date; or (F) Akerna or any of its directors, officers, employees or other representatives has willfully and intentionally materially breached the provisions set forth in Section 5.03 of the Purchase Agreement; or
• if (A) each of the closing conditions have been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing of the Sale Transaction), (B) MJ Acquisition have notified Akerna in writing that it is ready, willing and able to consummate the closing of the Sale Transaction (and Akerna has not revoke such notice) and (iii) Akerna and Akerna Exchange fails to consummate the closing of the Sale Transaction within five business days of such notice.
In the event the Purchase Agreement is terminated, the Purchase Agreement will become void and there will be no liability of any party thereto except: (i) as set forth in Article IX, Section 5.06, and Article X of the Purchase Agreement; and (ii) nothing shall relieve any party from liability for any material breach of any provision of the Purchase Agreement or for common law fraud under the law of the State of Delaware
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Termination Fee
If the Purchase Agreement is terminated, then Akerna will pay or reimburse the following fees to MJ Acquisition:
• a nonrefundable fee in an amount equal to $290,000 within 10 business days after such termination (in the case of termination by POSaBIT) or concurrent with such termination (in the case of termination by Akerna); and
• up to a maximum of $60,000 of reasonable fees and expenses incurred by MJ Acquisition in connection with the Purchase Agreement, the ancillary documents related thereto, and the transactions contemplated thereby within 10 business days after the date on which MJ Acquisition submits to Akerna true and correct copies of reasonable documentation supporting such fees and expenses by wire transfer of same-day funds.
If Akerna fails to pay when due any amount payable by Akerna under Section 9.03 of the Purchase Agreement, then (a) Akerna shall reimburse MJ Acquisition for reasonable costs and expenses (including reasonable fees and disbursements of counsel) incurred in connection with the collection of such overdue amount and the enforcement by MJ Acquisition of its rights under Section 9.03 of the Purchase Agreement, and (b) Akerna shall pay to MJ Acquisition interest on such overdue amount (for the period commencing as of the date such overdue amount was originally required to be paid and ending on the date such overdue amount is actually paid to MJ Acquisition in full) at a rate per annum equal to the “prime rate” (as announced by Bank of America or any successor thereto) in effect on the date such overdue amount was originally required to be paid.
Amendment
The Purchase Agreement may only be amended, modified or supplemented by an agreement in writing signed by each party thereto.
Governing Law
The Purchase Agreement is governed by, and construed in accordance with, the laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction).
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AGREEMENTS RELATED TO THE SALE TRANSACTION
Sale Transaction Support Agreements
In order to induce MJ Acquisition to enter into the Purchase Agreement, certain current directors and executive officers of Akerna are parties to support agreements with MJ Acquisition (“Sale Transaction Support Agreements”) pursuant to which, among other things, each such person has agreed, solely in his or her capacity as an Akerna stockholder, to vote all of his or her shares of Akerna capital stock in favor of the adoption and approval of the proposals described herein.
Under the Sale Transaction Support Agreement, subject to certain exceptions, such Akerna stockholders have also agreed not to sell or transfer their Akerna equity securities, until the earlier of (i) the closing of the Sale Transaction, (ii) the termination of the Sale Transaction Support Agreement in accordance with its terms, or (iii) it being determined (by mutual agreement of Akerna and MJ Acquisition) that the approval of Akerna’s stockholders is not required. To the extent that any such sale or transfer is permitted pursuant to the exceptions included in the Sale Transaction Support Agreement, each person to which any Akerna equity securities are so sold or transferred must agree in writing to be bound by the terms and provisions of the Sale Transaction Support Agreement.
Additionally, each holder of Akerna Notes entered into a Sale Transaction Lender Support Letter. The Sale Transaction Lender Support Letters provide, among other things, that the holder of Akerna Notes will vote all of the shares of Akerna capital stock held by them in favor of the proposals described herein and against any competing acquisition proposals. The Sale Transaction Lender Support Letters also place certain customary restrictions on the transfer of shares of Akerna held by the respective signatories thereto prior to the closing of the Sale Transaction.
The Akerna stockholders and holders of Akerna Notes who are parties to Sale Transaction Support Agreement or Sale Transaction Lender Support Letters own or have the right to acquire, in the aggregate, approximately 41% of the outstanding voting shares of Akerna capital stock.
The foregoing description of the Sale Transaction Support Agreement and Sale Transaction Lender Support Letters does not purport to be complete and is qualified in its entirety by the full text of the forms of Sale Transaction Support Agreement and Sale Transaction Lender Support Letter, which are attached hereto as Annex M and Annex N, respectively.
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MJ ACQUISITION PROMISSORY NOTE
Secured Promissory Note
Concurrently with the Purchase Agreement, Akerna, Akerna Exchange, and MJ Acquisition entered into a secured promissory note, dated April 28, 2023, which was amended and restated on October 11, 2023, (the “MJA Note”) whereby Akerna promises to pay to the order of MJ Acquisition or its registered assigns the amount of $1,650,000. The MJA Note bears simple interest at the rate of ten percent (10%) per annum from the date of issuance until repayment of the MJA Note. Interest on the MJA Note will be computed on the basis of a 365-day year and actual days elapsed.
The outstanding principal amount of and all accrued but unpaid interest on the MJA Note will be due and payable on April 28, 2024. The MJA Note, or a portion thereof, may be prepaid by the Company at any time without penalty, upon one (1) business day prior written notice from Akerna to MJ Acquisition, specifying the intended date and amount of repayment. Any payments shall be applied first to accrued interest and then to principal. All interest on the MJA Note will be surrendered by MJ Acquisition at the closing of the Sale Transaction. At the closing of the Sale Transaction, all principal amounts under the MJA Note will be converted into shares of Akerna Common Stock the 5-day volume weighted average price of the Akerna Common Stock as quoted on The Nasdaq Capital Market for the 5 trading days immediately preceding the date of the consummation of the Sale Transaction.
Security Agreement
Pursuant to the MJA Note, Akerna’s obligations under the MJA Note are to be secured pursuant to an Amended and Restated Security and Pledge Agreement entered by and among Akerna, MJ Acquisition and the other parties thereto dated November 15, 2023 (the “Security Agreement”). The Security Agreement creates a security interest in all of the personal property of Akerna and certain of its subsidiaries of every kind and description, tangible or intangible, whether currently owned and existing or created or acquired in the future (the “Collateral”).
Upon the occurrence of an “Event of Default” under the Security Agreement, the Collateral Agent will have certain rights under the Security Agreement including taking control of the Collateral and, in certain circumstances, selling the Collateral to cover obligations owed to the holders of the MJA Note pursuant to its terms. “Event of Default” under the Security Agreement means (a) Akerna breaches the SPA or any of the Ancillary Documents (as defined in the SPA) and does not cure such breach within ten (10) days after written notice thereof has been given by or on behalf of MJA to Akerna; (b) Akerna files any petition or action for relief under any bankruptcy, reorganization, insolvency or moratorium law or any other law for the relief of, or relating to, debtors, now or hereafter in effect, or makes any assignment for the benefit of creditors or takes any corporate action in furtherance of any of the foregoing; (c) an involuntary petition is filed against Akerna (unless such petition is dismissed or discharged within ninety (90) days under any bankruptcy statute now or hereafter in effect, or a custodian, receiver, trustee, assignee for the benefit of creditors (or other similar official) is appointed to take possession, custody or control of any property of Akerna; or (d) Akerna is in material breach of any of its representations or covenants in the MJA Note and, in the case of covenants, does not cure such breach within ten (10) days after written notice thereof has been given by or on behalf of MJA to Akerna.
Guaranty
In connection to the MJA Note, certain subsidiaries of Akerna entered into an amended and restated guaranty agreement with MJ Acquisition on November 15, 2023 (the “Guaranty Agreement”) under which they will guarantee the obligations of the Company under the Security Agreement and the MJA Note.
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AKERNA DIRECTORS, OFFICERS AND CORPORATE GOVERNANCE
Independence of Akerna Board
The Akerna Board evaluates the independence of each nominee for election as a director of Akerna in accordance with the Nasdaq Listing Rules. Pursuant to these rules, a majority of the Akerna Board must be “independent directors” within the meaning of the Nasdaq Listing Rules, and all directors who sit on Akerna’s Audit Committee, Nominating Committee and Compensation Committee must also be independent directors.
The Nasdaq definition of “independence” includes a series of objective tests, such as the director or director nominee is not, and was not during the last three years, an employee of the Company and has not received certain payments from, or engaged in various types of business dealings with, the Company. In addition, as further required by the Nasdaq Listing Rules, the Akerna Board has made a subjective determination as to each independent director that no relationships exist which, in the opinion of the Akerna Board, would interfere with such individual’s exercise of independent judgment in carrying out his or her responsibilities as a director. In making these determinations, the Board reviewed and discussed information provided by the directors with regard to each director’s business and personal activities as they may relate to Akerna and its management.
As a result, the Akerna Board has affirmatively determined that each of Matthew R. Kane and Tahira Rehmatullah are independent in accordance with the Nasdaq Listing Rules. The Akerna Board has also affirmatively determined that all members of Akerna’s Audit Committee, Nominating Committee and Compensation Committee are independent directors.
Leadership Structure and Role of Akerna Board in Risk Oversight
The Akerna Board currently consists of five directors. The Akerna Board has not appointed a lead independent director. Due to the size of the Board, the independent directors are able to closely monitor the activities of Akerna. In addition, the independent directors are able to meet independently with Akerna’s independent registered public accounting firm without management to discuss the Company’s financial statements and related audits. Therefore, the Akerna Board has determined that a lead independent director is not necessary at this time. To the extent the composition of the Akerna Board changes and/or grows in the future, the Akerna Board may re-evaluate the need for a lead independent director.
Management is responsible for the day-to-day management of risks the Company faces, while the Akerna Board as a whole has ultimate responsibility for the Company’s oversight of risk management. The Akerna Board takes an enterprise-wide approach to risk oversight, designed to support the achievement of organizational objectives, including strategic objectives, to improve long-term organizational performance and enhance stockholder value. A fundamental part of risk oversight is not only understanding the risks the Company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the Company. As a critical part of this risk management oversight role, the Akerna Board encourages full and open communication between management and the Akerna Board. The Akerna Board regularly reviews material strategic, operational, financial, compensation and compliance risks with management. In addition, our management team regularly reports to the full Akerna Board regarding their areas of responsibility and a component of these reports is risk within the area of responsibility and the steps management has taken to monitor and control such exposures. Additional review or reporting on risk is conducted as needed or as requested by the Akerna Board.
Meetings of Akerna Board
The Akerna Board met on 23 occasions during the fiscal year ended December 31, 2022. None of the incumbent directors attended fewer than 75% of the board meetings. Akerna Board members are not required to attend the Annual Meeting and no directors, except Ms. Billingsley, attended the 2022 Annual Meeting.
There are three committees of the Akerna Board: the Audit Committee; the Nominating Committee; and the Compensation Committee.
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Our named executive officers for the fiscal year ended December 31, 2022 are Jessica Billingsley, our Chief Executive Officer, L. Dean Ditto, our Chief Financial Officer, David McCullough, our Chief Technology Officer and Ray Thompson, our former Chief Operating Officer.
Summary Compensation Table
The following table sets forth all information concerning the compensation earned, for the fiscal years ended December 31, 2022 and 2021, six-month transition period ended December 31, 2020, and for the fiscal year ended June 30, 2020 for services rendered to us by persons who served as our named executive officers at the end of December 31, 2022.
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Name and Principal Position |
Year |
Salary |
Bonus |
Stock |
All Other |
Total |
|||||||||
|
(a) |
(b) |
(c) |
(d) |
(e) |
(i) |
(j) |
|||||||||
|
Jessica Billingsley |
2022 |
297,916 |
157,800 |
|
— |
|
6,587 |
(2) |
462,303 |
||||||
|
Chief Executive Officer |
2021 |
262,500 |
201,866 |
(3) |
108,200 |
(4) |
11,774 |
(5) |
584,340 |
||||||
|
2020TP |
125,000 |
81,625 |
(6) |
125,450 |
(7) |
740 |
(8) |
332,815 |
|||||||
|
2020 |
250,000 |
54,750 |
(9) |
153,474 |
(10) |
21,780 |
(11) |
480,004 |
|||||||
|
|
|
|
|||||||||||||
|
Ray Thompson |
2022 |
233,854 |
40,380 |
|
— |
|
— |
|
274,234 |
||||||
|
Former Chief Operating Officer |
2021 |
200,000 |
— |
|
83,200 |
(12) |
— |
|
283,200 |
||||||
|
2020TP |
100,000 |
— |
|
94,200 |
(13) |
— |
|
194,200 |
|||||||
|
|
|
|
|||||||||||||
|
David McCullough |
2022 |
240,432 |
41,930 |
|
— |
|
— |
|
282,362 |
||||||
|
Chief Technology Officer |
2021 |
200,000 |
60,075 |
(14) |
83,200 |
(15) |
— |
|
343,275 |
||||||
|
2020TP |
100,000 |
— |
|
94,200 |
(16) |
— |
|
194,200 |
|||||||
|
|
|
|
|||||||||||||
|
L. Dean Ditto(17) |
2022 |
68,750 |
18,230 |
|
25,000 |
(18) |
49,200 |
(19) |
161,180 |
||||||
|
Chief Financial Officer |
|
|
|
||||||||||||
____________
(1) In November 2022, the Company effected a 20-for-1 reverse stock split (the “Reverse Stock Split”). As a result, all references to stock-based awards issued before the Reverse Stock Split are noted parenthetically and adjusted downward by dividing by 20 in order to maintain the ratio of one unit/restricted share/share being equivalent to one share on Common Stock.
(2) In addition to cash and stock awards, Ms. Billingsley may redeem loyalty awards generated by corporate purchases made on certain credit cards for her personal use. During the year ended 2022, Ms. Billingsley redeemed $6,587 in loyalty awards for her personal use.
(3) Pursuant to Ms. Billingsley’s employment agreement with Akerna, she is eligible for a bonus that is determined by the Board on the basis of fulfillment of the objective performance criteria established in its discretion. For the year ended 2021, the bonus was determined based Akerna’s relative performance against budgeted targets, as further described below. The Board evaluated the achievement of these targets and Ms. Billingsley’s 2021 fiscal year bonus amount was $201,866.
(4) During the year ended 2021, Ms. Billingsley was awarded 20,000 restricted stock units (1,000 after the Reverse Stock Split) with a grant date fair value of $83,200. These awards vest 25% annually on December 1 with the final vesting occurring on December 1, 2024. As compensation for the 2021 fiscal year, Ms. Billingsley was also awarded a discretionary bonus of 22,322 restricted shares (1,117 after the Reverse Stock Split) with a grant date fair value of $25,000. These shares fully vested on April 12, 2022.
(5) In addition to cash and stock awards, Ms. Billingsley may redeem loyalty awards generated by corporate purchases made on certain credit cards for her personal use. During the year ended 2021, Ms. Billingsley redeemed $11,774 in loyalty awards for her personal use.
(6) Pursuant to Ms. Billingsley’s employment agreement with Akerna, she is eligible for a bonus that is determined by the Board on the basis of fulfillment of the objective performance criteria established in its discretion. For the transition period 2020, the transition period bonus was determined based Akerna’s relative performance against budgeted targets, as further described below. The Board evaluated the achievement of these targets and Ms. Billingsley’s transition period 2020 bonus amount was $81,625.
(7) During the transition period 2020, Ms. Billingsley was awarded 20,000 restricted stock units (1,000 after the Reverse Stock Split) with a grant date fair value of $94,200. These awards vest 25% annually on July 1 with the final vesting occurring
146
on July 1, 2024. As compensation for the 2020 transition period, Ms. Billingsley was also awarded a discretionary bonus of 7,548 restricted shares (375 after the Reverse Stock Split) with a grant date fair value of $31,250. These shares fully vested on April 26, 2021.
(8) In addition to cash and stock awards, Ms. Billingsley may redeem loyalty awards generated by corporate purchases made on certain credit cards for her personal use. During the six-month transition period ended December 31, 2020, Ms. Billingsley redeemed $740 in loyalty awards for her personal use.
(9) Pursuant to Ms. Billingsley’s employment agreement with Akerna, she is eligible for an annual bonus that is determined by the Board on the basis of fulfillment of the objective performance criteria established in its discretion. For the 2020 fiscal year, the annual bonus was determined based Akerna’s relative performance against budgeted targets, as further described below. The Board evaluated the achievement of these targets and Ms. Billingsley’s 2020 annual bonus amount was $54,750.
(10) During 2020, Ms. Billingsley was awarded 10,000 restricted stock units (500 after the Reverse Stock Split) with a grant date fair value of $57,900. These awards vest 25% annually on July 1 with the final vesting occurring on July 1, 2023. Ms. Billingsley was awarded share-based compensation that was conditioned upon the price of a share of our Common Stock achieving a specified total return as of June 30, 2020. This award had a grant date fair value of $12,465. The total return target was not achieved, as such no shares will be issued pursuant to this award. Ms. Billingsley was also awarded a share based annual bonus award of 19,694 shares of Common Stock (985 after the Reverse Stock Split). This award had a grant date fair value of $83,109.
(11) In addition to cash and stock awards, Ms. Billingsley may redeem loyalty awards generated by corporate purchases made on certain credit cards for her personal use. During the six-month transition period ended December 31, Ms. Billingsley redeemed $21,780 in loyalty awards for her personal use.
(12) During the year ended 2021, Mr. Thompson was awarded 20,000 restricted stock units (1,000 after the Reverse Stock Split) with a grant date fair value of $83,200. These awards vest 25% annually on December 1 with the final vesting occurring on December 1, 2024.
(13) During the transition period 2020, Mr. Thompson was awarded 20,000 restricted stock units (1,000 after the Reverse Stock Split) with a grant date fair value of $94,200. These awards vest 25% annually on July 1 with the final vesting occurring on July 1, 2024.
(14) During the year ended 2021, Mr. McCullough was awarded a discretionary cash bonus of $60,075.
(15) During the year ended 2021, Mr. McCullough was awarded 20,000 restricted stock units (1,000 after the Reverse Stock Split) with a grant date fair value of $83,200. These awards vest 25% annually on December 1 with the final vesting occurring on December 1, 2024.
(16) During the transition period 2020, Mr. McCullough was awarded 20,000 restricted stock units (1,000 after the Reverse Stock Split) with a grant date fair value of $94,200. These awards vest 25% annually on July 1 with the final vesting occurring on July 1, 2024.
(17) On July 25, 2022, Mr. Ditto was appointed as the Company’s Chief Financial Officer. Mr. Ditto was previously appointed as the Company’s Interim Chief Financial Officer on May 11, 2022, effective May 17, 2022.
(18) On July 25, Mr. Ditto was awarded a discretionary bonus of 134,013 restricted shares (6,701 after the Reverse Stock Split) with a grant date fair value of $25,000. These shares fully vested on the grant date.
(19) In the period during which Mr. Ditto was serving as the Company’s Interim Chief Financial Officer, he was compensated as a consultant for $49,200.
Employment Agreements with Named Executive Officers
Jessica Billingsley
In connection with the consummation of the mergers on June 17, 2019, Ms. Billingsley and Akerna entered into an employment agreement, dated June 17, 2019 (the “Billingsley Employment Agreement”). Under the terms of the Billingsley Employment Agreement, Ms. Billingsley serves at the Chief Executive Officer of Akerna at will, and must devote substantially all of her working time, skill and attention to her position and to the business and interests of Akerna (except for customary exclusions).
Akerna pays Ms. Billingsley an annual base salary in the amount of $250,000. The base salary is subject to (1) review at least annually by the Board for increase, but not decrease, and (2) automatic increase by an amount equal to $50,000 from its then current level on the date upon which Akerna’s aggregate, gross consolidated trailing twelve month (TTM) revenue equals the product of (x) two multiplied by (y) Akerna’s TTM revenue as of the Closing. Effective October 1, 2021, Ms. Billingsley’s annual base salary was increased to $300,000. Within ten days of the consummation of the Merger Agreement, Akerna paid Ms. Billingsley a completion award in a single lump sum of $95,000.
Ms. Billingsley will be eligible for an annual bonus (the “Annual Bonus”) with respect to each fiscal year ending during her employment. Her target annual cash bonus shall be in the amount of one hundred percent (100%) of her base salary (the “Target Bonus”) with the opportunity to earn greater than the Target Bonus upon achievement of above
147
target performance. The amount of the Annual Bonus shall be determined by the Board on the basis of fulfillment of the objective performance criteria established in its reasonable discretion. The performance criteria for any particular fiscal year shall be set no later than ninety days after the commencement of the relevant fiscal year. For the 2021 fiscal year, the Annual Bonus shall be determined based upon four (4) budget components (B2B Software Revenue, B2G Software Revenue, Services Revenue and Adjusted EBITDA) and NPS Scores With regards to the budget components, each scales linearly between achieving 75% to 100%, and greater than 100% with respect to the B2B Software Revenue, B2G Software Revenue, and Adjusted EBITDA target budget components respectively, of the applicable fiscal year’s budget for each such component (with 50% of the Target Bonus payable upon achievement of 75% of budget, 100% of the Target Bonus payable upon achievement of budget (and, with respect to the B2B Software Revenue, B2G Software Revenue, and Adjusted EBITDA budget components, with 200% of each weighted portion of the Target Bonus payable upon achievement of 125% of the corresponding component of budget, with linear interpolation between points. Accelerator to be paid at the discretion of the Board of Directors in cash, stock, or both. For the transition period 2020 and the 2020 fiscal year, the Annual Bonus was determined based upon the following four (4) budget components, each of which scales linearly between achieving 75% to 100%, and greater than 100% with respect to the Platform Recurring Revenue (as defined in Billingsley Employment Agreement) and Government Recurring Revenue (as defined in Billingsley Employment Agreement) budget components respectively, of the applicable fiscal year’s budget for each such component (with 50% of the Target Bonus payable upon achievement of 75% of budget, 100% of the Target Bonus payable upon achievement of budget (and, with respect to the Platform Recurring Revenue and Government Recurring Revenue budget components, with 200% of each weighted portion of the Target Bonus payable upon achievement of 125% of the corresponding component of budget, with linear interpolation between points)). During the fiscal year ended June 30, 2020, due to achieving targets Ms. Billingsley received a bonus of $54,750 and she received a discretionary share bonus of $90,000 worth of the Company’s shares of Common Stock based on the 10-day volume weighted average price as of the date of the award, which resulted in the issuance of 19,694 shares of Common Stock with a grant date fair value of $83,109. During the transition period ended December 31, 2020, due to achieving targets Ms. Billingsley received a bonus of $81,625.
Ms. Billingsley is entitled to participate in annual equity awards and employee benefits. She is indemnified by Akerna to for any and all expenses (including advancement and payment of attorneys’ fees) and losses arising out of or relating to any of her actual or alleged acts, omissions, negligence or active or passive wrongdoing, including, the advancement of expenses she incurs. The foregoing indemnification is in addition to the indemnification provided to her by Akerna pursuant to her Indemnification Agreement.
In the event of Ms. Billingsley’s termination for cause or without good reason, Akerna will be obligated to pay any accrued but unpaid base salary and any annual bonus earned and awarded for the fiscal year prior to that in which the termination occurs. In the event of Ms. Billingsley’s termination without cause or with good reason, Akerna will be obligated to pay any accrued but unpaid base salary, any annual bonus earned and awarded for the fiscal year prior to that in which the termination occurs, a cash severance payment equal to her base salary, pro-rated annual bonus for the fiscal year in which the termination occurs through the date of termination, and twelve months of health benefits.
The Billingsley Employment Agreement also contains noncompetition and non-solicitation provisions that apply through her employment and for a term of one year thereafter, and which are in addition to the noncompetition and non-solicitation provisions prescribed under a certain Non-Competition Agreement between Ms. Billingsley and Akerna. The Billingsley Employment Agreement also contains a non-disparagement provision that apply through her employment and for a term of two years thereafter.
L. Dean Ditto
Mr. Ditto entered into a letter agreement with Akerna on August 18, 2022 (the “Ditto Letter Agreement”). Mr. Ditto serves as the Chief Financial Officer of Akerna on an at-will-basis. Pursuant to the Ditto Letter Agreement, Mr. Ditto’s initial compensation package includes an annual base salary of $250,000, subject to all legal withholdings and deductions. Mr. Ditto will also immediately vest with $25,000 in Restricted Stock Units, which are subject to the terms of consulting agreement he previously executed.
148
Prior to Mr. Ditto’s appointment as Chief Financial Officer, the Company and Mr. Ditto entered into a consultant agreement dated April 21, 2022 (the “Ditto Consulting Agreement”). Pursuant to the Ditto Consulting Agreement, Mr. Ditto had agreed to perform certain financial and accounting related services and the Company granted Mr. Ditto restricted stock units that are valued at $25,000 that immediately vested upon the grant.
Subject to Mr. Ditto’s continued employment with Akerna through the occurrence of the first closing of a sale transaction of the majority of MJ Freeway at a reasonable and acceptable sale transactional valuation amount as determined by and at the sole discretion of the Akerna Board of Directors or a change in control (as defined in the Ditto Letter Agreement), Akerna will be obligated to pay Mr. Ditto a lump sum of $125,000 in one installment, within 60 days of the change in control event, subject to the requirements described in the Ditto Letter Agreement and less applicable payroll taxes and deductions.
Ray Thompson
On October 19, 2018, Mr. Thompson entered into a letter agreement with Akerna’s wholly owned subsidiary MJ Freeway LLC. Mr. Thompson served as the President and Chief Operating Officer of Akerna at will. Akerna paid Mr. Thompson an annual base salary of $200,000 in 2021. As part of his appointment as the Company’s President under the Company’s 2022 executive compensation structure, Mr. Thompson received an annual base salary of $275,000 and Mr. Thompson’s performance target annual cash bonus shall be 25% of his base salary. At the Board’s discretion, Mr. Thompson may be eligible for a bonus. Upon a change of control transaction, Mr. Thompson’s unvested restricted stock units or any other equity interests that he may be granted, will immediately vest. If Mr. Thompson’s employment is terminated by Akerna without cause or by him with good reason, he is entitled to his base salary through the date of termination.
Akerna entered into an Employee Covenant Agreement with Mr. Thompson, which obligates Mr. Thompson from disclosing any confidential information, including without limitation, trade secrets. The agreement also prohibits Mr. Thompson during the term of his employment and for a period of two years after his employment from soliciting any customer, client, employee, supplier or vendor of Akerna, and rendering any services or giving advice to any competitor or affiliate of a competitor. The agreement also requires Mr. Thompson to return all Akerna property and disclose all work product to Akerna.
On May 16, 2022, Akerna and Mr. Thompson agreed to a transition, effective immediately, by which Mr. Thompson will move from his current role as President and Chief Operating Officer to Special Advisor to the Chief Executive Officer. In that role, Mr. Thompson will continue to assist the Chief Executive Officer with certain of the day-to-day operations of the Company and advise the Company on various aspects of corporate strategy.
David McCullough
Mr. McCullough does not have a formal letter agreement with Akerna in relation to his employment as the Chief Technology Officer. Akerna paid Mr. McCullough an annual base salary of $200,000 for 2021. Under the Company’s 2022 executive compensation structure, Mr. McCullough will receive a base salary of $250,000 and Mr. McCullough’s performance target annual cash bonus shall be 25% of his base salary. At the Board’s discretion, Mr. McCullough may be eligible for a bonus. Upon a change of control transaction, Mr. McCullough’s unvested restricted stock units or any other equity interests that he may be granted, will immediately vest. If Mr. McCullough’s employment is terminated by Akerna without cause or by him with good reason, he is entitled to his base salary through the date of termination.
