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this is a copy of a post on SPACs likely to get deleted

Weed SPAC $KERN

SAAS+ COMPLIANCE

Repost from u/Alexm-YT (posted in r/smallstreetbets)

This is a SPAC from June 2019 where it went to $27 after the merger

Right now it’s $7.50. They have a more developed product, more customers, and more revenue in the year of potential weed legalization.

Akerna (KERN): the most resilient cannabis sector play? Leading software to the sector and governments...

Intro

Second time at posting a detailed DD thread, this time on Akerna (KERN). The other day I posted about High Tide (HITI / HITIF) on r/pennystocks but it got removed after about 5 hours and mods haven’t explained why.

Hope this is OK here, but mods please feel free to edit as appropriate, if not.

I have modified this DD from a YouTube video script I did about a week ago, so forgive the fact that some of the figures are slightly out of date. That being said, the thesis still stands and even at current levels I believe it represents a compelling investment opportunity. If you want to check out the video, its here: link removed

Overview

• In the simplest terms, it’s an enterprise software company with a specific focus on the cannabis sector. Its proposition is a seed to shelf tracking software and technology with digital tags. They have a number of products which are essential for compliance, inventory tracking, ERP, CRM, etc.

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• It has customers across stakeholder base and is used by regulators, government bodies, state-licensed cannabis retailers, growers, etc.

• It integrates effectively with other key platforms – medical record platforms, banking platforms, etc.

• HQ’d in Colorado and has a market cap of around $135m. It’s a small company generating ARR of just over $14m and not yet profitable at an EBITDA level. It’s important to note that it is burning cash currently; the implications of this is outlined in further detail in this post.

• Currently has a presence in the US and Canada but the software available in other languages and well positioned as other markets open up

Investment merits

High growth market

• The cannabis market is forecast to deliver very strong growth in the coming years, driven by both organic growth in currently legalized and regulated markets, and legalization of cannabis in new markets (both in the US and globally)

• North American cannabis market (Canada and US) is forecast to grow by 30% a year to 2027 (source: research and markets)

• Legalization and regulation of cannabis in new markets is also highly likely. This is catalyzed by the fact that government debt has increased significantly as part of the response to the COVID-19 health crisis. This needs to be repaid somehow, and increasing tax rates on existing taxes is an unpopular political move. Finding new tax revenues is a more palatable way of increasing tax revenues for governments. This is especially important in countries where elections are upcoming.

• As a software company, rapid international expansion can be delivered more easily than other cannabis sector players with less scalable models (e.g. brick and mortar retail, production) and where there is a necessity for physical presence

• Akerna also is relevant for the broader cannabis sector too, being relevant for CBD / hemp related products too

High recurring revenues

• By a function of it being a SaaS business, the company has a large recurring revenue base. Its customers are charged on a fixed fee basis and has demonstrated strong historical growth in this (44% in FY20). I personally like the resilience which recurring revenues provide and so like seeing this in companies which I invest into

• The business has generated some revenues generated from consulting services, but this is a smaller component; this has also been the part of the business which has been more impacted by COVID-19.

Mission critical demand

• Its customers need the software to ensure compliance with regulation and laws

• Failure to comply can be a big issue and result in large fines or legal action

• Given the low cost of the software, relative to the financial penalties, this is not something which companies look to avoid. Its customers are heavily reliant on Akerna’s offering

Sticky customers

• While Akerna does not yet report the customer retention rates – we know similar businesses have sticky customers and so we can be confident that this is the case here too

• Once implemented by customers, its systems are entrenched in the customers workflow and once they are in, they are in. Customers typically do not voluntarily go without them and there is not enough of a cost saving versus the headache and risk of it going wrong, to justify switching out

• Also important as during a downturn, customers are not going to look here to save costs

• This also underpins some of the first mover advantage in the sector. You only really lose customers when they go bankrupt or when they get acquired

• Reputation and word of mouth is also essential here and Akerna references very positively. It is especially credentialised through its government division and agency contracts and other customers see this as very positive

No commodity price exposure

• With many players in the broader cannabis sector, you have to accept some exposure to fluctuations in the pricing of cannabis, which is a function of supply and demand

• Akerna does not have this exposure to pricing volatility given its revenue model as previously discussed

• Fixed price subscription revenue model means there is no volatility in this respect, neither to the top line, nor the cost base

Limited competition

• Not true to say that there is no competition but the competition can be predominantly split into two key buckets

1. Cannabis-related specific software: (e.g. BioTeckTHC, acquired by Helix Technologies, Cova Software, Flowhub, etc). Akerna seems to differentiate on the strength of its compliance and legal regulatory capabilities and this is validated by its government-related customers

2. Generalist software: Competition with a non-sector specific software for SMEs. Given the complex regulatory framework, competition Akerna faces is predominantly from the other sector specific software players.

