The accretive acquisition builds on the company’s strategy of rolling up the cannabis software sector, and it gives entry into Canada via an opportunistic use of cash to acquire a capital-starved competitor.
The deal is expected to add annualized revenue of $8.7 million in 2020.
Acquisition accretive at 5.2X sales
With KERN reporting a F1Q20 sales run rate of $12.8 million and gaining an unquantified amount of incremental revenue from its earlier acquisition of Solo Sciences, Ample brings KERN’s pro forma revenue to at least an annualized $21 million for calendar 2020 (and at least $19.3 million assuming KERN only recognizes revenue starting in April 2020). Of course, this assumes that core revenue does not decline.
The consideration for Ample is a fixed $45.6 million, composed of $5.7 million cash and equity based on a fixed-dollar amount of $32.2 million at close in 1Q20 and a potential earnout of $7.6 million the following year.
At Tuesday’s close of $11.00, this means KERN will issue 2.9 million shares at close and potentially another 691,000 on the earnout.
Since the dollar amount is fixed, the shares issued will decline with an increase in the stock price and vice versa.
Combined with the 1.95 million shares for Solo Sciences and using $11.00 as the close price, this brings the current pro forma share KERN count to 16.5 million and gives Ample Organics 22% of the pro forma entity. It dilutes Solo down to owning 12% of the pro forma entity.
The purchase price of 5.2X EV/sales is less than the current trading multiples shown in our comp tables for KERN of 8.3X on the June 2020 target of $17 million and the 5.6X June 2021, making the acquisition accretive.
The key to maintaining the accretion mathematically, however, is increasing the sales estimate. Keeping sales estimates flat at the guided 50% annual growth puts KERN at 7.1X 2020 and 4.8X 2021 sales.
Ample Organics has scale, needs capital
Ample was founded in 2014 and financed by Green Acre Capital, which continues its pattern of exiting investments via sale to public operators.
Green Acre Capital sold Tokyo Smoke to Hiku Brands (which was later acquired by Canopy) and Anadia Labs to Aurora Cannabis. There was no mention of a lockup on the KERN shares to be issued to the owners of Ample Organics in the news release.
Ample recently announced it counted 70% of Canadian license holders as customers, so this gives Akerna access to the Canadian market without having to underbid an existing competitor.
Last summer, Ample Organics laid off 20 employees as the funding environment became more difficult, so this looks like an opportunistic deployment of its cash and liquid equity by Akerna.
Akerna guided to Ample achieving “cash-flow positive” in the second quarter of 2020, though it did not quantify if this requires any investment of cash after the 1Q20 close to achieve this beyond the $5.7 million in consideration.
This summer, Ample Organics also acquired Last Call Analytics, which provides data visualization tools to alcohol companies.
Assuming Last Call Analytics is included in Akerna’s acquisition, this would also help Akerna provide similar data analytics to cannabis companies and would also diversify revenue away from cannabis.
More to come
We will update any details to come in an 8K filing expected later Wednesday today and from the call on Jan. 7, 2020, at 4:30 pm ET (dial in 1-877-407-3982, domestic, or 1-201-493-6780, international. The passcode is 13697598.