Akerna entered into an Employee Covenant Agreement with Mr. McCullough, which obligates Mr. McCullough from disclosing any confidential information, including without limitation, trade secrets. The agreement also prohibits Mr. McCullough during the term of his employment and for a period of two years after his employment from soliciting any customer, client, employee, supplier or vendor of Akerna, and rendering any services or giving advice to any competitor or affiliate of a competitor. The agreement also requires Mr. McCullough to return all Akerna property and disclose all work product to Akerna.
149
Potential Payments upon Termination or Change in Control
As described above under “Employment Agreements with Named Executive Officers,” the Company has entered into employment agreements with each of the named executive officers that provide for certain severance payments and benefits in the event the named executive officer’s employment with the Company is terminated under certain circumstances.
In addition, upon a Change in Control of the Company, unvested equity awards held by an executive officer will be accelerated as follows: (i) outstanding stock options and other awards in the nature of rights that may be exercised shall become fully vested and exercisable, (ii) time-based restrictions on restricted stock, restricted stock units and other equity awards shall lapse and the awards shall become fully vested, and (iii) performance-based equity awards, if any, shall become vested and shall be deemed earned based on an assumed achievement of all relevant performance goals at “target” levels, and shall payout pro rata to reflect the portion of the performance period that had elapsed prior to the Change in Control.
The table below shows the estimated value of benefits to each of the named executive officers if their employment had been terminated under various circumstances as of June 23, 2023. The amounts shown in the table exclude accrued but unpaid base salary, unreimbursed employment-related expenses, accrued but unpaid vacation pay, and the value of equity awards that were vested by their terms as of June 23, 2023.
|
Involuntary |
Involuntary |
Death |
Disability |
Termination for |
||||||||
|
Jessica Billingsley |
|
|
||||||||||
|
Cash severance(1) |
$ |
300,000 |
$ |
300,000 |
||||||||
|
Bonus(2) |
|
— |
$ |
300,000 |
||||||||
|
Health benefits(3) |
$ |
2,400 |
$ |
2,400 |
||||||||
|
Value of equity acceleration(4) |
$ |
454 |
$ |
454 |
||||||||
|
Total |
$ |
302,854 |
$ |
602,854 |
||||||||
|
|
|
|||||||||||
|
L. Dean Ditto |
|
|
||||||||||
|
Cash severance(1) |
$ |
83,333 |
$ |
83,333 |
||||||||
|
Bonus(2) |
|
— |
$ |
125,000 |
||||||||
|
Health benefits(3) |
$ |
2,400 |
$ |
2,400 |
||||||||
|
Value of equity acceleration(4) |
|
— |
|
— |
||||||||
|
Total |
$ |
85,733 |
$ |
210,733 |
||||||||
____________
(1) Reflects severance payment equal to one times base salary payable in equal monthly installments for 12 months for Ms. Billingsley and one third of base salary for Mr. Ditto.
(2) Reflects change in control success bonuses equal to one times base salary for Ms. Billingsley and one half of base salary for Mr. Ditto.
(3) Reflects the Company’s estimated cost of continued health coverage at active employee rates for three months.
(4) Reflects the value of unvested in-the-money stock options and restricted stock units, or RSUs, that vest upon the designated event.
150
Outstanding Equity Awards at 2022 Fiscal Year-End
A summary of the number and the value of the outstanding equity awards as of December 31, 2022 held by the named executive officers is set out in the table below.
|
Stock Awards(1) |
||||||||||
|
Name |
Number of |
Market |
Equity |
Equity |
||||||
|
Jessica Billingsley |
— |
|
— |
125 |
(2) |
86 |
||||
|
Chief Executive Officer |
— |
|
— |
500 |
(3) |
345 |
||||
|
— |
|
— |
500 |
(4) |
345 |
|||||
|
Ray Thompson |
334 |
(5) |
230 |
125 |
(2) |
86 |
||||
|
Chief Operating Officer |
— |
|
— |
334 |
(6) |
230 |
||||
|
— |
|
— |
313 |
(7) |
216 |
|||||
|
— |
|
— |
500 |
(3) |
345 |
|||||
|
— |
|
— |
500 |
(4) |
345 |
|||||
|
David McCullough |
— |
|
— |
100 |
(8) |
69 |
||||
|
Chief Technology Officer |
— |
|
— |
500 |
(3) |
345 |
||||
|
— |
|
— |
500 |
(4) |
345 |
|||||
There were no options granted in the fiscal year ended December 31, 2022.
____________
(1) Each RSU represents a contingent right to receive one share of Common Stock of the Company.
(2) Represents 125 RSUs which vest on July 1, 2023.
(3) Represents 500 RSUs, which vest as follows: 250 units shall vest on July 1, 2023, and 250 units shall vest on July 1, 2024.
(4) Represents 500 RSUs, which vest as follows: 250 units shall vest on December 1, 2023, and 250 units shall vest on December 1, 2024.
(5) Represents 334 shares of restricted stock which vest on January 1, 2023.
(6) Represents 334 RSUs which vest on January 1, 2023.
(7) Represents 313 RSUs which vest on January 1, 2023.
(8) Represents 100 RSUs which vest on July 1, 2023.
Pension Benefits
None of our employees participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by us. Our Compensation Committee may elect to adopt qualified or non-qualified benefit plans in the future if it determines that doing so is in our company’s best interest.
Non-qualified Deferred Compensation
None of our employees participate in or have account balances in non-qualified defined contribution plans or other non-qualified deferred compensation plans maintained by us. Our Compensation Committee may elect to provide our officers and other employees with non-qualified defined contribution or other non-qualified compensation benefits in the future if it determines that doing so is in our company’s best interest.
151
Director Compensation
The following table sets forth the compensation granted to our directors who are not also executive officers during the fiscal year ended December 31, 2022. Compensation to directors that are also executive officers is detailed above and is not included on this table.
|
Name |
Fees |
Stock |
Option |
Non-equity |
Nonqualified |
All other |
Total |
|||||||
|
Barry Fishman |
49,467 |
21,750 |
— |
— |
— |
— |
71,217 |
|||||||
|
Matthew Kane |
49,467 |
21,750 |
— |
— |
— |
— |
71,217 |
|||||||
|
Tahira Rehmatullah |
49,467 |
21,750 |
— |
— |
— |
— |
71,217 |
|||||||
|
Scott Sozio(1) |
161,458 |
— |
— |
— |
— |
— |
161,458 |
____________
(1) Mr. Sozio receives compensation pursuant to his role as Head of Corporate Development and is not compensated independently as a director.
Narrative Disclosure to Director Compensation Table
Compensation granted to our directors who are not also executive officers or employees during the fiscal year ended December 31, 2022 included $71,217 paid $49,467 in cash and $21,750 in stock. Each independent director receives the following per year cash fees for participation on each of the audit ($11,000), compensation ($9,500) and corporate governance and nominating committee ($8,000). Additionally, the Compensation Committee approved a one-time payment to the current independent directors of $20,000 per director as compensation for service on the Board’s special committees since the beginning of the 2022 fiscal year. Amounts earned in cash are paid quarterly. Stock awards vest quarterly over the fiscal year.
Compensation Policies and Practices and Risk Management
The Compensation Committee has reviewed the design and operation of Akerna’s compensation policies and practices for all employees, including executives, as they relate to risk management practices and risk-taking incentives. The Compensation Committee believes that Akerna’s compensation policies and practices do not encourage unnecessary or excessive risk taking and that any risks arising from Akerna’s compensation policies and practices for its employees are not reasonably likely to have a material adverse effect on Akerna.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee has ever been an officer or employee of Akerna. None of Akerna’s executive officers serve, or have served during the last fiscal year, as a member of the Board, compensation committee, or other board committee performing equivalent functions of any other entity that has one or more executive officers serving as one of Akerna’s directors or on the Compensation Committee.
152
Gryphon’S EXECUTIVE AND DIRECTOR COMPENSATION
The following tables and accompanying narrative set forth information about the 2021 and 2022 compensation provided to Gryphon’s principal executive officer who will serve as an executive officer of Akerna following the closing of the Merger. This individual, who is referred to in this section as a “named executive officer,” and his position is as follows:
• Rob Chang: Chief Executive Officer
This discussion may contain forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt following the closing of the Merger may differ materially from the currently planned programs summarized in this discussion.
The Gryphon Board, with input from Gryphon’s Chief Executive Officer, has historically determined the compensation for Gryphon’s named executive officers. The Gryphon Board has designed, and intends to modify as necessary, its compensation and benefits programs to attract, retain, incentivize and reward talented and qualified executives who share its philosophy and desire to work towards achieving Gryphon’s goals. Gryphon believes its compensation programs should promote Gryphon’s success and align executive incentives with the long-term interests of its stockholders. Gryphon’s current compensation programs reflect its startup origins and consist primarily of salary, annual bonus eligibility and equity awards. As Gryphon’s needs evolve, it intends to continue to evaluate its philosophy and compensation programs as circumstances require.
2022 Summary Compensation Table
The following table sets forth information concerning the compensation of the named executive officer for the years ended December 31, 2021 and December 31, 2022:
|
Name and Principal Position |
Year |
Salary(1) |
Bonus |
Stock |
Total |
|||||||||
|
Rob Chang |
2022 |
$ |
230,640 |
$ |
— |
$ |
— |
$ |
230,640 |
|||||
|
Chief Executive Officer |
2021 |
|
206,822 |
|
76,680 |
|
4,540,420 |
|
4,823,922 |
|||||
____________
(1) The amounts for Mr. Chang’s salary and bonus in the table were converted from Canadian dollars to United States dollars using an average exchange rate over 2022 of 1 CAD for .7688 USD.
(2) The amounts reported in this column reflect the aggregate grant date fair value of shares granted to the applicable named executive officer as computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (“ASC Topic 718”). These amounts do not necessarily correspond to the actual value recognized by the applicable named executive officer. The assumptions used in the valuation of these awards are consistent with the valuation methodologies specified in Note 1 to Gryphon’s consolidated financial statements included elsewhere in this proxy statement/prospectus. See the narrative below for more information on the stock awards in this column.
Narrative Disclosure to Summary Compensation Table
For 2022, the compensation program for Gryphon’s named executive officer consisted of base salary and vesting of unvested stock.
Base Salary
The base salary for each named executive officer is set at a level that is commensurate with the executive’s duties and authorities, contributions, prior experience and sustained performance.
2021 Cash Bonus
As described below, the Consulting Agreement with Mr. Chang provides for an annual cash incentive opportunity with a target equal to 100% of Chang Advisory’s base fee for such year. For 2021, Mr. Chang earned an annual bonus equal to CAD $100,000 based on a review of Gryphon’s performance, as well as the performance of Mr. Chang. Gryphon anticipates implementing a formal annual bonus program for its executive officers following the closing of the Merger.
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Consulting Agreement with Chang Advisory, Inc.
Mr. Chang serves as Gryphon’s Chief Executive Officer pursuant to a Consulting Agreement between Gryphon and Chang Advisory, Inc. (“Chang Advisory”), effective January 14, 2021. Mr. Chang is the sole owner of Chang Advisory. Under the agreement, Chang Advisory’s base fee was initially CAD $175,000 per year. The agreement provided that the base fee would increase to CAD $300,000 per year upon the closing of either: (i) an equity financing totaling at least CAD $5 million or (ii) a debt and equity financing totaling at least CAD $10 million. This condition was met in March 2021 and, accordingly, the base fee is currently CAD $300,000 per year. Under the agreement, Chang Advisory’s base fee for any year may not be reduced without the written consent of both Chang Advisory and Gryphon, and Chang Advisory is entitled to an annual cash incentive opportunity with a target equal to 100% of Chang Advisory’s base fee for such year. The agreement further provides that Gryphon will pay to Chang Advisory harmonized sales tax on any invoice or other compensation paid to Chang Advisory in the event that Gryphon’s head office becomes located in Canada or in the event that any law or governmental authority requires that such tax be remitted by Chang Advisory in respect of any such compensation.
On the effective date of the agreement, Chang Advisory became entitled to purchase, for USD $0.004 per share, 15.2% of the outstanding shares of common stock of Gryphon as of such date. In the event that Chang Advisory’s engagement with Gryphon terminates by reason of Chang Advisory’s resignation or by reason of a material breach by Chang Advisory of the agreement, or for cause (as defined below), prior to the one-year anniversary of the effective date of the agreement, Gryphon or any other affiliate of Gryphon had the right (but not the obligation) to repurchase (i) 75% of the such shares if such termination occurred within six months of the effective date of the agreement; and (ii) 50% of such shares if such termination occurred after six months and within one year of such effective date, in each case for a price of USD $0.004 per share. Such repurchase right expired on the one-year anniversary of the effective date of the agreement.
In the event that Chang Advisory’s engagement is terminated by Gryphon without cause, is terminated by Chang Advisory for good reason, or in the event that there is a change in control (as defined in the agreement), all unvested equity awards held by Chang Advisory will accelerate vesting and, with respect to any stock options, such options will remain fully exercisable until their original expiry date. In the event of Chang Advisory’s termination for cause or voluntary resignation, all equity awards granted to Chang Advisory that are outstanding on the date of such termination or resignation will continue to vest on the original schedule and any stock options will remain exercisable until the earlier of (i) the expiration date set forth in the applicable stock option agreement; or (ii) the expiration of 6 months measured from the date of such termination or resignation.
The agreement also provides that Chang Advisory will be entitled to receive reimbursement from Gryphon for all reasonable business expenses, and Mr. Chang and his partner and dependents will be eligible to participate in the benefit plans that are available to the executive officers of Gryphon. Under the agreement, Gryphon will indemnify Chang Advisory and Mr. Chang to the fullest extent permitted by law against all costs, charges, awards, legal fees and expenses which Chang Advisory and/or Mr. Chang is/are involved because of its/his/their association with Gryphon, and Gryphon will at all times maintain a Directors and Officers Insurance Policy under which Chang Advisory and Mr. Chang will be insured.
Upon termination of engagement due to the death or disability (as defined in the agreement) of Chang Advisory, Chang Advisory will be entitled to receive: (i) any unpaid annual bonus for the year immediately prior to the year of such termination (in an amount equal to the greater of the bonus percentage accrued by Gryphon or Chang Advisory’s target annual bonus) and (ii) a pro-rated share of Chang Advisory’s target annual bonus for the year of such termination (in an amount equal to the bonus percentage accrued by Gryphon through the last closed accounting month prior to such termination but with such bonus percentage being deemed to be fully accrued if Gryphon is at least on target to attain the appropriate financial targets for such year). In addition, in the case of termination due to disability, Gryphon will continue Chang Advisory’s and/or Mr. Chang’s participation in the benefit plans for so long as he remains disabled as defined under those plans.
Under the agreement, should Gryphon terminate Chang Advisory’s engagement (other than for cause or as a result of Chang Advisory’s death or disability), or in the event Chang Advisory resigns for good reason, or in the event of a termination of Chang Advisory’s engagement whether by Chang Advisory or by Gryphon for any reason other
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than cause within 6 months of a change in control, then Gryphon will pay to Chang Advisory (i) a termination fee equal to the annual fee; (ii) bonus for any prior year that has been earned but is unpaid (in an amount equal to the greater of the bonus percentage accrued by Gryphon or Chang Advisory’s target annual bonus); and (iii) a pro-rated share of Chang Advisory’s target annual bonus for the year of such termination (in an amount equal to the bonus percentage accrued by Gryphon through the last closed accounting month prior such termination but with such bonus percentage being deemed to be fully accrued if Gryphon is at least on target to attain the appropriate financial targets for such year).
For purposes of the agreement, “cause ” means that Chang Advisory or Mr. Chang has engaged in any one of the following: (i) intentional misconduct involving Gryphon or its assets, including, without limitation, material misappropriation of Gryphon’s funds or property; (ii) reckless or willful misconduct in the performance of Chang Advisory’s duties in the event such conduct continues after Gryphon has provided 30 days written notice to Chang Advisory and a reasonable opportunity to cure such misconduct; (iii) conviction of, or plea of nolo contendere to, any felony or misdemeanor involving dishonesty or fraud; (iv) the material violation of any of Gryphon’s policies, including without limitation, Gryphon’s policies on equal engagement opportunity and the prohibition against unlawful harassment; (v) the material breach of any provision of the agreement after 30 days written notice to Chang Advisory of such breach and a reasonable opportunity to cure such breach; or (vi) any other misconduct that has a material adverse effect on the business or reputation of Gryphon after 30 days written notice to Chang Advisory of such breach and a reasonable opportunity to cure the adverse effects of such misconduct.
Executive Employment Agreement with Simeon Salzman
Gryphon and Simeon Salzman are party to an Executive Employment Agreement dated June 19, 2023, the effective date of the employment agreement. Because Mr. Salzman recently joined Gryphon in, his compensation is not disclosed in the 2022 Summary Compensation Table presented above. The employment agreement provides for the terms described in this paragraph. Mr. Salzman will serve as the Chief Financial Officer of Gryphon (and, under certain circumstances, such other position as Gryphon’s Chief Executive Officer may designate), reporting to Gryphon’s Chief Executive Officer. Mr. Salzman will receive a base salary of $200,000 and will be eligible to receive an annual bonus with a target of up to 50% of his then-current base salary. Mr. Salzman will receive a time-based equity grant covering 390,800 Gryphon Shares (the “Equity Grant”), vesting as follows (subject to Mr. Salzman’s continued employment with Gryphon through the relevant vesting date): 1/6 of the Equity Grant will vest upon the 6-month anniversary of the effective date of the employment agreement and the remainder of the Equity Grant will vest in substantially equal quarterly installments commencing with the first quarter following the 6 month anniversary of the effective date of the employment agreement. The vesting of the Equity Grant will be accelerated if Mr. Salzman is continuously employed through of a change in control of Gryphon (excluding a reverse takeover transaction or merger for the purposes of listing Gryphon on a public exchange). Mr. Salzman will be entitled to receive those benefits that are made available to the other similarly situated executive employees of Gryphon, and will be reimbursed for reasonable out-of-pocket expenses. Upon the termination of the employment agreement during the first two full financial reporting quarters of Gryphon by (a) Mr. Salzman for good reason (as defined in the employment agreement) or (b) by Gryphon without cause (as defined in the employment agreement), then, subject to Mr. Salzman’s execution and non- revocation of and compliance with a separation and release agreement in a form provided by Gryphon, Gryphon will pay Mr. Salzman an amount equal to 3 months of his then current base salary. Upon such a termination of the employment agreement following the first two full financial reporting quarters of Gryphon, Gryphon will pay Mr. Salzman an amount equal to (a) 12 months of his then current base salary, plus (b) Mr. Salzman’s then-current annual bonus target.
Outstanding Equity Awards at 2022 Fiscal Year-End
The named executive officer did not hold outstanding equity awards as of December 31, 2022.
Post-Closing of the Merger Executive Compensation
Following the closing of the Merger, the board of directors of the combined company is expected to develop an executive compensation program that is designed to align compensation with Gryphon’s business objectives and the creation of stockholder value, while enabling Gryphon to attract, retain, incentivize and reward individuals who contribute to the long-term success of the combined company. Decisions regarding the executive compensation
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program will be made by the compensation committee of the board of directors of the combined company. This section describes the plans and arrangements the board of directors of the combined company is expected to maintain following the closing of the Merger, for the benefit of employees, including the named executive officers.
2023 Omnibus Incentive Plan
In connection with the closing of the Merger, the Akerna Board will adopt the 2023 Omnibus Incentive Plan, subject to the approval of Akerna’s stockholders described herein, in order to facilitate the grant of equity awards to attract, retain and incentivize employees (including the named executive officers), independent contractors and directors of Gryphon and its affiliates, which is essential to Gryphon’s long-term success. The 2023 Omnibus Incentive Plan is intended to replace Akerna’s 2019 Long Term Incentive Plan. The combined company’s board of directors is expected to terminate Akerna’s 2019 Long Term Incentive Plan, effective as of and contingent upon the closing of the Merger. We anticipate that, following the closing of the Merger, no additional equity awards will be granted under Akerna’s 2019 Long Term Incentive Plan. For additional information about the 2023 Omnibus Incentive Plan, please see Proposal No. 6.
Benefits and Perquisites
Following the closing of the Merger, the combined company is expected to provide benefits to its named executive officers, including medical, dental, vision, life and AD&D, and short- and long-term disability insurance, flexible spending accounts, vacation, paid holidays, and participation in a 401(k) plan.
Compensation of Directors
The following table and accompanying narrative set forth information about the 2021 and 2022 compensation provided to certain of members of the Gryphon Board and the Akerna Board, all of whom will serve as a member of the board of directors of the combined company following the closing of the Merger. These individuals are as follows:
• Rob Chang (current member of the Gryphon Board)
• Brittany Kaiser (current member of the Gryphon Board)
• Jessica Billingsley (Chief Executive Officer of Akerna and Chairperson of the Akerna Board)
Rob Chang is a Gryphon named executive officer who also served on the Gryphon Board of directors during 2022. The 2022 compensation information for Mr. Chang is presented in the Summary Compensation Table above and he was not entitled to any additional compensation for his service on the Gryphon Board during 2022. Jessica Billingsley is Chairperson of the Akerna Board and Akerna’s Chief Executive Officer.
|
Name |
Fees |
Stock |
Total |
|||
|
Rob Chang |
— |
— |
— |
|||
|
Brittany Kaiser |
200,000 |
— |
200,000 |
|||
|
Jessica Billingsley(1) |
— |
— |
— |
____________
(1) At the end of 2022, Ms. Billingsley held no unvested equity awards.
Historically, Gryphon has not had a formal compensation policy for Gryphon’s non-employee directors, and has instead entered into Director Agreements with its directors.
Director Agreement with Ms. Kaiser
Ms. Kaiser and Gryphon entered into a Director Agreement on May 12, 2021, pursuant to which she agreed to serve Gryphon as a member of the Gryphon Board upon the terms and conditions set forth in Director Agreement, subject to any necessary approval by Gryphon’s stockholders after an initial one-year term on the Gryphon Board. The Director Agreement requires Ms. Kaiser to use her best efforts to promote the interests of Gryphon and to dedicate a minimum of 20 hours per week to Gryphon. Under the Director Agreement, Ms. Kaiser is entitled to a base fee of $200,000 per year, which may not be reduced without the written consent of Ms. Kaiser. During the term of Director Agreement, Gryphon will reimburse Ms. Kaiser for all reasonable out-of-pocket expenses incurred by Ms. Kaiser, subject to
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certain pre-approval requirements. In connection with the entry into the Director Agreement, Achayot Partners LLC received 700,000 shares of Gryphon’s common stock. Ms. Kaiser is the CEO and 50% owner of Achayot Partners LLC with Natalie Kaiser, the other 50% owner of Achayot Partners LLC. The term of the Director Agreement is the period commencing on the May 12, 2021 and terminating upon the earliest of (a) May 12, 2024; (b) the death of Ms. Kaiser; (c) the termination of Ms. Kaiser from her membership on the Gryphon Board by the mutual agreement of Gryphon and Ms. Kaiser; (d) the removal of Ms. Kaiser from the Gryphon Board by the majority stockholders of Gryphon or the stockholder who appointed Ms. Kaiser, as applicable; and (e) the resignation by Ms. Kaiser from the Gryphon Board. During her service as a member of the Gryphon Board and for a period of one year thereafter, Ms. Kaiser will not interfere with Gryphon’s relationship with, or endeavor to entice away from Gryphon, any person who, on the date of the termination of Ms. Kaiser’s service as a member of the Gryphon Board and/or at any time during the one year period prior to the termination of such service, was an employee or customer of Gryphon or otherwise had a material business relationship with Gryphon. Ms. Kaiser is also subject to a customary non-competition covenant in favor of Gryphon during her service as a member of the Gryphon Board and for a period of six months thereafter. Under the Director Agreement, Gryphon will indemnify Ms. Kaiser for her activities as a member of the Gryphon Board to the fullest extent permitted under applicable law and will use its best efforts to maintain Directors and Officers Insurance benefitting the Gryphon Board.
In connection with the closing of the Merger, the board of directors of the combined company is expected to adopt a new non-employee director compensation policy. The new policy will be designed to attract and retain high quality non-employee directors by providing competitive compensation and to align their interests with the interests of the combined company’s stockholders through equity awards.
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MATTERS BEING SUBMITTED TO A VOTE OF AKERNA STOCKHOLDERS
APPROVAL OF THE ISSUANCE OF COMMON STOCK IN THE MERGER AND THE CHANGE OF CONTROL RESULTING FROM THE MERGER
At the Akerna special meeting, Akerna stockholders will be asked to approve the issuance of Akerna Common Stock in the Merger. Immediately following the Merger, it is expected that the former Gryphon stockholders will own approximately 92.5% of the equity interests of the combined company on a fully diluted basis and the Akerna stockholders as of immediately prior to the Merger will own approximately 7.5% of the equity interests of the combined company on a fully diluted basis.
The terms of, reasons for, and other aspects of the Merger Agreement, the Merger and the issuance of Akerna Common Stock in the Merger are described in detail in the other sections in this proxy statement / prospectus. A copy of the Merger Agreement is attached as Annex A to this proxy statement / prospectus.
Under Nasdaq Listing Rule 5635(a)(1), a company listed on Nasdaq is required to obtain stockholder approval prior to the issuance of common stock, among other things, in connection with the acquisition of another company’s stock, if the number of shares of common stock to be issued is in excess of 20% of the number of shares of common stock then outstanding.
The issuance of the shares of Akerna Common Stock in the Merger exceeds the 20% threshold under the Nasdaq Listing Rules and is expected to represent approximately 92.5% of the outstanding equity interests of the combined company on a fully diluted basis following the Merger. Accordingly, in order to ensure compliance with Nasdaq Listing Rule 5635(a)(1), Akerna must obtain the approval of Akerna stockholders for the issuance of these shares of Akerna Common Stock in the Merger.
Stockholders should review the disclosure in the prospectus/proxy statement under the headings “Transactions”, “The Merger Agreement” and “Agreements Related to the Merger” for an additional information regarding the Merger, the Merger Agreement and related matters thereto.
The Merger is subject to certain risks. See “Risk Factors — Risks Related to the Merger”.
Under Nasdaq Listing Rule 5635(b), a company listed on Nasdaq is required to obtain stockholder approval prior to an issuance of stock that will result in a “change of control” of the listed company. Nasdaq has determined that the Merger constitutes a “change of control” of Akerna. Accordingly, in order to ensure compliance with Nasdaq Listing Rule 5635(b), Akerna must obtain the approval of Akerna stockholders of the change of control resulting from the Merger.
Required Vote
The affirmative vote of a majority of the votes properly cast at the Akerna special meeting, whether present at the special meeting or represented by proxy at the special meeting, is required for approval the issuance of Akerna Common Stock in the Merger and the change of control of Akerna resulting from the Merger.
AKERNA BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THIS MERGER PROPOSAL TO APPROVE THE ISSUANCE OF AKERNA COMMON STOCK IN THE MERGER AND THE CHANGE OF CONTROL OF AKERNA RESULTING FROM THE MERGER.