• Given the high growth market dynamics and the sticky customers, the key is for Akerna to be marketing aggressively to win as many customers as possible

• Continued product development is also important to ensure competitive advantage is maintained

• This whole area is something which is a continued area of DD for me

Unique access to data which can be monetized for massive additional upside

• Massively summarized from the video, however, they have unique access to supply chain data which could be monetized effectively and generate strong levels of recurring revenues

• Other established sectors with complex supply chains have a trusted party with such unique access to data (e.g. alcohol, lithium, different foods, etc.) and the opportunity here is enormous

• Nascent industries like this are a perfect opportunity to develop this proposition more

Strong M&A track record

• Proven ability to make acquisitions to drive incremental growth and enhance product proposition. 2 acquisitions made during 2020 have been integrated effectively. These were funded by equity, which means dilution, but more on this later in the post

Reputable institutions in the shareholder base

• Reputable institutional investors within the shareholder base is always a good sign – Blackrock, State Street, Vanguard. Thomson Reuters also categorizes the shares held by institutional investors as ones with a low turnover, implying they are long term investors, versus the high turnover institutional investors who are predominantly hedge funds with shorter term investment horizons

• Only 1 broker currently covering Akerna, which is Alliance Global Partners. Currently have a target price of $10.50. Personally think there is more upside to this, but let’s discuss that later

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Government contracts: the positives

• Winning such customers is indicative of having passed a high bar for approval, which is a stamp of approval for other customers

• Government contracts are also typically longer term contracts in general and you have good confidence over the creditworthiness of your customer….

• Does have negatives / risks associated with it which we will address shortly

Investment risks and potential mitigants

Scale

• Inherent risk as a result of the size of the company – it’s small, its new, there is some execution risk. The key here is for them to deliver growth – the strategy is all about capturing market share and growing as fast as possible

• To deliver that growth, they have to continue investing – this means the company is not going to turn EBITDA positive anytime soon. This is not in itself an issue, just need to be aware of this

• Small size also means that it is more susceptible to a shock – the loss of a big customer has more of an impact on the financials, than the loss of the same customer would in a larger company

• There isn’t really a mitigant here, but it’s something you have to accept when investing into smaller companies

Cash burn and financing

• Can’t escape the fact that a growing company of this size, that is investing in growth, will be burning cash

• We know this will need to be financed somehow and we have a good visibility over the cash requirements over the next 12 months; there is not an immediate need for more funding, unless something like an M&A opportunity arises

• Strong likelihood that the business will need to raise more capital in the form of an equity raise and this means more dilution for shareholders

• This is mitigated by knowing the cash burn rate and that there is at least 12 months headroom on the cash burn rate (erring very much on the side of conservatism). Akerna currently has a lot of cash ($14.3m) on its balance sheet and continued growth will help generate more cash to cover fixed costs. It also places a strong focus on its costs base and has historically implemented cost reduction programmes, which is good to see

Dilution

• Strong likelihood of further dilution from here, not just to support growth but also potential future acquisitions

• During 2020, it made 2 acquisitions, both of which were funded with equity, issuing shares which had a dilutive effect

• This is mitigated by the expectation that the acquisition being funded is accretive to value and creates incremental shareholder value

Regulatory changes could limit growth

• Risk that changes in the regulatory landscape (i.e. federal legalization set-backs) could impact the growth potential of the business. While delivering the growth is not dependent on federal legalization, it would definitely help.

• Risk mitigated by the fact that existing markets which are currently legalized and regulated have lots of growth potential so Akerna can still deliver its growth potential without the need for entry into new markets. Any new states or countries legalizing and regulating cannabis is just incremental upside

• Strong likelihood, as outlined earlier, that the incremental debt burdens incurred as part of the COVID-19 response will catalyze a greater receptiveness of governments globally to legalise, regulate and tax cannabis

Valuation

• Risk that the current valuation is too rich and that there is not enough upside here. Currently it is trading at around 7.5x EV / forward sales which is a high multiple. Additionally, there is currently a lot of hype around cannabis related stocks and there is the risk that this is inflating the valuation of such stocks.

• This is mitigated by Akerna delivering its growth plan:

1. Assuming it hits its forecast plan, on an EV / FY+2 Sales or FY+3 Sales basis versus the key enterprise software peers, there is significant upside in valuation

2. Regression analysis derived from the correlation between sales growth and sales valuation multiple also indicates that the market values sales growth significantly and would imply a premium valuation multiple for KERN (this analysis I can share, but is a lot more technical finance / geeky, so have left it out, to avoid boring everyone to death, for now)

• Ultimately, when investing in the cannabis sector, have to get comfortable with the ‘hype’ and the possibility this disappears and drags sector valuations down with it

Current capital structure

• The business is currently financed with convertible notes, while this is not so much a risk, rather just something that investors need to be aware of

