How a marijuana-software company became the first of its kind to list its stock on Nasdaq

To accomplish the feat of becoming the first cannabis-software stock to list on the Nasdaq, MJ Freeway Chief Executive Jessica Billingsley employed a strategy well known to Wall Street veterans.

Rather than attempt to go through the expensive and time-consuming process of an initial public offering — the route chosen by vape supplier Greenlane Holdings Inc.GNLN, -1.78% and Canadian weed producer Tilray Inc.TLRY, +1.58% — Billingsley opted to merge MJ Feeway with a special purpose acquisition company by the name of MTech Acquisition.

The resulting entity, called Akerna Corp.KERN, +28.02% began trading Tuesday, and closed up 28% at $15.35. By Tuesday’s close, the company’s market value was $71.9 million after 144,897 shares changed hands, according to FactSet.

Canadian marijuana companies can cross-list their stock on senior U.S. exchanges by virtue of the fact that cannabis is allowed under federal law in Canada, and many have opted to do so. U.S. companies have no such luck — Nasdaq and the New York Stock Exchange have banned companies that violate U.S. federal law, excluding most of the pot companies in the U.S. and forcing them on to the Canadian Securities Exchange.

What’s less clear — because the senior exchanges refuse to talk about it publicly — is what happens to companies that service the cannabis industry but don’t actually break federal law. These companies, which “don’t touch the plant” in colloquial terms, seem to be breaking through on a case-by-case basis, with Akerna following Greenlane onto Nasdaq’s junior circuit.

Read: This company wants to be the Bacardi of cannabis — and it has plans for an IPO

MJ Freeway is best known for two types of software: seed-to-sale technology required by states such as Washington and California, which tracks cannabis through its eventual sale to consumers; and “enterprise resource planning” software for cultivators, pot stores and manufacturers, similar to what Oracle Corp. ORCL, -0.43% offers for other industries.

“MJ Freeway was born 9½ years ago — we invented the concept of seed-to-sale tracking,” Billingsley said over the phone. “It didn’t exist outside of cannabis. There were other models that had pieces of it, but nothing that pulled together all those pieces. It did have to be built from the ground up … we also built in compliance across the entire supply chain in every legal jurisdiction.”

Listing the company was not as straightforward as it would be in any other industry. MJ Freeway first announced the merger Oct. 20, said Billingsley, but the process was complicated by the 35-day government shutdown that included the Securities and Exchange Commission. There was also some hand-holding with Nasdaq — according to documents on Nasdaq’s website, the exchange normally takes roughly six weeks to approve a listing.

“I certainly would say that we went through a longer legal-review process,” Billingsley said.

Akerna trades on the Nasdaq Capital Market, which is designed for smaller companies and removes a number of the listing requirements. The corporate governance requirements are consistent across all of Nasdaq’s listing products, such as the Global Select Market, where Tilray listed. Greenlane Holdings listed on the Global Market, which is designed for midsize companies.

For more: Push for legislation allowing banks to serve the cannabis business is gaining momentum

In the December quarter, MJ Freeway reported losses of $2.4 million, which amounts to 19 cents a share versus losses of $980,079, or 12 cents a share, in the year-ago period. Revenue fell to $2.6 million, from $2.9 million in the year-ago period. MJ Freeway logged fiscal 2018 net losses of $2.5 million, or 30 cents a share, on sales of $10.5 million.

According to documents filed with the SEC, government contracts with Washington and Pennsylvania account for 43% of the company’s fiscal 2018 revenue and 49% of revenue in the second half of calendar 2018. It has made bids for its track- and inventory-reporting software with Florida and New Mexico, and terminated its contract with Nevada because the state refused to increase payments after legalizing recreational cannabis.

Overall, MJ Freeway has clients in 29 of the 33 U.S. states that have some type of legal pot on the books. The company has clients in 10 other countries, including Canada.

See also: Another Canadian pot stock is headed for a U.S. exchange

MTech Acquisition, the SPAC, raised roughly $60 million to find and acquire a cannabis-related company. With the cash and stock from the merger, Billingsley said she plans to grow the business but intends to remain focused exclusively on cannabis for the next few years. MTech’s management included notable cannabis investors Tahira Rehmatullah of Hypur Ventures and Emily Paxhia, who runs Poseidon Investment Management. Anthony Georgiadis, who serves as Green Thumb Industries Inc.’s GTBIF, -0.98% chief financial officer, was a director for the SPAC.

Billingsley said that Akerna was in talks with several exchange-traded funds to include the company and was in early discussions with several mutual funds and other institutional investors.

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