Unless otherwise instructed, it is the intention of the persons named in the accompanying proxy card to vote shares represented by properly executed proxy cards “FOR” the approval of the issuance of Akerna Common Stock in the Merger and the change of control of Akerna resulting from the Merger.
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PROPOSAL NO. 2: SALE TRANSACTION
APPROVAL OF THE SALE TRANSACTION
At the Akerna special meeting, Akerna stockholders will be asked to approve sale of the Membership Interests of MJ Freeway and Capital Stock of Ample to MJ Acquisition pursuant to the terms of the Purchase Agreement and the transactions contemplated thereby.
Stockholders should review the disclosure in the prospectus/proxy statement under the headings “Transactions”, “The Purchase Agreement” and “Agreements Related to the Sale Transaction” for an additional information regarding the Sale Transaction, the Purchase Agreement and related matters thereto.
The Sale Transaction is subject to certain risks. See “Risk Factors — Risks Related to the Sale Transaction”.
The terms of, reasons for, and other aspects of the Purchase Agreement and the transactions described therein are described in detail in the other sections in this proxy statement / prospectus. A copy of the Purchase Agreement is attached as Annex B to this proxy statement / prospectus.
Required Vote
The affirmative vote of the holders of a majority of the outstanding Akerna Common Stock and Series C Preferred Stock, voting as one class, having voting power on the record date for the Akerna special meeting is required to approve the sale of the Membership Interests and Capital Stock pursuant to the terms of the Purchase Agreement and the transactions contemplated thereby.
AKERNA BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THIS PROPOSAL NO. 2 AND THE TRANSATCIONS CONTEMPLATED BY THE PURCHASE AGREEMENT.
Unless otherwise instructed, it is the intention of the persons named in the accompanying proxy card to vote shares represented by properly executed proxy cards “FOR” the approval of the sale of the Membership Interests of MJ Freeway and the Capital Stock of Ample to MJ Acquisition, pursuant to the terms of the Purchase Agreement and the transactions contemplated thereby.
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PROPOSAL NO. 3: AKERNA REVERSE STOCK SPLIT
APPROVAL OF THE AMENDMENT TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AS AMENDED OF AKERNA TO EFFECT THE REVERSE STOCK SPLIT
General
At the Akerna special meeting, Akerna stockholders will be asked to approve a series of amendments to the restated certificate of incorporation of Akerna as amended that will implement the Akerna Reverse Stock Split, a reverse stock split of the issued and outstanding shares of Akerna Common Stock, at a reverse split ratio in the range of one (1) new share for every fifteen (15) to one hundred (100) shares outstanding (or any number in between), with the exact ratio and effective time of the reverse stock split of Akerna Common Stock to be determined by the Akerna Board, agreed to by Gryphon, and publicly announced by a press release. The effectiveness of any one of these amendments and the abandonment of the other amendments, or the abandonment of all of these amendments, will be determined by the Akerna Board in its discretion and subject to agreement by Gryphon in connection with the Merger. Upon the effectiveness of such amendment to the restated certificate of incorporation of Akerna as amended to effect the reverse stock split (the “Reverse Stock Split Effective Time”), the issued and outstanding shares of Akerna Common Stock immediately prior to the Reverse Stock Split Effective Time will be reclassified into a smaller number of shares such that an Akerna stockholder will own one new share of Akerna Common Stock for each fifteen (15) to one hundred (100) (or any number in between) shares of issued common stock held by such stockholder immediately prior to the Reverse Stock Split Effective Time, as specified.
The Akerna Board may determine to effect the Akerna Reverse Stock Split, if it is approved by the stockholders, even if the other proposals to be acted upon at the meeting are not approved, including the issuance of Akerna Common Stock pursuant to the Merger Agreement.
By approving this Reverse Stock Split Proposal, Akerna stockholders will: (a) approve a series of alternate amendments to the amended and restated certificate of incorporation of Akerna pursuant to which any whole number of issued and outstanding shares of Akerna Common Stock between and including fifteen (15) to one hundred (100) and could be combined and reclassified into one share of Akerna Common Stock; and (b) authorize the Akerna Board to file only one such amendment, as determined by the Akerna Board in its sole discretion, and to abandon each amendment not selected by the Akerna Board. Should Akerna receive the required stockholder approval for this Reverse Stock Split Proposal, and following such stockholder approval, the Akerna Board, subject to agreement by Gryphon, determines that effecting the reverse stock split is in the best interests of Akerna and its stockholders, the Akerna Reverse Stock Split will become effective as specified in the amendment filed with the Secretary of State of the State of Delaware. The amendment filed thereby will contain the number of shares selected by the Akerna Board within the limits set forth in this Reverse Stock Split Proposal to be combined and reclassified into one share of Akerna Common Stock. Accordingly, at the Reverse Stock Split Effective Time, every fifteen (15) to one hundred (100) shares (or any number in between) of Akerna Common Stock outstanding immediately prior to the Reverse Stock Split Effective Time will be combined and reclassified into one share of Akerna Common Stock.
The proposed form of certificate of amendment to the amended and restated certificate of incorporation of Akerna to effect the Akerna Reverse Stock Split, as more fully described below, will affect the Akerna Reverse Stock Split but will not change the number of authorized shares of Akerna Common Stock or Akerna’s preferred stock, par value $0.0001 (the “Akerna Preferred Stock”), or the par value of Akerna Common Stock or Akerna Preferred Stock.
A copy of the proposed form of certificate of amendment to the restated certificate of incorporation of Akerna as amended to effect the reverse stock split is attached as Annex C to this proxy statement / prospectus.
Notwithstanding approval of this Reverse Stock Split Proposal by Akerna stockholders, the Akerna Board may, in its sole discretion, abandon the proposed amendments and determine prior to the effectiveness of any filing with the Secretary of State of the State of Delaware not to effect the reverse stock split, as permitted under Section 242(c) of the DGCL.
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Purpose
The Akerna Board approved the proposal approving the amendment to the Akerna restated certificate of incorporation as amended effecting the Akerna Reverse Stock Split for the following reasons:
• the Akerna Board believes effecting the reverse stock split will result in an increase in the minimum bid price of Akerna Common Stock and reduce the risk of a delisting of Akerna Common Stock from Nasdaq in the future; and
• in order for Nasdaq to approve the continued listing of the common stock of the combined company on The Nasdaq Capital Market following the completion of the Merger, the combined company will need to meet the initial listing standards for The Nasdaq Capital Market. One of the initial listing standards is a minimum trading price of $4.00 per share. Given the recent trading price of the Akerna Common Stock, Gryphon and Akerna anticipate that the Akerna Reverse Stock Split will be required in order to meet this standard.
Nasdaq Requirements for Listing on Nasdaq
Akerna Common Stock is listed on The Nasdaq Capital Market under the symbol “KERN.” Akerna will file an initial listing application pursuant to the terms of the Merger Agreement for the combined company with Nasdaq.
According to the Nasdaq rules, an issuer must, in a case such as this, apply for initial inclusion following a transaction whereby the issuer combines with a non-Nasdaq entity, resulting in a change of control of the issuer and potentially allowing the non-Nasdaq entity to obtain a Nasdaq listing. Accordingly, the listing standards of Nasdaq will require Akerna to have, among other things, a $4.00 per share minimum bid price for a certain number of trading days preceding the closing of the Merger. Therefore, the Akerna Reverse Stock Split may be necessary in order to consummate the Merger.
In addition, it is a condition to the closing of the Merger that the shares of Akerna Common Stock to be issued in the Merger pursuant to the Merger Agreement have been approved for listing on Nasdaq, and that the Akerna Common Stock remain continuously listed on Nasdaq through the completion of the Merger.
One of the effects of the Akerna Reverse Stock Split will be to effectively increase the proportion of authorized shares which are unissued relative to those which are issued. This could result in the combined company’s management being able to issue more shares without further stockholder approval. The Akerna Reverse Stock Split will not affect the number of authorized shares of Akerna capital stock that will continue to be authorized pursuant to the restated certificate of incorporation of Akerna, as amended.
There are risks associated with the Akerna Reverse Stock Split, including that the Akerna Reverse Stock Split may not result in an increase in the per share price of Akerna Common Stock.
Akerna cannot predict whether the Akerna Reverse Stock Split will increase the market price for Akerna Common Stock. The history of similar stock split combinations for companies in like circumstances is varied. There is no assurance that:
• the market price per share of Akerna Common Stock after the Akerna Reverse Stock Split will rise in proportion to the reduction in the number of shares of Akerna Common Stock outstanding before the Akerna Reverse Stock Split;
• the Akerna Reverse Stock Split will result in a per share price that will attract brokers and investors who do not trade in lower-priced stocks;
• the Akerna Reverse Stock Split will result in a per share price that will increase the ability of the combined company to attract and retain employees;
• the market price per share will either exceed or remain in excess of the $1.00 minimum bid price as required by Nasdaq for continued listing; or
• the market price per share will achieve and maintain the $4.00 minimum bid price requirement for a sufficient period for the combined company’s common stock to be approved for listing by Nasdaq.
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The market price of Akerna Common Stock will also be based on the performance of Akerna, and after the Merger, on the performance of the combined company, and other factors, some of which are unrelated to the number of shares outstanding. If the Akerna Reverse Stock Split is effected and the market price of Akerna Common Stock declines, the percentage decline as an absolute number and as a percentage of the overall market capitalization of Akerna may be greater than would occur in the absence of a reverse stock split. Furthermore, the liquidity of Akerna Common Stock could be adversely affected by the reduced number of shares that would be outstanding after the Akerna Reverse Stock Split.
Principal Effects of the Reverse Stock Split
The reverse stock split will be realized simultaneously for all shares of Akerna Common Stock and options to purchase shares of Akerna Common Stock outstanding immediately prior to the Reverse Stock Split Effective Time. The Akerna Reverse Stock Split will affect all holders of shares of Akerna Common Stock outstanding immediately prior to the Reverse Stock Split Effective Time uniformly and each such stockholder will hold the same percentage of Akerna Common Stock outstanding immediately following the Akerna Reverse Stock Split as that stockholder held immediately prior to the Akerna Reverse Stock Split, except for immaterial adjustments that may result from the treatment of fractional shares as described below. The Akerna Reverse Stock Split will not change the par value of Akerna Common Stock or Akerna Preferred Stock and will not reduce the number of authorized shares of Akerna Common Stock or Akerna Preferred Stock. Akerna Common Stock issued pursuant to the Akerna Reverse Stock Split will remain fully paid and non-assessable. The Akerna Reverse Stock Split will not affect Akerna continuing to be subject to the periodic reporting requirements of the Exchange Act.
The table below shows, as of January 4, 2024 and assuming the approval of the Akerna Authorized Share Increase, the number of Akerna shares outstanding prior to the reverse stock split and the number of outstanding shares of Akerna Common Stock that would result from a (a) 1-for-15 ratio, (b) 1-for-30 ratio, (c) 1-for-50 ratio, (d) 1-for-75 ratio and (e) 1-for-100 ratio, in each case without giving effect to the treatment of fractional shares:
|
Reverse Stock Split Ratio |
Number of |
Approximate |
Percentage of |
Number of |
|||||
|
Current shares |
300,000,000 |
10,352,069 |
3.5 |
% |
47,030,772 |
||||
|
1-for-15 |
300,000,000 |
690,138 |
0.2 |
% |
3,135,385 |
||||
|
1-for-30 |
300,000,000 |
345,069 |
0.1 |
% |
1,567,693 |
||||
|
1-for-50 |
300,000,000 |
207,041 |
0.07 |
% |
940,616 |
||||
|
1-for-75 |
300,000,000 |
138,028 |
0.05 |
% |
627,077 |
||||
|
1-for-100 |
300,000,000 |
103,521 |
0.03 |
% |
470,308 |
||||
____________
(1) Based on the number of Akerna Shares authorized following the approval of the increase in authorized Akerna Common Stock.
(2) Based on the number of Akerna shares outstanding as of January 4, 2024.
Procedure for Effecting Reverse Stock Split and Exchange of Stock Certificates
If the Akerna stockholders approve the amendment to the Akerna amended and restated certificate of incorporation as amended effecting the Akerna Reverse Stock Split, and if the Akerna Board still believes that a reverse stock split is in the best interests of Akerna and its stockholders, Akerna will file the amendment to the restated certificate of incorporation as amended with the Secretary of State of the State of Delaware at such time as the Akerna Board has determined to be the appropriate Reverse Stock Split Effective Time. The Akerna Board may delay effecting the Akerna Reverse Stock Split without resoliciting stockholder approval. Beginning at the Reverse Stock Split Effective Time, each stock certificate representing pre-split shares will be deemed for all corporate purposes to evidence ownership of post-split shares.
As soon as practicable after the Reverse Stock Split Effective Time, stockholders will be notified that the Akerna Reverse Stock Split has been effected. Akerna expects that the Akerna transfer agent will act as exchange agent for purposes of implementing the exchange of stock certificates. Holders of pre-split shares will be asked to surrender to the exchange agent stock certificates representing pre-split shares in exchange for stock certificates (or book-entry
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positions) representing post-split shares in accordance with the procedures to be set forth in a letter of transmittal to be sent by Akerna. No new certificates (or book-entry positions) will be issued to a stockholder until such stockholder has surrendered such stockholder’s outstanding certificate(s) together with the properly completed and executed letter of transmittal to the exchange agent. Shares held in book-entry form will be automatically exchanged. Any pre-split shares submitted for transfer, whether pursuant to a sale or other disposition, or otherwise, will automatically be exchanged for post-split shares. Stockholders should not destroy any stock certificate(s) and should not submit any certificate(s) unless and until requested to do so.
Fractional Shares
No fractional shares will be issued in connection with the Akerna Reverse Stock Split. Stockholders of record who otherwise would be entitled to receive fractional shares because they hold a number of pre-split shares not evenly divisible by the number of pre-split shares for which each post-split share is to be reclassified, will be entitled, upon surrender to the exchange agent of certificates representing such shares, to have their fractional share rounded up the nearest whole number share.
Potential Anti-Takeover Effect
Although the increased proportion of unissued authorized shares to issued shares could, under certain circumstances, have an anti-takeover effect, for example, by permitting issuances that would dilute the stock ownership of a person seeking to effect a change in the composition of the Akerna Board or contemplating a tender offer or other transaction for the combination of Akerna with another company, the Akerna Reverse Stock Split is not being proposed in response to any effort of which Akerna is aware to accumulate shares of Akerna Common Stock or obtain control of Akerna, other than in connection with the Merger, nor is it part of a plan by management to recommend a series of similar amendments to the Akerna Board and stockholders. Other than the proposals being submitted to the Akerna stockholders for their consideration at the Akerna special meeting, the Akerna Board does not currently contemplate recommending the adoption of any other actions that could be construed to affect the ability of third parties to take over or change control of Akerna. For more information, please see the section titled “Risk Factors — Risks Related to the Combined Company” beginning on page 71.
Material U.S. Federal Income Tax Consequences of the Reverse Stock Split
The following is a discussion of certain material U.S. federal income tax consequences of the Akerna Reverse Stock Split that are applicable to U.S. Holders (as defined below) of Akerna Common Stock. This discussion does not purport to be a complete analysis of all potential tax consequences and is based upon current provisions of the Code, existing Treasury Regulations, judicial decisions and published rulings and administrative pronouncements of the IRS, all in effect as of the date hereof and all of which are subject to differing interpretations or change. Any such change or differing interpretation, which may be retroactive, could alter the tax consequences to holders of Akerna Common Stock as described in this summary.
This discussion does not address all U.S. federal income tax consequences relevant to holders of Akerna Common Stock. In addition, it does not address consequences relevant to holders of Akerna Common Stock that are subject to particular U.S. or non-U.S. tax rules, including, without limitation, to holders of Akerna Common Stock that are:
• persons who do not hold their Akerna Common Stock as a “capital asset” within the meaning of Section 1221 of the Code;
• brokers, dealers or traders in securities, banks, insurance companies, other financial institutions or mutual funds;
• real estate investment trusts; regulated investment companies; tax-exempt organizations or governmental organizations;
• pass-through entities such as partnerships, S corporations, disregarded entities for federal income tax purposes and limited liability companies (and investors therein);
• subject to the alternative minimum tax provisions of the Code;
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• persons who hold their shares as part of a hedge, wash sale, synthetic security, conversion transaction or other integrated transaction;
• persons that have a functional currency other than the U.S. dollar;
• traders in securities who elect to apply a mark-to-market method of accounting;
• persons who hold shares of Akerna Common Stock that may constitute “qualified small business stock” under Section 1202 of the Code or as “Section 1244 stock” for purposes of Section 1244 of the Code;
• persons who acquired their shares of Akerna stock in a transaction subject to the gain rollover provisions of Section 1045 of the Code;
• persons subject to special tax accounting rules as a result of any item of gross income with respect to Akerna stock being taken into account in an “applicable financial statement” (as defined in the Code);
• persons deemed to sell Akerna Common Stock under the constructive sale provisions of the Code;
• persons who acquired their shares of Akerna Common Stock pursuant to the exercise of options or otherwise as compensation or through a tax-qualified retirement plan or through the exercise of a warrant or conversion rights under convertible instruments; and
• certain expatriates or former citizens or long-term residents of the United States.
Holders of Akerna Common Stock subject to particular U.S. or non-U.S. tax rules, including those that are described in this paragraph, are urged to consult their own tax advisors regarding the consequences to them of the Akerna Reverse Stock Split.
If an entity that is treated as a partnership for U.S. federal income tax purposes holds Akerna Common Stock, the U.S. federal income tax treatment of a partner in the partnership or other pass-through entity will generally depend upon the status of the partner, the activities of the partnership or other pass-through entity and certain determinations made at the partner level. If you are a partner of a partnership or other pass-through entity holding Akerna Common Stock, you should consult your tax advisors regarding the tax consequences of the Akerna Reverse Stock Split.
In addition, the following discussion does not address the tax consequences of the Akerna Reverse Stock Split under state, local and foreign tax laws. Furthermore, the following discussion does not address any tax consequences of transactions effectuated before, after or at the same time as the Akerna Reverse Stock Split, whether or not they are in connection with the Akerna Reverse Stock Split.
STOCKHOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES OF THE AKERNA REVERSE STOCK SPLIT ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.
This discussion is limited to holders of Akerna Common Stock that are U.S. Holders. For purposes of this discussion, a “U.S. Holder” is a beneficial owner of Akerna Common Stock that, for U.S. federal income tax purposes, is or is treated as:
• an individual who is a citizen or resident of the United States;
• a corporation or any other entity taxable as a corporation created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;
• an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
• a trust if either (i) a court within the United States is able to exercise primary supervision over the administration of such trust, and one or more United States persons (within the meaning of Section 7701(a)(30) of the Code) is authorized or has the authority to control all substantial decisions of such trust, or (ii) the trust was in existence on August 20, 1996, and has a valid election in effect under applicable Treasury Regulations to be treated as a United States person for U.S. federal income tax purposes.
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Tax Consequences of the Akerna Reverse Stock Split
The proposed Akerna Reverse Stock Split should constitute a “recapitalization” for U.S. federal income tax purposes pursuant to Section 368(a)(1)(E) of the Code. As a result, a U.S. Holder generally should not recognize gain or loss upon the proposed reverse stock split. A U.S. Holder’s aggregate adjusted tax basis in the shares of Akerna Common Stock received pursuant to the proposed Akerna Reverse Stock Split should equal the aggregate adjusted tax basis of the shares of the Akerna Common Stock surrendered (excluding any portion of such basis that is allocated to any fractional share of Akerna Common Stock), and such U.S. Holder’s holding period in the shares of Akerna Common Stock received should include the holding period in the shares of Akerna Common Stock surrendered. U.S. Treasury Regulations provide detailed rules for allocating the tax basis and holding period of the shares of Akerna Common Stock surrendered to the shares of Akerna Common Stock received in a recapitalization pursuant to the proposed Akerna Reverse Stock Split. U.S. Holders of shares of Akerna Common Stock acquired on different dates and at different prices should consult their tax advisors regarding the allocation of the tax basis and holding period of such shares.
Required Vote
The affirmative vote of the holders of a majority of the outstanding Akerna Common Stock and Series C Preferred Stock, voting as one class, having voting power on the record date for the Akerna special meeting is required to approve the amendment of our amended and restated certificate of incorporation to effect the Akerna Reverse Stock Split. Failures to vote, abstentions and broker “non-votes”, if any, will be the equivalent of a vote AGAINST this proposal.
AKERNA BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” PROPOSAL NO. 3 TO APPROVE THE AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF AKERNA AS AMENDED TO EFFECT THE AKERNA REVERSE STOCK SPLIT.
Unless otherwise instructed, it is the intention of the persons named in the accompanying proxy card to vote shares represented by properly executed proxy cards “FOR” the approval of the amendment to the amended and restated certificate of incorporation of Akerna as amended to effect the Akerna Reverse Stock Split.
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PROPOSAL NO. 4: AKERNA AUTHORIZED SHARE INCREASE
APPROVAL OF THE AMENDMENT TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AS AMENDED OF AKERNA TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF AKERNA
At the Akerna special meeting, Akerna stockholders will be asked to approve an amendment to the amended and restated certificate of incorporation, as amended, of Akerna to effect the Akerna Authorized Share Increase, which will increase the number of authorized shares of Akerna Common Stock from 150,000,000 to 300,000,000, in the form attached as Annex D to the accompanying proxy statement/prospectus.
Increase of Authorized Shares
The certificate of incorporation amendment also amends the amended and restated certificate of incorporation to increase the number of authorized shares of Akerna Common Stock. Approval by Akerna’s stockholders of the increase in the number of authorized shares of Akerna Common Stock is a condition to completion of the Merger.
Reasons for Increase in Authorized Shares
The Akerna Authorized Share Increase will provide the combined company with the ability to raise funds through the sale of equity securities of the combined company in the future. The Akerna Authorized Share Increase will also enable the combined company to issue equity awards and attract qualified officers, directors and employees.
Procedure for Effecting the Certificate of Incorporation Amendment
If the Akerna stockholders approve the amendment to the Akerna amended and restated certificate of incorporation to effect the Akerna Authorized Share Increase, and if the Akerna Board still believes that an increase in the number of authorized shares is in the best interests of Akerna and its stockholders, Akerna will file the amendment to the amended and restated certificate of incorporation as amended with the Secretary of State of the State of Delaware at such time as the Akerna Board has determined to be the appropriate time. The Akerna Board may delay effecting the Authorized Shares Proposal without resoliciting stockholder approval.
As soon as practicable after the certificate of incorporation amendment effective time, stockholders will be notified that the certificate of incorporation amendment has been effected.
Dilution
The issuance of additional shares of Akerna common stock will decrease the relative percentage of equity ownership of Akerna’s existing stockholders, thereby diluting their voting power. Currently, there are 150,000,000 shares of Akerna Common Stock authorized for issuance with 10,352,069 shares of Akerna Common Stock issued and outstanding, warrants exercisable to acquire 2,573,299 shares of Akerna Common Stock, and restricted stock units which vest and settle for 9,347 shares of Akerna Common Stock, exchangeable shares to be redeemed for 12,476 shares of Akerna Common Stock and the Akerna Notes which we estimate will be exchanged into shares of Series C Preferred Stock exchangeable into 17,110,000 shares of Akerna Common Stock and the remaining Akerna Notes convertible for approximately 19,075,660 shares of Akerna Common Stock (based on approximately $3.15 million outstanding principal amount after the exchange of a portion thereof into Series C Preferred Stock, 121% repayment premium and a conversion price of $0.50, which is the current conversion price for the Akerna Notes) and 8,250,000 shares of Akerna Common Stock estimated to be issuable upon conversion of $1.65 million in principal amount of the MJA Promissory Note at a conversion price of $0.20 per share for an aggregate total of approximately 57,382,841 shares of Akerna Common Stock on a fully diluted basis immediately prior to the Reverse Stock Split. Assuming a Reverse Stock Split ratio of 20 to 1 in the Akerna Reverse Stock Split, this would result in approximately 2,869,142 shares of common stock outstanding on a fully diluted basis immediately prior to closing of the Merger and would result in the issuance of approximately 34,318,117 shares to Gryphon’s stockholders as Merger Consideration for an aggregate total of approximately 38,255,227 shares of common stock outstanding or reserved for issuance and leaving 111,744,773 shares of common stock available for issuance. To ensure that the combined company has adequate authorized share capital the Akerna Board is asking stockholders to increase the number of authorized shares of common stock from 150,000,000 to 300,000,000.
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Akerna stockholders will be diluted at the Effective Time, when the Merger Consideration will be issued to the Gryphon shareholders, which will result in the current Akerna stockholders holding approximately 7.5% of the issued and outstanding equity interests of the combined company on a fully diluted basis.
Potential Anti-Takeover Effect
There will be substantially more shares of Akerna Common Stock authorized than are needed to effect the issuance of the Merger Consideration pursuant to the Merger Agreement. Although this proposal is not motivated by antitakeover concerns and is not considered by the Akerna Board to be an anti-takeover measure, the availability of additional authorized shares of Akerna Common Stock could be utilized as such or otherwise have the effect of delaying or preventing a change of control of the combined company. Following the completion of the Merger, the combined company could issue some or all of the newly authorized shares of common stock, which would make more difficult or discourage an attempt to obtain control of the combined company by means of a merger, tender offer, proxy content, or other means.
Required Vote
The affirmative vote of the holders of a majority of the outstanding Akerna Common Stock and Series C Preferred Stock, voting as one class, having voting power on the record date for the Akerna special meeting is required to approve the amendment of our amended and restated certificate of incorporation to effect the Akerna Authorized Share Increase. The affirmative vote of the holders of a majority of the outstanding Akerna Common Stock, voting as a separate class, having voting power on the record date for the Akerna special meeting is required to approve the amendment of our amended and restated certificate of incorporation to effect the Akerna Authorized Share Increase. Failures to vote, abstentions and broker “non-votes”, if any, will be the equivalent of a vote AGAINST this proposal.
AKERNA BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” PROPOSAL NO. 4 TO APPROVE THE AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF AKERNA AS AMENDED TO EFFECT THE AKERNA AUTHORIZED SHARE INCREASE.
Unless otherwise instructed, it is the intention of the persons named in the accompanying proxy card to vote shares represented by properly executed proxy cards “FOR” the approval of the amendment to the amended and restated certificate of incorporation of Akerna as amended to effect the Akerna Authorized Share Increase.
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PROPOSAL NO. 5: AKERNA NAME CHANGE
APPROVAL OF THE AMENDMENT TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AS AMENDED OF AKERNA TO CHANGE THE CORPORATE NAME FROM AKERNA CORP. TO “GRYPHON DIGITAL MINING, INC.”
At the Akerna special meeting, Akerna stockholders will be asked to approve an amendment to the amended and restated certificate of incorporation, as amended, of Akerna to change the corporate name of Akerna to “Gryphon Digital Mining, Inc.” in the form attached as Annex E to this proxy statement/prospectus, each pursuant to the Merger Agreement.
Corporate Name Change
The certificate of incorporation amendment also amends the amended and restated certificate of incorporation as amended to change the corporate name of Akerna to “Gryphon Digital Mining, Inc.” Approval by Akerna’s stockholders of the corporate name change is a condition to completion of the Merger.