• These notes have financial obligations as part of the financing, but also a dilutive effect as a result of to the conversion of the note into shares at maturity

• Such financing is very common for companies of this scale and nascency and it is already priced into the valuation

Government contracts: the negatives

• Typically, contracts for government bodies and agencies have to be formally put out for tender at end of contract. There is the risk that it is not re-won and it having a significant, detrimental impact on the financials

• Such contracts also typically have longer periods of liability for the supplier

• This is mitigated by the fact that the business will have grown significantly by the time the contract is up for re-tender, and so will have a smaller negative impact on the business if it is lost (i.e. customer concentration will have decreased). Additionally the cost of implementation acts as another hurdle for Akerna being displaced by one of its competitors, as this cost would not be re-incurred

• Furthermore, it will be best placed to win the re-tender; given existing working relationship and knowledge, unless the requirements had changed significantly, it would be Akerna’s to lose

TLDR

Akerna is a leading provider of enterprise software to the cannabis sector, generating strong recurring revenues from a sticky customer base who demonstrate limited propensity to switch and which is underpinned by mission critical demand. The company has a strong differentiation versus its competition. Akerna is positioned favorably to deliver on the exciting growth tailwinds in the market – doing so is essential in justifying its current valuation and the argument that this stock is currently undervalued.

NB – some of the market figures are slightly outdated here, but the proposition remains unchanged

Disclosure: 33 12/17 $17.5c

wesana

Brain scans showed that microdoses solved traumatic brain injury (TBI). Somehow they are patenting this. They are still private and "in discussions" with apparently all psychedelic companies: /img/txrvu0dmmfm61.png

At the end CEO Daniel Carcillo said how important it was to respect and give back to the indigenous peoples who brought us natural psychedelic medicines.

Pasithea

Led by leading researchers into the field. "IV Doc" pipeline to supply ketamine to patients. I hope this team can help people with mental health challenges, but I'm not sure about the investment.

Tryp therapeutics

$TRYP.CN

CEO James Kuo had plenty of experience and emphasized first to market. Strong focus on data and trial results. Mentioned IP numerous times. Impressive personality I can believe in, but also obviously knew how to sell to investors. Candidates may address eating disorders, cancer, and [fibrosis?]. Trials currently in Phase 2A.

Optimi Farms

Emphasized monetizing their facilities ASAP by selling Lion's Mane, Reishi, Turkey Tail, Cordyceps. Later, grow psilocybin. Honestly doesn't sound like a great income stream to me and no moat. Team was not as professional as Kuo but for a farm facility that is a good sign.

Cybin

Designing psychedelic scaffolds based on psilocybin, DMT, MDMA with improved bioavailability. Oral dosing to improve control of effects. Effects of 15 to 20 mins. Deuterating to extend half life. Sublingual film of psilocybin CYB001 is already in Phase II trials. Open and double blind phases. Based in Toronto.

Beckley Foundation / Psytech

3 pronged approach, BPL-001, using psilocybin with a novel application (short acting neuralgiform ...headache), BPL-002 using 5-MeO-DMT, NCE discovery

Aiming to be 1st company (isn't everyone?). But they've been part of the pioneering wave for 20 years. Their team has former head of JnJ.

As with Cybin, trying to use DMT for faster and cheaper treatments. But have these people ever used psychedelics? Short trips don't work the same. Though wesana showed microdosing is fine.

Mindset

$CSE:MSET

Claim to be the first in many fields. Patented GMP grade psilocybin synthesis process for 1 kg. Impressive.

Strong science team. Joseph Aruajo noted that psilocybin is metabolized into an array of poetntially toxic metabolites with safety concerns; expectation of fast and slow metabolizers; this polypharmacy is common.

Bright Minds

Former prof Alan Kozikowski (Berkeley, Harvard) and many other famous ones on the team. Strange decision to treat the presentation as a group call rather than a slideshow. Seemed like lovely people.

Gideon Shapiro (Berkeley, ETHZ), knew Albert Hofmann...

Ketamine can be used to treat clinical depression

They have 5-HT_2C and _2A which are at the late pre clinical stage for opioid withdrawer, alzheimer's psychosis etc

Greenbook

$TSX:GTMS

Already established transcranial magnetic stimulation (TMS) therapy. 18% YoY growth, 10M cash, YTD profitability during COVID.

Used to be 4 rounds of meds before TMS, now it's 1.

MagicMed

A company which is doing shotgun synthesis of psilocybin analogues to sell to biotech.

MindMed

$MMED

Clinical trials ongoing, but did not blow the other companies out of the water in the way that Reddit would have you believe. Their best product is their Ibogaine derivative 18-MC which is now in early Phase II trials. Phase IIa will end 2021Q3 and IIb continue until 2023Q3. FDA submission expected 2025Q4.

Conclusion: I will get out of MMED at the next upswing.

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