Following consummation of the Merger and the Sale Transaction, the Gryphon’s business will be the business of the combined company. The corporate name change, if approved by Akerna’s stockholders, would have the effect of changing Akerna’s legal name.
Procedure for Effecting the Certificate of Incorporation Amendment
If the Akerna stockholders approve the amendment to the Akerna amended and restated certificate of incorporation as amended effecting the corporate name change, and if the Akerna Board still believes that a corporate name change is in the best interests of Akerna and its stockholders, Akerna will file the amendment to the amended and restated certificate of incorporation as amended with the Secretary of State of the State of Delaware at such time as the Akerna Board has determined to be the appropriate time. The Akerna Board may delay effecting the Name Change Proposal without resoliciting stockholder approval.
As soon as practicable after the certificate of incorporation amendment effective time, stockholders will be notified that the certificate of incorporation amendment has been effected.
Required Vote
The affirmative vote of the holders of a majority of the outstanding Akerna Common Stock and Series C Preferred Stock, voting as one class, having voting power on the record date for the Akerna special meeting is required to approve the amendment of our amended and restated certificate of incorporation to effect the Akerna Name Change. Failures to vote, abstentions and broker “non-votes”, if any, will be the equivalent of a vote AGAINST this proposal.
AKERNA BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THIS PROPOSAL NO. 5 TO CHANGE THE CORPORATE NAME FROM AKERNA CORP. TO “GRYPHON DIGITAL MINING, INC.”
Unless otherwise instructed, it is the intention of the persons named in the accompanying proxy card to vote shares represented by properly executed proxy cards “FOR” the approval of the amendment to the amended and restated certificate of incorporation of Akerna as amended to change the corporate name of Akerna to “Gryphon Digital Mining, Inc.”.
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APPROVAL OF THE 2024 PLAN
In this Proposal No. 6, Akerna is asking its stockholders to approve the Akerna 2023 Omnibus Incentive Plan (the “2024 Plan”). If the 2024 Plan is approved by Akerna’s stockholders, the 2024 Plan will become effective on the closing date of the Merger. If the 2024 Plan is not approved by Akerna’s stockholders, it will not become effective and no stock awards will be granted thereunder. The 2024 Plan is described in more detail below. This summary is qualified in its entirety by reference to the complete text of the 2024 Plan, a copy of which is attached hereto as Annex F.
The 2024 Plan is intended to replace the Akerna Corp. 2019 Long Term Incentive Plan (the “2019 Plan”). If the 2024 Plan becomes effective, then no additional stock awards will be granted under the 2019 Plan as in effect immediately prior to the closing date of the Merger, although all outstanding stock awards granted under the 2019 Plan as in effect immediately prior to the closing date of the Merger will remain outstanding. All outstanding stock awards granted under the existing Akerna stock incentive plans will be accelerated in accordance with their terms.
Reasons to Approve the 2024 Plan
The purpose of the 2024 Plan is to enhance the ability of the combined company to attract, retain and incentivize employees, independent contractors and directors and promote the success of its business. Equity compensation will be a vital element of the combined company’s compensation program and the ability to grant stock awards at competitive levels is in the best interest of the combined company and its shareholders.
Approval of the 2024 Plan by Akerna’s stockholders is required, among other things, in order to comply with stock exchange rules requiring stockholder approval of equity compensation plans and allow the grant of incentive stock options under the 2024 Plan. If the 2024 Plan is approved by Akerna’s stockholders, the 2024 Plan will become effective as of the closing of the Merger and the combined company will register the necessary shares of its common stock on a Registration Statement on Form S-8. The approval of the 2024 Plan is a condition to the closing of the Merger.
Description of the 2024 Plan
Set forth below is a summary of the material features of the 2024 Plan. The 2024 Plan is set forth in its entirety as Annex F to this proxy statement/prospectus, and all descriptions of the 2024 Plan contained in this Proposal No. 6 are qualified by reference to Annex F.
The 2024 Plan provides for the following grants: (a) incentive stock options (within the meaning of Section 422 of the Internal Revenue Code of 1986 (the “Code”)) (“ISO” or “ISOs”); (b) nonstatutory stock options (i.e., options other than ISOs) (“NSO” or “NSOs”), (c) stock appreciation rights (“SAR” or “SARs”), (d) restricted stock grants, (e) restricted stock unit grants (“RSU” or “RSUs”), (f) performance grants, and (g) other grants based in whole or in part by reference to shares that are granted pursuant to the terms and conditions of the 2024 Plan.
Subject to any Capitalization Adjustment (as defined and described below) and the automatic increase (as described later in this paragraph), and any other applicable provisions in the 2024 Plan, the total number of shares reserved and available for issuance pursuant to the 2024 Plan is 15% of the total number of shares of Akerna Common Stock outstanding at the closing of the Merger (the “Share Reserve”). The Share Reserve will automatically increase on January 1st of each year, for a period of not more than ten years, commencing on January 1, 2024 and ending on (and including) January 1, 2033 by the lesser of (a) 3% of the total number of the shares of Common Stock outstanding on December 31st of the immediately preceding calendar year, and (b) such number of shares determined by the Akerna Board.
Following the effective date of the 2024 Plan (the “Plan Effective Date”), any shares subject to an outstanding grant or any portion thereof granted under the 2024 Plan will be returned to the Share Reserve and will be available for issuance in connection with subsequent grants under the 2024 Plan to the extent such shares: (a) are cancelled, forfeited, or settled in cash; (b) are used to pay the exercise price of such outstanding grant or any Tax-Related Items (as defined below) arising in connection with vesting, exercise or settlement of such outstanding grant; (c) are surrendered
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pursuant to an Exchange Program (as defined below); (d) expire by their terms at any time; or (e) are reacquired by the Company pursuant to a forfeiture provision or repurchase right by the Company (collectively, “Returning Shares”). Shares subject to Substitute Grants (as defined below) will not be deducted from the Share Reserve and may not be returned to the Share Reserve as Returning Shares.
Subject to the provisions relating to Capitalization Adjustments described below, the maximum number of shares that may be issued pursuant to the exercise of ISOs is 15% of the total number of shares of Akerna Common Stock outstanding at the closing of the Merger (the “Incentive Stock Option Limit”).
If, after the Plan Effective Date, the number of outstanding shares is changed or the value of the shares is otherwise affected by a stock dividend, extraordinary dividend or distribution (whether in cash, shares or other property, other than a regular cash dividend) recapitalization, stock split, reverse stock split, subdivision, combination, consolidation, reclassification, spin-off or similar change in the capital structure of the Company or any similar equity restructuring transaction, as that term is used in Statement of Financial Accounting Standards Board Accounting Standards Codification Topic 718 (or any successor thereto), without consideration (a “Capitalization Adjustment”), then (a) the maximum number and class of shares or type of security reserved for issuance and future grant from the Share Reserve, (b) the exercise price, purchase price, and number and class of shares or type of security subject to outstanding grants, and (c) the number and class of shares subject to the Incentive Stock Option Limit, will be proportionately adjusted, subject to any required action by the Akerna Board or the stockholders of the Company and in compliance with applicable laws; provided that fractions of a share will not be issued.
The shares issuable under the 2024 Plan will be authorized but unissued or forfeited shares, treasury shares or shares reacquired by the Company in any manner.
Incentive stock options may be granted only to employees of the Company, and its parent and any subsidiary entities (to the extent permitted under Section 422 of the Code). All other grants may be granted to employees, consultants and directors, provided such consultants and directors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction.
The maximum number of shares subject to grants (and of cash subject to cash-settled grants) granted under the 2024 Plan or otherwise during any one calendar year to any non-employee director for service on the Akerna Board, taken together with any cash fees paid by the Company to such non-employee director during such calendar year for service on the Akerna Board, will not exceed $1,000,000 in total value (calculating the value of any such grants based on the grant date fair value of such grants for financial reporting purposes).
Each option or SAR will be in such form and will contain such terms and conditions as the plan administrator deems appropriate. Each SAR will be denominated in share equivalents. The provisions of separate options or SARs need not be identical.
Options and SARs may be exercisable within the times or upon the events determined by the plan administrator and as set forth in the grant agreement governing such grant. No option or SAR will be exercisable after the expiration of ten (10) years from the date the option or SAR is granted, or such shorter period specified in the grant agreement. In addition, in the case of an ISO granted to a person who, at the time the ISO is granted, directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any parent or subsidiary (“Ten Percent Holder”), such option may not be exercisable after the expiration of five (5) years from the date the ISO is granted.
The exercise price of an option or SAR will be such price as is determined by the plan administrator and set forth in the grant agreement; provided that (a) in the case of an ISO (i) granted to a Ten Percent Holder, the exercise price will be no less than one hundred ten percent (110%) of the fair market value (as defined in the 2024 Plan) on the date of grant and (ii) granted to any other employee, the exercise price will be no less than one hundred percent (100%) of the fair market value on the date of grant, and (b) in the case of an NSO or SAR, the exercise price will be such price as is determined by the plan administrator. Notwithstanding the foregoing, an option or SAR that is a Substitute Grant may be granted with an exercise price lower than one hundred percent (100%) of the fair market value.
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Upon exercise of a SAR, a grantee will be entitled to receive payment from the Company in an amount determined by multiplying (a) the difference between the fair market value of a share on the date of exercise over the exercise price, by (b) the number of shares with respect to which the SAR is exercised. At the discretion of the plan administrator, the payment from the Company for the SAR exercise may be in cash, in shares of equivalent value, or in some combination thereof.
Unless explicitly provided otherwise in a grantee’s grant agreement, if a grantee’s continuous service status (as defined in the 2024 Plan) is terminated, the grantee (or his or her legal representative, in the case of death) may exercise his or her option or SAR (to the extent such grant was exercisable on the termination date) within the following period of time following the termination of the grantee’s continuous service status: (a) three (3) months following a termination of a grantee’s continuous service status by the Company or any parent or subsidiary without cause (as defined in the 2024 Plan) or by the grantee for any reason (other than due to death or disability (as disability is defined in the Plan)); (b) six (6) months following a termination due to the grantee’s disability; (c) twelve (12) months following a termination due to the grantee’s death; and (d) twelve (12) months following the grantee’s death, if such death occurs following the date of such termination but during the period such grant is otherwise exercisable (as provided in clauses (a) or (b) above).
Except as otherwise provided in the grant agreement, if a grantee’s continuous service status is terminated by the Company or any parent or subsidiary for cause, the grantee’s options or SARs will terminate and be forfeited immediately upon such grantee’s termination of continuous service status, and the grantee will be prohibited from exercising any portion (including any vested portion) of such grants on and after the date of such termination of continuous service status.
To the extent that the aggregate fair market value of shares with respect to which options designated as ISOs are exercisable for the first time by any grantee during any calendar year (under all plans of the Company or any parent or subsidiary of the Company) exceeds One Hundred Thousand Dollars ($100,000), such excess options will be treated as NSOs. For this purpose, ISOs will be taken into account in the order in which they were granted, and the fair market value of the shares subject to an ISO will be determined as of the date of the grant of such option.
Without stockholder approval, the plan administrator may modify, extend or renew outstanding options or SARs, and authorize the grant of new options or SARs in substitution therefor, including in connection with an Exchange Program. Any such action may not, without the written consent of a grantee, materially impair any of such grantee’s rights under any grant previously granted, except that the plan administrator may reduce the exercise price of an outstanding option or SAR without the consent of a grantee by a written notice (notwithstanding any adverse tax consequences to the grantee arising from the repricing); provided, however, that the exercise price may not be reduced below the fair market value on the date the action is taken to reduce the exercise price.
A restricted stock grant is an offer by the Company to sell or issue (with no payment required, unless explicitly provided otherwise in a grantee’s grant agreement) shares to a grantee that are subject to certain specified restrictions. Each restricted stock grant will be in such form and will contain such terms and conditions as the plan administrator will deem appropriate. The terms and conditions of restricted stock grants may change from time to time, and the terms and conditions of separate grant agreements need not be identical.
The purchase price for shares issued pursuant to a restricted stock grant, if any, will be determined by the plan administrator on the date the restricted stock grant is granted and, if permitted by applicable law, no cash consideration will be required in connection with the payment for the purchase price where the plan administrator provides that payment will be in the form of services previously rendered.
Grantees holding restricted stock grants will be entitled to receive all dividends and other distributions paid with respect to such shares, unless the plan administrator provides otherwise at the time the grant is granted. If any such dividends or distributions are paid in shares, the shares will be subject to the same restrictions on transferability and forfeitability as the restricted stock grants with respect to which they were paid.
An RSU grant is a grant covering a number of shares that may be settled in cash, or by issuance of those shares at a date in the future. Each RSU grant will be in such form and will contain such terms and conditions as the plan administrator will deem appropriate. The terms and conditions of RSU grants may change from time to time, and the terms and conditions of separate grant agreements need not be identical. Unless otherwise determined by the plan administrator, no purchase price will apply to an RSU settled in shares. Payment of vested RSUs will be made as soon as practicable after the date(s) determined by the plan administrator and set forth in the grant agreement. The plan administrator, in its sole discretion, may settle vested RSUs in cash, shares, or a combination of both.
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The plan administrator may permit grantees holding RSUs to receive dividend equivalent rights (as defined in the 2024 Plan) on outstanding RSUs if and when dividends are paid to stockholders on shares. In the discretion of the plan administrator, such dividend equivalent rights may be paid in cash or shares, and may either be paid at the same time as dividend payments are made to stockholders or delayed until shares are issued pursuant to the underlying RSUs, and may be subject to the same vesting or performance requirements as the RSUs. If the plan administrator permits dividend equivalent rights to be made on RSUs, the terms and conditions for such dividend equivalent rights will be set forth in the applicable grant agreement.
A performance grant is a grant that may be granted, may vest or may become eligible to vest contingent upon the attainment during a performance period of performance goals determined by the plan administrator. Performance grants may be granted as options, SARs, restricted stock, RSUs or other grants, including cash-based grants.
Performance grants will be based on the attainment of performance goals that are established by the plan administrator for the relevant performance period. Prior to the grant of any performance grant, the plan administrator will determine and each grant agreement will set forth the terms of each performance grant. A performance grant may but need not require the grantee’s completion of a specified period of service. The plan administrator will determine the extent to which a performance grant has been earned in its sole discretion. The plan administrator may reduce or waive any criteria with respect to a performance goal, or adjust a performance goal (or method of calculating the attainment of a performance goal) to take into account unanticipated events, including changes in law and accounting or tax rules, as the plan administrator deems necessary or appropriate, or to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships. The plan administrator may also adjust or eliminate the compensation or economic benefit due upon attainment of performance goals in its sole discretion, subject to any limitations contained in the grant agreement and compliance with applicable law.
Other forms of grants valued in whole or in part by reference to, or otherwise based on, shares, including the appreciation in value thereof (e.g., options or stock rights with an exercise price or strike price less than 100% of the fair market value of the shares at the time of grant) may be granted either alone or in addition to other grants provided for in the 2024 Plan. Subject to the provisions of the 2024 Plan and applicable law, the plan administrator may determine the persons to whom and the time or times at which such other grants will be granted, the number of shares (or the cash equivalent thereof) to be granted pursuant to such other grants and all other terms and conditions of such other grants.
Payment from a grantee for shares acquired pursuant to the 2024 Plan may be made in cash or cash equivalents or, where approved for the grantee by the plan administrator and where permitted by applicable law (and to the extent not otherwise set forth in the applicable grant agreement): (a) by cancellation of indebtedness of the Company owed to the grantee; (b) by surrender of shares held by the grantee that are clear of all liens, claims, encumbrances or security interests and that have a fair market value on the date of surrender equal to the aggregate payment required; (c) by waiver of compensation due or accrued to the grantee for services rendered or to be rendered to the Company or an affiliate; (d) by consideration received by the Company pursuant to a broker-assisted or other form of cashless exercise program implemented by the plan administrator in connection with the 2024 Plan; (e) by any combination of the foregoing; or (f) by any other method of payment as is permitted by applicable law.
Regardless of any action taken by the Company or any affiliate, the ultimate liability for all income tax, social insurance, payroll tax, fringe benefits tax, payment on account, employment tax, stamp tax or other Tax-Related Items related to the grantee’s participation in the 2024 Plan and legally applicable to the grantee, including any employer liability for which the grantee is liable (the “Tax-Related Items”) is the grantee’s responsibility.
Unless otherwise provided in the grantee’s grant agreement, the plan administrator, or its delegate(s) (as permitted by applicable law), in its sole discretion and pursuant to such procedures as it may specify from time to time and subject to limitations of applicable law, may require or permit a grantee to satisfy any applicable withholding obligations for Tax-Related Items, in whole or in part by (without limitation): (a) requiring the grantee to make a cash payment; (b) withholding from the grantee’s wages or other cash compensation paid to the grantee by the Company or any affiliate; (c) withholding from the shares otherwise issuable pursuant to a grant; (d) permitting the grantee to deliver to the Company already-owned shares or (e) withholding from the proceeds of the sale of otherwise deliverable shares acquired pursuant to a grant either through a voluntary sale or through a mandatory sale arranged by the Company. The Company or an affiliate may withhold or account for Tax-Related Items by considering applicable minimum statutory withholding amounts or other applicable withholding rates, including up to the maximum applicable rate in the grantee’s jurisdiction.
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Except as expressly provided in the 2024 Plan or an applicable grant agreement, or otherwise determined by the plan administrator, grants granted under the 2024 Plan will not be transferable or assignable by the grantee, other than by will or by the laws of descent and distribution. Any options, SARs or other grants that are exercisable may only be exercised: (a) during the grantee’s lifetime only by (i) the grantee, or (ii) the grantee’s guardian or legal representative; (b) after the grantee’s death, by the legal representative of the grantee’s heirs or legatees. The plan administrator may permit transfer of grants in a manner that is not prohibited by applicable law.
No grantee will have any of the rights of a stockholder with respect to any shares until the shares are issued to the grantee, except for any dividend equivalent rights permitted by an applicable grant agreement. After shares are issued to the grantee, the grantee will be a stockholder and have all the rights of a stockholder with respect to such shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such shares, subject to any repurchase or forfeiture provisions in any restricted stock grant, the terms of the Company’s insider trading policy, and applicable law.
Without prior stockholder approval, the plan administrator may conduct an Exchange Program, subject to consent of an affected grantee (unless not required in connection with a repricing pursuant to the 2024 Plan, or under the terms of a grant agreement) and compliance with applicable law. For purposes of the 2024 Plan, “Exchange Program” means a program pursuant to which (a) outstanding grants are surrendered, cancelled or exchanged for cash, the same type of grant or a different grant (or combination thereof) or (b) the exercise price of an outstanding grant is increased or reduced.
All grants granted under the 2024 Plan will be subject to clawback or recoupment under any clawback or recoupment policy adopted by the Akerna Board or the plan administrator or required by applicable law during the term of grantee’s employment or other service with the Company that is applicable to officers, employees, directors or other service providers of the Company. In addition, the plan administrator may impose such other clawback, recovery or recoupment provisions in a grant agreement as the plan administrator determines necessary or appropriate.
Except as otherwise provided in the applicable grant agreement or as determined by the plan administrator, if a grantee’s continuous service status terminates for any reason, vesting of a grant will cease and such portion of a grant that has not vested will be forfeited, and the grantee will have no further right, title or interest in any then-unvested portion of the grant. In addition, the Company may receive through a forfeiture condition or a repurchase right any or all of the shares held by the grantee under a restricted stock grant that have not vested as of the date of such termination, subject to the terms of the applicable grant agreement.
In the event that the Company is subject to a change in control (as defined in the 2024 Plan), outstanding grants acquired under the 2024 Plan will be subject to the agreement evidencing the change in control, which need not treat all outstanding grants in an identical manner. Such agreement, without the grantee’s consent, will provide for one or more of the following with respect to all outstanding grants as of the effective date of such change in control: (a) the continuation of an outstanding grant by the Company (if the Company is the successor entity); (b) the assumption of an outstanding grant by the successor or acquiring entity (if any) of such change in control (or by its parents, if any); (c) the substitution by the successor or acquiring entity in such change in control (or by its parents, if any) of equivalent awards with substantially the same terms for such outstanding grants; (d) the full or partial acceleration of exercisability or vesting and accelerated expiration of an outstanding grant and lapse of the Company’s right to repurchase or re-acquire shares acquired under a grant or lapse of forfeiture rights with respect to shares acquired under a grant; (e) the settlement of such outstanding grant (whether or not then vested or exercisable) in cash, cash equivalents, or securities of the successor entity (or its parent, if any) with a fair market value equal to the required amount provided in the definitive agreement evidencing the change in control, followed by the cancellation of such grants; or (e) the cancellation of outstanding grants in exchange for no consideration.
The Company, from time to time, may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either (a) granting a grant under the 2024 Plan in substitution of such other company’s award; or (b) assuming such award as if it had been granted under the 2024 Plan if the terms of such assumed award could be applied to a grant granted under the 2024 Plan (a “Substitute Grant”). Such substitution or assumption will be permissible if the holder of the Substitute Grant would have been eligible to be granted a grant under the 2024 Plan if the other company had applied the rules of the 2024 Plan to such grant. The exercise price and the number and nature of shares issuable upon exercise or settlement of any such Substitute Grant will be adjusted appropriately pursuant to Section 424(a) of the Code and/or Section 409A of the Code, as applicable.
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The 2024 Plan will be administered by the Akerna Board or a delegate, including without limitation the Compensation Committee, appointed in accordance with applicable laws (the “plan administrator”). Without limitation, the plan administrator will have the authority to, subject to the preceding sentence: construe and interpret the 2024 Plan, any grant agreement and any other agreement or document executed pursuant to the 2024 Plan; prescribe, amend, expand, modify and rescind or terminate rules and regulations relating to the 2024 Plan or any grant (including the terms or conditions of any grant); approve persons to receive grants; determine the form, terms and conditions of grants; determine the number of shares or other consideration subject to grants; determine the fair market value in good faith and interpret the applicable provisions of the 2024 Plan and the definition of fair market value in connection with circumstances that impact the fair market value, if necessary; determine whether grants will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other grants under the 2024 Plan or awards under any other incentive or compensation plan of the Company or any affiliate; grant waivers of any conditions of the 2024 Plan or any grant; determine the vesting, exercisability and payment of grants; correct any defect, supply any omission or reconcile any inconsistency in the 2024 Plan, any grant or any grant agreement; determine whether a grant has been earned or has vested; determine the terms and conditions of any, and to institute any exchange program; adopt or revise rules and/or procedures (including the adoption or revision of any subplan under the 2024 Plan) relating to the operation and administration of the 2024 Plan to facilitate compliance with requirements of local law and procedures outside the united States (provided that Akerna Board approval will not be necessary for immaterial modifications to the 2024 Plan or any grant agreement made to ensure or facilitate compliance with the laws or regulations of the relevant foreign jurisdiction); delegate any of the foregoing to one or more persons pursuant to a specific delegation as permitted by the terms of the 2024 Plan and applicable law, including Section 157(c) of the Delaware General Corporation Law; and make all other determinations necessary or advisable in connection with the administration of the 2024 Plan. We expect that our Compensation Committee will administer the 2024 Plan.
To the maximum extent permitted by applicable laws, each member of the plan administrator (including officers of the Company or an affiliate of the Company, if applicable), or of the Akerna Board, as applicable, will be indemnified and held harmless by the Company against and from (i) any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the 2024 Plan or pursuant to the terms and conditions of any grant except for actions taken in bad faith or failures to act in good faith, and (ii) any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit or proceeding against him or her; provided that such member will give the Company an opportunity, at its own expense, to handle and defend any such claim, action, suit or proceeding before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification will not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Certificate of Incorporation or Bylaws, by contract, as a matter of law or otherwise, or under any other power that the Company may have to indemnify or hold harmless each such person.
The 2024 Plan and all grants granted thereunder will be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to that body of laws pertaining to conflict of laws.
The plan administrator may amend the 2024 Plan or any grant in any respect the plan administrator deems necessary or advisable, subject to the limitations of applicable law and the 2024 Plan. If required by applicable law, the Company will seek stockholder approval of any amendment of the 2024 Plan that (a) materially increases the number of shares available for issuance under the 2024 Plan (excluding any Capitalization Adjustment); (b) materially expands the class of individuals eligible to receive grants under the 2024 Plan; (c) materially increases the benefits accruing to grantees under the 2024 Plan; (d) materially reduces the price at which shares may be issued or purchased under the 2024 Plan; (e) materially extends the term of the 2024 Plan; (f) materially expands the types of grants available for issuance under the 2024 Plan; or (g) as otherwise required by applicable law.
The 2024 Plan will terminate automatically on the tenth (10th) anniversary of the Plan Effective Date. No grant will be granted pursuant to the 2024 Plan after such date, but grants previously granted may extend beyond that date. The plan administrator may suspend or terminate the 2024 Plan at any earlier date at any time. No grants may be granted under the 2024 Plan while the 2024 Plan is suspended or after it is terminated.
No amendment, suspension or termination of the 2024 Plan or any grant may materially impair a grantee’s rights under any outstanding grant, except with the written consent of the affected grantee or as otherwise expressly permitted in the 2024 Plan. Subject to the limitations of applicable law, if any, the plan administrator may amend the terms
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of any one or more grants without the affected grantee’s consent (a) to maintain the qualified status of the grant as an ISO under Section 422 of the Code; (b) to change the terms of an ISO, if such change results in impairment of the grant solely because it impairs the qualified status of the grant as an ISO; (c) to clarify the manner of exemption from, or to bring the grant into compliance with, Section 409A of the Code; or (d) to facilitate compliance with other applicable laws.
Summary of U.S. Federal Income Tax Consequences
The following summary is intended only as a general guide to the U.S. federal income tax consequences of participation in the 2024 Plan. The summary is based on existing U.S. laws and regulations, and there can be no assurance that those laws and regulations will not change. The summary is not complete and does not discuss the tax consequences upon a grantee’s death, or the income tax laws of any municipality, state or foreign country in which the grantee may reside. Tax consequences for any particular grantee may vary based on individual circumstances.
Incentive Stock Options. A grantee recognizes no taxable income for regular income tax purposes because of the grant or exercise of an option that qualifies as incentive stock option under Section 422 of the Code. If a grantee exercises the option and then later sells or otherwise disposes of the shares acquired through the exercise the option after both the two-year anniversary of the date the option was granted and the one-year anniversary of the exercise, the grantee will recognize a capital gain or loss equal to the difference between the sale price of the shares and the exercise price, and we will not be entitled to any deduction for federal income tax purposes.
However, if the grantee disposes of such shares either on or before the two-year anniversary of the date of grant or on or before the one-year anniversary of the date of exercise (a “disqualifying disposition”), any gain up to the excess of the fair market value of the shares on the date of exercise over the exercise price generally will be taxed as ordinary income, unless the shares are disposed of in a transaction in which the grantee would not recognize a loss (such as a gift). Any gain in excess of that amount will be a capital gain. If a loss is recognized, there will be no ordinary income, and such loss will be a capital loss. Any ordinary income recognized by the grantee upon the disqualifying disposition of the shares generally should be deductible by the Company for federal income tax purposes, except to the extent such deduction is limited by applicable provisions of the Code.
For purposes of the alternative minimum tax, the difference between the option exercise price and the fair market value of the shares on the exercise date is treated as an adjustment item in computing the grantee’s alternative minimum taxable income in the year of exercise. In addition, special alternative minimum tax rules may apply to certain subsequent disqualifying dispositions of the shares or provide certain basis adjustments or tax credits for purposes.
Nonstatutory Stock Options. A grantee generally recognizes no taxable income as the result of the grant of such an option. However, upon exercising the option, the grantee normally recognizes ordinary income equal to the amount that the fair market value of the shares on such date exceeds the exercise price. If the grantee is an employee, such ordinary income generally is subject to withholding of income and employment taxes. Upon the sale of the shares acquired by exercising a nonstatutory stock option, any gain or loss (based on the difference between the sale price and the fair market value on the exercise date) will be taxed as capital gain or loss. Any ordinary income recognized by the grantee upon exercising a nonstatutory stock option generally should be deductible by the Company for federal income tax purposes, except to the extent such deduction is limited by applicable provisions of the Code. No tax deduction is available to the Company with respect to the grant of a nonstatutory stock option or the sale of the shares acquired through the exercise of the nonstatutory stock option.
Stock Appreciation Rights. In general, no taxable income is reportable when a stock appreciation right is granted to a grantee. Upon exercise, the grantee generally will recognize ordinary income equal to the fair market value of any shares received. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss.
Restricted Stock Awards. A grantee acquiring shares of restricted stock generally will recognize ordinary income equal to the fair market value of the shares on the vesting date, reduced by any amount paid by the grantee for such shares. If the grantee is an employee, such ordinary income generally is subject to withholding of income and employment taxes. The grantee may elect, under Section 83(b) of the Code to accelerate the ordinary income tax event to the date of acquisition by filing an election with the Internal Revenue Service no later than thirty (30) days after the
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date the shares are acquired. Upon the sale of shares acquired under a restricted stock award, any gain or loss, based on the difference between the sale price and the fair market value on the date the ordinary income tax event occurs, will be taxed as capital gain or loss.
Restricted Stock Unit Awards. There are no immediate tax consequences of receiving an award of restricted stock units. A grantee who is awarded restricted stock units generally will recognize ordinary income equal to the fair market value of shares issued to such grantee at the end of the applicable vesting period or, if later, the settlement date elected by the administrator or a grantee. Any additional gain or loss recognized upon any later disposition of any shares received would be capital gain or loss.
Performance Shares and Performance Unit Awards. A grantee generally will recognize no income upon the grant of a performance share or a performance unit award. Upon the settlement of such awards, grantees normally will recognize ordinary income in the year of receipt in an amount equal to the cash received and the fair market value of any cash or unrestricted shares received. If the grantee is an employee, such ordinary income generally is subject to withholding of income and employment taxes. Upon the sale of any shares received, any gain or loss, based on the difference between the sale price and the fair market value on the date the ordinary income tax event occurs, will be taxed as capital gain or loss.
Section 409A. Section 409A of the Code provides certain requirements for non-qualified deferred compensation arrangements with respect to an individual’s deferral and distribution elections and permissible distribution events. Awards granted under the 2024 Plan with a deferral feature will be subject to the requirements of Section 409A of the Code. If an award is subject to and fails to satisfy the requirements of Section 409A of the Code, the recipient of that award may recognize ordinary income on the amounts deferred under the award, to the extent vested, which may be before the compensation is actually or constructively received. Also, if an award subject to Section 409A of the Code violates the provisions of Section 409A of the Code, Section 409A of the Code imposes an additional 20% federal income tax on compensation recognized as ordinary income, and interest on such deferred compensation.
Tax Effect for the Company. We generally will be entitled to a tax deduction in connection with an award under the 2024 Plan equal to the ordinary income realized by a grantee when the grantee recognizes such income (for example, the exercise of a nonstatutory stock option) except to the extent such deduction is limited by applicable provisions of the Code. Special rules limit the deductibility of compensation paid to our chief executive officer, chief financial officer and other “covered employees” as determined under Section 162(m) of the Code and applicable guidance. Under Section 162(m) of the Code, the annual compensation paid to any of these specified executives will be deductible only to the extent that it does not exceed $1,000,000.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF U.S. FEDERAL INCOME TAXATION UPON GRANTEES AND THE COMPANY WITH RESPECT TO AWARDS UNDER THE 2024 PLAN. IT DOES NOT PURPORT TO BE COMPLETE AND DOES NOT DISCUSS THE IMPACT OF EMPLOYMENT OR OTHER TAX REQUIREMENTS, THE TAX CONSEQUENCES OF A GRANTEE’S DEATH, OR THE PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE, OR FOREIGN COUNTRY IN WHICH THE GRANTEE MAY RESIDE.
New Plan Benefits. No awards have been made under the 2024 Plan, and no awards have been granted that are contingent on the approval of the 2024 Plan. Awards under the 2024 Plan would be made at the discretion of the Compensation Committee or the Akerna Board. Therefore, the benefits and amounts that will be received or allocated under the 2024 Plan in the future are not determinable at this time.
Required Vote
The affirmative vote of a majority of the votes properly cast at the Akerna special meeting, whether present at the special meeting or represented by proxy at the special meeting, is required for approval of the 2024 Plan.
AKERNA BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THIS PROPOSAL NO. 6 TO APPROVE THE 2024 PLAN.
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PROPOSAL NO. 7: MJA PROMISSORY NOTE CONVERSION
APPROVAL OF THE ISSUANCE OF COMMON STOCK UPON CONVERSION OF THE MJA
PROMISSORY NOTE
At the Akerna special meeting, Akerna stockholders will be asked to approve the issuance of Akerna Common Stock upon the conversion of $1.65 million in principal amount of the MJA Promissory Note.
Under Nasdaq Listing Rule 5635(a)(1), a company listed on Nasdaq is required to obtain stockholder approval prior to the issuance of common stock, among other things, in connection with the acquisition of another company’s stock, if the number of shares of common stock to be issued is in excess of 20% of the number of shares of common stock then outstanding.
The issuance of the shares of Akerna Common Stock upon the conversion of the MJA Promissory Note is expected to exceed the 20% threshold under the Nasdaq Listing Rules and is expected to represent approximately 46% following conversion based on 10,352,069 shares currently issued and outstanding (assuming no shares are issued pursuant to other outstanding securities or the Merger) and approximately 1.2% of the shares issued and outstanding following the closing of the Merger based on a 20 to 1 reverse stock split and the issuance of 34,318,117 shares of Akerna Common Stock as Merger Consideration. Accordingly, in order to ensure compliance with Nasdaq Listing Rule 5635(a)(1), Akerna must obtain the approval of Akerna stockholders for the issuance of these shares of Akerna Common Stock pursuant to the MJA Promissory Note Conversion.
The MJA Promissory Note provides that the principal amount thereof as of the closing of the Sale Transaction will be converted into shares of Akerna Common Stock at the 5-day volume weighted average price of the Akerna Common Stock as quoted on The Nasdaq Capital Market for the 5 trading days immediately preceding the date of the consummation of the transactions under the Purchase Agreement. Therefore, it is not currently known how many shares will be issued upon the MJA Promissory Note Conversion. The following table shows the number of shares of Akerna Common Stock issuable upon conversion of the $1,650,000 in principal amount of MJA Promissory Note based upon the pre-reverse split prices per share set forth below.
|
Price per Share |
$ |
0.05 |
|
$ |
0.10 |
|
$ |
0.20 |
|
$ |
0.50 |
|
||||
|
Number of Shares Issuable |
|
33,000,000 |
|
|
16,500,000 |
|
|
8,250,000 |
|
|
3,300,000 |
|
||||
|
Percentage of Current Issued and Outstanding(1) |
|
76 |
% |
|
62 |
% |
|
46 |
% |
|
24 |
% |
||||
|
Percentage Following Merger(2) |
|
4.5 |
% |
|
2.3 |
% |
|
1.2 |
% |
|
0.5 |
% |
____________
(1) Based on 10,352,069 shares issued and outstanding as of December 6, 2023
(2) Following a 20 for 1 reverse stock split and assuming a total of 34,676,183 shares issued and outstanding after the Merger excluding shares issued upon converstion of the MJA Promissory Note
All shares of Akerna Common Stock issued upon conversion of the MJA Promissory Note will be included in the shares of Akerna Common Stock outstanding prior to the closing of the Merger and will be taken into account in calculating the Merger Consideration, which will dilute current Akerna stockholders. Stockholders should review the disclosure in the prospectus/proxy statement under the headings “Transactions”, “The Purchase Agreement” and “MJA Promissory Note” for an additional information regarding the MJA Promissory Note and related matters thereto.
Under Nasdaq Listing Rule 5635(b), a company listed on Nasdaq is required to obtain stockholder approval prior to an issuance of stock that will result in a “change of control” of the listed company. Nasdaq has determined that the issuance of 20% or more the issued and outstanding shares at the time an agreement is entered into constitutes a “change of control”. Accordingly, in order to ensure compliance with Nasdaq Listing Rule 5635(b), Akerna must obtain the approval of Akerna stockholders of the potential change of control resulting from the conversion of the MJA Promissory Note.
Required Vote
The affirmative vote of a majority of the votes properly cast at the Akerna special meeting, whether present at the special meeting or represented by proxy at the special meeting, is required for approval the issuance of Akerna Common Stock under the MJA Promissory Note Conversion and the change of control of Akerna resulting from the MJA Promissory Note Conversion.
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AKERNA BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE MJA PROMISSORY NOTE CONVERSION TO APPROVE THE ISSUANCE OF AKERNA COMMON STOCK UNDER THE MJA PROMISSORY NOTE CONVERSION AND THE CHANGE OF CONTROL OF AKERNA RESULTING FROM THE MJA PROMISSORY NOTE CONVERSION.
Unless otherwise instructed, it is the intention of the persons named in the accompanying proxy card to vote shares represented by properly executed proxy cards “FOR” the approval of the issuance of Akerna Common Stock in the MJA Promissory Note Conversion and the change of control of Akerna resulting from the MJA Promissory Note Conversion.
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APPROVAL OF POSSIBLE ADJOURNMENT OF THE SPECIAL MEETING
If Akerna fails to receive a sufficient number of votes to approve the Merger Proposal, Sale Transaction Proposal, Reverse Stock Split Proposal, Authorized Shares Proposal, Name Change Proposal and 2024 Plan Proposal, Akerna may propose to adjourn the Akerna special meeting, for a period of not more than 60 days, for the purpose of soliciting additional proxies to approve the Merger Proposal, Sale Transaction Proposal, Reverse Stock Split Proposal, Authorized Shares Proposal, Name Change Proposal, the 2024 Plan Proposal and the MJA Promissory Note Conversion. Akerna currently does not intend to propose adjournment at the Akerna special meeting if there are sufficient votes to approve the Merger Proposal, Sale Transaction Proposal, Reverse Stock Split Proposal, Authorized Shares Proposal, Name Change Proposal, the 2024 Plan Proposal and the MJA Promissory Note Conversion.
Required Vote
The affirmative vote of a majority of the votes properly cast at the Akerna special meeting, whether present at the special meeting or represented by proxy at the special meeting, is required to approve the adjournment of the Akerna special meeting for the purpose of soliciting additional proxies to approve the Merger Proposal, Sale Transaction Proposal, Reverse Stock Split Proposal, Authorized Shares Proposal, Name Change Proposal, the 2024 Plan Proposal and the MJA Promissory Note Conversion.
AKERNA BOARD RECOMMENDS A VOTE “FOR” THIS PROPOSAL NO. 8 TO ADJOURN THE AKERNA SPECIAL MEETING, IF NECESSARY, TO SOLICIT ADDITIONAL PROXIES IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF PROPOSAL NOS. 1, 2, 3, 4, 5, 6 AND 7.
Unless otherwise instructed, it is the intention of the persons named in the accompanying proxy to vote shares “FOR” the ratification to adjourn the Akerna special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the Merger Proposal, Sale Transaction Proposal, Reverse Stock Split Proposal, Authorized Shares Proposal, Name Change Proposal, the 2024 Plan Proposal and the MJA Promissory Note Conversion.
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Business Overview
Akerna is a leading provider of enterprise software solutions within the cannabis industry. Cannabis businesses face significant complexity due to the stringent regulations and restrictions that shift based on regional, state, and national governing bodies. As the first to market more than ten years ago, Akerna’s family of software platforms help to enable regulatory compliance and inventory management across the entire supply chain. When the legal cannabis market started to grow, we identified a need for organic material tracking and regulatory compliance software as a service (“SaaS”) solution customized specifically for the unique needs of the industry. By providing an integrated ecosystem of applications and services that help our clients enable compliance, regulation, consumer safety and taxation, Akerna is building the technology backbone of the cannabis industry. While designed specifically for the unique needs of the cannabis market, our solutions are adaptable for other industries requiring government regulatory oversight, or where the tracking of organic materials from seed or plant to end products is desired.
On the commercial side, our products help state-licensed businesses operate in compliance with applicable regional laws. Our integrated ecosystem provides integrations with third-party vendors and add-ons that enhance the capabilities of our commercial software platforms. On the regulatory side, we provide track and trace solutions that allow state governments to monitor compliance of licensed cannabis businesses. To date, our software has helped monitor the compliance of more than $30 billion in legal cannabis. While our software facilitates the success of legal cannabis businesses, we do not handle any cannabis-related material, do not process cannabis sales transactions within the United States (“U.S.”), and our revenue is generated from a fixed-fee based subscription and professional services model and is not related to the type or amount of sales made by our clients.
We drive revenue growth through the development of our product line, our acquisitions and from continued expansion of the cannabis, hemp, and Cannabidiol (“CBD”) industry. Businesses across the regulated cannabis industry use our solutions. The brand recognition of our existing products, our ability to provide services in all areas of the seed-to-sale life cycle, and our wealth of relevant experience attracts cultivation, manufacturing, and dispensary clients who are seeking comprehensive business optimization solutions. Our software solutions are designed to be scalable, and while mid-market and smaller customers have historically been our primary target segment, we are focused on extending our customer reach to address the needs of the emerging enterprise level operator. We believe these larger multi- state/multi-vertical operations represent significant long-term future growth opportunities as the cannabis industry continues to consolidate at a rapid rate. The sophistication of our platform accommodates the complexities of both multi-vertical and multi-state business needs, making us critical partners and allowing us to cultivate long-term, successful relationships with our clients.
Our platforms provide licensed businesses with a true enterprise solution for managing their inventory and compliance and allow government regulators to engage in accurate and real-time compliance monitoring. Key capabilities of our technology infrastructure include:
Seed-to-Sale Tracking allows the tracking of products from cultivation, through harvest and processing and manufacturing, to the monitoring of the final sale to the patient or consumer. Our traceability technology captures every step in an individual plant’s life, providing visibility into the supply chain from any measurement of finished product dispensed to a patient or customer, back to the plant it came from, and all activity, transportation, and transactions that happen in between. While we do not provide payment processing, and never take, own, or handle any product or cash transaction, our platform records all sales as part of state and jurisdictional compliance Track-and-Trace processes. The data gathered throughout all of these processes is captured, and provides the insights and information needed to run an efficient and streamlined cannabis business. Seed-to-Sale software operates in a complementary relationship with state-mandated Track-and-Trace systems, replicating the reporting functionality and eliminating the need for operators to duplicate their compliance data into two disparate systems. Track-and-Trace systems are designed solely for government regulators to maintain compliance and do not have the sophistication or functionality to provide cannabis business owners with the insights and tools for effective business management. Our seed-to-sale platforms integrate with the state Track-and-Trace compliance system, reporting in the mandated data along the supply chain while also providing business owners with the capabilities to make informed business decisions based on the full overview of their operations.
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Track-and-Trace is the compliance reporting system used by regulatory bodies in most states. In order to adhere to their state-specific compliance regulations, cannabis operators are required to enter specific data points along the supply chain into the state-mandated track-and- trace system. By doing so, regulators can track the movement of cannabis inventory through the full supply chain, even when it moves between facilities or operators. The aggregated view that Track-and-Trace software seeks to ensure that the end product being sold has been grown, harvested, processed, transferred and sold compliantly, and provides assurance of safety to consumers.
Using our years of experience, proprietary databases, and resources to identify trends and predict changes in the cannabis industry we evolve our products and better assist our clients in operating in compliance with the applicable laws of their jurisdictions and capitalizing on commercial opportunities within the applicable regulatory framework, with accuracy, efficiency, and geographic specificity. We have worked with clients and governments across the globe to create customized solutions that fit their specific regulatory and commercially compliant needs. While the majority of our clients are in the U.S. and Canada, our solutions allow cannabis businesses to operate efficiently in this fast- changing industry and comply with state, local, and federal regulations (in countries such as Italy, Macedonia, and Colombia). Akerna and our family of companies is well-positioned to provide compliance solutions for the expanding national and international legal cannabis market.
Exploration of Strategic Alternatives — Sale of 365, Merger and Sale Transaction
In May 2022, we announced that we were exploring strategic alternatives to enhance shareholder value and engaged JMP as our financial advisor to assist in this process. In May 2022, we announced the implementation of a strategic restructuring with the objective of preserving capital. Our board of directors approved a restructuring plan following a review of our operations, cost structure and growth opportunities. The restructuring included a reduction in headcount and operating costs. We recorded a charge of $0.6 million in the six months ended June 30, 2022 as a result of the restructuring, which consisted of one-time termination benefits for employee severance, benefits and related costs, all of which resulted in cash expenditures and substantially all of which were paid out by the end of 2022.
On January 11, 2023, we completed the sale of 365 Cannabis to 365 Holdco LLC (the “Buyers”) pursuant to a stock purchase agreement (the “365 SPA”) for (i) cash in the amount of $0.5 million and the (ii) the termination and release of our obligation to the Buyers for contingent consideration in connection with our original acquisition of 365 Cannabis from the Buyers in 2021 (the “Earn-out Obligation”), subject to customary post-closing adjustments, if any. Any post-closing adjustments are generally limited to certain adjustments in accounts payable and indemnification obligations in accordance with the 365 SPA. Upon completion of the sale, $0.4 million of the total cash proceeds was placed into restricted accounts held as security for our 2021 Senior Secured Convertible Notes (the “Senior Convertible Notes”) while $0.1 million was subject to a hold-back (the “365 Holdback”) by the Buyers to be released to us and also placed into restricted accounts after all post-closing adjustments, if any, are resolved. In accordance with the 365 SPA, we and the Buyers agreed that the value of the Earn-out Obligation was $2.3 million, a reduction of $4.0 million from the original estimate, for purposes of the sale of 365 Cannabis and is reflected on our consolidated balance sheets as Contingent consideration payable.
On January 27, 2023, we, Akerna Merger Co., a Delaware corporation and wholly owned direct subsidiary of Akerna (“Merger Sub”), and Gryphon Digital Mining, Inc., a Delaware corporation (“Gryphon”), entered into an Agreement and Plan of Merger, as may be amended from time to time (the “Merger Agreement”), pursuant to which Merger Sub, will merge with and into Gryphon, with Gryphon surviving as a wholly-owned subsidiary of Akerna (the “Merger”).
At the effective time of the Merger (the “Effective Time”) each share of Gryphon’s common stock, par value $0.0001 per share (the “Gryphon Common Stock”), and Gryphon’s preferred stock, par value $0.0001 per share (the “Gryphon Preferred Stock”, collectively referred to herein with the Gryphon Common Stock as, the “Gryphon Shares”) outstanding immediately prior to the Effective Time, will be converted into the right to receive a per share portion of the aggregate number of shares of our common stock, par value $0.0001 per share (the “Akerna Common Stock”), to be issued at the Effective Time as consideration for the Merger, as calculated pursuant to the terms set forth in the Merger Agreement (the “Merger Consideration”).
Each share of Akerna Common Stock, each share of Akerna Common Stock reserved for each warrant to purchase Akerna Common Stock, that is issued and outstanding at the Effective Time will remain issued and outstanding, and such securities will be unaffected by the Merger. Immediately after the consummation of the Merger, Akerna securityholders as of immediately prior to the Merger are expected to own approximately 7.5% of the outstanding
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equity shares of the combined company on a fully diluted basis and former Gryphon equityholders are expected to own approximately 92.5% of the outstanding equity shares of the combined company on a fully diluted basis, subject to adjustment of the Merger Consideration pursuant to its terms prior to the closing of the Merger.
We have also entered into the Purchase Agreement, with Akerna Canada Ample Exchange Inc. (“Akerna Exchange”), a wholly owned subsidiary of Akerna, and MJ Acquisition Corp. (“MJ Acquisition”), on April 28, 2023, pursuant to which, subject to the satisfaction of the conditions set forth in the Purchase Agreement, we will sell to MJ Acquisition all of Akerna’s membership interests in MJ Freeway, LLC, a Colorado limited liability company (“MJ Freeway”), being all of the issued and outstanding membership interests of MJ Freeway (the “Membership Interests”), and Akerna Exchange will sell to MJ Acquisition all of Akerna Exchange’s capital stock of Ample Organics Inc., an Ontario corporation (“Ample”), being all of the issued and outstanding common and preferred shares of Ample (the “Capital Stock”) for a purchase price of $5,000,000, subject to adjustments as set forth in the Purchase Agreement (the “Sale Transaction”).
On September 28, 2023, Akerna, Akerna Exchange and MJ Acquisition Corp. entered into a first amendment to the Purchase Agreement (the “Purchase Agreement Amendment”) which amended certain of the terms of the Purchase Agreement. Principally, the Purchase Agreement Amendment: (i) changed the outside date of the Purchase Agreement to December 31, 2023; (ii) amended the Purchase Agreement to reduce the amount of cash to be paid at closing from $4 million to $2 million; (iii) amended the Purchase Agreement to add a new section which provides that prior to closing under the Purchase Agreement MJ Acquisition Corp will work in good faith on a best efforts basis across multiple interested parties on behalf of and with the express approval of Akerna to secure for Akerna the highest purchase price possible for the shares of Ample, and Akerna shall cause the proceeds from such sale to be included in the assets of MJ Freeway effective as of the closing of the Sale Transaction; provided that, notwithstanding the foregoing, in the event that the shares of Ample are sold to a third-party for a net purchase price above $700,000, Akerna shall be entitled to retain all net proceeds in excess of $700,000; (iv) provided that, within 3 business days of the Purchase Agreement Amendment, MJA will loan Akerna an additional $500,000 to fund Akerna’s working capital requirements; and (v) provided that concurrently with the funding of the additional $500,000 loan to Akerna, Akerna will issue an amended and restated convertible secured promissory note (“MJA Promissory Note”) to MJ Acquisition Corp. and related security documents. The MJA Promissory Note will convert into shares of Akerna Common Stock at the closing the Sale Transaction.
On November 15, 2023, Akerna, Akerna Exchange and MJ Acquisition Corp. entered into a second amendment to the Purchase Agreement (the “Second Purchase Agreement Amendment”) which amended certain of the terms of the Purchase Agreement. Principally, the Second Purchase Agreement Amendment: (i) amended the Purchase Agreement to reduce the amount of cash to be paid at closing from $2 million to $1.85 million; (ii) amended the Purchase Agreement to provide that the proceeds from any sale of the shares of Ample prior to the Closing are to be remitted to the MJ Acquisition Corp. upon the closing of such sale (not to exceed $700,000 less $20,000 to cover Akerna’s legal expenses; (iii) provided that concurrently with the Second Purchase Agreement Amendment, MJ Acquisition Corp. will loan Akerna an additional $150,000 to fund Akerna’s working capital requirements; and (iv) provided that concurrently with the funding of the additional $150,000 loan to Akerna, Akerna will issue an amended and restated convertible secured promissory note in the amount of $1.65 million (“MJA Promissory Note”) to MJ Acquisition Corp. and related security documents. The MJA Promissory Note will convert into shares of Akerna Common Stock at the closing the Sale Transaction.
On December 28, 2023, pursuant to the terms of the Purchase Agreement, Akerna and Akerna Exchange entered into a share purchase agreement with Wilcompute Systems Group Inc., (“Wilcompute”) pursuant to which Akerna Exchange sold all of the Capital Stock of Ample to Wilcompute for approximately $638,000. In accordance with the Purchase Agreement, in lieu of delivering the Capital Stock of Ample at the closing of the Sale Transaction, Akerna will instead deliver to MJ Acquisition the $638,000 purchase price received from Wilcompute, which Akerna expects to be in the form of a reduction of the purchase price paid by MJ Acquisition from $1.85 million to approximately $1.22 million.
On December 28, 2023, Akerna, Akerna Exchange and MJ Acquisition Corp. enerted into a third amendment to the Purchase Agreement to reduce certain of the indemnity caps therein to reflect the sale of the Capital Stock of Ample to Wilcompute.
Shares of Akerna Common Stock are currently listed on The Nasdaq Capital Market under the symbol “KERN.” We will file an initial listing application for the combined company with The Nasdaq Stock Market Inc., or Nasdaq. After completion of the Merger, Akerna will be renamed “Gryphon Digital Mining, Inc.” and it is expected that the common stock of the combined company will trade on The Nasdaq Capital Market.
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Our future business operations are highly dependent on the success of the Merger with Gryphon and Sale Transaction with MJ Acquisition. If the Merger and Sale Transaction are completed, our business will cease to be software solutions within the cannabis industry and will become the business of Gryphon, which is net carbon neutral bitcoin mining.
Exchange Agreements
Concurrently with the signing of the Merger Agreement, we entered into exchange agreements (as amended, the “Exchange Agreements”) with each of the holders (each, a “Holder”) of our senior secured convertible notes (the “Notes”) issued pursuant to a securities purchase agreement dated October 5, 2021. Pursuant to the Exchange Agreements, each Holder has agreed to exchange a certain aggregate conversion amount of the Notes no greater than the lesser of (i) the aggregate amount then outstanding under the Notes and (ii) such portion of the maximum note amount set forth in the Exchange Agreement for such Holder that is convertible into 19.9% of the voting rights of the Company outstanding as of the time immediately following the issuance of the Series C Preferred Stock into such number of shares of newly designated Series C Preferred Stock of Akerna, which will have an aggregate voting power and economic value equal to the aggregate number of shares of common stock then issuable upon conversion of such amount of Note.
The Series C Preferred Stock will have the terms and conditions set forth in the Certificate of Designation of the Series C Preferred Stock. The Series C Preferred Stock is non-convertible, voting preferred stock. Upon the closing of the Merger, Akerna anticipates that the Series C Preferred Stock will be exchanged for Akerna Common Stock at the then current market price per share of Akerna Common Stock. The Series C Preferred Stock can also be redeemed for cash at the option of Akerna and in limited circumstances redeemed for cash at the option of the holder.
Under the Exchange Agreements, Akerna has agreed that 50% of the gross proceeds from any subsequent placements will be used to repay the aggregate amounts then outstanding under the Notes, allocated pro rata to the holders of Notes then outstanding based on the aggregate principal amount of Notes outstanding as of the time of such applicable subsequent placement (“Subsequent Placement Redemption”).
Further, Akerna has agreed that on or prior to the closing of the Merger, if any Notes are then outstanding, Akerna will consummate one or more Company Optional Redemptions (as defined in the Notes) pursuant to Section 9(a) of the Notes (as amended under the Exchange Agreements), using the lesser of (A) the difference of (I) the sum of (x) all cash then held by Akerna (or any of its subsidiaries) and (y) any cash to be paid, directly or indirectly, to Akerna (or any of its subsidiaries) in connection with the transactions contemplated by the Merger Agreement and/or the SPA, as applicable, less (II) $500,000 and (B) an aggregate amount of cash equal to the Company Optional Redemption Price of the aggregate Conversion Amount (as defined in the Notes) of the Notes then outstanding (with each such Company Optional Redemption allocated pro rata to the holders of Notes then outstanding based upon the aggregate principal amount of Notes then outstanding) (the “Cash Sweep”).
Upon closing of the Merger, the Exchange Agreements provide that if any portion of the Notes remain outstanding other than such portion of the applicable Company Optional Redemption Price of the Notes to be paid in cash pursuant to the Cash Sweep, to exchange the remaining Conversion Amount of the Notes into such aggregate number of shares of common stock (the “New Note Exchange Shares”) equal to the quotient of (A) the applicable Company Optional Redemption Price of the remaining Conversion Amount of the Notes then outstanding divided by (B) the lower of (x) the lowest volume weighted average price of the Common Stock during the five (5) Trading Day period ending, and including, the Trading Day immediately prior to the closing and (y) the Conversion Price (as defined in the Notes) in effect as of the closing; and (ii) in accordance with the terms of the Series C Certificate of Designations, the Series C Preferred Stock shall be exchanged into the Change of Control Redemption/Exchange Consideration (as defined in the Series C Certificate of Designations) (with any shares of common stock included in such applicable Change of Control Redemption/Exchange Consideration, if any, the “New Preferred Exchange Shares”, and together with the New Note Exchange Shares, the “Final Closing Exchange Shares”); provided, however, that to the extent that any issuances of Final Closing Exchange Shares to a Holder at the closing in accordance herewith or pursuant to the Series C Certificate of Designations, as applicable would result in such Holder and its other Attribution Parties (as defined in the Note) exceeding the Maximum Percentage (as defined in the Note) (as calculated in accordance with Section 3(d)(i) of the Note) (a “Maximum Percentage Event”), then such Holder shall not be entitled to receive such aggregate number of Final Closing Exchange Shares in excess of the Maximum Percentage (and shall not have beneficial ownership of such Final Closing Exchange Shares (or other equivalent security) as a result of the closing
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(and beneficial ownership) to such extent of any such excess), such remaining portion of such Final Closing Exchange Shares that would have otherwise been issued to the Holder at the Final Closing (such remaining portion of Final Closing Exchange Shares, the “Abeyance Shares”), such portion of the Note and/or shares of Series C Preferred Stock, as applicable, shall alternatively be exchanged for the right to receive such Abeyance Shares (with a beneficial ownership and issuance limitation substantially in the form of Section 3(d) of the Note, mutatis mutandis), at such time or times as its right thereto would not result in such Holder and the other Attribution Parties exceeding the Maximum Percentage, at which time or times, if any, such Holder shall be granted such remaining portion of such Abeyance Shares in accordance herewith and/or pursuant to the Series C Certificate of Designations, as applicable.
The closing of the exchange of a certain portion of the Notes into the Series C Preferred Stock and the exchange of any remaining Notes and the Series C Preferred Stock into shares of common stock at the Closing of the Merger is subject to certain customary conditions and, in relation to the exchange into Series C Preferred Stock, subject to Akerna completing a subsequent placement for gross aggregate proceeds of at least $500,000.
Industry & Competition
We believe the growing cannabis industry in numerous states in the U.S. and other countries represents a significant market opportunity for our technology, as legally licensed operating companies need to ensure they operate within applicable laws and carefully track inventory. With democratic leadership and the new legislation passed during the 2020 election improving the outlook of the industry and a congress that is committed to push forward cannabis policy, the industry’s growth potential has large near-term upside. Since state governments require supply chain transparency to ensure compliance and the maintenance of the seed-to-sale life cycle within their jurisdictions, each new regulated jurisdiction offers an expanded market opportunity for Akerna.
The regulated cannabis industry (medicinal and adult-use) is experiencing rapid growth. According to BDSA’s 2021 Essential Cannabis Insights, December 2022 Vol 4, Issue 10, legal cannabis sales in the U.S. passed $25 billion in 2021, growth of 40% over 2020’s $18 billion. BDSA’s Cannabis Market Forecast update from September 2021 noted sales are forecasted to rise to $46 billion in 2026, a CAGR of 14% from 2021. Global cannabis sales reached nearly $29 billion in 2021, an increase of 45% over 2020 sales of $20 billion. BDSA forecasts global cannabis sales will grow from $29 billion in 2021 to $61 billion in 2026, a compound annual growth rate (CAGR) of more than 16%.
The COVID-19 pandemic has had a positive effect on the growth and acceptance of the cannabis industry. Fitting into a non-cyclical, vice product category has worked to the industry’s advantage overall based on the 2020 sales data. Although many cannabis companies felt extremely adverse circumstances, and some were even forced to close or sell their businesses, this has accelerated a predictable M&A marketplace in which licenses are being acquired for a fraction of what they cost only one year ago. The largest Multi-State Operators (MSOs) are growing and financing faster than ever before. For example, Curaleaf, one of the largest MSOs, opened their 100th retail location in February 2021. As a result of the current M&A marketplace, the landscape is beginning to position itself in a similar way that the alcohol industry has, with major companies controlling a vast majority of market share. Akerna is positioned as an enterprise-level offering to address the needs of these large MSOs that continue to grow through consolidation. The addition of the MJ Analytics seed-to-sale reporting engine, built on the architecture of leading business intelligence platform, Domo, further positions Akerna as an enterprise-level solution.
Further to our current addressable market, the regulatory changes in the 2018 Farm Bill in the U.S. have created an opportunity for hemp-based CBD in general retail and pharmaceutical channels. Additionally, multiple countries across the world have legalized hemp for growth and export including Canada, China, Italy, Australia, and South Korea. In the U.S., hemp-derived CBD is available broadly across retailers (not solely licensed cannabis dispensaries), including online, drug and convenience stores, natural product, beauty, grocery, and pet stores. According to Grand View Research, Industrial Hemp Market Analysis, the global CBD market size was valued at USD 2.8 billion in 2020 and is expected to expand at a compound annual growth rate (CAGR) of 21.2% from 2021 to 2028.
The unfortunate events of the 2019 vape scare in the U.S. prompted regulatory changes and additional requirements, including anti- counterfeiting tags and codes. With major investment and partnership with Solo, Akerna has provided a solution to address the issue for both regulators and operators. The combined supply chain transparency solution was chosen by the State of Utah, requiring all medical dispensary products to be validated. Markets and Markets projects that the anti-counterfeit packaging market size will grow from $105.9 billion in 2018 to $182.2 billion by 2023, at
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a CAGR of 11.5%. The anti-counterfeit packaging market is projected to witness high growth due to the increasing focus of manufacturers on brand protection to reduce counterfeiting. By leveraging this investment, we strengthen our current addressable market with an essential compliance tool.
The cannabis industry is a fast-growing, increasingly complex, and rapidly changing landscape. Arcview Market Research and BDS Analytics note that the range of regulatory schemes is wide, and fines for non-compliance are steep. Proper, safe, and profitable operation of a cannabis business requires a full understanding of applicable laws, the ability to track plants and products to ensure compliance with these laws, and the ability to operate at scale in a competitive environment.
Competitive Landscape
The competitive set within the cannabis technology and consulting space has traditionally been comprised of several smaller and specialized companies with limited access to capital. As part of our growth strategy, we may seek to acquire assets or companies that are synergistic with our business. We have built a scalable infrastructure to support both rapid organic growth and targeted acquisitions. By providing the full seed-to-sale solution, we believe we are well-positioned to be an acquirer of cannabis technology solutions throughout the supply chain. We compete with numerous technology and consulting companies that offer services that are similar to some of our services including, but not limited to, Acumatica, BDS Analytics, BioTrackTHC, Canna Advisors, Cova Cannabis, Dutchie, Flowhub, Headset, Jane, Metrc, New Frontier Data, Nextec, 3C, Treez, and TILT Holdings.
We face competition in each of the service markets in which we operate. We believe, however, that we possess relative strengths in each market that provide us with competitive advantages, including:
• the range of services offered by us;
• our management personnel and their industry knowledge and experience; and
• our proprietary databases, which are only available to users of our platforms and consulting services.
Range of Services
We believe we possess a unique viewpoint into the industry because we offer solutions to, and work with, both commercial businesses and government regulatory agencies towards the common goal of ensuring regulatory compliance and real-time monitoring of inventory and sales. We offer a complete range of both software and services to meet these needs for both state governments and commercial businesses. While we do not face competition from firms focusing on specific subsets of our markets, there are a very limited number of competitors providing products or services that compete with our complete range of products and services. We compete with software companies offering a product to businesses only in a certain geographic region or of a certain business type. We also compete with consulting firms serving a specific phase of the cannabis plant life cycle.
Industry Knowledge and Experience
Our management personnel have extensive technical and business operations knowledge and experience within the cannabis and technology industries, which has been developed through numerous years of service in key roles with a broad range of both cannabis and technology companies, both in terms of product and service type and size. We leverage this knowledge and experience to guide our product and service development and delivery. Our management team possesses significant compliance expertise, allowing us to continually monitor changes in legislation and regulation within the markets we and our clients operate. We face competition from companies that have teams with technical expertise or cannabis industry experience, but there are a limited number of competitors who have both and who understand the interplay between software and technology development and the application of the same to the evolving cannabis compliance landscape.
Proprietary Databases
Over a decade of operations have provided us with a statistically significant dataset of cannabis transaction information that we believe cannot be readily duplicated by new entrants into the marketplace. This growing database includes proprietary sales, market trends, customer preferences, pricing, and regulatory data. We use this dataset to predict trends more accurately in the marketplace and make this dataset available to users of our platforms, providing greater utility to clients in this regard than can be provided by competing platforms.
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Products and Solutions Software
SMB Market
Akerna’s suite of small and medium business (“SMB” or “Non-Enterprise”) products including MJ Platform® and Ample Organics provide SaaS offerings for legal cannabis, hemp and CBD businesses. We provide government-licensed cultivators, manufacturers, distributors, and retail dispensaries with a data-driven seed-to-sale tracking platform that provides clients with an enterprise resource planning solution for managing their inventory and regulatory compliance. Akerna’s products and ecosystem of connections are used by clients to compliantly track inventory through all phases of the seed-to-sale cycle — from cultivation to extraction and infusion to packaging, distribution and retail sales. Data points are collected at every stage of the product life cycle and about multiple aspects of the plant’s growing environment, manufacturing processes, and ingredients, as well as retail pricing and purchase data. In Canada, the first G7 country with a federally legal market, we have a pharmacy portal and insurance adjudication. We service licensed operators in all verticals of the industry, including cultivation, manufacturing, distribution, and retail dispensaries. We have significant client presence for our commercial software solutions in mature cannabis markets such as Arizona, California, Michigan, Pennsylvania, Colorado, Utah, Illinois, Oklahoma, and Puerto Rico, as well as Canada.
We have exclusivity in the Pennsylvania and Utah markets due to our government contracts, which require operators in the states to use MJ Platform®.
Government Market
Leaf Data Systems — Government Regulatory Software
Leaf Data Systems® is our SaaS product for government agencies. Leaf Data Systems® provides regulatory authorities with visibility into the operations of licensed medical and recreational cannabis businesses. Government regulators desire visibility at critical junctures within the seed-to-sale chain of custody in order to ensure public safety, monitor sales data for the purposes of taxation, and perform physical inspections of cannabis industry facilities. Leaf Data Systems® allows for specific data points captured during these workflows to be compiled into the state and regional view retrievable by regulatory officials.
Licensed cannabis facilities within a state can track plant and product movement and waste across their organization, which is processed into reporting tailored to the government agencies that regulate and enforce the rules of the industry. This gives regulators a tool for transparency and accountability across the cannabis supply chain to ensure public and product safety as well as to monitor sales and inventory within the industry. Leaf Data Systems® is customized to the regulations of the state in which it is contracted and tailored to capture the relevant data points desired by regulatory officials.
Leaf Data Systems® is currently serving two state clients, the Commonwealth of Pennsylvania and the State of Utah. The State of Utah mandates the use of our proprietary solo*TAGTM the world’s first cryptographically-secure, cannabis product authentication system, exclusively for governments as an alternative to radio-frequency identification tracking. This customized system includes an electronic verification and inventory control system to track plants and products throughout the compliance supply chain.
Business Intelligence and Data Analytics Products
We have three data products: MJ Analytics (“MJA”); Akerna Acumen Big Data, which both leverage the extensive data captured in each of MJ Platform’s cultivation, E&I, distribution, and retail modules; and Ample Data, which leverages data obtained through Canadian regulated retail channels.
MJ Analytics
MJA gives MJ Platform® clients access to aggregate data across their organization to keep track of emerging legal and commercial trends, allowing for informed actionable insights at various levels within the organization, including room, location, state, brand, and administration. MJ Platform® allows users to align their operational data from three vantage points: in real-time, past trends, and predictive future. This proprietary database assists the user in making important decisions in real-time with respect to product monitoring, tracking, planning, and pricing.
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Built in partnership with Domo and Snowflake, MJA is monetized through the provision of Data Analytics subscriptions to clients. We typically grant a limited, non-exclusive, non-sublicensable license to use our industry data for internal management, reporting, and business optimization purposes. The information typically supplied to clients is aggregated and anonymized information regarding products, which may or may not be those of the client, sold through sales generated through our online service platforms.
Akerna Acumen Business Intelligence
We have cultivated a substantial legal cannabis dataset with over $30 billion in sales tracked and twelve years of data across 30+ states and multiple countries. With the contractual ability to aggregate and anonymize this data, we have launched the Akerna Acumen product to provide banks, investors, researchers, cannabis businesses, and non-cannabis businesses with cannabis market intelligence and valuable market comparison data. The data is available in various formats and is available with updates as frequently as daily.
Ample Data
Ample has created Ample Data, a retail analytics platform for the cannabis industry that applies the same proven solution to data streams ingested from various points within the regulated supply chain. Ample Data is designed to provide key insights for Canadian cannabis license holders, cannabis agencies and government regulators.
Cannabis Business Consulting
We provide project-focused consulting services to clients that are initiating or expanding their cannabis businesses or are interested in data consulting engagements regarding the legal cannabis industry. We typically provide our consulting services to clients in emerging markets that are seeking consultation on newly introduced licensing regimes and assistance with the regulatory compliant build-out of operations in newly opened states.
Entering the cannabis industry is a significant undertaking. We work with clients to efficiently comply with state requirements in connection with the launch and operations of their cannabis businesses. Our management and key personnel bring deep cannabis industry experience to us. Our management team and key personnel have broad experience gained from working with numerous cannabis businesses, with operational experience across every vertical (e.g., cultivation, processing, and retail). Our team members have previously managed projects, including cultivation facilities exceeding 100,000 square feet, retail operations with locations in multiple states, and online businesses serving an entire country.
Competitive Advantage
Partner API. We host an open application programming interface (“API”) ecosystem and are continually developing and maintaining an extensive collection of integrations that are designed to connect our solutions to over 80 partners, provide full-service solutions at all points in the cannabis business life cycle, including compliance, hardware, banking, accounting, online ordering, payment solutions, CRM and loyalty, delivery, and business analytics. We believe these integrations provide a competitive advantage as they reduce implementation time, effort, and cost while providing a holistic cannabis solution; We have certified API integration with tier one ERP software providers supplying sophisticated accounting solutions that collect and store business transactions to satisfy external reporting requirements. Additionally, we leverage revenue sharing agreements and referral programs with our strategic partners to further grow our business and our revenue.
Technology. As the inventors of Seed-To-Sale technology, our proprietary platform is an Amazon Web Services (“AWS”) cloud-based software solution. We offer specialized cannabis workflows specific to the needs of the industry. We serve all verticals of the cannabis supply chain (cultivation, manufacturing, distribution, retail and delivery). We are one of the few true, single-platform Seed-To-Sale solutions in the cannabis space, and the sophistication of our technology allows us to uniquely scale across legal markets. Our platform has processed over $30 billion in legal cannabis sales, with speed, reliability, and security capabilities designed to serve the needs of even the largest of enterprise customers. Compliance with state regulations is built into our platform infrastructure, assisting clients in their efforts to operate within the regulatory parameters of their individual markets. The business insights provided by the data collection throughout the supply chain enables businesses to optimize their operations and make crucial data-driven decisions for their business. These insights are easily analyzed and made actionable by our MJ Analytics module, built in partnership with Domo, a leading BI platform.
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Learning Management System. Through our license with ZolTrain, we are able to provide our Akerna clients with training modules to educate and on-board their staff and improve the patient /consumer experience by pairing education with product information both in person and through digital channels. The ZolTrain platform allows cannabis employees to self-direct their own learning and certification through an Akerna specific curriculum, and their employers are able to monitor and track their progress, assisting clients in ensuring that their staff is fully trained and knowledgeable about the software they are required to use within their job functions. This is one of the only learning management system (“LMS”) platforms specifically designed both for the industry and for our software. It provides detailed notes, takeaways, scored exams and certificates of completion, ensuring staff knows their Seed-To-Sale software inside and out. ZolTrain modules are dynamic, and can be easily updated to accommodate new content or education on new product offerings. The AmpleLearn platform is a similar onboarding and education tool developed for Ample Organics clients to assist with building their proficiency using the software in Canada. Similar to ZolTrain, AmpleLearn is built on industry tested content within a dynamic learning environment. There are assessments, progress reports and certifications that are all available to both the employee and their supervisor. The AmpleLearn product is maintained by the internal team at Ample Organics, ensuring that the content is always up-to-date with the most recent software upgrades and functionality.
Customers
Businesses across the cannabis and hemp industries and of all sizes, ranging from small, single location/ single vertical businesses to multi-state enterprise operations, use the Akerna family of solutions. The cannabis industry is still very much in its infancy compared to more established markets, and as it matures, we are seeing a shift in the typical business model. In the beginning, most operators only managed a single location, or a single vertical operation, and therefore many of our longer-standing clients fall into the small to mid-market size business. Over the past few years, and significantly expedited by the COVID-19 pandemic, we are witnessing large-scale, rapid consolidation within the industry. Many of the original small licensees are being purchased and assumed into larger, multi-state, enterprise level organizations. Our software solutions are designed to be scalable, and as we see this shift in the market, we are focused on extending our customer reach to address the needs of the emerging enterprise level operator. We believe these larger multi-state/multi-vertical operations represent significant long-term future growth opportunities as the cannabis industry continues to consolidate. As more states legalize, these operators are identifying future growth opportunities into these expanded legal markets and need a software solution that can grow with them.
Sales and Marketing
We sell our solutions primarily on a subscription basis with module-based and user-seat pricing, allowing businesses to customize their solution based on their specific business model or vertical. With our integrations to major accounting solutions and cannabis service providers, we are able to customize solutions for all sizes and types of businesses. To gain market share and expand beyond the small to mid- size market, Akerna invests in specialized go-to-market strategies for sales and marketing unique to each state and customer segment.
Our omnichannel marketing program, which includes paid and unpaid digital advertising, event marketing, account-based marketing, content marketing, prospect database nurturing, and other digital marketing activities, is designed to capture inbound marketing leads. We also leverage our expertise and industry intel to identify and engage directly with our prospective customers, especially at the enterprise level. Additionally, we have a broad ecosystem of partners across the cannabis industry and have selectively implemented referral and revenue sharing opportunities with the key players.
We reach each market segment, from emerging small business to enterprise, through channels and tactics that match their expectations for content, outreach, timeliness, and service level. This can require high touch service for some enterprise customers, with more a traditional purchase path for the smallest companies. We hire and train both sales and marketing professionals specialized for the market and the customer segment.
For growth in the regulatory and consulting side, we stay current on emerging legal markets, both nationally and globally to actively conduct outreach and education programs to engage with state regulators and business owners. This strategy strongly supports the growth of our consulting client bases, as we provide license application assistance in new markets, and require in-depth understanding of the regulatory guidelines to be able to successfully win licenses for our customers. We leverage our expertise to provide thought-leadership and industry guidance in order to gain recognition as a leader in the space.
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Government Regulation
Cannabis and Cannabis-derived Products
We do not grow, handle, process, or sell cannabis or cannabis-derived products, nor do we ever possess any such material or process any transactions related to the sale of the same. We only provide a technology platform for our clients to assist them with their compliance with state law and to monitor and control their inventory in compliance with state regulatory environments. We do not receive any commissions from sale by our clients and our revenue generation is not based on the sales of cannabis products by our clients, but rather we generate revenues through a fixed-fee based subscription and professional services revenue model. We are not directly subject to state or federal government drug regulation and our products are only intended to be used to assist with compliance with applicable state laws, under which our clients operate.
Our clients are subject to state and federal law as it relates to cannabis growth, processing, and sale. As of March 2023, 38 U.S. states have legalized cannabis in some form. The federal government regulates drugs through the Controlled Substances Act (“CSA”) (21 U.S.C. § 811), which does not recognize the difference between medical and recreational use of cannabis. State laws regulating cannabis are in direct conflict with the CSA, which prohibits cannabis use and possession. Although certain states and territories authorize medical or recreational cannabis cultivation, manufacturing, production, distribution, and sales by licensed or registered entities, under federal law, the cultivation, manufacture, distribution, possession, use, and transfer of cannabis and any related drug paraphernalia, unless specifically exempt, is illegal and any such acts are criminal acts under the CSA.
While the U.S. Department of Justice has used prosecutorial discretion to not prioritize enforcement actions against state-legal cannabis businesses that are compliant with state, county, municipal and other local laws and regulations and which do not trigger any other federal enforcement priorities, the Department of Justice reserves the right to enforce federal law and there can be no assurance that the federal government will not enforce the CSA and related federal laws in the future. Any shift in enforcement priority at the Department of Justice or with the individual U.S. Attorneys with jurisdiction over our clients, could have a drastic and adverse impact upon our clients and our business.
While we do not grow, handle, process or sell cannabis or cannabis-derived products, our receipt of funds from clients that do conduct such operations in violation of federal law exposes us to risks related to federal racketeering laws. The Racketeer Influenced Corrupt Organizations Act (“RICO”) is a federal statute providing criminal penalties in addition to a civil cause of action for acts performed as part of an ongoing criminal organization. Under RICO, it is unlawful for any person who has received income derived from a pattern of racketeering activity (which includes most felonious violations of the CSA), to use or invest any of that income in the acquisition of any interest, or the establishment or operation of, any enterprise which is engaged in interstate commerce. RICO also authorizes private parties whose properties or businesses are harmed by such patterns of racketeering activity to initiate a civil action against the individuals involved. Although RICO suits against the cannabis industry are rare, a few cannabis businesses have been subject to a civil RICO action.
Our receipt of payments from clients engaged in state-legal cannabis operations could also subject us to the consequences of a variety of federal laws and regulations that involve money laundering, financial record keeping and proceeds of crime, including the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”) and any related or similar rules, regulations or guidelines, issued, administered or enforced by the federal government. Because the funds from activities that are illegal under the CSA, banks and other financial institutions providing services to us risk violation of federal anti-money laundering statutes (18 U.S.C. §§ 1956 and 1957), the unlicensed money-remitter statute (18 U.S.C. § 1960) and the Bank Secrecy Act, among other applicable federal statutes. Banks often refuse to provide banking services to businesses involved in the cannabis industry due to the present state of federal laws and regulations governing financial institutions. The lack of banking and financial services presents unique and significant challenges to businesses in the cannabis industry and we may experience similar difficulties in obtaining and maintaining regular banking and financial services because of the activities of our clients.
Any violations of federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens or criminal charges, including but not limited to, seizure of assets, disgorgement of profits, cessation of business activities or divestiture. In the event that any of our operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations were found to be in violation of
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money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize our ability to declare or pay dividends or effect other distributions. Furthermore, while there are no current intentions to declare or pay dividends in the foreseeable future, in the event that a determination was made that our proceeds from operations (or any future operations) could reasonably be shown to constitute proceeds of crime, we may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
Privacy & Customer Data
Regulation related to the provision of services over the Internet is evolving, as federal, state, and foreign governments continue to adopt new, or modify existing, laws and regulations addressing data privacy and the collection, processing, storage, transfer, and use of data. In some cases, data privacy laws and regulations, such as the European Union’s (“EU”) General Data Protection Regulation (“GDPR”) that took effect in May 2018, impose obligations directly on us as both a data controller and a data processor, as well as on many of our clients. In addition, domestic data privacy laws, such as the California Consumer Privacy Act (“CCPA”), which took effect in January 2020, continue to evolve and could expose us to further regulatory burdens. Further, laws such as the EU’s proposed e-Privacy Regulation are increasingly aimed at the use of personal information for marketing purposes and the tracking of individuals’ online activities.
Although we monitor the regulatory environment and have invested in addressing these developments, such as GDPR and CCPA readiness, these laws may require us to make additional changes to our services to enable us or our clients to meet the new legal requirements, and may also increase our potential liability exposure through higher potential penalties for non-compliance. These new or proposed laws and regulations are subject to differing interpretations and may be inconsistent among jurisdictions. These and other requirements could reduce demand for our services, require us to take on more onerous obligations in our contracts, restrict our ability to store, transfer, and process data or, in some cases, impact our ability or our clients’ ability to offer our services in certain locations, to deploy our solutions, to reach current and prospective customers, or to derive insights from customer data globally. The costs of compliance with, and other burdens imposed by, privacy laws, regulations, and standards may limit the use and adoption of our services, reduce overall demand for our services, make it more difficult to meet expectations from or commitments to clients, lead to significant fines, penalties or liabilities for non-compliance, impact our reputation, or slow the pace at which we close sales transactions, any of which could harm our business.
Furthermore, the uncertain and shifting regulatory environment and trust climate may cause concerns regarding data privacy and may cause our clients or our clients’ customers to resist providing the data necessary to allow our clients to use our services effectively. Even the perception that the privacy of personal information is not satisfactorily protected or does not meet regulatory requirements could inhibit sales of our products or services and could limit the adoption of our cloud-based solutions.
Patents and Trademarks
We primarily rely upon a combination of confidentiality procedures, contractual provisions, copyright, trademark, patent, and trade secret laws, and other similar measures to protect our proprietary information and intellectual property.
We hold two patents in the U.S., through Solo, related to its Solo*ID proprietary technology. One patent has an issue date of December 1, 2009 and is set to expire on December 1, 2029. The other patent has an issue date of May 31, 2011 and is set to expire on July 11, 2025. We also have two patent applications that are currently pending action by the U.S. Patent Office. One was filed on April 22, 2011 by MJF and the other was filed on January 22, 2022 related to Solo blockchain technology.
We and our wholly-owned subsidiaries hold 19 trademarks in the U.S., principally related to Akerna, MJ Freeway, Leaf Data Systems®, our Daily Dose mailer, Solo*ID and our logos and designs, seven in Canada, principally related to Ample, AmpleCentral, AmpleData, AmpleExchange and Ample’s logos and designs and one each with Colombia, Jamaica and the European Union Intellectual Property Office (“EUIPO”) related to Ample’s logo and designs.
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Employees
As of December 31, 2022, we had 112 full time employees. Of these employees, 85 are based in the U.S. and 27 are based in Canada. Our workforce is highly educated, with most of our employees working in engineering, technical, or professional roles. None of our employees is a member of a union or a party to any collective bargaining agreement. We believe our relations with our employees are good.
Legal Proceedings
On December 4, 2020, TechMagic USA LLC (“Tech Magic”) filed suit against our wholly-owned subsidiary, Solo, in Massachusetts Superior Court, Department Business Litigation, seeking recovery for certain unpaid invoices pursuant to a Master Services Agreement dated February 5, 2018 (the “Master Services Agreement”) by and between TechMagic and Solo. The recovery sought for continued fees under the Master Services Agreement through the end of January 2021. Akerna provided a notice of termination of the Master Services Agreement on November 23, 2020 and the parties dispute the effective date of the termination. Solo disputes the validity of the invoices, in whole or in part. Mr. Ashesh Shah, formerly the president of Solo and currently the holder of less than five percent of our issued and outstanding shares of Common Stock is, to our knowledge, the founder and one of the principal managers of TechMagic. On May 21, 2021, Solo filed suit against two of Solo’s former directors, Mr. Shah and Palle Pedersen. Solo sought recovery for Mr. Shah’s intentional interference with contractual relations, and the defendant’s breaches of various fiduciary duties owed to Solo. Defendant Shah engaged in improper communications with Solo’s customers with the intent that those customers cease their contractual relations with Solo. The defendants also entered into an improper contract with a contractual counter party with whom the defendants had a conflict of interest. The defendants filed a motion to dismiss, which the court found unpersuasive and denied. In July 2022, we entered into an agreement with TechMagic and the defendants to dismiss all litigation and claims described above. In connection with the settlement agreement, we reversed our previously accrued loss contingency of $0.5 million during the second quarter of 2022 and no amounts were paid in cash.
On April 2, 2021, TreCom Systems Group, Inc. (“TreCom”) filed suit against Akerna and MJF in federal District Court for the Eastern District of Pennsylvania, seeking recovery of up to approximately $2.0 million for services allegedly provided pursuant to a Subcontractor Agreement between MJF and TreCom. MJF provided a notice of termination of the operative Subcontractor Agreement on August 4, 2020. MJF disputes the validity of TreCom’s invoices and the enforceability of the alleged agreement that TreCom submitted to the court. Akerna filed counterclaims against TreCom for breach of contract, a declaratory judgment, commercial disparagement, and defamation. TreCom failed to return Akerna’s intellectual property and issued numerous disparaging statements to one of Akerna’s clients. TreCom subsequently filed a motion to dismiss these counterclaims, which was denied by the court. Akerna intends to vigorously defend against TreCom’s claims, and pursue its own claims. With respect to the TreCom matter, we established a loss contingency $0.2 million in 2021 which remains outstanding as of December 31, 2022.
On January 13, 2023, Courier Plus Inc. d/b/a Dutchie (“Dutchie”) filed a complaint in the Court of Common Please, Dauphin County, Pennsylvania against Akerna and MJF alleging unfair competition, tortious interference and unjust enrichment with respect to MJF’s exclusive contract with the State of Pennsylvania. We filed a preliminary objection alleging serious defects, such as jurisdiction, and we worked with the State of Pennsylvania to ensure compliance with our contract. We intend to defend our position vigorously and, at this time, we do not believe an estimate of potential loss, if any, is appropriate. Our September 21, 2023, the Court of Common Pleas issued an order granting certain of Akerna’s demurrers and motions to strike against all of the counts set forth in Dutchie’s complaint. For certain of the counts, Dutchie had until October 11, 2023 to file an amended complaint but failed to do so.
On May 15 and May 23, 2023, Akerna and all its directors were named in two derivative lawsuits (McCaffrey v. Akerna et al. and Caller v. Akerna et al., Nos. 1:23-cv-01213-PAB and 1:23-cv-01300-KLM, respectively) filed in the United States District Court for the District of Colorado by stockholders Albert McCaffrey and Israel Caller, respectively, alleging that the disclosures made regarding the pending transactions with Gryphon and MJ Acquisition violate Sections 14(a) and 20(a) of the Securities and Exchange Act of 1934. The lawsuits contend that the disclosures omit material information regarding the transactions and seek injunctive relief and attorneys’ fees. Akerna has not yet responded to either complaint but intends to vigorously defend the lawsuits and, at this time, we do not believe an estimate of potential loss if any, is appropriate. Both lawsuits have been dismissed without prejudice on October 9, 2023 (McCaffrey) and October 3, 2023 (Caller).
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Company Information
Emerging Growth Company
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, (the “JOBS Act”) because we went public in the U.S. in January 2018 and meet the criteria outlined in the JOBS Act. We will remain an emerging growth company until up to the last day of the fiscal year following the fifth anniversary of our initial public offering, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenue exceeds $1.07 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non- convertible debt during the preceding three-year period. As allowed by the JOBS Act, we have elected to utilize the extended transition period provided to non-public companies for complying with new or revised accounting standards.
Available Information
We make available, free of charge, on or thorough our website, at www.akerna.com, our annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934. Our website and the information contained therein or connected thereto are not intended to be, and are not incorporated into this Annual Report on Form 10-K.
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AKERNA MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of Akerna’s financial condition and results of operations in conjunction with the audited and interim financial statements and the related notes, each included elsewhere in this proxy statement/prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect Akerna’s plans, estimates, beliefs and expectations that involve risks and uncertainties. Akerna’s actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this proxy statement/prospectus, particularly in the sections titled “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statement.”
Akerna is the leading provider of SaaS solutions within the cannabis industry that enable regulatory compliance and inventory management through our wholly-owned subsidiaries MJF, Trellis, Ample, Solo, Viridian, and 365 Cannabis. Our proprietary suite of solutions are adaptable for industries in which interfacing with government regulatory agencies for compliance purposes is required, or where the tracking of organic materials from seed or plant to end products is desired. We also develop products intended to assist states in monitoring licensed businesses’ compliance with state regulations and to help state-licensed businesses operate in compliance with such law. We provide our commercial software platform, MJ Platform®, Trellis®, Ample, Viridian and 365 Cannabis to state-licensed businesses, and our regulatory software platform, Leaf Data Systems®, to state government regulatory agencies. Our Viridian and 365 Cannabis solutions are considered enterprise offerings (“Enterprise”) and all other solutions are considered non-enterprise offerings (“Non-Enterprise”) that meet the needs of our small and medium business (“SMB”) and government regulatory agency customers. We offer our software solutions to our customers as a subscription-based service. Subscription fees are based upon the chosen package which includes differentiated platform capabilities, support and user accounts. As customers recognize the value of our platform, we increasingly engage with them to facilitate broad adoption across other parts of their business.
We consult with clients on a wide range of areas to help them successfully maintain compliance with state laws and regulations. We provide project-focused consulting services to clients who are initiating or expanding their cannabis business operations or are interested in data consulting engagements with respect to the legal cannabis industry. Our advisory engagements include service offerings focused on compliance requirement assessments, readiness and best practices, compliance monitoring systems, application processes, inspection readiness, and business plan and compliance reviews. We typically provide our consulting services to clients in emerging markets that are seeking consultation on newly introduced licensing regimes and assistance with the regulatory compliant build-out of operations.
Key Business Metrics
In addition to our results determined in accordance with GAAP, we believe earnings before interest, taxes, depreciation and amortization, or EBITDA, and Adjusted EBITDA are useful in evaluating our operating performance. We use EBITDA and Adjusted EBITDA, to evaluate our ongoing operations and for internal planning and forecasting purposes. Please see the heading “Non-GAAP Financial Measures” for additional discussion and a reconciliation of our net loss determined in accordance with GAAP to these non-GAAP measures.
Key Developments
The following general business developments had or may have a significant impact on our results of operations, financial position and cash flows:
Strategic Shift in Business Strategy
As previously disclosed, we have been engaged in considering strategic partnerships and evaluating potential strategic transactions in a comprehensive effort to address our financial challenges and our ability to continue as a going concern. During the fourth quarter of 2022, we committed to a number of significant actions described below that collectively represent a strategic shift in our business strategy for 2023 and beyond.
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Exiting the Enterprise Software Business
The development of our Enterprise software business unit, which began with the acquisitions of Viridian and 365 Cannabis in 2021, did not achieve a sustainable scale in a timely manner consistent with our original plans. Accordingly, we committed to an effort to market this business unit during the fourth quarter of 2022. Ultimately we secured a buyer for 365 Cannabis and were engaged in exclusive negotiations through December 31, 2022 and into January 2023. On January 11, 2023, we completed the sale of 365 Cannabis to the Buyers pursuant to the 365 SPA for (i) cash in the amount of $0.5 million and the (ii) the termination and release of our obligation to the Buyers for contingent consideration in connection with the Earn-out Obligation, subject to customary post-closing adjustments, if any. Any post-closing adjustments are generally limited to certain adjustments in accounts payable and indemnification obligations in accordance with the 365 SPA. Upon completion of the sale, $0.4 million of the total cash proceeds was placed into the Restricted Accounts held as security for the Senior Convertible Notes while $0.1 million was subject to the 365 Holdback by the Buyers to be released to us and also placed into the Restricted Accounts after all post-closing adjustments, if any, are resolved. In accordance with the 365 SPA, we and the Buyers agreed that the value of the Earn-out Obligation was $2.3 million, a reduction of $4.0 million from the original estimate, for purposes of the sale of 365 Cannabis and is reflected on our consolidated balance sheets as Contingent consideration payable.
While we explored similar sale options for Viridian, we were unable to commit to any definitive transaction. Accordingly, we informed Viridian’s customers that we do not plan to continue software and support services beyond the date of existing contracts, all of which expire during the first quarter of 2023. With the sale of 365 Cannabis and our commitment to wind down the operations of Viridian, we have effectively exited the Enterprise software business. Accordingly, we have suspended efforts to seek any new revenue generating opportunities and will only service the existing customers of Viridian in connection with our contractual commitments. Continuing revenues and expenses in the first quarter of 2023 are not anticipated to be material.
Disposal of Non-Core SMB Software Products and Brands
In addition to the our exit from the Enterprise software business, we initiated efforts in the fourth quarter of 2022 to explore a sales process for the non-core components and brands of our SMB/Non-Enterprise business unit, including Trellis, a cultivation and compliance software platform, Solo, a seed-to-sale tagging and tracking software platform, Last Call Analytics (“LCA”), a retail analytics platform and wholly-owned subsidiary of Ample, and our equity investment in Zol Solutions, Inc. (“ZolTrain”). On January 31, 2023, we completed the sale of LCA for cash in the amount of $0.1 million, subject to post-closing adjustments, if any. In December 2022, we sold our investment in ZolTrain for a nominal amount (see Note 7 — Investments to the consolidated financial statements). While we pursued sale opportunities for Trellis and Solo, we were ultimately unable to commit to any definitive transactions. Accordingly, we have communicated with the remaining customers of those businesses that we will discontinue software service and support upon the expiration of existing contracts during the first half of 2023. Similar to Viridian, as discussed above, we have suspended efforts to seek any new revenue generating opportunities and will only service the existing customers of Solo and Trellis in connection with our contractual commitments. Continuing revenues and expenses in the first half of 2023 are not anticipated to be material.
Exit Strategy
With the completion of the sales of 365 Cannabis, LCA and ZolTrain and the commitment to effectively discontinue and wind down the operations and service associated with Viridian, Solo and Trellis, our remaining core SMB and governmental business unit is comprised of MJF and Ample. Concurrent with the actions described above, we entered into letters of intent with two unrelated parties in the fourth quarter of 2022 to (i) explore the sale of our remaining core SMB and governmental business unit and (ii) realize the potential value of our publicly-held holding company through a merger or similar transaction. Collectively, pursuit of these transactions reflects our intention to fully exit the SaaS industry.
On January 27, 2023, we and Akerna Exchange entered into the Sale Transaction with POSaBIT to sell MJF and Ample to POSaBIT for a purchase price of $4.0 million in cash. See “Item 1 — Business — Business Overview — Exploration of Strategic Alternatives — Merger and Sale Transaction” for a more detailed description of the Sale Transaction and the underlying MJF-Ample Purchase Agreement.
On April 28, 2023, we entered into a securities purchase agreement (the “SPA”) with MJA, a subsidiary of Alleaves. Upon the terms and subject to the satisfaction of the conditions described in the SPA, including approval of the transaction by Akerna’s stockholders, Akerna will sell MJF and Ample to MJA (the “Sale Transaction”) for a purchase price of
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$5.0 million, consisting of $4.0 million in cash at closing and a loan by MJA to Akerna in the principal amount of $1.0 million evidenced by a note and security documents (as described in detail below) with such note to be deemed paid in full upon closing. The purchase price is subject to adjustment at closing of the Sale Transaction attributable to variances from target working capital (as set forth in the SPA) and further adjustment post-closing upon delivery of a post-closing statement by MJA within 75 days after the closing subject to a $0.5 million cap on any post-closing working capital adjustments. The closing of the Sale Transaction is subject to customary closing conditions as well as the required approval of the stockholders of Akerna and the simultaneous closing of the merger transaction, as described below. The obligation of MJA to close on the Sale Transaction is also subject to satisfaction of certain additional conditions regarding employee retention and contractual matters associated with MJF’s and Ample’s customers, among others. Under the SPA, Akerna and MJA have agreed to provide limited indemnification to each other with respect to certain tax matters, in each case capped at a maximum amount of $0.5 million. We or MJA may terminate the SPA upon mutual consent and either party may terminate the SPA unilaterally under certain conditions as described in the SPA. In the event that MJA or Akerna terminates the SPA pursuant to certain of the sections set forth above, Akerna will be required to pay MJA a termination fee of $290,000 and reimburse MJA for its reasonable fees and expenses up to $60,000.
On January 27, 2023, we entered into the Merger Agreement with Gryphon and Akerna Merger. Upon the terms and subject to the satisfaction of the conditions provided in the Merger Agreement, including the approval of the transaction by Akerna’s and Gryphon’s stockholders, Akerna Merger will be merged with and into Gryphon with Gryphon surviving the Merger as a wholly-owned subsidiary of Akerna. See “Item 1 — Business — Business Overview — Exploration of Strategic Alternatives — Merger and Sale Transaction” for a more detailed description of the Merger and the underlying Merger Agreement.
On June 14, 2023, Akerna, Merger Sub and Gryphon entered into a second amendment to agreement and plan of Merger (the “Second Amending Agreement”) which amends the definition of Merger Consideration to mean the greater of (a) a number of shares of Akerna Common Stock equal to (i) the quotient obtained by dividing (A) the number of shares of Akerna Common Stock on a fully diluted basis (B) 0.075, minus (ii) the Akerna fully diluted share number minus (iii) the adjusted Gryphon warrant reserve number, and (b) a number of shares of Akerna Common Stock equal to the quotient obtained by dividing (i) $115,625,000 by (ii) the last sale price of the Akerna Common Stock on the second trading day immediately preceding the closing of the Merger.
On September 28, 2023, Akerna, Akerna Exchange and MJ Acquisition Corp. entered into a first amendment to the SPA (the “SPA Amendment”) which amended certain of the terms of the SPA. Principally, the SPA Amendment: (i) changed the outside date of the SPA to December 31, 2023; (ii) amended the SPA to reduce the amount of cash to be paid at closing from $4 million to $2 million; (iii) amended the SPA to add a new section which provides that prior to closing under the SPA, MJA will work in good faith on a best efforts basis across multiple interested parties on behalf of and with the express approval of Akerna to secure for Akerna the highest purchase price possible for the shares of Ample, and Akerna shall cause the proceeds from such sale to be included in the assets of MJF effective as of the closing of the Sale Transaction; provided that, notwithstanding the foregoing, in the event that the shares of Ample are sold to a third-party for a net purchase price above $700,000, Akerna shall be entitled to retain all net proceeds in excess of $700,000; (iv) provided that, within 3 business days of the SPA Amendment, MJA will loan Akerna an additional $500,000 to fund Akerna’s working capital requirements; and (v) provided that concurrently with the funding of the additional $500,000 loan to Akerna, Akerna will issue an amended and restated convertible secured promissory note to MJA and related security documents. The amended and restated promissory note will convert into shares of common stock of Akerna at the closing the Sale Transaction.
On November 15, 2023, Akerna, Akerna Exchange and MJ Acquisition Corp. entered into a second amendment to the Purchase Agreement (the “Second Purchase Agreement Amendment”) which amended certain of the terms of the Purchase Agreement. Principally, the Second Purchase Agreement Amendment: (i) amended the Purchase Agreement to reduce the amount of cash to be paid at closing from $2 million to $1.85 million; (ii) amended the Purchase Agreement to provide that the proceeds from any sale of the shares of Ample prior to the Closing are to be remitted to the MJ Acquisition Corp. upon the closing of such sale (not to exceed $700,000 less $20,000 to cover Akerna’s legal expenses; (iii) provided that concurrently with the Second Purchase Agreement Amendment, MJ Acquisition Corp. will loan Akerna an additional $150,000 to fund Akerna’s working capital requirements; and (iv) provided that concurrently with the funding of the additional $150,000 loan to Akerna, Akerna will issue an amended and restated convertible secured promissory note in the amount of $1.65 million (“MJA Promissory Note”) to MJ Acquisition Corp. and related security documents. The MJA Promissory Note will convert into shares of Akerna Common Stock at the closing the Sale Transaction.
On November 15, 2023, Mr. Barry Fishman resigned as a director of the Akerna Board.
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On December 28, 2023, pursuant to the terms of the Purchase Agreement, Akerna and Akerna Exchange entered into a share purchase agreement with Wilcompute Systems Group Inc. (“Wilcompute”) pursuant to which Akerna Exchange sold all of the Capital Stock of Ample to Wilcompute for approximately $638,000. In accordance with the Purchase Agreement, in lieu of delivering the Capital Stock of Ample at the closing of the Sale Transaction, Akerna will instead deliver to MJ Acquisition the $638,000 purchase price received from Wilcompute, which Akerna expects to be in the form of a reduction of the purchase price paid by MJ Acquisition from $1.85 million to approximately $1.22 million.
On December 28, 2023, Akerna, Akerna Exchange and MJ Acquisition Corp. enerted into a third amendment to the Purchase Agreement to reduce certain of the indemnity caps therein to reflect the sale of the Capital Stock of Ample to Wilcompute.
Exchange Agreements
In connection with and in support of the Sale Transaction and the Merger, we and each of the holders of the Senior Convertible Notes entered into exchange agreements (the “Exchange Agreements”) whereby the holders would ultimately convert the principal amounts of each of their note holdings to a level that would represent 19.9 percent of the outstanding voting shares of our capital stock prior to the closing of the Sale Transaction and the Merger. Immediately prior to the stockholder vote required for the closing of those transaction, the remaining Senior Convertible Notes outstanding would be converted into a special class of exchangeable preferred stock to facilitate the required stockholder vote and then be exchanged into shares of our Common Stock subject to the Merger. For a limited period, the conversion price of the Senior Convertible Notes was lowered to $1.20 per share from $4.75 per share. During the nine months ended September 30, 2023, the holders of the Senior Convertible Notes converted a total of $1.5 million of principal for 1,394,251 shares of Common Stock at the lowered prices of $1.20 and $0.50 per share. We anticipate scheduling a meeting of stockholders during the fourth quarter of 2023 to approve the Sale Transaction and the Merger and we expect these transactions to close shortly thereafter.
On December 20, 2023, Akerna and the Holders of the Senior Convertible Notes entered into Amendment One to the Exchange Agreements with such Holders to amend the terms of the Exchange Agreement and finalize the provisions of the Initial Closing (as defined therein) of the exchange of Senior Convertible Notes into Series C Preferred Stock of the Akerna.
On December 20, 2023, Akerna issued an aggregate of 3,244 shares of Series C Preferred Stock upon exchange of $3,244,000 principal amount of Senior Convertible Notes.
Secured Note and Ancillary Agreements
On May 3, 2023, we received a loan in the amount of $1.0 million from MJA in connection with the Sale Transaction. Accordingly, we and MJA entered into a $1.0 million secured promissory note (the “MJA Note”). The MJA Note bears simple interest at the rate of ten percent (10%) per annum from the date of issuance until repayment of the MJA Note which will be due and payable on April 28, 2024, or, upon completion Sale Transaction, in which case the MJA Note shall be deemed paid in full. Akerna’s obligations under the MJA Note have been secured pursuant to a Security and Pledge Agreement (the “Security Agreement”). The Security Agreement creates a security interest in all of the personal property of Akerna and certain of its subsidiaries. In addition, certain subsidiaries of Akerna entered into a guaranty agreement with MJA (the “Guaranty Agreement”) under which they will guarantee the obligations of the Company under the Security Agreement and the MJA Note.
In connection to the MJA Note, the Security Agreement, and the Guaranty Agreement (collectively, “New Note Transaction Documents”) and solely to permit Akerna to issue the MJA Note and execute and perform its obligations under the New Note Transaction Documents and a Subordination Agreement (as defined below), each of the holders (each, a “Holder”) of the Senior Convertible Notes issued pursuant to a Securities Purchase Agreement dated October 5, 2021 (“2021 SPA”) agreed to waive the prohibition on issuing indebtedness other than Permitted Indebtedness (as defined in the Senior Convertible Notes) pursuant to Section 14(b) of the Senior Convertible Notes and the prohibition permitting Liens (as defined in the Senior Convertible Notes) to exist other than Permitted Liens (as defined in the Senior Convertible Notes) pursuant to Section 14(c) of the Senior Convertible Notes and Section 5(g)(v) of the 2021 SPA (the “Waiver”). In connection to the New Note Transaction Documents, MJA, Akerna, and HT Investments MA LLC (the “Senior Agent”, together with the Holders, the “Senior Creditors”), as collateral agent under the 2021 SPA, each on behalf of the respective Holders, entered into a subordination and intercreditor agreement (the “Subordination Agreement”), whereby the parties agreed that the payment of any and all obligations, liabilities and indebtedness of every nature of Akerna, its applicable subsidiary and/or affiliates from time to time owed to MJA under the Subordinated Debt Documents (as defined in the Subordination Agreement) will be subordinate and subject in right and time of payment, to the prior payment in full of all obligations under the Senior Convertible Notes.
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On October 11, 2023, Akerna issued an amended and restated convertible secured promissory note (“Amended and Restated Note”) to MJA which amends and restates the MJA Note by and between Akerna and MJA (the “Original Note”), whereby Akerna promises to pay to the order of MJA or its registered assigns the amount of $1,500,000. The Amended and Restated Note amended the Original Note to:
(A) increase the principal amount of the Original Note from $1,000,000 to $1,500,000;
(B) provide for the forfeiture by MJA of the accrued and unpaid interest at the consummation of the Sale Transaction; and
(C) provide that contemporaneous with and immediately prior to the consummation of the Sale Transaction provide that contemporaneous with and immediately prior to the consummation of the Sale Transaction, the principal amount of the shall convert into such quantity of shares of common stock of the Company as equals (1) $1,500,000, divided by (2) the 5-day volume weighted average price of the common stock of the Company as quoted on The Nasdaq Capital Market for the 5 trading days immediately preceding the date of the consummation of the Sale Transaction; provided however, that in no case shall Akerna be required to issue to MJA such number of shares of common stock as would in the aggregate with all shares issued pursuant to the SPA and/or held or controlled by MJA exceed 19.99% of the number of issued and outstanding shares of common stock of the Seller on the date hereof without first obtaining the approval of stockholders of Akerna as required pursuant to the rules of the Nasdaq Stock Exchange.
In connection with the Amended and Restated Note, on October 11, 2023, Akerna and MJA entered into an amended and restated Security Agreement (“Amended and Restated Security Agreement”) and amended and restated Guaranty (‘Amended and Restated Guaranty”) to reflect the Amended and Restated Note.
In connection to the Amended and Restated Note, the Amended and Restated Security Agreement, and the Amended and Restated Guaranty Agreement (collectively, “Amended and Restated Note Transaction Documents”) and solely to permit Akerna to issue the Amended and Restated Note and execute and perform its obligations under the Amended and Restated Note Transaction Documents and an Amended and Restated Subordination Agreement (as defined below), on October 11, 2023, each of the Holders under the 2021 SPA agreed to waive the prohibition on issuing indebtedness other than Permitted Indebtedness (as defined in the Senior Convertible Notes) pursuant to Section 14(b) of the Senior Convertible Notes and the prohibition permitting Liens (as defined in the Senior Convertible Notes) to exist other than Permitted Liens (as defined in the Senior Convertible Notes) pursuant to Section 14(c) of the Senior Convertible Notes and Section 5(g)(v) of the 2021 SPA (the “October Waiver”). In connection to the Amended and Restated Note Transaction Documents, MJA, Akerna, and the Senior Agent, as collateral agent under the 2021 SPA, entered into an amended and restated Subordination Agreement (the “Amended and Restated Subordination Agreement”), whereby the parties agreed that the payment of any and all obligations, liabilities and indebtedness of every nature of Akerna, its applicable subsidiary and/or affiliates from time to time owed to MJA under the Amended and Restated Subordinated Debt Documents (as defined in the Subordination Agreement) will be subordinate and subject in right and time of payment, to the prior payment in full of all obligations under the Senior Convertible Notes.
On November 15, 2023, Akerna issued an amended and restated convertible secured promissory note (“Second Amended and Restated Note”) to MJA which amends and restates the MJA Note by and between Akerna and MJA (the “Original Note”), whereby Akerna promises to pay to the order of MJA or its registered assigns the amount of $1,650,000. The Amended and Restated Note amended the Original Note to:
(A) increase the principal amount of the Amended and Restated Note from $1,500,000 to $1,650,000;
(B) provide for the forfeiture by MJA of the accrued and unpaid interest at the consummation of the Sale Transaction; and
(C) provide that contemporaneous with and immediately prior to the consummation of the Sale Transaction provide that contemporaneous with and immediately prior to the consummation of the Sale Transaction, the principal amount of the shall convert into such quantity of shares of common stock of the Company as equals (1) $1,650,000, divided by (2) the 5-day volume weighted average price of the common stock of the Company as quoted on The Nasdaq Capital Market for the 5 trading days immediately preceding the date of the consummation of the Sale Transaction; provided however, that in no case shall Akerna be required to issue to MJA such number of shares of common stock as would in the aggregate with all shares issued pursuant to the SPA and/or held or controlled by MJA exceed 19.99% of the number of issued and outstanding shares of common stock of the Seller on the date hereof without first obtaining the approval of stockholders of Akerna as required pursuant to the rules of the Nasdaq Stock Exchange.
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In connection with the Second Amended and Restated Note, on November 15, 2023, Akerna and MJA entered into a second amended and restated Security Agreement (“Second Amended and Restated Security Agreement”) and a second amended and restated Guaranty (“Second Amended and Restated Guaranty”) to reflect the Second Amended and Restated Note.
In connection to the Second Amended and Restated Note, the Second Amended and Restated Security Agreement, and the Second Amended and Restated Guaranty Agreement (collectively, “Second Amended and Restated Note Transaction Documents”) and solely to permit Akerna to issue the Second Amended and Restated Note and execute and perform its obligations under the Second Amended and Restated Note Transaction Documents and a Second Amended and Restated Subordination Agreement (as defined below), on November 15, 2023, each of the Holders under the 2021 SPA agreed to waive the prohibition on issuing indebtedness other than Permitted Indebtedness (as defined in the Senior Convertible Notes) pursuant to Section 14(b) of the Senior Convertible Notes and the prohibition permitting Liens (as defined in the Senior Convertible Notes) to exist other than Permitted Liens (as defined in the Senior Convertible Notes) pursuant to Section 14(c) of the Senior Convertible Notes and Section 5(g)(v) of the 2021 SPA (the “October Waiver”). In connection to the Second Amended and Restated Note Transaction Documents, MJA, Akerna, and the Senior Agent, as collateral agent under the 2021 SPA, entered into a second amended and restated Subordination Agreement (the “Second Amended and Restated Subordination Agreement”), whereby the parties agreed that the payment of any and all obligations, liabilities and indebtedness of every nature of Akerna, its applicable subsidiary and/or affiliates from time to time owed to MJA under the Second Amended and Restated Subordinated Debt Documents (as defined in the Second Amended and Restated Subordination Agreement) will be subordinate and subject in right and time of payment, to the prior payment in full of all obligations under the Senior Convertible Notes.
Financial Reporting and Classification
As a result of the corporate actions described above, 365 Cannabis and LCA (together, the “Discontinued Group”) met the criteria to be considered “held for sale” as that term is defined in accounting principles generally accepted in the United States (“GAAP”). Accordingly, the assets and liabilities of these entities are classified and reflected on our consolidated balance sheets as held for sale as of December 31, 2022 and 2021, respectively, and their results of operations are classified as “discontinued operations” in the consolidated statements of operations for the years ended December 31, 2022 and 2021, respectively. Certain financial disclosures including major components of the assets and liabilities and results of operations of the Discontinued Group are provided in Note 17 to the consolidated financial statements. Our core SMB and governmental business unit (MJF and Ample), the businesses for which we have committed to terminate operations (Viridian, Solo and Trellis) and our publicly-held parent holding company (Akerna Corp.) comprise our continuing operations. Collectively, these entities are presented as continuing operations for all periods presented herein and until such time that stockholder approval is received for the Sale Transaction and the Merger.
The results of operations of our discontinued operations and the assets and liabilities of these operations that are held for sale and certain other additional disclosures are provided in Note 17 to the consolidated financial statements.
Preferred Stock Offering and Reverse Stock Split
On October 4, 2022, we completed an offering 400,000 of shares of the Company’s Series A Convertible Redeemable Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), and 100,000 shares of the Company’s Series B Convertible Redeemable Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock,” and together with the Series A Preferred Stock, the “Convertible Redeemable Preferred Stock”), at an offering price of $9.50 per share, representing a 5 percent original issue discount to the stated value of $10.00 per share, for gross proceeds of approximately $4.75 million in the aggregate, before the deduction of $0.4 million for fees and offering expenses of our financial advisor. We also incurred and paid approximately $0.1 million of other issue costs attributable to third-party professional and legal fees. The aggregate net proceeds (after deducting the fees and expenses of our financial advisor) together with the additional amount to provide for the 105 percent redemption premium, or $0.5 million, on the Convertible Redeemable Preferred Stock was deposited in an account with an escrow agent.
On November 7, 2022, we held a special meeting of stockholders to consider an amendment (the “Amendment”) to our Amended and Restated Certificate of Incorporation (the “Charter”), to effect the Reverse Stock Split as determined by our Board of Directors. The holders of the Convertible Redeemable Preferred Stock agreed to not transfer, offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of the shares of the Convertible Redeemable Preferred Stock until the Reverse Stock Split, voted the shares of the Series A Preferred Stock purchased in the offering in favor of the Amendment and voted the shares of the Series B Preferred Stock purchased in the offering in a manner that “mirrored” the proportions on which the shares of Common Stock (excluding any shares of Common Stock that did not vote), the
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Company’s Special Voting Preferred Stock (excluding any proportion of the Special Voting Preferred Stock that did not vote) and Series A Preferred Stock voted on the Reverse Stock Split. The Reverse Stock Split required the approval of the majority of the issued and outstanding shares entitled to vote on the matter. Because the Series B Preferred Stock was automatically and without further action of the holder voted in a manner that “mirrored” the proportions on which the shares of Common Stock (excluding any shares of Common Stock that were not voted), the Company’s Special Voting Preferred Stock (excluding any proportion of the Special Voting Preferred Stock that was not voted) and Series A Preferred Stock voted on the Reverse Stock Split, abstentions by common stockholders did not have any effect on the votes cast by the holders of the Series B Preferred Stock. The Amendment was approved on November 7, 2022 and the Reverse Stock Split was effectuated at 12:01 a.m. Eastern Standard Time on November 8, 2022.
The holders of all of the Convertible Redeemable Preferred Stock redeemed their shares for cash at 105 percent of the stated value, or $10.50 per share, of such shares on November 9, 2022. Accordingly, we directed the escrow agent to pay $5.25 million on November 10, 2022 to the holders from the escrow account established upon the date of the Convertible Redeemable Preferred Stock offering. The amounts paid over the offering price upon redemption are considered “deemed” dividends and reported as a reduction of Additional paid-in capital in the consolidated statement of changes in stockholders’ equity (deficit).
ATM Offering Program
In 2021, we entered into an Equity Distribution Agreement with Oppenheimer & Co. Inc. (“Oppenheimer”) and A.G.P./Alliance Global Partners (“AGP”) pursuant to which we could offer and sell from time to time, up to $25 million of shares of our Common Stock through an “at the market” equity offering program (the “2021 ATM Program”). From its inception through September 23, 2022, a total of 118,629 shares of Common Stock with an aggregate gross purchase price of $2.7 million, including 90,808 shares with an aggregate gross purchase price of $0.8 million sold during 2022, were sold under the 2021 ATM Program. On September 23, 2022, we, Oppenheimer and AGP mutually agreed to terminate the 2021 ATM Program.
On September 28, 2022, we entered into a new agreement with AGP pursuant to which we may offer and sell up to $20.0 million of shares of our Common Stock (the “2022 ATM Program”) from time to time through AGP as the sales agent for which they will receive a commission of 3.0 percent of the gross proceeds. The 2022 ATM Program is currently limited to $3.5 million due to certain restrictions imposed by the registration statement underlying the offering (the “Baby Shelf Limitation”). Under the Baby Shelf Limitation, we may not offer Common Stock under the registration statement with a value of more than one-third of the aggregate market value of our Common Stock held by non-affiliates in any twelve-month period, so long as the aggregate market value of our Common Stock held by non-affiliates is less than $75.0 million. Net proceeds from the sale of Common Stock under the 2022 ATM Program have been and will continue to be used for general corporate purposes including working capital, marketing, product development and capital expenditures. Through December 31, 2022, we sold a total of 552,148 shares of Common Stock with an aggregate gross purchase price of $1.1 million under the 2022 ATM Program leaving $2.4 million remaining available under the Baby Shelf Limitation.
2022 Unit Offering
On July 5, 2022, we completed an offering (the “2022 Unit Offering”) which was comprised of an aggregate of (i) 29,382,861 units consisting of 1,469,143 shares of Common Stock together with Common Stock warrants (the “Common Warrants”) to purchase up to 1,469,143 shares of Common Stock (together, the “Units”) and (ii) 14,095,400 pre-funded units, consisting of 14,095,400 pre-funded warrants (“Pre-funded Warrants”) to purchase 704,770 shares of Common Stock, together with Common Warrants, any combination thereof solely to cover over-allotments to purchase up to 704,770 shares of Common Stock (together, the “Pre-funded Units”). The Units were sold at a public offering price of $0.23 per unit and the Pre-funded Units were sold at a public offering price of $0.2299 per pre-funded unit. The Pre-Funded Warrants were exercised immediately thereafter at their nominal exercise price of $0.002 per share. The Common Warrants accompanying each of the Units and Pre-funded Units were issued separately and are immediately tradeable separately upon issuance. The Common Warrants have an exercise price of $4.60 per share subject to certain adjustments, are immediately exercisable and will expire five years from the date of issuance. In connection with the Convertible Redeemable Preferred Stock offering, the exercise price of the Common Warrants was reduced to $3.518 per share effective October 5, 2022.
We granted the Underwriter a 45-day option from the effective date of the 2022 Unit Offering to purchase from us (i) additional shares of Common Stock and/or (ii) Common Warrants and/or (iii) Pre-Funded Warrants, in any combination thereof solely to cover over-allotments (the “Over-allotment Option”); however, the Over-allotment
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Option expired unexercised on August 14, 2022. In addition, we issued to the Underwriter warrants to purchase additional shares of Common Stock (the “Underwriter Warrants”). Upon the expiration of the Over-allotment Option, the Underwriter Warrants provided for the purchase of up to 108,696 shares of Common Stock. The Underwriter Warrants are exercisable at any time and from time to time, in whole or in part, commencing from six months after June 29, 2022 (the “Effective Date”) and ending five years from the Effective Date, at a price per share equal to $4.60, subject to certain adjustments. In connection with the Convertible Redeemable Preferred Stock offering, the exercise price of the Underwriter Warrants was reduced to $3.518 per share effective October 5, 2022. The Underwriter Warrants may be transferred by the Underwriter without restriction during the same period.
The Unit Offering closed on July 5, 2022 and we received net proceeds of approximately $9.2 million after deducting underwriting discounts and commissions and related expenses including legal and other professional fees. In connection with an amendment to the Senior Convertible Notes that deferred principal payments to 2023 and provided for certain waivers, among others (see Note 10 - Long Term Debt to the consolidated financial statements), a total of $7.0 million of the proceeds were deposited into the Restricted Accounts. We used the remaining net proceeds from the 2022 Unit Offering for general corporate purposes, including working capital, marketing, product development and capital expenditures. As of September 30, 2022, a total of 45,652,174 warrants exercisable for 2,282,609 shares of Common Stock remain outstanding from the 2022 Unit Offering including 43,478,261 Common Warrants exercisable for 2,173,913 shares of Common Stock and 2,173,913 Underwriter Warrants exercisable for 108,696 shares of Common Stock.
Restructuring
In May 2022, we implemented a corporate restructuring initiative (the “Restructuring”) as approved by our Board of Directors. The Restructuring resulted in a reduction of our workforce by 59 employees, or approximately 33 percent of the Company’s headcount at that time. We incurred costs of approximately $0.6 million in severance benefits, including employee insurance, associated payroll taxes and legal costs in connection with the Restructuring. This amount was fully attributable to our continuing operations. Of the total, $0.3 million was included in Sales and marketing costs, $0.2 million was recorded in Product development costs and less than $0.1 million was included in each of Cost of revenue and General and administrative expenses, respectively. All amounts incurred were settled in cash during the year ended December 31, 2022. Accordingly, we have no material obligations remaining associated with the Restructuring. In addition to the reduction in force, our executive leadership team was subject to a temporary 25 percent reduction in salary during the second quarter of 2022.
Components of Results of Operations
Revenue
We generate revenue from two primary sources: (1) software and (2) consulting services. Revenue from software comprised approximately 95 percent and 91 percent of our revenue for the years ended December 31, 2022, and 2021, respectively. Revenue from consulting services comprised approximately 5 percent and 9 percent of our revenue for the same periods, respectively.
Software. Our software is solutioned for our key markets, SMB and government regulatory agencies. In these markets, software revenue is generated from subscriptions and services related to the use of our commercial software platforms, MJ Platform®, and our government regulatory platform, Leaf Data Systems®. Software contracts are generally quarterly or annual contracts paid monthly, quarterly, or annually in advance of service and cancellable upon 30 or 90 days’ notice, although we do have many multi-year commercial software contracts. Leaf Data Systems® contracts are generally multi-year contracts payable annually or quarterly in advance of service. MJ Platform® and Leaf Data Systems® contracts generally may only be terminated early for breach of contract as defined in the respective agreements. Amounts that have been invoiced are initially recorded as deferred revenue or contract liabilities.
Consulting Services. Consulting services revenue is generated by providing solutions for prospective and current cannabis, hemp and CBD business operators in the pre-application of licensures and pre-operational phases of development. These services include application and business plan preparation as they seek licenses to be granted. Consulting projects completed during the pre-application phase generally solidify us as the software vendor of choice for subsequent operational phases once the operator is granted the license. As a result, our consulting revenue is driven as new emerging states pass legislation, and as our client-operators gain licenses.
Other Revenue. Our other revenue is derived primarily from point-of-sale hardware and other non-recurring revenue.
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Cost of Revenue and Operating Expenses
Cost of Revenue. Our cost of revenue is derived from direct costs associated with operating our commercial and government regulatory software platforms and providing consulting services. The cost of revenue for our commercial and government regulatory platforms relates primarily to hosting and infrastructure costs and subcontractor expenses incurred in connection with certain government contracts. Consulting cost of revenue relates primarily to our employees’ and consultants’ salaries and other related compensation expenses. We record the cost of revenue using the direct cost method. This method requires the allocation of direct costs including support services and materials to the cost of revenue.
Product Development Expenses. Our product development expenses include salaries and benefits, nearshore contractor expenses, technology expenses, and other overhead related to the ongoing maintenance of our commercial and government regulatory software platforms and planning for new software development. Product development costs, other than software development expenses qualifying for capitalization, are expensed as incurred. Capitalized software development costs consist primarily of employee-related costs. We devote substantial resources to enhancing and maintaining our technology infrastructure, developing new and enhancing existing solutions, conducting quality assurance testing, and improving our core technology.
Sales and Marketing Expenses. Sales and marketing expense is primarily salaries and related expenses, including commissions, for our sales, marketing, and client service staff. We also categorize payments to partners and marketing programs as sales and marketing expenses. Marketing programs consist of advertising, events, such as trade shows, corporate communications, brand building, and product marketing activities. The timing of these marketing events will affect our marketing costs in a particular quarter. We defer the portion of sales commissions that is considered a cost of obtaining a new contract with a customer and amortize these deferred costs over the period of benefit, currently one year. We expense the remaining sales commissions as incurred. The rates at which sales commissions are earned varies depending on a variety of factors, including the nature of the sale (new, renewal, or add-on service offering), the type of service or solution sold, and the sales channel.
General and Administrative Expenses. Our general and administrative expenses include salaries and benefits and other costs of departments serving administrative functions, such as executive and corporate governance, finance and accounting, human resources, public relations and investor relations. In addition, general and administrative expense includes non-personnel costs, such as professional fees and other supporting corporate expenses not allocated to cost of revenue, product and development or sales and marketing.
Results of Operations for the Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
The following table highlights our operating revenues and expenses for the year ended December 31, 2022 as compared to the year ended December 31, 2021:
|
Year Ended December 31, |
Change |
||||||||||||||
|
2022 |
2021 |
||||||||||||||
|
Revenue |
|
|
|
|
|
|
|
||||||||
|
Software |
$ |
12,920,647 |
|
$ |
15,984,376 |
|
$ |
(3,063,729 |
) |
(19 |
)% |
||||
|
Consulting |
|
682,309 |
|
|
1,510,413 |
|
|
(828,104 |
) |
(55 |
)% |
||||
|
Other revenue |
|
42,074 |
|
|
132,308 |
|
|
(90,234 |
) |
(68 |
)% |
||||
|
Total revenue |
|
13,645,030 |
|
|
17,627,097 |
|
|
(3,982,067 |
) |
(23 |
)% |
||||
|
|
|
|
|
|
|
|
|||||||||
|
Cost of revenue |
|
5,412,388 |
|
|
7,433,884 |
|
|
(2,021,496 |
) |
(27 |
)% |
||||
|
Gross profit |
|
8,232,642 |
|
|
10,193,213 |
|
|
(1,960,571 |
) |
(19 |
)% |
||||
|
Gross profit percentage |
|
60 |
% |
|
58 |
% |
|
|
|
||||||
|
|
|
|
|
|
|
|
|||||||||
|
Operating expenses |
|
|
|
|
|
|
|
||||||||
|
Product development |
|
4,690,967 |
|
|
5,892,022 |
|
|
(1,201,055 |
) |
(20 |
)% |
||||
|
Sales and marketing |
|
6,053,172 |
|
|
7,708,265 |
|
|
(1,655,093 |
) |
(21 |
)% |
||||
|
General and administrative |
|
8,344,613 |
|
|
10,173,630 |
|
|
(1,829,017 |
) |
(18 |
)% |
||||
|
Depreciation and amortization |
|
5,622,274 |
|
|
5,174,551 |
|
|
447,723 |
|
9 |
% |
||||
|
Impairment of long-lived assets |
|
38,967,295 |
|
|
14,354,114 |
|
|
24,613,181 |
|
171 |
% |
||||
|
Total operating expenses |
|
63,678,321 |
|
|
43,302,582 |
|
|
20,375,739 |
|
47 |
% |
||||
|
Loss from operations |
$ |
(55,445,679 |
) |
$ |
(33,109,369 |
) |
$ |
(22,336,310 |
) |
67 |
% |
||||
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Revenue
Software Revenue
Total software revenue declined to $12.9 million for the year ended December 31, 2022 from $16.0 million for the year ended December 31, 2021, for a decrease of $3.1 million, or 19 percent. Software revenue accounted for 95 percent and 91 percent of total revenue in 2022 and 2021, respectively. The decline is primarily attributable to (i) customer attrition and declines in business development with a focus on maintenance-only after the Restructuring for Ample, Solo, Trellis and Viridian ($2.1 million), (ii) the loss of subscription service for the state of Washington for 2022 ($0.7 million) and (iii) the transition of a key client’s business from implementation fees to traditional subscription service from 2021 to 2022 ($0.5 million). These declines were partially offset by higher revenues attributable to subscription service for the states of Utah and Pennsylvania ($0.2 million) and higher revenues attributable to a new text-capable application ($0.1 million).
Consulting Revenue
Our consulting revenue was $0.7 million for the year ended December 31, 2022 compared to $1.5 million for the year ended December 31, 2022, a decrease of $0.8 million, or 55 percent. Consulting revenue was 5 percent and 9 percent of total revenue for 2022 and 2021, respectively. Due to the nature of consulting revenue, our dependence on emerging market activity as a driver of demand, the percentage of consulting revenue over total revenue has varied from period to period depending on whether state legislation has expanded to allow new market entrants or growth of existing market participant operations.
Other Revenue
Other revenue includes retail/resale revenue, which is generated from point-of-sale hardware and other non-recurring revenues. Other revenue was less than $0.1 million and $0.1 million for the years ended December 31, 2022 and 2021 and was less than 1 percent of total revenue for each of the years ended December 31, 2022 and 2021, respectively.
Cost of Revenue
Cost of revenue decreased to $5.4 million for the year ended December 31, 2022 from $7.4 million for the year ended December 31, 2021, for a decrease of $2.0 million, or 27 percent. The decrease was due primarily to the following (i) $0.8 million of lower software application and hosting expenses, (ii) $0.5 million of lower hardware and platform license expenses, (iii) $0.2 million of lower salary-related and contractor expenses and (iv) $0.1 million of lower stock-based compensation. In addition, we recorded a reversal of a legal contingency of $0.5 million that was initially recognized in 2021 (see Note 12 — Commitments and Contingencies to the consolidated financial statements for further discussion of this matter).
Gross Profit
Gross profit decreased to $8.2 million for the year ended December 31, 2022 from $10.2 million for the year ended December 31, 2021, for a decrease of $2.0 million, or 19 percent. Gross profit percentage increased to 60 percent for the year ended December 31, 2022 from 58 percent for the year ended December 31, 2021. This decline in gross profit was due primarily to the decline in revenue despite the higher relative gross profit margin.
Operating Expenses
Product Development
Product development expense decreased to $4.7 million for the year ended December 31, 2022 from $5.9 million for the year ended December 31, 2021, for a decrease of $1.2 million, or 20 percent. The decrease was due primarily to lower salary-related and contractor expenses in the amount of $0.9 million and $0.5 million of lower stock-based compensation expense. In addition, we incurred $0.2 million of lower recruiting expenses. These declines were primarily attributable to the effects of the Restructuring in 2022 which reduced our overall headcount. The restructuring resulted in $0.2 million of direct costs attributable to Product development. In addition, we incurred higher software application and hosting expenses of $0.1 million and a $0.1 million increase to a legal settlement reserve in the 2022 period.
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Sales and Marketing
Sales and marketing expense decreased to $6.1 million for the year ended December 31, 2022 from $7.7 million for the year ended December 31, 2021, for a decrease of $1.7 million or 21 percent. The decrease was due primarily to lower salary-related and contractor expenses in the amount of $1.2 million and $0.5 million of lower stock-based compensation expense. We also incurred $0.2 million of lower trade show and related promotional expenses during 2022. These declines were primarily attributable to the effects of the Restructuring in 2022 which reduced our overall headcount. The restructuring resulted in $0.3 million of direct costs attributable to Sales and marketing. In addition, we incurred higher software and application expenses of $0.1 million in the 2022 period.
General and Administrative
General and administrative expense decreased to $8.3 million for the year ended December 31, 2022 from $10.2 million for the year ended December 31, 2021, for a decrease of $1.8 million, or 18 percent. This decrease was due primarily to $2.4 million of lower restructuring costs as the 2021 period included the termination of our office spaces in Denver in December 2021 and Toronto in June 2021 and the associated write-off of certain leasehold improvements. In addition, we had a reduction in acquisition-related expenses of $0.4 million as we completed two acquisitions, Viridian and 365 Cannabis, during 2021 and none in 2022. These decreases were partially offset by (i) $0.4 million of higher salary and related benefits and recruiting costs due in part to addressing employee turnover in certain key management positions, (ii) $0.3 million of higher professional fees due primarily to multiple proxy solicitations for shareholder votes including the Reverse Stock Split and multiple SEC filings associated with the proxies and the 2022 ATM Program and (iii) $0.3 million of higher software and applications costs.
Depreciation and Amortization
Depreciation and amortization expense increased to $5.6 million for the year ended December 31, 2022 from $5.2 million for the year ended December 31, 2021. The increase is due primarily to an increase of $2.8 million in capitalized software during 2022 prior to the assessment for impairment during the fourth quarter of 2022 (see below).
Impairment of long-lived assets
During 2022, we determined that the carrying value of the capitalized software associated with MJF, Solo, Trellis and Viridian were not recoverable with its undiscounted cash flows during their remaining useful lives. Accordingly, we recorded a charge of $4.6 million to fully impair these assets. With the exception of the intangible assets attributable to Ample, we fully impaired our intangible assets due to our intention to discontinue Solo, Trellis and Viridian resulting in a charge of $3.2 million. Based on our qualitative assessment of goodwill and consideration of the Sale Transaction as well as our intention to wind down and discontinue service for Solo, Trellis and Viridian, we determined in December 2022 that it was necessary to impair the remaining goodwill asset by an incremental $3.8 million. During the first and second quarters of 2022, we recognized impairments of $15.4 million and $11.9 million to goodwill, respectively, due primarily to continued declines in market valuations. During the year ended December 31, 2021, primarily due to a continued decline in market valuation and a flattening in the operating results of Ample, Solo, Trellis and Viridian compared to acquisition assumptions, we recognized an impairment of $14.4 million to goodwill.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP.
Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. Other companies, including companies in our industry, may calculate similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. We attempt to compensate for these limitations by providing specific information regarding the GAAP items excluded from these non-GAAP financial measures.
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Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures with their most directly comparable GAAP financial measures and not rely on any single financial measure to evaluate our business.
EBITDA and Adjusted EBITDA
We believe that EBITDA and Adjusted EBITDA, when considered with the consolidated financial statements determined in accordance with GAAP, are helpful to investors in understanding our performance and allows for comparison of our performance and credit strength to our peers. EBITDA and Adjusted EBITDA should not be considered alternatives to net loss as determined in accordance with GAAP as indicators of our performance or liquidity.
We define EBITDA as net loss before loss from discontinued operations, net of tax, interest expense (income), net, changes in fair value of convertible notes, changes in fair value of derivative liability, provision for income taxes, and depreciation and amortization. We calculate Adjusted EBITDA as EBITDA further adjusted to exclude the effects of the following items for the reasons set forth below:
• impairment of long-lived assets, as this is a non-cash, non-recurring item, which effects the comparability of results of operations and liquidity;
• stock-based compensation expense, as this represents a non-cash charge and our mix of cash and share-based compensation may differ from other companies, which affects the comparability of results of operations and liquidity;
• costs incurred in connection with business combinations that are required to be expensed as incurred in accordance with GAAP, because business combination costs are specific to the complexity and size of the underlying transactions and are not reflective of our ongoing operations;
• costs incurred in connection with non-recurring financing activities and related transactions, including the Reverse Stock Split as well as fees incurred as a direct result of electing the fair value option to account for our debt instruments;
• restructuring charges, which includes severance costs to terminate employees in functions that have been eliminated, costs to terminate a lease and the related non-cash write-off of leasehold improvements and furniture, as we believe these costs are not representative of operating performance;
• gain on the forgiveness of PPP loan, as this is a one-time forgiveness of debt that is not recurring across all periods and we believe inclusion of the gain is not representative of operating performance;
• gain on the extinguishment of debt attributable to repayment of the 2020 Notes prior to their maturity that is not recurring across all periods and we believe inclusion of the gain is not representative of operating performance;
• loss on sale of investment that is not recurring across all periods and we believe inclusion of the loss is not representative of operating performance;
• equity in losses of investees because our share of the operations of investees is not representative of our own operating performance and may not be monetized for a number of years;
• other non-operating income which affects the comparability of results of operations and liquidity.
204
The reconciliation of net loss to EBITDA and Adjusted EBITDA is as follows:
|
Year Ended December 31, |
||||||||
|
2022 |
2021 |
|||||||
|
(unaudited) |
(unaudited) |
|||||||
|
Net loss |
$ |
(79,057,610 |
) |
$ |
(31,328,711 |
) |
||
|
Loss from discontinued operations, net of tax |
|
20,432,174 |
|
|
248,244 |
|
||
|
Interest expense, net |
|
853,716 |
|
|
1,530,703 |
|
||
|
Change in fair value of convertible notes |
|
2,884,273 |
|
|
1,365,904 |
|
||
|
Change in fair value of derivative liability |
|
(63,178 |
) |
|
(248,198 |
) |
||
|
Income tax benefit |
|
(716,155 |
) |
|
(2,263,725 |
) |
||
|
Depreciation and amortization |
|
5,622,274 |
|
|
5,174,551 |
|
||
|
EBITDA |
$ |
(50,044,506 |
) |
$ |
(25,521,232 |
) |
||
|
Impairment of long-lived assets |
|
38,967,295 |
|
|
14,354,114 |
|
||
|
Stock-based compensation expense |
|
808,682 |
|
|
1,964,638 |
|
||
|
Business combination and merger related costs |
|
5,081 |
|
|
449,940 |
|
||
|
Non-recurring financing fees |
|
583,482 |
|
|
458,691 |
|
||
|
Restructuring charges |
|
552,563 |
|
|
2,420,092 |
|
||
|
Gain on forgiveness of PPP loan |
|
— |
|
|
(2,234,730 |
) |
||
|
Gain on extinguishment of debt |
|
— |
|
|
(186,177 |
) |
||
|
Loss on sale of investment |
|
221,101 |
|
|
— |
|
||
|
Equity in losses of investee |
|
— |
|
|
7,564 |
|
||
|
Other non-operating income, net |
|
— |
|
|
(243 |
) |
||
|
Adjusted EBITDA |
$ |
(8,906,302 |
) |
$ |
(8,287,343 |
) |
||
Results of Operations for the Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
The following table highlights our operating revenues and expenses attributable to our continuing operations for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022:
|
Nine Months Ended |
Change |
||||||||||||||
|
2023 |
2022 |
||||||||||||||
|
Revenues: |
|
|
|
|
|
|
|
||||||||
|
Software |
$ |
6,909,399 |
|
$ |
10,150,011 |
|
|||||||||